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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period Commission file number 1-9076
ended June 30, 2003
FORTUNE BRANDS, INC.
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(Exact name of Registrant as specified in its charter)
DELAWARE 13-3295276
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
300 Tower Parkway, Lincolnshire, Illinois 60069-3640
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (847) 484-4400
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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 whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes (X) No ( )
The number of shares outstanding of the Registrant's common stock, par value
$3.125 per share, at July 31, 2003 was 145,241,192 shares.
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions)
(Unaudited)
June 30, December 31,
2003 2002
---------- ------------
Assets
Current assets
Cash and cash equivalents $ 132.3 $ 15.4
Accounts receivable, net 993.8 845.1
Inventories
Bulk whiskey 220.3 200.5
Other raw materials, supplies and
work in process 255.8 247.0
Finished products 393.7 388.3
---------- ----------
869.8 835.8
Other current assets 272.1 206.8
---------- ----------
Total current assets 2,268.0 1,903.1
Property, plant and equipment, net 1,184.9 1,189.6
Goodwill resulting from business
acquisitions, net 1,511.0 1,443.6
Other intangible assets resulting
from business acquisitions, net 875.9 889.1
Other assets 404.1 396.8
---------- ----------
Total assets $ 6,243.9 $ 5,822.2
========== ==========
See Notes to Condensed Consolidated Financial Statements.
2
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In millions, except per share amounts)
(Unaudited)
June 30, December 31,
2003 2002
--------- -----------
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 37.2 $ 37.8
Commercial paper 373.0 123.5
Current portion of long-term debt 132.6 132.9
Accounts payable 279.9 268.2
Accrued taxes 393.3 316.7
Accrued customer programs 148.4 152.8
Accrued salaries, wages and other compensation 119.0 141.3
Accrued expenses and other liabilities 330.2 341.5
--------- ----------
Total current liabilities 1,813.6 1,514.7
Long-term debt 841.5 841.7
Deferred income 186.8 200.2
Postretirement and other liabilities 579.7 553.5
--------- ----------
Total liabilities 3,421.6 3,110.1
--------- ----------
Minority interest in consolidated subsidiaries 368.4 398.9
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 7.7 7.9
Common stock, par value $3.125 per
share, 229.6 million shares issued 717.4 717.4
Paid-in capital 115.2 116.0
Accumulated other
comprehensive loss (125.2) (177.6)
Retained earnings 4,727.0 4,529.9
Treasury stock, at cost (2,988.2) (2,880.4)
--------- ----------
Total stockholders' equity 2,453.9 2,313.2
--------- ----------
Total liabilities and
stockholders' equity $ 6,243.9 $ 5,822.2
========= =========
See Notes to Condensed Consolidated Financial Statements.
3
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Six Months Ended June 30, 2003 and 2002
(In millions, except per share amounts)
(Unaudited)
2003 2002
-------- --------
Net sales $2,974.2 $2,783.0
Cost of products sold 1,627.2 1,522.8
Excise taxes on spirits and wine 141.8 149.3
Advertising, selling, general and
administrative expenses 762.9 719.3
Amortization of intangibles 9.5 6.7
Restructuring charges 7.8 19.3
Write-down of identifiable intangibles 12.0 -
-------- --------
Operating income 413.0 365.6
-------- --------
Interest and related expenses 36.8 37.7
Other income (16.7) (30.3)
-------- --------
Income before income taxes 392.9 358.2
Income taxes 108.5 69.6
Minority interests 8.2 7.7
-------- --------
Net income $ 276.2 $ 280.9
======== ========
Earnings per common share
Basic $ 1.89 $ 1.88
======== ========
Diluted $ 1.85 $ 1.82
======== ========
Dividends paid per common share $ 0.54 $ 0.50
======== ========
Average number of common shares outstanding
Basic 145.7 149.5
======== ========
Diluted 149.7 154.3
======== ========
See Notes to Condensed Consolidated Financial Statements.
4
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended June 30, 2003 and 2002
(In millions, except per share amounts)
(Unaudited)
2003 2002
-------- --------
Net sales $1,582.1 $1,512.6
Cost of products sold 856.5 824.6
Excise taxes on spirits and wine 71.3 74.6
Advertising, selling, general and
administrative expenses 391.5 375.9
Amortization of intangibles 4.7 3.4
Restructuring charges 5.7 17.5
Write-down of identifiable intangibles 12.0 -
-------- --------
Operating income 240.4 216.6
-------- --------
Interest and related expenses 18.6 20.9
Other income, net (7.8) (23.9)
-------- --------
Income before income taxes and minority interests 229.6 219.6
Income taxes 49.0 18.9
Minority interests 3.9 3.8
-------- --------
Net income $ 176.7 $ 196.9
======== ========
Earnings per common share
Basic $ 1.22 $ 1.31
======== ========
Diluted $ 1.18 $ 1.27
======== ========
Dividends paid per common share $ 0.27 $ 0.25
======== ========
Average number of common shares outstanding
Basic 145.2 150.3
======== ========
Diluted 149.5 155.1
======== ========
See Notes to Condensed Consolidated Financial Statements.
5
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Six Months Ended June 30, 2003 and 2002
(In millions)
(Unaudited)
2003 2002
------- -------
Operating activities
Net income $ 276.2 $ 280.9
Restructuring charges 3.5 6.0
Depreciation and amortization 93.9 86.0
Deferred income taxes 33.8 15.9
Write-down of identifiable intangibles 12.0 -
Increase in accounts receivable (117.7) (66.1)
(Increase) decrease in inventories (6.3) 49.7
Decrease in accounts payable, accrued
expenses and other liabilities (25.2) (100.4)
Increase in accrued taxes 13.1 49.4
Tax benefit on exercise of stock options 2.7 22.8
Other operating activities, net (35.4) (73.8)
------- -------
Net cash provided from operating activities 250.6 270.4
------- -------
Investing activities
Additions to property, plant and equipment (70.4) (75.1)
Acquisitions, net of cash acquired (78.6) (433.0)
Proceeds from the disposition of property, plant
and equipment 5.4 2.1
------- -------
Net cash used by investing activities (143.6) (506.0)
------- -------
Financing activities
Increase in short-term debt, net 245.4 358.4
Dividends paid to stockholders (79.1) (75.3)
Issuance of long-term debt - 25.0
Repayment of long-term debt (0.5) (100.7)
Cash purchases of common stock for treasury (140.6) (85.0)
Proceeds received from exercise of stock options 22.7 120.8
Other financing activities, net (49.0) -
------- -------
Net cash (used) provided by financing activities (1.1) 243.2
------- -------
Effect of foreign exchange rate changes on cash 11.0 (0.6)
------- -------
Net increase in cash and cash equivalents 116.9 7.0
Cash and cash equivalents at beginning of period $ 15.4 $ 48.7
------- -------
Cash and cash equivalents at end of period $ 132.3 $ 55.7
======= =======
See Notes to Condensed Consolidated Financial Statements.
6
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the Six Months Ended June 30, 2003 and 2002
(In millions)
(Unaudited)
$2.67 Accumulated
Convertible other Treasury
Preferred Common Paid-in comprehensive Retained stock,
Stock stock capital loss earnings at cost Total
=============================================================================================================================
Balance at December 31, 2001 $ 8.6 $ 717.4 $ 113.2 $ (131.7) $ 4,157.7 $ (2,762.5) $2,102.7
Comprehensive income
Net income -- -- -- -- 280.9 -- 280.9
Changes during the period -- -- -- 17.7 -- -- 17.7
------ -------- -------- -------- ---------- ---------- --------
Total comprehensive income -- -- -- 17.7 280.9 -- 298.6
------ -------- -------- -------- ---------- ---------- --------
Dividends -- -- -- -- (75.3) -- (75.3)
Purchases -- -- -- -- -- (85.4) (85.4)
Tax benefit on exercise of stock
options -- -- 22.8 -- -- -- 22.8
Conversion of preferred stock
delivery of stock plan shares
and the sale of stock in a
subsidiary (0.5) -- (23.0) -- -- 141.0 117.5
------ -------- -------- -------- ---------- ---------- --------
Balance at June 30, 2002 $ 8.1 $ 717.4 $ 113.0 $ (114.0) $ 4,363.3 $ (2,706.9) $2,380.9
====== ======== ======== ======== ========== ========== ========
Balance at December 31, 2002 $ 7.9 $ 717.4 $ 116.0 $ (177.6) $ 4,529.9 $ (2,880.4) $2,313.2
Comprehensive income
Net income -- -- -- -- 276.2 -- 276.2
Changes during the period -- -- -- 52.4 -- -- 52.4
------ -------- -------- -------- ---------- ---------- --------
Total comprehensive income -- -- -- 52.4 276.2 -- 328.6
------ -------- -------- -------- ---------- ---------- --------
Dividends -- -- -- -- (79.1) -- (79.1)
Purchases -- -- -- -- -- (137.4) (137.4)
Tax benefit on exercise of stock
options -- -- 2.7 -- -- -- 2.7
Conversion of preferred stock and
delivery of stock plan shares (0.2) -- (3.5) -- -- 29.6 25.9
------ -------- -------- -------- ---------- ---------- --------
Balance at June 30, 2003 $ 7.7 $ 717.4 $ 115.2 $ (125.2) $ 4,727.0 $ (2,988.2) $2,453.9
====== ======== ======== ======== ========== ========== ========
See Notes to Condensed Consolidated Financial Statements.
7
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of June 30, 2003, the
related condensed consolidated statements of income for the three-month and
six-month periods ended June 30, 2003 and 2002, and the related condensed
consolidated statements of cash flows and stockholders' equity for the
six-month periods ended June 30, 2003 and 2002 are unaudited. In the
opinion of management, all adjustments necessary for a fair presentation of
such financial statements have been included. Such adjustments included
restructuring and restructuring-related charges in 2003 and 2002 and
write-downs of identifiable intangibles in 2003. Interim results may not be
indicative of results for a full year.
The condensed consolidated financial statements and notes are
presented as permitted by Form 10-Q and do not contain certain information
included in the Company's annual consolidated financial statements and
notes. The year-end condensed consolidated balance sheet was derived from
the Company's audited financial statements, but does not include all
disclosures required by generally accepted accounting principles. This Form
10-Q should be read in conjunction with the Company's consolidated
financial statements and notes incorporated by reference in its 2002 Annual
Report on Form 10-K.
2. Accounting Changes
Costs Associated with Exit or Disposal Activities
In July 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 146 (SFAS 146), "Accounting
for Costs Associated with Exit or Disposal Activities." SFAS 146 requires
companies to initially recognize and measure costs associated with exit or
disposal activities at fair value only when the liability is incurred,
rather than at the date the Company commits to an exit or disposal plan.
Examples of costs covered by SFAS 146 include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing or other exit or disposal activity.
SFAS 146 also supercedes, in its entirety, previous accounting guidance
that was provided by Emerging Issues Task Force Issue No. 94-3 (EITF 94-3),
"Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS 146 is effective for exit or disposal activities
initiated after December 31, 2002. The adoption of SFAS 146 did not have a
material impact on the Company's operating results or financial position
for the three-month or six-month periods ended June 30, 2003.
8
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Accounting Changes (Concluded)
Costs Associated with Exit or Disposal Activities (Concluded)
See Note 12 to the Condensed Consolidated Financial Statements for
further discussion.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (FIN 46),
"Consolidation of Variable Interest Entities." The objective of FIN 46 is
to improve financial reporting by companies with transactions involving
variable interest entities. Prior to FIN 46, companies generally included
another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 is effective for
newly created variable interest entities as of January 31, 2003 and will be
effective for existing variable interest entities as of July 1, 2003. The
adoption of FIN 46 will not have an impact on the Company's results or
financial position.
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
Statement of Financial Accounting Standards No. 150 (SFAS 150),
"Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity," was issued in May 2003. SFAS 150 establishes
standards for how an issuer of equity (including the equity shares of any
entity whose financial statements are included in the consolidated
financial statements) classifies and measures on its balance sheet certain
financial instruments with characteristics of both liabilities and equity.
SFAS 150 is effective for financial instruments entered into or modified
after May 31, 2003 and for existing financial instruments after July 1,
2003. The adoption of SFAS 150 will not have an impact on the Company's
results or financial position.
9
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Guarantees and Commitments
Financial Accounting Standards Board Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantee's of Indebtedness of Others," was issued in
November 2002. FIN 45 requires that upon issuance of a guarantee, the
guarantor must disclose and recognize a liability for the fair value of the
guarantee. The initial recognition and measurement requirements of FIN 45
are effective for guarantees issued or modified after December 31, 2002.
Guarantees and Commitments: As of June 30, 2003, the Company had
third-party guarantees totaling approximately $72.0 million. These
represent guarantees of Maxxium Worldwide B.V. (Maxxium), the Company's
spirits and wine business's international sales and distribution joint
venture. The Company is required to perform under these guarantees in the
event that the guaranteed party fails to make contractual payments. During
the six months ended June 30, 2003, the Company renewed its guarantee of
Maxxium's credit facilities. The renewal resulted in an extension of the
expiration date of the credit facility's committed portion from November
14, 2003 to June 13, 2006. Because the guarantees of Maxxium debt were
modified after the effective date of FIN 45, the Company recorded a
liability of approximately $2.0 million as of June 30, 2003 to reflect the
fair value of the guarantees to Maxxium (through a reduction in the credit
facility's interest rate).
The Company has provided certain indemnities pursuant to which it may
be required to make payments to an indemnified party in connection with
certain divestitures. These indemnities related to various representations
typically included in divestiture agreements, such as environmental, tax,
product liability, employee liability and other contingencies, depending on
the transactions. In several of these divestitures, a maximum obligation
for certain contingencies is not specified, which is not atypical for such
transactions. Accordingly, pursuant to FIN 45, payments under these
divestiture-related indemnity obligations can not be reasonably estimated.
The duration of the indemnities varies, and in some cases is indefinite. We
have not recorded any liability for these indemnities in the consolidated
financial statements. The Company has not made any payments related to
indemnity obligations that were material to the company's financial
position or results of operations for any quarter. Furthermore, the Company
does not expect that any sums it may have to pay in connection with any of
these indemnity obligations would have a material adverse effect on our
consolidated financial position for fiscal 2003 or in subsequent periods.
10
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Acquisitions
In April 2003, the Home and Hardware business acquired American Lock
Company, a U.S.-based manufacturer of solid body padlocks. In addition, in
June 2003 the Home and Hardware business acquired Capital Cabinet
Corporation, a U.S.-based manufacturer of kitchen and bath cabinets. The
aggregate cost of these acquisitions was $78.6 million. The cost exceeded
the estimated fair value of net assets acquired by approximately $60
million. The Company is still in the process of valuing and allocating the
other identifiable intangibles acquired; we expect to complete this process
by December 31, 2003.
The businesses acquired have been included in consolidated results
from the date of acquisition. Had the acquisitions been consolidated as of
January 1, 2002, they would not have materially affected results.
In April 2002, the Home and Hardware business acquired Omega Holdings,
Inc. (Omega), a U.S.-based manufacturer of custom and semi-custom
cabinetry. If Omega had been included in our results of operations for the
full six months ended June 30, 2002, the Company's unaudited pro forma net
sales, net income and diluted earnings per share would each have been 3%
higher.
5. Goodwill and Other Identifiable Intangibles
The Company carries finite-lived identifiable intangibles, principally
tradenames, that are subject to amortization over their estimated useful
life, either 15 or 30 years. The gross carrying value and accumulated
amortization of the Company's amortizable intangible assets were $574.3
million and $186.5 million, respectively, as of June 30, 2003. During the
six months ended June 30, 2003, the Company recorded a write-down of
identifiable intangibles of $12.0 million ($8.0 million after tax) to
recognize the diminished values of select identifiable intangibles,
specifically trade names, in our Office business.
The Company's intangible amortization was $9.5 million and $6.7
million for the six months ended June 30, 2003 and 2002, respectively. The
Company expects to record intangible amortization of approximately $19
million for each of the next five fiscal years ending December 31, 2003
through December 31, 2007.
In addition to these amortizable intangibles, the Company also had
goodwill of approximately $1.5 billion as of June 30, 2003 and
indefinite-lived intangibles, principally tradenames, of $488.1 million as
of June 30, 2003. The change in goodwill during the six
11
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Goodwill and Other Identifiable Intangibles (Concluded)
months ended June 30, 2003 of $67.4 million was attributable to the
American Lock and Capital Cabinets acquisitions, Omega purchase accounting
and foreign currency fluctuations.
6. Minority Interest in Consolidated Subsidiaries
In April 2003, the balance sheet caption "Minority interest in
consolidated subsidiaries" decreased as a result of a return of capital by
the Company's spirits and wine business to its shareholders.
7. Income Taxes
During the six months ended June 30, 2003, the Internal Revenue
Service (IRS) completed its audit of our 1993-1996 tax returns. As a
result, we recorded a $35.0 million tax reserve reversal. In the third
quarter, we anticipate receiving a cash refund of approximately $35.0
million and recording an after-tax gain of approximately $7 million after
review and approval by the Congressional Joint Committee. During the six
months ended June 30, 2002, the Company recorded a tax benefit of $61.7
million plus after-tax interest of $9.6 million. This resulted from new IRS
regulations, issued in March 2002, that reinterpret the capital loss
disallowance rules and enabled the Company to utilize a tax loss incurred
in 1994 to offset capital gains taxed in 1996 and 1997. The Company will
receive cash representing the 1997 tax refund and related interest upon the
conclusion of the IRS's regular audit of our 1997 tax returns.
12
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Information on Business Segments
Net sales for the six and three months ended June 30, 2003 and 2002 by
segment are as follows:
Six Months Ended June 30,
-------------------------
Net Sales
-------------
2003 2002
---- ----
(In millions)
Home and hardware $1,324.6 $1,191.0
Spirits and wine 492.8 480.8
Golf 654.2 600.7
Office 502.6 510.5
-------- --------
$2,974.2 $2,783.0
======== ========
Three Months Ended June 30,
---------------------------
Net Sales
---------
2003 2002
---- ----
(In millions)
Home and hardware $ 704.0 $ 670.7
Spirits and wine 253.6 246.1
Golf 371.8 334.7
Office 252.7 261.1
-------- --------
$1,582.1 $1,512.6
======== ========
13
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Information on Business Segments (Concluded)
Operating income for the six and three months ended June 30, 2003 and
2002 by segment are as follows:
Six Months Ended June 30,
-------------------------
Operating Income
----------------
2003 2002
---- ----
(In millions)
Home and hardware $207.7 $177.7
Spirits and wine 127.4 124.9
Golf 101.2 94.0
Office 4.9 (7.5)
Less:
Corporate expenses 28.2 23.5
------ ------
Operating income $413.0 $365.6
====== ======
Three Months Ended June 30,
---------------------------
Operating Income
----------------
2003 2002
---- ----
(In millions)
Home and hardware $119.4 $107.7
Spirits and wine 69.5 68.6
Golf 68.5 63.1
Office (3.1) (11.4)
Less:
Corporate expenses 13.9 11.4
------ ------
Operating income $240.4 $216.6
====== ======
14
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Earnings Per Share
The computation of basic and diluted earnings per common share for
"Net income" is as follows:
Six Months Ended Three Months Ended
June 30, June 30,
----------------- ------------------
2003 2002 2003 2002
---- ---- ---- ----
(In millions, except per share amounts)
Net income $ 276.2 $280.9 $176.7 $ 196.9
Less: Preferred stock dividends 0.3 0.4 0.2 0.2
------- ------ ------ -------
Income available to common
stockholders - basic 275.9 280.5 176.5 196.7
Convertible Preferred stock
dividend requirements 0.3 0.4 0.2 0.2
------- ------ ------ -------
Income available to common
stockholders - diluted $ 276.2 $280.9 $176.7 $ 196.9
======= ====== ====== =======
Weighted average number of common
shares outstanding - basic 145.7 149.5 145.2 150.3
Conversion of Convertible
Preferred stock 1.6 1.7 1.6 1.7
Exercise of stock options 2.4 3.1 2.7 3.1
------- ------ ------ -------
Weighted average number of common
shares outstanding - diluted 149.7 154.3 149.5 155.1
======= ====== ====== =======
Earnings per common share
Basic $1.89 $ 1.88 $ 1.22 $ 1.31
======= ====== ====== =======
Diluted $ 1.85 $ 1.82 $ 1.18 $ 1.27
======== ====== ====== =======
10. Stock Plans
The 1999 and 2003 Long-Term Incentive Plans authorize the granting to
key employees of the Company and its subsidiaries of incentive and
nonqualified stock options, stock appreciation rights, restricted stock,
performance awards and other stock-based awards, any of which may be
granted alone or in combination with other types of awards or dividend
equivalents. Grants under the 1999 Long-Term Incentive Plan may be made on
or before December 31, 2004 for up to 12 million shares of common stock.
Grants under the 2003 Long-Term Incentive Plan may be made on or before
December 31, 2008 for up to 12 million shares of common stock. Under each
plan, no more than two million shares may be granted to any one individual.
15
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock Plans (Continued)
No new stock-based awards may be made under the 1990 Long-Term
Incentive Plan, but existing awards already issued may continue to be
exercised or paid pursuant to their terms.
Stock options under the Plans have exercise prices equal to fair
market values at dates of grant. Options generally may not be exercised
prior to one year or more than ten years from the date of grant. Options
granted since November 1998 generally vest one-third each year over a
three-year period after the date of grant. Stock appreciation rights, which
may be granted in conjunction with option grants, permit the optionees to
receive shares of common stock, cash or a combination of shares and cash
measured by the difference between the option exercise price and the fair
market value of the common stock at the time of exercise of such right.
The Company applies APB Opinion No. 25, "Accounting for Stock Issued
to Employees" and related interpretations, in accounting for its stock
plans as allowed under Statement of Financial Accounting Standards No. 148
(SFAS 148), "Accounting for Stock-Based Compensation - Transition and
Disclosure." Had compensation cost for the fixed stock options been
determined in accordance with SFAS 148, pro forma net income and earnings
per common share for the six and three months ended June 30, 2003 and 2002
would have been as follows:
Six Months Ended June 30,
-------------------------
(In millions, except per share amounts) 2003 2002
Net income - as reported $ 276.2 $ 280.9
------- ------
Deduct: Total stock-based
employee compensation determined
under the fair-value based method
for all awards, net of tax 10.5 6.7
------- -------
Pro forma net income $ 265.7 $ 274.2
======= =======
Earnings per Common share
Basic - as reported $ 1.89 $ 1.88
Basic - pro forma $ 1.82 $ 1.83
Diluted - as reported $ 1.85 $ 1.82
Diluted - pro forma $ 1.77 $ 1.77
16
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. Stock Plans (Concluded)
Three Months Ended June 30,
---------------------------
(In millions, except per share amounts) 2003 2002
------- -------
Net income - as reported $ 176.7 $ 196.9
------- -------
Deduct: Total stock-based
employee compensation determined
under the fair-value based method
for all awards, net of tax 5.5 3.7
------- -------
Pro forma net income $ 171.2 $ 193.2
======= =======
Earnings per Common share
Basic - as reported $ 1.22 $ 1.31
Basic - pro forma $ 1.18 $ 1.29
Diluted - as reported $ 1.18 $ 1.27
Diluted - pro forma $ 1.15 $ 1.25
The weighted-average fair values of options granted during the six
months ended June 30, 2003 and 2002 were $10.84 and $11.63, respectively.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for options granted during the six months ended June 30,
2003 and 2002:
2003 2002
---- ----
Expected dividend yield 2.5% 2.3%
Expected volatility 31.1% 30.0%
Risk-free interest rate 2.7% 4.1%
Expected term 4.5 Years 4.5 Years
17
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Product Warranties
The Company records warranty expense at the time of sale. The Company
offers its customers various warranty terms based upon the type of product
that is sold. In addition, the Company does not offer extended warranty
terms on any of the products it sells.
The following table summarizes the activity related to the Company's
product warranty liability during the six-month period ended June 30, 2003:
(In millions)
Balance as of January 1, 2003 $ 9.2
Accruals for warranties issued during 2003 15.1
Settlements made (in cash or in kind) during 2003 (11.9)
------
Balance as of June 30, 2003 $ 12.4
======
12. Restructuring and Restructuring-Related Charges
RESTRUCTURING AND RESTRUCTURING-RELATED CHARGES
In April 2001, the Company announced that as a result of its
evaluation of strategic options for its Office business, it would
immediately begin implementing a plan designed to improve both financial
results and the long-term value of the business. In conjunction with this
restructuring program, during the six and three months ended June 30, 2003,
the Company's Office business recorded charges associated with
consolidation of manufacturing facilities and employee termination.
In addition, the Company's Golf business recorded charges associated
with the consolidation of golf ball manufacturing facilities into its two
newest production facilities, as follows:
Restructuring Charges
--------------------------------------------------------
Six Months Ended Three Months Ended
June 30, 2003 June 30, 2003
---------------- ------------------
(In millions)
Golf $2.0 $2.0
Office $5.8 $3.7
The Golf charges relate to asset write-offs associated with the
consolidation of golf ball manufacturing facilities.
18
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Restructuring and Restructuring-Related Charges (Continued)
The Office charges principally relate to employment termination costs
and asset write-offs associated with the consolidation of manufacturing
facilities.
Pursuant to the provisions of SFAS 146, the following tables represent
the reconciliation of the restructuring charges and supplemental
information for actions initiated after December 31, 2002.
2003 Cash Non-Cash Balance at
Provision Expenditures Write-offs Adjustments 6/30/03
--------- ------------ ---------- ---------- ----------
Rationalization of
operations
Employment
termination costs $3.6 $ (2.6) $ - - $ 1.0
Other 0.6 (0.3) (0.1) - 0.2
Loss on disposal of assets 3.6 - (3.5) - 0.1
---- ------ ----- ----- -----
$7.8 $ (2.9) $(3.6) $ - $ 1.3
==== ====== ===== ===== =====
The Company expects that substantially all remaining cash expenditures
will be made within the next twelve months.
The Office business expects to record additional after-tax
restructuring and restructuring-related charges of $25 to $30 million ($40
to $50 million pre tax) to complete the final phase of its restructuring
program. The Office business expects to complete the program in 2004.
The Golf business expects to record additional after-tax restructuring
and restructuring-related charges of approximately $6 million ($10 million
pre tax) over the next twelve months.
In addition, the Company recorded the following charges for the six
and three-month periods ended June 30, 2002.
Restructuring Charges
-----------------------------------------------
Six Months Ended Three Months Ended
June 30, 2002 June 30, 2002
---------------- ------------------
(In millions)
Office $19.3 $ 17.5
The charges principally related to employee termination costs, asset
write-offs and costs associated with a consolidation of manufacturing and
distribution facilities.
19
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Restructuring and Restructuring-Related Charges (Continued)
During the six and three months ended June 30, 2003, the Company
recorded pre-tax restructuring-related charges as follows:
Restructuring-related Charges
------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, 2003 June 30, 2003
-------------------------------- ------------------------------
(In millions)
Cost of Cost of
Sales SG&A Sales SG&A
Charges Charges Total Charges Charges Total
Office $ 5.0 $ 0.3 $ 5.3 $ 0.7 $ 0.2 $ 0.9
The restructuring-related charges include the relocation of
manufacturing and distribution facilities and inventory write-offs
associated with the discontinuance of certain unprofitable product lines.
In addition, the Company recorded the following restructuring-related
charges for the six and three-month periods ended June 30, 2002:
Restructuring-related Charges
------------------------------------------------------------------
Six Months Ended Three Months Ended
June 30, 2003 June 30, 2003
-------------------------------- ------------------------------
(In millions)
Cost of Cost of
Sales SG&A Sales SG&A
Charges Charges Total Charges Charges Total
------- ------- ----- ------- ------- -----
Office $ 2.5 $ 0.9 $ 3.4 $ 1.8 $ 0.2 $ 2.0
The charges relate to the relocation of manufacturing facilities and
inventory write-offs.
20
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Restructuring and Restructuring-Related Charges (Concluded)
The following table represents the reconciliation of the restructuring
liability, as of June 30, 2003, for restructuring charges recognized prior
to January 1, 2003 pursuant to EITF 94-3:
Balance at Cash Non-Cash Balance at
12/31/02 Expenditures Writeoffs (1) 6/30/03
---------- ------------ ------------- ----------
(In millions)
Rationalization of operations
Employment termination costs (2) $11.3 $ (5.4) $ (0.7)(3) $5.2
International distribution
and lease agreements 4.2 (0.7) 0.1 3.6
Loss on disposal of assets 0.8 (0.6) (0.2) -
----- ------ ------ ----
$16.3 $ (6.7) $ (0.8) $8.8
===== ====== ====== ====
(1) Foreign exchange adjustments of $0.5 million are included in the
category "Non-Cash Writeoffs."
(2) Of the planned downsizing of 2,065 positions, 1,903 reductions
had been implemented as of June 30, 2003. The employee groups
affected by these restructuring actions were in the Office
business and include plant and administrative hourly and salaried
employees.
(3) A reduction of $1.0 million is included in non-cash write-offs
and represents a reclassification of employment termination costs
to accrued pension.
The Company expects that all remaining cash expenditures will be made
by December 31, 2003.
21
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Comprehensive Loss
The components of accumulated other comprehensive loss are as follows:
Foreign Minimum Accumulated
currency pension liability other comprehensive
adjustments adjustment loss
------------ ----------------- -------------------
(In millions)
Balance at December 31, 2001 $(113.6) $ (18.1) $(131.7)
Changes in six months 17.8 (0.1) 17.7
------- ------- -------
Balance at June 30, 2002 $ (95.8) $ (18.2) $(114.0)
======= ======= =======
Balance at December 31, 2002 $ (92.5) $ (85.1) $(177.6)
Changes in six months 52.4 - 52.4
------- ------- -------
Balance at June 30, 2003 $ (40.1) $ (85.1) $(125.2)
======= ======= =======
Included in the foreign currency adjustments balance at June 30, 2003
is a deferred loss of $1.5 million related to the hedging of anticipated
transactions denominated in foreign currencies.
14. Pending Litigation
Tobacco Litigation and Indemnification
On December 22, 1994, the Company sold The American Tobacco Company
(ATCO) subsidiary to Brown & Williamson Tobacco Corporation (B&W), a
wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with the
sale, B&W and ATCO, which has since merged into B&W (the "Indemnitor"),
agreed to indemnify the Company against claims including legal expenses
arising from smoking and health and fire safe cigarette matters relating to
the tobacco business of ATCO. The Indemnitor has complied with the terms of
the indemnification agreement since 1994 and the Company is not aware of
any inability on the part of the Indemnitor to satisfy its indemnity
obligations.
The Company is a defendant in numerous actions based upon allegations
that human ailments have resulted from tobacco use. It is not possible to
predict the outcome of the pending litigation, and, as with any litigation,
it is possible that some of these actions could be decided unfavorably.
Management is unable to make a meaningful
22
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Pending Litigation (Concluded)
estimate of the amount or range of loss that could result from an
unfavorable outcome of the pending litigation. However, management believes
that there are a number of meritorious defenses to the pending actions,
including the fact that the Company never made or sold tobacco, and these
actions are being vigorously contested by the Indemnitor. Management
believes that the pending actions will not have a material adverse effect
upon the results of operations, cash flows or financial condition of the
Company because it believes it has meritorious defenses and the Company is
indemnified under the previously mentioned indemnification agreement.
Other Litigation
There is an increasing volume of asbestos-related personal injury
litigation in the United States generally. A subsidiary of the Company,
Moen Incorporated, has been named as a defendant in approximately 155
cases claiming personal injury from asbestos. All of these suits name
multiple defendants and, in most cases, in excess of 75 defendants are
named in addition to Moen. It is not possible to predict the outcome of the
pending litigation, and, as with any litigation, it is possible that some
of these actions could be decided unfavorably. Management believes it has
meritorious defenses to these actions and that these actions will not have
a material adverse effect upon the results of operations, cash flows or
financial condition of the Company. These actions are being vigorously
contested.
In addition to the lawsuits described above, the Company and its
subsidiaries are defendants in lawsuits associated with their business and
operations. It is not possible to predict the outcome of the pending
actions, and, as with any litigation, it is possible that some of these
actions could be decided unfavorably. Management believes that there are
meritorious defenses to these actions and that these actions will not have
a material adverse effect upon the results of operations, cash flows or
financial condition of the Company. These actions are being vigorously
contested.
23
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
15. Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. While it is not possible to quantify with
certainty the potential impact of actions regarding environmental matters,
particularly remediation and other compliance efforts that the Company's
subsidiaries may undertake in the future, in the opinion of management,
compliance with the present environmental protection laws, before taking
into account estimated recoveries from third parties, will not have a
material adverse effect upon the results of operations, cash flows or
financial condition of the Company.
24
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of Fortune Brands, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Fortune Brands, Inc. and Subsidiaries as of June 30, 2003, and the related
condensed consolidated statements of income for each of the three-month and
six-month periods ended June 30, 2003 and June 30, 2002, and the condensed
consolidated statements of cash flows and stockholders' equity for the six-month
periods ended June 30, 2003 and June 30, 2002. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated interim financial statements
for them to be in conformity with accounting principles generally accepted in
the United States of America.
We previously audited in accordance with auditing standards generally accepted
in the United States of America, the consolidated balance sheet as of December
31, 2002, and the related consolidated statements of income, cash flows and
stockholders' equity for the year then ended (not presented herein), and in our
report dated January 21, 2003, we expressed an unqualified opinion on those
consolidated financial statements. In our opinion, the information set forth in
the accompanying condensed consolidated balance sheet as of December 31, 2002,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Chicago, Illinois 60606
July 16, 2003
25
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Results of Operations for the Six Months Ended June 30, 2003 as Compared to the
Six Months Ended June 30, 2002
Net Sales
-----------------
2003 2002
---- ----
(In millions)
Home and hardware $1,324.6 $1,191.0
Spirits and wine 492.8 480.8
Golf 654.2 600.7
Office 502.6 510.5
-------- --------
$2,974.2 $2,783.0
======== ========
Operating Income
----------------
2003 2002
---- ----
(In millions)
Home and hardware $207.7 $177.7
Spirits and wine 127.4 124.9
Golf 101.2 94.0
Office 4.9 (7.5)
Less:
Corporate expenses 28.2 23.5
------ ------
Operating income $413.0 $365.6
====== ======
26
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Fortune Brands, Inc. is a holding company with subsidiaries that manufacture or
produce and sell leading consumer branded products in the following industries:
home and hardware, spirits and wine, golf equipment and office products. It
earns cash and profits by building its consumer brands to grow sales, including
the development of innovative new products and effective marketing campaigns,
and improving its productivity and cost structure. It strives to enhance
shareholder value by strategically positioning its businesses to achieve higher
growth and improved returns, including through acquisitions, dispositions and
joint ventures, and through other shareholder value initiatives such as using
its financial resources to repurchase shares and pay attractive dividends.
The Company's net income decreased 2% during the six months ended June 30, 2003
as compared to the same period in 2002 primarily due to the lower tax benefits
in 2003 compared with the prior year period. The decrease was partly offset by
the benefit of the acquisition and growth of the Omega Group cabinet company,
cost savings and strong operating performance, particularly in our Office, Home
and Hardware and Golf businesses. In 2003, the Company faces overall economic
uncertainty and the impact of increased industry-wide expenses for pension,
post-retirement benefit plans and insurance. The Company's operating units will
also face challenges and opportunities unique to each of their industries, as
discussed in this report.
SIX MONTHS 2003 COMPARED TO 2002
Net Sales
Net sales increased $191.2 million, or 7%, to $3.0 billion. Sales benefited
principally from increased volumes associated with line extensions and the
introduction of new products, principally in the Golf and Home and Hardware
businesses, the acquisition of cabinet manufacturer Omega Holdings, Inc., as
well as favorable foreign exchange ($65 million). These benefits were offset, in
part, by lower volumes in some existing product lines, principally in the Golf,
Office and Home and Hardware businesses, and the divestiture by the Home and
Hardware business in November 2002 of its plumbing parts business.
Cost of products sold
Cost of products sold increased $104.4 million, or 7%, on the higher sales.
Excise taxes on spirits and wine
Excise taxes on spirits and wine decreased $7.5 million, or 5%, due to lower
excise taxes during the period.
27
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CONSOLIDATED (Continued)
Advertising, selling, general and administrative expenses
Advertising, selling, general and administrative expenses increased $43.6
million, or 6%, on higher advertising and marketing expenditures, pension
expense and general insurance costs, partially offset by cost savings achieved
as a result of our restructuring actions and other cost containment initiatives
across all of our operations, particularly in our Office business.
Amortization of intangibles
Amortization of intangibles increased $2.8 million to $9.5 million due to the
amortization, beginning July 1, 2002, of certain finite-lived intangibles
recorded as part of the Omega cabinets acquisition.
Restructuring charges
For the six months ended June 30, 2003, we recorded pre-tax restructuring
charges of $7.8 million ($5.1 million after tax). The charges principally
related to the consolidation of manufacturing facilities and employee
termination costs, principally in the Office business.
For the six months ended June 30, 2002, we recorded pre-tax restructuring
charges of $19.3 million ($12.8 million after tax). The charges principally
related to employee termination costs, asset write-offs and costs associated
with the consolidation of manufacturing and distribution facilities in the
Office business.
Write-down of identifiable intangibles
We recorded a write-down of identifiable intangibles of $12.0 million ($8.0
million after tax) to recognize the diminished values of select identifiable
intangibles, specifically trade names, in our Office business in conjunction
with its current restructuring program.
Interest and related expenses
Interest and related expenses decreased $0.9 million, or 2%, on the lower
average interest rates for the six months ended June 30, 2003 as compared to the
prior year period.
28
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CONSOLIDATED (Continued)
Other income, net
Other income, net decreased $13.6 million to $16.7 million due to the absence in
2003 of interest income recorded on a tax receivable during the prior year
period.
Income taxes
Income taxes increased $38.9 million, or 56%, as we recorded a lower tax benefit
in 2003 compared with the prior year period. The reported effective income tax
rates for the six months ended June 30, 2003 and June 30, 2002 were 27.6% and
19.4%, respectively. The effective income tax rate comparison was effected by
the following items. During the six months ended June 30, 2003, the Internal
Revenue Service (IRS) completed its audit of our 1993-1996 tax returns. As a
result, we recorded a $35.0 million tax reserve reversal. In the third quarter,
we anticipate receiving a cash refund of approximately $35.0 million and
recording an after-tax gain of approximately $7 million after review and
approval by the Congressional Joint Committee. During the six months ended June
30, 2002, we recorded a $61.7 million tax credit which resulted from new IRS
regulations that reinterpreted the capital loss disallowance rules. The new
regulations enabled us to utilize a previously disallowed capital tax loss to
offset capital gains taxed in 1996 and 1997.
Minority interests
Minority interests increased $0.5 million to $8.2 million, due to the higher
operating income in our Office business.
Net income
Net income of $276.2 million, or $1.89 basic and $1.85 diluted per share, for
the six months ended June 30, 2003 compared with net income of $280.9 million,
$1.88 basic and $1.82 diluted per share, for the six months ended June 30, 2002.
The decrease in net income of $4.7 million, or 2%, was principally due to the
lower tax benefits recorded in 2003 compared with the prior year period. Partly
offsetting these factors were higher net sales and cost savings resulting from
our restructuring and other cost containment initiatives across all of our
operations.
29
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CONSOLIDATED (Continued)
Minority Interest in Consolidated Subsidiaries
In April 2003, the balance sheet caption "Minority interest in consolidated
subsidiaries" decreased as a result of a return of capital by the Company's
spirits and wine business to its shareholders.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation
of Variable Interest Entities." The objective of FIN 46 is to improve financial
reporting by companies with transactions involving variable interest entities.
Prior to FIN 46, companies generally included another entity in its consolidated
financial statements only if it controlled the entity through voting interests.
FIN 46 is effective for newly created variable interest entities as of January
31, 2003 and will be effective for existing variable interest entities as of
July 1, 2003. The adoption of FIN 46 will not have an impact our results or
financial position.
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity
Statement of Financial Accounting Standards No. 150 (SFAS 150), "Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity," was issued in May 2003. SFAS 150 establishes standards for how an
issuer of equity (including the equity shares of any entity whose financial
statements are included in the consolidated financial statements) classifies and
measures on its balance sheet certain financial instruments with characteristics
of both liabilities and equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and for existing financial
instruments after July 1, 2003. The adoption of SFAS 150 will not have an impact
on the Company's results or financial position.
Pension Plans
On an annual basis, we evaluate the assumptions used in determining our pension
liabilities and assets as well as pension expense based upon historical returns
on plan assets and current economic conditions at the time the assumptions are
set.
30
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CONSOLIDATED (Concluded)
The December 2001 review led to a reduction in both our weighted-average
discount rate from 7.2% to 7.0% and weighted-average expected rate of return
from 9.6% to 8.3%. These revisions led to an increase in pension expense of
approximately $15 million to $21.9 million in 2002. Our December 2002 review led
to a reduction of our weighted-average discount rate from 7.0% to 6.6% for 2003.
Our weighted-average expected return on plan assets remained unchanged at 8.3%.
Management believes that these assumptions are appropriate. The 2002 revisions
will result in an increase to our pension expense of approximately $10 to $15
million in 2003.
In addition, we expect to provide cash contributions in 2003 of approximately
$35 million to fund existing pension liabilities for our qualified
defined-benefit plans versus a cash contribution of $8.5 million in 2002. As
previously disclosed, a significant portion of these contributions will be made
in the third quarter of 2003. We also expect to make cash contributions in 2003
of approximately $8 to $10 million for retirement benefits that will be paid
under our various supplemental defined-benefit plans. In 2002, cash
contributions to our supplemental defined-benefit plans totaled $7.9 million.
31
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Home and Hardware
Net sales increased $133.6 million, or 11%, to $1.3 billion. The increase was
attributable to the acquisition and growth of Omega cabinets and successful line
extensions and new product introductions, principally faucets and cabinets. The
sales growth was partially offset by the absence of the divested plumbing parts
business and soft retail volume in our tool storage business. Operating income
increased $30.0 million, or 17%, to $207.7 million on the higher sales and
productivity improvements partially offset by higher operating expenses.
Management expects that our Home and Hardware business will benefit from strong
demographic trends supporting the home repair and remodeling and new home
construction markets, particularly for kitchen and bath products.
Our Home and Hardware business may be impacted by the continued uncertain U.S.
economic outlook, including mortgage interest rates, and its potential impact on
the U.S. housing and remodeling markets. In addition, we continue to face
pricing pressure associated with consolidation of the customer industry base.
Spirits and Wine
Net sales increased $12.0 million, or 2%, to $492.8 million principally on
favorable foreign exchange ($13 million), growth in ready-to-drink Jim Beam and
Cola in Australia, a price increase for Jim Beam bourbon and higher sales of
DeKuyper cordials and super-premium products in the U.S. These benefits were
partly offset by lower excise taxes during the period, lower volumes for some
non-premium products in the U.S. and lower After Shock cordial volumes in the
U.K.
Operating income increased $2.5 million, or 2%, to $127.4 million on the higher
sales partly offset by increased brand investment expenses and selling and
general and administrative costs.
32
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Spirits and Wine (Concluded)
Management expects that our spirits and wine business will benefit from growth
in the premium and super-premium spirits market, and has focused its product
development and marketing activities on those segments. Factors that could
adversely affect results include: the possibility of excise tax increases;
increased regulation; and continued softness in the restaurant and bar channel.
In addition, the spirits and wine industry could be impacted by the continued
trend towards consolidation of the supplier, distributor and retailer tiers.
Golf
Net sales increased $53.5 million, or 9%, to $654.2 million. The increase was
led by significant share gains in golf clubs and golf balls benefiting from line
extensions and the introduction of successful new products as well as favorable
foreign exchange ($20 million). Sales growth was partially offset by the effect
of decreased rounds of play. Operating income increased $7.2 million, or 8%, to
$101.2 million on the higher sales partly offset by higher operating expenses.
In April 2003, our Golf business announced plans to consolidate its golf ball
manufacturing facilities into its two newest production facilities. We believe
this consolidation will create manufacturing efficiencies while preserving
capacity to meet expected demand. Related to this consolidation we recorded $1.2
million in after-tax restructuring charges ($2.0 million pre tax). We expect to
record additional after-tax restructuring and restructuring-related charges of
approximately $6 million ($10 million pre tax) to complete this action over the
next twelve months.
The U.S. golf industry has been negatively impacted in the last two and one-half
years by decreases in rounds of play. Management believes this decrease is due
to weak economic conditions and, in part, poor weather conditions and a decrease
in travel. The lower rounds of play and the entrance of significant competitors
into the category have led to increased competition. The effects of these market
conditions have been offset by increases in the Company's U.S. market share in
golf balls, clubs, shoes and gloves.
33
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Golf (Concluded)
The ability of the Company's golf business to maintain and increase revenues
will depend upon continued strong innovation and marketing across product
categories.
The United States Golf Association (USGA) and the Royal and Ancient Golf Club
(R&A) establish standards for golf equipment used in the United States and
outside the United States, respectively. Each of the USGA and the R&A has
proposed new rules addressing the overall distance standard for golf balls, golf
club head size and golf club shaft length. The proposed rules, when combined
with other existing rules, could potentially create barriers to, and limitations
on, the golf product industry's ability to innovate and deploy new technologies,
potentially impacting our Golf business.
Office
Net sales decreased $7.9 million, or 2%, to $502.6 million. The decrease was
principally related to lower volumes in some existing product lines due to weak
economic growth, particularly white-collar employment, a shift in office
superstore back-to-school purchases from the second to the third quarter and the
continued share gain of private-label products. These factors were partly offset
by favorable foreign exchange ($27 million) and the introduction of new
products.
Operating income increased $12.4 million to $4.9 million as a result of the
business's ongoing repositioning, including successful cost reduction and asset
management initiatives as well as favorable foreign exchange. The profit
recovery in the business was broad-based, with particularly strong gains in our
key international markets, Europe and Australia. These benefits were partly
offset by the $12.0 million write-down of select identifiable intangibles,
specifically trade names, to reflect their diminished value.
The office products industry is increasingly concentrated in a small number of
major customers, principally office products superstores, large retailers,
wholesalers and contract stationers. Continued customer consolidation and share
growth of private-label products are increasing pricing pressures, which may
adversely affect margins for our office products group and its competitors.
34
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Office (Concluded)
Since 2001, we have been repositioning and restructuring the Office business to
improve both financial results and the long-term value of the business. Under
this plan, our office products group is realigning and streamlining its
worldwide operations, intensifying its focus on growing profitable core product
categories, and reducing overhead expenses and excess capacity. As a result of
the final phase of our Office repositioning, during the six months ended June
30, 2003, we recorded total after-tax restructuring and restructuring-related
charges of $7.3 million ($11.1 million pre tax). We expect to record additional
after-tax charges of $25 to $30 million ($40 to $50 million pre tax) to complete
this final phase, of which $15 to $20 million in after-tax charges ($25 to $30
million pre tax) will be incurred over the final six months of 2003. We expect
to complete this final phase in 2004. Once completed, this restructuring action
will have reduced the business' manufacturing and distribution square footage by
approximately one-third, providing significant cost savings. These actions have
generated significant working capital improvements. The overall office products
repositioning program will continue to be self-funding within the Office
business.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities of $250.6 million for the six months
ended June 30, 2003 compared with $270.4 million for the same six-month period
last year. The decrease was principally related to the implementation of asset
management initiatives in the prior year period in our Office business.
Net cash used by investing activities for the six months ended June 30, 2003 was
$143.6 million, compared with $506.0 million in the same six-month period last
year. The lower net cash used by investing activities is attributable to the
lower cost of acquisitions in 2003 compared with the prior year period.
Net cash used by financing activities for the six months ended June 30, 2003 was
$1.1 million, compared with net cash provided by financing activities of $243.2
million in the same six-month period last year. During the six months ended June
30, 2003, purchases of our common stock
35
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
increased to $140.6 million (3,000,000 shares repurchased) and proceeds received
from the exercise of stock options ($22.7 million) decreased as options
exercises were lower than in the same six-month period last year.
Total debt increased $248.4 million during the six-month period ended June 30,
2003. This increase reflected higher average borrowings to finance share
repurchases and the acquisitions of American Lock Company, a U.S.-based
manufacturer of solid body padlocks, and Capital Cabinets Corporation, a
U.S.-based manufacturer of kitchen and bath cabinets. The ratio of total debt to
total capital increased to 32.9% at June 30, 2003 from 29.5% at December 31,
2002.
We believe that our internally generated funds, together with access to global
credit markets, are adequate to meet our capital needs.
Guarantees and Commitments:
Third-party guarantees executed in connection with the formation of Maxxium
Worldwide, B.V. (Maxxium), our spirits and wine international sales and
distribution joint venture, total approximately $72.0 million as of June 30,
2003. We are required to perform under these guarantees in the event that
Maxxium fails to make contractual payments. During the six months ended June 30,
2003, we renewed our guarantee of Maxxium's credit facilities. The renewal
resulted in an extension of the expiration date of the credit facility's
committed portion from November 14, 2003 to June 13, 2006. Because the guarantee
of Maxxium debt was modified after the effective date of FIN 45, the Company
recorded a liability of approximately $2.0 million as of June 30, 2003 to
reflect the fair value of the guarantees to Maxxium (through a reduction in the
credit facility's interest rate).
Indemnification Contracts:
We have provided certain indemnities pursuant to which we may be required to
make payments to an indemnified party in connection with certain divestitures.
These indemnities relate to various representations typically included in
divestiture agreements such as environmental, tax, product liability, employee
liability and other contingencies depending on the transaction. In several of
these divestitures, a maximum obligation for certain contingencies is not
specified, which is not atypical for such transactions. Accordingly, pursuant to
FIN 45, payments under these
36
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
Indemnification Contracts (Concluded)
divestiture-related indemnity obligations cannot be reasonably estimated. The
duration of the indemnities varies, and in some cases is indefinite. We have not
recorded any liability for these indemnities in the consolidated financial
statements.
We have not made any payments related to indemnity obligations that were
material to the Company's financial position or results of operations for any
quarter. Furthermore, we do not expect that any sums we may have to pay in
connection with any of these indemnity obligations would have a material adverse
effect on our consolidated financial position for fiscal 2003 or in subsequent
periods.
In addition, we are contingently liable for surety bonds of $20.2 million
primarily to support workers' compensation insurance obligations.
In total, the guarantees identified above do not have and are not expected to
have a significant impact on our liquidity.
37
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORTUNE BRANDS, INC. AND SUBSIDIARIES
Results of Operations for the Three Months Ended June 30, 2003 as Compared to
the Three Months Ended June 30, 2002
Net Sales
-----------------
2003 2002
---- ----
(In millions)
Home and hardware $ 704.0 $ 670.7
Spirits and wine 253.6 246.1
Golf 371.8 334.7
Office 252.7 261.1
-------- --------
$1,582.1 $1,512.6
======== ========
Operating Income
----------------
2003 2002
---- ----
(In millions)
Home and hardware $119.4 $107.7
Spirits and wine 69.5 68.6
Golf 68.5 63.1
Office (3.1) (11.4)
Less:
Corporate expenses 13.9 11.4
------ ------
Operating income $240.4 $216.6
====== ======
38
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Net Sales
Net sales increased $69.5 million, or 5%, to $1.6 billion. Sales benefited
principally from increased volumes associated with line extensions and the
introduction of new products, principally in the Golf and Home and Hardware
businesses, and favorable foreign exchange ($36 million). These benefits were
partially offset by lower volumes in some existing product lines, principally in
the Golf and Office businesses, and the divestiture by the Home and Hardware
business in November 2002 of its plumbing parts business.
Cost of products sold
Cost of products sold increased $31.9 million, or 4%, on the higher net sales,
partially offset by productivity improvements.
Excise taxes on spirits and wine
Excise taxes on spirits and wine decreased $3.3 million, or 4%, due to lower
excise taxes during the period.
Advertising, selling, general and administrative expenses
Advertising, selling, general and administrative expenses increased $15.6
million, or 4%, on higher advertising and marketing expenditures, pension
expense and general insurance costs, partially offset by cost savings achieved
as a result of our restructuring actions and other cost containment initiatives
across all of our operations, particularly in our Office business.
Amortization of intangibles
Amortization of intangibles increased $1.3 million to $4.7 million due to the
amortization, beginning July 1, 2002, of certain finite-lived intangibles
recorded as part of the Omega cabinets acquisition.
Restructuring charges
For the three months ended June 30, 2003, we recorded pre-tax restructuring
charges of $5.7 million ($3.7 million after tax). The charges principally
related to the consolidation of manufacturing facilities and employee
termination costs, principally in the Office business.
39
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Continued)
Restructuring charges (Concluded)
For the three months ended June 30, 2002, we recorded pre-tax restructuring
charges of $17.5 million ($11.6 million after tax). The charges principally
related to employee termination costs, asset write-offs and costs associated
with the consolidation of manufacturing facilities in the Office business.
Write-down of identifiable intangibles
We recorded a write-down of identifiable intangibles of $12.0 million ($8.0
million after tax) to recognize the diminished values of select identifiable
intangibles, specifically trade names, in our Office business in conjunction
with its current restructuring program.
Interest and related expenses
Interest and related expenses decreased $2.3 million, or 11%, on the lower
average interest rates for the three months ended June 30, 2003 as compared to
the prior year period.
Other income, net
Other income, net decreased $16.1 million to $7.8 million due to the absence in
2003 of interest income recorded on a tax receivable during the prior year
period.
Income taxes
Income taxes increased $30.1 million, or 159%, to $49.0 million as we recorded a
lower tax benefit in 2003 compared with the prior year period. The reported
effective income tax rate for the three months ended June 30, 2003 and June 30,
2002 were 21.3% and 8.6%, respectively. The effective income tax rate comparison
was effected by the following items. During the three months ended June 30,
2003, the Internal Revenue Service (IRS) completed its audit of our 1993-1996
tax returns. As a result, we recorded a $35.0 million tax reserve reversal. In
the third quarter, we anticipate receiving a cash refund of approximately $35.0
million and recording an after-tax gain of approximately $7 million after review
and approval by the Congressional Joint Committee. During the three months ended
June 30, 2002, we recorded a $61.7 million tax credit
40
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
Income taxes (Concluded)
which resulted from new IRS regulations that reinterpreted the capital loss
disallowance rules. The new regulations enabled us to utilize a previously
disallowed capital tax loss to offset capital gains taxed in 1996 and 1997.
Minority interests
Minority interests increased $0.1 million to $3.9 million, due to the higher
operating income in our Office business.
Net income
Net income of $176.7 million, or $1.22 basic and $1.18 diluted per share, for
the three months ended June 30, 2003 compared with net income of $196.9 million,
$1.31 basic and $1.27 diluted, for the three months ended June 30, 2002. The
decrease in net income of $20.2 million, or 10%, was due to lower tax benefits
recorded in 2003 compared with the prior year period. Partly offsetting this
factor was higher net sales and cost savings resulting from our restructuring
actions and other cost containment initiatives across all of our operations.
41
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Home and Hardware
Net sales increased $33.3 million, or 5%, to $704.0 million. The increase was
attributable to the introduction of new products and line extensions and the
acquisition of American Lock Company. The sales growth was partially offset by
the absence of the divested plumbing parts business. Operating income increased
$11.7 million, or 11%, to $119.4 million on the higher sales and productivity
improvements partially offset by higher operating expenses.
Spirits and Wine
Net sales increased $7.5 million, or 3%, to $253.6 million principally on
favorable foreign exchange ($8 million), growth in ready-to-drink Jim Beam and
Cola in Australia, a price increase for Jim Beam bourbon and higher volumes of
super-premium products in the U.S. These benefits were partly offset by lower
excise taxes during the period, lower distributor inventories in the U.S. and
lower After Shock cordial volumes in the U.K.
Operating income increased $0.9 million, or 1%, to $69.5 million on the higher
sales partly offset by increased brand investment expenses and general and
administrative costs.
Golf
Net sales increased $37.1 million, or 11%, to $371.8 million. The increase was
attributable to significant share gains in golf clubs and golf balls benefiting
from line extensions and the introduction of successful new products, sales
gains across all product categories and favorable foreign exchange ($11
million). These benefits were partly offset by the effect of decreased rounds of
play resulting, in part, from adverse weather conditions and decreased travel.
Operating income increased $5.4 million, or 9%, to $68.5 million on the higher
sales partly offset by higher operating expenses.
42
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
---------------------------------------------------------
Office
Net sales decreased $8.4 million, or 3%, to $252.7 million. The decrease was
principally related to lower volumes in some existing product lines due to weak
economic growth, particularly white-collar employment, a shift in office
superstore back-to-school purchases from the second to the third quarter and the
continued share gain of private-label products. These factors were partly offset
by the introduction of new products and favorable foreign exchange ($14
million). Operating losses decreased $8.3 million, or 73%, to $3.1 million on
the higher sales and the business's ongoing repositioning, including successful
cost reduction and asset management initiatives. These benefits were partly
offset by the $12.0 million write-down of select identifiable intangibles,
specifically trade names, to reflect their diminished value.
43
CAUTIONARY STATEMENT
This Quarterly Report on Form 10-Q contains statements relating to future
results. They are forward-looking statements as that term is defined in the
Private Securities Litigation Reform Act of 1995. Readers are cautioned that
these forward-looking statements speak only as of the date hereof. Actual
results may differ materially from those projected as a result of certain risks
and uncertainties, including but not limited to changes in general economic
conditions, foreign exchange rate fluctuations, changes in interest rates,
returns on pension assets, competitive product and pricing pressures, trade
consolidations, the impact of excise tax increases with respect to distilled
spirits, regulatory developments, the uncertainties of litigation, changes in
golf equipment regulatory standards, the impact of weather, particularly on the
home and hardware and golf products businesses, expenses and disruptions related
to shifts in manufacturing to different locations and sources, the impact of
weak conditions in the leisure travel industry on our golf and spirits and wine
businesses as well as other risks and uncertainties detailed from time to time
in the Company's Securities and Exchange Commission filings.
Item 3. QUANTATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There are no material changes in the information provided in Item
7A of the Company's Form 10-K for the fiscal year ended December
31, 2002.
Item 4. CONTROLS AND PROCEDURES.
(a) Evaluation of Disclosure Controls and Procedures
The Company's Chief Executive Officer and Chief Financial Officer
have reviewed and evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in the Exchange Act) as of the end of the
period covered by this report. Based on that evaluation, the Chief Executive
Officer and the Chief Financial Officer have concluded that the Company's
current disclosure controls and procedures are effective in providing them on a
timely basis with material information relating to the Company required to be
disclosed in the reports the Company files or submits under the Exchange Act.
(b) Changes in Internal Controls.
There have not been any changes in the Company's internal
controls over financial reporting identified in connection with the evaluation
by the Chief Executive Officer and Chief Financial Officer referred to above
that occurred during the Company's fiscal quarter ending June 30, 2003 that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
44
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS.
(a) Smoking and Health Proceedings
Indemnification Agreement
On December 22, 1994, Registrant sold The American Tobacco
Company ("ATCO") to Brown & Williamson Tobacco Corporation ("B&W"), at the time
a wholly-owned subsidiary of B.A.T Industries p.l.c. In connection with the
sale, B&W and ATCO, which has since merged into B&W (the "Indemnitor"), agreed
to indemnify Registrant against claims including legal expenses arising from
smoking and health and fire safe cigarette matters relating to the tobacco
business of ATCO.
Individual Cases
On August 1, 2003, there were approximately 34 smoking and health
cases pending on behalf of individual plaintiffs in which Registrant has been
named as one of the defendants, compared with approximately 34 such cases as of
February 24, 2003 as reported by Registrant in its Annual Report on Form 10-K
for the fiscal year ended December 31, 2002.
Class Actions
As of August 1, 2003, there were approximately nine purported
smoking and health class actions pending in which Registrant has been named as
one of the defendants, compared with approximately nine such cases on February
24, 2003, as reported by Registrant in its Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
Health Care Cost Recovery Actions
As of August 1, 2003, there were approximately four health care
cost recovery actions pending in which Registrant had been named as one of the
defendants, compared with approximately four such cases as of February 24, 2003,
as reported by Registrant in its Annual Report on Form 10-K for the fiscal year
ended December 31, 2002.
List of Pending Cases
See Exhibit 99.1 to this Form 10-Q for a list of additional
proceedings involving the smoking and health controversy in which Registrant has
been named as a defendant and not previously reported.
List of Terminated Cases
See Exhibit 99.1 to this Form 10-Q for a list of smoking and
health proceedings, in which Registrant has been named as a defendant, which
have been terminated and have not previously been reported as such.
45
Conclusion
It is not possible to predict the outcome of the pending
litigation, and it is possible that some of these actions could be decided
unfavorably. Management is unable to make a meaningful estimate of the amount or
range of loss that could result from an unfavorable outcome of the pending
litigation. However, management believes that there are a number of meritorious
defenses to the pending actions, including the fact that the Company never made
or sold tobacco, and these actions are being vigorously contested by the
Indemnitor. Management believes that the pending actions will not have a
material adverse effect upon the results of operations, cash flows or financial
condition of the Registrant because it believes it has meritorious defenses and
the Registrant is indemnified under the previously mentioned indemnification
agreement.
Reference is made to Note 14, "Pending Litigation" in the Notes to
Condensed Consolidated Financial Statements set forth in Part I, Item
1 of this Quarterly Report on Form 10-Q.
(b) Environmental Matters
The Company is subject to laws and regulations relating to the protection of
the environment. While it is not possible to quantify with certainty the
potential impact of actions regarding environmental matters, particularly
remediation and other compliance efforts that the Company's subsidiaries may
undertake in the future, in the opinion of management, compliance with the
present environmental protection laws, before taking into account estimated
recoveries from third parties, will not have a material adverse effect upon the
results of operations, cash flows or financial condition or the Company.
Capital Cabinets Corporation, which the Company acquired on June 27, 2003, is a
party to an administrative proceeding relating to alleged air emissions
violations at Capital's North Las Vegas, Nevada facility. Although Capital has
not admitted the existence of violations at the facilities, Capital and the U.S.
Environmental Protection Agency are negotiating a consent decree under which it
is anticipated that Capital will pay sanctions of $142,000. The purchase price
for Capital was reduced by an amount equal to the anticipated sanctions, and
management has determined that any additional costs related to these proceedings
will not be material. These administrative proceedings were instituted prior to
Registrant's acquisition of Capital. The North Las Vegas, Nevada facility is
currently in compliance with applicable terms of the consent decree.
The Company's spirits and wine business received a notice of violation on August
8, 2003 from the Kentucky Department for Environmental Protection relating to a
discharge of distilled spirits from the business' warehouse facility in
Bardstown, Kentucky. The discharge occurred during a fire at the facility
believed to have been caused by a large lightning strike. The notice of
violation seeks remediation and monitoring. Management believes any liability
associated with the alleged violation or with the fire will not be material.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Stockholders was held on April
29, 2003.
46
(b) Registrant's Certificate of Incorporation provides for
the classification of the Board of Directors into three
classes, as nearly equal in number as possible, with
staggered terms of office and provides that upon the
expiration of the term of office for a class of
directors, nominees for such class shall be elected for
a term of three years or until their successors are
duly elected and qualified. The three nominees for
Class II directors, Dr. Patricia O. Ewers, Mr. Eugene
A. Renna and Mr. David M. Thomas, were duly elected at
the 2003 Annual Meeting for a term of office expiring
at the 2006 Annual Meeting. The term of office of the
Class III directors, Mrs. Anne M. Tatlock, Mr. Norman
H. Wesley and Mr. Peter M. Wilson and the Class I
directors, Mr. Thomas C. Hays, Mr. Gordon R. Lohman and
Mr. J. Christopher Reyes, also continued after the 2003
Annual Meeting.
(c) (i) The three nominees for Class II directors were
elected by a plurality of the combined votes cast by
the holders of Registrant's Common Stock and $2.67
Convertible Preferred Stock voting thereon: (A) Dr.
Ewers: 90,220,314 votes for and 37,682,464 votes
withheld; (B) Mr. Renna: 90,316,273 votes for and
37,586,505 votes withheld; (C) Mr. Thomas: 93,033,874
votes for and 34,868,905 votes withheld.
(ii) A proposal (designated Item 2 and set forth in
Registrant's Proxy Statement), approved by the Board of
Directors, to elect PricewaterhouseCoopers LLP
independent accountants of Registrant for the year
2003, was approved by a majority of the combined votes
cast by the holders of Registrant's Common Stock and
$2.67 Convertible Preferred Stock voting thereon:
123,156,730 affirmative votes; 3,818,442 negative
votes; and 928,603 votes abstained.
(iii) A proposal (designated Item 3 and set forth in
Registrant's Proxy Statement), approved by the Board of
Directors, to approve the Registrant's 2003 Long Term
Incentive Plan, was approved by a majority of the
combined votes cast by the holders of Registrant's
Common Stock and $2.67 Convertible Preferred Stock
voting thereon: 90,651,217 affirmative votes;
16,524,269 negative votes; and 1,690,579 votes
abstained.
(iv) A proposal (designated Item 4 and set forth in
Registrant's Proxy Statement), from a stockholder, Nick
Rossi, relating to the Registrant's rights plan, was
approved by a majority of the combined votes cast by
the holders of Registrant's Common Stock and $2.67
Convertible Preferred Stock voting thereon: 66,950,583
affirmative votes; 39,376,514 negative votes; and
2,539,005 votes abstained.
47
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10a1. 1999 Long Term Incentive Plan, as amended.*
10b1. Termination, Replacement and Restatement Agreement, dated as of
July 10, 2003, by and among Registrant as Borrower, JPMorgan
Chase Bank as Administrative Agent, Citibank, N.A. as Syndication
Agent and 13 financial institutions as Lenders.
12. Statement re computation of ratio of earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated August 13, 2003 re
unaudited financial information.
31.1 Certificate of Chief Executive Officer Required Under Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer Required Under Section
302 of the Sarbanes-Oxley Act of 2002.
32. Joint CEO/CFO Certificate Required Under Section 906 of the
Sarbanes-Oxley Act of 2002.
99. List of Pending/Terminated Cases.
*Indicates that exhibit is a management contract or compensatory plan or
arrangement.
In lieu of filing certain instruments with respect to long-term
debt of the kind described in Item 601(b)(4) of Regulation S-K, Registrant
agrees to furnish a copy of such instruments to the Securities and Exchange
Commission upon request.
(b) Reports on Form 8-K
Registrant filed a Current Report on Form 8-K, dated April 17, 2003, in respect
of Registrant's press release dated April 17, 2003 announcing Registrant's
financial results for the fiscal quarter ended March 31, 2003 (Items 7(c) and
12).
Registrant filed a Current Report on Form 8-K, dated May 19, 2003, in respect of
Registrant's press release dated May 19, 2003 announcing Registrant's
reaffirmation of its earnings outlook for the second quarter ending June 30,
2003 and the fiscal year ending December 31, 2003 (Items 7(c) and 12).
48
Registrant furnished a Current Report on Form 8-K, dated May 20, 2003, in
respect of distribution of Registration's revised investor brochure dated and
first distributed on May 20, 2003 (Item 7(c) and 9).
49
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report to be signed on its behalf by
the undersigned, thereunto duly authorized.
FORTUNE BRANDS, INC.
--------------------
(Registrant)
Date: August 14, 2003 By /s/ C. P. Omtvedt
---------------------
C. P. Omtvedt
Senior Vice President
and Chief Financial Officer
50
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
- ------- -------------
10a1. 1999 Long Term Incentive Plan, as amended.*
10b1. Termination, Replacement and Restatement Agreement, dated as of
July 10, 2003, by and among Registrant as Borrower, JPMorgan
Chase Bank as Administrative Agent, Citibank, N.A. as Syndication
Agent and 13 financial institutions as Lenders.
12. Statement re computation of ratio of earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated August 13, 2003 re
unaudited financial information.
31.1 Certificate of Chief Executive Officer Required Under Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certificate of Chief Financial Officer Required Under Section
302 of the Sarbanes-Oxley Act of 2002.
32. Joint CEO/CFO Certificate Required Under Section 906 of the
Sarbanes-Oxley Act of 2002.
99. List of Pending/Terminated Cases.
*Indicates that exhibit is a management contract or compensatory plan or
arrangement.