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United States
Securities and Exchange Commission

FORM 10-Q

Commission File No. 1-123

Brown-Forman Corporation

(502) 585-1100
(Registrant’s telephone number, including area code)

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  þ     No  o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes  þ     No  o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: February 28, 2003

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BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q

PART I — FINANCIAL INFORMATION

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PART I — FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

BROWN-FORMAN CORPORATION

     See notes to the condensed consolidated financial statements.

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BROWN-FORMAN CORPORATION

See notes to the condensed consolidated financial statements.

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BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions; amounts in parentheses are reductions of cash)

See notes to the condensed consolidated financial statements.

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BROWN-FORMAN CORPORATION

In these notes, “we,” “us,” and “our” refer to Brown-Forman Corporation.

1.     Condensed Consolidated Financial Statements

We prepared these unaudited condensed consolidated statements using our customary accounting practices as set out in our 2002 annual report on Form 10-K (the “2002 Annual Report”). We made all of the adjustments (which include only normal, recurring adjustments) needed for a fair statement of this data.

We condensed or omitted some of the information found in financial statements prepared according to generally accepted accounting principles (“GAAP”). You should read these financial statements together with the 2002 Annual Report, which does conform to GAAP.

2.     Inventories

We use the last-in, first-out method to determine the cost of most of our inventories. If the last-in, first-out method had not been used, inventories would have been $109.7 million higher than reported as of April 30, 2002, and $124.5 million higher than reported as of January 31, 2003. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.

3.     Advertising Costs

We expense most advertising costs when we incur the costs or, in some cases, when we recognize revenues related to advertising activities. We capitalize and amortize certain direct-response advertising costs over periods not exceeding one year.

4.     Taxes on Income

Our consolidated effective tax rate may differ from current statutory rates due to the recognition of amounts for events or transactions that do not have tax consequences. We use the estimated annual effective tax rate in determining our interim results.

5.     Earnings Per Share

Basic earnings per share is calculated as net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated in the same manner, except that the denominator also includes additional common shares that would have been issued if outstanding stock options had been exercised during the period. The dilutive effect of outstanding stock options is determined by application of the treasury stock method.

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The following table presents information concerning basic and diluted earnings per share:

6.     Environmental

Along with other responsible parties, we face environmental claims resulting from the cleanup of several waste deposit sites. We have accrued our estimated portion of cleanup costs. We expect either the other responsible parties or insurance to cover the remaining costs. We do not believe that any additional costs we incur to satisfy environmental claims will have a material adverse effect on our financial condition or results of operations.

7.     Contingencies

We get sued in the ordinary course of business. Some suits and claims seek significant damages. Many of them take years to resolve, which makes it difficult for us to predict their outcomes. We believe, based on our legal counsel’s advice, that none of the suits and claims pending against us will have a material adverse effect on our financial condition or results of operations.

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8.     Business Segment Information

(Dollars in millions)

9.     Comprehensive Income

Comprehensive income is a broad measure of the effects of all transactions and events (other than investments by or distributions to shareholders) that are recognized in stockholders’ equity, regardless of whether those transactions and events are included in net income. The following table adjusts the company’s net income for the other items included in comprehensive income:

(Dollars in millions)

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Accumulated other comprehensive loss (income) consisted of the following:

(Dollars in millions)

10.     Stock Options

Under our Omnibus Compensation 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. We apply Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for stock options. Accordingly, no stock-based employee compensation cost is reflected in net income, as no options granted under those plans had an exercise price below the market value of the underlying stock on the grant date. The following table illustrates the effect on net income and earnings per share 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 Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation.”

(Dollars in millions, except per share amounts)

The 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 68,996,238 shares that were outstanding at inception of the plan (as adjusted for any share repurchases or issuances unrelated to the plan).

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11.     Acquisition of Finlandia Vodka Worldwide

On December 31, 2002, we acquired an additional 35% interest in Finlandia Vodka Worldwide (FVW), the joint venture company that owns the Finlandia brand and trademark, for $71.8 million (net of cash acquired). This increased Brown-Forman’s total interest in the venture to 80% and our total investment to $157.4 million, which we have preliminarily allocated to the individual assets and liabilities acquired. The investment consists primarily of indefinite-lived intangible assets, including the Finlandia brand name and goodwill. We are in the process of obtaining third-party valuations of those intangibles for financial reporting purposes, but have preliminarily assigned a value of $56.2 million to the Finlandia brand name and $112.0 million to goodwill.

The operating results of FVW have been consolidated with our financial statements since December 31, 2002. (We previously accounted for the investment in FVW using the equity method). Consolidated pro forma operating results for the nine months ended January 31, 2002 and 2003 would not have been materially different from the actual amounts reported for those periods.

The minority shareholder of FVW (Altia Corporation) has an option during a two-year window beginning December 31, 2004, with which it may require us to buy its remaining 20% interest in FVW. Buying the remaining interest would cost us approximately €39 million ($42.2 million at January 31, 2003) plus interest of 4.5% per year from August 1, 2000.

12.     Leased Vineyard Properties

We have a master operating lease agreement with an unrelated party that enables us to lease vineyard properties in California to support our premium varietal and estate wine business. We have used this arrangement primarily to secure land under development that is not yet a fully producing asset. We have made arrangements to terminate the agreement and purchase the leased properties for approximately $39 million by the end of fiscal 2003.

13.     New Accounting Pronouncement

In June, the Financial Accounting Standards Board (FASB) issued Statement No. 146, “Accounting for Exit or Disposal Activities.” That Statement addresses the recognition, measurement, and reporting of costs that are associated with exit and disposal activities, including certain severance-type costs and costs to close or consolidate facilities. Statement No. 146 requires liabilities associated with exit and disposal activities to be expensed as incurred and will impact the timing of recognition for exit or disposal activities that are initiated after December 31, 2002.

In November, the FASB issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which elaborates on required disclosures by a guarantor in its financial statements about obligations under certain guarantees that it has issued and clarifies the need for a guarantor to recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing the guarantee. The company is reviewing the provisions of this Interpretation relating to initial recognition and measurement of guarantor liabilities, which are effective for qualifying guarantees entered into or modified after December 31, 2002, but does not expect it to have a material impact on the company’s financial statements.

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In January, the FASB issued Interpretation No. 46, “Consolidation of Variable Interest Entities,” which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. The Interpretation is effective immediately for certain disclosure requirements and variable interest entities created after January 31, 2003, and in fiscal 2004 for all other variable interest entities. The company is reviewing the provisions of this Interpretation and complies with the disclosure requirements, but does not expect it to have a material impact on the company’s financial statements.

Information satisfying the disclosure requirements of the Interpretations is included in Note 12.

14.     Reclassifications

Certain prior year amounts have been reclassified to conform with the current year presentation.

15.     Subsequent Events

On February 11, 2003, we acquired the remaining 55% interest in Distillerie Tuoni e Canepa for $65.3 million. Distillerie Tuoni e Canepa is the Italy-based owner and producer of Tuaca Liqueur, which Brown-Forman has distributed in the United States since 1999.

On February 3, 2003, the company announced an offer by us to repurchase up to 1.5 million shares of our Class A common stock and 6.8 million shares of our Class B common stock at a price between $63 and $73 per share. The offer was in the form of a “Dutch Auction” tender offer where the final price (for each class of common stock) is determined based upon the number of shares, and the respective prices, tendered. The tender offer expired on March 4, 2003. Based on a preliminary count by the depositary for the tender offer, on March 5, 2003 we announced that approximately 498,000 shares of Class A stock were tendered and not withdrawn at a price at or below $73 per share and 11,206,000 shares of Class B stock were tendered and not withdrawn at a price at or below $73 per share, and that based on these preliminary results, the company expects to accept for purchase approximately 498,000 Class A shares at a price of $73 per share and 7,590,607 Class B shares at a price of $70.50 per share.

The company plans to finance the share repurchase through an enlarged commercial paper program. To provide the financing necessary for the repurchase in the event sufficient financing through the commercial paper program is not available, on February 25, 2003 we entered into a new 364-Day Interim Credit Agreement which provides a $700 million revolving credit commitment to us from a syndicate of banks. The Interim Credit Agreement allows us to borrow funds on an unsecured basis and all such borrowings will become due no later than February 24, 2004. The company intends to refinance all or a portion of the short-term borrowings incurred in connection with the share repurchase with longer term debt shortly thereafter, subject to market conditions.

On March 7, 2003, the company announced certain changes in its distributor network in Florida, Colorado and New Mexico.

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Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis along with our 2002 Annual Report. Note that the results of operations for the nine months ended January 31, 2003, do not necessarily indicate what our operating results for the full fiscal year will be. In this Item, “we,” “us,” and “our” refer to Brown-Forman Corporation.

Important Note on Forward-Looking Statements:

This report includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to a number of important risks and uncertainties, which could cause actual results to differ materially from those discussed in these statements. They include but are not limited to further deterioration of the U.S. economy, significant strengthening of the U.S. dollar against other currencies, deterioration in economic conditions in principal countries to which we export beverage products, and a decline in discretionary consumer spending. Further weakening of the pricing environment in the U.S. wine business could also adversely affect earnings. The company’s beverage alcohol business is sensitive to higher tax rates, especially federal excise taxes; an increase in those taxes, or other measures adopted to restrict beverage sales (whether in the U.S. or abroad,) may hurt our business. Consumer Durables sales could also be hurt by a decline in sales of products to department stores, a reduction in retail space in department stores devoted to tableware, giftware and/or luggage products, or lower demand for consumer durable products sold through the direct-mail channel.

Other factors, unrelated to our specific business, could affect earnings. These include the unknown impact of a war in the Middle East, or other outbreak of hostilities, adverse effects of additional terrorist attacks and related events, or an ongoing lack of investor confidence relating to perceived inadequacies in the financial reporting systems of U.S. companies. The statements in this report are also subject to the factors mentioned in the section entitled “Important Information Regarding Forward-Looking Statements” on page 38 of the Company’s Annual Report to Stockholders and referred to in Part I, Item 7 of the Company’s Form 10-K for 2002, which Brown-Forman incorporates by reference. Brown-Forman has no current intention of updating or revising any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.

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Results of Operations:
Third Quarter Fiscal 2003 Compared to Third Quarter Fiscal 2002

Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts):

The company’s earnings per share for the quarter ended January 31, 2003 was $1.02, up 22% or $0.18 per share compared to the same period last year. Adjusted for business improvement costs, earnings for the quarter improved $0.14 per share, or 16%. Improved results reflected increased profitability in the United Kingdom from a new distribution arrangement, benefits from a weaker U.S. dollar, and solid growth for Jack Daniel’s and Southern Comfort. Tempering growth was a substantial drop in earnings for our wine business, which continues to suffer from higher costs and a very competitive pricing environment in the United States. The company’s effective tax rate declined to 34.0% in the quarter, largely reflecting a shift of income to lower tax-rate jurisdictions. Overall results in the quarter were consistent with the company’s previously stated outlook for full year earnings growth of 6% to 10%, excluding any potential impact from a recently announced share repurchase.

Wine & Spirits

Third quarter beverage operating income grew 17% on gross profit growth of 15%. Similar to the factors cited for the company, beverage results were driven by added profitability from the new U.K. distribution arrangement, benefits from a weaker U.S. dollar, and growth for Jack Daniel’s and Southern Comfort. Partially offsetting these positive factors was substantially lower earnings from our wine business, driven by higher product costs and the continued competitive pricing environment in the U.S.

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Worldwide demand for Jack Daniel’s Tennessee Whiskey continued to expand during the quarter, led by significant gains in the United Kingdom. While depletions for Southern Comfort were down slightly, the brand continued to contribute significantly to gross profit and operating income growth for the quarter. Depletion trends remained healthy for Korbel while volumes were soft for Fetzer and Bolla.

Consumer Durables

For the quarter, sales and gross profit for the Consumer Durables segment were down 7% and 4%, respectively. Adjusted for business improvement costs, segment operating income was $1 million lower than the same period last year. A sluggish U.S. economy and declining consumer confidence levels are believed to have tempered consumer demand for consumer durables during the important holiday period. In addition to soft trends for traditional department and outlet stores, the company’s direct to consumer channel also experienced a drop in orders during the quarter.

Business Improvement Program

The company recognized approximately $0.02 per share in Business Improvement costs during the third quarter, primarily related to improvements at our beverage production facilities, and we anticipate an additional $0.01 per share during the fourth quarter to complete the series of Business Improvement Program initiatives announced in July 2001.

The following chart summarizes the effect on earnings per share of costs related to the company’s Business Improvement Program.

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Results of Operations:
Nine Months Fiscal 2003 Compared to Nine Months Fiscal 2002

Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts):