Brown-Forman Corporation — Fiscal 2013 Second-Quarter 10-Q
Reporting period: Three and six months ended October 31, 2012; quarter ended October 31, 2012. The company sells spirits and wine products. Comparative per-share and share data reflect the 3-for-2 stock split paid in August 2012.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,013.8 million, flat year over year | $1,891.9 million, up 2% |
| Gross profit / margin | $524.5 million; 51.7%, versus 49.5% | $988.6 million; 52.3%, versus 49.7% |
| Operating income / margin | $262.3 million, up 7%; 25.9%, versus 24.3% | $484.0 million, up 12%; 25.6%, versus 23.3% |
| Net income | $173.0 million, up 10% | $320.5 million, up 16% |
| Diluted EPS | $0.80, up 11% | $1.49, up 18% |
| Net interest expense | $4.8 million, down from $7.1 million | $9.4 million, down from $14.2 million |
| Effective tax rate | 32.8%, versus 34.1% | 32.5%, versus 34.1% |
For the six months, operating cash flow was $164.7 million, compared with $155.5 million. Capital expenditures were $38.7 million, versus $18.8 million; cash dividends paid were $99.5 million. Cash and cash equivalents ended the period at $368.5 million, up $30.2 million since April 30, 2012. Total debt was approximately $512.0 million, comprising $7.9 million of short-term borrowings, $2.7 million current long-term debt, and $501.4 million long-term debt. The $800 million credit facility was unused; the company reported a 33-to-1 EBITDA-to-interest covenant ratio against a minimum of 3-to-1.
Changes and business drivers
- Quarterly underlying net sales grew 6%, but reported sales were flat, reflecting lower estimated distributor trade inventories, foreign exchange, and the absence of the sold Hopland wine business. Six-month underlying sales grew 8%; higher trade inventories contributed 1 percentage point, while foreign exchange and the Hopland comparison reduced reported growth.
- Jack Daniel’s, including Tennessee Honey, was a principal growth driver, alongside several premium brands. Southern Comfort declined, particularly in international markets. Six-month growth was broad across several markets, while the U.K. and South Africa were among the weaker markets.
- Lower value-added packaging costs, pricing, favorable brand/market mix, foreign exchange, and the absence of the lower-margin Hopland business supported margins. The Hopland comparison lifted overall margin by about 1.3 percentage points.
- SG&A rose 8% in both the quarter and six-month period, reflecting salary and benefit inflation, higher pension expense, investments in emerging-market capabilities and route-to-consumer operations, and spending timing. The company cited a lower assumed pension discount rate as a principal driver of higher pension expense.
- Net interest expense fell following repayment with cash of $250 million of 5.2% bonds on April 1, 2012. Six-month diluted EPS growth also benefited from fewer shares outstanding.
Outlook, risks, and unusual items
Management raised fiscal 2013 diluted EPS guidance to $2.58–$2.70 from $2.40–$2.67. It expected high-single-digit underlying net sales growth and low-double-digit operating income growth, while noting uncertainty in the global economy and the importance of the holiday selling season. Management anticipated low-single-digit transportation and input-cost increases, including corn and glass, and expected some margin benefit from pricing to be offset by higher costs, less benefit from the Hopland comparison, and unfavorable mix.
After quarter-end, the board raised the quarterly dividend from $0.233 to $0.255 per share and declared a special $4.00-per-share dividend, payable December 27, 2012. The company expected to fund the special dividend with cash on hand and expected short- and/or long-term borrowing. Of period-end cash, $266.0 million was held by foreign subsidiaries and expected to remain invested abroad; repatriation would entail U.S. taxes.
Key disclosed risks include economic and consumer weakness, competition and pricing, brand and product execution, distributor inventory changes, foreign exchange, regulation and taxes, input availability and costs, and litigation. The company reported no material accrued loss contingencies and did not expect litigation contingencies to materially affect its financial position, results, or liquidity. It used currency and interest-rate derivatives for risk management, not trading; outstanding currency derivative notional was $719.1 million. Management said liquidity was sufficient for foreseeable commitments.
Important facts for investors to verify
- How much reported growth and margin improvement is attributable to underlying demand and pricing versus trade-inventory movements, foreign exchange, and the Hopland comparison.
- Whether the raised full-year guidance is achieved, particularly given the holiday-season uncertainty and expected cost increases.
- The funding and balance-sheet impact of the $4.00-per-share special dividend, including any new borrowing and resulting interest expense.
- Whether foreign-held cash remains available for the company’s intended uses without repatriation, and the potential tax cost if repatriated.
- Developments in Southern Comfort, major international markets, pension costs, and the company’s disclosed market, supply, regulatory, and litigation risks.