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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2004
Commission file number 002-26821
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 40210
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (502) 585-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Class A Common Stock (voting) $0.15 par value New York Stock Exchange
Class B Common Stock (nonvoting) $0.15 par value New York Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: None
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No[ ]
The aggregate market value, as of the last business day of the most recently
completed second fiscal quarter, of the voting and nonvoting equity held by
nonaffiliates of the registrant was approximately $2,300,000,000.
The number of shares outstanding for each of the registrant's classes of
Common Stock on June 30, 2004 was:
Class A Common Stock (voting) 56,841,070
Class B Common Stock (nonvoting) 64,926,934
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2004 Annual Report to Stockholders are incorporated
by reference into Parts I, II, and IV of this report. Portions of the Proxy
Statement of Registrant for use in connection with the Annual Meeting of
Stockholders to be held July 22, 2004 are incorporated by reference into Part
III of this report.
PART I
Item 1. Business
(a) General development of business:
Brown-Forman Corporation ("we," "us," or "our" below) was incorporated under the
laws of the State of Delaware in 1933, successor to a business founded in 1870
as a partnership and subsequently incorporated under the laws of the
Commonwealth of Kentucky in 1901. Through the first 85 years, we were primarily
a bourbon company, marketing brands such as Early Times and Old Forester.
Starting in the mid-1950s, we began a series of acquisitions, including the
purchase of Jack Daniel's Tennessee Whiskey in 1956, and the subsequent
acquisitions of Canadian Mist Canadian whisky, Southern Comfort liqueur, a
minority equity position in the company that owns Glenmorangie Single Malt
Scotch, an 80% investment in Finlandia Vodka Worldwide, and Tuaca liqueur.
Beginning in the 1990s, we also acquired premium wine companies including Fetzer
Vineyards California wines, Bolla Italian wines, and California's Sonoma-Cutrer
Vineyards.
Our principal executive offices are located at 850 Dixie Highway, Louisville,
Kentucky 40210 (mailing address: P.O. Box 1080, Louisville, Kentucky
40201-1080), and our telephone number is (502) 585-1100.
(b) Financial information about segments:
Information regarding net sales, operating income, and total assets of each of
our business segments is in Note 12 of Notes to Consolidated Financial
Statements on page 46 of our 2004 Annual Report to Stockholders, which
information is incorporated into this report by reference in response to Item 8.
(c) Narrative description of business:
The two segments comprising our operations are described below.
Beverages
- ---------
We manufacture, bottle, import, export, and market a wide variety of alcoholic
beverage brands. We also manufacture and market new and used oak barrels. Our
principal beverage brands are:
Spirits Wines
------- -----
Jack Daniel's Fetzer Vineyards
Gentleman Jack Bolla
Jack Daniel's Single Barrel Bel Arbor
Jack Daniel's Country Cocktails Bonterra Vineyards
Jack Daniel's Original Hard Cola Jekel Vineyards
Canadian Mist Sonoma-Cutrer Vineyards
Southern Comfort Fontana Candida
Finlandia Korbel*
Old Forester Mariah*
Early Times Michel Picard*
Woodford Reserve
Pepe Lopez
Tuaca
Don Eduardo*
Glenmorangie*
Glen Moray*
Ardbeg*
Appleton*
Amarula*
* Brands represented in the U.S and other select markets by Brown-Forman
2
Our primary spirits brand is Jack Daniel's, which is the fifth-largest premium
spirits brand and the largest selling American whiskey brand in the world
according to volume statistics recently published by a leading trade
publication. Our other leading brands are Southern Comfort, the second-largest
selling liqueur in the United States, and Canadian Mist, the second-largest
selling Canadian whisky worldwide, according to the recently published volume
statistics referenced above. Our largest wine brands are Fetzer Vineyards and
Bolla, two of the leading premium wine brands in the United States generally
selling in the $6-10 per bottle price range according to information published
by a leading consumer market research firm. That same firm cites Korbel as the
largest selling premium champagne in the retail channel in the United States. We
believe the statistics used to rank these products are reasonably accurate.
Our strategy is to market high quality products that satisfy the preferences of
consumers of legal drinking age and to support those products with extensive
international, national, and regional marketing programs. These programs are
intended to extend consumer brand recognition and brand loyalty.
In the United States, we sell spirits and wines either through wholesale
distributors or directly to state governments in those states that control
alcohol sales. The contracts that we have with many of our distributors have
formulas which determine reimbursement to distributors if we terminate them; the
amount of reimbursement is based primarily on the distributor's length of
service and a percentage of its purchases over time. Some states have statutes
which limit our ability to terminate distributor contracts. Outside the United
States, we typically distribute our products by selecting the best local
distributor for our brands in each specific market. Our principal export markets
are the United Kingdom, Australia, Germany, Spain, Italy, Japan, Canada, and
France.
The principal raw materials used in manufacturing and packaging distilled
spirits are corn, rye, malted barley, glass, cartons, and wood for new white oak
barrels, which are used for storage of bourbon and Tennessee whiskey. Currently,
none of these raw materials is in short supply, and there are adequate sources
from which they may be obtained.
The principal raw materials used in the production of wines are grapes and
packaging materials. Grapes are primarily purchased under contracts with
independent growers and, from time to time, are adversely affected by weather
and other forces which may limit production. We believe that our relationships
with our growers are good.
3
The industry is highly competitive and there are many brands sold in the
consumer market. Trade information indicates that we are one of the largest wine
and spirit suppliers in the United States in terms of revenues.
The Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury
Department regulates the wine and spirits industry with respect to production,
blending, bottling, sales, advertising and transportation of industry products.
Also, each state regulates advertising, promotion, transportation, sale, and
distribution of such products.
Under federal regulations, whiskey must be aged for at least two years to be
designated "straight whiskey." We age our straight whiskeys for a minimum of
three to five years. Federal regulations also require that "Canadian" whisky
must be manufactured in Canada in compliance with Canadian laws and must be aged
in Canada for at least three years. We believe we are in compliance with the
regulations.
Due to aging requirements, production of whiskeys is scheduled to meet demand
three to five years in the future. Accordingly, inventories are larger in
relation to sales and total assets than would be normal for most other
businesses.
Consumer Durables
- -----------------
Our Consumer Durables business consists of a portfolio of consumer brands that
have a rich heritage in the domestic market. We sell fine china dinnerware,
crystal stemware and giftware, stainless steel flatware, and silver-plated and
metal giftware under the Lenox and Gorham brands. Dansk is our contemporary
tabletop, houseware and giftware brand. We sell premium casual dinnerware and
fine china giftware under the Lenox trademark, and sterling silver flatware and
sterling silver giftware under the Gorham and Kirk Stieff trademarks. Hartmann
is our luggage, business case, and personal leather accessories brand. In
addition, in the direct response channel, we sell collectible and home decor
products in the United States under the Lenox brand and outside the United
States primarily under the Brooks & Bentley brand.
We market our products domestically through authorized department stores, home
specialty stores, and gift and jewelry shops, and through our company-owned
stores and the internet. The following table provides information about
company-owned store openings and closures for the two most recent fiscal years:
Lenox Dansk Hartmann Total
As of April 30, 2002 60 49 5 114
Opened 5 2 2 9
Closed (2) (5) -- (7)
---- ---- ---- -----
As of April 30, 2003 63 46 7 116
Opened -- -- 1 1
Closed (5) (5) (1) (11)
---- ---- ---- -----
As of April 30, 2004 58 41 7 106
==== ==== ==== =====
4
We also sell our products domestically through strategic partnerships with third
party companies and the incentive, premium, business gift and military exchange
distribution channels, and internationally through authorized retailers, duty
free stores and distributors. We sell collectible and home decor products both
domestically and in the United Kingdom through the direct response channel,
including mail-order, catalogs and the internet. We also sell collectibles
domestically through independent collectible shops and select department stores.
In the wholesale channel, company-employed sales representatives and, where
appropriate, independent commissioned sales representatives and independent
distributors sell our consumer durables products.
We believe we are the largest domestic marketer of fine tabletop products. We
are also a leading domestic marketer of fine quality luggage, business cases,
and personal leather accessories. We compete with a number of other suppliers in
the wholesale channel. We also face competition from lifestyle retail stores
that market their own brands.
Clay and feldspar are the principal raw materials used to manufacture china
products. Gold and platinum are significant raw materials used to decorate china
products. Fine silver is the principal raw material used to manufacture sterling
silver giftware and sterling flatware products. Steel is the principal raw
material used to manufacture stainless steel flatware. Leather and nylon, tweed
and wool fabric are the principal raw materials used to manufacture luggage,
business cases and personal leather accessories. We anticipate that these raw
materials will be in adequate supply. However, the acquisition price of gold,
platinum, fine silver and steel is influenced significantly by worldwide
economic events and commodity trading.
Our revenues are traditionally greater in the second and third quarters of the
fiscal year, primarily because of seasonal holiday buying.
Other Information
- -----------------
We own numerous valuable trademarks that are essential to our business.
Registrations of trademarks can generally be renewed indefinitely as long as the
trademarks are in use. We have authorized, through licensing arrangements, the
use of some of our trademarks on promotional items for the primary purpose of
enhancing brand awareness.
As of April 30, 2004, we employed about 6,400 persons, including approximately
700 employed on a part-time or temporary basis. We believe our employee
relations are good.
For information on the effects of compliance with federal, state, and local
environmental regulations, refer to Note 14, "Environmental Matters," on page 47
of our 2004 Annual Report to Stockholders, which information is incorporated
into this report by reference.
Our website address is www.brown-forman.com. Please note that our website
address is provided as an inactive textual reference only. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to these reports are available free of charge on our website as soon
as reasonably practicable after we electronically file those reports with the
Securities and Exchange Commission. The information provided on our website is
not part of this report, and is therefore not incorporated by reference unless
such information is otherwise specifically referenced elsewhere in this report.
5
We have posted on our website (www.brown-forman.com) our Corporate Governance
Guidelines, our Code of Conduct that applies to all directors and employees, and
our Code of Ethics that applies specifically to our senior financial officers.
We have also posted on our website the charters of our Audit and Compensation
Committees. Copies of these materials are also available free of charge by
writing to our Corporate Secretary, Michael B. Crutcher, 850 Dixie Highway,
Louisville, Kentucky 40210 or e-mailing him at Michael_Crutcher@b-f.com.
(d) Financial information about geographic areas:
Geographic information about net sales and long-lived assets is in Note 12 of
Notes to Consolidated Financial Statements on page 46 of our 2004 Annual Report
to Stockholders, which information is incorporated into this report by reference
in response to Item 8.
Item 2. Properties
Significant properties by business segments are as follows:
Beverages
- ---------
Owned facilities:
- Office facilities:
- Corporate offices (including renovated historic structures)
- Louisville, Kentucky
- Production and warehousing facilities:
- Lynchburg, Tennessee
- Louisville, Kentucky
- Collingwood, Ontario
- Shively, Kentucky
- Woodford County, Kentucky
- Frederiksted, St. Croix, U.S. Virgin Islands
- Mendocino County, California
- Monterey County, California
- San Luis Obispo County, California
- Sonoma County, California
- Livorno, Italy
- Lucca, Italy
- Pedemonte, Italy
- Soave, Italy
Leased facilities:
- Production and bottling facility in Dublin, Ireland
- Wine production and warehousing facility in Mendocino County, California
The lease terms expire at various dates and are generally renewable.
We believe that the facilities are in good condition and are adequate for the
business.
6
Consumer Durables
- -----------------
Owned facilities:
- Office facilities:
- Lenox corporate - Lawrenceville, New Jersey
- Headquarters for Lenox Direct Response/Collectibles Division
(includes retail store and warehouse) - Langhorne, Pennsylvania
- Production and office facilities (each of which includes a retail store):
- Lenox - Pomona, New Jersey; and Kinston, North Carolina
- Hartmann - Lebanon, Tennessee
- Warehousing facilities:
- Lenox/Dansk/Gorham - Hagerstown, Maryland
- Lenox/Dansk/Gorham - Williamsport, Maryland
Leased facilities:
- Office facilities:
- Brooks & Bentley - Kent, England
- Warehousing facilities:
- Lenox - South Brunswick, New Jersey (includes a retail store and
clearance center); and Oxford, North Carolina
- Lenox/Dansk/Gorham - Williamsport, Maryland
- Lenox Direct Response/Collectibles - Bristol Township, Pennsylvania
- Retail stores:
- The Segment operates 58 Lenox stores in 29 states and 41 Dansk stores
in 24 states. In addition, the Segment operates 7 Hartmann luggage
outlet stores in 6 states.
- Showrooms:
- Lenox/Dansk/Gorham - New York, New York; Dallas, Texas; and
Atlanta, Georgia
The lease terms expire at various dates and are generally renewable.
We believe that the facilities are in good condition and are adequate for the
business.
7
Item 3. Legal Proceedings
Brown-Forman Corporation and many other manufacturers of spirits, wine and beer
are defendants in a series of essentially similar class action lawsuits seeking
damages and injunctive relief over alleged marketing of beverage alcohol to
underage consumers. Five lawsuits have been filed to date, the first three
against eight defendants, including Brown-Forman: "Hakki v. Adolph Coors
Company, et.al.," U.S. District Court for the District of Columbia, No.
1:03cv02621 (GK), filed November 2003; "Kreft v. Zima Beverage Co., et.al.,"
District Court, Jefferson County, Colorado, No. 04cv1827, filed December 2003;
and "Wilson v. Zima Company, et.al.," U.S. District Court for the Western
District of North Carolina, Charlotte Division, No. 3:04cv141, filed January
2004. Two virtually identical suits with allegations similar to those in the
first three lawsuits were filed in Cleveland, Ohio, in April and June, 2004,
respectively, against the original eight defendants as well as an additional
nine manufacturers of spirits and beer, styled "Eisenberg v. Anheuser-Busch,"
U.S. District Court for the District of Northern Ohio, No. 1:04cv1081, and
"Tully v. Anheuser-Busch," U.S. District Court for the District of Northern
Ohio, No. 1:04cv1101. In addition, Brown-Forman has received a pre-lawsuit
notice under the California Consumer Protection Act indicating that the same
lawyers intend to file a lawsuit there against many industry defendants,
including Brown-Forman, presumably on the same facts and legal theories.
The suits allege that the defendants have engaged in deceptive marketing
practices and schemes targeted at underage consumers, negligently marketed their
products to the underage, and fraudulently concealed their alleged misconduct.
Plaintiffs seek class action certification on behalf of: (a) a guardian class
consisting of all persons who were or are parents 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 currently under the age of 21.
The lawsuits seek: (1) a finding that defendants engaged in a deceptive scheme
to market alcoholic beverages to underage persons and an injunction against such
alleged practices; (2) disgorgement and refund to the guardian class of all
proceeds resulting from sales to the underage since 1982; and (3) judgment to
each guardian class member for a trebled award of actual damages, punitive
damages, and attorneys fees. The lawsuits, either collectively or individually,
if ultimately successful, represent significant financial exposure.
Brown-Forman denies that it intentionally markets its beverage alcohol products
to minors and denies that its advertising is illegal. It will defend these cases
vigorously.
Item 4. Submission of Matters to a Vote of Security Holders
None.
8
Executive Officers of the Registrant
Principal Occupation and
Name Age Business Experience
---- --- ---------------------------------
Owsley Brown II 61 Chairman and Chief Executive Officer
of the company since 1995.
Paul C. Varga 40 President and Chief Executive
Officer of Brown-Forman Beverages
(a division of Brown-Forman) since
August 2003. Global Chief Marketing
Officer for Brown-Forman Beverages
from 2000 to July 2003. Director of
Marketing for Brown-Forman Spirits-
North American Group from 1998 to
2000.
Phoebe A. Wood 51 Executive Vice President and Chief
Financial Officer of the company
since February 2001. Vice President
and Chief Financial Officer for
Propel, Inc. (a subsidiary of
Motorola) from August 2000 to
February 2001. Vice President,
Finance, Planning and Control for
ARCO Alaska, Inc. from 1996 to 2000.
Michael B. Crutcher 60 Vice Chairman, General Counsel, and
Secretary since August 2003. Senior
Vice President, General Counsel, and
Secretary from 1989 to August 2003.
James S. Welch, Jr. 45 Vice Chairman, Strategy and Human
Resources since August 2003. Senior
Vice President and Executive
Director of Human Resources from
1999 to August 2003.
James L. Bareuther 58 Executive Vice President of and
Chief Operating Officer of Brown-
Forman Beverages since August 2003.
President of Brown-Forman Spirits
Americas from July 2001 to August
2003. Executive Vice President,
Spirits Marketing and Sales, North
American Group - Brown-Forman
Beverages Worldwide from 1994 to
July 2001.
Jane C. Morreau 45 Vice President and Controller since
August 2002. Director of Business
Planning & Analysis from 1997 to
July 2002.
9
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters,
and Issuer Purchases of Equity Securities
The principal market for Brown-Forman common shares is the New York Stock
Exchange.
Holders of record of Common Stock at April 30, 2004:
Class A Common Stock (Voting) 3,458
Class B Common Stock (Nonvoting) 4,161
Information regarding securities authorized for issuance under our equity
compensation plans can be found in the section entitled "Equity Compensation
Plan Information" on page 22 of our definitive proxy statement for the Annual
Meeting of Stockholders to be held July 22, 2004, which information is
incorporated into this report by reference.
For the other information required by this item, refer to the section entitled
"Quarterly Financial Information" at the front of the 2004 Annual Report to
Stockholders, which information is incorporated into this report by reference.
Item 6. Selected Financial Data
For the information required by this item, refer to the section entitled
"Selected Financial Data" on page 22 of the 2004 Annual Report to Stockholders,
which information is incorporated into this report by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the information required by this item, refer to the section entitled
"Management's Discussion and Analysis" on pages 23 through 33 of the 2004 Annual
Report to Stockholders, and the section entitled "Important Information on
Forward-Looking Statements" on page 52 of the 2004 Annual Report to
Stockholders, which information is incorporated into this report by reference.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
For the information required by this item, refer to the section entitled "Market
Risks" beginning on page 31 of the 2004 Annual Report to Stockholders, which
information is incorporated into this report by reference.
Item 8. Financial Statements and Supplementary Data
For the information required by this item, refer to the Consolidated Financial
Statements, Notes to Consolidated Financial Statements, Report of Management,
and Report of Independent Registered Public Accounting Firm on pages 34 through
49 of the 2004 Annual Report to Stockholders, which information is incorporated
into this report by reference.
10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
Brown-Forman (its principal executive and principal financial officers) have
evaluated the effectiveness 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 to ensure that information
required to be disclosed by the company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms; and include controls
and procedures designed to ensure that information required to be disclosed by
the company in such reports is accumulated and communicated to the company's
management, including the CEO and the CFO, as appropriate, to allow timely
decisions regarding required disclosure. 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.
PART III
Item 10. Directors and Executive Officers of the Registrant
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 22, 2004, which information is incorporated into this report by reference:
(a) "Election of Directors" on pages 6 through 8 (for information on directors);
(b) "Corporate Governance Guidelines, Committee Charters and Codes" on page 11
(for information on our Code of Ethics); (c) the last paragraph on page 15 (for
information on delinquent Section 16 filings); and (d) "Audit Committee" on
pages 16 through 18. Also, see the information with respect to "Executive
Officers of the Registrant" under Part I of this report, which information is
incorporated herein by reference.
We will post any amendments to our Code of Ethics that applies to our chief
executive officer, principal financial officer, controller and principal
accounting officer, and any waivers that are required to be disclosed by the
rules of either the SEC or NYSE on our website.
Item 11. Executive Compensation
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 22, 2004, which information is incorporated into this report by reference:
(a) "Executive Compensation" on pages 21 through 24; (b) "Retirement Plan
Descriptions" on page 25; and (c) "Director Compensation" on page 26.
11
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 22, 2004, which information is incorporated into this report by reference:
(a) "Equity Compensation Plan Information" on page 22; and (b) "Stock Ownership"
on pages 14 and 15.
Item 13. Certain Relationships and Related Transactions
For the information required by this item, refer to the section entitled
"Transactions with Management" on page 33 of our definitive proxy statement for
the Annual Meeting of Stockholders to be held July 22, 2004, which information
is incorporated into this report by reference.
Item 14. Principal Accountant Fees and Services
For the information required by this item, refer to the section entitled "Fees
Paid to Independent Auditor" on page 17 of our definitive proxy statement for
the Annual Meeting of Stockholders to be held July 22, 2004, which information
is incorporated into this report by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) 1 and 2 - Index to Consolidated Financial Statements and Schedule:
Reference
Annual
Form 10-K Report to
Annual Report Stockholders
Page Page(s)
Incorporated by reference to our Annual Report to
Stockholders for the year ended April 30, 2004:
Consolidated Statement of Income for the
years ended April 30, 2002, 2003, and 2004* -- 34
Consolidated Balance Sheet at April 30, 2003 and 2004* -- 35
Consolidated Statement of Cash Flows for the
years ended April 30, 2002, 2003, and 2004* -- 36
Consolidated Statement of Stockholders' Equity
for the years ended April 30, 2002, 2003, and 2004* -- 37
Notes to Consolidated Financial Statements* -- 38 - 48
Report of Management* -- 49
Report of Independent Registered Public Accounting Firm* -- 49
Important Information on Forward-Looking Statements -- 52
Consolidated Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule S-1 --
II - Valuation and Qualifying Accounts S-2 --
12
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted either
because they are not required under the related instructions, because the
information required is included in the consolidated financial statements and
notes thereto, or because they are inapplicable.
* Incorporated by reference to Item 8 in this report.
(a) 3 - Exhibits: Filed with this report:
Exhibit Index
- -------------
13 Brown-Forman Corporation's Annual Report to Stockholders for the
year ended April 30, 2004, but only to the extent set forth in
Items 1, 5, 6, 7, 7A and 8 of this Annual Report on Form 10-K for
the year ended April 30, 2004.
14 Code of Ethics.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP independent registered public
accounting firm.
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).
Previously Filed:
Exhibit Index
- -------------
3(i) Restated Certificate of Incorporation of registrant, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-Q filed on March 4, 2004.
3(ii) By-laws of Registrant, as amended on May 29, 2003, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on July 24, 2003.
4 Form of Indenture dated as of March 1, 1994 between Brown-Forman
Corporation and The First National Bank of Chicago, as Trustee,
which is incorporated into this report by reference to Brown-Forman
Corporation's Form S-3 (Registration No. 33-52551) filed on
March 8, 1994.
13
10(a) A description of the Brown-Forman Omnibus Compensation Plan, which
is incorporated into this report by reference to Brown-Forman
Corporation's Form S-8 (Registration No. 333-88925) filed on
October 13, 1999.
10(b) Brown-Forman Corporation Supplemental Excess Retirement Plan, which
is incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on July 23, 1990.
10(c) A description of the Brown-Forman Savings Plan, which is
incorporated into this report by reference to page 10 of the
registrant's definitive proxy statement for the Annual Meeting of
Stockholders held on July 25, 1996.
10(d) A description of the Brown-Forman Non-Employee Director
Compensation Plan, which is incorporated into this report by
reference to Brown-Forman Corporation's Form S-8 (Registration No.
333-38649) filed on October 24, 1997.
10(e) Five-Year Credit Agreement, dated as of October 19, 2001, among
Brown-Forman Corporation, the Lenders named therein, Bank of
America, N.A. and Bank One, NA, as Co-Syndication Agents, National
City Bank of Kentucky and Suntrust Bank, as Co-Documentation
Agents, and The Chase Manhattan Bank, as Administrative Agent,
which is incorporated into this report by reference to
Brown-Forman Corporation's Form 10-Q filed on March 7, 2003.
10(f) Amended and Restated 364-Day Credit Agreement, dated as of
October 19, 2001, and amended and restated as of October 11, 2002,
among Brown-Forman Corporation, the Lenders named therein, Bank of
America, N.A. and Bank One, NA, as Co-Syndication Agents, National
City Bank of Kentucky and Suntrust Bank, as Co-Documentation
Agents, and JP Morgan Chase Bank, as Administrative Agent, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-Q filed on March 7, 2003.
10(g) The description of the terms of $250,000,000 of 2-1/8% Notes due
2006 and $350,000,000 of 3% Notes due 2008, which description is
incorporated by reference into this report by reference to the
Indenture filed with Brown-Forman Corporation's Form S-4
(Registration No. 333-104657) on April 21, 2003.
(b) Reports on Form 8-K:
None.
14
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BROWN-FORMAN CORPORATION
(Registrant)
/s/ OWSLEY BROWN II
------------------------------------
Date: July 1, 2004 By: Owsley Brown II
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on July 1, 2004 as indicated:
/s/ INA BROWN BOND /s/ RICHARD P. MAYER /s/ OWSLEY BROWN II
- --------------------------------------- --------------------------------- -----------------------------------------
By: Ina Brown Bond By: Richard P. Mayer By: Owsley Brown II
Director Director Director, Chairman of the Board
and Chief Executive Officer
/s/ BARRY D. BRAMLEY /s/ STEPHEN E. O'NEIL /s/ MATTHEW R. SIMMONS
- --------------------------------------- --------------------------------- -----------------------------------------
By: Barry D. Bramley By: Stephen E. O'Neil By: Matthew R. Simmons
Director Director Director
/s/ GEO. GARVIN BROWN III /s/ WILLIAM M. STREET /s/ DACE BROWN STUBBS
- --------------------------------------- --------------------------------- -----------------------------------------
By: Geo. Garvin Brown III By: William M. Street By: Dace Brown Stubbs
Director Director, Former President, Director
Brown-Forman Corporation
/s/ JANE C. MORREAU /s/ PHOEBE A. WOOD /s/ OWSLEY BROWN FRAZIER
- --------------------------------------- --------------------------------- -----------------------------------------
By: Jane C. Morreau By: Phoebe A. Wood By: Owsley Brown Frazier
Vice President and Controller Executive Vice President and Director, Former Vice Chairman
(Principal Accounting Officer) Chief Financial Officer Brown-Forman Corporation
(Principal Financial Officer)
15
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Brown-Forman Corporation:
Our audits of the consolidated financial statements referred to in our report
dated May 27, 2004 appearing in the 2004 Annual Report to Shareholders of
Brown-Forman Corporation and Subsidiaries (which report and consolidated
financial statements are incorporated by reference in this Annual Report on Form
10-K) also included an audit of the financial statement schedule listed in Item
15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule
presents fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
July 1, 2004
S-1
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended April 30, 2002, 2003, and 2004
(Expressed in thousands)
Col. A Col. B Col. C Col. D Col. E
------ ------ ------ ------ ------
Additions
Balance at Charged to Balance at
Beginning Costs End
Description of Period and Expenses Deductions of Period
----------- ---------- ------------ ---------- ----------
2002
Allowance for Doubtful Accounts $12,260 $ 8,677 $ 5,316(1) $15,621
Accrued Restructuring Costs -- 16,800 3,762(2) 13,038
2003
Allowance for Doubtful Accounts $15,621 $ 3,828 $ 7,419(1) $12,030
Accrued Restructuring Costs 13,038 -- 6,192(2) 6,846
2004
Allowance for Doubtful Accounts $12,030 $ 4,324 $ 4,923(1) $11,431
Accrued Restructuring Costs 6,846 2,200 6,219(2) 2,827
(1) Doubtful accounts written off, net of recoveries.
(2) Employee termination benefit payments, write-offs of impaired machinery and
equipment (net of recoveries), and other cash expenditures related to the
closing of three manufacturing plants.
S-2
Exhibit 13
FINANCIAL HIGHLIGHTS
(Dollars in millions, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 % Change
- --------------------------------------------------------------------------------
Net Sales $2,376 $2,577 8%
Gross Profit $1,180 $1,298 10%
Operating Income $ 378 $ 407 8%
Net Income $ 245 $ 258 5%
Earnings Per Share
- Basic $ 1.82 $ 2.12 17%
- Diluted $ 1.82 $ 2.11 16%
Cash Dividends Per Common Share $ 0.73 $ 0.80 10%
Return on Average Invested Capital 15.7% 15.8%
Return on Average Common Stockholders' Equity 19.1% 27.8%
Gross Margin 49.7% 50.4%
Operating Margin 15.9% 15.8%
QUARTERLY FINANCIAL INFORMATION
(Expressed in millions, except per share amounts)
- ------------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Market Price
Per Common Share Per Common Share
---------------- ----------------
Net Gross Net Basic Diluted Class A Class B
Sales Profit Income EPS EPS Declared Paid High Low High Low
- ------------------------------------------------------------------------------------------------------------------------------------
Fiscal 2004 $2,577 $1,298 $258 $2.123 $2.112 $0.800 $0.800 $52.25 $38.25 $50.00 $37.55
Quarters
First 532 271 31 0.257 0.256 0.375 0.188 42.20 38.25 41.43 37.55
Second 724 364 88 0.727 0.724 0.000 0.188 43.63 39.13 42.75 38.25
Third 696 344 81 0.664 0.660 0.425 0.213 50.60 43.00 47.90 42.00
Fourth 625 319 58 0.475 0.472 0.000 0.213 52.25 48.75 50.00 45.92
Fiscal 2003 $2,376 $1,180 $245 $1.820 $1.815 $0.725 $0.725 $40.63 $29.00 $40.29 $29.35
Quarters
First 479 247 36 0.264 0.263 0.350 0.175 39.93 29.00 39.93 29.35
Second 691 338 81 0.592 0.591 0.000 0.175 37.75 32.88 37.68 32.41
Third 635 308 70 0.511 0.510 0.375 0.188 37.25 31.30 36.94 30.13
Fourth 571 287 58 0.453 0.451 0.000 0.188 40.63 34.95 40.29 33.95
Total Shareholder Return
(including dividend reinvestment)
Fiscal Brown-Forman S&P 500
Year (Class B) Index
------ ------- -------
1994 $100 $100
1995 114 117
1996 140 153
1997 184 191
1998 211 270
1999 279 329
2000 211 362
2001 241 315
2002 318 275
2003 316 239
2004 394 294
10-Year Annual Growth +15% +11%
CONTENTS
Page
Selected Financial Data 22
Management's Discussion and Analysis 23
Consolidated Statement of Income 34
Consolidated Balance Sheet 35
Consolidated Statement of Cash Flows 36
Consolidated Statement of Stockholders' Equity 37
Notes to Consolidated Financial Statements 38
Report of Management 49
Report of Independent Registered Public Accounting Firm 49
Important Information On Forward-Looking Statements 52
21
SELECTED FINANCIAL DATA
(Expressed in millions, except per share amounts and ratios)
Year Ended April 30,
Operations 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
- ---------- ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Sales $1,681 1,801 1,831 1,915 2,020 2,146 2,194 2,223 2,376 2,577
Gross Profit $ 812 862 884 956 1,019 1,104 1,152 1,132 1,180 1,298
Operating Income $ 268 274 287 307 322 348 374 353 378 407
Net Income $ 149 160 169 185 202 218 233 228 245 258
Weighted Average Shares used to
calculate Earnings Per Share
- - Basic 138.0 138.0 138.0 137.9 137.2 137.0 137.0 136.7 134.7 121.4
- - Diluted 138.0 138.0 138.0 138.0 137.4 137.2 137.1 137.0 135.1 122.0
Earnings Per Share
- Basic $ 1.07 1.15 1.22 1.33 1.46 1.59 1.70 1.66 1.82 2.12
- Diluted $ 1.07 1.15 1.22 1.33 1.46 1.59 1.70 1.66 1.82 2.11
Cash Dividends Declared
Per Common Share $ 0.48 0.51 0.53 0.55 0.58 0.61 0.64 0.68 0.73 0.80
Invested Capital
- ----------------
Average Invested Capital $ 835 875 929 948 1,049 1,238 1,357 1,470 1,598 1,719
Average Common
Stockholders' Equity $ 493 578 671 756 854 974 1,110 1,235 1,283 927
Total Assets at April 30 $1,286 1,381 1,428 1,494 1,735 1,802 1,939 2,016 2,264 2,376
Long-Term Debt at April 30 $ 247 211 63 50 53 41 40 40 669 630
Total Debt at April 30 $ 303 267 225 164 297 267 244 207 836 680
Other Key Measures
- ------------------
Cash Flows from Operations $ 197 167 176 220 213 241 232 249 243 306
Gross Margin 48.3% 47.9% 48.3% 49.9% 50.5% 51.4% 52.5% 50.9% 49.7% 50.4%
Operating Margin 15.9% 15.2% 15.7% 16.0% 16.0% 16.2% 17.0% 15.9% 15.9% 15.8%
Effective Tax Rate 39.8% 37.8% 38.0% 37.6% 36.5% 36.5% 36.3% 34.5% 34.2% 33.5%
Return on Average
Invested Capital 19.5% 19.7% 19.4% 20.4% 19.8% 18.4% 17.9% 15.9% 15.7% 15.8%
Return on Average Common
Stockholders' Equity 30.1% 27.5% 25.2% 24.3% 23.6% 22.4% 21.0% 18.5% 19.1% 27.8%
Total Debt to Total Capital 35.7% 29.6% 23.6% 16.7% 24.5% 20.3% 17.1% 13.7% 49.9% 38.5%
Dividend Payout Ratio 45.3% 44.2% 43.3% 41.2% 39.3% 38.1% 37.7% 40.8% 40.4% 37.7%
Notes:
1. Includes the consolidated results of Sonoma-Cutrer Vineyards, Finlandia
Vodka Worldwide, and Tuoni e Canepa since their acquisitions in April 1999,
December 2002, and February 2003, respectively.
2. Weighted average shares, earnings per share, and cash dividends declared
per common share have been adjusted for a 2-for-1 common stock split in
fiscal 2004.
3. We define Return on Average Invested Capital as the sum of net income
(excluding extraordinary items) and after-tax interest expense, divided by
average invested capital. Invested capital is the sum of all interest-
bearing debt and preferred and common equity.
4. We define Return on Average Common Stockholders' Equity as income applicable
to common stock divided by average common stockholders' equity.
5. We define Total Debt to Total Capital as total debt divided by the sum of
total debt and stockholders' equity.
6. We define Dividend Payout Ratio as cash dividends divided by net income.
7. We have reclassified some prior year amounts to conform with this year's
presentation.
22
MANAGEMENT'S DISCUSSION AND ANALYSIS
In the discussion below, we review Brown-Forman's consolidated financial
condition and results of operations for the fiscal years ended April 30, 2002,
2003, and 2004. We also make statements relating to our anticipated financial
performance and other forward-looking statements and discuss factors that may
affect the company's future financial condition and performance. We have
prepared a non-exclusive list of risk factors that could cause actual results to
differ materially from our anticipated results. Please read this Management's
Discussion and Analysis section in conjunction with our consolidated financial
statements for the year ended April 30, 2004 and the related notes, and the
important information regarding forward-looking statements on page 52.
EXECUTIVE OVERVIEW
Brown-Forman Corporation is a diversified producer and marketer of fine quality
consumer products. Our company consists of two business segments: Beverages and
Consumer Durables. In fiscal 2004, the Beverage segment generated approximately
96% of the company's total operating income and the Consumer Durables segment
generated the remaining 4%.
Our Beverage segment includes both wine and spirits brands, which are produced,
marketed, and sold on a global basis. Approximately two-thirds of the segment's
sales are generated in the United States, by far the company's largest market.
In general, the domestic market for premium spirits brands has improved over the
past year. We believe several factors are driving this favorable trend,
including positive demographic trends, a growing consumer interest in cocktails,
and more effective consumer advertising. In addition, we believe that there are
also potential benefits to sales resulting from the increasing popularity of low
carbohydrate diets, which is causing some consumers to switch from beer to wine
and spirits. We currently anticipate that these trends will continue. However,
we recognize that consumer trends can change very quickly and these recent
beneficial industry factors may not continue into the future.
Much of the growth for the Beverage segment over the past decade has been from
the international markets for our spirits brands. The most important export
markets for Brown-Forman are the United Kingdom, Australia, Germany, Spain,
Italy, Japan, Canada, and France. As we continue to expand outside of the United
States, our financial results are more exposed to foreign exchange rate
fluctuations. Although we have purchased foreign currency option contracts for
the upcoming year to help protect against a significant strengthening of the
U.S. dollar, over the longer term, profits from our international beverage
business may be adversely affected if the U.S. dollar strengthens against other
currencies.
The wine business has been extremely challenging over the past few years. An
oversupply of grapes in both California and Australia has resulted in
significant retail price competition, reducing industry margins. Generally,
Australian wineries have a lower cost of grapes than comparable quality wineries
in California, thereby providing a significant advantage for those producers.
Although a weaker U.S. dollar and aggressive cost-cutting in California have
helped close the gap, imported wine brands continue to be priced lower than
comparable California wine brands. As a result, volumes and margins for many of
the major wine brands from California have been weak.
Jack Daniel's Tennessee Whiskey is the most important brand within the Beverage
segment and is one of the largest and most profitable spirits brands in the
world. Global volume growth for Jack Daniel's accelerated in fiscal 2004 to 6%,
the strongest growth rate registered for the brand in five years. In the U.S.,
which represents about 55% of the brand's volume, consumer demand for Jack
Daniel's continued to accelerate in fiscal 2004. The healthy environment for
premium spirits, increased levels of advertising and promotional support, and
the brand's overall positioning are combining to provide volume growth and
increased profitability. It is important to note that a significant percentage
of our company's total earnings are derived from the brand. Although it remains
very healthy by most consumer measures, and we remain confident that we can
continue to grow the brand on a global basis, a significant decline in volume or
pricing for the brand would hurt the overall earnings for our company.
23
Southern Comfort, the second most important brand in our Beverage segment,
continues to provide good earnings growth. The brand's two largest markets, the
U.S. and the U.K., are both performing well, although many of the other
international markets for the brand have weakened. The segment's other premium
spirits brands, including Finlandia, Tuaca, and Woodford Reserve, have also
experienced an acceleration in demand and are expected to be important
contributors to the long-term growth of our Beverage business. In contrast, the
company's mid-priced spirits brands are not doing as well. Our large,
off-premise driven category leaders, such as Canadian Mist and Early Times, are
susceptible to price competition in those categories, and discounting over the
last 18 months has eroded profits. We recognize that growth from these
mid-priced brands will be difficult.
The segment's wine portfolio has struggled in recent years. Our largest wine
brand, Fetzer, has been unable to take advantage of lower industry grape costs
in California because of its grape purchase commitments. It will be at least
three more harvests before Fetzer will derive meaningful cost savings from lower
cost grapes. In contrast to the oversupply in California, a shortage of certain
Italian grape varietals (primarily Pinot Grigio) and foreign exchange trends
have increased costs for Bolla. Aggressive price increases partially offset
these cost pressures, but volumes suffered as a result during fiscal 2004.
We have not made major investments in overseas distribution networks; instead,
we mostly use other spirits producers to distribute and market our products
outside the U.S. In April 2005, many of our distribution contracts in Western
Europe will expire. We are currently undertaking an extensive review of our
distribution agreements in these markets. As a result, we may have opportunities
to improve our distribution arrangements in many of these countries. Although
consolidation among spirits producers theoretically could hinder the
distribution of our spirits and wine products in the future, to date this has
rarely happened. Other spirits companies typically seek to distribute our
premium spirits and wine brands, and we expect that demand to continue.
Our Consumer Durables segment includes tabletop, collectibles, and luggage
products marketed under the Lenox, Dansk, Gorham, Kirk Stieff, and Hartmann
brand names. Sales in our fine china business rely on three primary channels:
department stores, company-owned retail outlet stores, and
direct-to-the-consumer through catalogs, direct mail and the internet. The
financial results from this segment have been disappointing over the past few
years, as purchases of fine china and luggage are discretionary and can be
deferred in uncertain economic times. The fine china business relies heavily on
the department store channel, which has been struggling. Major chains have also
consolidated in recent years, which has resulted in a reduction in the number of
stores selling our products. In addition, much of the growth in the 1990's was
led by the direct-to-consumer division, referred to as Lenox Collections.
Unfortunately, this channel, which has the highest profit margins in the
segment, weakened considerably over the past two years.
In partial response to the difficulties of this segment, in January 2004 several
members of the senior management team at Lenox were replaced. The new team of
executives is already implementing specific actions that should benefit future
earnings and cash flow of the segment. These actions include reducing fixed
costs, increasing production efficiencies, closing unprofitable retail outlet
locations, and developing new products. As a result, we expect an increase in
free cash flow and earnings for this segment in the next year.
Overall, we are optimistic about the earnings outlook for fiscal 2005, due to
expected growth for Jack Daniel's and Southern Comfort, improved profitability
for the wine brands, and benefits from the recent initiatives in the Consumer
Durables segment. We currently expect fiscal 2005 earnings to grow approximately
10-15%, to a range of $2.32 to $2.42 per share.
CONSOLIDATED SUMMARY OF OPERATING PERFORMANCE
Fiscal 2004 Compared to Fiscal 2003
Consolidated net sales reached record levels in fiscal 2004, growing 8%, or $201
million. This sales growth reflects an acceleration in demand for premium
spirits brands, particularly in the United States, the company's largest market.
Beverage sales increased 11%, driven by favorable currency trends, continued
volume growth and price increases for our premium spirits brands, the addition
of new markets to our distribution agreement for Finlandia and its related
agency brands, and the company's new distribution arrangement in the United
Kingdom. Sales of our Consumer Durables segment improved 1% as modest increases
in sales to wholesale customers, particularly to specialty stores, were offset
by declines in sales in the segment's retail and direct-to-consumer channels.
Consolidated international sales of $628 million (excluding excise taxes) rose
29% in fiscal 2004, reflecting the strengthening of foreign currencies against
the U.S. dollar, higher volumes of Jack Daniel's, the addition of new markets to
our distribution agreement for Finlandia, and the benefits of the new
distribution arrangement in the United Kingdom. Sales in the United States,
representing 72% of our revenues (excluding excise taxes), were up a modest 1%,
as accelerating volume trends for Jack Daniel's and Southern Comfort, in
particular, were partially offset by declines for Fetzer, Bolla, and Lenox
retail and direct-to-consumer divisions.
Consolidated gross profit is a key performance measure for us. The same factors
described above that drove revenue growth also drove the increase in gross
profit.
Gross margin improved from 49.7% to 50.4%, the first increase since fiscal 2001.
This improvement was driven by our higher-margin Beverage segment, which grew
significantly faster than the Consumer Durables segment. The Beverage segment
gross margin benefited from favorable foreign exchange trends, higher prices,
the absence of lower-margin discontinued wine brands, and a continuing shift
toward higher-margin products.
24
Fiscal Gross
Year Margin
------ ------
1995 48.3%
1996 47.9%
1997 48.3%
1998 49.9%
1999 50.5%
2000 51.4%
2001 52.5%
2002 50.9%
2003 49.7%
2004 50.4%
Consolidated operating income for fiscal 2004 improved 8%, or $29 million. A $42
million increase in profits from the Beverage segment was driven by solid gains
for both Jack Daniel's and Southern Comfort, benefits from a weaker U.S. dollar,
and a modest increase in profits from our wine brands. These gains were
partially offset by a $13 million decline in operating income for Consumer
Durables, reflecting the continued challenging environment for tabletop,
collectibles, and luggage, as well as several charges incurred in fiscal 2004.
Operating Income
Dollars in Millions
2002 2003 2004
---- ---- ----
Beverages $336 $348 $390
Consumer Durables 17 30 17
---- ---- ----
Total $353 $378 $407
==== ==== ====
Total change -6% +7% +8%
Diluted earnings per share reached a record $2.11, up 16% over fiscal 2003,
representing the largest percentage increase in earnings per share in nine
years. This strong earnings performance was fueled by healthy underlying growth
for our premium spirits brands, benefits from a weaker U.S. dollar, the effects
of the March 2003 share repurchase (+$0.14), and a modest increase in profits
from our wine brands. Tempering the growth in earnings for the year was a
significant decline in profits from the Consumer Durables segment, higher
pension costs, and the settlement of a lawsuit with Diageo involving the
distribution of Jack Daniel's in the United Kingdom.
BASIC AND DILUTED EARNINGS PER SHARE. We have a stock option plan described in
Note 15 to our financial statements. Our 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 no
more than the original number of shares outstanding at inception of the plan (as
adjusted for any share issuances unrelated to our stock option plan). The extent
to which the number of diluted shares exceeds the number of basic shares is
determined by how much our stock price has appreciated since the options were
granted, not by how many treasury shares we have acquired.
Fiscal 2003 Compared to Fiscal 2002
Consolidated net sales grew 7%, or $153 million. Beverage sales increased 11%,
due to solid growth for Jack Daniel's Tennessee Whiskey and Southern Comfort,
the impact of our new United Kingdom distribution arrangement, and favorable
foreign exchange trends. Significantly lower revenues for our wine brands and
our Consumer Durables segment partially offset these gains.
Consolidated gross profit increased $48 million, or 4%, reflecting the expansion
of consumer demand around the world for Jack Daniel's, coupled with significant
margin improvement on both Jack Daniel's and Southern Comfort (boosted by higher
prices, the new U.K. distribution arrangement, and positive foreign exchange
trends). Partially mitigating our gross profit growth in fiscal 2003 were higher
grape costs, a competitive pricing environment for wines, and soft retail and
direct-to-consumer trends for the Consumer Durables segment.
Consolidated operating income for fiscal 2003 improved 7%, or $25 million. A $12
million increase in profits from the Beverage segment was driven primarily by
solid gains for Jack Daniel's and Southern Comfort, partially offset by
significantly lower earnings on wines. In addition, operating income for the
Consumer Durables segment increased $13 million, largely reflecting the absence
of $17 million of business improvement initiative costs incurred in fiscal 2002.
Diluted earnings per share increased 9% to $1.81 per share in fiscal 2003. (All
EPS amounts have been adjusted to reflect the January 2004 two-for-one stock
split). Solid growth from our spirits brands and lower costs associated with
business improvement initiatives more than offset the significant decline in
profits for wines and Consumer Durables. The benefits of the repurchase of 7.9
million shares of the company's common stock in March 2003 also boosted earnings
per share by $0.01 in fiscal 2003.
OTHER KEY PERFORMANCE MEASURES
Our primary goal is to increase the value of our shareholders' investment.
Long-term growth in the market value of our stock is a good indication of our
success in delivering an attractive return to shareholders.
TOTAL SHAREHOLDER RETURN. A $100 investment in our Class B stock ten years ago
would have grown to $394 by the end of fiscal 2004, assuming reinvestment of all
dividends and ignoring personal taxes and transaction costs. This represents an
annualized return of 15% over the ten-year period, compared to 11% for the S&P
500. A more recent investment in Brown-Forman also outperformed the market, with
our Class B stock yielding an average annual return of 18% over the three-year
period ended April 30, 2004, compared to an average annual decline of 2% for the
S&P 500.
25
RETURN ON AVERAGE INVESTED CAPITAL. Following several years of declining trends,
our return on average invested capital improved slightly in fiscal 2004. We
expect this trend to continue in fiscal 2005, as the repayment of approximately
$200 million of our deferred tax liability over a five-year period as required
by a change in U.S. tax regulations ended in fiscal 2003. In addition, we expect
our recent investments in Finlandia and Tuaca, which were dilutive to our
returns last year, will enhance our returns over the long-term. We believe these
factors, coupled with our positive outlook for earnings growth and tight
management of our investment base, will continue to increase our return on
invested capital over time.
Return on average common stockholders' equity grew to near record levels,
reflecting the benefit of our March 2003 share repurchase.
2002 2003 2004
---- ---- ----
Return on Average Invested Capital 15.9% 15.7% 15.8%
Return on Average Common Stockholders' Equity 18.5% 19.1% 27.8%
BEVERAGE SEGMENT
Summary of Operating Performance
(Dollars in millions) 2002 2003 2004
------ ------ ------
Net Sales $1,618 $1,795 $1,992
% Change 3% 11% 11%
Gross Profit $ 849 $ 900 $1,024
% Change 0% 6% 14%
Advertising Expenses $ 213 $ 230 $ 265
% Change 0% 8% 15%
SG&A Expenses $ 303 $ 329 $ 366
% Change (4%) 9% 11%
Other Expense (Income) $ (3) $ (7) $ 3
Operating Income $ 336 $ 348 $ 390
% Change 3% 4% 12%
Gross Margin 52.5% 50.1% 51.4%
Operating Margin 20.7% 19.4% 19.6%
Our Beverage segment includes strong brands representing a wide range of wine
varietals, champagnes, and distilled spirits such as whiskey, bourbon, vodka,
tequila, rum, and liqueur. This segment's largest market is the United States,
which generally prohibits wine and spirits manufacturers from selling their
products directly to consumers. Instead, we sell our products to wholesale
distributors, who then sell the products to retailers, who in turn sell to
consumers. We also use a similar tiered distribution model in most markets
outside the United States.
Distributors and retailers normally keep some of our products on hand as
inventory, making it possible for retailers to sell more (or less) of our
products to the consumer than distributors buy from us during any given time
period. Because we record revenues when we ship our products to distributors,
our sales do not necessarily reflect actual consumer demand during any
particular period. Ultimately, of course, consumer demand is critical in
determining our financial results. Thus, it is important to consider that demand
in assessing our performance. Depletions, which are defined as nine-liter case
movements from distributors to retailers, are generally used in the wine and
spirits industry as the most accurate approximation of consumer demand on a
national and international basis.
Fiscal 2004 Compared to Fiscal 2003
Net sales reached nearly $2 billion in fiscal 2004, increasing $197 million, or
11%. The major drivers of this growth were:
% of Growth
vs. 2003
--------
A weaker U.S. dollar 4%
The full-year impact of new markets for Finlandia and
related agency brands; net of discontinued wine brands 2%
The new distribution arrangement in the U.K 1%
Underlying revenue growth 4%
--------
Total 11%
========
We believe that disclosing the 4% underlying revenue growth for fiscal 2004 is
important because it is a more accurate reflection of the ongoing operational
performance of the segment. However, our spirits sales grew at a higher rate
than 4%, driven by solid volume growth and price increases, while revenues fell
for our wine portfolio.
It was another strong year for Jack Daniel's Tennessee Whiskey, as volume
increased for the twelfth consecutive year. Consumer demand accelerated globally
and the brand surpassed an annualized volume of seven million cases, growing 6%
for the year. The brand's volumes were particularly strong in the U.S., U.K.,
Canada, South Africa, and China. Volumes in Korea, Japan, and most of
Continental Europe were sluggish, however, as mixed economic conditions and a
growing anti-alcohol sentiment in Europe moderated growth in these markets.
Results for Southern Comfort were also strong, as growth in the U.S., U.K., and
South Africa was only partially offset by weaker performance in Continental
Europe. Both brands achieved record sales and profit levels, driven by higher
volumes, positive foreign exchange trends, and price increases.
26
Volumes for Finlandia were also up, reflecting the new markets of distribution
added late last fiscal year. Sales of Finlandia in the U.S. improved in the
second half of the fiscal year, as the introduction of a new package and
increased promotional investments stimulated demand for the brand. However,
Canadian Mist struggled in the highly competitive mid-priced whiskey market in
the U.S. Several of the segment's super-premium brands, including both Woodford
Reserve and Tuaca, experienced accelerating rates of demand and double-digit
volume growth.
The company's two largest wine brands, Fetzer and Bolla, both increased pricing
this past year more aggressively than their competitors. This factor, coupled
with continued competitive pressure from both imported and domestic wine brands,
contributed to the significant decline in volumes and sales for these two
brands. However, volumes and revenues for Korbel Champagnes were higher in
fiscal 2004, as the brand continued to increase its market share in the United
States.
The following table highlights worldwide depletion results for our major brands
during fiscal 2004:
Nine-Liter % of Growth
Cases (000s) vs. 2003
------------ -----------
Jack Daniel's 7,205 6%
Total RTDs(1) 2,540 14%
Southern Comfort 2,185 1%
Canadian Mist 2,150 (7%)
Finlandia(2) 1,725 35%
Fetzer 2,550 (14%)
Bolla 1,440 (13%)
Korbel Champagnes 1,145 2%
(1) RTD (ready-to-drink) volumes include Jack Daniel's, Southern Comfort and
Finlandia RTD products with the exception of Jack Daniel's Original Hard
Cola, which was marketed and sold by SABMiller during fiscal 2004.
(2) Depletions for Finlandia benefited from the addition of new markets to
Brown-Forman's distribution agreement. Excluding these new markets,
comparable depletions for Finlandia were up 2%.
Gross profit for the beverage business reached a new milestone of over $1
billion in fiscal 2004, expanding 14%, or $124 million. This growth was fueled
by the same factors that boosted revenue growth, though overall underlying gross
profit growth was much stronger, reflecting volume and margin improvement for
Jack Daniel's and Southern Comfort. The following chart details the major
factors driving gross profit growth:
% of Growth
vs. 2003
--------
A weaker U.S. dollar 4%
The full-year impact of new markets for Finlandia and
related agency brands; net of discontinued wine brands 1%
The new distribution arrangement in the U.K 1%
Underlying gross profit growth 8%
--------
Total 14%
========
We believe that disclosing the 8% underlying gross profit growth for fiscal 2004
is important because it is a more accurate reflection of the ongoing operating
performance of the segment. The gross margin for our Beverage business increased
from 50.1% in fiscal 2003 to 51.4% in fiscal 2004. The major factors driving
this improvement were the weaker U.S. dollar, price increases on selected major
wine and spirits brands, a higher mix of Jack Daniel's volume, and a higher mix
of volumes in the high-margin U.K. market.
Advertising expenses were up 15% as we continued our long track record of
reinvesting substantial dollars in brand building activities for our premium
spirits brands. Although Jack Daniel's and Finlandia drove most of the increase
in advertising investments in fiscal 2004, we also significantly increased our
investments behind our developing brands, including Woodford Reserve, Tuaca, and
Appleton. The weaker U.S. dollar also drove up our costs for advertising outside
of the U.S. over fiscal 2003. On a constant exchange basis, our advertising
costs were up 10% for the year.
27
Selling, general and administrative expenses were up 11%, influenced
by the following factors:
% of Growth
vs. 2003
--------
Consolidation of Finlandia Vodka Worldwide and
Tuoni e Canepa (both acquired in late fiscal 2003) 3%
Higher pension and postretirement expenses 2%
Incremental sales and marketing personnel in the
U.K. (to support the new distribution arrangement) 1%
Wine reorganization costs 1%
Underlying SG&A growth 4%
--------
Total 11%
========
We believe that disclosing the 4% underlying SG&A growth is important because it
is a more accurate reflection of the ongoing operating performance of the
segment. Other expense was up $10 million in fiscal 2004 due to the settlement
of a lawsuit with Diageo involving the distribution of Jack Daniel's in the
United Kingdom.
Operating income reached a record $390 million in fiscal 2004, growing $42
million, or 12%, over fiscal 2003. This is the strongest year-over-year growth
rate in operating income the Beverage segment has experienced since 1990.
Positive factors driving earnings growth were solid performance for our premium
spirits brands (fueled in part by the double-digit increase in our
brand-building investments), the benefits of a weaker U.S. dollar, and a modest
improvement in wines. These gains were only partially offset by the $10 million
in expenses associated with the Diageo litigation settlement, $4 million in wine
restructuring costs, and $7 million in incremental pension expenses.
Fiscal 2003 Compared to Fiscal 2002
Net sales improved 11%, or $177 million. Jack Daniel's registered growth for the
eleventh consecutive year, as volumes increased in 16 of the brand's top 20
markets around the world. The new U.K. distribution arrangement, positive
foreign exchange and higher volumes and pricing for Southern Comfort boosted
revenues in fiscal 2003.
Gross profit grew 6%, or $51 million, reflecting solid gains for Jack Daniel's
and Southern Comfort, a more profitable distribution arrangement in the U.K.,
and favorable foreign exchange movements. These improvements were partially
offset by significantly lower profits for our wine brands. The recording of
excise taxes for the new U.K. distribution arrangement, higher costs and pricing
pressure for wines contributed to the decline in gross margin from 52.5% in
fiscal 2002 to 50.1% in fiscal 2003.
Advertising expenses increased 8% as we increased brand-building activities for
our spirits brands. Selling, general and administrative expenses were up 9%,
influenced by an increase in sales and marketing costs related to the new
distribution arrangement in the U.K. and new markets added as a result of
acquiring additional ownership and distribution of Finlandia.
Operating income grew 4%, or $12 million, primarily reflecting healthy growth
for spirits, tempered partially by lower profits for wines.
BUSINESS ENVIRONMENT FOR WINE AND SPIRITS
GOVERNMENT POLICIES, PUBLIC ATTITUDES: Our ability to market and sell our
beverage alcohol products depends heavily on government policy towards those
products and the attitude of society in general toward drinking them. This is
true in the United States, our largest market, and around the world.
A small minority of drinkers abuse beverage alcohol, giving rise to public
issues of great significance. We strongly oppose abusive drinking and contribute
significant resources to programs aimed at understanding and curbing alcohol
abuse -- especially drunk driving and underage drinking. As a society, we are
more likely to curb alcohol abuse through better education about beverage
alcohol and moderate drinking than by restricting alcohol advertising and sales
or imposing punitive taxation. We and other beverage alcohol producers take a
prominent role in encouraging responsible consumption of our products and in
warning against alcohol abuse. We observe voluntary industry marketing and
advertising guidelines. We support social awareness organizations that fight
alcohol abuse and educate consumers about beverage alcohol, often in partnership
with public health officials.
Anti-alcohol groups in the U.S. and Europe are increasingly advocating
governmental actions that would be unfavorable for our business. Legal or
regulatory measures against beverage alcohol (including its advertising and
promotion) could adversely affect our sales. Especially in the U.S., distilled
spirits are at a marked disadvantage to beer and wine in taxation, advertising,
and number and type of sales outlets. Achieving greater cultural acceptance of
our products and parity with beer and wine in access to consumers are major
goals, which we share with other distillers.
LEVELING THE PLAYING FIELD: Among the objectives we seek are:
- greater access to television advertising for distilled spirits;
- fairer product distribution rules, so that our customers can buy our
beverage products more conveniently. Over the past year, our industry
has successfully lobbied for laws allowing spirits sales on Sundays in
Idaho, Massachusetts and Virginia. We are actively working to pass
similar legislation in a number of other U.S. markets;
- ability to use consumer education opportunities such as tastings (in
the last two years, the spirits industry helped pass legislation allowing
consumer tastings in nine states);
- freedom to advertise our products outdoors (some municipal ordinances
discriminate against billboard advertising of spirits products); and
- improved access to foreign markets, many of which have discriminatory
tax or other non-tariff barriers to U.S. beverage imports.
28
TAXES: Like all goods, beverage alcohol sales are sensitive to higher tax rates.
No legislation to increase U.S. federal excise taxes on distilled spirits is
currently pending, but future tax increases are always possible. From time to
time state legislatures increase beverage alcohol taxes. Some states even allow
local taxes. A number of states continue to face financial difficulties and
could raise excise taxes to remedy this. The cumulative effect of such tax
increases over time hurts sales. Because combined federal and state taxes
currently account for more than 50% of the price of a typical bottle of bourbon,
we work for reasonable excise tax reductions. Over the past year the industry
has defeated tax increase proposals in over 30 states, but with several states
continuing to face budget problems, we do not expect the threat of state tax
increases to abate next fiscal year. Increased tax rates and advertising
restrictions also affect beverage alcohol markets outside the U.S. To date,
those changes in our export markets have not been significant to our overall
business, but that could change.
THE LITIGATION CLIMATE: Publicity surrounding the many lawsuits against the
tobacco industry (and, to a lesser extent, against the gun and fast-food
industries) has prompted some commentators to suggest that alcohol might be
next. We believe that because the products and industry practices differ, the
legal theories that created liability for the tobacco companies do not apply to
beverage alcohol.
Five class action lawsuits have been filed against Brown-Forman and other
spirits, beer, and wine manufacturers alleging that our marketing causes
consumption of alcohol by those under the legal drinking age. We will defend
these cases and contest the allegations. However, adverse developments in these
or similar lawsuits could hurt our Beverage business, and the overall industry.
THE PUBLIC HEALTH COMMUNITY: We seek partnerships with the public health
community to combat alcohol abuse and improve understanding of beverage alcohol.
We have seen some notable successes, but we are disappointed that groups such as
the American Medical Association and the World Health Organization so far have
chosen to attack beverage alcohol producers rather than work with us jointly to
combat alcohol abuse. Long-range, these kinds of attacks could hurt our
business.
EXCHANGE RATES: The strength of foreign currencies relative to the U.S. dollar
affects profits and costs in our international beverage business. This year, our
corporate earnings benefited from a weaker U.S. dollar, particularly in the
United Kingdom and Australia. We have entered into foreign currency forward and
option contracts to limit the downside risk to foreign exchange fluctuations in
fiscal 2005. If the U.S. dollar appreciates significantly, the effect on our
business would be negative for any portion of our business that has not been
hedged.
CONSUMER DURABLES SEGMENT
Summary of Operating Performance
(Dollars in millions) 2002 2003 2004
------ ------ ------
Net Sales $ 605 $ 581 $ 585
% Change (3%) (4%) 1%
Gross Profit $ 283 $ 280 $ 274
% Change (7%) (1%) (2%)
Advertising Expenses $ 85 $ 91 $ 89
% Change 4% 8% (3%)
SG&A Expenses $ 171 $ 156 $ 161
% Change (1%) (9%) 4%
Other Expense (Income) $ 10 $ 3 $ 7
Operating Income $ 17 $ 30 $ 17
% Change (64%) 81% (45%)
Gross Margin 46.8% 48.2% 46.9%
Operating Margin 2.8% 5.2% 2.9%
Our Consumer Durables segment includes tabletop, collectibles, and luggage
products marketed under the Lenox, Dansk, Gorham, Kirk Stieff, and Hartmann
brand names. Consumer Durables sales made directly to consumers through our own
retail stores, direct mail, and the internet are now approaching nearly 60% of
the segment's total. The remaining sales for this segment are made to department
stores, specialty stores and other distributors.
Fiscal 2004 Compared to Fiscal 2003
Net sales increased $4 million, or 1%, in fiscal 2004 as the segment expanded
into new wholesale channels of distribution, particularly specialty stores.
Sales also benefited from the successful introduction of the kate spade tabletop
line, which has increased sales through bridal registries. These increases were
partially offset by declines in both the segment's retail outlet stores (closed
11 outlet stores in fiscal 2004) and direct-to-consumer division.
Gross profit declined $6 million, or 2%, in fiscal 2004, despite the modest
increase in sales, reflecting a shift in channel and product mix, aggressive
discounting designed to lower retail outlet inventories, the unfavorable impact
of foreign exchange on product sourced overseas, and $1 million of higher
pension and postretirement expense. As a result, the segment's overall gross
margin declined from 48.2% to 46.9%.
Advertising expenses were down 3% in fiscal 2004 due primarily to a decision to
decrease consumer direct mail and catalog advertising in response to the decline
in consumer response rates. Selling, general and administrative expenses
increased 4%, driven by $3 million of severance expenses and $2 million of
incremental pension and postretirement expenses. Excluding these items, selling,
general and administrative expenses were essentially flat compared to fiscal
2003.
29
Other expenses increased $4 million in fiscal 2004, reflecting a write-down for
impaired real estate associated with previous plant closures and start-up costs
related to the new distribution center.
Operating income fell $13 million, or 45%, primarily due to lower consumer
response rates in the direct channel. In addition, the segment incurred several
charges in fiscal 2004, including severance, a write-down for impaired real
estate associated with previous plant closures, and start-up costs related to
the new distribution center. The new management team at Lenox has taken steps to
reduce fixed costs, increase production efficiencies, close unprofitable retail
outlet locations, and develop relevant new products, which we expect will
benefit fiscal 2005 results.
Fiscal 2003 Compared to Fiscal 2002
Net sales declined $24 million, or 4%, in fiscal 2003 reflecting a decline in
revenues through the segment's retail outlet stores and a reduction in orders
from department stores. In addition, for the first time in eight years, the
direct-to-consumer channel, which includes direct mail, catalogs, and the
internet, also slowed. Hartmann continued to suffer as airline travel remained
depressed, a trend that was further exacerbated by the war in Iraq and the
outbreak of the SARS virus.
Gross profit declined $3 million in fiscal 2003. However, gross margin improved
from 46.8% to 48.2%, reflecting firmer pricing, improved product mix, and
manufacturing efficiencies resulting from the business improvement initiatives
implemented in fiscal 2002.
Advertising expenses were up 8%, due primarily to an increase in advertising of
collectible items. Selling, general and administrative expenses declined 9%,
reflecting the absence of business improvement initiative costs of $12 million
incurred in fiscal 2002 and the tight control of costs.
Operating income increased $13 million, or 81%, although the increase largely
reflects the absence of $17 million in costs from business improvement
initiatives designed to rationalize manufacturing capacity, streamline
procurement and production practices, and improve connections with customers.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to consistently generate cash from operations is one of our most
significant financial strengths. Our strong cash flows enable us to pay
dividends, pursue brand-building programs, make strategic acquisitions, and
undertake other initiatives that we believe will enhance shareholder value.
Investment grade ratings of A2 from Moody's and A from Standard & Poor's provide
us with financial flexibility when accessing credit markets. Cash flows from
operations, together with access to global credit markets, are more than
adequate to meet our expected operating and capital requirements.
Cash Flow Summary
(Dollars in millions) 2002 2003 2004
------ ------ ------
Cash from operating activities $ 249 $ 243 $ 306
Additions to property, plant,
and equipment (71) (119) (56)
Acquisitions and other investments (8) (108) (7)
Dividends (94) (99) (97)
Net issuance (repayment) of debt (37) 596 (162)
Acquisition of treasury stock (13) (561) --
Other 4 4 12
------ ------ ------
Change in cash $ 30 $ (44) $ (4)
====== ====== ======
Cash provided by operations increased $63 million, from $243 million in fiscal
2003 to $306 million in fiscal 2004, largely reflecting higher earnings and a
reduction in the single largest item on our balance sheet -- inventory. We
successfully managed our inventory levels over this past year through closer
management of our supply chain. We reduced our raw materials and finished goods
inventories in the Beverage segment and aggressively liquidated excess Consumer
Durables inventory.
30
Cash used for investments returned to a more normal level in fiscal 2004,
decreasing $163 million. In fiscal 2003, we had an unusually high level of
capital expenditures (see discussion below) and acquired an additional equity
stake in Finlandia and the remaining interest in Tuaca.
In comparing fiscal 2003 with fiscal 2002, cash provided by operations declined
$6 million, reflecting higher levels of working capital. Cash used for
investments increased $147 million, reflecting higher levels of capital
investments and the acquisitions of Finlandia and Tuaca.
In March 2003, we repurchased 7.9 million shares of our common stock for $561
million, including transaction costs, through a "Dutch Auction" tender offer.
(That amount does not include $11 million for 155,000 shares that were tendered
but not delivered to us. We are pursuing our legal rights in this matter). We
financed the repurchase by issuing $600 million in debt, of which $250 million
is due in 2006 and $350 million is due in 2008. We expect to meet those
obligations through cash from operations.
We have access to short-term capital markets through the issuance of commercial
paper, backed by bank credit agreements. Our committed revolving credit
agreements total $400 million, $200 million of which expire in fiscal 2005 and
the remaining $200 million of which expire in fiscal 2007. The credit agreements
provide us with an immediate and continuing source of liquidity. At April 30,
2004, we had no outstanding borrowings under these agreements.
We maintain an SEC shelf registration that gives us prompt access to longer-term
financing. At April 30, 2004, we had $220 million available on our $250 million
shelf registration.
CAPITAL EXPENDITURES
We invested $71 million in property, plant, and equipment in fiscal 2002, $119
million in fiscal 2003, and $56 million in fiscal 2004. Following record
spending levels in fiscal 2003, which included the purchase of $39 million in
California vineyard properties that were previously leased through a third-party
financing arrangement, spending returned to more modest levels in fiscal 2004.
Expenditures included investments to improve efficiencies of our production and
distribution facilities for both our Beverage and Consumer Durables businesses.
Capital Expenditures
Dollars in Millions
2002 2003 2004
---- ---- ----
Beverages $ 54 $ 91 $ 39
Consumer Durables 17 28 17
---- ---- ----
Total $ 71 $119 $ 56
==== ==== ====
We expect capital expenditures for fiscal 2005 to be in the $60-$70 million
range as we continue to invest in opportunities to improve the efficiencies of
our production operations, enhance the quality of our brands and devote
resources to building our brands. We expect to fund fiscal 2005 capital
expenditure requirements with cash from operations.
LONG-TERM OBLIGATIONS
We have long-term obligations related to contracts, leases, and borrowing
arrangements that we enter into in the normal course of business (see Notes 4
and 6 to the accompanying consolidated financial statements). The following
table summarizes the amounts of those obligations as of April 30, 2004 and the
years in which those obligations must be paid:
Long-Term Obligations 2006- After
(Dollars in millions) Total 2005 2009 2009
----- ---- ---- ----
Long-term debt $ 633 $ -- $630 $ 3
Unconditional purchase obligations 201 37 112 52
Operating leases 68 27 37 4
----- ---- ---- ----
Total $ 902 $ 64 $779 $ 59
===== ==== ==== ====
We expect to meet these obligations with internally generated funds.
MARKET RISKS
We have foreign currency forward and option contracts, commodity futures and
option contracts, and debt obligations that are exposed to risk from changes in
foreign currency exchange rates, commodity prices, and interest rates,
respectively. The sensitivity of these instruments to market fluctuations is
discussed below. See Note 4 to our consolidated financial statements for
information regarding our grape purchase obligations, which are also exposed to
commodity price risk, and "Critical Accounting Policies" (page 32) for a
discussion of the exposure of our pension and other postretirement plans to
risks related to interest rates.
Inflationary, deflationary, and recessionary conditions affecting these market
risks also affect the demand for and pricing of our products. See "Important
Information Regarding Forward-Looking Statements" (page 52) for further
discussion.
31
FOREIGN EXCHANGE. As a result of continued growth in our international sales,
our annual foreign currency receipts now exceed our foreign currency payments by
approximately $250 million. To the extent this foreign currency exposure is not
hedged, our results of operations and financial position are positively affected
by a weakening of the U.S. dollar against foreign currencies and negatively
affected when the dollar strengthens. However, we routinely use foreign currency
forward and option contracts to hedge our foreign exchange risk. Provided the
contracts remain effective in hedging the foreign exchange risk, we do not
recognize any unrealized gains or losses on the contracts in earnings until the
underlying hedged transactions are recognized in earnings. At April 30, 2004,
our foreign currency hedges had a total notional value of $188 million and a net
unrealized gain of $3 million. Assuming the contracts remain effective hedges,
we estimate that a 10% increase in the value of the U.S. dollar against the
other currencies in which we conduct business would reduce our fiscal 2005
operating income by $3 million, while a 10% decline in value would increase
operating income by $22 million.
COMMODITY PRICES. We are subject to commodity price volatility caused by
weather, supply conditions, geopolitical and economic variables, and other
unpredictable external factors. We use futures contracts and options to manage
the volatility of pricing for certain commodities, primarily corn. At April 30,
2004, we had outstanding hedge positions of approximately 3 million bushels of
corn with a negligible net unrealized gain. We estimate that a 10% decline in
commodity prices would result in an incremental loss on these contracts of less
than $1 million.
INTEREST RATES. Most of our debt has a fixed interest rate. However, our
short-term investments and commercial paper obligations are exposed to the risk
of changes in interest rates. Assuming year-end variable rate investment and
debt levels, a one percentage point increase in interest rates would have a
negligible effect on our annual net interest expense.
ENVIRONMENTAL MATTERS
We face environmental claims resulting from the cleanup of several manufacturing
or waste disposal sites in the U.S. We accrue for losses associated with
environmental cleanup obligations when such losses are probable and can be
reasonably estimated. 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.
CRITICAL ACCOUNTING POLICIES
Our financial statements reflect certain estimates involved in applying the
following critical accounting policies that entail uncertainties and
subjectivity. Using different estimates could have a material effect on our
operating results, financial condition, and changes in financial condition.
BRANDS AND GOODWILL. We have obtained most of our brands through acquisitions
from other companies. (See Note 3 to the accompanying consolidated financial
statements for recent acquisitions). Upon acquisition, the purchase price is
first allocated to identifiable assets and liabilities, including intangible
brand names, based on estimated fair value, with any remaining purchase price
recorded as goodwill. Goodwill and indefinite-lived brand names are not
amortized. As of April 30, 2004, we consider all of our brand names to have
indefinite lives.
We assess our brand names and goodwill for impairment at least annually to
ensure that future cash flows continue to exceed the related book value. A brand
name is impaired if its book value exceeds its fair value. Goodwill is evaluated
for impairment if the book value of its reporting unit exceeds its fair value.
Fair value is determined using discounted future cash flows, with consideration
of market values for similar assets when available. If the fair value of an
evaluated asset is less than its book value, the asset is written down to its
estimated fair value.
Considerable management judgment is necessary to assess impairment and estimate
fair value. The assumptions used in our evaluations, such as forecasted growth
rates and cost of capital, are consistent with our internal projections and
operating plans.
PROPERTY, PLANT, AND EQUIPMENT. We depreciate our property, plant, and equipment
on a straight-line basis using our estimates of useful life, which are 20 to 40
years for buildings and improvements, 3 to 10 years for machinery and equipment,
and 3 to 7 years for capitalized software.
We assess our property, plant, and equipment and other long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset or asset group may not be recoverable. Fair value is
determined using discounted future cash flows, with consideration of market
values for similar assets when available. If the fair value of an evaluated
asset is less than its book value, the asset is written down to its estimated
fair value.
Considerable management judgment is necessary to assess impairment and estimate
fair value. Assumptions used in these evaluations are consistent with our
internal projections and operating plans.
PENSION AND OTHER POSTRETIREMENT BENEFITS. We sponsor various defined benefit
pension plans as well as postretirement plans providing retiree health care and
retiree life insurance benefits. Benefits are based on such factors as years of
service and compensation level during employment. The benefits expected to be
paid are expensed over the employees' expected service. This requires us to make
certain assumptions to determine the expected benefit, such as interest rates,
return on plan assets, the rate of salary increases, expected service, and
health care cost trend rates.
32
The assets, obligations, and assumptions used to measure pension and retiree
medical expenses are determined as of January 31 of the preceding year
("measurement date"). Because obligations are measured on a discounted basis,
the discount rate is a significant assumption. It is based on interest rates for
high-quality, long-term corporate debt at each measurement date. The expected
return on pension plan assets is based on our historical experience and our
expectations for long-term rates of return. The other assumptions also reflect
our historical experience and management's best judgment regarding future
expectations. We review our assumptions on each annual measurement date. For
fiscal 2005, we have reduced the discount rate from 6.5% to 6.0%, based on
Moody's AA corporate bond index. Pension and postretirement benefit expense for
fiscal 2005 is estimated to be approximately $16 million, compared to $7 million
for fiscal 2004.
INCOME TAXES. Our annual tax rate is based on our income and the statutory tax
rates in the various jurisdictions in which we operate. The decline in the
annual rate to 33.5% for fiscal 2004 primarily reflects a shift in earnings from
higher taxed jurisdictions in the U.S.
Significant judgment is required in evaluating our tax positions. We establish
reserves when we believe that certain positions are likely to be challenged and
that we may not succeed, despite our belief that our tax return positions are
fully supportable. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. We believe current reserves
are appropriate for all known contingencies, however, it is reasonably possible
that a favorable or unfavorable change in this estimate may occur in the near
future.
Several years can elapse before a particular matter for which we have
established a reserve is resolved. While it is often difficult to predict the
final outcome or the timing of resolution of any particular tax matter, we
believe that our reserves reflect the likely outcome of known tax contingencies.
Our annual tax rate includes the impact of reserve provisions and changes to
reserves that we consider appropriate, as well as related interest. Unfavorable
settlement of any particular issue could require use of our cash. Favorable
resolution would be recognized as a reduction to our effective tax rate in the
year of resolution.
The U.S. Congress has introduced legislation that would, if passed, repeal the
current extraterritorial income tax regime, and replace it with a new regime
that is compliant with the rules of the World Trade Organization. We realize tax
benefits with respect to export sales from the U.S. under the current regime. We
are uncertain as to what impact any new legislation in this area would have on
our annual tax rate. However, we do not anticipate the impact, if any, would be
material.
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. 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.
Brown-Forman and many other manufacturers of spirits, wine and beer are
defendants in a series of similar class action lawsuits seeking damages and
injunctive relief over alleged marketing of beverage alcohol to underage
consumers. The suits allege that the defendants have engaged in deceptive
marketing practices and schemes targeted at underage consumers, negligently
marketed their products to the underage, and fraudulently concealed their
alleged misconduct. Brown-Forman denies that we intentionally market beverage
alcohol products to minors and denies that our advertising is illegal. We will
vigorously defend this position and it is not possible at this time to estimate
a possible loss or range of loss, if any, in these lawsuits. However, an adverse
result in these lawsuits or similar class action lawsuits could have a material
adverse effect on our business.
33
Brown-Forman
CONSOLIDATED STATEMENT OF INCOME
(Expressed in millions, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
Net sales $2,223 $2,376 $2,577
Excise taxes 250 318 364
Cost of sales 841 878 915
--------------------------------
Gross profit 1,132 1,180 1,298
Advertising expenses 298 321 354
Selling, general, and administrative expenses 474 485 527
Other expense (income), net 7 (4) 10
--------------------------------
Operating income 353 378 407
Interest income 3 3 2
Interest expense 8 8 21
--------------------------------
Income before income taxes 348 373 388
Income taxes 120 128 130
--------------------------------
Net income $ 228 $ 245 $ 258
================================
Earnings per share
- Basic $ 1.66 $ 1.82 $ 2.12
- Diluted $ 1.66 $ 1.82 $ 2.11
The accompanying notes are an integral part of the consolidated financial
statements.
34
Brown-Forman
CONSOLIDATED BALANCE SHEET
(Expressed in millions, except share and per share amounts)
- --------------------------------------------------------------------------------
April 30, 2003 2004
- --------------------------------------------------------------------------------
Assets
- ------
Cash and cash equivalents $ 72 $ 68
Accounts receivable, less allowance for doubtful
accounts of $12 in 2003 and $11 in 2004 325 348
Inventories:
Barreled whiskey 222 218
Finished goods 203 185
Work in process 112 111
Raw materials and supplies 48 43
---------------------
Total inventories 585 557
Current portion of deferred income taxes 56 67
Other current assets 30 43
---------------------
Total Current Assets 1,068 1,083
Property, plant, and equipment, net 506 515
Prepaid pension cost 39 118
Investment in affiliates 41 45
Trademarks and brand names 235 247
Goodwill 311 315
Other assets 64 53
---------------------
Total Assets $2,264 $2,376
=====================
Liabilities
- -----------
Commercial paper $ 167 $ 50
Accounts payable and accrued expenses 297 271
Accrued taxes on income 44 48
Current portion of long-term debt 40 --
---------------------
Total Current Liabilities 548 369
Long-term debt, less unamortized
discount of $4 in 2003 and $3 in 2004 629 630
Deferred income taxes 78 122
Accrued pension and other postretirement benefits 143 137
Other liabilities 26 33
---------------------
Total Liabilities 1,424 1,291
---------------------
Commitments and contingencies
Stockholders' Equity
- --------------------
Common Stock:
Class A, voting, $0.15 par value;
authorized shares, 57,000,000;
issued shares, 56,841,000 4 9
Class B, nonvoting, $0.15 par value;
authorized shares, 100,000,000;
issued shares, 69,188,000 6 10
Retained earnings 1,506 1,236
Treasury stock, at cost
(16,857,000 and 4,441,000 common shares
in 2003 and 2004, respectively) (593) (156)
Accumulated other comprehensive loss:
Cumulative translation adjustment (2) 16
Pension liability adjustment (79) (32)
Unrealized gain (loss) on cash flow hedge contracts (2) 2
---------------------
Total accumulated other comprehensive loss (83) (14)
---------------------
Total Stockholders' Equity 840 1,085
---------------------
Total Liabilities and Stockholders' Equity $2,264 $2,376
=====================
The accompanying notes are an integral part of the consolidated financial
statements.
35
Brown-Forman
CONSOLIDATED STATEMENT OF CASH FLOWS
(Expressed in millions; amounts in brackets are reductions of cash)
- --------------------------------------------------------------------------------
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 228 $ 245 $ 258
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Depreciation 55 55 56
Deferred income taxes (43) (15) (1)
Other 3 1 4
Change in assets and liabilities, excluding
the effects of businesses acquired or sold:
Accounts receivable 23 (30) (23)
Inventories 5 2 25
Other current assets 5 (4) (13)
Accounts payable and accrued expenses 15 (18) (25)
Accrued taxes on income (13) 12 4
Noncurrent assets and liabilities (29) (5) 21
-------------------------
Cash provided by operating activities 249 243 306
-------------------------
Cash flows from investing activities:
Additions to property, plant, and equipment (71) (119) (56)
Acquisition of businesses, net of cash acquired -- (99) --
Computer software expenditures (8) (8) (5)
Trademark and patent expenditures -- (1) (2)
Disposals of property, plant, and equipment -- 1 --
-------------------------
Cash (used for) investing activities (79) (226) (63)
-------------------------
Cash flows from financing activities:
Net change in commercial paper (37) -- (117)
Proceeds from long-term debt -- 596 --
Debt issuance costs -- (4) --
Reduction of long-term debt -- -- (45)
Proceeds from exercise of stock options 4 7 12
Dividends paid (94) (99) (97)
Acquisition of treasury stock (13) (561) --
-------------------------
Cash (used for) financing activities (140) (61) (247)
-------------------------
Net increase (decrease) in cash and cash equivalents 30 (44) (4)
Cash and cash equivalents, beginning of year 86 116 72
-------------------------
Cash and cash equivalents, end of year $116 $ 72 $ 68
=========================
Supplemental disclosure of cash paid for:
Interest $ 8 $ 5 $ 21
Income taxes $175 $130 $129
The accompanying notes are an integral part of the consolidated financial
statements.
36
Brown-Forman
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Dollars expressed in millions, except per share amounts)
- --------------------------------------------------------------------------------
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
Class A Common Stock:
Balance at beginning of year $ 4 $ 4 $ 4
Stock split (2-for-1 in 2004) -- -- 5
---------------------------
Balance at end of year 4 4 9
---------------------------
Class B Common Stock:
Balance at beginning of year 6 6 6
Retirement of treasury stock -- -- (1)
Stock split (2-for-1 in 2004) -- -- 5
---------------------------
Balance at end of year 6 6 10
---------------------------
Retained Earnings:
Balance at beginning of year 1,226 1,360 1,506
Retirement of treasury stock -- -- (420)
Stock split (2-for-1 in 2004) -- -- (10)
Loss on issuance of treasury stock -- -- (4)
Tax benefit related to stock-based compensation -- -- 3
Net income 228 245 258
Cash dividends ($0.68, $0.73, and $0.80 per
share, split-adjusted, in 2002, 2003, and
2004, respectively) (94) (99) (97)
---------------------------
Balance at end of year 1,360 1,506 1,236
---------------------------
Treasury Stock, at cost:
Balance at beginning of year (32) (40) (593)
Acquisition of treasury stock (13) (561) --
Treasury stock issued under compensation plans 5 8 16
Retirement of treasury stock (567,000 Class A
and 5,414,000 Class B shares in 2004) -- -- 421
---------------------------
Balance at end of year (40) (593) (156)
---------------------------
Accumulated Other Comprehensive Income (Loss):
Balance at beginning of year (17) (19) (83)
Net other comprehensive income (loss) (2) (64) 69
---------------------------
Balance at end of year (19) (83) (14)
---------------------------
Total Stockholders' Equity $1,311 $840 $1,085
===========================
Comprehensive Income:
Net income $228 $245 $258
Other comprehensive income (loss):
Foreign currency translation adjustment 2 13 18
Pension liability adjustment,
net of tax of $52 in 2003 and $31 in 2004 (3) (76) 47
Amounts related to cash flow hedges:
Cumulative effect of accounting change,
net of tax of $1 in 2002 2 -- --
Reclassification to earnings,
net of tax of $1, $4, and $3 in 2002,
2003, and 2004, respectively (2) 6 5
Net loss on hedging instruments,
net of tax of $1, $4, and $1 in 2002,
2003, and 2004, respectively (1) (7) (1)
---------------------------
Net other comprehensive loss (2) (64) 69
---------------------------
Total Comprehensive Income $226 $181 $327
===========================
Class A Common Shares Outstanding (in thousands):
Balance at beginning of year 28,988 28,891 28,420
Acquisition of treasury stock (97) (471) --
Stock split (2-for-1 in 2004) -- -- 28,421
---------------------------
Balance at end of year 28,891 28,420 56,841
---------------------------
Class B Common Shares Outstanding (in thousands):
Balance at beginning of year 39,471 39,457 32,147
Acquisition of treasury stock (93) (7,436) --
Stock split (2-for-1 in 2004) -- -- 32,147
Treasury stock issued under compensation plans 79 126 453
---------------------------
Balance at end of year 39,457 32,147 64,747
---------------------------
Total Common Shares Outstanding (in thousands) 68,348 60,567 121,588
===========================
The accompanying notes are an integral part of the consolidated financial
statements.
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars expressed in millions, except per share and per option amounts)
1. ACCOUNTING POLICIES
References to "FASB" are to the Financial Accounting Standards Board, the
private-sector organization that establishes financial accounting and reporting
standards, including Statements of Financial Accounting Standards ("SFAS").
PRINCIPLES OF CONSOLIDATION. Our consolidated financial statements include the
accounts of all wholly-owned and majority-owned subsidiaries. We use the equity
method to account for investments in affiliates over which we can exercise
significant influence (but not control). We carry all other investments in
affiliates at cost. We eliminate all intercompany transactions.
CASH EQUIVALENTS. Cash equivalents include bank demand deposits and all highly
liquid investments with original maturities of three months or less.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We evaluate the collectibility of accounts
receivable based on a combination of factors. When we are aware of circumstances
that may impair a specific customer's ability to meet its financial obligations,
we record a specific allowance to reduce the net recognized receivable to the
amount we reasonably believe will be collected. For all other customers, we
recognize allowances for doubtful accounts based on the length of time the
receivables are outstanding, the current business environment, and our
historical collection experience for customers of similar nature and background.
INVENTORIES. We state inventories at the lower of cost or market, with
approximately 80% of consolidated inventories being valued using the last-in,
first-out (LIFO) method. All remaining inventories are valued using either the
first-in, first-out or the average cost methods. If we did not use the LIFO
method, inventories would have been $130 and $146 higher than reported at April
30, 2003 and 2004, respectively.
Whiskey must be barrel-aged for several years, so we bottle and sell only a
portion of our whiskey inventory each year. Following industry practice, we
classify all barreled whiskey as a current asset. We include warehousing,
insurance, ad valorem taxes, and other carrying charges applicable to barreled
whiskey in inventory costs.
We classify bulk wine inventories as work in process.
PROPERTY, PLANT, AND EQUIPMENT. We state property, plant, and equipment at cost
less accumulated depreciation. We calculate depreciation on a straight-line
basis over the estimated useful lives of the assets as follows: 20 to 40 years
for buildings and improvements, 3 to 10 years for machinery and equipment, and 3
to 7 years for capitalized software costs.
FOREIGN CURRENCY TRANSLATION. The U.S. dollar is the functional currency for
most of our consolidated operations. For those operations, we report all gains
and losses from foreign currency transactions in current income. The local
currency is the functional currency for some foreign operations. For those
investments, we report cumulative translation effects in the cumulative
translation adjustment to stockholders' equity.
REVENUE RECOGNITION. We recognize revenue when title and risk of loss pass to
the buyer, which typically is at the time the product is shipped.
COST OF SALES. Cost of sales includes the costs of receiving, producing,
inspecting, warehousing, insuring, and shipping goods sold during the period.
SHIPPING AND HANDLING FEES AND COSTS. We report the amounts we bill to our
customers for shipping and handling as net sales, and we report the costs we
incur for shipping and handling as cost of sales.
ADVERTISING COSTS. We expense most advertising costs as we incur them, but we
capitalize and amortize certain direct-response advertising costs over periods
not exceeding one year. Capitalized advertising costs totaled $9 at both April
30, 2003 and 2004.
SALES INCENTIVES. We offer sales discounts and provide consideration to certain
of our distributors under cooperative advertising arrangements. Discounts, which
are recorded as a reduction of net sales, totaled $107, $120, and $125 for 2002,
2003, and 2004, respectively. The cost of cooperative advertising arrangements,
which are recorded as advertising expenses, totaled $11, $10, and $9 for 2002,
2003, and 2004, respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses include the costs associated with our sales force,
administrative staff and facilities, and other expenses related to the
non-production functions of our business.
EARNINGS PER SHARE. We calculate basic earnings per share as net income divided
by the weighted average number of common shares outstanding during the year. We
calculate diluted earnings per share the same way, except that the denominator
also includes the additional common shares that would have been issued if
outstanding stock options had been exercised, as determined by applying the
treasury stock method.
The following table presents information concerning basic and diluted earnings
per share:
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
Basic and diluted net income $228 $245 $258
Share data (in thousands):
Basic average common shares outstanding 136,678 134,748 121,359
Effect of dilutive stock options 291 378 627
------------------------------
Diluted average common shares outstanding 136,969 135,126 121,986
==============================
Basic net income per share $1.66 $1.82 $2.12
Diluted net income per share $1.66 $1.82 $2.11
38
STOCK OPTIONS. 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
SFAS 123, "Accounting for Stock-Based Compensation."
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
Net income, as reported $228 $245 $258
Stock-based employee compensation
expense determined under fair value
based method, net of tax 4 4 4
---------------------------
Pro forma net income $224 $241 $254
===========================
Earnings per share - pro forma:
Basic $1.64 $1.79 $2.09
Diluted $1.64 $1.79 $2.08
Earnings per share - as reported:
Basic $1.66 $1.82 $2.12
Diluted $1.66 $1.82 $2.11
Our stock option 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 no more than the original number of
shares outstanding at inception of the stock option plan (as adjusted for any
share issuances unrelated to the plan). The extent to which the number of
diluted shares exceeds the number of basic shares is determined by how much our
stock price has appreciated since the options were granted, not by how many
treasury shares we have acquired.
ESTIMATES. To prepare financial statements that conform with generally accepted
accounting principles, our management must make informed estimates that affect
how we report revenues, expenses, assets, and liabilities, including contingent
assets and liabilities. Actual results could (and probably will) differ from
these estimates.
RECLASSIFICATIONS. We have reclassified some prior year amounts to conform with
this year's presentation.
OTHER. In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities," which addresses the accounting for assets held in
other entities such as trusts and special-purpose companies. As the leasing
arrangement that held our developing vineyard properties in a separate trust was
terminated in 2003, we had no variable interest entities subject to the
provisions of this Interpretation at April 30, 2003 or 2004.
2. GOODWILL AND OTHER INTANGIBLE ASSETS
In July 2001, the FASB issued SFAS 141, "Business Combinations," and SFAS 142,
"Goodwill and Other Intangible Assets." SFAS 141 requires that the purchase
method of accounting be used for all business combinations initiated or
completed after June 30, 2001. SFAS 141 also specifies the criteria under which
intangible assets acquired in a purchase method business combination should be
recognized and reported apart from goodwill. SFAS 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized, but
instead be assessed for impairment at least annually by applying a fair
value-based test. SFAS 142 also requires that intangible assets with definite
useful lives be amortized over their respective estimated useful lives to their
estimated residual values, and reviewed for impairment in accordance with SFAS
144, "Accounting for the Impairment or Disposal of Long-Lived Assets." We
adopted SFAS 142 as of May 1, 2001.
Equity method intangibles totaling $9 and $8 as of April 30, 2003 and 2004,
respectively, are included in "Investment in Affiliates" in the accompanying
consolidated balance sheet. We have no significant intangible assets with
definite useful lives and thus had no significant amortization expense during
the three years ended April 30, 2004.
39
3. ACQUISITIONS
The following are major acquisitions made over the past three years, each of
which was accounted for as a purchase.
FINLANDIA. During 2000, we acquired 45% of Finlandia Vodka Worldwide Ltd ("FVW")
for $84. We acquired an additional 35% interest for $72 (net of cash acquired)
in December 2002. This increased our total interest in FVW to 80% and our total
net investment to $158, which we have allocated to the individual assets and
liabilities acquired. The investment consists primarily of the Finlandia brand
name, which has an indefinite useful life. For financial reporting purposes, we
have assigned a value of $216 to the Finlandia brand name, which is partially
offset by a deferred income tax liability of $57.
The minority shareholder of FVW (Altia Corporation) has an option during a
two-year window beginning December 31, 2004, to require us to buy its remaining
20% interest in FVW. Buying the remaining interest would cost us approximately
39 million euros ($47 at April 30, 2004) plus interest of 4.5% per year from
August 1, 2000.
TUACA. In February 2003, we acquired the remaining 55% interest in Distillerie
Tuoni e Canepa ("T&C") for $27 in cash (net of cash acquired) and a promissory
note of $33 that was paid in March 2004. T&C is the Italy-based owner and
producer of Tuaca liqueur, which we have distributed in the United States since
1999. This increased our total investment in T&C to $77, which we have allocated
to the individual assets and liabilities acquired. The investment consists
primarily of indefinite-lived intangible assets, including the Tuaca brand name
and goodwill. For financial reporting purposes, we have assigned a value of $20
to the Tuaca brand name and $64 to goodwill.
The operating results of both FVW and T&C have been consolidated with our
financial statements since we acquired majority ownership during fiscal 2003.
(We previously accounted for our investments in those companies using the equity
method). Consolidated pro forma operating results for the fiscal years ended
April 30, 2002 and 2003 would not have been materially different from the actual
amounts reported for those periods.
The following table shows the effect of the T&C acquisition on the amount
recorded as goodwill in the accompanying consolidated balance sheet:
Consumer
Beverages Durables Total
--------- -------- --------
Goodwill:
Balance as of April 30, 2002 $116 $130 $246
Adjustments related to Tuoni e Canepa:
Reclassified from Investment in Affiliates 10 -- 10
Acquired during period 55 -- 55
------------------------------
Balance as of April 30, 2003 181 130 311
Adjustments related to Tuoni e Canepa:
Purchase price allocation adjustment (1) -- (1)
Foreign currency translation adjustment 5 -- 5
------------------------------
Balance as of April 30, 2004 $185 $130 $315
==============================
40
4. COMMITMENTS
We have contracted with various growers and wineries to supply some of our
future grape and bulk wine requirements. Many of these contracts call for prices
to be determined by market conditions, but some contracts provide for minimum
purchase prices that may exceed market prices. We have purchase obligations
related to these contracts of $37 in 2005, $35 in 2006, $34 in 2007, $26 in
2008, $17 in 2009, and $52 after 2009.
We made rental payments for real estate, vehicles, as well as office, computer,
and manufacturing equipment under operating leases of $31 in 2002, $32 in 2003,
and $35 in 2004. We have commitments related to minimum lease payments of $27 in
2005, $17 in 2006, $11 in 2007, $6 in 2008, $3 in 2009, and $4 after 2009.
5. CREDIT FACILITIES
We have committed revolving credit agreements with various domestic and
international banks for $400, $200 of which expire in fiscal 2005 and the
remaining $200 of which expire in fiscal 2007. The most restrictive of the
agreements' covenants requires that our consolidated total debt to consolidated
net worth not exceed a ratio of 2 to 1. At April 30, 2004, we were well within
this covenant's parameters. At April 30, 2004, we also had $220 of debt
securities available for issuance under an SEC shelf registration.
6. DEBT
Our long-term debt consisted of the following:
April 30, 2003 2004
- --------------------------------------------------------------------------------
2.125% notes, due 2006 $249 $249
3.0% notes, due 2008 347 348
6.82% to 7.38% notes, due 2005 30 30
Non-interest bearing note, due 2004 33 --
Variable rate industrial
revenue bonds, due through 2026 10 3
-------------------------------
$669 $630
Less current portion 40 --
-------------------------------
$629 $630
===============================
Debt payments required over the next five fiscal years consist of $280 in 2006
and $350 in 2008. The weighted average interest rates on the variable rate
industrial revenue bonds were 1.6% and 1.2% at April 30, 2003 and 2004,
respectively. In addition to long-term debt, we had commercial paper outstanding
with weighted average interest rates of 1.2% and 1.0% at April 30, 2003 and
2004, respectively.
7. FOREIGN CURRENCY RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
Effective May 1, 2001, we adopted SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." That Statement requires that all derivative
instruments be reported on the balance sheet at fair value. The cumulative
effect of adopting SFAS 133 was not material to our consolidated financial
statements.
We use foreign currency options and forward contracts, generally with average
maturities of less than one year, as protection against the risk that the
eventual U.S. dollar cash flows resulting from our forecasted sales and
purchases of goods in foreign currencies will be adversely affected by changes
in exchange rates. We designate these derivative financial instruments as cash
flow hedges.
We formally assess (both at inception and at least quarterly) whether the
derivative financial instruments are effective at offsetting changes in the cash
flows of the hedged transactions. We defer the effective portion of a
derivative's change in fair value in Accumulated Other Comprehensive Income
(Loss) until the underlying hedged transaction is recognized in earnings. We
recognize any ineffective portion of the change in fair value immediately in
earnings.
No material gains or losses were recognized in earnings due to the
ineffectiveness of cash flow hedges. We expect to reclassify the majority of the
existing $2 net gain from Accumulated Other Comprehensive Loss to earnings
during fiscal 2005. However, the amount we ultimately reclassify may differ as a
result of future changes in exchange rates.
We had outstanding foreign currency option and forward contracts, hedging
primarily British pound, Australian dollar, euro, and Japanese yen revenues,
with notional amounts totaling $110 and $188 at April 30, 2003 and 2004,
respectively. Our credit exposure is, however, limited to the contracts' fair
value (see Note 8) rather than their notional amounts. We minimize credit losses
by entering into foreign currency contracts only with major financial
institutions that have earned investment grade credit ratings.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash and cash equivalents and commercial paper approximates
the carrying amount due to the short maturities of these instruments.
We estimate the fair value of long-term debt using discounted cash flows based
on our incremental borrowing rates for similar debt. The fair value of foreign
currency contracts is based on quoted market prices. A comparison of the fair
values and carrying amounts of these instruments is as follows:
April 30, 2003 2004
- --------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------------------------------
Assets:
Cash and
cash equivalents $ 72 $ 72 $ 68 $ 68
Liabilities:
Foreign currency
contracts 3 3 6 6
Commercial paper 167 167 50 50
Long-term debt 669 669 630 623
41
9. BALANCE SHEET INFORMATION
April 30, 2003 2004
- --------------------------------------------------------------------------------
Property, plant, and equipment:
Land $ 88 $ 92
Buildings 314 346
Equipment 518 538
Construction in process 68 24
-------------------------------
988 1,000
Less accumulated depreciation 482 485
-------------------------------
$506 $515
===============================
Accounts payable and accrued expenses:
Accounts payable, trade $ 94 $ 92
Accrued expenses:
Advertising 50 37
Compensation and commissions 64 65
Excise and other non-income taxes 18 20
Self-insurance claims 12 12
Interest 4 4
Other 55 41
-------------------------------
203 179
-------------------------------
$297 $271
===============================
10. TAXES ON INCOME
We incur income taxes on our domestic and foreign operations. The following
table, which is based on the locations of the taxable entities from which sales
were derived (rather than the location of customers), presents the domestic and
foreign components of our income before income taxes:
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
United States $315 $305 $305
Foreign 33 68 83
------------------------------------
$348 $373 $388
====================================
The income shown above was determined according to financial accounting
standards. Because those standards sometimes differ from the tax rules used to
calculate taxable income, there are differences between: (a) the amount of
taxable income and pretax financial income for a year; and (b) the tax bases of
assets or liabilities and their amounts as recorded in our financial statements.
As a result, we recognize a current tax liability for the estimated income tax
payable on the current tax return, and deferred tax liabilities (income tax
payable on income that will be recognized on future tax returns) and deferred
tax assets (income tax refunds from deductions that will be recognized on future
tax returns) for the estimated effects of the differences mentioned above.
Deferred tax assets and liabilities as of the end of each of the last two years
were as follows:
April 30, 2003 2004
- --------------------------------------------------------------------------------
Deferred tax assets:
Postretirement and other benefits $ 54 $ 20
Accrued liabilities and other 15 9
Inventories 42 52
-----------------------------------
Total deferred tax assets 111 81
-----------------------------------
Deferred tax liabilities:
Trademarks and brand names 62 68
Property, plant, and equipment 38 48
Undistributed foreign earnings 17 17
Other 16 3
-----------------------------------
Total deferred tax liabilities 133 136
-----------------------------------
Net deferred tax liability $ 22 $ 55
===================================
Deferred tax liabilities were not provided on undistributed earnings of certain
foreign subsidiaries ($186 and $243 at April 30, 2003 and 2004, respectively)
because we expect these undistributed earnings to be reinvested indefinitely
overseas. If these amounts were not considered permanently reinvested,
additional deferred tax liabilities of approximately $41 and $45 would have been
provided as of April 30, 2003 and 2004, respectively.
Total income tax expense for a year includes the tax associated with the current
tax return ("current tax expense") and the change in the net deferred tax
liability ("deferred tax expense"). Total income tax expense for each of the
last three years was as follows:
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
Current:
Federal $144 $114 $100
Foreign 5 13 20
State and local 14 16 13
------------------------------------
163 143 133
------------------------------------
Deferred:
Federal (35) (11) 1
Foreign -- (2) (1)
State and local (8) (2) (3)
------------------------------------
(43) (15) (3)
------------------------------------
$120 $128 $130
====================================
Our consolidated effective tax rate may differ from current statutory rates due
to the recognition of amounts for events or transactions that have no tax
consequences. The following table reconciles our effective tax rate to the
federal statutory tax rate in the United States:
Percent of Income Before Taxes
- --------------------------------------------------------------------------------
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
U.S federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of U.S.
federal tax benefit 2.3 2.5 1.8
Income taxed at other than U.S.
federal statutory rate (1.3) (2.0) (1.4)
Tax benefit from export sales (2.0) (1.7) (2.1)
Other, net 0.5 0.4 0.2
-------------------------------------
Effective rate 34.5% 34.2% 33.5%
=====================================
42
11. PENSION AND OTHER POSTRETIREMENT BENEFITS
The following discussion provides information about our obligations related to
these plans, the assets that are dedicated to meeting the obligations, and the
amounts we recognized in our financial statements as a result of sponsoring
these plans. We use a measurement date of January 31 to determine the amounts of
the plan obligations and assets presented below.
OBLIGATIONS. We provide eligible employees with pension and other postretirement
benefits based on such factors as years of service and compensation level during
employment. The pension obligation shown below ("projected benefit obligation")
consists of: (a) benefits earned by employees to date based on current salary
levels ("accumulated benefit obligation"); and (b) benefits to be received by
the employees as a result of expected future salary increases. (The obligation
for medical and life insurance benefits is not affected by future salary
increases). This table shows how the present value of our obligation changed
during each of the last two years.
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 2003 2004
- --------------------------------------------------------------------------------
Obligation at beginning of year $402 $449 $ 69 $ 79
Service cost 13 14 2 2
Interest cost 27 29 5 5
Actuarial loss (gain) 25 38 7 (4)
Benefits paid (18) (19) (4) (3)
----------------------------------------
Obligation at end of year $449 $511 $ 79 $ 79
========================================
Service cost represents the present value of the benefits attributed to service
rendered by employees during the year. Interest cost is the increase in the
present value of the obligation due to the passage of time. Actuarial loss
(gain) is the change in value of the obligation resulting from experience
different from that assumed or from a change in an actuarial assumption. (The
actuarial assumptions used are discussed at the end of this note).
The Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the
Act") was enacted in December 2003. The Act provides a federal subsidy to plan
sponsors for certain qualifying prescription drug benefits covered under the
sponsor's postretirement medical benefit plans. The change in the obligation for
medical and life insurance benefits during 2004 includes a $7 million actuarial
gain resulting from the Act.
43
ASSETS. We specifically invest certain assets in order to fund our pension
benefit obligations. Our investment goal is to earn a total return that over
time will grow assets sufficient to fund our plans' liabilities, after providing
appropriate levels of contributions and accepting prudent levels of investment
risk. In order to achieve this goal, plan assets are invested primarily in
funds or portfolios of funds actively managed by outside managers. Investment
risk is managed to prudent levels by company policies that require
diversification of asset classes, manager styles and individual holdings. We
measure and monitor investment risk on an ongoing basis through quarterly and
annual performance reviews, and periodic asset/liability studies.
Asset allocation is the most important method for achieving our investment goals
and is based on our assessment of the plans' long-term return objectives and the
appropriate balances needed for liquidity, stability and diversification. The
allocation of our pension plan assets at fair value on January 31, 2003 and
2004, and the target allocation for 2005, by asset category, are as follows:
Asset Allocation
- --------------------------------------------------------------------------------
Actual Actual Target
2003 2004 2005
- --------------------------------------------------------------------------------
Equity securities 76% 73% 70%
Debt securities 21 15 15
Real estate -- 4 5
Other 3 8 10
----------------------------------------
Total 100% 100% 100%
========================================
This table shows how the fair value of the pension plan assets changed during
each of the last two years. (We do not have assets set aside for postretirement
medical or life insurance benefits).
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
Year Ended April 30, 2003 2004 2003 2004
- --------------------------------------------------------------------------------
Fair value at beginning of year $431 $334 $ -- $ --
Actual return on plan assets (80) 97 -- --
Retiree contributions -- -- 1 1
Company contributions 1 9 3 3
Benefits paid (18) (19) (4) (4)
----------------------------------------
Fair value at end of year $334 $421 $ -- $ --
========================================
Consistent with our funding policy, we expect to contribute $2 to our pension
plans and $5 to our other postretirement benefit plans in 2005.
FUNDED STATUS. The funded status of a plan refers to the difference between its
assets and its obligations. This amount differs from the amount recognized on
the balance sheet because, as discussed below, certain changes in the present
value of the obligation and the fair value of the plan assets are amortized over
several years for accounting purposes. This table reconciles the funded status
of the plans to the net amount recognized on the balance sheet.
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
April 30, 2003 2004 2003 2004
- --------------------------------------------------------------------------------
Assets $ 334 $ 421 $ -- $ --
Obligations (449) (511) (79) (79)
--------------------------------------
Funded status (115) (90) (79) (79)
Unrecognized net loss 203 187 12 7
Unrecognized prior service cost 8 8 5 5
Other (1) -- -- 1
--------------------------------------
Net amount recognized on balance sheet $ 95 $ 105 $(62) $(66)
======================================
The unrecognized net loss for the pension plans primarily relates to the
difference between the actual cumulative return on plan assets versus the
expected cumulative return. (See below for assumptions regarding expected return
on plan assets).
The net amount is recognized on the consolidated balance sheet as follows:
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
April 30, 2003 2004 2003 2004
- --------------------------------------------------------------------------------
Prepaid pension cost $ 39 $118 $ -- $ --
Accrued postretirement benefits (81) (71) (62) (66)
Other assets 6 5 -- --
Accumulated other comprehensive loss 131 53 -- --
--------------------------------------
Net amount recognized on balance sheet $ 95 $105 $(62) $(66)
======================================
This table compares our pension plans that have assets in excess of their
accumulated benefit obligations with those whose assets are less than their
obligations. (As discussed above, we do not have assets set aside for
postretirement medical or life insurance benefits).
Accumulated Projected
Benefit Benefit
Plan Assets Obligation Obligation
- -------------------------------------------------------------------------------
April 30, 2003 2004 2003 2004 2003 2004
- -------------------------------------------------------------------------------
Plans with assets in
excess of accumulated
benefit obligation $ 57 $292 $ 47 $259 $ 49 $292
Plans with accumulated
benefit obligation in
excess of assets 277 129 358 200 400 219
------------------------------------------------
Total $334 $421 $405 $459 $449 $511
================================================
44
PENSION INCOME. This table shows the components of the pension income recognized
during each of the last three years. The income for each year includes
amortization of the net loss (gain), prior service cost, and transition asset
that was unrecognized as of the beginning of the year.
Pension Benefits
- --------------------------------------------------------------------------------
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
Service cost $ 14 $ 13 $ 14
Interest cost 27 27 29
Expected return on plan assets (49) (49) (44)
Amortization of:
Unrecognized prior service cost 1 1 1
Unrecognized net loss (gain) (2) -- --
Unrecognized transition asset (3) (2) (1)
-----------------------------------------
Net income $(12) $(10) $ (1)
=========================================
The prior service cost represents the cost of retroactive benefits granted in
plan amendments. These costs are amortized on a straight-line basis over the
average remaining service period of the employees expected to receive the
benefits. The net loss (gain), which results from experience different from that
assumed or from a change in actuarial assumptions, is amortized over at least
that same period. The unrecognized transition asset was amortized on a
straight-line basis through 2004.
The pension income recorded during the year is estimated at the beginning of the
year. As a result, the amount is calculated using an expected return on plan
assets rather than the actual return. The difference between actual and expected
returns is included in the unrecognized net loss (gain) at the end of the year.
OTHER POSTRETIREMENT BENEFIT EXPENSE. This table shows the components of the
postretirement medical and life insurance benefit expense that we recognized
during each of the last three years.
Medical and Life Insurance Benefits
- --------------------------------------------------------------------------------
Year Ended April 30, 2002 2003 2004
- --------------------------------------------------------------------------------
Service cost $1 $2 $2
Interest cost 3 5 5
Amortization of unrecognized net loss -- -- 1
-----------------------------------------
Net expense $4 $7 $8
=========================================
ASSUMPTIONS AND SENSITIVITY. We use various assumptions in determining the
obligations and expense (income) related to our pension and other postretirement
benefit plans. The assumptions used in computing benefit plan obligations as of
the end of the last two years were as follows:
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
In Percent 2003 2004 2003 2004
- --------------------------------------------------------------------------------
Discount rate 6.50 6.00 6.50 6.00
Rate of salary increase 4.00 4.00 -- --
Expected return on plan assets 8.75 8.75 -- --
The assumptions used in computing benefit plan expense (income) during each of
the last three years were as follows:
Pension Medical and Life
Benefits Insurance Benefits
- --------------------------------------------------------------------------------
In Percent 2002 2003 2004 2002 2003 2004
- --------------------------------------------------------------------------------
Discount rate 7.50 7.00 6.50 7.50 7.00 6.50
Rate of salary increase 4.50 4.00 4.00 -- -- --
Expected return on plan assets 10.00 9.50 8.75 -- -- --
45
The discount rate represents the interest rate used to discount the cash-flow
stream of benefit payments to a net present value as of the current date. We
base this rate on Moody's AA corporate bond index. A lower assumed discount rate
increases the present value of the benefit obligation.
The assumed rate of salary increase reflects the expected annual increase in
salaries as a result of inflation, merit increases, and promotions. A lower
assumed rate decreases the present value of the benefit obligation.
The expected return on plan assets represents the long-term rate of return that
we assume will be earned over the life of our pension assets, considering the
distribution of those assets among investment categories and the related
historical rates of return.
The assumed healthcare cost trend rates as of the end of the last two years were
as follows:
Medical and Life Insurance Benefits
- --------------------------------------------------------------------------------
In Percent 2003 2004
- --------------------------------------------------------------------------------
Healthcare cost trend rates:
Present rate before age 65 9.44 8.88
Present rate age 65 and after 11.19 10.38
We project healthcare cost trend rates to decline gradually to 5.5% by 2010 and
to remain level after that. Assumed healthcare cost trend rates have a
significant effect on the amounts reported for postretirement medical plans. A
one percentage point increase/decrease in assumed healthcare cost trend rates
would have increased/decreased the accumulated postretirement benefit obligation
as of April 30, 2004 by $6 and the aggregate service and interest costs for 2004
by $1.
12. BUSINESS SEGMENT INFORMATION
We do business in two operating segments - Beverages and Consumer Durables.
These segments reflect the two categories of products from which we derive our
revenues. Our Beverage segment produces, imports, and markets wines and
distilled spirits. Our Consumer Durables segment manufactures and sells china,
crystal, ceramic and crystal collectibles, silver, luggage, and leather
accessories.
Segment accounting policies are the same as the policies described in Note 1. We
have no intersegment revenues.
The following tables reconcile segment operating results and asset information
to consolidated amounts.
2002 2003 2004
- --------------------------------------------------------------------------------
Net sales:
Beverages $1,618 $1,795 $1,992
Consumer Durables 605 581 585
-----------------------------------------------
Consolidated $2,223 $2,376 $2,577
===============================================
Operating income:
Beverages $ 336 $ 348 $ 390
Consumer Durables 17 30 17
Amounts not allocated to segments:
Interest expense, net (5) (5) (19)
-----------------------------------------------
Consolidated income
before income taxes $ 348 $ 373 $ 388
===============================================
Depreciation and amortization:
Beverages $ 37 $ 38 $ 40
Consumer Durables 18 17 16
-----------------------------------------------
Consolidated $ 55 $ 55 $ 56
===============================================
Goodwill:
Beverages $ 116 $ 181 $ 185
Consumer Durables 130 130 130
-----------------------------------------------
Consolidated $ 246 $ 311 $ 315
===============================================
Total assets:
Beverages $1,573 $1,809 $1,924
Consumer Durables 443 455 452
-----------------------------------------------
Consolidated $2,016 $2,264 $2,376
===============================================
Our investments in affiliates are included in the Beverage segment's assets.
Long-lived assets located outside the United States are not significant.
2002 2003 2004
- --------------------------------------------------------------------------------
Additions to long-lived assets:
Beverages $58 $ 96 $42
Consumer Durables 21 32 21
-----------------------------------------------
Consolidated $79 $128 $63
===============================================
The following table presents geographic information about net sales:
2002 2003 2004
- --------------------------------------------------------------------------------
Net sales:
United States $1,830 $1,824 $1,823
Other countries 393 552 754
-----------------------------------------------
$2,223 $2,376 $2,577
===============================================
Net sales are attributed to countries based on where customers are located.
46
13. 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. 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.
Brown-Forman and many other manufacturers of spirits, wine and beer are
defendants in a series of similar class action lawsuits seeking damages and
injunctive relief over alleged marketing of beverage alcohol to underage
consumers. The suits allege that the defendants have engaged in deceptive
marketing practices and schemes targeted at underage consumers, negligently
marketed their products to the underage, and fraudulently concealed their
alleged misconduct. Brown-Forman denies that we intentionally market beverage
alcohol products to minors and denies that our advertising is illegal. We will
vigorously defend this position and it is not possible at this time to estimate
a possible loss or range of loss, if any, in these lawsuits. However, an adverse
result in these lawsuits or similar class action lawsuits could have a material
adverse effect on our business.
14. ENVIRONMENTAL MATTERS
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 can be
reasonably estimated. 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.
15. STOCK OPTIONS
Under our Omnibus Compensation Plan ("the Plan"), we can grant stock options and
other stock-based incentive awards for a total of 6,800,000 shares of common
stock to eligible employees until April 30, 2005. Shares delivered to employees
are limited by the Plan to shares that we purchase for this purpose. No new
shares may be issued.
We grant stock options at an exercise price of not less than the fair value of
the underlying stock on the grant date. Except for the stock options granted at
an exercise price of $50 per share (discussed below), stock options granted
under the Plan become exercisable after three years from the first day of the
fiscal year of grant and expire seven years after that date. The fair values of
these options granted during 2002, 2003, and 2004 were $8.69, $7.77, and $9.29
per option, respectively. Fair values were estimated using the Black-Scholes
pricing model with the following assumptions:
2002 2003 2004
- --------------------------------------------------------------
Risk-free interest rate 4.8% 3.9% 3.6%
Expected volatility 23.6% 24.1% 24.6%
Expected dividend yield 2.1% 2.0% 1.9%
Expected life (years) 6 6 6
We have also granted 1,064,000 stock options with an exercise price of $50 per
share that become exercisable on May 1, 2006, and expire on September 1, 2007.
The fair value of these options was $2.89 per option, using the Black-Scholes
pricing model and assuming a risk-free interest rate of 6.0%, expected
volatility of 18.0%, an expected dividend yield of 2.2%, and an expected life of
eight years.
As of April 30, 2004, we have no other significant stock-based awards
outstanding under the Plan.
47
The following table summarizes option activity for the three years ended April
30, 2004. All options are for an equivalent number of shares of Class B common
stock.
Options Weighted
Outstanding Average Exercise
(in thousands) Price Per Option
----------- ----------------
Balance, April 30, 2001 3,577 $33.33
Granted 716 35.74
Exercised (159) 24.05
Forfeited (6) 31.18
----------- ----------------
Balance, April 30, 2002 4,128 34.10
Granted 742 32.13
Exercised (254) 26.58
Forfeited (31) 30.19
----------- ----------------
Balance, April 30, 2003 4,585 34.23
Granted 726 39.24
Exercised (459) 26.58
Forfeited (17) 33.68
----------- ----------------
Balance, April 30, 2004 4,835 $35.71
=========== ================
The following table summarizes the status of stock options outstanding as of
April 30, 2004, by exercise price:
Options Remaining Options
Exercise Price Outstanding Contractual Exercisable
Per Option (in thousands) Life (Years) (in thousands)
- -------------- ----------- ------------ -----------
$18.06 114 2.0 114
24.56 216 3.0 216
25.22 572 6.0 572
30.63 324 4.0 324
31.13 466 5.0 466
32.11 737 8.0 --
34.17 616 7.0 --
39.23 726 9.0 --
$50.00 1,064 3.3 --
----------- ------------ -----------
4,835 5.8 1,692
=========== ============ ===========
16. RESTRUCTURING COSTS
During 2002, we accrued $17 of costs related to our decision to close three
manufacturing plants in the Consumer Durables segment. The $17 included $9 of
severance costs for 600 terminated employees, $5 of other estimated cash
expenditures, and $3 of losses on impaired machinery and equipment. We closed
one plant during fiscal 2002 and the other two during fiscal 2003. We have
replaced the output of these plants by shifting a portion of production to two
of our other facilities and by outsourcing the remainder. During 2004, we
accrued an additional $2 for anticipated losses on the sale of buildings and
equipment. We have charged $16 of costs against the accrual through April 30,
2004, including $8 of severance costs, $5 of other cash expenditures, and $3 of
losses on impaired machinery and equipment, leaving a remaining accrual balance
of $3 as of April 30, 2004.
48
REPORT OF MANAGEMENT
As Brown-Forman's CEO and CFO, we are responsible for the presentation,
integrity, and objectivity of the information contained in these consolidated
financial statements. We have discharged this responsibility by establishing a
rigorous system of corporate conduct, internal audit, external audit, and board
oversight.
CORPORATE CONDUCT: In the current turbulent business climate, we are proud of
Brown-Forman's hard-earned reputation for conducting business in a forthright
manner. We take seriously our responsibility to foster a strong ethical climate
so that employees conduct the company's business according to the highest
personal and corporate standards.
Our Code of Conduct and Compliance Guidelines set out unambiguously each
employee's duty to ensure open communication throughout the company, disclose
potential conflicts of interest, comply with all applicable domestic and foreign
laws (including financial disclosure laws), and keep proprietary information
confidential. The company systematically assesses compliance with these
standards, including annual verification statements signed by all employees, and
review by the Audit Committee of our Board of Directors (comprising independent
directors).
INTERNAL AUDIT: We are also responsible for establishing and maintaining a
system of internal audit designed to provide reasonable assurance at a
reasonable cost that financial records are reliable for preparing financial
statements and that assets are properly accounted for and safeguarded. We
believe that, as of April 30, 2004, the internal audit system accomplishes its
objectives adequately.
EXTERNAL AUDIT: PricewaterhouseCoopers LLP, independent accountants (PwC),
audited the company's consolidated financial statements. As part of its audit,
PwC evaluated selected internal accounting controls to establish the nature,
timing, and extent of its audit tests. We gave PwC access to all the company's
financial records and related data, as well as the minutes of stockholders',
directors', and other appropriate meetings. We believe that all representations
made to PwC during the audit were valid and appropriate.
BOARD OVERSIGHT: The Board of Directors, through its Audit Committee, meets with
management, the internal auditors, and the independent accountants to ensure
that each is discharging its responsibilities properly. Both the independent
accountants and the internal auditors have free access to the Audit Committee,
without management present, to discuss the results of their work, including
internal accounting controls and the quality of financial reporting.
Accordingly, we can report that the consolidated financial statements in this
Annual Report have been prepared in accordance with generally accepted
accounting principles. They include amounts based on our best estimates and
judgments. We also prepared the related financial information in this report and
are responsible for its accuracy and consistency with the financial statements.
/s/ Owsley Brown II
Owsley Brown II
Chairman of the Board
and Chief Executive Officer
/s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President
and Chief Financial Officer
REPORT OF INDEPENDENT ACCOUNTANTS
TO BROWN-FORMAN CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of stockholders' equity and of cash flows
present fairly, in all material respects, the financial position of Brown-Forman
Corporation and Subsidiaries (the "Company") at April 30, 2003 and 2004, and the
results of their operations and their cash flows for each of the three years in
the period ended April 30, 2004 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
May 27, 2004
49
IMPORTANT INFORMATION ON FORWARD-LOOKING STATEMENTS
This annual report contains statements, estimates, or projections that
constitute "forward looking statements" as defined under U.S. federal securities
laws. Generally, the words "expect," "believe," "intend," "estimate," "will,"
"anticipate," and "project," and similar expressions 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.
We believe that the expectations and assumptions with respect to our
forward-looking statements are reasonable. But by their nature, forward-looking
statements involve known and unknown risks, uncertainties and other factors that
in some cases are out of our control. These factors could cause our actual
results to differ materially from Brown-Forman's historical experience or our
present expectations or projections. Here is a non-exclusive list of such risks
and uncertainties:
- changes in general economic conditions, particularly in the United
States where we earn the majority of our profits;
- a strengthening U.S. dollar against foreign currencies, especially
the British Pound;
- reduced bar, restaurant, hotel and travel business in wake of other
terrorist attacks, such as occurred on 9/11;
- developments in the class action lawsuits filed against Brown-Forman
and other spirits, beer and wine manufacturers alleging
that our advertising causes illegal consumption of alcohol by those
under the legal drinking age, or other attempts to limit alcohol
marketing, through either litigation or regulation;
- a dramatic change in consumer preferences, social trends or cultural
trends that results in the reduced consumption of our premium
spirits brands;
- tax increases, whether at the federal or state level;
- increases in the price of grain and grapes;
- continued depressed retail prices and margins in our wine business
because of our excess wine inventories, existing grape contract
obligations, and a world-wide oversupply of grapes; and
- the effects on our Consumer Durables business of the general economy,
department store business, response rates in our direct marketing
business, and profitability of mall outlet operations.
52
Exhibit 14
CODE OF ETHICS FOR SENIOR FINANCIAL OFFICERS
A. Purpose
At Brown-Forman Corporation (the "Company"), we pride ourselves on maintaining
the highest ethical standards in the conduct of our business. The Company's Code
of Conduct, together with our Compliance Guidelines, sets forth standards of
behavior for our employees regarding the ethical conduct of our business and our
relations with the public, customers, fellow employees, competitors, suppliers,
the media, government and others.
As a result of recent corporate scandals involving accounting and other
financial misconduct, newly passed laws and rules require the chief executive
officer and senior financial officers of public companies to adhere to a Code of
Ethics that is particularly focused on the behavior of individuals with primary
responsibility for financial and accounting functions, policies and public
disclosures. This Code of Ethics is incorporated into our Code of Conduct and
constitutes a Compliance Guideline for our Senior Financial Officers.
While these ethical requirements have always been part of our Code of Conduct,
by adopting this Code of Ethics the Company reaffirms its strong commitment to:
- Honest and ethical conduct, including the ethical handling of actual or
apparent conflicts of interest;
- Full, fair, accurate, timely and understandable disclosure in reports and
documents that The Company files with or submits to the Securities and
Exchange Commission and in other public communications made by the Company;
- Compliance with applicable governmental laws, rules and regulations,
including, without limitation, compliance with the Sarbanes-Oxley Act of
2002, as well as any implementing regulations promulgated by the Securities
and Exchange Commission and the corporate governance rules of the New York
Stock Exchange, and any other legal requirements that may be imposed by
governmental agencies and regulators to help restore investor confidence;
1
- The prompt internal reporting of violations of the Code of Ethics to any of
the persons set forth on Exhibit A hereto; and
- Accountability and adherence to the Code of Ethics.
B. Senior Financial Officers
For the purposes of this Code of Ethics, the Company's Senior Financial Officers
are the:
1. Chief Executive Officer;
2. Chief Financial Officer;
3. Directors of Corporate Finance, Corporate Development, Strategy, Tax, and
Investor Relations;
4. Controller; General Auditor; and Treasurer;
5. Chief Financial Officers of the operating groups, presently: Wine;
Spirits; Spirits Americas; Spirits Asia Pacific; Spirits Europe, Africa
and Eurasia; the Distillery Company, Hartmann and Lenox; and
6. Successor officers having substantially the same financial reporting
responsibilities, even though their job titles may be different.
C. Standard of Conduct
Under the Brown-Forman Compliance Program, the Company's financial officers
always have been expected to conduct the financial, accounting, reporting, and
auditing activities of the Company with the highest ethical standards and in
compliance with all laws and regulations. This Code of Ethics is not limited to
the situations described below, nor is it intended to address or anticipate all
situations involving financial officers with respect to the reliability and
accuracy of our books, records, and accounts, as well as the integrity of all
financial disclosures and financial dealings of the Company. It is intended to
convey that the Company expects our senior financial officers to engage only in
conduct that is above reproach and that fully reflects their duty to maintain
reliable and accurate financial records and reports for the Company.
2
Each Senior Financial Officer is required to:
1. Act in all Company financial and accounting matters with honesty,
integrity and fair dealing, and in full compliance with all applicable
laws and regulations.
2. Establish financial and accounting procedures that to the extent
reasonably possible ensure that the Company's books and records are
complete, accurate and conform with applicable national or international
accounting standards.
3. Never approve, authorize or participate in any activity that involves the
falsification of documents or accounts, the making of misleading or
intentionally incomplete entries into the Company's books and records, or
transactions or recording of business transactions off the Company's books
and records. Any Senior Financial Officer who becomes aware of such
activities is required to report them to his or her superior; if the
matter is not promptly corrected, the officer shall report it to the
General Auditor, the General Counsel, or the Audit Committee of the Board
of Directors (the "Audit Committee").
4. Elevate his or her duty of loyalty and care to the interests of the
Company over any personal or family interest or the interests of third
parties and avoid becoming involved in any transaction that creates a
material conflict of interest with the Company; and disclose to any of the
persons in Exhibit A for prior review and approval any situation that
might reasonably be expected to give an appearance of a personal benefit
to the financial officer, his or her family, or other third parties at the
expense of, or to the disadvantage of the Company.
5. Impose systems and processes which, if followed and monitored, provide
reasonable assurance that Company officers and directors do not use
Company funds or assets for unauthorized (as opposed to approved
perquisites) personal benefit, or for the benefit of their relatives or
other third parties.
3
6. Engage in dealings with outside and internal auditors that are open,
honest, and not misleading.
7. Respect the confidentiality of information acquired in the course of one's
work except when authorized or otherwise legally obligated to disclose.
8. Avoid having an ownership interest in any other enterprise if that
interest compromises your loyalty to the Company. For example, you may
not own an interest in a company that competes with the Company or that
does business with the Company unless you obtain the written approval of
any of the persons listed on Exhibit A hereto before making any such
investment. However, it is not typically considered, and the Company does
not consider it, a conflict of interest (and therefore prior written
approval is not required) to make investments in competitors, clients or
suppliers that are listed on a national or international securities
exchange so long as the total value of the investment is less than one
percent (1%) of the outstanding stock of the company and the amount of the
investment is not so significant that it would affect your business
judgment on behalf of the Company. Also, this is not intended to prohibit
an ownership interest, of any amount, in a company that makes products
that compete with the Company's products, so long as the product line
involved does not represent more than five percent of the Company's
consolidated gross revenues for its last full fiscal year.
9. Being employed by or serving as a director of a competitor of the Company
is strictly prohibited, as is any activity that is intended to or that you
should reasonably expect to advance a competitor's interests at the
expense of the Company's interests. You may not market products or
services in competition with the Company's current or potential business
activities. It is your responsibility to consult with the Chief Executive
Officer to determine whether a planned activity will compete with any of
the Company's business activities before you pursue the activity in
question. However, it is not typically considered, and the Company does
not consider it, a conflict of interest (and therefore prior written
approval is not required) to serve as a director of a company that makes
products that compete with the Company's products, so long as the product
line involved does not represent more than five percent of the Company's
consolidated gross revenues for its last full fiscal year. The provisions
of this paragraph 9 do not apply to an employee who serves on the board of
a corporation or joint venture at Brown-Forman's request.
4
10. Directly, or through another of the Senior Financial Officers, fully,
regularly and accurately report to the Audit Committee concerning material
financial accounting and reporting activities of the Company, including:
- any proposed significant changes in Company accounting policies and
practices;
- assurance that the financial and accounting aspects of all projects,
activities, reports, or other business that come before them are
lawful, accurate complete, in conformance with general accepted
accounting practices, corporate policy and procedure, and not
designed for some ulterior or misleading purpose;
- timely, accurate and complete disclosures to the Audit Committee and
others, as appropriate, of any violation of Company financial and
accounting policies or procedures; and
- annual assurance to the Audit Committee that internal financial
control systems are reasonably designed to detect fraud in the
financial books and records of the Company.
D. Penalties for Failure to Comply
Senior Financial Officers who fail to comply with this Code are subject to
disciplinary action, up to and including termination from the Company. The
Company may also refer matters involving a violation of this Code of Ethics to
the relevant government regulatory and enforcement agencies, as circumstances
may warrant.
5
E. Confidential Disclosure and Monitoring Procedures
All employees have the responsibility to report observed or suspected violations
of law, Company policy, or this Code of Ethics for Senior Financial Officers, as
well as any activity that might constitute financial fraud or financial
misconduct, to any one of the individuals listed in the attached Exhibit A or to
the Audit Committee under the Complaint Handling and Review Procedure. Like all
employees, the Senior Financial Officers should each also promptly make all
facts known to his or her supervisor if at any time he or she believes that
someone is engaged in an or may engage in an activity that violates the
Brown-Forman Code of Conduct and Compliance Guidelines. If the employee believes
his or her supervisor may be engaged in the questionable activity or is
reporting to someone who may be so engaged, the employee should report the
relevant facts to the Compliance Omsbudsman in the Legal Department.
It is the duty of the responsible Chief Financial Officer, along with the Legal
Department and the General Auditor, to ensure that any suspected misconduct or
financial fraud is disclosed promptly to the Audit Committee.
A Senior Financial Officer may also report suspected misconduct or financial
fraud directly to the Audit Committee.
For the complete Code of Conduct, Compliance Guidelines, and other Compliance
Officers and reporting vehicles, refer to the Compliance Center on BF Connect or
Lenox LEO.
F. Penalties for Retaliation Against Employees Who Report Financial Misconduct
In Good Faith
It is the Company's policy that no employee who makes good faith reports of
suspected misconduct, including any violation of this or other the Company
policies, guidelines, or procedures, shall suffer retaliatory acts from any
Company employee, officer, manager or director. Any employee who believes that
he or she is suffering retaliation for making a good faith report of a violation
of this Code or other Company policy and procedure should notify the General
Counsel, the General Auditor, or the Audit Committee. Employees, officers,
managers or directors who are determined to have engaged in such retaliation are
subject to immediate termination of employment from the Company, as the
situation and facts warrant.
6
EXHIBIT A*
Chief Financial Officer Phoebe Wood 502-774-7841
General Counsel Michael Crutcher 502-774-7202
General Auditor Fred Ament 502-774-7450
B-F Compliance Ombudsman Bill Blodgett 502-774-7202
Lenox/Hartmann Compliance Ombudsman Lou Fantin 609-844-1333
V.P. Finance Jane Morreau 502-774-7165
* This Exhibit A is intended to encompass the current positions listed above.
If there is a change in personnel, the new person shall be deemed to be the
occupant of the position. If there is a change in the nature of the
position, due to organizational restructuring or otherwise, then this
Exhibit A shall be deemed to be modified to include those positions
exercising the same or similar functions as the positions listed above,
and the persons holding them from time to time.
7
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Percentage State or
of Voting Jurisdiction
Name Securities Owned of Incorporation
- ---- ---------------- ----------------
AMG Trading, L.L.C. 100% Delaware
Brown-Forman Beverages Australia Pty. Ltd. 100% Australia
Brown-Forman Beverages North Asia, L.L.C. 100% Delaware
B-F Korea, L.L.C. 100% Delaware
Brown-Forman Beverages Poland 100% Poland
Brown-Forman Beverages UK, Ltd. 100% United Kingdom
Brown-Forman Relocation Corp. 100% Kentucky
Canadian Mist Distillers, Limited 100% Ontario, Canada
Early Times Distillers Company 100% Delaware
Fetzer Vineyards 100% California
Fratelli Bolla International Wines, Inc. 100% Kentucky
Hartmann Incorporated 100% Delaware
Heddon's Gate Investments, L.L.C. 100% Delaware
Jack Daniel's Properties, Inc. 100% Delaware
Lenox, Incorporated 100% New Jersey
Mt. Eagle Corporation 100% Delaware
Sonoma-Cutrer Vineyards, Inc. 100% California
Southern Comfort Properties, Inc. 100% California
Washington Investments, L.L.C. 100% Kentucky
Longnorth Limited 100% (1) (3) Ireland
Clintock Limited 100% (1) (4) Ireland
Brooks & Bentley Limited 100% (2) United Kingdom
DID, Incorporated 100% (2) Delaware
Voldgade Investment Holdings A/S 100% (3) Denmark
Pitts Bay Trading Limited 75% (4) Bermuda
BFC Tequila Limited 67% (4) Ireland
Drake Investments, Inc. 100% (5) Delaware
Jack Daniel Distillery,
Lem Motlow, Prop., Inc. 100% (5) Tennessee
Brown-Forman Korea Ltd. 100% (6) Korea
Fratelli Bolla, S.p.A. 100% (7) Italy
Finlandia Vodka Worldwide Ltd. 80% (8) Finland
Alkometa s.r.o. 100% (9) Czech Republic
Finlandia Polska 100% (9) Poland
Brown-Forman Beverages Worldwide,
Comercio de Bebidas Ltda. 100% (10) Brazil
Brown-Forman Worldwide, L.L.C. 100% (10) Delaware
JDPI Investments, L.L.C. 100% (11) Delaware
Amercain Investments C.V. 100% (12) Netherlands
Brown-Forman Beverages Africa, Ltd. 100% (13) Bermuda
Distillerie Tuoni e Canepa Srl 100% (14) Italy
The companies listed above constitute all active subsidiaries in which
Brown-Forman Corporation owns, either directly or indirectly, the majority of
the voting securities. No other active affiliated companies are controlled by
Brown-Forman Corporation.
(1) Includes qualifying shares assigned to Brown-Forman Corporation.
(2) Owned by Lenox, Incorporated.
(3) Owned by Amercain Investments C.V.
(4) Owned by Longnorth Limited.
(5) Owned by Jack Daniel's Properties, Inc.
(6) Owned by B-F Korea, L.L.C.
(7) Owned by Fratelli Bolla International Wines, Inc.
(8) Owned by Voldgade Investment Holdings A/S.
(9) Owned by Finlandia Vodka Worldwide Ltd.
(10) Owned 99% by Brown-Forman Corporation and 1% by Early Times Distillers
Company.
(11) Owned 99% by Jack Daniel's Properties, Inc. and 1% by Fetzer Vineyards.
(12) Owned 95% by Brown-Forman Corporation and 5% by Heddon's Gate
Investments, L.L.C.
(13) Owned 99% by Clintock Limited and 1% by Longnorth Limited.
(14) Owned 55% by Fratelli Bolla International Wines, Inc. and 45% by
Voldgade Investment Holdings A/S.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-3 (Nos. 33-12413 and 33-52551) and Form S-8 (No. 333-08311,
333-38649, 333-74567, 333-77903, 333-88925 and 333-89294) of Brown-Forman
Corporation and Subsidiaries of our report dated May 27, 2004 relating to the
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K. We also consent to the
incorporation by reference of our report dated May 27, 2004 relating to the
financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
July 1, 2004
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 Annual Report on Form 10-K 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)) 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) 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
c) 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: July 1, 2004 By: /s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer
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 Annual Report on Form 10-K 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)) 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) 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
c) 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: July 1, 2004 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Chief Financial Officer
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 Annual Report of Brown-Forman Corporation ("the Company")
on Form 10-K for the period ended April 30, 2004, 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.
Dated: July 1, 2004
/s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer and Chairman
Dated: July 1, 2004
/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.
This certificate is being furnished solely for purposes of Section 906 and is
not being filed as part of the Report.