Business context and reporting period
Brown-Forman manufactures and sells spirits, wine, and ready-to-drink products in approximately 160 countries. Its portfolio is led by the Jack Daniel’s family of brands. This Form 10-K covers the fiscal year ended April 30, 2016—not calendar 2015 or a standalone “2015 Q4” period. Fiscal 2016 fourth-quarter results include the sale of Southern Comfort and Tuaca.
Financial performance
| Metric | Fiscal 2016 | Fiscal 2015 | Change / context |
|---|---|---|---|
| Net sales | $4.011 billion | $4.096 billion | Down 2% reported; up 5% underlying |
| Gross profit / margin | $2.144 billion / 53.4% | $2.183 billion / 53.3% | Gross profit down 2% reported, up 5% underlying; margin up 0.1 percentage point |
| Operating income / margin | $1.533 billion / 38.2% | $1.027 billion / 25.1% | Up 49% reported; up 8% underlying. Reported results include the divestiture gain. |
| Net income | $1.067 billion | $684 million | Up 56%; fiscal 2016 includes the $485 million gain on sale |
| Diluted EPS | $5.22 | $3.21 | Up 63%; adjusted fiscal 2016 EPS excluding divestiture effects was $3.46 |
| Operating cash flow | $524 million | $608 million | Down $84 million |
| Capital expenditures | $108 million | $120 million | Management expects $150–$200 million in fiscal 2017 |
Underlying figures are non-GAAP measures adjusted for foreign exchange, estimated distributor-inventory changes, and, where applicable, the Southern Comfort and Tuaca sale. Management says fiscal 2016 underlying sales growth reflected 1% volume growth and 4% favorable price/mix. Foreign exchange reduced reported results, while mix shifted toward higher-priced brands.
Cash, debt, and liquidity
At April 30, 2016, cash and cash equivalents were $263 million, down from $370 million a year earlier. Total debt was approximately $1.501 billion ($271 million short-term borrowings and $1.230 billion long-term debt), versus approximately $1.183 billion a year earlier; net debt was approximately $1.238 billion. Fiscal-year financing included $1.107 billion of share repurchases and $266 million of dividends. The company reported investment-grade ratings and said operating cash flow was sufficient for expected needs. It had $800 million of undrawn revolving credit and an undrawn $400 million 364-day facility; its principal facility covenant ratio was 24:1 against a 3:1 minimum.
Material changes and notable items
- On March 1, 2016, Brown-Forman sold Southern Comfort and Tuaca for $543 million cash and recognized a $485 million gain. The sale contributed $1.76 to reported diluted EPS; adjusted EPS was $3.46.
- Reported sales fell despite underlying growth, primarily because of currency effects and the divestiture. The U.S. represented 46% of fiscal 2016 sales; underlying sales growth was 6% there and 6% in Europe.
- Brand results were mixed: Jack Daniel’s family underlying sales rose 6%; Woodford Reserve rose 28%; Herradura rose 13%; Finlandia declined 5% and Canadian Mist declined 11%.
- Barreled whiskey inventory increased to $666 million from $571 million, contributing to working-capital demands as the company builds aged-product supply.
- In June 2016, after fiscal year-end, the company acquired 90% of The BenRiach Distillery Company for approximately $307 million cash, assumed and subsequently paid approximately $66 million of debt and transaction obligations, and may acquire the remaining 10% for approximately $34 million.
Outlook, management commentary, and risks
Management was optimistic about fiscal 2017 net-sales and operating-income growth, but did not provide a specific growth-rate forecast in the supplied filing text. It expected ongoing foreign-exchange headwinds; low-single-digit increases in freight, logistics, and raw-material costs; and continued uncertainty in emerging markets. Fiscal 2017 capital spending was projected at $150–$200 million, supporting capacity, distillery, bottling, and warehousing projects. Planned growth initiatives included further international rollout of Jack Daniel’s Tennessee Fire and the launch of Coopers’ Craft; Slane Irish Whiskey was anticipated in spring 2017.
Key risks include dependence on the Jack Daniel’s franchise; stronger-dollar exposure (management estimated a 10% currency move could change fiscal 2017 operating income by approximately $18 million after hedges); emerging-market economic and geopolitical uncertainty; alcohol regulation, excise-tax increases, and marketing restrictions; changing consumer preferences and intensifying craft and premium-whiskey competition; supply disruption and imprecision in forecasting aged inventory; and litigation, product-liability, cybersecurity, and intellectual-property risks. The company said pending litigation was not expected to materially affect its financial position, results, or liquidity and reported no material accrued loss contingencies.
Important facts for investors to verify
- Reconcile reported earnings with the $485 million divestiture gain and review the company’s non-GAAP adjustments underlying its 5% sales and 8% operating-income growth figures.
- Assess whether fiscal 2017 growth can offset continuing currency pressure, emerging-market weakness, and cost inflation.
- Track whiskey inventory, working capital, and planned capacity spending against demand for aged products and the expected $150–$200 million capital-expenditure range.
- Review the effect of share repurchases and increased debt on liquidity, interest expense, and future capital allocation.
- Evaluate the BenRiach acquisition’s total cost, remaining-share option, integration, and contribution to results; it closed after the reported fiscal year.