Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months ended January 31, 2017 (fiscal 2017); comparisons are with the periods ended January 31, 2016. Amounts are in U.S. dollars. The filing recasts prior-period excise-tax presentation, so net sales exclude excise taxes.
Financial performance
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $808 million; essentially flat reported, up 4% underlying | $2,299 million; down 3% reported, up 3% underlying |
| Gross profit / margin | $536 million; 66.4%, down 2.3 percentage points | $1,541 million; 67.0%, down 2.1 percentage points |
| Operating income / margin | $273 million; 33.8%, down 0.6 percentage points | $778 million; 33.8%, down 0.4 percentage points |
| Net income | $182 million, versus $190 million | $524 million, versus $545 million |
| Diluted EPS | $0.47, versus $0.47 | $1.34, versus $1.33 |
| Operating cash flow | Not separately presented for the quarter | $445 million, versus $448 million |
Underlying measures are non-GAAP and adjust for foreign exchange, distributor inventory changes, and acquisition/divestiture effects as applicable. Underlying operating income increased 3% for the quarter and 5% year to date. Year-to-date net sales growth reflected 2% volume growth and 1% price/mix. Higher costs and foreign exchange weighed on reported margins.
Cash, debt, and liquidity
- Cash and cash equivalents were $197 million at January 31, 2017, down from $263 million at April 30, 2016. Cash decreased $66 million over the nine months.
- Cash used in investing was $380 million, principally including $307 million paid for BenRiach and $71 million of property, plant, and equipment additions. Financing used $111 million; the company issued $717 million of long-term debt, repurchased $561 million of shares, and paid $203 million of dividends.
- At January 31, total debt was approximately $2.23 billion: $308 million short-term borrowings, $249 million current long-term debt, and $1.669 billion long-term debt. Long-term debt increased after issuance of euro- and sterling-denominated notes in July 2016.
- Current assets were $2.377 billion and current liabilities $1.130 billion. The company reported access to an undrawn $800 million credit facility and an undrawn $400 million 364-day facility, in addition to its commercial paper program. It reported a 19-to-1 EBITDA-to-interest covenant ratio against a minimum of 3-to-1.
- The board declared a quarterly dividend of $0.1825 per share, payable April 3, 2017. The share-repurchase authorization had approximately $330 million remaining through March 31, 2017.
Material changes and business developments
- BenRiach was acquired in June 2016 for aggregate consideration of $407 million, including $307 million paid at acquisition; the remaining 10% interest was purchased for $30 million in November. BenRiach’s reported operating contribution was not material in the period.
- Southern Comfort and Tuaca were sold in March 2016 for $543 million. Their absence from comparable-period results affects reported comparisons.
- Underlying growth was led by the Jack Daniel’s family, tequila brands, and Woodford Reserve. Woodford Reserve and Herradura posted year-to-date underlying net sales growth of 20% and 18%, respectively. Canadian Mist and used-barrel sales declined.
- Underlying net sales rose 4% in the United States and 2% in Europe. Turkey and Russia faced weak economic conditions and geopolitical instability; currency devaluation and foreign-exchange effects also affected results.
- A two-for-one stock split was completed in August 2016; reported share and per-share figures are split-adjusted. The company also changed excise-tax presentation to the net method and adopted stock-compensation tax accounting guidance.
Outlook, commentary, and risks
Management said liquidity remained strong and sufficient for obligations, capital spending, dividends, and planned repurchases. For the remainder of fiscal 2017, it expected input costs to increase mid-single digits and SG&A to increase in the low single digits. The filing provides no clear full-year revenue or earnings guidance.
Key risks cited include currency volatility, economic and political conditions, consumer preference shifts, dependence on Jack Daniel’s growth, regulatory and tax changes, competition, supply and production disruptions, distributor inventory fluctuations, and acquisition integration. The company reported no material changes to previously disclosed risk factors and no material accrued loss contingencies. A Russian importer guarantee had approximately $8 million actual exposure and a maximum possible exposure of approximately $23 million; related receivables were approximately $10 million and expected to be collected in full. Management did not expect pending litigation to materially affect financial position, results, or liquidity.
Important facts for investors to verify
- How much underlying growth persists after adjusting for currency, distributor inventories, and the BenRiach and Southern Comfort/Tuaca effects.
- Whether input-cost increases and foreign-exchange pressure continue to compress gross and operating margins.
- BenRiach purchase-price allocation and the acquisition’s contribution to future sales and earnings.
- Debt levels, refinancing needs, and commercial-paper availability, including the maturity of the $400 million facility in May 2017.
- Progress on the remaining share-repurchase authorization and the sustainability of dividends alongside acquisition and investment spending.