United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended OCTOBER 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 002-26821
BROWN-FORMAN CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 61-0143150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
850 Dixie Highway
Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
(502) 585-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: November 30, 2006
Class A Common Stock ($.15 par value, voting) 56,870,114
Class B Common Stock ($.15 par value, nonvoting) 66,207,451
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Statements of Operations
Three months ended October 31, 2005 and 2006 3
Six months ended October 31, 2005 and 2006
Condensed Consolidated Balance Sheets
April 30, 2006 and October 31, 2006 4
Condensed Consolidated Statements of Cash Flows
Six months ended October 31, 2005 and 2006 5
Notes to the Condensed Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 21
Item 4. Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21 - 22
Item 1A. Risk Factors 22 - 23
Item 6. Exhibits 23
Signatures 24
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Six Months Ended
October 31, October 31,
2005 2006 2005 2006
------- ------- -------- --------
Net sales $ 665.8 $ 735.3 $1,213.2 $1,375.0
Excise taxes 115.4 145.0 213.0 273.4
Cost of sales 193.0 204.9 339.8 364.9
------- ------- -------- --------
Gross profit 357.4 385.4 660.4 736.7
Advertising expenses 87.4 92.7 159.7 174.0
Selling, general, and
administrative expenses 110.2 123.8 220.5 254.7
Other expense (income), net (0.4) (13.2) (14.2) (15.3)
------- ------- -------- --------
Operating income 160.2 182.1 294.4 323.3
Interest income 3.2 3.8 5.1 8.6
Interest expense 4.5 5.7 9.1 11.7
------- ------- -------- --------
Income from continuing operations
before income taxes 158.9 180.2 290.4 320.2
Income taxes 47.1 55.9 91.1 102.0
------- ------- -------- --------
Income from continuing operations 111.8 124.3 199.3 218.2
Loss from discontinued operations,
net of income taxes (3.0) (0.5) (77.7) (0.6)
------- ------- -------- --------
Net income $ 108.8 $ 123.8 $ 121.6 $ 217.6
======= ======= ======== ========
Basic earnings (loss) per share:
Continuing operations $ 0.92 $ 1.01 $ 1.64 $ 1.78
Discontinued operations (0.03) -- (0.64) (0.01)
------- ------- -------- --------
Total $ 0.89 $ 1.01 $ 1.00 $ 1.77
======= ======= ======== ========
Diluted earnings (loss) per share:
Continuing operations $ 0.91 $ 1.00 $ 1.62 $ 1.76
Discontinued operations (0.03) -- (0.63) (0.01)
------- ------- -------- --------
Total $ 0.88 $ 1.00 $ 0.99 $ 1.75
======= ======= ======== ========
Shares (in thousands) used in
the calculation of earnings (loss)
per share:
Basic 122,016 122,873 121,978 122,742
Diluted 123,242 124,291 123,199 124,178
Cash dividends per common share:
Declared $ 0.000 $ 0.000 $ 0.490 $ 0.560
Paid $ 0.245 $ 0.280 $ 0.490 $ 0.560
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
April 30, October 31,
2006 2006
-------- --------
Assets
------
Cash and cash equivalents $ 474.8 $ 222.6
Short-term investments 159.9 190.2
Accounts receivable, net 328.4 441.7
Inventories:
Barreled whiskey 274.2 283.7
Finished goods 99.5 156.6
Work in process 106.8 92.6
Raw materials and supplies 42.5 60.8
-------- --------
Total inventories 523.0 593.7
Current portion of deferred income taxes 81.0 81.0
Current assets held for sale 8.9 6.9
Other current assets 34.1 19.9
-------- --------
Total current assets 1,610.1 1,556.0
Property, plant and equipment, net 428.5 427.5
Prepaid pension cost 146.1 140.1
Trademarks and brand names 324.9 442.1
Goodwill 195.4 324.3
Noncurrent assets held for sale 1.0 1.0
Other assets 22.2 34.2
-------- --------
Total assets $2,728.2 $2,925.2
======== ========
Liabilities
-----------
Accounts payable and accrued expenses $ 292.9 $ 341.9
Accrued income taxes 48.3 48.5
Short-term borrowings 225.0 197.2
Current liabilities held for sale 2.9 2.7
-------- --------
Total current liabilities 569.1 590.3
Long-term debt 351.6 353.7
Deferred income taxes 132.8 131.3
Accrued pension and other postretirement benefits 77.9 81.0
Other liabilities 33.7 19.3
-------- --------
Total liabilities 1,165.1 1,175.6
Stockholders' Equity
--------------------
Common stock:
Class A, voting
(57,000,000 shares authorized;
56,882,000 shares issued) 8.5 8.5
Class B, nonvoting
(100,000,000 shares authorized;
69,188,000 shares issued) 10.4 10.4
Additional paid-in capital 44.8 51.1
Retained earnings 1,609.1 1,765.5
Accumulated other comprehensive income 18.0 21.1
Treasury stock
(3,565,000 and 3,001,000 shares at
April 30 and October 31, respectively) (127.7) (107.0)
-------- --------
Total stockholders' equity 1,563.1 1,749.6
-------- --------
Total liabilities and stockholders' equity $2,728.2 $2,925.2
======== ========
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Six Months Ended
October 31,
2005 2006
------- -------
Cash flows from operating activities:
Net income $ 121.6 $ 217.6
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Net loss from discontinued operations 77.7 0.6
Depreciation and amortization 21.7 20.7
Gain on sale of property, plant, and equipment -- (11.1)
Stock-based compensation expense 3.3 4.3
Deferred income taxes (11.5) (1.5)
Changes in assets and liabilities, excluding
the effects of businesses acquired or sold:
Accounts receivable (109.1) (112.4)
Inventories (51.9) (66.6)
Other current assets 2.4 16.3
Accounts payable and accrued expenses 35.5 45.9
Accrued income taxes (4.6) 0.1
Noncurrent assets and liabilities (1.1) (8.7)
Net cash (used for) provided by operating
activities of discontinued operations (18.1) 1.6
------- -------
Cash provided by operating activities 65.9 106.8
Cash flows from investing activities:
Acquisition of business, net of cash acquired -- (250.6)
Proceeds from sale of discontinued operations 196.5 --
Purchase of short-term investments -- (112.8)
Sale of short-term investments -- 82.5
Additions to property, plant, and equipment (21.0) (21.2)
Proceeds from sale of property, plant,
and equipment -- 14.6
Computer software expenditures (0.2) (3.3)
Net cash used for investing activities
of discontinued operations (1.9) --
------- -------
Cash provided by (used for)
investing activities 173.4 (290.8)
Cash flows from financing activities:
Net repayment of short-term borrowings (30.0) (30.2)
Proceeds from exercise of stock options 8.4 24.6
Excess tax benefits from stock options 2.3 5.7
Acquisition of treasury stock (3.2) --
Dividends paid (59.8) (68.8)
------- -------
Cash used for financing activities (82.3) (68.7)
Effect of exchange rate changes on
cash and cash equivalents -- 0.5
------- -------
Net increase (decrease) in
cash and cash equivalents 157.0 (252.2)
Cash and cash equivalents, beginning of period 294.9 474.8
------- -------
Cash and cash equivalents, end of period $ 451.9 $ 222.6
======= =======
See notes to the condensed consolidated financial statements.
5
BROWN-FORMAN CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, "we," "us," and "our" refer to Brown-Forman Corporation.
1. Condensed Consolidated Financial Statements
We prepared these unaudited condensed consolidated statements using our
customary accounting practices as set out in our 2006 annual report on Form 10-K
(the "2006 Annual Report"). We made all of the adjustments (which include only
normal, recurring adjustments, unless otherwise noted) needed for a fair
statement of this data.
We condensed or omitted some of the information found in financial statements
prepared according to generally accepted accounting principles ("GAAP"). You
should read these financial statements together with the 2006 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 $122.4 million higher than reported as of April 30, 2006,
and $125.5 million higher than reported as of October 31, 2006. Changes in the
LIFO valuation reserve for interim periods are based on a proportionate
allocation of the estimated change for the entire fiscal year.
3. Income Taxes
Our consolidated quarterly effective tax rate is based upon our expected annual
operating income, statutory tax rates, and tax laws in the various jurisdictions
in which we operate. Significant or unusual items, including adjustments to
reserves for tax uncertainties, are recognized in the quarter in which the
related event occurs. The effective tax rate of 31.9% for continuing operations
for the six months ended October 31, 2006, is based on an expected effective tax
rate of 33.0% on ordinary income for the full fiscal year, and was affected by
an approximate 3% tax rate on the gain on the sale of a wine production facility
in September 2006 (see Note 12).
4. 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 $59.5
million 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.
6
After the sale of Lenox, we retained ownership of Brooks & Bentley, a former
subsidiary of Lenox, located in the United Kingdom. We still intend to dispose
of Brooks & Bentley, the assets and liabilities of which are classified as held
for sale in the accompanying consolidated balance sheets, and the operating
results of which are classified as discontinued operations in the accompanying
consolidated statements of operations.
A summary of discontinued operations follows:
(Dollars in millions) Three Months Ended Six Months Ended
October 31, October 31,
2005 2006 2005 2006
------- ------- ------- -------
Net sales $ 39.6 $ 5.5 $ 119.0 $ 10.3
Operating expenses (41.5) (5.9) (134.2) (10.9)
Impairment charge -- -- (59.5) --
Transaction costs (2.1) -- (9.6) --
------- ------- ------- -------
Loss before income taxes (4.0) (0.4) (84.3) (0.6)
Income tax (expense) benefit 1.0 (0.1) 6.6 --
------- ------- ------- -------
Net loss from
discontinued operations $ (3.0) $ (0.5) $ (77.7) $ (0.6)
======= ======= ======= =======
The net assets held for sale consist of the following:
(Dollars in millions) April 30, October 31,
2006 2006
------ ------
Current assets:
Accounts receivable, net $ 5.4 $ 4.0
Inventories 3.1 2.3
Other 0.4 0.6
------ ------
8.9 6.9
------ ------
Noncurrent assets:
Property, plant and equipment, net 0.2 0.1
Other 0.8 0.9
------ ------
1.0 1.0
------ ------
Current liabilities:
Accounts payable and accrued expenses 2.9 2.7
------ ------
Net assets held for sale $ 7.0 $ 5.2
====== ======
5. 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. No stock-based awards were excluded from the calculation of diluted
earnings per share for any of the periods presented in the accompanying
financial statements.
7
The following table presents information concerning basic and diluted earnings
per share:
Three Months Ended Six Months Ended
October 31, October 31,
(Dollars in millions, except per share amounts) 2005 2006 2005 2006
------- ------- ------- -------
Basic and diluted net income (loss):
Continuing operations $111.8 $124.3 $199.3 $218.2
Discontinued operations (3.0) (0.5) (77.7) (0.6)
------- ------- ------- -------
Total $108.8 $123.8 $121.6 $217.6
======= ======= ======= =======
Share data (in thousands):
Basic average common shares outstanding 122,016 122,873 121,978 122,742
Dilutive effect of non-vested restricted stock 28 55 25 51
Dilutive effect of stock options and SSARs 1,198 1,363 1,196 1,385
------- ------- ------- -------
Diluted average common shares outstanding 123,242 124,291 123,199 124,178
======= ======= ======= =======
Basic earnings (loss) per share:
Continuing operations $0.92 $1.01 $1.64 $1.78
Discontinued operations (0.03) -- (0.64) (0.01)
------- ------- ------- -------
Total $0.89 $1.01 $1.00 $1.77
======= ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations $0.91 $1.00 $1.62 $1.76
Discontinued operations (0.03) -- (0.63) (0.01)
------- ------- ------- -------
Total $0.88 $1.00 $0.99 $1.75
======= ======= ======= =======
6. Goodwill and Other Intangible Assets
The following table shows the changes in the amounts recorded as goodwill during
the six months ended October 31, 2006:
(Dollars in millions)
Balance as of April 30, 2006 $195.4
Acquisition of Chambord (Note 11) 128.2
Foreign currency translation adjustment 0.7
------
Balance as of October 31, 2006 $324.3
======
Our other intangible assets consist of trademarks and brand names. We consider
all of our trademarks and brand names to have indefinite useful lives.
8
7. Pension and Other Postretirement Benefits
The following table shows the components of the pension and other postretirement
benefit expense recognized during the periods covered by this report:
(Dollars in millions) Three Months Ended Six Months Ended
October 31, October 31,
2005 2006 2005 2006
------ ------ ------ ------
Pension Benefits:
Service cost $3.2 $3.2 $6.3 $6.5
Interest cost 5.5 6.0 11.0 12.0
Expected return on plan assets (7.8) (7.9) (15.7) (15.9)
Amortization of:
Unrecognized prior service cost 0.1 0.2 0.3 0.4
Unrecognized net loss 2.1 2.9 4.3 5.8
------ ------ ------ ------
Net expense $3.1 $4.4 $6.2 $8.8
====== ====== ====== ======
Other Postretirement Benefits:
Service cost $0.3 $0.3 $0.6 $0.6
Interest cost 0.6 0.8 1.3 1.5
Amortization of unrecognized net loss 0.1 0.1 0.1 0.2
------ ------ ------ ------
Net expense $1.0 $1.2 $2.0 $2.3
====== ====== ====== ======
8. Environmental Matters
We are subject to environmental regulations in connection with the operation of
our production facilities and in connection with the transportation of products
we manufacture. Violation of these environmental regulations can result in fines
or penalties. As of October 31, 2006, we do not consider the exposure from the
risks of such fines or penalties to be material.
9. 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 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. Brown-Forman is vigorously defending these cases. Six of
the suits have been dismissed by trial court and are being appealed. One case
remains pending on a motion to dismiss. Two others were voluntarily withdrawn.
As we cannot yet predict the outcome of these claims, no amounts have been
accrued. However, an unfavorable result in these or similar class action
lawsuits could have a material adverse impact on our business.
9
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 the determination of comprehensive
income:
(Dollars in millions) Three Months Ended Six Months Ended
October 31, October 31,
2005 2006 2005 2006
------ ------ ------ ------
Continuing operations:
Net income $111.8 $124.3 $199.3 $218.2
Other comprehensive income (loss):
Net gain (loss) on cash flow hedges (1.3) 0.6 2.3 0.5
Net gain on securities -- -- 0.1 --
Foreign currency translation adjustment (0.8) (0.8) (12.8) 2.1
------ ------ ------ ------
(2.1) (0.2) (10.4) 2.6
------ ------ ------ ------
Comprehensive income 109.7 124.1 188.9 220.8
------ ------ ------ ------
Discontinued operations:
Net loss (3.0) (0.5) (77.7) (0.6)
Other comprehensive income (loss):
Pension liability adjustment 27.6 -- 27.6 --
Foreign currency translation adjustment 0.1 0.2 (0.9) 0.5
------ ------ ------ ------
27.7 0.2 26.7 0.5
------ ------ ------ ------
Comprehensive income (loss) 24.7 (0.3) (51.0) (0.1)
------ ------ ------ ------
Total comprehensive income $134.4 $123.8 $137.9 $220.7
====== ====== ====== ======
Accumulated other comprehensive income (loss) consisted of the following:
(Dollars in millions) April 30, October 31,
2006 2006
------ ------
Pension liability adjustment $ (4.6) $ (4.6)
Cumulative translation adjustment 23.8 26.4
Unrealized loss on cash flow hedge contracts (1.4) (0.9)
Unrealized gain on securities 0.2 0.2
------ ------
$ 18.0 $21.1
====== ======
10
11. Acquisition of Chambord Liqueur
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 $250.6 million, 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 consists primarily of the Chambord brand name and goodwill, to
which we have preliminarily allocated $116.5 million and $128.2 million of the
purchase price, respectively. The entire amount allocated to goodwill is
deductible for income tax purposes. The initial allocation of the purchase price
was based on preliminary estimates and may be revised as asset valuations are
finalized. The operating results of Chambord have been consolidated with our
financial statements since the acquisition date. Consolidated pro forma
operating results for the three-month and six-month periods ended October 31,
2005 and 2006 would not have been materially different from the actual amounts
reported for those periods.
12. Other Income
During 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 United States, Canada, and certain
countries in Europe and Asia. We received approximately $13.5 million for the
early termination, which is included in "other income" for the six months ended
October 31, 2005, in the accompanying consolidated statements of operations.
During 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
will now begin to produce Bolla Italian Wines for us. We recognized a gain on
the sale of $11.1 million, which is included in "other income" for the periods
ended October 31, 2006, in the accompanying consolidated statements of
operations. The agreement also names GIV as Bolla's distributor in the Italian
domestic market. We will maintain worldwide ownership of the Bolla trademark and
continue to sell Bolla Wines in the brand's other markets.
13. Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
we recognize in our financial statements the benefit of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. 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 are currently evaluating the impact that FIN 48 will have on our
financial statements.
11
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
(FAS 157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. The provisions of
FAS 157 become effective as of the beginning of our 2009 fiscal year. We are
currently evaluating the impact that FAS 157 will have on our financial
statements.
In September 2006, the FASB issued Statement 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)" (FAS 158). FAS 158 requires that
employers recognize the funded status of their defined benefit pension and other
postretirement plans on the balance sheet and recognize as a component of other
comprehensive income, net of tax, the plan-related gains or losses and prior
service costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost. We will prospectively adopt FAS 158 on
April 30, 2007. Based on the funded status of our plans as of the date of our
most recent actuarial valuation (April 30, 2006), we expect the adoption of FAS
158 to reduce reported stockholders' equity by approximately $100 million.
However, the actual impact of adopting FAS 158 is highly dependent on a number
of factors, including the discount rates in effect at April 30, 2007, and the
actual rate of return on pension assets during fiscal 2007. These factors could
significantly increase or decrease the expected impact of adopting FAS 158.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108), which addresses how to quantify the effect of financial
statements errors. The provisions of SAB 108 become effective as of the end of
our 2007 fiscal year. We do not expect the adoption of SAB 108 to have a
significant impact on our financial statements.
14. Other
On August 25, 2006, we entered into an agreement to acquire substantially all of
the assets relating to the tequila business of Grupo Industrial Herradura ("Casa
Herradura"), including the Herradura and el Jimador tequilas, the New Mix
tequila-based ready-to-drink brand, related production facilities and a sales
and distribution organization in Mexico, for an aggregate purchase price of $876
million in cash and the assumption of selected liabilities. The closing of the
acquisition, which is subject to a number of conditions, is expected to occur in
December 2006.
15. Subsequent Event
On November 16, 2006, the Board of Directors, after reviewing various strategic
alternatives, decided to pursue a possible sale of our wholly-owned subsidiary,
Hartmann, Inc. This process has been initiated. Hartmann's operating results and
net assets are not material in relation to Brown-Forman.
12
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 2006 Annual
Report. Note that the results of operations for the six months ended October 31,
2006, do not necessarily indicate what our operating results for the full fiscal
year will be. In this Item, "we," "us," and "our" refer to Brown-Forman
Corporation.
Important Note on Forward-Looking Statements:
This 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 a significant portion of our profits;
- lower consumer confidence or purchasing in the wake of catastrophic events;
- tax increases, whether at the federal or state level or in major
international markets and/or tariff barriers or other restrictions affecting
beverage alcohol;
- limitations and restrictions on distribution of products and alcohol
marketing, including advertising and promotion, as a result of stricter
governmental policies adopted either in the United States or globally;
- 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;
- lower consumer confidence or purchasing associated with rising energy prices;
- 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;
- increases in the price of energy or raw materials, including grapes, grain,
wood, glass, and plastic;
- excess wine inventories or a world-wide oversupply of grapes;
13
- termination of our rights to distribute and market agency brands included in
our portfolio;
- counterfeit production of our products which could adversely affect our
intellectual property rights, brand equity and operating results;
- adverse developments as a result of state investigations of beverage alcohol
industry trade practices of suppliers, distributors and retailers.
14
Results of Operations:
Second Quarter Fiscal 2007 Compared to Second Quarter Fiscal 2006
A summary of our operating performance (expressed in millions, except percentage
and per share amounts) is presented below. Continuing Operations consist
primarily of our beverage business. Discontinued Operations consist of Lenox and
Brooks & Bentley.
Three Months Ended
October 31,
CONTINUING OPERATIONS 2005 2006 Change
------ ------ ------
Net sales $665.8 $735.3 10%
Gross profit 357.4 385.4 8%
Advertising expenses 87.4 92.7 6%
Selling, general, and
administrative expenses 110.2 123.8 12%
Other expense (income), net (0.4) (13.2)
Operating income 160.2 182.1 14%
Interest expense, net 1.3 1.9
Income before income taxes 158.9 180.2 13%
Income taxes 47.1 55.9
Net income 111.8 124.3 11%
Gross margin 53.7% 52.4%
Effective tax rate 29.7% 31.0%
Earnings per share:
Basic 0.92 1.01 10%
Diluted 0.91 1.00 10%
Diluted earnings from continuing operations for the quarter ended October 31,
2006 of $1.00 per share improved 10% from the same prior year period. The higher
earnings reflect volume and profit growth for the Jack Daniel's family of brands
and gross profit gains for Southern Comfort, Finlandia and most of our other
super-premium developing brands, including Sonoma-Cutrer, Tuaca and Woodford
Reserve. Second quarter earnings benefited from a net $0.08 per share gain
related to the sale of an Italian winery done in conjunction with our ongoing
efforts to reduce wine costs and improve the performance of Bolla Italian wines.
Revenues grew 10% and gross profit increased 8% in the quarter. Comparisons to
the prior year were, as in the previous quarter, affected by distribution
changes in Germany and Australia. We are now responsible for the collection and
remittance of excise taxes in these markets. The net effect of these changes
reduces our reported gross margin. The gross margin on a stripped net sales
basis (gross profit as a percentage of net sales excluding excise tax) was
65.3%, up from 64.9% in the prior-year period. Management believes excluding
excise tax from the gross margin calculation provides a more meaningful
comparison due to the changes in distribution that have occurred in these two
markets.
15
(Dollars in millions) Three Months Ended
October 31,
2005 2006
------ ------
Net sales $665.8 $735.3
Excise taxes (as reported) (115.4) (145.0)
------ ------
Net sales (stripped of excise taxes) $550.4 $590.3
====== ======
Gross profit (as reported) $357.4 $385.4
change
Gross margin (stripped net sales basis) 64.9% 65.3% 0.4 % pts.
Advertising expenses increased $5.3 million in the quarter, or 6% in the quarter
as a result of additional investments behind our premium global brands. SG&A
expenses increased $13.6 million, or 12%. Approximately $6.0 million of this
growth over the prior-year period was related to the previously mentioned
changes in our distribution arrangements in Australia and Germany.
Operating income increased $21.9 million in the quarter, up 14% over the same
prior year period, due in part to the previously mentioned net gain on the sale
of the Italian winery, and gross profit gains, which more than offset increases
in both SG&A and brand investments.
Jack Daniel's global depletions grew at a mid-single digit rate in the quarter,
with U.S. and international volumes both increasing in the mid-single digits.
(Depletions are shipments from wholesale distributors to retail customers, and
are commonly regarded in the industry as an approximate measure of consumer
demand). Solid volume gains in Australia, France, Italy, and Japan offset
softness in the quarter for the brand in Germany, Spain, and the UK. Global
volumes for Southern Comfort grew at a mid-single digit rate in the quarter, led
by continued growth in the U.S. Finlandia volumes grew at a double-digit rate,
fueled by continued strong growth in Poland.
DISCONTINUED OPERATIONS
As discussed in Note 4 to the accompanying financial statements, we sold Lenox
during fiscal 2006, and we intend to dispose of Brooks & Bentley, a former
subsidiary of Lenox, located in the United Kingdom. As a result, we have
reported the operations of Lenox and Brooks & Bentley as discontinued operations
in the accompanying financial statements.
Three Months Ended
October 31,
2005 2006
------ ------
Net loss $(3.0) $(0.5)
Loss per share:
Basic (0.03) --
Diluted (0.03) --
For the three months ended October 31, 2006, we reported a net loss from
discontinued operations of $0.5 million versus a net loss of $3.0 million for
the same prior year period. Last year's loss included transaction costs of $2.1
million associated with the sale of Lenox.
16
Results of Operations:
Six Months Fiscal 2007 Compared to Six Months Fiscal 2006
A summary of our operating performance (expressed in millions, except percentage
and per share amounts) is presented below. Continuing Operations consist
primarily of our beverage business. Discontinued Operations consist of Lenox and
Brooks & Bentley.
Six Months Ended
October 31,
CONTINUING OPERATIONS 2005 2006 Change
------ ------ ------
Net sales $1,213.2 $1,375.0 13%
Gross profit 660.4 736.7 12%
Advertising expenses 159.7 174.0 9%
Selling, general, and
administrative expenses 220.5 254.7 16%
Other expense (income), net (14.2) (15.3)
Operating income 294.4 323.3 10%
Interest expense, net 4.0 3.1
Income before income taxes 290.4 320.2 10%
Income taxes 91.1 102.0
Net income 199.3 218.2 9%
Gross margin 54.4% 53.6%
Effective tax rate 31.4% 31.9%
Earnings per share:
Basic $1.64 $1.78 9%
Diluted 1.62 1.76 9%
Revenues and gross profit increased 13% and 12%, respectively, reflecting solid
growth for Jack Daniel's, Southern Comfort, and improved profits from the Jack
Daniel's & Cola ready-to-drink product that is sold primarily in Australia. Also
contributing to these gains were positive benefits from foreign exchange and
changes in go-to-market strategies in several markets, most notably Germany and
Australia.
Advertising expenses were up 9% for the first half of the fiscal year,
reflecting incremental investments behind most brands in our portfolio but most
notably Jack Daniel's, Finlandia, and several developing super-premium brands,
and spending behind Chambord.
SG&A expenses were up 16% on a year-to-date basis. Changes in our go-to-market
strategy in Australia and Germany as well as in the U. S. accounted for
approximately half of the year-to-year growth in SG&A through October. The
remaining increase reflects severance benefits for employees of the Pedemonte
facility in Italy, costs associated with changes in our U.S. sales and marketing
structure, higher pension and other postretirement costs, and general inflation.
17
Operating income grew 10% on a year-to-date basis. Volume and margin
improvements (on a stripped sales basis) for the majority of our brands, but
particularly Jack Daniel's, Southern Comfort, and Jack Daniel's & Cola,
partially offset by increased advertising and promotional investments and higher
levels of SG&A spending fueled the gain in operating income. Results also
benefited from a $10.0 million net gain associated with the sale of the Italian
winery.
The increase in the effective tax rate from 31.4% to 31.9% largely reflects the
tax benefit achieved last year by offsetting the capital gain associated with
the early termination of Glenmorangie marketing and distribution rights against
the capital loss resulting from the sale of Lenox.
For the first six months of the fiscal year, diluted earnings per share were
$1.76, up 9% from the $1.62 earned in the same period last year. Year-to-date
results benefited from solid growth for Jack Daniel's, Southern Comfort, and
improved volume and profits from the Jack Daniel's & Cola ready-to-drink product
that is sold primarily in Australia. Year-over-year comparisons were affected by
the following:
- profits associated with the early termination of Glenmorangie marketing and
distribution rights recorded last year of approximately $0.11 per share;
- profits recorded this year from the sale of an Italian winery of
approximately $0.08 per share;
- a $0.06 per share benefit of favorable foreign currency fluctuations, and;
- the impact of changes in global distributor inventories (which negatively
affected comparisons by $0.02 per share).
DISCONTINUED OPERATIONS
As discussed earlier, we sold Lenox during fiscal 2006, and we intend to dispose
of Brooks & Bentley. As a result, we have reported the operations of Lenox and
Brooks & Bentley as discontinued operations in the accompanying financial
statements.
Six Months Ended
October 31,
2005 2006
------ ------
Net loss $(77.7) $(0.6)
Loss per share:
Basic (0.64) (0.01)
Diluted (0.63) (0.01)
For the six months ended October 31, 2006, we reported a net loss from
discontinued operations of $0.6 million versus a net loss of $77.7 million for
the same prior year period. Last year's loss included a non-cash impairment
charge and transaction costs totaling $69.1 million in addition to a loss from
the operations of Lenox incurred during the period prior to the sale.
18
OUTLOOK FOR CONTINUING OPERATIONS
We have narrowed the range of our full-year earnings outlook to $3.14 to $3.30
per share, representing forecasted growth of 8% to 14% over adjusted prior-year
earnings of $2.90 per share. This outlook includes the current quarter's $0.08
per share gain from the sale of the Italian winery and additional benefits from
foreign exchange. It also includes expected further reductions in global
distributor inventory levels and an expected higher tax rate in the second half
of the fiscal year versus the prior-year second half.
This outlook excludes the impact of our pending acquisition of Casa Herradura
(see below), which was announced on August 28, 2006. As previously communicated,
we expect the acquisition to be dilutive to earnings through fiscal 2009. We
expect the transaction to dilute fiscal 2007 earnings in the range of $0.08 to
$0.12 per share.
LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents decreased by $252.2 million during the six months
ended October 31, 2006, compared to an increase of $157.0 million during the
same period last year. Cash provided by operations grew from $65.9 million to
$106.8 million, reflecting a $21.2 million increase in cash from continuing
operations, largely attributable to higher earnings, and a $19.7 million
decrease in cash used for discontinued operations. Cash used for investing
activities increased by $464.2 million, largely reflecting the $250.6 million
acquisition of Chambord (discussed below) and a net investment in short-term
securities of $30.3 million during this year, versus the same period last year
in which we received cash of $196.5 million from the sale of Lenox. Cash used
for financing activities declined by $13.6 million, primarily reflecting higher
proceeds from the exercise of employee stock options, offset partially by
increased dividend payments.
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 $250.6 million, including
transaction costs. The acquisition consists primarily of the Chambord brand name
and goodwill, to which we have preliminarily allocated $116.5 million and $128.2
million of the purchase price, respectively.
On August 25, 2006, we entered into an agreement to acquire substantially all of
the assets relating to the tequila business of Casa Herradura, including the
Herradura and el Jimador tequilas, the New Mix tequila-based ready-to-drink
brand, related production facilities and a sales and distribution organization
in Mexico, for an aggregate purchase price of $876 million in cash and the
assumption of selected liabilities. The closing of the acquisition, which is
subject to a number of conditions, is expected to occur in December 2006. We
expect to finance the acquisition with a combination of cash and debt.
On November 16, 2006, the Board of Directors, after reviewing various strategic
alternatives, decided to pursue a possible sale of our wholly-owned subsidiary,
Hartmann, Inc. This process has been initiated. Hartmann's operating results and
net assets are not material in relation to Brown-Forman.
19
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" (FIN 48), which clarifies the
accounting for uncertainty in tax positions. This Interpretation requires that
we recognize in our financial statements the benefit of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. 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 are currently evaluating the impact that FIN 48 will have on our
financial statements.
In September 2006, the FASB issued Statement No. 157, "Fair Value Measurements"
(FAS 157), which defines fair value, establishes a framework for measuring fair
value, and expands disclosures about fair value measurements. The provisions of
FAS 157 become effective as of the beginning of our 2009 fiscal year. We are
currently evaluating the impact that FAS 157 will have on our financial
statements.
In September 2006, the FASB issued Statement 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)" (FAS 158). FAS 158 requires that
employers recognize the funded status of their defined benefit pension and other
postretirement plans on the balance sheet and recognize as a component of other
comprehensive income, net of tax, the plan-related gains or losses and prior
service costs or credits that arise during the period but are not recognized as
components of net periodic benefit cost. We will prospectively adopt FAS 158 on
April 30, 2007. Based on the funded status of our plans as of the date of our
most recent actuarial valuation (April 30, 2006), we expect the adoption of FAS
158 to reduce reported stockholders' equity by approximately $100 million.
However, the actual impact of adopting FAS 158 is highly dependent on a number
of factors, including the discount rates in effect at April 30, 2007, and the
actual rate of return on pension assets during fiscal 2007. These factors could
significantly increase or decrease the expected impact of adopting FAS 158.
In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, "Considering the Effects of Prior Year
Misstatements when Quantifying Misstatements in Current Year Financial
Statements" (SAB 108), which addresses how to quantify the effect of financial
statements errors. The provisions of SAB 108 become effective as of the end of
our 2007 fiscal year. We do not expect the adoption of SAB 108 to have a
significant impact on our financial statements.
20
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We hold debt obligations, foreign currency forward and option contracts, and
commodity futures contracts that are exposed to risk from changes in interest
rates, foreign currency exchange rates, and commodity prices, respectively.
Established procedures and internal processes govern the management of these
market risks. As of October 31, 2006, 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.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Brown-Forman Corporation and many other manufacturers of spirits, wine, and beer
are defendants in a series of essentially similar class action lawsuits seeking
damages and injunctive relief for alleged marketing of beverage alcohol to
underage consumers. Nine lawsuits have been filed to date, the first three
against eight defendants, including Brown-Forman: "Hakki v. Adolph Coors
Company, et.al.," District of Columbia Superior Court No. CD 03-9183 (November
2003); "Kreft v. Zima Beverage Co., et.al.," District Court, Jefferson County,
Colorado, No. 04cv1827 (December 2003); and "Wilson v. Zima Company, et.al.,"
U.S. District Court for the Western District of North Carolina, Charlotte
Division, No. 3:04cv141 ( January 2004). Two virtually identical suits with
allegations similar to those in the first three lawsuits were filed in
Cleveland, Ohio, in April and June, 2004, respectively, against the original
eight defendants as well as an additional nine manufacturers of spirits and
beer, and are now consolidated as "Eisenberg v. Anheuser-Busch," U.S. District
Court for the District of Northern Ohio, No. 1:04cv1081. Five similar suits were
filed in 2005: "Elizabeth H. Sciocchette v. Advanced Brands," Albany County, New
York Supreme Court No. 102205 (February 16, 2005); "Roger and Kathy Bertovich v.
Advanced Brands," Hancock County, West Virginia, Circuit Court No. 05-C-42M
(February 17, 2005); "Jacquelin Tomberlin v. Adolph Coors," Dane County
(Madison, Wisconsin) Circuit Court, (February 23, 2005); "Viola Alston v.
Advanced Brands," Wayne County, Michigan, Circuit Court No. 05-509294, (March,
30, 2005), and "Craig Konhauzer v. Adolph Coors Company," Broward County Florida
Circuit Court, No. 05004875 (March 30, 2005). In addition, Brown-Forman received
in February, 2004, a pre-lawsuit notice under the California Consumer Protection
Act indicating that the same lawyers intend to file a lawsuit there against many
industry defendants, including Brown-Forman, presumably on the same facts and
legal theories.
21
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. Each involuntarily dismissal is
being appealed by the respective plaintiffs.
Item 1A. Risk Factors
Other than with respect to the revision and additions below, there have been no
changes to "Item 1A: Risk Factors" in our Annual Report on Form 10-K for the
fiscal year ended April 30, 2006 and filed on June 29, 2006. The revision and
additions below should be read together with the risk factors and information
disclosed in our Annual Report on Form 10-K.
The risk factor entitled "Demand for our products may be adversely affected by
changes in consumer preferences and tastes" is amended and restated in its
entirety as follows.
22
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. 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 can affect our
business.
The following two risk factors constitute additions to the risk factors
disclosed in "Item 1A: Risk Factors" of our Annual Report on Form 10-K.
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, 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 the protection of 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 of 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 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).
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROWN-FORMAN CORPORATION
(Registrant)
Date: December 7, 2006 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)
24
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Paul C. Varga, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 7, 2006 By: /s/ Paul C. Varga
Paul C. Varga
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Phoebe A. Wood, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: December 7, 2006 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Brown-Forman Corporation ("the
Company") on Form 10-Q for the period ended October 31, 2006, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in the capacity as an
officer of the Company, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: December 7, 2006 By: /s/ Paul C. Varga
Paul C. Varga
President and Chief Executive Officer
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 Periodic Report.