Brown-Forman Corporation — Form 10-Q summary
Reporting period: Three months ended July 31, 2020 (first quarter of fiscal 2021), compared with the three months ended July 31, 2019. Brown-Forman sells spirits and wine, including the Jack Daniel’s family of brands. Figures are in U.S. dollars; dollar amounts are millions except per-share data.
Financial performance
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Sales before excise taxes | $987 | $978 | +1% |
| Net sales | $753 | $766 | -2% reported; +3% underlying |
| Gross profit / margin | $465 / 61.7% | $498 / 64.9% | Profit -7%; margin -3.2 percentage points |
| Operating income | $387 | $248 | +56% reported; +15% underlying |
| Net income | $324 | $186 | +74% |
| Diluted EPS | $0.67 | $0.39 | +73% |
| Cash provided by operations | $91 | $72 | +$19 |
Underlying measures are non-GAAP and adjust for items including divestitures, foreign exchange, and estimated distributor inventory changes. The $127 pretax gain on the sale of three brands materially boosted reported operating income; management estimates it added $0.19 to diluted EPS. A discrete tax benefit related to an intercompany asset transfer added an estimated $0.08 per share. The effective tax rate was 11.6%, versus 18.2% a year earlier.
Underlying net sales growth reflected estimated distributor inventory reductions; management reported underlying volume growth of 22% offset by unfavorable price/mix of 19%. U.S. underlying net sales grew 9% and Developed International grew 12%; Emerging declined 3% and Travel Retail fell 63%. Whiskey underlying sales grew 4%, tequila 16%, and wine 10%; Finlandia declined 24%. Underlying gross profit declined 1%.
Cash, debt, and liquidity
- Cash and cash equivalents were $908 at July 31, 2020, up from $675 at April 30; cash increased $233 during the quarter.
- Operating activities provided $91; investing activities provided $162, including $177 proceeds from the brand sale; financing activities used $37, including $83 of dividends paid.
- Short-term borrowings were $389, primarily commercial paper; long-term debt was $2,316. Total reported borrowings were $2,705. The $800 commercial paper program is supported by an undrawn $800 bank credit facility expiring in November 2023.
- Management cited investment-grade ratings (Moody’s A1 and S&P A-) and said liquidity and expected cash generation should meet commitments. No long-term debt matures before fiscal 2023. The quarterly dividend was $0.1743 per share.
Material changes, outlook, and risks
- Portfolio sale: On July 31, Brown-Forman sold Early Times, Canadian Mist, and Collingwood for $177 cash, subject to a post-closing inventory adjustment. Related assets had a book value of $50; the company recorded a $127 pretax gain. Management said the transaction supports a focus on premium spirits.
- COVID-19: Restrictions continued to weigh on on-premise sales, Travel Retail, and emerging markets. Off-premise and e-commerce gains in developed markets partially offset those declines. Management said production and distribution capacity had not been materially impaired, but uncertainty remained high.
- Fiscal 2021 outlook: No quantitative guidance was provided because of pandemic uncertainty and limited visibility. Management expected Travel Retail not to recover during the fiscal year, on-premise to remain below full capacity at year-end, and emerging markets to remain down. Gross margin was expected to remain pressured by input costs and mix; operating expenses, particularly advertising, were expected to rise from the first-quarter year-over-year decline. Expected full-year effective tax rate: 17%–19%. A $20 contribution to the Brown-Forman Foundation was planned.
- Dispute with Bacardi: After the U.K. cost-sharing agreement expired, Bacardi withheld more than £50 owed to Brown-Forman and claimed approximately £49 million in commercial-agency compensation, among other amounts. Brown-Forman sued in the U.K.; Bacardi demanded arbitration. The company disputed the claims and said it could not estimate any reasonably possible loss.
- Other exposures: The company reported a July 2020 malware-related breach involving unauthorized access to its IT networks, but did not believe it had significant operational or financial impact. COVID-related remote work may heighten cyber risk. It also guaranteed an importer’s bank facility, with approximately $3 exposure and a maximum possible exposure of about $9; it expected to collect approximately $6 of receivables from that importer.
- Management identified pandemic and economic conditions, currency and commodity movements, regulation, consumer preferences, channel and distributor inventory changes, supply disruption, litigation, and cybersecurity among significant risks. No material accrued loss contingencies were recorded; the company did not expect other pending proceedings to materially affect its financial position, results, or liquidity.
Important facts for investors to verify
- Reconcile reported earnings and EPS to underlying performance, particularly the $127 sale gain and $0.08-per-share discrete tax benefit.
- Track recovery in on-premise, Travel Retail, and emerging markets, and whether distributor inventory adjustments and unfavorable price/mix persist.
- Monitor gross margin pressure, input costs, and the expected increase in advertising and other operating expenses.
- Follow the Bacardi litigation/arbitration and the amounts withheld; the potential loss range was not estimable in the filing.
- Assess commercial-paper market access, borrowings, cash deployment, and customer credit collection, as well as any further disclosure about the cyber incident.