A first half Underlying EPS Growth a Strong 9%
Brown-Forman Corporation (NYSE:BFB) (NYSE:BFA) reported earnings per share for its second quarter ended October 31, 2006 of $1.00, up 10% from the same prior year period.(1) The higher earnings reflect volume and profit growth for the Jack Daniel’s family of brands and gross profit gains for Southern Comfort, Finlandia and most of the company’s other super-premium developing brands, including Sonoma-Cutrer, Tuaca, and Woodford Reserve.
(1) All financial and statistical information relates to continuing operations of the company’s business unless otherwise stated. Earnings per share refers to diluted earnings per share.
Second quarter earnings benefited from a net $0.08 per share gain related to the sale of an Italian winery completed in conjunction with the company’s ongoing efforts to reduce wine costs and improve the performance of Bolla Italian wines. Excluding this net gain and adjusting comparisons for a $0.04 per share reduction in tax expense in the prior-year period, earnings per share grew 7%. (The reduction in tax expense in the prior-year period was related to the utilization of a portion of the capital loss from the sale of Lenox, which offset the capital gain associated with the early termination of the company’s Glenmorangie distribution rights reported in last year’s first quarter).
Revenues grew 10% and gross profit increased 8% in the quarter. Comparisons to the prior year were, as in the previous quarter, affected by distribution changes in Germany and Australia. The company is now responsible for the collection and remittance of excise taxes in these markets. The net effect of these changes reduces the company’s reported gross margin. The gross margin on a stripped net sales basis (gross profit as a percentage of net sales excluding excise tax) was 65.3%, up from 64.9% in the prior-year period. Management believes excluding excise tax from the gross margin calculation provides a more meaningful comparison due to the changes in distribution that have occurred in these two markets.
Advertising expenses increased $5 million, or 6% in the quarter as a result of additional investments behind the company’s premium global brands. SG&A expenses increased approximately $14 million, or 12%. Approximately $6 million of this growth over the prior-year period was related to the previously mentioned changes in the company’s distribution arrangements in Australia and Germany.
Operating income increased $22 million in the quarter, up 14% over the same prior year period, due in part to the previously mentioned net gain on the sale of the company’s Italian winery, and gross profit gains, which more than offset increases in both SG&A and brand investments.
Jack Daniel’s global depletions(2) grew at a mid-single digit rate in the quarter, with U.S. and international volumes both increasing in the mid-single digits. Solid volume gains in Australia, France, Italy, and Japan offset softness in the quarter for the brand in the UK, Germany, and Spain. Global volumes for Southern Comfort grew at a mid-single digit rate in the quarter, led by continued growth in the U.S. Finlandia volumes grew at a double-digit rate, fueled by continued strong growth in Poland.
(2) Depletions are shipments from wholesale distributors to retail customers, and are commonly regarded in the industry as an approximate measure of consumer demand.
For the first six months of the fiscal year, earnings per share were $1.76, up 9% from the $1.62 earned in the same period last year. Year-to-date results benefited from solid growth for Jack Daniel’s, Southern Comfort, and improved volume and profits from the Jack Daniel’s & Cola ready-to-drink product that is sold primarily in Australia. Underlying earnings per share also increased 9% adjusting comparisons for:
* profits associated with the early termination of Glenmorangie marketing and distribution rights recorded last year of approximately $0.11 per share;
* profits recorded this year from the sale of an Italian winery of approximately $0.08 per share;
* a $0.06 per share benefit of favorable foreign currency fluctuations, and;
* the impact of changes in global distributor inventories (which negatively affected comparisons by $0.02 per share).
Full-Year Outlook
The company is narrowing the range of its full-year earnings outlook to $3.14 to $3.30 per share, representing forecasted growth of 8% to 14% over adjusted prior-year earnings of $2.90 per share. This outlook includes the current quarter’s $0.08 per share gain from the sale of the company’s Italian winery and additional benefits from foreign exchange. It also includes expected further reductions in global distributor inventory levels and an expected higher tax rate in the second half of the fiscal year versus the prior-year second half.
This outlook excludes the impact of the company’s pending acquisition of Casa Herradura, which was announced on August 28, 2006. As previously communicated, the company projects the acquisition will be dilutive to earnings through fiscal 2009. In fiscal 2007 the company estimates the transaction will dilute earnings in the range of $0.08 to $0.12 per share.
Brown-Forman Corporation is a diversified producer and marketer of fine quality consumer products, including Jack Daniel’s, Southern Comfort, Finlandia Vodka, Canadian Mist, Fetzer and Bolla Wines, Korbel California Champagnes, and Hartmann Luggage.
Brown-Forman Corporation
Consolidated Statements of Income
(Dollars in millions, except per share amounts)
Three Months Ended
October 31,
2005 2006 Change
--------- -------- ------
Continuing Operations
Net sales $ 665.8 $ 735.3 10%
Gross profit 357.4 385.4 8%
Advertising expenses 87.4 92.7 6%
Selling, general, and administrative
expenses 110.2 123.8 12%
Other expense (income), net (0.4) (13.2)
Operating income 160.2 182.1 14%
Interest expense, net 1.3 1.9
Income before income taxes 158.9 180.2 13%
Income taxes 47.1 55.9
Net income 111.8 124.3 11%
Earnings per share:
Basic 0.92 1.01 10%
Diluted 0.91 1.00 10%
Discontinued Operations
Net loss $ (3.0) $ (0.5)
Loss per share:
Basic (0.03) --
Diluted (0.03) --
Total Company
Net income $ 108.8 $ 123.8 14%
Earnings per share:
Basic 0.89 1.01 13%
Diluted 0.88 1.00 13%
Brown-Forman Corporation
Consolidated Statements of Income
(Dollars in millions, except per share amounts)
Six Months Ended
October 31,
2005 2006 Change
--------- --------- ------
Continuing Operations
Net sales $1,213.2 $1,375.0 13%
Gross profit 660.4 736.7 12%
Advertising expenses 159.7 174.0 9%
Selling, general, and administrative
expenses 220.5 254.7 16%
Other expense (income), net (14.2) (15.3)
Operating income 294.4 323.3 10%
Interest expense, net 4.0 3.1
Income before income taxes 290.4 320.2 10%
Income taxes 91.1 102.0
Net income 199.3 218.2 9%
Earnings per share:
Basic 1.64 1.78 9%
Diluted 1.62 1.76 9%
Discontinued Operations
Net loss $ (77.7) $ (0.6)
Loss per share:
Basic (0.64) (0.01)
Diluted (0.63) (0.01)
Total Company
Net income $ 121.6 $ 217.6 79%
Earnings per share:
Basic 1.00 1.77 78%
Diluted 0.99 1.75 78%
Brown-Forman Corporation
Condensed Consolidated Balance Sheets
(Dollars in millions)
April 30, October 31,
2006 2006
--------- -----------
Assets:
Cash and cash equivalents $ 474.8 $ 222.6
Short-term investments 159.9 190.2
Accounts receivable, net 328.4 441.7
Inventories 523.0 593.7
Other current assets 124.0 107.8
--------- -----------
Total current assets 1,610.1 1,556.0
Property, plant, and equipment, net 428.5 427.5
Trademarks and brand names 324.9 442.1
Goodwill 195.4 324.3
Prepaid pension cost 146.1 140.1
Other assets 23.2 35.2
--------- -----------
Total assets $2,728.2 $ 2,925.2
========= ===========
Liabilities:
Accounts payable and accrued expenses $ 292.9 $ 341.9
Accrued income taxes 48.3 48.5
Short-term borrowings 225.0 197.2
Other current liabilities 2.9 2.7
--------- -----------
Total current liabilities 569.1 590.3
Long-term debt 351.6 353.7
Deferred income taxes 132.8 131.3
Accrued postretirement benefits 77.9 81.0
Other liabilities 33.7 19.3
--------- -----------
Total liabilities 1,165.1 1,175.6
Stockholders' equity 1,563.1 1,749.6
--------- -----------
Total liabilities and stockholders' equity $2,728.2 $ 2,925.2
========= ===========
Brown-Forman Corporation
Condensed Consolidated Statements of Cash Flows
(including cash flows from discontinued operations)
(Dollars in millions)
Six Months Ended
October 31,
2005 2006
------- --------
Cash flows from operating activities:
Continuing operations $ 84.0 $ 105.2
Discontinued operations (18.1) 1.6
------- --------
Cash provided by operating activities 65.9 106.8
Cash flows from investing activities:
Acquisition of business -- (250.6)
Short-term investments -- (30.3)
Proceeds from sale of discontinued operations 196.5 --
Additions to property, plant, and equipment (21.0) (21.2)
Other (2.1) 11.3
------- --------
Cash provided by (used for) investing
activities 173.4 (290.8)
Cash flows from financing activities:
Net debt repayments (30.0) (30.2)
Dividends paid (59.8) (68.8)
Other 7.5 30.3
------- --------
Cash used for financing activities (82.3) (68.7)
Effect of exchange rate changes on cash and cash
equivalents -- 0.5
------- --------
Net increase (decrease) in cash and cash equivalents 157.0 (252.2)
Cash and cash equivalents, beginning of period 294.9 474.8
------- --------
Cash and cash equivalents, end of period $451.9 $ 222.6
======= ========
Brown-Forman Corporation
Continuing Operations Only
Supplemental Information
(Dollars in millions, except per share amounts)
Three Months Ended
October 31,
2005 2006
--------- ---------
Depreciation and amortization $ 10.9 $ 10.5
Excise taxes $ 115.4 $ 145.0
Effective tax rate 29.7% 31.0%
Cash dividends paid per common share $ 0.245 $ 0.280
Shares (in thousands) used in the calculation of
earnings per share
Basic 122,016 122,873
Diluted 123,242 124,291
Six Months Ended
October 31,
2005 2006
--------- ---------
Depreciation and amortization $ 21.7 $ 20.7
Excise taxes $ 213.0 $ 273.4
Effective tax rate 31.4% 31.9%
Cash dividends paid per common share $ 0.490 $ 0.560
Shares (in thousands) used in the calculation of
earnings per share
Basic 121,978 122,742
Diluted 123,199 124,178
These figures have been prepared in accordance with the company's
customary accounting practices.
SOURCE: Brown-Forman Corporation
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