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BEAM > SEC Filings for BEAM > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for BEAM INC


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following information should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management's expectations. Please see "Forward-Looking Statements."

We use the terms "Beam," "the Company," "we," "us," and "our" to refer to Beam Inc. and its consolidated subsidiaries.

We are a leading premium spirits company that makes and sells branded distilled spirits products in major markets worldwide. Our principal products include bourbon whiskey, Scotch whisky, Canadian whisky, vodka, tequila, cognac, rum, cordials, and ready-to-drink pre-mixed cocktails. Our diverse portfolio includes several of the world's top premium spirits brands. As further described in the unaudited condensed consolidated financial statements included in this Form 10-Q, discontinued operations includes the former Fortune Brands Golf and Home & Security segments, both of which were disposed of in 2011. The sale of the Golf business and the tax-free spin-off of the Home & Security business (the "Spin-Off") are together referred to in this Form 10-Q as the "Separation Transactions."

Our portfolio consists of brands we identify as Power Brands, Rising Stars, Local Jewels and Value Creators. The Power Brands are our core brand equities, with global reach in premium categories and large annual sales volume. Rising Stars are smaller premium brands in priority markets that we believe have excellent growth profiles that receive substantial brand investment to drive expansion. Brands identified as Local Jewels act as Power Brands in local markets. Value Creators include a variety of brands competing across multiple categories. Our Power Brands and Rising Stars, which are the focus of our brand investment, are listed below.

      Power Brands:     Jim Beam Bourbon, Maker's Mark Bourbon, Sauza Tequila,
                        Courvoisier Cognac, Canadian Club Whisky, Teacher's Scotch, and
                        Pinnacle Vodka

      Rising Stars:     Laphroaig Scotch, Knob Creek Bourbon, Basil Hayden's Bourbon,
                        Kilbeggan Irish Whiskey, Cruzan Rum, Hornitos Tequila, EFFEN
                        Vodka, Pucker Vodka, Skinnygirl Cocktails, and Sourz Liqueurs

EXECUTIVE SUMMARY

Operational and Financial Highlights for the Third Quarter of 2012

Operational and financial highlights for the third quarter of 2012 include the following:

Our diluted earnings per share from continuing operations were $0.57 in the third quarter of 2012 compared with a loss of $0.53 per share in the third quarter of 2011. The third quarter of 2012 benefitted from an 8% increase in net sales, the absence of a prior year loss on early extinguishment of debt and lower business separation, acquisition/integration and other special charges/gains, which had a significant, adverse impact on the 2011 quarter;

We increased advertising and marketing by 12% compared to the third quarter of 2011 and 10% compared to the second quarter of 2012 to build and enhance our Power Brands and Risings Stars; and

We opened our new Global Innovation Center and Jim Beam American Stillhouse visitors center in Kentucky.

Certain items had a significant impact on our financial results in the third quarters of 2012 and 2011. These include the impact of the Separation Transactions completed in 2011, changes in foreign currency exchange rates, acquisition related items, restructuring and other related charges and income tax related matters.

In the third quarter of 2012, our financial results included the following:

Restructuring charges of $1.0 million ($0.6 million, net of tax) and other costs of $1.6 million ($1.0 million, net of tax), which include acquisition/integration costs incurred in connection with the May 2012 acquisition of the Pinnacle assets and the January 2012 acquisition of Cooley's, primarily consisting of costs related to integrating the Pinnacle assets into our existing operational structure (e.g., accelerated depreciation, employee retention, information technology systems integration costs and other organizational streamlining expenses);

An income tax adjustment of $5.9 million ($0.04 per share) primarily related to our annual reconciliation of the 2011 income tax filing to the 2011 provision for income taxes; and

The net impact of foreign exchange hedge results and the impact of translating 2012 amounts at 2011 exchange rates, which was an unfavorable $16.9 million on net sales and a favorable $0.2 million on operating income.

In the third quarter of 2011, our financial results included the following:

Business separation costs of $69 million ($52 million, or $0.34 per share, net of tax) incurred in connection with the Separation Transactions completed in 2011, principally including severance and other employee related costs and financial, legal and other advisory fees related to the Separation Transactions;

Acquisition/integration-related costs of $25.0 million ($15.5 million, or $0.10 per share, net of tax) to accrue additional, estimated contingent consideration related to the Skinnygirl acquisition;


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Restructuring and other related charges of $9.7 million ($6.0 million, or $0.04 per share, net of tax) primarily related to a facility consolidation and other supply chain and distribution cost reduction initiatives in North America as well as other organizational streamlining initiatives;

Other income benefited from a nontaxable distribution from our Maxxium investment of $7.6 million ($0.05 per share) and nontaxable income tax indemnification payments of $26 million ($0.17 per share) related to foreign tax jurisdictions for periods prior to our acquisitions of the businesses;

Loss on early extinguishment of debt of $134.0 million ($86.4 million net of tax or $0.56 per share);

Corporate and other general and administrative overhead costs related to the former Fortune Brands, Inc. management structure of $20 million ($13 million, or $0.08 per share, net of tax); and

Income tax expense was impacted by the tax effects of the significant items described above and the impact of tax assessments associated with the resolution of routine foreign and U.S. income tax audit examinations, including an unfavorable $25.5 million related to Mexican tax audits.

Business Outlook

We believe that the long-term demographic trends are favorable for the continued profitable growth of western premium spirits globally. We believe that the continued management and investment focus on the best growth and return opportunities in our brand portfolio and geographic markets, including innovation, advertising and more effective routes to market, position us well for long-term growth. We project our global spirits market to grow value slightly above 3% during 2012, supported by growth in the U.S. and partially offset by uncertainty in certain international markets.

Please see "Forward-Looking Statements."

RESULTS OF OPERATIONS

The following discussion and analysis of our results from continuing operations for the three and nine month periods ended September 30, 2012 compared to the three and nine month periods ended September 30, 2011 addresses changes in net sales, operating expenses and income from continuing operations. Approximately 50 percent of our business is outside the U.S. As a result, changes in foreign exchange rates can have a significant impact on our reported results of operations when translated and presented in U.S. dollars.

Our discussion of results of operations includes the use of comparable net sales growth rates, a non-GAAP measure, in evaluating the Company's sales growth on a year-over-year basis exclusive of items that are not indicative of the underlying sales performance of our business. Comparable net sales growth rates are adjusted for the impact of foreign exchange, acquisitions/divestures and, for the nine month periods, the impact of transitioning to the new Australia manufacturing and distribution agreement. This measure should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and may also be inconsistent with similar measures presented by other companies.

Consolidated Results for the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Net sales

The following table presents a reconciliation of GAAP net sales growth to comparable net sales growth for the third quarter of 2012 as compared to the third quarter of 2011:

                                                   Consolidated
                                                 Net Sales Growth
              Net sales growth (GAAP)                            8 %
              Foreign exchange rates (a)                         3 %
              Acquisitions/divestitures (b)                     (7 )%

              Comparable net sales (Non-GAAP)                    4 %

(a) Impacts of translating current year sales at prior year exchange rates and hedging activity.

(b) Impact is predominantly due to the acquisition of the Pinnacle assets in the second quarter of 2012. Impact also reflects the acquisition of the Cooley business in the first quarter of 2012.


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Net sales increased $48.3 million, or 8%, from $579.2 million in the third quarter of 2011 to $627.5 million in the third quarter of 2012. The comparable net sales increase of 4% was driven by net sales growth in all three of our segments. Improved product mix and price increases were the primary factors contributing to the 4% comparable net sales growth. The product mix benefit was partially due to the impact of innovations and premiumization on our product portfolio and the price benefit in 2012 was due to targeted price increases for certain brands and markets such as Jim Beam and Maker's Mark in the U.S. Power Brands were the primary contributors to our sales growth. Our Power Brands net sales growth was 15% on a GAAP basis and 8% on a comparable basis adjusting for foreign exchange (+3%) and acquisitions/divestitures (-10%). Rising Stars net sales decrease was 9% on both a GAAP and comparable basis, mostly due to the impact of strong shipments of Skinnygirl in the third quarter of 2011 as supply caught up with consumer demand. Net sales for Local Jewels also decreased during the quarter, primarily due to the impact of the Spanish market as further described in our segment discussion below.

Cost of goods sold

Cost of goods sold increased $12.6 million, or 5%, from $243.4 million in the third quarter of 2011 to $256.0 million in the third quarter of 2012. The increase in cost of goods sold in the 2012 period was largely due to the impact of acquisitions (approximately $20 million), partially offset by a year-over-year benefit from foreign currency ($12 million), which we expect to have less of an impact in the fourth quarter. The impact of higher raw material-related costs and inflation was largely offset by savings from our organizational streamlining initiatives.

Advertising and marketing expense

Advertising and marketing expense increased $11.5 million, or 12%, from $96.0 million in the third quarter of 2011 to $107.5 million in the third quarter of 2012. We increased advertising and marketing expense in the current year period behind successful innovation and market programs building our core equity brands to drive long-term growth. Advertising and marketing expense as a percentage of net sales was 17.1% in the third quarter of 2012 and 16.6% in the third quarter of 2011.

Selling, general and administrative expense

Selling, general and administrative expense decreased $39.3 million, or 29%, from $135.6 million in the third quarter of 2011 to $96.3 million in the third quarter of 2012. This decrease was primarily due to the absence of a $25 million acquisition-related charge that was incurred in the prior-year period in connection with contingent consideration related to the Skinnygirl acquisition, lower Beam standalone-company costs as compared to the former Fortune Brands corporate cost structure ($10 million) and a favorable foreign currency impact ($2 million). Refer to Note 16, Segment Information, to our financial statements included in this report for more information on estimating standalone corporate cost structure.

Restructuring charges

In 2012, restructuring charges related to organizational streamlining initiatives, which primarily relate to the relocation of certain U.S. finance and human resource shared services from our Deerfield headquarters to Kentucky and ongoing integration of the Pinnacle assets. For the three months ended September 30, 2011, the Company incurred restructuring charges of $3.8 million primarily related to distribution and supply-chain initiatives, facility consolidations, and organizational streamlining initiatives. The Company is employing lean techniques throughout the organization to meet its long-term goal of sustaining 1-2% annual improvement before inflation in our total cost of goods sold and selling, general and administrative expenses. For the three months ended September 30, 2012, the Company did not incur any material restructuring costs.

Business separation costs

Business separation costs of $68.6 million for the three months ended September 30, 2011 consisted of $24.1 million of financial, legal and other advisory fees related to the Separation Transactions that were completed in 2011, as well as $44.5 million of employee-related costs primarily related to termination benefits.

Operating income

Operating income increased $134.8 million from $27.6 million in the third quarter of 2011 to $162.4 million in the third quarter of 2012. The increase in operating income was primarily due to lower business separation costs ($69 million) and acquisition and integration-related costs ($23 million), lower corporate costs (compared to the former Fortune Brands corporate cost structure) ($10 million) and increased gross profit ($36 million) from higher sales, which were driven by favorable product mix and price increases.


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Interest expense

Interest expense increased $2.0 million, or 8%, from $26.5 million in the third quarter of 2011 to $28.5 million in the third quarter of 2012 due to higher average borrowings, principally due to new borrowings of $600 million in May 2012, which were used to fund the second quarter 2012 acquisition of the Pinnacle assets.

Loss on early extinguishment of debt

In August 2011, we used proceeds from the sale of our Golf business to complete an early extinguishment of debt with a principal amount of $911 million. The loss on early extinguishment of debt in the 2011 period of $134.0 million consists of $139.0 million of purchase premiums and $5.5 million of accelerated unamortized debt issuance costs, partially offset by $10.5 million related to amortization/write-off of deferred gains on terminated interest rate swaps related to the extinguished debt.

Other income

Other income decreased $35.8 million from $37.7 million in the third quarter of 2011 to $1.9 million in the third quarter of 2012 due to the absence of two significant items that benefited the 2011 quarter, consisting of $26 million of tax indemnification payments from Pernod Ricard in connection with foreign income tax audit settlements and a $7.6 million distribution related to the wind down of a joint venture investment. Refer to Note 8, Income Taxes, to our financial statements included in this report for more information on the indemnification payments received from Pernod Ricard.

Income taxes

The effective income tax rates for the three months ended September 30, 2012 and 2011 were 32.5% and 13.9%, respectively. We had a net tax benefit in the 2011 period which was due to a pre-tax loss from continuing operations. The significant items adversely impacting our net tax benefit in the 2011 period include nondeductible expenses related to the Separation Transactions and additional tax expense from the settlement of foreign income tax returns covering pre-acquisition tax years. These adverse impacts on our net tax benefit were partially offset by the favorable impact of non-taxable income of $26 million related to a tax indemnification payment received from Pernod Ricard for the aforementioned tax audit settlement. We did not have similar significant items impacting our effective tax rate in the 2012 period; however, our tax expense in the 2012 quarter was unfavorably impacted by an adjustment of approximately $7 million related to our annual reconciliation of the 2011 income tax filing to the 2011 provision for income taxes. See Note 8, Income Taxes, to our financial statements included in this report for additional information relating to the foreign tax audit settlement, the related indemnification payment and other factors impacting our effective tax rates as compared to the U.S. federal statutory rate.

Loss (income) from discontinued operations, net of tax

Loss from discontinued operations, net of tax, of $15.2 million in the 2012 period is mostly related to tax expense on the sale of discontinued operations, primarily due to a decrease in estimated foreign tax credits available to offset the gain on the sale of the Golf business. Income from discontinued operations, net of tax, of $496 million in the 2011 period is due to a third quarter 2011 gain of $476 million on the sale of the Golf business and the discontinued operations of both our former Golf business and former Home & Security business.


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Segment Results for the Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

The Company evaluates its segment net sales and operating income excluding items considered by management to be unusual or infrequent in nature and not indicative of the segments' underlying operating performance. Consequently, segment results presented in accordance with GAAP exclude these items. Net sales and operating income by operating segment are also presented below excluding the impact of foreign exchange translation. We calculate foreign exchange translation effects by translating current year results at prior year exchange rates and excluding hedge impacts. In the following discussion, we refer to net sales and operating income calculated on this basis as "constant currency." Constant currency net sales and operating income are non-GAAP measures that management believes are useful for evaluating performance, as fluctuations in exchange rates can impact the underlying year-over-year growth rates of the segments. These measures may not be comparable to similar measures used by other companies.

The following table sets forth net sales and operating income by operating segment for the three months ended September 30, 2012 and 2011 as reported and adjusted to exclude the impact of foreign exchange translation (in millions):

                                                                                            Non-GAAP
                                                                                       Constant Currency
                                                                      %               2012             %
                                                                    Change          Adjusted         Change
Net Sales                                  2012        2011        Reported          Amount         Adjusted
North America                             $ 380.1     $ 337.3           12.7 %     $    382.3            13.3 %
EMEA                                        116.5       120.0           (2.9 )%         127.3             6.1 %
APSA                                        130.9       121.9            7.4 %          134.8            10.6 %

Segment net sales                           627.5       579.2            8.3 %          644.4            11.3 %
Foreign exchange                               -           -                            (16.9 )           n/m

Net sales                                 $ 627.5     $ 579.2            8.3 %     $    627.5             8.3 %


                                                                                            Non-GAAP
                                                                                       Constant Currency
                                                                      %               2012             %
                                                                    Change          Adjusted         Change
Operating Income                           2012        2011        Reported          Amount         Adjusted
North America                             $ 105.8     $  91.0           16.3 %     $    103.9            14.2 %
EMEA                                         27.9        24.8           12.5 %           30.8            24.2 %
APSA                                         31.3        26.5           18.1 %           30.1            13.6 %

Segment operating income                    165.0       142.3           16.0 %          164.8            15.8 %
Deduct:
Foreign exchange                               -           -                             (0.2 )
Business separation costs (Note 6)             -         68.6                              -
Restructuring charges (Note 7)                1.0         3.8                             1.0
Other charges (Note 7)                        1.6        30.9                             1.6
Unallocated corporate costs (Note 16)          -         11.4                              -

Operating income                          $ 162.4     $  27.6            n/m       $    162.4             n/m


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We also evaluate our segment net sales on a "comparable basis" (a non-GAAP measure). In addition to excluding the impact of foreign currency rate changes, comparable net sales are adjusted for the impact of acquisitions/divestitures. In the following discussion, we refer to sales presented on this basis as "comparable net sales." The Company believes that comparable net sales growth is useful in evaluating the Company's sales growth year-over-year excluding items that are not indicative of underlying sales performance. Below is a reconciliation of GAAP segment net sales growth to comparable segment net sales growth for the third quarter of 2012 as compared to the third quarter of 2011.

                                               North
                                              America        EMEA        APSA
           Net sales growth (GAAP)                  13 %        (3 )%        7 %
           Foreign exchange rates (a)               -            9 %         3 %
           Acquisitions/divestitures (b)           (11 )%       (1 )%       -

           Comparable net sales (Non-GAAP)           2 %         5 %        10 %

(a) Impacts of translating current year sales at prior year exchange rates and hedging activity.

(b) Impact is predominantly due to the acquisition of the Pinnacle assets in the second quarter of 2012. Impact also reflects the acquisition of the Cooley business in the first quarter of 2012.

North America

North America comparable net sales growth was 2% in the third quarter of 2012, benefiting from innovation, price increases and favorable product mix. Price and product mix benefited from the growth of our bourbon portfolio, including Jim Beam and Maker's Mark, as well as Pinnacle vodka. Net sales growth for the third quarter of 2012 was adversely impacted by the strong shipments of Skinnygirl in the third quarter of 2011, as supply caught up with consumer demand, as well as the strong shipments of Maker's Mark in the second quarter 2012 related to customer buy-in ahead of our price increases.

On a constant currency basis, North America operating income increased by $12.9 million, or 14%, from $91.0 million in the third quarter of 2011 to $103.9 million in the third quarter of 2012. Operating income increased principally due to the net sales increase, as discussed above, and the operating leverage associated with the acquisition of the Pinnacle assets in the second quarter of 2012.

Europe/Middle East/Africa

EMEA comparable net sales growth was 5% in the third quarter of 2012, benefiting primarily from price increases and the benefit of Jim Beam and Sourz innovations. Strong growth in Germany and emerging markets contributed to net sales growth. These benefits were partially offset by sales decreases in economically challenged markets, particularly Spain, where the value of the spirits market declined at a mid-to-high single-digit rate.

On a constant currency basis, EMEA operating income increased $6.0 million, or 24%, from $24.8 million in the third quarter of 2011 to $30.8 million in the third quarter of 2012. The increase was attributed to the operating income benefit derived from increased sales described above, a reversal of a non-income tax accrual for a closed review period and a reduction in bad debt expense, partially offset by an increase in advertising and marketing expenses.

Asia-Pacific/South America

APSA comparable net sales growth was 10% in the third quarter of 2012, primarily due to increased sales from Jim Beam, Courvoisier, Canadian Club and Teacher's, benefiting from innovations, as well as favorable product mix and price increases. In addition, net sales growth benefited from growth in emerging markets. Net sales benefited somewhat from the timing of sales between the second and third quarters of 2012 in Australia as well as the phasing of shipments in Brazil, which occurred largely in the first half of the year-ago period.

On a constant currency basis, APSA operating income increased $3.6 million, or 14%, from $26.5 million in the third quarter of 2011 to $30.1 million in the third quarter of 2012. Operating income increased principally due to increased net sales as described above and the timing of advertising and marketing spend, which was more heavily weighted in the third quarter of last year.


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Consolidated Results for the Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Net sales

The following table presents a reconciliation of GAAP net sales growth to comparable net sales growth for the nine months ended September 30, 2012 as compared to the nine months ended September 30, 2011:

                                                         Consolidated
                                                       Net Sales Growth
        Net sales growth (GAAP)                                        5 %
        Foreign exchange rates (a)                                     2 %
        Acquisitions/divestitures (b)                                 (4 )%
        Australia distribution one-time sale (c)                       3 %
        Australia distribution margin structure (d)                    1 %
. . .
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