SECURITIES AND EXCHANGE COMMISSION

                           WASHINGTON, D.C. 20549

                                  FORM 10-Q


                 Quarterly Report Under Section 13 or 15(d)
                   Of the Securities Exchange Act of 1934



                       For Quarter Ended SeptemberJune 30, 20042005



                        Commission file number 1-7823



                       ANHEUSER-BUSCH COMPANIES, INC.
           (Exact name of registrant as specified in its charter)

                    DELAWARE                                43-1162835
        (State or other jurisdiction of                 (I.R.S. Employer
         incorporation or organization)                Identification No.)

      One Busch Place, St. Louis, Missouri                    63118
     (Address of principal executive offices)              (Zip Code)



                                314-577-2000
            (Registrant's telephone number, including area code)

   Indicate by check mark whether the registrant (1) has filed all reports
 required to be filed by Section 13 or 15(d) of the Securities Exchange Act
   of 1934 during the preceding 12 months (or for such shorter period that
 the registrant was required to file such reports), and (2) has been subject
             to such filing requirements for the past 90 days.

                               Yes [X] No [ ]

    Indicate by check mark whether the registrant is an accelerated filer
               (as defined in Rule 12b-2 of the Exchange Act)

                               Yes [X] No [ ]

      Indicate the number of shares outstanding of each of the issuer's
        classes of common stock, as of the latest practicable date.

     $1 Par Value Common Stock - 790,068,368776,779,707 shares as of SeptemberJune 30, 20042005


                                     1



                                  Anheuser-Busch Companies, Inc. and Subsidiaries
                                       Consolidated Balance Sheet (Unaudited)


- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
SeptemberJune 30, December 31, (In millions)millions, except per share) 2005 2004 2003 ------------------ --------------------------- ------------ Assets Current Assets: Cash $ 196.0 $ 191.1$137.1 $228.1 Accounts receivable 938.4 669.4963.9 696.1 Inventories: Raw materials and supplies 322.9 320.3378.1 405.0 Work in progress 82.6 81.9103.1 80.0 Finished goods 261.4 185.3229.3 205.3 Total inventories 666.9 587.5710.5 690.3 Other current assets 198.3 182.3 ------------------ ------------------230.5 203.9 --------- --------- Total current assets 1,999.6 1,630.32,042.0 1,818.4 Investments in affiliated companies 3,208.0 3,052.03,060.7 3,150.2 Plant and equipment, net 8,726.2 8,498.98,986.5 8,847.4 Intangible assets, including goodwill of $960.3$996.6 and $349.0, respectively 1,167.5 486.6$984.1 1,201.3 1,191.9 Other assets 1,097.9 1,021.7 ------------------ ------------------1,098.9 1,165.5 --------- --------- Total Assets $16,199.2 $14,689.5 ================== ==================$16,389.4 $16,173.4 ========= ========= Liabilities and Shareholders Equity Current Liabilities: Accounts payable $ 1,170.31,155.4 $ 1,093.71,194.8 Accrued salaries, wages and benefits 267.1 288.9267.9 291.4 Accrued taxes 322.4 163.1235.8 152.9 Accrued interest 111.7 110.4128.6 125.2 Other current liabilities 218.0 201.1 ------------------ ------------------254.9 204.7 --------- --------- Total current liabilities 2,089.5 1,857.2 ------------------ ------------------2,042.6 1,969.0 --------- --------- Postretirement benefits 458.4 470.4 ------------------ ------------------443.7 454.2 --------- --------- Debt 8,272.4 7,285.4 ------------------ ------------------8,275.3 8,278.6 --------- --------- Deferred income taxes 1,695.9 1,462.1 ------------------ ------------------1,617.4 1,727.2 --------- --------- Other long-term liabilities 918.3 902.7 ------------------ ------------------1,077.0 1,076.3 --------- --------- Shareholders Equity: Common stock, $1.00 par, value,authorized 1.6 billion shares authorized 1,462.0 1,457.91,466.7 1,463.0 Capital in excess of par value 1,397.0 1,194.01,543.6 1,425.3 Retained earnings 15,267.3 13,935.416,145.7 15,407.2 Treasury stock, at cost (14,330.8) (12,939.0)(15,214.0) (14,638.5) Accumulated non-owner changes in equity (1,030.8) (890.3) ESOP debt guarantee -- (46.3) ------------------ ------------------(1,008.6) (988.9) --------- --------- Total Shareholders Equity 2,764.7 2,711.7 ------------------ ------------------2,933.4 2,668.1 --------- --------- Commitments and contingencies -- -- ------------------ --------------------------- --------- Total Liabilities and Shareholders Equity $16,199.2 $14,689.5 ================== ==================$16,389.4 $16,173.4 ========= ========= - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- See the accompanying footnotes on pages 5 -- 14.13.
2 Anheuser-Busch Companies, Inc., and Subsidiaries Consolidated Income Statement (Unaudited) - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
ThirdSecond Qtr. Ended Sept. 30, NineFirst Six Months Ended Sept. 30, (In millions, except per share) Ended June 30, Ended June 30, ------------------------------ ------------------------------ 2005 2004 20032005 2004 2003 ------------------------------------ ----------------------------------------------- -------- -------- -------- Gross sales $ 4,679.6 $ 4,465.8 $13,279.8 $12,600.0$4,597.3 $4,597.2 $8,682.4 $8,600.2 Excise taxes (599.5) (585.3) (1,712.7) (1,668.7) ---------------- ---------------- ---------------- ----------------(579.2) (587.2) (1,100.6) (1,113.2) -------- -------- -------- -------- Net sales 4,080.1 3,880.5 11,567.1 10,931.34,018.1 4,010.0 7,581.8 7,487.0 Cost of sales (2,361.3) (2,204.1) (6,765.8) (6,368.4) ---------------- ---------------- ---------------- ----------------(2,476.0) (2,331.2) (4,703.2) (4,404.5) -------- -------- -------- -------- Gross profit 1,718.8 1,676.4 4,801.3 4,562.91,542.1 1,678.8 2,878.6 3,082.5 Marketing, distribution &and administrative expenses (672.5) (648.5) (1,909.1) (1,812.9) ---------------- ---------------- ---------------- ----------------(697.1) (654.3) (1,301.2) (1,236.6) -------- -------- -------- -------- Operating income 1,046.3 1,027.9 2,892.2 2,750.0845.0 1,024.5 1,577.4 1,845.9 Interest expense (107.2) (98.7) (314.8) (299.7)(115.9) (105.9) (230.7) (207.6) Interest capitalized 4.7 6.9 15.7 17.75.5 5.8 10.7 11.0 Interest income 1.9 0.3 3.4 0.60.2 0.4 2.2 1.5 Other income, net 2.5 2.1 32.5 1.1 ---------------- ---------------- ---------------- ----------------1.2 2.4 20.7 30.0 -------- -------- -------- -------- Income before income taxes 948.2 938.5 2,629.0 2,469.7736.0 927.2 1,380.3 1,680.8 Provision for income taxes (367.7) (361.5) (1,020.3) (955.7)(266.2) (360.0) (503.6) (652.6) Equity income, net of tax 103.9 87.3 299.1 267.7 ---------------- ---------------- ---------------- ----------------137.2 106.3 243.1 195.2 -------- -------- -------- -------- Net income $684.4 $664.3 $1,907.8 $1,781.7 ================ ================ ================ ================$607.0 $673.5 $1,119.8 $1,223.4 ======== ======== ======== ======== Basic earnings per share $.86 $.81 $2.38 $2.15 ================ ================ ================ ================$.78 $.84 $1.44 $1.52 ======== ======== ======== ======== Diluted earnings per share $.85 $.80 $2.35 $2.12 ================ ================ ================ ================$.78 $.83 $1.43 $1.50 ======== ======== ======== ======== - ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- See the accompanying footnotes on pages 5 -- 14.13.
3 Anheuser-Busch Companies, Inc. and Subsidiaries Consolidated Statement Ofof Cash Flows (Unaudited) - -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
NineFirst Six Months Ended Sept. 30, ----------------------------------------- (In millions) Ended June 30, ------------------------------- 2005 2004 2003 ---------------- ------------------------- -------- Cash flow from operating activities: Net Income $1,907.8 $ 1,781.7$1,119.8 $1,223.4 Adjustments to reconcile net income to cash provided by operating activities: Depreciation and amortization 692.0 649.9 Deferred481.0 457.1 (Decrease) / Increase in deferred income taxes 134.9 63.3(55.0) 33.3 Undistributed earnings of affiliated companies (120.1) (107.1)(39.5) (16.2) Gain on sale of business (15.4) --- Other, net (17.9) 68.5 ---------------- -----------------102.9 93.8 -------- -------- Operating cash flow before changechanges in working capital 2,596.7 2,456.31,593.8 1,791.4 Increase in working capital (205.3) (7.2) ---------------- -----------------(244.7) (235.2) -------- -------- Cash provided by operating activities 2,391.4 2,449.1 ---------------- -----------------1,349.1 1,556.2 -------- -------- Cash flow from investing activities: Capital expenditures (726.5) (719.5) Business acquisitions (726.0) (116.4) ---------------- -----------------(565.4) (441.7) Proceeds from sale of business 48.3 --- Acquisitions -- (441.3) -------- -------- Cash used for investing activities (1,452.5) (835.9) ---------------- -----------------(517.1) (883.0) -------- -------- Cash flow from financing activities: Increase in long-term debt 1,435.1 929.33.7 963.5 Decrease in long-term debt (508.4) (401.9)(57.9) (502.9) Dividends paid to shareholders (549.9) (506.7)(381.3) (354.3) Acquisition of treasury stock (1,410.3) (1,747.8)(575.5) (792.2) Shares issued under stock plans 99.5 61.4 ---------------- -----------------88.0 82.6 -------- -------- Cash used for financing activities (934.0) (1,665.7) ---------------- -----------------(923.0) (603.3) -------- -------- Net increase/(decrease) / increase in cash during the period 4.9 (52.5)(91.0) 69.9 Cash, beginning of period 228.1 191.1 188.9 ---------------- ------------------------- -------- Cash, end of period $196.0 $136.4 ================ =================$137.1 $261.0 ======== ======== - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- See the accompanying footnotes on pages 5 -- 14.13.
4 ANHEUSER-BUSCH COMPANIES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS 1. Unaudited Financial Statements ------------------------------ The unaudited financial statements have been prepared in accordance with U.S. generally accepted accounting principles and applicable SEC guidelines pertaining to quarterly financial information.reporting, and include all adjustments necessary for a fair presentation. These financial statements should be read in combination with the consolidated financial statements and footnotesnotes included in the company's annual report on Form 10-K for the year ended December 31, 2003.2004. 2. Business Segments Information ----------------------------- Comparative business segment information for the second quarter and first six months ended June 30 are presented below (in millions): ----------------------------------------------------------------------------------------
SECOND Domestic Int'l Corporate QUARTER Beer Beer Packaging Entertain. & Elims. Consol. - --------------------------------------------------------------------------------------------------------------- 2005 Gross Sales $3,432.1 296.8 648.9 320.9 (101.4) $4,597.3 Net Sales: - - Intersegment $0.7 -- 227.5 -- (228.2) $-- - - External $2,912.7 236.3 421.4 320.9 126.8 $4,018.1 Income Before Income Taxes $773.3 26.0 44.5 78.0 (185.8) $736.0 Equity Income, Net of Tax -- $137.2 -- -- -- $137.2 Net Income $479.5 153.3 27.6 48.4 (101.8) $607.0 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- 2004 Gross Sales $3,558.2 237.5 625.8 312.5 (136.8) $4,597.2 Net Sales: - - Intersegment $0.7 -- 237.9 -- (238.6) $-- - - External $3,020.6 187.5 387.9 312.5 101.5 $4,010.0 Income Before Income Taxes $951.6 31.1 52.5 81.8 (189.8) $927.2 Equity Income, Net of Tax -- $106.3 -- -- -- $106.3 Net Income $589.9 125.6 32.6 50.7 (125.3) $673.5 - --------------------------------------------------------------------------------------------------------------- 5 ---------------------------------------------------------------------------------------- FIRST Domestic Int'l Corporate SIX MONTHS Beer Beer Packaging Entertain. & Elims. Consol. - --------------------------------------------------------------------------------------------------------------- 2005 Gross Sales $6,645.8 545.1 1,215.4 496.0 (219.9) $8,682.4 Net Sales: - - Intersegment $1.4 -- 436.1 -- (437.5) $-- - - External $5,647.1 441.8 779.3 496.0 217.6 $7,581.8 Income Before Income Taxes $1,554.6 47.8 80.1 71.6 (373.8) $1,380.3 Equity Income -- $243.1 -- -- -- $243.1 Net Income $963.9 272.7 49.7 44.4 (210.9) $1,119.8 - --------------------------------------------------------------------------------------------------------------- - --------------------------------------------------------------------------------------------------------------- 2004 Gross Sales $6,821.1 430.6 1,147.2 466.6 (265.3) $8,600.2 Net Sales: - - Intersegment $1.4 -- 448.0 -- (449.4) $-- - - External $5,790.8 346.3 699.2 466.6 184.1 $7,487.0 Income Before Income Taxes $1,814.2 54.0 89.3 70.8 (347.5) $1,680.8 Equity Income -- $195.2 -- -- -- $195.2 Net Income $1,124.8 228.7 55.4 43.9 (229.4) $1,223.4 - ---------------------------------------------------------------------------------------------------------------
Effective in the first quarter 2005, the company's transportation business is included within the domestic beer segment and its real estate business is reported as a corporate item. These businesses previously comprised the "other" segment. Segment results for 2004 have been updated to conform to the 2005 reporting convention. The change in composition is not material for any period presented. 3. Earnings Per Share ------------------ Earnings per share are calculated by dividing net income by weighted-average common shares outstanding for the period. The difference between basic and diluted weighted-average common shares is due to the dilutive impact of unexercised in-the-money stock options. There were no adjustments to net income for any period shown for purposes of calculating earnings per share. Weighted-average common shares outstanding for the thirdsecond quarter and ninefirst six months ended SeptemberJune 30 are shown belowin the follow table (millions of shares): 6
ThirdSecond Quarter NineFirst Six Months --------------------------- --------------------------- 2005 2004 20032005 2004 2003 ----------- ------------ ------------ ----------- ------------ Basic weighted average shares outstanding 797.4 819.7 802.9 830.6777.1 800.9 778.2 805.7 =========== ============ ============ =========== ============ Diluted weighted average shares outstanding 806.6 830.3 812.8 841.2782.4 810.6 784.4 815.8 =========== ============ ============ =========== ============
5 3. Business Segments Information ----------------------------- Comparative business segment information for the third quarter and nine months ended September 30 (in millions):
----------------------------------------------------------------------------------------- THIRD Domestic Int'l Corporate & QUARTER Beer Beer Packaging Entertain. Other Elims. Consol. - ---------------------------------------------------------------------------------------------------------------------------- 2004 Gross Sales $3,561.3 284.6 611.6 360.6 18.8 (157.3) $4,679.6 Net Sales: - - Intersegment -- -- $240.1 -- 0.9 (241.0) $-- - - External $3,018.4 228.0 371.5 360.6 17.9 83.7 $4,080.1 Income Before Income Taxes $933.3 36.5 48.9 112.9 (1.0) (182.4) $948.2 Equity Income, Net of Tax -- $103.9 -- -- -- -- $103.9 Net Income $578.7 126.5 30.3 70.0 (0.6) (120.5) $684.4 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- 2003 Gross Sales $3,483.1 216.3 541.9 356.0 20.0 (151.5) $4,465.8 Net Sales: - - Intersegment -- -- $231.4 -- 1.0 (232.4) $-- - - External $2,942.0 172.1 310.5 356.0 19.0 80.9 $3,880.5 Income Before Income Taxes $901.0 29.7 47.2 121.9 (0.1) (161.2) $938.5 Equity Income, Net of Tax -- $87.3 -- -- -- -- $87.3 Net Income $558.6 105.7 29.2 75.6 -- (104.8) $664.3 - ---------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------ NINE Domestic Int'l Corporate & MONTHS Beer Beer Packaging Entertain. Other Elims. Consol. - ---------------------------------------------------------------------------------------------------------------------------- 2004 Gross Sales $10,373.3 715.2 1,758.8 827.2 53.1 (447.8) $13,279.8 Net Sales: - - Intersegment -- -- $688.1 -- 3.0 (691.1) $-- - - External $8,801.5 574.3 1,070.7 827.2 50.1 243.3 $11,567.1 Income Before Income Taxes $2,747.5 90.5 138.2 183.7 (3.3) (527.6) $2,629.0 Equity Income, Net of Tax -- $299.1 -- -- -- -- $299.1 Net Income $1,703.5 355.2 85.7 113.9 (2.0) (348.5) $1,907.8 - ---------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------- 2003 Gross Sales $10,019.4 583.5 1,628.8 762.1 53.3 (447.1) $12,600.0 Net Sales: - - Intersegment -- -- $678.8 -- 3.3 (682.1) $-- - - External 8,463.5 470.7 950.0 762.1 50.0 235.0 $10,931.3 Income Before Income Taxes $2,576.3 75.8 131.5 167.4 (0.2) (481.1) $2,469.7 Equity Income, Net of Tax -- $267.7 -- -- -- -- $267.7 Net Income $1,597.3 314.7 81.5 103.8 (0.1) (315.5) $1,781.7 - ----------------------------------------------------------------------------------------------------------------------------
6 4. Business Investments -------------------- Harbin Group Acquisition ------------------------ During the second quarter 2004, the company initiated a tender offer for all the outstanding shares of Harbin Brewery Group, the fourth largest brewer in China, and completed the purchase by the end of July 2004. Harbin is included in Anheuser-Busch's consolidated results as of September 30, 2004. Operating results for Harbin are included in the company's consolidated third quarter 2004 results on a one-month lag basis (i.e., Harbin's June, July and August results are reported in the third quarter). Anheuser-Busch paid a total of $693 million for 100% of Harbin, with the purchase price allocated as shown below (in millions). The valuation of acquired assets and liabilities was performed by an independent appraiser. Description Amount ------------------------------------------------ ------------ Working Capital $4 Property, Plant and Equipment 174 Identifiable Intangible Assets 59 Goodwill 590 Long-Term Debt (118) Net Other Liabilities (16) ------------ $693 ============ Identifiable intangible assets consist of trademarks valued at $44 million and a wholesaler distribution network valued at $15 million. Trademarks are not amortized. The wholesaler distribution network is being amortized on a straight-line basis over seven years. The company recognized $366,000 in amortization expense for the wholesaler network in the third quarter and expects on-going annual amortization expense of approximately $2.2 million over the life of the asset. The Harbin debt assumed is a portfolio of small-scale loans with an average maturity of approximately two years and a weighted average interest rate of 5.57%. 7 Tsingtao Investment ------------------- In March 2004, the company made its planned final investment of $33 million in convertible bonds of Tsingtao, the largest brewer in China, bringing the total of its recent investments in Tsingtao to $182 million. The company's equity ownership interest remains at 9.9% and continues to be accounted for using the cost method. 5. Non-Owner Changes in Shareholders Equity --------------------------- Net income and---------------------------------------- The components of accumulated non-owner changes in shareholders equity, net of applicable income taxes, for the third quarteras of June 30, 2005 and nine months ended September 30December 31, 2004 follow (in millions):
ThirdJune 30, Dec. 31, 2005 2004 --------------- --------------- Foreign currency translation loss $(493.1) $(566.5) Deferred hedging gains 1.9 (1.3) Deferred securities valuation gains (0.4) 95.9 Minimum pension liability (517.0) (517.0) --------------- --------------- Accumulated non-owner changes in shareholders equity $(1,008.6) $(988.9) =============== ===============
Net income plus non-owner changes in shareholders equity, net of applicable income taxes, for the second quarter and first six months ended June 30 follows (in millions):
Second Quarter NineFirst Six Months ----------------------------- ----------------------------------------------------------- ---------------------------- 2005 2004 20032005 2004 2003 ------------ ------------- -------------- ------------------------ --------- ----------- ---------- Net income $684.4 $664.3 $1,907.8 $1,781.7$607.0 $673.5 $1,119.8 $1,223.4 Non-owner changes in equity: Foreign currency translation gains/gains and (losses) 13.3 (165.1) (8.6) (196.2) Deferred43.0 (103.5) 73.4 (21.9) Net change in deferred hedging gains/(losses) (9.2) 16.0 (51.6) 14.3and gains (1.9) (31.7) 3.2 (42.4) Deferred securities valuation gains/(losses) 21.5 42.4 (80.3) 66.1 ------------ ------------- -------------- ---------------losses (104.2) (114.9) (96.3) (101.8) --------- --------- ----------- ---------- Combined net income and non-owner changes in equity $710.0 $557.6 $1,767.3 $1,665.9 ============ ============= ============== ===============$543.9 $423.4 $1,100.1 $1,057.3 ========= ========= =========== ==========
The components of accumulated non-owner changes in equity, net of applicable taxes,7 5. Goodwill -------- Following is goodwill by business segment, as of SeptemberJune 30, 20042005 and December 31, 2003 follow2004 (in millions):. For balance sheet classification, goodwill related to consolidated companies is included in other assets, while goodwill related to equity investments is included in investment in affiliated companies. The change in international beer segment goodwill during 2005 is due to post-acquisition balance sheet adjustments related to Harbin and fluctuations in foreign currency exchange rates.
Sept.June 30, 20042005 Dec. 31, 2003 --------------------- --------------------2004 ------------------- ---------------------- Foreign currency translation loss $(678.0) $(669.4) Minimum pension obligation (453.0) (453.0) Deferred hedging gains 8.2 59.8 Deferred securities valuation gains 92.0 172.3 --------------------- -------------------- Accumulated non-owner changes in equity $(1,030.8) $(890.3) ===================== ====================
8 In 2004, the company began recording deferred income taxes related to certain non-owner changes in shareholders equity. The deferred income tax liability effects for the third quarter and nine months ended September 30, 2004 follow (in millions):
Increase/(Decrease) ------------------------------------------------------------------------------ Third Quarter Nine Months ------------------------------------ ----------------------------------- Non-Owner Deferred Non-Owner Deferred Changes Income Changes Income in Equity Tax Liability in Equity Tax Liability ------------------------------------ ----------------------------------- Deferred securities valuation gains $(19.0) $19.0 $(54.1) $54.1 Deferred hedging gains 5.7 (5.7) (5.0) 5.0 ------------------------------------ -----------------------------------Domestic Beer $21.2 $21.2 International Beer 1,206.8 1,177.8 Packaging 21.9 21.9 Entertainment 288.3 288.3 ------------------- ---------------------- Total $(13.3) $13.3 $(59.1) $59.1 ==================================== ===================================goodwill $1,538.2 $1,509.2 =================== ======================
6. Derivatives ----------- Anheuser-Busch accounts for itsAll of Anheuser-Busch's derivatives underqualify as hedges in accordance with FAS 133, "Accounting for Derivatives and Other Hedging Instruments," and the company therefore defers the recognition of effective hedging gains and losses in accumulated non-owner changes in shareholders equity until the underlying hedged transactions actually occur. As the underlying transactions occur, gains and losses that have been previously deferred are reclassified into earnings. The company reclassified the following gains and losses from accumulated non-owner changes in equity into earnings during the second quarter and first six months (in millions):
2005 2004 -------------------------- -------------------------- Gains Losses Gains Losses -------- -------- --------- --------- Second Quarter $1.8 $0.8 $18.5 $0.4 ======== ======== ========= ========= First Six Months $2.4 $5.3 $36.2 $0.8 ======== ======== ========= =========
8 The company immediately recognizes in earnings any portion of derivative gains or losses that are not 100% effective at offsetting price changes in the underlying hedged exposures. The company reclassified deferred gains of $14.6 million and $49.0 million, and deferred losses of $2.1 million and $1.1 million, from accumulated non-owner changes in equity into operating income during the third quarter and nine months of 2004, respectively, as underlying hedged transactions occurred. The companytransactions. Anheuser-Busch recognized net pretax gainslosses due to hedgesuch ineffectiveness of $2.4totaling $0.1 million for the thirdsecond quarter and $26$0.4 million for the ninefirst six months of 2004,2005, compared withto a net pretax lossesloss of $0.1$0.5 million for second quarter and a net gainsgain of $0.8$23.6 million respectively, for the comparable 2003 periods.first six months of 2004. The gain for the ninefirst six months of 2004 includes $19.5 million related to the sale of commodity hedges, that had been in place for future years, which is reported in other income. The hedges were originally placed using estimates of costs to be contained in the renewal of supply contracts. Anheuser-Busch lowered its cost estimates during the first quarter, resulting in significant hedge ineffectiveness in compliance with FAS 133. Due to the hedge ineffectiveness, the company sold these hedgesincome and realized the ineffective portion of the gain. 9classified as a corporate item for segment reporting. 7. Goodwill -------- Following is goodwill by business segment, as of September 30, 2004 and December 31, 2003 (in millions). Goodwill related to consolidated operations is included in intangible assets. Goodwill associated with the company's equity investments in Grupo Modelo and CCU is reflected in investments in affiliated companies. The company completed the purchase price allocation for the acquisition of a wholesaler during the second quarter resulting in the increase in domestic beer goodwill. The increase in international beer goodwill is due to the acquisition of the Harbin Group in China, plus the impact of foreign currency translation.
Sept. 30, 2004 Dec. 31, 2003 -------------------- --------------------- Domestic Beer $ 21.2 $ -- International Beer 1,271.5 679.7 Packaging 21.9 21.9 Entertainment 288.3 288.3 -------------------- --------------------- Total goodwill $1,602.9 $989.9 ==================== =====================
8. Stock Based Compensation ------------------------ The company currently accounts for employee stock options in accordance with FAS 123, "Accounting for Stock-Based Compensation." Under FAS 123, the company elects to recognizerecognizes no compensation expense related to employee stock options since options are always granted with an exercise price equal to the market price of the company's stock on the day of grant. Because of its election to not recognize compensation expense for stock options, the company makes requiredand instead provides pro forma disclosures of net income and diluted earnings per share as if compensation expense had been recognized based on the fair value of the stock options on the grant date. For FAS 123 disclosureIn the first quarter 2005, for pro forma reporting purposes Anheuser-Busch began assuming that 100% of the fair value ofexpense associated with non-forfeitable stock options granted is required to be based on a theoretical option-pricing model. Anheuser-Busch estimatesrecognized at the value of its options using the Black-Scholes model and then hypothetically amortizes the value to compensationgrant date. The company previously assumed all stock option expense was amortized over 10 the three-year vesting period forperiod. The company expects full year 2005 pro forma reporting. In actuality, because the company's employee stock options are not traded on an exchange, employees can receive no value nor derive any benefit from holding stock options under these plans without an increaseoption expense in the market pricerange of Anheuser-Busch stock. Such an increase in stock price benefits all stockholders. The$.13 - $.15 per share. Following is the pro forma impact on net income and earnings per share for the thirdsecond quarter and ninefirst six months ended SeptemberJune 30 follows (in millions, except per share): 9
ThirdSecond Quarter NineFirst Six Months --------------------------------------------------------- ------------------------------- 2005 2004 20032005 2004 2003 -------------- ------------ ----------- -------------- ------------- Reported Net Income $684.4 $664.3 $1,907.8 $1,781.7$607.0 $673.5 $1,119.8 $1,223.4 Pro Forma Impact of Expensing Stock Options (13.4) (29.1) (27.8) (87.3) (83.5) --------------(25.8) (58.2) ------------ ----------- -------------- ------------- Pro Forma Net Income $655.3 $636.5 $1,820.5 $1,698.2 ==============$593.6 $644.4 $1,094.0 $1,165.2 ============ =========== ============== ============= Reported Basic Earnings Per Share $.86 $.81 $2.38 $2.15$.78 $.84 $1.44 $1.52 Pro Forma Impact of Expensing Stock Options (.02) (.04) (.03) (.11) (.11) --------------(.07) ------------ ----------- -------------- ------------- Pro Forma Basic Earnings Per Share $.82 $.78 $2.27 $2.04 ==============$.76 $.80 $1.41 $1.45 ============ =========== ============== ============= Reported Diluted Earnings Per Share $.85 $.80 $2.35 $2.12$.78 $.83 $1.43 $1.50 Pro Forma Impact of Expensing Stock Options (.02) (.04) (.03) (.11) (.10) --------------(.07) ------------ ----------- -------------- ------------- Pro Forma Diluted Earnings Per Share $.81 $.77 $2.24 $2.02 ==============$.76 $.79 $1.40 $1.43 ============ =========== ============== =============
In MarchDecember 2004, the FASB issued a proposed standard entitledrevised and renamed guidance on stock option accounting, FAS 123R, "Share-Based Payment - An Amendment ofPayment." FAS Nos. 123 and 95." The proposed rules will eliminate the disclosure-only election under FAS 123 and require the recognition of123R requires compensation expense forrelated to stock options and other forms of equity compensationto be recognized in the income statement, based on the fair value of the instruments onoptions at the date of grant. FAS 123R is required to be adopted in the first quarter 2006. Anheuser-Busch is currently evaluating when it will adopt FAS 123R. 10 8. Pension and Postretirement Health Care Expense ---------------------------------------------- The components of total pension expense for the second quarter and first six months ended June 30 are shown below (in millions):
Second Quarter First Six Months --------------------- ------------------------ 2005 2004 2005 2004 -------- ------- -------- --------- Service cost (benefits earned during the period) $24.2 $22.0 $48.5 $42.3 Interest cost on benefit obligation 42.2 39.5 84.4 79.1 Assumed return on plan assets (49.0) (47.4) (98.0) (95.1) Amortization of prior service cost and net actuarial losses 22.0 16.3 44.0 31.9 -------- ------- -------- --------- Expense for defined benefit plans 39.4 30.4 78.9 58.2 Cash contributed to multi-employer pension plans 4.2 4.4 8.1 8.5 Cash contributed to defined contribution pension plans 4.0 4.7 8.7 9.3 -------- ------- -------- --------- Total pension benefits expense $47.6 $39.5 $95.7 $76.0 ======== ======= ======== =========
The components of total postretirement health care expense for the second quarter and first six months ended June 30 are shown below (in millions):
Second Quarter First Six Months --------------------- ----------------------- 2005 2004 2005 2004 ------- ------- ------- --------- Service cost (benefits earned during the period) $6.6 $5.3 $12.8 $11.2 Interest cost on benefit obligation 10.1 8.0 19.7 17.4 Amortization of prior service cost and net actuarial losses and (gains) 3.0 (1.9) 1.3 (2.7) ------- ------- ------- --------- Total defined benefits expense $19.7 $11.4 $33.8 $25.9 ======= ======= ======= =========
11 9. Tsingtao Bond Conversion ------------------------ In addition to the quarterly and year-to-date disclosures shown above,April 2005, the company also disclosedconverted its two remaining Tsingtao convertible bonds into Series H common shares, thereby increasing Anheuser-Busch's economic ownership in Tsingtao from 9.9% to 27%, and its 2003 annual reportvoting stake from 9.9% to shareholders that20%. Local government authorities hold the dilutive impact on net income and diluted earnings per share of hypothetically expensing stock options based on Black-Scholesproxy voting rights for the full years 2003, 20027% difference between the company's voting and 2001 was $113 millioneconomic stakes. The increased economic stake allows the company to nominate an additional director, giving the company two of 11 board seats. Because of the additional share ownership and $.14 per share, $93 millionboard representation, Anheuser-Busch believes it can now exercise significant influence over Tsingtao and $.11 per share, and $69 million and $.08 per share, respectively. 11 9.therefore began applying the equity method of accounting for Tsingtao in May 2005, on a one-month lag. 10. Contingencies ------------- In January 1997, Maris Distributing Company, Inc., a former independent Anheuser-Busch wholesaler in Florida, initiated litigation against the company alleging breach of contract and 12 other claims. Anheuser-Busch terminated its distribution agreement with Maris Distributing in March 1997. During the course of litigation, nine claims were resolved in favor of Anheuser-Busch and a defamation claim brought by Maris was mistried. In August 2001, a jury rendered a verdict against the company in the amount of $50 million on two remaining claims. The court subsequently awarded plaintiffs an additional $22.6 million in accumulated prejudgment interest on the jury award, which may continuecontinues to accrue at a rate that is fixed annually. Prejudgment interest is now approximately $37 million. Anheuser-Busch continues to believe it acted appropriately in terminating the distribution agreement of Maris Distributing. In May 2003, the Court of Appeals remanded the case to the trial court for resolution of issues relating to the defamation claim. In September 2003, the trial court determined that Maris Distributing's amended defamation claim could proceed. The trial of the defamation claim is scheduled to begin August 1, 2005. Anheuser-Busch is vigorously contesting that claim. The appeals of the 2001 verdict cannot be heard by the Court of Appeals until matters relating to the defamation claim are resolved. The company continues to vigorously 12 contest the verdict. However, resolution is not expected to occur quickly and the ultimate impact of this matter on the company's financial position, results of operations or cash flows cannot presently be predicted. The company's results do not include any expense related to the Maris Distributing judgment or interest for any period shown. The company and certain of its subsidiaries are involved in additional claims and legal proceedings in which monetary damages and other relief is sought. The company is vigorously contesting these claims; however resolution is not expected to occur quickly, and their ultimate outcome cannot presently be predicted. It is the opinion of management that the ultimate resolution of these claims, legal proceedings and other contingencies, either individually or in the aggregate, will not materially affect the company's financial position, results of operations or liquidity. 12 10. Pension and Other Postretirement Benefits Expense ------------------------------------------------- The components of total pension expense for the third quarter and nine months ended September 30 are shown below (in millions):
Third Quarter Nine Months ----------------------- --------------------------- 2004 2003 2004 2003 ---------- --------- ----------- ------------ Service cost (benefits earned during the period) $22.5 $18.7 $64.8 $56.0 Interest cost on benefit obligation 40.2 37.9 119.3 113.9 Assumed return on plan assets (47.2) (47.2) (142.3) (141.7) Amortization of prior service cost and net actuarial losses 14.7 9.0 46.6 27.1 ---------- --------- ----------- ------------ Expense for defined benefit plans 30.2 18.4 88.4 55.3 Cash contributed to multi-employer pension plans 4.1 4.2 12.6 12.6 Cash contributed to defined contribution pension plans 4.7 4.6 14.0 13.8 ---------- --------- ----------- ------------ Total pension benefits expense $39.0 $27.2 $115.0 $81.7 ========== ========= =========== ============
The components of total other postretirement benefits expense for the third quarter and nine months ended September 30 are shown below (in millions):
Third Quarter Nine Months ------------------------ -------------------------- 2004 2003 2004 2003 ---------- ---------- ---------- ------------ Service cost (benefits earned during the period) $5.6 $5.0 $16.8 $14.8 Interest cost on benefit obligation 8.7 9.4 26.1 28.4 Amortization of prior service cost and net actuarial gains (2.7) (2.3) (5.4) (6.9) ---------- ---------- ---------- ------------ Total defined benefits expense $11.6 $12.1 $37.5 $36.3 ========== ========== ========== ============
During the second quarter of 2004, Anheuser-Busch began recognizing the estimated impact of the Medicare Prescription Drug Improvement and Modernization Act of 2003, which provides a federal subsidy to sponsors of retiree health care plans. As a result of the Act, the company's accumulated postretirement benefits obligation was reduced $43.9 million as of June 30, 2004. Additionally, the Act has reduced defined 2004 postretirement benefits expense $2.5 million and $5.3 million, respectively, for the third quarter and nine months. 13 11. Deferred Income Tax Liability Adjustment ---------------------------------------- During the second quarter 2004, the company identified a $25.9 million balance sheet reclassification related to the spin-off of its Campbell-Taggart bakery subsidiary in 1996. This reclassification does not have any impact on the company's results of operations, cash flows or total assets. As of June 30, 2004, the company increased the deferred income tax liability by $25.9 million, from $1,541.2 million to $1,567.1 million, and decreased retained earnings by $25.9 million, from $14,804.5 million to $14,778.6 million. 12. Modelo Capital Transaction -------------------------- During June and July 2004 (A-B's third quarter, based on the company's one-month lag reporting for Modelo), Grupo Modelo received a $251 million capital infusion in certain subsidiaries in exchange for equity in those subsidiaries. A-B has reported its share of the capital infusion as an $85.4 million increase in its equity investment in Grupo Modelo and a $74.0 million increase in capital in excess of par value, net of deferred taxes of $11.4 million. 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS AND FINANCIAL CONDITION INTRODUCTION - ------------ This discussion summarizes the significant factors affecting the consolidated operating results, financial condition and liquidity/liquidity and cash flows of Anheuser-Busch Companies, Inc. for the thirdsecond quarter and ninefirst six months ended SeptemberJune 30, 2004,2005, compared withto the thirdsecond quarter and ninefirst six months ended SeptemberJune 30, 2003,2004, and the year ended December 31, 2003.2004. This discussion should be read in combinationconjunction with the consolidated financial statements and notes included in the company's annual report to shareholders for the year ended December 31, 2003.2004. This discussion contains forward-looking statements regarding the company's expectations concerning its future operations, earnings and prospects. On the date the forward-looking statements are made, the statements represent the company's expectations, but the company's expectations concerning its future operations, earnings and prospects may change. The company's expectations involve risks and uncertainties (both favorable and unfavorable) and are based on many assumptions that the company believes to be reasonable, but such assumptions may ultimately prove to be inaccurate or incomplete, in whole or in part. Accordingly, there can be no assurances that the company's expectations and the forward-looking statements will be correct. Important factors that could cause actual results to differ (favorably or unfavorably) from the expectations stated in this discussion include, among others, changes in the pricing environment for the company's products; changes in U.S. demand for malt beverage products;products, including changes in U.S. demand for other alcohol beverages; changes in consumer preference for the company's malt beverage products; changes in the cost of marketing the company's malt beverage products; regulatory or legislative changes, including changes in beer excise taxes at either the federal or state level and changes in income taxes; changes in the litigation to which the company is a party; changes in raw materials prices; changes in packaging materials costs; changes in interest rates; changes in foreign currency exchange rates; unusual weather conditions that could impact beer consumption in the U.S.; changes in attendance and consumer spending patterns for the company's theme park operations; changes in demand for aluminum beverage containers; changes in the company's international beer business or in the beer business of the company's international equity partners; changes in the economies of the countries in which the company's international beer business or its international equity partners operate; changes in the company's credit rating resulting from future 14 acquisitions or 15 divestitures; and the effect of stock market conditions on the company's share repurchase program. Anheuser-Busch disclaims any obligation to update or revise any of these forward-looking statements. RESULTS OF OPERATIONS - --------------------- Anheuser-Busch Cos., Inc. achieved improvedhad a challenging first six months in its domestic beer business. Both the company and the domestic beer industry experienced volume declines and higher cost pressures. The company has implemented a number of initiatives to enhance beer volume and market share growth including introduction of new products and packaging, increased investments in domestic marketing, stepped-up on-premise sales activities and earnings fortactical price promotions, and Anheuser-Busch is encouraged by its sales improvement in June. During the thirdsecond quarter 2005, wholesaler inventories were reduced significantly and nine months of 2004.are now below last year. Consolidated net sales increased 5.1%0.2% and 1.3%, respectively, in the thirdsecond quarter and first six months of 2005, while reported diluted earnings per share increased 6.3%. Net salesdecreased 6% for the quarter and 4.7% year-to-date. Reported earnings per share increased 5.8%for both periods in 2005 and 10.8%, respectively, for the nine months. Results for the ninefirst six months of 2004 benefited frominclude one-time gains that make comparisons between periods difficult. These one-time gains include settlement of tax matters in Chile related to the sale of the company's investment in Compania Cervecerias Unidas S.A. (CCU), Ohio state income tax reform legislation and a $19.5 million pretax gain ($.015 per share)on the sale of an interest in the first quartera theme park in Spain in 2005, and a gain in 2004 fromrelated to the sale of commodity hedges. This gain is reported in other income/(expense) on the consolidated income statementExcluding these one-time items to make 2005 and does not impact gross profit or operating income. Excluding this gain, which better reflects underlying operations,2004 results comparable, earnings per share for the ninesecond quarter and first six months increased 10.1% versus 2003of 2005 decreased 8.4% and 6.7%, respectively (see additionalcomplete discussion on page 23)pages 21 through 24). Although Anheuser-Busch is achieving another year ofconfident it will restore its sales momentum and return to solid earnings growth in the future, the company is currently forecasting 2005 earnings per share despite the general slowdown in spendingto be below 2004 results, excluding one-time gains for consumer products this summer. The company anticipates earnings per share growth of 10% to 11% for 2004, excluding the benefit of the commodity hedge gain and including the dilution related to the Harbin acquisition,both years, as shown below:below. 15
Earnings Per Share Increase -------------------------- ------------------------------------------------------------- 2005 2004 Decrease --------------------- ------------- --------------------- Including Hedge Projected / Reported $2.61 - $2.69 $2.77 Gain $2.745 to $2.765 10.7% to 11.5% =======================on Sale of Spanish Theme Park (.024) -- Chile Income Tax Settlement on CCU Sale (.009) -- Deferred Income Tax Benefit from Ohio Tax Legislation (.009) -- Commodity Hedge Gain -- (.015) --------------------------Gain on Sale of CCU -- (.018) Deferred Income Tax Benefit From Mexican Income Tax Rate Reduction -- (.012) --------------------- ------------- Excluding Hedge GainOne-Time Gains $2.57 - $2.65 $2.73 (6)% to $2.75 10.1% to 10.9% ========================== =======================(3)% ===================== ============= =====================
Additionally, the company currently expects earnings per share growth in the 7% to 10% range for 2005 compared with 2004 on a reported basis, including the commodity hedge gain. Anheuser-Busch remains confident in its ability to achieve its double-digit earnings per share growth objective over the longer-term. 16 BEER SALES RESULTS - ------------------ The company's reported beer volume for the thirdsecond quarter and ninefirst six months is summarized in the following table:
- ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Reported Beer Volume (millions of barrels) - ---------------------------------------------------------------------------------------------------------------------- Thirdfor Periods Ended June 30 -------------------------------------------------------------------------------------------------------------------- Second Quarter NineFirst Six Months Ended Sept. 30 -------------------------------- ---------------------------------------------------------------------- ------------------------------------ Versus 20032004 Versus 2003 -------------------- -------------------- 2004 ------------------------- -------------------------- 2005 Barrels % 20042005 Barrels % ------ -------- -------- ------- --------- ------------------ ------ --------- ----------- Domestic 27.6 0.03 0.1% 80.0 0.8 0.9%26.3 Dn 1.0 Dn 3.7% 50.8 Dn 1.7 Dn 3.2% International 4.9 Up 2.6 112.1% 9.1 2.8 45.7% ------ -------- --------Up 115.6% 9.3 Up 5.1 Up 122.5% ------- --------- ------------------ ------ --------- ----------- Worldwide A-B Brands 32.5 2.6 8.8% 89.1 3.6 4.2%31.2 Up 1.6 Up 5.4% 60.1 Up 3.4 Up 6.0% Int'l Equity Partner Brands 5.2 0.3 6.5% 14.8 0.5 3.6% ------ -------- --------6.8 Up 1.6 Up 31.1% 11.1 Up 1.5 Up 16.1% ------- --------- ------------------ ------ --------- ----------- Total Brands 37.7 2.9 8.5% 103.9 4.1 4.1% ====== ======== ========38.0 Up 3.2 Up 9.2% 71.2 Up 4.9 Up 7.5% ======= ========= ================== ====== ========= =========== - -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Domestic volume represents Anheuser-Busch beer shipped within the United States. During the second quarter of 2005, domestic beer sales-to-wholesalers volume decreased 3.7% compared with the second quarter 2004, and wholesaler sales-to-retailers declined 0.2%. Wholesaler inventories were up 0.1% forreduced significantly during the third quarter, from approximately 1.5 days higher than prior year at the beginning of the quarter to over one day lower than 2004 versusat the third quarter 2003, and were up 0.9% forend of the ninequarter. During the first six months of 2004. The company now expects full year2005, domestic beer sales-to-wholesalers to be up about 0.5%.declined 3.2%, while wholesaler sales-to-retailers declined 0.4% on a comparable selling day adjusted basis. Wholesaler sales-to-retailers were down 1.3%sales-to-retailer trends improved significantly in June. Bud family sales-to- 16 retailers increased in the thirdsecond quarter 2005 and up 0.7% for the ninefirst six months versus 2003 levels. Both sales-to-wholesalers and sales-to-retailers have been adversely impacteddriven by the abnormally cool and wet weather in many key markets, especially in the Southeastern U.S.,growth of Bud Light and the general slowdownnational introduction in consumer spending during the third quarter.late February of Budweiser Select. The company's estimated domestic market share (excluding exports) for the ninefirst six months of 2005 was 48.8%, compared to 2004 and 2003 was 50%market share of 49.8%. Domestic market share is based on estimated U.S. beer industry salesshipment volume using information provided by the Beer Institute and the U.S. Department of Commerce. Anheuser-Busch's market share performance based on shipments was primarily due to the company's wholesaler inventory reduction. At the consumer level, Anheuser-Busch gained share in supermarkets and convenience stores combined for the first six months of 2005 versus 2004, according to IRI data. International volume, consisting of Anheuser-Busch brands produced overseas by company-owned breweries and under license and contract-brewingcontract brewing agreements, plus exports from the company's U.S. breweries to markets around the world, increased 112.1%116% for the second quarter and 123% for the first six months of 2005. These increases for the second quarter and year-to-date 2005 include 2.5 million and 5.1 million barrels, respectively, from the Harbin Brewery, which the company acquired and began consolidating in the third quarter and 45.7% for the nine months of 2004. International beer volume for the third quarter 2004 includes 2.6 million barrels for Harbin. The company completed its acquisition of Harbin in July and reports Harbin results on a one-month lag basis. Excluding Harbin, international beer volume decreased 1.8% in the third quarter. 17 The decrease isincreased 3.5% and 1.2%, respectively, primarily due to lowerincreased volume in Europe, reflecting a difficult comparison to volume in 2003 that benefited from unusually hot summer weather. For the nine months of 2004, international volume excluding Harbin increased 3.3%, due primarily to higherCanada, partially offset by lower sales volume in China.Ireland and the United Kingdom for both the second quarter and first six months of 2005 and lower Bud-Wuhan operations volume in China year-to-date. Bud-Wuhan operations volume in China was up 2% for the second quarter 2005. Worldwide Anheuser-Busch beer salesbrands volume, which is comprised of domestic volume and international volume, rose 8.8%increased 5.4% and 4.2%6.0%, respectively, for the thirdsecond quarter and ninefirst six months of 2004 versus 2003,2005 to 32.531.2 million and 89.160.1 million barrels respectively. Internationalversus 2004. Total brands volume, which combines worldwide Anheuser-Busch brand volume with international equity partner brands volume representing(representing the company's share of its foreign equity partners' volume reported on a one-month lag, increased 6.5%lag) was 38.0 million barrels in the second quarter 2005, up 3.2 million barrels, or 9.2% over second quarter 2004. Total brands volume was up 7.5%, to 71.2 million barrels for the thirdfirst six months of 2005. International equity partner brands volume grew 31.1% and 16.1%, respectively, for the second quarter and 3.6% for the ninefirst six months of 2004 versus 2003, contributing2005 due to Modelo volume growth and the addition of Tsingtao equity volume beginning in May 2005, partially offset by the loss of 17 volume from the sale of the company's 8.5%equity investment in CCU in the fourth quarter 2004. Consistent with the company's stated priorities to restore U.S. volume and 4.1%market share momentum, the company plans to defer additional price increases throughout most of the country until early 2006. A single phase price increase in totalis being planned for early 2006. As always, future revenue enhancement initiatives will be tailored to specific markets, brands volume for the same periods. THIRDand packages. SECOND QUARTER AND NINEFIRST SIX MONTHS OF 20042005 FINANCIAL RESULTS - -------------------------------------------------------------------------------------------------------------------- Key operating results for the thirdsecond quarter and ninefirst six months of 20042005 are summarized in the following tables:below:
- --------------------------------------------------------------------------------------------------------------- In----------------------------------------------------------------------------------------------------------------------- ($ in millions, except per share Thirdshare) -------------------------------------------------------------- Second Quarter Nine Months ------------------------------------ ------------------------------------ Vs. 2003 Vs. 2003 ------------------------ -----------------------2005 vs. 2004 $ %-------------------------- --------------------------- 2005 2004 $ % -------- --------- ---------- ----------------- --------- ---------- Gross Sales $4,597 $4,597 -- -- Net Sales $4,018 $4,010 Up $8 Up 0.2% Income Before Income Taxes $736 $927 Dn $191 Dn 20.6% Equity Income $137 $106 Up $31 Up 29.0% Net Income $607 $674 Dn $67 Dn 9.9% Diluted Earnings per Share $.78 $.83 Dn $.05 Dn 6.0% - ----------------------------------------------------------------------------------------------------------------------- 18 - ----------------------------------------------------------------------------------------------------------------------- ($ in millions, except per share) -------------------------------------------------------------- First Six Months 2005 vs. 2004 -------------------------- --------------------------- 2005 2004 $ % -------- -------- --------- ---------- Gross Sales $4,680$8,682 $8,600 Up $214$82 Up 4.8% $13,280 Up $680 Up 5.4%1.0% Net Sales $4,080$7,582 $7,487 Up $199$95 Up 5.1% $11,567 Up $636 Up 5.8%1.3% Income Before Income Taxes $948 Up $9 Up 1.0% $2,629 Up $159 Up 6.4%$1,380 $1,681 Dn $301 Dn 17.9% Equity Income Net of Tax $104$243 $195 Up $17$48 Up 18.9% $299 Up $31 Up 11.7%24.5% Net Income $684 Up $20 Up 3.0% $1,908 Up $126 Up 7.1%$1,120 $1,223 Dn $103 Dn 8.5% Diluted Earnings per Share $.85 Up $.05 Up 6.3% $2.35 Up $.23 Up 10.8%$1.43 $1.50 Dn $.07 Dn 4.7% - --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
A discussion of financial results for the third quarter and nine months of 2004 follows. Anheuser-Busch achieved improvedreported gross sales of $4.7$4.6 billion and $13.3$8.7 billion, and improved net sales of $4.1$4.0 billion and $11.6$7.6 billion, respectively, in the thirdsecond quarter and ninefirst six months of 2004.2005. These amounts represent gross sales increases over 2003 of 4.8%being level versus 2004 for the thirdsecond quarter and 5.4%increasing 1.0% for the ninefirst six months. Net sales increased over 20032004 by 5.1%0.2% and 5.8%1.3%, respectively, for the same periods. The differences between gross and net sales reflect beer excise taxes paid byof $579 million and $1.1 billion for the company on its products. 18second quarter and first six months, respectively. The increases in consolidated gross and net sales are primarilyfor the resultsecond quarter and first six months of 2.6% and 4%2005 were due to sales increases for theinternational beer, packaging and entertainment operations partially offset by declines in domestic beer segment in the third quarter and nine months of 2004, respectively, due essentially to higher revenue per barrel in the third quarter and both higher revenue per barrel and increased beer volume year-to-date. The third quarter and year-to-date results also include higher sales for all of the company's other business segments.revenues. International beer net sales were up 32%increased 26% and 22%28%, respectively, primarily due to the impact ofincremental volume from the Harbin acquisitionacquisition. Commodity-based packaging operations net sales increased 9% in the second quarter and 11.5% for the first six months due to higher can and recycling revenues attributable to higher aluminum prices. Entertainment segment sales increased 3% for the second quarter and 6% year-to-date volume growth in Chinaprimarily due to higher admissions pricing and Canada. Packaginghigher in-park spending for both periods. For the second quarter and first six months, domestic beer segment net sales were up 20% for the third quarterdecreased 3.6% and up 13% for the nine months from increased sales from the company's commodity-based aluminum recycling operations in the quarter, and increased recycling sales plus soft drink can volume and price increases year-to-date. Sales growth for the entertainment segment was adversely impacted by hurricanes in Florida during the third quarter. Entertainment net sales increased 1% and 9%2.5%, respectively, primarily due to admissions pricing and in-park spending,lower beer sales volume partially offset by attendance declines due tohigher revenue per barrel. Second quarter also includes higher sales for the Florida hurricanes. For the domesticcompany's real estate subsidiary. Domestic beer segment, revenue per barrel increased 2.1% ingrew 0.2% and 0.9% for the thirdsecond quarter and 2.5% for the ninefirst six months of 2004 vs. the same periods in 2003, reflecting the continuing favorable pricing environment. Revenue per barrel generated $73 million and $258 million in net sales improvement for the third quarter and nine months of 2004, respectively. Higher beer volume contributed $3 million and $80 million to the sales increases, respectively.2005. Domestic revenue per barrel is calculated as net sales generated by the company's domestic beer operations on barrels of beer sold, 19 determined on a U.S. GAAP basis, divided by the volume of beer shipped from the company's breweries to independent U.S. wholesalers. Consistent with the company's practice of implementing moderate annual price increases in two phases, Anheuser-Busch initiated selected pricing actions in early October 2004 on over 40% of the company's volume, somewhat greater than in 2003. As in the past, the revenue enhancement initiatives are again tailored to specific markets, brands and packages, and preliminary results are encouraging. The second phase of the pricing initiatives is planned for the first quarter of 2005 and will cover slightly less volume than the first quarter 2004 increase. Cost of sales was $2.4$2.5 billion and $6.8$4.7 billion, respectively, for the thirdsecond quarter and ninefirst six months of 2004,2005, reflecting increases of $157$145 million, or 7%6.2%, and $397$299 million, 19 or 6%6.8%, respectively, compared with 2003.to 2004. The increases in cost of sales for the third quarter and nine months are dueattributable to higher costs for all of the company's major business segments. The increase insegments, including higher aluminum and other packaging materials expense and increased energy costs for domestic beerbeer; incremental production costs are due to costsfor international beer associated with increased beer volume for the nine months,timing of the Harbin acquisition; increased costs for brewing and packaging materials for both the third quarter and nine months and higher utility costs year-to-date. International beer experienced higher costs associated with increased beer volume plus the impact of Harbin cost of sales. Packaging operations incurred higher aluminum costs and entertainment operations incurredhigher can and glass manufacturing costs for the commodity-based packaging businesses; and higher park operating expenses including hurricane clean up costs in the third quarter.entertainment operations. Gross profit margin declined 110as a percentage of net sales decreased 320 basis points in the thirdfirst half of 2005, to 38.0%, while second quarter to 42.1%, due primarily to higher sales from the company's commodity-based aluminum recycling operations and the impact of Florida hurricanes on the entertainment business segment. For the nine months of 2004,2005 gross margin was down 2038.4%, a decline of 350 basis points versus 2004. These decreases are primarily due to 41.5%, from the impact of higher sales from the company's commodity based aluminum recycling operation, which offset a 30 basis point increasedecline in domestic beer gross margin.volume combined with domestic beer production costs per barrel significantly exceeding revenue per barrel. Marketing, distribution and administrative expenses for the thirdsecond quarter 20042005 were $673$697 million, an increase of $24$43 million, or 4%6.5% compared with thirdsecond quarter 2003.2004. For the ninefirst six months of 2004,2005, these expenses were $1.9$1.3 billion, an increase of $96$65 million, or 5%5.2% versus lastprior year. For both periods, thesethe second quarter and year-to-date, the increases are principally due tothe result of higher domestic beer marketing and selling costs, primarily for the Bud Family and including the national introduction of Budweiser Select; increased international beer marketing costs;costs and higher beer distribution costs from owning an additional wholesale operation;for company-owned U.S. beer wholesalers and higher corporate expenses, primarily higher employee benefits expense. The nine-month increase also reflects increased marketing costs associated with the Olympics.for China operations, partially offset reduced general and administrative expenses. Operating income increased $18decreased $180 million, or 2%17.5% in the thirdsecond quarter 20042005 and was up $142declined $269 million, or 5%14.5% for the ninefirst six months versus comparable periods in 2003.2004 periods. Operating margins for the thirdsecond quarter and ninefirst six months of 2005 were 25.6%21.0% and 25.0%20.8%, respectively, decreases of 90450 and 20390 basis points, respectively, versus prior year. The same factors impacting gross margins also adversely impacted operating margins.due primarily to reduced domestic beer sales volume and higher costs. Interest expense net ofless interest income was $105$116 million for the thirdsecond quarter and $3112005, an increase of $10 million, foror 9.7% compared to the nine monthssecond quarter 2004. Year-to-date, interest expense less interest income was $229 million, an increase of 2004, representing$22 million, or 20 11% versus 2004. These increases of approximately 7% and 4%, respectively, compared with 2003. The increases in 2004 are due to the impact of higher average outstanding debt balances partially offsetreduced by slightly lower average 20 interest rates.rates compared to prior year. Interest capitalized, decreased 32%which fluctuates depending on the amount and 11%timing of capital project in-service dates, was $5.5 million and $10.7 million, respectively for the thirdsecond quarter and ninefirst six months of 2005, down slightly compared with 2004 respectively, to $5 million and $16 million. These changes primarily resulted from fluctuations in construction in progress balances during 2004 dueamounts. Other income/(expense), net reflects the impact of numerous items not directly related to the timingcompany's operations. For the second quarter and first six months of project in-service dates. Other income/expense, net includes equity earnings from2005, the company's limited partnership investments in beer wholesalers and numerous other items of a nonoperating nature. The company had other income of $3$1.2 million and $33$20.7 million, for the third quarterrespectively, representing decreases versus 2004 of 50% and nine months of 2004, respectively, compared with other income of $2 million and $1 million for the comparable 2003 periods.31%, respectively. Other income for the ninefirst six months of 2005 includes the $15.4 million pretax gain ($.024 per share) from the sale of the company's equity interest in the Port Aventura theme park in Spain, while other income for the first six months of 2004 includes the one-time pretax gain of $19.5 million ($.015 per share) in the first quarter from the sale of commodity derivatives that had been in place for future years. The hedges were originally placed using estimates of costs to be contained in the renewal of supply contracts. Anheuser-Busch lowered its cost estimates during the first quarter, resulting in significant hedge ineffectiveness in compliance with FAS 133. Due to the hedge ineffectiveness, the company sold these hedges and realized the ineffective portion of the gain, which is reported as a corporate item forderivatives. For business segment reporting purposes. Other income for the nine monthspurposes, both of these gains are reported as corporate items. Year-to-date 2004 results also includesinclude a $19.1 million pretax gain ($.014 per share) related to the sale of two beer wholesaler partnerships, which is reported in the first quarter 2004.domestic beer segment results. Income before income taxes for the thirdsecond quarter 2005 was $948$736 million, an increasea decrease of $9$191 million, or 1%21% versus thirdsecond quarter 2003. Income before2004. Pretax income taxes of $2.6 billion for the ninefirst six months represents an increase of $1592005 was $1.4 billion, a decline of $301 million, or 6% compared with 2003. For the third quarter, this reflects improved18% versus 2004. Decreases for both periods primarily reflect lower profits in domestic beer, higher interest expense, and lower results for domestic beer, international beer and packaging operations, mostlypartially offset by a lower entertainment profit contribution and higher corporate expenses. The nine-month increase reflects improved resultsperformance for all of the company's real estate subsidiary in the second quarter. Entertainment operating segments.results were down for the second quarter and up year-to-date in 2005. Domestic beer segment pretax profits declined 19%, or $178 million and 14%, or $260 million, respectively, in the second quarter and first six months of 2005 due to lower beer sales volume, higher aluminum, energy and plant operating costs and the incremental expenses to support the company's stepped-up pricing and marketing efforts and national introduction of Budweiser Select. International beer pretax income was $933 million and $2.7 billion for the third quarter and nine months of 2004, respectively, representing growth of $32 million, or 3.6% for the third quarter and $171 million, or 6.6% for the nine months, versus prior year. Both of these increases reflect higher revenue per barrel due to the favorable pricing environment, with increased beer sales volume contributing to the nine-month increase. The year-to-date increase also includes the $19.1 million pretax gain related 21 to the sale of two beer wholesalerships, which is reported in other income/(expense), net for consolidated reporting. International beer segment pretax income (excluding equity income) was $37down $5 million for the third quarter of 2004 and $91 million for the nine months, representing increases of $7 million, or 23% in the thirdsecond quarter and $15down $6 million or 19% for the nine months versus 2003. These increases are primarily due to the inclusion of Harbin results, profit growth in Canada in both periods and volume and profit growth for Budweiser China operations for the nine months. Packaging segment pretax profits in the third quarter 2004 were $49 million, an increase of $2 million, or 4%. For the nine months, pretax profits were $138 million, an increase of $7 million, or 5%.year-to-date. The increases in packaging pretax profits are primarily due to improved profits from aluminum recycling operations during both periods, plus higher soft drink can volume and pricing for the nine months. Entertainment segment pretax earnings for the third quarter 2004 were $113 million, a decline of $9 million, or 7% compared with the third quarter 2003. Pretax profits for entertainment were $184 million for the nine months, an increase of $16 million, or 10% versus 2003. The thirdsecond quarter decline is primarily due to lower attendance resultingprofits in the United Kingdom caused by lower sales volume, and the adoption of equity accounting for the company's investment in Tsingtao during the quarter. In 2004, Tsingtao was accounted for on the cost basis and the company therefore reported its 21 Tsingtao dividend (declared in the second quarter) in pretax income. The change to equity accounting in 2005 resulted in a decrease in international beer pretax income versus last year, which is offset by equity income from Tsingtao this year. For the impact of hurricanesfirst six months, international beer pretax income declined primarily due to lower United Kingdom results and lower volume and profits for Bud-Wuhan operations in Florida. Year-to-date, the benefit of higher admissions pricing and increased in-park spending wasChina, partially offset by the impact of the third quarter Florida hurricanes. Equity income was $104 millionHarbin acquisition. The company completed its acquisition and began consolidating Harbin results in the third quarter 2004. Packaging segment pretax profits were down $8 million and $299$9 million for the ninesecond quarter and first six months, respectively, primarily due to higher materials cost for both can and glass manufacturing operations. Entertainment segment pretax results were down $4 million for the second quarter and improved $1 million for the first six months of 2004, up $17 million, or 19%2005. The entertainment segment had increased admissions pricing and higher in-park spending along with higher park operating expenses for both the second quarter and first six months. Attendance was level with prior year for the second quarter and up for the first six months of 2005. The decline in entertainment segment results for the second quarter essentially reflects the timing of the Easter holiday in 2005, which occurred in the first quarter this year versus the second quarter of 2004. Equity income increased $31 million or 12% forand $48 million in the ninesecond quarter and first six months versus 2003. Bothof 2005, respectively. These increases are due toprimarily reflect the benefit of price increases implemented by Grupo Modelo combined with strongpricing and volume growth.growth, a lower Mexican income tax rate and the recognition of the company's pro rata share in the net earnings of Tsingtao Brewing Company beginning in May 2005. Equity income results from 2003 included a $5.5 million after tax gain representing Anheuser-Busch's equityfor the comparable 2004 periods includes the company's share of CCU earnings fromearnings. As previously noted, the sale of a brewerycompany sold its equity stake in Croatia. Excluding this gain, which better reflects underlying equity investee operations, equity income forCCU in the nine months of 2004 increased 14.1% vs. 2003, as shown below: 22
Equity Income Increase --------------------------- ------------ 2004 2003 ----------- ------------ Reported $299.1 $267.7 11.7% ============ Gain on Brewery Sale -- (5.5) ----------- ------------ Excluding Gain $299.1 $262.2 14.1% =========== ============ ============
The company'sfourth quarter 2004. Anheuser-Busch's effective tax rate was 36.2% in the second quarter 2005, a decline of 260 basis points versus the second quarter 2004. The quarterly decline is due primarily to a $6.8 million favorable impact from the settlement of certain tax matters in Chile associated with the fourth quarter 2004 sale of the company's equity stake in CCU, a $7.2 million reduction of deferred income taxes resulting from income tax reform legislation enacted in Ohio, plus ongoing benefits received under the American Jobs Creation Act. For the first six months of 2005 the effective income tax rate was 36.5% versus 38.8% in both2004. The year-to-date decrease reflects the thirdCCU settlement, the Ohio 22 legislation and the American Jobs Creation Act benefit from the second quarter, plus a favorable deferred income tax impact related to the first quarter sale of the company's investment in the Spanish theme park. Net income decreased $67 million, or 9.9% during the second quarter, and ninewas down $103 million, or 8.5% for the first six months of 2004, versus rates of 38.5% and 38.7% for the comparable 2003 periods. Net income of $684 million and $1.9 billion for the third quarter and nine months of 2004, respectively, represents increases of $20 million, or 3% during the quarter, and $126 million, or 7% for the nine months,2005, versus the same periods last year. DilutedReported diluted earnings per share were $.85$.78 for the thirdsecond quarter 2004, an increase2005, a decrease of 6.3%6.0% compared withto prior year, and were $2.35$1.43 for the ninefirst six months, an increasea decrease of 10.8%4.7% compared with 2003.to the first half of 2004. Earnings per share continue to benefitbenefited from the company's share repurchase program. The company repurchased 11.7of nearly 12 million shares duringin the thirdfirst half of 2005. Excluding the one-time gains as applicable, the effective tax rates for the second quarter and a total of 27.1 million shares for the ninefirst six months of 2004. Excluding the impact of the one-time gain from the sale of commodity hedges previously discussed, which better reflects underlying operations,2005 would have been 38.1% and 38.2%, respectively, while net income and diluted earnings per share would have declined 11.9% and 8.4%, respectively, for the nine months of 2004 would have increased 10.1%second quarter and decreased 10.3% and 6.7%, respectively, year-to-date, as shown below:in the following tables (in millions, except per share). Excluding the nonrecurring gains from earnings better reflects the company's underlying operations and enhances comparability between periods. 23
Income Before Provision Income for Income Net Earnings perSECOND QUARTER Taxes (1) Taxes (1) Income Per Share Increase ------------------------- ------------ 2004 2003 ----------- ----------- -------------- -------------- --------------- ------------- -------------- 2005 - ---- Reported $ 2.35 $2.12 10.8% ============$736.0 $(266.2) $607.0 $.78 Chile Income Tax Settlement on CCU Sale -- (6.8) (6.8) (.009) Deferred Income Tax Benefit from Ohio Tax Legislation -- (7.2) (7.2) (.009) -------------- --------------- ------------- -------------- Excluding One-Time Gains $736.0 $(280.2) $593.0 $.76 ============== =============== ============= ============== 2004 - ---- Reported $927.2 $(360.0) $673.5 $.83 ============== =============== ============= ============== Percentage Decrease --- 2005 vs. 2004 - ------------------------------------- Reported (9.9)% (6.0)% ============= ============== Excluding One-Time Gains (11.9)% (8.4)% ============= ============== FIRST SIX MONTHS - ---------------- 2005 - ---- Reported $1,380.3 $(503.6) $1,119.8 $1.43 Gain on Sale of Spanish Theme Park (15.4) (3.5) (18.9) (.024) Chile Income Tax Settlement on CCU Sale -- (6.8) (6.8) (.009) Deferred Income Tax Benefit from Ohio Tax Legislation -- (7.2) (7.2) (.009) ------------- --------------- ------------- ------------- Excluding One-Time Gains $1,364.9 $(521.1) $1,086.9 $1.386 ============= =============== ============= ============= 2004 - ---- Reported $1,680.8 $(652.6) $1,223.4 $1.50 Commodity Hedge Gain (19.5) 7.4 (12.1) (.015) -- ----------- ----------------------- --------------- ------------- ------------- Excluding HedgeOne-Time Gain $2.335 $2.12 10.1% =========== ========== ============$1,661.3 $(645.2) $1,211.3 $1.485 ============= =============== ============= ============= Percentage Decrease --- 2005 vs. 2004 - ------------------------------------- Reported (8.5)% (4.7)% ============= ============= Excluding One-Time Gains (10.3)% (6.7)% ============= =============
The effective tax rates excluding one-time gains of 38.1% and 38.2% for the second quarter and first six months of 2005, respectively, are computed by dividing the provision for income taxes excluding one-time gains by income before income taxes excluding one-time gains. 24 LIQUIDITY AND FINANCIAL CONDITION - --------------------------------- Cash at SeptemberJune 30, 20042005 was $196$137 million, an increasea decrease of $5$91 million from the December 31, 20032004 balance. The principalprimary source of the company's cash flow is cash generated by operations. Principal uses of cash are capital expenditures, share repurchase, dividends and business investments. OperatingThe company generated operating cash flow before the changechanges in working capital of $1.6 billion for the ninefirst six months of 2004 was $2.6 billion. The $198 million increase in working capital in 2004 compared with 2003 is due to higher brewing 23 materials inventories, increased accounts receivable for recycling operations due to higher volume and pricing, and lower accounts payable from the year-over-year timing of payments for commodity purchases and media spending for the Olympics.2005. See the consolidated statement of cash flows for additionaldetailed information. Cash generated by the company's business segments is projected to exceed funding requirements for each segment's currently anticipated capital spending. The net issuance of debt provides an additional source of cash as necessary for share repurchase, dividends and business investments.investments in order to maintain the company's leverage position. The usenature, extent and timing of debt financing lowersvary depending on the company's overall costevaluation of capital.existing market conditions and other factors. The Harbin Group acquisition cost resultedcompany's debt balance declined $3 million since December 31, 2004, compared to an increase of $403 million during the first six months of 2004. The details of the changes in debt are outlined below.
INCREASES - --------------------------------------------------------------------------------------------------------------------- Amount Interest Rate Description (millions) (fixed unless noted) - --------------------------------------------------------------------------------------------------------------------- First Six Months of 2005 - ------------------------ Commercial Paper $3.7 2.32% Weighted Average, Floating United Kingdom Brewery Capital Lease Obligation 51.5 6.25% Other 0.8 Various ------------- $56.0 ============= First Six Months of 2004 - ------------------------ U.S. Dollar Notes $550.0 $300.0 at 5.0%; $250.0 at 4.7% Commercial Paper 406.3 1.0% Weighted Average, Floating Industrial Revenue Bonds 1.0 5.875% Issuance Discounts (1.0) N/A Other, net 8.0 Various ------------- $964.3 ============= 25 REDUCTIONS - --------------------------------------------------------------------------------------------------------------------- Amount Interest Rate Description (millions) (fixed unless noted) - --------------------------------------------------------------------------------------------------------------------- ------------- First Six Months of 2005 - ------------------------ U.S. Dollar Notes $0.7 5.35% Chinese Renminbi-Denominated Bank Loans 54.5 5.41% Weighted Average Other 4.1 Various ------------- $59.3 ============= First Six Months of 2004 - ------------------------ Euro Notes $251.0 $200.0 at 6.5%; $51.0 at 4.6% U.S. Dollar Notes 250.4 $250.0 at 7.1%; $0.4 at 5.35% ESOP Note 46.3 8.25% Other, net 13.2 Various ------------- $560.9 =============
The company has $1.8 billion of debt available for issuance through existing SEC shelf registrations. The company's commercial paper borrowings of $1.2 billion at June 30, 2005 were classified as long-term, since commercial paper is maintained on a reduction inlong-term basis with on-going support provided by the company's planned 2004 share repurchases.$2 billion revolving credit agreement. Capital expenditures during the ninefirst six months of 20042005 were $727$565 million, compared with $720to $442 million through September 2003.for the first six months of 2004. Full year 20042005 capital expenditures are expected to approximate $900 million to $975 million. Per share dividends paid by the company were $.245 in the third quarter and $.685 for the nine monthsrange of 2004, compared with $.22 and $.610, respectively, for the comparable 2003 periods.$1 billion to $1.1 billion. At its OctoberJuly 2005 meeting, the Board of Directors declaredannounced a $.025, or 10.2% increase in the regular quarterly dividend on outstanding shares of the company's common stock, offrom $.245 per share to $.27 per share. The new dividend rate is payable DecemberSeptember 9, 2004,2005, to shareholders of record NovemberAugust 9, 2004. The company has2005. This increase reflects Anheuser-Busch's substantial cash commitments inflow and management's confidence regarding the ordinary course of business for operating leases, capital commitments, debt service and the purchase of brewing and packaging materials.company's long-term prospects. There have been no materialonly normal and recurring changes in the magnitude or types of cashcompany's commitments made by the company during the year. In September 2004, Anheuser-Busch elected to contribute $154 million to its defined benefit pension plans to enhance the funded status of the plans. This funding is in addition to minimum contributions required for 2004. Pension contributions in 2004 for all plans are projected to total approximately $250 million for the full year. 24 The company's debt balance has increased $987 million since December 31, 2003, including $1182004. Return on capital employed for the 12 months ended June 30, 2005 was 17.3%, compared to 18.6% for the 12 months ended June 30, 2004. The decline in return on capital employed is due to the decrease in net income in 2005 versus 2004. Return on 26 capital employed is computed as 12 months of net income before after-tax net interest (interest expense less interest capitalized) divided by average net investment. Net investment is defined as total assets less non-debt current liabilities. For the 12 months ended June 30, 2005, after-tax net interest expense was $266 million, calculated as pretax net interest expense of debt assumed$428 million less income taxes applied using a 38% tax rate. For the 12 months ended June 30, 2004, after-tax net interest expense was $238 million, calculated as pretax net interest expense of $384 less income taxes applied using a 38% tax rate. ITEM 2. OTHER INFORMATION Anheuser-Busch was party to an agreement with its wholesaler in St. Louis County, Missouri, providing the company with the option to purchase substantially all of the assets of the wholesaler's business. Anheuser-Busch has assigned its rights under the agreement to an entity owned by David Stokes, who is the son of Patrick T. Stokes. Prior to the assignment, David Stokes was the vice president and general manager of the company's Sylmar, California wholesale beer distribution operation. Based upon the company's extensive experience in valuing wholesale beer operations, Anheuser-Busch believes the price required to be paid by the company as part ofentity for the Harbin acquisition. Comparative debt activity during the nine months of 2004acquired assets and 2003business is shown below. ISSUANCES - --------- Amount Interest Rate Description (millions) (fixed unless noted) - ------------------------------------------------------------------------------ 2004 U.S. Dollar Notes $800.0 $550.0 at 5.0%; $250.0 at 4.7% Commercial Paper, net 628.4 1.16% weighted average, floating Harbin Debt Assumed 118.4 5.57% weighted average Industrial Revenue Bonds 1.0 5.875% Other, net 8.4 Various Issuance Discounts (1.6) N/A ------------- $1,554.6 ============= 2003 U.S. Dollar Notes $880.0 $180.0 at 5.35%; $300.0 at 4.95%; $200.0 at 4.625%; $200.0 at 4.5% Commercial Paper, net 53.2 1.21% weighted average, floating Other, net 2.1 Various Issuance Discounts (3.9) N/A ------------- $931.4 ============= REDUCTIONS - ---------- Amount Interest Rate Description (millions) (fixed unless noted) - ----------------------------------------------------------------------------- 2004 Euro Notes $251.0 $200.0 at 6.5%; $51.0 at 4.6% U.S. Dollar Notes 251.2 $250 at 7.1%; $1.2 at 5.35% ESOP Note 46.3 8.25% Harbin Debt 4.0 5.57% weighted average Other, net 15.1 Various -------------- $567.6 ============== 2003 U.S. Dollar Debentures $200.0 7.375% U.S. Dollar Notes 200.0 6.75% ESOP Note 44.0 8.25% Other, net 15.3 Various -------------- $459.3 ============== 25 The ESOP debt guarantee expired on March 31, 2004. Commercial paper borrowings are supported on a long-term basis by the company's $2 billion revolving credit agreement. Anheuser-Busch has the ability and intent to refinance its entire debt portfolio on a long-term basis and therefore classifies all debt as long-term in the balance sheet. The company registered $1.4 billion in long-term debt with the SEC in the third quarter and as of September 30, 2004 had a total of $1.8 billion available for issuance through existing shelf registrations.fair market value price. ITEM 3. RISK MANAGEMENT The company's derivatives holdings fluctuate during theany given year based on normal and recurring changes in purchasing and production activity. The company has experienced slightly higher derivatives use over the last few years as raw material inputs have increased in conjunction withas a result of increases in domestic beer volume. Since December 31, 2003,2004, there have been no significant changes in the company's commodity,interest rate, foreign currency or commodity exposures, and interest rate exposures. Therethere have been no changes in the types of derivative instruments used to hedge the company's exposures. Underlying commodity market conditions have been somewhat volatile, with recent trendstrending towards higher prices.prices due to increased worldwide demand. 27 ITEM 4. CONTROLS AND PROCEDURES It is the responsibility of the chief executive officer and chief financial officer to ensure the company maintains disclosure controls and procedures designed to provide reasonable assurance that material information, both financial and non-financial, and other information required under the securities laws to be disclosed is identified and communicated to senior management on a timely basis. The company's disclosure controls and procedures include mandatory communication of material subsidiary events, automated accounting processing and reporting, management review of monthly and quarterly results, periodic subsidiary business reviews, an established system of internal controls and rotating internal control reviews by the company's internal auditors. The chief executive officer and chief financial officer evaluated the company's disclosure controls and procedures as of the end of the quarter ended SeptemberJune 30, 20042005 and have concluded that they are effective as of SeptemberJune 30, 20042005 in providing 26 reasonable assurance that such information is identified and communicated on a timely basis. Additionally, there were no changes in the company's internal control over financial reporting identified in connection withduring the evaluationquarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The company is a party to a lawsuit with the Maris Distributing Company. Information regarding this lawsuit is contained in Note 10, "Contingencies," on page 12. A law firm has named the company (and many other brewers and distillers) as a defendant in very similar class action lawsuits in Florida, Michigan, New York, Ohio, Wisconsin and West Virginia state courts. In these suits, the parents of illegal underage drinkers are suing to recover the sums that their offspring purportedly spent illegally buying alcohol from persons or entities other than the defendants. The claims asserted against the company vary depending on the suit, but include negligence, unjust 28 enrichment, violation of the state's Sales Practice Act or other statutory provisions, nuisance, fraudulent concealment and civil conspiracy. The suit filed in Michigan includes a claim under the Michigan Consumer Protection Act. Each suit seeks money damages, punitive damages and injunctive and equitable relief, including so-called disgorgement of profits allegedly attributable to underage drinking. The company removed the Ohio case to federal court in the Northern District of Ohio in June 2004, removed the West Virginia case to federal court in the Northern District of West Virginia in May 2005 and removed the Michigan case to federal court in the Eastern District of Michigan in July 2005. The company believes that it has strong legal and factual defenses to these class actions and intends to defend itself vigorously. ITEM 2. CHANGES IN SECURITIES Common Stock Repurchases - ------------------------ Following are the company's monthly common stock purchases during the thirdsecond quarter 20042005 (in millions, except per share):
AverageShares Avg. Price Shares per Share ----------- ------------------------------- ---------------- Shares Remaining Authorized Under Disclosed Repurchase Programs at July 1, 2004 62.0 ----------- Less Shares Repurchased: July 1.3 $52.43 August 4.5 $52.30 September 5.9 $50.65 ----------- ---------------March 31, 2005 34.4 ---------------- Share Repurchases - ----------------- April 0.5 $45.93 ================ May 0.8 $46.64 ================ June 0.7 $47.12 ---------------- ================ Total Shares Repurchased 11.7 $51.49 ----------- ===============2.0 $46.63 ---------------- ================ Shares Remaining Authorized Under Disclosed Repurchase Programs at SeptemberJune 30, 2004 50.3 ===========2005 32.4 ================
As of September 30, 2004, the company had disbursed $18.6 million for 369,400 shares for which title had not yet been received due to normal three-day securities settlement period. All shares arehave been repurchased under a March 2003 Board of Directors authorization. The Board authorized the current programauthorization to repurchase 100 million shares in March 2003.shares. There is no prescribed termination date for this program. The numbers of shares shown include shares delivered to the company to exercise stock options. 27 Stockholder Rights Plan - ----------------------- On October 27, 2004, the board of directors determined not to renew the company's Stockholder Rights Plan, which by its terms expires October 31, 2004. The Plan permitted stockholders to purchase common stock from the company at prices substantially below market value under certain change-in-control scenarios. The board of directors adopted the following policy concerning rights plans, effective upon expiration of the Plan: "The Company does not have a stockholder rights plan and is not considering adopting one. The board of directors hereby adopts a policy that it will not approve a stockholders rights plan without first submitting the plan to a vote of stockholders, unless, in its exercise of its fiduciary duties, the board of directors determines that, under the circumstances existing at that time, adoption of a stockholders rights plan without first seeking stockholder approval is in the best interests of the Company's stockholders (whether to avoid the delay resulting from seeking stockholder approval or for other reasons). If the Company adopts a rights plan without first submitting the plan to a vote of stockholders, within 12 months after the adoption the Company will submit the stockholders rights plan to a vote by the stockholders of the Company or will cause termination of the rights plan." 2829 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -------- 10.1 Form of Incentive Stock Option Cover Sheet and Standard Incentive Stock Option Agreement under the Anheuser-Busch Companies, Inc. 1998 Incentive Stock Plan for executive officers of Anheuser-Busch Companies, Inc. 10.2 Form of Non-Qualified Stock Option Cover Sheet and Standard Non-Qualified Stock Option Agreement under the Anheuser-Busch Companies, Inc. 1998 Incentive Stock Plan for executive officers of Anheuser-Busch Companies, Inc. 12 Ratio of Earnings to Fixed Charges 31.1 Certification of Chief Executive Officer required by RuleRules 13a-14(a) or 15d-14(a) under the Exchange Act 31.2 Certification of Chief Financial Officer required by RuleRules 13a-14(a) or 15d-14(a) under the Exchange Act 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) Reports on Form 8-K ------------------- Item Reported Date of Report ------------- -------------- Item 7 (c) Exhibit - Press Release July 28, 2004 Item 12 Results of Operations and Financial Condition July 28, 2004 2930 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. ANHEUSER-BUSCH COMPANIES, INC. (Registrant) /s/ W. Randolph Baker ------------------------------------------------------------------------------------- W. Randolph Baker Vice President and Chief Financial Officer (Chief Financial Officer) October 29, 2004July 28, 2005 /s/ John F. Kelly ------------------------------------------------------------------------------------- John F. Kelly Vice President and Controller (Chief Accounting Officer) October 29, 2004 30 July 28, 2005 31