Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended October 31, 2010 (fiscal 2011). Results are unaudited and in U.S. dollars.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net sales | $905.7 million | $892.9 million | $1,650.6 million | $1,630.8 million |
| Gross profit | $458.8 million | $443.0 million | $837.6 million | $823.1 million |
| Operating income | $235.0 million | $225.6 million | $407.7 million | $417.6 million |
| Net income | $154.0 million | $147.3 million | $265.4 million | $268.6 million |
| Diluted EPS | $1.05 | $0.99 | $1.80 | $1.79 |
| Gross margin | 50.7% | 49.6% | 50.7% | 50.5% |
| Operating margin | 25.9% | 25.3% | 24.7% | 25.6% |
- Q2 net sales rose 1% reported and 2% underlying; reported growth was partly offset by lower estimated distributor trade inventories. Gross profit rose 4%, supported by favorable currency, lower packaging activity, and production efficiencies.
- For the six-month period, sales rose 1% reported and 2% underlying, while operating income fell 2% and net income fell 1%. Higher pension expense, route-to-market costs, brand investment, and lower estimated trade inventories weighed on reported operating results.
- Q2 diluted EPS increased 6%; six-month diluted EPS increased 1%, aided by lower net interest expense, lower taxes, and fewer shares outstanding.
- Six-month operating cash flow was $177.8 million, versus $205.7 million a year earlier. Investing used $4.3 million, including $15.1 million of capital expenditures and $12.1 million of asset-sale proceeds; financing used $251.2 million, including $106.6 million for treasury shares and $87.9 million for dividends.
Balance sheet and liquidity
- At October 31, 2010, cash was $155.7 million, total assets $3.44 billion, and stockholders’ equity $1.98 billion. Cash decreased $75.9 million from April 30.
- Short-term borrowings were $129.2 million; current and long-term debt totaled $511.4 million. The fair value of long-term debt was $548.1 million, versus its $508.5 million carrying amount.
- The company described liquidity as strong and sufficient. Its $800 million bank facility was unused and expires April 30, 2012. The minimum interest-coverage covenant was 3-to-1; the reported ratio was 27-to-1.
- Inventory was $698.9 million, including $299.3 million of barreled whiskey. Accounts receivable was $544.0 million.
Outlook, commentary, and risks
- Management raised full-year diluted EPS guidance to $3.18–$3.42 and continued to expect mid-single-digit underlying operating-income growth for fiscal 2011.
- Management cited foreign exchange, growth outside the U.S., and production efficiencies as reasons for the guidance increase. Uncertainties include economic and consumer conditions, exchange rates, holiday-period performance, U.S. market improvement, and Southern Comfort’s performance.
- Brand performance was mixed: Jack Daniel’s, its ready-to-drink products, el Jimador, and several other brands gained; Southern Comfort and Fetzer declined. Management cited competitive pressure on Southern Comfort, particularly in the U.S.
- SG&A rose 9% in the first half, including about $10 million of additional pension expense associated in part with a lower discount rate. Management expected pension expense to recur in the second half, while SG&A overall was expected to moderate.
- Market and operating risks include consumer and distributor trends, competitive pricing, regulation and taxation, input costs and supply, currency movements, pension assumptions, route-to-market changes, litigation, and potential asset impairment. The filing reported no material accrued loss contingencies.
Other notable items
- The company repurchased approximately 1.97 million shares for about $117.1 million under its authorized program during the period.
- After quarter-end, the board approved a regular quarterly dividend of $0.32 per share, a 6.7% increase, and declared a special dividend of $1.00 per share. The filing said the regular payment was accelerated amid uncertainty over dividend tax rates.
- Currency contracts had a total notional amount of $374.7 million; corn futures and options covered approximately four million bushels. Management used derivatives to manage exposures, not for trading. Deferred net losses of $6.7 million were expected to be reclassified to earnings over the next 12 months, offsetting anticipated effects of the hedged exposures.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether full-year EPS guidance and mid-single-digit underlying operating-income growth remain achievable, particularly through the holiday period.
- Whether trade-inventory movements, foreign exchange, and route-to-market costs continue to affect reported growth and margins.
- Whether pension expense and other SG&A moderate as management expected, and how assumptions affect future benefit costs.
- Cash generation, debt levels, share repurchases, and the funding implications of the regular and special dividends.
- Progress in Southern Comfort and U.S. demand, alongside the sustainability of growth in Jack Daniel’s, RTDs, and el Jimador.