Business Context and Reporting Period
Brown-Forman Corporation (Brown-Forman) filed an 8-K on June 10, 2009, reporting results for the fiscal year and quarter ended April 30, 2009. The company is a global producer and marketer of fine beverage alcohol brands, including Jack Daniel's, Finlandia, and Southern Comfort. The reporting period was characterized by significant global economic headwinds and a strengthening U.S. dollar.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Net Sales | $3,192.2 million | $3,282.2 million | (3%) |
| Operating Income | $661.1 million | $685.0 million | (4%) |
| Net Income (Continuing Ops) | $434.4 million | $439.4 million | (1%) |
| Diluted EPS (Continuing Ops) | $2.87 | $2.84 | 1% |
| Operating Margin | 20.7% | 20.9% | (0.2 pts) |
| Operating Cash Flow | $491 million | $534 million | (8%) |
| Cash and Equivalents | $340 million | $119 million | 186% |
| Long-term Debt | $509 million | $417 million | 22% |
Underlying Performance: Adjusting for specific items, underlying net sales grew 3% and underlying operating income grew 4% for the fiscal year.
Material Changes vs. Prior Period
- Revenue Decline: Reported net sales declined 3% year-over-year, primarily due to a 5% negative impact from foreign currency fluctuations and a 1% impact from Australian excise tax changes. Underlying sales grew 3%.
- Profitability: Reported operating income decreased 4% to $661 million. However, underlying operating income increased 4%, driven by price increases and cost management, partially offset by higher grain and fuel costs.
- Quarterly Volatility: The fourth quarter saw a 19% decline in diluted EPS to $0.53 and a 10% drop in operating income, attributed to workforce reduction costs and distributor inventory reductions.
- Liquidity: Cash and cash equivalents increased significantly from $119 million to $340 million, supported by strong operating cash flows and the sale of $250 million in 5% Notes in January 2009.
- Shareholder Returns: The company increased its annual dividend by 7% to $1.1190 per share, marking the 25th consecutive year of dividend increases.
Guidance, Outlook, and Risks
Fiscal 2010 Outlook: Management projects modest underlying growth in operating income for fiscal 2010. Reported earnings per share are expected to range from $2.60 to $3.00. This guidance assumes a continued challenging consumer environment and a negative foreign exchange impact of approximately $0.12 per share at recent spot rates.
Management Commentary: CEO Paul Varga emphasized the company's ability to deliver earnings growth despite global economic and foreign exchange headwinds. The company maintains a strong balance sheet with "A2" (Moody's) and "A" (S&P) credit ratings.
Key Risks and Contingencies:
- Foreign Exchange: Continued strengthening of the U.S. dollar negatively impacts reported international revenues.
- Economic Environment: Risks include deepening global economic downturns, reduced consumer spending, and distributor inventory reductions.
- Commodity Costs: Volatility in the cost of raw materials such as grain, agave, and energy.
- Regulatory: Potential increases in tax rates and tighter governmental restrictions on marketing.
Investor Verification Checklist
- Verify the reconciliation of reported to underlying (non-GAAP) financial measures in Schedule A to understand the impact of foreign currency and one-time charges.
- Monitor the trajectory of distributor inventory levels, as reductions in the fourth quarter significantly impacted reported results.
- Assess the sensitivity of fiscal 2010 earnings to further fluctuations in the U.S. dollar against the Euro, British Pound, and Australian Dollar.
- Review the specific brand performance data in Schedule C, particularly the divergence between reported sales and constant currency sales for key brands like Jack Daniel's and Finlandia.
- Confirm the company's ability to maintain dividend growth and share repurchases given the projected modest earnings growth for fiscal 2010.