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 June 30, 2004
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 - 800,997,265 shares as of June 30, 2004
1
CONSOLIDATED BALANCE SHEET
Anheuser-Busch Companies, Inc. and Subsidiaries (Unaudited)
June 30, December 31,
(In millions) 2004 2003
------------------- -------------------
Assets
Current Assets:
Cash $261.0 $191.1
Accounts receivable 955.1 669.4
Inventories:
Raw materials and supplies 316.9 320.3
Work in progress 101.1 81.9
Finished goods 228.4 185.3
Total inventories 646.4 587.5
Other current assets 149.9 182.3
------------------- -------------------
Total current assets 2,012.4 1,630.3
Investment in Harbin Brewery 408.4 --
Investments in affiliated companies 2,967.3 3,052.0
Plant and equipment, net 8,496.8 8,498.9
Intangible assets, including goodwill of $370.2
million and $349.0 million, respectively 518.4 486.6
Other assets 961.1 1,021.7
------------------- -------------------
Total Assets $15,364.4 $14,689.5
=================== ===================
Liabilities and Shareholders Equity
Current Liabilities:
Accounts payable $1,009.3 $1,093.7
Accrued salaries, wages and benefits 264.7 288.9
Accrued taxes 361.7 163.1
Other current liabilities 358.3 311.5
------------------- -------------------
Total current liabilities 1,994.0 1,857.2
------------------- -------------------
Postretirement benefits 462.6 470.4
------------------- -------------------
Debt 7,688.8 7,285.4
------------------- -------------------
Deferred income taxes 1,567.1 1,462.1
------------------- -------------------
Other long-term liabilities 898.5 902.7
------------------- -------------------
Shareholders Equity:
Common stock, $1.00 par value, 1.6 billion
shares authorized 1,461.2 1,457.9
Capital in excess of par value 1,299.9 1,194.0
Retained earnings 14,778.6 13,935.4
Treasury stock, at cost (13,729.9) (12,939.0)
Accumulated non-owner changes in equity (1,056.4) (890.3)
ESOP debt guarantee -- (46.3)
------------------- -------------------
Total Shareholders Equity 2,753.4 2,711.7
------------------- -------------------
Commitments and contingencies -- --
------------------- -------------------
Total Liabilities and Shareholders Equity $15,364.4 $14,689.5
=================== ===================
See the accompanying footnotes on pages 5 -- 13.
2
CONSOLIDATED STATEMENT OF INCOME
Anheuser-Busch Companies, Inc., and Subsidiaries (Unaudited)
Second Qtr. Ended June 30, Six Months Ended June 30,
---------------------------------- ----------------------------------
(In millions, except per share) 2004 2003 2004 2003
--------------- --------------- --------------- ---------------
Gross sales $4,597.2 $4,339.3 $8,600.2 $8,134.2
Excise taxes (587.2) (569.1) (1,113.2) (1,083.4)
--------------- --------------- --------------- ---------------
Net sales 4,010.0 3,770.2 7,487.0 7,050.8
Cost of sales (2,331.2) (2,189.9) (4,404.5) (4,164.3)
--------------- --------------- --------------- ---------------
Gross profit 1,678.8 1,580.3 3,082.5 2,886.5
Marketing, distribution and
administrative expenses (654.3) (622.3) (1,236.6) (1,164.4)
--------------- --------------- --------------- ---------------
Operating income 1,024.5 958.0 1,845.9 1,722.1
Interest expense (105.9) (102.3) (207.6) (201.0)
Interest capitalized 5.8 6.4 11.0 10.8
Interest income 0.4 0.2 1.5 0.3
Other income/(expense), net 2.4 (0.8) 30.0 (1.0)
--------------- --------------- --------------- ---------------
Income before income taxes 927.2 861.5 1,680.8 1,531.2
Provision for income taxes (360.0) (334.9) (652.6) (594.2)
Equity income, net of tax 106.3 106.0 195.2 180.4
--------------- --------------- --------------- ---------------
Net income $673.5 $632.6 $1,223.4 $1,117.4
=============== =============== =============== ===============
Basic earnings per share $.84 $.76 $1.52 $1.34
=============== =============== =============== ===============
Diluted earnings per share $.83 $.75 $1.50 $1.32
=============== =============== =============== ===============
See the accompanying footnotes on pages 5 -- 13.
3
CONSOLIDATED STATEMENT OF CASH FLOWS
Anheuser-Busch Companies, Inc. and Subsidiaries (Unaudited)
Six Months Ended June 30,
----------------------------------------
(In millions) 2004 2003
---------------- ----------------
Cash flow from operating activities:
Net Income $1,223.4 $1,117.4
Adjustments to reconcile net income to cash provided by operating
activities:
Depreciation and amortization 457.1 429.0
Deferred income taxes 33.3 28.7
Undistributed earnings of affiliated companies (16.2) (50.7)
Other, net 93.8 59.3
---------------- ----------------
Operating cash flow before change in working capital 1,791.4 1,583.7
Increase in working capital (235.2) (119.3)
---------------- ----------------
Cash provided by operating activities 1,556.2 1,464.4
---------------- ----------------
Cash flow from investing activities:
Capital expenditures (441.7) (490.1)
Business acquisitions (441.3) (116.4)
---------------- ----------------
Cash used for investing activities (883.0) (606.5)
---------------- ----------------
Cash flow from financing activities:
Increase in long-term debt 963.5 576.9
Decrease in long-term debt (502.9) (77.2)
Dividends paid to shareholders (354.3) (326.2)
Acquisition of treasury stock (792.2) (1,126.6)
Shares issued under stock plans 82.6 49.3
---------------- ----------------
Cash used for financing activities (603.3) (903.8)
---------------- ----------------
Net increase/(decrease) in cash during the period 69.9 (45.9)
Cash, beginning of period 191.1 188.9
---------------- ----------------
Cash, end of period $261.0 $143.0
================ ================
See the accompanying footnotes on pages 5 -- 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 generally accepted accounting principles and applicable SEC
guidelines pertaining to quarterly financial information, and include
all adjustments necessary for a fair presentation. These statements
should be read in combination with the consolidated financial
statements and footnotes included in the company's annual report on
Form 10-K for the year ended December 31, 2003.
2. 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 second quarter and six months ended June 30
are shown below (millions of shares):
Second Quarter Six Months
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Basic weighted average shares
outstanding 800.9 831.2 805.7 836.0
============ ============ ============ ============
Diluted weighted average shares
outstanding 810.6 842.0 815.8 846.5
============ ============ ============ ============
5
3. Business Segments Information
-----------------------------
Comparative business segment information for the second quarter and
first six months ended June 30 (in millions):
-----------------------------------------------------------------------------------------
SECOND Domestic Int'l Corporate
QUARTER Beer Beer Packaging Entertain. Other & Elims. Consol.
-----------------------------------------------------------------------------------------------------------------
2004
Gross Sales $3,553.9 237.5 625.8 312.5 23.5 (156.0) $4,597.2
Net Sales:
- Intersegment -- -- $237.9 -- 1.1 (239.0) $ --
- External $3,016.7 187.5 387.9 312.5 22.4 83.0 $4,010.0
Income Before
Income Taxes $951.5 31.1 52.5 81.8 2.2 (191.9) $927.2
Equity Income -- $106.3 -- -- -- -- $106.3
Net Income $589.9 125.6 32.6 50.7 1.4 (126.7) $673.5
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
2003
Gross Sales $3,397.5 201.0 589.9 280.3 21.2 (150.6) $4,339.3
Net Sales:
- Intersegment -- -- $232.9 -- 1.2 (234.1) $ --
- External $2,870.8 158.6 357.0 280.3 20.0 83.5 $3,770.2
Income Before
Income Taxes $875.7 25.9 50.5 66.0 2.5 (159.1) $861.5
Equity Income -- $106.0 -- -- -- -- $106.0
Net Income $542.9 122.1 31.3 40.9 1.5 (106.1) $632.6
-----------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------
FIRST Domestic Int'l Corporate
SIX MONTHS Beer Beer Packaging Entertain. Other & Elims. Consol.
-----------------------------------------------------------------------------------------------------------------
2004
Gross Sales $6,812.0 430.6 1,147.2 466.6 34.3 (290.5) $8,600.2
Net Sales:
- Intersegment -- -- $448.0 -- 2.1 (450.1) $ --
- External $5,783.1 346.3 699.2 466.6 32.2 159.6 $7,487.0
Income Before
Income Taxes $1,814.2 54.0 89.3 70.8 (2.3) (345.2) $1,680.8
Equity Income -- $195.2 -- -- -- -- $195.2
Net Income $1,124.8 228.7 55.4 43.9 (1.4) (228.0) $1,223.4
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
2003
Gross Sales $6,536.3 367.2 1,086.9 406.1 33.3 (295.6) $8,134.2
Net Sales:
- Intersegment -- -- $447.4 -- 2.3 (449.7) $ --
- External $5,521.5 298.6 639.5 406.1 31.0 154.1 $7,050.8
Income Before
Income Taxes $1,675.3 46.1 84.3 45.5 (0.1) (319.9) $1,531.2
Equity Income -- $180.4 -- -- -- -- $180.4
Net Income $1,038.7 209.0 52.3 28.2 (0.1) (210.7) $1,117.4
-----------------------------------------------------------------------------------------------------------------
6
4. Business Investments
--------------------
Harbin Group Investment
-----------------------
During the second quarter Anheuser-Busch acquired an initial 36 percent
equity stake and launched a tender offer for the remaining shares in
Harbin Brewery Group, a major brewer in China. By the end of the
quarter, the company had acquired an additional 29 percent of Harbin,
increasing its total ownership to approximately 65 percent. The company
paid $408.4 million for its 65 percent investment in Harbin, which is
included in its consolidated statement of cash flows and as a single
line item in the consolidated balance sheet as of June 30, 2004 because
a U.S. GAAP balance sheet is currently not available. To date,
Anheuser-Busch has acquired virtually all Harbin shares for a total
investment of approximately $692 million.
Anheuser-Busch's second quarter earnings do not include results for
Harbin. Beginning in the third quarter, upon completion of purchase
accounting valuations, the company will fully consolidate its Harbin
investment within its financial statements. The company anticipates
reporting Harbin results on a one-month lag basis. For 2004, it is
estimated the Harbin acquisition will dilute earnings per share by
approximately $.01.
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.
7
5. Non-Owner Changes in Equity
---------------------------
Net income and non-owner changes in equity, net of applicable taxes,
for the second quarter and six months ended June 30 follows (in
millions):
Second Quarter Six Months
---------------------------- ----------------------------
2004 2003 2004 2003
------------ ------------ ------------ ------------
Net income $673.5 $632.6 $1,223.4 $1,117.4
Non-owner changes in equity:
Foreign currency translation
gains and (losses) (103.5) 176.3 (21.9) (31.1)
Net change in deferred hedging gains and
(losses) (31.7) 0.8 (42.4) (1.7)
Deferred securities valuation gains and
(losses) (114.9) 16.0 (101.8) 23.7
------------ ------------ ------------ ------------
Combined net income and non-owner changes in
equity $423.4 $825.7 $1,057.3 $1,108.3
============ ============ ============ ============
During the second quarter 2004, the company began recording deferred
income taxes related to certain non-owner changes in shareholders
equity. The deferred income tax liability effects were as follows (in
millions):
Increase/(Decrease)
-----------------------------------
Non-Owner Deferred
Changes Income
in Equity Tax Liability
--------------- -----------------
Deferred securities valuation gains $(35.1) $35.1
Deferred hedging gains (10.7) 10.7
-------------- ------------
Total $(45.8) $45.8
============== ============
The components of accumulated non-owner changes in equity, net of
applicable taxes, as of June 30, 2004 and December 31, 2003 follow (in
millions):
June 30, Dec. 31,
2004 2003
------------- -------------
Foreign currency translation loss $(691.3) $(669.4)
Minimum pension liability (453.0) (453.0)
Deferred hedging gains 17.4 59.8
Deferred securities valuation gains 70.5 172.3
------------- -------------
Accumulated non-owner changes in equity $(1,056.4) $(890.3)
============= =============
8
6. Derivatives
-----------
Anheuser-Busch accounts for its derivatives under FAS 133, "Accounting
for Derivatives and Other Hedging Instruments," and therefore defers
hedging gains and losses that are effective at offsetting price changes
in the underlying hedged exposures. The company reclassified deferred
gains of $18.5 million and $36.2 million, and deferred losses of $0.4
million and $0.8 million from accumulated non-owner changes in equity
into operating income during the second quarter and first six months of
2004, respectively, as underlying hedged transactions occurred.
The company recognized a net loss due to hedge ineffectiveness of $0.5
million for the second quarter and a net gain of $23.6 million for the
first six months of 2004, compared to net gains of $0.8 million and
$0.9 million, respectively, for the comparable 2003 periods. The first
half 2004 gain 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 hedges
and realized the ineffective portion of the gain.
7. Goodwill
--------
Following is goodwill by business segment, as of June 30, 2004 and
December 31, 2003 (in millions). Goodwill is included in intangible
assets or investment in affiliated companies, as appropriate, in the
consolidated balance sheet. 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 change
in international beer goodwill is due to foreign currency translation.
June 30, Dec. 31,
2004 2003
-------------- --------------
Domestic Beer $21.2 $ --
International Beer 672.7 679.7
Packaging 21.9 21.9
Entertainment 288.3 288.3
-------------- --------------
Total goodwill $1,004.1 $989.9
============== ==============
9
8. Stock Based Compensation
------------------------
The company accounts for employee stock options in accordance with FAS
123, "Accounting for Stock-Based Compensation." Under FAS 123, the
company elects to recognize 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 required pro forma disclosures of net income
and diluted earnings per share as if compensation expense had been
recognized, based on the fair value of stock options on the grant date.
For FAS 123 disclosure purposes, the fair value of stock options
granted is required to be based on a theoretical option-pricing model.
Anheuser-Busch estimates the value of its options using the
Black-Scholes model and then hypothetically amortizes the value to
compensation expense over the three-year vesting period for the 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 increase in the market price of Anheuser-Busch stock. Such
an increase in stock price benefits all stockholders. The pro forma
impact for the second quarter and six months ended June 30 follows (in
millions, except per share):
Second Quarter Six Months
--------------------------- --------------------------------
2004 2003 2004 2003
----------- ------------ -------------- --------------
Reported Net Income $673.5 $632.6 $1,223.4 $1,117.4
Pro Forma Impact of Expensing
Stock Options (29.1) (27.8) (58.2) (55.7)
----------- ------------ -------------- --------------
Pro Forma Net Income $644.4 $604.8 $1,165.2 $1,061.7
=========== ============ ============== ==============
Reported Basic Earnings Per Share $.84 $.76 $1.52 $1.34
Pro Forma Impact of Expensing
Stock Options (.04) (.03) (.07) (.07)
----------- ------------ -------------- --------------
Pro Forma Basic Earnings Per Share $.80 $.73 $1.45 $1.27
=========== ============ ============== ==============
Reported Diluted Earnings Per Share $.83 $.75 $1.50 $1.32
Pro Forma Impact of Expensing
Stock Options (.04) (.03) (.07) (.07)
----------- ------------ -------------- --------------
Pro Forma Diluted Earnings Per Share $.79 $.72 $1.43 $1.25
=========== ============ ============== ==============
10
In March 2004 the FASB issued a proposed standard entitled "Share-Based
Payment - An Amendment of FAS Nos. 123 and 95." The proposed rules will
eliminate the disclosure-only election under FAS 123 and require the
recognition of compensation expense for stock options and other forms
of equity compensation based on the fair value of the instruments on
the date of grant. The FASB currently expects to issue a final standard
in late 2004, which is slated to be effective for the first quarter
2005 for Anheuser-Busch. In addition to the quarterly disclosures shown
previously, the company also disclosed in its 2003 Annual Report to
Shareholders that the pro forma dilutive impact on net income and
earnings per share of hypothetically expensing stock options based on
Black-Scholes for the full years 2003, 2002 and 2001 was $113 million
and $.14 per share, $93 million and $.11 per share, and $69 million and
$.08 per share, respectively. The FASB's proposal advocates using a
binomial (lattice-based) option pricing model rather than the
Black-Scholes model the company currently uses to determine grant date
fair value. Anheuser-Busch has not yet determined what, if any, impact
using the recommended binomial model will have on the company's
estimated net income and earnings per share dilution compared to the
Black-Scholes model.
9. Contingencies
-------------
In January 1997, Maris Distributing Company, Inc., a former
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 continue
to accrue at a rate that is fixed annually. 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
11
defamation claim could proceed. Anheuser-Busch is vigorously contesting
that claim and is seeking review of the decision of the trial court to
permit the defamation claim to proceed. 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
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.
10. Deferred Income Tax Liability
-----------------------------
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
11. Pension and Other Postretirement Benefits Expense
-------------------------------------------------
The components of total pension expense for the second quarter and six
months ended June 30 are shown below (in millions):
Second Quarter First Six Months
----------------------- -----------------------
2004 2003 2004 2003
---------- --------- ---------- ---------
Service cost (benefits earned during the period) $22.0 $18.7 $42.3 $37.3
Interest cost on benefit obligation 39.5 38.0 79.1 76.0
Assumed return on plan assets (47.4) (47.3) (95.1) (94.5)
Amortization of prior service cost and net actuarial
losses 16.3 9.1 31.9 18.1
---------- --------- ---------- ---------
Expense for defined benefit plans 30.4 18.5 58.2 36.9
Cash contributed to multi-employer pension plans 4.4 4.2 8.5 8.4
Cash contributed to defined contribution pension plans 4.7 4.6 9.3 9.2
---------- --------- ---------- ---------
Total pension benefits expense $39.5 $27.3 $76.0 $54.5
========== ========= ========== =========
The components of total postretirement benefits expense for the second
quarter and six months ended June 30 are shown below (in millions):
Second Quarter First Six Months
----------------------- -----------------------
2004 2003 2004 2003
---------- --------- ---------- ---------
Service cost (benefits earned during the period) $5.3 $4.9 $11.2 $9.8
Interest cost on benefit obligation 8.0 9.5 17.4 19.0
Amortization of prior service cost and net actuarial
gains (1.9) (2.3) (2.7) (4.6)
---------- --------- ---------- ---------
Total defined benefits expense $11.4 $12.1 $25.9 $24.2
========== ========= ========== =========
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 liability as of June 30, 2004
decreased $43.9 million while defined postretirement benefits expense
for the first six months was reduced $2.8 million.
13
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/cash flows
of Anheuser-Busch Companies, Inc. for the second quarter and six months
ended June 30, 2004, compared to the second quarter and six months ended
June 30, 2003, and the year ended December 31, 2003. This discussion should
be read in combination with the consolidated financial statements and notes
included in the company's annual report to shareholders for the year ended
December 31, 2003.
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 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; changes in consumer preference for the company's malt beverage
products; regulatory or legislative changes, including changes in beer
excise taxes at either the federal or state level; 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 company's credit rating resulting from future
acquisitions or divestitures; and the effect of stock
14
market conditions on the company's share repurchase program. Anheuser-Busch
disclaims any obligation to update any of these forward-looking statements.
RESULTS OF OPERATIONS
---------------------
With strong growth from all of its major operating segments,
Anheuser-Busch achieved record sales and earnings for the second quarter and
first six months of 2004. Consolidated net sales increased 6.4% in the
second quarter, while diluted earnings per share increased 10.7%. Net sales
and diluted earnings per share increased 6.2% and 13.6%, respectively, for
the first six months. Results for the first six months of 2004 benefited
from a $19.5 million pretax gain ($.015 per share) from the sale of
commodity hedges in the first quarter. This gain is reported in other
income/(expense) on the consolidated income statement and as such does not
impact gross profit or operating income. Excluding this gain, earnings per
share for the first six months increased 12.5% vs. 2003.
Anheuser-Busch had an excellent second quarter and continued its
track record of delivering consistent and dependable earnings growth. The
company has now achieved 23 consecutive quarters of double-digit earnings
per share growth and remains confident in its ability to consistently
achieve its double-digit annual earnings per share growth objective over the
long-term, with an 11.7% earnings per share growth target for 2004,
excluding the benefit of the commodity hedge gain as shown below.
Earnings
Per Share Increase
----------- ------------
Including Hedge Gain $2.785 +12.3%
============
Commodity Hedge Gain (.015)
-----------
Excluding Hedge Gain $2.77 +11.7%
=========== ============
15
BEER SALES RESULTS
------------------
The company's beer volume for the second quarter and first six
months of 2004 is summarized in the following table:
Reported Beer Volume (millions of barrels) for Periods Ended June 30
------------------------------------------------------------------------------------------------------------
Second Quarter Six Months
----------------------------------- -----------------------------------
Versus 2003 Versus 2003
------------------------ ------------------------
2004 Barrels % 2004 Barrels %
---------- ------------- ---------- ---------- ------------- ----------
Domestic 27.3 Up 0.5 1.9% 52.5 Up 0.7 1.4%
International 2.3 Up 0.15 6.6% 4.1 Up 0.3 6.4%
---------- ------------- ---------- ---------- ------------- ----------
Worldwide A-B Brands 29.6 Up 0.7 2.2% 56.6 Up 1.0 1.7%
Int'l Equity Partner Brands 5.2 Up 0.1 2.3% 9.6 Up 0.2 2.1%
---------- ------------- ---------- ---------- ------------- ----------
Total Brands 34.8 Up 0.8 2.2% 66.2 Up 1.2 1.8%
========== ============= ========== ========== ============= ==========
Domestic beer sales-to-wholesalers increased 1.9% for the second
quarter of 2004 vs. the second quarter 2003 and were up 1.4% for the first
six months of 2004. Wholesaler sales-to-retailers were up 1.2% in the second
quarter and up 1.8% for the first six months, vs. similar 2003 periods.
These results were led by strong growth of the company's Michelob ULTRA and
Bud Light brands.
The company's domestic market share (excluding exports) for the
first six months of 2004 was 49.8%, level with 2003 market share. Domestic
market share is based on estimated U.S. beer industry sales using
information provided by the Beer Institute and the U.S. Department of
Commerce.
International volume, consisting of Anheuser-Busch brands produced
overseas by company-owned breweries and under license and contract-brewing
agreements, plus exports from the company's U.S. breweries to markets around
the world, increased 6.6% for the second quarter and 6.4% for the first six
months of 2004.
Worldwide Anheuser-Busch beer sales volume for the second quarter
and first six months of 2004 rose 2.2% and 1.7%, to 29.6 million and 56.6
million barrels respectively, vs. 2003. Worldwide beer volume is comprised
of domestic volume and international volume. International equity partner
brands volume, representing the company's share of its foreign equity
partners' volume reported on a one-month lag, increased 2.3% for the second
quarter and 2.1% for the first six months of 2004 vs. 2003, contributing to
the company's 2.2% and 1.8% increase in total brands volume for
16
the same periods. International equity partner volume was up due to Modelo
volume growth.
SECOND QUARTER AND FIRST SIX MONTHS OF 2004 FINANCIAL RESULTS
-------------------------------------------------------------
Key operating results for the second quarter and first six months
of 2004 are summarized in the following tables:
($ in millions, except per share)
---------------------------------------------------------------------
Second Quarter 2004 versus 2003
------------------------------ --------------------------------
2004 2003 $ %
------------ ------------ ----------- -----------
Gross Sales $4,597 $4,339 Up $258 Up 5.9%
Net Sales $4,010 $3,770 Up $240 Up 6.4%
Income Before Income Taxes $927 $862 Up $65 Up 7.6%
Equity Income, Net of Tax $106 $106 -- --
Net Income $674 $633 Up $41 Up 6.5%
Diluted Earnings per Share $.83 $.75 Up $.08 Up 10.7%
($ in millions, except per share)
---------------------------------------------------------------------
First Six Months 2004 versus 2003
------------------------------ --------------------------------
2004 2003 $ %
------------ ------------ ----------- -----------
Gross Sales $8,600 $8,134 Up $466 Up 5.7%
Net Sales $7,487 $7,051 Up $436 Up 6.2%
Income Before Income Taxes $1,681 $1,531 Up $150 Up 9.8%
Equity Income, Net of Tax $195 $180 Up $15 Up 8.2%
Net Income $1,223 $1,117 Up $106 Up 9.5%
Diluted Earnings per Share $1.50 $1.32 Up $.18 Up 13.6%
A discussion of financial results for the second quarter and first
six months of 2004 follows.
Anheuser-Busch achieved record gross sales of $4.6 billion and $8.6
billion, and record net sales of $4.0 billion and $7.5 billion,
respectively, in the second quarter and first six months of 2004. These
amounts represent gross sales increases over 2003 of 5.9% for the second
quarter and 5.7% for the six months. Net sales increased over 2003 by 6.4%
and 6.2%, respectively, for the same periods. The differences between gross
and net sales reflect beer excise taxes paid by the company on its products.
The increases in consolidated gross and net sales are primarily the
result of 5.1% and 4.7% sales increases for the domestic beer segment in the
second quarter and first six months of 2004, respectively, due to higher
revenue per barrel and
17
increased beer volume. The second quarter and year-to-date results also
include higher sales for all of the company's remaining segments.
International beer net sales were up mid-teens for both periods due to
volume growth in China, Canada and the United Kingdom; packaging segment net
sales were up 9% for both the second quarter and six months from soft drink
can sales volume increases; and entertainment net sales increased 11.5% and
15%, respectively, both due to higher attendance and admissions pricing.
Domestic revenue per barrel grew 2.5% in the second quarter, and
2.8% for the first six months of 2004 vs. the same periods in 2003. This
growth reflects the continuing favorable pricing environment and continued
consumer trading up to the super premium Michelob family. Revenue per barrel
has now increased by 2% or more for 23 consecutive quarters, and generated
$91.7 million and $184.9 million in net sales improvement for the second
quarter and first six months of 2004, respectively. Higher beer volume
contributed $54.2 million and $76.7 million, respectively, to the increases
for the same periods. Domestic revenue per barrel is calculated as net sales
generated by the company's domestic beer operations on barrels of beer sold,
determined on a U.S. GAAP basis, divided by the volume of beer shipped from
the company's breweries to U.S. wholesalers. Consistent with the company's
practice of implementing moderate annual price increases in two phases,
Anheuser-Busch plans to initiate selected pricing actions in the fourth
quarter 2004. The revenue enhancement initiatives will again be tailored to
specific markets, brands and packages and will apply to over 40% of the
company's volume, which is somewhat greater than in 2003.
Cost of sales was $2.3 billion and $4.4 billion, respectively, for
the second quarter and first six months of 2004, reflecting increases of
$141 million, or 6.5%, and $240 million, or 5.8%, respectively, compared to
2003. The increases in cost of sales for the second quarter and first six
months are due to higher costs for all of the company's major business
segments. The increase in domestic beer costs are primarily due to costs
associated with increased beer volume versus prior year of $18 million for
second quarter and $26 million for the first six months, plus increased
costs for brewing and packaging materials in both periods and higher utility
costs year-to-date. International beer experienced higher costs associated
with increased beer volume. Packaging operations incurred higher aluminum
costs and entertainment operations incurred
18
higher park operating expenses. Gross margin (gross profit as a percentage
of net sales) increased 30 basis points in the first half of 2004, to 41.2%.
Second quarter gross margin was 41.9%, level versus 2003, with domestic beer
gross margin growth of 30 basis points being essentially offset by lower
margins for the commodity-based packaging segment.
Marketing, distribution and administrative expenses for the second
quarter 2004 were $654 million, an increase of $32 million, or 5.1% compared
with second quarter 2003. For the first six months of 2004, these expenses
were $1.2 billion, an increase of $72 million, or 6.2% versus last year.
These increases are principally due to increased domestic marketing costs,
especially year-to-date and primarily for the Bud Family and Michelob ULTRA,
increased international beer marketing costs, higher distribution costs
associated with owning an additional wholesale operation, and higher legal
and administrative costs. The second quarter increase also reflects
increased marketing costs associated with the Olympics and higher
compensation costs due to the expiration of the company's employee stock
ownership plans.
Operating income increased $67 million, or 6.9% in the second
quarter 2004 and was up $124 million, or 7.2% for the first six months,
versus comparable periods in 2003. Operating margins for the second quarter
and first six months were 25.5% and 24.7%, respectively, for increases of 10
and 30 basis points, respectively.
Interest expense net of interest income was $106 million for the
second quarter and $206 million for the first six months of 2004,
representing increases of approximately 3% in both periods compared to 2003.
The increases in 2004 are primarily due to the impact of higher average
outstanding debt balances compared to last year. Interest capitalized
decreased 9% and increased 2% for the second quarter and first six months of
2004, respectively, to $6 million and $11 million. These changes primarily
resulted from fluctuations in construction in progress balances during 2004.
Other income/expense, net includes equity earnings from the
company's limited partnership investments in beer wholesalers and numerous
other items of a nonoperating nature. The company had other income of $2
million and $30 million for the second quarter and first six months of 2004,
respectively, compared to other expense of $1 million for each of the
comparable 2003 periods. Other income for the first six months of 2004
includes the one-time pretax gain of $19.5 million ($.015 per
19
share) 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 for business
segment reporting purposes. Other income for the first six months also
includes a $19.1 million pretax gain ($.014 per share) related to the sale
of two beer wholesaler partnerships in the first quarter 2004.
Income before income taxes for the quarter was $927 million, an
increase of $66 million, or 7.6% versus second quarter 2003. Income before
income taxes of $1.7 billion for the first six months increased $150
million, or 9.8% compared to 2003. These results reflect increased pretax
income for the domestic beer segment along with improved results for all of
the company's other operating segments.
Domestic beer pretax income was $952 million and $1.8 billion for
the second quarter and first six months of 2004, respectively. This
represents growth of $76 million, or an especially strong 8.7% for the
second quarter 2004, and $139 million, or 8.3% for the first six months
versus prior year. Both of these increases reflect higher revenue per barrel
due to the favorable pricing environment and increased beer sales volume.
The year-to-date increase also includes the $19.1 million pretax gain
related 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 $31 million for the second quarter of 2004 and $54 million for the first
six months, representing increases of $5 million, or 20% in the second
quarter and $8 million, or 17% for the first six months versus 2003. The
increase for the second quarter and first six months is primarily due to
volume and profit growth in China and Canada.
Packaging segment pretax profits in the second quarter 2004 were
$53 million, an increase of $2 million, or 4%. For the first six months,
pretax profits were $89 million, an increase of $5 million, or 6%. The
increases in packaging pretax profits for both the second quarter and the
first six months were due to higher soft drink can volume and improved
results from the company's aluminum recycling operations.
20
Entertainment segment pretax results for the second quarter 2004
increased $16 million, or 24%, to $82 million compared to the second quarter
2003, and were up $25 million, or 56% for the first six months. Results were
up for both the quarter and year-to-date primarily due to increased
attendance and higher admissions pricing.
Equity income was $106 million in the second quarter and $195
million for the first six months of 2004, up slightly for the quarter and an
increase of $15 million, or 8.2% for the first six months versus 2003.
Increases in equity income are due to higher Modelo volume combined with the
impact of price increases. Equity income results from 2003 included a $5.5
million after tax gain representing Anheuser-Busch's equity share of CCU
earnings from the sale of a brewery in Croatia. Excluding this gain, which
better reflects underlying equity investee operations, equity income in the
second quarter 2004 increased 5.8% vs. 2003, as shown below:
Equity Income Increase
--------------------------- ------------
2004 2003
----------- ------------
Reported $106.3 $106.0 0.3%
============
Gain on Brewery Sale -- (5.5)
----------- ------------
Excluding Gain $106.3 $100.5 5.8%
=========== ============ ============
The company's effective tax rate was 38.8% in both the second
quarter and first six months of 2004, essentially level with the rates of
38.9% and 38.8% for the respective periods in 2003.
Net income increased $41 million, or 6.5% during the second quarter
2004, and was up $106 million, or 9.5% for the first six months, versus the
same periods last year. Diluted earnings per share were $.83 for the second
quarter 2004, an increase of 10.7% compared to prior year, and were $1.50
for the first six months, an increase of 13.6% compared to the first half of
2003. Earnings per share continue to benefit from the company's share
repurchase program. The company repurchased 4.6 million shares in the second
quarter and a total of 15.4 million for the first half of 2004. Excluding
the impact of the one-time gain from the sale of commodity hedges, which
better reflects underlying operations, diluted earnings per share for the
first six months of 2004 would have been $1.49, or an increase of 12.5%, as
shown below:
21
Diluted Earnings
Per Share Increase
---------------------- ----------
2004 2003
--------- ---------
Reported $1.50 $1.32 13.6%
==========
Commodity Hedge Gain (.015) ---
--------- ---------
Excluding Hedge Gain $1.485 $1.32 12.5%
========= ========= ==========
LIQUIDITY AND FINANCIAL CONDITION
---------------------------------
Cash at June 30, 2004 was $261 million, an increase of $70 million
from the December 31, 2003 balance. The principal 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.
Operating cash flow before the change in working capital for the first six
months of 2004 was $1.8 billion. See the consolidated statement of cash
flows for detailed information. The increase in working capital for the
first six months of 2004 compared to the first half of 2003 is primarily due
to higher raw material inventories for barley. 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. The Harbin Brewery
investment will result in a comparable reduction in the company's 2004 share
repurchases.
The use of debt financing lowers the company's overall cost of
capital. The company's debt balance has increased $403 million since
December 31, 2003. Comparative debt activity during the first six months of
2004 and 2003 is shown below:
22
ISSUANCES
---------
Amount Interest Rate
Description (millions) (fixed unless noted)
-----------------------------------------------------------------------------------------------------
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
=============
2003
U.S. Dollar Notes $580.0 $200.0 at 4.5%; $200.0 at 4.625%; $180.0 at 5.35%
Issuance Discounts (3.1) N/A
Other, net 0.6 Various
-------------
$577.5
=============
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 250.4 $250 at 7.1%; $0.4 at 5.35%
ESOP Note 46.3 8.25%
Other, net 13.2 Various
-------------
$560.9
=============
2003
Commercial Paper $76.0 1.21% weighted average, floating
ESOP Note 44.0 8.25%
Other, net 5.1 Various
-------------
$125.1
=============
The company's ESOP debt guarantee expired on March 31, 2004. At
June 30, 2004, the company's commercial paper borrowings of $932.6 million
were classified as long-term since they are maintained on a long-term basis
with on-going support provided by the company's $2 billion revolving credit
agreement. The company has $570 million of debt available for issuance
through existing SEC shelf registrations.
Capital expenditures during the first six months of 2004 were $442
million, compared to $490 million for the first half of 2003. The decrease
in capital expenditures is essentially due to the timing of spending. Full
year 2004 capital expenditures are expected to approximate $900 million to
$975 million.
Per share dividends paid by the company were $.22 in the second
quarter and $.44 for the first six months of 2004, compared to $.195 and
$.39, respectively, for the
23
comparable 2003 periods. At its July meeting, the Board of Directors
increased the regular quarterly dividend on outstanding shares of the
company's common stock to $.245 per share, an increase of 11.4% from the
prior rate of $.22 per share. This marks the 28th consecutive year of
Anheuser-Busch dividend increases. The new dividend rate is payable
September 9, 2004, to shareholders of record August 9, 2004.
Return on Capital Employed
--------------------------
Return on capital employed for the twelve months ended June 30,
2004, was 18.6%, an increase of 70 basis points over the twelve-month period
ended June 30, 2003. Return on capital employed is computed as twelve 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 2004, after-tax net
interest expense was $237.8 million, calculated as pretax net interest
expense of $383.6 million less income taxes applied using a 38% tax rate.
For 2003, after-tax net interest expense was $228.9 million, calculated as
pretax net interest expense of $369.2 million less income taxes applied at
38%.
ITEM 3. RISK MANAGEMENT
The company's derivatives holdings fluctuate during the 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 with increases in
domestic beer volume. Since December 31, 2003, there have been no
significant changes in the company's interest rate and foreign currency
exposures. As previously discussed, certain of the company's commodity
exposures have been reduced due to Anheuser-Busch obtaining lower future
pricing in supply agreements that were finalized during the second quarter.
There 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 trends towards higher prices.
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
24
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 June 30, 2004 and have concluded that they are effective as of
June 30, 2004 in providing 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 with the evaluation that have materially affected,
or are reasonably likely to materially affect, the company's internal
control over financial reporting.
25
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
Following are the company's monthly common stock purchases during
the second quarter 2004 (in millions, except per share):
Avg. Price
Shares per Share
--------- ----------------
Shares Remaining Authorized Under Disclosed Repurchase
Programs at April 1, 2004 66.6
=========
Share Repurchases
-----------------
April 4.4 $50.98
May 0.2 $51.34
June --- N/A
---------
Total 4.6 $51.08
---------
Shares Remaining Authorized Under Disclosed Repurchase
Programs at June 30, 2004 62.0
=========
As of June 30, 2004, the company had disbursed $1.3 million for
25,000 shares for which title had not yet been received due to normal
three-day securities settlement protocol. All shares are repurchased under
Board of Directors authorization. The Board authorized the current program
to repurchase 100 million shares in March 2003. There is no prescribed
termination date for this program. The numbers of shares shown include
shares delivered to the company to exercise stock options.
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--- --------
12 Ratio of Earnings to Fixed Charges
31.1 Certification of Chief Executive Officer required by Rule 13a-14(a) or
15d-14(a) under the Exchange Act
31.2 Certification of Chief Financial Officer required by Rule 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 April 28, 2004
Item 12 Results of Operations and
Financial Condition April 28, 2004
27
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)
July 30, 2004
/s/ John F. Kelly
------------------------------------------
John F. Kelly
Vice President and Controller
(Chief Accounting Officer)
July 30, 2004