BROWN FORMAN CORP annual report, FY2020

Business context and reporting period

Brown-Forman Corporation’s Form 10-K covers the fiscal year ended April 30, 2020 (FY2020), not a standalone 2019 fourth quarter. The company manufactures and sells spirits, ready-to-drink cocktails, and wine in more than 170 countries. Its portfolio is led by Jack Daniel’s, alongside Woodford Reserve, Old Forester, Herradura, el Jimador, and other brands. The United States generated 50% of FY2020 net sales. The company operates as one reportable segment.

Financial results and liquidity

FY2020 underlying net sales were flat after adjustments for foreign exchange and estimated distributor inventory changes; underlying operating income declined 6%. Cost of sales rose 7%, driven by agave and wood input costs and tariffs; the company estimated tariffs accounted for over one-third of that increase. Operating cash flow fell amid lower earnings and a larger working-capital increase, including higher inventory. Capital expenditures were $113 million. Dividends paid were $325 million; the declared dividend was $0.6806 per share for the year.

Year-end short-term borrowings were $333 million, primarily commercial paper, and long-term debt was $2.269 billion. The company had an undrawn $800 million revolving credit facility due November 2023 and reported no long-term debt maturities until FY2023. Management said liquidity and cash generation were adequate to fund business investment and regular dividends. Credit ratings were A1 from Moody’s and A- from S&P.

Material changes versus the prior comparable period

• Reported net sales increased 1%, but underlying sales were flat; volume fell 1% while net price/mix rose 1%.
• U.S. underlying net sales grew 5%, led by premium bourbon and Jack Daniel’s Tennessee Apple. Declines in Travel Retail, developed international, and emerging markets offset U.S. growth.
• Woodford Reserve underlying net sales grew 19%; the Jack Daniel’s family was flat, with Tennessee Whiskey declines offset by product launches and growth in RTDs and other expressions. Finlandia underlying sales fell 12%.
• Gross and operating margins both contracted 2.0 percentage points, reflecting higher input and tariff costs and COVID-19-related disruption.
• Cash from operations decreased to $724 million. Cash increased to $675 million, while short-term borrowings rose to $333 million; share repurchases fell substantially, from $207 million to $1 million.
• Fourth-quarter FY2020 net sales were $709 million versus $744 million in the prior-year quarter, and net income was $128 million versus $159 million. COVID-19 materially affected the quarter.

Outlook, risks, contingencies, and unusual items

Management did not provide quantitative FY2021 guidance because of uncertainty around COVID-19. It expected Travel Retail not to recover during FY2021, with on-premise recovery dependent on multiple factors and emerging markets likely to recover more slowly. Management described the business as having a strong balance sheet, solid cash flows, and ample liquidity, and said it expected to continue business investment and regular dividends. It also reported reducing discretionary spending, reprioritizing some capital projects, and shifting resources toward off-premise and e-commerce channels.

• COVID-19 sharply curtailed on-premise and Travel Retail activity in March and April 2020. Management cited uncertainty about demand, consumer behavior, restrictions, economic conditions, and potential further waves; the eventual financial impact could be material.
• Retaliatory tariffs on American whiskey continued to weigh on sales and costs. The filing also highlights foreign-exchange exposure, economic weakness, changing consumer preferences, dependence on the Jack Daniel’s franchise, supply and aged-inventory forecasting risks, regulation, and competition.
• A $13 million non-cash impairment was recorded for the Chambord brand in Q4, reflecting weaker long-term expectations amid on-premise closures. The remaining carrying value was $104 million; management noted further impairment could result from changes in assumptions.
• Brown-Forman disputed Bacardi’s approximately £49 million claim for U.K. commercial agency compensation. Bacardi had withheld more than £34 million of amounts otherwise owed to Brown-Forman. The company could not estimate a reasonably possible loss; it said existing contingencies were not expected to have a material adverse effect overall.
• On June 12, 2020, the company agreed to sell Early Times, Canadian Mist, and Collingwood assets to Sazerac, with closing expected by October 31, 2020. A gain was expected at closing; the assets represented approximately 1% of total assets.
• The auditor issued an unqualified opinion on the financial statements and internal controls. The filing identifies brand-name impairment valuation as a critical audit matter. The company reported effective internal control over financial reporting.

Important facts for investors to verify

• How COVID-19 affected subsequent demand and the pace of recovery in on-premise, Travel Retail, and emerging markets, given the absence of quantitative FY2021 guidance.
• Whether tariffs, input-cost inflation, and distributor inventory movements continue to pressure underlying sales, gross margin, and operating income.
• Whether Jack Daniel’s Tennessee Whiskey stabilizes and whether growth in Woodford Reserve, Old Forester, and newer products can offset declines elsewhere.
• The outcome and cash impact of the Bacardi dispute, and the timing, proceeds, and gain from the agreed Sazerac asset sale.
• Cash conversion and working-capital needs, including inventory investment, commercial-paper usage, and the company’s ability to maintain dividends and planned investments.