United
States
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-Q
(Mark
One)
þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
|
For the quarterly period ended
JANUARY 31, 2010
OR
o
|
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
þ
No
o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes
o
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
Large
accelerated filer
þ
|
Accelerated
filer
o
|
Non-accelerated
filer
o
(Do
not check if a smaller reporting company)
|
Smaller
reporting company
o
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No
þ
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date: February 28,
2010
Class
A Common Stock ($.15 par value, voting)
|
|
|
56,601,083
|
|
Class
B Common Stock ($.15 par value, nonvoting)
|
|
|
90,283,995
|
|
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
|
|
|
Nine
Months Ended
|
|
|
|
January
31,
|
|
|
January
31,
|
|
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
$784.1
|
|
|
|
$861.7
|
|
|
|
$2,508.9
|
|
|
|
$2,492.5
|
|
Excise
taxes
|
|
|
191.7
|
|
|
|
224.3
|
|
|
|
564.7
|
|
|
|
585.5
|
|
Cost
of sales
|
|
|
221.8
|
|
|
|
226.5
|
|
|
|
726.1
|
|
|
|
673.0
|
|
Gross
profit
|
|
|
370.6
|
|
|
|
410.9
|
|
|
|
1,218.1
|
|
|
|
1,234.0
|
|
Advertising
expenses
|
|
|
87.0
|
|
|
|
92.0
|
|
|
|
294.1
|
|
|
|
260.2
|
|
Selling,
general, and administrative expenses
|
|
|
113.1
|
|
|
|
131.5
|
|
|
|
397.2
|
|
|
|
373.7
|
|
Amortization
expense
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
3.8
|
|
|
|
3.8
|
|
Other
(income) expense, net
|
|
|
(8.0
|
)
|
|
|
12.2
|
|
|
|
(16.6
|
)
|
|
|
4.8
|
|
Operating
income
|
|
|
177.2
|
|
|
|
173.9
|
|
|
|
539.6
|
|
|
|
591.5
|
|
Interest
income
|
|
|
1.3
|
|
|
|
0.5
|
|
|
|
4.7
|
|
|
|
1.9
|
|
Interest
expense
|
|
|
9.4
|
|
|
|
7.6
|
|
|
|
28.2
|
|
|
|
23.6
|
|
Income
before income taxes
|
|
|
169.1
|
|
|
|
166.8
|
|
|
|
516.1
|
|
|
|
569.8
|
|
Income
taxes
|
|
|
45.7
|
|
|
|
58.9
|
|
|
|
161.3
|
|
|
|
193.3
|
|
Net
income
|
|
|
$123.4
|
|
|
|
$107.9
|
|
|
|
$354.8
|
|
|
|
$376.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$0.82
|
|
|
|
$0.73
|
|
|
|
$2.35
|
|
|
|
$2.54
|
|
Diluted
|
|
|
$0.81
|
|
|
|
$0.73
|
|
|
|
$2.34
|
|
|
|
$2.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
dividends per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declared
|
|
|
$0.5750
|
|
|
|
$0.6000
|
|
|
|
$1.1190
|
|
|
|
$1.1750
|
|
Paid
|
|
|
$0.2875
|
|
|
|
$0.3000
|
|
|
|
$0.8315
|
|
|
|
$0.8750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
notes to the condensed consolidated financial statements.
BROWN-FORMAN
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars
in millions)
|
|
April
30,
|
|
|
January
31,
|
|
|
|
2009
|
|
|
2010
|
|
Assets
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
$340.1
|
|
|
|
$241.7
|
|
Accounts
receivable, net
|
|
|
367.1
|
|
|
|
454.0
|
|
Inventories:
|
|
|
|
|
|
|
|
|
Barreled
whiskey
|
|
|
313.1
|
|
|
|
304.2
|
|
Finished
goods
|
|
|
143.3
|
|
|
|
153.4
|
|
Work
in process
|
|
|
144.1
|
|
|
|
151.9
|
|
Raw
materials and supplies
|
|
|
51.5
|
|
|
|
48.8
|
|
Total
inventories
|
|
|
652.0
|
|
|
|
658.3
|
|
|
|
|
|
|
|
|
|
|
Current
deferred tax assets
|
|
|
104.9
|
|
|
|
104.3
|
|
Other
current assets
|
|
|
109.7
|
|
|
|
90.1
|
|
Total
current assets
|
|
|
1,573.8
|
|
|
|
1,548.4
|
|
|
|
|
|
|
|
|
|
|
Property,
plant and equipment, net
|
|
|
482.8
|
|
|
|
464.2
|
|
Goodwill
|
|
|
675.0
|
|
|
|
677.6
|
|
Other
intangible assets
|
|
|
686.1
|
|
|
|
672.9
|
|
Deferred
tax assets
|
|
|
11.0
|
|
|
|
10.0
|
|
Other
assets
|
|
|
46.0
|
|
|
|
45.2
|
|
Total
assets
|
|
|
$3,474.7
|
|
|
|
$3,418.3
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
$326.4
|
|
|
|
$361.4
|
|
Dividends
payable
|
|
|
--
|
|
|
|
44.1
|
|
Accrued
income taxes
|
|
|
5.4
|
|
|
|
4.8
|
|
Current
deferred tax liabilities
|
|
|
14.3
|
|
|
|
15.3
|
|
Short-term
borrowings
|
|
|
336.6
|
|
|
|
105.3
|
|
Current
portion of long-term debt
|
|
|
152.9
|
|
|
|
153.1
|
|
Total
current liabilities
|
|
|
835.6
|
|
|
|
684.0
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt
|
|
|
509.3
|
|
|
|
508.3
|
|
Deferred
tax liabilities
|
|
|
79.6
|
|
|
|
109.8
|
|
Accrued
pension and other postretirement benefits
|
|
|
175.6
|
|
|
|
171.4
|
|
Other
liabilities
|
|
|
58.8
|
|
|
|
63.0
|
|
Total
liabilities
|
|
|
1,658.9
|
|
|
|
1,536.5
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ Equity
|
|
|
|
|
|
|
|
|
Common
stock:
|
|
|
|
|
|
|
|
|
Class
A, voting
|
|
|
|
|
|
|
|
|
(57,000,000
shares authorized; 56,964,000 shares issued)
|
|
|
8.5
|
|
|
|
8.5
|
|
Class
B, nonvoting
|
|
|
|
|
|
|
|
|
(100,000,000
shares authorized; 99,363,000 shares issued)
|
|
|
14.9
|
|
|
|
14.9
|
|
Additional
paid-in capital
|
|
|
67.6
|
|
|
|
63.7
|
|
Retained
earnings
|
|
|
2,189.2
|
|
|
|
2,391.8
|
|
Accumulated
other comprehensive loss
|
|
|
(133.0
|
)
|
|
|
(117.1
|
)
|
Treasury
stock, at cost (6,200,000 and 9,443,000
|
|
|
|
|
|
|
|
|
shares
at April 30 and January 31, respectively)
|
|
|
(331.4
|
)
|
|
|
(480.0
|
)
|
Total
stockholders’ equity
|
|
|
1,815.8
|
|
|
|
1,881.8
|
|
Total
liabilities and stockholders’ equity
|
|
|
$3,474.7
|
|
|
|
$3,418.3
|
|
See
notes to the condensed consolidated financial statements.
BROWN-FORMAN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars
in millions)
|
|
Nine
Months Ended
|
|
|
|
January
31,
|
|
|
|
2009
|
|
|
2010
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
income
|
|
|
$354.8
|
|
|
|
$376.5
|
|
Adjustments
to reconcile net income to
net
cash provided by operations:
|
|
|
|
|
|
|
|
|
Non-cash
asset write-downs
|
|
|
22.4
|
|
|
|
11.6
|
|
Depreciation
and amortization
|
|
|
40.1
|
|
|
|
43.8
|
|
Gain
on sale of brand names
|
|
|
(20.4
|
)
|
|
|
--
|
|
Loss
on sale of property, plant, and equipment
|
|
|
3.7
|
|
|
|
--
|
|
Stock-based
compensation expense
|
|
|
6.2
|
|
|
|
5.8
|
|
Deferred
income taxes
|
|
|
1.8
|
|
|
|
32.5
|
|
Changes
in assets and liabilities
|
|
|
(65.7
|
)
|
|
|
(45.7
|
)
|
Cash
provided by operating activities
|
|
|
342.9
|
|
|
|
424.5
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Additions
to property, plant, and equipment
|
|
|
(37.1
|
)
|
|
|
(17.2
|
)
|
Proceeds
from sale of brand names, net of transaction costs
|
|
|
16.8
|
|
|
|
--
|
|
Computer
software expenditures
|
|
|
(2.5
|
)
|
|
|
(2.2
|
)
|
Cash
used for investing activities
|
|
|
(22.8
|
)
|
|
|
(19.4
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Net
change in short-term borrowings
|
|
|
(179.7
|
)
|
|
|
(231.3
|
)
|
Repayment
of long-term debt
|
|
|
(2.9
|
)
|
|
|
(1.7
|
)
|
Proceeds
from long-term debt
|
|
|
249.1
|
|
|
|
--
|
|
Debt
issuance costs
|
|
|
(1.7
|
)
|
|
|
--
|
|
Net
payments related to exercise of stock options
|
|
|
(5.6
|
)
|
|
|
(3.8
|
)
|
Excess
tax benefits from stock options
|
|
|
4.2
|
|
|
|
3.0
|
|
Acquisition
of treasury stock
|
|
|
(22.8
|
)
|
|
|
(157.5
|
)
|
Dividends
paid
|
|
|
(125.6
|
)
|
|
|
(129.8
|
)
|
Cash
used for financing activities
|
|
|
(85.0
|
)
|
|
|
(521.1
|
)
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash equivalents
|
|
|
(19.3
|
)
|
|
|
17.6
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
215.8
|
|
|
|
(98.4
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
118.9
|
|
|
|
340.1
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
|
$334.7
|
|
|
|
$241.7
|
|
|
|
|
|
|
|
|
|
|
See
notes to the condensed consolidated financial statements.
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 the accompanying unaudited condensed consolidated financial statements
pursuant to the rules and regulations of the Securities and Exchange Commission
(“SEC”) for interim financial information. In accordance with those
rules and regulations, we condensed or omitted certain information and
disclosures normally included in annual financial statements prepared in
accordance with U.S. generally accepted accounting principles
(“GAAP”). We suggest that you read these condensed financial
statements together with the financial statements and footnotes included in our
annual report on Form 10-K for the fiscal year ended April 30, 2009 (the “2009
Annual Report”).
In our
opinion, the accompanying financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of our financial results for the periods covered by this report.
We
prepared the accompanying financial statements on a basis that is substantially
consistent with the accounting principles applied in our 2009 Annual Report,
except that during the first quarter of fiscal 2010, we adopted new accounting
standards regarding:
·
|
accounting
for and disclosing information about transactions in which control is
obtained over another business (i.e., business
combinations);
|
·
|
measuring
and disclosing the fair value of certain nonfinancial assets and
liabilities;
|
·
|
the
treatment of unvested share-based awards, such as restricted stock, in the
calculation of earnings per share;
and
|
·
|
disclosing
the fair value of financial instruments in interim financial
statements.
|
Also, in
June 2009, the Financial Accounting Standards Board (“FASB”) established the
FASB Accounting Standards Codification™ (“Codification”) as the single source
(other than rules and interpretive releases of the SEC) of authoritative GAAP
for nongovernmental entities. The Codification, which is not intended
to change GAAP, is effective for financial statements issued for periods ending
after September 15, 2009, including the accompanying financial statements for
the periods ended January 31, 2010.
Our
adoption of these new accounting standards had no material impact on our
financial statements.
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 $188.5 million higher than reported as of
April 30, 2009, and $213.9 million higher than reported as of
January 31, 2010. Changes in the LIFO valuation reserve for
interim periods are based on a proportionate allocation of the estimated change
for the entire fiscal year.
During
the three months ended July 31, 2008, we recorded a $22.4 million provision for
inventory losses (which was included in cost of sales) resulting from abnormally
high levels of mortality and disease in some of our agave fields.
3.
Income Taxes
Our
consolidated quarterly effective tax rate is based upon our expected annual
operating income, statutory tax rates, and income tax laws in the various
jurisdictions in which we operate. Significant or unusual items, including
adjustments to accruals for tax uncertainties, are recognized in the quarter in
which the related event occurs. The effective tax rate of 33.9% for the nine
months ended January 31, 2010, is based on an expected tax rate from operations
of 32.6% on ordinary income for the full fiscal year, the recognition of
additional tax expense related to discrete items arising during the period,
interest on previously provided tax contingencies, and the impact of a portion
of the non-cash write-down of the Don Eduardo brand name that is not
deductible. Our expected tax rate from operations includes current
fiscal year additions for existing tax contingency items.
We
believe it is reasonably possible that there may be a net increase in our gross
unrecognized tax benefits of approximately $1.2 million in the next 12 months as
a result of tax positions taken in the current period and expirations of
statutes of limitations.
We file
income tax returns in the U.S., including several state and local jurisdictions,
as well as in several other countries in which we conduct
business. The major jurisdictions and their earliest fiscal years
that are currently open for tax examinations are 1998 in the U.S., 2007 in
Mexico, 2006 in Australia and Italy, 2005 in Ireland, 2004 in Poland and
Finland, and 2003 in the U.K. Audits of our fiscal 2006 and 2007 U.S.
federal tax returns, which were initiated during fiscal 2009, remain
open.
4.
Earnings Per
Share
Basic
earnings per share is calculated by dividing net income available to common
stockholders by the weighted average number of all unrestricted common shares
outstanding during the period. Diluted earnings per share further
includes the dilutive effect of stock options, stock-settled appreciation rights
(“SSARs”), and restricted stock units (“RSUs”). Stock-based awards
for approximately 1,438,000 common shares and 1,341,000 common shares were
excluded from the calculation of diluted earnings per share for the periods
ended January 31, 2009 and 2010, respectively, because the exercise price of the
awards was greater than the average market price of the shares.
We have
granted restricted shares of common stock to certain employees as part of their
compensation. These restricted shares, which have varying vesting
periods, contain nonforfeitable rights to dividends declared on common
stock. As a result, the unvested restricted shares are considered
participating securities in the calculation of earnings per share in accordance
with a new accounting standard that we adopted retrospectively effective May 1,
2009. The adoption decreased previously reported basic earnings per
share for the nine months ended January 31, 2009, from $2.36 to
$2.35. No other earnings per share amounts reported for the periods
ended January 31, 2009, changed as a result of adopting the new accounting
standard.
The
following table presents information concerning basic and diluted earnings per
share:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
January
31,
|
|
|
January
31,
|
|
(Dollars
in millions, except per share amounts)
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net income
|
|
|
$123.4
|
|
|
|
$107.9
|
|
|
|
$354.8
|
|
|
|
$376.5
|
|
Income
allocated to participating
securities
(restricted shares)
|
|
|
(0.2
|
)
|
|
|
(0.1
|
)
|
|
|
(0.5
|
)
|
|
|
(0.5
|
)
|
Net
income available to common stockholders
|
|
|
$123.2
|
|
|
|
$107.8
|
|
|
|
$354.3
|
|
|
|
$376.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
data (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
average common shares outstanding
|
|
|
150,544
|
|
|
|
146,758
|
|
|
|
150,592
|
|
|
|
148,162
|
|
Dilutive
effect of stock options,
SSARs
and RSUs
|
|
|
794
|
|
|
|
784
|
|
|
|
1,008
|
|
|
|
718
|
|
Diluted
average common shares outstanding
|
|
|
151,338
|
|
|
|
147,542
|
|
|
|
151,600
|
|
|
|
148,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share
|
|
|
$0.82
|
|
|
|
$0.73
|
|
|
|
$2.35
|
|
|
|
$2.54
|
|
Diluted
earnings per share
|
|
|
$0.81
|
|
|
|
$0.73
|
|
|
|
$2.34
|
|
|
|
$2.53
|
|
5.
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:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
January
31,
|
|
|
January
31,
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
Pension
Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
$3.4
|
|
|
|
$2.7
|
|
|
|
$9.9
|
|
|
|
$8.1
|
|
Interest
cost
|
|
|
7.5
|
|
|
|
8.1
|
|
|
|
22.6
|
|
|
|
24.3
|
|
Expected
return on plan assets
|
|
|
(8.7
|
)
|
|
|
(8.6
|
)
|
|
|
(26.1
|
)
|
|
|
(25.7
|
)
|
Amortization
of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
0.6
|
|
|
|
0.7
|
|
Net
actuarial loss
|
|
|
1.6
|
|
|
|
1.0
|
|
|
|
4.9
|
|
|
|
2.9
|
|
Net
expense
|
|
|
$4.0
|
|
|
|
$3.4
|
|
|
|
$11.9
|
|
|
|
$10.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Postretirement
Benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost
|
|
|
$0.3
|
|
|
|
$0.2
|
|
|
|
$0.9
|
|
|
|
$0.7
|
|
Interest
cost
|
|
|
0.9
|
|
|
|
0.9
|
|
|
|
2.6
|
|
|
|
2.6
|
|
Amortization
of net actuarial gain
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
(0.1
|
)
|
Net
expense
|
|
|
$1.2
|
|
|
|
$1.1
|
|
|
|
$3.5
|
|
|
|
$3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.
Contingencies
We
operate in a litigious environment, and we are sued in the normal course of
business. Sometimes plaintiffs seek substantial
damages. Significant judgment is required in predicting the outcome
of these suits and claims, many of which take years to adjudicate. We
accrue estimated costs for a contingency when we believe that a loss is probable
and we can make a reasonable estimate of the loss, and then adjust the accrual
as appropriate to reflect changes in facts and circumstances.
7.
Comprehensive
Income
Comprehensive
income is a broad measure of the effects of all transactions and events (other
than investments by or distributions to stockholders) that are recognized in
stockholders' equity, regardless of whether those transactions and events are
included in net income. The following table adjusts net income for
the other items included in the determination of comprehensive
income:
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
|
January
31,
|
|
|
January
31,
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2010
|
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
$123.4
|
|
|
|
$107.9
|
|
|
|
$354.8
|
|
|
|
$376.5
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain (loss) on cash flow hedges
|
|
|
(1.1
|
)
|
|
|
9.4
|
|
|
|
25.0
|
|
|
|
(8.7
|
)
|
Postretirement
benefits adjustment
|
|
|
--
|
|
|
|
0.9
|
|
|
|
1.9
|
|
|
|
2.2
|
|
Foreign
currency translation adjustment
|
|
|
(14.8
|
)
|
|
|
(4.6
|
)
|
|
|
(114.2
|
)
|
|
|
22.4
|
|
|
|
|
(15.9
|
)
|
|
|
5.7
|
|
|
|
(87.3
|
)
|
|
|
15.9
|
|
Comprehensive
income
|
|
|
$107.5
|
|
|
|
$113.6
|
|
|
|
$267.5
|
|
|
|
$392.4
|
|
Accumulated
other comprehensive income (loss) consisted of the following:
|
|
April
30,
|
|
|
January
31,
|
|
(Dollars
in millions)
|
|
2009
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
Postretirement
benefits adjustment
|
|
|
$(127.2
|
)
|
|
|
$(125.0
|
)
|
Cumulative
translation adjustment
|
|
|
(10.3
|
)
|
|
|
12.1
|
|
Unrealized
gain (loss) on cash flow hedge contracts
|
|
|
4.5
|
|
|
|
(4.2
|
)
|
|
|
|
$(133.0
|
)
|
|
|
$(117.1
|
)
|
8.
Derivative Financial
Instruments
Our
multinational business exposes us to global market risks, including the effect
of fluctuations in currency exchange rates, commodity prices, and interest
rates. We use derivatives to manage financial exposures that occur in
the normal course of business. We formally document the purpose of
each derivative contract, which includes linking the contract to the financial
exposure it is designed to mitigate. We do not hold or issue
derivatives for trading purposes.
We use
currency derivative contracts to limit our exposure to the currency exchange
risk that we cannot mitigate internally by using netting
strategies. We designate most of these contracts as cash flow hedges
of forecasted transactions (expected to occur within three years). We
record all changes in the fair value of cash flow hedges (except any ineffective
portion) in accumulated other comprehensive income (“AOCI”) until the underlying
hedged transaction occurs, at which time we reclassify that amount into
earnings. We designate some of our currency derivatives as hedges of
net investments in foreign subsidiaries. We record all changes in the
fair value of net investment hedges (except any ineffective portion) in the
cumulative translation adjustment component of AOCI.
We assess
the effectiveness of our hedges based on changes in forward exchange
rates. The ineffective portion of the changes in fair value of our
hedges (recognized immediately in earnings) during the periods presented in this
report was not material.
We do not
designate some of our currency derivatives as hedges because we use them to at
least partially offset the immediate earnings impact of changes in foreign
exchange rates on existing assets or liabilities. We immediately
recognize the change in fair value of these contracts in earnings.
As of
January 31, 2010, we had outstanding foreign currency contracts with a total
notional amount of $374.1 million, related primarily to our euro, British pound,
and Australian dollar exposures.
We also
had outstanding exchange-traded futures and options contracts on three million
bushels of corn as of January 31, 2010. We use these contracts to
mitigate our exposure to corn price volatility. Because we do not
designate these contracts as hedges for accounting purposes, we immediately
recognize the changes in their fair value in earnings.
We manage
our interest rate risk with swap contracts. As of January 31, 2010,
we had fixed-to-floating interest rate swaps outstanding with a notional value
of $150.0 million and a maturity matching our bonds due April 1,
2012. These swaps are designated as fair value hedges. The
change in fair value of the swap not related to accrued interest is offset by a
corresponding adjustment to the carrying value of the bond.
The
following table presents the fair values of our derivative instruments as of
January 31, 2010. As required by GAAP, the fair values are presented
below on a gross basis, even though the fair values of those instruments that
are subject to master settlement arrangements are presented on a net basis in
the accompanying consolidated balance sheet.
(Dollars
in millions)
|
Classification
|
|
Fair
value of derivatives in a
gain
position
|
|
|
Fair
value of derivatives in a
loss position
|
|
Designated
as cash flow hedges:
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
Other
current assets
|
|
|
$0.5
|
|
|
|
$(0.2
|
)
|
Foreign
currency contracts
|
Other
assets
|
|
|
1.4
|
|
|
|
(0.4
|
)
|
Foreign
currency contracts
|
Accrued
expenses
|
|
|
2.7
|
|
|
|
(16.8
|
)
|
Foreign
currency contracts
|
Other
liabilities
|
|
|
0.1
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
Designated
as fair value hedges:
|
|
|
|
|
|
|
|
|
|
Interest
rate swap contracts
|
Other
assets
|
|
|
0.3
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
Designated
as net investment hedges:
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
Other
current assets
|
|
|
--
|
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
|
|
Not
designated as hedges:
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
Other
current assets
|
|
|
0.5
|
|
|
|
--
|
|
Foreign
currency contracts
|
Accrued
expenses
|
|
|
--
|
|
|
|
(0.1
|
)
|
Commodity
contracts
|
Accrued
expenses
|
|
|
--
|
|
|
|
(0.6
|
)
|
This
table presents the amounts affecting our consolidated statement of operations
for the periods covered by this report:
(Dollars
in millions)
|
|
Classification
|
|
|
Three
Months Ended
January 31, 2010
|
|
|
Nine
Months Ended
January 31, 2010
|
|
Currency
derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Net
gain (loss) recognized in AOCI
|
|
N/A
|
|
|
|
|
$7.5
|
|
|
|
$(24.5
|
)
|
Net
loss reclassified from AOCI into income
|
|
Net
sales
|
|
|
|
(7.7
|
)
|
|
|
(9.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
rate derivatives designated as fair value hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
gain recognized in income*
|
|
Other
income
|
|
|
|
0.3
|
|
|
|
0.3
|
|
*
The effect on the hedged item was an equal but offsetting amount for the
periods presented.
|
|
|
|
Currency
derivatives designated as net investment hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss recognized in AOCI
|
|
N/A
|
|
|
|
|
(2.0
|
)
|
|
|
(5.3
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
not designated as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency
derivatives – net gain (loss) recognized in income
|
|
Net
sales
|
|
|
|
1.5
|
|
|
|
(9.7
|
)
|
Currency
derivatives – net gain recognized in income
|
|
Other
income
|
|
|
|
2.6
|
|
|
|
0.9
|
|
Commodity
derivatives – net loss recognized in income
|
|
Cost
of sales
|
|
|
|
(0.3
|
)
|
|
|
(1.3
|
)
|
We expect
to reclassify $6.9 million of deferred net losses recorded in AOCI as of January
31, 2010, to earnings during the next 12 months. Such
reclassification would offset the anticipated earnings impact of the underlying
hedged exposures. The actual amounts that we ultimately reclassify to
earnings will depend on the exchange rates in effect when the underlying hedged
transactions occur. The maximum term of our contracts outstanding at
January 31, 2010 is 18 months.
We are
exposed to credit-related losses if the other parties to our derivative
contracts breach them. This credit risk is limited to the fair value
of the contracts. To manage this risk, we enter into contracts only
with major financial institutions that have earned investment-grade credit
ratings; we have established counterparty credit guidelines that are regularly
monitored and that provide for reports to senior management according to
prescribed guidelines; and we monetize contracts when we believe it is
warranted. Because of the safeguards we have put in place, we believe
the risk of loss from counterparty default to be immaterial.
Some of
our derivative instruments require us to maintain a specific level of
creditworthiness, which we have maintained. If our creditworthiness were to fall
below such level, then the counterparties to our derivative instruments could
request immediate payment or collateralization for derivative instruments in net
liability positions. As of January 31, 2010, the aggregate fair value of all
derivatives with creditworthiness requirements that were in a net liability
position was $8.3 million.
9.
Fair Value of Financial
Instruments
The fair
value of cash, cash equivalents, and short-term borrowings approximates the
carrying amount due to the short maturities of these instruments. We
estimate the fair value of long-term debt using discounted cash flows based on
our incremental borrowing rates for similar debt. The fair value of
commodity and foreign currency contracts is determined as discussed in Note
10. As of January 31, 2010, the fair values and carrying amounts of
these instruments were as follows:
(Dollars
in millions)
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
$241.7
|
|
|
|
$241.7
|
|
Foreign
currency contracts
|
|
|
1.4
|
|
|
|
1.4
|
|
Interest
rate swap contracts
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
0.6
|
|
|
|
0.6
|
|
Foreign
currency contracts
|
|
|
14.4
|
|
|
|
14.4
|
|
Short-term
borrowings
|
|
|
105.3
|
|
|
|
105.3
|
|
Current
portion of long-term debt
|
|
|
153.1
|
|
|
|
153.1
|
|
Long-term
debt
|
|
|
508.3
|
|
|
|
550.5
|
|
10.
Fair Value
Measurements
The fair
values of assets and liabilities are categorized into three levels based upon
the assumptions (inputs) used to determine those values. Level 1
provides the most reliable measure of fair value, while Level 3 generally
requires significant management judgment. The three levels
are:
·
|
Level
1
–
Quoted prices
(unadjusted) in active markets for identical assets or
liabilities.
|
·
|
Level
2
–
Observable
inputs other than those included in Level 1, such as quoted prices for
similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not
active; or other inputs that are observable or can be derived from or
corroborated by observable market
data.
|
·
|
Level
3
–
Unobservable
inputs that are supported by little or no market
activity.
|
The
following table summarizes the assets and liabilities measured at fair value on
a recurring basis in the accompanying balance sheet as of January 31,
2010:
(Dollars
in millions)
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts
|
|
|
$1.4
|
|
|
|
--
|
|
|
|
$1.4
|
|
|
|
--
|
|
Interest
rate swap contracts
|
|
|
0.3
|
|
|
|
--
|
|
|
|
0.3
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity
contracts
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
--
|
|
|
|
--
|
|
Foreign
currency contracts
|
|
|
14.4
|
|
|
|
--
|
|
|
|
14.4
|
|
|
|
--
|
|
The fair
value of commodity contracts is based on quoted prices in active
markets. The fair values of foreign exchange contracts and interest
rate swap contracts are determined through pricing models or formulas using
observable market data.
Some
assets and liabilities are measured at fair value on a nonrecurring basis; that
is, they not measured at fair value on an ongoing basis but are subject to fair
value adjustments only in certain circumstances (for example, when an asset is
determined to be impaired). The fair values of assets and liabilities
measured at fair value on a nonrecurring basis during fiscal 2010 were not
material as of January 31, 2010.
11.
Brand Name and Trademark Intangible
Assets
We assess
each of our brand names and trademarks ("brand names") for impairment at least
annually. A brand name is considered impaired if its book value
exceeds its estimated fair value. We estimate that fair value using
the relief from royalty method, which incorporates assumptions about future
revenues, growth rates, discount rates and royalty rates, with consideration of
market values for similar assets when available. Considerable
management judgment is necessary to estimate fair value, including the selection
of assumptions. If the estimated fair value of a brand name is less
than its book value, we write down the brand name’s book value to the estimated
fair value via a non-cash impairment charge to earnings.
In
accordance with our policy, we assessed several of our brand names for
impairment during the quarter ended January 31, 2010. Our assessment
indicated that the book value of one of those brand names, Don Eduardo, exceeded
its fair value by $11.6 million. As a result, we wrote down the book
value of the Don Eduardo brand name by that amount, which is reflected in other
expense in the accompanying statement of operations. The remaining
book value of the Don Eduardo brand name is not material. The decline
in its value reflects a significant reduction in estimated future net sales for
this low volume, high-priced tequila brand that has in part been affected by the
downturn in the global economic environment over the past 18
months.
No
impairment was indicated by the assessments performed during the third quarter
for our other brand names. However, two of our recently-acquired
brand names, Chambord and Herradura, have also been adversely affected by the
weakened global economy. As of January 31, 2010,
the estimated fair value of the Chambord and Herradura brand names exceeded
their book values of $116.5 million and $124.2 million by approximately $2.0
million and
$1.0
million
, respectively. Future events or changes in the
assumptions used to estimate those fair values could significantly change those
fair values, which could result in future impairment
charges.
In
accordance with our policy, the Finlandia and Tuaca brand names are scheduled to
be tested for impairment during the fourth quarter. (The book values
of the Finlandia and Tuaca brand names at January 31, 2010 are $296.6 million
and $24.4 million, respectively.) Unlike the brand names assessed
during the third quarter, the fair values of Finlandia and Tuaca have
significantly exceeded their book values in previous
assessments. Based on this, and other factors, we concluded that no
triggering events occurred to require an interim impairment analysis during the
third quarter.
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 2009 Annual
Report. Note that the results of operations for the nine months ended
January 31, 2010, 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, and projections that are "forward-looking
statements" as defined under U.S. federal securities laws. Words such as
"expect," "believe," "intend," "estimate," "will," "may," "anticipate,"
"project," and similar words identify forward-looking statements, which speak
only as of the date we make them. 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. By their nature,
forward-looking statements involve risks, uncertainties and other factors (many
beyond our control) that could cause our actual results to differ materially
from our historical experience or from our current expectations or projections.
These risks and other factors include, but are not limited to:
·
|
Prolonged
or deepening global economic downturn or renewed turmoil in financial and
equity markets (and related credit and capital market instability
and illiquidity; decreased consumer and trade spending; higher
unemployment; supplier, customer or consumer credit or other financial
problems; inventory fluctuations at distributors, wholesalers, or
retailers; bank failures or governmental nationalizations;
etc.)
|
·
|
competitors’
pricing actions (including price reductions, promotions, discounting,
couponing or free goods), marketing, product introductions, or other
competitive activities aimed at our
brands
|
·
|
trade
or consumer reaction to our product line extensions or marketing
activities
|
·
|
prolonged
or deeper declines in consumer confidence or spending, whether related to
global economic conditions, wars, natural disasters, weather, pandemics
(such as swine flu), terrorist attacks or other
factors
|
·
|
changes
in tax rates (including excise, sales, corporate, individual income,
dividends, capital gains) or in related reserves, changes in tax rules
(e.g., LIFO, foreign income deferral, U.S. manufacturing deduction) or
accounting standards, tariffs, or other restrictions affecting
beverage alcohol, and the unpredictability and suddenness with which they
can occur
|
·
|
trade
or consumer resistance to price increases in our
products
|
·
|
tighter
governmental restrictions on our ability to produce, sell, price, or
market our products, including advertising and
promotion
|
·
|
business
disruption, decline or costs related to reductions in workforce or other
cost-cutting measures
|
·
|
lower
returns on pension assets, higher interest rates on debt, or significant
changes in recent inflation rates (whether up or
down)
|
·
|
fluctuations
in the U.S. dollar against foreign currencies, especially the euro,
British pound, Australian dollar, or Polish
zloty
|
·
|
changes
in consumer behavior including further reduction of bar, restaurant, hotel
and other on-premise business; shifts to discount store purchases or
shifts away from premium-priced products; other price-sensitive consumer
behavior; or further reductions in
travel
|
·
|
changes
in consumer preferences, societal attitudes or cultural trends that result
in reduced consumption of our
products
|
·
|
distribution
arrangement decisions that affect the timing of our sales, temporarily
disrupt the marketing or sale of our products, or that result in
implementation-related costs
|
·
|
adverse
impacts resulting from our acquisitions, dispositions, joint ventures,
business partnerships, or portfolio
strategies
|
·
|
lower
profits, due to factors such as fewer used barrel sales, lower production
volumes (either for our own brands or those of third parties), sales mix
shift toward lower priced or lower margin skus, or cost increases in
energy or raw materials, such as grapes, grain, agave, wood, glass,
plastic, or closures
|
·
|
climatic
changes, agricultural uncertainties, our suppliers’ financial hardships or
other factors that affect the availability or quality of
grapes, agave, grain, glass, closures, plastic, or
wood
|
·
|
negative
publicity related to our company, brands, personnel, operations, business
performance or prospects
|
·
|
product
counterfeiting, tampering, or contamination and resulting negative effects
on our sales, brand equity, or corporate
reputation
|
·
|
adverse
developments stemming from state, federal or other governmental
investigations of beverage alcohol industry business, trade, or marketing
practices by us, our distributors, or
retailers
|
·
|
impairment
in the recorded value of any assets, including receivables, inventory,
fixed assets, goodwill or other
intangibles
|
Results
of Operations:
Third
Quarter Fiscal 2010 Compared to Third Quarter Fiscal 2009
A summary
of our operating performance (dollars expressed in millions, except per share
amounts) is presented below.
|
|
Three
Months Ended
|
|
|
|
|
|
|
January
31,
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
$784.1
|
|
|
|
$861.7
|
|
|
|
10
|
%
|
Gross
profit
|
|
|
370.6
|
|
|
|
410.9
|
|
|
|
11
|
%
|
Advertising
expenses
|
|
|
87.0
|
|
|
|
92.0
|
|
|
|
6
|
%
|
Selling,
general, and administrative expenses
|
|
|
113.1
|
|
|
|
131.5
|
|
|
|
16
|
%
|
Amortization
expense
|
|
|
1.3
|
|
|
|
1.3
|
|
|
|
|
|
Other
(income) expense, net
|
|
|
(8.0
|
)
|
|
|
12.2
|
|
|
|
|
|
Operating
income
|
|
|
177.2
|
|
|
|
173.9
|
|
|
|
(2
|
%)
|
Interest
expense, net
|
|
|
8.1
|
|
|
|
7.1
|
|
|
|
|
|
Income
before income taxes
|
|
|
169.1
|
|
|
|
166.8
|
|
|
|
(1
|
%)
|
Income
taxes
|
|
|
45.7
|
|
|
|
58.9
|
|
|
|
|
|
Net
income
|
|
|
123.4
|
|
|
|
107.9
|
|
|
|
(13
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
47.3
|
%
|
|
|
47.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
27.0
|
%
|
|
|
35.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$0.82
|
|
|
|
$0.73
|
|
|
|
(10
|
%)
|
Diluted
|
|
|
0.81
|
|
|
|
0.73
|
|
|
|
(10
|
%)
|
Net sales
for the three months ended January 31, 2010 were $861.7 million, up $77.6
million or 10% compared to the same prior year period. The major
factors driving the increase in net sales for the quarter were the benefits of a
weaker U.S. dollar, a net change in estimated trade inventory levels, and
volumetric gains for several brands in our portfolio including Jack Daniel’s
& Cola, Jack Daniel’s Tennessee Whiskey, Gentleman Jack, Antiguo, and el
Jimador. These positive factors were partially offset by the loss of
sales associated with sold and discontinued brands and net sales declines for
Southern Comfort, Finlandia and Agency Brands, particularly Maximus in
Poland. On a geographic basis, our overall net sales grew in several
markets for the quarter including Australia, the U.S., Mexico, and Germany,
while net sales declined in the U.K. and Poland.
The
components of the 10% increase in net sales for the quarter were:
|
Change
vs.
Prior
Period
|
|
5%
|
·
Estimated
net change in trade inventories
2
|
4%
|
·
Underlying
change
3
in net sales
|
2%
|
|
1%
|
|
(2%)
|
Reported
change in net sales
|
10%
|
Gross
profit increased $40.3 million, or 11%, from the third quarter of last
year. The same factors that drove the increase in net sales for the
quarter also contributed to the growth in gross profit for the same
period. In addition, production efficiencies in the quarter also
contributed to the growth in gross profit. Gross margin of 47.7%
improved slightly compared to 47.3% in the prior year period.
The
following table shows the major factors influencing the changes in gross profit
for the quarter:
|
Change
vs.
Prior
Period
|
·
Estimated
net change in trade inventories
|
5%
|
·
Foreign
exchange
|
3%
|
·
Underlying
change in gross profit
|
3%
|
Reported
change in gross profit
|
11%
|
1
Refers to net gains and losses incurred by the company relating to sales and
purchases in currencies other than the U.S. dollar. We use the
measure to understand the growth of the business on a constant dollar basis as
fluctuations in exchange rates can distort the underlying growth of our business
(both positively and negatively). To neutralize the effect of foreign
exchange fluctuations, we have historically translated current year results at
prior year rates. We believe it is important to separately identify
the impact that foreign exchange has on each major line item of our consolidated
statement of operations.
2
Refers to the estimated financial impact of changes in wholesale trade
inventories for our company's brands. We compute this effect using
our estimated depletion trends and separately identify trade inventory changes
in the variance analysis for our key measures. Based on the estimated
depletions and the fluctuations in trade inventory levels, we then adjust the
percentage variances from prior to current periods for our key
measures. We believe it is important to separately identify the
impact of this item in order for management and investors to understand the
results of our business that can arise from varying levels of wholesale
inventories.
3
Underlying change represents the percentage increase or decrease in reported
financial results in accordance with generally accepted accounting principles
(GAAP) in the United States, exclusive of other items impacting
period-over-period results. We believe presenting the underlying
change helps provide transparency to our comparable business
performance.
4
Excise
tax increases
refers to the impact of the additional revenue related to
these increases implemented during the period in several markets around the
world.
5
Refers to both the company's December 2008 sale of its Bolla and FontanaCandida
Italian wine brands to Gruppo Italiano Vini (GIV) and to the impact of certain
agency brands distributed in various geographies that exited our portfolio
during the comparable period.
Advertising
expenses increased $5.0 million, or 6%, for the three month period reflecting
the impact of a weaker U.S. dollar and a seasonal shift in advertising and
promotional investments to this quarter. Our investments employed in
the quarter that were delayed from earlier in the year resulted in higher
advertising spending in several markets including the U.S., Australia, and
several markets in Central Europe and South America. Spending behind
several brands increased in the quarter including Jack Daniel’s Tennessee
Whiskey, Gentleman Jack, Jack Daniel’s Single Barrel, Herradura, and
Chambord. Additionally, we continued to increase our investment
behind our brands via other activities that are recorded elsewhere in the
statement of operations including value-added packaging (cost of sales) and
targeted consumer price promotions (net sales).
Selling,
general and administrative expenses increased $18.4 million, or 16%, for the
third quarter primarily as a result of higher performance-related incentive
expenses compared to the same period a year ago when we reduced these expenses
following the downturn in our business. The negative impact of a
weaker U.S. dollar relative to this period last year also contributed to the
increase in selling, general and administrative expenses for the
quarter.
Other
expense increased $20.2 million compared to the third quarter last year,
reflecting the absence of the gain from the divestiture of our Italian wine
brands in the third quarter of last fiscal year ($20.4 million) and the non-cash
write-down of the Don Eduardo brand name ($11.6 million) during the current
fiscal year (see Note 11 to the condensed consolidated financial statements in
Item 1), offset partially by the year-over-year net impact of the revaluation of
certain monetary assets (including cash) and liabilities denominated in foreign
currencies.
Operating
income of $173.9 million declined $3.3 million, or 2%, from the same period last
year. The chart below summarizes the major factors influencing the
change in operating income for the quarter, which are described above, and
indicates underlying operating income declined 2%. This decline was
driven by higher performance based incentive compensation expense also discussed
above that more than offset underlying net sales growth.
|
Change
vs.
Prior
Period
|
·
Estimated
net change in trade inventories
|
11%
|
·
Foreign
exchange
|
9%
|
·
Underlying
change in operating income
|
(2%)
|
·
Don
Eduardo brand name write-down
6
|
(7%)
|
·
Discontinued
brands
|
(13%)
|
Reported
change in operating income
|
(2%)
|
Net interest expense decreased by $1.0
million reflecting lower net debt and a reduction in short-term interest
borrowing rates compared to a year ago.
6
Refers to a non-cash charge related to the impairment of the trade name for Don
Eduardo, a low volume, high-priced tequila.
The
effective tax rate in the quarter was 35.3% compared to 27.0% reported in the
third quarter of fiscal 2009. The increase in our tax rate was driven
primarily by the absence of items which favorably affected our effective tax
rate in the third quarter of fiscal 2009. These items included the
net reversal of unrecognized tax benefits due to the expiration of statutes of
limitations and the utilization of a portion of the capital loss carryforward
from the previous sale of Lenox, Inc. to offset the tax gain realized from the
Italian wine brands sale. The write-down of the Don Eduardo brand
name during the third quarter of fiscal 2010 also contributed to the increase in
the tax rate for the quarter, as a portion of the impairment is not
deductible.
Reported
diluted earnings per share of $0.73 for the quarter decreased 10% from the $0.81
earned in the same prior year period. The higher effective tax rate
and lower operating income for the quarter more than offset the benefit to
earnings per share resulting from the reduction in shares outstanding
attributable to the share repurchase activity authorized in December
2008.
Results
of Operations:
Nine
Months Fiscal 2010 Compared to Nine Months Fiscal 2009
|
|
Nine
Months Ended
|
|
|
|
|
|
|
January
31,
|
|
|
|
|
|
|
2009
|
|
|
2010
|
|
|
Change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
|
$2,508.9
|
|
|
|
$2,492.5
|
|
|
|
(1
|
%)
|
Gross
profit
|
|
|
1,218.1
|
|
|
|
1,234.0
|
|
|
|
1
|
%
|
Advertising
expenses
|
|
|
294.1
|
|
|
|
260.2
|
|
|
|
(12
|
%)
|
Selling,
general, and administrative expenses
|
|
|
397.2
|
|
|
|
373.7
|
|
|
|
(6
|
%)
|
Amortization
expense
|
|
|
3.8
|
|
|
|
3.8
|
|
|
|
|
|
Other
(income) expense, net
|
|
|
(16.6
|
)
|
|
|
4.8
|
|
|
|
|
|
Operating
income
|
|
|
539.6
|
|
|
|
591.5
|
|
|
|
10
|
%
|
Interest
expense, net
|
|
|
23.5
|
|
|
|
21.7
|
|
|
|
|
|
Income
before income taxes
|
|
|
516.1
|
|
|
|
569.8
|
|
|
|
10
|
%
|
Income
taxes
|
|
|
161.3
|
|
|
|
193.3
|
|
|
|
|
|
Net
income
|
|
|
354.8
|
|
|
|
376.5
|
|
|
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
|
48.6
|
%
|
|
|
49.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective
tax rate
|
|
|
31.2
|
%
|
|
|
33.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
$2.35
|
|
|
|
$2.54
|
|
|
|
8
|
%
|
Diluted
|
|
|
2.34
|
|
|
|
2.53
|
|
|
|
8
|
%
|
Net sales
for the nine months ended January 31, 2010 were down $16.4 million, or 1%
compared to the same prior-year period. The major factors driving the
decrease in net sales were:
|
Change
vs.
Prior
Period
|
·
Underlying
change in net sales
|
1%
|
·
Excise
tax increases
|
1%
|
·
Foreign
exchange
|
(1%)
|
·
Discontinued
brands
|
(2%)
|
Reported
change in net sales
|
(1%)
|
Underlying
net sales through January were up 1% versus the prior year supported by net
sales growth for several brands in our portfolio including Jack Daniel’s &
Cola, Gentleman Jack, Jack Daniel’s Tennessee Whiskey, el Jimador, Jack Daniel’s
Single barrel, Woodford Reserve, and Southern Comfort Ready-To-Pour (RTP) as
well as used barrels sales. Lower net sales for brands such as
Southern Comfort and Finlandia partially offset the growth recorded by these
brands. Australia, Germany, and France were the most significant
geographies that experienced underlying growth in net sales while net sales
declined in several countries including Poland, the U.K., Russia and
Spain. Our underlying net sales in the U.S. were flat. We
believe that our results over the first nine months were negatively affected by
the decline in the on-premise channel, trading down by consumers to lower price
brands, and some de-stocking in markets in Eastern Europe. More
specifically, for the first nine months of the fiscal year:
·
|
Jack
Daniel’s Tennessee Whiskey net sales increased in the low single digits on
both a reported and constant currency basis. Global
depletions
7
for the brand improved in the third
quarter as depletions increased 8% internationally and 1% in the U.S.,
lifting the brands worldwide depletion growth rate to 1% for the first
nine months of the fiscal year. In addition, for the first nine
months of the fiscal year, the brand registered depletion gains in
Australia, France, and Germany, while recording flat growth in the U.S.
and declining slightly in its second largest market, the
U.K.
|
·
|
Gentleman
Jack’s and Jack Daniel’s Single Barrel net sales grew at a double-digit
rate on both a reported and a constant currency basis for the nine month
period.
|
·
|
Jack
Daniel’s ready-to-drink brands registered significant double-digit growth
in net sales on both a reported and constant currency basis as the brand
has benefitted from strong volumetric gains in Germany as well as the
geographic expansion into the U.K., Mexico, Italy, and a number of other
markets. In Australia, Jack Daniel’s & Cola registered
double digit growth in both reported and constant currency net sales due
in part to depressed results in the first six months of last year that
followed the April 2008 unexpected increase of the ready-to-drink tax in
the country.
|
7
Depletions are shipments direct to retail or from distributors to wholesale and
retail customers, and are commonly regarded in the industry as an approximate
measure of consumer demand.
·
|
Finlandia
global net sales declined significantly on both a reported and constant
currency basis reflecting soft trends in Eastern Europe, particularly
Poland, due, we believe, to a soft economy exacerbated by unfavorable
weather conditions, a very difficult on-premise channel, and significant
inventory destocking earlier this fiscal
year.
|
·
|
Southern
Comfort global net sales on both a reported and constant currency basis
declined in the mid-single digits during the first nine months of the
fiscal year. We believe Southern Comfort’s negative trends
continue to be influenced in part by weakness in the on-premise channel
around the world. Southern Comfort ready-to-pour brands have
generated incremental sales through the first nine months of the fiscal
year as consumers have responded favorably to the newly introduced
premixed versions of cocktails for off-premise
consumption.
|
·
|
el
Jimador experienced strong growth in both constant currency net sales and
depletions reflecting double digit depletions gains in the U.S.,
outperformance of the overall tequila category in Mexico, and the
expansion of the brand into international markets outside
Mexico.
|
Our gross
profit increased $15.9 million, or 1%, due primarily to the absence of last
year’s first quarter $22.4 million non-cash inventory write-down related to
agave plants. The loss of gross profit from discontinued brands
partially offset this factor. As a result, our overall gross margin
as a percentage of sales improved from 48.6% to 49.5% for the first nine months
of the fiscal year.
The
following table shows the major factors influencing the change in gross profit
for the period:
|
Change
vs.
Prior
Period
|
·
Non-cash
agave inventory write-down
8
|
2%
|
·
Discontinued
brands
|
(1%)
|
Reported
change in gross profit
|
1%
|
The
aggregate impact of changes in sales mix, taking into consideration geographic
markets, brands, sizes, and sales channels, contributed to our flat underlying
gross profit change lagging the 1% underlying net sales growth through
January.
Advertising
investments were down $33.9 million or 12% for the first nine months of the
fiscal year compared to the same period last year due in part to the impact of a
stronger U.S. dollar and the absence of spending behind brands that are no
longer in our portfolio. Excluding these items, advertising
investments remained significantly below the same period last year, primarily
reflecting a continued reallocation of brand investment to other activities such
as value-added packaging and targeted consumer price promotions, neither of
which is reflected in advertising expense. Additionally, we believe
the expansion of our ready-to-drink brands serves as a form of advertising
despite not being reflected as such in the statement of operations.
8
Refers to an abnormal number of agave plants identified during the first quarter
of fiscal 2009 as dead or dying. Although agricultural uncertainties
are inherent in our tequila or any other business including the growth and
harvesting of raw materials, we believe that the magnitude of this item distorts
the underlying trends of our business.
Selling,
general, and administrative expenses decreased $23.5 million, or 6%, over the
first nine months of last year. Several factors influenced this
reduction in spending including the impact of a stronger U.S. dollar, the
benefit of the actions we took during fiscal 2009 to reduce our cost base
including an early retirement program and an overall reduction in workforce, the
timing of some activities, and the continued tight management of discretionary
expenses. These reductions were partially offset by higher
performance related incentive compensation expense compared to the same period a
year ago.
Other
expense increased $21.4 million compared to the first nine months of last year,
reflecting the absence of the $20.4 million gain from the divestiture of our
Italian wine brands last year and the $11.6 million write-down of the Don
Eduardo brand name during the current fiscal year, offset partially by the
year-over-year net impact of the revaluation of certain monetary assets
(including cash) and liabilities that are denominated in foreign
currencies.
Operating
income reached $591.5 million, increasing $51.9 million, or 10%, compared to the
first nine months of last year. Operating income benefited
from:
·
|
Planned
cost savings and efficiencies;
|
·
|
The
absence of the $22.4 million non-cash agave inventory write-down last
year; and
|
·
|
The
benefits of a weaker U.S. dollar.
|
Operating
income growth was negatively affected by the absence of income from discontinued
brands (including the gain last year on the sale of our Italian wine brands) and
the write-down of the Don Eduardo brand name during the current fiscal
year.
The following table summarizes the
major factors influencing the change in operating income for the period and
identifies our underlying operating income growth for the first nine months of
the fiscal year of 10%. Significant cost savings related to selling,
general, and administrative expenses and advertising efficiencies were the
primary drivers of the underlying growth in operating income through
January
.
|
Change
vs.
Prior
Period
|
·
Underlying
change in operating income
|
10%
|
·
Non-cash
agave inventory write-down
|
5%
|
·
Foreign
exchange
|
2%
|
·
Don
Eduardo brand name write-down
|
(2%)
|
·
Discontinued
brands (including gain on sale)
|
(5%)
|
Reported
change in operating income
|
10%
|
Net
interest expense decreased by $1.8 million, reflecting lower net debt and a
reduction in short-term interest borrowing rates compared to a year
ago.
The
effective tax rate for the first nine months of the year was 33.9%, compared to
31.2% reported in the first nine months of fiscal 2009. The increase
in our effective tax rate was largely driven by the absence of items which
favorably impacted our effective tax rate last fiscal year including the net
reversal in fiscal 2009 of unrecognized tax benefits due to the expiration of
statutes of limitations and the utilization in fiscal 2009 of a portion of the
capital loss carryforward from the sale of Lenox, Inc. to eliminate the tax gain
realized from the Italian wine brands sale. The non-cash write-down
of the Don Eduardo brand name in the current fiscal year also contributed to the
increase in the tax rate in fiscal 2010.
Reported
diluted earnings per share of $2.53 for the first nine months increased 8% from
the $2.34 earned in the same prior year period. The same factors that
boosted the increase in operating income also contributed to the gain in
earnings per share. In addition, earnings per share also benefitted
from a reduction in net interest expense and fewer shares outstanding resulting
from our share repurchase activity authorized in December 2008. A
higher effective tax rate only partially offset these gains.
Full-Year
Outlook
We
have adjusted our fiscal 2010 full-year earnings outlook to $2.98 to $3.08
per share, which incorporates the $0.07 per share non-cash trademark impairment
charge. In addition, this guidance includes expectations of continued
underlying net sales trends, current foreign exchange spot rates, projected
costs associated with route-to-consumer enhancements, and an anticipated higher
effective tax rate. We remain concerned about the impact on
consumption trends from a soft on-premise channel, consumer trading-down, and
heightened competitive activity. While we anticipate overall
operating expenses to decline for fiscal year 2010, year-to-date trends are
expected to moderate as underlying investments in both advertising and selling,
general, and administrative expenses are expected to be higher in the fourth
quarter when compared to the same prior year period.
Critical
Accounting Estimates
Our
Annual Report on Form 10-K for the year ended April 30, 2009, includes a
discussion of our critical accounting estimates, including those related to the
valuation of our brand names.
We assess
each of our brand names for impairment at least annually. A brand
name is considered impaired if its book value exceeds its estimated fair
value. We estimate that fair value using the relief from royalty
method, which incorporates assumptions about future revenues, growth rates,
discount rates and royalty rates, with consideration of market values for
similar assets when available. Considerable management judgment is
necessary to estimate fair value, including the selection of
assumptions. If the estimated fair value of a brand name is less than
its book value, we write down the brand name’s book value to the estimated fair
value via a non-cash impairment charge to earnings.
In
accordance with our policy, we assessed several of our brand names for
impairment during the quarter ended January 31, 2010. Our assessment
indicated that the book value of one of those brand names, Don Eduardo, exceeded
its fair value by $11.6 million. As a result, we wrote down the book
value of the Don Eduardo brand name by that amount, which is reflected in other
expense in the accompanying statement of operations. The remaining
book value of the Don Eduardo brand name is not material. The decline
in its value reflects a significant reduction in estimated future net sales for
this low volume, high-priced tequila brand that has in part been affected by the
downturn in the global economic environment over the past 18
months.
No
impairment was indicated by the assessments performed during the third quarter
for our other brand names. However, two of our recently-acquired
brand names, Chambord and Herradura, have also been adversely affected by the
weakened
global economy. As of January 31, 2010, the
estimated fair value of the Chambord and Herradura brand names exceeded their
book values of $116.5 million and $124.2 million by approximately $2.0 million
and
$1.0
million
, respectively. Future events or changes in the
assumptions used to estimate those fair values could significantly change those
fair values, which could result in future impairment
charges.
In
accordance with our policy, the Finlandia and Tuaca brand names are scheduled to
be tested for impairment during the fourth quarter. (The book values
of the Finlandia and Tuaca brand names at January 31, 2010 are $296.6 million
and $24.4 million, respectively.) Unlike the brand names assessed
during the third quarter, the fair values of Finlandia and Tuaca have
significantly exceeded their book values in previous
assessments. Based on this, and other factors, we concluded that no
triggering events occurred to require an interim impairment analysis during the
third quarter.
Liquidity
and Financial Condition
Cash and
cash equivalents declined $98.4 million during the nine months ended January 31,
2010, compared to an increase of $215.8 million during the same period last
year. Cash provided by operations was $424.5 million, up from $342.9
million for the same nine-month period last year, reflecting higher earnings
(excluding non-cash items) and a lower seasonal increase in working
capital. Cash used for investing activities declined from last year
by $3.4 million, primarily reflecting a $19.9 million decrease in capital
expenditures during the current year and last year’s receipt of $16.8 million, a
portion of the proceeds from the sale of the Bolla and Fontana Candida brand
names. Cash used for financing activities was $436.1 million more
than last year, primarily reflecting a $299.5 million increase in net debt
repayments and a $134.7 million increase in share repurchases. The
impact on cash and cash equivalents as a result of exchange rate changes was an
increase of $17.6 million for the nine months ended January 31, 2010, compared
to a decrease of $19.3 million for the same period last year.
In
addition to our cash flow from operations, we have access to other liquidity
sources. Our commercial paper program, supported by our bank credit
facility, continues to fund our short-term credit needs at attractive interest
rates with strong demand from investors. Absent funding availability
in the commercial paper market, our secondary source of short-term liquidity is
our $800 million bank credit facility, which expires April 30, 2012, and carries
favorable terms compared with current market conditions. Under
extreme market conditions, it is possible this agreement might not be fully
funded. While we are alert to this uncertainty, because the health of
the global banking system has improved and the markets for investment-grade
bonds and private placements are currently robust, we believe these should
provide a source of long-term financing that we could use to pay off our
short-term debt if necessary.
Our
credit facility includes only one financial covenant, which requires that our
consolidated EBITDA (as defined in the agreement) to consolidated interest
expense not be less than a ratio of 3 to 1. At January 31, 2010, with
a ratio of approximately 25 to 1, we were well within this covenant’s parameters
and there were no borrowings outstanding under the credit facility.
We
continue to closely monitor our counterparty risks with respect to our cash
balances and derivative contracts. Absent significant further
deterioration of market conditions, we believe our current liquidity position is
strong and sufficient to meet all of our financial commitments for the
foreseeable future, including the maturity of $150 million in floating rate
notes on April 1, 2010.
In
December 2008, we announced that our Board of Directors authorized the
repurchase of up to a total of $250 million of our outstanding Class A and Class
B common shares over the succeeding 12 months, subject to market
conditions. Under this plan, which expired at the close of business
on December 3, 2009, we repurchased a total of 4,249,039 shares (23,788 of Class
A and 4,225,251 of Class B) for approximately $195.7 million. The
average repurchase price per share, including broker commissions, was $47.13 for
Class A and $46.06 for Class B.
On
January 28, 2010, our Board of Directors approved a regular quarterly cash
dividend of $0.30 per share on Class A and Class B common
stock. Stockholders of record on March 8, 2010, will receive the cash
dividend on April 1, 2010.
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.
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
2. Unregistered Sales of Equity Securities and Use of
Proceeds
The
following table provides information about shares of our common stock that we
repurchased during the quarter ended January 31, 2010:
Period
|
|
Total
Number of
Shares
Purchased
|
|
|
Average
Price Paid
per
Share
|
|
|
Total
Number of Shares Purchased
as
Part of Publicly Announced
Plans
or Programs
|
|
|
Approximate
Dollar
Value
of Shares that
May
Yet Be Purchased Under the Plans or Programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November
1, 2009 – November 30, 2009
|
|
|
309,968
|
|
|
|
$49.70
|
|
|
|
309,968
|
|
|
|
$57,300,000
|
|
December
1, 2009 – December 31, 2009
|
|
|
60,956
|
|
|
|
$50.58
|
|
|
|
60,956
|
|
|
|
--
|
|
January
1, 2010 – January 31, 2010
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
|
|
--
|
|
Total
|
|
|
370,924
|
|
|
|
$49.85
|
|
|
|
370,924
|
|
|
|
|
|
As
announced on December 4, 2008, our Board of Directors authorized the repurchase
of up to a total of $250.0 million of outstanding Class A and Class B common
stock over the succeeding 12 months, subject to market
conditions. The shares presented in the above table were acquired as
part of this repurchase plan, which expired at the close of business on December
3, 2009.
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 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).
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:
March 11, 2010
|
By:
|
/s/ Donald
C. Berg
|
|
|
|
Donald
C. Berg
|
|
|
|
Executive
Vice President and Chief Financial Officer
|
|
|
|
(On
behalf of the Registrant and as Principal Financial Officer)
|
|
|
|
|
|
|
|
|
|