Brown-Forman Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended April 30, 2012. The filing is an annual report, not a standalone fourth-quarter filing; it also reports fourth-quarter results. Brown-Forman makes and markets spirits, wine, and ready-to-drink products, led by Jack Daniel’s. It reported one operating segment and generated 58% of net sales outside the United States.
Financial performance
| Metric | FY2012 | Prior comparable period | Change / context |
|---|---|---|---|
| Net sales | $3.614 billion | $3.404 billion | Up 6% reported; up 9% on an underlying basis |
| Gross profit / margin | $1.795 billion / 49.7% | $1.724 billion / 50.7% | Gross profit up 4%; margin down 1.0 percentage point |
| Operating income / margin | $788 million / 21.8% | $855 million / 25.1% | Down 8% reported; underlying operating income grew 9% |
| Net income | $513 million | $572 million | Down 10% |
| Diluted EPS | $3.56 | $3.90 | Down 9% |
| Cash from operations | $516 million | $527 million | Down $11 million |
| Capital expenditures | $58 million | $39 million | Higher as production expansion began |
| Cash and cash equivalents | $338 million | $567 million | Down $229 million |
| Total debt | $510 million | $759 million | Down $249 million; includes $4 million short-term borrowings |
FY2012 net sales growth reflected 10% volume growth, offset by a 1% decline in net price/mix, an estimated 1% negative effect from trade inventory changes, and a 2% reduction related to the Hopland wine business sale. Cost of sales rose 8%, reflecting volume, higher corn, glass, and fuel costs, partly offset by the end of transition-service costs related to the divested business.
Geographic net sales were $1.522 billion in the United States, $974 million in Europe, and $1.118 billion in other regions. U.S. reported sales were essentially flat, while sales outside the United States grew about 11% on both reported and constant-currency bases. Net sales by product category were $3.374 billion for spirits and $240 million for wine.
Liquidity remained supported by $516 million of operating cash flow and an unused $800 million revolving credit facility expiring in November 2016. The company reported a 29-to-1 EBITDA-to-interest ratio against a minimum covenant of 3-to-1. It repaid $250 million of debt at maturity in April 2012. Debt payments disclosed for future fiscal years included $253 million in FY2014 and $250 million in FY2016. The company paid $1.34 per share in dividends in FY2012; FY2011’s $2.24 included a $1.00 special dividend.
Material changes and notable items
- Reported operating income fell despite underlying growth, largely because FY2011 included the gain on sale of the Hopland-based wine business and FY2012 lacked its earnings contribution. The sale generated $234 million cash proceeds and a $38 million after-tax gain in FY2011; the company also cited foreign exchange and trade inventory effects.
- Jack Daniel’s Tennessee Whiskey depletions rose 8% to 10.8 million nine-liter cases. The Jack Daniel’s family grew 12% in depletions; Tennessee Honey exceeded 450,000 cases in its first full year.
- Southern Comfort family depletions declined 2% and net sales declined 7%; management cited competition and planned renewed marketing, product, and formulation initiatives.
- Finlandia net sales increased 7% reported; Herradura, Woodford Reserve, and Sonoma-Cutrer posted strong depletion growth. Canadian Mist and Korbel depletions declined.
- Cash used for share repurchases was $220 million, versus $136 million in FY2011. Cash dividends paid were $192 million, lower than FY2011 because the special dividend did not recur.
- Lower pension discount rates increased obligations: the pension obligation rose to $727 million from $613 million, and the medical and life insurance obligation to $62 million from $56 million. The combined funded deficit was $281 million. Management estimated FY2013 benefit expense of about $48 million, compared with $35 million in FY2012.
- Management disclosed an $8 million tax expense reversal in FY2011 relating to prior periods and said the error and correction were not material to the financial statements for those periods.
Guidance, management commentary, and risks
For FY2013, management guided to diluted EPS of $3.60–$4.00, versus FY2012 reported EPS of $3.56, and expected high-single-digit underlying net sales and operating income growth. The outlook included an estimated $0.11 per-share foreign-exchange headwind at then-current spot rates. Management expected price increases across much of the portfolio to contribute more to profit growth, while noting uncertainty about consumer and trade response.
Planned FY2013 capital expenditures were $100–$110 million, principally for Jack Daniel’s production capacity, including distillery and cooperage projects, and winery expansion. Management expected spending to be funded from operating cash flow.
Key risks include economic weakness and reduced demand for premium products; currency movements; input-cost, agricultural, water, and supply-chain disruptions; dependence on Jack Daniel’s; competition and uncertain product innovation; taxes and changes to alcohol regulation or marketing restrictions; political and commercial risks in international markets; distributor or route-to-market changes; and litigation, counterfeiting, contamination, or product recalls. The company hedged approximately 48% of FY2013 transactional foreign-currency exposure for major currencies; it estimated that a 10% stronger dollar would reduce FY2013 operating income by about $35 million after hedging.
The company reported no material accrued loss contingencies and no legal proceedings in Item 3. Management and the independent auditor concluded that internal control over financial reporting was effective as of April 30, 2012. As a subsequent event, the board authorized a proposed 3-for-2 stock split, subject to shareholder approval of an increase in authorized shares.
Important facts for investors to verify
- Whether FY2013 underlying growth and the $3.60–$4.00 diluted EPS outlook were achieved, including the realized currency impact and effectiveness of planned price increases.
- Whether Jack Daniel’s growth continued and Southern Comfort’s planned turnaround improved sales and depletions.
- How much reported earnings were affected by the Hopland divestiture comparison, trade inventory movements, currency, and rising input costs.
- Whether planned capital spending translated into adequate production capacity and operating cash flow, and how debt maturities were funded.
- How pension assumptions, funding needs, and the $281 million combined benefit-plan deficit evolved.
- Whether the proposed stock split received shareholder approval and was completed.