UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2007
Commission file number 002-26821
BROWN-FORMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 61-0143150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
850 Dixie Highway 40210
Louisville, Kentucky (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code (502) 585-1100
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ----------------------
Class A Common Stock (voting) $0.15 par value New York Stock Exchange
Class B Common Stock (nonvoting) $0.15 par value New York Stock Exchange
Securities registered pursuant to
Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [X] No [ ]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is 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]
The aggregate market value, as of the last business day of the most recently
completed second fiscal quarter, of the voting and nonvoting equity held by
nonaffiliates of the registrant was approximately $4,400,000,000.
The number of shares outstanding for each of the registrant's classes of
Common Stock on May 31, 2007 was:
Class A Common Stock (voting) 56,870,147
Class B Common Stock (nonvoting) 66,388,156
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 2007 Annual Report to Stockholders are incorporated
by reference into Parts I, II, and IV of this report. Portions of the Proxy
Statement of Registrant for use in connection with the Annual Meeting of
Stockholders to be held July 26, 2007 are incorporated by reference into Part
III of this report.
PART I
Item 1. Business
Brown-Forman Corporation ("we," "us," or "our" below) was incorporated under the
laws of the State of Delaware in 1933, successor to a business founded in 1870
as a partnership and subsequently incorporated under the laws of the
Commonwealth of Kentucky in 1901.
We primarily manufacture, bottle, import, export, and market a wide variety of
alcoholic beverage brands. We also manufacture and market new and used oak
barrels. Our principal beverage brands are:
Jack Daniel's Tennessee Whiskey Fontana Candida Wines
Southern Comfort Gala Rouge Wines
Finlandia Vodka Herradura Tequila
Gentleman Jack Jekel Vineyards
Jack Daniel's Single Barrel Korbel California Champagnes*
Jack Daniel's Ready-to-Drinks Little Black Dress Wines
Amarula Cream Liqueur* Mariah Vineyards
Appleton Estate Jamaica Rum* Maximus*
Bel Arbor Wines Michel Picard Wines*
Bolla Wines New Mix
Bonterra Vineyards Old Forester Bourbon
Canadian Mist Blended Canadian Whisky Pepe Lopez Tequilas
Chambord Liqueur Sanctuary Wines
Don Eduardo Tequila Sonoma-Cutrer Wines
Durbanville Hills Wines* Tuaca Liqueur
Early Times Kentucky Whisky Stellar Gin
el Jimador Tequila Virgin Vines Wines*
Eleven Tongues Wines Wakefield Wines*
Fetzer Wines Woodford Reserve Bourbon
Five Rivers Wines
* Brands represented in the U.S. and/or other select markets by Brown-Forman
The most important brand in our portfolio is Jack Daniel's, which is the
fourth-largest premium spirits brand and the largest selling American whiskey
brand in the world according to volume statistics recently published by Impact
Databank, a leading trade publication. Our other leading brands are Southern
Comfort, the second-largest selling liqueur in the United States, and Canadian
Mist, the third-largest selling Canadian whiskey worldwide, according to the
recently published volume statistics referenced above. Our largest wine brands
are Fetzer, Korbel, and Bolla, generally selling in the $6-9 per bottle price
range. We believe the statistics used to rank these products are reasonably
accurate.
Geographic information about net sales and long-lived assets is in Note 13 of
the Notes to Consolidated Financial Statements on page 51 of our 2007 Annual
Report to Stockholders, which information is incorporated into this report by
reference.
2
Our strategy is to market high quality products that satisfy the preferences of
consumers of legal drinking age and to support those products with extensive
international, national, and regional marketing programs. These programs are
intended to extend consumer brand recognition and brand loyalty.
We own numerous valuable trademarks that are essential to our business.
Registrations of trademarks can generally be renewed indefinitely as long as the
trademarks are in use. We have authorized, through licensing arrangements, the
use of some of our trademarks on promotional items for the primary purpose of
enhancing brand awareness.
Customers
In the United States, we sell spirits and wines either through wholesale
distributors or directly to state governments in those states that control
alcohol sales. The contracts that we have with many of our distributors have
formulas that determine reimbursement to distributors if we terminate them. The
amount of reimbursement is based primarily on the distributor's length of
service and a percentage of its purchases over time. Some states have statutes
that limit our ability to terminate distributor contracts. Outside the United
States, we typically distribute our products by selecting the best local
distributor for our brands in each specific market. Our principal export markets
are the United Kingdom, Australia, Poland, Germany, Mexico, South Africa, Spain,
France, Canada, and Japan.
Ingredients and Other Supplies
The principal raw materials used in manufacturing and packaging distilled
spirits are corn, rye, malted barley, agave, sugar, glass, cartons, and wood for
new white oak barrels, which are used for storage of bourbon and Tennessee
whiskey. Currently, none of these raw materials is in short supply, and there
are adequate sources from which they may be obtained.
Due to aging requirements, production of whiskeys is scheduled to meet demand
three to six years in the future. Accordingly, our inventories may be larger in
relation to sales and total assets than would be normal for most other
businesses.
The principal raw materials used in the production of wines are grapes,
packaging materials and wood for wine barrels. Grapes are primarily purchased
under contracts with independent growers and, from time to time, are adversely
affected by weather and other forces that may limit production. We believe that
our relationships with our growers are good.
Competition
The wine and spirits industry is highly competitive, and there are many brands
sold in the consumer market. Trade information indicates that we are one of the
largest wine and spirits suppliers in the United States in terms of revenues.
3
Regulatory Environment
The Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury
Department regulates the wine and spirits industry with respect to production,
blending, bottling, sales, advertising and transportation of industry products.
Also, each state regulates the advertising, promotion, transportation, sale, and
distribution of such products.
Under federal regulations, whiskey must be aged for at least two years to be
designated "straight whiskey." We age our straight whiskeys for a minimum of
three to six years. Federal regulations also require that "Canadian" whiskey
must be manufactured in Canada in compliance with Canadian laws and must be aged
in Canada for at least three years. We believe we are in compliance with these
regulations.
Employees
As of April 30, 2007, we employed about 4,440 persons, including approximately
390 employed on a part-time or temporary basis. We believe our employee
relations are good.
Available Information
You may read and copy any materials that we file with the SEC at the SEC's
Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information
on the Public Reference Room may be obtained by calling the SEC at
1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains
reports, proxy and information statements, and other information regarding
issuers that file with the SEC at http://www.sec.gov.
Our website address is www.brown-forman.com. Please note that our website
address is provided as an inactive textual reference only. Our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any
amendments to these reports are available free of charge on our website as soon
as reasonably practicable after we electronically file those reports with the
Securities and Exchange Commission. The information provided on our website is
not part of this report, and is therefore not incorporated by reference, unless
such information is otherwise specifically referenced elsewhere in this report.
On our website, we have posted our Corporate Governance Guidelines, our Code of
Conduct and Compliance Guidelines that apply to all directors and employees, and
our Code of Ethics that applies specifically to our senior executive and
financial officers. We have also posted on our website the charters of our Audit
and Compensation Committees. Copies of these materials are also available free
of charge by writing to our Assistant Secretary, Holli H. Lewis, 850 Dixie
Highway, Louisville, Kentucky 40210 or e-mailing her at Holli_Lewis@b-f.com.
4
Item 1A. Risk Factors
You should carefully consider the following factors that could materially affect
our business. There are also other risks that are not presently known or not
presently material, as well as the other information set forth in this report,
which could affect materially our business. In addition, in our periodic filings
with the SEC, press releases and other statements, we discuss estimates and
projections regarding our future performance and business outlook. Such
"forward-looking statements," by their nature, 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 our historical
experience or our present expectations and projections. The following is a
non-exclusive discussion of such risks and uncertainties.
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. Just over 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, decreased bar, hotel and travel spending
resulting from terrorist attacks and related subsequent events, major natural
disasters, widespread outbreak of infectious diseases such as avian influenza,
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, 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.
OUR INTERNATIONAL OPERATIONS SUBJECT US TO RISKS ASSOCIATED WITH FOREIGN
CURRENCY EXCHANGE RATES.
Sales of our brands and our purchases of goods and services in international
markets are conducted in local currency. Thus, profits from our overseas
business could be adversely affected if the U.S. dollar strengthens against
other currencies, especially the British Pound, Euro, Australian Dollar and
Mexican Peso, because the local currency received from the sale of our products
would translate into fewer U.S. dollars. To the extent we are unable to
effectively manage our exposure to such fluctuations, our financial results may
suffer.
RISING ENERGY COSTS COULD AFFECT OUR FINANCIAL RESULTS.
If energy costs remain high, our transportation, freight and other operating
costs, such as distilling, will likely increase. We may not be able to pass
along such cost increases to our customers through higher prices. Additionally,
rising energy costs may diminish consumer confidence generally or curtail
consumer spending on entertainment and discretionary products, thereby resulting
in decreased demand for our brands.
5
DEMAND FOR OUR PRODUCTS MAY BE ADVERSELY AFFECTED BY CHANGES IN CONSUMER
PREFERENCES AND TASTES.
We operate in a highly competitive marketplace. Maintaining our competitive
position depends on our continued ability to offer products that have a strong
appeal to consumers. Consumer preferences may shift due to a variety of factors,
including changes in demographic and social trends, and changes in dining and
beverage consumption patterns, as they have from time to time in the past. In
addition, sales of a brand might diminish because of a scare over product
contamination or some other negative publicity regarding the brand. If a product
recall becomes necessary, that also could adversely affect our business.
NATIONAL AND LOCAL GOVERNMENTS MAY ADOPT REGULATIONS OR UNDERTAKE INVESTIGATIONS
THAT COULD INCREASE OUR COSTS OR OUR LIABILITIES, OR THAT COULD LIMIT OUR WINE
AND SPIRITS BUSINESS ACTIVITIES.
Our operations are subject to extensive regulatory requirements regarding
advertising, marketing, labeling, distribution and production. Legal or
regulatory measures against beverage alcohol could adversely affect our
business. In particular, governmental bodies in countries where we operate may
impose or increase limitations on advertising and promotional activities, or
adopt other non-tariff measures that could hurt our sales. In addition,
particularly in the United States, state and federal officials in some states
have begun investigating trade practices of beverage alcohol suppliers,
distributors and retailers. Adverse developments in or as a result of these
regulatory measures and investigations or similar investigations could hurt our
business.
TAX INCREASES COULD HURT OUR FINANCIAL RESULTS.
The wine and spirits business is highly sensitive to changes in taxes. Increases
in state or federal excise taxes in the U.S. could depress our domestic wine and
spirits business, both through reducing overall consumption and by encouraging
consumers to switch to lower-taxed categories of beverage alcohol. No
legislation to increase U.S. federal excise taxes on distilled spirits is
currently pending, but future increases are possible, as are taxes levied on the
broader business community. Tax rates also affect the beverage alcohol business
outside the United States, but the effect of those changes in any one country is
less likely to be significant to our overall business. Nevertheless, the
cumulative effect of such tax increases over time could hurt our financial
performance.
IF THE SOCIAL ACCEPTABILITY OF OUR PRODUCTS DECLINES OR GOVERNMENTS ADOPT
POLICIES AGAINST BEVERAGE ALCOHOL, OUR REVENUES COULD DECREASE AND OUR BUSINESS
COULD BE MATERIALLY ADVERSELY AFFECTED.
Our ability to market and sell our alcohol beverage products depends heavily on
both society's attitudes toward drinking and governmental policies that flow
from those attitudes. In recent years, there has been increased social and
political attention directed at the beverage alcohol industry. The recent
attention has focused largely on public health concerns related to alcohol
abuse, including drunk driving, underage drinking, and health consequences from
the misuse of beverage alcohol. Alcohol critics in the U.S. and Europe and other
countries around the world increasingly seek governmental measures to make
beverage alcohol more expensive, less available, and more difficult to advertise
and promote. If the social acceptability of beverage alcohol were to decline
significantly, sales of our products could materially decrease. Our sales would
also suffer if governments sought to ban or restrict advertising or promotional
activities, to limit hours or places of sale, or took other actions that
discourage alcohol consumption.
6
LITIGATION RELATING TO ALCOHOL ABUSE AND ILLEGAL ALCOHOL CONSUMPTION COULD
ADVERSELY IMPACT OUR BUSINESS.
A number of beverage alcohol producers have been sued over allegations relating
to their advertising practices. A law firm has filed nine class action lawsuits
against several spirits, beer, and wine manufacturers, including us. The suits
allege that our marketing causes illegal consumption of alcohol by persons under
the legal drinking age. To date, the first six courts to consider those lawsuits
have dismissed them and two cases have been withdrawn voluntarily. Plaintiffs
have appealed the six involuntary dismissals. (One of the dismissals was
affirmed in June 2007.) We dispute the allegations in these lawsuits and intend
to continue to defend these cases vigorously. However, adverse developments in
these or similar lawsuits could materially hurt our beverage business and the
overall industry.
OUR WINE OR TEQUILA BUSINESS MAY BE ADVERSELY AFFECTED BY PRODUCTION COSTS.
Our California-based wine operations have entered into long-term contracts with
various growers and wineries to supply portions of our future grape
requirements. Most of the contracts call for prices to be determined based on
market conditions, within a certain range, and most of the contracts also have
minimum tonnage requirements. Although these contracts may provide some
protection in times of rising grape prices, the contracts may result in
above-market costs during times of declining prices. Likewise, our Mexico-based
tequila operations have entered into long-term contracts with land owners in
regions where blue agave can be grown. Most of these contracts require us to
plant, maintain, and harvest the agave, plus compensate the owners based on
specified percentages of the crop at the prevailing market price at the time of
harvest. Instability in agave market conditions could cause us to pay
above-market costs for some of the agave we use to produce tequila. There can be
no assurances as to the future prevailing market prices for grapes or agave or
our ability, relative to our competitors, to take advantage of changes in market
prices.
CONSOLIDATION AMONG OR POOR PERFORMANCE BY SPIRITS PRODUCERS, WHOLESALER OR
RETAILERS COULD HINDER THE MARKETING AND DISTRIBUTION OF OUR PRODUCTS.
We use a number of different business models to market and distribute our
products. However, we rely on other spirits producers to distribute and market
our products in some international markets. In the United States, we sell our
products to wholesalers through the mandatory three-tier system. Distributor,
wholesaler and retailer consolidations have not in the past negatively affected
our business. Nevertheless, consolidation among spirits producers overseas or
wholesalers in the United States could hinder the distribution of our products
as a result of reduced attention and resource allocation to our brands, due to
our brands representing a smaller portion of their business and/or a changing
competitive environment.
7
OUR ACQUISITION STRATEGIES AND INTEGRATION OF ACQUIRED BUSINESSES MAY NOT BE
SUCCESSFUL.
From time to time, we acquire additional businesses that we believe to be a
strategic fit, such as our recent purchases of the Casa Herradura business,
Chambord Liqueur and the remainder of Don Eduardo. Integration of acquired
businesses and personnel into our existing operations, and bringing them into
conformity with our trade practice standards, financial control environment and
U.S. public company requirements, may prove difficult, may involve significant
expenses and management time and attention, and may otherwise disrupt our
business. Our ability to grow the volumes and maintain or increase the profit
margins on these brands, especially in the U.S. or Mexico, will be important to
our future performance. Additionally, business acquisitions such as these may
expose us to unknown liabilities, the possible loss of key customers and
employees knowledgeable about the acquired business, and risks associated with
doing business in countries or regions with less stable governments, political
climates, legal systems and/or economies, among other risks.
TERMINATION OF OUR RIGHTS TO DISTRIBUTE AND MARKET AGENCY BRANDS INCLUDED IN OUR
PORTFOLIO COULD ADVERSELY AFFECT OUR BUSINESS.
In addition to the brands our company owns, we also market and distribute
products on behalf of other brand owners in selected markets, including the U.S.
Our rights to sell these agency brands are based on contracts with the various
brand owners, which have varying lengths, renewal terms, termination rights, and
other provisions. We earn a margin for these sales and also gain distribution
cost efficiencies in some instances. Therefore, the termination of our rights to
distribute agency brands included in our portfolio could adversely affect our
business.
COUNTERFEIT PRODUCTION OF OUR PRODUCTS COULD ADVERSELY AFFECT OUR INTELLECTUAL
PROPERTY RIGHTS, BRAND EQUITY AND OPERATING RESULTS.
The beverage alcohol industry is experiencing problems with product
counterfeiting and other forms of trademark infringement, especially within the
Asian and Eastern European markets. Given our dependence on brand recognition,
we devote substantial resources on a worldwide basis to protect our intellectual
property rights. In addition, we have taken steps to reduce the ability of
others to imitate our products. Although we believe that our intellectual
property rights are legally supported in the markets in which we do business,
the protection afforded intellectual property rights varies greatly from country
to country. Confusingly similar, lower quality or even dangerous counterfeit
product could reach the market and adversely affect our intellectual property
rights, brand equity and/or operating results.
Item 1B. Unresolved Staff Comments
None.
8
Item 2. Properties
Significant properties are as follows:
Owned facilities:
- Office facilities:
- Corporate offices (including renovated historic structures)
- Louisville, Kentucky
- Production and warehousing facilities:
- Lynchburg, Tennessee
- Louisville, Kentucky
- Collingwood, Ontario, Canada
- Shively, Kentucky
- Woodford County, Kentucky
- Hopland, California
- Paso Robles, California
- Windsor, California
- Livorno, Italy
- Soave, Italy
- Albany, Kentucky
- Waverly, Tennessee
- Blois, France
- Amatitan, Mexico
Leased facilities:
- Production and bottling facility in Dublin, Ireland
- Warehousing facility in Mendocino County, California
- Stave and heading mill in Jackson, Ohio
The lease terms expire at various dates and are generally renewable.
We believe that the facilities are in good condition and are adequate for our
business.
9
Item 3. Legal Proceedings
Brown-Forman Corporation and many other manufacturers of spirits, wine, and beer
are defendants in a series of essentially similar class action lawsuits seeking
damages and injunctive relief 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.
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, in coordination with other defendants, is vigorously defending
itself in these cases. 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 defendant's motion to dismiss. Each involuntarily dismissal is being
appealed by the respective plaintiffs. The Hakki dismissal was affirmed by the
D.C. Court of Appeals in June 2007.
Item 4. Submission of Matters to a Vote of Security Holders
None.
10
Executive Officers of the Registrant
Principal Occupation and
Name Age Business Experience
---- --- ---------------------------------
Owsley Brown II 64 Chairman of the Board of the Company
since 1995. Chief Executive Officer
of the Company from 1993 to July
2005.
Paul C. Varga 43 President and Chief Executive
Officer of the Company since August
2005. President and Chief Executive
Officer of Brown-Forman Beverages
(a division of the Company) from
August 2003 to August 2005. Global
Chief Marketing Officer for
Brown-Forman Beverages from 2000
to August 2003.
Phoebe A. Wood 54 Vice Chairman and Chief Financial
Officer of the Company since March
2007. Executive Vice President and
Chief Financial Officer of the
Company from 2001 to 2007.
Michael B. Crutcher 63 Vice Chairman, General Counsel, and
Secretary since August 2003. Senior
Vice President, General Counsel, and
Secretary from 1989 to August 2003.
James S. Welch, Jr. 48 Vice Chairman, Strategy and Human
Resources since August 2003. Senior
Vice President and Executive
Director of Human Resources from
1999 to August 2003.
James L. Bareuther 61 Executive Vice President and Chief
Operating Officer of Brown-Forman
since July 2006. Executive Vice
President and Chief Operating
Officer of Brown-Forman Beverages
from August 2003 to July 2006.
President of Brown-Forman Spirits
Americas from 2001 to August 2003.
Mark I. McCallum 52 Executive Vice President and Chief
Brand Officer since May 2006.
Senior Vice President and Chief
Marketing Officer from July 2003 to
May 2006. Executive Vice President
of Marketing for Darden Restaurants,
Inc., from 2001 to 2003.
Jane C. Morreau 48 Senior Vice President and Controller
since December 2006. Vice President
and Controller from August 2002 to
December 2006. Director of Business
Planning & Analysis from 1997 to
August 2002.
11
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters
and Issuer Purchases of Equity Securities
Our Class A and Class B Common Stock is traded on the New York Stock Exchange
(symbols "BFA" and "BFB," respectively).
Holders of record of Common Stock at April 30, 2007:
Class A Common Stock (Voting) 3,522
Class B Common Stock (Nonvoting) 4,081
For the other information required by this item, refer to the section entitled
"Quarterly Financial Information" at the front of the 2007 Annual Report to
Stockholders, which information is incorporated into this report by reference.
Item 6. Selected Financial Data
For the information required by this item, refer to the section entitled
"Selected Financial Data" on page 25 of the 2007 Annual Report to Stockholders,
which information is incorporated into this report by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
For the information required by this item, refer to the section entitled
"Management's Discussion and Analysis" on pages 26 through 37 of the 2007 Annual
Report to Stockholders, and the section entitled "Important Information on
Forward-Looking Statements" on page 56 of the 2007 Annual Report to
Stockholders, which information is incorporated into this report by reference.
Impact of Inflation and Changing Prices
Inflation affects the way we market and price our products in many markets
around the world. In general, and with respect to the most recent three fiscal
years, we believe that we have been able to increase prices to counteract the
majority of the inflationary effects on our net sales, revenue and income from
continuing operations.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
For the information required by this item, refer to the section entitled "Market
Risks" beginning on page 36 of the 2007 Annual Report to Stockholders, which
information is incorporated into this report by reference.
Item 8. Financial Statements and Supplementary Data
For the information required by this item, refer to the Consolidated Financial
Statements, Notes to Consolidated Financial Statements, Reports of Management,
and Report of Independent Registered Public Accounting Firm on pages 38 through
54 of the 2007 Annual Report to Stockholders, which information is incorporated
into this report by reference.
12
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item 9A. Controls and Procedures
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
Brown-Forman (its principal executive and principal financial officers) have
evaluated the effectiveness of the company's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")) as of the end of the period covered by this report.
Based on that evaluation, the CEO and CFO concluded that the company's
disclosure controls and procedures: are effective to ensure that information
required to be disclosed by the company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms; and include controls
and procedures designed to ensure that information required to be disclosed by
the company in such reports is accumulated and communicated to the company's
management, including the CEO and the CFO, as appropriate, to allow timely
decisions regarding required disclosure. There has been no change in the
company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting.
For the other information required by this item, refer to "Management's Report
on Internal Control over Financial Reporting" and "Report of Independent
Registered Public Accounting Firm" on pages 53 and 54 of the 2007 Annual Report
to Stockholders, which information is incorporated into this report by
reference.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 26, 2007, which information is incorporated into this report by reference:
(a) "Election of Directors" on pages 6 through 8 (for information on directors);
(b) "Corporate Governance" on page 9 (for information on our Code of Ethics);
(c) "Section 16(a) Beneficial Ownership Reporting Compliance" on page 19 (for
information on delinquent Section 16 filings); and (d) "Audit Committee" on
pages 20 through 22. Also, see the information with respect to "Executive
Officers of the Registrant" under Part I of this report, which information is
incorporated herein by reference.
We will post any amendments to our Code of Ethics that applies to our chief
executive officer, principal financial officer, controller and principal
accounting officer, and any waivers that are required to be disclosed by the
rules of either the SEC or NYSE on our website.
13
We filed during the fiscal year ended April 30, 2007 with the NYSE the Annual
CEO Certification regarding the Company's compliance with the NYSE's Corporate
Governance listing standards as required by Section 303A-12(a) of the NYSE
Listed Company Manual. In addition, the Company has filed as exhibits to this
annual report and to the annual report on Form 10-K for the year ended April 30,
2006, the applicable certifications of its Chief Executive Officer and its Chief
Financial Officer required under Section 302 of the Sarbanes-Oxley Act of 2002,
regarding the quality of the company's public disclosures.
Item 11. Executive Compensation
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 26, 2007, which information is incorporated into this report by reference:
(a) "Executive Compensation" on pages 23 through 48; and (b) "Compensation
Committee Interlocks and Insider Participation" on page 51.
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
Equity Compensation Plan Information
In July 2004, shareholders approved the 2004 Omnibus Compensation Plan as the
successor to both the 1994 Omnibus Compensation Plan providing equity awards to
employees and the Non-Employee Directors ("NED") Plan providing equity awards to
non-employee directors. At the time the NED Plan was discontinued, it had not
been submitted to shareholders. The following table provides information on
these plans as of the end of the most recently completed fiscal year:
Number of securities
Number of securities to be Weighted-average exercise remaining available
issued upon exercise of price of outstanding for future issuance
outstanding options, options, warrants and under equity compensation
Plan category warrants and rights rights(1) plans(2)
Equity compensation plans
approved by security holders 4,054,381 $41.86 4,815,817
Equity compensation plans not
approved by security holders 158,641 $31.76 -- (3)
--------- ------ ---------
Total 4,213,022 $41.48 4,815,817
========= ====== =========
(1) The difference in weighted-average exercise price between plans is primarily due to a premium-priced, broad-based grant made
to employees under the stockholder-approved 2004 Omnibus Compensation Plan. In all other instances, grant prices were equal
to the fair market value of the stock at the time of grant.
(2) Securities available for issuance under the 2004 Omnibus Compensation Plan include stock, stock options, stock appreciation
rights, market value units, and performance units.
(3) No further awards can be made under the NED plan.
14
For the other information required by this item, refer to the section entitled
"Stock Ownership" on pages 15 through 19 of our definitive proxy statement for
the Annual Meeting of Stockholders to be held July 26, 2007, which information
is incorporated into this report by reference.
Item 13. Certain Relationships and Related Transactions, and Director
Independence
For the information required by this item, refer to the following sections of
our definitive proxy statement for the Annual Meeting of Stockholders to be held
July 26, 2007, which information is incorporated into this report by reference:
(a) "Certain Relationships and Related Transactions" on pages 50 through 51; and
(b) "Corporate Governance" on pages 9 through 14.
Item 14. Principal Accountant Fees and Services
For the information required by this item, refer to the sections entitled "Fees
Paid to Independent Registered Public Accounting Firm" and "Policy on Audit
Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Registered Public Accounting Firm" on pages 21 through 22 of our
definitive proxy statement for the Annual Meeting of Stockholders to be held
July 27, 2006, which information is incorporated into this report by reference.
15
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) 1 and 2 - Index to Consolidated Financial Statements and Schedule:
Reference
Annual
Form 10-K Report to
Annual Report Stockholders
Page Page(s)
Incorporated by reference to our Annual Report to
Stockholders for the year ended April 30, 2007:
Consolidated Statements of Operations for the
years ended April 30, 2005, 2006, and 2007* -- 38
Consolidated Balance Sheets at April 30, 2006 and 2007* -- 39
Consolidated Statements of Cash Flows for the
years ended April 30, 2005, 2006, and 2007* -- 40
Consolidated Statements of Stockholders' Equity
for the years ended April 30, 2005, 2006, and 2007* -- 41
Notes to Consolidated Financial Statements* -- 42 - 52
Reports of Management* -- 53
Report of Independent Registered Public Accounting Firm* -- 54
Important Information on Forward-Looking Statements -- 56
Consolidated Financial Statement Schedule:
Report of Independent Registered Public Accounting Firm
on Financial Statement Schedule S-1 --
II - Valuation and Qualifying Accounts S-2 --
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission have been omitted either
because they are not required under the related instructions, because the
information required is included in the consolidated financial statements and
notes thereto, or because they are inapplicable.
* Incorporated by reference to Item 8 in this report.
16
(a) 3 - Exhibits: Filed with this report:
Exhibit Index
-------------
10(m) First Amendment to the Brown-Forman Omnibus Compensation Plan
Restricted Stock Agreement.**
10(n) Second Amendment to the Brown-Forman 2004 Omnibus Compensation Plan
Restricted Stock Agreement.**
13 Brown-Forman Corporation's Annual Report to Stockholders for the
year ended April 30, 2007, but only to the extent set forth in
Items 1, 5, 6, 7, 7A, 8 and 9A of this Annual Report on Form 10-K
for the year ended April 30, 2007.
21 Subsidiaries of the Registrant.
23 Consent of PricewaterhouseCoopers LLP, independent registered
public accounting firm.
31.1 CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
31.2 CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of
2002.
32 CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(not considered to be filed).
Previously Filed:
Exhibit Index
-------------
2(a) Asset Purchase Agreement, dated as of March 15, 2006, among Chatham
International Incorporated, Charles Jacquin et Cie., Inc., the
Selling Stockholders and Brown-Forman Corporation, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on June 29, 2006.
2(b) Asset Purchase Agreement, dated as of August 25, 2006, among Jose
Guillermo Romo de la Pena, Luis Pedro Pablo Romo de la Pena, Grupo
Industrial Herradura, S.A. de C.V., certain of their respective
affiliates, Brown-Forman Corporation and Brown-Forman Tequila
Mexico, S. de R.L. de C.V., a subsidiary of Brown-Forman
Corporation, as amended, which is incorporated into this report by
reference to Brown-Forman Corporation's Forms 8-K filed on
August 29, 2006, December 22, 2006, January 16, 2007, and
January 22, 2007.
3(i) Restated Certificate of Incorporation of registrant, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 10-Q filed on March 4, 2004.
3(ii) By-laws of Registrant, as amended on May 26, 2005, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 8-K filed on May 27, 2005.
4 Form of Indenture dated as of March 1, 1994 between Brown-Forman
Corporation and The First National Bank of Chicago, as Trustee,
which is incorporated into this report by reference to Brown-Forman
Corporation's Form S-3 (Registration No. 33-52551) filed on
March 8, 1994.
17
10(a) Brown-Forman Corporation Supplemental Executive Retirement Plan,
which is incorporated into this report by reference to Brown-Forman
Corporation's Form 10-K filed on July 23, 1990.**
10(b) A description of the Brown-Forman Savings Plan, which is
incorporated into this report by reference to page 10 of
Brown-Forman's definitive proxy statement filed on June 27, 1996
in connection with its 1996 Annual Meeting of Stockholders.**
10(c) The description of the terms of $250,000,000 of 2-1/8% Notes due
2006 and $350,000,000 of 3% Notes due 2008, which description is
incorporated by reference into this report by reference to the
Indenture filed with Brown-Forman Corporation's Form S-4
(Registration No. 333-104657) on April 21, 2003.
10(d) Brown-Forman Corporation 2004 Omnibus Compensation Plan, which is
incorporated into this report by reference to Brown-Forman's
definitive proxy statement filed on June 30, 2004 in connection
with its 2004 Annual Meeting of Stockholders.
10(e) Five-Year Credit Agreement dated as of April 30, 2007 by and among
Brown-Forman Corporation, Brown-Forman Beverages, Europe, LTD,
certain borrowing subsidiaries and certain lender parties thereto,
Bank of America, N.A., as Syndication Agent and as a Lender,
Citicorp North America, Inc., Barclays Bank Plc, National City Bank
and Wachovia Bank, National Association as Co-Documentation Agents
and as Lenders, JPMorgan Chase Bank, N.A. as Administrative Agent
and as a Lender and J.P. Morgan Europe Limited, as London Agent.,
which is incorporated into this report by reference to Brown-Forman
Corporation's Form 8-K filed on May 2, 2007.
10(f) Form of Restricted Stock Agreement, as amended, which is
incorporated into this report by reference to Brown-Forman
Corporations's Form 10-K filed on June 30, 2005.**
10(g) Form of Employee Stock Appreciation Right Award, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 8-K filed on August 2, 2006.**
10(h) Form of Employee Non-Qualified Stock Option Award, which is
incorporated into this report by reference to Brown-Forman
Corporation's Form 8-K filed on August 2, 2006.**
10(i) Form of Non-Employee Director Stock Appreciation Right Award, which
is incorporated into this report by reference to Brown-Forman
Corporation's Form 8-K filed on August 2, 2006.**
10(j) Form of Non-Employee Director Non-Qualified Stock Option Award,
which is incorporated into this report by reference to Brown-Forman
Corporation's Form 8-K filed on August 2, 2006.**
10(k) Summary of Director and Named Executive Officer Compensation, which
description is incorporated into this report by reference to
Brown-Forman Corporation's Form 8-K filed on August 2, 2006.**
10(l) The description of the terms of $150,000,000 of Floating Rate Notes
due 2010 and $250,000,000 of 5.2% Notes due 2012, which description
is incorporated into this report by reference to the Indenture,
the Officer's Certificate pursuant thereto and the 2010 and 2012
global notes filed as exhibits to Brown-Forman Corporation's
Form 8-K filed on April 3, 2007.
18
14 Code of Ethics, which is incorporated into this report by reference
to Brown-Forman Corporation's Form 10-K filed on July 2, 2004.
** Indicates management contract, compensatory plan or arrangement.
19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BROWN-FORMAN CORPORATION
(Registrant)
/s/ Paul C. Vargs
Date: June 28, 2007 By: Paul C. Varga
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on June 28, 2007 as indicated:
/s/ Barry D. Bramley
By: Barry D. Bramley
Director
/s/ Geo. Garvin Brown IV
By: Geo. Garvin Brown IV
Director
/s/ Martin S. Brown, Jr.
By: Martin S. Brown, Jr.
Director
/s/ Owsley Brown II
By: Owsley Brown II
Director, Chairman of the Board
/s/ Donald G. Calder
By: Donald G. Calder
Director
/s/ Sandra A. Frazier
By: Sandra A. Frazier
Director
/s/ William E. Mitchell
By: William E. Mitchell
Director
/s/ Jane C. Morreau
By: Jane C. Morreau
Senior Vice President
and Controller
(Principal Accounting Officer)
/s/ Matthew R. Simmons
By: Matthew R. Simmons
Director
/s/ William M. Street
By: William M. Street
Director, Former President,
Brown-Forman Corporation
/s/ Dace Brown Stubbs
By: Dace Brown Stubbs
Director
/s/ Paul C. Varga
By: Director, President and
Chief Executive Officer
/s/ James S. Welch, Jr.
By: James S. Welch, Jr.
Director
/s/ Phoebe A. Wood
By: Phoebe A. Wood
Vice Chairman and
Chief Financial Officer
(Principal Financial Officer)
20
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors
of Brown-Forman Corporation:
Our audits of the consolidated financial statements, of management's assessment
of the effectiveness of internal control over financial reporting and of the
effectiveness of internal control over financial reporting referred to in our
report dated June 28, 2007 appearing in the 2007 Annual Report to Stockholders
of Brown-Forman Corporation (which report, consolidated financial statements and
assessment are incorporated by reference in this Annual Report on Form 10-K)
also included an audit of the financial statement schedule listed in Item
15(a)(1) and (2) of this Form 10-K. In our opinion, this financial statement
schedule presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
June 28, 2007
S-1
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Years Ended April 30, 2005, 2006, and 2007
(Expressed in thousands)
Col. A Col. B Col. C(1) Col. C(2) Col. D Col. E
------ ------ --------- --------- ------ ------
Additions Additions
Balance at Charged to Charged to Balance at
Beginning Costs Other End
Description of Period and Expenses Accounts Deductions of Period
----------- ---------- ------------ ---------- ---------- ----------
2005
Allowance for Doubtful Accounts $5,082 $ 33 -- -- $5,115
2006
Allowance for Doubtful Accounts $5,115 $164 -- $15(2) $5,264
2007
Allowance for Doubtful Accounts $5,264 $316 $16,374(1) -- $21,954
(1) Amount recorded as part of the Casa Herradura acquisition.
(2) Doubtful accounts written off, net of recoveries.
S-2
Exhibit 10(m)
FIRST AMENDMENT TO THE BROWN-FORMAN
OMNIBUS COMPENSATION PLAN
RESTRICTED STOCK AGREEMENT
WHEREAS, Brown-Forman Corporation (the "Company") maintains the
Brown-Forman Omnibus Compensation Plan (the "Plan"), effective May 1, 1994 (as
amended July 24, 1995, June 15, 1999 and September 23, 1999); and
WHEREAS, the Plan permits the Company to issue restricted stock to
Participants pursuant to the Plan if certain performance based goals are reached
during a predetermined performance period; and
WHEREAS, the Company and (insert name) (the "Participant") entered into a
Restricted Stock Agreement (the "Agreement"), effective July 24, 2003; and
WHEREAS, Section 10(B) of the Agreement provides that the Agreement may be
amended with the Company's and the Participant's written consent; and
WHEREAS, Section 3 of the Agreement currently provides for the
discretionary vesting of the restricted stock underlying this Agreement in the
event of the Participant's retirement, death or involuntary termination for
reasons other than discharge for Cause; and
WHEREAS, the Company and the Participant desire to amend Section 3 of the
Agreement to require mandatory vesting (on a pro-rated basis) of the restricted
stock underlying this Agreement in the event of an involuntary termination for
reasons other than discharge for Cause.
NOW, THEREFORE, the Company and the Participant hereby consent to amend
Section 3 of the Agreement to provide as follows:
3. Termination of Employment. In the event the Participant does not remain
continuously employed by the Company until the Restriction Ending Date, the
following rules will apply:
Participants terminating voluntarily and Participants who are discharged
for Cause will forfeit all Restricted Stock.
In the event of retirement or death, the Participant may be entitled, at
the discretion of the Plan Administrator, to receive a pro-rated portion of
each Restricted Stock Award, with the Restricted Stock released from
restrictions at a time determined by the Plan Administrator, but in no
circumstances later than described in Section 2 above.
In the event of involuntary termination for reasons other than discharge
for Cause, the Participant shall be entitled to receive a pro-rated portion
of each Restricted Stock Award, with the pro-rated portion of the
Restricted Stock released from restrictions at the time of the involuntary
termination. The pro-rated portion shall be determined based on the
following formula:
The number of whole or partial months elapsed
at the time of the involuntary termination
divided by
The number of months required for full vesting
IN WITNESS WHEREOF, Brown-Forman Corporation and (insert name) have caused
this First Amendment to the Brown-Forman Omnibus Compensation Plan Restricted
Stock Agreement to be executed this _____ day of _______________________, 2007.
Consented to and accepted by:
Brown-Forman Corporation
By:____________________
Bruce S. Cote
Vice President,
Director HR Employee Services
Consented to and accepted by:
_______________________
Participant
Exhibit 10(n)
SECOND AMENDMENT TO THE BROWN-FORMAN
2004 OMNIBUS COMPENSATION PLAN
RESTRICTED STOCK AGREEMENT
WHEREAS, Brown-Forman Corporation (the "Company") maintains the
Brown-Forman 2004 Omnibus Compensation Plan (the "Plan"), effective July 22,
2004; and
WHEREAS, the Plan permits the Company to issue restricted stock to
Participants pursuant to the Plan if certain performance based goals are reached
during a predetermined performance period; and
WHEREAS, the Company and (insert name) (the "Participant") entered into
Restricted Stock Agreement(s) (the "Agreement(s)"), effective __________________
___, 200_, ___________ __, 200_, _______________ __, 200_, and _________________
__, 200_; and
WHEREAS, Section 10(B) of the Agreement provides that the Agreement may be
amended with the Company's and the Participant's written consent; and
WHEREAS, Section 3 of the Agreement currently provides for the
discretionary vesting of the restricted stock underlying this Agreement in the
event of the Participant's retirement, death or involuntary termination for
reasons other than discharge for Cause; and
WHEREAS, the Company and the Participant desire to amend Section 3 of the
Agreement to require mandatory vesting (on a pro-rated basis) of the restricted
stock underlying this Agreement in the event of an involuntary termination for
reasons other than discharge for Cause.
NOW, THEREFORE, the Company and the Participant hereby consent to amend
Section 3 of the Agreement to provide as follows:
3. Termination of Employment. In the event the Participant does not remain
continuously employed by the Company until the Restriction Ending Date, the
following rules will apply:
Participants terminating voluntarily and Participants who are discharged
for Cause will forfeit all Restricted Stock.
In the event of retirement or death, the Participant may be entitled, at
the discretion of the Plan Administrator, to receive a pro-rated portion of
each Restricted Stock Award, with the Restricted Stock released from
restrictions at a time determined by the Plan Administrator, but in no
circumstances later than described in Section 2 above.
In the event of involuntary termination for reasons other than discharge
for Cause, the Participant shall be entitled to receive a pro-rated portion
of each Restricted Stock Award, with the pro-rated portion of the
Restricted Stock released from restrictions at the time of the involuntary
termination. The pro-rated portion shall be determined based on the
following formula:
The number of whole or partial months elapsed
at the time of the involuntary termination
divided by
The number of months required for full vesting
IN WITNESS WHEREOF, Brown-Forman Corporation and (insert name) have caused
this Second Amendment to the Brown-Forman 2004 Omnibus Compensation Plan
Restricted Stock Agreement to be executed this _____ day of
_______________________, 2007.
Consented to and accepted by:
Brown-Forman Corporation
By:____________________
Bruce S. Cote
Vice President,
Director HR Employee Services
Consented to and accepted by:
________________________
Participant
Exhibit 13
FINANCIAL HIGHLIGHTS
(Expressed in millions, except per share amounts and ratios)
--------------------------------------------------------------------------------
Year Ended April 30, 2006 2007 % Change
--------------------------------------------------------------------------------
CONTINUING OPERATIONS
Net Sales $2,412 $2,806 16%
Gross Profit $1,308 $1,481 13%
Operating Income $ 563 $ 602 7%
Income from Continuing Operations $ 395 $ 400 1%
Earnings Per Share from Continuing Operations
- Basic $ 3.24 $ 3.26 1%
- Diluted $ 3.20 $ 3.22 1%
Return on Average Invested Capital 21.9% 17.4%
Gross Margin 54.2% 52.8%
Operating Margin 23.3% 21.5%
QUARTERLY FINANCIAL INFORMATION
(Expressed in millions, except per share amounts)
----------------------------------------------------------------------------------------------------------------------------------
Fiscal 2006 Fiscal 2007
---------------------------------------------- ----------------------------------------------
First Second Third Fourth First Second Third Fourth
Quarter Quarter Quarter Quarter Year Quarter Quarter Quarter Quarter Year
----------------------------------------------------------------------------------------------------------------------------------
Net Sales $542 $658 $628 $585 $2,412 $633 $727 $755 $691 $2,806
Gross Profit 301 354 331 323 1,308 349 383 387 362 1,481
Net Income
Continuing Operations 88 112 120 76 395 95 125 112 69 400
Total Company 13 109 120 78 320 94 124 105 67 389
Basic EPS
Continuing Operations $0.72 $0.92 $0.98 $0.62 $3.24 $0.77 $1.02 $0.91 $0.56 $3.26
Total Company 0.10 0.89 0.99 0.64 2.62 0.76 1.01 0.86 0.54 3.17
Diluted EPS
Continuing Operations $0.71 $0.91 $0.97 $0.61 $3.20 $0.76 $1.00 $0.90 $0.56 $3.22
Total Company 0.10 0.88 0.98 0.63 2.60 0.76 1.00 0.85 0.54 3.14
Cash Dividends Per Common Share
Declared $0.49 $0.00 $0.56 $0.00 $1.05 $0.56 $0.00 $0.61 $0.00 $1.17
Paid 0.25 0.25 0.28 0.28 1.05 0.28 0.28 0.30 0.30 1.17
Market Price Per Common Share
Class A High $64.15 $65.65 $74.25 $84.45 $84.45 $77.70 $79.58 $73.23 $71.19 $79.58
Class A Low 56.44 58.02 64.64 69.80 56.44 69.14 71.55 66.41 66.32 66.32
Class B High $61.59 $63.69 $72.40 $82.55 $82.55 $77.65 $79.38 $72.65 $68.25 $79.38
Class B Low 54.90 55.50 62.41 67.66 54.90 68.32 71.19 64.20 63.54 63.54
Note: Quarterly amounts may not add to amounts for the year due to rounding.
SELECTED FINANCIAL DATA
(Expressed in millions, except per share amounts and ratios)
Year Ended April 30,
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
CONTINUING OPERATIONS
Net Sales $1,365 1,446 1,542 1,572 1,618 1,795 1,992 2,195 2,412 2,806
Gross Profit $ 689 741 812 848 849 900 1,024 1,156 1,308 1,481
Operating Income $ 265 279 296 320 326 341 383 445 563 602
Income from Continuing Operations $ 160 176 187 200 212 222 243 339 395 400
Weighted Average Shares used to
calculate Earnings per Share
- Basic 137.9 137.2 137.0 137.0 136.7 134.7 121.4 121.7 122.1 122.9
- Diluted 138.0 137.4 137.2 137.1 137.0 135.1 122.0 122.5 123.4 124.2
Earnings per Share from
Continuing Operations
- Basic $ 1.15 1.28 1.36 1.46 1.55 1.65 2.00 2.79 3.24 3.26
- Diluted $ 1.15 1.28 1.36 1.46 1.55 1.65 1.99 2.77 3.20 3.22
Gross Margin 50.4% 51.2% 52.6% 53.9% 52.5% 50.1% 51.4% 52.7% 54.2% 52.8%
Operating Margin 19.4% 19.3% 19.2% 20.3% 20.2% 19.0% 19.2% 20.3% 23.3% 21.5%
Effective Tax Rate 37.3% 36.0% 35.9% 35.8% 34.1% 33.6% 33.1% 32.6% 29.3% 31.7%
Average Invested Capital $ 583 681 889 1,016 1,128 1,266 1,392 1,535 1,863 2,431
Return on Average Invested Capital 28.9% 26.7% 22.0% 20.7% 19.3% 18.0% 18.5% 23.0% 21.9% 17.4%
TOTAL COMPANY
Cash Dividends Declared per Common Share $ 0.55 0.58 0.61 0.64 0.68 0.73 0.80 0.92 1.05 1.17
Average Stockholders' Equity $ 757 855 976 1,111 1,241 1,290 936 1,198 1,397 1,700
Total Assets at April 30 $1,494 1,735 1,802 1,939 2,016 2,264 2,376 2,649 2,728 3,551
Long-Term Debt at April 30 $ 43 46 33 33 33 629 630 351 351 422
Total Debt at April 30 $ 157 290 259 237 200 829 679 630 576 1,177
Cash Flow from Operations $ 220 213 241 232 249 243 304 396 343 355
Return on Average Stockholders' Equity 24.2% 23.4% 22.1% 20.7% 18.1% 18.7% 27.1% 25.7% 22.9% 22.9%
Total Debt to Total Capital 16.1% 24.0% 19.8% 16.6% 13.2% 49.4% 38.3% 32.5% 26.9% 42.8%
Dividend Payout Ratio 41.5% 39.5% 38.5% 38.1% 41.4% 41.1% 38.2% 36.1% 40.0% 36.8%
Notes:
1. Includes the consolidated results of Sonoma-Cutrer Vineyards, Finlandia
Vodka Worldwide, Tuoni e Canepa, Swift & Moore, Chambord, and Casa Herradura
since their acquisitions in April 1999, December 2002, February 2003,
February 2006, May 2006, and January 2007, respectively.
2. Weighted average shares, earnings per share, and cash dividends declared
per common share have been adjusted for a 2-for-1 common stock split in
January 2004.
3. We define Return on Average Invested Capital as the sum of net income
(excluding extraordinary items) and after-tax interest expense, divided by
average invested capital. Invested capital equals assets less liabilities,
excluding interest-bearing debt.
4. We define Return on Average Stockholders' Equity as net income applicable
to common stock divided by average stockholders' equity.
5. We define Total Debt to Total Capital as total debt divided by the sum of
total debt and stockholders' equity.
6. We define Dividend Payout Ratio as cash dividends divided by net income.
25
MANAGEMENT'S DISCUSSION AND ANALYSIS
In the discussion below, we review Brown-Forman's consolidated financial
condition and results of operations for the fiscal years ended April 30, 2005,
2006, and 2007. We also make statements relating to our anticipated financial
performance and other forward-looking statements and discuss factors that may
affect our future financial condition and performance. We have prepared a list
of some risk factors that could cause actual results to differ materially from
our anticipated results. Please read this Management's Discussion and Analysis
section in conjunction with our consolidated financial statements for the year
ended April 30, 2007, their related notes, and the important information
regarding forward-looking statements on page 56.
As discussed in Note 2 to the accompanying financial statements, we sold Lenox,
Inc. during fiscal 2006, and sold Brooks & Bentley and Hartmann in fiscal 2007.
As a result, we have reported them as discontinued operations in the
accompanying financial statements.
EXECUTIVE OVERVIEW
Brown-Forman Corporation is a diversified producer and marketer of fine-quality
consumer beverage products, including Jack Daniel's and its family of brands,
Southern Comfort, Finlandia, Tequila Herradura, el Jimador Tequila, Canadian
Mist, Fetzer, Bolla, and Sonoma-Cutrer wines, and Korbel Champagne. We market
and sell various categories of beverage alcohol products, such as Tennessee,
Canadian, and Kentucky whiskies; Kentucky bourbon; California sparkling wine;
tequila; table wine; liqueurs; vodka; rum; gin; and ready-to-drink products.
Our Markets
Our brands are sold around the world in over 135 countries. Our largest and most
important market is the U.S., where 53% of our net sales from continuing
operations were generated in fiscal 2007, compared to 58% in fiscal 2006. Sales
in the U.S. grew 7% when compared to fiscal 2006, while our sales outside of the
U.S. grew 30%. Europe, our second-largest region in terms of net sales, grew a
healthy 15% in fiscal 2007, influenced in part by a weaker U.S. dollar and the
full-year effect of a structural change in our distribution arrangement in
Germany, where we are now responsible for paying and remitting excise taxes.
Europe represented 29% of total net sales from continuing operations in fiscal
2007, unchanged from fiscal 2006. Growth from the rest of the world accelerated,
improving 65% in fiscal 2007, and now constitutes 18% of our total net sales
from continuing operations, up from 11% of total net sales just two short years
ago. The double-digit increase in net sales and the significant increase in the
percentage contribution to total sales compared to fiscal 2005 includes the
effect of structural changes in our distribution model in Australia, where we
are now responsible for paying and remitting excise taxes, and the incremental
net sales associated with the acquisition of Casa Herradura primarily in the
Mexican market.
International expansion continued to provide a significant portion of our
growth, as it has over the past decade. In fact, markets outside of the U.S.
contributed more than 75% of growth in net sales in fiscal 2007 and constituted
approximately 47% of our total reported net sales for the year.
The principal international markets for our brands include the U.K., Australia,
Poland, Germany, Mexico, South Africa, Spain, France, Canada, and Japan. As we
continue to expand outside of the U.S., foreign exchange rate fluctuations
increasingly affect our financial results - in terms of both sales from goods
sold in local currencies and the cost of goods and services purchased in local
currencies. On a net basis, we sell more in local currency than we buy, thus
exposing our financial results to the negative impact of a strengthening U.S.
dollar. To help protect against this, we regularly hedge our foreign currency
exposure. But over the long term, reported profits from our international
business may be adversely affected if the U.S. dollar strengthens against other
currencies.
Net Sales by Geography
(in millions)
2005 2006 2007
---- ---- ----
United States $1,316 $1,404 $1,498
Europe 637 709 816
Rest of World 242 299 492
------ ------ ------
Total $2,195 $2,412 $2,806
====== ====== ======
Consumer demand for both premium and super-premium brands in the U.S. continued
to expand this past year, but at a slightly lower growth rate than in fiscal
2006. Positive demographic trends, the continued consumer interest in
spirits-based cocktails, and consumers' desire to trade up to more premium
offerings helped to maintain the positive environment for premium spirits in the
U.S. We anticipate that this encouraging environment will continue in the U.S.,
but consumer preferences can change very quickly and could affect our
performance if we are not prepared to respond quickly to changing industry and
competitive dynamics.
Our Brands
In fiscal 2007, we entered into numerous transactions, including those that
allow us to focus on better opportunities in our beverage business, and others
that changed our brand portfolio. Following the sale of Lenox, Inc. in fiscal
2006, during fiscal 2007 we sold the remaining businesses in our former consumer
durables segment, Hartmann luggage and Brooks & Bentley, which have been
classified as discontinued operations in this annual report.
Meanwhile, we strengthened our brand offerings with the purchase of Chambord
liqueur and the Casa Herradura brands (including el Jimador, Herradura, New Mix,
Antiguo, and Suave 35). These brand additions to our portfolio participate in
the premium or super-premium categories, in high priority markets, and offer
attractive gross profit per case. We anticipate each of these brands will
provide long-term earnings growth rates at or above our historical average,
strengthening our margins and growth profile.
26
Our brand portfolio reached a milestone in fiscal 2007, with depletions (defined
on the next page) surpassing 30 million nine-liter cases. We also had nine
brands with depletions exceeding 1 million nine-liter cases.
We analyze our beverage portfolio in numerous ways. One way includes the
following three categories: premium global brands, which have broad
international distribution and are sold at premium price points; mid-priced
regional brands, which are important category leaders whose volumes are
concentrated in fewer markets; and super-premium developing brands, which are
smaller, higher-margin brands with significant growth opportunities.
Net Sales by Category:
Premium Global 71%
Mid-Priced Regional 23%
Super-Premium Developing 6%
Our premium global brands, which include Jack Daniel's, Southern Comfort, and
Finlandia and their brand families, represented 71% of our net sales in fiscal
2007, with net sales growing at double-digit rates. We expect our premium global
brands to continue to contribute significantly to our future performance.
Jack Daniel's Tennessee Whiskey remains the most important brand within our
portfolio and is one of the largest and most profitable spirits brands in the
world. Global depletions for Jack Daniel's increased 6% in fiscal 2007,
surpassing the 9 million nine-liter case mark, and growing in the U.S. and in 23
of its 25 largest international markets. Volumes of Jack Daniel's outside of the
U.S. experienced double-digit growth in fiscal 2007, surpassing the 4 million
case mark; non-U.S. volumes now represent slightly over half of the brand's
total net dollar sales. In the U.S., where approximately 52% of Jack Daniel's
nine-liter case volumes are sold, depletions grew 3%.
The positive environment for premium spirits, increased levels of advertising
and promotional support, and the brand's overall marketplace strength have
combined to provide solid growth in volumes and double-digit gains in gross
profit on a global basis. A significant percentage of our total earnings are
derived from Jack Daniel's, and the brand's growth is vital to our overall
marketplace strength. Accordingly, it will remain our major overall focus. While
a significant decline in volume or selling price for the brand could materially
depress our overall earnings, we are encouraged by the accelerating geographic
diversification of the brand's profits, which intensified in fiscal 2007.
Southern Comfort, our second most important brand, delivered solid volume and
profit growth in fiscal 2007. The brand's global depletions grew 3%, fueled by
growth in its largest market, the U.S. Finlandia's volume grew an impressive 15%
led by strong growth in Poland, the brand's biggest market. In contrast to Jack
Daniel's and Southern Comfort, nearly 85% of this brand's 2.4 million cases are
sold outside of the U.S., including over 600,000 cases in Poland. We expect both
Southern Comfort and Finlandia to contribute significantly to our long-term
growth.
Our mid-priced regional brands had mixed results during fiscal 2007, as
depletions expanded for Fetzer Valley Oaks and Bonterra wines and Korbel
Champagnes, but contracted for Bolla, Canadian Mist, and Early Times. Together,
our foundation brands represent 23% of our total net sales and remain important
contributors to our earnings and cash flow. These large, off-premise-driven
category leaders compete in extremely price-competitive categories.
Consequently, we have only moderate growth expectations for most of these
brands.
Our super-premium developing brands, representing 6% of net sales in fiscal
2007, comprise the category that we believe has significant worldwide growth
opportunities. Overall net sales improved at a double-digit rate for the year,
due in part to our acquisitions of Chambord and Casa Herradura and solid growth
from Woodford Reserve bourbon and Sonoma-Cutrer wines. We remain encouraged by
the growth prospects for these brands and believe they have the potential to
contribute meaningfully to our earnings in the years ahead, especially as we
integrate Casa Herradura fully into our brand portfolio.
In the short term, we expect this integration to moderately depress our
earnings, however. In fiscal 2008, we estimate a $0.13 to $0.18 dilutive effect
on earnings per share. We will also be bringing Casa Herradura into conformity
with our trade practice standards, financial control environment and U.S. public
company requirements. Greater than anticipated changes needed on one or more of
these fronts could detract from our current anticipated fiscal 2008 performance.
Longer term, our ability to grow the volumes and maintain or increase the profit
margins on the Herradura and el Jimador brands, especially in the U.S. or
Mexico, will be important to our future performance.
Our acquisition of Casa Herradura in January 2007 expanded our super-premium
developing portfolio, and we believe provides us with several meaningful brand
contributors to our earnings growth potential in the future.
Our Route-to-Consumer Strategy
Introduced four years ago, the Brown-Forman Arrow captures our overarching
objective to "Be the Best Brand Builder in the Industry, Period!" and the five
supporting imperatives that reach that goal. All of our strategies flow from
this overarching objective.
A critical supporting component of our brand-building strategy is a multifaceted
program designed to ensure that consumers can find our products whenever and
wherever they have an opportunity to choose a premium beverage alcohol brand.
This program employs a variety of distribution models around the world and our
preference for a particular arrangement or partnership depends on our assessment
of a market's long-term competitive dynamics and our portfolio's stage of
development in that market. In several markets around the world, we own and
operate our own distribution network, including Australia, China, the Czech
Republic, Korea, Mexico, Poland, and Thailand. In those markets we sell our
beverage alcohol products directly to retail stores and to wholesalers. In many
other markets, including the U.S., we use third parties to distribute our
portfolio of brands.
27
We continued to see the distribution environment change in the U.S. this past
year with a number of distributor consolidations. We have been evaluating
options that might lead to new arrangements or partnerships in the important
U.S. market. During fiscal 2007, we renewed our cost-sharing agreement with
Bacardi in the U.K., the largest market for our brands outside the U.S., and
changed distributors in several other markets. In January 2007, as part of the
Casa Herradura acquisition, we acquired a distribution network in Mexico.
Our Competition
Our brands operate in a highly competitive industry, as we compete against many
global, regional, and local brands in several categories and price points of
beverage alcohol. Trade information indicates that we are one of the largest
wine and spirits suppliers in the U.S. in terms of revenues.
Our Earnings Outlook
We are optimistic about our earnings outlook for fiscal 2008 due to the current
momentum of our brands, the continued favorable global environment for premium
spirits, the exciting opportunities to expand our recent brand additions, and
the numerous possibilities we believe we have to continue building our fine
portfolio of brands around the world.
Fiscal 2007 earnings from continuing operations were $3.22 per diluted share. We
currently expect fiscal 2008 earnings from continuing operations to be $3.35 to
$3.55 per diluted share, which represents growth of 7% to 13% compared to fiscal
2007 earnings from continuing operations, excluding the $0.08 per share net gain
on the sale of winery assets. This outlook includes our estimated earnings
dilution of $0.13 to $0.18 per share associated with the Casa Herradura
acquisition, two-thirds of which we expect to be transition-related costs. These
estimated costs include integration and compliance expenditures and non-cash
charges associated with the purchase of distribution rights for the Herradura
brand in the U.S.
The low end of our earnings outlook noted above approximates our projection of
the average operating income growth of our competitors, while the high end of
the range is modestly higher than our most recent three year average underlying
growth in earnings. Our full-year earnings outlook for fiscal 2008 is moderated
by the potential incremental dilution over fiscal 2007 attributable to the
acquisition of Casa Herradura, a higher effective tax rate, an anticipated
increase in raw material costs, and the absence of an approximate $0.06 per
share benefit from interest earned in fiscal 2007 on proceeds invested from the
sale of Lenox Inc., the latter of which we distributed to shareholders on May
10, 2007.
RESULTS OF OPERATIONS
Our total company diluted earnings per share were $3.14 in fiscal 2007, which
consisted of $3.222 per diluted share from continuing operations and a $0.086
loss from discontinued operations. The following discussion of our results from
continuing operations excludes the results related to the former Consumer
Durables segment, which have been segregated from continuing operations and
reflected as discontinued operations for all periods presented. See
"Discontinued Operations" on page 34.
CONTINUING OPERATIONS
Continuing operations consist of our beverage business, which includes strong
brands representing a wide range of varietal wines, champagnes, and spirits such
as whiskey, bourbon, vodka, tequila, rum, and liqueur. The largest market for
our brands is the U.S., which generally prohibits wine and spirits manufacturers
from selling their products directly to consumers. Instead, we sell our products
to wholesale distributors, who then sell the products to retailers, who in turn
sell to consumers. We use a similar tiered distribution model in many markets
outside the U.S., but we distribute our own products in several markets,
including Australia, China, the Czech Republic, Korea, Mexico, Poland, and
Thailand.
Distributors and retailers normally keep some of our products on hand as
inventory, making it possible for retailers to sell more (or less) of our
products to consumers than distributors buy from us during any given time
period. Because we generally record revenues when we ship our products to
distributors, our sales do not necessarily reflect actual consumer demand during
any particular period. Ultimately, of course, consumer demand is critical in
determining our financial results. Depletions, which are defined as nine-liter
case shipments from distributors to retailers, are generally used in the
beverage alcohol industry as the most representative approximation of consumer
demand.
Fiscal 2007 Compared to Fiscal 2006
Net sales surpassed $2.8 billion in fiscal 2007, replacing the net sales
provided by Lenox Inc. (which we sold in fiscal 2006) with what we believe are
much higher-quality sales with far better growth potential. The major factors
driving the $394 million, or 16%, increase in net sales were:
Growth
vs. 2006
Distribution changes 4%
Foreign exchange 3%
Acquisitions 3%
Underlying net sales growth: 6%
Volume 4%
Price/Mix 2%
-----
Reported net sales growth 16%
=====
"Distribution changes" refers to our operations in Australia and Germany, where
our net sales were affected due to additional margin earned, a change in the
timing of revenue recognition during the transition, or the payment of excise
taxes. We believe these items create a disproportionate effect on the underlying
net sales growth, making comparisons difficult to understand.
28
"Foreign exchange" refers to net gains and losses incurred by our sales and
purchases in currencies other than the U.S. dollar. We use this to understand
the growth of our business on a constant dollar basis, as we believe
fluctuations in exchange rates distort the underlying growth of our business
(both positively and negatively). To neutralize the effect of foreign exchange
fluctuations, we translate current year results at prior year rates. In fiscal
2007, our net sales, gross profit, operating income, and earnings per share
benefited from a weaker U.S. dollar, while advertising and selling, general, and
administrative expenses were hurt. We believe separately identifying the impact
foreign exchange has on each of the key line items of the Consolidated Statement
of Operations allows the reader to better understand our underlying business
performance.
"Acquisitions" refers to the effect the Chambord liqueur and Casa Herradura
acquisitions had on our results, which we believe makes comparisons difficult to
understand. We believe disclosing this effect separately aids in understanding
the underlying year-over-year changes.
We believe that disclosing the 6% underlying revenue growth for fiscal 2007 is
important because it more accurately reflects our underlying performance.
Fiscal 2007 was another strong year for Jack Daniel's Tennessee Whiskey, as
volume increased for the fifteenth consecutive year, passing the 9 million
nine-liter case milestone. Consumer demand continued to expand for this iconic,
authentic American whiskey, as the brand added 525,000 nine-liter cases
globally, growing more than 6% over the prior year. The brand was particularly
strong outside of the U.S., from which over 70%, or nearly 375,000 nine-liter
cases, of its growth came. Depletions grew at a double-digit rate
internationally and were notably robust in Germany, France, South Africa, Italy,
Russia, and Japan. Volumes improved in the low single digits in the brand's
largest market, the U.S., adding approximately 150,000 nine-liter cases to its
already large base.
Like Jack Daniel's U.S. volume growth, the overall total distilled spirits
category continued to increase. These industry trends, as measured by National
Alcohol Beverage Control Association (NABCA) data, indicate total distilled
spirits grew 3.6% for the twelve months ending April 30, 2007, while Jack
Daniel's grew 3.2% for the same period. One factor that may have contributed to
the Jack Daniel's U.S. moderated growth rate was our reorganization to combine
our wine and spirits sales and marketing organizations. With this reorganization
behind us, we anticipate that Jack Daniel's growth rate in the U.S. will improve
and be on par with the total distilled spirits category. However, if this year's
trend of Jack Daniel's slight underperformance in growth rate relative to the
total distilled spirits category were to continue in the future, it could
negatively affect our earnings growth rate.
Performance for the rest of the Jack Daniel's family of brands was also strong.
Growing at a double-digit rate, Jack Daniel's ready-to-drink products approached
the 3 million nine-liter case mark on the strength of Jack Daniel's & Cola sales
in Australia while Jack Daniel's Single Barrel and repackaged Gentlemen Jack
combined to reach volumes of nearly 250,000 nine-liter cases.
Southern Comfort global depletions grew 3%, with mid-single digit gains in the
U.S. and South Africa. For the second consecutive year, worldwide depletions for
Finlandia grew 15%, led again by volume growth in Poland, the brand's largest
market (where it now sells over 600,000 nine-liter cases), and double-digit
growth in numerous other markets, including Israel, Russia, and the U.K. The
brand grew in the low single digits in the very competitive U.S. vodka market.
All three of these premium global brands, Jack Daniel's, Southern Comfort, and
Finlandia, achieved record sales and profit levels in fiscal 2007.
Overall volume performance was mixed for our mid-priced regional brands.
Depletions grew in the mid-single digits for both Fetzer Valley Oaks and Korbel
Champagnes, while Canadian Mist, Bolla, and Early Times all posted volume
declines for the year. Overall volumes for our super-premium developing brands
grew at a double-digit rate, led by solid growth for Sonoma-Cutrer and Woodford
Reserve. Ready-to-drink volumes continued their strong performance, expanding 9%
for the second consecutive year, fueled primarily by excellent double-digit
gains in Australia.
The following table highlights worldwide depletion results for our major brands
during fiscal 2007:
Nine-Liter % Change
Cases (000s) vs. 2006
------------ -----------
Jack Daniel's 9,075 6%
Total RTDs(1) 3,360 9%
Southern Comfort 2,465 3%
Finlandia 2,440 15%
Fetzer Valley Oaks 2,295 5%
Canadian Mist 1,945 (4%)
Korbel Champagnes 1,280 5%
Bolla 1,160 (5%)
(1) RTD (ready-to-drink) volumes include Jack Daniel's and Southern Comfort
products.
Gross profit is a key performance measure for us. The same factors described
above that boosted revenue growth also fueled the 13%, or $173 million, increase
in gross profit, which approached $1.5 billion. The table below summarizes the
major factors driving the gross profit growth for the year.
Growth
vs. 2006
Foreign exchange 2%
Distribution changes 2%
Acquisitions 2%
Trade inventory changes (1%)
Underlying gross profit growth: 8%
Volume 6%
Margin/Mix 2%
-----
Reported gross profit growth 13%
=====
Underlying gross profit growth of 8% was fueled primarily by double-digit gains
for Jack Daniel's, Southern Comfort, Finlandia, and our Jack Daniel's & Cola
ready-to-drink product sold primarily in Australia. Improved margins on Canadian
Mist, reflecting the brand's recent pricing strategy, and higher volumes for
several other brands, including Woodford Reserve, Sonoma-Cutrer, Korbel
Champagne, and Bonterra wines, also contributed to the underlying growth in
gross profit for the year.
29
We work with our distributor partners around the world to enable them to
maintain optimal inventories of our brands and to help them realize supply-chain
efficiencies. Ultimately, however, given the number of distributors and
importers to whom we sell our brands, we do not have control over their buying
patterns or the inventory held at either wholesale or retail levels. Therefore,
we believe it is important to provide visibility to both the positive and
negative effects that fluctuating trade inventory levels have on our reported
results. We compute this effect using our historical and estimated depletion
trends and, as shown in the table on page 29, separately identify trade
inventory changes in the variance analysis for our key metrics.
Gross margin declined from 54.2% in fiscal 2006 to 52.8% in fiscal 2007. The
major factor driving this decline in margin was the full-year effect of
recording excise taxes for our German and Australian businesses, which lowered
gross margin by 1.5 percentage points. The distribution structures changed in
these markets in October 2005 and February 2006, respectively, causing us to be
responsible for collecting and remitting excise taxes in these markets.
Advertising expenses were up $38 million, or 12%, as we continued our long track
record of consistently reinvesting to build our brands. The weaker U.S. dollar
and spending behind acquired brands (Chambord liqueur and the Casa Herradura
brands) contributed to the increase in spending for the year. On a
constant-exchange basis, and excluding the effect of acquisitions, advertising
investments were up 6%, reflecting incremental spending behind Jack Daniel's,
Southern Comfort, Finlandia, and several of our super-premium developing brands.
Growth
vs. 2006
Foreign exchange 3%
Acquisitions 3%
Underlying advertising growth 6%
-----
Reported advertising growth 12%
=====
ADVERTISING TRENDS
Advertising
Fiscal Expense Growth vs.
Year (in millions) Prior Year
2003 $230 7%
2004 265 15%
2005 293 11%
2006 323 10%
2007 361 12%
Selling, general, and administrative expenses increased $68 million, or 14%,
influenced by the following factors:
Growth
vs. 2006
Distribution changes 5%
Acquisitions 3%
Foreign exchange 1%
Underlying SG&A growth 5%
-----
Reported SG&A growth 14%
=====
Higher compensation and postretirement costs increased the underlying selling,
general, and administrative expenses. We also made changes to our distribution
networks during fiscal 2006 in Germany and Australia that we believe will
improve our direct influence over in-market brand-building activities.
Other income decreased $28 million in fiscal 2007, due primarily to the absence
of the following items that occurred during fiscal 2006:
- $14 million consideration received from LVMH Moet Hennessy Louis Vuitton
for the early termination of our distribution and marketing rights for the
Glenmorangie family of brands;
- $25 million gain relating to a contractual fee paid to us by Pernod Ricard
following their acquisition of Allied Domecq and decision to exit
Swift & Moore (formerly a joint venture between Allied Domecq and us
in Australia); and
- $5 million gain on the sale of unused Jekel winery assets in Monterey,
California (although the Jekel brand remains an important part of our
portfolio).
Partially offsetting the absence of these items in fiscal 2007 was an $11
million gain we recognized on the sale of an Italian winery used in producing
Bolla wines to Gruppo Italiano Vini (GIV). Although the Bolla brand remains an
important part of our portfolio, we moved the responsibility for producing these
Italian wines to GIV, an Italian company, during fiscal 2007.
Operating income from continuing operations for fiscal 2007 improved 7%, or $39
million. Positive factors driving operating income growth were solid underlying
performances from our premium global brands, a weaker U.S. dollar, and a net
gain on the sale of winery property in Italy. These positive factors were
partially offset by the absence of several items that occurred in fiscal 2006,
including a cash payment received for the early termination of marketing and
distribution rights for the Glenmorangie family of brands, a net gain related to
the restructuring of the ownership of our Australian distributor, and a gain on
the sale of winery property in California. The following chart summarizes the
major factors driving our 7% growth in operating income and identifies our
underlying operating income growth for fiscal 2007 of 11%, which we believe more
accurately reflects the underlying performance of our business.
30
Growth
vs. 2006
Absence of Glenmorangie consideration (3%)
Distribution changes (4%)
Trade inventory changes (1%)
Acquisitions (1%)
Net gain on sale of winery property 1%
Foreign exchange 4%
Underlying operating income growth 11%
-----
Reported operating income growth 7%
=====
Interest expense (net) increased $12 million compared to fiscal 2006, reflecting
the financing of the Casa Herrudura acquisition. We initially financed the
acquisition with approximately $114 million of cash and approximately $680
million of commercial paper. We replaced some of this debt with the issuance of
$400 million of long-term debt in March 2007.
Effective tax rate reported for continuing operations in fiscal 2007 was 31.7%
compared to 29.3% reported in fiscal 2006. The 2.4 percentage points increase in
the rate was primarily attributable to the absence of a tax benefit achieved
last year by offsetting various capital gains items (from the early termination
of Glenmorangie marketing and distribution rights, the sale of winery property,
and consideration received from changes in our Australian distribution
operation) against the capital loss resulting from the sale of Lenox, Inc. The
effective tax rate was also affected by the phase-out of the extraterritorial
income exclusion, as provided by The American Jobs Creation Act of 2004.
Diluted earnings per share from continuing operations reached a record $3.22, up
1% over fiscal 2006. Performance for the year benefited from solid growth for
Jack Daniel's, Southern Comfort, and Finlandia, and improved volume and profits
from Jack Daniel's ready-to-drink product, sold primarily in Australia. Reported
results in both fiscal 2007 and fiscal 2006 were also affected by several items
that we believe were not representative of our underlying growth in earnings.
These items include:
Recorded in fiscal 2006:
- A net benefit received from changes in our Australian distribution
operation of approximately $0.15 per share;
- Profits associated with the early termination of Glenmorangie marketing
and distribution of approximately $0.11 per share;
- A net gain on the sale of California winery property of approximately
$0.04 per share; and
- An increase in trade inventory levels which boosted earnings by
approximately $0.05 per share.
Recorded in fiscal 2007:
- A net gain on the sale of Italian winery property of approximately
$0.08 per share;
- A benefit resulting from a weaker U.S. dollar of approximately
$0.13 per share; and
- A reduction in earnings reflecting interest and transition expenses
associated with our acquisitions of Chambord liqueur and Casa Herradura
of approximately $0.15 per share.
Basic and diluted earnings per share. In Note 15 to our consolidated financial
statements, we describe our 2004 Omnibus Compensation Plan and how we issue
stock options under it. In Note 1, under "Stock-Based Compensation" we describe
how the plan is designed to avoid diluting earnings per share.
Fiscal 2006 Compared to Fiscal 2005
Net sales improved 10%, or $217 million, driven by higher sales for almost all
of our brands but notably for Jack Daniel's, Southern Comfort, and Finlandia,
reflecting higher volumes, and margin expansion related to selected price
increases. Jack Daniel's registered growth for the fourteenth consecutive year,
as demand expanded 8% globally, or 665,000 nine-liter cases, to over 8.5 million
nine-liter cases. Southern Comfort worldwide volumes expanded 5% for the second
consecutive year. Results for Finlandia were also strong, as worldwide
depletions accelerated, growing 15% led by volume growth in Poland and
double-digit increases in Israel, Russia, and China. Higher volumes from our
super-premium developing brands, including Woodford Reserve, Sonoma-Cutrer, and
Tuaca, and our ready-to-drink performance in Australia, also contributed to the
growth in sales for the year.
Gross profit grew 13%, or $152 million. This growth resulted from the same
factors that generated revenue growth. Gross margin increased from 52.7% in
fiscal 2005 to 54.2% in fiscal 2006. The major factors driving this improvement
were price increases on several brands in various markets, a favorable shift of
business to more profitable markets and brands, and significantly lower cost for
wines.
Advertising expenses increased 10% as we increased brand-building activities
behind Jack Daniel's, Southern Comfort, Finlandia, and several of our
super-premium developing brands, including Woodford Reserve and Tuaca. Partially
offsetting these increases in spending were the benefit of a stronger U.S.
dollar on spending outside of the U.S. and the absence of advertising
investments behind two low-carbohydrate wines, One.6 Chardonnay and One.9 Merlot
in fiscal 2005.
Selling, general, and administrative expenses increased 12% from fiscal 2005,
driven by changes in our distribution networks around the world that we believe
will enhance our direct influence over in-market brand-building activities in
key markets in Continental Europe, Australia, and Japan. In addition, higher
postretirement expenses, inflation on salary and related, and third-party
advisory fees associated with the evaluation of a possible purchase of Allied
Domecq, contributed to the growth in spending.
Other income improved $45 million in fiscal 2006 due primarily to three items:
- a $14 million benefit associated with terminating our distribution rights
to the Glenmorangie family of brands;
- a $25 million gain related to acquiring full ownership of our Australian
distributor; and
- a $5 million gain from selling winery assets.
31
Operating income reached a then record $563 million in fiscal 2006, growing $118
million, or 26%, reflecting strong underlying growth for our premium global
brands. The payment received for the early termination of marketing and
distribution rights for the Glenmorangie family of brands, the net gain related
to the restructuring of the ownership of our Australian distributor, the gain on
the sale of winery assets, and profits associated with higher global trade
inventory levels contributed to the growth in operating income. These positive
factors were partially offset by the negative effect of a stronger U.S. dollar.
Interest expense (net) declined $9 million compared to fiscal 2005 reflecting
significantly higher cash balances due in part to the sale of Lenox, Inc. and
the repayment of approximately $280 million of short- and medium-term notes.
Effective tax rate for continuing operations in fiscal 2006 was 29.3% compared
to 32.6% in fiscal 2005. The decline in the rate primarily reflects the tax
benefit achieved by offsetting various capital gains against the capital loss
resulting from the sale of Lenox, Inc.
Diluted earnings per share increased 16% to $3.20 per share in fiscal 2006. This
growth resulted from the same factors that generated operating income growth,
though it was tempered by the absence of a gain recorded in fiscal 2005 related
to the sale of our shares in Glenmorangie plc.
OTHER KEY PERFORMANCE MEASURES
Our primary goal is to increase the value of our shareholders' investment. We
believe that long-term growth in the market value of our stock is a good
indication of our success in delivering attractive returns to shareholders.
TOTAL SHAREHOLDER RETURN. While an investment made in Brown-Forman Class B stock
a year ago has declined nearly 9% and the S&P 500 has increased, a $100
investment in our stock over the long-term has outpaced the return provided by
the S&P 500. A $100 investment in our Class B stock five years ago would have
grown to nearly $183 by the end of fiscal 2007, assuming reinvestment of all
dividends and ignoring personal taxes and transaction costs. This represents an
annualized return of 13% over the five-year period, compared to an 8% annualized
increase for the S&P 500.
Compound Annual Growth in Total Shareholder Return
(as of April 30, 2007, and including dividend reinvestment)
1 Year 5 Years 10 Years 15 Years
Brown-Forman Class B shares (9%) 13% 12% 14%
S&P 500 index 16% 8% 8% 11%
RETURN ON AVERAGE INVESTED CAPITAL. Our return on average invested capital from
continuing operations improved 3.4 percentage points from fiscal 2004 through
fiscal 2006 reflecting record earnings fueled by double-digit organic growth and
tight management of our investment base. Despite our return on average invested
capital declining in fiscal 2007 to 17.4%, our returns continued to outpace
those of nearly all of our competitors. Record earnings in fiscal 2007 were
offset by the dilutive effect of the investments in Chambord liqueur and Casa
Herradura. We believe our return on invested capital will continue to improve
over the long term, given our positive outlook for earnings growth and careful
management of our investment base. However, we expect a decline in our returns
next fiscal year due to the full-year effect of the Casa Herradura acquisition,
which is expected to be dilutive initially but is projected to build and enhance
our returns, as we believe the brands have considerable growth potential.
Return on Average Invested Capital from Continuing Operations:
Fiscal 2004 18.5%
Fiscal 2005 23.0%
Fiscal 2006 21.9%
Fiscal 2007 17.4%
BUSINESS ENVIRONMENT FOR WINE AND SPIRITS
GENERALLY. The business climate for distilled spirits, our principal product
line, continues to be solid in the U.S. (our biggest market) and very robust
overseas. This reflects favorable demographic and income trends in the U.S. and
the popularity of Jack Daniel's, Southern Comfort, and Finlandia Vodka in many
international markets. The trend toward premium products continues, which helps
our brands. We see great opportunity in emerging markets such as China, Central
Europe, and South Africa.
The wine business is more challenging, given margin pressure and a high cost
basis. However, wine and spirits combined have taken market share in beverage
alcohol from beer in the U.S. Favorable demographic trends should help the
top-line growth of wine sales, but acceptable profitability remains a challenge.
We continue to actively pursue opportunities to improve our overall wine cost
structure and our brand performance such as those we accomplished this past
year, including the sale of a winery operation in Italy and the reorganization
of our wine production facilities.
32
GOVERNMENT POLICIES, PUBLIC ATTITUDES. Against this background of good business
trends, we know that our ability to market and sell our beverage alcohol
products depends heavily on society's attitudes toward drinking and government
policies that flow from those attitudes. This is not just a U.S. issue but one
we see in Europe and around the world. In particular, a number of organizations
criticize abusive drinking and blame alcohol manufacturers for problems
associated with alcohol misuse. Specifically, critics say alcohol companies
market their products to encourage underage drinking.
We are extremely careful to market our beverage products only to adults. We were
one of the first companies to adopt a comprehensive marketing code governing the
sale of our wine and spirits brands, which emphasizes the importance of content
and placement to minimize exposure to the underaged. We adhere to marketing
codes of the Distilled Spirits Council of the U.S. and the Wine Institute. We
also contribute significant resources to The Century Council, an organization
that we and other spirits producers created to combat drunk driving and underage
drinking.
Illegal alcohol consumption by underaged drinkers and abusive drinking by a
minority of adult drinkers give rise to public issues of great significance.
Alcohol critics seek governmental measures to make beverage alcohol more
expensive, less available, and more difficult to advertise and promote. We
disagree that this is a good strategy to deal with the minority of individuals
who abuse alcohol. In our view, society is more likely to curb alcohol abuse
through better education about beverage alcohol and by setting a good example
through moderate drinking than by restricting alcohol advertising and sales or
imposing punitive taxation.
Legal or regulatory measures against beverage alcohol (including its advertising
and promotion) could hurt our sales. Especially in the U.S., distilled spirits
are at a marked disadvantage to beer and wine in taxation, access to network
television advertising, and the number and type of sales outlets. Achieving
greater cultural acceptance of our products and parity with beer and wine in
access to consumers are major goals that we share with other distillers.
POLICY OBJECTIVES. We believe that beverage alcohol should be regarded like
other beneficial products, such as automobiles, power lawnmowers, and chocolate
- which can be hazardous if misused by the consumer. Therefore, we seek to
encourage the proper use of our products and discourage abuse of alcohol,
particularly drinking by those under the legal drinking age. We believe the most
powerful way to encourage proper drinking and discourage alcohol abuse is
through partnership with parents, schools, and other organizations.
We also seek recognition that distilled spirits, wine, and beer, are all
different forms of beverage alcohol, and should be treated on an equal basis by
government. Generally speaking, however, distilled spirits, especially in the
U.S., pay higher taxes per ounce of pure alcohol, are subject to more severe
restrictions on the places and hours of sale, and in some venues (such as
network TV) are denied the right to advertise. We seek to "level the playing
field" in beverage alcohol.
We also seek, for the convenience of our customers, Sunday sales in those states
that still ban them. We encourage rules that liberalize international trade, so
that we can expand our international business. We oppose tax increases, which
make our products more expensive for our consumers, and seek to diminish the tax
advantage enjoyed by beer.
TAXES. Like all goods, beverage alcohol sales are sensitive to higher tax rates.
No legislation to increase U.S. federal excise taxes on distilled spirits is
currently pending, but future tax increases are always possible, as are tax
increases levied on the broader business community. From time to time, state
legislatures increase beverage alcohol taxes. The cumulative effect of such tax
increases over time hurts sales. Because combined federal and state taxes
already account for more than 50% of the price of a typical bottle of bourbon,
we work for reasonable excise tax reductions. Increased tax rates, advertising
restrictions, and outmoded product standards also affect beverage alcohol
markets outside the U.S. To date, those changes have not been significant to our
overall business, but that could change.
THE LITIGATION CLIMATE. A law firm has filed nine class-action lawsuits against
spirits, beer, and wine manufacturers, including us, alleging that our marketing
causes illegal consumption of alcohol by those under the legal drinking age. We
dispute these allegations and will defend these cases vigorously. To date, the
first six courts to consider those lawsuits have dismissed them and two cases
have been voluntarily withdrawn. However, the plaintiffs have appealed the
dismissal of the six cases. Adverse developments in these or similar lawsuits
could hurt our beverage business and the overall industry.
DISTRIBUTION STRATEGY. We use a number of different business models to market
and distribute our products overseas. But we rely largely on other spirits
producers to distribute and market our products outside the U.S. Although
consolidation among spirits producers could hinder the distribution of our wine
and spirits products in the future, to date this has rarely happened. Other
spirits companies typically seek to distribute our premium spirits and wine
brands, and we expect that demand to continue.
EXCHANGE RATES. The strength of foreign currencies relative to the U.S. dollar
affects sales and cost to purchase goods and services in our international
business. This year, our earnings were helped by a weaker U.S. dollar,
particularly in the U.K., Australia, and Continental Europe. We have hedged the
majority of our exposure to foreign exchange fluctuations in 2008 by entering
into foreign currency forwards and option contracts. However, if the U.S. dollar
appreciates significantly, the effect on our business would be negative for any
unhedged portion.
33
DISCONTINUED OPERATIONS
Summary of Operating Performance
(Dollars in millions, except per share amounts)
2005 2006 2007
---- ---- ----
Net sales $534 $166 $ 50
Operating expenses (524) (178) (53)
Impairment charge (37) (60) (9)
Transaction costs -- (10) (1)
---- ---- ----
Loss before income taxes (27) (82) (13)
Income tax (expense) benefit (4) 7 2
---- ---- ----
Net loss from discontinued operations $(31) $(75) $(11)
==== ==== ====
Loss per share:
Basic (0.256) (0.615) (0.087)
Diluted (0.255) (0.608) (0.086)
As discussed in Note 2 to the accompanying financial statements, we sold Lenox,
Inc. during fiscal 2006, and sold Brooks & Bentley and Hartmann in fiscal 2007.
As a result, we have reported them as discontinued operations in the
accompanying financial statements.
The net loss from discontinued operations in fiscal 2007 was $11 million
compared to a net loss of $75 million in fiscal 2006. Fiscal 2006 included a
pre-tax impairment charge and transaction costs totaling $70 million in addition
to a loss from the operations of Lenox Inc. incurred during the period before
the sale. Fiscal 2007 loss includes a pre-tax impairment charge of $9 million.
The majority of this impairment relates to the decision made in fiscal 2007 by
our Board of Directors to sell Hartmann and to focus our efforts entirely on our
beverage business. The $7 million pretax impairment charge associated with
Hartmann consisted of a goodwill impairment of $4 million and an impairment
charge of $3 million that represented the excess of the carrying value of the
net assets to be sold over the expected sales proceeds, net of estimated costs
to sell.
Before we decided to sell Hartmann, no impairment charge was recorded because we
believed its operations would generate sufficient future cash flows to enable us
to fully recover its carrying amount. The decision to sell Hartmann reflects the
Board's opinion that the sum of the price to be obtained from the sale and the
strategic value of focusing entirely on our beverage business would be greater
than the value of continuing to operate Hartmann.
There was also a $2 million pre-tax impairment charge recorded for Brooks &
Bentley in fiscal 2007. This impairment charge reflected a revision to its
estimated fair value and costs to sell, based on the negotiations that resulted
in the sale of Brooks & Bentley.
LIQUIDITY AND CAPITAL RESOURCES
Our ability to generate cash from operations consistently is one of our most
significant financial strengths. Our strong cash flows enable us to pay
dividends, pursue brand-building programs, and make strategic acquisitions that
we believe will enhance shareholder value. Investment grade ratings of A2 from
Moody's and A from Standard & Poor's provide us with financial flexibility when
accessing global credit markets. We believe cash flows from operations are more
than adequate to meet our expected operating and capital requirements. In fiscal
2007, our cash flow from operations, cash on hand, and a net increase in debt
enabled us to fund capital expenditures of $58 million, distribute $143 million
in dividends to our shareholders, and to support acquisitions totaling over $1
billion.
Cash Flow Summary
(Dollars in millions) 2005 2006 2007
------ ------ ------
Operating activities $ 396 $ 343 $ 355
Investing activities:
Acquisitions (64) -- (1,045)
Sale of discontinued operations -- 205 12
Sale of investment in affiliate 93 -- --
Net (purchase) sale of short-term
securities -- (160) 74
Additions to property, plant,
and equipment (44) (51) (58)
Other (1) 3 (21)
------ ------ ------
(16) (3) (1,038)
Financing activities:
Net (repayment) issuance of debt (50) (55) 597
Dividends (111) (128) (143)
Other 8 23 33
------ ------ ------
(153) (160) 487
------ ------ ------
Foreign exchange effect -- -- 4
------ ------ ------
Change in cash and cash equivalents $ 227 $ 180 $(192)
====== ====== ======
Cash provided by operations was $355 million in fiscal 2007 compared to $343
million in fiscal 2006. This increase was driven by a $24 million reduction in
cash used for discontinued operations following the sale of both Lenox, Inc. in
fiscal 2006 and the remaining businesses that comprised the former consumer
durables segment in fiscal 2007. We generated $349 million in cash flow from the
operating activities of continuing operations in fiscal 2007, a 3% decrease
compared with $361 million in the prior year. Higher earnings were offset by an
increase in working capital requirements due in part to the acquisitions of
Chambord liqueur and Casa Herradura. In addition, an increase in barreled
whiskey inventory levels for Jack Daniel's and a reduction in our accrued income
taxes due to the seasonalization of our payments increased working capital
requirements.
Cash used for investing activities in fiscal 2007 increased by $1,035 million
compared to fiscal 2006, largely reflecting the acquisitions of Chambord and
Casa Herradura for a total of $1,045 million during fiscal 2007.
Cash provided by financing activities increased by $647 million, primarily
reflecting the issuance of a combination of commercial paper and $400 million of
debt to finance the acquisition of Casa Herradura.
34
In comparing fiscal 2006 with fiscal 2005, cash provided by operations decreased
$53 million, as higher earnings were offset by a $59 million reduction in cash
provided by discontinued operations following the sale of Lenox, Inc. in fiscal
2006. Cash used for investing activities declined $13 million in fiscal 2006, as
proceeds received on the sale of Lenox, Inc. were offset by capital spending and
higher interest-yielding short-term investments.
Fiscal 2007 Cash Utilization
Sources of Cash:
Long-term borrowings 56%
Operating activities 33%
Sale of short-term investments 7%
Stock option exercises 3%
Sale of discontinued operations 1%
Uses of Cash:
Acquisitions 82%
Dividends 11%
Capital spending 5%
Purchase of short-term investments 2%
Investments in property, plant, and equipment were $44 million in fiscal 2005,
$51 million in fiscal 2006, and $58 million in fiscal 2007. Expenditures over
the three-year period included investments to maintain, expand, and improve
efficiencies of our production operations and to provide capital resources to
build our brands.
We expect capital expenditures for fiscal 2008 to be $70 to $80 million, an
increase compared to our spending over the past three fiscal years. This
increase reflects investments to further expand capacity of our production and
distribution facilities to meet the continued growing demand for Jack Daniel's
and investments resulting from the Casa Herradura acquisition. We will also
continue to invest in technology to enhance our understanding of our consumers,
improve the efficiency of our production operations, augment the quality of each
of our brands, and build our brands. We expect to fund fiscal 2008 capital
expenditures with cash provided by operations.
In March 2003, we repurchased 7.9 million shares of our common stock for $561
million, including transaction costs, through a "Dutch auction" tender offer. We
financed the repurchase by issuing $600 million in debt; of this amount, $250
million was repaid in March 2006, and the remaining $350 million is due in March
2008. We expect to meet the 2008 obligation through cash from operations and
existing commercial paper capacity.
We have access to short-term capital markets through the issuance of commercial
paper, backed by a bank credit agreement for $800 million that expires in fiscal
2012. The credit agreement provides us with an immediate and continuing source
of liquidity. At April 30, 2007, we had no outstanding borrowings under this
agreement.
In January 2007, we filed a new shelf registration with the SEC for an
undetermined amount of securities that gives us prompt access to longer-term
financing.
Effective May 31, 2006, we completed the acquisition of Chambord liqueur and all
related assets from Chatam International Incorporated and its operating
subsidiary, Charles Jacquin et Cie Inc., for $251 million, including transaction
costs. The acquisition consisted primarily of the Chambord brand name and
goodwill, to which we allocated $116 million and $127 million of the purchase
price, respectively.
On January 18, 2007, we completed the acquisition of substantially all of the
assets of Casa Herradura and its affiliates relating to its tequila business,
including the Herradura and el Jimador tequilas, the New-Mix tequila-based
ready-to-drink brand, the trade names and trademarks associated with such brands
and other acquired brands, as well as related production facilities and the
sales, marketing, and distribution organization in Mexico. The cost of the
acquisition, including transaction costs, was $794 million, which has been
preliminarily allocated to the acquired assets and liabilities (see Note 3 to
the accompanying consolidated financial statements). We financed the acquisition
with approximately $114 million of cash and approximately $680 of commercial
paper, $400 million of which was subsequently replaced with long-term debt.
On March 22, 2007, our Board of Directors approved the distribution to
shareholders of the $204 million in cash received (net of transaction fees) from
the sale of Lenox, Inc. and Brooks & Bentley. The distribution of $1.6533 per
share was made on May 10, 2007, to shareholders of record on April 5, 2007. The
Internal Revenue Service has issued to us a private letter ruling which states
that the special distribution will be treated as a distribution in partial
liquidation pursuant to Sections 302(b)(4) and 302(e)(1) of the Internal Revenue
Code.
LONG-TERM OBLIGATIONS
We have long-term obligations related to contracts, leases, and borrowing
arrangements that we enter into in the normal course of business (see Notes 5
and 7 to the accompanying consolidated financial statements). The following
table summarizes the amounts of those obligations as of April 30, 2007, and the
years when those obligations must be paid:
Long-Term Obligations 2009- After
(Dollars in millions) Total 2008 2012 2012
----- ---- ---- ----
Long-term debt $ 776 $354 $414 $ 8
Interest on long-term debt 106 33 72 1
Grape purchase obligations 104 29 55 20
Operating leases 44 13 21 10
Postretirement benefit obligations(1) 6 6 n/a n/a
Agave purchase obligations(2) n/a n/a n/a n/a
----- ---- ---- ----
Total $1,036 $435 $562 $ 39
===== ==== ==== ====
(1) As of April 30, 2007, we have unfunded pension and other postretirement
benefit obligations of $104 million. Because the specific periods in which
those obligations will be funded are not determinable, no amounts related
to those obligations are reflected in the above table other than the
$6 million of expected contribution in fiscal 2008. Historically, we have
generally funded these obligations with the minimum annual contribution
required by ERISA, but we may elect to contribute more than the minimum
amount in future years.
(2) As discussed in Note 5 to the accompanying consolidated financial
statements, we have obligations to purchase agave. Because the specific
periods in which those obligations will be paid are not determinable, no
amounts related to those obligations are reflected in the table above.
We expect to meet these obligations with internally generated funds.
35
MARKET RISKS
Our foreign currency hedging contracts are subject to changes in exchange rates;
our commodity futures and option contracts are subject to changes in commodity
prices; and some of our debt obligations are subject to changes in interest
rates. We discuss these instruments' sensitivity to market fluctuations below.
See Note 5 to our consolidated financial statements for information regarding
our grape and agave purchase obligations, which are also exposed to commodity
price risk, and "Critical Accounting Estimates" for a discussion of the exposure
of our pension and other postretirement plans to interest rate risks.
Inflationary, deflationary, and recessionary conditions affecting these market
risks also affect the demand for and pricing of our products. See "Important
Information Regarding Forward-Looking Statements" (page 56) for details.
FOREIGN EXCHANGE. As a result of continued growth in international sales, we
estimate that our foreign currency revenues will exceed our foreign currency
expenses by approximately $460 million in fiscal 2008. To the extent that this
foreign currency exposure is not hedged, our results of operations and financial
position are positively affected when the U.S. dollar weakens against foreign
currencies and negatively affected when the dollar strengthens against them.
However, we routinely use foreign currency forward and option contracts to hedge
our foreign exchange risk. Provided the contracts remain effective in hedging
the foreign exchange risk, we do not recognize any unrealized gains or losses on
the contracts in earnings until the underlying hedged transactions are
recognized in earnings. At April 30, 2007, our foreign currency hedges had a
total notional value of $406 million and a net unrealized loss of $6 million.
Assuming the contracts remain effective hedges, we estimate that if the value of
the U.S. dollar averaged 10% higher in fiscal 2008 than the fiscal 2007
effective rates for the currencies in which we do business, our fiscal 2008
operating income would decrease by $7 million. Conversely, a 10% average decline
in the value of the dollar would increase operating income by $29 million. Thus,
over the longer term, reported profits from our international business may be
adversely affected if the U.S. dollar strengthens against other currencies.
COMMODITY PRICES. We are subject to commodity price volatility caused by
weather, supply conditions, geopolitical and economic variables, and other
unpredictable external factors. We use futures contracts and options to reduce
the volatility of pricing for certain commodities, primarily corn. At April 30,
2007, we had outstanding hedge positions on approximately 1 million bushels of
corn with a negligible net unrealized loss. We estimate that a 10% change in
commodity prices would result in negligible incremental gain or loss on these
contracts.
INTEREST RATES. Our short-term investments and short-term borrowings are exposed
to the risk of changes in interest rates. Based on April 30, 2007, balances of
variable-rate debt and investments, a 1% increase in interest rates would
increase our net interest expense, which includes interest income on cash and
short-term investments, by $4 million.
CRITICAL ACCOUNTING ESTIMATES
Our financial statements reflect certain estimates involved in applying the
following critical accounting policies that entail uncertainties and
subjectivity. Using different estimates could have a material effect on our
operating results, financial condition, and changes in financial condition.
GOODWILL AND OTHER INTANGIBLE ASSETS. We have obtained most of our brands
through acquisitions from other companies. Upon acquisition, the purchase price
is first allocated to identifiable assets and liabilities, including brand names
and other intangible assets, based on estimated fair value, with any remaining
purchase price recorded as goodwill. Goodwill and intangible assets with
indefinite lives are not amortized. We consider all of our brand names to have
indefinite lives.
We assess our brand names and goodwill for impairment at least annually to
ensure that future cash flows continue to exceed the related book value. A brand
name is impaired if its book value exceeds its fair value. Goodwill is evaluated
for impairment if the book value of its reporting unit exceeds its estimated
fair value. Fair value is determined using discounted future cash flows, with
consideration of market values for similar assets when available. If the fair
value of an evaluated asset is less than its book value, the asset is written
down to its estimated fair value.
Considerable management judgment is necessary to assess impairment and estimate
fair value. The assumptions used in our evaluations, such as forecasted growth
rates and cost of capital, are consistent with our internal projections and
operating plans.
PROPERTY, PLANT, AND EQUIPMENT. We depreciate our property, plant, and equipment
on a straight-line basis using our estimates of useful life, which are 20 to 40
years for buildings and improvements, 3 to 10 years for machinery, equipment,
furniture, and fixtures, and 3 to 7 years for capitalized software.
We assess our property, plant, and equipment and other long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset or asset group may not be recoverable. Fair value is
determined using discounted future cash flows, with consideration of market
values for similar assets when available. If the fair value of an evaluated
asset is less than its book value, we write it down to its estimated fair value.
Considerable management judgment is necessary to assess impairment and estimate
fair value. Assumptions used in these evaluations are consistent with our
internal projections and operating plans.
PENSION AND OTHER POSTRETIREMENT BENEFITS. We sponsor various defined benefit
pension plans as well as postretirement plans providing retiree health care and
retiree life insurance benefits. Benefits are based on such factors as years of
service and compensation level during employment. The benefits expected to be
paid are expensed over the employees' expected service. This requires us to make
certain assumptions to determine the expected benefit, such as interest rates,
return on plan assets, the rate of salary increases, expected service, and
health care cost trend rates.
36
The assets, obligations, and assumptions used to measure pension and retiree
medical expenses are determined as of January 31 of the preceding year
("measurement date"). Because obligations are measured on a discounted basis,
the discount rate is a significant assumption. It is based on interest rates for
high-quality, long-term corporate debt at each measurement date. The expected
return on pension plan assets is based on our historical experience and our
expectations for long-term rates of return. The other assumptions also reflect
our historical experience and management's best judgment regarding future
expectations. We review our assumptions on each annual measurement date. For
fiscal 2007, we have increased the discount rate for pension obligations from
5.95% to 6.04%, and for other postretirement benefit obligations from 5.95% to
5.98%. Pension and postretirement benefit expense for fiscal 2008 is estimated
to be approximately $25 million, compared to $22 million for fiscal 2007. A
decrease/increase in the discount rate of 25 basis points would
increase/decrease the fiscal 2008 expense by approximately $1 million.
As discussed in Note 12 to the accompanying consolidated financial statements,
we adopted Statement of Financial Accounting Standards No. 158, "Employer's
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132(R)," on April 30, 2007.
INCOME TAXES. Our annual tax rate is based on our income and the statutory tax
rates in the various jurisdictions in which we operate. In fiscal 2007, our
annual income tax rate for continuing operations was 31.7%, compared to 29.3% in
fiscal 2006. The tax rate in fiscal 2007 increased 2.4 percentage points,
primarily as a result of the absence of the fiscal 2006 tax benefit achieved by
offsetting various capital gains items (from the early termination of
Glenmorangie marketing and distribution rights, the sale of winery property, and
consideration from changes in our Australian distribution) against the capital
loss resulting from the sale of Lenox, Inc. The total Lenox capital loss
exceeded the amount of capital gains offset during fiscal 2006 by $64 million.
Currently, we are unaware of any particular transactions that will permit the
use of this capital loss carryforward, so we have not recorded any tax benefit
relating to it. The effective tax rate was also affected by the phase-out of the
extraterritorial income exclusion, as provided by The American Jobs Creation Act
of 2004 (the "Act").
Additionally, the Act, which was enacted in October 2004, provided a special,
one-time opportunity to deduct from taxable income 85% of certain qualifying
foreign dividends repatriated in the U.S. from controlled foreign corporations,
subject to various limitations and restrictions. In fiscal 2006, we repatriated
$277 million of foreign earnings previously considered to be indefinitely
reinvested outside of the U.S. This one time opportunity allowed us to
repatriate earnings in excess of those for which a deferred income tax liability
previously had been established. The deferred tax liability covered all of the
associated tax expense attributable to the repatriation. We intend to continue
to reinvest earnings outside the U.S. indefinitely and have not recognized any
U.S. tax expense on these earnings. At April 30, 2007, we had approximately $230
million of undistributed international earnings.
Significant judgment is required in evaluating our tax positions. We establish
reserves when we believe that certain positions are likely to be challenged and
may not succeed, despite our belief that our tax return positions are fully
supportable. We adjust these reserves in light of changing facts and
circumstances, such as the progress of a tax audit. We believe current reserves
are appropriate for all known contingencies, but this situation could change.
Several years can elapse before a particular matter for which we have
established a reserve is resolved. Although predicting the final outcome or the
timing of resolution of any particular tax matter can be difficult, we believe
that our reserves reflect the likely outcome of known tax contingencies.
Unfavorable settlement of any particular issue could require use of our cash.
Favorable resolution would be recognized as a reduction to our effective tax
rate at the time of resolution.
In June 2006, the Financial Accounting Standards Board issued 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 impact of a tax position if that position is more likely than not
to be sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 become effective as of the beginning of our 2008 fiscal
year, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We do not expect our adoption of
FIN 48 to affect our financial statements materially.
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 a 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. Six of the suits
have been dismissed by trial court and are being appealed. Two cases have been
voluntarily withdrawn. One is pending decision of 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.
37
Brown-Forman
CONSOLIDATED STATEMENTS OF OPERATIONS
(Expressed in millions, except per share amounts)
--------------------------------------------------------------------------------
Year Ended April 30, 2005 2006 2007
--------------------------------------------------------------------------------
Net sales $2,195 $2,412 $2,806
Excise taxes 417 468 588
Cost of sales 622 636 737
--------------------------------
Gross profit 1,156 1,308 1,481
Advertising expenses 293 323 361
Selling, general, and administrative expenses 420 469 537
Other income, net (2) (47) (19)
--------------------------------
Operating income 445 563 602
Gain on sale of investment in affiliate 72 -- --
Interest income 7 14 18
Interest expense 20 18 34
--------------------------------
Income from continuing operations
before income taxes 504 559 586
Income taxes 165 164 186
--------------------------------
Income from continuing operations 339 395 400
Loss from discontinued operations,
net of income taxes (31) (75) (11)
--------------------------------
Net income $ 308 $ 320 $ 389
================================
Basic earnings (loss) per share:
Continuing operations $2.788 $3.239 $3.257
Discontinued operations (0.256) (0.615) (0.087)
--------------------------------
Total $2.532 $2.624 $3.170
================================
Diluted earnings (loss) per share:
Continuing operations $2.772 $3.204 $3.222
Discontinued operations (0.255) (0.608) (0.086)
--------------------------------
Total $2.517 $2.596 $3.136
================================
The accompanying notes are an integral part of the consolidated financial
statements.
38
Brown-Forman
CONSOLIDATED BALANCE SHEETS
(Expressed in millions, except share and per share amounts)
--------------------------------------------------------------------------------
April 30, 2006 2007
--------------------------------------------------------------------------------
Assets
------
Cash and cash equivalents $ 475 $ 283
Short-term investments 160 86
Accounts receivable, less allowance for doubtful
accounts of $5 in 2006 and $22 in 2007 323 404
Inventories:
Barreled whiskey 274 303
Finished goods 94 151
Work in process 106 198
Raw materials and supplies 37 42
---------------------
Total inventories 511 694
Current portion of deferred income taxes 80 76
Current assets held for sale 26 --
Other current assets 34 92
---------------------
Total Current Assets 1,609 1,635
Property, plant, and equipment, net 425 506
Prepaid pension cost 146 23
Goodwill 192 670
Other intangible assets 325 684
Noncurrent assets held for sale 9 --
Other assets 22 33
---------------------
Total Assets $2,728 $3,551
=====================
Liabilities
-----------
Accounts payable and accrued expenses $ 289 $ 361
Accrued income taxes 49 27
Payable to shareholders -- 204
Short-term borrowings 225 401
Current portion of long-term debt -- 354
Current liabilities held for sale 6 --
---------------------
Total Current Liabilities 569 1,347
Long-term debt, less unamortized
discount of $1 in both 2006 and 2007 351 422
Deferred income taxes 133 56
Accrued pension and other postretirement benefits 78 123
Other liabilities 34 30
---------------------
Total Liabilities 1,165 1,978
---------------------
Commitments and contingencies
Stockholders' Equity
--------------------
Common Stock:
Class A, voting, $0.15 par value
(57,000,000 shares authorized;
56,882,000 shares issued) 9 9
Class B, nonvoting, $0.15 par value
(100,000,000 shares authorized;
69,188,000 shares issued) 10 10
Additional paid-in capital 47 64
Retained earnings 1,607 1,649
Accumulated other comprehensive income (loss):
Pension and other postretirement benefits adjustment (5) (99)
Cumulative translation adjustment 24 46
Unrealized loss on cash flow hedge contracts (1) (4)
Treasury stock, at cost
(3,565,000 and 2,833,000 shares
in 2006 and 2007, respectively) (128) (102)
---------------------
Total Stockholders' Equity 1,563 1,573
---------------------
Total Liabilities and Stockholders' Equity $2,728 $3,551
=====================
The accompanying notes are an integral part of the consolidated financial
statements.
39
Brown-Forman
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Expressed in millions)
--------------------------------------------------------------------------------
Year Ended April 30, 2005 2006 2007
--------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 308 $ 320 $ 389
Adjustments to reconcile net income to net cash
provided by (used for) operations:
Gain on sale of investment in affiliate (72) -- --
Net loss from discontinued operations 31 75 11
Depreciation and amortization 43 42 44
Stock-based compensation expense 7 9 8
Deferred income taxes (3) (33) (7)
Other 2 (2) (11)
Change in assets and liabilities, excluding
the effects of businesses acquired or sold:
Accounts receivable (3) (21) (47)
Inventories (27) (37) (41)
Other current assets 11 (7) (9)
Accounts payable and accrued expenses 54 3 14
Accrued income taxes (6) 7 (20)
Noncurrent assets and liabilities 10 5 18
Net cash provided by (used for) operating
activities of discontinued operations 41 (18) 6
-------------------------
Cash provided by operating activities 396 343 355
-------------------------
Cash flows from investing activities:
Acquisition of businesses, net of cash acquired -- -- (1,045)
Acquisition of distribution rights -- -- (25)
Proceeds from sale of discontinued operations -- 205 12
Proceeds from sale of investment in affiliate,
net of disposal costs 93 -- --
Acquisition of minority interest in subsidiary (64) -- --
Purchase of short-term investments -- (388) (249)
Sale of short-term investments -- 228 323
Additions to property, plant, and equipment (44) (51) (58)
Proceeds from sale of property, plant,
and equipment -- 7 14
Computer software expenditures (3) -- (9)
Trademark and patent expenditures (1) (1) --
Net cash provided by (used for) investing
activities of discontinued operations 3 (3) (1)
-------------------------
Cash used for investing activities (16) (3) (1,038)
-------------------------
Cash flows from financing activities:
Net change in short-term borrowings (50) 225 178
Proceeds from long-term debt -- -- 421
Repayment of long-term debt -- (280) (2)
Debt issuance costs -- -- (2)
Proceeds from exercise of stock options 9 19 27
Excess tax benefits from stock options 2 7 8
Acquisition of treasury stock (3) (3) --
Dividends paid (111) (128) (143)
-------------------------
Cash (used for) provided by
financing activities (153) (160) 487
-------------------------
Effect of exchange rate changes
on cash and cash equivalents -- -- 4
-------------------------
Net increase (decrease) in cash and cash equivalents 227 180 (192)
Cash and cash equivalents, beginning of year 68 295 475
-------------------------
Cash and cash equivalents, end of year $295 $475 $283
=========================
Supplemental disclosure of cash paid for:
Interest $ 21 $ 21 $ 32
Income taxes $174 $188 $205
The accompanying notes are an integral part of the consolidated financial
statements.
40
Brown-Forman
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars expressed in millions, except per share amounts)
--------------------------------------------------------------------------------
Year Ended April 30, 2005 2006 2007
--------------------------------------------------------------------------------
Class A Common Stock $ 9 $ 9 $ 9
Class B Common Stock 10 10 10
Additional Paid-in Capital:
Balance at beginning of year 28 34 47
Stock issued under compensation plans -- -- 2
Stock-based compensation expense 7 8 6
Adjustment for stock option exercises (3) (3) 1
Excess tax benefits from stock options 2 8 8
----------------------------
Balance at end of year 34 47 64
----------------------------
Retained Earnings:
Balance at beginning of year 1,218 1,415 1,607
Net income 308 320 389
Cash dividends ($0.92, $1.05, and $1.165 per
share in 2005, 2006, and 2007, respectively) (111) (128) (143)
Special cash distribution payable to
shareholders ($1.6533 per share in 2007) -- -- (204)
----------------------------
Balance at end of year 1,415 1,607 1,649
----------------------------
Treasury Stock, at cost:
Balance at beginning of year (156) (147) (128)
Acquisition of treasury stock (3) (3) --
Stock issued under compensation plans 12 21 24
Stock-based compensation expense -- 1 2
----------------------------
Balance at end of year (147) (128) (102)
----------------------------
Accumulated Other Comprehensive Income (Loss):
Balance at beginning of year (14) (11) 18
Net other comprehensive income 3 29 19
Adjustment to initially apply SFAS 158,
net of tax of $60 (Note 12) -- -- (94)
----------------------------
Balance at end of year (11) 18 (57)
----------------------------
Total Stockholders' Equity $1,310 $1,563 $1,573
============================
Comprehensive Income:
Net income $308 $320 $389
Other comprehensive income (loss):
Foreign currency translation adjustment 11 (3) 22
Pension liability adjustment, net of
tax of $4, $(21), and $1 in 2005
2006, and 2007, respectively (6) 33 (1)
Amounts related to cash flow hedges:
Reclassification to earnings,
net of tax of $(2), $2, and $(2)
in 2005, 2006, and 2007, respectively 3 (4) 3
Net gain (loss) on hedging instruments,
net of tax of $3, $(2), and $3
in 2005, 2006, and 2007, respectively (5) 3 (6)
----------------------------
Net other comprehensive income 3 29 18
----------------------------
Total Comprehensive Income $311 $349 $407
============================
Class A Common Shares Outstanding (in thousands):
Balance at beginning of year 56,841 56,782 56,829
Acquisition of treasury stock (59) -- --
Stock issued under compensation plans -- 47 41
----------------------------
Balance at end of year 56,782 56,829 56,870
----------------------------
Class B Common Shares Outstanding (in thousands):
Balance at beginning of year 64,747 65,106 65,636
Acquisition of treasury stock -- (91) --
Stock issued under compensation plans 359 621 731
----------------------------
Balance at end of year 65,106 65,636 66,367
----------------------------
Total Common Shares Outstanding (in thousands) 121,888 122,465 123,237
============================
The accompanying notes are an integral part of the consolidated financial
statements.
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars expressed in millions, except per share amounts)
1. ACCOUNTING POLICIES
We apply the following accounting policies when preparing our consolidated
financial statements. References to "FASB" are to the Financial Accounting
Standards Board, the private-sector organization that establishes financial
accounting and reporting standards, including Statements of Financial Accounting
Standards (SFAS).
PRINCIPLES OF CONSOLIDATION. Our consolidated financial statements include the
accounts of all wholly-owned and majority-owned subsidiaries. We use the equity
method to account for investments in affiliates over which we can exercise
significant influence (but not control). We carry all other investments in
affiliates at cost. We eliminate all intercompany transactions.
CASH EQUIVALENTS. Cash equivalents include bank demand deposits and all highly
liquid investments with original maturities of three months or less.
SHORT-TERM INVESTMENTS. Short-term investments consist of auction rate
securities and variable-rate demand notes. These instruments have long-term
underlying maturities, but have interest rates that are reset every 90 days or
less, at which time they can typically be purchased or sold, which creates a
highly liquid market for these instruments. These investments are classified as
available-for-sale and recorded at cost, which approximates fair value due to
the reset feature.
ALLOWANCE FOR DOUBTFUL ACCOUNTS. We evaluate the collectibility of accounts
receivable based on a combination of factors. When we are aware of circumstances
that may impair a specific customer's ability to meet its financial obligations,
we record a specific allowance to reduce the net recognized receivable to the
amount we reasonably believe will be collected.
INVENTORIES. We state inventories at the lower of cost or market, with
approximately 59% of consolidated inventories being valued using the last-in,
first-out (LIFO) method. Other inventories are valued using the first-in,
first-out (FIFO) method. If the FIFO method had been used, inventories would
have been $121 and $125 higher than reported at April 30, 2006 and 2007,
respectively. FIFO cost approximates current replacement cost.
Whiskey must be barrel-aged for several years, so we bottle and sell only a
portion of our whiskey inventory each year. Following industry practice, we
classify all barreled whiskey as a current asset. We include warehousing,
insurance, ad valorem taxes, and other carrying charges applicable to barreled
whiskey in inventory costs.
We classify bulk wine and agave inventories as work in process.
PROPERTY, PLANT, AND EQUIPMENT. We state property, plant, and equipment at cost
less accumulated depreciation. We calculate depreciation on a straight-line
basis over the estimated useful lives of the assets as follows: 20 to 40 years
for buildings and improvements; 3 to 10 years for machinery, equipment,
furniture, and fixtures; and 3 to 7 years for capitalized software costs.
We assess our property, plant, and equipment and other long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying value of the asset or asset group may not be recoverable. Fair value is
determined using discounted future cash flows, with consideration of market
values for similar assets when available. If the fair value of an evaluated
asset is less than its book value, we write it down to its estimated fair value.
GOODWILL AND OTHER INTANGIBLE ASSETS. We assess our goodwill and other
intangible assets for impairment at least annually. If the fair value of an
evaluated asset is less than its book value, the asset is written down to its
estimated fair value. Fair value is determined using discounted future cash
flows, with consideration of market values for similar assets when available.
FOREIGN CURRENCY TRANSLATION. The U.S. dollar is the functional currency for
most of our consolidated operations. For those operations, we report all gains
and losses from foreign currency transactions in current income. The local
currency is the functional currency for some foreign operations. For those
investments, we report cumulative translation effects as a component of
accumulated other comprehensive income (loss), a component of stockholders'
equity.
REVENUE RECOGNITION. We recognize revenue when title and risk of loss pass to
the customer, which typically is at the time the product is shipped. Certain
sales contain customer acceptance provisions that grant a right of return on the
basis of either subjective criteria or specified objective criteria. Revenue is
recorded net of the estimated cost of sales returns and allowances.
COST OF SALES. Cost of sales includes the costs of receiving, producing,
inspecting, warehousing, insuring, and shipping goods sold during the period.
SHIPPING AND HANDLING FEES AND COSTS. We report the amounts we bill to our
customers for shipping and handling as net sales, and we report the costs we
incur for shipping and handling as cost of sales.
ADVERTISING COSTS. We expense the costs of advertising during the year in which
the advertisements first take place.
SALES DISCOUNTS. Sales discounts, which are recorded as a reduction of net
sales, totaled $119, $157, and $242 for 2005, 2006, and 2007, respectively.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general, and
administrative expenses include the costs associated with our sales force,
administrative staff and facilities, and other expenses related to the
non-manufacturing functions of our business.
EARNINGS PER SHARE. Basic earnings per share is based upon the weighted average
number of 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.
42
The following table presents information concerning basic and diluted earnings
per share:
Year Ended April 30, 2005 2006 2007
--------------------------------------------------------------------------------
Basic and diluted net income (loss):
Continuing operations $339 $395 $400
Discontinued operations (31) (75) (11)
------------------------------
Total $308 $320 $389
==============================
Share data (in thousands):
Basic average common shares outstanding 121,746 122,094 122,868
Dilutive effect of non-vested restricted stock 12 31 59
Dilutive effect of stock options and SSARs 749 1,314 1,274
------------------------------
Diluted average common shares outstanding 122,507 123,439 124,201
==============================
Basic earnings (loss) per share:
Continuing operations $2.788 $3.239 $3.257
Discontinued operations (0.256) (0.615) (0.087)
------------------------------
Total $2.532 $2.624 $3.170
==============================
Diluted earnings (loss) per share:
Continuing operations $2.772 $3.204 $3.222
Discontinued operations (0.255) (0.608) (0.086)
------------------------------
Total $2.517 $2.596 $3.136
==============================
STOCK-BASED COMPENSATION. In December 2004, the FASB issued SFAS 123(R),
"Share-Based Payment," which requires companies to expense the fair value of
stock options and other forms of stock-based compensation. We adopted SFAS
123(R) during fiscal 2005 by retroactively adjusting our financial statements
for all periods since fiscal 1997, when we first began granting stock-based
compensation subject to SFAS 123(R).
Our stock-based compensation plan requires that we purchase shares to satisfy
stock-based compensation 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 never exceeds
the original number of shares outstanding at the inception of the stock-based
compensation plan (as adjusted for any share issuances unrelated to the plan).
The extent to which the number of diluted shares exceeds the number of basic
shares is determined by how much our stock price has appreciated since the
stock-based compensation was awarded, not by how many treasury shares we have
acquired.
ESTIMATES. To prepare financial statements that conform with generally accepted
accounting principles, our management must make informed estimates that affect
how we report revenues, expenses, assets, and liabilities, including contingent
assets and liabilities. Actual results could (and probably will) differ from
these estimates.
RECENT ACCOUNTING PRONOUNCEMENTS. In June 2006, the FASB issued 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 impact of a tax position if that position is more likely than not
to be sustained on audit, based on the technical merits of the position. The
provisions of FIN 48 become effective as of the beginning of our 2008 fiscal
year, with the cumulative effect of the change in accounting principle recorded
as an adjustment to opening retained earnings. We do not expect our adoption of
FIN 48 to affect our financial statements materially.
In September 2006, the FASB issued SFAS 157, "Fair Value Measurements," which
defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements. The provisions of SFAS 157
become effective as of the beginning of our 2009 fiscal year. We are currently
evaluating the impact that SFAS 157 will have on our financial statements.
In February 2007, the FASB issued SFAS 159, "The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115." SFAS 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 SFAS 159 become effective as of the beginning of our 2009 fiscal
year. We are currently evaluating the impact that SFAS 159 will have on our
financial statements.
2. DISCONTINUED OPERATIONS
We sold our wholly-owned subsidiary Lenox, Inc. ("Lenox") during fiscal 2006. In
connection with the sale, we recognized a non-cash impairment charge of $60 in
July 2005. The impairment charge represented the excess of the carrying value of
the net assets sold over the expected sales proceeds. We also incurred
transaction costs related to the sale, including legal, tax and actuarial
expenses, transaction success payments, and investment banking fees.
Lenox's results of operations and the impairment charge and other transaction
costs have been classified as discontinued operations, net of income taxes, in
the accompanying consolidated statements of operations for fiscal 2005 and 2006.
After the sale of Lenox, we retained ownership of Brooks & Bentley, a former
subsidiary of Lenox, located in the U.K. We sold Brooks & Bentley in 2007. After
reviewing various strategic alternatives, we also sold our wholly-owned
subsidiary, Hartmann, Inc. ("Hartmann") in 2007. Accordingly, the assets and
liabilities of Brooks & Bentley and Hartmann that were sold in 2007 are
classified as held for sale in the accompanying consolidated balance sheet as of
April 30, 2006, and their operating results are classified as discontinued
operations in the accompanying consolidated statements of operations. The
results of discontinued operations for 2007 include a $9 impairment charge. The
majority of this impairment relates to the decision made in 2007 by our Board of
Directors to sell Hartmann and to focus our efforts entirely on our beverage
business. The $7 pre-tax impairment charge associated with Hartmann consisted of
a goodwill impairment of $4 and an impairment charge of $3 that represented the
excess of the carrying value of the net assets to be sold over the expected
sales proceeds, net of estimated costs to sell.
43
Before we decided to sell Hartmann, no impairment charge was recorded because we
believed its operations would generate sufficient future cash flows to enable us
to fully recover its carrying amount. The decision to sell Hartmann reflects the
Board's opinion that the sum of the price to be obtained from the sale and the
strategic value of focusing entirely on our beverage business would be greater
than the value of continuing to operate Hartmann.
There was also a $2 pre-tax impairment charge recorded in 2007 for Brooks &
Bentley. This impairment charge reflected a revision to its estimated fair value
and costs to sell, based on the negotiations that resulted in the sale of Brooks
& Bentley.
A summary of discontinued operations follows:
--------------------------------------------------------------------------------
Year Ended April 30, 2005 2006 2007
--------------------------------------------------------------------------------
Net sales $ 534 $ 166 $ 50
Operating expenses (524) (178) (53)
Impairment charge (37) (60) (9)
Transaction costs -- (10) (1)
--------------------------------
Loss before income taxes (27) (82) (13)
Income tax (expense) benefit (4) 7 2
--------------------------------
Net loss from discontinued operations $ (31) $ (75) $ (11)
================================
3. ACQUISITIONS
We have completed the following acquisitions over the past three years. The
operating results of each acquired entity have been consolidated with our
financial statements since their respective acquisition dates. Consolidated pro
forma operating results would not have been materially different from the actual
amounts reported.
FINLANDIA VODKA. In December 2004, we acquired the remaining capital stock of
Finlandia Vodka Worldwide Ltd. (FVW) that we did not already own from the Altia
Corporation of Finland for $64. The value of FVW consists primarily of the
Finlandia brand name, which has an indefinite useful life. As a result of this
transaction, we allocated an additional $80 to the Finlandia brand name (which
was partially offset by a deferred income tax liability of $21) and $5 to
various other net assets.
CHAMBORD LIQUEUR. In May 2006, we completed the acquisition of Chambord liqueur
and all related assets from Chatam International Incorporated and its operating
subsidiary, Charles Jacquin et Cie Inc., for $251, including transaction costs.
We believe that Chambord, which is positioned in the super-premium spirits
category, fits well with our approach to brand building. With the close of the
transaction, we acquired the Chambord trademark, French manufacturing operations
where the brand is produced, and the services of employees who work at the
facility.
The acquisition consisted primarily of the Chambord brand name and goodwill, to
which we allocated $116 and $127 of the purchase price, respectively. The
transaction provides valuable strategic opportunities, which we believe will
enable us to leverage our strong brand-building skills and our current
distribution network, allowing us to grow sales of this super-premium priced
product around the world. We also believe that the brand will provide us with
additional distributor influence and that it complements several other brands in
our portfolio, allowing for cross-selling, merchandising, and promotion, which
we expect will lead to overall increased sales. These factors contributed to a
purchase price that resulted in the recognition of $127 of goodwill. The entire
amount allocated to goodwill is deductible for income tax purposes.
CASA HERRADURA. In January 2007, we completed the acquisition contemplated in an
August 2006 asset purchase agreement among Jose Guillermo Romo de la Pena, Luis
Pedro Pablo Romo de la Pena, Grupo Industrial Herradura, S.A. de C.V. ("Casa
Herradura"), certain of their respective affiliates, Brown-Forman and
Brown-Forman Tequila Mexico, S. de R.L. de C.V., a subsidiary of Brown-Forman.
We acquired substantially all of the assets of Casa Herradura and its affiliates
relating to its tequila business, including the Herradura and el Jimador
tequilas, the New-Mix tequila-based ready-to-drink brand, the trade names and
trademarks associated with such brands and other acquired brands, as well as
related production facilities and the sales, marketing and distribution
organization in Mexico.
We believe this acquisition provides us with several strategic opportunities,
including the ownership of two strong, established brands, Herradura and el
Jimador, which compete at the super-premium and premium levels, respectively, in
the world's largest tequila markets - the U.S. and Mexico. In addition, we
believe the growth potential for these brands is very attractive based on the
fact that tequila is one of the fastest-growing spirits category in both
markets. We expect these brands will help advance our entire business within the
Hispanic population, which is the fastest growing demographic segment in the
U.S., and increase our participation in the popular cocktail culture of the
U.S., where the tequila-based margarita is the most frequently called-for mixed
drink. We also believe the infrastructure in Mexico will give us a strong
business platform to advance our portfolio in an important international market
where we have historically had very little presence. We expect to leverage our
current distribution network outside of Mexico, allowing us to grow sales of
these super-premium and premium brands in the U.S. and to expand the brands'
presence in the rest of the world, where the opportunities for growth appear
numerous given the very limited distribution of tequila. Finally, by expanding
and diversifying our portfolio, we believe that these brands will provide us
with additional clout with our distributors and that the brands' performance
will benefit significantly from our strong brand-building skills. These factors
contributed to a purchase price that resulted in the recognition of the goodwill
shown on the next page.
44
The cost of the acquisition was $794, including transaction costs of $16. The
purchase price is subject to a customary post-closing working capital
adjustment. The cost of the acquisition has been preliminarily allocated based
on management's estimates and independent appraisals as follows:
Accounts receivable $ 33
Inventories 138
Other current assets 47
Property, plant, and equipment 65
Deferred income taxes 6
Goodwill 346
Other intangible assets 215
----
Total assets 850
----
Accounts payable and accrued expenses 54
Long-term debt 1
Other noncurrent liabilities 1
----
Total liabilities 56
----
Net assets acquired $794
====
A third-party valuation specialist performed a preliminary valuation of the
acquired intangible assets to help us determine the fair value of each
identifiable intangible asset. Standard valuation procedures were used in
determining the fair value of the acquired intangible assets. The following
table summarizes the identified intangible asset categories and their weighted
average amortization period, where applicable:
Weighted Average
Amortization Period Fair Value
Finite-lived intangible assets:
Customer relationships 38 years $4
Indefinite-lived intangible assets:
Trademarks and brand names $211
Goodwill 346
The initial allocation of the cost of the acquisition was based on preliminary
estimates and may be revised as asset valuations are finalized and further
information is obtained on the fair value of liabilities. The entire preliminary
goodwill amount of $346 is expected to be deductible for tax purposes.
We financed the acquisition with approximately $114 of cash and approximately
$680 of commercial paper, $400 of which was subsequently replaced with long-term
debt.
4. GOODWILL AND OTHER INTANGIBLE ASSETS
The following table shows the changes in the amounts recorded as goodwill over
the past two years:
Balance as of April 30, 2005 $189
Consolidation of Swift & Moore (Note 17) 5
Foreign currency translation adjustment (2)
----
Balance as of April 30, 2006 192
Acquisition of Chambord (Note 3) 127
Acquisition of Casa Herradura (Note 3) 346
Foreign currency translation adjustment 5
----
Balance as of April 30, 2007 $670
====
As of April 30, 2006, our other intangible assets consisted of trademarks and
brand names, with indefinite useful lives. As of April 30, 2007, our other
intangible assets consisted of:
Gross Carrying Accumulated
Amount Amortization
Finite-lived intangible assets:
Customer relationships $ 4 $ --
Distribution rights 25 (2)
---- -----
$ 29 $ (2)
==== =====
Indefinite-lived intangible assets:
Trademarks and brand names $657 --
Amortization expense related to intangible assets was $0 in 2006 and $2 in 2007.
Amortization expense of approximately $5 is projected for each of the next five
fiscal years. However, actual amounts of future amortization expense may differ
due to additional intangible asset acquisitions, impairment of intangible
assets, accelerated amortization of intangible assets, purchase price
reallocations, and other events.
5. COMMITMENTS
We have contracted with various growers and wineries to supply some of our
future grape and bulk wine requirements. Many of these contracts call for prices
to be determined by market conditions, but some contracts provide for minimum
purchase prices that may exceed market prices. We have purchase obligations
related to these contracts of $29 in 2008, $19 in 2009, $14 in 2010, $12 in
2011, $10 in 2012, and $20 after 2012.
We also have contracts for the purchase of agave, which is used to produce
tequila. These contracts provide for prices to be determined based on market
conditions at the time of harvest, which although not specified, is expected to
occur over the next ten years. As of April 30, 2007, based on current market
prices, obligations under these contracts totaled $26.
We made rental payments for real estate, vehicles, and office, computer, and
manufacturing equipment under operating leases of $15 in 2005, $16 in 2006, and
$19 in 2007. We have commitments related to minimum lease payments of $13 in
2008, $8 in 2009, $6 in 2010, $4 in 2011, $3 in 2012, and $10 after 2012.
45
6. CREDIT FACILITIES
We have a committed revolving credit agreement with various domestic and
international banks for $800 that expires in fiscal 2012. Its most restrictive
covenant requires that our consolidated EBITDA (as defined in the agreement) to
consolidated interest expense not be less than a ratio of 3 to 1. At April 30,
2007, we were within this covenant's parameters. At April 30, 2007, we also had
the ability to issue an undetermined amount of debt securities under an SEC
shelf registration filed in January 2007.
7. DEBT
Our long-term debt consisted of the following:
April 30, 2006 2007
--------------------------------------------------------------------------------
3.0% notes, due in fiscal 2008 $349 $350
Variable-rate notes, due in fiscal 2010 -- 150
5.2% notes, due in fiscal 2012 -- 250
Other 2 26
-------------------------------
351 776
Less current portion -- 354
-------------------------------
$351 $422
===============================
Debt payments required over the next five fiscal years consist of $354 in 2008,
$4 in 2009, $154 in 2010, $3 in 2011, and $253 in 2012. The weighted average
interest rate on the variable-rate notes was 5.4% at April 30, 2007. In addition
to long-term debt, we had short-term borrowings outstanding with weighted
average interest rates of 5.0% and 5.3% at April 30, 2006 and 2007,
respectively.
8. FOREIGN CURRENCY RISK MANAGEMENT AND DERIVATIVE FINANCIAL INSTRUMENTS
We use foreign currency options and forward contracts as protection against the
risk that the eventual U.S. dollar cash flows resulting from our forecasted
sales and purchases of goods and services in foreign currencies will be
adversely affected by changes in exchange rates. In general, average maturities
are less than one year, although at April 30, 2007, we had some forward
contracts with maturities approaching two years. We designate these derivative
financial instruments as cash flow hedges.
We formally assess (both at inception and at least quarterly) whether the
derivative financial instruments are effective at offsetting changes in the cash
flows of the hedged transactions. We defer the effective portion of a
derivative's change in fair value in Accumulated Other Comprehensive Income
(Loss) until the underlying hedged transaction is recognized in earnings. We
recognize any ineffective portion of the change in fair value immediately in
earnings. No material gains or losses were recognized in earnings due to the
ineffectiveness of cash flow hedges.
We had outstanding foreign currency options and forward contracts, hedging
primarily British pound, Australian dollar, euro, and South African rand
revenues, with notional amounts totaling $205 and $406 at April 30, 2006 and
2007, respectively. At April 30, 2007, we also had forward contracts hedging the
fair value of a Mexican peso-denominated intercompany receivable, with a
notional value of approximately $120. Our credit exposure is, however, limited
to the contracts' fair value (see Note 9) rather than their notional amounts. We
minimize credit exposure by entering into foreign currency contracts only with
major financial institutions that have earned investment-grade credit ratings.
9. FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of cash, cash equivalents, short-term investments, and short-term
borrowings approximates the carrying amount due to the short maturities of these
instruments.
We estimate the fair value of long-term debt using discounted cash flows based
on our incremental borrowing rates for similar debt. The fair value of foreign
currency contracts is based on quoted market prices. A comparison of the fair
values and carrying amounts of these instruments is as follows:
April 30, 2006 2007
--------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
--------------------------------------------------------------------------------
Assets:
Cash and cash equivalents $475 $475 $283 $283
Short-term investments 160 160 86 86
Liabilities:
Foreign currency contracts 1 1 4 4
Short-term borrowings 225 225 401 401
Current portion of
long-term debt -- -- 354 347
Long-term debt 351 338 422 422
10. BALANCE SHEET INFORMATION
Supplemental balance sheet information is as follows:
April 30, 2006 2007
--------------------------------------------------------------------------------
Property, plant, and equipment:
Land $ 78 $ 88
Buildings 290 323
Equipment 403 446
Construction in process 23 27
-------------------------------
794 884
Less accumulated depreciation 369 378
-------------------------------
$425 $506
===============================
Accounts payable and accrued expenses:
Accounts payable, trade $ 89 $118
Accrued expenses:
Advertising 62 65
Compensation and commissions 84 93
Excise and other non-income taxes 27 41
Self-insurance claims 8 10
Postretirement benefits -- 4
Interest 1 3
Other 18 27
-------------------------------
200 243
-------------------------------
$289 $361
===============================
46
11. INCOME TAXES
We incur income taxes on the earnings of our domestic and foreign operations.
The following table, based on the locations of the taxable entities from which
sales were derived (rather than the location of customers), presents the
domestic and foreign components of our income before income taxes:
Year Ended April 30, 2005 2006 2007
--------------------------------------------------------------------------------
United States $350 $395 $489
Foreign 154 164 97
------------------------------------
$504 $559 $586
====================================
The income shown above was determined according to financial accounting
standards. Because those standards sometimes differ from the tax rules used to
calculate taxable income, there are differences between: (a) the amount of
taxable income and pretax financial income for a year; and (b) the tax bases of
assets or liabilities and their amounts as recorded in our financial statements.
As a result, we recognize a current tax liability for the estimated income tax
payable on the current tax return, and deferred tax liabilities (income tax
payable on income that will be recognized on future tax returns) and deferred
tax assets (income tax refunds from deductions that will be recognized on future
tax returns) for the estimated effects of the differences mentioned above.
Deferred tax assets and liabilities as of the end of each of the last two years
were as follows:
April 30, 2006 2007
--------------------------------------------------------------------------------
Deferred tax assets:
Postretirement and other benefits $ 2 $ 71
Accrued liabilities and other 9 9
Inventories 64 62
Loss carryforwards 21 46
Valuation allowance (21) (32)
-----------------------------------
Total deferred tax assets, net 75 156
-----------------------------------
Deferred tax liabilities:
Trademarks and brand names (85) (96)
Property, plant, and equipment (43) (40)
-----------------------------------
Total deferred tax liabilities (128) (136)
-----------------------------------
Net deferred tax (liability) asset $(53) $ 20
===================================
The $32 valuation allowance at April 30, 2007, relates primarily to the $23
capital loss carryforward associated with the sale of Lenox during fiscal 2006.
Currently, we are unaware of any transaction that will permit the use of this
carryforward, which expires in fiscal 2011. The remaining valuation allowance
relates to various other operating and capital loss carryforwards, which expire
between fiscal 2012 and fiscal 2018.
Deferred tax liabilities were not provided on undistributed earnings of certain
foreign subsidiaries ($150 and $230 at April 30, 2006 and 2007, respectively)
because we expect these undistributed earnings to be reinvested indefinitely
overseas. If these amounts were not considered permanently reinvested,
additional deferred tax liabilities of approximately $26 and $41 would have been
provided as of April 30, 2006 and 2007, respectively.
The 2004 American Jobs Creation Act (the "Act") provided a special one time
opportunity to deduct from taxable income 85% of certain qualifying foreign
dividends repatriated to the U.S. from controlled foreign corporations, subject
to various limitations and restrictions, including qualified U.S. reinvestment
of such earnings. During 2006, we repatriated $277 of foreign earnings that
represented qualified dividends under the Act. This reduced our deferred income
tax liability related to undistributed foreign earnings by $17.
Total income tax expense for a year includes the tax associated with the current
tax return ("current tax expense") and the change in the net deferred tax
liability ("deferred tax expense"). Total income tax expense for each of the
last three years was as follows:
Year Ended April 30, 2005 2006 2007
--------------------------------------------------------------------------------
Current:
Federal $130 $153 $141
Foreign 19 16 27
State and local 19 19 16
------------------------------------
168 188 184
------------------------------------
Deferred:
Federal 4 (11) 5
Foreign (1) (8) 1
State and local (6) (5) (4)
------------------------------------
(3) (24) 2
------------------------------------
$165 $164 $186
====================================
Our consolidated effective tax rate may differ from current statutory rates due
to the recognition of amounts for events or transactions that have no tax
consequences. The following table reconciles our effective tax rate to the
federal statutory tax rate in the U.S.:
Percent of Income Before Taxes
--------------------------------------------------------------------------------
Year Ended April 30, 2005 2006 2006
--------------------------------------------------------------------------------
U.S federal statutory rate 35.0% 35.0% 35.0%
State taxes, net of U.S.
federal tax benefit 1.2 1.3 1.3
Income taxed at other than U.S.
federal statutory rate (1.9) (1.5) (1.5)
Tax benefit from export sales (2.0) (1.6) (1.0)
Tax benefit from U.S. manufacturing -- (0.7) (0.7)
Impairment charges 0.2 -- --
Capital loss benefit -- (2.8) --
Other, net 0.1 (0.4) (1.4)
-------------------------------------
Effective rate 32.6% 29.3% 31.7%
=====================================
47
12. PENSION AND OTHER POSTRETIREMENT BENEFITS
We sponsor various defined benefit pension plans as well as postretirement plans
providing retiree health care and retiree life insurance benefits. The following
discussion provides information about our obligations related to these plans,
the assets dedicated to meeting the obligations, and the amounts we recognized
in our financial statements as a result of sponsoring these plans. We use a
measurement date of January 31 to determine the amounts of the plan obligations
and assets presented below.
OBLIGATIONS. We provide eligible employees with pension and other postretirement
benefits based on such factors as years of service and compensation level during
employment. The pension obligation shown below ("projected benefit obligation")
consists of: (a) benefits earned by employees to date based on current salary
levels ("accumulated benefit obligation"); and (b) benefits to be received by
the employees as a result of expected future salary increases. (The obligation
for medical and life insurance benefits is not affected by future salary
increases). This table shows how the present value of our obligation changed
during each of the last two years.
Pension Medical and Life
Benefits Insurance Benefits
--------------------------------------------------------------------------------
2006 2007 2006 2007
--------------------------------------------------------------------------------
Obligation at beginning of year $386 $414 $ 47 $ 53
Service cost 13 13 1 1
Interest cost 22 24 3 3
Actuarial loss 7 14 5 --
Plan amendments 1 -- -- --
Retiree contributions -- -- 1 1
Benefits paid (15) (16) (4) (4)
Effect of Hartmann sale -- (1) -- (1)
----------------------------------------
Obligation at end of year $414 $448 $ 53 $ 53
========================================
Service cost represents the present value of the benefits attributed to service
rendered by employees during the year. Interest cost is the increase in the
present value of the obligation due to the passage of time. Actuarial loss
(gain) is the change in value of the obligation resulting from experience
different from that assumed or from a change in an actuarial assumption. (The
actuarial assumptions used are discussed at the end of this note).
As shown in the previous table, our pension and other postretirement benefit
obligations were reduced by benefit payments in 2007 of $16 and $4,
respectively. Expected benefit payments over the next ten years are as follows:
Pension Medical and Life
Benefits Insurance Benefits
--------------------------------------------------------------------------------
2008 $ 17 $ 3
2009 19 3
2010 20 3
2011 22 3
2012 23 3
2013-2017 141 16
ASSETS. We specifically invest certain assets in order to fund our pension
benefit obligations. Our investment goal is to earn a total return that, over
time, will grow assets sufficiently to fund our plans' liabilities, after
providing appropriate levels of contributions and accepting prudent levels of
investment risk. To achieve this goal, plan assets are invested primarily in
funds or portfolios of funds actively managed by outside managers. Investment
risk is managed by company policies that require diversification of asset
classes, manager styles, and individual holdings. We measure and monitor
investment risk through quarterly and annual performance reviews, and periodic
asset/liability studies.
Asset allocation is the most important method for achieving our investment goals
and is based on our assessment of the plans' long-term return objectives and the
appropriate balances needed for liquidity, stability, and diversification. The
allocation of our pension plan assets at fair value on January 31, 2006 and
2007, and the target allocation for 2008, by asset category, are as follows:
Asset Allocation
--------------------------------------------------------------------------------
Actual Actual Target
2006 2007 2008
--------------------------------------------------------------------------------
Equity securities 71% 71% 70%
Debt securities 16 15 15
Real estate 6 6 5
Other 7 8 10
----------------------------------------
Total 100% 100% 100%
========================================
This table shows how the fair value of the pension plan assets changed during
each of the last two years. (We do not have assets set aside for postretirement
medical or life insurance benefits).
Pension Medical and Life
Benefits Insurance Benefits
--------------------------------------------------------------------------------
2006 2007 2006 2007
--------------------------------------------------------------------------------
Fair value at beginning of year $324 $368 $ -- $ --
Actual return on plan assets 41 42 -- --
Retiree contributions -- -- 1 1
Company contributions 18 2 3 3
Benefits paid (15) (16) (4) (4)
----------------------------------------
Fair value at end of year $368 $396 $ -- $ --
========================================
48
Consistent with our funding policy, we expect to contribute $3 to our
postretirement medical and life insurance benefit plans in 2008. While we may
decide to contribute more, we currently expect to contribute $3 to our pension
plans in 2008.
FUNDED STATUS. The funded status of a plan refers to the difference between its
assets and its obligations. Prior to our adoption of SFAS 158 (discussed below),
this amount differed from the amount recorded as a net asset (liability) on the
balance sheet. This table shows the funded status of our plans.
Pension Medical and Life
Benefits Insurance Benefits
--------------------------------------------------------------------------------
2006 2007 2006 2007
--------------------------------------------------------------------------------
Assets $ 368 $ 396 $ -- $ --
Obligations (414) (448) (53) (53)
Assets contributed
after measurement date 1 -- 1 1
--------------------------------------
Funded status $ (45) $ (52) $(52) $(52)
======================================
The net asset (liability) is recorded on the balance sheet as follows:
Pension Medical and Life
Benefits Insurance Benefits
--------------------------------------------------------------------------------
2006 2007 2006 2005
--------------------------------------------------------------------------------
Prepaid pension cost $146 $ 23 $ -- $ --
Other assets 1 -- -- --
Accounts payable and accrued expenses -- (1) -- (3)
Accrued postretirement benefits (37) (74) (41) (49)
--------------------------------------
Net asset (liability) $110 $(52) $(41) $(52)
======================================
Accumulated other comprehensive loss:
Net actuarial loss $ -- $148 $ -- $ 9
Prior service cost -- 5 -- 1
Minimum pension liability adjustment 7 -- -- --
--------------------------------------
$ 7 $153 $ -- $ 10
======================================
On April 30, 2007, we adopted SFAS 158, "Employer's Accounting for Defined
Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements
No. 87, 88, 106, and 132(R)." SFAS 158 requires that we recognize the funded
status of our pension and other postretirement benefit plans as an asset or
liability on our balance sheet. Subsequent changes in the funded status will be
recognized through comprehensive income in the year in which they occur. SFAS
158 also requires that, beginning in 2009, the assumptions used to measure our
annual pension and other postretirement benefit expenses be determined as of the
balance sheet date, and all plan assets and liabilities be reported as of that
date. In accordance with SFAS 158, prior year amounts have not been adjusted.
The following table illustrates the incremental effect of applying SFAS 158 on
individual line items on our balance sheet as of April 30, 2007:
Before After
Application Application
of SFAS 158 Adjustments of SFAS 158
--------------------------------------------------------------------------------
Prepaid pension cost $ 134 $(111) $ 23
Total assets 3,662 (111) 3,551
Accounts payable and
accrued expenses 357 4 361
Accrued postretirement benefits 84 39 123
Deferred income taxes 116 (60) 56
Total liabilities 1,995 (17) 1,978
Accumulated other
comprehensive gain (loss) 37 (94) (57)
Total stockholders' equity 1,667 (94) 1,573
Total liabilities and
stockholders' equity 3,662 (111) 3,551
This table compares our pension plans that have assets in excess of their
accumulated benefit obligations with those whose assets are less than their
obligations. (As discussed above, we have no assets set aside for postretirement
medical or life insurance benefits).
Accumulated Projected
Benefit Benefit
Plan Assets Obligation Obligation
-------------------------------------------------------------------------------
2006 2006 2006 2007 2006 2007
-------------------------------------------------------------------------------
Plans with assets in
excess of accumulated
benefit obligation $368 $396 $329 $346 $368 $396
Plans with accumulated
benefit obligation in
excess of assets -- -- 37 42 46 52
------------------------------------------------
Total $368 $396 $366 $388 $414 $448
================================================
49
PENSION EXPENSE. This table shows the components of the pension expense
recognized during each of the last three years. The amount for each year
includes amortization of the prior service cost and net loss that was
unrecognized as of the beginning of the year.
Pension Benefits
--------------------------------------------------------------------------------
2005 2006 2007
--------------------------------------------------------------------------------
Service cost $ 11 $ 13 $ 13
Interest cost 20 22 24
Expected return on plan assets (32) (32) (32)
Amortization of:
Unrecognized prior service cost 1 1 1
Unrecognized net loss 3 8 12
-----------------------------------------
Net expense $ 3 $ 12 $ 18
=========================================
The prior service cost represents the cost of retroactive benefits granted in
plan amendments and is amortized on a straight-line basis over the average
remaining service period of the employees expected to receive the benefits. The
net loss results from experience different from that assumed or from a change in
actuarial assumptions, and is amortized over at least that same period. The
estimated amount of prior service cost and net loss that will be amortized from
accumulated other comprehensive loss into pension expense in 2008 is $1 and $12,
respectively.
The pension expense recorded during the year is estimated at the beginning of
the year. As a result, the amount is calculated using an expected return on plan
assets rather than the actual return. The difference between actual and expected
returns is included in the unrecognized net loss at the end of the year.
OTHER POSTRETIREMENT BENEFIT EXPENSE. This table shows the components of the
postretirement medical and life insurance benefit expense that we recognized
during each of the last three years.
Medical and Life Insurance Benefits
--------------------------------------------------------------------------------
2005 2006 2007
--------------------------------------------------------------------------------
Service cost $1 $1 $1
Interest cost 3 3 3
-----------------------------------------
Net expense $4 $4 $4
=========================================
ASSUMPTIONS AND SENSITIVITY. We use various assumptions to determine the
obligations and expense related to our pension and other postretirement benefit
plans. The assumptions used in computing benefit plan obligations as of the end
of the last two years were as follows:
Pension Medical and Life
Benefits Insurance Benefits
--------------------------------------------------------------------------------
In Percent 2006 2007 2006 2007
--------------------------------------------------------------------------------
Discount rate 5.95 6.04 5.95 5.98
Rate of salary increase 4.00 4.00 -- --
Expected return on plan assets 8.75 8.75 -- --
The assumptions used in computing benefit plan expense during each of the last
three years were as follows:
Pension Medical and Life
Benefits Insurance Benefits
--------------------------------------------------------------------------------
In Percent 2005 2006 2007 2005 2006 2007
--------------------------------------------------------------------------------
Discount rate 6.00 5.80 5.95 6.00 5.80 5.95
Rate of salary increase 4.00 4.00 4.00 -- -- --
Expected return on plan assets 8.75 8.75 8.75 -- -- --
The discount rate represents the interest rate used to discount the cash-flow
stream of benefit payments to a net present value as of the current date. A
lower assumed discount rate increases the present value of the benefit
obligation.
The assumed rate of salary increase reflects the expected annual increase in
salaries as a result of inflation, merit increases, and promotions. A lower
assumed rate decreases the present value of the benefit obligation.
The expected return on plan assets represents the long-term rate of return that
we assume will be earned over the life of the pension assets, considering the
distribution of those assets among investment categories and the related
historical rates of return.
The assumed health care cost trend rates as of the end of the last two years
were as follows:
Medical and Life Insurance Benefits
--------------------------------------------------------------------------------
In Percent 2006 2007
--------------------------------------------------------------------------------
Health care cost trend rate assumed for next year:
Present rate before age 65 11.0 10.0
Present rate age 65 and after 11.0 10.0
50
We project health care cost trend rates to decline gradually to 5.0% by 2012 and
to remain level after that. Assumed health care cost trend rates have a
significant effect on the amounts reported for postretirement medical plans. A
one percentage point increase/decrease in assumed health care cost trend rates
would have increased/decreased the accumulated postretirement benefit obligation
as of April 30, 2007, by $5 and the aggregate service and interest costs for
2007 by $1.
SAVINGS PLANS. We also sponsor various defined contribution benefit plans that
in total cover substantially all employees. Employees can make voluntary
contributions in accordance with the provisions of their respective plans, which
includes a 401(k) tax deferral option. We match a percentage of each employee's
contributions in accordance with the provisions of the plans. We expensed $7,
$7, and $8 for matching contributions during 2005, 2006, and 2007, respectively.
13. NET SALES INFORMATION
The following table presents net sales by product category:
2005 2006 2007
--------------------------------------------------------------------------------
Net sales:
Spirits $1,824 $2,049 $2,425
Wine 371 363 381
-----------------------------------------------
$2,195 $2,412 $2,806
===============================================
The following table presents net sales by geographic region:
2005 2006 2007
--------------------------------------------------------------------------------
Net sales:
United States $1,316 $1,404 $1,498
Europe 637 709 816
Other countries 242 299 492
-----------------------------------------------
$2,195 $2,412 $2,806
===============================================
Net sales are attributed to countries based on where customers are located.
Long-lived assets located outside the United States are not significant.
14. 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. Six of the suits
have been dismissed by trial court and are being appealed. Two cases have been
voluntarily withdrawn. One is pending decision of 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.
15. STOCK-BASED COMPENSATION
Under our 2004 Omnibus Compensation Plan (the "Plan"), we can grant stock
options and other stock-based incentive awards for a total of 5,946,000 shares
of common stock to eligible employees until July 22, 2014. As of April 30, 2007,
awards for 4,816,000 shares remain available for issuance under the Plan. Shares
delivered to employees are limited by the Plan to shares that we purchase for
this purpose. No new shares may be issued.
We grant stock options and SSARs at an exercise price of not less than the fair
value of the underlying stock on the grant date. Except for the stock options
that expire on September 1, 2007 (discussed below), stock options and SSARs
granted under the Plan become exercisable after three years from the first day
of the fiscal year of grant and expire seven years after that date. The
grant-date fair values of these awards granted during 2005, 2006, and 2007 were
$10.78, $12.59, and $16.46 per award, respectively. Fair values were estimated
using the Black-Scholes pricing model with the following assumptions:
2005 2006 2007
--------------------------------------------------------------
Risk-free interest rate 4.0% 4.0% 5.0%
Expected volatility 24.0% 22.0% 16.9%
Expected dividend yield 1.9% 1.9% 1.8%
Expected life (years) 6 6 6
On March 22, 2007, our Board of Directors approved the distribution to
shareholders of the $204 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 shareholders of record on April 5, 2007. The
Internal Revenue Service has issued to us a private letter ruling which states
that the special distribution will be treated as a distribution in partial
liquidation pursuant to Sections 302(b)(4) and 302(e)(1) of the Internal Revenue
Code.
In connection with this special distribution, and pursuant to the terms of the
Plan, the exercise price and number of stock options and SSARs outstanding on
the ex-distribution date were adjusted in order to avoid the reduction in value
of those awards that would otherwise have occurred as a result of the special
distribution. The following information has been retroactively restated to
reflect these adjustments.
51
In September 1999, we granted stock options with an exercise price of $48.78 per
share that became exercisable on May 1, 2006, and expire on September 1, 2007.
The fair value of these options was $2.89 per option, using the Black-Scholes
pricing model and assuming a risk-free interest rate of 6.0%, expected
volatility of 18.0%, an expected dividend yield of 2.2%, and an expected life of
eight years. Approximately 418,000 of these options are outstanding as of April
30, 2007.
We also grant restricted shares of common stock under the Plan. As of April 30,
2007, there are approximately 122,000 restricted shares outstanding, with a
weighted-average remaining restriction period of 3.4 years. The following table
summarizes restricted stock activity during 2007.
Weighted
Restricted Average
Shares Grant Date
(in thousands) Fair Value
--------------------------------------------------------------
Oustanding at May 1, 2006 81 $43.75
Granted 41 61.70
---
Outstanding at April 30, 2007 122 49.79
===
The accompanying statements of operations reflect compensation expense related
to stock-based incentive awards on a pre-tax basis of $7 in 2005, $8 in 2006,
and $8 in 2007, partially offset by deferred income tax benefits of $3 in 2005,
$3 in 2006, and $3 in 2007.
A summary of stock option and SSAR activity under the Plan as of April 30, 2007,
and changes during the year then ended is presented below.
Weighted Weighted
Shares Average Exercise Average Remaining Aggregate
(in thousands) Price Per Option/SSAR Contractual Term Intrinsic Value
-------------------------------------------------------------------------------------------------------------
Outstanding at May 1, 2006 4,786 $39.32
Granted 340 70.61
Exercised (885) 40.60
Forfeited or expired (28) 54.03
---------------
Outstanding at April 30, 2007 4,213 $41.48 4.8 $97
---------------
Exercisable at April 30, 2007 2,920 $35.50 3.6 $83
---------------
The total intrinsic value of options exercised during 2005, 2006, and 2007 was
$7, $23, and $26, respectively.
As of April 30, 2007, there was $10 of total unrecognized compensation cost
related to nonvested stock-based compensation. That cost is expected to be
recognized over a weighted-average period of 2.6 years.
16. SALE OF INVESTMENT IN AFFILIATE
During 2005, we sold our equity stake in Glenmorangie plc for proceeds of $93
(net of disposal costs), resulting in a pre-tax gain of $72.
17. OTHER INCOME
In July 2005, we entered into an agreement with LVMH Moet Hennessey Louis
Vuitton for the early termination of our long-term importing and marketing
agreements for Glenmorangie products in the U.S., Canada, and certain countries
in Europe and Asia, effective July 29, 2005. We received approximately $14 for
the early termination, which is included in other income for fiscal 2006 in the
accompanying consolidated statement of operations.
In January 2006, we received proceeds of $25 as compensation for Pernod Ricard
assuming the distribution of its brands from Swift & Moore, an Australian
distribution company co-owned by Pernod Ricard (following its purchase of
Allied-Domecq) and us. This amount is recorded in other income for fiscal 2006.
Pernod Ricard surrendered its ownership interest in Swift & Moore to us
effective February 1, 2006, resulting in our becoming 100% owner of Swift &
Moore as of that date. Swift & Moore, which is now Brown-Forman Australia,
continues to distribute our brands in Australia.
In January 2006, we sold winery land and buildings in California for $7,
resulting in a gain of $5 that is included in other income for fiscal 2006.
In September 2006, we entered into an agreement with Gruppo Italiano Vini (GIV)
for the production of Bolla Italian wines. Under the agreement, we also sold our
main Bolla wine production facility in Pedemonte, Italy to GIV, which now
produces Bolla Italian Wines for us. We recognized a gain on the sale of $11,
which is included in other income for fiscal 2007. The agreement also named GIV
as Bolla's distributor in the Italian domestic market. We maintained worldwide
ownership of the Bolla trademark and continue to sell Bolla Wines in the brand's
other markets.
18. SUBSEQUENT EVENT
On May 16, 2007, we reached an agreement with the Orendain family of Mexico to
end our joint ventures in the tequila business. We purchased the remaining
portion of the global trademark for the Don Eduardo super premium tequila brand
from the Orendain family, and the Orendain family repurchased all other Orendain
trademarks that were once part of the joint ventures.
We had shared ownership of the trademarks with the Orendain family since 1999
through two joint ventures: Tequila Orendain de Jalisco and BFC Tequila Limited.
Tequila Orendain de Jalisco produced the tequila and held the trademarks in
Mexico. BFC Tequila Limited held the trademarks for all markets excluding
Mexico. During the process of closing the Casa Herradura acquisition in fiscal
2007, we began negotiations with the Orendain family for the termination of
these joint ventures, including the purchase of full ownership and rights to the
Don Eduardo brand, and returning all rights to the international Orendain
trademarks to the Orendain family.
52
REPORTS OF MANAGEMENT
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Our management is responsible for the preparation, presentation, and integrity
of the financial information presented in this Annual Report. The consolidated
financial statements were prepared in conformity with accounting principles
generally accepted in the United States of America (GAAP), including amounts
based on management's best estimates and judgments. In management's opinion, the
consolidated financial statements fairly present the Company's financial
position, results of operations, and cash flows.
The Audit Committee of the Board of Directors, which is composed of independent
directors, meets regularly with the independent registered public accounting
firm, PricewaterhouseCoopers LLP (PwC), internal auditors, and representatives
of management to review accounting, internal control structure, and financial
reporting matters. The internal auditors and PwC have full and free access to
the Audit Committee. As set forth in our Code of Conduct and Compliance
Guidelines, we are firmly committed to adhering to the highest standards of
moral and ethical behaviors in all of our business activities.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is also responsible for establishing and maintaining adequate
internal control over financial reporting, as defined in Rule 13a-15(f) under
the Securities Exchange Act of 1934. Our internal control over financial
reporting is designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally accepted in the U.S.
Under our supervision, and with the participation of management, we conducted an
evaluation of the effectiveness of the Company's internal control over financial
reporting based on the framework and criteria in "Internal Control - Integrated
Framework" issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation, we concluded that the Company's internal
control over financial reporting was effective as of April 30, 2007. During the
year ended April 30, 2007, Brown-Forman acquired Casa Herradura. (See Note 3 to
the accompanying consolidated financial statements.) We are in the process of
integrating the Casa Herradura operations and will be incorporating these
operations as part of our internal controls. As permitted by the SEC, for
purposes of this evaluation, the disclosure controls and procedures of the
recently acquired Casa Herradura operations and the impact of this acquisition
on the Company's internal controls over financial reporting were excluded. In
accordance with guidance, we will include Casa Herradura in our assessment of
internal control over financial reporting in fiscal 2008. There has been no
change in the Company's internal control over financial reporting during the
most recent fiscal year that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting,
provided that the Casa Herrradura operations and acquisition were excluded from
management's evaluation as noted above. Management's assessment of the
effectiveness of the Company's internal control over financial reporting as of
April 30, 2007, has been audited by PwC as stated in their report that appears
on page 54.
/s/ Paul C. Varga
Paul C. Varga
President and Chief Executive Officer
/s/ Phoebe A. Wood
Phoebe A. Wood
Vice Chairman and Chief Financial Officer
53
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
TO THE BOARD OF DIRECTORS AND STOCKHOLDERS OF BROWN-FORMAN CORPORATION:
We have completed integrated audits of Brown-Forman Corporation's consolidated
financial statements and of its internal control over financial reporting as of
April 30, 2007, in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.
CONSOLIDATED FINANCIAL STATEMENTS: In our opinion, the accompanying consolidated
balance sheets and the related consolidated statements of operations, cash flows
and stockholders' equity present fairly, in all material respects, the financial
position of Brown-Forman Corporation and its subsidiaries (the "Company") at
April 30, 2007 and 2006, and the results of their operations and their cash
flows for each of the three years in the period ended April 30, 2007 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 12 to the consolidated financial statements, the Company
adopted the recognition provisions of SFAS 158, "Employer's Accounting for
Defined Benefit Pension and Other Postretirement Plans - Amendment of FASB
Statements No. 87, 88, 106, and 132(R)."
INTERNAL CONTROL OVER FINANCIAL REPORTING: Also, in our opinion, management's
assessment, included in Management's Report on Internal Control over Financial
Reporting appearing on page 53, that the Company maintained effective internal
control over financial reporting as of April 30, 2007, based on criteria
established in "Internal Control - Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated,
in all material respects, based on those criteria. Furthermore, in our opinion,
the Company maintained, in all material respects, effective internal control
over financial reporting as of April 30, 2007, based on criteria established in
"Internal Control - Integrated Framework" issued by the COSO. The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting. Our responsibility is to express opinions on
management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit of
internal control over financial reporting in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether effective internal control over financial reporting was maintained in
all material respects. An audit of internal control over financial reporting
includes obtaining an understanding of internal control over financial
reporting, evaluating management's assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing such other
procedures as we consider necessary in the circumstances. We believe that our
audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed 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. A company's internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (ii)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
As described in Management's Report on Internal Control over Financial
Reporting, management has excluded Casa Herradura from its assessment of
internal control over financial reporting as of April 30, 2007 because it was
acquired by the Company in a purchase business combination during fiscal 2007.
We have also excluded Casa Herradura from our audit of internal control over
financial reporting. Casa Herradura is a wholly-owned subsidiary whose total
assets and total revenues represent 8% and 2%, respectively, of the related
consolidated financial statement amounts as of and for the year ended April 30,
2007.
/s/ PricewaterhouseCoopers LLP
Louisville, Kentucky
June 28, 2007
54
IMPORTANT INFORMATION ON FORWARD-LOOKING STATEMENTS
This annual report contains statements, estimates, or projections that
constitute "forward-looking statements" as defined under U.S. federal securities
laws. Generally, the words "expect," "believe," "intend," "estimate," "will,"
"anticipate," and "project," and similar expressions identify a forward-looking
statement, which speaks only as of the date the statement is made. Except as
required by law, we do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
We believe that the expectations and assumptions with respect to our
forward-looking statements are reasonable. But by their nature, forward-looking
statements involve known and unknown risks, uncertainties and other factors that
in some cases are out of our control. These factors could cause our actual
results to differ materially from Brown-Forman's historical experience or our
present expectations or projections. Here is a non-exclusive list of such risks
and uncertainties:
- changes in general economic conditions, particularly in the U.S. where we
earn about half of our profits;
- lower consumer confidence or purchasing in the wake of catastrophic events
or related to higher energy costs;
- 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 U.S. 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 Mexican Peso;
- reduced bar, restaurant, hotel and travel business, including travel retail,
in the wake of terrorist attacks;
- 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 control environment, and U.S. public
company requirements;
- increases in the price of energy or raw materials, including grapes, grain,
agave, wood, glass, and plastic;
- excess wine inventories or a worldwide oversupply of grapes or agave;
- termination of our rights to distribute and market agency brands included
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.
56
Exhibit 21
SUBSIDIARIES OF THE REGISTRANT
Percentage State or
of Voting Jurisdiction
Name Securities Owned of Incorporation
---- ---------------- ----------------
AMG Trading, L.L.C. 100% Delaware
Brown-Forman Arrow Continental
Europe, L.L.C. 100% Kentucky
Brown-Forman Beverages Australia Pty. Ltd. 100% Australia
Brown-Forman Beverages North Asia, L.L.C. 100% Delaware
B-F Korea, L.L.C. 100% Delaware
Brown-Forman Beverages Japan, L.L.C. 100% Delaware
Brown-Forman Thailand, L.L.C. 100% Delaware
Canadian Mist Distillers, Limited 100% Ontario, Canada
Chambord Liqueur Royale de France 100% France
Early Times Distillers Company 100% Delaware
Fetzer Vineyards 100% California
Fratelli Bolla International Wines, Inc. 100% Kentucky
Heddon's Gate Investments, Inc. 100% Delaware
Jack Daniel's Properties, Inc. 100% Delaware
Sonoma-Cutrer Vineyards, Inc. 100% California
Southern Comfort Properties, Inc. 100% California
Washington Investments, L.L.C. 100% Kentucky
Woodford Reserve Stables, L.L.C. 100% Kentucky
Longnorth Limited 100% (1)(2) Ireland
Clintock Limited 100% (1)(3) Ireland
Voldgade Holdings Ireland Limited 100% (2) Ireland
Pitts Bay Trading Limited 75% (3) Bermuda
BFC Tequila Limited 100% (3)(16) Ireland
Jack Daniel Distillery,
Lem Motlow, Prop., Inc. 100% (4) Tennessee
Brown-Forman Korea Ltd. 100% (5) Korea
Fratelli Bolla, S.p.A. 100% (6) Italy
Brown-Forman Worldwide (Shanghai) Co., Ltd. 100% (7) China
Brown-Forman Czech & Slovak
Republics, s.r.o. 100% (8) Czech Republic
Brown-Forman Polska Sp. z o.o. 100% (8) Poland
Brown-Forman Beverages Worldwide,
Comercio de Bebidas Ltda. 100% (9) Brazil
Brown-Forman Holding Mexico S.A. de C.V. 100% (9) Mexico
Brown-Forman Worldwide, L.L.C. 100% (9) Delaware
Amercain Investments C.V. 100% (10) Netherlands
Finlandia Vodka Worldwide Ltd. 100% (11) Finland
Distillerie Tuoni e Canepa Srl 100% (12) Italy
Brown-Forman Beverages Europe, Ltd. 100% (13) United Kingdom
Voldgade Investment Holdings A/S 100% (13) Denmark
Brown-Forman Beverages Edinburgh 100% (14) Scotland
Brown-Forman Tequila Mexico,
S. de R.L. de C.V. 100% (15) Mexico
Cosesa-BF S.A., de C.V. 100% (15) Mexico
Valle de Amatitan, S.A. de C.V. 100% (15) Mexico
The companies listed above constitute all active subsidiaries in which
Brown-Forman Corporation owns, either directly or indirectly, the majority of
the voting securities. No other active affiliated companies are controlled by
Brown-Forman Corporation.
(1) Includes qualifying shares assigned to Brown-Forman Corporation.
(2) Owned by Amercain Investments C.V.
(3) Owned by Longnorth Limited.
(4) Owned by Jack Daniel's Properties, Inc.
(5) Owned by B-F Korea, L.L.C.
(6) Owned by Fratelli Bolla International Wines, Inc.
(7) Owned by Brown-Forman Beverages North Asia, L.L.C.
(8) Owned by Brown-Forman Beverages Edinburgh.
(9) Owned 99% by Brown-Forman Corporation and 1% by Early Times Distillers
Company.
(10) Owned 95% by Brown-Forman Corporation and 5% by Heddon's Gate
Investments, Inc.
(11) Owned by Brown-Forman Beverages Europe, Ltd.
(12) Owned 55% by Fratelli Bolla International Wines, Inc. and 45% by
Voldgade Investment Holdings A/S.
(13) Owned by Voldgade Holdings Ireland Limited.
(14) Owned 81.8% by Voldgade Investment Holdings A/S and 18.2% by Brown-Forman
Beverages, Europe, Ltd.
(15) Owned 99% by Brown-Forman Holding Mexico S.A. de C.V. and 1% by
Early Times Distillers Company.
(16) Ownership increased from 67% to 100% in May 2007.
Exhibit 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-3 (No. 333-140317, 33-12413, and 33-52551) and Form S-8
(No. 333-08311, 333-38649, 333-74567, 333-77903, 333-88925, 333-89294,
333-126988, and 333-117630) of Brown-Forman Corporation of our report dated June
28, 2007 relating to the financial statements, management's assessment of the
effectiveness of internal control over financial reporting and the effectiveness
of internal control over financial reporting, which appears in the Annual Report
to Stockholders, which is incorporated in this Annual Report on Form 10-K. We
also consent to the incorporation by reference of our report dated June 28, 2007
relating to the financial statement schedule, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Louisville, Kentucky
June 28, 2007
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 Annual Report on Form 10-K of Brown-Forman Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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: June 28, 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 Annual Report on Form 10-K of Brown-Forman Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report.
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) 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: June 28, 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 Annual Report of Brown-Forman Corporation ("the Company")
on Form 10-K for the period ended April 30, 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.
Dated: June 28, 2007
/s/ Paul C. Varga
Paul C. Varga
President and
Chief Executive Officer
/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 Report.