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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2002
Commission file number 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)
Registrant's telephone number, including area code (502) 585-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Class A Common Stock (voting) $0.15 par value New York Stock Exchange
Class B Common Stock (nonvoting) $0.15 par value New York Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: None
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value, at April 30, 2002, of the voting and nonvoting
equity held by nonaffiliates of the registrant was approximately $2,700,000,000.
The number of shares outstanding for each of the registrant's classes of
Common Stock on June 30, 2002 was:
Class A Common Stock (voting) 28,891,260
Class B Common Stock (nonvoting) 39,498,469
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2002 Annual Report to Stockholders are incorporated
by reference into Parts I, II, and IV of this report. Portions of the Proxy
Statement of Registrant for use in connection with the Annual Meeting of
Stockholders to be held July 25, 2002 are incorporated by reference into Part
III of this report.
PART I
Item 1. Business
(a) General development of business:
Brown-Forman Corporation ("we," "us," or "our" below) was incorporated under the
laws of the State of Delaware in 1933, successor to a business founded in 1870
as a partnership and subsequently incorporated under the laws of the
Commonwealth of Kentucky in 1901. Our principal executive offices are located at
850 Dixie Highway, Louisville, Kentucky 40210
(mailing address: P.O. Box 1080, Louisville, Kentucky 40201-1080).
(b) Financial information about industry segments:
Information regarding net sales, operating income, and total assets of each of
our business segments is in Note 12 of Notes to Consolidated Financial
Statements on page 35 of our 2002 Annual Report to Stockholders, which
information is incorporated into this report by reference in response to Item 8.
(c) Narrative description of business:
The following is a description of our operations.
Wine and Spirits Segment
- ------------------------
Wine and Spirits operations include manufacturing, bottling, importing,
exporting, and marketing a wide variety of alcoholic beverage brands. This
Segment also manufactures and markets new and used oak barrels.
The Segment's brands consist of the following:
Jack Daniel's Tennessee Whiskey
Southern Comfort
Canadian Mist Canadian Whisky
Early Times Kentucky Whisky
Finlandia Vodkas*
Old Forester Kentucky Straight Bourbon Whisky
Glenmorangie Single Highland Malt Scotch Whiskies*
Jack Daniel's Country Cocktails
Gentleman Jack Rare Tennessee Whiskey
Jack Daniel's Single Barrel Tennessee Whiskey
Woodford Reserve Kentucky Straight Bourbon Whiskey
Fetzer Vineyards California Wines
Korbel California Champagnes, Wines and Brandy*
Bolla Italian Wines
Sonoma-Cutrer Chardonnay Wines
Bonterra Vineyards California Wines
Jekel Vineyards California Wines
Fontana Candida Italian Wines
Don Eduardo Tequilas*
Ardberg Single Islay Malt Scotch Whisky*
Usher's Scotch Whisky*
McPherson Australian Wines*
2
Mariah California Wines
Chateau Tahbilk Australian Wines
Tuaca Liqueur*
Pepe Lopez Tequilas
Bel Arbor California Wines
Glen Moray Single Speyside Malt Scotch Whisky*
Michel Picard French Wines*
Owen's Estate Australian Wines*
Geoff Merrill Reserve Australian Wines*
Appleton Estate Jamaica Rum*
Amarula Cream Liqueur*
* Brands represented in the U.S and other select markets by Brown-Forman
Statistics based on case sales, published annually by a leading trade
publication, rank Jack Daniel's as the largest selling bourbon or Tennessee
whiskey in the United States, Canadian Mist as the second-largest selling
Canadian whisky in the United States, and Southern Comfort as the third-largest
selling cordial in the United States.
A leading industry trade publication reported Korbel California Champagnes as
the largest selling premium champagne in the United States. This trade
publication also reported that Fetzer was ranked seventeenth among all domestic
table wines, and second in the $7 to $10 price segment. Among numerous imported
wines, Bolla Italian Wine is the leading premium Italian table wine in the
United States, and ranks fourth among imported wines in the $7 to $10 segment.
We believe the statistics used to rank these products are reasonably accurate.
Our strategy with respect to the Wine and Spirits Segment is to market high
quality products that satisfy the preferences of consumers of legal drinking age
and to support those products with extensive international, national, and
regional marketing programs. These programs are intended to extend consumer
brand recognition and brand loyalty.
Sales managers and representatives or brokers represent the Segment in all
states. The Segment distributes its spirits products domestically either through
state agencies or through wholesale distributors. The contracts that we have
with many of our distributors have formulas which determine reimbursement to
distributors if we terminate them; the amount of reimbursement is based
primarily on the distributor's length of service and a percentage of its
purchases over time. Some states have statutes which limit our ability to
terminate distributor contracts.
Jack Daniel's Tennessee Whiskey, Southern Comfort, and Fetzer Vineyards
California Wines are the principal products exported by the Segment. These
brands are sold through contracts with brokers and distributors in most
countries.
The principal raw materials used in manufacturing and packaging distilled
spirits are corn, rye, malted barley, glass, cartons, and wood for new white oak
barrels, which are used for storage of bourbon and Tennessee whiskey. None of
these raw materials is in short supply, and there are adequate sources from
which they may be obtained.
3
The principal raw materials used in the production of wines are grapes and
packaging materials. Grapes are primarily purchased under contracts with
independent growers and, from time to time, are adversely affected by weather
and other forces which may limit production. We believe that our relationships
with our growers are good.
Due to aging requirements, production of whiskeys is scheduled to meet demand
three to five years in the future. Accordingly, inventories are larger in
relation to sales and total assets than would be normal for most other
businesses.
The industry is highly competitive and there are many brands sold in the
consumer market. Trade information indicates that we are one of the largest wine
and spirit suppliers in the United States in terms of revenues.
The wine and spirits industry is regulated by the Bureau of Alcohol, Tobacco,
and Firearms of the United States Treasury Department with respect to
production, blending, bottling, sales, advertising, and transportation of its
products. Also, each state regulates advertising, promotion, transportation,
sale, and distribution of such products.
Under federal regulations, whiskey must be aged for at least two years to be
designated "straight whiskey." The Segment ages its straight whiskeys for a
minimum of three to five years. Federal regulations also require that "Canadian"
whisky must be manufactured in Canada in compliance with Canadian laws and must
be aged in Canada for at least three years.
Consumer Durables Segment
- -------------------------
The Consumer Durables Segment includes the manufacturing and/or marketing of the
following:
Fine China Dinnerware
Casual Dinnerware and Glassware
Crystal Stemware and Barware
China and Crystal Giftware
Collectibles, Home Decor and Jewelry
Sterling Silver, Silver-Plated and Metal Giftware
Sterling Silver and Stainless Steel Flatware
Contemporary Tabletop, Houseware and Giftware
Luggage
Business Cases
Personal Leather Accessories
Segment products are sold directly to consumers through company-owned stores,
direct mail, catalog, and the Internet. Also, products are sold in the wholesale
channel by segment-employed sales representatives under various compensation
arrangements, and where appropriate to the class of trade, by specialized
independent commissioned sales representatives and independent distributors.
The Segment's products are marketed domestically through authorized retail
stores consisting of department stores specialty stores, and jewelry shops and
through retail stores operated by the Segment. Products are also distributed
domestically through the institutional, incentive, premium, business gift and
military exchange classes of trade, and internationally through authorized
retailers, duty free stores and/or distributors in select foreign markets.
Specially created collectible jewelry and home decor products are distributed
both domestically and in the United Kingdom through the direct response channel,
including mail-order, catalogs and the Internet.
4
Fine china dinnerware, crystal stemware, barware and giftware, stainless
flatware, and silver-plated and metal giftware are marketed under both the Lenox
and Gorham trademarks. Contemporary tabletop, houseware and giftware products
are marketed under the Dansk trademark. Premium casual dinnerware and fine china
giftware are marketed under the Lenox trademark. Sterling silver flatware and
sterling giftware are marketed under the Gorham and Kirk Stieff trademarks.
Luggage, business cases, and personal leather accessories are marketed under the
Hartmann and Wings trademarks. The direct response sales in the United States of
specially designed collectible jewelry and home decor products are marketed
under the Lenox trademark, while such sales abroad are marketed primarily under
the Brooks & Bentley trademark.
The Lenox, Gorham, and Hartmann brand names hold significant positions in their
industries. The Segment has granted licenses for the use of the Lenox trademark
on fine table linens and lamps and other electrical lighting products, subject
to the terms of licensing agreements.
We believe the Segment is the largest domestic manufacturer and marketer of fine
china dinnerware and the only significant domestic manufacturer of fine quality
china giftware. The Segment is also a leading manufacturer and distributor of
fine quality luggage, business cases, and personal leather accessories. The
Segment competes with a number of other suppliers and is subject to intense
foreign competition in the distribution of its fine china, contemporary and
casual dinnerware, crystal stemware and giftware, stainless flatware, and
luggage products in the wholesale channel. In the retail channel, the Segment
also faces intense competition from lifestyle and home specialty stores that
market their own brands.
In the Segment's china and stainless businesses, competition is based primarily
on quality, design, brand, style, product appeal, consumer satisfaction, and
price. In its luggage, business case and personal leather accessories business,
competition is based primarily on brand awareness, quality, design, style, and
price. In its direct response/mail-order business, the most important
competitive factors are the brand, product appeal, design, sales/marketing
program, service, and price. In its crystal, sterling silver, silver-plated, and
metal giftware businesses, competition is based primarily on price, with
quality, design, brand, style, product appeal, and consumer satisfaction also
being factors.
Clay and feldspar are the principal raw materials used to manufacture china
products. Gold and platinum are significant raw materials used to decorate china
products. Fine silver is the principal raw material used to manufacture sterling
silver giftware and flatware products. Leather and nylon, tweed and wool fabric
are the principal raw materials used to manufacture luggage, business cases and
personal leather accessories. It is anticipated that raw materials used by the
Segment will be in adequate supply. However, the acquisition price of gold,
platinum, and fine silver is influenced significantly by worldwide economic
events and commodity trading.
Segment revenues are traditionally greater in the second and third quarters of
the fiscal year, primarily because of seasonal holiday buying.
5
Other Information
- -----------------
As of April 30, 2002, we employ approximately 7,000 persons, including 1,600
employed on a part-time or temporary basis.
We are an equal opportunity employer and we recruit and place employees without
regard to race, color, national or ethnic origin, gender, age, religion, veteran
status, sexual preference, or disability.
We believe our employee relations are good.
For information on the effects of compliance with federal, state, and local
environmental regulations, refer to Note 14, "Environmental Matters," on page 35
of our 2002 Annual Report to Stockholders, which information is incorporated
into this report by reference in response to Item 8.
Item 2. Properties
The corporate offices consist of office buildings, including renovated historic
structures, all located in Louisville, Kentucky.
Significant properties by business segments are as follows:
Wine and Spirits Segment
- ------------------------
The facilities of the Wine and Spirits Segment are shown below. The owned
facilities are held in fee simple.
Owned facilities:
- - Production facilities:
- Lynchburg, Tennessee
- Louisville, Kentucky
- Collingwood, Ontario
- Shively, Kentucky
- Woodford County, Kentucky
- Frederiksted, St. Croix, U.S. Virgin Islands
- Mendocino County, California
- Monterey County, California
- Sonoma County, California
- Pedemonte, Italy
- Soave, Italy
- - Warehousing facilities:
- Lynchburg, Tennessee
- Louisville, Kentucky
- Collingwood, Ontario
- Shively, Kentucky
- Woodford County, Kentucky
- Mendocino County, California
- Monterey County, California
- Sonoma County, California
- Pedemonte, Italy
- Soave, Italy
6
Leased facilities:
- - Production and bottling facility in Dublin, Ireland
- - Wine production and warehousing facility in Mendocino County, California
- - Vineyards in Mendocino, Monterey and San Luis Obispo Counties, California
We believe that the productive capacities of the Wine and Spirits Segment are
adequate for the business, and that the facilities are maintained in a good
state of repair.
Consumer Durables Segment
- -------------------------
The facilities of the Consumer Durables Segment are shown below. The owned
facilities are held in fee simple.
Owned facilities:
- - Office facilities:
- Lenox corporate - Lawrenceville, New Jersey
- Headquarters for Lenox Direct Response/Collectibles
Division (includes retail store and warehouse) - Langhorne,
Pennsylvania
- - Production and office facilities (each of which includes a retail store):
- Lenox - Pomona, New Jersey; Oxford, North Carolina; and
Kinston, North Carolina
- Lenox/Gorham - Smithfield, Rhode Island
- Hartmann - Lebanon, Tennessee
- - Warehousing facilities:
- Lenox/Dansk/Gorham - Williamsport, Maryland
Leased facilities:
- - Office facilities:
- Dansk headquarters - White Plains, New York
- Norfolk and DID, Inc. headquarters - Wilmington, Delaware
- Brooks & Bentley headquarters - Kent, England
- Hartmann (includes showroom) - New York, New York
- - Warehousing facilities:
- Lenox - South Brunswick, New Jersey (includes retail store);
Oxford, North Carolina; and Kinston, North Carolina
- Lenox/Dansk/Gorham - Williamsport, Maryland
- Lenox Direct Response/Collectibles - Bristol Twp.,
Pennsylvania
- Hartmann - Lebanon, Tennessee
- - Retail stores:
- The Segment operates 54 Lenox stores in 28 states and 55 Dansk
stores in 28 states. In addition, the Segment operates 5
Hartmann luggage outlet stores in 5 states.
- - Showrooms:
- Lenox/Dansk/Gorham - New York, New York; Dallas, Texas;
Atlanta, Georgia;
The lease terms expire at various dates and are generally renewable.
We believe that the Segment's facilities are in good condition and are adequate
for the business.
7
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
Principal Occupation and
Name Age Business Experience
---- --- ---------------------------------
Owsley Brown II 59 Chairman and Chief Executive Officer
of the company since 1995.
William M. Street 63 President of the company since
November 2000. Vice Chairman from
1987 to 2000. President and Chief
Executive Officer of Brown-Forman
Beverages Worldwide (a division of
Brown-Forman) since 1994.
Phoebe A. Wood 49 Executive Vice President and Chief
Financial Officer of the company
since February 2001. Vice President
and Chief Financial Officer for
Propel, Inc. (a subsidiary of
Motorola) from August 2000 to
February 2001. Vice President,
Finance, Planning and Control for
ARCO Alaska, Inc. from 1996 to 2000.
Michael B. Crutcher 58 Senior Vice President, General
Counsel, and Secretary since 1989.
Donald C. Berg 47 Senior Vice President and
Director of Corporate Development
and Strategy since May 2001.
President of the company's Advancing
Markets Group (AMG) from August 1999
to May 2001. Senior Vice President
and Managing Director of AMG from
August 1997 to August 1999.
Lois A. Mateus 55 Senior Vice President of Corporate
Communications and Corporate
Services since 1988.
James S. Welch, Jr. 43 Senior Vice President and Executive
Director of Human Resources since
March 1999. Vice President of Human
Resources for Brown-Forman Beverages
Worldwide from January 1998 to March
1999. Vice President of the
company's Business Consulting Group
from 1995 to January 1998.
Stanley E. Krangel 51 President of Lenox, Incorporated
(a subsidiary of Brown-Forman) since
June 1998. President of Lenox
Collections from 1995 to June 1998.
8
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
Except as presented below, for the information required by this item refer to
the section entitled "Quarterly Financial Information" appearing on the
"Highlights" page of the 2002 Annual Report to Stockholders, which information
is incorporated into this report by reference.
Holders of record of Common Stock at April 30, 2002:
Class A Common Stock (Voting) 3,734
Class B Common Stock (Nonvoting) 4,453
The principal market for Brown-Forman common shares is the New York Stock
Exchange.
9
Equity Compensation Plan Information
The company maintains two plans that may grant equity compensation: the
shareholder-approved Brown-Forman Omnibus Compensation Plan (described in the
proxy statement) and the Non-Employee Directors' Compensation Plan (described
below). Both of these plans require the company to fund all equity awards with
stock purchased on the open market, so the equity of existing shareholders is
not diluted.
Number of securities to Weighted-average Number of securities
be issued upon exercise of exercise price of remaining available for
outstanding options, outstanding options, future issuance under
Plan Category warrants and rights warrants and rights(Note 1) equity compensation plans
Equity compensation
plans approved by
security holders 2,010,442 $68.428 1,282,424
Equity compensation
plans not approved by
security holders 60,332 $59.012 *(Note 2)
Total 2,070,774 $68.154 N/A
Note 1: The difference in weighted-average exercise price between plans is
primarily due to a premium-priced, broad-based grant made to employees
under the shareholder-approved plan. In most cases, grant dates and
grant prices are the same under both plans.
Note 2: This plan, which provides equity compensation for non-employee
directors, does not specify a specific maximum number of option shares
that may be awarded. However, the company has filed with the Securities
and Exchange Commission a registration statement covering the issuance
of 150,000 shares under this plan.
In order to align the interests of the company's directors with those of its
shareholders, the company may grant stock options and other stock-based
incentive awards to non-employee directors pursuant to the Brown-Forman
Non-Employee Directors' Compensation Plan (the Plan). The Plan requires the
company to buy all shares needed to satisfy the options and awards granted under
the Plan, so there is no dilution of the equity of existing shareholders. Stock
options are granted at an exercise price of not less than the fair market value
of the underlying stock on the date of the grant. The Plan administrator
determines the dates on which the options may be exercised and other terms and
restrictions, which may vary by award. The Plan administrator also sets the
expiration date, which cannot be more than ten years from the grant date. All
options currently outstanding under the Plan are exercisable and expire ten
years after they were granted. No other stock-based awards have been granted
under the Plan.
In fiscal 2002, each director who was not an employee received options for
$25,000 worth of Class B common stock (1,292 options with a per share exercise
price of $68.33 each). In addition, directors were allowed to elect in advance
of their one-year term to receive their retainer in the form of an equivalent
value of stock options issued at the start of their terms.
Item 6. Selected Financial Data
For the information required by this item, refer to the section entitled
"Selected Financial Data" appearing on page 17 of the 2002 Annual Report to
Stockholders, which information is incorporated into this report by reference.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the information required by this item, refer to the section entitled
"Management's Discussion and Analysis" appearing on pages 18 through 24 of the
2002 Annual Report to Stockholders, and the section entitled "Important
Information Regarding Forward-Looking Statements" appearing on page 38 of the
2002 Annual Report to Stockholders, which information is incorporated into this
report by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
For the information required by this item, refer to the section entitled "Market
Risks" appearing on page 24 of the 2002 Annual Report to Stockholders, which
information is incorporated into this report by reference.
Item 8. Financial Statements and Supplementary Data
For the information required by this item, refer to the Consolidated Financial
Statements, Notes to Consolidated Financial Statements, Report of Independent
Accountants, and Report of Management appearing on pages 25 through 37 of the
2002 Annual Report to Stockholders, which information is incorporated into this
report by reference. For selected quarterly financial information, refer to the
section entitled "Quarterly Financial Information" appearing on the "Highlights"
page of the 2002 Annual Report to Stockholders, which information is
incorporated into this report by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 25, 2002, which information is incorporated into this report by reference:
(a) "Election of Directors" on page 4 through the fourth paragraph on page 5
(for information on directors); and (b) the last paragraph on page 7 (for
information on delinquent Section 16 filings). Also, see the information with
respect to "Executive Officers of the Registrant" under Part I of this report,
which information is incorporated herein by reference.
Item 11. Executive Compensation
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 25, 2002, which information is incorporated into this report by reference:
(a) "Executive Compensation" on pages 10 through 13; (b) "Retirement Plan
Descriptions" on page 14; and (c) "Director Compensation" on page 15.
Item 12. Security Ownership of Certain Beneficial Owners and Management
For the information required by this item, refer to the section entitled "Stock
Ownership" appearing on pages 6 through 7 of our definitive proxy statement for
the Annual Meeting of Stockholders to be held July 25, 2002, which information
is incorporated into this report by reference.
11
Item 13. Certain Relationships and Related Transactions
For the information required by this item, refer to the section entitled
"Transactions with Management" appearing on page 17 of our definitive proxy
statement for the Annual Meeting of Stockholders to be held July 25, 2002, which
information is incorporated into this report by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1 and 2 - Index to Consolidated Financial Statements and Schedule:
Reference
Annual
Form 10-K Report to
Annual Report Stockholders
Page Page(s)
Incorporated by reference to our Annual
Report to Stockholders for the year
ended April 30, 2002:
Consolidated Statement of Income for the
years ended April 30, 2000, 2001, and 2002* -- 25
Consolidated Balance Sheet at April 30, 2000, 2001, and 2002* -- 26 - 27
Consolidated Statement of Cash Flows for the
years ended April 30, 2000, 2001, and 2002* -- 28
Consolidated Statement of Stockholders' Equity
for the years ended April 30, 2000, 2001, and 2002* -- 29
Notes to Consolidated Financial Statements* -- 30 - 36
Report of Management* -- 37
Report of Independent Accountants* -- 37
Important Information Regarding Forward-Looking Statements -- 38
Consolidated Financial Statement Schedule:
Report of Independent Accountants on Financial Statement Schedule S-1 --
II - Valuation and Qualifying Accounts S-2 --
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted either
because they are not required under the related instructions, because the
information required is included in the consolidated financial statements and
notes thereto, or because they are inapplicable.
* Incorporated by reference to Item 8 in this report.
(a) 3 - Exhibits: Filed with this report:
Exhibit Index
- -------------
13 Brown-Forman Corporation's Annual Report to Stockholders for the
year ended April 30, 2002, but only to the extent set forth in
Items 1, 5, 6, 7, 7A and 8 of this Annual Report on Form 10-K for
the year ended April 30, 2002.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP independent accountants.
12
Previously Filed:
Exhibit Index
- -------------
3(a) Restated Certificate of Incorporation of registrant, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on July 19, 1994.
3(b) Certificate of Amendment to Restated Certificate of Incorporation
of registrant, which is incorporated into this report by reference
to Brown-Forman Corporation's Form 10-K filed on July 19, 1994.
3(c) Certificate of Ownership and Merger of Brown-Forman Corporation
into Brown-Forman, Inc., which is incorporated into this report by
reference to Brown-Forman Corporation's Form 10-K filed on July 19,
1994.
3(d) Certificate of Amendment to Restated and Amended Certificate of
Incorporation of Brown-Forman Corporation, which is incorporated
into this report by reference to Brown-Forman Corporation's Form
10-K filed on July 19, 1994.
3(e) The by-laws of registrant, as amended on May 25, 2000, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 8-K filed on May 31, 2000.
4 The Form of Indenture dated as of March 1, 1994 between
Brown-Forman Corporation and The First National Bank of Chicago, as
Trustee, which is incorporated into this report by reference to
Brown-Forman Corporation's Form S-3 (Registration No. 33-52551)
filed on March 8, 1994.
10(a) A description of the Brown-Forman Omnibus Compensation Plan, which
is incorporated into this report by reference to the Appendix of
the registrant's definitive proxy statement for the Annual Meeting
of Stockholders held on July 27, 1995.
10(b) Brown-Forman Corporation Restricted Stock Plan, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on July 19, 1994.
10(c) Brown-Forman Corporation Supplemental Excess Retirement Plan, which
is incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on July 23, 1990.
10(d) Brown-Forman Corporation Stock Appreciation Rights Plan, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on July 23, 1990.
13
10(e) A description of the Brown-Forman Savings Plan, which is
incorporated into this report by reference to page 10 of the
registrant's definitive proxy statement for the Annual Meeting of
Stockholders held on July 25, 1996.
10(f) A description of the Brown-Forman Flexible Reimbursement Plan,
which is incorporated into this report by reference to page 10 of
the registrant's definitive proxy statement for the Annual Meeting
of Stockholders held on July 25, 1996.
10(g) A description of the Brown-Forman Non-Employee Director
Compensation Plan, which is incorporated into this report by
reference to Brown-Forman Corporation's Form S-8 (Registration No.
333-38649) filed on October 24, 1997.
10(h) Credit Agreement dated as of October 29, 1997, among Brown-Forman
Corporation and a group of United States and international banks,
which is incorporated into this report by reference to Amendment
No. 1 to Brown-Forman Corporation's Form 10-Q filed on December 15,
1997.
(b) Reports on Form 8-K:
On July 19, 2001, the Registrant filed a report on Form 8-K announcing its
purchase of 96,831 shares of its Class A Common Stock and 93,085 shares of
its Class B Common Stock in a private transaction.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
/s/ OWSLEY BROWN II
------------------------------------
Date: July 25, 2002 By: Owsley Brown II
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities on July 25, 2002 as indicated:
/s/ JERRY E. ABRAMSON /s/ RICHARD P. MAYER /s/ OWSLEY BROWN II
- --------------------------------------- --------------------------------- -----------------------------------------
By: Jerry E. Abramson By: Richard P. Mayer By: Owsley Brown II
Director Director Director, Chairman of the Board
and Chief Executive Officer
/s/ BARRY D. BRAMLEY /s/ STEPHEN E. O'NEIL
- --------------------------------------- ---------------------------------
By: Barry D. Bramley By: Stephen E. O'Neil
Director Director
/s/ GEO. GARVIN BROWN III /s/ DACE BROWN STUBBS /s/ OWSLEY BROWN FRAZIER
- --------------------------------------- --------------------------------- -----------------------------------------
By: Geo. Garvin Brown III By: Dace Brown Stubbs By: Owsley Brown Frazier
Director Director Director, Former Vice Chairman
of the Board
/s/ DONALD G. CALDER
- ---------------------------------------
By: Donald G. Calder
Director
/s/ LAWRENCE K. PROBUS /s/ PHOEBE A. WOOD /s/ WILLIAM M. STREET
- --------------------------------------- --------------------------------- -----------------------------------------
By: Lawrence K. Probus By: Phoebe A. Wood By: William M. Street
Senior Vice President Executive Vice President and Director, President
(Principal Accounting Officer) Chief Financial Officer
(Principal Financial Officer)
15
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Brown-Forman Corporation
Our audits of the consolidated financial statements referred to in our report
dated May 23, 2002 appearing in the 2002 Annual Report to Shareholders of
Brown-Forman Corporation and Subsidiaries (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
May 23, 2002
S-1
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended April 30, 2000, 2001, and 2002
(Expressed in thousands)
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
Balance at Charged to Balance at
Beginning Costs End
Description of Period and Expenses Deductions of Period
----------- ---------- ------------ ---------- ----------
2000
Allowance for Doubtful Accounts $11,159 $ 5,833 $ 5,346(1) $11,646
2001
Allowance for Doubtful Accounts $11,646 $ 6,083 $ 5,469(1) $12,260
2002
Allowance for Doubtful Accounts $12,260 $ 8,677 $ 5,316(1) $15,621
Accrued Restructuring Costs -- 16,800 3,762(2) 13,038
(1) Doubtful accounts written off, net of recoveries.
(2) Employee termination benefit payments
S-2
Exhibit 13
HIGHLIGHTS
(Expressed in millions, except per share amounts and ratios)
- --------------------------------------------------------------------------------
Year Ended April 30, 2001 2002 % Change
- --------------------------------------------------------------------------------
Net Sales $2,180 $2,208 1%
Gross Profit $1,153 $1,133 (2%)
Operating Income $ 374 $ 353 (6%)
Net Income $ 233 $ 228 (2%)
Earnings Per Share - Basic and Diluted $ 3.40 $ 3.33 (2%)
Cash Dividends Paid Per Common Share $ 1.28 $ 1.36 6%
EBITDA $ 438 $ 407 (7%)
Business Value Added $ 108 $ 94 (13%)
Return on Average Invested Capital 17.9% 15.9%
Return on Average Common Stockholders' Equity 21.0% 18.5%
Gross Margin 52.9% 51.3%
Operating Margin 17.1% 16.0%
QUARTERLY FINANCIAL INFORMATION
(Expressed in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings
Per Share- Cash Dividends Market Price (High-Low)
Net Gross Net Basic and Paid Per Per Common Share
Sales Profit Income Diluted Common Share Class A Class B
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2002 $2,208 $1,133 $ 228 $3.33 $ 1.36 $78.45 - $60.25 $79.14 - $58.90
Quarters
First 470 248 39 0.57 0.33 69.50 - 61.21 69.50 - 60.70
Second 644 329 80 1.17 0.33 68.60 - 60.25 68.56 - 59.08
Third 570 282 58 0.84 0.35 67.40 - 60.26 66.46 - 58.90
Fourth 524 274 51 0.75 0.35 78.45 - 65.50 79.14 - 64.76
Fiscal 2001 $2,180 $1,153 $ 233 $3.40 $ 1.28 $71.00 - $49.00 $72.00 - $50.00
Quarters
First 466 255 43 0.62 0.31 57.50 - 49.00 60.94 - 50.00
Second 647 340 80 1.17 0.31 60.75 - 49.75 61.19 - 50.44
Third 559 290 56 0.82 0.33 68.75 - 59.00 69.25 - 58.75
Fourth 508 268 54 0.79 0.33 71.00 - 58.00 72.00 - 57.65
FINANCIAL TABLE OF CONTENTS
17
Selected Financial Data
18
Management's Discussion and Analysis
25
Consolidated Statement of Income
26
Consolidated Balance Sheet
28
Consolidated Statement of Cash Flows
29
Consolidated Statement of Stockholders' Equity
30
Notes to Consolidated Financial Statements
37
Report of Management
37
Report of Independent Accountants
SELECTED FINANCIAL DATA
Year Ended April 30,
(Expressed in millions, except per share amounts and ratios)
Operations 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
- ---------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Sales $1,644 1,606 1,672 1,793 1,824 1,906 2,009 2,134 2,180 2,208
Gross Profit $ 777 768 815 864 885 956 1,019 1,103 1,153 1,133
Operating Income $ 255 240 268 274 287 307 322 348 374 353
Net Income $ 156 129 149 160 169 185 202 218 233 228
Weighted Average Shares used to
calculate Earnings Per Share
- - Basic 82.7 78.7 69.0 69.0 69.0 68.9 68.6 68.5 68.5 68.3
- - Diluted 82.7 78.7 69.0 69.0 69.0 69.0 68.7 68.6 68.6 68.5
Earnings Per Share
- Basic and Diluted $ 1.88 1.63 2.15 2.31 2.45 2.67 2.93 3.18 3.40 3.33
Cash Dividends Paid
Per Common Share $ 0.86 0.93 0.97 1.02 1.06 1.10 1.15 1.21 1.28 1.36
Invested Capital
- ----------------
Average Invested Capital $ 925 900 835 875 929 948 1,049 1,238 1,357 1,470
Average Common
Stockholders' Equity $ 765 629 493 578 671 756 854 974 1,110 1,235
Total Assets $1,311 1,234 1,286 1,381 1,428 1,494 1,735 1,802 1,939 2,016
Long-Term Debt $ 154 299 247 211 63 50 53 41 40 40
Other Key Measures
- ------------------
Cash Flows from Operations $ 193 221 197 167 176 220 213 241 231 250
EBITDA $ 299 286 311 320 337 358 377 410 438 407
Gross Margin 47.3% 47.8% 48.8% 48.2% 48.5% 50.2% 50.7% 51.7% 52.9% 51.3%
Operating Margin 15.5% 15.0% 16.0% 15.3% 15.8% 16.1% 16.0% 16.3% 17.1% 16.0%
Effective Tax Rate 35.6% 37.4% 39.8% 37.8% 38.0% 37.6% 36.5% 36.5% 36.3% 34.5%
Return on Average
Invested Capital 18.0% 15.4% 19.5% 19.7% 19.4% 20.4% 19.8% 18.4% 17.9% 15.9%
Return on Average Common
Stockholders' Equity 20.4% 20.4% 30.1% 27.5% 25.2% 24.3% 23.6% 22.4% 21.0% 18.5%
Total Debt to Total Capital 16.4% 43.6% 35.7% 29.6% 23.6% 16.7% 24.5% 20.3% 17.1% 13.7%
Total Cash Dividends
Paid to Net Income 45.8% 57.5% 45.3% 44.2% 43.3% 41.2% 39.3% 38.1% 37.7% 40.8%
Notes:
1. Includes the operations of Fetzer Vineyards and Sonoma-Cutrer Vineyards
since their acquisitions in August 1992 and April 1999, respectively.
2. Fiscal 1994 net income and earnings per share were reduced by $32 million
and $0.41, respectively, from the cumulative effect of accounting changes.
3. In October 1993, we sold Brown-Forman Enterprises, a credit card processing
operation, resulting in an after-tax gain of $18 million.
4. Weighted average shares, earnings per share, and cash dividends paid per
common share have been adjusted for a 3-for-1 common stock split in fiscal
1994.
5. We define EBITDA as earnings before interest, taxes, depreciation and
amortization, representing a measure of our cash flow. It should be
considered in addition to, but not as a substitute for, other measures of
financial performance that are in accordance with generally accepted
accounting principles.
6. We define Return on Average Invested Capital as the sum of net income
(excluding extraordinary items) and after-tax interest expense, divided by
average invested capital. Invested capital is the sum of all interest-
bearing debt and preferred and common equity.
7. We define Return on Average Common Stockholders' Equity as income applicable
to common stock divided by average common stockholders' equity.
8. We define Total Debt to Total Capital as total debt divided by the sum of
total debt and equity.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS
In the discussion below, and in the Chairman's letter, we review Brown-Forman's
consolidated financial condition and results of operations for the fiscal years
ended April 30, 2000, 2001, and 2002. We also make statements relating to our
anticipated financial performance and other forward-looking statements and
discuss factors that may affect the company's future financial condition and
performance. We have prepared a non-exclusive list of risk factors that could
cause actual results to differ materially from our anticipated results, which is
on page 38. Please read this Management's Discussion and Analysis section in
conjunction with our consolidated financial statements for the year ended April
30, 2002 and the related notes, and the important information regarding
forward-looking statements on page 38.
We have summarized our significant accounting policies in Note 1 to our
consolidated financial statements. We believe that our consistent application of
these policies results in financial statements that provide useful and reliable
information about our operating results and financial condition.
In applying these accounting policies, we must make estimates and judgments
about the effects of matters that are inherently uncertain. Areas in which
uncertainties exist include allowances for uncollectible receivables, impairment
and amortization of long-lived assets, advertising and promotion accruals,
self-insurance reserves, pension and postretirement benefit obligations, income
tax accruals, and litigation. Our actual results could differ from our
estimates. Despite these inherent limitations, we believe that the following
discussion and the accompanying financial statements provide a meaningful and
fair perspective.
CONSOLIDATED SUMMARY OF OPERATING PERFORMANCE
Fiscal 2002 Compared to 2001
Net sales reached record levels in fiscal 2002, growing 1% or $28 million. Sales
of beverages increased 3%, due largely to higher volumes and price increases for
Jack Daniel's Tennessee Whiskey, Southern Comfort and Finlandia Vodka. Sales of
our Consumer Durables segment fell 3%, however, resulting from a recessionary
U.S. economy, exacerbated by the events of September 11.
International sales of $391 million were up 6% in fiscal 2002 despite
unfavorable currency trends. Sales in the United States, representing 80% of our
revenues, grew slightly. A slowing U.S. economy softened sales trends during the
year, particularly in the traditional department store channel of our Consumer
Durables segment.
Gross profit is a key performance measure for us. A more competitive pricing
environment for wines and consumer durable products, cost pressures resulting
from lower production levels for spirits and china products, and unfavorable
currency trends combined to lower our gross profit in fiscal 2002.
Gross margin dropped from 52.9% in fiscal 2001 to 51.3% in fiscal 2002,
resulting from price and cost pressures previously mentioned. Our gross margin
remains very strong, however, having grown steadily over the past ten years.
This trend has been a particularly impressive achievement given the weakening of
foreign currencies against the U.S. dollar over the past several years, which
depressed our results as reported in U.S. dollars.
Fiscal Gross
Year Margin
------ ------
1992 47.9%
1993 47.3%
1994 47.8%
1995 48.8%
1996 48.2%
1997 48.5%
1998 50.2%
1999 50.7%
2000 51.7%
2001 52.9%
2002 51.3%
Operating income for fiscal 2002 fell $21 million, or 6%. A $30 million decrease
for the Consumer Durables segment caused by the recessionary U.S. economy and
costs to implement the Business Improvement Initiatives (discussed below) more
than offset a $9 million improvement for Wine and Spirits.
Operating Income
Dollars in Millions
2000 2001 2002
---- ---- ----
Wine and Spirits $304 $327 $336
Consumer Durables 44 47 17
---- ---- ----
Total $348 $374 $353
==== ==== ====
Total change +8% +7% -6%
BUSINESS IMPROVEMENT INITIATIVES AND ADOPTION OF FAS 142. Two non-recurring
items had a net effect of lowering fiscal 2002 operating income by $10 million,
or $0.03 per share. As a result of adopting Statement of Financial Accounting
Standards (FAS) 142 on May 1, 2001, we no longer amortize goodwill and other
intangible assets with indefinite lives. This helped both operating income and
net income by $12 million ($0.18 per share), reflecting the fact that
amortization was not deductible for tax purposes. We also undertook a series of
Business Improvement Initiatives in fiscal 2002 designed to rationalize
capacity, streamline procurement and production practices, and improve
connections with our customers. We incurred costs of $22 million, or $0.21 per
share, related to these initiatives in fiscal 2002, primarily to close three
manufacturing facilities in our Consumer Durables business. Remaining
initiatives being contemplated could lower fiscal 2003 earnings an additional
$0.08 per share. We expect these initiatives to produce benefits in the future
that will significantly strengthen our long-term cash flow and earnings.
18
Earnings per share fell 2% to $3.33 per share. Continued growth in our Wine
and Spirits business was more than offset by an unfavorable currency environment
and a significant earnings decline for the Consumer Durables segment. On a
constant exchange basis, and adjusting for Business Improvement Initiatives and
the adoption of FAS 142, earnings per share increased 2% over fiscal 2001, to
$3.48 per share:
Fiscal 2002 %
EPS Change
------ ------
Reported EPS $ 3.33 -2%
Benefit from FAS 142 (0.18)
Cost of Business Improvement Initiatives 0.21
Constant currency adjustment 0.12
------
Adjusted EPS $ 3.48 +2%
======
BASIC AND DILUTED EARNINGS PER SHARE. We have a stock option plan described in
Note 15 of our financial statements. Our plan requires that we purchase shares
on the open market to satisfy stock option requirements, thereby avoiding future
dilution of earnings that would occur from issuing additional shares. We acquire
treasury shares from time to time in anticipation of these requirements. The
extent to which diluted shares exceed the number of basic shares is determined
by how much our stock price has appreciated since options were granted,
irrespective of how many treasury shares we have acquired. To ensure that
earnings are not diluted by the stock option plan, our intention is to hold
enough treasury stock so that the number of diluted shares is always less than
the original 69.0 million that was outstanding at inception of the plan (as
adjusted for any share repurchases or issuances unrelated to our stock option
plan).
Fiscal 2001 Compared to 2000
Net sales grew 2%, or $46 million. Sales of our Wine and Spirits increased 2%,
as solid growth of Jack Daniel's was tempered by lower shipments of Korbel
Champagne following the Millennium boom. Revenues from the consumer durables
segment improved 3%, fueled by gains in catalog, direct mail, and Internet
channels.
Gross profit growth of 5% outpaced the rate of sales gains, reflecting a shift
toward higher-margin products, benefits from selected price increases, and
stable costs.
Operating income for fiscal 2001 improved 7%, or $26 million. A $23 million
increase in profits from Wine and Spirits was driven primarily by growth of Jack
Daniel's. Operating income for the Consumer Durables segment increased $3
million, largely attributable to successful new products sold directly to
consumers. In addition to the negative impact of weakening foreign currencies,
earnings growth was tempered by lower profits from Korbel Champagne, sales of
used barrels, and Hartmann luggage.
Earnings per share reached a record $3.40, up 7% over fiscal 2000. A slower
growth rate in 2001 principally reflected an industry-wide contraction in sales
of sparkling wine and used barrels, as well as weakening foreign currencies and
a softer U.S. economy.
OTHER KEY PERFORMANCE MEASURES
Our central goal is to increase the value of our shareholders' investment.
Long-term growth in the market value of our stock is a good indication of our
success in delivering an attractive return to shareholders.
Total Shareholder Return
(including dividend reinvestment)
Fiscal B-F S&P 500
Year (Class B) Index
------ ------- -------
1992 $100 $100
1993 110 109
1994 126 115
1995 144 135
1996 177 176
1997 232 220
1998 266 310
1999 352 378
2000 266 416
2001 303 362
2002 399 317
10-Year Annual Growth +15% +12%
TOTAL SHAREHOLDER RETURN. A $100 investment in our Class B stock ten years ago
would have grown to $399 by the end of fiscal 2002, assuming reinvestment of all
dividends and ignoring personal taxes and transaction costs. This represents an
annualized return of 15% over the ten-year period. During fiscal 2002, the
market value of an investment in Brown-Forman rose 32% compared to a 13% decline
by the S&P 500 for the same period.
19
Business Value Added
Dollars in Millions
2000 2001 2002
---- ---- ----
As defined $111 $108 $ 94
Adjusted for deferred taxes;
investments in Sonoma-Cutrer
and Finlandia; benefit of
FAS 142; cost of Business
Improvement Initiatives $124 $133 $125
BUSINESS VALUE ADDED. We also apply a measure we call Business Value Added (BVA)
to evaluate our financial performance. We define BVA as our after-tax operating
income less a capital charge for net operating assets employed. This measure
takes into account not only the profits generated, but also capital costs
required to produce those profits. BVA grew 4% in fiscal 2000, declining 2% in
fiscal 2001 and 13% in fiscal 2002. While favorable interest rates benefited our
cost of capital this past year, BVA results have been lowered by a change in
U.S. tax regulations requiring us to repay approximately $200 million of
deferred tax liability over a five-year period ending in fiscal 2003. And though
we expect investments in Sonoma-Cutrer and Finlandia will enhance BVA over the
long term, they are also diluting current BVA results. Adjusted for these items
as well as the non-recurring benefit of FAS 142 and cost of Business Improvement
Initiatives, BVA increased 14% in fiscal 2000 and 8% in fiscal 2001, while
declining 5% in fiscal 2002.
Returns on average invested capital and stockholders' equity were similarly
influenced by these factors. As a result, our returns have trended lower, but
remain very healthy in the context of current capital market conditions.
2000 2001 2002
---- ---- ----
Return on Average Invested Capital 18.4% 17.9% 15.9%
Return on Average Common Stockholders' Equity 22.4% 21.0% 18.5%
COMPANY OUTLOOK
We believe Brown-Forman's growth prospects remain very positive. Long term
demographic trends in the U.S., our largest market, suggest a growing market for
our premium Wine and Spirits brands. Although growth for Jack Daniel's moderated
in the U.S. market this past year, it remains an extremely powerful brand with a
solid U.S. consumer base and excellent prospects overseas. In addition, we have
continued to add premium brands to our portfolio over the past several years,
including Finlandia, Sonoma-Cutrer, Glenmorangie, Tuaca, Amarula and Appleton
rums. We believe that these brands, together with internally developed products
such as Woodford Reserve bourbon and Bonterra wines, will be important factors
in the long-term growth of our Wine and Spirits business. We are introducing
Jack Daniel's Original Hard Cola in the U.S. market this summer and could
benefit if the brand is a success.
Brands that we own, such as Woodford Reserve, and brands for which we have
international distribution rights, such as Finlandia and Glenmorangie, will help
grow our global business together with our established international brands,
Jack Daniel's, Southern Comfort, and Fetzer. Earnings growth from overseas
markets has been tempered because of the strong dollar; to the extent the dollar
weakens against major international currencies, our international earnings will
benefit.
We have recently made several meaningful distribution improvements, including a
cost-sharing agreement with Bacardi in the U.K. and the appointment of Allied
Domecq as our distributor in Turkey. We expect these distribution changes to
increase focus on our brands and spur their growth and, in the U.K., to increase
our profit margins.
The outlook is also positive for our Consumer Durables business. Lenox remains
the leader in the U.S. market for fine china dinnerware. A softening economy and
effects of September 11 had a very negative impact on orders from department
stores, a major channel of distribution for us. Growth of this business depends
upon our ability to develop new distribution channels, including selling
directly to the consumer. Consumer Durables should benefit from a lower cost
structure, as a result of recent decisions to close plants, and a significantly
lower inventory position than last year. We believe the segment is in a better
position for future growth and should rebound as fiscal 2003 progresses.
Based on a recovery of the U.S. economy and benefits from Business Improvement
Initiatives implemented in 2002, we anticipate earnings per share growth of 9%
to 12% in fiscal 2003. This includes an estimated $0.08 per share in expenses to
complete our Business Improvement Initiatives, as well as providing for full
investment behind our brands.
WINE AND SPIRITS SEGMENT
Summary of Operating Performance
(Dollars in millions)
2000 2001 2002
------ ------ ------
Net Sales $1,543 $1,573 $1,620
% Change 7% 2% 3%
Gross Profit $ 812 $ 849 $ 851
% Change 9% 5% 0%
Advertising Expenses $ 206 $ 214 $ 214
% Change 8% 4% 0%
SG&A Expenses $ 298 $ 302 $ 301
% Change 14% 2% 0%
Amortization $ 5 $ 7 $ --
Operating Income $ 304 $ 327 $ 336
% Change 7% 8% 3%
EBITDA $ 341 $ 367 $ 372
% Change 8% 8% 2%
Gross Margin 52.6% 54.0% 52.5%
Operating Margin 19.7% 20.8% 20.7%
20
Our Wine and Spirits segment includes strong brands representing a wide range of
wine varietals, champagne, and distilled spirits such as whiskey, bourbon,
vodka, brandy, tequila, rum, and liqueur. This segment's largest market is the
United States, which generally prohibits wine and spirits manufacturers from
selling their products directly to consumers. Instead, we sell our products to
wholesale distributors, who then sell the products to retailers, who in turn
sell to consumers. We also use a similar tiered distribution model in most
markets outside the United States.
Distributors and retailers normally keep some of our products on hand as
inventory, making it possible for retailers to sell more (or less) of our
products to the consumer than distributors buy from us during any given time
period. Because we record revenues when we ship our products to distributors,
our sales volumes do not necessarily reflect actual consumer demand during any
particular period. Ultimately, of course, consumer demand determines our
financial results. Thus, it is important to consider that demand in assessing
our performance. Our best approximation of consumer demand is based on case
sales from wholesalers to retailers, called "depletions."
We and our trade partners have been actively implementing supply chain systems
that have allowed us to reduce inventories over the past few years. We believe
trade inventory levels for most of our products at the end of fiscal 2002 were
at the lowest levels in recent history.
Fiscal 2002 Compared to 2001
Net sales grew 3%, or $47 million. On a constant exchange basis, revenues for
the segment increased 4%. Jack Daniel's registered growth for the tenth
consecutive year. Worldwide depletions increased 2%, with particular strength in
Western Europe. Jack Daniels' depletions were essentially flat in the U.S.,
largely reflecting a slowdown in on-premise sales. A continued reduction in
wholesale and retail inventories also tempered shipments during the year.
Annual depletions for Southern Comfort were up 2% in the U.S., with gross
profits improving at a double-digit rate for the second consecutive year. Volume
and profit trends for Finlandia continued to improve. Volume trends for our
major wine brands were strong, led by Fetzer, Bolla, and Korbel.
Here are worldwide depletions figures for our major brands during fiscal 2002:
Nine-Liter Change From
Cases Fiscal 2001
---------- -----------
Spirits:
Jack Daniel's 6,520,000 +2%
Canadian Mist 2,375,000 0%
Southern Comfort 2,130,000 +1%
Finlandia 1,190,000 *
Early Times 1,065,000 -5%
Wine:
Fetzer 3,130,000 +11%
Bolla 1,670,000 +8%
Korbel Champagnes 1,065,000 +8%
*Annual percentage change is not comparable; previous period was a partial year.
Gross profit was flat compared to fiscal 2001, despite the growth in sales, as a
result of a more competitive pricing environment for our wines, unfavorable
foreign exchange rates, and costs incurred for our Business Improvement
Initiatives. These same factors, which we do not expect to continue in the long
term, caused gross margin to decline to 52.5% from 54.0% in fiscal 2001. On a
constant currency basis, however, gross margin was 52.9%.
Advertising expenses approximated fiscal 2001 expenditures, as we decided not to
increase spending levels given unfavorable on-premise market conditions and a
generally soft U.S. economy in the aftermath of September 11. Assuming an
economic recovery in fiscal 2003, we intend to increase advertising at a growth
rate more consistent with historical levels. Selling, general, and
administrative expenses declined slightly, reflecting tight cost controls and
reduced travel.
Operating income for the segment improved 3%, primarily reflecting reduced
operating expenses and the benefit from adopting FAS 142. On a constant exchange
basis, excluding the benefit of adopting FAS 142 as well as costs associated
with Business Improvement Initiatives, the segment's operating income improved
6%.
Fiscal 2001 Compared to 2000
Net sales improved $30 million, or 2%, driven by strong results for the Jack
Daniel's family of brands. Jack Daniel's Black Label experienced excellent
consumer demand around the world, with worldwide depletions up 6%. Depletions
improved 3% in the United States, the brand's biggest market. Volumes grew at a
double-digit rate in Western Europe and other important overseas markets.
We expanded our distribution rights to Finlandia during fiscal 2001, which also
contributed to higher beverage sales. While unit volumes for Fetzer and Bolla
declined modestly, higher prices yielded increased revenue for both brands.
Shipments of Korbel Champagnes declined significantly in fiscal 2001, reflecting
an industry-wide contraction in sales of sparkling wines.
Gross profit expanded 5%, or $37 million. Gross margin increased from 52.6% to
54.0%, continuing a long-term trend of steady improvement.
Advertising expenses grew 4% as measured in U.S. dollars, up 7% on a local
currency basis. Selling, general, and administrative expenses increased only 2%,
reflecting continued productivity gains from process and technology
improvements.
Operating income improved 8% in fiscal 2001. Strong results for the Jack
Daniel's family of brands were tempered by two adverse industry-wide events.
Although Korbel Champagne gained market share during the year, a sharp decline
in the U.S. sparkling wine category following the Millennium boom resulted in
lower volumes for the brand. In addition, a slowdown in Scotch production led to
a significant decline in sales of used barrels to Scotch whisky distillers.
Excluding Korbel and the used barrel business, segment operating income improved
13%.
21
Business Environment for Wine and Spirits
GOVERNMENT POLICIES, PUBLIC ATTITUDES: Our ability to market and sell our
beverage alcohol products depends heavily on government policy towards those
products and the attitude of society in general toward drinking them. This is
true both in the United States, our largest market, and around the world.
A small minority of drinkers abuse beverage alcohol, giving rise to public
issues of great significance. We strongly oppose abusive drinking and contribute
significant resources to programs aimed at understanding and curbing alcohol
abuse - especially drunk driving and underage drinking. We also support and
abide by voluntary industry marketing and advertising guidelines. We and other
beverage alcohol producers take a prominent role in encouraging responsible
consumption of our products and in warning against alcohol abuse. We support
social awareness organizations that fight alcohol abuse and provide education
about beverage alcohol, often in partnership with public health officials.
As a society, we are more likely to curb alcohol abuse through better education
about beverage alcohol and moderate drinking than with restrictions on alcohol
advertising and sales or punitive taxation. Especially in the U.S., distilled
spirits are at a marked disadvantage to beer and wine in taxation, advertising,
and the number and type of sales outlets. Along with other distillers, a major
goal of ours is to achieve greater cultural acceptance of our products and
parity with beer and wine in access to consumers.
LEVELING THE PLAYING FIELD: Among the objectives we seek are:
- greater access to television advertising for liquor (we were disappointed
by NBC's decision not to accept liquor ads after a brief trial run; NBC
accepts millions of dollars of beer and wine advertising annually)
- fairer product distribution rules, so that our customers can buy our
beverage products more conveniently;
- freedom to advertise our products outdoors (some municipal ordinances
discriminate against billboard advertising of beverage alcohol); and
- improved access to foreign markets, many of which have discriminatory tax
or other non-tariff barriers to U.S. beverage imports.
EXCISE EXCESS: As with all goods, beverage alcohol sales are sensitive to higher
tax rates. No legislation to increase U.S. federal excise taxes on distilled
spirits is currently pending, but future tax increases are always possible.
State legislatures increase beverage alcohol taxes from time to time; some
states even allow local taxes. The cumulative effect of such tax increases over
time hurts sales. With well over half of what a consumer pays going to taxes
(typically, more than 50% of the price of a bottle of bourbon), distilled
spirits are the most highly taxed consumer product in the U.S. We work for
reasonable excise tax reductions to remedy this situation. Tax rates and
advertising restrictions also affect beverage alcohol markets outside the U.S.,
but to date the impact of those changes in any one market is not significant to
our overall business.
THE LITIGATION CLIMATE: Publicity surrounding the many lawsuits against the
tobacco industry (and, to a lesser extent, against the gun industry) has
prompted some commentators to suggest that other "dangerous" industries, such as
alcohol, fast foods, gambling, and automobiles, might be next. But we do not
believe the legal theories that created liability for the tobacco companies
apply to beverage alcohol because the products are so different.
Unlike tobacco:
- Beverage alcohol does not harm otherwise healthy adults when used as
intended. In fact, scientists and health care experts report that beverage
alcohol may have positive cardiovascular health benefits for many otherwise
healthy adults (although we do not promote drinking beverage alcohol for
health reasons).
- The dangers of alcohol abuse are commonly known, and alcohol producers have
never tried to conceal them. Indeed, beverage alcohol producers are at the
forefront of efforts to combat drunk driving and underage drinking.
- Lastly, state and federal governments stringently regulate the content,
manufacture, marketing, and sale of beverage alcohol.
THE PUBLIC HEALTH COMMUNITY: We seek partnerships with the public health
community to combat alcohol abuse and improve understanding of beverage alcohol.
We have seen some notable successes, but we are disappointed that groups such as
The American Medical Association and The World Health Organization choose to
attack beverage alcohol producers rather than work with us. Long-range, such
attacks could hurt our business.
DISTRIBUTION STRATEGY: We have not made major investments in overseas
distribution networks; instead, we mostly use other spirits producers to
distribute and market our products outside the U.S. Although consolidation among
spirits producers theoretically could hinder the distribution of our spirits
products in the future, to date this has rarely happened. Other spirits
companies typically seek to distribute our premium spirits and wine brands, and
we expect that demand to continue.
EXCHANGE RATES: Sales revenue from international markets is affected by the
strength of foreign currencies relative to the U.S. dollar. Over the past
several years, the strong dollar has limited the revenue growth of our
international business, especially in Europe, despite excellent unit sales
growth. Strengthening of the dollar would have negative effects on our dollar
revenues.
22
CONSUMER DURABLES SEGMENT
Summary of Operating Performance
(Dollars in millions)
2000 2001 2002
------ ------ ------
Net Sales $ 591 $ 607 $ 588
% Change 5% 3% (3%)
Gross Profit $ 291 $ 304 $ 282
% Change 5% 4% (7%)
Advertising Expenses $ 75 $ 81 $ 85
% Change 5% 8% 4%
SG&A Expenses $ 167 $ 171 $ 180
% Change 2% 3% 6%
Amortization $ 5 $ 5 $ --
Operating Income $ 44 $ 47 $ 17
% Change 16% 6% (64%)
EBITDA $ 69 $ 71 $ 35
% Change 10% 2% (51%)
Gross Margin 49.3% 50.1% 48.0%
Operating Margin 7.5% 7.7% 2.9%
Our consumer durables segment includes fine china, crystal, silver, and luggage
products marketed under the Lenox, Dansk, Gorham, Kirk Stieff, and Hartmann
brand names. More than half of our Consumer Durables sales are now made directly
to consumers through our own retail stores, direct mail, and the Internet. The
balance of our Consumer Durable sales are made to department stores and other
distributors. This segment's sales are generally more vulnerable to changes in
economic conditions than those of our Wine and Spirits segment.
Fiscal 2002 Compared to 2001
Net sales declined $19 million, or 3%. Record sales for our direct-to-consumer
channel were more than offset by a sharp decline in orders for department
stores, which were acutely affected by the events of September 11.
Gross profit declined $22 million in fiscal 2002. In addition to the factors
discussed above, lower production levels and higher discounting activity eroded
margins.
Advertising expenses increased $4 million due primarily to increased spending in
the catalog and direct mail channels. Selling, general and administrative
expenses included $17 million of non-recurring costs related to our decision to
close three manufacturing plants. The $17 million includes $9 million of
severance costs for 600 terminated employees, $5 million of other estimated cash
expenditures, and $3 million of losses on impaired machinery and equipment. We
closed one plant during fiscal 2002 and plan to close the other two during
fiscal 2003. We are replacing the output of these plants by shifting a portion
of production to two of our other facilities and by outsourcing the remainder.
Excluding these non-recurring costs, segment selling, general, and
administrative expenses declined 5%.
Operating income fell 64%, reflecting the factors discussed above. Excluding the
benefit from FAS 142 and the cost of Business Improvement Initiatives, segment
operating income declined $18 million, or 39%.
Fiscal 2001 Compared to 2000
Net sales increased $16 million, or 3%, in fiscal 2001, fueled by gains in
catalog, direct mail, and Internet channels. Sales through traditional wholesale
channels softened during the last half of the fiscal year, attributable to a
weaker U.S. economy. Hartmann, the smallest of the company's consumer durables
businesses, suffered an unusually difficult holiday season, a trend that
continued through the fourth quarter.
Gross profit for the segment increased $13 million. Gross margin improved from
49.3% to 50.1%, reflecting an improved product mix and the benefits of
investments made to rationalize manufacturing capacity.
Advertising expenses were up 8%, due primarily to increased advertising of
collectible items. Selling, general, and administrative expenses rose 3%, and
included expenses of $1 million incurred during the second half of the year to
improve Hartmann's future performance. Management of costs, combined with a
reduction in required working capital, helped boost returns for the segment.
Operating income improved 6% for the year. Strong growth in sales of collectible
items resulted in a fourth consecutive year of double-digit earnings gains for
Lenox. This performance was partially offset by a $5 million decline in earnings
at Hartmann.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to consistently generate cash internally is one of our most
significant financial strengths. Our strong cash flows enable us to pay
dividends, pursue brand-building programs, make strategic acquisitions, and
undertake business improvement initiatives that enhance shareholder value.
Investment grade credit ratings of A1 from Moody's and A+ from Standard and
Poor's provide us with financial flexibility when accessing credit markets. Cash
flows from operations, together with access to global credit markets, are more
than adequate to meet our operating and capital requirements.
Cash Flow Summary
(Dollars in millions)
2000 2001 2002
------ ------ ------
Cash from operating activities $ 241 231 250
Additions to property, plant,
and equipment (78) (96) (71)
Acquisitions and other investments (41) (116) (5)
Dividends (83) (87) (94)
Net repayment of debt (30) (23) (37)
Acquisition of treasury stock -- (3) (13)
------ ------ ------
Change in cash $ 9 $ (94) $ 30
====== ====== ======
Cash provided by operations increased $19 million in fiscal 2002, helped by
lower working capital requirements. Cash used for investments fell to a more
normal level, following significant equity investments made during fiscal 2001.
Cash provided by operations declined $10 million in fiscal 2001, primarily due
to higher inventory levels in both business segments. Cash used for investments
increased significantly, driven by the acquisition of equity stakes in
Finlandia, Glenmorangie, and Tuaca.
23
We have access to short-term capital through the issuance of commercial paper,
backed by revolving bank credit agreements. Our committed revolving credit
agreements total $400 million, $200 million of which expires in fiscal 2003; the
remaining $200 million expires in fiscal 2007. The credit agreements provide us
with an immediate and continuing source of liquidity. At April 30, 2002, we had
no outstanding borrowings under these agreements.
We maintain an SEC shelf registration that gives us prompt access to longer-term
financing. At April 30, 2002, we had $220 million available on our $250 million
shelf registration.
CAPITAL EXPENDITURES
We invested $78 million in property, plant, and equipment in fiscal 2000, $96
million in fiscal 2001, and $71 million in fiscal 2002, primarily to expand
capacity for distilling and warehousing Jack Daniel's whiskey as well as adding
to our vineyard and winemaking properties.
Capital Expenditures
Dollars in Millions
2000 2001 2002
---- ---- ----
Wine and Spirits $63 $78 $54
Consumer Durables 15 18 14
---- ---- ----
Total $78 $96 $71
==== ==== ====
We expect our capital expenditures for fiscal 2003 to be in the range of $80 to
$100 million as we continue expanding the capacity of our production and
distribution facilities to meet growing consumer demand for our premium brands.
We expect to meet fiscal 2003 capital expenditure requirements with internally
generated funds.
LONG-TERM OBLIGATIONS
We have long-term obligations related to contracts, leases and borrowing
arrangements that we enter into in the normal course of business (see Notes 4
and 6 to the accompanying consolidated financial statements). The following
table summarizes the amounts of those obligations as of April 30, 2002:
Long-Term Obligations
(Dollars in millions)
2004- After
Total 2003 2007 2007
----- ---- ---- ----
Long-term debt $ 40 $ -- $ 32 $ 8
Unconditional purchase obligations 249 43 149 57
Operating leases 74 24 46 4
----- ---- ---- ----
Total $363 $ 67 $227 $ 69
===== ==== ==== ====
We expect to meet these obligations with internally generated funds.
DERIVATIVE FINANCIAL INSTRUMENTS
We use foreign currency forward contracts and options, generally with average
maturities of less than one year, as protection against the risk that the
eventual U.S. dollar cash flows resulting from our forecasted sales and
purchases of goods in foreign currencies will be adversely affected by changes
in exchange rates. We designate these derivative financial instruments as cash
flow hedges.
We formally assess (both at inception and at least quarterly) whether the
derivative financial instruments are effective at offsetting changes in the cash
flows of the hedged transactions. We defer the effective portion of a
derivative's change in fair value in Accumulated Other Comprehensive Loss
(Income) until the underlying hedged transaction is recognized in earnings. We
recognize any ineffective portion of the change in fair value immediately in
earnings.
No material gains or losses were recognized in earnings due to the
ineffectiveness of cash flow hedges. We expect to reclassify the majority of the
existing $1 million net loss from Accumulated Other Comprehensive Loss to
earnings during fiscal 2003. However, the amount we ultimately reclassify may
differ as a result of future changes in exchange rates.
We had outstanding foreign currency option and forward contracts, hedging
primarily euro, British pound, and yen revenues, with notional (face value)
amounts totaling $55 million, $98 million, and $122 million at April 30, 2000,
2001 and 2002, respectively. Our credit exposure is, however, limited to the
contracts' fair value ($4 million, $4 million, and ($1 million) at April 30,
2000, 2001, and 2002, respectively) rather than their notional amounts. We
minimize credit losses by entering into foreign currency contracts only with
major financial institutions that have earned investment grade credit ratings.
MARKET RISKS
We hold debt obligations, foreign currency forward and option contracts, and
commodity futures contracts that are exposed to risk from changes in interest
rates, foreign currency exchange rates, and commodity prices, respectively.
Established procedures and internal processes govern the management of these
market risks. As of April 30, 2002, we do not consider the exposure to these
market risks to be material.
ENVIRONMENTAL MATTERS
Along with other parties deemed responsible, we face environmental claims
resulting from the cleanup of several waste deposit sites in the U.S. We have
accrued our estimated portion of cleanup costs and expect either the other
responsible parties or insurance to cover the remainder. We do not expect that
any additional costs we incur to satisfy environmental claims will have a
material adverse effect on our financial position, results of operations, or
cash flows.
24
Brown-Forman
CONSOLIDATED STATEMENT OF INCOME
(Expressed in millions, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended April 30, 2000 2001 2002
- --------------------------------------------------------------------------------
Net sales $2,134 $2,180 $2,208
Excise taxes 257 256 250
Cost of sales 774 771 825
--------------------------------
Gross profit 1,103 1,153 1,133
Advertising expenses 281 295 299
Selling, general, and administrative expenses 474 484 481
--------------------------------
Operating income 348 374 353
Interest income 10 8 3
Interest expense 15 16 8
--------------------------------
Income before income taxes 343 366 348
Taxes on income 125 133 120
--------------------------------
Net income $ 218 $ 233 $ 228
================================
Earnings per share - Basic and Diluted $ 3.18 $ 3.40 $ 3.33
================================
Weighted average shares used to calculate earnings per share:
Basic 68.5 68.5 68.3
Diluted 68.6 68.6 68.5
The accompanying notes are an integral part of the consolidated financial
statements.
25
Brown-Forman
CONSOLIDATED BALANCE SHEET
(Expressed in millions, except share and per share amounts)
- --------------------------------------------------------------------------------
April 30, 2000 2001 2001
- --------------------------------------------------------------------------------
Assets
- ------
Cash and cash equivalents $ 180 $ 86 $ 116
Accounts receivable, less allowance for doubtful accounts
of $12 in 2000, $12 in 2001 and $16 in 2002 294 303 280
Inventories:
Barreled whiskey 202 219 219
Finished goods 169 202 183
Work in process 94 113 118
Raw materials and supplies 49 49 58
-------------------------
Total inventories 514 583 578
Prepaid income taxes -- -- 31
Other current assets 32 28 24
-------------------------
Total Current Assets 1,020 1,000 1,029
Property, plant and equipment, net 376 418 437
Prepaid pension cost 79 93 108
Investment in affiliates 17 125 127
Goodwill 253 246 246
Other assets 57 57 69
-------------------------
Total Assets $1,802 $1,939 $2,016
=========================
The accompanying notes are an integral part of the consolidated financial
statements.
26
- --------------------------------------------------------------------------------
April 30, 2000 2001 2002
- --------------------------------------------------------------------------------
Liabilities
- -----------
Commercial paper $ 220 $ 204 $ 167
Accounts payable and accrued expenses 271 281 296
Current portion of long-term debt 6 -- --
Accrued taxes on income 1 45 32
Deferred income taxes 15 8 --
-------------------------
Total Current Liabilities 513 538 495
Long-term debt 41 40 40
Deferred income taxes 95 62 58
Accrued postretirement benefits 58 59 60
Other liabilities 47 53 52
-------------------------
Total Liabilities 754 752 705
-------------------------
Stockholders' Equity
- --------------------
Capital Stock:
Class A common stock, voting, $0.15 par value;
authorized shares, 30,000,000;
issued shares, 28,988,091 4 4 4
Class B common stock, nonvoting, $0.15 par value;
authorized shares, 60,000,000;
issued shares, 40,008,147 6 6 6
Retained earnings 1,080 1,226 1,360
Treasury stock, at cost
(484,000, 537,000 and 648,000 common shares
in 2000, 2001, and 2002, respectively) (30) (32) (40)
Accumulated other comprehensive loss:
Cumulative translation adjustment (12) (17) (15)
Minimum pension liability adjustment -- -- (3)
Unrealized loss on cash flow hedge contracts -- -- (1)
-------------------------
Total accumulated other comprehensive loss (12) (17) (19)
-------------------------
Total Stockholders' Equity 1,048 1,187 1,311
-------------------------
Total Liabilities and Stockholders' Equity $1,802 $1,939 $2,016
=========================
27
Brown-Forman
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in millions; amounts in brackets are reductions of cash)
- --------------------------------------------------------------------------------
Year Ended April 30, 2000 2001 2002
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 218 $ 233 $ 228
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Depreciation 52 53 55
Amortization 10 11 --
Deferred income taxes (51) (40) (43)
Other (14) (20) (22)
Change in assets and liabilities, excluding
the effects of businesses acquired or sold:
Accounts receivable (20) (9) 23
Inventories 8 (63) 5
Other current assets (3) 3 5
Accounts payable and accrued expenses 36 10 15
Accrued taxes on income 1 44 (13)
Accrued postretirement benefits 1 1 1
Other liabilities 3 8 (4)
-------------------------
Cash provided by operating activities 241 231 250
-------------------------
Cash flows from investing activities:
Additions to property, plant and equipment (78) (96) (71)
Investment in affiliates -- (110) --
Acquisition of business, net of cash acquired (27) (4) --
Other (14) (2) (5)
-------------------------
Cash (used for) investing activities (119) (212) (76)
-------------------------
Cash flows from financing activities:
Net change in commercial paper (6) (16) (37)
Reduction of long-term debt (24) (7) --
Dividends paid (83) (87) (94)
Acquisition of treasury stock -- (3) (13)
-------------------------
Cash (used for) financing activities (113) (113) (144)
-------------------------
Net increase (decrease) in cash and cash equivalents 9 (94) 30
Cash and cash equivalents, beginning of year 171 180 86
-------------------------
Cash and cash equivalents, end of year $180 $ 86 $116
=========================
The accompanying notes are an integral part of the consolidated financial
statements.
28
Brown-Forman
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the Years Ended April 30, 2000, 2001 and 2002
(Expressed in millions, except share and per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Common Stock
Class Class Retained Accumulated Other Treasury
Total A B Earnings Comprehensive Loss Stock
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, April 30, 1999 $ 917 $ 4 $ 6 $ 945 $(8) $ (30)
Net income 218 218
Foreign currency translation
adjustment (4) (4)
-------
Comprehensive income 214
Cash dividends
Common, per share $1.21 (83) (83)
---------------------------------------------------------------------------------------------
Balance, April 30, 2000 1,048 4 6 1,080 (12) (30)
Net income 233 233
Foreign currency translation
adjustment (5) (5)
-------
Comprehensive income 228
Cash dividends
Common, per share $1.28 (87) (87)
Acquisition of treasury stock
(75,350 Class B common shares) (3) (3)
Treasury stock issued under
compensation plans 1 1
---------------------------------------------------------------------------------------------
Balance, April 30, 2001 1,187 4 6 1,226 (17) (32)
Net income 228 228
Foreign currency translation
adjustment 2 2
Pension liability adjustment (3) (3)
Cumulative effect of
accounting change 2 2
Reclassification to earnings,
net of tax of $1 (2) (2)
Net loss on hedging instruments,
net of tax of $1 (1) (1)
-------
Comprehensive income 226
Cash dividends
Common, per share $1.36 (94) (94)
Acquisition of treasury stock
(96,831 Class A and 93,085
Class B common shares) (13) (13)
Treasury stock issued under
compensation plans 5 5
---------------------------------------------------------------------------------------------
Balance, April 30, 2002 $1,311 $ 4 $ 6 $1,360 $(19) $ (40)
=============================================================================================
The accompanying notes are an integral part of the consolidated financial statements.
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars expressed in millions, except per share and per option amounts)
1. ACCOUNTING POLICIES...the accounting policies we apply when preparing our
consolidated financial statements. References to "FASB" are to the Financial
Accounting Standards Board, the private-sector organization that establishes
financial accounting and reporting standards.
Principles of Consolidation
- ---------------------------
Our consolidated financial statements include the accounts of all wholly-owned
and majority-owned subsidiaries. We use the equity method to account for
investments in affiliates over which we can exercise significant influence (but
not control). We carry all other investments in affiliates at cost. We eliminate
all intercompany transactions.
Cash Equivalents
- ----------------
Cash equivalents include bank demand deposits and all highly liquid investments
with original maturities of three months or less.
Inventories
- -----------
We state inventories at the lower of cost or market, with approximately 85% of
consolidated inventories being valued using the last-in, first-out (LIFO)
method. All remaining inventories are valued using either the first-in,
first-out or the average cost methods. If we did not use the LIFO method,
inventories would have been $110, $105, and $110 higher than reported at April
30, 2000, 2001, and 2002, respectively.
Generally, whiskey must be barreled for several years, so we bottle and sell
only a portion of our whiskey inventory each year. Following industry practice,
we classify all barreled whiskey as a current asset. We include warehousing,
insurance, ad valorem taxes, and other carrying charges applicable to barreled
whiskey in inventory costs.
We classify bulk wine inventories as work in process.
Property, plant, and equipment
- ------------------------------
We state property, plant, and equipment at cost. We depreciate these assets
based on their estimated useful lives, principally using the straight-line
method.
Treasury Stock
- --------------
As of April 30, 2002, we held 648,000 shares of our common stock (97,000 of
Class A and 551,000 of Class B) as treasury stock. We expect to use most of
these shares to satisfy future exercises of employee stock options.
Foreign Currency Translation
- ----------------------------
The U.S. dollar is the functional currency for most of our consolidated
operations. For those operations, we report all gains and losses from foreign
currency transactions in current income. The local currency is the functional
currency for some foreign operations. For those investments, we report
cumulative translation effects in the cumulative translation adjustment to
stockholders' equity.
Revenue Recognition
- -------------------
We recognize revenue when we ship products to third parties, which is when title
and risk of loss pass to the buyer.
Shipping and Handling Fees and Costs
- ------------------------------------
We report the amounts we bill to our customers for shipping and handling as net
sales, and we report the costs we incur for shipping and handling as cost of
sales.
Advertising Costs
- -----------------
We expense most advertising costs as we incur them, but we capitalize and
amortize direct-response advertising costs over periods not exceeding one year.
Earnings Per Share
- ------------------
We calculate basic earnings per share as net income divided by the weighted
average number of common shares outstanding during the year. We calculate
diluted earnings per share the same way, except that the denominator also
includes the additional common shares that would have been issued if outstanding
stock options had been exercised, as determined by applying the treasury stock
method.
Estimates
- ---------
To prepare financial statements that conform with generally accepted accounting
principles, our management must make informed estimates that affect how we
report revenues, expenses, assets, and liabilities, including contingent assets
and liabilities. Actual results could (and probably will) differ from these
estimates.
Reclassifications
- -----------------
We have reclassified some prior year amounts to conform with this year's
presentation.
Other
- -----
Effective May 1, 2001, we adopted FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." FAS 144 resolves certain implementation issues
related to FAS 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of." The adoption of FAS 144 did not have a
material impact on our consolidated financial statements.
2. GOODWILL AND OTHER INTANGIBLE ASSETS...how we account for intangible assets,
including our adoption of a new accounting rule pertaining to the amortization
of such assets. In July 2001, the FASB issued FAS 141, "Business Combinations,"
and FAS 142, "Goodwill and Other Intangible Assets." FAS 141 requires that the
purchase method of accounting be used for all business combinations initiated or
completed after June 30, 2001. FAS 141 also specifies the criteria under which
intangible assets acquired in a purchase method business combination should be
recognized and reported apart from goodwill. FAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be assessed for impairment at least annually by applying a fair value-
based test. FAS 142 also requires that intangible assets with definite useful
lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with FAS
121.
FAS 141 became effective upon its issuance. We elected to adopt FAS 142 as of
May 1, 2001. No impairment of intangible assets was indicated as of that date.
30
The following table adjusts reported net income and earnings per share for 2000
and 2001 to exclude amortization of goodwill and other intangible assets with
indefinite useful lives:
2000 2001
- --------------------------------------------------------------------------------
Net Per Net Per
Income Share Income Share
------ ----- ------ -----
As reported $218 $3.18 $233 $3.40
Amortization of goodwill 9 0.14 10 0.14
Amortization of equity method intangibles -- -- 2 0.03
Amortization of trademarks 1 0.01 1 0.01
------ ----- ------ -----
Adjusted $228 $3.33 $246 $3.58
====== ===== ====== =====
Equity method intangibles totaling $9, $92, and $92 as of April 30, 2000, 2001,
and 2002, respectively, are included in "Investment in Affiliates" in the
accompanying consolidated balance sheet. Trademarks of $7, $8, and $8 as of
those dates are included in "Other Assets." We have no significant intangible
assets with definite useful lives and thus had no significant amortization
expense during 2002.
3. ACQUISITIONS...of brands and distribution rights that add value to our
business. Until we adopted FAS 142 effective May 1, 2001, we were amortizing the
goodwill and other indefinite-lived intangibles related to acquisitions over
forty years from their respective acquisition dates. The following are major
acquisitions made over the past three years, each of which was accounted for as
a purchase.
- Sonoma-Cutrer: In April 1999, we acquired a majority interest in Sonoma-
Cutrer Vineyards, Inc. for $69, net of $32 of monetary assets received
(cash and tax benefits receivable, offset by assumed debt). We acquired the
remaining interests for $27 and $3 during 2000 and 2001, respectively.
Total goodwill was $39.
- Glenmorangie: In May 2000, we agreed with Glenmorangie plc to expand our
sales and marketing of the Glenmorangie and Ardberg Single Malt Scotch
brands outside the U.S. In connection with this expansion, we bought
shares representing approximately 20% of the equity of Glenmorangie plc
for $15.
- Finlandia: In June 2000, we formed a global alliance with Altia Group Ltd
to market and sell Finlandia Vodka. We acquired 45% of Finlandia Vodka
Worldwide Ltd (FVW), which owns the Finlandia trademark and the rights to
market Finlandia Vodka, for $84. That amount included an intangible asset
of $75.
Altia Group Ltd has an option during a three-year window beginning
January 1, 2004, during which it may require us to buy some or all of its
remaining 55% interest in FVW. Buying Altia's entire remaining interest
would cost us approximately 107 million euros (approximately $97 at
April 30, 2002) plus interest of 4.5% per year from June 15, 2000.
4. COMMITMENTS...for future purchases of grapes and bulk wine, as well as leased
facilities and equipment. We have contracted with various growers and wineries
to supply portions of our future grape and bulk wine requirements. Most of these
contracts call for prices to be determined by market conditions, but some
contracts provide for minimum purchase prices. We have purchase obligations
related to these contracts of $43 in 2003, $41 in 2004, $39 in 2005, $36 in
2006, $33 in 2007, and $57 after 2007.
We made rental payments for real estate and vehicles, as well as office,
computer, and manufacturing equipment under operating leases of $26 in 2000, $28
in 2001, and $31 in 2002. We have commitments related to minimum lease payments
of $24 in 2003, $20 in 2004, $15 in 2005, $7 in 2006, $4 in 2007, and $4 after
2007.
The operating leases described above include a master operating lease agreement
with an unrelated party that enables us to add vineyard properties in California
to support our premium varietal and estate wine business. We use this
arrangement primarily to secure land under development that is not yet a fully
producing asset. The agreement allows us to lease land with a capitalized value
up to $60; at April 30, 2002, we have used $35 of the facility. The master lease
expires in March 2005. Lease payments for each property commence upon completion
of development or March 2003, whichever is sooner.
Upon expiration of the master lease, we can either renegotiate the lease,
request the sale of the properties to a third party, or purchase the properties
at a price equal to the original acquisition cost plus accrued interest and any
other lease amounts owed. For each property that we decide not to purchase, we
guarantee a significant residual value to the seller. If there is a difference
between what the seller receives for the properties and what we owe at
termination, we have agreed to make up that difference. The value of that
guarantee totaled $32 as of April 30, 2002. We expect the fair value of these
properties to exceed the guaranteed value.
5. CREDIT FACILITIES...commitments from banks to provide us with liquidity. We
have committed revolving credit agreements with various domestic and
international banks for $400, $200 of which expires in fiscal 2003. The
remaining $200 million expires in fiscal 2007. The most restrictive of the
agreements' covenants requires that our consolidated total debt to consolidated
net worth not exceed a ratio of 2 to 1. At April 30, 2002, we were well within
this covenant's parameters, although we had no outstanding borrowings under
these agreements. At April 30, 2002, we also had available for issuance $220 of
debt securities under an SEC shelf registration.
6. DEBT...our long-term debt consisted of the following:
April 30, 2000 2001 2002
- -----------------------------------------------------------------
6.82% to 7.38% medium-term notes,
due 2005 $ 30 $ 30 $ 30
Variable rate industrial
revenue bonds, due through 2026 10 10 10
Other 7 -- --
--------------------------
47 40 40
Less current portion 6 -- --
--------------------------
$ 41 $ 40 $ 40
==========================
31
Long-term debt payments of $32 are required during fiscal 2006. No additional
debt payments are required through 2007. Cash paid for interest was $15 in 2000,
$16 in 2001, and $8 in 2002. The weighted average interest rates on commercial
paper were 6.1% at April 30, 2000; 4.8% at April 30, 2001; and 1.8% at April 30,
2002. The weighted average interest rates on the variable rate industrial
revenue bonds were 5.2%, 4.3%, and 1.8% at April 30, 2000, 2001, and 2002,
respectively.
7. FOREIGN CURRENCY RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS...the
policies and accounting practices we apply to manage foreign currency risk.
Effective May 1, 2001, we adopted FAS 133, "Accounting for Derivative
Instruments and Hedging Activities." That Statement requires that all derivative
instruments be reported on the balance sheet at fair value. The cumulative
effect of adopting FAS 133 was not material to our consolidated financial
statements.
We use foreign currency forward contracts and options, generally with average
maturities of less than one year, as protection against the risk that the
eventual U.S. dollar cash flows resulting from our forecasted sales and
purchases of goods in foreign currencies will be adversely affected by changes
in exchange rates. We generally designate these derivative financial instruments
as cash flow hedges.
We formally assess, both at inception and at least quarterly thereafter, whether
the derivative financial instruments are effective at offsetting changes in the
cash flows of the hedged transactions. The effective portion of a derivative's
change in fair value is deferred in Accumulated Other Comprehensive Loss
(Income) until the underlying hedged transaction is recognized in earnings. Any
ineffective portion of the change in fair value is immediately recognized in
earnings.
No material gains or losses were recognized in earnings due to the
ineffectiveness of cash flow hedges. We expect to reclassify the majority of the
existing $1 net loss from Accumulated Other Comprehensive Loss to earnings
during fiscal 2003. However, the amount we ultimately reclassify may differ as a
result of future changes in exchange rates.
We had outstanding foreign currency option and forward contracts, hedging
primarily euro, British pound, and yen revenues, with notional (face value)
amounts totaling $55, $98, and $122 at April 30, 2000, 2001 and 2002,
respectively. Our credit exposure is, however, limited to the contracts' fair
value ($4, $4, and ($1) at April 30, 2000, 2001, and 2002, respectively) rather
than their notional amounts. We minimize credit losses by entering into foreign
currency contracts only with major financial institutions that have earned
investment grade credit ratings.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS...the liquidation value of our cash,
foreign currency contracts, and debt is essentially the same as our recorded
book value. The fair value of cash and cash equivalents and commercial paper
approximates the carrying amount due to the short maturities of these
instruments. We estimate the fair value of long-term debt using discounted cash
flows based on our incremental borrowing rates for similar debt. The fair value
of foreign currency contracts is based on quoted market prices. A comparison of
the fair values and carrying amounts of these instruments is as follows:
April 30, 2001 2002
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Assets:
Cash and
cash equivalents $ 86 $ 86 $116 $116
Foreign currency
contracts 4 4 (1) (1)
Liabilities:
Commercial paper 204 204 167 167
Long-term debt 40 42 40 42
9. BALANCE SHEET INFORMATION...supplemental information on our year end balance
sheet is as follows:
April 30, 2000 2001 2002
- --------------------------------------------------------------------------------
Property, plant, and equipment
- ------------------------------
Land $ 65 $ 69 $ 69
Buildings 243 267 292
Equipment 491 512 546
------------------------------------
799 848 907
Less accumulated depreciation 423 430 470
------------------------------------
$376 $418 $437
====================================
Accounts payable
and accrued expenses
- --------------------
Accounts payable, trade $ 79 $ 79 $ 80
Accrued expenses:
Advertising 53 59 65
Compensation and commissions 67 66 62
Excise and other non-income taxes 14 16 16
Other 58 61 73
------------------------------------
192 202 216
------------------------------------
$271 $281 $296
====================================
32
10. TAXES ON INCOME...details of our income tax expense, and amounts we owe at
year end. Taxes on income are composed of the following:
- --------------------------------------------------------------------------------
2000 2001 2002
- --------------------------------------------------------------------------------
Current:
Federal $160 $153 $144
Foreign 4 6 5
State and local 12 14 13
------------------------------------
176 173 162
------------------------------------
Deferred:
Federal (43) (34) (34)
State and local (8) (6) (8)
------------------------------------
(51) (40) (42)
------------------------------------
$125 $133 $120
====================================
United States and foreign components of income before income taxes are as
follows:
- --------------------------------------------------------------------------------
2000 2001 2002
- --------------------------------------------------------------------------------
United States $307 $329 $315
Foreign 36 37 33
------------------------------------
$343 $366 $348
====================================
The income amounts in the above table are based on the location of the taxable
entity from which sales are derived, rather than the location of its customers.
The following is a reconciliation of the effective tax rates with the United
States' statutory rate:
Percent of Income Before Taxes
- --------------------------------------------------------------------------------
2000 2001 2002
- --------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State taxes, net of U.S.
Federal tax benefit 2.2 2.3 2.3
Income taxed at other than U.S.
Federal statutory rate (1.2) (1.0) (1.3)
Tax benefit of Foreign
Sales Corporation (1.0) (1.2) (2.0)
Nondeductible amortization 1.0 1.0 --
Other, net 0.5 0.2 0.5
-------------------------------------
Effective rate 36.5% 36.3% 34.5%
=====================================
Deferred tax assets and liabilities are composed of the following:
April 30, 2000 2001 2002
- --------------------------------------------------------------------------------
Deferred tax assets:
Postretirement and other benefits $ 44 $ 46 $ 48
Accrued liabilities and other 19 12 20
Intercompany transactions -- -- 9
-----------------------------------
Total deferred tax assets 63 58 77
-----------------------------------
Deferred tax liabilities:
Intercompany transactions 84 31 --
Property, plant, and equipment 36 35 37
Undistributed foreign earnings 17 17 17
Pension plans 31 36 41
Other 5 9 9
-----------------------------------
Total deferred tax liabilities 173 128 104
-----------------------------------
Net deferred tax liability $110 $ 70 $ 27
===================================
Deferred income taxes were not provided on undistributed earnings of certain
foreign subsidiaries ($136, $149, and $161 at April 30, 2000, 2001, and 2002,
respectively) because we expect these undistributed earnings to be reinvested
indefinitely overseas. If these amounts were not considered permanently
reinvested, additional deferred taxes of approximately $30, $33, and $38 would
have been provided in 2000, 2001, and 2002, respectively.
Cash paid for income taxes was $174 in 2000, $131 in 2001, and $175 in 2002.
11. PENSION AND POSTRETIREMENT BENEFITS...we sponsor various defined benefit
pension and postretirement plans covering most full-time employees. Information
about these plans is presented below.
Components of net periodic pension benefit expense (income):
Pension
- ---------------------------------------------------------------
2000 2001 2002
- ---------------------------------------------------------------
Service cost $12 $ 12 $ 14
Interest cost 21 25 27
Expected return on plan assets (38) (44) (49)
Amortization of:
Unrecognized net gain -- (2) (2)
Unrecognized prior service cost 1 1 1
Unrecognized net asset (3) (3) (3)
------------------------
Net periodic benefit expense (income) $(7) $(11) $(12)
========================
We amortize prior service costs on a straight-line basis over the average
remaining service period of employees expected to receive benefits.
33
Components of net periodic postretirement benefit cost:
Postretirement
- --------------------------------------------------------------
2000 2001 2002
- --------------------------------------------------------------
Service cost $ 1 $ 1 $ 1
Interest cost 3 3 3
-----------------------
Net periodic benefit cost $ 4 $ 4 $ 4
=======================
Change in benefit obligation:
Pension Postretirement
- ------------------------------------------------------------------------
2001 2002 2001 2002
- ------------------------------------------------------------------------
Obligation at beginning of year $329 $366 $ 45 $ 47
Service cost 12 14 1 1
Interest cost 25 27 3 3
Plan amendments 1 3 -- 6
Actuarial loss 15 10 -- 15
Benefits paid (16) (18) (2) (3)
----------------------------------
Obligation at end of year $366 $402 $ 47 $ 69
==================================
Change in plan assets:
Pension Postretirement
- ------------------------------------------------------------------------
2001 2002 2001 2002
- ------------------------------------------------------------------------
Fair value at beginning of year $516 $516 $ -- $ --
Actual return on plan assets 15 (68) -- --
Company contributions 1 1 2 3
Benefits paid (16) (18) (2) (3)
----------------------------------
Fair value at end of year $516 $431 $ -- $ --
==================================
Plan assets consist primarily of stocks and bonds.
Selected information for plans with accumulated benefit obligations in excess of
plan assets:
Pension Postretirement
- ------------------------------------------------------------------------
2001 2002 2001 2002
- ------------------------------------------------------------------------
Projected benefit obligation $(30) $(66) $(47) $(69)
Accumulated benefit obligation (25) (61) (47) (69)
Fair value of plan assets -- 28 -- --
Funded status:
Pension Postretirement
- ------------------------------------------------------------------------
April 30, 2001 2002 2001 2002
- ------------------------------------------------------------------------
Funded status $150 $ 29 $(47) $(69)
Unrecognized net loss (gain) (83) 49 (11) 4
Unrecognized prior service cost 10 11 (1) 5
Unrecognized transition asset (6) (4) -- --
----------------------------------
Net amount recognized $ 71 $ 85 $(59) $(60)
==================================
Net amounts recognized in the consolidated balance sheet:
Pension Postretirement
- ------------------------------------------------------------------------
April 30, 2001 2002 2001 2001
- ------------------------------------------------------------------------
Prepaid benefit cost $ 93 $108 $ -- $ --
Accrued benefit liability (26) (30) (59) (60)
Intangible asset 4 4 -- --
Accumulated other comprehensive loss -- 3 -- --
----------------------------------
Net amount recognized $ 71 $ 85 $(59) $(60)
==================================
Weighted-average assumptions:
Pension
- --------------------------------------------------------------
2000 2001 2002
- --------------------------------------------------------------
Discount rate 7.8% 7.5% 7.0%
Expected return on plan assets 10.0% 10.0% 9.5%
Rate of compensation increase 4.5% 4.5% 4.0%
Postretirement
- --------------------------------------------------------------
2000 2001 2002
- --------------------------------------------------------------
Discount rate 7.8% 7.5% 7.0%
Health care cost trend rates:
Present rate before age 65 6.3% 6.0% 10.0%
Present rate age 65 and after 5.9% 5.7% 12.0%
We project health care cost trend rates to decline gradually to 5.5% by 2010 and
to remain level after that. Assumed health care cost trend rates have a
significant effect on the amounts reported for postretirement medical plans. A
one percentage point increase in assumed health care cost trend rates would have
increased the accumulated postretirement benefit obligation as of April 30, 2002
by $6 and the aggregate service and interest costs for 2002 by $1. A one
percentage point decrease in assumed health care cost trend rates would have
decreased the accumulated postretirement benefit obligation as of April 30, 2002
by $5 and the aggregate service and interest costs for 2002 by $1.
34
12. BUSINESS SEGMENT INFORMATION...we do business in two operating segments -
Wine and Spirits, and Consumer Durables. These segments reflect the two
categories of products from which we derive our revenues. Our Wine and Spirits
segment produces, imports, and markets wines and distilled spirits. Our Consumer
Durables segment manufactures and sells china, crystal, ceramic and crystal
collectibles, silver, luggage, and leather accessories.
Segment accounting policies are the same as the policies described in Note 1. We
have no intersegment revenues.
The following tables reconcile segment operating results and asset information
to consolidated amounts.
2000 2001 2002
-----------------------------------------------
Net sales:
Wine and spirits $1,543 $1,573 $1,620
Consumer durables 591 607 588
-----------------------------------------------
Consolidated $2,134 $2,180 $2,208
===============================================
Earnings before interest, taxes, depreciation,
and amortization (EBITDA):
Wine and spirits $ 341 $ 367 $ 372
Consumer durables 69 71 35
-----------------------------------------------
Consolidated $ 410 $ 438 $ 407
===============================================
Operating income:
Wine and spirits $ 304 $ 327 $ 336
Consumer durables 44 47 17
Amounts not allocated to segments:
Interest expense, net (5) (8) (5)
-----------------------------------------------
Consolidated income
before income taxes $ 343 $ 366 $ 348
===============================================
Depreciation and amortization:
Wine and spirits $ 37 $ 40 $ 37
Consumer durables 25 24 18
-----------------------------------------------
Consolidated $ 62 $ 64 $ 55
===============================================
Goodwill:
Wine and spirits $ 117 $ 116 $ 116
Consumer durables 136 130 130
-----------------------------------------------
Consolidated $ 253 $ 246 $ 246
===============================================
Total assets:
Wine and spirits $1,349 $1,468 $1,573
Consumer durables 453 471 443
-----------------------------------------------
Consolidated $1,802 $1,939 $2,016
===============================================
The company's investments in affiliates are included in the Wine and Spirits
segment's assets. Long-lived assets located outside the United States are not
significant.
2000 2001 2002
-----------------------------------------------
Additions to long-lived assets:
Wine and spirits $ 69 $ 80 $ 57
Consumer durables 19 20 21
---------------------------------------------
Consolidated $ 88 $ 100 $ 78
===============================================
The following table presents geographic information about net sales:
2000 2001 2002
-----------------------------------------------
Net sales:
United States $1,777 $1,810 $1,817
Other countries 357 370 391
-----------------------------------------------
$2,134 $2,180 $2,208
===============================================
Net sales are attributed to countries based on where customers are located.
13. CONTINGENCIES...potential claims against us. We operate in a litigious
environment, and we get sued in the normal course of business. Sometimes
plaintiffs seek significant damages. Many suits and claims take years to
adjudicate, and it is difficult to predict their outcome. In our opinion, based
on advice from legal counsel, none of these suits or claims will have a material
adverse effect on our consolidated financial position, results of operations, or
cash flows.
14. ENVIRONMENTAL MATTERS...potential cleanup costs. Along with other parties
deemed responsible, we face environmental claims resulting from the cleanup of
several waste deposit sites in the U.S. We have accrued our estimated portion of
cleanup costs and expect other responsible parties and insurance to cover the
remaining costs. We do not believe that any additional costs we incur will have
a material adverse effect on our consolidated financial position, results of
operations, or cash flows.
35
15. STOCK OPTIONS...a summary of our Plan, how we account for it, and how we
fund it. Under our Omnibus Compensation Plan (Plan), we can grant stock options
and other stock-based incentive awards for a total of 3,400,000 shares of common
stock to eligible employees until April 30, 2005. Shares delivered to employees
are limited by the Plan to shares that we purchase in the market for this
purpose. No new shares may be issued.
We grant stock options at an exercise price of not less than the fair value of
the underlying stock on the grant date. Except for the stock options granted at
an exercise price of $100 per share (discussed below), stock options granted
under the Plan become exercisable after three years from the first day of the
fiscal year of grant and expire seven years after that date. The fair value of
these options granted during 2000, 2001, and 2002 were $16.37, $14.38, and
$17.37 per option, respectively. Fair values were estimated using the Black-
Scholes pricing model with the following assumptions:
2000 2001 2002
- --------------------------------------------------------------
Risk-free interest rate 5.9% 6.2% 4.8%
Expected volatility 21.6% 24.0% 23.6%
Expected dividend yield 2.2% 2.2% 2.1%
Expected life (years) 6 6 6
We have also granted 533,455 stock options with an exercise price of $100 per
share, which become exercisable on May 1, 2006, and expire on September 1, 2007.
The fair value of these options was $5.77 per option, using the Black-Scholes
pricing model and assuming a risk-free interest rate of 6.0%, expected
volatility of 18.0%, an expected dividend yield of 2.2%, and an expected life of
eight years.
As of April 30, 2002, we have no other stock-based awards outstanding under the
Plan.
We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees," and related interpretations in accounting for stock
options. Accordingly, we have not recognized any compensation expense related to
stock option grants. If we had instead recognized compensation expense for stock
options based on their fair value at their grant dates consistent with the
methodology prescribed under FAS 123, "Accounting for Stock-Based Compensation,"
our net income would have been reduced by $2.6 in 2000, $3.2 in 2001, and $3.8
in 2002. Our basic and diluted earnings per share would have been reduced by
$0.04 per share in 2000, $0.05 per share in 2001, and $0.06 per share in 2002.
The Plan plan requires that we purchase shares on the open market to satisfy
stock option requirements, thereby avoiding future dilution of earnings that
would occur from issuing additional shares. We acquire treasury shares from time
to time in anticipation of these requirements. The extent to which diluted
shares exceed the number of basic shares is determined by how much our stock
price has appreciated since options were granted, irrespective of how many
treasury shares we have acquired. To ensure that earnings are not diluted by the
Plan, our intention is to hold enough treasury stock so that the number of
diluted shares is always less than the original 69.0 million that was
outstanding at inception of the Plan (as adjusted for any share repurchases or
issuances unrelated to the Plan).
The following table summarizes option activity for the three years ended April
30, 2002. All options are for an equivalent number of shares of Class B common
stock.
Weighted
Options Average
Outstanding Exercise Price
- --------------------------------------------------------------------------------
Balance, April 30, 1999 618,265 $ 51.03
Granted 802,928 85.11
Exercised (6,154) 36.13
Forfeited (13,658) 87.84
------------------------------------------
Balance, April 30, 2000 1,401,381 70.28
Granted 418,216 52.97
Exercised (21,802) 43.93
Forfeited (3,502) 51.47
------------------------------------------
Balance, April 30, 2001 1,794,293 66.60
Granted 356,299 71.49
Exercised (78,621) 48.00
------------------------------------------
Balance, April 30, 2002 2,071,971 68.15
==========================================
The following table summarizes the status of stock options outstanding as of
April 30, 2002, by exercise price:
Remaining
Exercise Price Options Contractual Options
Per Option Outstanding Life (Years) Exercisable
- -------------- ----------- ------------ -----------
$ 36.13 95,956 4.0 95,956
49.13 185,276 5.0 185,276
50.44 396,841 8.0 --
61.25 223,946 6.0 223,946
62.25 316,678 7.0 --
68.33 319,819 9.0 --
100.00 533,455 5.3 --
----------- -----------
2,071,971 505,178
=========== ===========
16. RESTRUCTURING COSTS...for plant closings announced in 2002. During 2002, we
accrued $17 of non-recurring costs related to our decision to close three
manufacturing plants in the Consumer Durables segment. The $17 includes $9 of
severance costs for 600 terminated employees, $5 of other estimated cash
expenditures, and $3 of losses on impaired machinery and equipment. We closed
one plant during fiscal 2002 and plan to close the other two during fiscal 2003.
We are replacing the output of these plants by shifting a portion of production
to two of our other facilities and by outsourcing the remainder. We charged $4
of severance costs against the accrual during 2002, leaving a remaining accrual
balance of $13, as of April 30, 2002.
36
REPORT OF MANAGEMENT
As Brown-Forman's CEO and CFO, we are responsible for the presentation,
integrity, and objectivity of the information contained in these consolidated
financial statements. We have discharged this responsibility by establishing a
rigorous system of corporate conduct, internal audit, external audit, and board
oversight.
Corporate Conduct: In the current turbulent business climate, we are proud of
Brown-Forman's hard-earned reputation for conducting business in a forthright
manner. We take seriously our responsibility to foster a strong ethical climate
so that employees conduct the company's business according to the highest
personal and corporate standards.
Our Code of Conduct and Compliance Guidelines set out unambiguously each
employee's duty to ensure open communication throughout the company, disclose
potential conflicts of interest, comply with all applicable domestic and foreign
laws (including financial disclosure laws), and keep proprietary information
confidential. The company systematically assesses compliance with these
standards, including annual verification statements signed by all employees, and
review by the Audit Committee of our Board of Directors (comprising non-
employee directors).
Internal Audit: We are also responsible for establishing and maintaining a
system of internal audit designed to provide reasonable assurance at a
reasonable cost that financial records are reliable for preparing financial
statements and that assets are properly accounted for and safeguarded. We
believe that, as of April 30, 2002, the internal audit system accomplishes its
objectives adequately.
External Audit: PricewaterhouseCoopers LLP, independent accountants (PwC),
audited the company's consolidated financial statements. As part of its audit,
PwC evaluated selected internal accounting controls to establish the nature,
timing, and extent of its audit tests. We gave PwC access to all the company's
financial records and related data, as well as the minutes of stockholders',
directors', and other appropriate meetings. We believe that all representations
made to PwC during the audit were valid and appropriate.
Board Oversight: The Board of Directors, through its Audit Committee, meets with
management, the internal auditors, and the independent accountants to ensure
that each is discharging its responsibilities properly. Both the independent
accountants and the internal auditors have free access to the Audit Committee,
without management present, to discuss the results of their work, including
internal accounting controls and the quality of financial reporting.
Accordingly, we can report that the consolidated financial statements in this
Annual Report have been prepared in accordance with generally accepted
accounting principles. They include amounts based on our best estimates and
judgments. We also prepared the related financial information in this report and
are responsible for its accuracy and consistency with the financial statements.
/s/ Owsley Brown II
Owsley Brown II
Chairman of the Board
and Chief Executive Officer
/s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President
and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
BROWN-FORMAN CORPORATION
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Brown-Forman
Corporation and Subsidiaries ("the Company") at April 30, 2000, 2001 and 2002,
and the results of their operations and their cash flows for each of the three
years in the period ended April 30, 2002, in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Financial Accounting Standards Board Statement No. 142, "Goodwill and
Other Intangible Assets" as of May 1, 2001.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
May 23, 2002
37
IMPORTANT INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
From time to time, we make "forward-looking statements" related to our
anticipated financial performance, business prospects, new products, and similar
matters, within the meaning of the Private Securities Litigation Reform Act of
1995. The words "believe," "expect," "anticipate," "project," and similar
expressions, among others, identify forward-looking statements, which speak only
as of the date the statement was made. We have no current intent to update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise, except as otherwise required by law.
In this Annual Report to Stockholders, we make several such forward-looking
statements, but we do not guarantee that the results indicated will actually be
achieved. These statements are subject to a number of important risks and
uncertainties, which could cause our actual results and experience to differ
materially from the anticipated results or other expectations expressed in those
forward-looking statements. We set forth below a non-exclusive list of such
risks and uncertainties.
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. However, the bulk of our business remains in the U.S. and our
business prospects generally depend heavily on the state of the U.S. economy,
which appears to be in recession. Earnings could be adversely affected by
terrorist attacks, such as those of September 11, 2001 and related subsequent
events, including the U.S response, other hostile acts, retaliation, and threats
of any of these. Earnings could also be hurt if the United States went to war
with Iraq or another country deemed to be harboring terrorists.
Beverage Risk Factors: The beverage alcohol business is not "recession proof."
Current projections for our domestic beverage business assume that the U.S.
economy will rebound in 2002 and continue through the next calendar year. Such a
rebound should also increase business travel and entertainment, which helps our
business. If this rebound does not occur, our earnings will be weaker. Beverage
wholesalers and retailers in the U.S. appear to be lowering their beverage trade
inventories, which adversely affects shipments. Profits from our international
beverage business may be adversely affected 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 the United
Kingdom, Germany, Japan, and Australia. The long-term outlook for our beverage
business anticipates continued success of Jack Daniel's Tennessee Whiskey,
Southern Comfort, and our other core wine and spirits brands. This assumption is
based in part on favorable demographic trends in the U.S. and many international
markets for the sale of wine and spirits. Current expectations for our global
beverage business may not be met if these demographic trends do not translate
into corresponding sales increases. Profits could also be hurt by increases in
the price of grain, grapes or energy.
The wine and spirits business, both in the United States and abroad, is also
sensitive to political and social trends. 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.
Increases in state excise taxes on wine and spirits to meet budget shortfalls
could dampen sales in those states. 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 lawsuits are
filed against alcohol manufacturers.
Consumer Durables Risk Factors: The Consumer Durables segment depends more upon
a strong economy than the beverage segment. Current plans anticipate an economic
rebound sometime in 2002. Department stores are the most important sales channel
for fine china and dinnerware. If there is further deterioration in the
department store business, or more consolidation, it could hurt our sales.
Similarly, sales could be hurt if department stores devote less space to fine
china and dinnerware products. Hartmann Luggage's business has suffered from the
decline in travel since the events of September 11, 2001. Future growth in that
business depends partly on a stronger travel environment.
38
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Percentage State or
of Voting Jurisdiction
Name Securities Owned of Incorporation
- ---- ---------------- ----------------
AMG Trading, L.L.C. 100% Delaware
Brown-Forman Beverages Australia Pty. Ltd. 100% Australia
Brown-Forman Beverages North Asia, L.L.C. 100% Delaware
Brown-Forman International FSC, Ltd. 100% U.S. Virgin Islands
B-F Korea, L.L.C. 100% Delaware
Brown-Forman Beverages Poland 100% Poland
Brown-Forman Beverages UK, Ltd. 100% United Kingdom
Brown-Forman Relocation Corp. 100% Kentucky
Brown-Forman Travel, Inc. 100% Kentucky
Canadian Mist Distillers, Limited 100% Ontario, Canada
Early Times Distillers Company 100% Delaware
Fetzer Vineyards 100% California
Fratelli Bolla International Wines, Inc. 100% Kentucky
Hartmann Incorporated 100% Delaware
Heddon's Gate Investments, L.L.C. 100% Delaware
Jack Daniel's Properties, Inc. 100% Delaware
Lenox, Incorporated 100% New Jersey
Mt. Eagle Corporation 100% Delaware
Sonoma-Cutrer Vineyards, Inc. 100% California
Southern Comfort Properties, Inc. 100% California
Washington Investments, L.L.C. 100% Kentucky
West Main Interactive, L.L.C. 100% Delaware
Longnorth Limited 100% (1) (3) Ireland
Chissick Limited 100% (1) (4) Ireland
Clintock Limited 100% (1) (4) Ireland
Brooks & Bentley Limited 100% (2) United Kingdom
DID, Inc. 100% (2) Delaware
Norfolk Investments, Inc. 100% (2) Delaware
Voldgade Investment Holdings A/S 100% (3) Denmark
Brown-Forman Mauritius Limited 100% (4) Mauritius
Pitts Bay Trading Limited 75% (4) Bermuda
BFC Tequila Limited 67% (4) Ireland
Drake Investments, Inc. 100% (5) Delaware
Jack Daniel Distillery,
Lem Motlow, Prop., Inc. 100% (5) Tennessee
Brown-Forman Korea Ltd. 100% (6) Korea
Fratelli Bolla, S.p.A. 100% (7) Italy
Brown-Forman Beverages Worldwide,
Comercio de Bebidas Ltda. 100% (8) Brazil
Brown-Forman Worldwide, L.L.C. 100% (8) Delaware
JDPI Investments, L.L.C. 100% (9) Delaware
Amercain Investments C.V. 100% (10) Netherlands
Brown-Forman Beverages Africa, Ltd. 100% (11) Bermuda
The companies listed above constitute all active subsidiaries in which
Brown-Forman Corporation owns, either directly or indirectly, the majority of
the voting securities. No other active affiliated companies are controlled by
Brown-Forman Corporation.
(1) Includes qualifying shares assigned to Brown-Forman Corporation.
(2) Owned by Lenox, Incorporated.
(3) Owned by Amercain Investments C.V.
(4) Owned by Longnorth Limited.
(5) Owned by Jack Daniel's Properties, Inc.
(6) Owned by B-F Korea, L.L.C.
(7) Owned by Fratelli Bolla International Wines, Inc.
(8) Owned 99% by Brown-Forman Corporation and 1% by Early Times Distillers
Company.
(9) Owned 99% by Jack Daniel's Properties, Inc. and 1% by Fetzer Vineyards.
(10) Owned 95% by Brown-Forman Corporation and 5% by Heddon's Gate
Investments, L.L.C.
(11) Owned 99% by Clintock Limited and 1% by Longnorth Limited.
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (Nos. 33-12413, 33-52551) and Form S-8 (No. 333-08311,
333-38649, 333-74567, 333-77903, 333-88925 and 333-89294) of Brown-Forman
Corporation and Subsidiaries of our report dated May 23, 2002 relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated May 23, 2002 relating to the
financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
July 26, 2002