BROWN FORMAN
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A Letter to Our Stockholders The last 15 years of international effort have fundamentally changed Brown-Forman and provided a solid foundation for continued growth. When we committed to stepping up our international expansion in 1994, only 20% of our net sales came from outside the United States. Today, Brown-Forman ranks among the largest spirits companies worldwide; our brands are distributed in over 135 countries; and we generate over 47% of our sales from outside the U.S. We have grown our international business while continuing to expand our domestic endeavors. For example, Jack Daniels grew 50% in the last seven years, from 6 million to 9 million cases worldwide. About one-third of that new growth came from the U.S. and the remaining two-thirds from expanding international markets.
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Numbers alone are insufficient to understand the depth of our progress. We have evolved from a company that struggled to afford hiring managers to a company now populated with a multitude of them. We have grown from a small company whose employees were exclusively American to one whose employees are citizens of most the major countries of the world. We have evolved from a company that operated mostly on instinct and rules of thumb into one of the most thoughtful, talented, and professional organizations of comparable size found in the distribution industry. As we made this evolution, we have tried to codify our operating philosophy based both on enduring values and from our recent decades’ experiences. • We continue to be passionate about producing high quality products and promoting our brands responsibly; • We remain dedicated to achieving excellence and are continually improving all aspects of what we do; • We also continue to seek out people of honesty and integrity who respect one another in all our relationships; • We remain committed to protecting the environment and enhancing the communities where we live, work, do business; and • We continue to benefit from the valuable support of longterm shareholders, especially members of the Brown family and their upstanding tradition. Since our first acquisition, that of Early Times in 1923, acquiring strong, complementary brands has been a vital part of our overall growth strategy. From time to time, we divest brands or businesses that lack the strong potential to produce growth or returns that meet our expectations. It’s certainly not rare for Brown Forman to be as busy on the transaction front end as we were in fiscal 2007, but don’t misinterpret our most recent buying and selling activities as significant change in company direction or philosophy.
In the three years that Paul Varga and his leadership team have headeded the company, we have furthered our progress in each of these areas while successfully achieving praiseworthy underlying earnings growth. You can see, therefore, why I believe with such great confidence I have in the wisdom of the leadership that will guide this company in the future is well placed. And I know our Board of Directors will carry on in an equally positive manner with the guidance of our new current Presiding Chairman, Garvin Brown IV. Beginning with our founder George Garvin Brown and extending through generations of visionary leadership, the Brown family has made an indelible impression and a lasting legacy on the company that bears its name. Through assertive involvement on the Board, in management, and as supportive shareholders, the great Brown family continues to influence and inspire our success and our integrity as an organization.
Average Return on Invested Capital Basic earning per share is based upon the weighted average number of common shares during the period.
20% 15% 10% 5% 2005 2006 2007 2008
In statistical terms important to you, our shareholders, we have grown our net income from around $12 million to $400 million. We have succeeded in moving our company from one whose norm was being highly leveraged to one whose strong balance sheet is a source of pride. And, because we have been succeeded in having our assets work even harder for you, we have produced cash flows which have enabled our earnings to increase from $0.05 per share in 1968 to $3.22 a share today: more than a 60-fold increase.
2005 2006 2007 FINANCIALS Net sales $2,195 $2,412 $2,806 Excise taxes 417 468 588 Cost of sales 622 636 737 GROSS PROFIT 1,156 1,308 1,481 Advertising expenses Selling, general, and administrative expenses Other income, net OPERATING INCOME
293 420 (2) 445
Gain on sale of investment in affiliate Interest income Interest expense INCOME FROM OPERATIONS BEFORE TAXES
72 7 20 504
Income taxes INCOME FROM CONTINUING OPERATION Loss from discontinued operations, net of income taxes NET INCOME
165 339 (31) $308
323 469 (47) 563 80 14 18 559 164 395 (75) $320
361 537 (19) 602 83 18 34 586 186 400 (11) $389
Basic earnings (loss) per share: Continuing operations Discontinued operations TOTAL
$2.788 $3.239 $3.257 0.256 0.615 0.087 $2.532 $2.624 $3.170
Diluted earnings (loss) per share: Continuing operations Discontinued operations TOTAL
$2.772 $3.204 $3.222 (0.255) (0.608) (0.086) $2.517 $2.596 $3.136
(Expressed in millions, except per share amounts)
2006 2007 ASSETS Cash and cash equivalents $475 $283 Short-term investments 160 86 Accounts receivable 323 404 Inventories: Barreled whiskey 274 303 Finished goods 94 151 Work in process 106 198 Raw materials and supplies 37 42 Total inventories 511 694 Current portion of deferred income taxes 80 76 Current assets held for sale 26 — Other current assets 34 92 TOTAL CURRENT ASSETS 1,609 1,635 Property, plant, and equipment, net Prepaid pension cost Goodwill Other intangible assets Noncurrent assets held for sale Other assets TOTAL ASSETS
425 146 192 325 9 22 $2,728
506 23 670 684 — 33 $3,551
STOCKHOLDERS’ EQUITY Common stock: Class A, voting, $0.15 par value (56,882,000 shares issued) Class B, nonvoting, $0.15 par value (69,188,000 shares issued) Additional paid-in capital Retained earnings
9 10 47 1,607
9 10 64 1,649
Accumulated other comprehensive income (loss): Pension and other postretirement benefits adjustment Cumulative translation adjustment Unrealized loss on cash flow hedge contracts Treasury stock, at cost
(5) 24 (1) (128)
(99) 46 (4) (102)
TOTAL STOCKHOLDERS’ EQUITY
1,563
1,573
$2,728
$3,551
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
(Expressed in millions, except share and per share amounts)