Brown-Forman Corporation — Q1 Fiscal 2013 10-Q
Reporting period: Three months ended July 31, 2012, compared with the three months ended July 31, 2011. Brown-Forman is a global beverage-alcohol company. The interim financial statements are unaudited.
Financial results
| Metric | Q1 FY2013 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $878.1 million | $840.3 million | +4% reported |
| Gross profit / margin | $464.1 million / 52.9% | $420.3 million / 50.0% | +10%; margin +2.9 points |
| Operating income / margin | $221.7 million / 25.2% | $185.9 million / 22.1% | +19%; margin +3.1 points |
| Net income | $147.5 million | $118.1 million | +25% |
| Diluted EPS | $0.69 | $0.54 | +27% |
| Operating cash flow | $87.6 million | $64.0 million | +$23.6 million |
Net sales growth included 10% underlying growth, partly offset by estimated trade-inventory effects (+4%), the prior-year wine business sale (-4%), and foreign exchange (-6%). Management attributed underlying growth primarily to higher volumes and price-increase buy-ins; price/mix contributed about 1%. The absence of the lower-margin Hopland wine business and favorable brand and market mix supported gross-margin expansion.
Cash and cash equivalents were $361.5 million at July 31, 2012, up $23.2 million from April 30. Investing activities used $17.5 million, including $17.4 million of capital expenditures; financing activities used $44.6 million, including $49.8 million of dividends paid. Long-term debt was $502.1 million, with $6.5 million in short-term borrowings and $2.7 million current maturities. The $800 million credit facility was unused; the company reported a 32-to-1 EBITDA-to-interest ratio against a 3-to-1 minimum covenant. Cash held by foreign subsidiaries was $257.4 million and was expected to remain invested abroad.
Performance drivers and changes
- Jack Daniel’s, including Tennessee Honey, contributed to growth; management said price-increase buy-ins were expected to reverse in Q2.
- Growth also came from several premium brands and markets including the U.S., Australia, Poland, and Mexico. China and Japan were among markets with declines; Southern Comfort’s parent brand declined.
- Cost of sales fell 7%, reflecting the stronger dollar and the wine-business sale, partly offset by volume and mix. SG&A rose 7%, including salary and benefit inflation, higher pension expense, organizational investments, and spending timing.
- Net interest expense declined $2.5 million, principally following repayment of $250 million of 5.2% bonds on April 1, 2012. The effective tax rate was 32.1%, versus 34.0%, reflecting lower tax expense from discrete items.
Outlook, risks, and other items
Fiscal 2013 diluted EPS guidance remained $2.40–$2.67, adjusted for the 3-for-2 stock split. Management continued to expect high-single-digit underlying net-sales and operating-income growth, while citing macroeconomic uncertainty, especially in Europe; consumer response to price increases; innovation performance; distributor and retailer inventories; and foreign-exchange and commodity volatility. It expected higher grain, glass, and transportation costs to contribute to low-single-digit cost-of-sales increases over the rest of the year.
The stock split was effected as a stock dividend on August 10, 2012; reported share and per-share amounts were restated. The board approved a regular $0.233-per-share dividend payable October 1, 2012. The company reported no material accrued loss contingencies and did not expect disclosed litigation contingencies to materially adversely affect its financial position, results, or liquidity. It identified risks including competition, changing consumer preferences, regulation and taxes, supply disruptions, foreign exchange, pension assumptions, and litigation. Disclosure controls were reported effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How much of the reported growth reflects underlying demand versus price-increase buy-ins and trade-inventory increases, particularly given the expected Q2 reversal.
- Whether high-single-digit underlying growth and the $2.40–$2.67 diluted-EPS outlook are achieved amid currency, demand, and input-cost pressures.
- Cash generation and working-capital needs, capital spending on production capacity, and the company’s debt and credit-facility position.
- Whether the portfolio’s growth brands offset declines in Southern Comfort and weaker markets, and whether recent price increases affect demand.
- Potential tax, litigation, derivative-counterparty, and repatriation-tax exposures; the filing does not quantify a material litigation accrual.