[Conformed Copy]
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 September 30, 2001
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 October 31, 2001 was 148,588,599 shares.
1
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS.
------ --------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions)
September 30, December 31,
2001 2000
------------- ------------
(Unaudited)
Assets
Current assets
Cash and cash equivalents $ 64.7 $ 20.9
Accounts receivable, net 946.2 952.1
Inventories
Bulk whiskey 299.4 297.9
Other raw materials, supplies and
work in process 267.2 303.7
Finished products 447.7 477.6
-------- --------
1,014.3 1,079.2
Other current assets 226.7 212.3
-------- --------
Total current assets 2,251.9 2,264.5
Property, plant and equipment, net 1,208.5 1,205.1
Intangibles resulting from
business acquisitions, net 1,946.9 1,989.4
Other assets 344.1 305.1
-------- --------
Total assets $5,751.4 $5,764.1
======== ========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
---------------------------------------
(In millions, except per share amounts)
September 30, December 31,
2001 2000
------------ -----------
(Unaudited)
Liabilities and stockholders' equity
Current liabilities
Notes payable to banks $ 30.7 $ 41.7
Commercial paper 280.3 751.9
Current portion of long-term debt 1.3 12.4
Accounts payable 346.8 291.8
Accrued taxes 507.3 387.3
Accrued expenses and other liabilities 555.1 554.8
--------- ---------
Total current liabilities 1,721.5 2,039.9
Long-term debt 951.2 1,151.8
Deferred income 234.0 -
Deferred income taxes - 54.9
Postretirement and other liabilities 368.3 367.2
--------- ---------
Total liabilities 3,275.0 3,613.8
--------- ---------
Minority interest in consolidated 390.3 14.4
subsidiaries
Stockholders' equity
$2.67 Convertible Preferred stock -
redeemable at Company's option 8.7 9.2
Common stock, par value $3.125 per
share, 229.6 shares issued 717.4 717.4
Paid-in capital 115.6 125.9
Accumulated other
comprehensive loss (89.7) (79.6)
Retained earnings 4,028.6 3,919.7
Treasury stock, at cost (2,694.5) (2,556.7)
--------- ---------
Total stockholders' equity 2,086.1 2,135.9
--------- ---------
Total liabilities and
stockholders' equity $ 5,751.4 $ 5,764.1
========= =========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Nine Months Ended September 30, 2001 and 2000
-----------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
2001 2000
-------- --------
Net sales $ 4,206.7 $ 4,251.5
Cost of products sold 2,300.7 2,273.1
Excise taxes on spirits and wine 265.2 254.3
Advertising, selling, general and
administrative expenses 1,123.2 1,151.4
Amortization of intangibles 47.4 59.6
Restructuring charges 12.0 10.2
Interest and related expenses 79.1 100.5
Other expenses, net (9.2) 2.8
----------- -----------
Income before income taxes 388.3 399.6
Income taxes 123.8 161.1
Minority interests 7.3 3.5
----------- -----------
Net Income $ 257.2 $ 235.0
=========== ===========
Earnings per Common share
Basic $ 1.68 $ 1.48
=========== ===========
Diluted $ 1.65 $ 1.46
=========== ===========
Dividends paid per Common share $ .72 $ .69
=========== ===========
Average number of Common shares outstanding
Basic 152.7 158.6
=========== ===========
Diluted 156.1 161.0
=========== ===========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF INCOME
for the Three Months Ended September 30, 2001 and 2000
------------------------------------------------------
(In millions, except per share amounts)
(Unaudited)
2001 2000
--------- ---------
Net sales $ 1,472.3 $ 1,397.5
Cost of products sold 826.0 754.6
Excise taxes on spirits and wine 93.8 83.7
Advertising, selling, general and
administrative expenses 363.7 375.0
Amortization of intangibles 15.9 19.8
Restructuring charges - 2.1
Interest and related expenses 20.2 34.8
Other expenses, net (6.5) 1.6
--------- ---------
Income before income taxes 159.2 125.9
Income taxes 62.5 51.5
Minority interests 3.9 1.1
--------- ---------
Net income $ 92.8 $ 73.3
========= =========
Earnings per Common share
Basic $ 0.61 $ 0.47
========= =========
Diluted $ 0.60 $ 0.46
========= =========
Dividends paid per Common share $ .24 $ .23
========= =========
Average number of Common shares outstanding
Basic 151.6 156.5
========= =========
Diluted 155.4 158.8
========= =========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
for the Nine Months Ended September 30, 2001 and 2000
-----------------------------------------------------
(In millions)
(Unaudited)
2001 2000
--------- ---------
Operating activities
Net income $ 257.2 $ 235.0
Depreciation and amortization 165.1 177.2
Restructuring charges 12.0 10.2
Decrease in accounts receivable 8.0 36.2
Decrease (increase) in inventories 60.2 (82.2)
Decrease in accounts payable, accrued
expenses and other liabilities (35.6) (54.9)
Increase (decrease) in accrued taxes 117.0 (8.4)
Other operating activities, net (94.3) (31.8)
--------- ---------
Net cash provided from operating activities 489.6 281.3
Investing activities
Additions to property, plant and equipment (128.6) (144.3)
Acquisitions and investment in joint venture,
net of cash acquired (6.5) (25.6)
Proceeds from contribution of assets to
joint venture 270.0 -
Other investing activities, net (5.6) 13.2
--------- ---------
Net cash provided (used) by investing activities 129.3 (156.7)
--------- ---------
Financing activities
Proceeds from sale of minority interest in
wholly-owned subsidiary 375.0 -
(Decrease) increase in short-term debt, net (681.8) 223.9
Borrowings (Repayments) of long-term debt, net (11.7) (41.9)
Dividends to stockholders (110.7) (110.4)
Cash purchases of Common stock for treasury (173.3) (185.6)
Proceeds received from exercise of stock options 32.3 1.8
Other financing activities, net - 0.5
--------- ---------
Net cash used by financing activities (570.2) (111.7)
--------- ---------
Effect of foreign exchange rate changes on cash (4.9) 0.1
--------- ---------
Net increase in cash and cash equivalents 43.8 13.0
Cash and cash equivalents at beginning of period 20.9 71.9
--------- ---------
Cash and cash equivalents at end of period $ 64.7 $ 84.9
========= =========
See Notes to Condensed Consolidated Financial Statements.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
for the Nine Months Ended September 30, 2001 and 2000
-------------------------------------------------------------
(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, 1999 $ 9.9 $717.4 $130.8 $(14.9) $4,205.2 $(2,310.2) $2,738.2
Comprehensive income
Net income - - - - 235.0 - 235.0
Foreign currency adjustments - - - (61.0) - - (61.0)
----- ------ ------ ------ -------- -------- --------
Total comprehensive (loss) income - - - (61.0) 235.0 - 174.0
----- ------ ------ ------ -------- -------- --------
Dividends - - - - (148.1) - (148.1)
Purchases - - - - - (188.2) (188.2)
Conversion of preferred stock and
delivery of stock plan shares (0.5) - (4.0) - - 7.1 2.6
----- ------ ------ ------ -------- --------- --------
Balance at September 30, 2000 $ 9.4 $717.4 $126.8 $(75.9) $4,292.1 $(2,491.3) $2,578.5
===== ====== ====== ====== ======== ========= ========
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 - - - - 257.2 - 257.2
Foreign currency adjustments - - - (10.1) - - (10.1)
----- ------ ------ ------ -------- -------- --------
Total comprehensive (loss) income - - - (10.1) 257.2 - 247.1
----- ------ ------ ------ -------- -------- --------
Dividends - - - - (148.3) - (148.3)
Purchases - - - - - (181.8) (181.8)
Conversion of preferred stock and
delivery of stock plan shares (0.5) - (10.3) - - 44.0 33.2
----- ------ ------ ------ -------- --------- --------
Balance at September 30, 2001 $ 8.7 $717.4 $115.6 $(89.7) $4,028.6 $(2,694.5) $2,086.1
===== ====== ====== ====== ======== ========= ========
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 September 30, 2001, the
related condensed consolidated statements of income for the three month and
nine month periods ended September 30, 2001 and 2000, and the related
condensed consolidated statements of cash flows and stockholders' equity
for the nine month periods ended September 30, 2001 and 2000 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 and
normal recurring items. 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 2000 Annual
Report on Form 10-K.
2. Reclassifications
Certain reclassifications were made to the prior year income statements for
the three months and nine months ending September 30, 2000.
3. Accounting Changes
Derivative Financial Instruments
--------------------------------
Effective January 1, 2001, the Company adopted FAS Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and its
related amendment FAS Statement No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities". These statements establish
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging
activities. It requires recognition of all derivatives as either assets or
liabilities on the balance sheet and the measurement of those instruments
at fair value. If the derivative is designated as a fair value hedge and is
effective, the changes in the fair value of the derivative and of the
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Accounting Changes (Continued)
hedged item attributable to the hedged risk are recognized in earnings in
the same period. If the derivative is designated as a cash flow hedge, the
effective portions of changes in the fair value of the derivative are
recorded in other comprehensive income (OCI) and are recognized in the
income statement when the hedged item affects earnings. Ineffective
portions of changes in the fair value of cash flow hedges are recognized in
earnings.
The impact of the adoption of FAS 133 and 138 on January 1, 2001, was
not material. Derivative gains or losses included in OCI are reclassified
into earnings at the time the forecasted revenue or expense is recognized.
During the three and nine months ended September 30, 2001, minimal gain
amounts were reclassified to cost of sales. The Company estimates that $1.1
million of derivative loss included in OCI will be reclassified to earnings
within the next twelve months.
Foreign Currency Risk
Certain forecasted transactions, assets and liabilities are exposed to
foreign currency risk. The Company continually monitors its foreign
currency exposures in order to maximize the overall effectiveness of its
foreign currency hedge positions. Principal currencies hedged include the
Pound sterling, the Euro, the Canadian dollar and the Australian dollar.
Interest Rate Risk
The Company may, from time to time, enter into interest rate swap
agreements to manage its exposure to interest rate changes. The swaps
involve the exchange of fixed and variable interest rate payments without
exchanging the notional principal amounts. The Company records the payments
or receipts on the agreements as adjustments to interest expense. As of
September 30, 2001, the Company did not have any outstanding interest rate
swap agreements.
Net Sales
---------
Net sales reflect the effect of a reclassification of amounts billed to
cover shipping and handling costs and sales incentives
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. Accounting Changes (Concluded)
provided to customers primarily from the category "advertising, selling and
general and administrative expenses". These reclassifications, which
reduced reported net sales by $5.8 and $16.2 million for the three months
and nine months ending September 30, 2000, respectively, were required by
the Emerging Issues Task Force Issue No. 00-10 and No. 00-22. 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
presented.
4. Joint Ventures
On May 31, 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 both companies' spirits
and wine brands in the United States. V&S paid $270 million to gain access
to Beam's U.S. distribution network and to acquire a 49% interest in the
LLC 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 has 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., 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. Starting in June 2001, these amounts will be amortized to other
(income) expenses, net on a straight-line basis over the next ten years as
JBBW has continuing operating obligations to the joint venture.
In addition, V&S invested 107 million euros to acquire a one-fourth
interest in our international sales and distribution joint venture, named
Maxxium International B.V. Maxxium was formed in 1999 by JBBW,
Remy-Cointreau and Highland Distillers to distribute and sell premium wines
and spirits in key markets outside the United States.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Joint Ventures (Continued)
JBBW made a cash investment of $28.6 million in 1999 and $25.6 million in
2000 towards its total investment of $110 million in Maxxium.
5. Income Taxes
The Company recorded a tax reserve reversal of $31.0 million during the
second quarter of 2001, as the IRS examinations for the years 1990 through
1992 were effectively concluded during the second quarter. A review and
approval of the 1990 through 1992 examinations by the IRS Joint Committee
occurred subsequent to the end of the third quarter of 2001, which will
trigger a one-time non-operating final adjustment in the form of interest
income of approximately $17 million (after-tax) to be recorded in the
fourth quarter.
6. Information on Business Segments
Net sales and operating company contribution are as follows:
Nine Months Ended September 30,
-------------------------------
Operating
Net Company
Sales Contribution
------------- ------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
Home products $1,548.0 $1,553.0 $225.9 $241.2
Office products 911.5 1,027.9 27.9 49.2
Golf products 772.9 805.6 117.6 137.9
Spirits and wine 974.3 865.0 206.6 196.7
-------- -------- ------ ------
$4,206.7 $4,251.5 $578.0 $625.0
======== ======== ====== ======
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Information on Business Segments (Continued)
Three Months Ended September 30,
--------------------------------
Operating
Net Company
Sales Contribution
------------- ------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
Home products $ 539.3 $ 528.5 $ 87.6 $ 84.1
Office products 321.5 365.4 13.3 23.2
Golf products 218.3 212.0 25.8 25.5
Spirits and wine 393.2 291.6 72.7 71.2
-------- -------- ------ ------
$1,472.3 $1,397.5 $199.4 $204.0
======== ======== ====== ======
Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, write-down of
goodwill, amortization of intangibles, corporate administrative expense,
interest and related expenses, other (income) expenses, net and income
taxes.
A reconciliation of operating company contribution to consolidated income
before income taxes is as follows:
Nine Months Ended September 30,
-------------------------------
2001 2000
------ ------
(In millions)
Operating company contribution $ 578.0 $ 625.0
Amortization of intangibles 47.4 59.6
Restructuring and other
nonrecurring charges 42.3 30.4
Interest and related expenses 79.1 100.5
Non-operating expenses 20.9 34.9
------- --------
Income before income taxes $ 388.3 $ 399.6
======= ========
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Information on Business Segments (Concluded)
Three Months Ended September 30,
--------------------------------
2001 2000
------ ------
(In millions)
Operating company contribution $199.4 $204.0
Amortization of intangibles 15.9 19.8
Restructuring and other
nonrecurring charges - 12.3
Interest and related expenses 20.2 34.8
Non-operating expenses 4.1 11.2
------ ------
Income before income taxes $159.2 $125.9
====== ======
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Earnings Per Share
The computation of basic and diluted earnings per common share for
"Net income" is as follows:
Nine Months Ended Three Months Ended
September 30, September 30,
----------------- ------------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions, except per share amounts)
Net income $257.2 $ 235.0 $ 92.8 73.3
Less: Preferred stock dividends 0.6 0.6 0.2 0.2
------ ------- ------ ------
Income available to Common
stockholders - basic 256.6 234.4 92.6 73.1
Convertible Preferred stock
dividend requirements 0.6 0.6 0.2 0.2
------ ------- ------ ------
Income available to Common
stockholders - diluted $257.2 $ 235.0 $ 92.8 $ 73.3
====== ======= ====== ======
Weighted average number of Common
shares outstanding - basic 152.7 158.6 151.6 156.5
Conversion of Convertible
Preferred stock 1.8 2.0 1.8 1.9
Exercise of stock options 1.6 0.4 2.0 0.4
------ ------- ------ ------
Weighted average number of Common
shares outstanding - diluted 156.1 161.0 155.4 158.8
====== ======= ====== ======
Earnings per Common share
Basic $ 1.68 $ 1.48 $ 0.61 $ 0.47
====== ======= ====== ======
Diluted $ 1.65 $ 1.46 $ 0.60 $ 0.46
====== ======= ====== ======
8. Restructuring and Other Nonrecurring Charges
Restructuring and Other Nonrecurring Charges Program - 1999
-----------------------------------------------------------
During 2000, the Company recorded $73.0 million of pre-tax
restructuring and other nonrecurring charges. These included employee
termination costs, asset write-offs, lease termination costs, relocation
costs for certain manufacturing facilities, inventory write-offs due to
discontinuance of certain product lines and relocation costs associated
with establishing a new corporate headquarters.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Restructuring and Other Nonrecurring Charges (Continued)
Reconciliation of the 1999 restructuring program, as of September 30,
2001 is as follows:
Balance at 2001 Cash Non-Cash Balance at
12/31/00 Provision Expenditures Write-offs 9/30/01
---------- ---------- ------------ ---------- ---------
(In millions)
Rationalization of
operations
Employment
termination costs (1) $ 14.3 $ - $ (9.1) $ (0.6) $ 4.6
International distribution
and lease agreements (2) 7.6 - (1.4) (5.6) 0.6
Loss on disposal of assets 1.6 - - (1.1) 0.5
------ -------- ------- ------ ------
$ 23.5 $ - $ (10.5) $ (7.3) $ 5.7
====== ======== ======= ====== ======
(1) Of the 2,307 positions planned for elimination, 2,277 had been
eliminated as of September 30, 2001.
(2) $5.4 of the $5.6 classified as non-cash write-offs for the nine
months ending September 30, 2001 represents the reclassification
of lease payments on various lease agreements to long-term.
The Company expects that substantially all remaining payments will be
made within the next twelve months.
Restructuring and Other Nonrecurring Charges Program - 2001
------------------------------------------------------------
(Office Products)
-----------------
On April 19, 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.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8. Restructuring and Other Nonrecurring Charges (Concluded)
As a result of this plan, the Company recorded total pre-tax
restructuring and other nonrecurring charges of $42.3 million, during
the nine months ended September 30, 2001, as follows:
Nine Months Ended
September 30, 2001
------------------------------------------------
Nonrecurring
--------------------------
Cost of SG&A
Restructuring Sales Charges Charges Total
------------- ------------- ------- -----
(In millions)
Office products $12.0 $17.8 $12.5 $ 42.3
----- ----- ----- ------
Total $12.0 $17.8 $12.5 $ 42.3
===== ===== ===== ======
The charges principally relate to product line discontinuances,
rationalization of operations, expenses associated with the
exploration of strategic options for the office products business and
workforce reduction initiatives across its operations.
Reconciliation of the 2001 restructuring program, as of September
30, 2001, is as follows:
Nine Months Ended
September 30, 2001
------------------
2001 Cash Non-Cash Balance at
Provision Expenditures Write-offs 9/30/01
---------- ------------ ---------- ----------
Rationalization of
operations
Employment
termination costs (1) $ 3.5 $ (1.5) $ - $ 2.0
Other 2.0 - - 2.0
Loss on disposal of assets 6.5 (0.1) (1.5) 4.9
------- ------- ------ ------
$ 12.0 $ (1.6) $ (1.5) $ 8.9
======= ======= ====== ======
(1) Of the 317 positions planned for elimination, 274 had been
eliminated as of September 30, 2001.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
9. 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, 1999 $(11.9) $ (3.0) $(14.9)
Changes in nine months (61.0) - (61.0)
------- ------- -------
Balance at September 30, 2000 $(72.9) $ (3.0) $(75.9)
======= ======= =======
Balance at December 31, 2000 $(75.4) $ (4.2) $(79.6)
Changes in nine months (10.1) - (10.1)
------- ------- -------
Balance at September 30, 2001 $(85.5) $ (4.2) $(89.7)
======= ======= =======
Included in the foreign currency adjustments balance at September 30,
2001 is total deferred derivative loss of $1.1 million. (See Note 3.)
For the three month periods ended September 30, 2001 and 2000, total
comprehensive income resulted in income of $109.5 million and $54.7
million, respectively.
10. Subsequent Event
On October 16, 2001, the Company announced that Jim Beam Brands Worldwide,
Inc. sold its U.K.-based Scotch whisky business for $290 million in cash.
The sale of the business consisted of the Invergordon private-label and
bulk Scotch operations and several regional brands in the U.K. The products
included in the agreement generated sales of approximately $235 million
(including excise taxes) and operating company contribution of
approximately $38 million in 2000. The Company will record an after-tax
gain of approximately $20 million. The Company anticipates that the sale
will have no effect on the U.S. or international distribution of Jim Beam
Brands Worldwide's remaining brand portfolio.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. 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.
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.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
12. 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 Stockholders of Fortune Brands, Inc.:
We have reviewed the accompanying condensed consolidated balance sheet of
Fortune Brands, Inc. and its Subsidiaries as of September 30, 2001, the related
condensed consolidated statements of income for each of the three-month and
nine-month periods ended September 30, 2001 and September 30, 2000, and the
condensed consolidated statements of cash flows and stockholders' equity for the
nine-month periods ended September 30, 2001 and September 30, 2000. 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, 2000, 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 24, 2001 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, 2000,
is fairly stated in all material respects in relation to the consolidated
balance sheet from which it has been derived.
PricewaterhouseCoopers LLP
Chicago, Illinois 60601
October 17, 2001
Item 2.
------
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
-----------------------------------------------------------
FORTUNE BRANDS, INC. AND SUBSIDIARIES
--------------------------------------
Results of Operations for the Nine Months Ended September 30, 2001 as
Compared to the Nine Months Ended September 30, 2000
-----------------------------------------------------------------------
Operating Company
Net Sales Contribution(1)
----------------- ------------------------
2001 2000 2000 1999
---- ---- ---- ----
(In millions)
Home products $ 1,548.0 $ 1,553.0 $225.9 $241.2
Office products 911.5 1,027.9 27.9 49.2
Golf products 772.9 805.6 117.6 137.9
Spirits and wine 974.3 865.0 206.6 196.7
--------- --------- ------ ------
$ 4,206.7 $ 4,251.5 $578.0 $625.0
========= ========= ====== ======
(1) Operating company contribution is net sales less all costs and expenses
other than restructuring and other nonrecurring charges, write-down of
goodwill, amortization of intangibles, corporate administrative expense,
interest and related expenses, other (income) expenses, net and income
taxes.
CONSOLIDATED
------------
Net sales decreased $44.8 million, or 1%, principally on volume declines in
certain existing product lines, primarily in the office, home and golf segments
and unfavorable foreign exchange ($65 million). The decline was partly offset by
the introduction of new products, line extensions and an increase in average
selling prices. On a comparable basis with the prior year period, excluding the
impact of the revenues recorded under the interim distribution arrangement with
Vin & Sprit, net sales would have declined 4%. Operating company contribution
decreased $47.0 million, or 8%, on the lower volumes in certain existing product
lines that were spread across our existing fixed cost base, lower margins,
particularly in the golf segment, and unfavorable foreign exchange rates ($12
million).
As a result of an uncertain U.S. economic outlook and generally weak economic
conditions, particularly after the events of September 11, it is difficult to
predict consumer spending trends and the effect they may have
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
on our businesses, if any, for the fourth quarter of 2001 and leading into 2002.
We experienced increases in deferred income and minority interest in
consolidated subsidiaries as of September 30, 2001 as compared with December 31,
2000. The change in deferred income arose from the payment of $270 million from
Vin & Sprit, the maker of Absolut vodka, to gain access to Beam's U.S.
distribution network and to acquire a 49% interest in Future Brands, LLC. This
amount will be amortized to other (income) expenses, net on a straight-line
basis over the next ten years as Jim Beam Brands Worldwide has continuing
operating obligations to the joint venture.
On October 16, 2001, the Company announced that Jim Beam Brands Worldwide, Inc.
sold its U.K.-based Scotch whisky business for $290 million in cash. The sale of
the business consisted of the Invergordon private-label and bulk Scotch
operations and several regional brands in the U.K. The products included in the
agreement generated sales of approximately $235 million (including excise taxes)
and operating company contribution of approximately $38 million in 2000. The
Company will record an after-tax gain of approximately $20 million. The Company
anticipates that the sale will have no effect on the U.S. or international
distribution of Jim Beam Brands Worldwide's remaining brand portfolio.
In connection with the repositioning of the office products business, we
recorded for the nine months ended September 30, 2001 pre-tax restructuring and
other nonrecurring charges of $42.3 million, $27.8 million after-tax, or 18
cents per share. These charges principally related to product line
discontinuances, rationalization of operations, expenses associated with the
exploration of strategic options and workforce reduction initiatives across its
operations.
For the nine months ended September 30, 2000, we recorded pre-tax restructuring
and other nonrecurring charges of $30.4 million, $19.2 million after-tax, or
twelve cents per share. These charges principally relate to the downsizing and
relocation of the Corporate office, product discontinuances and manufacturing
consolidation in the golf segment, rationalization of operations in the home
segment, relocation costs for manufacturing facilities in the office segment and
other workforce reduction initiatives across these segments.
Interest and related expenses decreased $21.4 million, or 21%, primarily due to
lower interest rates and the repayment of debt using proceeds received from Vin
& Sprit.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
The effective income tax rate of 39.3% for the nine months ended September 30,
2001 excludes the reversal of a $31.0 million tax reserve as the IRS
examinations for the years 1990 through 1992 were effectively concluded in the
second quarter with final adjustments recorded in the fourth quarter of 2001
(see below), and the restructuring and other nonrecurring charges taken in the
second quarter of 2001 and the first nine months of 2000. This compared to the
effective tax rate of 40.4% for the nine months ended September 30, 2000.
Subsequent to the third quarter of 2001, the IRS Joint Committee approved the
1990 through 1992 examinations which will trigger a one-time non-operating final
adjustment in the form of interest income of approximately $17.0 million (after-
tax) to be recorded in the fourth quarter.
Net income of $257.2 million, or $1.68 basic and $1.65 diluted per share,
compared with a net income of $235.0 million, or $1.48 basic and $1.46 diluted
per share, for the same nine month period last year. Income from operations
before net gains and charges was $254.1 million, or $1.66 basic and $1.63
diluted per share, for 2001, compared with $254.2 million, or $1.60 basic and
$1.58 diluted per share, for 2000.
Income from operations before net gains and charges for the nine months ended
September 30, 2001 represents income before the $42.3 million ($27.8 million
after-tax) restructuring and other nonrecurring charges and a $31.0 tax reserve
reversal that was no longer required as the audits for 1990 through 1992 were
effectively concluded in the second quarter. Income from operations before net
gains and charges for the nine months ended September 30, 2000 represents income
before the $30.4 million ($19.2 million after-tax) restructuring and other
nonrecurring charges.
The Emerging Issues Task Force ("EITF") issued EITF 00-14, "Accounting for
Certain Sales Incentives" which addresses the recognition, measurement and
statement of earnings classification for certain sales incentives, and will be
effective in the first quarter of 2002. As a result, certain items previously
included in cost of sales and in selling and administrative costs on the
consolidated statement of operations will be recorded as a reduction of sales.
We are currently in the process of determining the impact of adoption or
subsequent application of EITF 00-14. Upon adoption, prior period amounts will
be reclassified to conform to the new requirements. In April 2001, the EITF
reached a consensus on Issue EITF 00-25, "Vendor Income Statement
Characterization of Consideration to a Purchaser of the Vendor's Products or
Services." EITF Issue No. 00-25 requires that certain expenses included in cost
of sales and in selling and administrative costs be recorded as a reduction of
sales and will be effective in the first quarter of 2002. We are currently in
the process of determining the impact of EITF Issue No. 00-25.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
In July 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards No. 141, "Business Combinations," and No. 142,
"Goodwill and Other Intangible Assets." Effective January 1, 2002, we will no
longer be required to amortize goodwill and certain intangible assets as a
charge to earnings. In addition, we will be required to review goodwill and
other intangible assets for potential impairment. We are currently in the
process of quantifying the impact of the new standard. However, we currently
anticipate that substantially all amortization of goodwill will be eliminated.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Home Products
-------------
Net sales were essentially flat with the previous year. Increased sales
attributable to line extensions, the introduction of new products and higher
average selling prices were offset by volume declines in certain existing
product lines, higher customer rebates and unfavorable foreign exchange rates
($4 million). Operating company contribution decreased $15.3 million, or 6%. The
decline in operating company contribution was principally due to adverse
operating leverage, higher operating expenses and unfavorable product mix.
Our home products business may be impacted by the uncertain U.S. economic
outlook and its potential impact on the housing and remodeling markets,
particularly following the events of September 11.
Office Products
---------------
Net sales declined $116.4 million, or 11%. The decrease resulted principally
from lower volumes in the United States across all product categories, including
discontinuing certain unprofitable product lines, unfavorable product mix and
lower average foreign exchange rates ($28 million). These factors were partially
offset by the introduction of new products, an increase in average selling
prices and lower rebates. Operating company contribution decreased $21.3
million, or 43%. The decrease was primarily attributable to adverse operating
leverage, lower sales and unfavorable foreign exchange rates ($2 million). These
factors were partially offset by reduced operating expenses and savings achieved
as a result of restructuring actions.
Sales of our office products business during 2001 have been negatively impacted
by reductions in inventory levels by retail customers, store closures and a
slowing of the growth in new store openings by several major customers. These
factors, in combination with an uncertain U.S. economic outlook, particularly
the weak economic conditions following the events of September 11, may continue
to further negatively impact sales of our office products business in future
quarters.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Office Products (Concluded)
---------------
In October 2000, we announced that we were exploring strategic options for our
office products group. We have decided not to divest our office products
business at this time due to weakness in the overall economy and current
conditions in the office products industry. We have begun implementing a plan to
improve both financial results and the long-term value of the business. Under
this plan, our office products group will realign and streamline its North
American operations, intensify its focus on growing profitable core product
categories, divest or discontinue non-strategic and low-return product
categories and reduce overhead expenses and excess capacity. As a result of this
plan, the Company recorded total pre-tax restructuring and other nonrecurring
charges of $42.3 million, $27.8 million after-tax, during the second quarter.
While no charges were recorded during the third quarter, the Company is
currently evaluating additional restructuring alternatives, which will result in
additional charges, including charges of approximately $25 million that the
Company expects to record over the course of the fourth quarter of 2001 and the
first quarter of 2002. We foresee first-year savings in the range of $10 to 15
million as a result of these charges.
Golf Products
-------------
Net sales decreased $32.7 million, or 4%, on volume declines, price competition
and lower average selling prices as well as lower average foreign exchange ($17
million). These declines were partially offset by new product introductions in
golf balls, golf clubs and golf shoes coupled with line extensions. In addition,
retail sell-through was adversely affected by unfavorable weather conditions
resulting in a decline in rounds played. Operating company contribution
decreased $20.3 million, or 15% on the lower sales, certain product line
discontinuances and unfavorable foreign exchange ($2 million), partly offset by
reduced operating expenses.
Our golf products business may be impacted in future quarters by the uncertain
U.S. economic outlook and by a potential reduction of rounds of play at resort
locations due to a slowdown in the travel industry, particularly as a result of
weak U.S. economic conditions after September 11.
Competitors whose products have significant brand awareness have introduced golf
balls into their product offerings in the past three years. Our share of the
domestic golf ball market fell by approximately 2% in 2000, as the golf ball
industry experienced increased price
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Golf Products (Concluded)
-------------
competition. Largely as a result of the success of the Pro V1 golf ball, our
golf ball share is trending positively in 2001. It is not possible to
predict the long-term effect of these events on our golf ball business, but
continued new product introductions, such as the Pro V1 and the recently
introduced NXT, as well as significant research and development and marketing
expenditures to defend and recover ball market share, will continue.
The United States Golf Association (USGA) establishes standards for golf
equipment used in competitive play 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 divergence between the USGA and the
R&A on this issue may cause confusion to consumers and could be disruptive to
the United States and world markets for driving clubs. In addition, the USGA
rule could hamper innovation and make it more difficult to use technological
advances to produce USGA conforming products. However, it is not possible to
determine whether in the long term the USGA rule or the divergence in rules will
have a material effect on the golf club industry and our golf products business.
Each of the USGA and the R&A has announced its intention to propose new rules
addressing the initial velocity and overall distance standards for golf balls.
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. The adoption of any such rules could materially
impact our golf products business and/or the golf ball industry.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Spirits and Wine
----------------
Net sales increased $109.3 million, or 13%, principally as a result of revenues
recorded by the spirits and wine business on an interim basis until Vin &
Sprit's U.S. subsidiary is fully operational, as well as volume increases in
certain existing product lines and price increases in our Jim Beam Bourbon and
DeKuyper product lines. On a comparable basis with the prior year period,
excluding the impact of the revenues recorded under the interim distribution
arrangement with Vin & Sprit, net sales would have had an adjusted improvement
of 1%. These benefits were partially offset by adverse foreign exchange rates
($16 million). The volume increases included gains in our Jim Beam pre-mix
product in Australia, cordials in the United Kingdom and premium and
super-premium product lines in the United States. These benefits were partly
offset by the continued weakness of our Scotch whisky business in Europe and a
decline in bulk wine sales.
Operating company contribution increased $9.9 million, or 5%, on the higher
average selling prices, volume increases in certain existing product lines and
lower selling costs as a result of the Future Brands joint venture (as discussed
below) partly offset by adverse foreign exchange rates ($7 million) and
transition costs associated with the new joint venture.
On October 16, 2001, the Company announced that Jim Beam Brands Worldwide, Inc.
sold its U.K.-based Scotch whisky business for $290 million in cash. The sale of
the business consisted of the Invergordon private-label and bulk Scotch
operations and several regional brands in the U.K. The products included in the
agreement generated sales of approximately $235 million (including excise taxes)
and operating company contribution of approximately $38 million in 2000. The
Company will record an after-tax gain of approximately $20 million. The
Company anticipates that the sale will have no effect on the U.S. or
international distribution of Jim Beam Brands Worldwide's remaining brand
portfolio.
On May 31, 2001, the Company's spirits and wine business completed transactions
with Vin & Sprit creating a joint venture, named Future Brands LLC (the "LLC"),
to distribute both companies' spirits and wine brands in the United States. V&S
paid $270 million to gain access to Beam's U.S. distribution network and to
acquire a 49% interest in the LLC 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%
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Spirits and Wine (Concluded)
----------------
of the JBBW common stock and has 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., 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. In June 2001, we started to amortize these amounts to
other (income) expenses, net on a straight-line basis over the next ten years as
JBBW has continuing operating obligations to the joint venture.
In addition, V&S invested 107 million euros to acquire a one-fourth interest in
our international sales and distribution joint venture, named Maxxium
International B.V. Maxxium was formed in 1999 by JBBW, Remy-Cointreau and
Highland Distillers to distribute and sell premium wines and spirits in key
markets outside the United States. (See Note 4.)
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Net cash provided from operating activities was $489.6 million for the nine
months ended September 30, 2001 compared with $281.3 million for the same nine
month period last year. The principal reasons for the increase were: reductions
in inventory levels, specifically in office and home products, as a result of
concerted efforts in inventory management, and timing of taxes associated with
the sale of 49% of the LLC to V&S.
Net cash provided by investing activities for the nine months ended September
30, 2001 was $129.3 million, as compared with net cash used of $156.7 million in
the same nine month period last year.
Net cash used by financing activities for the nine months ended September 30,
2001 was $570.2 million, as compared with $111.7 in the same nine month period
last year. During the nine months ended September 30, 2001, we purchased
5,096,900 shares through open market purchases.
LIQUIDITY AND CAPITAL RESOURCES (Concluded)
-------------------------------
Total debt at September 30, 2001 was $1.3 billion, a decrease of $694.0 million
from December 31, 2000. The decline was caused by the repayment of debt using
the proceeds received from V&S partially offset by share repurchases ($175
million) and the purchase of certain spirits distribution rights ($7 million).
The ratio of total debt to total capital was 37.7% as of September 30, 2001
versus 47.8% as of December 31, 2000. We believe that our internally generated
funds, together with access to global credit markets, are adequate to meet our
capital needs.
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 September 30, 2001 as
Compared to the Three Months Ended September 30, 2000
-----------------------------------------------------------------------
Operating
Net Sales Company Contribution(1)
---------------------- -------------------------
2001 2000 2001 2000
---- ---- ---- ----
(In millions)
Home products $ 539.3 $ 528.5 $ 87.6 $ 84.1
Office products 321.5 365.4 13.3 23.2
Golf products 218.3 212.0 25.8 25.5
Spirits and wine 393.2 291.6 72.7 71.2
-------- -------- ------ ------
$1,472.3 $1,397.5 $199.4 $204.0
======== ======== ====== ======
(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 and income taxes.
CONSOLIDATED
------------
Net sales increased $74.8 million, or 5%, principally on the benefits of an
interim distribution arrangement with V&S as a result of the formation of the
Future Brands joint venture, the introduction of new products, line extensions
and an increase in average selling prices. These factors were partly offset by
volume declines in certain existing product lines and unfavorable foreign
exchange ($12 million). On a comparable basis with the prior year period,
excluding the impact of the revenues recorded under the interim distribution
arrangement with Vin & Sprit, net sales would have declined 1%. Operating
company contribution declined $4.6 million, or 2%, due principally to the volume
declines experienced in the office products segment. This weakness was partially
offset by lower general and administrative and selling expenses.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
CONSOLIDATED (Concluded)
------------
During the three month period ended September 30, 2000, the Company recorded
pre-tax restructuring and nonrecurring charges of $12.3 million, $7.7 million
after-tax, or five cents basic and diluted per share. (See Note 8 and the
section on "Consolidated" describing the nine months results for additional
information on restructuring and other nonrecurring charges.)
Interest and related expenses decreased $14.6 million, or 42%, primarily due to
lower interest rates and the repayment of debt using proceeds received from V&S.
The effective income tax rate of 39.3% for the three months ended September 30,
2001 compares to 40.9% for the three months ended September 30, 2000, which
excludes the restructuring and other nonrecurring charges taken in the third
quarter of 2000.
Net income of $92.8 million, or 61 cents basic and 60 cents diluted per share,
compared with net income of $73.3 million, or 47 cents basic and 46 cents
diluted per share, for the same three month period last year.
Income from operations before net gains and charges was $92.8 million, or 61
cents basic and 60 cents diluted per share for 2001, compared with $81.0
million, or 52 cents basic and 51 cents diluted per share for 2000. Income from
operations before net gains and charges for three months ended September 30,
2000 represents income before the $12.3 million ($7.7 million after-tax)
restructuring and other nonrecurring charges.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Home Products
-------------
Net sales increased $10.8 million, or 2%. The increase was attributable to line
extensions and the introduction of new products partly offset by declines in
certain existing product lines and higher customer rebates. Operating company
contribution increased $3.5 million, or 4%. The increase reflects the higher
sales, benefits realized from the implementation of cost reduction initiatives
and lower operating expenses.
Office Products
---------------
Net sales decreased $43.9 million, or 12%. The decline resulted from lower
overall volumes as same store sales of major North American office products
retailers continued to weaken in the third quarter, certain product line
discontinuances and overall economic conditions and lower average foreign
exchange rates ($7 million). As far as the volume shortfall, we attribute about
half to unprofitable businesses we have exited and about half to the economic
slowdown. These factors were mitigated by reduced rebates to customers and
higher average selling prices. Operating company contribution decreased $9.9
million, or 43%, on the lower sales, adverse operating leverage and
unfavorable product mix, partly offset by reduced operating expenses and
restructuring related savings.
Golf Products
-------------
Net sales increased $6.3 million, or 3%. The increase was primarily due to the
introduction of new products and improved product mix. This increase was partly
offset by a decline in certain existing product lines, product line
discontinuances and lower average foreign exchange ($4 million). Operating
company contribution was flat as compared with the prior year period. The higher
sales were offset by lower overall gross margins due to certain product line
discontinuances.
FORTUNE BRANDS, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)
---------------------------------------------------------
Spirits and Wine
----------------
Net sales increased $101.6 million, or 35%, principally as a result of revenues
recorded by the spirits and wine business on an interim basis until Vin &
Sprit's U.S. subsidiary is fully operational. On a comparable basis with the
prior year period, excluding the impact of the revenues recorded under the
interim distribution arrangement with Vin & Sprit, net sales would have had an
adjusted improvement of 2%.
Operating company contribution increased $1.5 million, or 2%, on price increases
in the United States and volume gains in our Jim Beam pre-mix product in
Australia and cordials in the United Kingdom and lower selling costs as a result
of the Future Brands joint venture (as discussed above). These factors were
partly offset by higher brand advertising and brand support costs and by adverse
average foreign exchange rates ($2 million) and transition costs associated with
the new joint venture.
CAUTIONARY STATEMENT
--------------------
This annual report contains statements relating to future results. They are
forward-looking statements as that term is defined in the Private Securities
Litigation Reform Act of 1995. Readers are cautioned that these forward-looking
statements speak only as of the date hereof. Actual results may differ
materially from those projected as a result of certain risks and uncertainties,
including but not limited to changes in general economic conditions, foreign
exchange rate fluctuations, changes in interest rates, 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, risks
associated with the Company's implementation of the repositioning plan for ACCO
World Corporation, 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
safe cigarette matters relating to the tobacco business of ATCO.
Individual Cases
As of November 1, 2001, there were approximately 97 smoking and health
cases pending on behalf of individual plaintiffs in which Registrant has been
named as one of the defendants, compared with approximately 93 such cases as of
March 1, 2001 as reported by Registrant in its Annual Report on Form 10-K for
the fiscal year ended December 31, 2000.
Class Actions
As of November 1, 2001, there were approximately 22 purported smoking
and health class actions pending in which Registrant has been named as one of
the defendants, compared with approximately 18 such cases on March 1, 2001, as
reported by Registrant in its Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
Health Care Cost Recovery Actions
As of November 1, 2001, there were approximately four health care cost
recovery actions pending in which Registrant had been named as one of the
defendants, compared with approximately four such cases as of March 1, 2001,
as reported by Registrant in its Annual Report on Form 10-K for the fiscal year
ended December 31, 2000.
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, 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 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 11, "Pending Litigation", in the Notes
to Condensed Consolidated Financial Statements set forth in Part
I, Item 1 of this Quarterly Report on Form 10-Q.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
------- --------------------------------------------------------
There are no material changes in the information provided in Item 7A
of the Company's Form 10-K for the fiscal year ended December 31,
2000.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K.
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(a) Exhibits
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3(ii)a. Amendment to By-laws of Registrant.
3(ii)b. By-laws of Registrant as in effect on the date hereof.
10a1. Amendment, dated September 25, 2001, to Fortune Brands, Inc. 1990
Long-Term Incentive Plan.
10b1. Amendment, dated September 25, 2001, to Fortune Brands, Inc. 1999
Long-Term Incentive Plan.
12. Statement re computation of ratio of earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP dated November 13, 2001 re
unaudited financial information.
99. List of Pending/Terminated Cases.
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 July 19, 2001, in respect
of Registrant's press release dated July 19, 2001 announcing Registrant's
financial results for the three month period ended June 30, 2001 (Items 5 and 7
(c)).
Registrant filed a Current Report on Form 8-K, dated August 1, 2001, for
purposes of furnishing an investment brochure pursuant to Regulation FD (Items
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: November 13, 2001 By /s/ C. P. Omtvedt
----------------- -------------------
C. P. Omtvedt
Senior Vice President and
Chief Financial Officer
EXHIBIT INDEX
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Sequentially
Exhibit Numbered Page
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3(ii)a. Amendment to By-laws of Registrant.
3(ii)b. By-laws of Registrant as in effect on the date hereof.
10a1. Amendment, dated September 25, 2001, to Fortune
Brands, Inc. 1990 Long-Term Incentive Plan.
10b1. Amendment, dated September 25, 2001, to Fortune
Brands, Inc. 1999 Long-Term Incentive Plan.
12. Statement re computation of ratio of
earnings to fixed charges.
15. Letter from PricewaterhouseCoopers LLP
dated November 13, 2001 re unaudited
financial information.
99. List of Pending/Terminated Cases.