Brown-Forman Corporation — FY2018 Form 10-K
Reporting period: Fiscal year ended April 30, 2018. The filing is an annual report, not a quarterly filing; it also reports fourth-quarter results. Dollar amounts below are in millions except per-share data.
Business context and performance
Brown-Forman manufactures, markets, and sells spirits, ready-to-drink cocktails, and wine in more than 170 countries. Its portfolio is led by Jack Daniel’s. The United States generated 47% of FY2018 net sales; international markets generated 53%.
| Metric | FY2018 | FY2017 | Change / context |
|---|---|---|---|
| Net sales | $3,248 | $2,994 | +8% reported; +6% underlying |
| Gross profit / margin | $2,202 / 67.8% | $2,021 / 67.5% | Profit +9%; margin +0.3 percentage points |
| Operating income / margin | $1,039 / 32.0% | $989 / 33.0% | Income +5% reported; +8% underlying; margin down 1.0 point |
| Net income | $717 | $669 | +7% |
| Diluted EPS | $1.48 | $1.37 | +8% |
| Cash from operations | $632 | $639 | Down $7 |
| Capital expenditures | $127 | $112 | Investments in production capacity and facilities |
| Cash and cash equivalents | $239 | $182 | Up $57 |
| Total debt | $2,556 | $2,149 | Up $407 |
Underlying measures are non-GAAP and exclude specified effects such as foreign exchange, distributor inventory changes, and, for operating income, the $70 million Foundation contribution. They should be read alongside reported GAAP results. The FY2018 effective tax rate was 26.6%, versus 28.3% in FY2017. Return on average invested capital was 20.0%, versus 19.8%.
Material changes and unusual items
- Underlying sales growth reflected 5% volume growth and roughly 2% favorable price/mix. Growth was led by Jack Daniel’s, premium bourbons, and tequila. Reported sales also benefited from foreign exchange; estimated distributor inventory increases partly offset underlying growth.
- Gross margin improved modestly, but operating margin fell largely because the company recorded a one-time $70 million contribution to establish the Brown-Forman Foundation. Underlying operating expenses rose 4%.
- FY2018 net income included a provisional $43 million net charge from U.S. tax reform: a $91 million repatriation tax charge partly offset by a $48 million deferred-tax benefit. Management said estimates could change as guidance and analysis are completed.
- The company paid a $1.00-per-share special dividend totaling $481 million, contributed $120 million to U.S. pension plans, and funded the Foundation with $70 million. Total dividends paid were $773 million. The annual declared dividend per share included the special dividend.
- Debt increased following new long-term borrowing and shareholder and pension funding actions. The company issued $600 million principal amount of notes in March 2018 and repaid $250 million of notes that matured in January.
- Fourth-quarter net sales were $733 million versus $694 million a year earlier, while net income was $110 million versus $144 million. The filing does not clearly attribute the full year-over-year quarterly net-income decline to specific items.
Liquidity, outlook, and risks
Current assets were $2,555 million and current liabilities $821 million at year-end. The company had $215 million of commercial paper outstanding and an undrawn $800 million revolving credit facility expiring in November 2022, with no financial covenants. Management said operating cash flows and available liquidity should cover expected needs. About 88% of cash and cash equivalents were held by foreign subsidiaries; the company was evaluating its working-capital needs and reinvestment position following tax reform.
For FY2019, management expected the FY2018 trend in underlying net sales growth to continue, led by Jack Daniel’s, premium bourbon, and tequila, with volume the principal growth driver. It expected underlying expenses to grow more slowly than sales, input costs to rise in the mid-single digits, advertising to grow at a rate similar to sales, and underlying SG&A to be approximately unchanged. No specific numerical sales or EPS growth target was provided. Management anticipated a modest adverse foreign-exchange effect at then-current rates and said the impact of potential retaliatory tariffs was uncertain. Capital expenditures were expected to be about $130 million in FY2019, with elevated spending continuing in FY2020 and FY2021.
- Principal risks: dependence on the Jack Daniel’s family of brands; changing consumer preferences and intense competition; tariffs and other trade or regulatory changes; foreign-exchange exposure; supply and demand forecasting for aged spirits; disruptions at key production facilities or in suppliers; and higher input costs.
- Mexico had imposed retaliatory tariffs on U.S. goods, including American whiskey; other trading partners had threatened tariffs. A stronger U.S. dollar could hurt results; the company does not hedge all currency exposure.
- The company is family-controlled, with a dual-class share structure and nonvoting Class B shares. The Brown family controls a majority of voting stock.
- Management reported no pending lawsuits expected to have a material adverse effect and no material accrued loss contingencies. The company reported effective disclosure controls and internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls.
- CEO Paul Varga announced his retirement effective December 31, 2018; Lawson Whiting was selected to succeed him effective January 1, 2019.
Important facts for investors to verify
- Reconcile reported growth with non-GAAP underlying growth, including foreign exchange, distributor inventory estimates, and the Foundation adjustment.
- Assess whether FY2019 growth expectations are being met, and whether volume, pricing, and mix sustain the FY2018 trend.
- Monitor debt, interest expense, cash generation, and the capacity to fund dividends and capital projects after the special dividend and increased borrowing.
- Track the final accounting and cash-tax effects of the Tax Act, including the provisional repatriation tax and future international tax rules.
- Assess the actual impact of retaliatory tariffs, currency movements, and cost inflation on U.S. whiskey exports and margins.
- Review the concentration of business in Jack Daniel’s and the long-term inventory, production, and supply risks associated with aged spirits.