Brown-Forman Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended July 31, 2013; comparisons are with the three months ended July 31, 2012 unless otherwise noted. The interim financial statements are unaudited.
Financial performance and position
| Metric | Q1 FY2014 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $896 million | $878 million | +2% reported; +5% underlying |
| Gross profit / gross margin | $477 million / 53.3% | $464 million / 52.9% | Profit +3%; margin +0.4 percentage points |
| Operating income / operating margin | $217 million / 24.2% | $222 million / 25.2% | Income -2%; margin -1.0 percentage point |
| Net income | $143 million | $147 million | -3% |
| Diluted EPS | $0.66 | $0.69 | -3% |
| Cash provided by operations | $93 million | $87 million | +$6 million |
| Capital expenditures | $25 million | $17 million | +$8 million |
Advertising expense rose 12% to $103 million, and selling, general, and administrative expense rose 5% to $156 million. Interest expense was $7 million, partly offset by $1 million of interest income. The effective tax rate was 32.4%, versus 32.1%.
At July 31, 2013, cash and cash equivalents were $217 million, total assets were $3.686 billion, and stockholders’ equity was $1.666 billion. Debt comprised $997 million of long-term debt, $1 million current long-term debt, and $5 million of short-term borrowings. The company paid $54 million in dividends during the quarter. The board declared a quarterly dividend of $0.255 per share, payable October 1, 2013.
Working-capital movements used $77 million of cash, compared with $102 million in the prior-year quarter. Cash increased $13 million during the quarter. Capital spending was higher largely due to construction of a cooperage facility in Decatur, Alabama.
Material changes and business drivers
- Underlying net sales growth of 5% included approximately 4% from improved price and mix. Unfavorable foreign exchange reduced sales growth by 1 percentage point, and lower estimated net trade inventories reduced it by 2 points. Last year’s sales were elevated by distributor purchases ahead of price increases.
- Underlying operating income grew 4%, but reported operating income fell 2%; lower estimated trade inventories reduced the reported comparison by 7 percentage points. Pricing and portfolio mix supported underlying performance, while higher costs and operating expenses partly offset gains.
- Jack Daniel’s family sales and volume grew, supported by pricing and demand in several markets. El Jimador New Mix RTD sales fell amid elevated customer inventories following prior-year-end buy-ins; management expected the pattern to normalize. Finlandia’s underlying sales rose, while reported sales declined. Southern Comfort sales fell, including due to weaker U.S. on-premise demand and a difficult comparison.
- Korbel Champagne and Woodford Reserve performed strongly; Woodford Reserve volume increased 25%. Geographic underlying growth in several markets, including the U.S., U.K., Germany, Turkey, France, Japan, and Russia, more than offset declines in Australia, Mexico, and Poland.
Outlook, risks, and contingencies
Management maintained fiscal 2014 diluted EPS guidance of $2.80–$3.00, expected high-single-digit underlying net sales growth, and expected underlying operating income growth of 9%–11%. Guidance includes an expected $0.09 per-share adverse impact: $0.06 from lower inventories associated with the France route-to-consumer change and $0.03 from foreign exchange. Management also expected low-single-digit increases in transportation and other input costs for the remainder of the year.
The company cited risks including foreign-exchange and commodity-price movements, economic and political conditions, changing consumer preferences, distributor inventory fluctuations, supply-chain disruption, regulation and taxation of beverage alcohol, competition, and dependence on continued growth of the Jack Daniel’s brands. The filing states there were no material changes in market-risk disclosures since the 2013 Form 10-K.
Brown-Forman reported access to an $800 million bank credit facility extending to November 2017 and stated that liquidity was sufficient for foreseeable commitments. Its facility requires a minimum consolidated EBITDA-to-interest ratio of 3-to-1; the reported ratio was 25-to-1. Of cash on hand, $103 million was held by foreign subsidiaries expected to reinvest earnings abroad; repatriation could result in U.S. tax. The company reported no material accrued loss contingencies and did not expect a material change in gross unrecognized tax benefits over the next 12 months. It noted ordinary-course litigation and open tax examinations in multiple jurisdictions.
Important facts for investors to verify
- Whether underlying sales and operating-income growth meet the full-year outlook, and whether distributor inventories normalize as expected.
- Whether the France route-to-consumer transition and foreign exchange produce the forecast $0.09-per-share impact.
- Whether rising input, transportation, advertising, and personnel costs pressure margins despite pricing and mix benefits.
- Whether brand and geographic trends—particularly Jack Daniel’s growth and weakness in selected markets and brands—persist.
- Whether liquidity, foreign-held cash, debt levels, and tax or litigation exposures change materially in subsequent filings.