Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Three months ended July 31, 2015, the first quarter of fiscal 2016. Comparisons are with the three months ended July 31, 2014, unless stated otherwise. Dollar amounts are in millions except per-share data. The interim financial statements are unaudited.
Financial performance
| Metric | Q1 FY2016 | Prior-year quarter | Change or context |
|---|---|---|---|
| Net sales | $900 | $921 | Down 2% reported; up 7% underlying, adjusted for foreign exchange and estimated distributor-inventory changes |
| Gross profit / margin | $491 / 54.5% | $495 / 53.7% | Profit down 1% reported; underlying gross profit up 7%; margin increased about 0.8 percentage points |
| Operating income / margin | $227 / 25.2% | $221 / 23.9% | Up 3% reported and 9% underlying; margin increased 1.3 percentage points |
| Net income | $156 | $150 | Up 4% |
| Diluted EPS | $0.75 | $0.70 | Up 7% |
| Interest expense | $9 | $7 | Up 36% |
| Effective tax rate | 28.5% | 29.8% | Lower mainly due to discrete tax items |
| Cash provided by operations | $147 | $112 | Increase attributed primarily to working-capital timing |
| Capital expenditures | $39 | $31 | Included $8 for an Indiana stave mill |
Foreign exchange was a significant headwind: the stronger U.S. dollar contributed to reported sales and operating results declining relative to underlying growth. Underlying cost of sales rose 10%, reflecting volume and higher input costs, while favorable brand mix and pricing supported margin expansion.
Business drivers and material changes
- Growth was led by the American whiskey portfolio, especially the Jack Daniel’s family, including Jack Daniel’s Tennessee Fire, and by Woodford Reserve. Management said Tennessee Fire contributed about half of the Jack Daniel’s family’s underlying net-sales growth.
- Underlying net sales increased 10% in the United States and 13% in Europe. Reported sales were sharply lower in Russia and Australia; underlying sales declined 36% and 10%, respectively.
- Worldwide underlying net sales grew 28% for Woodford Reserve and Herradura, 51% for New Mix RTDs, and 18% for Jack Daniel’s Tennessee Honey. New Mix growth benefited from low starting inventories and advance purchasing before a price increase; management said that growth rate was not expected to continue.
- Southern Comfort underlying sales declined 4%, with U.S. performance affected by competition from flavored whiskeys. Jack Daniel’s RTD/RTP underlying sales declined 4%, with weakness primarily in Australia.
- Underlying sales growth comprised 5% volume growth and 2% net price/mix growth. Reported sales nevertheless fell 2%, principally because of currency translation.
Cash, debt, and capital allocation
- Cash and cash equivalents were $494 at July 31, 2015, up $124 during the quarter. Cash used in investing was $39; financing provided $21, including proceeds from new long-term debt.
- In June, the company issued $500 principal amount of 4.50% senior unsecured notes due July 15, 2045, receiving $490 net of discounts and issuance costs. Long-term debt carrying value was $1,229, including $250 current; short-term borrowings were $13. Total reported debt carrying value was approximately $1,492.
- The company had an undrawn $800 bank credit facility maturing November 20, 2018, and a $1 billion commercial-paper program. No commercial paper was outstanding at quarter-end. Management said liquidity was strong and sufficient for future commitments; the credit-facility interest-coverage covenant was 37-to-1 against a minimum of 3-to-1.
- Foreign subsidiaries held $334 of cash that management expected to reinvest indefinitely outside the United States; repatriation would entail U.S. taxes.
- Dividends paid were $65, and share repurchases were $230. The board declared a quarterly dividend of $0.315 per share, payable October 1, 2015. At quarter-end, $765 remained available under the repurchase authorization through March 24, 2016.
Outlook, risks, and contingencies
- No specific full-year revenue or earnings guidance is provided in the supplied filing text. Management expected input costs to rise in the low-to-mid single digits.
- Management cautioned that first-quarter results do not necessarily indicate full-year results. It expected elevated New Mix growth to moderate and Herradura growth to moderate as comparisons include the October 2014 launch of Herradura Ultra.
- Key disclosed risks include foreign exchange, consumer and category shifts, dependence on continued growth of the Jack Daniel’s brands, distributor inventory fluctuations, competition, input availability and costs, regulation and taxation of beverage alcohol, supply-chain disruptions, and litigation. The filing reported no material changes to the risk factors in the FY2015 Form 10-K.
- The company reported no material accrued loss contingencies and did not expect pending lawsuits to have a material adverse effect. A guarantee related to a Russian importer had approximately $8 of actual exposure and a maximum possible exposure of approximately $17; the company also had $13 in receivables from that importer, which it expected to collect in full.
- Currency derivatives had $1,258 notional value at quarter-end. Management expected to reclassify $48 of deferred net gains from accumulated other comprehensive income to earnings over the next 12 months, offsetting anticipated effects of hedged exposures.
Important facts for investors to verify
- Whether underlying sales and operating-income growth persists after separating currency effects and distributor-inventory changes, and how those non-GAAP measures reconcile to GAAP results.
- Whether growth in Jack Daniel’s Tennessee Fire, Woodford Reserve, and other premium brands can offset weakness in Russia, Australia, and declining brands.
- The effect of rising input costs, foreign exchange, and the higher interest burden from the 2045 notes on future margins and earnings.
- The pace and price of share repurchases, remaining authorization, and the company’s capital needs for capacity expansion and dividends.
- Developments in the Russian importer exposure and any changes in litigation, tax contingencies, or other disclosed risks.