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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2004
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-61516
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THE ROBERT MONDAVI CORPORATION
Incorporated under the laws I.R.S. Employer Identification:
of the State of California 94-2765451
Principal Executive Offices:
7801 St. Helena Highway
Oakville, CA 94562
Telephone: (707) 259-9463
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
------------ ------------
As of April 30, 2004, there were issued and outstanding 10,657,277 shares of the
issuer's Class A Common Stock and 5,770,718 share of the issuer's Class B Common
Stock.
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1
PART I
Item 1. Financial Statements.
CONSOLIDATED BALANCE SHEETS
March 31, June 30,
---------------------------
(In thousands, except share data) 2004 2003
---------------------------
Unaudited
ASSETS
Current assets:
Cash $ 15,054 $ 1,339
Accounts receivable, net 87,129 96,111
Inventories 406,666 392,635
Prepaid expenses and other current assets 7,948 12,545
------------ ------------
Total current assets 516,797 502,630
Property, plant and equipment, net 401,744 416,110
Investments in joint ventures 29,383 30,763
Restricted cash 6,177 5,143
Other assets, net 6,049 6,531
------------ ------------
Total assets $ 960,150 $ 961,177
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ - - $ 5,000
Accounts payable 24,236 28,727
Employee compensation and related costs 11,500 13,987
Accrued interest 3,570 7,115
Other accrued expenses 15,728 7,317
Current portion of long-term debt 19,980 9,837
------------ ------------
Total current liabilities 75,014 71,983
Long-term debt, less current portion 362,968 397,889
Deferred income taxes 35,797 30,610
Deferred executive compensation 7,060 6,508
Other liabilities 2,956 3,193
------------ ------------
Total liabilities 483,795 510,183
------------ ------------
Commitments and contingencies (Note 6)
Shareholders' equity
Preferred Stock: authorized - 5,000,000 shares;
issued and outstanding - no shares - - - -
Class A Common Stock, without par value: authorized
- 25,000,000 shares; issued and outstanding -
10,606,694 and 9,734,645 shares 98,563 95,909
Class B Common Stock, without par value: authorized
- 12,000,000 shares; issued and outstanding -
5,820,718 and 6,621,734 shares 9,337 10,636
Paid-in capital 13,387 11,579
Retained earnings 355,151 333,852
Deferred compensation stock plans (819) - -
Accumulated other comprehensive income (loss):
Cumulative translation adjustment 523 (1,269)
Forward contracts 213 287
------------ ------------
Total shareholders' equity 476,355 450,994
------------ ------------
Total liabilities and shareholders' equity $ 960,150 $ 961,177
============ ============
See Notes to Consolidated Financial Statements.
2
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------
(In thousands, except share data) 2004 2003 2004 2003
------------------------------------------
Revenues $103,328 $ 96,843 $367,005 $348,591
Less excise taxes 5,179 4,679 17,578 16,727
--------- --------- --------- ---------
Net revenues 98,149 92,164 349,427 331,864
Cost of goods sold 61,509 62,679 211,235 202,395
--------- --------- --------- ---------
Gross profit 36,640 29,485 138,192 129,469
Selling, general and administrative
expenses 30,693 28,341 96,868 94,963
Net gain on sale of assets - - (6,144) (1,531) (6,144)
Special charges, net - - 3,394 - - 6,504
--------- --------- --------- ---------
Operating income 5,947 3,894 42,855 34,146
Other (income) expense:
Interest 4,920 5,832 16,120 16,658
Equity (income) loss from joint
ventures (1,569) 489 (6,026) (7,906)
Other (583) 505 (780) 81
--------- --------- --------- ---------
Income (loss) before income taxes 3,179 (2,932) 33,541 25,313
Provision (benefit) for income taxes 1,160 (1,084) 12,242 9,366
--------- --------- --------- ---------
Net income (loss) $ 2,019 $ (1,848) $ 21,299 $ 15,947
========= ========= ========= =========
Earnings (loss) per share - basic $ 0.12 $ (0.11) $ 1.30 $ 0.98
========= ========= ========= =========
Earnings (loss) per share - diluted $ 0.12 $ (0.11) $ 1.29 $ 0.97
========= ========= ========= =========
Weighted average number of shares
outstanding - basic 16,421 16,290 16,391 16,246
========= ========= ========= =========
Weighted average number of shares
outstanding - diluted 16,619 16,290 16,512 16,363
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
3
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,
---------------------------
(In thousands) 2004 2003
---------------------------
Cash flows from operating activities:
Net income $ 21,299 $ 15,947
Adjustments to reconcile net income to net cash
flows from operating activities:
Deferred income taxes 2,918 (187)
Depreciation and amortization 18,737 18,809
Equity income from joint ventures (6,026) (7,906)
Distributions of earnings from joint ventures 7,648 9,388
Special charges, net - - 6,504
Inventory and fixed asset write-downs - - 7,561
Net gain on sale of assets (1,531) (6,144)
Other 148 1,475
Change in assets and liabilities, net of
acquisitions:
Accounts receivable, net 8,982 10,071
Inventories (12,548) (44,796)
Other assets 4,278 (745)
Accounts payable and accrued expenses (134) 8,119
Deferred executive compensation 552 497
Other liabilities (237) (270)
------------ ------------
Net cash flows from operating activities 44,086 18,323
------------ ------------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (12,196) (25,114)
Proceeds from sale of assets 3,788 17,555
Contributions of capital to joint ventures - - (1,814)
Increase in restricted cash (1,034) (1,023)
------------ ------------
Net cash flows from investing activities (9,442) (10,396)
------------ ------------
Cash flows from financing activities:
Book overdraft - - 663
Net repayments under credit lines (19,000) (5,900)
Proceeds from issuance of long-term debt 4,748 8,694
Principal repayments of long-term debt (7,695) (12,267)
Proceeds of issuance of Class A Common Stock - - 260
Exercise of Class A Common Stock options 1,355 1,076
Other (337) (453)
------------ ------------
Net cash flows from financing activities (20,929) (7,927)
------------ ------------
Net change in cash 13,715 - -
Cash at the beginning of the period 1,339 - -
------------ ------------
Cash at the end of the period $ 15,054 $ - -
============ ============
See Notes to Consolidated Financial Statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands, except share data)
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position at
March 31, 2004, its results of operations for the three and nine month periods
ended March 31, 2004 and 2003 and its cash flows for the nine month periods
ended March 31, 2004 and 2003. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been
condensed or omitted from the accompanying consolidated financial statements.
For further information, reference should be made to the consolidated financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2003, on file at the Securities and
Exchange Commission and to the section "Critical Accounting Policies" under Item
7 of the Form 10-K.
In January 2003, the Financial Accounting Standards Board (FASB) issued
Financial Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities", an interpretation of Accounting Research Bulletin No. 51
"Consolidated Financial Statements". FIN 46 establishes accounting guidance for
the consolidation of variable interest entities that function to support the
activities of the primary beneficiary and applies to any business enterprise,
both public and private, that has a controlling interest, contractual
relationship or other business relationship with a variable interest entity. The
Company maintains master lease facilities that enable the leasing of certain
real property (predominantly vineyards) to be constructed or acquired and that
qualify as variable interest entities with the Company as the primary
beneficiary. Accordingly, the Company has adopted the provisions of FIN 46,
effective July 1, 2003, and has included in its consolidated financial
statements the assets, and related liabilities, leased under its master lease
facilities. As a result, property, plant, and equipment and long-term debt were
increased by $114,095 and $114,557, respectively, and inventory, deferred income
tax liabilities and retained earnings were decreased by $1,754, $826, and
$1,390, respectively, at June 30, 2003. Also, as encouraged by the
Interpretation, the Company has restated prior period financial statements back
to July 1, 2001. As a result, property, plant, and equipment and long-term debt
were increased by $112,759 and $112,914, respectively, and inventory, deferred
income tax liabilities and retained earnings were decreased by $1,727, $702, and
$1,180, respectively, at March 31, 2003. Net income for the three and nine
months ended March 31, 2003, was reduced by $205 and $402, respectively. On July
1, 2001, property, plant, and equipment and long-term debt were increased by
$88,292. In December 2003, the FASB issued a revised Interpretation No. 46,
("FIN 46R"), which clarified and enhanced the provisions of FIN 46. The Company
was required to adopt FIN 46R in the current quarter. The Company has evaluated
FIN 46R and based on this evaluation, the adoption did not have a significant
impact on its financial condition, results of operations or cash flows.
Reclassifications
Certain fiscal 2003 balances have been reclassified to conform with the current
year presentation. These reclassifications had no effect on the Consolidated
Statements of Operations.
Earnings (loss) per share
Diluted earnings (loss) per share is computed by dividing net income (loss) by
the sum of the weighted average number of Class A and Class B common shares
outstanding plus the dilutive effect, if any, of common share equivalents for
stock option awards. Potentially dilutive securities are excluded from the
computation of diluted earnings (loss) per share if their inclusion would have
an antidilutive effect. Excluded antidilutive securities are 556,000 and
1,494,000 options, respectively, for the three months ended March 31, 2004 and
2003, and 927,000 and 1,145,000 options, respectively, for the nine months ended
March 31, 2004 and 2003.
In computing basic earnings (loss) per share for all periods presented, no
adjustments have been made to net income (loss) (numerator) or weighted-average
shares outstanding (denominator). The computation of diluted earnings (loss) per
share for all periods is identical to the computation of basic earnings (loss)
per share except that the weighted-average shares outstanding (denominator) has
been increased by 197,725 for the three months ended March 31, 2004, and by
121,092 and 117,000, respectively, for the nine months ended March 31, 2004 and
2003, to include the dilutive effect of stock options outstanding.
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
Derivative instruments and hedging activities
The Company has only a limited involvement with derivative instruments and does
not use them for trading purposes. Forward exchange contracts, generally with
average maturities of less than one year, are used as protection against the
risk that the eventual U.S. dollar cash flows resulting from certain
unrecognized firm purchase commitments and forecasted transactions denominated
in foreign currencies will be adversely affected by changes in exchange rates.
The derivative financial instruments associated with unrecognized firm purchase
commitments are designated as fair-value hedges. The derivative financial
instruments associated with forecasted transactions are designated as cash-flow
hedges.
At March 31, 2004, the Company had outstanding forward exchange contracts,
hedging primarily Australian dollar purchases of wine and software and
forecasted receipts of Canadian dollars and European euros, with notional
amounts totaling $789. Using exchange rates outstanding as of March 31, 2004,
the U.S. dollar equivalent of the contracts totaled $617.
During the second quarter of fiscal 2004, the Company entered into two interest
rate swap agreements, with a total notional amount of $95,000, with the
objective to both take advantage of the current low interest rate environment
and to protect against further increases in the fair value of the Company's debt
due to further declines in rates. These swap agreements have been designated as
fair-value hedges of certain of the Company's fixed rate debt, effectively
converting them to variable rate obligations indexed to LIBOR. The variable rate
interest to be paid by the Company will be based on 6-month LIBOR plus a spread
of 2.1%. The swap has been marked to fair value at March 31, 2004, resulting in
the recording of a swap liability of $2,692, which is included in Long-term
Debt, Less Current Portion in the Consolidated Balance Sheets.
Stock-based compensation
The Company measures compensation cost for employee stock options and similar
equity instruments using the intrinsic value method described in Accounting
Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to
Employees," and related interpretations. In accordance with APB No. 25, the
compensation cost for stock options is recognized in income based on the excess,
if any, of the quoted market price of the stock at the grant date of the award
or other measurement date over the amount an employee must pay to acquire the
stock. No stock-based employee compensation cost is reflected in net income
(loss) for the three and nine month periods ended March 31, 2004 or 2003 as all
options granted had an exercise price equal to or greater than the fair market
value of the underlying common stock on the date of grant. The Company utilizes
the disclosure-only provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation,"(Statement 123) as amended by
Statement 148.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share if the Company had applied the fair value recognition
provisions of Statement 123 to stock-based employee compensation.
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------
2004 2003 2004 2003
------------------------------------------
Net income (loss), as reported $ 2,019 $ (1,848) $ 21,299 $ 15,947
Less total stock-based compensation
expense determined under fair value
based method for all awards, net of
tax effects (647) (742) (2,042) (2,305)
--------- --------- --------- ---------
Pro forma net income (loss) $ 1,372 $ (2,590) $ 19,257 $ 13,642
========= ========= ========= =========
Earnings (loss) per share:
Basic, as reported $ 0.12 $ (0.11) $ 1.30 $ 0.98
========= ========= ========= =========
Basic, pro forma $ 0.08 $ (0.16) $ 1.17 $ 0.84
========= ========= ========= =========
Diluted, as reported $ 0.12 $ (0.11) $ 1.29 $ 0.97
========= ========= ========= =========
Diluted, pro forma $ 0.08 $ (0.16) $ 1.17 $ 0.83
========= ========= ========= =========
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
For purposes of calculating compensation cost using the fair value-based method,
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 grants in fiscal 2004 and 2003, respectively: dividend
yield of 0% for all periods; expected volatility of 42% and 43%; risk-free
interest rates of 3.04% and 3.18%; and expected lives of three to five years for
all periods. The weighted-average grant-date fair value of options granted
during fiscal 2004 and 2003, respectively, was $11.62 and $13.54 per share.
NOTE 2 INVENTORIES
Inventories consist of the following:
March 31, June 30,
---------------------------
2004 2003
---------------------------
Wine in production $ 239,613 $ 224,064
Bottled wine 150,174 145,842
Crop costs and supplies 16,879 22,729
------------ ------------
$ 406,666 $ 392,635
============ ============
Inventories are valued at the lower of cost or market. Inventory and cost of
goods sold are determined using the first-in, first-out (FIFO) method. Costs
associated with growing crops, winemaking and other costs associated with the
manufacturing of product for resale are recorded as inventory. The Company's
acquisition of Arrowood Vineyards and Winery in fiscal 2001 resulted in the
allocation of purchase price to inventories in excess of book value. This
difference between the original book value and the fair market value of the
inventory upon acquisition is referred to as inventory step-up. Included in
inventory at March 31, 2004 and June 30, 2003, respectively, was $1,203 and
$2,837 of inventory step-up remaining from the acquisition.
NOTE 3 INVESTMENTS IN JOINT VENTURES
March 31, June 30,
---------------------------
Investments in joint ventures are as follows: 2004 2003
---------------------------
Opus One $ 12,395 $ 10,695
Chile 613 6,160
Italy 6,515 6,662
Ornellaia 7,050 4,334
Australia 2,470 2,295
Other 340 617
------------ ------------
$ 29,383 $ 30,763
============ ============
The Company's interest in income and losses for each joint venture is equal to
its ownership percentage. The Opus One joint venture is a general partnership,
of which the Company has a 50% general partnership interest. The Ornellaia joint
venture is a C-Corporation, of which the Company has a 50% interest. The Italy
joint venture is a limited liability company, of which the Company has a 50%
interest. The Australia joint venture operates through two entities: a limited
liability company, of which the Company owns a 50% interest; and a general
partnership, of which the Company has a 50% general partnership interest. Prior
to September 2003, the Chile joint venture was a single corporation, of which
the Company owned a 50% interest. During September 2003, the joint venture was
split into two new corporations in order to separate the Sena and Arboleda
brands and assets from the Caliterra brand and assets. The Company had a 50%
interest in each of the new corporations. In January 2004, the Company sold its
50% interest in the corporation holding the Caliterra brand and assets ("Vina
Caliterra") to its joint venture partner for $1,673 (see Assets Held for Sale
below).
The Company's investment in each joint venture increases or decreases each
period for its share of income and losses (equity income) from each joint
venture and for any contributions of capital to or distributions of earnings
from the joint ventures. During the nine months ended March 31, 2004, total
distributions of $7,648 were made from the Company's joint ventures; however,
there were no contributions of capital.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
The condensed combined statements of operations of the joint ventures are
summarized below. The Company's equity income (loss) from joint ventures differs
from the amount that would be obtained by applying the Company's ownership
interest to the net income of these entities due to the elimination of
intercompany profit in inventory.
Statements of Operations Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------
2004 2003 2004 2003
------------------------------------------
Net revenues $ 9,800 $ 17,986 $ 64,634 $ 74,085
Cost of goods sold 3,943 8,807 23,170 28,542
--------- --------- --------- ---------
Gross profit 5,857 9,179 41,464 45,543
Other expenses 5,192 8,462 23,045 27,730
--------- --------- --------- ---------
Net income $ 665 $ 717 $ 18,419 $ 17,813
========= ========= ========= =========
NOTE 4 ASSETS HELD FOR SALE
During the second quarter of fiscal 2004, the Company decided to sell its joint
venture investment in Vina Caliterra. As a result, the Company recorded an
impairment loss of $6,075 for the difference between the carrying value and fair
value less costs to sell at December 31, 2003. The loss is included in Equity
Income (Loss) from Joint Ventures in the Consolidated Statements of Operations.
The sale of Vina Caliterra was completed on January 22, 2004, for an amount
equal to the impaired value.
During fiscal 2003, the Company determined that certain of its vineyard and
other assets were no longer expected to fit its long-term grape sourcing needs
or meet its long-term financial objectives. At that time, assets with a combined
book value of $57,752 were identified for potential future sale. These assets
are expected to be held and used while the Company pursues the sale of the
assets. At March 31, 2004, the net book value of the remaining assets held for
sale totaled $41,478, which is included in Property, Plant and Equipment in the
Consolidated Balance Sheets. The Company believes that this value is recoverable
and it does not exceed fair value. As of December 31, 2002, the Company had
agreed to sell one of its vineyard properties for an amount lower than its book
value, less costs required to sell the property. As a result, the Company
recorded an asset impairment charge of $3,110 during the second quarter of
fiscal 2003, which is included in Special Charges, Net in the Consolidated
Statements of Operations. The sale of the property was completed in the third
quarter of fiscal 2003. In addition, the Company recorded a $6,144 gain on the
sale of non-strategic assets during the third quarter of fiscal 2003, which was
included in Equity Income (Loss) from Joint Ventures in the Consolidated
Statements of Operations.
During the first quarter of fiscal 2004, the Company sold a non-strategic asset
to a related party at a price determined using independent appraisers. The
transaction resulted in a gain of $1,965 and was included in Net Gain on Sale of
Assets in the Consolidated Statements of Operations.
NOTE 5 COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes revenues, expenses, gains and losses that
are excluded from net income (loss), including foreign currency translation
adjustments and unrealized gains and losses on certain derivative financial
instruments designated as cash-flow hedges. Comprehensive income (loss) for the
three and nine months ended March 31, 2004 and 2003 was as follows:
Three Months Ended Nine Months Ended
March 31, March 31,
------------------------------------------
2004 2003 2004 2003
------------------------------------------
Net income (loss) $ 2,019 $ (1,848) $ 21,299 $ 15,947
Foreign currency translation
adjustment, net of tax (1,504) (48) 1,792 (144)
Forward contracts, net of tax 132 20 (74) 152
--------- --------- --------- ---------
Comprehensive income (loss) $ 647 $ (1,876) $ 23,017 $ 15,955
========= ========= ========= =========
8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited, dollars in thousands)
NOTE 6 COMMITMENTS AND CONTINGENCIES
The Company has contracted with various growers and certain wineries to supply a
large portion of its future grape requirements and a smaller portion of its
future bulk wine requirements. These contracts range from one-year spot market
purchases to longer-term agreements. While most of these contracts call for
prices to be determined by market conditions, many long-term contracts also
provide minimum grape or bulk wine purchase prices. The ultimate amount due
under any of these contracts cannot be determined until the end of each year's
harvest because the contracted amount varies based on vineyard grape yields,
grape quality and grape market conditions.
The Company is subject to litigation in the ordinary course of business. In the
opinion of management, the ultimate outcome of existing litigation will not have
a material adverse effect on the Company's consolidated financial condition,
results of its operations, or cash flows.
NOTE 7 SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest, net of amounts capitalized, was $18,914 and $20,576 for
the nine month periods ended March 31, 2004 and 2003, respectively. Cash paid
for income taxes was $125 and $7,483 for the nine month periods ended March 31,
2004 and 2003, respectively.
During the nine months ended March 31, 2004, the Company completed the sale and
subsequent leaseback of certain equipment. Proceeds from the sale used to repay
the associated long-term debt totaled $7,712, which resulted in a loss on
disposition of $434 included in Net Gain on Sale of Assets in the Consolidated
Statements of Operations. The new lease has been accounted for as an operating
lease, has a term of approximately five years, and has lease payments totaling
$621 per year.
9
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
INTRODUCTION
The Company is a leading producer and marketer of premium table wines. The
Company operates in one business segment (premium table wine). Its core brands
include Robert Mondavi Winery, Robert Mondavi Private Selection and Woodbridge.
The Company's smaller wineries include Byron in Santa Maria and Arrowood in
Sonoma, as well as four international joint ventures. The Company produces Opus
One in partnership with the Baron Philippe de Rothschild of Chateau Mouton
Rothschild of Bordeaux, France; Luce, Lucente, Danzante and Ornellaia in
partnership with Marchesi de'Frescobaldi of Tuscany, Italy; Sena and Arboleda in
partnership with the Eduardo Chadwick family of Vina Errazuriz in Chile; and
Talomas and Kirralaa in partnership with the Robert Oatley family and Southcorp
Limited. For a discussion of the risks of the premium wine industry please refer
to Item 1, "Business" in the Form 10-K for the fiscal year ended June 30, 2003.
Sales volume for the quarter ended March 31, 2004, increased by 9.3% to 2.2
million cases and net revenues increased by 6.5% to $98.1 million compared to
the same period last year. The Company reported net income of $2.0 million, or
$0.12 per share-diluted, for the period ended March 31, 2004, compared to a net
loss of $1.8 million, or $0.11 per share-diluted, a year ago. Sales volume for
the nine months ended March 31, 2004, increased by 4.7% to 7.4 million cases and
net revenues increased by 5.3% to $349.4 million compared to prior year. The
Company reported net income for the nine months ended, March 31, 2004, of $21.3
million, or $1.29 per share-diluted, versus $15.9 million, or $0.97 per
share-diluted, a year ago. The year to date change in net revenues and net
income from the same period last year is detailed below in the Results of
Operations discussion, but can be primarily linked to the Company's increased
investment in its core brands, continued development of new products, and the
positive impact from the streamlining of the Company's operations and
organization structure in the second half of fiscal 2003. The Company's current
year-to-date results include a net gain of $1.5 million related to the sale of
certain non-strategic assets during the first quarter and an asset impairment
loss of $6.1 million related to the disposition of part of the Company's joint
venture investment in Chile during the second quarter.
The Company has historically experienced and expects to continue experiencing
seasonal and quarterly fluctuations in its net revenues, gross profit, equity
income from joint ventures, and net income. Sales volume tends to increase in
advance of holiday periods, before price increases go into effect, and during
promotional periods. Sales volume tends to decrease if distributors begin a
quarter with larger than normal inventory levels. The timing of releases for
certain luxury wines can also have a significant impact on quarterly results.
Refer to the Company's Annual Report on Form 10-K for the fiscal year ended June
30, 2003, for further discussion of the operations and organizational changes.
RESULTS OF OPERATIONS
Third Quarter of Fiscal 2004 Compared to Third Quarter of Fiscal 2003
Net Revenues - Net revenues increased by 6.5% to $98.1 million and shipments
rose 9.3% to 2.2 million cases. The increase in volume is driven by growth in
the Robert Mondavi Winery and Robert Mondavi Private Selection brands which
increased 30.0% and 19.6%, respectively, and from the introduction of several
new products, including Papio and Woodbridge Select Vineyard Series. The
increase in net revenues was offset by a 1% decrease in Woodbridge volume. Net
revenues per case decreased to $45.21 in the current quarter from $46.41 in the
prior year's quarter. The decrease is a result of a mix shift to lower priced
products and a $2.0 million increase in sales promotional spending compared to
the prior quarter.
Cost of Goods Sold - Cost of goods sold decreased by 1.9% to $61.5 million,
reflecting a decrease of $6.6 million due to the shift in product mix toward
brands with both lower net revenues per case and lower costs per case, and a
decrease of $0.3 million from the prior year quarter in the cost associated with
sales of grapes and surplus bulk wine. This is offset by an increase of $5.7
million from incremental sales volume of 9.3%.
Gross Profit - As a result of the above factors, the gross profit percentage
increased to 37.3% from 32.0% in the same period last year.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased by $2.4 million, or 8.3% and the ratio of
selling, general and administrative expenses to net revenues increased to 31.3%
from 30.8% a year ago, reflecting additional sales and marketing spending in
support of the increase in sales.
10
Gain on Sale of Assets - During the third quarter of fiscal 2003, the Company
completed the sale of certain non-strategic fixed assets, which resulted in a
$6.1 million gain.
Special Charges, Net - During the third quarter of fiscal 2003, the Company
recorded $3.4 million in special charges, net reflecting $2.2 million in
vineyard write-downs and $1.2 million in employee separation expenses. The
vineyard write-downs were the result of the Company completing the sale of one
of its non-strategic vineyard assets for an amount less than its book value and
concluding that certain of its vineyards were no longer expected to meet the
Company's quality standards and long-term financial objectives.
Interest - Interest expense decreased by $0.9 million or 15.6%, primarily
reflecting an 11.0% decrease in average borrowings outstanding, lower interest
rates, and the positive effect of the Company's new interest rate swap program,
partially offset by a $0.1 million decrease in capitalized interest resulting
from the completion of certain capital and vineyard development projects.
Equity (Income) Loss from Joint Ventures - The Company reported equity income
from joint ventures of $1.6 million compared to a loss of $0.5 million in the
prior year quarter, primarily reflecting increased income from Opus One and the
Company's Italian joint ventures of $0.6 million and $1.6 million, respectively,
compared to prior year's quarter.
Income Tax Provision - The Company's effective tax rate was 36.5% compared to
37.0% last year.
Net Income (Loss) and Earnings (Loss) Per Share - As a result of the above
factors, the Company reported net income of $2.0 million, or $0.12 per
share-diluted, compared to a net loss of $1.8 million, or $0.11 per
share-diluted, a year ago.
First Nine Months of Fiscal 2004 Compared to the First Nine Months of Fiscal
2003
Net Revenues - Net revenues increased by 5.3% to $349.4 million and shipments
rose 4.7% to 7.4 million cases. The increase in volume is driven by growth in
the Robert Mondavi Winery brand, Robert Mondavi Private Selection brand and the
Company's import portfolio, which increased 19.9%, 11.2% and 19.3%,
respectively, and from the introduction of several new products, including Papio
and Woodbridge Select Vineyard Series. The increase in net revenues, incremental
to volume, is a result of positive sales mix which increased to $46.98, year to
date, from $46.70 last year. Net revenues also includes revenue from the sale of
surplus bulk wines and grapes, which increased by $2.9 million from the prior
year. The increase was partially offset by a 2% decrease in Woodbridge volume
and $7.1 million increase in promotional allowances compared to the prior year.
Cost of Goods Sold - Cost of goods sold increased by 4.4% to $211.2 million,
reflecting a $9.1 million increase from incremental sales volume of 4.7%, and an
increase of $0.6 million from the prior year in the cost associated with sales
of grapes and surplus bulk wines. The increase is offset by a $1.0 million
decrease due to the shift in product mix toward brands with lower costs per
case.
Gross Profit - As a result of the above factors, the gross profit percentage
increased to 39.5% from 39.0% in the same period last year.
Selling, General and Administrative Expenses - Selling, general and
administrative expenses increased by $1.9 million, or 2.0%, reflecting
additional sales and marketing spending in support of the increase in sales. The
ratio of selling, general and administrative expenses to net revenues decreased
to 27.7% from 28.6% a year ago, reflecting general and administrative cost
savings resulting from the fiscal 2003 organization changes.
Gain on Sale of Assets - During the first quarter of the current fiscal year,
the Company recognized a net gain of $1.5 million related to the sale of certain
non-strategic assets. During the third quarter of fiscal 2003, the Company
completed the sale of certain non-strategic fixed assets, which resulted in a
$6.1 million gain.
Special Charges, Net - During fiscal 2003, the Company recorded $6.5 million in
special charges, net reflecting $5.3 million in vineyard write-downs and $1.2
million in employee separation expenses. The vineyard write-downs were the
result of the Company completing the sale of one of its non-strategic vineyard
assets for an amount less than its book value and concluding that certain of its
vineyards were no longer expected to meet the Company's quality standards and
long-term financial objectives.
Interest - Interest expense decreased by $0.5 million or 3.2%, primarily
reflecting an 11.0% decrease in average borrowings outstanding due to cash
generated from operations, lower interest rates and positive effect of the
Company's new interest rate swap program that was partially offset by a $1.0
million decrease in capitalized interest resulting from the completion of
certain capital and vineyard development projects.
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Equity Income from Joint Ventures - The Company reported equity income from
joint ventures of $6.0 million compared to income of $7.9 million in the prior
year. The decrease is primarily a result of the $6.1 million impairment charge
noted above offset by increased income from Opus One and the Company's Italian
joint ventures of $1.1 million and $3.3 million, respectively, compared to prior
year.
Income Tax Provision - The Company's effective tax rate was 36.5% compared to
37.0% last year.
Net Income and Earnings Per Share - As a result of the above factors, the
Company reported net income of $21.3 million, or $1.29 per share-diluted,
compared to net income of $15.9 million, or $0.97 per share-diluted, a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Working capital as of March 31, 2004, was $441.8 million compared to $430.6
million at June 30, 2003. The $11.2 million increase in working capital was
primarily attributable to a $13.7 million increase in cash and a $14.0 million
increase in inventories, which is a result of the harvest. This is offset by an
increase of $10.1 million in current portion of long-term debt, primarily
reclassifying long-term to short-term debt and a seasonal decrease of $9.0
million in accounts receivables.
Cash provided by operations totaled $44.1 million, primarily reflecting net
income of $21.3 million, $17.2 million of non-cash items (depreciation,
amortization, and net gain on sale of assets), an increase in deferred tax
liabilities of $2.9 million, and $1.6 million of equity income from joint
ventures (net of distributions from joint ventures during the period). Cash used
in investing activities totaled $9.4 million, primarily reflecting $12.2 million
of capital purchases offset by proceeds of $3.8 million from the sale of certain
assets. Cash used in financing activities totaled $20.9 million, primarily
reflecting net repayments of debt. As a result of these activities, the Company
increased cash on hand from $1.3 million at June 30, 2003 to $15.1 million at
March 31, 2004.
The Company has an unsecured credit line that has maximum credit availability of
$150.0 million and expires on December 14, 2004. The Company had no amounts
outstanding under this facility at March 31, 2004. The Company also has $382.9
million of fixed rate debt and capital lease obligations outstanding at March
31, 2004, of which $20.0 million is classified as current at quarter end.
The Company maintains master lease facilities that provide the capacity to fund
up to $129.4 million, of which $111.5 million had been utilized as of March 31,
2004. The facilities enable the Company to lease certain real property to be
constructed or acquired. The leases have initial terms of three to seven years,
after a construction period, with options to renew. The Company may, at its
option, purchase the property under lease during or at the end of the lease
term. If the Company does not exercise the purchase option, the Company will
guarantee a residual value of the property under lease, which was approximately
$92.5 million as of March 31, 2004. Effective July 1, 2003, the Company adopted
the provisions of FIN 46, and included in its consolidated financial statements
the assets, and related liabilities, leased under the master lease facilities.
Also, as encouraged by the FIN 46, the Company has restated prior period
financial statements. The assets leased under these facilities have historically
been included in the financial covenants of the Company's debt agreements and in
the evaluation of the Company's creditworthiness by its banks.
The premium wine industry is a capital intensive business, due primarily to the
lengthy aging and processing cycles involved in premium wine production.
Historically, the Company has financed its operations and capital spending
principally through borrowings, as well as through internally generated funds.
The Company projects continued capital spending over the next several years to
expand production capacity, acquire barrels and complete its vineyard
development. The Company currently expects its capital spending requirements to
be between $25 million and $30 million for fiscal 2004.
Management believes that the Company will support its operating and capital
needs and its debt service requirements through internally generated funds for
the foreseeable future, but will utilize available short-term borrowings to
support seasonal and quarterly fluctuations in cash requirements.
12
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There were no material changes from the items disclosed in the Company's Annual
Report on Form 10-K for the fiscal year ended June 30, 2003, on file at the
Securities and Exchange Commission.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures: The Company's Chief
Executive Officer and Chief Financial Officer have reviewed, as of the end of
the period covered by this report, the Company's "disclosure controls and
procedures" (defined in the Securities Exchange Act of 1934, Rules 13a-15 (e)
and 15d- 15 (e)). Based upon this review, the Chief Executive Officer and Chief
Financial Officer believe that the disclosure controls and procedures in place
are effective to ensure that information relating to the Company required to be
disclosed in its Exchange Act reports is recorded, processed, summarized and
reported in a timely and proper manner.
(b) Internal control over financial reporting: The Company is currently
undergoing a comprehensive effort to ensure compliance with the new Regulations
under Section 404 of the Sarbanes Oxley Act that take effect for the fiscal year
ending June 30, 2005. This effort includes internal control documentation and
review under the direction of senior management. The evaluation of internal
controls revealed control deficiencies which management believed needed to be
improved. As a result of these activities, during the quarter ended March 31,
2004, the Company implemented the following changes to its internal controls and
procedures:
-- Improved segregation of duties and monitoring controls within
information technology
-- Formalized and modified information technology change management
controls
-- Documented and modified enhanced information technology security
procedures
-- Developed, documented and implemented backup and recovery procedures
-- Modified information technology user administration, including
improvements to access to computer systems
-- Improved controls surrounding distributor payables by requesting a
regular detailed aging of invoices from its distributors
Despite the noted deficiencies, management believes that its detailed monthly
financial reviews and other oversight procedures were sufficient to ensure the
financial statements were not materially misstated. Management believes these
changes have strengthened the Company's control structure around financial
reporting required by the Exchange Act. The Company will continue to make
improvements over its internal controls over financial reporting as control
issues arise.
PART II
Item 1. Legal Proceedings.
The Company is subject to litigation in the ordinary course of its business. In
the opinion of management, the ultimate outcome of existing litigation will not
have a material adverse effect on the Company's consolidated financial
condition, the results of its operations or its cash flows.
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits:
Exhibit 31.1 Certification by Gregory M. Evans
pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
Exhibit 31.2 Certification by Henry J. Salvo, Jr.
pursuant to Rule 13a-14(a) of the
Securities Exchange Act of 1934
Exhibit 32.1 Certification by Gregory M. Evans
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
Exhibit 32.2 Certification by Henry J. Salvo, Jr.
pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
13
2) Form 8-K:
A Current Report on Form 8-K was filed on April 22,
2004, in which the Company announced results for its
third quarter of fiscal 2004.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ROBERT MONDAVI CORPORATION
Dated: May 14, 2004 By /s/ HENRY J. SALVO, JR.
-----------------------------------
Henry J. Salvo, Jr.
Chief Financial Officer
Forward-looking Statements
--------------------------
This announcement and other information provided from time to time by the
Company contain historical information as well as forward-looking statements
about the Company, the premium wine industry and general business and economic
conditions. Such forward-looking statements include, for example, projections or
predictions about the Company's future growth, consumer demand for its wines,
including new brands and brand extensions, margin trends, anticipated future
investment in vineyards and other capital projects, the premium wine grape
market and the premium wine industry generally. Actual results may differ
materially from the Company's present expectations. Among other things, a soft
economy, a downturn in the travel and entertainment sector, risk associated with
continued worldwide conflict, reduced consumer spending, or changes in consumer
preferences could reduce demand for the Company's wines. Similarly, increased
competition or changes in tourism to the Company's California properties could
affect the Company's volume and revenue growth outlook. The supply and price of
grapes, the Company's most important raw material, is beyond the Company's
control. A shortage of grapes might constrict the supply of wine available for
sale and cause higher grape costs that put more pressure on gross profit
margins. A surplus of grapes might allow for greater sales and lower grape
costs, but it might also result in more competition and pressure on selling
prices or marketing spending. Interest rates and other business and economic
conditions could increase significantly the cost and risks of projected capital
spending, which in turn could impact the Company's profit margins. For
additional cautionary statements identifying important factors that could cause
actual results to differ materially from such forward-looking information,
please refer to Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," in the Company's Annual Report on Form
10-K for the fiscal year ended June 30, 2003, on file with the Securities and
Exchange Commission. For these and other reasons, no forward-looking statement
by the Company can nor should be taken as a guarantee of what will happen in the
future.
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