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Brown-Forman Reports Strong First Half Results And Raises Full Year Outlook

1 Percentage growth rates are compared to prior year periods, unless otherwise noted 2 Underlying change represents the percentage increase or decrease in reported financial results in accordance with generally accepted accounting principles (GAAP) in the United States, adjusted for certain items. A reconciliation from reported to underlying net sales, gross profit, advertising expense, SG&A, and operating income (non-GAAP measures) increases or decreases for the three-month and six-month periods ended October 31, 2012, and the reasons why management believes these adjustments to be useful to the reader, are included in Schedule A and the note to this press release. 3 Net sales references are on a constant currency basis, unless otherwise noted. Constant currency represents reported net sales with the cost/benefit of currency movements removed. Management uses the measure to understand the growth of the business on a constant dollar basis, as fluctuations in exchange rates can distort the underlying growth of the business both positively and negatively.

Important Information on Forward-Looking Statements:

This report contains statements, estimates, and projections that are "forward-looking statements" as defined under U.S. federal securities laws. Words such as “aim,” “anticipate,” “aspire,” “believe,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “plan,” “potential,” “project,” “pursue,” “see,” “will,” “will continue,” and similar words identify forward-looking statements, which speak only as of the date we make them. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risks, uncertainties and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. These risks and other factors include, but are not limited to:
  • declining or depressed global or regional economic conditions, particularly in the Euro zone; political, financial, or credit or capital market instability; supplier, customer or consumer credit or other financial problems; bank failures or governmental debt defaults
  • failure to develop or implement effective business, portfolio and brand strategies, including the increased U.S. penetration and international expansion of Jack Daniel’s Tennessee Honey, innovation, marketing and promotional activity, and route-to-consumer
  • unfavorable trade or consumer reaction to our new products, product line extensions, price changes, marketing, or changes in formulation, flavor or packaging
  • inventory fluctuations in our products by distributors, wholesalers, or retailers
  • competitors’ consolidation or other competitive activities such as pricing actions (including price reductions, promotions, discounting, couponing or free goods), marketing, category expansion, product introductions, entry or expansion in our geographic markets
  • declines in consumer confidence or spending, whether related to the economy (such as austerity measures, tax increases, high fuel costs, or higher unemployment), wars, natural or other disasters, weather, pandemics, security concerns, terrorist attacks or other factors
  • changes in tax rates (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, capital gains) or in related reserves, changes in tax rules (e.g., LIFO, foreign income deferral, U.S. manufacturing and other deductions) or accounting standards, and the unpredictability and suddenness with which they can occur
  • governmental or other restrictions on our ability to produce, import, sell, price, or market our products, including advertising and promotion in either traditional or new media; regulatory compliance costs
  • business disruption, decline or costs related to organizational changes, reductions in workforce or other cost-cutting measures
  • lower returns or discount rates related to pension assets, interest rate fluctuations, inflation or deflation
  • fluctuations in the U.S. dollar against foreign currencies, especially the euro, British pound, Australian dollar, Polish zloty or Mexican peso
  • changes in consumer behavior or preferences and our ability to anticipate and respond to them, including societal attitudes or cultural trends that result in reduced consumption of our products; reduction of bar, restaurant, hotel or other on-premise business or travel
  • consumer shifts away from brown spirits, premium-priced spirits, or spirits products generally; shifts to discount store purchases or other price-sensitive consumer behavior
  • distribution and other route-to-consumer decisions or changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in implementation-related or higher fixed costs
  • effects of acquisitions, dispositions, joint ventures, business partnerships or investments, or their termination, including acquisition, integration or termination costs, disruption or other difficulties, or impairment in the recorded value of assets (e.g. receivables, inventory, fixed assets, goodwill, trademarks and other intangibles)
  • lower profits, due to factors such as fewer or less profitable used barrel sales, lower production volumes, decreased demand or inability to meet consumer demand for products we sell, sales mix shift toward lower priced or lower margin SKUs, or cost increases in energy or raw materials, such as grain, agave, wood, glass, plastic, or closures
  • natural disasters, climate change, agricultural uncertainties, environmental or other catastrophes, or other factors that affect the availability, price, or quality of agave, grain, glass, energy, closures, plastic, water, or wood, or that cause supply chain disruption or disruption at our production facilities or aging warehouses
  • negative publicity related to our company, brands, marketing, personnel, operations, business performance or prospects
  • product counterfeiting, tampering, contamination, or recalls and resulting negative effects on our sales, brand equity, or corporate reputation
  • significant costs or other adverse developments stemming from class action, intellectual property, governmental, or other major litigation; or governmental investigations of beverage alcohol industry business, trade, or marketing practices by us, our importers, distributors, or retailers

For further information regarding these risks, please refer to the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our annual report on Form 10-K and quarterly reports on Form 10-Q filed with the SEC.
 

Brown-Forman CorporationUnaudited Consolidated Statements of OperationsFor the Three Months Ended October 31, 2011 and 2012(Dollars in millions, except per share amounts)
 
 
   

2011
   

2012
   

Change
 
Net sales $ 1,013.7 $ 1,013.8 0 %
Excise taxes 232.6 237.1 2 %
Cost of sales   279.2     252.2   (10 %)
Gross profit 501.9 524.5 4 %
Advertising expenses 106.7 106.6 0 %
Selling, general, and administrative expenses 146.8 159.1 8 %
Amortization expense 1.3 --
Other expense (income), net   0.8     (3.5 )
Operating income 246.3 262.3 7 %
Interest expense, net   7.1     4.8  
Income before income taxes 239.2 257.5 8 %
Income taxes   81.6     84.5  
Net income $ 157.6   $ 173.0   10 %
 
Earnings per share:
Basic $ 0.73 $ 0.81 11 %
Diluted $ 0.73 $ 0.80 11 %
 
Gross margin 49.5 % 51.7 %
Operating margin 24.3 % 25.9 %
 
Effective tax rate 34.1 % 32.8 %
 
Cash dividends paid per common share $ 0.213 $ 0.233
 

Shares (in thousands) used in the calculation of earnings per share
Basic 214,813 213,276
Diluted 216,276 214,891
 

Note:  All previously reported share and per share amounts have been restated to reflect the 3-for-2 stock split effected in August 2012.
 
 

Brown-Forman CorporationUnaudited Consolidated Statements of OperationsFor the Six Months Ended October 31, 2011 and 2012(Dollars in millions, except per share amounts)
 
 
   

2011
   

2012
   

Change
 
Net sales $ 1,854.0 $ 1,891.9 2 %
Excise taxes 435.1 449.4 3 %
Cost of sales   496.7     453.9   (9 %)
Gross profit 922.2 988.6 7 %
Advertising expenses 197.5 198.7 1 %
Selling, general, and administrative expenses 285.9 307.6 8 %
Amortization expense 2.5 --
Other expense (income), net   4.1     (1.7 )
Operating income 432.2 484.0 12 %
Interest expense, net   14.2     9.4  
Income before income taxes 418.0 474.6 14 %
Income taxes   142.4     154.1  
Net income $ 275.6   $ 320.5   16 %
 
Earnings per share:
Basic $ 1.28 $ 1.50 18 %
Diluted $ 1.27 $ 1.49 18 %
 
Gross margin 49.7 % 52.3 %
Operating margin 23.3 % 25.6 %
 
Effective tax rate 34.1 % 32.5 %
 
Cash dividends paid per common share $ 0.427 $ 0.467
 

Shares (in thousands) used in the calculation of earnings per share
Basic 215,868 213,220
Diluted 217,379 214,843
 

Note: All previously reported share and per share amounts have been restated to reflect the 3-for-2 stock split effected in August 2012.
 
 

Brown-Forman CorporationUnaudited Condensed Consolidated Balance Sheets (Dollars in millions)
 
 
    April 30,     October 31,

2012

2012
Assets:
Cash and cash equivalents $ 338.3 $ 368.5
Accounts receivable, net 475.3 681.5
Inventories 712.1 797.5
Other current assets   223.6   207.5
Total current assets 1,749.3 2,055.0
 
Property, plant, and equipment, net 398.7 415.9
Goodwill 617.2 615.8
Other intangible assets 668.3 667.6
Other assets   43.9   49.6
Total assets $ 3,477.4 $ 3,803.9
 
Liabilities:
Accounts payable and accrued expenses $ 385.7 $ 480.7
Other current liabilities   17.7   25.2
Total current liabilities 403.4 505.9
 
Long-term debt 502.8 501.4
Deferred income taxes 157.9 185.2
Accrued postretirement benefits 278.1 243.1
Other liabilities   65.8   63.5
Total liabilities 1,408.0 1,499.1
 
Stockholders’ equity   2,069.4   2,304.8
 
Total liabilities and stockholders’ equity $ 3,477.4 $ 3,803.9
 
 

Brown-Forman CorporationUnaudited Condensed Consolidated Statements of Cash FlowsFor the Six Months Ended October 31, 2011 and 2012(Dollars in millions)
 
 
   

2011
   

2012
 
Cash provided by operating activities $ 155.5 $ 164.7
 
Cash flows from investing activities:
Additions to property, plant, and equipment (18.8 ) (38.7 )
Acquisitions of brand names and trademarks (7.2 ) --
Other   (0.7 )   (0.3 )
Cash used for investing activities (26.7 ) (39.0 )
 
Cash flows from financing activities:
Net issuance of debt 1.1 2.4
Acquisition of treasury stock (216.1 ) --
Dividends paid (92.4 ) (99.5 )
Other   2.8     2.5  
Cash used for financing activities (304.6 ) (94.6 )
 

Effect of exchange rate changes on cash and cash equivalents
  (11.2 )   (0.9 )
 
Net (decrease) increase in cash and cash equivalents (187.0 ) 30.2
 
Cash and cash equivalents, beginning of period   567.1     338.3  
 
Cash and cash equivalents, end of period $ 380.1   $ 368.5  
 
 

Schedule A
  Brown-Forman Corporation
Supplemental Information (Unaudited)
           
 
Three Months Ended Six Months Ended Fiscal Year Ended
Oct 31, 2012

Oct 31, 2012
April 30, 2012
 
 
 
Reported change in net sales 0 % 2 % 6 %
Impact of Hopland-based wine business sale 3 % 4 % 2 %
Estimated net change in distributor inventories 2 % (1 %) 1 %
Impact of foreign currencies 1 % 3 % -
 
Underlying change in net sales 6 % 8 % 9 %
 
 
Reported change in gross profit 4 % 7 % 4 %
Estimated net change in distributor inventories 3 % (1 %) -
Impact of Hopland-based wine business sale 1 % 1 % 3 %
Impact of foreign currencies - 3 % 1 %
 
Underlying change in gross profit 8 % 10 % 8 %
 
Reported change in advertising 0 % 1 % 8 %
Impact of Hopland-based wine business sale 2 % 2 % 1 %
Impact of foreign currencies 2 % 3 % -
 
Underlying change in advertising 4 % 6 % 9 %
 
Reported change in SG&A 8 % 8 % 6 %
Impact of foreign currencies 1 % 2 % 1 %
Dispute settlement - - (1 %)
 
Underlying change in SG&A 9 % 10 % 6 %
 
Reported change in operating income 7 % 12 % (8 %)
Estimated net change in distributor inventories 6 % (2 %) 3 %
Impact of Hopland-based wine business sale 1 % 1 % 12 %
Impact of foreign currencies (5 %) 1 % 1 %
Dispute settlement - - 1 %
 
Underlying change in operating income 9 % 12 % 9 %
 

Notes:

Foreign currencies – Refers to net gains and losses incurred by the company relating to sales and purchases in currencies other than the U.S. Dollar. Brown-Forman uses the measure to understand the growth of the business on a constant dollar basis as fluctuations in exchange rates can distort the underlying growth of the business (both positively and negatively). To neutralize the effect of foreign exchange fluctuations, the company has translated current year results at prior year rates. While Brown-Forman recognizes that foreign exchange volatility is a reality for a global company, it routinely reviews its performance on a constant dollar basis. The company believes this allows management and investors to understand Brown-Forman’s growth trends.

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