Brown-Forman Corporation — fiscal 2019 Form 10-K
Reporting period: Year ended April 30, 2019. Although the request metadata identifies 2018 Q4, this filing reports fiscal 2019; the unaudited fourth-quarter figures are summarized below. Amounts are in U.S. dollars.
Business context
Brown-Forman manufactures, markets, and sells spirits, ready-to-drink beverages, and wine in more than 170 countries. The Jack Daniel’s family is its primary revenue and growth driver. The United States accounted for 47% of fiscal 2019 net sales; international markets accounted for 53%.
Key financial metrics
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Sales, including excise taxes | $4.276 billion | $4.201 billion | +2% |
| Net sales | $3.324 billion | $3.248 billion | +2% reported; +5% underlying |
| Gross profit | $2.166 billion | $2.202 billion | -2% reported |
| Operating income | $1.144 billion | $1.048 billion | +9% reported; +5% underlying |
| Net income | $835 million | $717 million | +16% |
| Diluted EPS | $1.73 | $1.48 | +17% |
| Gross margin | 65.2% | 67.8% | -2.6 percentage points |
| Operating margin | 34.4% | 32.3% | +2.1 percentage points |
| Effective tax rate | 19.8% | 26.6% | -6.8 percentage points |
| Cash provided by operations | $800 million | $653 million | +$147 million |
Underlying measures are non-GAAP and adjusted for specified items including foreign exchange, accounting changes, and distributor inventory changes. Fiscal 2019 underlying net-sales growth comprised 3% volume growth and 2% price/mix. Tariff-related costs reduced underlying net-sales growth by an estimated one percentage point and underlying gross margin by 1.6 percentage points.
Liquidity and debt: Cash and cash equivalents were $307 million, versus $239 million a year earlier. Current assets were $2.719 billion and current liabilities were $703 million. Long-term debt was $2.290 billion and short-term commercial paper was $150 million (total debt of $2.440 billion). The company had an undrawn $800 million revolving credit facility expiring in 2022. Capital expenditures were $119 million; the company expected approximately $130 million in fiscal 2020.
Fiscal 2019 fourth quarter (unaudited): Net sales were $744 million versus $733 million in fiscal 2018 Q4; gross profit was $482 million versus $512 million; net income was $159 million versus $110 million; diluted EPS was $0.33 versus $0.23.
Material changes versus the prior year
- Net sales growth was led by whiskey, tequila, and emerging markets. Underlying net sales rose 11% in emerging markets and 4% in developed international markets; U.S. underlying net sales grew 3%.
- Gross margin declined as tariffs and higher input costs, notably wood and agave, outweighed favorable price/mix. Underlying cost of sales increased 12%.
- Operating income benefited from the absence of fiscal 2018’s $70 million contribution to establish the Brown-Forman Foundation and lower underlying SG&A. The prior-year comparison also included foreign-exchange and distributor-inventory effects.
- Net income and EPS benefited from higher operating income and a lower tax rate following U.S. tax reform; higher interest expense and a $15 million pension settlement charge partly offset those benefits.
- Operating cash flow rose year over year, but management said it would have declined by $43 million excluding fiscal 2018’s $120 million additional U.S. pension contribution and $70 million Foundation contribution; tariffs were a principal adverse factor.
Outlook, risks, and unusual items
- Management expected fiscal 2020 underlying net-sales growth to accelerate from fiscal 2019, led by Jack Daniel’s, premium bourbons, and tequila, with volume expected to be the largest growth driver. No specific percentage guidance was provided.
- Underlying cost of sales was expected to grow significantly faster than net sales, reflecting tariffs and higher agave and wood costs; underlying operating expenses were expected to grow more slowly than net sales.
- The outlook assumed EU, Turkish, and Chinese retaliatory tariffs remained in place. Mexico and Canada had rescinded tariffs after year-end, and Turkey had reduced its tariff rate. Management warned further tariffs could hurt results; a stronger U.S. dollar could also weigh on fiscal 2020 results.
- Other key risks include dependence on the Jack Daniel’s brand, changing consumer preferences and competition, supply and demand forecasting for aged inventory, production or supply-chain disruptions, regulation and alcohol-related restrictions, and global currency exposure. The company also cited cyber and data-security risks and its Brown-family-controlled dual-class share structure.
- U.S. tax reform reduced the statutory federal corporate tax rate to 21% for fiscal 2019 and subsequent years. Fiscal 2019 included a $15 million pension settlement charge after increased lump-sum payments. The company reported no material accrued loss contingencies and did not expect pending lawsuits, individually or in aggregate, to materially affect its financial position, results, or liquidity.
- The company expected to adopt lease accounting in fiscal 2020, recording approximately $55 million of right-of-use assets and lease liabilities; it did not expect a material effect on earnings, equity, or cash flows.
Most important facts for investors to verify
- Whether tariff changes and higher agave and wood costs continue to pressure gross margin and the fiscal 2020 outlook.
- Whether reported growth converts into sustained volume and pricing gains, particularly for Jack Daniel’s, premium bourbons, and tequila.
- How much of EPS growth reflects operating performance versus the lower tax rate and absence of the prior-year Foundation contribution.
- Cash generation, working-capital and inventory requirements, debt levels, and planned capital spending and shareholder distributions.
- Potential impairment sensitivity: two brand-name assets totaling $360 million were identified as more exposed; management estimated reasonably possible assumption changes could cause impairment charges.