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 JULY 31, 2007
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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: August 31, 2007
Class A Common Stock ($.15 par value, voting) 56,753,985
Class B Common Stock ($.15 par value, nonvoting) 66,780,336
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Statements of Operations
Three months ended July 31, 2006 and 2007 3
Condensed Consolidated Balance Sheets
April 30, 2007 and July 31, 2007 4
Condensed Consolidated Statements of Cash Flows
Three months ended July 31, 2006 and 2007 5
Notes to the Condensed Consolidated Financial Statements 6 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 15
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 16 - 17
Item 1A. Risk Factors 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 18
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits 19
Signatures 20
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended
July 31,
2006 2007
------- -------
Net sales $ 633.4 $ 739.1
Excise taxes 128.4 152.0
Cost of sales 156.1 196.1
------- -------
Gross profit 348.9 391.0
Advertising expenses 80.7 94.0
Selling, general, and administrative expenses 127.9 143.1
Amortization expense -- 1.3
Other (income), net (2.0) (2.8)
------- -------
Operating income 142.3 155.4
Interest income 4.7 2.0
Interest expense 5.8 13.1
------- -------
Income from continuing operations
before income taxes 141.2 144.3
Income taxes 46.6 48.9
------- -------
Income from continuing operations 94.6 95.4
Loss from discontinued operations,
net of income taxes (0.9) (0.1)
------- -------
Net income $ 93.7 $ 95.3
======= =======
Basic earnings (loss) per share:
Continuing operations $ 0.77 $ 0.77
Discontinued operations (0.01) --
------- -------
Total $ 0.76 $ 0.77
======= =======
Diluted earnings (loss) per share:
Continuing operations $ 0.76 $ 0.77
Discontinued operations (0.01) --
------- -------
Total $ 0.76 $ 0.77
======= =======
Shares (in thousands) used in the
calculation of earnings (loss) per share:
Basic 122,613 123,217
Diluted 124,066 124,434
Cash dividends per common share:
Declared $0.5600 $0.6050
Paid $0.2800 $0.3025
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
April 30, July 31,
2007 2007
-------- --------
Assets
------
Cash and cash equivalents $ 282.8 $ 179.8
Short-term investments 85.6 --
Accounts receivable, net 403.7 393.8
Inventories:
Barreled whiskey 302.8 308.7
Finished goods 150.6 187.5
Work in process 198.5 175.2
Raw materials and supplies 42.5 53.4
-------- --------
Total inventories 694.4 724.8
Current portion of deferred income taxes 76.1 76.0
Other current assets 92.6 41.0
-------- --------
Total current assets 1,635.2 1,415.4
Property, plant and equipment, net 506.3 504.8
Goodwill 670.2 669.0
Other intangible assets 683.9 695.8
Prepaid pension cost 23.0 23.3
Other assets 32.8 33.9
-------- --------
Total assets $3,551.4 $3,342.2
======== ========
Liabilities
-----------
Accounts payable and accrued expenses $ 361.1 $ 334.3
Accrued income taxes 27.0 7.0
Payable to stockholders 203.7 37.4
Short-term borrowings 401.1 342.8
Current portion of long-term debt 354.0 354.0
-------- --------
Total current liabilities 1,346.9 1,075.5
Long-term debt 421.9 421.4
Deferred income taxes 56.6 53.0
Accrued pension and other postretirement benefits 122.8 124.9
Other liabilities 29.8 60.5
-------- --------
Total liabilities 1,978.0 1,735.3
Stockholders' Equity
--------------------
Common stock:
Class A, voting
(57,000,000 shares authorized; 56,882,000 and
56,925,000 shares issued at April 30 and
July 31, respectively) 8.5 8.5
Class B, nonvoting
(100,000,000 shares authorized;
69,188,000 shares issued) 10.4 10.4
Additional paid-in capital 63.9 73.0
Retained earnings 1,649.6 1,670.2
Accumulated other comprehensive income (57.2) (54.3)
Treasury stock
(2,833,000 and 2,620,000 shares
at April 30 and July 31, respectively) (101.8) (100.9)
-------- --------
Total stockholders' equity 1,573.4 1,606.9
-------- --------
Total liabilities and stockholders' equity $3,551.4 $3,342.2
======== ========
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Three Months Ended
July 31,
2006 2007
------- -------
Cash flows from operating activities:
Net income $ 93.7 $ 95.3
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Net loss from discontinued operations 0.9 0.1
Depreciation and amortization 10.0 12.8
Stock-based compensation expense 2.5 2.4
Deferred income taxes (3.6) (4.8)
Changes in assets and liabilities, excluding
the effects of businesses acquired or sold:
Accounts receivable (4.4) 9.9
Inventories (19.6) (28.9)
Other current assets 20.5 51.6
Accounts payable and accrued expenses (47.1) (26.8)
Accrued income taxes 31.0 (20.0)
Noncurrent assets and liabilities (10.3) 36.9
Net cash provided by (used for) operating
activities of discontinued operations 2.6 (0.1)
------- -------
Cash provided by operating activities 76.2 128.4
Cash flows from investing activities:
Acquisition of business, net of cash acquired (250.1) 1.5
Acquisition of brand name -- (12.0)
Purchase of short-term investments (43.1) --
Sale of short-term investments 16.7 85.6
Additions to property, plant, and equipment (10.5) (11.4)
Computer software expenditures (0.9) (3.3)
Net cash used for investing activities
of discontinued operations (0.1) --
------- -------
Cash (used for) provided by
investing activities (288.0) 60.4
Cash flows from financing activities:
Net repayment of short-term borrowings (29.3) (58.9)
Proceeds from exercise of stock options 16.9 11.3
Excess tax benefits from stock options 3.3 3.3
Acquisition of treasury stock -- (7.0)
Special distribution to stockholders -- (203.7)
Dividends paid (34.4) (37.3)
------- -------
Cash used for financing activities (43.5) (292.3)
Effect of exchange rate changes on cash and
cash equivalents 0.4 0.5
------- -------
Net decrease in cash and cash equivalents (254.9) (103.0)
Cash and cash equivalents, beginning of period 474.8 282.8
------- -------
Cash and cash equivalents, end of period $ 219.9 $ 179.8
======= =======
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 statements using our
customary accounting practices as set out in our annual report on Form 10-K for
the year ended April 30, 2007 (the "2007 Annual Report"). We made all of the
adjustments (which include only normal, recurring adjustments, unless otherwise
noted) needed for a fair statement of this data.
We condensed or omitted some of the information found in financial statements
prepared according to accounting principles generally accepted in the United
States of America ("GAAP"). You should read these financial statements together
with the 2007 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 $126.0 million higher than reported as of April 30, 2007,
and $130.6 million higher than reported as of July 31, 2007. 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. Income Taxes
Our consolidated quarterly effective tax rate is based upon our expected annual
operating income, statutory tax rates, and tax laws in the various jurisdictions
in which we operate. Significant or unusual items, including adjustments to
accruals for tax uncertainties, are recognized in the quarter in which the
related event occurs. The effective tax rate of 33.9% for the three months ended
July 31, 2007, is based on an expected effective tax rate of 32.8% on ordinary
income for the full fiscal year, plus first quarter additions to existing tax
contingencies and additional interest on previously provided tax contingencies.
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
we recognize in our financial statements the benefit of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position.
6
We adopted the provisions of FIN 48 as of May 1, 2007, and made no adjustment to
our unrecognized tax benefits. Upon adoption, we had $43.8 million of gross
unrecognized tax benefits and $34.1 million of net uncertain tax benefits that
would reduce our effective income tax rate if recognized. We do not believe that
our gross liability for unrecognized tax benefits will materially change over
the next 12 months although we do expect that the statute of limitations on
certain gross unrecognized state income tax benefits of $5.5 million will expire
during this period. We do not anticipate that our current fiscal year effective
income tax rate will be materially affected by the net changes to our uncertain
tax positions during the current fiscal year because we believe current year net
additions of tax and interest on existing tax contingencies will be offset by
the recognition of previously unrecognized net tax benefits from lapsing
statutes of limitation.
It is our continuing practice to record interest and penalties related to
unrecognized tax benefits as a component of our income tax provision. As of May
1, 2007, our gross liability for accrued interest and penalties on our
unrecognized tax benefits totaled $8.7 million.
We file income tax returns in the U.S., including several state and local
jurisdictions, as well as in various other countries throughout the world in
which we conduct our business. The major tax jurisdictions and their earliest
fiscal years that are currently open for tax examinations are 2003 in the U.S.,
United Kingdom and Ireland, 2004 in Italy, and 2001 in Finland and Poland.
4. Discontinued Operations
Discontinued Operations consist of Hartmann and Brooks & Bentley, wholly-owned
subsidiaries that we sold in fiscal 2007. Those subsidiaries, along with Lenox,
Inc., the wholly-owned subsidiary that we sold in fiscal 2006, comprised our
former consumer durables business.
5. Earnings Per Share
Basic earnings per share is based upon the weighted average number of all common
shares outstanding during the period. Diluted earnings per share includes the
dilutive effect of stock-based compensation awards, including stock options,
stock-settled stock appreciation rights ("SSARs"), and non-vested restricted
stock. Stock-based awards for approximately 326,000 common shares were excluded
from the calculation of diluted earnings per share for the period ended July 31,
2007, because the exercise price of the awards was greater than the average
market price of the shares. No stock-based awards were excluded from the
calculation of diluted earnings per share for the period ended July 31, 2006.
7
The following table presents information concerning basic and diluted earnings
per share:
Three Months Ended
July 31,
2006 2007
------ ------
(Dollars in millions, except per share amounts)
Basic and diluted net income (loss):
Continuing operations $94.6 $95.4
Discontinued operations (0.9) (0.1)
----- -----
Total $93.7 $95.3
===== =====
Share data (in thousands):
Basic average common shares outstanding 122,613 123,217
Dilutive effect of non-vested
restricted stock 47 80
Dilutive effect of stock options and SSARs 1,406 1,137
------- -------
Diluted average common shares
outstanding 124,066 124,434
======= =======
Basic earnings (loss) per share:
Continuing operations $0.77 $0.77
Discontinued operations (0.01) --
----- -----
Total $0.76 $0.77
===== =====
Diluted earnings (loss) per share:
Continuing operations $0.76 $0.77
Discontinued operations (0.01) --
----- -----
Total $0.76 $0.77
===== =====
6. Payable to Stockholders
On March 22, 2007, our Board of Directors approved the distribution to
stockholders of the $203.7 million in cash received (net of transaction fees)
from the sale of Lenox and Brooks & Bentley. The distribution of $1.6533 per
share was made on May 10, 2007, to stockholders of record on April 5, 2007.
On July 26, 2007, our Board of Directors approved a regular quarterly cash
dividend of $0.3025 per share on Class A and Class B Common Stock. Stockholders
of record on September 4, 2007 will receive the cash dividend on October 1,
2007.
7. Pension and Other Postretirement Benefits
The following table shows the components of the pension and other postretirement
benefit expense recognized during the three months ended July 31:
Pension Benefits Other Benefits
(Dollars in millions) 2006 2007 2006 2007
---- ---- ---- ----
Service cost $ 3.2 $3.4 $0.3 $0.2
Interest cost 6.0 6.6 0.8 0.8
Expected return on plan assets (7.9) (8.0) -- --
Amortization of:
Unrecognized prior service cost 0.2 0.2 -- --
Unrecognized net loss 2.9 3.0 0.1 0.1
----- ---- ---- ----
Net expense $ 4.4 $5.2 $1.2 $1.1
===== ==== ==== ====
8
8. Contingencies
We operate in a litigious environment, and we are 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 we can make a reasonable estimate of the loss, and
adjust the accrual as appropriate to reflect changes in facts and circumstances.
A law firm has sued Brown-Forman and many other manufacturers and marketers of
spirits, wines, and beer in a series of nine very similar class action lawsuits
seeking damages and injunctive relief from alleged marketing of beverage alcohol
to underage consumers. The suits allege that the defendants engage in deceptive
and negligent marketing practices targeting underage consumers. They seek to
recover on behalf of parents those funds that their children spent on the
illegal purchase of alcohol as well as disgorgement of all profits from the
alleged illegal sales. We are vigorously defending these cases. Two cases were
voluntarily withdrawn. Six of the suits have been dismissed by trial courts,
each of which was appealed. Three of those appeals have affirmed the dismissals.
One case remains pending on a dismissal motion. We cannot yet predict the
outcome of these claims, including whether we will incur related losses or the
amount of such losses. Since we cannot estimate the amount of possible loss, no
amounts have been accrued. But an unfavorable result in these or similar
class-action lawsuits could have a material adverse impact on our business.
9. Comprehensive Income
Comprehensive income is a broad measure of the effects of all transactions and
events (other than investments by or distributions to stockholders) 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 the determination of comprehensive
income:
(Dollars in millions) Three Months Ended
July 31,
2006 2007
------ ------
Continuing operations:
Net income $94.6 $95.4
Other comprehensive income (loss):
Net loss on cash flow hedges (0.1) (0.4)
Net loss on securities -- (0.1)
Postretirement benefits adjustment -- 2.0
Foreign currency translation adjustment 2.9 1.4
------ ------
2.8 2.9
------ ------
Comprehensive income 97.4 98.3
------ ------
Discontinued operations:
Net loss (0.9) (0.1)
Other comprehensive income (loss):
Foreign currency translation adjustment 0.3 --
------ ------
Comprehensive loss (0.6) (0.1)
------ ------
Total comprehensive income $96.8 $98.2
====== ======
9
Accumulated other comprehensive loss (income) consisted of the following:
(Dollars in millions) April 30, July 31,
2007 2007
------ ------
Postretirement benefits adjustment $(99.2) $(97.2)
Cumulative translation adjustment 45.7 47.1
Unrealized loss on cash flow hedge contracts (4.0) (4.4)
Unrealized gain on securities 0.3 0.2
------ ------
$(57.2) $(54.3)
====== ======
10. Acquisition of Brand Name
In May 2007, we ended our joint ventures in the tequila business with the
Orendain family of Mexico. We had shared ownership of the "Don Eduardo" and
other "Orendain" trademarks and related intellectual property with the Orendain
family since 1999 through two joint venture companies: Tequila Orendain de
Jalisco (TOJ) and BFC Tequila Limited (BFCTL). TOJ produced the tequila and held
the trademarks in Mexico. BFCTL owned the trademarks for all markets excluding
Mexico. Upon ending the joint ventures, we acquired the remaining portion of the
global trademark for the Don Eduardo super premium tequila brand that we did not
already own. In exchange, we paid $12.0 million to the other shareholders of TOJ
and BFCTL and surrendered to them our interest in all other Orendain trademarks
previously owned by these two companies.
11. Recent Accounting Pronouncements
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurements" (FAS 157), which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The
provisions of FAS 157 become effective as of the beginning of our 2009 fiscal
year. We are currently evaluating the impact that FAS 157 will have on our
financial statements.
In February 2007, the FASB issued FASB Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" (FAS 159). FAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. The provisions of FAS 159 become effective as of the beginning of
our 2009 fiscal year. We are currently evaluating the impact that FAS 159 will
have on our financial statements.
10
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 2007 Annual
Report. Note that the results of operations for the three months ended July 31,
2007, do not necessarily indicate what our operating results for the full fiscal
year will be. In this Item, "we," "us," and "our" refer to Brown-Forman
Corporation.
Important Note on Forward-Looking Statements:
This release 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 about half of our profits, including higher energy prices,
declining home prices, deterioration of the sub-prime lending market, or
other factors;
- lower consumer confidence or purchasing related to changes in economic
conditions, major natural disasters, terrorist attacks or widespread outbreak
of infectious diseases;
- tax increases, whether at the federal or state level or in major
international markets and/or tariff barriers or other restrictions affecting
beverage alcohol;
- limitations and restrictions on distribution of products and alcohol
marketing, including advertising and promotion, as a result of stricter
governmental policies adopted either in the United States or in international
markets;
- adverse developments in the class action lawsuits filed against Brown-Forman
and other spirits, beer and wine manufacturers alleging that our industry
conspired to promote the consumption of alcohol by those under the legal
drinking age;
- a strengthening U.S. dollar against foreign currencies, especially the
British Pound, Euro, Australian Dollar, and the South African Rand;
- reduced bar, restaurant, hotel and travel business, including travel retail;
- longer-term, a change in consumer preferences, social trends or cultural
trends that results in the reduced consumption of our premium spirits brands;
- changes in distribution arrangements in major markets that limit our ability
to market or sell our products;
- adverse impact on performance and reported results as a consequence of
integrating acquisitions and ensuring their conformance to the company's
trade practice standards, financial controls environment and U.S. public
company requirements;
- price increases in energy or raw materials, including grapes, grain, agave,
wood, glass, and plastic;
- excess wine inventories or a world-wide oversupply of grapes or agave;
- termination of our rights to distribute and market agency brands in our
portfolio;
- counterfeit production of our products and any resulting negative effect on
our intellectual property rights or brand equity; and
- adverse developments as a result of state or federal investigations of
beverage alcohol industry trade practices of suppliers, distributors and
retailers.
11
Results of Operations:
First Quarter Fiscal 2008 Compared to First Quarter Fiscal 2007
A summary of our operating performance (expressed in millions, except percentage
and per share amounts) is presented below. Continuing Operations consist of our
beverage business. Discontinued Operations consist of Lenox, Brooks & Bentley,
and Hartmann, which previously comprised our consumer durables business.
Three Months Ended
July 31,
CONTINUING OPERATIONS 2006 2007 Change
------ ------ ------
Net sales $633.4 $739.1 17%
Gross profit 348.9 391.0 12%
Advertising expenses 80.7 94.0 16%
Selling, general, and
administrative expenses 127.9 143.1 12%
Amortization expense -- 1.3
Other (income), net (2.0) (2.8)
Operating income 142.3 155.4 9%
Interest expense, net 1.1 11.1
Income before income taxes 141.2 144.3 2%
Income taxes 46.6 48.9
Net income 94.6 95.4 1%
Gross margin 55.1% 52.9%
Effective tax rate 33.0% 33.9%
Earnings per share:
Basic $0.77 $0.77 0%
Diluted 0.76 0.77 1%
Net sales for the three months ended July 31, 2007 grew $105.7 million, up 17%
over the prior-year period. The major factors driving the increase in net sales
were:
Growth vs.
Prior Period
Acquisitions 8%
Foreign exchange 3%
Trade inventory changes (1%)
Underlying net sales growth 7%
-----
Reported net sales growth 17%
=====
The underlying growth in net sales reflects solid growth in consumer demand
behind Jack Daniel's, Southern Comfort, Finlandia, and most of our super-premium
developing brands.
12
Gross profit increased $42.1 million, up 12% from the first quarter of last
year. Continuing consumer demand for our premium global brands, the addition of
acquired brands, and a weaker U.S. dollar contributed to these strong results.
Growth vs.
Prior Period
Acquisitions 5%
Foreign exchange 3%
Trade inventory changes (3%)
Underlying gross profit growth 7%
-----
Reported gross profit growth 12%
=====
Our overall gross margin as a percent of net sales declined in the quarter due
in part to the addition of Casa Herradura(1) results. While the gross profit
margin for Herradura and el Jimador sales in the U.S. are at or above our
company's overall margins, gross margins on sales in Mexico, which include
agency brands and New Mix, a tequila-based ready-to-drink, are considerably
lower. As the mix of our business shifts toward more U.S. tequila revenue, we
expect gross margins to improve. Gross margins in the quarter were also
suppressed by the higher costs associated with a one-time write-up of certain
acquired inventories to estimated fair value in purchase accounting and higher
costs associated with tequila inventory purchased in the U.S. from previous
distributors.
Advertising expenses in the quarter were up $13.3 million, or 16%, over last
year's first quarter due to incremental investments behind our premium global
brands, new investments in support of acquired brands (approximately $6
million), and a weaker U.S. dollar (approximately $2 million). SG&A expenses
increased $15.2 million, or 12%, compared to the same prior year period, due
primarily to infrastructure associated with the addition of acquired brands.
Operating income increased $13.1 million, up 9% over the first quarter last
year.
Prior to our acquisition of Casa Herradura, the U.S. distribution rights for the
Herradura brand had been granted to a third party through December 31, 2011.
Upon completing the acquisition of Casa Herradura, we acquired those
distribution rights from that third party at a cost of $25.0 million. This
amount is being amortized on a straight-line basis over the period ending
December 31, 2011. The amortization expense of $1.3 million for the current
period reflects three months of amortization of the cost of those distribution
rights.
Net interest expense increased by $10.0 million over the prior period due
largely to the financing of the Casa Herradura acquisition.
--------
(1) References to Casa Herradura include all brands (el Jimador, Herradura,
New Mix, Antiguo, Suave 35 and other agency brands) and operations acquired
in January 2007.
13
Jack Daniel's global depletions(2) registered mid-single digit gains in the
quarter, led by double-digit growth outside of the U.S. The brand's
international volume expansion reflected strong growth in the U.K., France,
Australia, Asia, and Eastern Europe. In the U.S., Jack Daniel's volume growth
rate moderated slightly, increasing at a low-single digit rate for the
three-month period. Global volumes for Southern Comfort grew at a mid-single
digit rate in the quarter, as double-digit gains in the U.K., South Africa, and
Germany offset modest declines in the U.S. Worldwide Finlandia volumes
accelerated in the quarter, as double-digit increases reflect continued
expansion in Eastern Europe. Depletions for our super-premium developing brands,
including Woodford Reserve and Chambord, increased at a double-digit rate in the
quarter. Volumes for our mid-priced regional brands were up mid-single digits,
as solid growth for Fetzer Valley Oaks, Korbel, and Bonterra more than offset
declines for Canadian Mist, Bolla, and Early Times.
Diluted earnings from continuing operations of $0.77 per share for the quarter
improved 1% from the $0.76 earned in the prior year period. Reported results for
both quarters were affected by the following items:
Quarter ended July 31, 2006
- an increase in trade inventory levels which boosted earnings by approximately
$0.07 per share.
- $0.01 per share of interest income earned on proceeds from the sale of Lenox
(which were distributed to shareholders in May 2007).
Quarter ended July 31, 2007
- $0.05 per share of dilution associated with acquisitions;
- a $0.04 per share benefit from favorable foreign currency fluctuations;
- an increase in trade inventory levels which boosted earnings by $0.03 per
share.
--------
(2) Depletions are shipments from wholesale distributors to retail customers,
and are commonly regarded in the industry as an approximate measure of
consumer demand.
14
FULL-YEAR OUTLOOK
Our full-year earnings outlook remains unchanged at $3.35 to $3.55 per diluted
share, representing growth of 7% to 13% over comparable prior-year earnings of
$3.14 per share. This outlook includes projected earnings dilution of $0.13 to
$0.18 per share associated with the Casa Herradura acquisition, which is also
unchanged.
LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents decreased by $103.0 million during the three months
ended July 31, 2007, compared to a decrease of $254.9 million during the same
period last year. Cash provided by operations increased from $76.2 million to
$128.4 million, primarily reflecting a larger reduction in working capital. Cash
provided by investing activities increased over last year by $348.4, largely
reflecting the $250.1 million acquisition of Chambord last year and the
liquidation of $85.6 million in short-term investments during the current period
versus a net investment in short-term securities of $26.4 million during the
prior year period. Cash used for financing activities increased by $248.8
million over last year, primarily reflecting the $203.7 million special
distribution to shareholders in May 2007 and a $29.6 million increase in net
debt repayments.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued FASB Statement No. 157, "Fair Value
Measurements" (FAS 157), which defines fair value, establishes a framework for
measuring fair value, and expands disclosures about fair value measurements. The
provisions of FAS 157 become effective as of the beginning of our 2009 fiscal
year. We are currently evaluating the impact that FAS 157 will have on our
financial statements.
In February 2007, the FASB issued FASB Statement No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" (FAS 159). FAS 159 permits companies to choose to measure
many financial instruments and certain other items at fair value that are not
currently required to be measured at fair value and establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. The provisions of FAS 159 become effective as of the beginning of
our 2009 fiscal year. We are currently evaluating the impact that FAS 159 will
have on our financial statements.
Our critical accounting policies have not changed since April 30, 2007. However,
as discussed in Note 3 to the accompanying financial statements, we adopted FASB
Interpretation No. 48 effective May 1, 2007.
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 July 31, 2007, we do not consider the exposure to these
market risks to be material.
15
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.
PART II - OTHER INFORMATION
Item 1. 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 for alleged marketing of beverage alcohol to
underage consumers. Nine lawsuits have been filed to date, the first three
against eight defendants, including Brown-Forman: "Hakki v. Adolph Coors
Company, et.al.," District of Columbia Superior Court No. CD 03-9183 (November
2003); "Kreft v. Zima Beverage Co., et.al.," District Court, Jefferson County,
Colorado, No. 04cv1827 (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 ( 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, and are now consolidated as "Eisenberg v. Anheuser-Busch," U.S. District
Court for the District of Northern Ohio, No. 1:04cv1081. Five similar suits were
filed in 2005: "Elizabeth H. Sciocchette v. Advanced Brands," Albany County, New
York Supreme Court No. 102205 (February 16, 2005); "Roger and Kathy Bertovich v.
Advanced Brands," Hancock County, West Virginia, Circuit Court No. 05-C-42M
(February 17, 2005); "Jacquelin Tomberlin v. Adolph Coors," Dane County
(Madison, Wisconsin) Circuit Court, (February 23, 2005); "Viola Alston v.
Advanced Brands," Wayne County, Michigan, Circuit Court No. 05-509294, (March,
30, 2005), and "Craig Konhauzer v. Adolph Coors Company," Broward County Florida
Circuit Court, No. 05004875 (March 30, 2005). In addition, Brown-Forman received
in February, 2004, 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.
16
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 and the other defendants have successfully obtained orders to
dismiss six of the pending cases: Kreft (Colorado) in October 2005; Eisenberg
(Ohio) in February 2006; Tomberlin (Wisconsin) in March 2006; Hakki (D.C.) in
March 2006; Alston (Michigan) in May 2006; and Bertovich (West Virginia) in
August 2006. Konhauzer (Florida) and Sciocchette (New York) voluntarily withdrew
their respective suits. Wilson (North Carolina) is pending decision on
defendants' motion to dismiss. Each involuntarily dismissal has been appealed by
the respective plaintiffs. The Hakki dismissal was affirmed by the D.C. Court of
Appeals in June 2007. The consolidated Alston and Eisenberg dismissals were
affirmed by the Federal Circuit Court of Appeals for the Sixth Circuit in July
2007.
17
Item 1A. Risk Factors
Other than with respect to the revision and additions below, there have been no
changes to "Item 1A: Risk Factors" in our Annual Report on Form 10-K for the
fiscal year ended April 30, 2007. The revision and additions below should be
read together with the risk factors and information disclosed in our 2007 Annual
Report on Form 10-K.
The risk factor entitled "Our business may be adversely affected by unfavorable
economic conditions in the United States and abroad" is amended and restated in
its entirety as follows.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY UNFAVORABLE ECONOMIC CONDITIONS IN THE
UNITED STATES AND ABROAD.
Our business is subject to changes in global economic conditions. About one-half
of our business is in the United States and our business prospects generally
depend heavily on the health of the U.S. economy. Earnings could be adversely
affected by lower consumer confidence or purchasing, or decreased bar, hotel and
travel spending resulting from changes in economic conditions, higher energy
prices, declining home prices, deterioration of the sub-prime lending market,
major natural disasters, widespread outbreak of infectious diseases such as
avian influenza, terrorist attacks and related subsequent events, including the
U.S. response, other hostile acts, retaliation, or threats of any of these.
Earnings could also be hurt by the United States' current war in Iraq, or if the
United States goes to war against another country deemed to be harboring
terrorists or otherwise a threat to U.S. interests.
If global economic conditions deteriorate, or if there is an increase in
anti-American sentiment in the principal countries to which we export our
beverage products, including the United Kingdom, Australia, Poland, Germany,
Mexico, South Africa, Spain, France, Canada and Japan, our sales could
materially decrease. The long-term outlook for our beverage business anticipates
continued success of Jack Daniel's Tennessee Whiskey, Southern Comfort,
Finlandia Vodka, Tequila Herradura, el Jimador Tequila, and our other core wine
and spirits brands. This assumption is based in part on favorable demographic
trends in the United States and many international markets for the sale of wine
and spirits. Current expectations for our global beverage business may not be
met if these demographic trends do not translate into corresponding sales
increases.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about shares of our common stock that
we repurchased during the quarter ended July 31, 2007:
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
June 1, 2007 - June 30, 2007 39,654 $75.65 -- --
July 1, 2007 - July 31, 2007 53,104 $75.32 -- --
Total 92,758 $75.47 -- --
These shares were purchased in privately negotiated transactions pursuant to a
written purchase and sale agreement involving Class A shares held by a trust
beneficially owned by a Brown family member. Under this agreement, which was
approved by our Board of Directors on May 24, 2007, we may purchase up to $22.0
million of Class A shares over a 22-week period beginning June 22, 2007.
18
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of the Company held July 26, 2007, the
persons named below were elected to serve as directors until the next annual
election of directors, or until a successor has been elected and qualified:
For Withheld
---------- ---------
Patrick Bousquet-Chavanne 55,821,506 40,116
Barry D. Bramley 50,992,672 4,868,950
Geo. Garvin Brown IV 55,284,635 576,987
Martin S. Brown, Jr. 55,327,797 533,825
Owsley Brown II 50,499,034 5,362,588
Donald G. Calder 50,993,002 4,868,620
Sandra A. Frazier 55,329,526 532,096
Richard P. Mayer 50,986,806 4,874,816
William E. Mitchell 55,557,857 303,765
Matthew R. Simmons 55,570,107 291,515
William M. Street 50,963,844 4,897,778
Dace Brown Stubbs 55,244,594 617,028
Paul C. Varga 55,069,456 792,166
James S. Welch, Jr. 55,061,301 800,321
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).
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROWN-FORMAN CORPORATION
(Registrant)
Date: September 7, 2007 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Vice Chairman and
Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial Officer)
20
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Paul C. Varga, 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: September 7, 2007 By: /s/ Paul C. Varga
Paul C. Varga
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 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: September 7, 2007 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 Quarterly Report of Brown-Forman Corporation ("the
Company") on Form 10-Q for the period ended July 31, 2007, 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: September 7, 2007 By: /s/ Paul C. Varga
Paul C. Varga
President and Chief Executive Officer
By: /s/ Phoebe A. Wood
Phoebe A. Wood
Vice Chairman 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 Periodic Report.