Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended July 31, 2011, compared with the three months ended July 31, 2010. Amounts are in U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $840.3 million | $744.9 million | +13% |
| Gross profit | $420.3 million | $378.8 million | +11% |
| Operating income | $185.9 million | $172.7 million | +8% |
| Net income | $118.1 million | $111.4 million | +6% |
| Diluted EPS | $0.81 | $0.76 | +7% |
| Gross margin | 50.0% | 50.9% | Down 0.9 percentage points |
| Operating margin | 22.1% | 23.2% | Down 1.1 percentage points |
| Effective tax rate | 34.0% | 33.1% | Up 0.9 percentage points |
Net sales growth included 7% underlying growth and a 7% foreign-exchange benefit, partly offset by a 1% reduction associated with the sale of the Hopland wine business. Management attributed underlying growth chiefly to the Jack Daniel’s family, including Tennessee Honey, and higher global demand for Jack Daniel’s Tennessee Whiskey. Portfolio and geographic performance was mixed.
Cost of sales rose 14%, reflecting higher sales, input costs (including corn and glass), and fuel expense. Advertising expense increased 19% (12% excluding foreign exchange), while SG&A rose 5%. Higher costs and the divested wine business contributed to lower margins despite sales and operating-income growth. Lower share count also supported EPS growth.
Cash flow, balance sheet, and capital allocation
- Operating cash flow was $64.0 million, down from $96.6 million, primarily due to a larger seasonal working-capital increase. Investing activities used $13.7 million, including $7.0 million for Maximus Vodka trademarks; financing activities used $61.1 million.
- Cash and cash equivalents were $552.5 million at July 31, 2011, down $14.6 million during the quarter. Current assets were $2,011.6 million and current liabilities $766.9 million.
- Debt comprised $254.4 million current long-term debt, $505.1 million long-term debt, and $1.9 million short-term borrowings. Cash exceeded these reported borrowings by approximately $208.9 million.
- The $800 million bank credit facility was unused and expires April 30, 2012. The company reported a 31-to-1 EBITDA-to-interest ratio against a minimum 3-to-1 covenant.
- Cash dividends paid were $46.4 million. A quarterly dividend of $0.32 per share was declared, payable October 3, 2011. Under a $250 million repurchase authorization, approximately $33.3 million had been repurchased as of July 31.
- Of cash on hand, $250.5 million was held by foreign subsidiaries and expected to remain invested outside the United States; repatriation would entail U.S. taxes.
Outlook, risks, and other notable items
- Fiscal 2012 EPS guidance remained $3.45–$3.85; management continued to expect mid-to-high-single-digit underlying operating-income growth. Management cautioned that quarterly results do not necessarily indicate full-year performance.
- Management cited macroeconomic and consumer-spending uncertainty, weak performance in some brands (including Southern Comfort in the U.S.), the execution and reception of innovations, and distributor and retailer inventory changes as outlook uncertainties.
- Jack Daniel’s growth included higher trade and retail inventory ahead of promotions and price increases. Management separately estimated that trade-inventory changes added 1% to reported gross-profit growth and 3% to operating-income growth.
- The April 2011 sale of the Hopland-based wine business reduced the year-over-year comparison. The company acquired the Maximus Vodka brand name for $7.0 million in June 2011.
- Key disclosed risks include foreign-exchange, commodity and interest-rate movements; competition and changes in consumer preferences; regulation and taxation; input availability and costs; and litigation. The company used derivatives for exposure management, not trading. It expected $12.8 million of deferred hedge losses to be reclassified to earnings over the next 12 months, with an offset from the related exposures.
- The company said it had no material accrued loss contingencies and did not expect a material change in gross unrecognized tax benefits over the next 12 months. U.S. federal tax audits for fiscal 2008–2010 had commenced.
Important facts for investors to verify
- Whether reported sales and profit growth persists after separating foreign-exchange effects, trade-inventory movements, and the Hopland divestiture.
- Whether higher input costs and brand investment continue to pressure gross and operating margins.
- Whether Jack Daniel’s growth is sustained by consumer demand rather than inventory build, and whether weaker brands recover.
- Whether working-capital needs, foreign-held cash, and refinancing of the credit facility affect liquidity or capital returns.
- How tax audits, derivative exposures, and litigation develop; the filing does not provide a clear quantified estimate of potential tax-audit or litigation outcomes.