Brown-Forman Corporation — FY2015 Form 10-K
Reporting period: Fiscal year ended April 30, 2015. The filing is not for fiscal 2014; it includes comparative fourth-quarter results for FY2015 and FY2014. Unless stated otherwise, amounts are U.S. dollars.
Business context
Brown-Forman manufactures, markets, and sells spirits, wine, and ready-to-drink beverages in more than 160 countries. Its portfolio is led by Jack Daniel’s; 57% of FY2015 net sales came from outside the United States. The Brown family controls a majority of the voting stock.
Financial performance and material changes
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Net sales | $4.096 billion | $3.946 billion | +4% reported; +6% underlying |
| Gross profit / margin | $2.183 billion / 53.3% | $2.078 billion / 52.7% | Margin +0.6 percentage points |
| Operating income / margin | $1.027 billion / 25.1% | $971 million / 24.6% | +6% reported; +9% underlying |
| Net income | $684 million | $659 million | +4% |
| Diluted EPS | $3.21 | $3.06 | +5% |
| Operating cash flow | $608 million | $649 million | Down $41 million |
Underlying growth is a non-GAAP measure adjusted for foreign exchange and estimated distributor inventory changes. Management attributed growth mainly to American whiskey, pricing and product mix; foreign exchange, especially a stronger U.S. dollar, reduced reported results. Gross-margin improvement reflected higher pricing and favorable mix. Cost of sales rose 4% reported and 7% underlying, including higher input and packaging costs.
For the fourth quarter of FY2015, net sales were $947 million versus $893 million in FY2014; gross profit was $527 million versus $493 million; net income was $140 million versus $132 million; diluted EPS was $0.66 versus $0.62.
Brand performance was mixed: Jack Daniel’s family underlying net sales grew 8% and volume rose 7% on a drinks-equivalent basis; Woodford Reserve volume rose 30%, and Herradura volume rose 18%. Finlandia and Southern Comfort underlying net sales fell 5% each; Canadian Mist fell 6%. Australia and Poland were weak, while the United States, France, and several emerging markets supported growth.
Cash, debt, and liquidity
Cash and cash equivalents were $370 million at year-end, down $67 million. Capital expenditures were $120 million. The company paid $256 million in dividends and repurchased $462 million of shares during FY2015. Debt totaled $1.188 billion, including $190 million of short-term borrowings; net debt was approximately $818 million. An $800 million revolving credit facility was undrawn, and the company reported a 38-to-1 EBITDA-to-interest covenant ratio against a 3-to-1 minimum. Investment-grade ratings were reported.
Inventories increased to $953 million from $882 million, including barreled whiskey of $571 million. The company cited working-capital needs associated with maturing whiskey inventory. Unfunded pension and other postretirement obligations were $318 million.
Outlook, risks, and unusual items
Management was optimistic about further net sales and operating income growth in FY2016 but gave no specific growth-rate guidance. It expected capital expenditures of $190 million to $220 million, including whiskey-capacity projects, and anticipated lower spending after 2017. Management expected foreign-exchange headwinds to continue, freight, logistics, and raw-material costs generally to rise in the low single digits, and volume to play a larger growth role than in recent years. It planned more modest price increases than in recent years and expected Jack Daniel’s Tennessee Fire to contribute to growth.
Key risks include currency movements, dependence on the Jack Daniel’s family, changing consumer preferences and competition from craft producers, alcohol regulation and excise taxes, supply and aging-inventory forecasting, and disruption at production facilities or in distribution. The filing reports no material accrued loss contingencies and says pending litigation is not expected to have a material adverse effect. A guarantee for a Russian importer had a maximum possible exposure of about $20 million and actual exposure of about $8 million; related receivables were approximately $17 million.
After year-end, in June 2015, the company acquired Slane Castle Irish Whiskey Limited and announced plans to invest $50 million in a distillery and related facilities. This is a subsequent event, not an FY2015 operating result. Other notable items include $30 million of FY2015 expense associated with revaluation of foreign-currency net assets, and a higher effective tax rate of 31.7% versus 30.5% in FY2014.
Investor facts to verify
- Assess whether underlying growth, after foreign exchange and distributor-inventory adjustments, translates into durable consumer demand.
- Track Jack Daniel’s core and flavored extensions, including Tennessee Fire, and the weaker brands and markets identified by management.
- Review the impact of currency changes, pricing decisions, excise taxes, and input-cost inflation on margins and reported growth.
- Monitor debt maturities, cash deployment, planned capital spending, and the build-up and eventual conversion of aged inventory.
- Evaluate the Slane acquisition and investment plans, pension assumptions, and the disclosed Russian importer exposure.