Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Second quarter and six months ended October 31, 2011 (fiscal 2012), compared with the corresponding fiscal 2011 periods. Amounts are in U.S. dollars; financial statement figures are in millions except per-share data.
Financial performance
| Metric | Three months ended Oct. 31 | Six months ended Oct. 31 |
|---|---|---|
| Net sales | $1,013.7; +12% | $1,854.0; +12% |
| Gross profit | $501.9; +9% | $922.2; +10% |
| Gross margin | 49.5%, down from 50.7% | 49.7%, down from 50.7% |
| Operating income | $246.3; +5% | $432.2; +6% |
| Operating margin | 24.3%, down from 25.9% | 23.3%, down from 24.7% |
| Net income | $157.6; +2% | $275.6; +4% |
| Diluted EPS | $1.09; +4% | $1.90; +5% |
| Effective tax rate | 34.1%, versus 32.7% | 34.1%, versus 32.9% |
For the quarter, reported sales growth included 10% underlying growth, an estimated 3% contribution from trade inventory changes, and a 1% drag from the sale of the Hopland wine business. For the half year, reported growth reflected 9% underlying growth, 3% favorable foreign exchange, 1% from trade inventory changes, and a 1% drag from the divestiture. Management said higher trade inventories reflected factors including advance buying ahead of price increases, promotion timing, and product-innovation pipeline fill.
Jack Daniel’s brands were the main growth driver, including Tennessee Honey and international expansion of other expressions. Finlandia, el Jimador, Herradura, New Mix, and Woodford Reserve also contributed in reported periods; Southern Comfort and Canadian Mist declined. Management attributed lower margins chiefly to higher input and fuel costs and the lower-margin divested wine business. Quarter operating income was also reduced by approximately $14 million from foreign exchange.
Cash flow, balance sheet, and capital allocation
- Operating cash flow: $155.5 for the six months, versus $177.8 a year earlier; management cited a larger seasonal working-capital increase, partly offset by higher earnings.
- Investing cash flow: $26.7 used, including $18.8 of property and equipment additions and $7.2 to acquire Maximus Vodka brand rights.
- Financing cash flow: $304.6 used, including $216.1 for treasury-share purchases and $92.4 of dividends. Cash declined $187.0 to $380.1.
- Liquidity: Current assets were $1,945.6 and current liabilities $752.7 at October 31. Cash was $380.1; $143.6 was held by foreign subsidiaries and expected to remain reinvested abroad.
- Debt: Short-term borrowings were $2.5, current long-term debt $253.5, and long-term debt $504.2. The filing reports an $800 million, five-year credit agreement entered into in November, replacing a facility due to expire in April 2012. It was unused; the stated minimum EBITDA-to-interest covenant is 3:1, and the company reported a 30:1 ratio at October 31.
- Shareholder returns: The company repurchased about $234 million of shares under a $250 million authorization through November 30. In November, the board approved a quarterly dividend of $0.35 per share, a 9.4% increase.
Outlook, risks, and notable items
- Fiscal 2012 diluted EPS outlook was adjusted to $3.45–$3.70. Management expected underlying first-half performance to continue, while warning that a stronger U.S. dollar and global macroeconomic uncertainty, particularly in the eurozone, could weigh on reported results.
- Management expected cost-of-sales increases to continue at about the first-half rate for the balance of the year. Advertising spending was expected to continue growing, but at a more moderate rate. The Fetzer transition-services cost trend was expected to end when the agreement expired on December 31, 2011.
- Management said it would evaluate potential price increases over the following six to 12 months, partly to offset cost increases.
- Key stated risks include economic and credit-market weakness, changing consumer demand and competitive activity, regulation and taxes, currency and commodity volatility, supply disruptions, and litigation. The company reported no material accrued loss contingencies and did not expect contingencies to materially harm financial position, results, or liquidity.
- The six-month effective tax rate reflected discrete tax items and interest on tax contingencies; management expected a 32.9% full-year rate on ordinary income. A $9.9 million net decrease in gross unrecognized tax benefits was considered reasonably possible over the next 12 months.
- Foreign currency, commodity, and interest-rate derivatives were used for risk management, not trading. The company expected to reclassify $7.2 million of deferred net hedge losses to earnings within 12 months, with the amount dependent on exchange rates.
Important facts for investors to verify
- Whether reported sales growth is sustained by consumer demand: reported results included estimated trade-inventory increases, and Finlandia shipments were noted as outpacing depletions.
- How currency effects, input-cost inflation, and the divested wine business affect future margins and the $3.45–$3.70 EPS outlook.
- The statements of operations report six-month excise taxes of $435.1 million, while the MD&A comparison table reports $438.1 million for fiscal 2012; verify the correct figure.
- Execution and funding implications of the share-repurchase and dividend program, and availability of the new credit facility under stressed market conditions.
- Tax audit outcomes, derivative exposures, and the impact of foreign-held cash if repatriation becomes necessary.