U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2002
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number: 33-61516
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THE ROBERT MONDAVI CORPORATION
Incorporated under the laws I.R.S. Employer Identification:
of the State of California 94-2765451
Principal Executive Offices:
7801 St. Helena Highway
Oakville, CA 94562
Telephone: (707) 259-9463
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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As of April 30, 2002, there were issued and outstanding 9,353,613 shares of the
issuer's Class A Common Stock and 6,852,647 shares of the issuer's Class B
Common Stock.
PART I
Item 1. Financial Statements.
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
ASSETS
March 31, June 30,
2002 2001
---- ----
Unaudited
Current assets:
Cash and cash equivalents $ - - $ 7,189
Accounts receivable--trade, net 79,408 104,555
Inventories 417,110 358,756
Prepaid expenses and other current assets 11,623 10,400
---------- ---------
Total current assets 508,141 480,900
Property, plant and equipment, net 324,640 338,935
Investments in joint ventures 32,193 31,311
Other assets 13,524 13,212
---------- ---------
Total assets $ 878,498 $864,358
========== =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Book overdraft $ 3,157 $ - -
Notes payable to banks 3,100 15,800
Accounts payable--trade 18,221 29,752
Employee compensation and related costs 11,760 19,835
Other accrued expenses 14,168 12,360
Current portion of long-term debt 12,641 15,823
---------- ---------
Total current liabilities 63,047 93,570
Long-term debt, less current portion 363,446 335,970
Deferred income taxes 23,658 23,454
Deferred executive compensation 5,321 5,128
Other liabilities 3,608 3,767
---------- ---------
Total liabilities 459,080 461,889
---------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred Stock:
Authorized--5,000,000 shares; issued and outstanding--no shares - - - -
Class A Common Stock, without par value:
Authorized--25,000,000 shares;
issued and outstanding--9,296,363 and 9,151,217 shares 92,861 91,214
Class B Common Stock, without par value:
Authorized--12,000,000 shares;
issued and outstanding--6,852,647 and 6,885,717 shares 11,006 11,059
Paid-in capital 11,166 10,547
Retained earnings 307,758 292,399
Accumulated other comprehensive income:
Cumulative translation adjustment (3,352) (2,750)
Forward contracts (21) - -
---------- ---------
419,418 402,469
---------- ---------
Total liabilities and shareholders' equity $ 878,498 $ 864,358
========== =========
See Notes to Consolidated Financial Statements.
2
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited) (in thousands, except per share data)
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Gross revenues $109,833 $117,665 $332,434 $364,256
Less excise taxes 5,543 5,584 16,130 17,056
--------- --------- --------- ---------
Net revenues 104,290 112,081 316,304 347,200
Cost of goods sold 57,981 60,571 178,300 193,417
--------- --------- --------- ---------
Gross profit 46,309 51,510 138,004 153,783
Selling, general and administrative expenses 29,429 31,166 93,043 91,373
Special charges - - - - 12,240 - -
--------- --------- ------ --------
Operating income 16,880 20,344 32,721 62,410
Other income (expense):
Interest (5,877) (6,187) (16,440) (15,425)
Equity income from joint ventures 1,137 244 8,936 7,343
Other (7) 56 (643) (863)
--------- --------- --------- ---------
Income before income taxes 12,133 14,457 24,574 53,465
Provision for income taxes 4,550 5,566 9,215 20,584
--------- --------- --------- ---------
Net income $ 7,583 $ 8,891 $ 15,359 $ 32,881
========= ========= ========= =========
Earnings per share-Basic $ .47 $ .56 $ .96 $ 2.08
========= ========= ========= =========
Earnings per share-Diluted $ .46 $ .54 $ .94 $ 2.02
========= ========= ========= =========
Weighted average number of shares outstanding-Basic 16,093 15,970 16,056 15,792
========= ========= ========= =========
Weighted average number of shares outstanding-Diluted 16,394 16,428 16,367 16,288
========= ========= ========= =========
See Notes to Consolidated Financial Statements.
3
THE ROBERT MONDAVI CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
March 31,
2002 2001
---- ----
Cash flows from operating activities:
Net income $ 15,359 $ 32,881
Adjustments to reconcile net income to net cash
used in operating activities:
Deferred income taxes (4,685) 2,413
Depreciation and amortization 16,931 15,844
Equity income from joint ventures (8,936) (7,343)
Special charges and asset write-downs 14,070 - -
Other 367 (25)
Changes in assets and liabilities, net of acquisitions:
Accounts receivable--trade 25,147 (9,906)
Inventories (62,108) (68,889)
Other assets 3,874 (7,233)
Accounts payable--trade and accrued expenses (17,322) 1,755
Deferred executive compensation 193 (3,786)
Other liabilities (159) 57
---------- ---------
Net cash used in operating activities (17,269) (44,232)
---------- ---------
Cash flows from investing activities:
Acquisitions of property, plant and equipment (26,109) (40,372)
Proceeds from sale of assets 12,327 2,425
Business acquisition - - (14,191)
Distributions from joint ventures 9,792 5,232
Contributions to joint ventures (1,128) (589)
---------- ---------
Net cash used in investing activities (5,118) (47,495)
---------- ---------
Cash flows from financing activities:
Book overdraft 3,157 3,586
Net additions under notes payable to banks 25,100 32,672
Proceeds from issuance of long-term debt - - 55,000
Principal repayments of long-term debt (13,506) (7,684)
Proceeds from issuance of Class A Common Stock 273 255
Exercise of Class A Common Stock options 1,321 5,927
Other (1,147) (1,031)
---------- ---------
Net cash provided by financing activities 15,198 88,725
---------- ---------
Net decrease in cash and cash equivalents (7,189) (3,002)
Cash and cash equivalents at the beginning of the period 7,189 3,002
---------- ---------
Cash and cash equivalents at the end of the period $ - - $ - -
========== =========
See Notes to Consolidated Financial Statements.
4
THE ROBERT MONDAVI CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands)
NOTE 1 BASIS OF PRESENTATION
In the opinion of management, the accompanying unaudited consolidated financial
statements contain all adjustments (which include only normal recurring
adjustments) necessary to present fairly the Company's financial position at
March 31, 2002, its results of operations for the three and nine month periods
ended March 31, 2002 and 2001 and its cash flows for the nine month periods
ended March 31, 2002 and 2001. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted from the
accompanying consolidated financial statements. For further information,
reference should be made to the consolidated financial statements and notes
thereto included in the Company's Annual Report on Form 10-K (the 10-K) for the
fiscal year ended June 30, 2001, on file at the Securities and Exchange
Commission. Certain fiscal 2001 balances have been reclassified to conform with
current year presentation.
Effective July 1, 2001, the Company implemented new pronouncements issued by the
Financial Accounting Standards Board's Emerging Issues Task Force that require
certain sales incentives and fees paid to retailers to be recorded as reductions
of revenue. The Company previously reported these expenses as selling, general
and administrative expenses. Prior period financial statements have been
restated to reflect this change in classification. The restatement resulted in a
$5,908 and $16,449 decrease in both revenues and selling, general and
administrative expenses for the three and nine months ended March 31, 2001,
respectively.
NOTE 2 INVENTORIES
Inventories consist of the following:
March 31, June 30,
2002 2001
---- ----
Unaudited
Wine in production $ 281,939 $ 226,214
Bottled wine 122,503 109,674
Crop costs and supplies 12,668 22,868
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$ 417,110 $ 358,756
========== =========
Inventories are valued at the lower of cost or market and inventory costs are
determined using the first-in, first-out (FIFO) method. Costs associated with
growing crops are recorded as inventory and are recognized as wine inventory
costs in the year in which the related crop is harvested. Included in inventory
at March 31, 2002, was $7,367 of inventory cost step-up remaining from applying
purchase accounting to the acquisition of Arrowood.
NOTE 3 DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company has only a limited involvement with derivative instruments and does
not use them for trading purposes. Forward exchange contracts, generally with
average maturities of less than one year, are used as protection against the
risk that the eventual U.S. dollar cash flows resulting from certain
unrecognized firm purchase commitments and forecasted transactions denominated
in foreign currencies will be adversely affected by changes in exchange rates.
The derivative financial instruments associated with unrecognized firm purchase
commitments are designated as fair-value hedges. The derivative financial
instruments associated with forecasted transactions are designated as cash-flow
hedges.
5
At March 31, 2002, the Company had outstanding forward exchange contracts,
hedging primarily European euro purchases of barrels and corks and forecasted
receipts of Canadian dollars and European euros, with notional amounts totaling
$10,732. Using exchange rates outstanding as of March 31, 2002, the U.S. dollar
equivalent of the contracts totaled $10,504.
NOTE 4 OPERATIONAL CHANGES
During the first quarter of fiscal 2002, the Company implemented a number of
operational changes aimed at improving its competitiveness in the slowing
economy. These included changes in the Company's Disney California Adventure
project and the write-down of certain inventories and fixed assets due to
lowered volume growth expectations.
The Company changed from an operator to a sponsor role at Disney's California
Adventure. With this change, the Company eliminated any further operational risk
associated with the project while it continues its business relationship with
Disney and maintains a presence at the theme park. As a result of this change,
the Company has recorded special charges to date totaling $12,240, or $0.47 per
diluted share, primarily reflecting fixed asset write-offs, employee separation
expenses and lease cancellation fees. All exit costs accrued in prior periods
associated with Disney's California Adventure were paid in full as of March 31,
2002.
During the first quarter of fiscal 2002, the Company also revised its volume
growth expectations for the fiscal year to reflect the continued economic
slowdown and a significant decrease in on-premise (i.e., hotel and restaurant)
sales. As a result of these lowered volume growth expectations, the Company
recorded $3,750, or $0.14 per diluted share, in inventory and fixed asset
write-downs during the first quarter that were classified as cost of goods sold.
NOTE 5 COMPREHENSIVE INCOME
Comprehensive income includes revenues, expenses, gains and losses that are
excluded from net income, including foreign currency translation adjustments and
unrealized gains and losses on certain derivative financial instruments
designated as cash-flow hedges. Comprehensive income for the three and nine
months ended March 31, 2002 and 2001 were as follows:
Unaudited
Three Months Ended Nine Months Ended
March 31, March 31,
2002 2001 2002 2001
---- ---- ---- ----
Net income $ 7,583 $ 8,891 $ 15,359 $ 32,881
Foreign currency translation adjustment, net of tax (281) 173 (602) (324)
Forward contracts, net of tax 37 - - (21) - -
--------- ---------- ---------- ---------
Comprehensive income $ 7,339 $ 9,064 $ 14,736 $ 32,557
========= ========== ========== =========
6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
INTRODUCTION
During the first six months of fiscal 2002, the Company recorded $12.2 million,
or $0.47 per diluted share, in special charges related to operational changes in
its Disney California Adventure project. During the first quarter of fiscal
2002, the Company also recorded inventory and fixed asset write-downs, totaling
$3.8 million, or $0.14 per diluted share, as a result of lowering its sales
volume growth projections for the fiscal year. The adjusted figures discussed
throughout this report, exclude the special charges and asset write-downs, as
well as inventory step-up charges associated with business acquisitions for all
periods presented.
The Company has included these adjusted figures in its discussion and analysis
of financial condition and results of operations to provide better visibility
into the results of its ongoing operations. The adjusted figures should not be
considered an alternative to financial statements required under generally
accepted accounting principles.
Effective July 1, 2001, the Company implemented new pronouncements issued by the
Financial Accounting Standards Board's Emerging Issues Task Force that require
certain sales incentives and fees paid to retailers to be recorded as reductions
of revenue. The Company previously reported these expenses as selling, general
and administrative expenses. Prior period financial statements have been
restated to reflect this change in classification.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses, and the related disclosures of contingent
assets and liabilities. Actual results could differ from those estimates under
different assumptions or conditions. The Company believes that the following
critical accounting policies affect its more significant estimates and
judgements used in the preparation of its consolidated financial statements:
The Company determines its allowance for doubtful accounts based on the aging of
accounts receivable balances, its historic write-off experience and the
financial condition of its customers. Changes in the financial condition of the
Company's major customers could result in significant accounts receivable
write-offs.
The Company writes down its inventory for estimated obsolescence equal to the
difference between the cost of the inventory and its estimated market value,
which is based on historic experience and assumptions about market conditions
and expected future demand. If actual market conditions and future demand are
less favorable than projected, additional write-downs may be required.
The Company has goodwill and license fees related to business acquisitions. The
Company reviews these assets for impairment whenever events or changes in
circumstances indicate that the carrying amount of the asset may not be
recoverable. The assessment of impairment is based on the estimated undiscounted
future cash flows from operating activities, which is compared to the carrying
amount of the assets. Write-downs are recorded when the estimated undiscounted
future cash flows are lower than the assets' carrying value.
The Company carries deductibles for workers' compensation, medical and general
liability claims, up to a maximum amount per claim. The Company accrues the
undiscounted estimated liability based on its historic claims experience,
estimated future claims costs and other factors.
7
The Company is subject to litigation and other contingencies in the ordinary
course of business. Liabilities related to commitments and contingencies are
recognized when a loss is probable and reasonably estimable.
RESULTS OF OPERATIONS
Third Quarter of Fiscal 2002 Compared to Third Quarter of Fiscal 2001
Net Revenues Net revenues decreased by 7.0%, reflecting a 1.0% increase in sales
volume and a 7.9% decrease in net revenues per case. The decrease in net
revenues per case was mainly due to a shift in sales mix from luxury wines to
super premium wines, combined with an increase in certain promotional
allowances, primarily for popular and super premium wines, that are now recorded
as reductions of revenue.
Cost of Goods Sold Cost of goods sold as reported decreased by 4.3%. Adjusted
cost of goods sold decreased by 4.8%, reflecting the shift in sales mix to super
premium wines and lower grape costs overall.
Gross Profit As a result of the above factors, the reported gross profit
percentage was 44.4% compared to 46.0% reported last year. The adjusted gross
profit percentage decreased to 45.5% from 46.7% last year.
Operating Expenses Operating expenses decreased by 5.6%, reflecting the impact
of cost cutting measures implemented during the fiscal year. However, the ratio
of operating expenses to net revenues increased to 28.2% from 27.8% due to the
loss of sales volume leverage.
Interest Interest expense decreased by 5.0%, reflecting decreases in the
Company's average borrowings outstanding and average interest rate that were
partially offset by a reduction of capitalized interest due to the completion of
certain capital and vineyard development projects.
Equity Income from Joint Ventures Equity income from joint ventures as reported
increased by $0.9 million. Adjusted equity income from joint ventures, which
excludes inventory step-up charges associated with the Ornellaia acquisition,
increased by $0.6 million. The increase in both the reported and adjusted
figures was due mainly to improved profitability of the Chilean joint venture.
Provision for Income Taxes The Company's effective tax rate was 37.5% compared
to 38.5% last year. The lower effective tax rate was primarily the result of an
increase in certain deductible expenses and manufacturing tax credits.
Net Income and Earnings Per Share As a result of the above factors, net income
as reported totaled $7.6 million, or $0.46 per diluted share, compared to $8.9
million, or $0.54 per diluted share, a year ago. Adjusted net income totaled
$8.7 million, or $0.53 per diluted share, compared to $10.0 million, or $0.61
per diluted share, a year ago.
First Nine Months of Fiscal 2002 Compared to First Nine Months of Fiscal 2001
Net Revenues Sales volume decreased by 5.6% and net revenues decreased by 8.9%,
reflecting the impact of the continued economic downturn combined with a sharp
decline in the travel and entertainment sectors that began in September. Net
revenues per case decreased by 3.5% to $46.58 per case, reflecting a shift in
sales mix from luxury wines to popular and super premium wines. Due to the
continued economic slowdown and the decline in the travel and entertainment
sectors, the Company expects sales volume, net revenues and net income to
decrease compared to prior year levels for the fiscal year.
8
Cost of Goods Sold Cost of goods sold as reported decreased by 7.8%. Adjusted
cost of goods sold decreased by 9.7%, reflecting decreased sales volume, the
shift in sales mix to popular and super premium wines and lower grape costs
overall.
Gross Profit As a result of the above factors, the reported gross profit
percentage was 43.6% compared to 44.3% reported last year. The adjusted gross
profit percentage increased to 45.7% from 45.2% last year.
Operating Expenses Operating expenses as reported increased by 15.2% and the
reported ratio of operating expenses to net revenues increased to 33.3% from
26.3% a year ago. Adjusted operating expenses increased by 1.8% and the adjusted
ratio of operating expenses to net revenues increased to 29.4% from 26.3% a year
ago. The increase in the adjusted operating expense ratio primarily reflects the
loss of sales volume leverage.
Interest Interest expense increased by 6.6%, reflecting a reduction in
capitalized interest due to the completion of certain capital and vineyard
development projects that was partially offset by a decrease in the Company's
average interest rate.
Equity Income from Joint Ventures Equity income from joint ventures as reported
increased by $1.6 million. Adjusted equity income from joint ventures, which
excludes inventory step-up charges associated with the Ornellaia acquisition,
increased by $1.1 million. The increase in both the reported and adjusted
figures was due mainly to improved profitability of the Chilean joint venture.
Provision for Income Taxes The Company's effective tax rate was 37.5% compared
to 38.5% last year. The lower effective tax rate was primarily the result of an
increase in certain deductible expenses and manufacturing tax credits.
Net Income and Earnings Per Share As a result of the above factors, net income
as reported totaled $15.4 million, or $0.94 per diluted share, compared to $32.9
million, or $2.02 per diluted share, a year ago. Adjusted net income totaled
$28.5 million, or $1.74 per diluted share, compared to $36.6 million, or $2.24
per diluted share, a year ago.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $7.2 million during the first nine months
of fiscal 2002 as cash used in operating and investing activities exceeded cash
provided by financing activities. Cash used in operations totaled $17.3 million,
reflecting an increase in inventories that was partially offset by net income,
as well as the non-cash impact on pre-tax income of depreciation and
amortization, and a decrease in accounts receivable. The increase in inventories
reflects a seasonal increase in inventories subsequent to harvest, as well as a
build up of inventories resulting from grape commitments that were made prior to
the Company lowering its sales forecast due to softening demand and a sharp
decline in the travel and entertainment sectors. Cash used in investing
activities totaled $5.1 million, reflecting purchases of production equipment
and vineyard development cost that were partially offset by proceeds from the
sale of certain vineyard assets and distributions from joint ventures. Cash
provided by financing activities totaled $15.2 million, reflecting net additions
of debt and a book overdraft of $3.2 million, which represents the float on
outstanding checks.
9
The Company maintains master lease facilities that provide the capacity to fund
up to $189.0 million, of which $142.8 million had been utilized as of March 31,
2002. The combined facilities enable the Company to lease certain real property
and equipment to be constructed or acquired. The leases are classified as
operating leases and they have initial terms of three to seven years, after a
construction period, with options to renew. The Company may, at its option,
purchase the property under lease during or at the end of the lease term. If the
Company does not exercise the purchase option, the Company will guarantee a
residual value of the property under lease, which was approximately $118.5
million as of March 31, 2002.
The Company has unsecured long-term credit lines that have maximum credit
availability of $150.0 million and expire on December 14, 2004. The Company had
$83.0 million outstanding under its long-term credit lines as of March 31, 2002.
The Company also has the ability to borrow up to $35.0 million under an
uncommitted credit facility with a bank. The Company may request advances under
this credit facility, and if approved by the bank, the advance must be repaid in
no more than 180 days from the date of the advance. The Company had $3.1 million
outstanding under this credit facility as of March 31, 2002.
PART II
Item 1. Legal Proceedings.
The Company is subject to litigation in the ordinary course of its business. In
the opinion of management, the ultimate outcome of existing litigation will not
have a material adverse effect on the Company's consolidated financial
condition, the results of its operations or its cash flows.
Item 6. Exhibits and Reports on Form 8-K.
1) Exhibits:
None
2) Form 8-K:
No reports on Form 8-K were filed during the quarter
ended March 31, 2002.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE ROBERT MONDAVI CORPORATION
Dated: May 15, 2002 By /s/ HENRY J. SALVO, JR.
--------------------------
Henry J. Salvo, Jr.
Chief Financial Officer
Forward-looking Statements
The above Form 10-Q and other information provided from time to time by the
Company contain historical information as well as forward-looking statements
about the Company, the premium wine industry and general business and economic
conditions. Such forward-looking statements include, for example, projections or
predictions about the Company's future growth, consumer demand for its wines,
including new brands and brand extensions, margin trends, anticipated future
investment in vineyards and other capital projects, the premium wine grape
market and the premium wine industry generally. Actual results may differ
materially from the Company's present expectations. Among other things, reduced
consumer spending, a change in consumer preferences or the length and severity
of the current economic downturn in some of the Company's key markets, including
in particular the depressed travel and entertainment sectors, could reduce
demand for the Company's wines. Similarly, competition from numerous domestic
and foreign vintners, coupled with changes in foreign currency valuations, could
affect the Company's volume and revenue growth outlook. The price of grapes, the
Company's single largest product cost, is beyond the Company's control and
higher grape costs may put more pressure on the Company's gross profit margin
than is currently forecast. Interest rates and other business and economic
conditions could change significantly the cost and risks of projected capital
spending. For additional cautionary statements identifying important factors
that could cause actual results to differ materially from such forward-looking
information, please refer to Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," in the Company's Annual Report
on Form 10-K for the fiscal year ended June 30, 2001, on file with the
Securities and Exchange Commission. For these and other reasons, no
forward-looking statement by the Company can nor should be taken as a guarantee
of what will happen in the future.
11