Brown-Forman Corporation — Q2 FY2020 10-Q
Reporting period: Quarter and six months ended October 31, 2019, compared with the corresponding prior-year periods. Brown-Forman sells spirits and wine, including the Jack Daniel’s family of brands, Woodford Reserve, and Herradura. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $989; up 9% reported and 6% underlying | $1,755; up 5% reported and 3% underlying |
| Gross profit / margin | $619; margin 62.7%, down 2.1 percentage points | $1,117; margin 63.7%, down 2.7 percentage points |
| Operating income / margin | $352; up 6% reported, down 3% underlying; margin 35.6% | $600; up 1% reported, down 5% underlying; margin 34.2% |
| Net income | $282, versus $249 | $468, versus $449 |
| Diluted EPS | $0.59, up 14% | $0.97, up 5% |
| Effective tax rate | 15.0%, versus 19.5% | 16.3%, versus 18.6% |
Underlying results are non-GAAP measures adjusted for acquisitions and divestitures, foreign exchange, and estimated changes in distributor inventories; they are not directly equivalent to reported GAAP results. Lower tax expense and higher reported operating income supported EPS growth.
Cash flow, balance sheet, and liquidity
- Six-month operating cash flow was $187, down from $272, principally reflecting the timing of sales and collection of receivables. Investing cash outflow was $75, including $22 for the acquisition of The 86 Company (Fords Gin); capital expenditures were $48. Financing cash outflow was $183, including $158 of dividends.
- Cash was $235 at October 31, 2019, down from $307 at April 30. Accounts receivable rose to $823 from $609, and inventories increased to $1,654 from $1,520.
- Short-term commercial paper was $156 and long-term debt was $2,288, for total carrying debt of $2,444. The company reported an $800 commercial paper program supported by an undrawn $800 bank credit facility, extended to November 10, 2023.
- Current assets were $3,039 and current liabilities $771. Management said cash, operating cash flow, and borrowing capacity were sufficient to meet future financial commitments. About 73% of cash was held by foreign subsidiaries; future repatriations could require additional taxes.
Changes, outlook, and risks
- U.S. net sales and underlying growth were supported partly by the October launch of Jack Daniel’s Tennessee Apple (JDTA); distributor inventory increases, primarily related to that launch, contributed to the difference between reported and underlying growth. U.S. underlying net sales rose 6% for the six-month period.
- Tariffs and higher agave and wood costs pressured profitability. Management estimated tariffs accounted for nearly half of the year-to-date increase in underlying cost of sales. Tariff-related effects reduced gross margin by 2.0 percentage points year to date, and management expected tariffs to remain a headwind while in place.
- Underlying sales growth came from the Jack Daniel’s family excluding Jack Daniel’s Tennessee Whiskey, premium bourbon led by Woodford Reserve, and tequila. Travel Retail and non-branded/bulk sales declined; Finlandia also weakened.
- Management said underlying SG&A was expected to increase during the remainder of fiscal 2020. The filing provides no specific full-year revenue or earnings guidance.
- The company acquired The 86 Company, owner of Fords Gin, for $22 in cash on July 3, 2019. Preliminary purchase accounting included $11 of goodwill and $12 of indefinite-lived intangible assets, net of $1 of deferred tax liabilities.
- The board raised the quarterly dividend from $0.1660 to $0.1743 per share, payable January 2, 2020. Management reported no material changes to previously disclosed risk factors and did not expect pending legal proceedings to materially affect financial position, results, or liquidity. A Russia importer guarantee had approximately $8 of exposure, with a stated maximum of approximately $10; receivables from the importer were $17 and expected to be collected in full.
Important facts for investors to verify
- How much of reported sales growth reflects sustainable consumer demand versus distributor inventory timing, particularly the JDTA launch and prior-year tariff-related order patterns.
- Whether tariff and input-cost pressures persist, and the resulting effect on gross and operating margins.
- The conversion of earnings into cash, given lower operating cash flow and higher receivables and inventories.
- Underlying growth calculations and assumptions, including distributor inventory estimates and foreign-exchange adjustments.
- Execution and valuation of the Fords Gin acquisition, and the planned use of foreign-held cash and ongoing debt capacity.