Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Three and six months ended October 31, 2015 (fiscal 2016 second quarter and year to date). Unaudited results; dollar amounts are in millions except per-share data. Comparisons are with the corresponding 2014 periods.
Financial performance
| Metric | Three months ended Oct. 31, 2015 | Six months ended Oct. 31, 2015 |
|---|---|---|
| Net sales | $1,096; down 4% reported, up 5% underlying | $1,995; down 3% reported, up 6% underlying |
| Gross profit / margin | $586; 53.5% (53.6% prior year) | $1,076; 53.9% (53.7% prior year) |
| Operating income / margin | $302; 27.6% (26.6% prior year) | $529; 26.5% (25.4% prior year) |
| Net income | $200 (prior year $208) | $356 (prior year $358) |
| Diluted EPS | $0.97, unchanged | $1.72, up 3% from $1.67 |
| Operating cash flow | Not presented as a quarterly figure | $161, compared with $70 |
Underlying figures are non-GAAP measures adjusted for foreign exchange and, where applicable, estimated distributor inventory changes; they are not substitutes for reported GAAP results. Interest expense was $12 for the quarter and $22 year to date, versus $7 and $14, respectively. The six-month effective tax rate was 29.9%, unchanged year over year; the quarterly rate was 31.0%, up from 29.9%.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $195 at October 31, down from $370 at April 30, 2015. Six-month operating cash flow was $161; investing cash use was $66 and financing cash use was $264.
- At October 31, short-term borrowings were $303, current long-term debt $250, and long-term debt $1,229. The company issued $500 principal amount of 4.50% senior notes due July 2045 in June; carrying value was $485.
- The $250 of 2.50% notes due January 2016 were planned to be repaid with cash. Commercial paper outstanding was $295. The company also had an undrawn $800 credit facility, within a $1 billion commercial paper program; the facility’s interest-coverage covenant ratio was 30-to-1 against a 3-to-1 minimum.
- During the six months, Brown-Forman returned $869 to shareholders through dividends and share repurchases. It repurchased approximately $739 of treasury stock in the period and had $256 remaining under its repurchase authorization at October 31.
Material changes and operating drivers
- Foreign exchange, primarily the stronger U.S. dollar, reduced reported sales and operating income; underlying sales and operating income grew in both periods. In the six-month period, underlying operating income increased 9%, compared with 1% reported growth.
- Growth was led by the Jack Daniel’s portfolio, including Tennessee Fire, and Woodford Reserve. Six-month underlying sales rose 28% for Woodford Reserve, 31% for New Mix RTDs, and 7% for the Jack Daniel’s family.
- Southern Comfort, Canadian Mist, and Finlandia were weaker. Russia’s reported sales were sharply affected by currency; underlying Russian sales declined 4% for the six months.
- Six-month gross margin improved modestly, while quarterly gross margin edged down. Management attributed performance to favorable brand mix and pricing, partly offset by higher input costs, including wood and grain. Operating margins improved as operating expenses grew more slowly than gross profit.
- Six-month operating cash flow increased by $91 year over year, largely reflecting lower income tax payments and working-capital timing.
Outlook, risks, and unusual items
- No numerical full-year earnings or sales guidance is provided. Management cautioned that first-half results do not necessarily indicate full-year results and expected input costs to increase in the low-single digits for the remainder of the fiscal year.
- Management described liquidity as strong and sufficient for commitments. It announced a quarterly dividend increase from $0.315 to $0.340 per share, payable December 30, 2015.
- Key disclosed risks include currency movements, consumer and category shifts, reliance on the Jack Daniel’s brands, competition, input and supply-chain costs or disruption, regulation and taxation, distributor inventory changes, and legal, product, and information-technology risks. The company reported no material changes to the risk factors in its 2015 Form 10-K.
- There were no material accrued loss contingencies at October 31. The company guaranteed a Russian importer’s bank obligation; actual exposure was approximately $9, with a maximum possible exposure of approximately $16, and it had $26 of receivables from that importer, which it expected to collect in full.
- Currency derivatives had $1,289 of notional value at October 31. Management expected to reclassify $35 of deferred net gains from accumulated other comprehensive income into earnings over the next 12 months, to offset anticipated effects of hedged exposures.
Important facts for investors to verify
- How much of underlying sales growth reflects consumer demand versus pricing, product mix, and distributor inventory movements.
- Whether foreign-exchange pressure, cost inflation, and softer performance in weaker brands or markets affect future margins and reported results.
- Cash generation and liquidity after planned repayment of the January 2016 notes, continued capacity investment, dividends, and repurchases.
- The sustainability of growth in Jack Daniel’s Tennessee Fire, Woodford Reserve, and other leading brands, alongside the company’s reliance on the Jack Daniel’s portfolio.
- The terms and developments concerning the Russian importer guarantee, receivable collection, and outstanding foreign-currency exposures.