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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 31, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 1-123
BROWN-FORMAN CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 61-0143150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
850 Dixie Highway
Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
(502) 585-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: November 28, 2003
Class A Common Stock ($.15 par value, voting) 28,420,496
Class B Common Stock ($.15 par value, nonvoting) 32,258,226
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Statement of Income
Three months ended October 31, 2002 and 2003 3
Six months ended October 31, 2002 and 2003 3
Condensed Consolidated Balance Sheet
April 30, 2003 and October 31, 2003 4
Condensed Consolidated Statement of Cash Flows
Six months ended October 31, 2002 and 2003 5
Notes to the Condensed Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 18
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Six Months Ended
October 31, October 31,
2002 2003 2002 2003
------- ------- -------- --------
Net sales $ 691.6 $ 725.2 $1,171.1 $1,257.8
Excise taxes 90.8 98.1 145.9 169.9
Cost of sales 262.0 262.3 439.0 450.8
------- ------- -------- --------
Gross profit 338.8 364.8 586.2 637.1
Advertising expenses 86.4 95.0 164.7 172.5
Selling, general, and
administrative expenses 123.4 132.4 237.6 262.5
Other expense (income), net 4.5 (1.4) 3.3 11.2
------- ------- -------- --------
Operating income 124.5 138.8 180.6 190.9
Interest income 0.6 0.5 1.2 0.9
Interest expense 1.3 5.6 3.0 10.9
------- ------- -------- --------
Income before income taxes 123.8 133.7 178.8 180.9
Taxes on income 42.7 45.5 61.7 61.5
------- ------- -------- --------
Net income $ 81.1 $ 88.2 $ 117.1 $ 119.4
======= ======= ======== ========
Earnings per share
- Basic $ 1.18 $ 1.45 $ 1.71 $ 1.97
- Diluted $ 1.18 $ 1.45 $ 1.71 $ 1.96
Shares (in thousands) used in the
calculation of earnings per share
- Basic 68,406 60,658 68,391 60,633
- Diluted 68,592 60,921 68,592 60,887
Cash dividends per common share
- Declared $ 0.000 $ 0.000 $ 0.700 $ 0.750
- Paid $ 0.350 $ 0.375 $ 0.700 $ 0.750
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
April 30, October 31,
2003 2003
(Unaudited)
-------- --------
Assets
- ------
Cash and cash equivalents $ 72.0 $ 74.5
Accounts receivable, net 324.6 431.2
Inventories:
Barreled whiskey 221.6 220.0
Finished goods 203.4 231.1
Work in process 112.2 115.3
Raw materials and supplies 47.4 59.4
-------- --------
Total inventories 584.6 625.8
Current portion of deferred income taxes 56.0 56.0
Other current assets 29.9 29.5
-------- --------
Total current assets 1,067.1 1,217.0
Property, plant and equipment, net 506.1 511.1
Prepaid pension cost 39.2 43.0
Investment in affiliates 41.2 43.2
Trademarks and brand names 235.0 237.9
Goodwill 311.0 315.5
Other assets 64.0 62.0
-------- --------
Total assets $2,263.6 $2,429.7
======== ========
Liabilities
- -----------
Commercial paper $ 167.1 $ 193.8
Accounts payable and accrued expenses 297.2 334.0
Accrued taxes on income 43.4 58.2
Current portion of long-term debt 40.1 35.7
-------- --------
Total current liabilities 547.8 621.7
Long-term debt 628.7 629.2
Deferred income taxes 77.8 73.7
Accrued pension and other
postretirement benefits 142.7 147.7
Other liabilities 26.4 28.5
-------- --------
Total liabilities 1,423.4 1,500.8
Commitments and contingencies
Stockholders' Equity
- --------------------
Common stock:
Class A, voting (30,000,000 shares
authorized; 28,988,091 shares issued) 4.3 4.3
Class B, nonvoting (60,000,000 shares
authorized; 40,008,147 shares issued) 6.0 6.0
Retained earnings 1,506.1 1,579.3
Accumulated other comprehensive loss (83.4) (75.4)
Treasury stock (8,429,000 and 8,318,000 shares
at April 30 and October 31, respectively) (592.8) (585.3)
-------- --------
Total stockholders' equity 840.2 928.9
-------- --------
Total liabilities and stockholders' equity $2,263.6 $2,429.7
======== ========
Note: The balance sheet at April 30, 2003, has been taken from the audited
financial statements at that date, and condensed.
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions; amounts in parentheses are reductions of cash)
Six Months Ended
October 31,
2002 2003
------- -------
Cash flows from operating activities:
Net income $ 117.1 $ 119.4
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 27.7 27.4
Deferred income taxes (19.6) (3.9)
Changes in assets and liabilities:
Accounts receivable (122.8) (106.6)
Inventories (41.5) (41.2)
Other current assets 4.8 0.4
Accounts payable and accrued expenses 27.9 38.2
Accrued taxes on income 17.7 14.8
Noncurrent assets and liabilities 0.2 6.9
------- -------
Cash provided by operating activities 11.5 55.4
Cash flows from investing activities:
Additions to property, plant, and equipment (36.2) (29.1)
Computer software expenditures (1.9) (2.1)
Trademark and patent expenditures (0.3) (1.1)
------- -------
Cash used for investing activities (38.4) (32.3)
Cash flows from financing activities:
Net change in commercial paper 91.8 26.7
Reduction of long-term debt -- (7.4)
Proceeds from exercise of stock options 3.8 5.6
Dividends paid (47.9) (45.5)
------- -------
Cash provided by (used for)
financing activities 47.7 (20.6)
------- -------
Net increase in cash and cash equivalents 20.8 2.5
Cash and cash equivalents, beginning of period 115.6 72.0
------- -------
Cash and cash equivalents, end of period $ 136.4 $ 74.5
======= =======
See notes to the condensed consolidated financial statements.
5
BROWN-FORMAN CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, "we," "us," and "our" refer to Brown-Forman Corporation.
1. Condensed Consolidated Financial Statements
We prepared these unaudited condensed consolidated financial statements using
our customary accounting practices as set out in our 2003 annual report on Form
10-K (the "2003 Annual Report"). We made all of the adjustments (which include
only normal, recurring adjustments) needed for a fair statement of this data.
We condensed or omitted some of the information found in financial statements
prepared according to generally accepted accounting principles ("GAAP"). You
should read these financial statements together with the 2003 Annual Report,
which does conform to GAAP.
2. Inventories
We use the last-in, first-out ("LIFO") method to determine the cost of most of
our inventories. If the LIFO method had not been used, inventories would have
been $130.4 million higher than reported as of April 30, 2003, and $137.8
million higher than reported as of October 31, 2003. Changes in the LIFO
valuation reserve for interim periods are based on a proportionate allocation of
the estimated change for the entire fiscal year.
3. Taxes on Income
Our consolidated effective tax rate may differ from current statutory rates due
to the recognition of amounts for events or transactions that do not have tax
consequences. We use the estimated annual effective tax rate in determining our
interim results.
4. Earnings Per Share
Basic earnings per share is calculated as net income divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is calculated in the same manner, except that the denominator also
includes additional common shares that would have been issued if outstanding
stock options had been exercised during the period. The dilutive effect of
outstanding stock options is determined by application of the treasury stock
method.
6
The following table presents information concerning basic and diluted earnings
per share:
Three Months Ended Six Months Ended
October 31, October 31,
2002 2003 2002 2003
------ ------ ------ ------
Basic and diluted
net income (in millions) $ 81.1 $ 88.2 $117.1 $119.4
Share data (in thousands):
Basic average common
shares outstanding 68,406 60,658 68,391 60,633
Effect of dilutive
stock options 186 263 201 254
------ ------ ------ ------
Diluted average common
shares outstanding 68,592 60,921 68,592 60,887
Basic net income per share $1.18 $1.45 $1.71 $1.97
Diluted net income per share $1.18 $1.45 $1.71 $1.96
5. Environmental
We face environmental claims resulting from the cleanup of several manufacturing
or waste disposal sites in the United States. We accrue for losses associated
with environmental cleanup obligations when such losses are probable and
reasonably estimable. At some sites, there are other potentially responsible
parties who are expected to bear part of the costs, in which cases our accrual
is based on our estimate of our share of the total costs. A portion of the
cleanup costs with respect to certain sites is expected to be paid by insurance.
The estimated recovery of cleanup costs from insurers is recorded as an asset
when receipt is deemed probable.
We do not believe that any additional environmental cleanup costs we incur will
have a material adverse effect on our consolidated financial position, results
of operations, or cash flows.
6. Contingencies
We operate in a litigious environment, and we get sued in the normal course of
business. Sometimes plaintiffs seek substantial damages. Significant judgment is
required in predicting the outcome of these suits and claims, many of which take
years to adjudicate.
Brown-Forman Corporation and certain other beer, spirits and wine producers are
defendants in a civil action entitled "Hakki v. Adolph Coors Company", et. al,
in the Superior Court of the District of Columbia, No. 03-9183. The suit alleges
that the defendants have engaged in deceptive advertising in violation of the
District of Columbia Consumer Protection Procedures Act ("the Act,") by
marketing their beverage alcohol products to purchasers under the legal drinking
age. Plaintiff alleges that defendants violated the Act by unfair and deceptive
trade practices, engaging in wrongful conduct resulting in unjust enrichment,
negligently marketing their products, and fraudulently concealing their alleged
misconduct.
7
The plaintiff seeks class action certification of the suit on behalf of: (a) a
guardian class, consisting of all persons who are or were parents or guardians
of children whose funds were used to purchase beverage alcohol marketed by the
defendants which were consumed without their prior knowledge by their children
under the age of 21 during the period 1982 to present; and (b) an injunctive
class, consisting of the parents and guardians of all children under the age of
21. The plaintiff seeks (1) a declaration that the defendants violated the Act;
(2) disgorgement of all proceeds resulting from such alleged underage sales; (3)
rescission of all sales to underage consumers and refund of those revenues to
the classes; (4) an injunction against the defendants from marketing beverage
alcohol to underage persons; (5) an award of damages against all defendants
jointly and severally for all actual damages sustained by the plaintiff classes,
plus treble damages or $1500 per violation, whichever is greater, punitive
damages and attorneys fees.
Brown-Forman denies that its marketing violates the Act, denies that it
intentionally markets its beverage alcohol products to minors, and will
vigorously defend this case.
We accrue estimated costs for a contingency when we believe that a loss is
probable, and adjust the accrual as appropriate to reflect changes in facts and
circumstances. In our opinion, based on advice from legal counsel, none of the
suits or claims against us will have a material adverse effect on our
consolidated financial position, results of operations, or cash flows.
In August 2003, we entered into an agreement with Diageo Great Britain Limited
to settle a lawsuit involving the distribution of Jack Daniel's Tennessee
Whiskey in the United Kingdom. Under the settlement, Brown-Forman paid Diageo
8.9 million British pounds (approximately $14.3 million) to end the controversy
between the parties. The cost of the settlement was accrued as of July 31, 2003,
and reduced earnings for the three months then ended by $0.11 per share.
7. Stock Options
Under our Omnibus Compensation Plan, we can grant stock options and other
stock-based incentive awards for a total of 3,400,000 shares of common stock to
eligible employees until April 30, 2005. We apply Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations in accounting for stock options. Accordingly, no stock-based
employee compensation cost is reflected in net income, as no options granted
under those plans had an exercise price below the market value of the underlying
stock on the grant date. The following table illustrates the effect on net
income and earnings per share if we had instead recognized compensation expense
for stock options based on their fair value at their grant dates consistent with
the methodology prescribed under Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation."
8
(Dollars in millions, except per share amounts)
Three Months Ended Six Months Ended
October 31, October 31,
2002 2003 2002 2003
------ ------ ------ ------
Net income, as reported $ 81.1 $ 88.2 $117.1 $119.4
Stock-based employee compensation
expense determined under fair
value based method, net of tax (1.0) (1.0) (1.8) (1.7)
------ ------ ------ ------
Pro forma net income $ 80.1 $ 87.2 $115.3 $117.7
====== ====== ====== ======
Earnings per share - pro forma:
Basic $1.17 $1.44 $1.69 $1.94
Diluted $1.17 $1.43 $1.68 $1.93
Earnings per share - as reported:
Basic $1.18 $1.45 $1.71 $1.97
Diluted $1.18 $1.45 $1.71 $1.96
The plan requires that we purchase shares to satisfy stock option requirements,
thereby avoiding future dilution of earnings that would occur from issuing
additional shares. We acquire treasury shares from time to time in anticipation
of these requirements. We intend to hold enough treasury stock so that the
number of diluted shares is always less than the original number of shares
outstanding at inception of the stock option plan (as adjusted for any share
repurchases or issuances unrelated to the plan). The extent to which diluted
shares exceed the number of basic shares is determined by how much our stock
price has appreciated since options were granted, irrespective of how many
treasury shares we have acquired.
8. Business Segment Information
(Dollars in millions) Three Months Ended Six Months Ended
October 31, October 31,
2002 2003 2002 2003
------ ------ -------- --------
Net sales:
Beverages $517.9 $544.6 $ 878.0 $ 968.3
Consumer durables 173.7 180.6 293.1 289.5
------ ------ -------- --------
Consolidated net sales $691.6 $725.2 $1,171.1 $1,257.8
====== ====== ======== ========
Operating income:
Beverages $105.5 $119.8 $ 167.2 $ 183.9
Consumer durables 19.0 19.0 13.4 7.0
------ ------ -------- --------
124.5 138.8 180.6 190.9
Interest expense, net 0.7 5.1 1.8 10.0
------ ------ -------- --------
Income before income taxes $123.8 $133.7 $ 178.8 $ 180.9
====== ====== ======== ========
Consumer
Beverages Durables Total
--------- -------- ------
Goodwill:
Balance as of April 30, 2003 $180.7 $130.3 $311.0
Additions related to
Distillerie Tuoni e Canepa:
Purchase accounting adjustment 1.6 -- 1.6
Foreign currency translation
adjustment 2.9 -- 2.9
------ ------ ------
Balance as of October 31, 2003 $185.2 $130.3 $315.5
====== ====== ======
9
9. Comprehensive Income
Comprehensive income is a broad measure of the effects of all transactions and
events (other than investments by or distributions to shareholders) that are
recognized in stockholders' equity, regardless of whether those transactions and
events are included in net income. The following table adjusts the company's net
income for the other items included in comprehensive income:
(Dollars in millions) Three Months Ended Six Months Ended
October 31, October 31,
2002 2003 2002 2003
------ ------ ------ ------
Net income $ 81.1 $ 88.2 $117.1 $119.4
Other comprehensive income (loss):
Net gain (loss) on cash flow hedges 2.7 (0.7) (1.2) 0.1
Net gain (loss) on securities (0.4) (0.1) (0.3) 0.2
Minimum pension liability adjustment -- -- (0.4) --
Foreign currency translation
adjustment 0.3 4.9 5.6 7.7
------ ------ ------ ------
Other comprehensive income 2.6 4.1 3.7 8.0
------ ------ ------ ------
Comprehensive income $ 83.7 $ 92.3 $120.8 $127.4
====== ====== ====== ======
Accumulated other comprehensive loss (income) consisted of the following:
(Dollars in millions) April 30, October 31,
2003 2003
------ ------
Pension liability adjustment $ 79.1 $ 79.1
Cumulative translation adjustment 2.8 (4.9)
Unrealized gain on cash flow hedge contracts 1.6 1.5
Unrealized gain on securities (0.1) (0.3)
------ ------
$ 83.4 $ 75.4
====== ======
10. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
10
11. Subsequent Events
On November 20, 2003, Directors of Brown-Forman Corporation approved a 2-for-1
stock split for all shares of Class A and Class B common stock, to be paid in
the form of a stock dividend. Assuming that the company's stockholders authorize
the additional shares of both classes of stock, the distribution of additional
shares would be made to stockholders of record on or about January 8, 2004.
Simultaneously, the Board of Directors approved a 13% increase in the company's
regular quarterly cash dividend, from $0.375 to $0.425 per share. If the
stockholders approve the 2-for-1 stock split, subsequent quarterly cash dividend
payments and earnings per share amounts will be divided in half to reflect the
stock split.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis along with our 2003 Annual
Report. Note that the results of operations for the six months ended October 31,
2003 do not necessarily indicate what our operating results for the full fiscal
year will be. In this Item, "we," "us," and "our" refer to Brown- Forman
Corporation.
Important Note on Forward-Looking Statements:
This report contains "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Words like "believe,"
"expect," "anticipate," and "project" identify a forward-looking statement,
which speaks only as of the date the statement is made. Except as required by
law, we do not intend to update or revise any forward-looking statements,
whether as a result of new information, future events, or otherwise. These
statements are subject to a number of important risks and uncertainties that
could cause our actual results and experience to differ materially from the
anticipated results or other expectations expressed. Such risks and
uncertainties include changes in general economic conditions, political and
social trends, and the uncertainties of litigation.
Our projections for our domestic beverage business assume that U.S. economic
activity will continue at about the same pace as currently, and our earnings
will be hurt if the economy weakens. Federal or state excise tax increases on
spirits and wine would also depress our domestic beverage business. Profits from
our international beverage business may be adversely affected if the U.S. dollar
strengthens against other currencies or if economic conditions deteriorate in
our principal export markets. As a leading exporter of American spirits brands,
our foreign sales could be hurt as a result of anti-Americanism in response to
the Iraq war or other international developments.
The long-term outlook for our beverage business is based in part on favorable
demographic trends in the U.S. and many international markets for the sale of
spirits and wine. We may not meet current expectations for our global beverage
business if these demographic trends do not translate into corresponding sales
increases. Profits could also be hurt by increases in the price of grain,
grapes, or energy. Margins for our wine business are likely to stay low so long
as the current oversupply of grapes continues. Attacks by anti-alcohol activists
or legal or regulatory measures against beverage alcohol (including its
advertising and promotion) could adversely affect sales.
Earnings from our consumer durables segment depend heavily on the state of the
U.S. economy, as purchases of fine china and luggage are discretionary. The
performance of our fine china dinnerware business depends on the health of major
department stores, the primary distribution channel for these products, as well
as further department store consolidation, a soft retail environment at outlet
malls, and consumer response to direct mail. The Hartmann luggage business
continues to be adversely affected by reduced travel in the U.S.
12
Results of Operations:
Second Quarter Fiscal 2004 Compared to Second Quarter Fiscal 2003
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Three Months Ended
October 31,
2002 2003 Change
------ ------ ------
Net Sales:
Beverages $517.9 $544.6 5%
Consumer Durables 173.7 180.6 4%
------ ------
Total $691.6 $725.2 5%
Gross Profit:
Beverages $253.7 $279.7 10%
Consumer Durables 85.1 85.1 0%
------ ------
Total $338.8 $364.8 8%
Advertising Expenses:
Beverages $ 62.2 $ 72.1 16%
Consumer Durables 24.2 22.9 (5%)
------ ------
Total $ 86.4 $ 95.0 10%
SG&A Expenses:
Beverages $ 82.2 $ 90.8 10%
Consumer Durables 41.2 41.6 1%
------ ------
Total $123.4 $132.4 7%
Other Expense (Income):
Beverages $ 3.8 $ (3.1)
Consumer Durables 0.7 1.7
------ ------
Total $ 4.5 $ (1.4)
Operating Income:
Beverages $105.5 $119.8 14%
Consumer Durables 19.0 19.0 0%
------ ------
Total $124.5 $138.8 11%
Net Income $ 81.1 $ 88.2 9%
Earnings per Share - Basic $ 1.18 $ 1.45 23%
Earnings per Share - Diluted $ 1.18 $ 1.45 23%
Effective Tax Rate 34.5% 34.0%
13
The company's earnings for the quarter ended October 31, 2003 were $1.45 per
share, up 23% or $0.27 per share compared to the same period last year. Higher
quarterly earnings were driven by the company's March 2003 share repurchase,
benefits from a weaker U.S. dollar, and solid profit growth for both Jack
Daniel's and Southern Comfort. These increases were partially offset by lower
profits from several of our wine brands, increased advertising investments for
our spirits brands, and higher pension expenses. Operating income for the
Consumer Durables segment was even with last year.
The March 2003 share repurchase accounted for $0.12 of the quarter's increased
earnings. Excluding this benefit, earnings increased $0.15 per share, or 13%. We
believe that disclosure of the increase in earnings per share excluding the
benefit from the share repurchase is informative because it reflects the
underlying operations of the company.
Beverages
In the second quarter, Beverage revenue increased 5% and gross profit increased
10%. Gross margin improved from 49.0% to 51.4%, the first increase in 10
quarters, driven by favorable foreign exchange trends, organic price increases
in both wine and spirits, and positive mix benefits resulting from higher sales
in the United Kingdom and the discontinuation of some lower margin wine brands.
Advertising expenses were up 16% in the quarter, as we substantially increased
investments behind our spirits brands. SG&A expenses were also up significantly
in the quarter, as the segment recognized $2 million more in pension expenses
and consolidated the financial results from both Finlandia Vodka Worldwide and
Distillerie Tuoni e Canepa following these acquisitions in the second half of
last fiscal year. Quarterly results were boosted by the absence of an operating
loss recorded in the prior year's second quarter related to upfront advertising
on Jack Daniel's Original Hard Cola, but were negatively impacted by significant
increases in advertising on Finlandia Vodka, primarily related to the brand's
re-launch in the U.S. As a result of these factors and the benefits from foreign
exchange, segment operating income was up 14% for the quarter.
Global shipments for Jack Daniel's Tennessee Whiskey were down slightly for the
quarter, but depletions were up in the mid-single digits, led by robust growth
in both the United States and U.K. These gains were partially offset by weaker
results in Japan and several countries in Continental Europe. (Depletions are
shipments from wholesale distributors to retailers, and are commonly regarded in
the wine and spirits industry as a better proxy for consumer demand.)
Worldwide shipments for Southern Comfort were also very strong, reflecting solid
underlying growth in the U.K. and U.S., and domestic wholesalers adjusting
inventories in advance of the holiday season. In addition to higher shipments,
price increases in the U.S. boosted the brand's gross profit and operating
income significantly. Global depletions were up in the low single digits for the
quarter.
14
Shipments and depletions for Finlandia Vodka were also up in the quarter, as the
company expanded its geographic distribution of the brand following last year's
acquisition of a majority interest in Finlandia Vodka Worldwide.
The wine industry continues to face challenging times. Profitability for several
of our wine brands declined for the quarter, reflecting lower volumes. These
volume declines were somewhat offset by an improved gross profit margin and
lower SG&A expenses. We expect modest improvement from our wine brands this
fiscal year, driven by slight improvement in the gross margin and lower
operating expenses.
Consumer Durables
Net sales for Consumer Durables were up 4% for the quarter, with improved sales
to department stores and through the segment's retail outlet stores. However,
sales through the direct-to-consumer channel were down. Quarterly operating
profit was flat compared with last year, as reductions in advertising and
selling expenses were largely offset by higher pension costs. Although Consumer
Durables full year performance is generally dependent upon the results of the
holiday season, we expect that overall segment earnings this fiscal year will be
down due to continued softness in the direct-to-consumer channel.
15
Results of Operations:
Six Months Fiscal 2004 Compared to Six Months Fiscal 2003
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Six Months Ended
October 31,
2002 2003 Change
-------- -------- ------
Net Sales:
Beverages $ 878.0 $ 968.3 10%
Consumer Durables 293.1 289.5 (1%)
-------- --------
Total $1,171.1 $1,257.8 7%
Gross Profit:
Beverages $ 445.2 $ 501.9 13%
Consumer Durables 141.0 135.2 (4%)
-------- --------
Total $ 586.2 $ 637.1 9%
Advertising Expenses:
Beverages $ 119.9 $ 128.7 7%
Consumer Durables 44.8 43.8 (2%)
------ ------
Total $ 164.7 $ 172.5 5%
SG&A Expenses:
Beverages $ 157.5 $ 181.0 15%
Consumer Durables 80.1 81.5 2%
------ ------
Total $ 237.6 $ 262.5 10%
Other Expense (Income):
Beverages $ 0.6 $ 8.3
Consumer Durables 2.7 2.9
------ ------
Total $ 3.3 $ 11.2
Operating Income:
Beverages $ 167.2 $ 183.9 10%
Consumer Durables 13.4 7.0 (47%)
-------- --------
Total $ 180.6 $ 190.9 6%
Net Income $ 117.1 $ 119.4 2%
Earnings per Share - Basic $ 1.71 $ 1.97 15%
Earnings per Share - Diluted $ 1.71 $ 1.96 15%
Effective Tax Rate 34.5% 34.0%
16
The company's diluted earnings for the six months ended October 31, 2003 were
$1.96 per share, up 15% from the $1.71 earned in the same period last year.
Year-to-date results benefited from the share repurchase ($0.14 per share),
favorable foreign exchange trends, solid growth for both Jack Daniel's and
Southern Comfort, and increased profits from a new distribution arrangement in
the U.K. These gains were partially offset by a charge of $0.11 per share to
settle a lawsuit with Diageo Great Britain Limited involving the distribution of
Jack Daniel's in the U. K., as well as lower profits from several of our wine
brands and Consumer Durables.
Beverages
For the first six months of the fiscal year, beverage revenues and gross profit
were up 10% and 13%, respectively. Growth was driven by a weakening of the U.S.
dollar, which increased year-to-date revenues and operating income by $38
million and $17 million, respectively. The new distribution arrangement in the
U.K also contributed to the growth in revenue. In the first quarter of fiscal
2003, we had a one-time reduction in trade inventories as we began selling our
spirits brands directly to the trade in the U.K. through a cost sharing
arrangement with Bacardi. As a result, revenues improved by $13 million during
fiscal 2004 due to the resumption of a normal shipment pattern into the U.K., as
well as the higher profit margin earned in that market via the new distribution
agreement. Additionally, we now record excise taxes for our U.K. spirits sales
in both sales and cost of sales, which increased segment revenue by $20 million.
Solid growth in Jack Daniel's and Southern Comfort more than offset lower
profits from wines.
Advertising expenses were up $9 million during the period, as increased
investments behind our spirits brands more than offset a reduction in
advertising for our wine brands. SG&A expenses increased approximately $23
million, as we added sales and marketing people in the U.K. to support the new
distribution arrangement and recognized higher pension costs. SG&A expenses were
also higher in Continental Europe due to the consolidation of financial results
from both Finlandia Vodka Worldwide and Distillerie Tuoni e Canepa.
Consumer Durables
Net sales for Consumer Durables were down 1% and gross profit decreased 4%. The
segment reported year-to-date operating income of $7 million compared to $13
million during the same period last year. A significant decline in operating
profits from the direct-to-consumer channel exceeded growth in sales registered
through the segment's wholesale channel.
Outlook
The company's full year 2004 earnings guidance of $4.10 to $4.30 per share
remains unchanged. This projection includes the $0.11 per share charge incurred
in the first quarter for the litigation settlement with Diageo Great Britain
Limited. We expect that higher earnings from our core spirits brands and the
benefits from foreign exchange will continue to offset higher pension costs and
weakness from Consumer Durables.
17
Liquidity and Financial Condition
Cash and cash equivalents increased by $2.5 million during the six months ended
October 31, 2003, compared to an increase of $20.8 million during the same
period last year. Cash provided by operations improved by $43.9 million, largely
reflecting a more favorable working capital position. Cash used for investments
declined by $6.1 million, due primarily to lower capital expenditures related to
vineyard properties. Cash provided by financing activities declined by $68.3
million, mainly reflecting a decrease in net debt proceeds.
In November, we increased the quarterly cash dividend 13% from $0.375 to $0.425
per share on both Class A and Class B common stock.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We hold debt obligations, foreign currency forward and option contracts, and
commodity futures contracts that are exposed to risk from changes in interest
rates, foreign currency exchange rates, and commodity prices, respectively.
Established procedures and internal processes govern the management of these
market risks. As of October 31, 2003, we do not consider the exposure to these
market risks to be material.
Item 4. Controls and Procedures
The company, under the supervision and with the participation of its management,
including the Chief Executive Officer ("CEO") and the Chief Financial Officer
("CFO"), evaluated the effectiveness of the design and operation of the
company's "disclosure controls and procedures" (as defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act)) as of the end of
the period covered by this report. Based on that evaluation, the CEO and CFO
concluded that the company's disclosure controls and procedures are effective in
timely making known to them material information relating to the company and the
company's consolidated subsidiaries required to be disclosed in the company's
reports filed or submitted under the Exchange Act. There has been no change in
the company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Brown-Forman Corporation and certain other beer, spirits and wine producers are
defendants in a civil action entitled "Hakki v. Adolph Coors Company," et. al,
in the Superior Court of the District of Columbia, No. 03-9183. The suit alleges
that the defendants have engaged in deceptive advertising in violation of the
District of Columbia Consumer Protection Procedures Act ("the Act,") by
marketing their beverage alcohol products to purchasers under the legal drinking
age. Plaintiff alleges that defendants violated the Act by unfair and deceptive
trade practices, engaging in wrongful conduct resulting in unjust enrichment,
negligently marketing their products, and fraudulently concealing their alleged
misconduct.
The plaintiff seeks class action certification of the suit on behalf of: (a) a
guardian class, consisting of all persons who are or were parents or guardians
of children whose funds were used to purchase beverage alcohol marketed by the
defendants which were consumed without their prior knowledge by their children
under the age of 21 during the period 1982 to present; and (b) an injunctive
class, consisting of the parents and guardians of all children under the age of
21. The plaintiff seeks (1) a declaration that the defendants violated the Act;
(2) disgorgement of all proceeds resulting from such alleged underage sales; (3)
rescission of all sales to underage consumers and refund of those revenues to
the classes; (4) an injunction against the defendants from marketing beverage
alcohol to underage persons; (5) an award of damages against all defendants
jointly and severally for all actual damages sustained by the plaintiff classes,
plus treble damages or $1500 per violation, whichever is greater, punitive
damages and attorneys fees.
Brown-Forman denies that its marketing violates the Act, denies that it
intentionally markets its beverage alcohol products to minors, and will
vigorously defend this case.
19
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
31.2 CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
32 CEO and CFO Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (not considered to be filed)
(b) Reports on Form 8-K:
On August 14, 2003, Brown-Forman Corporation filed a report on Form 8-K
announcing the resolution of certain litigation between itself and
Diageo Great Britain Limited relating to the distribution of
Jack Daniel's Tennessee Whiskey in the United Kingdom.
On August 27, 2003, Brown-Forman Corporation filed a report on Form 8-K
announcing the results of its operations for the quarter ended
July 31, 2003.
On September 25, 2003, Brown-Forman Corporation filed a report on
Form 8-K announcing the appointment of Paul C. Varga to its Board of
Directors, effective October 1, 2003.
On November 20, 2003, Brown-Forman Corporation filed a report on Form 8-K
announcing (i) its regular quarterly cash dividend, (ii) a solicitation
of shareholder consents to authorize additional shares and (iii) a
2-for-1 stock split.
On November 25, 2003, Brown-Forman Corporation filed a report on Form 8-K
announcing the results of its operations for the quarter
October 31, 2003.
On November 26, 2003, Brown-Forman Corporation filed a report on Form 8-K
announcing a lawsuit filed against several beer, spirits, and wine
companies, including Brown-Forman Corporation.
20
SIGNATURES
As required by the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned authorized officer.
BROWN-FORMAN CORPORATION
(Registrant)
Date: December 5, 2003 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial Officer)
21
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Owsley Brown II, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 5, 2003 By: /s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer
22
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Phoebe A. Wood, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 5, 2003 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Chief Financial Officer
23
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Brown-Forman Corporation ("the
Company") on Form 10-Q for the period ended October 31, 2003, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in the capacity as an
officer of the Company, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
This certificate is being furnished solely for purposes of Section 906 and is
not being filed as part of the Report.
Date: December 5, 2003 By: /s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer and
Chairman
Date: December 5, 2003 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
24