Brown-Forman Corporation (“we,” “us,” or “our” below) was incorporated under the laws of the State of Delaware in 1933, successor to a business founded in 1870 as a partnership and subsequently incorporated under the laws of the Commonwealth of Kentucky in 1901.
We primarily manufacture, bottle, import, export, and market a wide variety of alcoholic beverage brands. Our principal beverage brands are:
Jack Daniel’s Tennessee Whiskey
Chambord Vodka
Jack Daniel’s Single Barrel
Don Eduardo Tequila
Jack Daniel’s Ready-to-Drinks
Early Times Bourbon
Jack Daniel’s Tennessee Honey
Early Times Kentucky Whisky
Gentleman Jack
el Jimador Tequila
Southern Comfort
Herradura Tequila
Southern Comfort Ready-to-Drinks
Korbel California Champagnes*
Southern Comfort Ready-to-Pours
New Mix Ready-to-Drinks
Southern Comfort Lime
Old Forester Bourbon
Finlandia Vodka
Pepe Lopez Tequilas
Antiguo Tequila
Sonoma-Cutrer Wines
Canadian Mist Blended Canadian Whisky
Tuaca Liqueur
Chambord Liqueur
Woodford Reserve Bourbon
*Represented in the U.S. and other select markets by Brown-Forman
The most important brand in our portfolio is Jack Daniel’s, which is the fifth-largest premium spirits brand and the largest selling American whiskey brand in the world according to volume statistics published in February 2011 by Impact Databank, a well-known trade publication. Our other leading global brands are Finlandia, the eighth-largest selling vodka, Southern Comfort, the third-largest selling liqueur, Canadian Mist, the fourth-largest selling Canadian whiskey, and el Jimador, the fourth-largest selling tequila, according to the recently published volume statistics referenced above. We believe the statistics used to rank these products are reasonably accurate.
Geographic information about net sales and long-lived assets is in Note 16 of the Notes to Consolidated Financial Statements on page 67 of our 2011 Annual Report to Stockholders, which information is incorporated into this report by reference.
Our strategy is to market high quality products that satisfy the preferences of consumers of legal drinking age and to support those products with extensive international, national, and regional marketing programs. These programs are intended to extend consumer brand recognition and brand loyalty.
We own numerous valuable trademarks that are essential to our business. Registrations of trademarks can generally be renewed indefinitely as long as the trademarks are in use. Through licensing arrangements, we have authorized the use of some of our trademarks on promotional items for the primary purpose of enhancing brand awareness.
Customers
For information about our customers, refer to the section entitled "Our Distribution Network and Our Customers" on page 36 of the 2011 Annual Report to Stockholders, which information is incorporated into this report by reference.
Ingredients and Other Supplies
The principal raw materials used in manufacturing and packaging our distilled spirits are corn, rye, malted barley, agave, sugar, glass, cartons, PET (polyethylene terephthalate), labels, and wood for barrels, which are used for storage of bourbon, Tennessee whiskey, and certain tequilas. The principal raw materials used in liqueurs are neutral spirits, sugar, and wine, while the principal raw materials used in our ready-to-drink products are sugar, neutral spirits, whiskey, tequila, or malt. Currently, none of these raw materials is in short supply, and there are adequate sources from which they may be obtained, but shortages in some of these can occur.
Due to aging requirements, production of whiskeys, certain tequilas, and other distilled spirits is scheduled to meet demand three to ten years in the future. Accordingly, our inventories may be larger in relation to sales and total assets than would be normal for most other businesses.
The principal raw materials used in the production of wines are grapes, packaging materials and wood for wine barrels. Grapes are primarily purchased under contracts with independent growers, and we also own some vineyards in California; from time to time, our grape costs are adversely affected by weather and other forces that may limit production. We believe that our relationships with our growers are good.
Competition
For information about our competition, refer to the section entitled "Our Competition" on page 36 of the 2011 Annual Report to Stockholders, which information is incorporated into this report by reference.
Regulatory Environment
The Alcohol and Tobacco Tax and Trade Bureau of the United States Treasury Department regulates the wine and spirits industry with respect to production, blending, bottling, sales, advertising, and transportation of industry products. Also, each state regulates the advertising, promotion, transportation, sale, and distribution of such products.
Under federal regulations, bourbon and Tennessee whiskeys must be aged for at least two years in new charred oak barrels. We age all of our whiskeys for a minimum of three to six years. Federal regulations also require that "Canadian" whiskey must be manufactured in Canada in compliance with Canadian laws. Mexican authorities regulate the production of tequilas, which among other specifications, require minimum aging periods for anejo (one year) and reposado (two months) tequilas. We believe we are in compliance with these regulations.
Employees
As of April 30, 2011, we employed about 3,900 persons, including approximately 200 employed on a part-time or temporary basis. We believe our employee relations are good.
For more information about our business, refer to the sections entitled “Our Operations and Our Markets” and “Our Brands” in Management’s Discussion and Analysis on pages 33 through 36 of the 2011 Annual Report to Stockholders, which information is incorporated into this report by reference.
Available Information
You may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC at http://www.sec.gov.
Our website address is www.brown-forman.com. Please note that our website address is provided as an inactive textual reference only. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports are available free of charge on our website as soon as reasonably practicable after we electronically file those reports with the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference, unless such information is otherwise specifically referenced elsewhere in this report.
On our website, we have posted our Corporate Governance Guidelines, our Code of Conduct and Compliance Guidelines that apply to all directors and employees, and our Code of Ethics that applies specifically to our senior executive and financial officers. We have also posted on our website the charters of our Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee, and Executive Committee of our Board of Directors. Copies of these materials are also available free of charge by writing to our Secretary, Matthew E. Hamel, 850 Dixie Highway, Louisville, Kentucky 40210 or e-mailing him at Secretary@b-f.com.
Item 1A. Risk Factors
This report contains statements, estimates, and projections that are "forward-looking statements" as defined under U.S. federal securities laws. Words such as “aim,” “anticipate,” “aspire,” “believe,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “plan,” “potential,” “project,” “pursue,” “see,” “will,” “will continue,” and similar words identify forward-looking statements, which speak only as of the date we make them. In addition, in our periodic filings with the SEC, press releases, and other written and oral statements, we discuss estimates and projections about trends, future performance and our business outlook. Such "forward-looking statements" inherently involve risks and uncertainties that could cause our actual results to differ materially from our historical results or our present expectations and projections, and adversely affect our results of operations, financial condition, and the trading price of our stock in future periods. We caution investors not to place undue reliance on any forward-looking statements, which speak only as of the date they are made. We undertake no obligation to update any forward-looking statement, whether as a result of new information, future events, or otherwise. The discussion of risks below and elsewhere in this report is by no means all inclusive, but is designed to highlight what we believe are some important factors to consider when evaluating our future performance. There are also risks that are not presently known or not presently material, as well as other information set forth in this report, including trends, developments and uncertainties, that could materially affect our business. You should carefully consider the risk factors below, and the information throughout this report, which could materially affect our business and financial results.
Unfavorable economic conditions could negatively affect our operations and results significantly.
Our business and financial results will continue to be affected by worldwide and regional economic conditions. The specific ramifications of unfavorable economic conditions on our business are difficult to predict, but some potentially significant effects are reduced consumer spending, distributor or retailer destocking, higher interest rates, changes in the rate of inflation (up or down), exchange rate fluctuations, credit or capital market instability, bank failures, and/or lower returns or discount rates on our pension assets (requiring higher contributions to our pension plans). Our suppliers, customers, and consumers could experience cash flow problems, increased cost or reduced availability of financing, credit defaults, and other financial hardships. The U.S. federal budget and individual state budget deficits could result in increased taxes on our products, business, customers, or consumers; and a number of proposals to increase taxes on beverage alcohol have been made at the federal and state levels in recent years. Governments in other countries in which we have a sizable business also may impose taxes and implement other austerity measures to manage the economic conditions in ways that hurt our business. Countries, including significant markets for us in Europe, may default on sovereign debt. For additional information with respect to the effects of changes in the value of our benefit plan obligations and assets on our financial results, see “Pension and other Postretirement Benefits” on page 47 of the 2011 Annual Report to Stockholders.
Further, as the economy picks back up, consumers may continue to curtail spending, make more value-driven and price-sensitive purchasing choices, and have more at-home drinking occasions rather than at restaurants, bars, and hotels. In sum, in a variety of different manifestations, unfavorable economic conditions could have significant adverse effects on our business, financial position, and results of operations.
Our global growth is subject to a number of commercial and political risks.
We currently market products in more than 135 countries. In addition to the United States, significant markets for us include Australia, United Kingdom, Mexico, Poland, Germany, France, Canada, Japan, Spain, Turkey, South Africa, Russia, Italy, and China. We expect our future growth rates in international markets to surpass our growth rates in the United States. Emerging regions, such as Eastern Europe, Latin America, and Asia, as well as countries that some companies consider to be developed markets, such as France and Australia, provide significant growth opportunities for us. If anti-American sentiment became pronounced in the principal countries to which we export our beverage products, our global business could suffer.
Potentially unstable governments or legal systems, intergovernmental disputes, military conflicts, local labor conditions and business practices, nationalizations, closure of markets to exports or significant import tax increases or restrictions, inflation, recession, pandemics, terrorist activities in or outside of the United States, laws regulating activities of United States-based companies abroad, and other laws, regulations and policies of foreign governments, are also risks due to the global nature of our business. These and other political, commercial, and economic uncertainties in our various markets around the world may have a material adverse effect on our business, results of operations and future growth prospects.
The longer-term outlook for our business anticipates continued success of Jack Daniel's Tennessee Whiskey, Southern Comfort Liqueur, Finlandia Vodka, Tequila Herradura, el Jimador Tequila, their respective brand families, and our other brands. This outlook is based in part on favorable demographic trends for the sale of beverage alcohol through 2014 in the United States, and in many of our global markets for varying numbers of years. If these demographic trends do not translate into corresponding sales increases, we may fail to meet our growth expectations. In addition, the somewhat less favorable demographic trends in the United States for several years subsequent to 2014 could negatively affect our performance in those years and our ability to meet our longer-term strategic objectives.