Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2012, ended January 31, 2012. Comparisons are with the corresponding fiscal 2011 periods. Financial statements are unaudited.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $959.0 million, essentially flat | $2,813.1 million, up 8% |
| Gross profit / margin | $450.9 million, down 3%; 47.0% vs. 48.2% | $1,373.2 million, up 6%; 48.8% vs. 49.8% |
| Operating income / margin | $206.2 million, down 9%; 21.5% vs. 23.4% | $638.3 million, up 1%; 22.7% vs. 24.2% |
| Net income | $133.1 million, down 5% | $408.7 million, up 1% |
| Diluted EPS | $0.93, down 3% | $2.83, up 2% |
| Operating cash flow | Not separately reported for the quarter | $341.7 million, down from $399.5 million |
For the quarter, 7% underlying net-sales growth was offset by the Hopland wine-business divestiture (2%), foreign exchange (2%), and lower estimated trade inventories (3%). For the nine months, underlying sales growth was 8%; reported growth also reflected a 1% foreign-exchange benefit and a 1% reduction from the divestiture.
Higher corn, glass, and fuel costs, sales-volume growth, and product mix pressured gross margin. Quarterly operating income also reflected lower trade inventories and lost profits from the divested wine business. Advertising and selling, general, and administrative expenses rose 11% and 7%, respectively, over nine months. Net interest expense increased $2.3 million over nine months, primarily reflecting higher long-term debt, partly offset by lower short-term borrowings and interest-rate swaps.
Cash, debt, and liquidity
- Cash and cash equivalents were $494.9 million at January 31, down $72.2 million from the fiscal-year start. Operating cash flow was $341.7 million; investing used $40.9 million and financing used $357.4 million. The company cited federal tax-payment timing as a major reason operating cash flow declined year over year.
- Cash used for financing included $219.1 million of treasury-stock purchases and $142.0 million of dividends paid. The prior-year nine-month period included a $145.1 million special dividend; current-year declared dividends were $1.34 per share versus $2.24 a year earlier.
- Debt at January 31 included $5.0 million of short-term borrowings, $253.0 million of current long-term debt, and $503.5 million of long-term debt. The company said it planned to repay its $250 million of 5.2% notes maturing April 1, 2012, with cash.
- Current assets were $1,953.1 million and current liabilities $725.6 million. The company reported $494.9 million in cash, including $236.1 million held by foreign subsidiaries and expected to remain permanently reinvested abroad.
- A new $800 million five-year credit facility expires November 18, 2016 and was undrawn. The company reported a 29-to-1 consolidated EBITDA-to-interest ratio against a minimum 3-to-1 covenant and described liquidity as strong and sufficient for foreseeable commitments.
Business developments, outlook, and risks
- Jack Daniel’s brands were the principal growth driver, supported by Tennessee Whiskey, Tennessee Honey, and international expansion. Finlandia, Woodford Reserve, and several other brands also grew. Southern Comfort and el Jimador were weaker; management cited competitive pressure on Southern Comfort and promotional competition affecting el Jimador.
- Management narrowed full-year diluted EPS guidance to $3.50–$3.65 and expected high-single-digit growth in underlying net sales and operating income for the full fiscal year. It expected input-cost increases to continue at approximately the current rate for the balance of the year, and advertising spending, excluding foreign exchange and the divestiture, to be flat to modestly higher in the final quarter.
- The Maximus Vodka brand and related intellectual property were acquired for $7.2 million in June 2011. The Hopland-based wine business was sold in April 2011; its transition-services agreement ended December 31, 2011.
- Key stated risks include economic and consumer-demand weakness, competition and changing preferences, distributor and route-to-consumer changes, commodity and input-cost inflation, foreign-exchange movements, regulation and taxation of alcohol, and litigation or product-reputation events. The company uses currency, corn, and interest-rate derivatives to manage exposures, not for trading; it disclosed $402.2 million of currency-derivative notional and $375 million of interest-rate swaps.
- The company said it had no material accrued loss contingencies at January 31 and did not expect existing contingencies to materially adversely affect its financial position, results, or liquidity. It reported an expected annual tax rate of 33.4% on ordinary income; the nine-month effective rate was 33.7%, including discrete items and interest on tax contingencies. A net $9.3 million decrease in gross unrecognized tax benefits was considered reasonably possible over the next 12 months.
Most important facts for investors to verify
- Whether the full-year $3.50–$3.65 diluted-EPS outlook and high-single-digit underlying growth expectations were achieved.
- Whether input-cost inflation and trade-inventory movements continued to pressure margins, and whether pricing actions offset those pressures.
- Whether Jack Daniel’s growth continued and whether Southern Comfort and el Jimador improved amid competitive pressure.
- Repayment of the April 2012 notes, subsequent cash and debt levels, and the impact of repurchases and dividends on liquidity.
- Developments in tax examinations and contingencies, foreign-currency and commodity exposures, and any material litigation or other unusual items.