Back to GetFilings.com
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 31, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 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
Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
(502) 585-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: November 30, 2004
Class A Common Stock ($.15 par value, voting) 56,782,037
Class B Common Stock ($.15 par value, nonvoting) 65,003,823
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Statement of Income
Three months ended October 31, 2003 and 2004 3
Six months ended October 31, 2003 and 2004 3
Condensed Consolidated Balance Sheet
April 30, 2004 and October 31, 2004 4
Condensed Consolidated Statement of Cash Flows
Six months ended October 31, 2003 and 2004 5
Notes to the Condensed Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 19
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
Item 4. Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 20 - 21
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 21
Item 6. Exhibits 21
Signatures 22
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF INCOME
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Six Months Ended
October 31, October 31,
2003 2004 2003 2004
------- ------- -------- --------
Net sales $ 724.5 $ 779.7 $1,256.2 $1,357.7
Excise taxes 98.1 109.6 169.9 191.6
Cost of sales 262.3 269.2 450.8 467.6
------- ------- -------- --------
Gross profit 364.1 400.9 635.5 698.5
Advertising expenses 95.0 101.4 172.5 182.0
Selling, general, and
administrative expenses 131.7 139.4 260.9 272.7
Other expense (income), net (1.4) 1.1 11.2 2.0
------- ------- -------- --------
Operating income 138.8 159.0 190.9 241.8
Interest income 0.5 0.4 0.9 0.8
Interest expense 5.6 5.1 10.9 10.3
------- ------- -------- --------
Income before income taxes 133.7 154.3 180.9 232.3
Taxes on income 45.5 51.7 61.5 77.8
------- ------- -------- --------
Net income $ 88.2 $ 102.6 $ 119.4 $ 154.5
======= ======= ======== ========
Earnings per share
- Basic $ 0.73 $ 0.84 $ 0.98 $ 1.27
- Diluted $ 0.72 $ 0.84 $ 0.98 $ 1.26
Shares (in thousands) used in the
calculation of earnings per share
- Basic 121,315 121,737 121,266 121,708
- Diluted 121,841 122,417 121,774 122,409
Cash dividends per common share
- Declared $0.0000 $0.0000 $ 0.3750 $ 0.4250
- Paid $0.1875 $0.2125 $ 0.3750 $ 0.4250
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Dollars in millions)
April 30, October 31,
2004 2004
(Unaudited)
-------- --------
Assets
- ------
Cash and cash equivalents $ 67.7 $ 85.8
Accounts receivable, net 348.6 488.7
Inventories:
Barreled whiskey 217.9 225.5
Finished goods 185.4 217.6
Work in process 111.0 107.2
Raw materials and supplies 42.9 51.4
-------- --------
Total inventories 557.2 601.7
Current portion of deferred income taxes 66.9 66.9
Other current assets 43.1 32.9
-------- --------
Total current assets 1,083.5 1,276.0
Property, plant and equipment, net 515.2 507.6
Prepaid pension cost 118.2 118.6
Investment in affiliates 44.6 46.5
Trademarks and brand names 246.6 249.1
Goodwill 314.6 318.4
Other assets 53.3 47.5
-------- --------
Total assets $2,376.0 $2,563.7
======== ========
Liabilities
- -----------
Commercial paper $ 49.5 $ 26.8
Accounts payable and accrued expenses 271.5 344.9
Current portion of long-term debt -- 30.0
Accrued taxes on income 48.0 82.0
-------- --------
Total current liabilities 369.0 483.7
Long-term debt 630.0 601.1
Deferred income taxes 122.2 100.5
Accrued pension and other
postretirement benefits 136.7 141.3
Other liabilities 33.0 34.3
-------- --------
Total liabilities 1,290.9 1,360.9
Commitments and contingencies
Stockholders' Equity
- --------------------
Common stock:
Class A, voting (57,000,000 shares
authorized; 56,841,000 shares issued) 8.5 8.5
Class B, nonvoting (100,000,000 shares
authorized; 69,188,000 shares issued) 10.4 10.4
Retained earnings 1,236.2 1,340.2
Accumulated other comprehensive loss (14.3) (4.7)
Treasury stock (4,441,000 and 4,245,000 shares
at April 30 and October 31, respectively) (155.7) (151.6)
-------- --------
Total stockholders' equity 1,085.1 1,202.8
-------- --------
Total liabilities and stockholders' equity $2,376.0 $2,563.7
======== ========
Note: The balance sheet at April 30, 2004, has been taken from the audited
financial statements at that date, and condensed.
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(In millions; amounts in parentheses are reductions of cash)
Six Months Ended
October 31,
2003 2004
------- -------
Cash flows from operating activities:
Net income $ 119.4 $ 154.5
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation 27.4 28.9
Deferred income taxes (3.9) (21.7)
Changes in assets and liabilities:
Accounts receivable (106.6) (140.1)
Inventories (41.2) (44.5)
Other current assets 0.4 10.2
Accounts payable and accrued expenses 38.2 73.4
Accrued taxes on income 14.8 34.0
Noncurrent assets and liabilities 6.9 17.7
------- -------
Cash provided by operating activities 55.4 112.4
Cash flows from investing activities:
Additions to property, plant, and equipment (29.1) (21.5)
Computer software expenditures (2.1) (1.4)
Trademark and patent expenditures (1.1) (0.3)
------- -------
Cash used for investing activities (32.3) (23.2)
Cash flows from financing activities:
Net change in commercial paper 26.7 (22.7)
Proceeds from long-term debt -- 0.5
Reduction of long-term debt (7.4) --
Proceeds from exercise of stock options 5.6 5.7
Acquisition of treasury stock -- (2.9)
Dividends paid (45.5) (51.7)
------- -------
Cash used for financing activities (20.6) (71.1)
------- -------
Net increase in cash and cash equivalents 2.5 18.1
Cash and cash equivalents, beginning of period 72.0 67.7
------- -------
Cash and cash equivalents, end of period $ 74.5 $ 85.8
======= =======
See notes to the condensed consolidated financial statements.
5
BROWN-FORMAN CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, "we," "us," and "our" refer to Brown-Forman Corporation.
1. Condensed Consolidated Financial Statements
We prepared these unaudited condensed consolidated financial statements using
our customary accounting practices as set out in our 2004 annual report on Form
10-K (the "2004 Annual Report"). We made all of the adjustments (which include
only normal, recurring adjustments) needed for a fair statement of this data.
We condensed or omitted some of the information found in financial statements
prepared according to generally accepted accounting principles ("GAAP"). You
should read these financial statements together with the 2004 Annual Report,
which does conform to GAAP.
2. Inventories
We use the last-in, first-out ("LIFO") method to determine the cost of most of
our inventories. If the LIFO method had not been used, inventories at current
cost would have been $145.6 million higher than reported as of April 30, 2004,
and $150.3 million higher than reported as of October 31, 2004. Changes in the
LIFO valuation reserve for interim periods are based on a proportionate
allocation of the estimated change for the entire fiscal year.
3. Taxes on Income
Our consolidated effective tax rate may differ from current statutory rates due
to the recognition of amounts for events or transactions that do not have tax
consequences. We use the estimated annual effective tax rate in determining our
interim results.
4. Earnings Per Share
Basic earnings per share is calculated as net income divided by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is calculated in the same manner, except that the denominator also
includes additional common shares that would have been issued if outstanding
stock options had been exercised during the period. The dilutive effect of
outstanding stock options is determined by application of the treasury stock
method. Stock options for approximately 1.7 million common shares have been
excluded from the calculation of diluted earnings per share because the exercise
price of the options was greater than the average market price of the shares.
6
The following table presents information concerning basic and diluted earnings
per share:
Three Months Ended Six Months Ended
October 31, October 31,
2003 2004 2003 2004
------ ------ ------ ------
Basic and diluted
net income (in millions) $ 88.2 $102.6 $119.4 $154.5
Share data (in thousands):
Basic average common
shares outstanding 121,315 121,737 121,266 121,708
Effect of dilutive
stock options 526 680 508 701
------ ------ ------ ------
Diluted average common
shares outstanding 121,841 122,417 121,774 122,409
Basic net income per share $0.73 $0.84 $0.98 $1.27
Diluted net income per share $0.72 $0.84 $0.98 $1.26
5. 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 Financial
Accounting Standards Board Statement No. 123, "Accounting for Stock-Based
Compensation."
(Dollars in millions, except per share amounts)
Three Months Ended Six Months Ended
October 31, October 31,
2003 2004 2003 2004
------ ------ ------ ------
Net income, as reported $ 88.2 $102.6 $119.4 $154.5
Stock-based employee compensation
expense determined under fair
value based method, net of tax (1.0) (1.2) (1.7) (1.9)
------ ------ ------ ------
Pro forma net income $ 87.2 $101.4 $117.7 $152.6
====== ====== ====== ======
Earnings per share - pro forma:
Basic $0.72 $0.83 $0.97 $1.25
Diluted $0.72 $0.83 $0.97 $1.25
Earnings per share - as reported:
Basic $0.73 $0.84 $0.98 $1.27
Diluted $0.72 $0.84 $0.98 $1.26
7
The plan requires that we purchase shares to satisfy stock option requirements,
thereby avoiding future dilution of earnings that would occur from issuing
additional shares. We acquire treasury shares from time to time in anticipation
of these requirements. We intend to hold enough treasury stock so that the
number of diluted shares is never 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 options were granted, irrespective of how many
treasury shares we have acquired.
6. Environmental
We face environmental claims resulting from the cleanup of several manufacturing
or waste disposal sites in the United States. We accrue for losses associated
with environmental cleanup obligations when such losses are probable and
reasonably estimable. At some sites, there are other potentially responsible
parties who are expected to bear part of the costs, in which cases our accrual
is based on our estimate of our share of the total costs. A portion of the
cleanup costs with respect to certain sites is expected to be paid by insurance.
The estimated recovery of cleanup costs from insurers is recorded as an asset
when receipt is deemed probable.
We do not believe that any additional environmental cleanup costs we incur will
have a material adverse effect on our consolidated financial position, results
of operations, or cash flows.
7. 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.
8
8. Pension and Other Postretirement Benefits
The following table shows the components of the pension and other postretirement
benefit expense recognized during the periods covered by this report:
(Dollars in millions) Three Months Ended Six Months Ended
October 31, October 31,
2003 2004 2003 2004
----- ----- ----- -----
Pension Benefits:
Service cost $ 3.6 $ 4.2 $ 7.1 $ 8.3
Interest cost 7.1 7.5 14.3 15.0
Expected return on plan assets (11.0) (10.8) (22.0) (21.6)
Amortization of:
Unrecognized prior service cost 0.3 0.2 0.6 0.5
Unrecognized net loss (gain) 0.2 1.1 0.4 2.2
Unrecognized transition asset (0.4) -- (0.7) --
----- ----- ----- -----
Net expense (income) $(0.2) $ 2.2 $(0.3) $ 4.4
===== ===== ===== =====
Other Postretirement Benefits:
Service cost $ 0.5 $ 0.4 $ 1.0 $ 0.9
Interest cost 1.2 1.0 2.5 2.0
Amortization of:
Unrecognized prior service cost 0.1 0.1 0.1 0.1
Unrecognized net loss (gain) 0.3 -- 0.5 --
----- ----- ----- -----
Net expense $ 2.1 $ 1.5 $ 4.1 $ 3.0
===== ===== ===== =====
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. We estimate that the subsidy has
reduced our postretirement medical benefit obligation by $16 million. The
postretirement medical expense recognized during the three months ended October
31, 2004 includes a subsidy-related reduction of $0.6 million ($0.1 million of
service cost, $0.3 million of interest cost, and $0.2 million of amortization of
gain). The postretirement medical expense recognized during the six months ended
October 31, 2004 includes a subsidy-related reduction of $1.2 million ($0.3
million of service cost, $0.5 million of interest cost, and $0.4 million of
amortization of gain).
9
9. Business Segment Information
(Dollars in millions) Three Months Ended Six Months Ended
October 31, October 31,
2003 2004 2003 2004
------ ------ -------- --------
Net sales:
Beverages $543.9 $619.4 $ 966.7 $1,094.0
Consumer Durables 180.6 160.3 289.5 263.7
------ ------ -------- --------
Consolidated net sales $724.5 $779.7 $1,256.2 $1,357.7
====== ====== ======== ========
Operating income (loss):
Beverages $119.8 $145.6 $ 183.9 $ 243.3
Consumer Durables 19.0 13.4 7.0 (1.5)
------ ------ -------- --------
138.8 159.0 190.9 241.8
Interest expense, net 5.1 4.7 10.0 9.5
------ ------ -------- --------
Income before income taxes $133.7 $154.3 $ 180.9 $ 232.3
====== ====== ======== ========
Consumer
Beverages Durables Total
--------- -------- ------
Goodwill:
Balance as of April 30, 2004 $184.3 $130.3 $314.6
Foreign currency translation
adjustment 3.8 -- 3.8
------ ------ ------
Balance as of October 31, 2004 $188.1 $130.3 $318.4
====== ====== ======
10. Comprehensive Income
Comprehensive income is a broad measure of the effects of all transactions and
events (other than investments by or distributions to shareholders) that are
recognized in stockholders' equity, regardless of whether those transactions and
events are included in net income. The following table adjusts the company's net
income for the other items included in comprehensive income:
(Dollars in millions) Three Months Ended Six Months Ended
October 31, October 31,
2003 2004 2003 2004
------ ------ ------ ------
Net income $ 88.2 $102.6 $119.4 $154.5
Other comprehensive income (loss):
Net gain (loss) on cash flow hedges (0.7) (1.9) 0.1 (3.0)
Net gain (loss) on securities (0.1) (0.3) 0.2 (0.2)
Foreign currency translation
adjustment 4.9 9.9 7.7 12.8
------ ------ ------ ------
Other comprehensive income 4.1 7.7 8.0 9.6
------ ------ ------ ------
Comprehensive income $ 92.3 $110.3 $127.4 $164.1
====== ====== ====== ======
10
Accumulated other comprehensive loss (income) consisted of the following:
(Dollars in millions) April 30, October 31,
2004 2004
------ ------
Pension liability adjustment $ 31.8 $ 31.8
Cumulative translation adjustment (15.5) (28.3)
Unrealized (gain) loss on
cash flow hedge contracts (1.6) 1.4
Unrealized gain on securities (0.4) (0.2)
------ ------
$ 14.3 $ 4.7
====== ======
11. Reclassifications
Certain prior year amounts have been reclassified to conform with the current
year presentation.
12. Subsequent Event
In November, we reached an agreement with the Altia Corporation of Finland
("Altia") to acquire the remaining 20% of the capital stock of Finlandia Vodka
Worldwide Ltd. ("FVW") for 46.8 million euros (approximately $62 million at the
current exchange rate). As previously disclosed, we acquired 45% of FVW in 2000
and an additional 35% in 2002. The 2002 acquisition agreement granted Altia an
option to require Brown-Forman to buy its remaining interest in FVW during a
two-year window beginning December 31, 2004. The new transaction reflects
Altia's exercise of that option. Closing is expected to occur during the
company's third quarter.
11
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis along with our 2004 Annual
Report. Note that the results of operations for the six months ended October 31,
2004 do not necessarily indicate what our operating results for the full fiscal
year will be. In this Item, "we," "us," "our," and "the company" refer to Brown-
Forman Corporation.
Important Note on Forward-Looking Statements:
This 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.
12
Results of Operations:
Second Quarter Fiscal 2005 Compared to Second Quarter Fiscal 2004
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Three Months Ended
October 31,
2003 2004 Change
------ ------ ------
Net Sales:
Beverages $543.9 $619.4 14%
Consumer Durables 180.6 160.3 (11%)
------ ------
Total $724.5 $779.7 8%
Gross Profit:
Beverages $279.0 $326.9 17%
Consumer Durables 85.1 74.0 (13%)
------ ------
Total $364.1 $400.9 10%
Advertising Expenses:
Beverages $ 72.1 $ 80.9 12%
Consumer Durables 22.9 20.5 (11%)
------ ------
Total $ 95.0 $101.4 7%
SG&A Expenses:
Beverages $ 90.1 $100.9 12%
Consumer Durables 41.6 38.5 (7%)
------ ------
Total $131.7 $139.4 6%
Other Expense (Income):
Beverages $ (3.1) $ (0.5)
Consumer Durables 1.7 1.6
------ ------
Total $ (1.4) $ 1.1
Operating Income:
Beverages $119.8 $145.6 22%
Consumer Durables 19.0 13.4 (30%)
------ ------
Total $138.8 $159.0 15%
Net Income $ 88.2 $102.6 16%
Earnings per Share - Basic $ 0.73 $ 0.84 16%
Earnings per Share - Diluted $ 0.72 $ 0.84 16%
Effective Tax Rate 34.0% 33.5%
13
Diluted earnings per share for the second quarter ended October 31, 2004 were
$0.84, up 16% from the same period last year. The increase in quarterly earnings
was driven by excellent underlying profit growth from the company's premium
spirits portfolio, led by the strongest performance by Jack Daniel's Tennessee
Whiskey in many years, and benefits from a weaker U.S. dollar. Partially
offsetting these gains were lower profits from the company's portfolio of wine
brands, softness in the Consumer Durables segment, and incremental operating
expenses in the Beverage segment.
In addition to the impact of favorable foreign exchange, earnings growth in the
quarter was affected by a net increase in global trade inventories for the
company's premium spirits brands, introductory spending behind the company's new
low-carbohydrate wine products, incremental pension expense, and third party
advisory fees related to the prospective sale of the company's interest in
Glenmorangie plc. Excluding these factors, the company's quarterly earnings per
share grew 7%, as follows:
Reported EPS growth 16%
Adjustments:
Favorable foreign exchange (10%)
Net increase in trade inventories (4%)
Other, from above 5%
-----
Adjusted EPS growth 7%*
=====
*Beverages +11%; Consumer Durables (4%)
We believe that disclosing the adjusted EPS growth of 7% is useful because it is
a more accurate reflection of the ongoing operating performance of the company.
Beverages
In the second quarter, Beverages segment revenue increased 14% and gross profit
increased 17%, fueled by volume growth and margin improvement for Jack Daniel's,
favorable foreign exchange rates, and an increase in global trade inventories
for the company's premium spirits brands. Advertising expenses were up 12% in
the quarter, due to increased investments behind the segment's premium spirits
brands designed to take advantage of the increasingly favorable consumer
environment for distilled spirits, particularly in the U.S., and spending to
support the segment's new low-carbohydrate wine brands. SG&A expenses were up
12%, as the segment recorded higher compensation expenses, incremental pension
expenses and the Glenmorangie transaction fees. Overall Beverages segment
operating income was up 22% for the quarter. Adjusting for the impact of foreign
exchange, higher net trade inventories for premium spirits, introductory
advertising investments behind the company's low-carbohydrate wine brands,
incremental pension expenses, and Glenmorangie transaction fees, Beverages
segment operating income grew 10% for the quarter.
14
Reported operating income growth 22%
Adjustments:
Favorable foreign exchange (11%)
Net increase in trade inventories (5%)
Other, from above 4%
-----
Adjusted operating income growth 10%
=====
Global depletions for Jack Daniel's increased in the high single digits for the
quarter, reflecting growth in nearly all markets, but most notably in the U.S.,
United Kingdom, Germany, South Africa, and China. (Depletions are shipments from
wholesale distributors to retailers, and are commonly regarded in the wine and
spirits industry as an approximate measure of consumer demand.) Shipment growth
for the brand was several percentage points higher than the quarter's depletion
growth, primarily as a result of distributors and importers increasing their
inventory positions more than expected in advance of the holiday season and
changes in distributor buying patterns in a few markets. In addition to higher
shipment volumes, Jack Daniel's global profitability was boosted by favorable
foreign exchange and underlying margin improvement. Jack Daniel's last six and
twelve month volume growth represents the best performance by the brand in many
years, and it has been driven by strong, consistent brand investment, excellent
marketing programs, and focused sales support in an environment that is very
favorable for premium spirits brands. Jack Daniel's remains the company's single
most important brand and its continued growth is the company's top strategic
priority.
Worldwide depletions for Southern Comfort grew in the low single digits for the
quarter, led by solid performance in the U.S. and Germany. Global depletions for
Finlandia Vodka were up in the mid single digits for the quarter, fueled by
increases in the U.S. and Poland, the brand's largest markets. Depletions for
Jack Daniel's ready-to-drink products reflected solid growth in the quarter,
driven primarily by continued robust consumer demand in Australia.
Profits declined in the quarter for the company's wine brands, reflecting lower
volume and margins for Fetzer Premium Varietals and advertising investments
supporting the retail introduction of new low-carbohydrate wine brands. Initial
shipments to establish trade inventories of these new wines benefited this
fiscal year's first quarter.
Consumer Durables
The U.S. market for tabletop and giftware remains very soft and results for this
business segment in the second quarter were again disappointing. Net sales
declined 11% for the quarter, as the segment experienced softness in each of its
three channels of distribution -- wholesale, retail, and direct-to-consumer.
Excluding sales of "kate spade" co-branded items, sales through traditional
department stores fell at a double-digit rate. Similar trends were seen in the
retail channel where same store sales comparisons were also down a double-digit
percentage. The direct-to-consumer business experienced weakness, as volumes
declined for direct mail, catalog and internet sales. The management team at
Lenox continues to take aggressive steps to improve the health of this business,
but reductions in SG&A and advertising expenses of 7% and 11%, respectively,
were insufficient to offset the decline in sales. Despite solid improvement at
Hartmann Luggage, segment operating income of $13.4 million was 30% below the
prior year.
15
Results of Operations:
Six Months Fiscal 2005 Compared to Six Months Fiscal 2004
Here is a summary of our operating performance (expressed in millions,
except percentage and per share amounts):
Six Months Ended
October 31,
2003 2004 Change
-------- -------- ------
Net Sales:
Beverages $ 966.7 $1,094.0 13%
Consumer Durables 289.5 263.7 (9%)
-------- --------
Total $1,256.2 $1,357.7 8%
Gross Profit:
Beverages $ 500.3 $ 577.4 15%
Consumer Durables 135.2 121.1 (10%)
-------- --------
Total $ 635.5 $ 698.5 10%
Advertising Expenses:
Beverages $ 128.7 $ 142.1 10%
Consumer Durables 43.8 39.9 (9%)
-------- --------
Total $ 172.5 $ 182.0 5%
SG&A Expenses:
Beverages $ 179.4 $ 193.1 8%
Consumer Durables 81.5 79.6 (2%)
-------- --------
Total $ 260.9 $ 272.7 5%
Other Expense (Income):
Beverages $ 8.3 $ (1.1)
Consumer Durables 2.9 3.1
-------- --------
Total $ 11.2 $ 2.0
Operating Income:
Beverages $ 183.9 $ 243.3 32%
Consumer Durables 7.0 (1.5) N/M
-------- --------
Total $ 190.9 $ 241.8 27%
Net Income $ 119.4 $ 154.5 29%
Earnings per Share - Basic $ 0.98 $ 1.27 29%
Earnings per Share - Diluted $ 0.98 $ 1.26 29%
Effective Tax Rate 34.0% 33.5%
16
For the first six months of the fiscal year, earnings per share on a diluted
basis were $1.26, up 29% from the same period last year. The year-to-date
earnings compare favorably to last year due to robust growth for both Jack
Daniel's and Southern Comfort, favorable foreign exchange trends, the absence of
legal settlement expenses incurred in the first quarter of the prior year, and
profits from the company's new low-carbohydrate wine brands. These increases
were partially offset by continued weakness in the Consumer Durables segment.
Beverages
Beverages revenue and gross profit increased by 13% and 15%, respectively, over
the same period last year. Growth was driven primarily by higher global volumes
and improved pricing for both Jack Daniel's and Southern Comfort, benefits from
a weaker U.S. dollar, a net increase in global trade inventories for the
company's premium spirits brands, and profits from the company's new
low-carbohydrate wine brands. These gains were partially offset by volume
declines for Fetzer Premium Varietals.
Beverages advertising expenses increased 10% during the period, driven by higher
brand-building investments behind Jack Daniel's and Finlandia. SG&A expenses
increased by 8%, due largely to higher employee benefit costs and advisory fees
related to the Glenmorangie transaction. In addition to solid top-line growth,
the absence of both legal and wine restructuring expenses incurred in the first
quarter of last year boosted the segment's year-to-date operating income growth
to 32%.
Consumer Durables
The environment for the company's Lenox business remains very challenging.
Following disappointing results for the quarter, Consumer Durables posted a
year-to-date operating loss of $1.5 million compared to operating income of $7
million for the same period last year. Despite the revenue contribution from the
sale of "kate spade" co-branded patterns, increases in revenue and gross profit
for Hartmann luggage, and rigorous reductions in operating expenses, the segment
continues to reflect weak consumer demand across all three channels of
distribution -- wholesale, retail, and direct-to-consumer. Sales for each of
these channels are significantly lagging prior year levels. The continued
decline in the Lenox business, which reflects weakness throughout the tabletop
and giftware industry, is a major concern of the company. While we are focusing
efforts toward understanding consumer trends and buying patterns to improve the
prospects for revenue growth and aggressively reducing costs, we are extremely
cautious about the outlook for this business segment in the upcoming months.
Liquidity and Financial Condition
Cash and cash equivalents increased by $18.1 million during the six months ended
October 31, 2004, compared to an increase of $2.5 million during the same period
last year. Cash provided by operations grew by $57.0 million, reflecting a $35.1
million increase in net income as well as a more favorable working capital
position. Cash used for investments declined by $9.1 million, due primarily to
lower capital expenditures in the Consumer Durables segment. Cash used for
financing activities increased by $50.5 million, mainly reflecting an increase
in net debt repayments.
17
In October, we announced our intention to tender our shares in Glenmorangie plc
to Moet Hennessey Investissements for 51 million British pounds (approximately
$99 million at the current exchange rate). We expect this transaction to close
during our third quarter. Under pre-existing contracts, Brown-Forman continues
to have distribution and marketing rights for Glenmorangie brands in the U.S.
and marketing and representation rights for the brands in several European
markets.
In November, we increased the quarterly cash dividend 15% from $0.2125 to
$0.2450 per share on both Class A and Class B common stock.
We also reached in November an agreement with the Altia Group of Finland
("Altia") to acquire the remaining 20% of the capital stock of Finlandia Vodka
Worldwide Ltd. ("FVW") for 46.8 million euros (approximately $62 million at the
current exchange rate). As previously disclosed, we acquired 45% of FVW in 2000
and an additional 35% in 2002. The 2002 acquisition agreement granted Altia an
option to require Brown-Forman to buy its remaining interest in FVW during a
two-year window beginning December 31, 2004. The new transaction reflects
Altia's exercise of that option. Closing is expected to occur during the
company's third quarter. We plan to fund the purchase with cash from operations
and proceeds from the sale of our shares in Glenmorangie. Should those sale
proceeds not become available by the closing date, we intend to use a
combination of available cash and borrowings under our existing commercial paper
program, backed by bank credit agreements. The credit agreements total $400
million, all of which is currently available for borrowing.
Outlook
Underlying business trends for our premium spirits brands remain solid. However,
excluding the gain on the prospective sale of the Glenmorangie shareholding, we
expect modest growth in earnings per share for the remainder of the fiscal year.
This outlook reflects:
- a potential fourth quarter reduction in trade inventories as a result of
possible new distribution arrangements in several international markets;
- double-digit growth in advertising investments behind the company's spirits
brands;
- a continuation of intense price competition in the U.S. table wine category
and challenging business conditions for the Consumer Durables segment;
- modest benefits from foreign exchange; and
- higher pension expenses.
We currently expect to report fiscal 2005 diluted earnings per share of
$2.38-$2.43, excluding the anticipated $0.36 to $0.38 per share gain from the
sale of our Glenmorangie plc shareholding.
On October 22, 2004, the American Jobs Creation Act ("the Act") was signed into
law. The Act contains provisions that might affect Brown-Forman's future
effective tax rate, including a special one-time 85% dividends received
deduction for certain repatriated foreign earnings and the replacement of the
current extraterritorial income tax regime with a new regime that is compliant
with the rules of the World Trade Organization. We have begun our evaluation of
the effects of the Act, but do not expect to be able to complete this evaluation
until after the U.S. Treasury Department or Internal Revenue Service provide
additional clarifying language on key elements of the Act. The Internal Revenue
Service has stated publicly that it is expects to release this guidance by the
end of the calendar year. We expect to be in a position to complete our
evaluation, and to record any resulting income taxes by the end of this fiscal
year. While we are currently uncertain as to the impact of the Act on our annual
tax rate, we do not anticipate the impact, if any, to be material.
18
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We hold debt obligations, foreign currency forward and option contracts, and
commodity futures contracts that are exposed to risk from changes in interest
rates, foreign currency exchange rates, and commodity prices, respectively.
Established procedures and internal processes govern the management of these
market risks. As of October 31, 2004, we do not consider the exposure to these
market risks to be material.
Item 4. 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.
19
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Beverages
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.
20
Consumer Durables
On August 23 and 26, 2004, plaintiffs purporting to represent a class of
consumers who purchased tableware sold in the United States from May 1, 2001,
through the present filed suit against Federated Department Stores, the May
Department Stores Company, Waterford Wedgwood U.S.A., and Brown-Forman's Lenox,
Inc. subsidiary. In November 2004, plaintiffs filed a consolidated complaint
alleging that the defendants violated Section 1 of the Sherman Act by conspiring
to fix prices and to boycott sales to Bed Bath & Beyond. The cases are
consolidated in the U.S. District Court for the Northern District of California,
Nos. C-04-3514VRW and C-04-3622VRW. Plaintiffs seek to recover an undisclosed
amount of damages, trebled in accord with the anti-trust laws, as well as costs,
attorney fees and injunctive relief. A response to the complaint is due on
January 10, 2005. Lenox, Inc. denies the allegations of the complaint and
intends to defend the cases vigorously.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On August 5, 2004, the company acquired 59,033 shares of Class A Common Stock
from an estate. The purchase price of the shares was $47.16 per share, the
closing price of the stock on August 4, 2004.
Total Number of Maximum Number
Total Shares Purchased of Shares that May
Number of Average as Part of Yet Be Purchased
Shares Price Paid Publicly Announced Under the Plans or
Period Purchased per Share Plans or Programs Programs
August 1, 2004 - August 31, 2004 59,033 $47.16 -- --
September 1, 2004 - September 30, 2004 -- -- -- --
October 1, 2004 - October 31, 2004 -- -- -- --
Total 59,033 $47.16 -- --
Item 6. Exhibits
31.1 CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
31.2 CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002
32 CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(not considered to be filed)
21
SIGNATURES
As required by the Securities Exchange Act of 1934, the Registrant has caused
this report to be signed on its behalf by the undersigned authorized officer.
BROWN-FORMAN CORPORATION
(Registrant)
Date: December 1, 2004 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial Officer)
22
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Owsley Brown II, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 1, 2004 By: /s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer
23
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Phoebe A. Wood, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 1, 2004 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Chief Financial Officer
24
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Brown-Forman Corporation ("the
Company") on Form 10-Q for the period ended October 31, 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.
Date: December 1, 2004
By: /s/ Owsley Brown II
Owsley Brown II
Chief Executive Officer and
Chairman
By: /s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President and
Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
This certificate is being furnished solely for purposes of Section 906 and is
not being filed as part of the Report.
25