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 March 31, 2002
FORTUNE BRANDS, INC.
--------------------------------------------------------------------------------
(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
--------------
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 ( )
The number of shares outstanding of the Registrant's common stock, par value
$3.125 per share, at April 30, 2002 was 150,168,347 shares.
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
(Unaudited)
March 31, December 31,
2002 2001
-------- -----------
Assets
Current assets
Cash and cash equivalents $ 91.8 $ 48.7
Accounts receivable, net 893.5 860.6
Inventories
Bulk whiskey 185.9 180.8
Other raw materials, supplies and
work in process 244.0 249.6
Finished products 366.5 426.2
-------- --------
796.4 856.6
Other current assets 194.2 203.7
-------- --------
Total current assets 1,975.9 1,969.6
Property, plant and equipment, net 1,145.9 1,158.4
Intangibles resulting from
business acquisitions, net 1,785.9 1,789.6
Other assets 373.2 383.3
-------- --------
Total assets $5,280.9 $5,300.9
======== ========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
(Unaudited)
March 31, December 31,
2002 2001
-------- -----------
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 57.9 $ 37.8
Current portion of long-term debt 1.2 1.4
Accounts payable 267.5 308.9
Accrued taxes 376.2 353.3
Accrued customer programs 95.6 132.5
Accrued salaries, wages and other
compensation 75.8 100.2
Accrued expenses and other liabilities 304.3 324.3
-------- --------
Total current liabilities 1,178.5 1,258.4
Long-term debt 950.0 950.3
Deferred income 220.5 227.2
Postretirement and other liabilities 360.4 371.5
-------- --------
Total liabilities 2,709.4 2,807.4
-------- --------
Minority interest in consolidated
subsidiaries 398.4 390.8
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 8.3 8.6
Common stock, par value $3.125 per
share, 229.6 million shares issued 717.4 717.4
Paid-in capital 97.1 113.2
Accumulated other
comprehensive loss (133.8) (131.7)
Retained earnings 4,204.3 4,157.7
Treasury stock, at cost (2,720.2) (2,762.5)
-------- --------
Total stockholders' equity $ 2,173.1 $ 2,102.7
--------- ---------
Total liabilities and
stockholders' equity $ 5,280.9 $ 5,300.9
========= =========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended March 31, 2002 and 2001
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
2002 2001
----------- -----------
Net sales $ 1,270.7 $ 1,271.6
Cost of products sold 698.2 688.5
Excise taxes on spirits and wine 74.7 83.2
Advertising, selling, general and
administrative expenses 343.4 349.1
Amortization of intangibles 3.3 15.7
Restructuring charges 1.8 -
Interest and related expenses 16.8 31.8
Other income, net (6.1) (0.2)
----------- -----------
Income before income taxes and minority interests 138.6 103.5
Income taxes 50.7 40.5
Minority interests 3.9 1.5
----------- -----------
Net income $ 84.0 $ 61.5
=========== ===========
Earnings per share
Basic $ .57 $ .40
=========== ===========
Diluted $ .55 $ .39
=========== ===========
Dividends paid per share $ .25 $ .24
=========== ===========
Average number of shares outstanding
Basic 148.8 153.7
=========== ===========
Diluted 153.5 156.7
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Three Months Ended March 31, 2002 and 2001
-----------------------------------------------------
(In millions)
(Unaudited)
2002 2001
------- -------
Operating activities
Net income $ 84.0 $ 61.5
Restructuring Charges 0.4 -
Depreciation and amortization 41.6 53.9
Deferred income taxes 13.3 3.4
(Increase) decrease in accounts receivable (32.6) 45.6
Decrease (increase) in inventories 59.3 (17.7)
Decrease in accounts payable, accrued
expenses and other liabilities (130.3) (166.1)
Increase in accrued taxes 24.0 40.5
Other operating activities, net 2.6 2.4
------- -------
Net cash provided from operating activities 62.3 23.5
------- -------
Investing activities
Additions to property, plant and equipment (31.4) (37.8)
Acquisition of certain spirits distribution rights - (6.5)
Proceeds from the disposition of property, plant
and equipment 1.1 1.9
Other investing activities, net - (0.6)
------- -------
Net cash used by investing activities (30.3) (43.0)
------- -------
Financing activities
Increase in short-term debt, net 20.1 87.4
Dividends paid to stockholders (37.4) (37.1)
Cash purchases of common stock for treasury (52.1) (7.8)
Proceeds received from exercise of stock options 80.6 6.2
Other financing activities, net (0.5) (0.3)
------- -------
Net cash provided by financing activities 10.7 48.4
------- -------
Effect of foreign exchange rate changes on cash 0.4 (2.8)
------- -------
Net increase in cash and cash equivalents 43.1 26.1
Cash and cash equivalents at beginning of period $ 48.7 $ 20.9
------- -------
Cash and cash equivalents at end of period $ 91.8 $ 47.0
======= =======
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the Three Months Ended March 31, 2002 and 2001
-------------------------------------------------------------
(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, 2000 $ 9.2 $717.4 $125.9 $ (79.6) $3,919.7 $ (2,556.7) $2,135.9
Comprehensive income
Net income - - - - 61.5 - 61.5
Changes during the period - - - (23.7) - - (23.7)
------ ------ ------ ------- -------- ---------- --------
Total comprehensive (loss) income - - - (23.7) 61.5 - 37.8
------ ------ ------ ------- -------- ---------- --------
Dividends - - - - (37.1) - (37.1)
Purchases - - - - - (13.0) (13.0)
Conversion of preferred stock and
delivery of stock plan shares (0.1) - (2.9) - - 10.0 7.0
------ ------ ------ ------- -------- ---------- --------
Balance at March 31, 2001 $ 9.1 $717.4 $123.0 $(103.3) $3,944.1 $ (2,559.7) $2,130.6
====== ====== ====== ======= ======== ========== ========
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 - - - - 84.0 - 84.0
Changes during the period - - - (2.1) - - (2.1)
------ ------ ------ ------- -------- ---------- --------
Total Comprehensive (loss) income - - - (2.1) 84.0 - 81.9
------ ------ ------ ------- -------- ---------- --------
Dividends - - - - (37.4) - (37.4)
Purchases - - - - - (52.1) (52.1)
Conversion of preferred stock,
delivery of stock plan shares
and sale of stock in subsidiary (0.3) - (16.1) - - 94.4 78.0
------ ------ ------ ------- -------- ---------- --------
Balance at March 31, 2002 $ 8.3 $717.4 $ 97.1 $(133.8) $4,204.3 $ (2,720.2) $2,173.1
====== ====== ====== ======= ======== ========== ========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Principles of Consolidation
The condensed consolidated balance sheet as of March 31, 2002, the
related condensed consolidated statements of income for the three month
periods ended March 31, 2002 and 2001, and the related condensed
consolidated statements of cash flows and stockholders' equity for the
three month periods ended March 31, 2002 and 2001 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 other nonrecurring charges in 2002 and only normal
recurring items 2001. 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 2001 Annual
Report on Form 10-K.
2. Accounting Changes
Goodwill and Purchased Intangible Assets
In July 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets ("FAS Statement No. 142"). FAS Statement No. 142 requires
goodwill to be tested for impairment on an annual basis and under certain
circumstances, and written down when impaired, rather than amortized as
previous standards required. In addition, FAS Statement No. 142 requires
purchased intangible assets other than goodwill to be amortized over their
useful lives unless these lives are determined to be indefinite. Certain
of our tradenames have been assigned an indefinite life as it was deemed
that these tradenames are currently anticipated to contribute cash flows to
the Company indefinitely. Indefinite-lived intangible assets will not be
amortized, but are required to be evaluated at each reporting period to
determine whether the indefinite useful life is appropriate.
FAS Statement No. 142 is effective for all fiscal years beginning
after December 15, 2001. In accordance with FAS Statement No. 142, of the
total intangibles of $1.8 billion, the Company ceased amortizing
intangibles totaling $1.4 billion, including $1.1 billion of goodwill and
$0.3 billion of indefinite-lived tradenames, as of January 1, 2002.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting Changes (Continued)
Goodwill and Purchased Intangible Assets (Continued)
In addition, other purchased intangible assets, primarily tradenames,
are carried at cost less accumulated amortization. The remaining
tradenames are amortized over their estimated useful lives, either 15 or 30
years. The gross carrying value and accumulated amortization of the
Company's amortizable intangible assets were $516.2 million and $167.6
million, respectively, as of March 31, 2002. The Company's anticipated
annual amortization is expected to be approximately $13 million.
The following table presents the impact of FAS Statement No. 142
on net income and net income per share had the standard been in effect
for the three months ended March 31, 2001:
Three Months Ended
March 31, March 31,
2002 2001
---- ----
Net income - as reported $ 84.0 $ 61.5
Adjustments:
Amortization of goodwill - 9.4
Amortization of tradenames - 2.1
Income tax effect - (0.9)
-------- --------
Net adjustments - 10.6
-------- --------
Net income - adjusted $ 84.0 72.1
======== ========
Basic net income per share -
as reported $ 0.57 $ 0.40
Basic net income per share -
as adjusted $ 0.57 $ 0.47
Diluted net income per share -
as reported $ 0.55 $ 0.39
Diluted net income per share -
as adjusted $ 0.55 $ 0.46
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
2. Accounting Changes (Concluded)
Goodwill and Purchased Intangible Assets (Concluded)
As of March 31, 2002, no impairment of goodwill or other intangible
assets has been recognized. There can be no assurances that future goodwill
and other intangibles asset impairment tests will not result in a charge to
earnings.
Net Sales
Net sales reflect the effect of a reclassification of certain expenses
previously included in selling and general and administrative expenses as a
reduction of net sales. These reclassifications, which reduced reported net
sales by $29.4 million for the three months ending March 31, 2001, were
required by the Emerging Issues Task Force Issues No. 00-14 and No. 00-25.
These reclassifications did not result in a change in the Company's
operating company contribution, earnings or earnings per share in any of
the periods affected.
3. Sale of Stock of Subsidiary
In January 2002, the Company completed the second of two transactions
to sell shares in its wholly-owned office products subsidiary, ACCO World
Corporation ("ACCO"). This offering resulted in an aggregate reduction of
less than 2% of the Company's interest in ACCO. The Company treated the
sale as an equity transaction in accordance with Company policy, recording
the difference between the purchase price and the book value of the
subsidiary's stock to "Paid-in-capital." As a result of the first of the
two transactions, the Company recognized a net tax benefit of $72.9 million
in 2001. The two transactions resulted in a substantial tax loss
carryforward that will be realized in the event that the Company has
qualified taxable capital gains.
4. Joint Ventures
In May 2001, the Company's spirits and wine business completed
transactions with Vin & Sprit AB of Sweden (V&S) creating a joint venture,
named Future Brands LLC (the "LLC"), to distribute over an initial ten-year
period both companies' spirits and wine brands in the United States. The
Company's spirits and wine business has accounted for this joint venture
using the equity method of accounting. V&S paid $270 million to gain access
to our spirits and wine business's U.S. distribution network and to acquire
a 49% interest in the LLC,
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Joint Ventures (Concluded)
and paid $375 million to purchase a 10% equity interest in Jim Beam Brands
Worldwide ("JBBW") in the form of convertible preferred stock. The shares
of JBBW convertible preferred stock issued to V&S is convertible into 10%
of the JBBW common stock and have voting power equivalent to a 10% interest
in JBBW common stock. The preferred stock is entitled to a dividend equal
to the greater of 10% of the dividend paid upon JBBW common stock or 3% of
the preferred stock's face value ($375 million) plus unpaid accrued
dividends; no dividends may be paid on common stock unless all unpaid
accrued JBBW preferred stock dividends have been paid. V&S also received a
3-year option to increase its equity stake in JBBW by up to an additional
9.9%. V&S may require the Company to purchase the JBBW preferred stock in
whole or in part at any time after May 31, 2004, or upon a change in
control of JBBW, Jim Beam Brands Co. ("JBB Co."), or certain other events.
The Company has accounted for the $270 million gain on the sale of 49% of
the LLC as deferred income and the resulting tax on sale as a deferred
income tax asset due to certain continuing obligations of JBB Co.,
including, but not limited to, making payments to suppliers, employees and
other parties with which the LLC has contracts in the event of a default of
the LLC. In June 2001, the Company began amortizing these amounts to other
income on a straight-line basis over the initial term of the agreement.
5. Information on Business Segments
Net sales and operating company contribution are as follows:
Net Operating Company
Sales Contribution
---------------- ---------------
Three Months Ended March 31,
2002 2001 2002 2001
---- ---- ---- ----
(In millions)
Home products $ 520.6 $ 461.6 $ 70.3 $ 61.5
Spirits and wine 234.7 277.5 58.4 58.8
Golf products 266.0 254.2 31.5 33.5
Office products 249.4 278.3 7.7 7.3
-------- -------- -------- --------
$1,270.7 $1,271.6 $ 167.9 $ 161.1
======== ======== ======== ========
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5. Information on Business Segments (Concluded)
Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, amortization of
intangibles, corporate administrative expense, interest and related
expenses, other (income) expenses, net, income taxes and minority
interests.
A reconciliation of operating company contribution to consolidated
income before income taxes and minority interests is as follows:
Three Months Ended March 31,
----------------------------
2002 2001
---- ----
(In millions)
Operating company contribution $167.9 $161.1
Amortization of intangibles 3.3 15.7
Restructuring charges 1.8 -
Other nonrecurring charges 1.4 -
Interest and related expenses 16.8 31.8
Non-operating expenses 6.0 10.1
------ ------
Income before income taxes and
minority interests $138.6 $103.5
====== ======
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Earnings Per Share
The computation of basic and diluted earnings per common share for
"Net income" is as follows:
Three Months Ended
March 31,
------------------
2002 2001
---- ----
(In millions,
except per
share amounts)
Net income $ 84.0 $ 61.5
Less: Preferred stock dividends 0.2 0.2
------- -------
Income available to
stockholders - basic 83.8 61.3
Convertible Preferred stock
dividend requirements 0.2 0.2
------- -------
Income available to
stockholders - diluted $ 84.0 $ 61.5
======= =======
Weighted average number of
shares outstanding - basic 148.8 153.7
Conversion of Convertible
Preferred stock 1.8 1.8
Exercise of stock options 2.9 1.2
------- -------
Weighted average number of
shares outstanding - diluted 153.5 156.7
======= =======
Earnings per share
Basic $ .57 $ .40
======= =======
Diluted $ .55 $ .39
======= =======
7. Restructuring and Other Nonrecurring Charges
RESTRUCTURING AND OTHER NONRECURRING CHARGES PROGRAM - 2001
In April 2001, the Company announced that as a result of its
evaluation of strategic options for its office products business, it would
immediately begin implementing a plan designed to improve both financial
results and the long-term value of the business. The Company determined
that it would not divest its office products business due to weakness in
the overall economy and current conditions in the office products industry.
In addition, in the fourth quarter of 2001, the home products business
recorded restructuring and other
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Restructuring and Other Nonrecurring Charges (Continued)
nonrecurring charges for workforce reductions and rationalization of
operations while the golf business recorded charges for capacity reductions
in select technology platforms.
As a result of these actions, the Company recorded total pre-tax
restructuring and other nonrecurring charges of $3.2 million ($2.2 million
after tax), during the three months ended March 31, 2002, as follows:
Three Months Ended
March 31, 2002
--------------------------------------------
Nonrecurring
----------------------
Cost of SG&A
Restructuring Sales Charges Charges Total
------------- ------------- ------- -----
(In millions)
Office products $ 1.8 $ 0.7 $ 0.7 $ 3.2
----- ----- ----- -----
Total $ 1.8 $ 0.7 $ 0.7 $ 3.2
===== ===== ===== =====
The charges principally related to employee termination costs, asset
write-offs and costs associated with a consolidation of manufacturing
facilities.
Reconciliation of the restructuring liability, as of March 31, 2002 is
as follows:
Balance at 2002 Cash Non-Cash Balance at
12/31/01 Provision Expenditures Write-offs 3/31/02
---------- --------- ------------ ---------- ----------
(In millions)
Rationalization of
operations
Employment
termination costs (1) $17.1 $ 1.4 $(5.8) $ - $12.7
Other 4.7 - - (2.9) 1.8
International distribution
and lease agreements 5.2 - - - 5.2
Loss on disposal of assets 2.4 0.4 (0.6) (0.4) 1.8
----- ----- ----- ----- -----
$29.4 $ 1.8 $(6.4) $(3.3) $21.5
===== ===== ===== ===== =====
(1) Of the 1,253 positions planned for elimination, 706 had been
eliminated as of March 31, 2002.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Restructuring and Other Nonrecurring Charges (Concluded)
The Company expects that substantially all remaining payments will be
made within the next twelve months.
RESTRUCTURING AND OTHER NONRECURRING CHARGES PROGRAM - 1999
The following table represents our reconciliation of the restructuring
liability for the 1999 program, as of March 31, 2002, as follows:
Adjustments to
Income/
Balance at Cash Non-Cash Balance at
12/31/01 Expenditures Write-offs 3/31/02
---------- ------------ ---------- ----------
(In millions)
Rationalization of
operations
Employment
termination costs (1), (2) $ 2.8 $(0.3) $(1.3) $ 1.2
International distribution
and lease agreements (3) 0.5 (0.1) (0.3) 0.1
----- ----- ----- -----
$ 3.3 $(0.4) $(1.6) $ 1.3
===== ===== ===== =====
(1) Of the 2,306 positions planned for elimination, 2,284 had been
eliminated as of March 31, 2002.
(2) $1.0 million of the $1.3 million classified as non-cash
write-offs represents the reversal of certain employee termination
costs was reflected as a reduction of restructuring charges
recorded in 2001.
(3) The amount classified as non-cash write-offs represent the
reversal of certain lease agreement costs to income.
The Company expects that the 1999 restructuring and other nonrecurring
charges program will be either expended or adjusted by the end of the
second quarter of 2002.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. 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, 2000 $ (75.4) $ (4.2) $ (79.6)
Changes in three months (23.7) - (23.7)
------- ------ -------
Balance at March 31, 2001 $ (99.1) $ (4.2) $(103.3)
======= ====== =======
Balance at December 31, 2001 $(113.6) $(18.1) $(131.7)
Changes in three months (2.0) (0.1) (2.1)
------- ------ -------
Balance at March 31, 2002 $(115.6) $(18.2) $(133.8)
======= ====== =======
Included in the foreign currency adjustments balance at March 31, 2002
is total deferred derivative gain of $1.4 million.
9. Subsequent Event
On April 12, 2002, the Company announced that its home products
business completed its acquisition of The Omega Group, a U.S. based
manufacturer of kitchen and bath cabinets, for $538 million, which includes
the assumption of $127 million in debt. The products included in the
acquisition generated sales of $325 million in 2001.
On a consolidated basis, the pro forma impact of The Omega Group on
either net sales or operating company contribution is not expected to be
significant as required by FAS Statement No. 141, "Business Combinations".
10. Pending Litigation
Tobacco Litigation and Indemnification
On December 22, 1994, the Company sold The American Tobacco Company
subsidiary to Brown & Williamson Tobacco Corporation, a wholly-owned
subsidiary of B.A.T Industries p.l.c. In connection with the sale, Brown &
Williamson Tobacco Corporation and The American Tobacco Company ("the
Indemnitors") 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 The American Tobacco Company.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
10. Pending Litigation (Concluded)
The Company is a defendant in numerous actions based upon allegations
that human ailments have resulted from tobacco use.
Management believes that there are meritorious defenses to the pending
actions, including the fact that the Company never made or sold tobacco,
and these actions are being vigorously contested. However, 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. 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 as long as the Indemnitors continue to
fulfill their obligations to indemnify the Company under the aforementioned
indemnification agreement.
Other Litigation
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, but 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.
11. Environmental
The Company is subject to laws and regulations relating to the
protection of the environment. The Company provides for expenses associated
with environmental remediation obligations when such amounts are probable
and can be reasonably estimated. Such accruals are adjusted as new
information develops or circumstances change and are not discounted. 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.
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 March 31, 2002, and the related
condensed consolidated statements of income, cash flows and stockholders' equity
for each of the three-month periods ended March 31, 2002 and March 31, 2001.
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, 2001, 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 22, 2002, 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, 2001,
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
April 17, 2002
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 March 31, 2002 as Compared
to the Three Months Ended March 31, 2001
Operating Company
Net Sales Contribution(1)
--------------------- -------------------
2002 2001 2002 2001
---- ---- ----- ----
(In millions)
Home products $ 520.6 $ 461.6 $ 70.3 $ 61.5
Spirits and wine 234.7 277.5 58.4 58.8
Golf products 266.0 254.2 31.5 33.5
Office products 249.4 278.3 7.7 7.3
-------- -------- -------- --------
$1,270.7 $1,271.6 $ 167.9 $ 161.1
======== ======== ======== ========
(1) Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, amortization of
intangibles, corporate administrative expense, interest and related
expenses, other (income) expenses, net, income taxes and minority
interests.
CONSOLIDATED
------------
Net sales were flat as compared to the prior year. While net sales were
supported by strength in the home products business and the introduction of new
products in the golf and home business, these benefits were offset by lower
sales in the office products business and the sale of the U.K. private-label
Scotch business in October 2001 as well as unfavorable foreign exchange ($10
million). On a comparable basis to the prior year period, excluding the impact
of revenues for the U.K. private-label Scotch business for the first quarter of
2001 and the impact of excise taxes and foreign exchange, net sales increased
$50.7 million, or 4%.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
CONSOLIDATED (Continued)
Operating company contribution increased $6.8 million, or 4%, due to lower
operating expenses, strong demand in our home products business, cost savings
achieved as a result of the establishment of the Future Brands LLC joint venture
by the Company's spirits and wine business in June 2001, including $0.8 million
of profit for interim Absolut vodka revenues and expenses recorded on a
net basis during January 2002 prior to the termination of the Vin & Sprit
interim distribution agreement and other cost containment initiatives across all
of our businesses partly offset by unfavorable foreign exchange ($1.2 million).
On a comparable basis, excluding the impact of the U.K. private-label Scotch
business for the first quarter of 2001 and foreign exchange, operating company
contribution increased $12.2 million, or 8%.
For the three months ended March 31, 2002, we recorded pre-tax restructuring and
other nonrecurring charges of $3.2 million, $2.2 million after-tax, or one cent
per share. These charges related to the rationalization of operations in the
office products business.
Interest and related expenses decreased $15.0 million, or 47%. This decline
primarily reflected the repayment of debt using proceeds received from Vin &
Sprit and from the sale of the U.K. private-label Scotch business as well as
lower interest rates.
The effective income tax rates for the three months ended March 31, 2002 and
2001 were 36.5% and 39.1%, respectively. The lower effective tax rate for the
first quarter of 2002 principally reflected lower goodwill amortization related
to the adoption of FAS Statement No. 142.
Net income increased $22.5 million, or 36.6%, to $84.0 million, or 57 cents
basic and 55 cents diluted per share, compared with net income of $61.5 million,
or 40 cents basic and 39 cents diluted per share, for the same three month
period last year benefiting from lower interest expense and higher operating
company contribution.
Income from operations before net charges, which represents income before the
$3.2 million ($2.2 million after-tax) restructuring and other nonrecurring
charges taken in the three month period ended March 31, 2002, and includes the
eight cent benefit recognized as a result of the adoption of FAS Statement No.
142, was $86.2 million, or 58 cents basic and 56 cents diluted per share,
respectively, for the three months ended March 31, 2002.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Home Products
Net sales increased $59.0 million, or 13%. The increase in net sales was
attributable to overall volume increases and higher average selling prices
partly offset by higher rebates as well as unfavorable foreign exchange ($2
million). The overall volume increases were related to the introduction of new
products coupled with line extensions and higher volume in certain existing
product lines, primarily MasterBrand cabinets. Operating company contribution
increased $8.8 million, or 14% on the higher sales partly offset by higher
operating expenses.
The continued consolidation of the customer base in the home products industry,
for example among home centers and large homebuilders, and increased price
competition will continue to present us and our competitors with pricing
challenges. Customer consolidation will also present opportunities for the most
efficient manufacturers and skilled marketers.
Spirits and Wine
Net sales decreased $42.8 million, or 15%, principally on the sale of the U.K.
private-label Scotch business in October 2001 as well as unfavorable foreign
exchange ($1 million) partially offset by higher average selling prices in the
Jim Beam bourbon and DeKuyper product lines. On a comparable basis, excluding
the revenues of the U.K. private-label Scotch business for the first quarter of
2001 and the impact of excise taxes and foreign exchange, net sales were flat
compared to the prior year period.
Operating company contribution was flat versus the prior year period. On a
comparable basis, excluding the impact of the U.K. private-label Scotch business
for the first quarter of 2001 and foreign exchange, operating company
contribution increased $4.3 million, or 8%, principally attributable to the cost
savings achieved as a result of the establishment of the Future Brands LLC joint
venture in June 2001, including $0.8 million of profit for interim Absolut vodka
revenues and expenses recorded on a net basis during January 2002, and
continuing growth of the higher margin premium and superpremium spirits and wine
brands. With the establishment of Vin & Sprit's new U.S. subsidiary as the
exclusive importer of Vin & Sprit's products revenues and expenses under the
interim distribution agreement with Vin & Sprit were no longer recorded by our
spirits and wine business as of February 1, 2002.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Spirits and Wine (Concluded)
The Maxxium joint venture, the merger of Grand Metropolitan and Guinness to
create Diageo in late 1997, and the more recent sale of the Seagram brands to
Diageo and Pernod-Ricard, and the Jim Beam-Absolut U.S. distribution joint
venture and the Brown-Forman and Bacardi U.S. partnership reflect the continued
trend towards consolidation in the highly competitive spirits and wine business.
The creation of Diageo and the breadth of its portfolio, as well as continued
consolidation of the supplier, distributor and retailer tiers, may present
pricing and service challenges for our subsidiaries and their competitors. It
may also present opportunities, particularly for the most efficient and
innovative competitors.
Golf Products
Net sales increased $11.8 million, or 5%, on the introduction of new products
and line extensions partly offset by lower volumes in certain existing product
lines, unfavorable price mix as well as unfavorable foreign exchange ($3
million). The higher overall volumes were led by increased sales of golf balls,
golf clubs, golf gloves and outerwear. Operating company contribution decreased
$2.0 million, or 6%, due largely to higher marketing spending to support the
business's new product initiatives.
Competitors whose products have significant brand awareness have introduced golf
balls into their product offerings in the past three years and the golf ball
industry has experienced increased price competition, partially as a result of
such introductions. Largely as a result of the introduction of the Pro V1 and
NXT, our golf ball business has recovered market share losses that occurred upon
the entrance of new competitors. In 2002, our golf ball share has increased
principally as a result of the improved availability of Pro V1 as well as the
introduction of the new NXT Tour, Distance and Pinnacle golf balls. The ability
of the Company's golf business to maintain and increase revenues will depend
upon its innovation and marketing.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
Golf Products (Concluded)
The United States Golf Association (USGA) establishes standards for golf
equipment used in the United States. On November 2, 1998, the USGA announced the
immediate implementation of a new golf club performance rule that established a
rebound velocity standard for driving clubs. The Royal and Ancient Golf Club
(R&A) establishes standards for golf equipment used in competitive play outside
the United States and Mexico. On September 21, 2000, the R&A issued a Notice to
Manufacturers announcing its decision not to adopt the USGA's rebound velocity
standard or any new rule or test protocol for driving clubs. The R&A's decision
not to adopt the rule implemented by the USGA has resulted in conflicting
conformance standards for driving clubs in the United States and the rest of the
world. The USGA and R&A have recently proposed a compromise to resolve this
conflict in performance standards. Although it is not possible at this time to
determine the impact of this proposal if adopted, it may cause a significant
disruption to the market for driving clubs by changing the current standards in
the U.S. and by creating separate equipment standards for tournament and
recreational play.
Each of the USGA and the R&A has announced its intention to propose new rules
addressing the overall distance standard for golf balls, golf club head size and
golf club shaft length. Until more details regarding such potential rule changes
become available, we cannot determine whether they would have a material effect
on our group's golf ball business and/or the golf ball industry. However, the
new rules being considered could incorporate rules that would shorten the
overall distance that golf balls are allowed to travel and that could hamper
innovation in the design and manufacture of golf balls.
There has been considerable recent discussion in the golf trade press regarding
the use of a standardized golf ball for professional tournament play and a
separate set of rules for tournament play. The adoption of either concept by one
of golf's ruling bodies, a professional tour or individual tournaments could
materially impact our golf products business and the golf industry.
Although it is difficult to predict the impact of the rules discussed above if
adopted, they could have a significant impact on our golf products business
and/or the golf industry.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
Office Products
Net sales decreased $28.9 million, or 10%. The lower sales resulted primarily
from lower volumes in the United States and Europe, with major customers
continuing to reduce inventories, as well as unfavorable foreign exchange ($4
million). The lower sales were further impacted by industry-wide volume
challenges in the United States, economic softness in Europe, our office
products business's second largest market, and discontinued product lines in
both markets. The decrease in net sales was partly offset by the introduction of
new products.
Operating company contribution increased $0.4 million, or 5%, reflecting the
savings achieved as a result of the business's restructuring actions and the
business's focus on its most profitable product categories.
The office products business is increasingly concentrated in a small number of
major customers, principally office products superstores, large retailers,
wholesalers and contract stationers. The continuing consolidation of customers
is causing increased pricing pressures that negatively affect results. Pricing
pressures were compounded by the ongoing efforts of several major customers to
reduce inventory levels. These conditions continue to present challenges to our
office products group and its competitors.
We decided, in April 2001, not to divest our office products business due to
weakness in the overall economy particularly impacting the office products
industry. We are currently repositioning and restructuring the 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, divesting or discontinuing non-strategic and low-return product
categories and reducing overhead expenses and excess capacity. As a result of
this plan, we recorded total pre-tax restructuring and other nonrecurring
charges of $3.2 million during the three months ended March 31, 2002 to complete
the first phase of our repositioning program. We are currently in the process of
completing our plans for the final phase of our office products repositioning.
The final phase will substantially downsize the business's manufacturing
capacity and distribution infrastructure and we expect it will provide
significant further cost savings and working capital improvements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Concluded)
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided from operating activities of $62.3 million for the three
months ended March 31, 2002 compared with $23.5 million for the same three-month
period last year. The increase was primarily related to the higher net income
and a reduction in inventory.
Net cash used by investing activities for the three months ended March 31, 2002
was $30.3 million, compared with $43.0 million in the same three-month period
last year.
Net cash provided by financing activities for the three months ended March 31,
2002 was $10.7 million, compared with $48.4 million in the same three month
period last year. During the three months ended March 31, 2002, purchases of our
common stock amounted to $52.1 million (1,131,000 shares repurchased) and
proceeds received from the exercise of stock options ($80.6 million) increased
as options exercises were higher than in the same three-month period last year.
Total debt increased $19.6 million during the three month period ended March 31,
2002. However, the ratio of total debt to total capital decreased to 28.2% at
March 31, 2002 from 28.4% at December 31, 2001. As a result of the acquisition
of The Omega Group in April 2002, the total amount of debt increased $438
million, while the ratio of total debt to total capital increased to 35.8% at
April 30, 2002.
We believe that our internally generated funds, together with access to global
credit markets, are adequate to meet our capital needs.
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. We caution readers 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,
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 products and golf brand groups,
expenses and disruptions related to shifts in manufacturing to different
locations and sources, challenges in the integration of acquisitions and joint
ventures, as well as other risks and uncertainties detailed from time to time in
the Company's Securities and Exchange Commission filings.
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 (collectively, the "Indemnitors") agreed to indemnify Registrant
against claims including legal expenses arising from smoking and health and fire
sale cigarette matters relating to the tobacco business of ATCO.
Individual Cases
As of May 1, 2001, there were approximately 76 smoking and health
cases pending on behalf of individual plaintiffs in which Registrant has been
named as one of the defendants, compared with approximately 76 such cases as of
March 1, 2002, as reported by Registrant in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2001.
Class Actions
As of May 1, 2001, there were approximately 13 purported smoking and
health class actions pending in which Registrant has been named as one of the
defendants, compared with approximately 13 such cases on March 1, 2002, as
reported by Registrant in its Annual Report on Form 10-K for the fiscal year
ended December 31, 2001.
Health Care Cost Recovery Actions
As of May 1, 2001, there were approximately two health care cost
recovery actions pending in which Registrant had been name as one of the
defendants, compared with approximately two such cases as of March 1, 2002, as
reported by Registrant in its Annual Report on Form 10-K for the fiscal year
ended December 31, 2001.
List of Pending Cases
See Exhibit 99 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 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.
Conclusion
Management believes that there are meritorious defenses to the
above-mentioned pending actions and these actions are being vigorously
contested. However, 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. Management believes that the pending actions will not have a
material adverse effect upon the results of operations, cash flows or financial
condition of Registrant as long as the Indemnitors continue to fulfill their
obligations to indemnify Registrant under the aforementioned indemnification
agreement.
(b) Reference is made to Note 9, "Pending Litigation", in the Notes
to Condensed Consolidation Financial Statements set forth in Part
I, Item 1 of this Quarterly Report on Form 10-Q.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
12. Statement re computation of ratio of earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated May 15, 2002 re unaudited
financial information.
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 January 23, 2002, in
respect of Registrant's press release dated January 23, 2002 announcing
Registrant's financial results for the year-ended December 31, 2001 (Items 5 and
7(c)).
Registrant filed a Current Report on Form 8-K, dated March 6, 2002, in respect
of Registrant's renewal of its stock repurchase program and Registrant's press
release dated February 25, 2002 relating to the selection of Registrant's
cabinets business as exclusive supplier for Home Depot's Thomasville brands of
cabinets. (Items 5 and 7(c)).
Registrant filed a Current Report on Form 8-K, dated March 19, 2002, in respect
of Registrant's press release dated March 19, 2002 announcing that management
expected to report first quarter earnings per share that are above the top end
of the current range of analysts' estimates, and in respect of Registrant's
investor brochure dated March 19, 2002. (Items 5, 7(c) and 9).
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: May 15, 2002 By /s/ Nadine A. Heidrich
------------------- ----------------------
Nadine A. Heidrich
Vice President and Corporate
Controller
EXHIBIT INDEX
Sequentially
Exhibit Numbered Page
------- -------------
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP
dated May 15, 2002 re unaudited
financial information.
99. List of Pending/Terminated Cases.