United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JANUARY 31, 2006
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 002-26821
BROWN-FORMAN CORPORATION
(Exact name of Registrant as specified in its Charter)
Delaware 61-0143150
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
850 Dixie Highway
Louisville, Kentucky 40210
(Address of principal executive offices) (Zip Code)
(502) 585-1100
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer |X| Accelerated filer |_| Non-accelerated filer |_|
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes | | No |X|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: February 28, 2006
Class A Common Stock ($.15 par value, voting) 56,829,123
Class B Common Stock ($.15 par value, nonvoting) 65,465,327
BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited) Page
Condensed Consolidated Statements of Operations
Three months ended January 31, 2005 and 2006 3
Nine months ended January 31, 2005 and 2006 3
Condensed Consolidated Balance Sheets
April 30, 2005 and January 31, 2006 4
Condensed Consolidated Statements of Cash Flows
Nine months ended January 31, 2005 and 2006 5
Notes to the Condensed Consolidated Financial Statements 6 - 12
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13 - 20
Item 3. Quantitative and Qualitative Disclosures about Market Risk 20
Item 4. Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 21 - 22
Item 6. Exhibits 22
Signatures 23
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended Nine Months Ended
January 31, January 31,
2005 2006 2005 2006
------- ------- -------- --------
Net sales $ 607.1 $ 636.8 $1,715.6 $1,850.0
Excise taxes 127.8 132.8 319.4 345.9
Cost of sales 174.3 169.6 507.3 509.3
------- ------- -------- --------
Gross profit 305.0 334.4 888.9 994.8
Advertising expenses 76.8 85.0 219.9 244.7
Selling, general, and
administrative expenses 109.3 116.1 311.2 336.6
Other expense (income), net 1.5 (32.4) (0.6) (46.6)
------- ------- -------- --------
Operating income 117.4 165.7 358.4 460.1
Gain on sale of investment
in affiliate 73.5 -- 72.3 --
Interest income 3.0 4.6 3.8 9.7
Interest expense 5.0 4.3 15.4 13.5
------- ------- -------- --------
Income from continuing
operations before income taxes 188.9 166.0 419.1 456.3
Income taxes 64.5 45.6 141.5 136.7
------- ------- -------- --------
Income from continuing operations 124.4 120.4 277.6 319.6
Income (loss) from discontinued
operations, net of income taxes (29.4) 0.1 (30.0) (77.5)
------- ------- -------- --------
Net income $ 95.0 $ 120.5 $ 247.6 $ 242.1
======= ======= ======== ========
Basic earnings (loss) per share:
Continuing operations $ 1.02 $ 0.99 $ 2.28 $ 2.62
Discontinued operations (0.24) -- (0.25) (0.64)
------- ------- -------- --------
Total $ 0.78 $ 0.99 $ 2.03 $ 1.98
======= ======= ======== ========
Diluted earnings (loss) per share:
Continuing operations $ 1.02 $ 0.98 $ 2.27 $ 2.59
Discontinued operations (0.24) -- (0.25) (0.63)
------- ------- -------- --------
Total $ 0.78 $ 0.98 $ 2.02 $ 1.96
======= ======= ======== ========
Shares (in thousands) used in
the calculation of earnings (loss)
per share:
Basic 121,755 122,116 121,723 122,027
Diluted 122,482 123,558 122,432 123,321
Cash dividends per common share:
Declared $ 0.490 $ 0.560 $ 0.915 $ 1.050
Paid $ 0.245 $ 0.280 $ 0.670 $ 0.770
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
April 30, January 31,
2005 2006
-------- ----------
Assets
- ------
Cash and cash equivalents $ 294.9 $ 366.2
Short-term investments -- 229.7
Accounts receivable, net 295.9 312.6
Inventories:
Barreled whiskey 248.7 269.4
Finished goods 102.3 100.8
Work in process 80.5 108.5
Raw materials and supplies 38.4 41.1
-------- --------
Total inventories 469.9 519.8
Current portion of deferred income taxes 69.9 69.9
Current assets held for sale 157.6 9.3
Other current assets 27.0 22.3
-------- --------
Total current assets 1,315.2 1,529.8
Property, plant and equipment, net 417.9 418.1
Prepaid pension cost 130.2 137.7
Trademarks and brand names 334.2 331.7
Goodwill 192.7 188.6
Noncurrent assets held for sale 217.9 7.0
Other assets 41.0 41.7
-------- --------
Total assets $2,649.1 $2,654.6
======== ========
Liabilities
- -----------
Accounts payable and accrued expenses $ 264.2 $ 261.2
Dividends payable -- 34.2
Accrued income taxes 41.9 42.3
Current portion of long-term debt 279.3 249.5
Current liabilities held for sale 52.7 3.8
-------- --------
Total current liabilities 638.1 591.0
Long-term debt 351.5 351.9
Deferred income taxes 157.8 146.1
Accrued pension and other postretirement benefits 77.6 77.5
Noncurrent liabilities held for sale 82.9 --
Other liabilities 31.2 26.5
-------- --------
Total liabilities 1,339.1 1,193.0
Commitments and contingencies
Stockholders' Equity
- --------------------
Common stock:
Class A, voting
(57,000,000 shares authorized;
56,841,000 shares issued) 8.5 8.5
Class B, nonvoting
(100,000,000 shares authorized;
69,188,000 shares issued) 10.4 10.4
Additional paid-in capital 33.9 40.6
Retained earnings 1,415.5 1,530.4
Accumulated other comprehensive income (loss) (11.4) 6.0
Treasury stock
(4,141,000 and 3,749,000 shares
at April 30 and January 31, respectively) (146.9) (134.3)
-------- --------
Total stockholders' equity 1,310.0 1,461.6
-------- --------
Total liabilities and stockholders' equity $2,649.1 $2,654.6
======== ========
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Nine Months Ended
January 31,
2005 2006
------- -------
Cash flows from operating activities:
Net income $ 247.6 $ 242.1
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Net loss from discontinued operations 30.0 77.5
Gain on sale of investment in affiliate (72.3) --
Gain on sale of property, plant, and equipment -- (2.3)
Depreciation and amortization 32.8 32.3
Stock-based compensation expense 4.9 5.6
Deferred income taxes (35.4) (11.7)
Changes in assets and liabilities:
Accounts receivable (26.9) (16.7)
Inventories (21.9) (49.0)
Other current assets 20.2 4.7
Accounts payable and accrued expenses 45.8 (3.0)
Accrued income taxes 60.0 0.4
Noncurrent assets and liabilities 8.0 (18.4)
Net cash provided by (used for) operating
activities of discontinued operations 49.2 (18.1)
------- -------
Cash provided by operating activities 342.0 243.4
Cash flows from investing activities:
Proceeds from sale of discontinued operations -- 196.5
Proceeds from sale of investment in affiliate,
net of disposal costs 92.7 --
Investment in short-term securities -- (229.7)
Acquisition of minority interest in subsidiary (63.6) --
Additions to property, plant, and equipment (31.0) (33.6)
Proceeds from sale of property, plant,
and equipment -- 7.0
Computer software expenditures (0.7) (0.2)
Trademark and patent expenditures (0.5) --
Net cash provided by (used for) investing
activities of discontinued operations 6.6 (1.9)
------- -------
Cash provided by (used for)
investing activities 3.5 (61.9)
Cash flows from financing activities:
Net repayment of short-term borrowings (47.0) (30.0)
Proceeds from exercise of stock options 6.6 12.7
Excess tax benefits from stock options 1.2 4.3
Acquisition of treasury stock (2.9) (3.2)
Dividends paid (81.6) (94.0)
------- -------
Cash used for financing activities (123.7) (110.2)
------- -------
Net increase in cash and cash equivalents 221.8 71.3
Cash and cash equivalents, beginning of period 67.7 294.9
------- -------
Cash and cash equivalents, end of period $ 289.5 $ 366.2
======= =======
See notes to the condensed consolidated financial statements.
5
BROWN-FORMAN CORPORATION
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, "we," "us," and "our" refer to Brown-Forman Corporation.
1. Condensed Consolidated Financial Statements
We prepared these unaudited condensed consolidated statements using our
customary accounting practices as set out in our 2005 annual report on Form 10-K
(the "2005 Annual Report"). We made all of the adjustments (which include only
normal, recurring adjustments) needed for a fair statement of this data.
We condensed or omitted some of the information found in financial statements
prepared according to generally accepted accounting principles ("GAAP"). You
should read these financial statements together with the 2005 Annual Report,
which does conform to GAAP.
2. Inventories
We use the last-in, first-out ("LIFO") method to determine the cost of most of
our inventories. If the LIFO method had not been used, inventories at current
cost would have been $141.6 million higher than reported as of April 30, 2005,
and $131.8 million higher than reported as of January 31, 2006. Changes in the
LIFO valuation reserve for interim periods are based on a proportionate
allocation of the estimated change for the entire fiscal year.
3. Income Taxes
Our consolidated effective tax rate may differ from current statutory rates due
to the recognition of amounts for events or transactions that do not have tax
consequences. We use the estimated annual effective tax rate in determining our
interim results. The effective tax rate of 30.0% for continuing operations for
the nine months ended January 31, 2006, is based on an expected effective tax
rate of 32.9% on ordinary income for the full fiscal year, less the tax benefit
achieved by offsetting various capital gains from continuing operations (see
Note 11) against the capital loss resulting from the sale of Lenox.
4. Discontinued Operations
During July 2005, we entered into a definitive agreement to sell our
wholly-owned subsidiary Lenox, Incorporated ("Lenox") for $190 million in cash
(subject to a post-closing working capital adjustment). The agreement followed
the February 2005 announcement that we were exploring strategic alternatives for
Lenox, including a possible sale. On September 1, 2005, we consummated the sale
of substantially all of Lenox to Department 56, Inc. ("Department 56") for $196
million. This total was $6 million higher than previously announced due to a
working capital adjustment provision included in the sale agreement.
6
After consummation of the sale to Department 56, we retained ownership of the
Lenox headquarters building and property in Lawrenceville, New Jersey and
Lenox's Brooks & Bentley, a former subsidiary of Lenox, located in the United
Kingdom. As of January 31, 2006, it was our intention to sell those assets,
which are classified as held for sale in the accompanying consolidated balance
sheets. As discussed in Note 13, we subsequently sold the Lenox headquarters
building and property. It continues to be our intention to sell Brooks &
Bentley.
In connection with the definitive sales agreement, we recognized a non-cash
impairment charge during July 2005 of $59.5 million, representing the excess of
the carrying value of the net assets being sold over the expected sales
proceeds. We have also recorded transaction costs of $10.3 million, including
investment banking fees, transaction success payments, and legal, tax and
actuarial expenses.
Due to the sale of Lenox, its results of operations through August 2005, the
impairment charge, and other transaction costs have been classified as
discontinued operations, net of income taxes, in the accompanying consolidated
statements of operations, and its assets and liabilities have been classified as
held for sale in the accompanying consolidated balance sheets. In reports issued
prior to July 2005, Lenox's operating results and assets were presented in the
Consumer Durables segment, of which it comprised the major part. As a result of
the sale, the Consumer Durables segment no longer constitutes a separate
reportable segment.
A summary of discontinued operations follows:
(Dollars in millions) Three Months Ended Nine Months Ended
January 31, January 31,
2005 2006 2005 2006
------- ------- ------- -------
Net sales $ 151.1 $ 8.7 $ 400.4 $ 127.7
Operating expenses (138.6) (7.7) (388.9) (141.9)
Impairment charge (37.0) -- (37.0) (59.5)
Transaction costs -- (0.7) -- (10.3)
------- ------- ------- -------
Income (loss) before income taxes (24.5) 0.3 (25.5) (84.0)
Income tax (expense) benefit (4.9) (0.2) (4.5) 6.5
------- ------- ------- -------
Net income (loss) from
discontinued operations $ (29.4) $ 0.1 $ (30.0) $ (77.5)
======= ======= ======= =======
The net assets held for sale consist of the following:
(Dollars in millions) April 30, January 31,
2005 2006
------ ------
Current assets:
Accounts receivable, net $ 48.4 $ 5.9
Inventories 103.6 2.6
Other 5.6 0.8
------ ------
157.6 9.3
------ ------
Noncurrent assets:
Property, plant and equipment, net 82.8 6.5
Goodwill 89.7 --
Other 45.4 0.5
------ ------
217.9 7.0
------ ------
Current liabilities:
Accounts payable and accrued expenses 47.2 3.8
Accrued income taxes 5.5 --
------ ------
52.7 3.8
------ ------
Noncurrent liabilities:
Accrued postretirement benefits 78.3 --
Other 4.6 --
------ ------
82.9 --
------ ------
Net assets held for sale $239.9 $ 12.5
====== ======
7
5. Earnings Per Share
Basic earnings per share is based upon the weighted average number of common
shares outstanding during the period. Diluted earnings per share includes the
dilutive effect of stock-based compensation awards, including stock options,
stock-settled stock appreciation rights ("SSARs"), and non-vested restricted
stock. Stock-based awards for approximately 1.1 million common shares were
excluded from the calculation of diluted earnings per share for the periods
ended January 31, 2005, because the exercise price of the options was greater
than the average market price of the shares. No stock-based awards were excluded
from the calculation of diluted earnings per share for the periods ended January
31, 2006.
The following table presents information concerning basic and diluted earnings
per share:
Three Months Ended Nine Months Ended
January 31, January 31,
(Dollars in millions, except per share amounts) 2005 2006 2005 2006
------- ------- ------- -------
Basic and diluted net income (loss):
Continuing operations $124.4 $120.4 $277.6 $319.6
Discontinued operations (29.4) 0.1 (30.0) (77.5)
------- ------- ------- -------
Total $ 95.0 $120.5 $247.6 $242.1
======= ======= ======= =======
Share data (in thousands):
Basic average common shares outstanding 121,755 122,116 121,723 122,027
Dilutive effect of non-vested restricted stock 15 33 10 28
Dilutive effect of stock options and SSARs 712 1,409 699 1,266
------- ------- ------- -------
Diluted average common shares outstanding 122,482 123,558 122,432 123,321
======= ======= ======= =======
Basic earnings (loss) per share:
Continuing operations $ 1.02 $0.99 $ 2.28 $ 2.62
Discontinued operations (0.24) -- (0.25) (0.64)
------- ------- ------- -------
Total $ 0.78 $0.99 $ 2.03 $ 1.98
======= ======= ======= =======
Diluted earnings (loss) per share:
Continuing operations $ 1.02 $0.98 $ 2.27 $ 2.59
Discontinued operations (0.24) -- (0.25) (0.63)
------- ------- ------- -------
Total $ 0.78 $0.98 $ 2.02 $ 1.96
======= ======= ======= =======
8
6. Goodwill and Other Intangible Assets
The following table shows the changes in the amounts recorded as goodwill during
the nine months ended January 31, 2006:
(Dollars in millions)
Balance as of April 30, 2005 $192.7
Foreign currency translation adjustment (4.1)
------
Balance as of January 31, 2006 $188.6
======
Our other intangible assets consist of trademarks and brand names. As of January
31, 2006, we consider all of our trademarks and brand names to have indefinite
useful lives.
7. Environmental Matters
We are subject to environmental regulations in connection with the operation of
our production facilities and in connection with the transportation of products
we manufacture. Violation of these environmental regulations can results in
fines or penalties. As of January 31, 2006, we do not consider the exposure from
the risks of such fines or penalties to be material.
8. Contingencies
We operate in a litigious environment, and we get sued in the normal course of
business. Sometimes plaintiffs seek substantial damages. Significant judgment is
required in predicting the outcome of these suits and claims, many of which take
years to adjudicate. We accrue estimated costs for a contingency when we believe
that a loss is probable and a reasonable estimate of the loss can be made, and
adjust the accrual as appropriate to reflect changes in facts and circumstances.
A law firm has sued Brown-Forman and many other manufacturers and marketers of
spirits, wines, and beer in a series of nine very similar class action lawsuits
seeking damages and injunctive relief from alleged marketing of beverage alcohol
to underage consumers. The suits allege that the defendants engage in deceptive
and negligent marketing practices targeting underage consumers. They seek to
recover on behalf of parents those funds that their children spent on the
illegal purchase of alcohol as well as disgorgement of all profits from the
alleged illegal sales. Brown-Forman is vigorously defending these cases. Three
of the suits have been dismissed. Plaintiffs have appealed, or have time
remaining to appeal, those dismissals. Another was voluntarily dismissed. Four
others are pending on motions to dismiss. It is not possible at this time to
predict the outcome of these claims but an unfavorable result in these or
similar class action lawsuits could have a material adverse impact on our
business.
9
9. Pension and Other Postretirement Benefits
The following table shows the components of the pension and other postretirement
benefit expense recognized during the periods covered by this report:
(Dollars in millions) Three Months Ended Nine Months Ended
January 31, January 31,
2005 2006 2005 2006
------ ------ ------ ------
Pension Benefits:
Continuing operations:
Service cost $2.8 $3.2 $8.3 $9.5
Interest cost 5.1 5.5 15.3 16.5
Expected return on plan assets (8.0) (7.8) (24.0) (23.5)
Amortization of:
Unrecognized prior service cost 0.2 0.1 0.5 0.4
Unrecognized net loss 0.7 2.1 2.3 6.4
------ ------ ------ ------
Net expense 0.8 3.1 2.4 9.3
------ ------ ------ ------
Discontinued operations:
Service cost 1.4 -- 4.2 1.8
Interest cost 2.4 -- 7.2 3.3
Expected return on plan assets (2.8) -- (8.4) (3.5)
Amortization of:
Unrecognized prior service cost 0.1 -- 0.2 0.1
Unrecognized net loss 0.3 -- 1.0 0.9
------ ------ ------ ------
Net expense 1.4 -- 4.2 2.6
------ ------ ------ ------
Total net benefit expense $2.2 $3.1 $6.6 $11.9
====== ====== ====== ======
Other Postretirement Benefits:
Continuing operations:
Service cost $0.3 $0.3 $0.7 $0.9
Interest cost 0.6 0.6 1.8 2.0
Amortization of unrecognized net loss -- 0.1 0.1 0.2
------ ------ ------ ------
Net expense 0.9 1.0 2.6 3.1
------ ------ ------ ------
Discontinued operations:
Service cost 0.2 -- 0.6 0.3
Interest cost 0.4 -- 1.2 0.6
Amortization of unrecognized
prior service cost -- -- 0.1 --
------ ------ ------ ------
Net expense 0.6 -- 1.9 0.9
------ ------ ------ ------
Total net benefit expense $1.5 $1.0 $4.5 $4.0
====== ====== ====== ======
We have contributed approximately $21.0 million to our pension and other
postretirement benefit plans during the nine months ended January 31, 2006. We
expect to contribute approximately $2.0 million more to those plans during the
fourth quarter.
10
10. Comprehensive Income
Comprehensive income is a broad measure of the effects of all transactions and
events (other than investments by or distributions to shareholders) that are
recognized in stockholders' equity, regardless of whether those transactions and
events are included in net income. The following table adjusts the Company's net
income for the other items included in comprehensive income:
(Dollars in millions) Three Months Ended Nine Months Ended
January 31, January 31,
2005 2006 2005 2006
------ ------ ------ ------
Continuing operations:
Net income $124.4 $120.4 $277.6 $319.6
Other comprehensive income (loss):
Net gain (loss) on cash flow hedges 0.1 (1.2) (2.9) 1.1
Net gain (loss) on securities 0.1 -- (0.1) 0.1
Foreign currency translation adjustment 1.0 2.3 13.5 (10.5)
------ ------ ------ ------
1.2 1.1 10.5 (9.3)
------ ------ ------ ------
Comprehensive income 125.6 121.5 288.1 310.3
====== ====== ====== ======
Discontinued operations:
Net income (loss) (29.4) 0.1 (30.0) (77.5)
Other comprehensive income (loss):
Pension liability adjustment -- -- -- 27.6
Foreign currency translation adjustment 0.1 -- 0.4 (0.9)
------ ------ ------ ------
0.1 -- 0.4 26.7
------ ------ ------ ------
Comprehensive income (loss) (29.3) 0.1 (29.6) (50.8)
------ ------ ------ ------
Total comprehensive income $ 96.3 $121.6 $258.5 $259.5
====== ====== ====== ======
Accumulated other comprehensive income (loss) consisted of the following:
(Dollars in millions) April 30, January 31,
2005 2006
------ ------
Pension liability adjustment $(38.1) $(10.5)
Cumulative translation adjustment 27.2 15.8
Unrealized gain (loss) on cash flow hedge contracts (0.7) 0.4
Unrealized gain on securities 0.2 0.3
------ ------
$(11.4) $ 6.0
====== ======
11
11. Other Income
During July 2005, we entered into an agreement with LVMH Moet Hennessey Louis
Vuitton for the early termination of our long-term importing and marketing
agreements for Glenmorangie products in the United States, Canada, and certain
countries in Europe and Asia, effective July 29, 2005. We received approximately
$13.5 million for the early termination, which is included in "other income" for
the nine months ended January 31, 2006, in the accompanying consolidated
statement of operations.
During January 2006, we received proceeds of $24.8 million as compensation for
Pernod Ricard assuming the distribution of its brands from Swift & Moore, an
Australian distribution company co-owned by Pernod Ricard (following its
purchase of Allied-Domecq) and Brown-Forman. This amount is recorded in "other
income" for the periods ended January 31, 2006. Pernod Ricard surrendered its
ownership interest in Swift & Moore to Brown-Forman effective February 1, 2006,
resulting in Brown-Forman becoming 100% owner of Swift & Moore as of that date.
Swift & Moore will continue to distribute our brands in Australia.
During January 2006, we sold winery land and buildings in California for $7.0
million, resulting in a gain of $4.6 million that is included in "other income"
for the periods ended January 31, 2006.
12. Stock Options
Prior year amounts have been restated to reflect the retroactive adoption of
FASB Statement No. 123(R), "Share-Based Payment," during the fourth quarter of
fiscal 2005.
13. Subsequent Event
On February 10, 2006, we sold the former Lenox headquarters building and
property (included in noncurrent assets held for sale in the accompanying
consolidated balance sheet as of January 31, 2006) for $9.6 million, resulting
in a gain of $3.2 million. The gain will be reflected in discontinued operations
during the fourth quarter of fiscal 2006.
12
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
You should read the following discussion and analysis along with our 2005 Annual
Report. Note that the results of operations for the nine months ended January
31, 2006, do not necessarily indicate what our operating results for the full
fiscal year will be. In this Item, "we," "us," and "our" refer to Brown-Forman
Corporation.
Important Note on Forward-Looking Statements:
This report contains statements, estimates, or projections that constitute
"forward-looking statements" as defined under U.S. federal securities laws.
Generally, the words "expect," "believe," "intend," "estimate," "will,"
"anticipate," and "project," and similar expressions identify a forward-looking
statement, which speaks only as of the date the statement is made. Except as
required by law, we do not intend to update or revise any forward-looking
statements, whether as a result of new information, future events, or otherwise.
We believe that the expectations and assumptions with respect to our
forward-looking statements are reasonable. But by their nature, forward-looking
statements involve known and unknown risks, uncertainties and other factors that
in some cases are out of our control. These factors could cause our actual
results to differ materially from Brown-Forman's historical experience or our
present expectations or projections. Here is a non-exclusive list of such risks
and uncertainties:
- changes in general economic conditions, particularly in the United States
where we earn the majority of our profits;
- lower consumer confidence or purchasing in the wake of catastrophic events;
- tax increases, whether at the federal or state level or in major
international markets and/or tariff barriers or other restrictions affecting
beverage alcohol;
- restrictions on alcohol marketing, including advertising and promotion, as a
result of stricter governmental policies adopted either in the United States
or globally;
- adverse developments in the class action lawsuits filed against Brown-Forman
and other spirits, beer and wine manufacturers alleging that our industry
conspired to promote the consumption of alcohol by those under the legal
drinking age;
- a strengthening U.S. dollar against foreign currencies, especially the
British Pound;
- reduced bar, restaurant, hotel and travel business in wake of terrorist
attacks or threats, such as occurred in September, 2001 in the U.S. and in
July, 2005 in London;
- lower consumer confidence or purchasing associated with rising energy prices;
- a decline in U.S. spirits consumption as might be indicated by recently
published trends suggesting a slight reduction in the growth rate of
distilled spirits consumption;
- longer-term, a change in consumer preferences, social trends or cultural
trends that results in the reduced consumption of our premium spirits brands;
- changes in distribution arrangements in major markets that limit our ability
to market our products;
- increases in the price of energy or raw materials, including grapes, grain,
wood, glass, and plastic;
- excess wine inventories or a further world-wide oversupply of grapes;
- adverse developments as a result of state investigations of beverage alcohol
industry trade practices of suppliers, distributors and retailers.
13
Results of Operations:
Third Quarter Fiscal 2006 Compared to Third Quarter Fiscal 2005
A summary of our operating performance (expressed in millions, except percentage
and per share amounts) is presented below. Continuing Operations consist of our
beverage business and Hartmann luggage business. Discontinued Operations consist
of Lenox and Brooks & Bentley.
All per share amounts are calculated on a diluted basis unless otherwise
indicated.
Three Months Ended
January 31,
CONTINUING OPERATIONS 2005 2006 Change
------ ------ ------
Net sales $607.1 $636.8 5%
Gross profit 305.0 334.4 10%
Advertising expenses 76.8 85.0 11%
Selling, general, and
administrative expenses 109.3 116.1 6%
Other expense (income), net 1.5 (32.4)
Operating income 117.4 165.7 41%
Gain on sale of investment in affiliate 73.5 --
Interest expense (income), net 2.0 (0.3)
Income before income taxes 188.9 166.0 (12%)
Income taxes 64.5 45.6
Net income 124.4 120.4 (3%)
Gross margin 50.2% 52.5%
Effective tax rate 34.1% 27.5%
Earnings per share:
Basic $1.02 $0.99 (4%)
Diluted 1.02 0.98 (4%)
Diluted earnings from continuing operations for the quarter ended January 31,
2006, declined 4%, to $0.98 per share, from $1.02 per share in the prior year,
reflecting the absence of a $0.39 per share gain recorded in the prior year
related to the sale of our shares in Glenmorangie plc. Additionally, in the
third quarter of this fiscal year we recorded a $0.14 per share net benefit
related to changes in our Australian distribution joint venture and a $0.04 per
share gain on the sale of winery property. Quarterly earning per share growth
was also affected by higher average global trade inventory levels when compared
to the prior year ($0.05 per share). Adjusting for these factors (as shown in
the following table), underlying earnings per share growth for the quarter was
12%, reflecting continued strong growth in sales and profits for our premium
global brands, most notably Jack Daniel's Tennessee Whiskey.
Reported diluted EPS growth (4%)
Glenmorangie 39%
Australian distributor transition (14%)
Gain on sale of winery (4%)
Net increase in trade inventories (5%)
-----
Adjusted diluted EPS growth 12%
=====
14
We have adjusted for items that are considered to have a significant effect on
our underlying growth trends, such as acquisitions and dispositions, changes in
distribution arrangements, foreign exchange, and fluctuations in trade inventory
levels. We believe that disclosing the adjusted growth in EPS enhances the
ability to understand the underlying growth trends for the company as the items
adjusted have both a disproportionate positive and negative effect on results in
the quarter, making comparisons difficult. In addition, we believe this adjusted
growth rate is a more useful guide in forecasting and planning.
Net sales and gross profit for the quarter grew 5% and 10%, respectively,
reflecting continued volume and profit growth for Jack Daniel's, Fetzer Wines'
profit growth in the United States as a result of lower costs, and positive
trends for Finlandia (particularly in central Europe). These factors were
partially offset by a stronger U.S. dollar this year compared to last year
(negatively affecting this year's net sales by $24 million and gross profit by
$11 million) and the absence of sales and gross profit from Glenmorangie and its
family of brands, which we formerly distributed in the U.S. and several
international markets last year (negatively affecting this year's net sales by
$4 million and gross profit by $1 million). Adjusting for these factors, net
sales and gross profit improved 10% and 13%, respectively. Management believes
that disclosing these rates of growth is important because they are a better
indication of the underlying net sales and gross profit growth of the company in
the quarter.
In addition to the 10% increase in reported gross profit, other income was up
significantly compared to last year, reflecting the sale of the winery assets
and consideration received as a result of changes in our Australian joint
venture distribution. These positive factors were only partially offset by an
11% increase in advertising investments behind our premium global brands and
higher investments in SG&A expenses (6%), due in part to the effect of changes
in our distribution network in a number of markets around the world. As a
result, reported operating income grew 41%. Adjusting operating income growth
for higher global trade inventory levels (which boosted earnings 8%), the sale
of winery assets (which increased earnings 4%), the changes in our Australian
distribution joint venture (which added 12% to quarter over quarter growth in
operating income), and the net effect of a couple of other items (which
contributed 4% growth for the quarter), operating income grew at a much lower
rate of 13%. Management believes that disclosing this rate of growth is
important because it is a better indication of the underlying operating income
growth of the company in the quarter.
Global depletions for our total portfolio of brands were up in the mid-single
digits in the quarter with balanced growth across all geographies, led by
strength in many international markets. (Depletions are shipments from wholesale
distributors to retailers, and are commonly regarded in the wine and spirits
industry as an approximate measure of consumer demand.) Depletions for our
premium global brands, consisting of Jack Daniel's, Southern Comfort, and
Finlandia, grew in the high single digits and represent nearly 60% of total
volumes. Depletions for our mid-priced regional brands, which include Canadian
Mist, Early Times, Fetzer and Bolla, were flat, while depletions of
super-premium developing brands continued to grow at a double-digit rate in the
quarter.
15
The effective tax rate of 27.5% for continuing operations for the quarter ended
January 31, 2006, is based on an expected effective tax rate of 32.9% on
ordinary income for the full fiscal year, less the tax benefit achieved by
offsetting various capital gains from continuing operations against the capital
loss resulting from the sale of Lenox.
DISCONTINUED OPERATIONS
As discussed earlier, we consummated the sale of substantially all of Lenox on
September 1, 2005, and we intend to sell Brooks & Bentley. As a result, we have
reported the operations of Lenox and Brooks & Bentley as discontinued operations
in the accompanying financial statements. The net loss from discontinued
operations during the three months ended January 31, 2006, consists of the
results of operations for Brooks & Bentley as well as fees and other costs
associated with the Lenox transaction.
Three Months Ended
January 31,
2005 2006
------ ------
Net income (loss) $(29.4) $ 0.1
Loss per share:
Basic (0.24) --
Diluted (0.24) --
16
Results of Operations:
Nine Months Fiscal 2006 Compared to Nine Months Fiscal 2005
A summary of our operating performance (expressed in millions, except percentage
and per share amounts) is presented below. Continuing Operations consist of our
beverage business and Hartmann luggage business. Discontinued Operations consist
of Lenox and Brooks & Bentley.
All per share amounts are calculated on a diluted basis unless otherwise
indicated.
Nine Months Ended
January 31,
CONTINUING OPERATIONS 2005 2006 Change
------ ------ ------
Net sales $1,715.6 $1,850.0 8%
Gross profit 888.9 994.8 12%
Advertising expenses 219.9 244.7 11%
Selling, general, and
administrative expenses 311.2 336.6 8%
Other expense (income), net (0.6) (46.6)
Operating income 358.4 460.1 28%
Gain on sale of investment in affiliate 72.3 --
Interest expense, net 11.6 3.8
Income before income taxes 419.1 456.3 9%
Income taxes 141.5 136.7
Net income 277.6 319.6 15%
Gross margin 51.8% 53.8%
Effective tax rate 33.8% 30.0%
Earnings per share:
Basic $2.28 $2.62 15%
Diluted 2.27 2.59 14%
For the nine months ended January 31, 2006, earnings from continuing operations
were up 14% over the prior year. Growth was driven by positive volume trends and
continued margin improvement for our premium global brands. These improvements,
combined with higher profits from some of our mid-priced regional brands (most
notably Fetzer) and volume and profit growth from our super-premium developing
brand portfolio, more than offset increased advertising investments (primarily
behind premium global brands) and higher SG&A spending. Adjusting for the items
noted below, underlying earnings per share growth was also 14%.
17
Reported diluted EPS growth 14%
Glenmorangie 13%
Australian distributor transition (6%)
Gain on sale of winery (2%)
Net increase in trade inventories (3%)
All other, net (2%)
-----
Adjusted diluted EPS growth 14%
=====
*Consists of various items, including lower net interest expense, foreign
exchange effects, higher incentive compensation in the prior year, and an
asset impairment associated with the company's minority interest in a small
Mexican tequila company.
For the first nine months of the fiscal year, net sales grew 8%, or $134
million, to approximately $1.9 billion. Strong year-to-date results in the U.S.
and Europe contributed 75% of the total growth, with the remaining growth coming
from all other international markets.
Gross profit of $1.0 billion was up 12%. Approximately half of the increase was
driven by price increases, favorable mix and cost improvements, with the
remainder driven by volume gains, most notably for Jack Daniel's, Southern
Comfort, and Finlandia.
Healthy advertising investments of $245 million were up 11% (and 13% on a
constant dollar basis), reflecting increased spending in the U.S. and overseas,
while SG&A increased 8%.
In the first nine months of fiscal 2006, Jack Daniel's worldwide depletions grew
in the high single digits. While this growth rate was slightly below that of the
prior year, the brand grew by more than 500,000 cases in the period. Substantial
volume gains were registered in the U.S., Asia, South Africa and nearly all
markets in Europe. Year-to-date depletions for Southern Comfort grew in the
mid-single digits, driven by the brand's continued progress in the U.S., while
Finlandia depletions grew at a double-digit rate, propelled by continued strong
growth in Poland and Russia.
The effective tax rate of 30.0% for continuing operations for the nine months
ended January 31, 2006, is based on an expected effective tax rate of 32.9% on
ordinary income for the full fiscal year, less the tax benefit achieved by
offsetting various capital gains from continuing operations against the capital
loss resulting from the sale of Lenox.
18
DISCONTINUED OPERATIONS
As discussed earlier, we consummated the sale of substantially all of Lenox on
September 1, 2005, and we are pursuing the sale of Brooks & Bentley. As a
result, we have reported the operations of Lenox and Brooks & Bentley as
discontinued operations in the accompanying financial statements.
Nine Months Ended
January 31,
2005 2006
------ ------
Net loss $(30.0) $(77.5)
Loss per share:
Basic (0.25) (0.64)
Diluted (0.25) (0.63)
For the nine months ended January 31, 2006, we reported a net loss from
discontinued operations of $77.5 million, or $0.63 per diluted share, versus a
net loss of $30.0 million for the same prior year period. The loss recorded
during fiscal 2006 includes a non-cash impairment charge and fees related to the
transaction of approximately $0.57 per share.
EARNINGS OUTLOOK FOR CONTINUING OPERATIONS
Based on strong third quarter results, we have increased our fiscal 2006 full
year outlook from continuing operations. We now expect earnings in the range of
$2.79 to $2.85 per share compared to the previously communicated projected range
of $2.73 to $2.79 per share. Consistent with the previous guidance, this outlook
excludes (1) the net benefit from the early termination of our distribution
rights to the Glenmorangie family of brands, (2) the net effect of changes in
our Australian distribution joint venture, and (3) the gain on sale of winery
property in California. The revised outlook compares to prior year's adjusted
earnings per share of $2.42, which reflects prior year reported results for
continuing operations adjusted to exclude (1) the gain on the sale of
Glenmorangie shares and (2) trade inventory reductions related to distribution
changes in Europe. Neither the current year outlook nor the prior year results
have been adjusted for any other items, such as foreign exchange, changes in net
interest and effective tax rates, etc.
This revised full year guidance implies a range of earnings from continuing
operations for the fourth quarter of $0.48 to $0.54 per share, versus last
year's adjusted earnings of $0.54 per share, reflecting the expectation of
reductions in global trade inventory levels, incremental brand investments, an
unfavorable effect of a stronger U.S. dollar, and continued incremental SG&A
investments in several countries in Europe, Australia, and Japan.
19
LIQUIDITY AND FINANCIAL CONDITION
Cash and cash equivalents increased by $71.3 million during the nine months
ended January 31, 2006, compared to an increase of $221.8 million during the
same period last year. Cash provided by operations declined from $342.0 to
$243.4 million, primarily reflecting a $67.3 million reduction in cash from
discontinued operations in addition to higher working capital requirements in
continuing operations. Cash used for investing activities increased by $65.4
million, as we invested a portion of our cash into higher interest-yielding
short-term investments. Cash used for financing activities declined by $13.5
million, largely reflecting lower debt repayments and higher proceeds from stock
option exercises, partially offset by higher dividend payments.
The American Jobs Creation Act ("the Act"), which was enacted in October 2004,
would allow Brown-Forman a special one-time opportunity to repatriate certain
foreign earnings before April 30, 2006, at a 5.25% effective tax rate. The
opportunity is subject to a number of limitations and requirements, including
adoption of a specific domestic reinvestment plan for the repatriated funds. We
have not yet repatriated any dividends pursuant to the Act, but are considering
the opportunity and will decide whether to do so during the fourth quarter of
this fiscal year.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We hold debt obligations, foreign currency forward and option contracts, and
commodity futures contracts that are exposed to risk from changes in interest
rates, foreign currency exchange rates, and commodity prices, respectively.
Established procedures and internal processes govern the management of these
market risks. As of January 31, 2006, we do not consider the exposure to these
market risks to be material.
Item 4. Controls and Procedures
The Chief Executive Officer ("CEO") and the Chief Financial Officer ("CFO") of
Brown-Forman (its principal executive and principal financial officers) have
evaluated the effectiveness of the company's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934 (the "Exchange Act")) as of the end of the period covered by this report.
Based on that evaluation, the CEO and CFO concluded that the company's
disclosure controls and procedures: are effective to ensure that information
required to be disclosed by the company in the reports filed or submitted by it
under the Exchange Act is recorded, processed, summarized, and reported within
the time periods specified in the SEC's rules and forms; and include controls
and procedures designed to ensure that information required to be disclosed by
the company in such reports is accumulated and communicated to the company's
management, including the CEO and the CFO, as appropriate, to allow timely
decisions regarding required disclosure. There has been no change in the
company's internal control over financial reporting during the most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the company's internal control over financial reporting.
20
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Brown-Forman Corporation and many other manufacturers of spirits, wine, and beer
are defendants in a series of essentially similar class action lawsuits seeking
damages and injunctive relief for alleged marketing of beverage alcohol to
underage consumers. Nine lawsuits have been filed to date, the first three
against eight defendants, including Brown-Forman: "Hakki v. Adolph Coors
Company, et.al.," District of Columbia Superior Court No. CD 03-9183 (November
2003); "Kreft v. Zima Beverage Co., et.al.," District Court, Jefferson County,
Colorado, No. 04cv1827 (December 2003); and "Wilson v. Zima Company, et.al.,"
U.S. District Court for the Western District of North Carolina, Charlotte
Division, No. 3:04cv141 ( January 2004). Two virtually identical suits with
allegations similar to those in the first three lawsuits were filed in
Cleveland, Ohio, in April and June, 2004, respectively, against the original
eight defendants as well as an additional nine manufacturers of spirits and
beer, and are now consolidated as "Eisenberg v. Anheuser-Busch," U.S. District
Court for the District of Northern Ohio, No. 1:04cv1081. Five similar suits were
filed in 2005: "Elizabeth H. Sciocchette v. Advanced Brands," Albany County, New
York Supreme Court No. 102205 (February 16, 2005); "Roger and Kathy Bertovich v.
Advanced Brands," Hancock County, West Virginia, Circuit Court No. 05-C-42M
(February 17, 2005); "Jacquelin Tomberlin v. Adolph Coors," Dane County
(Madison, Wisconsin) Circuit Court, (February 23, 2005); "Viola Alston v.
Advanced Brands," Wayne County, Michigan, Circuit Court No. 05-509294, (March,
30, 2005), and "Craig Konhauzer v. Adolph Coors Company," Broward County Florida
Circuit Court, No. 05004875 (March 30, 2005). In addition, Brown-Forman received
in February, 2004, a pre-lawsuit notice under the California Consumer Protection
Act indicating that the same lawyers intend to file a lawsuit there against many
industry defendants, including Brown-Forman, presumably on the same facts and
legal theories.
The suits allege that the defendants have engaged in deceptive marketing
practices and schemes targeted at underage consumers, negligently marketed their
products to the underage, and fraudulently concealed their alleged misconduct.
Plaintiffs seek class action certification on behalf of: (a) a guardian class
consisting of all persons who were or are parents of children whose funds were
used to purchase beverage alcohol marketed by the defendants which were consumed
without their prior knowledge by their children under the age of 21 during the
period 1982 to present; and (b) an injunctive class consisting of the parents
and guardians of all children currently under the age of 21.
The lawsuits seek: (1) a finding that defendants engaged in a deceptive scheme
to market alcoholic beverages to underage persons and an injunction against such
alleged practices; (2) disgorgement and refund to the guardian class of all
proceeds resulting from sales to the underage since 1982; and (3) judgment to
each guardian class member for a trebled award of actual damages, punitive
damages, and attorneys fees. The lawsuits, either collectively or individually,
if ultimately successful, represent significant financial exposure.
21
Brown-Forman, in coordination with other defendants, is vigorously defending
itself in these cases. Brown-Forman and the other defendants have successfully
obtained orders to dismiss three of the pending cases: "Kreft" (Colorado) in
December 2005; "Eisenberg" (Ohio) in January 2006; and "Tomberlin" (Wisconsin)
in February 2006. In addition, plaintiff Konhauzer (Florida) has voluntarily
dismissed that lawsuit. Plaintiffs Kreft (Colorado) and Eisenberg (Ohio) have
appealed the dismissal of their cases and plaintiff Tomberlin (Wisconsin) still
has time in which to file an appeal.
Item 6. Exhibits
31.1 CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.
31.2 CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act
of 2002.
32 CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(not considered to be filed).
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BROWN-FORMAN CORPORATION
(Registrant)
Date: March 13, 2006 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President and
Chief Financial Officer
(On behalf of the Registrant and
as Principal Financial Officer)
23
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Paul C. Varga, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 13, 2006 By: /s/ Paul C. Varga
Paul C. Varga
Chief Executive Officer
Exhibit 31.2
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Phoebe A. Wood, certify that:
1. I have reviewed this Quarterly report on Form 10-Q of Brown-Forman
Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects
the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision,
to ensure that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this
report is being prepared;
b) Designed such internal control over financial reporting, or caused such
internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the
case of an annual report) that has materially affected, or is reasonably
likely to materially affect, the registrant's internal control over
financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent function):
a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: March 13, 2006 By: /s/ Phoebe A. Wood
Phoebe A. Wood
Chief Financial Officer
Exhibit 32
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Brown-Forman Corporation ("the
Company") on Form 10-Q for the period ended January 31, 2006, as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), each of
the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in the capacity as an
officer of the Company, that:
(1) The Report fully complies with the requirements of Section 13(a) of the
Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
Date: March 13, 2006 By: /s/ Paul C. Varga
Paul C. Varga
Chief Executive Officer
By: /s/ Phoebe A. Wood
Phoebe A. Wood
Executive Vice President
and Chief Financial Officer
A signed original of this written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
This certificate is being furnished solely for purposes of Section 906 and is
not being filed as part of the Periodic Report.