Brown-Forman Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended April 30, 2013. The filing also reports fiscal Q4 results; the metadata’s “2012 Q4” label does not match the fiscal year covered by this annual report. Financial figures are in U.S. dollars unless noted.
Business context
Brown-Forman manufactures, markets, and sells spirits and other beverage alcohol products in more than 150 countries. Jack Daniel’s is its largest and most important brand. Fiscal 2013 sales were 41% United States, 30% Europe, 14% Australia, and 15% other markets. The Brown family controls a majority of voting stock.
Financial performance
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $3.784 billion | $3.614 billion | +5%; +8% underlying |
| Gross profit / margin | $1.955 billion / 51.7% | $1.795 billion / 49.7% | Profit +9% |
| Operating income / margin | $898 million / 23.7% | $788 million / 21.8% | +14%; +13% underlying |
| Net income | $591 million | $513 million | +15% |
| Diluted EPS | $2.75 | $2.37 | +16% |
| Cash from operations | $537 million | $516 million | +$21 million |
| Capital expenditures | $95 million | $58 million | +$37 million |
Underlying measures are non-GAAP and exclude specified effects, including currency and, where applicable, trade inventory changes and the prior-year Hopland wine business. Gross-margin improvement reflected higher pricing and favorable mix, as well as the absence of the lower-margin Hopland business. The effective tax rate fell to 31.7% from 32.5%; net interest expense rose, including a $9 million charge for early redemption of notes.
Fiscal Q4: Net sales were $866 million versus $801 million; gross profit was $460 million versus $422 million; net income was $113 million versus $105 million; diluted EPS was $0.52 versus $0.49.
Cash, debt, and liquidity
- Cash and cash equivalents were $204 million at April 30, 2013, down from $338 million a year earlier. Working-capital investment included inventory growth of $105 million.
- Total debt was approximately $1.002 billion, up from $510 million. The company issued $750 million of notes in December 2012—$250 million each due 2018, 2023, and 2043—and redeemed $250 million of 5% notes due 2014.
- Debt proceeds partly funded a $4.00-per-share special dividend. Total dividends paid were $1.063 billion in FY2013, including the special dividend; the annual declared amount was $4.98 per share.
- The $800 million revolving credit facility runs to November 2017, with no borrowings outstanding under it at year-end. The company reported a 26:1 EBITDA-to-interest ratio against a 3:1 minimum covenant.
- Management said operating cash flow and available financing were adequate for foreseeable needs. FY2014 capital spending was projected at $140–$160 million.
Changes, outlook, and notable items
- Underlying sales growth of 8% was driven by 5% volume growth and 3% net price/mix. Reported growth was reduced by foreign exchange and the absence of Hopland wine sales.
- Jack Daniel’s family volume grew 6%; Jack Daniel’s Tennessee Whiskey volume rose 3%, while Southern Comfort family volume fell 5% and Canadian Mist fell 3%. Woodford Reserve volume increased 26%.
- Management forecast FY2014 reported and underlying net sales growth in the high single digits, underlying operating-income growth of 9%–11%, and diluted EPS of $2.80–$3.00 versus FY2013’s $2.75. The outlook included an estimated $0.08-per-share adverse impact from the France distribution transition and foreign exchange.
- The company planned to launch its own France distribution operation in January 2014; startup costs were expected. It also planned low-single-digit price increases in many markets.
- Management identified foreign exchange, consumer preferences and pricing reactions, regulation and alcohol taxation, competition, dependence on Jack Daniel’s, raw-material availability and costs, supply disruptions, and distributor changes as key risks.
- No legal proceedings or material accrued loss contingencies were reported. Chambord’s estimated fair value exceeded its $116 million book value by about $10 million; a 50-basis-point increase in cost of capital would reduce estimated fair value by $13 million and could trigger a noncash impairment.
Key facts for investors to verify
- Reconcile reported results with the company’s non-GAAP underlying growth measures, including the effects of foreign exchange, trade inventories, and the Hopland divestiture.
- Assess whether FY2014 sales, operating-income, and EPS guidance was achieved, particularly after France distribution startup costs and currency impacts.
- Monitor leverage and debt-service capacity following the special dividend-funded debt issuance, as well as the company’s capital spending and dividend policy.
- Track Jack Daniel’s growth and pricing response, plus continued performance of Southern Comfort and other brands.
- Review the assumptions supporting the Chambord valuation and pension obligations; the filing reports $284 million of unfunded pension and other postretirement obligations.