Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended October 31, 2020; fiscal year ends April 30. Amounts are in millions of U.S. dollars unless stated otherwise.
Financial performance
| Metric | Three months ended Oct. 31, 2020 | Six months ended Oct. 31, 2020 |
|---|---|---|
| Net sales | $985; essentially flat year over year | $1,738; down 1% |
| Gross profit / margin | $581 / 59.0%; down 6% / 3.7 percentage points | $1,046 / 60.2%; down 6% / 3.5 percentage points |
| Operating income | $330; down 6% | $717; up 19%, including a $127 gain on divestiture |
| Net income | $240; down from $282 | $564; up from $468 |
| Diluted EPS | $0.50; down from $0.59 | $1.17; up from $0.97, including an estimated $0.19 gain-related benefit |
| Operating cash flow | Not separately provided for the quarter | $283, versus $187 |
Management reported underlying net sales growth of 4% for both the quarter and half-year, adjusting for foreign exchange and estimated distributor inventory changes, among other items. Underlying operating income grew 6% for the quarter and 11% year to date. These are non-GAAP measures. For the half-year, revenue strength included U.S. and developed international markets; Travel Retail was particularly weak. Jack Daniel’s RTDs, premium bourbons, tequila, and wine contributed to growth, while Jack Daniel’s Tennessee Whiskey and Finlandia faced declines.
Cash, debt, and liquidity
- Cash and cash equivalents were $964 at October 31, up from $675 at April 30. Cash from operations was $283; investing activities provided $147, including $177 of divestiture proceeds; financing activities used $155.
- Short-term borrowings were $358 and long-term debt was $2,309, totaling $2,667. Long-term debt maturities begin in fiscal 2023. The company had an $800 commercial paper program backed by an undrawn $800 credit facility expiring in November 2023.
- Working-capital balances increased, including accounts receivable to $879 from $570; management cited distributor inventory movements and extended credit to some customers affected by COVID-19.
- The company said its liquidity and cash-generating capacity were sufficient to meet commitments. Credit ratings were A1 from Moody’s and A- from S&P.
Material changes and unusual items
- On July 31, 2020, Brown-Forman sold the Early Times, Canadian Mist, and Collingwood brands and related assets for $177 cash, recognizing a $127 pretax gain. The stated strategic rationale was a focus on premium spirits.
- Reported six-month operating margin rose to 41.2% from 34.2%, but the divestiture gain contributed 7.2 percentage points. Excluding specified items, underlying gross profit declined 1% for the half-year.
- Gross margin pressure reflected higher agave and wood costs, lower fixed-cost absorption for Jack Daniel’s Tennessee Whiskey, COVID-related channel shifts, and portfolio mix. Lower-priced RTDs and New Mix supported volume but weighed on price/mix.
- Advertising expense fell 23% year to date as spending was phased and events and on-premise activity were reduced or canceled. Management said the first-half spending decline would not persist for the full year.
Outlook, commentary, and risks
- No quantitative fiscal 2021 guidance was provided because of uncertainty and limited visibility related to COVID-19. Management did not expect a recovery in Travel Retail or the on-premise channel during the fiscal year and expected many emerging markets to remain down.
- Management expected full-year gross margin to remain pressured by input costs, lower fixed-cost absorption, and mix, while noting the outcome would depend on volumes and sales mix. It expected the full-year effective tax rate to be 17%–19%.
- The ongoing pandemic created both positive and negative effects: off-premise and e-commerce gains partly offset weaker on-premise, Travel Retail, and certain emerging-market sales. Supply availability and customer solvency remained areas of monitoring.
- On November 19, 2020, the board raised the quarterly dividend from $0.1743 to $0.1795 per share, payable January 4, 2021. The company also planned a $20 contribution to the Brown-Forman Foundation in the second half of fiscal 2021.
- Brown-Forman is disputing Bacardi’s claim for approximately £49 million in U.K. commercial agency compensation. Bacardi withheld more than £50 million owed to Brown-Forman; the amount remains included in receivables. The company said it could not estimate a reasonably possible loss given the early stage of the litigation and arbitration.
- The filing identifies risks including COVID-19 and economic conditions, currency and tariff exposure, consumer and channel shifts, input and supply-chain costs, distributor inventory changes, and legal disputes. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether underlying sales and operating-income trends persist, and how distributor inventory adjustments affect reported results.
- The pace of recovery in on-premise, Travel Retail, and emerging markets, and the resulting effects on sales mix and gross margin.
- Input-cost and fixed-cost absorption trends, and the expected rebound in advertising and other operating expenses.
- The outcome and potential financial exposure of the Bacardi dispute, including collection of the withheld receivable.
- Cash conversion, customer receivables, and borrowing needs as pandemic conditions and the commercial paper market evolve.