-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gdh/FSXSSpmk8G4GrOIm/tMVXGqWuaRGZB14FQdoJzzREOfubH8uIQEf938IXmZK YXjwcEew8rZUSx3u+0JKjg== 0000014693-05-000031.txt : 20050301 0000014693-05-000031.hdr.sgml : 20050301 20050301094433 ACCESSION NUMBER: 0000014693-05-000031 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20050131 FILED AS OF DATE: 20050301 DATE AS OF CHANGE: 20050301 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BROWN FORMAN CORP CENTRAL INDEX KEY: 0000014693 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 610143150 STATE OF INCORPORATION: DE FISCAL YEAR END: 0430 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 002-26821 FILM NUMBER: 05648156 BUSINESS ADDRESS: STREET 1: 850 DIXIE HWY CITY: LOUISVILLE STATE: KY ZIP: 40210 BUSINESS PHONE: 5025851100 MAIL ADDRESS: STREET 1: P O BOX 1080 CITY: LOUISVILLE STATE: KY ZIP: 40201 FORMER COMPANY: FORMER CONFORMED NAME: BROWN FORMAN INC DATE OF NAME CHANGE: 19870816 FORMER COMPANY: FORMER CONFORMED NAME: BROWN FORMAN DISTILLERS CORP DATE OF NAME CHANGE: 19840807 FORMER COMPANY: FORMER CONFORMED NAME: BROWN FORMAN DISTILLERY CO DATE OF NAME CHANGE: 19670730 10-Q 1 form10q0105.txt United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JANUARY 31, 2005 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________ Commission File No. 002-26821 BROWN-FORMAN CORPORATION (Exact name of Registrant as specified in its Charter) Delaware 61-0143150 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 850 Dixie Highway Louisville, Kentucky 40210 (Address of principal executive offices) (Zip Code) (502) 585-1100 (Registrant's telephone number, including area code) N/A (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: February 28, 2005 Class A Common Stock ($.15 par value, voting) 56,782,037 Class B Common Stock ($.15 par value, nonvoting) 65,022,149 BROWN-FORMAN CORPORATION Index to Quarterly Report Form 10-Q PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Page Condensed Consolidated Statement of Income Three months ended January 31, 2004 and 2005 3 Nine months ended January 31, 2004 and 2005 3 Condensed Consolidated Balance Sheet April 30, 2004 and January 31, 2005 4 Condensed Consolidated Statement of Cash Flows Nine months ended January 31, 2004 and 2005 5 Notes to the Condensed Consolidated Financial Statements 6 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk 19 Item 4. Controls and Procedures 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings 20 - 21 Item 6. Exhibits 21 Signatures 22 2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED STATEMENT OF INCOME (Unaudited) (Dollars in millions, except per share amounts) Three Months Ended Nine Months Ended January 31, January 31, 2004 2005 2004 2005 ------- ------- -------- -------- Net sales $ 695.7 $ 758.3 $1,951.8 $2,116.0 Excise taxes 103.1 127.8 272.9 319.4 Cost of sales 249.0 255.2 699.8 722.8 ------- ------- -------- -------- Gross profit 343.6 375.3 979.1 1,073.8 Advertising expenses 87.5 96.9 260.0 278.9 Selling, general, and administrative expenses 131.7 146.2 392.5 418.9 Goodwill impairment -- 37.0 -- 37.0 Other expense (income), net (2.5) 0.5 8.8 1.2 ------- ------- -------- -------- Operating income 126.9 94.7 317.8 337.8 Gain on sale of investment in affiliate -- 73.5 -- 72.3 Interest income 0.4 3.1 1.3 3.8 Interest expense 5.3 5.1 16.3 15.4 ------- ------- -------- -------- Income before income taxes 122.0 166.2 302.8 398.5 Taxes on income 41.5 70.1 102.9 147.9 ------- ------- -------- -------- Net income $ 80.5 $ 96.1 $ 199.9 $ 250.6 ======= ======= ======== ======== Earnings per share - Basic $ 0.66 $ 0.79 $ 1.65 $ 2.06 - Diluted $ 0.66 $ 0.78 $ 1.64 $ 2.05 Shares (in thousands) used in the calculation of earnings per share - Basic 121,385 121,755 121,305 121,723 - Diluted 122,114 122,482 121,886 122,432 Cash dividends per common share - Declared $0.4250 $0.4900 $ 0.8000 $ 0.9150 - Paid $0.2125 $0.2450 $ 0.5875 $ 0.6700 See notes to the condensed consolidated financial statements. 3 BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED BALANCE SHEET (Dollars in millions) April 30, January 31, 2004 2005 (Unaudited) -------- -------- Assets - ------ Cash and cash equivalents $ 67.7 $ 289.5 Accounts receivable, net 348.6 357.1 Inventories: Barreled whiskey 217.9 237.7 Finished goods 185.4 196.5 Work in process 111.0 102.2 Raw materials and supplies 42.9 37.3 -------- -------- Total inventories 557.2 573.7 Current portion of deferred income taxes 66.9 66.9 Other current assets 43.1 23.7 -------- -------- Total current assets 1,083.5 1,310.9 Property, plant and equipment, net 515.2 500.5 Prepaid pension cost 118.2 129.9 Investment in affiliates 44.6 18.2 Trademarks and brand names 246.6 334.4 Goodwill 314.6 282.8 Other assets 53.3 45.5 -------- -------- Total assets $2,376.0 $2,622.2 ======== ======== Liabilities - ----------- Accounts payable and accrued expenses $ 271.5 $ 314.3 Dividends payable -- 29.8 Short-term borrowings 49.5 32.5 Accrued taxes on income 48.0 112.6 -------- -------- Total current liabilities 369.0 489.2 Long-term debt 630.0 600.8 Deferred income taxes 122.2 113.2 Accrued pension and other postretirement benefits 136.7 143.6 Other liabilities 33.0 34.2 -------- -------- Total liabilities 1,290.9 1,381.0 Commitments and contingencies Stockholders' Equity - -------------------- Common stock: Class A, voting (57,000,000 shares authorized; 56,841,000 shares issued) 8.5 8.5 Class B, nonvoting (100,000,000 shares authorized; 69,188,000 shares issued) 10.4 10.4 Retained earnings 1,236.2 1,376.1 Accumulated other comprehensive loss (14.3) (3.4) Treasury stock, at cost (4,441,000 and 4,266,000 shares at April 30 and January 31, respectively) (155.7) (150.4) -------- -------- Total stockholders' equity 1,085.1 1,241.2 -------- -------- Total liabilities and stockholders' equity $2,376.0 $2,622.2 ======== ======== Note: The balance sheet at April 30, 2004, has been taken from the audited financial statements at that date, and condensed. See notes to the condensed consolidated financial statements. 4 BROWN-FORMAN CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited) (In millions; amounts in parentheses are reductions of cash) Nine Months Ended January 31, 2004 2005 ------- ------- Cash flows from operating activities: Net income $ 199.9 $ 250.6 Adjustments to reconcile net income to net cash provided by (used for) operations: Gain on sale of investment in affiliate -- (72.3) Goodwill impairment -- 37.0 Depreciation 41.7 43.8 Deferred income taxes (10.2) (34.2) Changes in assets and liabilities: Accounts receivable 11.1 (8.5) Inventories (5.7) (16.5) Other current assets (8.1) 19.4 Accounts payable and accrued expenses (10.9) 43.2 Accrued taxes on income 19.1 64.6 Noncurrent assets and liabilities 11.3 16.2 ------- ------- Cash provided by operating activities 248.2 343.3 Cash flows from investing activities: Proceeds from sale of investment in affiliate, net of disposal costs -- 92.7 Acquisition of minority interest in subsidiary -- (63.6) Additions to property, plant, and equipment (42.8) (32.2) Proceeds from sale of property, plant, and equipment -- 8.7 Computer software expenditures (2.8) (1.6) Trademark and patent expenditures (1.1) (0.5) ------- ------- Cash provided by (used for) investing activities (46.7) 3.5 Cash flows from financing activities: Net repayment of short-term borrowings (92.6) (47.0) Reduction of long-term debt (7.4) -- Proceeds from exercise of stock options 7.9 6.5 Acquisition of treasury stock -- (2.9) Dividends paid (71.3) (81.6) ------- ------- Cash used for financing activities (163.4) (125.0) ------- ------- Net increase in cash and cash equivalents 38.1 221.8 Cash and cash equivalents, beginning of period 72.0 67.7 ------- ------- Cash and cash equivalents, end of period $ 110.1 $ 289.5 ======= ======= See notes to the condensed consolidated financial statements. 5 BROWN-FORMAN CORPORATION NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) In these notes, "we," "us," and "our" refer to Brown-Forman Corporation. 1. Condensed Consolidated Financial Statements We prepared these unaudited condensed consolidated financial statements using our customary accounting practices as set out in our 2004 annual report on Form 10-K (the "2004 Annual Report"). We made all of the adjustments (which include only normal, recurring adjustments) needed for a fair statement of this data. We condensed or omitted some of the information found in financial statements prepared according to generally accepted accounting principles ("GAAP"). You should read these financial statements together with the 2004 Annual Report, which does conform to GAAP. 2. Inventories We use the last-in, first-out ("LIFO") method to determine the cost of most of our inventories. If the LIFO method had not been used, inventories at current cost would have been $145.6 million higher than reported as of April 30, 2004, and $148.9 million higher than reported as of January 31, 2005. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year. 3. Taxes on Income Our consolidated effective income tax rate may differ from current statutory rates due to the recognition of amounts for events or transactions that do not have income tax consequences. We use the estimated annual effective income tax rate in determining our interim results. The company's effective income tax rate increased during the quarter ended January 31, 2005 due primarily to the nondeductibility for income tax purposes of a $37.0 million goodwill impairment charge recorded during the quarter. 4. Earnings Per Share Basic earnings per share is calculated as net income divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated in the same manner, except that the denominator also includes additional common shares that would have been issued if outstanding stock options had been exercised during the period. The dilutive effect of outstanding stock options is determined by application of the treasury stock method. Stock options for approximately 1.1 million common shares have been excluded from the calculation of diluted earnings per share because the exercise price of the options was greater than the average market price of the shares. 6 The following table presents information concerning basic and diluted earnings per share: Three Months Ended Nine Months Ended January 31, January 31, 2004 2005 2004 2005 ------ ------ ------ ------ Basic and diluted net income (in millions) $ 80.5 $ 96.1 $199.9 $250.6 Share data (in thousands): Basic average common shares outstanding 121,385 121,755 121,305 121,723 Effect of dilutive stock options 729 727 581 709 ------- ------- ------- ------- Diluted average common shares outstanding 122,114 122,482 121,886 122,432 Basic earnings per share $0.66 $0.79 $1.65 $2.06 Diluted earnings per share $0.66 $0.78 $1.64 $2.05 5. Stock Options We apply Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations in accounting for stock options. Accordingly, no stock-based employee compensation cost is reflected in net income, as no options granted under those plans had an exercise price below the market value of the underlying stock on the grant date. The following table illustrates the effect on net income and earnings per share if we had instead recognized compensation expense for stock options based on their fair value at their grant dates consistent with the methodology prescribed under Financial Accounting Standards Board ("FASB") Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"). (Dollars in millions, except per share amounts) Three Months Ended Nine Months Ended January 31, January 31, 2004 2005 2004 2005 ------ ------ ------ ------ Net income, as reported $ 80.5 $ 96.1 $199.9 $250.6 Stock-based employee compensation expense determined under fair value based method, net of tax (1.0) (1.1) (2.8) (3.0) ------ ------ ------ ------ Pro forma net income $ 79.5 $ 95.0 $197.1 $247.6 ====== ====== ====== ====== Earnings per share - pro forma: Basic $0.65 $0.78 $1.63 $2.03 Diluted $0.65 $0.78 $1.62 $2.02 Earnings per share - as reported: Basic $0.66 $0.79 $1.65 $2.06 Diluted $0.66 $0.78 $1.64 $2.05 7 The plan requires that we purchase shares to satisfy stock option requirements, thereby avoiding future dilution of earnings that would occur from issuing additional shares. We acquire treasury shares from time to time in anticipation of these requirements. We intend to hold enough treasury stock so that the number of diluted shares is never more than the original number of shares outstanding at inception of the stock option plan (as adjusted for any share issuances unrelated to the plan). The extent to which the number of diluted shares exceeds the number of basic shares is determined by how much our stock price has appreciated since options were granted, irrespective of how many treasury shares we have acquired. In December 2004, the FASB issued Statement No. 123(R), "Share-Based Payment" ("FAS 123(R)"). FAS 123(R) revises FAS 123 and requires companies to expense the fair value of stock options and other forms of stock-based compensation. The company intends to adopt FAS 123(R) during the fourth quarter of fiscal 2005 by retroactively adjusting its financial statements for all periods since fiscal 1997, when it first began granting stock options. The adoption of FAS 123(R) is expected to reduce fiscal 2005 earnings by approximately $0.033 per share. 6. Environmental We face environmental claims resulting from the cleanup of several manufacturing or waste disposal sites in the United States. We accrue for losses associated with environmental cleanup obligations when such losses are probable and reasonably estimable. At some sites, there are other potentially responsible parties who are expected to bear part of the costs, in which cases our accrual is based on our estimate of our share of the total costs. A portion of the cleanup costs with respect to certain sites is expected to be paid by insurance. The estimated recovery of cleanup costs from insurers is recorded as an asset when receipt is deemed probable. We do not believe that any additional environmental cleanup costs we incur will have a material adverse effect on our consolidated financial position, results of operations, or cash flows. 7. Contingencies We operate in a litigious environment, and we get sued in the normal course of business. Sometimes plaintiffs seek substantial damages. Significant judgment is required in predicting the outcome of these suits and claims, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable, and adjust the accrual as appropriate to reflect changes in facts and circumstances. Brown-Forman and many other manufacturers of spirits, wine and beer are defendants in a series of similar class action lawsuits seeking damages and injunctive relief over alleged marketing of beverage alcohol to underage consumers. The suits allege that the defendants have engaged in deceptive marketing practices and schemes targeted at underage consumers, negligently marketed their products to the underage, and fraudulently concealed their alleged misconduct. Brown-Forman denies that we intentionally market beverage alcohol products to minors and denies that our advertising is illegal. We will vigorously defend this position and it is not possible at this time to estimate a possible loss or range of loss, if any, in these lawsuits. However, an adverse result in these lawsuits or similar class action lawsuits could have a material adverse effect on our business. 8 8. Pension and Other Postretirement Benefits The following table shows the components of the pension and other postretirement benefit expense recognized during the periods covered by this report: (Dollars in millions) Three Months Ended Nine Months Ended January 31, January 31, 2004 2005 2004 2005 ----- ----- ----- ----- Pension Benefits: Service cost $ 3.6 $ 4.2 $10.7 $12.5 Interest cost 7.1 7.5 21.4 22.5 Expected return on plan assets (11.0) (10.8) (33.0) (32.4) Amortization of: Unrecognized prior service cost 0.3 0.2 1.0 0.7 Unrecognized net loss 0.2 1.1 0.6 3.3 Unrecognized transition asset (0.4) -- (1.1) -- ----- ----- ----- ----- Net expense (income) $(0.2) $ 2.2 $(0.4) $ 6.6 ===== ===== ===== ===== Other Postretirement Benefits: Service cost $ 0.5 $ 0.4 $ 1.5 $ 1.3 Interest cost 1.2 1.0 3.7 3.0 Amortization of: Unrecognized prior service cost 0.1 0.1 0.2 0.2 Unrecognized net loss 0.3 -- 0.8 -- ----- ----- ----- ----- Net expense $ 2.1 $ 1.5 $ 6.2 $ 4.5 ===== ===== ===== ===== In January 2005, we made a discretionary contribution of $11 million to our pension plan assets. Including that amount, we expect to make total contributions of $12 million for our pension plans during fiscal 2005. The Medicare Prescription Drug, Improvement and Modernization Act of 2003 ("the Act") was enacted in December 2003. The Act provides a federal subsidy to plan sponsors for certain qualifying prescription drug benefits covered under the sponsor's postretirement medical benefit plans. We estimate that the subsidy has reduced our postretirement medical benefit obligation by $16 million. The postretirement medical expense recognized during the three months ended January 31, 2005 includes a subsidy-related reduction of $0.6 million ($0.1 million of service cost, $0.3 million of interest cost, and $0.2 million of amortization of unrecognized net loss). The postretirement medical expense recognized during the nine months ended January 31, 2005 includes a subsidy-related reduction of $1.8 million ($0.4 million of service cost, $0.8 million of interest cost, and $0.6 million of amortization of unrecognized net loss). 9 9. Business Segment Information (Dollars in millions) Three Months Ended Nine Months Ended January 31, January 31, 2004 2005 2004 2005 ------ ------ -------- -------- Net sales: Beverages $529.7 $598.3 $1,496.3 $1,692.3 Consumer Durables 166.0 160.0 455.5 423.7 ------ ------ -------- -------- Consolidated net sales $695.7 $758.3 $1,951.8 $2,116.0 ====== ====== ======== ======== Operating income (loss): Beverages $117.4 $118.6 $ 301.3 $ 363.2 Consumer Durables 9.5 (23.9) 16.5 (25.4) ------ ------ -------- -------- 126.9 94.7 317.8 337.8 Gain on sale of investment in affiliate -- 73.5 -- 72.3 Interest expense, net 4.9 2.0 15.0 11.6 ------ ------ -------- -------- Income before income taxes $122.0 $166.2 $ 302.8 $ 398.5 ====== ====== ======== ======== Consumer Beverages Durables Total --------- -------- ------ Goodwill: Balance as of April 30, 2004 $184.3 $130.3 $314.6 Impairment charge (Note 13) -- (37.0) (37.0) Foreign currency translation adjustment 5.2 -- 5.2 ------ ------ ------ Balance as of January 31, 2005 $189.5 $ 93.3 $282.8 ====== ====== ====== 10. Comprehensive Income Comprehensive income is a broad measure of the effects of all transactions and events (other than investments by or distributions to shareholders) that are recognized in stockholders' equity, regardless of whether those transactions and events are included in net income. The following table adjusts the company's net income for the other items included in comprehensive income: (Dollars in millions) Three Months Ended Nine Months Ended January 31, January 31, 2004 2005 2004 2005 ------ ------ ------ ------ Net income $ 80.5 $ 96.1 $199.9 $250.6 Other comprehensive income (loss): Net gain (loss) on cash flow hedges 0.2 0.1 0.3 (2.9) Net gain (loss) on securities 0.1 0.1 0.3 (0.1) Foreign currency translation adjustment 12.9 1.1 20.6 13.9 ------ ------ ------ ------ Other comprehensive income 13.2 1.3 21.2 10.9 ------ ------ ------ ------ Comprehensive income $ 93.7 $ 97.4 $221.1 $261.5 ====== ====== ====== ====== 10 Accumulated other comprehensive loss (income) consisted of the following: (Dollars in millions) April 30, January 31, 2004 2005 ------ ------ Pension liability adjustment $ 31.8 $ 31.8 Cumulative translation adjustment (15.5) (29.4) Unrealized (gain) loss on cash flow hedge contracts (1.6) 1.3 Unrealized gain on securities (0.4) (0.3) ------ ------ $ 14.3 $ 3.4 ====== ====== 11. Acquisition of Minority Interest in Subsidiary In December 2004, we acquired the remaining capital stock of Finlandia Vodka Worldwide Ltd. ("FVW") from the Altia Corporation of Finland ("Altia") for $63.6 million. The value of FVW consists primarily of the Finlandia brand name, which has an indefinite useful life. As a result of this transaction, we have preliminarily allocated $83.9 million to the Finlandia brand name, which is partially offset by a deferred income tax liability of $25.2 million, and $4.9 million to various other net assets. As previously disclosed, we acquired 45% of FVW in 2000 and an additional 35% in 2002. The 2002 acquisition agreement granted Altia an option to require Brown-Forman to buy its remaining interest in FVW during a two-year window beginning December 31, 2004. This transaction reflects Altia's exercise of that option. 12. Sale of Investment in Affiliate In January 2005, we consummated the sale of our equity stake in Glenmorangie plc for proceeds of $92.7 million (net of disposal costs). As a result of this transaction, we recognized a pre-tax gain of $73.5 million during the three months ended January 31, 2005. Under pre-existing contracts, Brown-Forman continues to have distribution and marketing rights for Glenmorangie brands in the U.S. and other select markets and marketing and representation rights for the brands in several European markets. 13. Goodwill Impairment The accompanying financial statements reflect a charge of $37.0 million during the quarter ended January 31, 2005 for impairment of goodwill associated with the company's Lenox retail business. The impairment charge reflects lowered expectations for the future prospects of the Lenox retail outlet business in light of changing consumer buying patterns. The $37.0 million represents the excess of the book value of the goodwill over the fair value, as estimated using discounted projected future cash flows based on the revised long-term outlook for the business. Due to the nondeductibility of the charge for income tax purposes, no income tax benefit related to this amount has been recorded. 14. Reclassifications Certain prior year amounts have been reclassified to conform with the current year presentation. 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations You should read the following discussion and analysis along with our 2004 Annual Report. Note that the results of operations for the nine months ended January 31, 2005 do not necessarily indicate what our operating results for the full fiscal year will be. In this Item, "we," "us," "our," and "the company" refer to Brown- Forman Corporation. Important Note on Forward-Looking Statements: This report contains statements, estimates, or projections that constitute "forward-looking statements" as defined under U.S. federal securities laws. Generally, the words "expect," "believe," "intend," "estimate," "will," "anticipate," and "project," and similar expressions identify a forward-looking statement, which speaks only as of the date the statement is made. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. We believe that the expectations and assumptions with respect to our forward-looking statements are reasonable. But by their nature, forward-looking statements involve known and unknown risks, uncertainties and other factors that in some cases are out of our control. These factors could cause our actual results to differ materially from Brown-Forman's historical experience or our present expectations or projections. Here is a non-exclusive list of such risks and uncertainties: - changes in general economic conditions, particularly in the United States where we earn the majority of our profits; - a strengthening U.S. dollar against foreign currencies, especially the British Pound; - reduced bar, restaurant, hotel and travel business in wake of other terrorist attacks, such as occurred on 9/11; - developments in the class action lawsuits filed against Brown-Forman and other spirits, beer and wine manufacturers alleging that our advertising causes illegal consumption of alcohol by those under the legal drinking age, or other attempts to limit alcohol marketing, through either litigation or regulation; - a dramatic change in consumer preferences, social trends or cultural trends that results in the reduced consumption of our premium spirits brands; - tax increases, whether at the federal or state level; - increases in the price of grain and grapes; - continued depressed retail prices and margins in our wine business because of our excess wine inventories, existing grape contract obligations, and a world-wide oversupply of grapes; and - the effects on our Consumer Durables business of the general economy, department store business, response rates in our direct marketing business, and profitability of mall outlet operations. 12 Results of Operations: Third Quarter Fiscal 2005 Compared to Third Quarter Fiscal 2004 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Three Months Ended January 31, 2004 2005 Change ------ ------ ------ Net Sales: Beverages $529.7 $598.3 13% Consumer Durables 166.0 160.0 (4%) ------ ------ Total $695.7 $758.3 9% Gross Profit: Beverages $264.9 $301.3 14% Consumer Durables 78.7 74.0 (6%) ------ ------ Total $343.6 $375.3 9% Advertising Expenses: Beverages $ 63.6 $ 76.3 20% Consumer Durables 23.9 20.6 (14%) ------ ------ Total $ 87.5 $ 96.9 11% SG&A Expenses: Beverages $ 88.2 $104.8 19% Consumer Durables 43.5 41.4 (5%) ------ ------ Total $131.7 $146.2 11% Goodwill Impairment: Consumer Durables -- $ 37.0 Other Expense (Income): Beverages $ (4.3) $ 1.6 Consumer Durables 1.8 (1.1) ------ ------ Total $ (2.5) $ 0.5 Operating Income: Beverages $117.4 $118.6 1% Consumer Durables 9.5 (23.9) N/M ------ ------ Total $126.9 $ 94.7 (25%) Gain on Sale of Investment in Affiliate -- $ 73.5 Net Income $ 80.5 $ 96.1 19% Earnings per Share - Basic $ 0.66 $ 0.79 19% Earnings per Share - Diluted $ 0.66 $ 0.78 19% Effective Tax Rate 34.0% 42.2% 13 Diluted earnings per share for the third quarter ended January 31, 2005 were $0.78, up 19% over the same period last year. Results for the quarter include a gain of approximately $0.39 per share from the sale of the company's investment in Glenmorangie plc and a $0.32 per share charge for asset impairments associated with Lenox, Inc.'s retail business ($0.30 per share) and a minority interest in a small Mexican tequila company ($0.02 per share). Excluding these items, earnings growth in the quarter was driven by solid growth for Jack Daniel's Tennessee Whiskey, Southern Comfort, and Finlandia Vodka, and benefits from stronger foreign currencies. These gains were partially offset by higher advertising and SG&A expenses in the company's Beverages segment. Excluding the Glenmorangie gain, the impairment charges, and favorable foreign exchange, the company's quarterly earnings per share grew 8%, as follows: Reported Diluted EPS growth 19% Adjustments: Glenmorangie gain (59%) Asset impairments 49% Foreign currency benefit (6%) All other, net 5%* ----- Adjusted Diluted EPS growth 8% ===== *Includes net earnings impact associated with incremental pension and incentive compensation expense; partially offset by restructuring expenses in the prior year. We believe that disclosing the adjusted diluted EPS growth of 8% is useful because it is a more accurate reflection of the ongoing operating performance of the company. Beverages In the third quarter, revenues and gross profit for the Beverages segment were up 13% and 14%, respectively. This growth was driven by stronger foreign currencies and continued volume growth and price increases for the company's global spirits brands. Advertising expenses were up 20%, reflecting both the company's desire to invest aggressively in the current robust global spirits environment and the impact of a weaker U.S. dollar on the company's costs. SG&A expenses increased 19% in the quarter, reflecting higher compensation and pension expense and the negative impact of foreign exchange. Global depletions for Jack Daniel's Tennessee Whiskey continued to grow impressively in the quarter, with high single-digit gains in the United States and double-digit increases in international markets. (Depletions are shipments from wholesale distributors to retailers, and are commonly used in the wine and spirits industry as an approximation of consumer demand.) Southern Comfort continued its strong performance in the quarter as global depletions were up in the high single-digits. Global depletions and shipments also grew at double-digit rates for Finlandia Vodka, driven by continued strength in Eastern Europe and the return to growth in the U.S. which is partially attributable to the introduction of a new flavor. 14 Consumer Durables Net sales for Consumer Durables declined 4% in the quarter, as the benefit from liquidation sales related to the previously-announced closing of Dansk retail outlets was insufficient to fully offset continued softness in the direct-to-consumer channel. Although segment gross profit declined $4.7 million during the quarter, operating income (excluding the impairment charge) improved $3.6 million due to reductions in operating expenses, the absence of restructuring charges incurred in the prior year, improved profits at Hartmann, and a gain on the sale of a closed distribution facility. The $37.0 million goodwill impairment charge recorded in the quarter is a result of the continued disappointing performance of Lenox's retail stores through this holiday season and management's conclusion that the retail chain should not be operated in its current configuration in the future. As a result, management has revised the long-term outlook for its retail business. On February 22, 2005, Brown-Forman announced that it is exploring strategic alternatives for Lenox, Inc., including a possible sale. Goldman Sachs & Co. has been retained to assist in these efforts, and Cavendish Corporate Finance, Ltd. in the U.K. will provide advice regarding Lenox's British operations. 15 Results of Operations: Nine Months Fiscal 2005 Compared to Nine Months Fiscal 2004 Here is a summary of our operating performance (expressed in millions, except percentage and per share amounts): Nine Months Ended January 31, 2004 2005 Change -------- -------- ------ Net Sales: Beverages $1,496.3 $1,692.3 13% Consumer Durables 455.5 423.7 (7%) -------- -------- Total $1,951.8 $2,116.0 8% Gross Profit: Beverages $ 765.2 $ 878.6 15% Consumer Durables 213.9 195.2 (9%) -------- -------- Total $ 979.1 $1,073.8 10% Advertising Expenses: Beverages $ 192.4 $ 218.4 14% Consumer Durables 67.6 60.5 (11%) -------- -------- Total $ 260.0 $ 278.9 7% SG&A Expenses: Beverages $ 267.4 $ 297.8 11% Consumer Durables 125.1 121.1 (3%) -------- -------- Total $ 392.5 $ 418.9 7% Goodwill Impairment: Consumer Durables -- $ 37.0 Other Expense (Income): Beverages $ 4.1 $ (0.8) Consumer Durables 4.7 2.0 -------- -------- Total $ 8.8 $ 1.2 Operating Income: Beverages $ 301.3 $ 363.2 21% Consumer Durables 16.5 (25.4) N/M -------- -------- Total $ 317.8 $ 337.8 6% Gain on Sale of Investment in Affiliate -- $ 72.3 Net Income $ 199.9 $ 250.6 25% Earnings per Share - Basic $ 1.65 $ 2.06 25% Earnings per Share - Diluted $ 1.64 $ 2.05 25% Effective Tax Rate 34.0% 37.1% 16 For the first nine months of the fiscal year, diluted earnings per share were $2.05, up 25% over the same period last year. Year-to-date growth was driven in part by the Glenmorangie gain, favorable foreign exchange trends, strong earnings growth for our global spirits brands, and the absence of litigation expenses incurred in the prior year. These increases were partially offset by the asset impairment charges, higher compensation and pension expense, and lower operating profits from Consumer Durables. Adjusting for the Glenmorangie gain, the asset impairment charges, favorable foreign exchange, and the prior year litigation expenses, diluted earnings per share for the nine months grew 8%, as follows: Reported Diluted EPS growth 25% Adjustments: Glenmorangie gain (24%) Asset impairments 20% Foreign currency benefit (9%) Absence of prior year litigation expense (4%) ----- Adjusted Diluted EPS growth 8% ===== We believe that disclosing the adjusted diluted EPS growth of 8% is useful because it is a more accurate reflection of the ongoing operating performance of the company. Beverages For the first nine months, Beverages revenue and gross profit increased by 13% and 15%, respectively, compared to the same period last year. Growth was driven primarily by accelerating consumer demand and margin improvement (pricing and foreign exchange related) for Jack Daniel's, Southern Comfort, and Finlandia, and the impact of the company's new low-carbohydrate wine brands. These gains were partially offset by top-line declines for Fetzer Premium Varietals and Jack Daniel's Country Cocktails. Beverages advertising investments increased 14% through January, reflecting higher brand-building efforts behind several brands, most notably Jack Daniel's, Southern Comfort, and Finlandia, the impact of a weaker U.S. dollar, and promotional investments supporting the launch of the new low-carbohydrate wines. SG&A expenses increased by 11%, due largely to higher employee compensation and pension expense and the negative impact of foreign exchange. In addition to solid top-line growth, the absence of litigation and restructuring expenses boosted the segment's year-to-date operating income growth to 21%. 17 Consumer Durables Revenues and gross profit declined 7% and 9%, respectively, during the period. The segment's disappointing results for the first nine months reflect the overall softness experienced in the U.S. for tabletop and giftware products. Profit gains from "kate spade" co-branded patterns and Hartmann luggage combined with aggressive reductions in advertising (down 11%) and other operating expenses were insufficient to offset the overall decline in consumer demand across all three channels of distribution - wholesale, retail, and direct-to-consumer. As a result, the segment's operating income through January of $11.6 million (excluding the impairment charge) lagged prior year performance by $4.9 million. As discussed above, the $37.0 million goodwill impairment charge reflects the continued disappointing performance of Lenox's retail stores through this holiday season and management's conclusion that the retail chain should not be operated in its current configuration in the future. As a result, management has revised the long-term outlook for its retail business. Liquidity and Financial Condition Cash and cash equivalents increased by $221.8 million during the nine months ended January 31, 2005, compared to an increase of $38.1 million during the same period last year. Cash provided by operations grew by $95.1 million, primarily reflecting a $57.0 million increase in operating income, excluding a $37.0 million non-cash goodwill impairment charge, and a more favorable working capital position. Cash provided by investments increased by $50.2 million, due largely to the receipt of $92.7 million on the sale of our equity stake in Glenmorangie plc and a $19.3 million reduction in net fixed asset additions, partially offset by $63.6 million used to acquire the outstanding minority interest in Finlandia Vodka Worldwide Ltd. Cash used for financing activities declined by $38.4 million, mainly reflecting lower net debt repayments. Outlook Following strong growth in earnings through January, only moderate growth is expected for the remainder of the fiscal year. Continued solid consumer demand for several of the company's beverage brands is projected to be partially offset by increases in advertising investments and reductions in global trade inventory levels related to both supply chain efficiency initiatives and potential distribution changes in continental Europe. Additionally, the company intends to adopt FAS 123(R) related to the expensing of stock options during the fourth quarter of this fiscal year which will reduce full year diluted earnings by approximately $0.033 per share. We are increasing our full year outlook to a range of $2.47 to $2.51 per share. Excluding the Glenmorangie gain and the asset impairment charges, diluted earnings per share are expected to be in a range of $2.41 to $2.45, reflecting growth of 16-18% for the full fiscal year. On October 22, 2004, the American Jobs Creation Act ("the Act") was signed into law. The Act contains provisions that might affect Brown-Forman's future effective tax rate, including a special one-time 85% dividends received deduction for certain repatriated foreign earnings. The company may make this one-time election with respect to funds repatriated during either fiscal 2005 or 2006. The deduction is subject to a number of limitations and requirements, including adoption of a specific domestic reinvestment plan for the repatriated funds. At this time, we do not plan to repatriate any dividends during fiscal year 2005, and are investigating whether to do so in fiscal 2006. We do not expect to complete this evaluation until fiscal 2006. The Act also creates a deduction for income from qualified domestic production activities which will be phased in from 2005 through 2010, effective for our fiscal years 2006 through 2011. In return, the Act also provides for a two-year phase-out of the existing extra-territorial income exclusion ("the ETI exclusion") for foreign sales that was viewed to be inconsistent with international trade protocols by the European Union. The new deduction for domestic production activities is subject to certain limitations and interpretations and, as such, we are not yet in a position to determine with reasonable certainty the potential impact on the effective tax rate of future years. However, we anticipate the combined net effect of the phase-out of the ETI exclusion and the phase-in of the new deduction for domestic production activities to result in an immaterial increase in the effective tax rate for fiscal years 2005 and 2006. 18 Item 3. Quantitative and Qualitative Disclosures about Market Risk We hold debt obligations, foreign currency forward and option contracts, and commodity futures contracts that are exposed to risk from changes in interest rates, foreign currency exchange rates, and commodity prices, respectively. Established procedures and internal processes govern the management of these market risks. As of January 31, 2005, we do not consider the exposure to these market risks to be material. Item 4. Controls and Procedures The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of Brown-Forman (its principal executive and principal financial officers) have evaluated the effectiveness of the company's "disclosure controls and procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this report. Based on that evaluation, the CEO and CFO concluded that the company's disclosure controls and procedures: are effective to ensure that information required to be disclosed by the company in the reports filed or submitted by it under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms; and include controls and procedures designed to ensure that information required to be disclosed by the company in such reports is accumulated and communicated to the company's management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in the company's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. 19 PART II - OTHER INFORMATION Item 1. Legal Proceedings Beverages Brown-Forman Corporation and many other manufacturers of spirits, wine and beer are defendants in a series of essentially similar class action lawsuits seeking damages and injunctive relief over alleged marketing of beverage alcohol to underage consumers. Six 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. A similar suit was filed in Madison, Wisconsin on February 23, 2005, styled Jacquelin Tomberlin v. Adolph Coors, Dane County (Wisconsin) Circuit Court, 05CV0545, 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 denies that it intentionally markets its beverage alcohol products to minors and denies that its advertising is illegal. It will defend these cases vigorously. 20 Consumer Durables On August 23 and 26, 2004, plaintiffs purporting to represent a class of consumers who purchased tableware sold in the United States from May 1, 2001, through the present filed suit against Federated Department Stores, the May Department Stores Company, Waterford Wedgwood U.S.A., and Brown-Forman's Lenox, Inc. subsidiary. In November 2004, plaintiffs filed a consolidated complaint alleging that the defendants violated Section 1 of the Sherman Act by conspiring to fix prices and to boycott sales to Bed Bath & Beyond. The cases are consolidated in the U.S. District Court for the Northern District of California, Nos. C-04-3514VRW and C-04-3622VRW. Plaintiffs seek to recover an undisclosed amount of damages, trebled in accord with the anti-trust laws, as well as costs, attorney fees and injunctive relief. Lenox, Inc. denies the allegations of the complaint and intends to defend the cases vigorously. Item 6. Exhibits 31.1 CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 31.2 CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002 32 CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (not considered to be filed) 21 SIGNATURES As required by the Securities Exchange Act of 1934, the Registrant has caused this report to be signed on its behalf by the undersigned authorized officer. BROWN-FORMAN CORPORATION (Registrant) Date: March 1, 2005 By: /s/ Phoebe A. Wood Phoebe A. Wood Executive Vice President and Chief Financial Officer (On behalf of the Registrant and as Principal Financial Officer) 22 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, Owsley Brown II, certify that: 1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 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: March 1, 2005 By: /s/ Owsley Brown II Owsley Brown II Chief Executive Officer 23 Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, Phoebe A. Wood, certify that: 1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman Corporation; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report. 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 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: March 1, 2005 By: /s/ Phoebe A. Wood Phoebe A. Wood Chief Financial Officer 24 Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Brown-Forman Corporation ("the Company") on Form 10-Q for the period ended January 31, 2005, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in the capacity as an officer of the Company, that: (1) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Date: March 1, 2005 By: /s/ Owsley Brown II Owsley Brown II Chief Executive Officer and Chairman By: /s/ Phoebe A. Wood Phoebe A. Wood Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Report. 25 -----END PRIVACY-ENHANCED MESSAGE-----