Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Fiscal 2015 first quarter, the three months ended July 31, 2014; comparative period ended July 31, 2013. Unaudited interim financial statements. Brown-Forman sells spirits and related beverages, with Jack Daniel’s among its principal brands.
Financial performance
| Metric | Q1 FY2015 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $921 million | $896 million | +3% reported; +3% underlying |
| Gross profit / margin | $495 million / 53.7% | $477 million / 53.3% | Profit +4% reported, +5% underlying; margin +0.5 percentage points |
| Operating income / margin | $221 million / 23.9% | $217 million / 24.2% | +1% reported; +7% underlying; margin −0.3 percentage points |
| Net income | $150 million | $143 million | +5% |
| Diluted EPS | $0.70 | $0.66 | +5% |
| Operating cash flow | $112 million | $93 million | +$19 million |
Underlying measures are non-GAAP and adjusted for foreign exchange and, where applicable, estimated distributor-inventory changes. Excise taxes were $216 million versus $210 million. Advertising expense declined 4% to $99 million, while SG&A rose 9% to $170 million. The effective tax rate fell to 29.8% from 32.4%.
Cash, debt, and liquidity
- Cash and cash equivalents were $460 million at July 31, 2014, up $23 million since April 30. Operating cash flow of $112 million was partly offset by $31 million of capital expenditures and $57 million of financing cash outflows.
- Balance-sheet debt comprised $13 million of short-term borrowings and $998 million of long-term debt, compared with $8 million and $997 million, respectively, at April 30.
- The company reported a $1 billion commercial-paper program and an undrawn $800 million revolving credit facility, maturing November 20, 2018. No commercial paper was outstanding at quarter-end. The credit facility’s minimum interest-coverage covenant was 3-to-1; the reported ratio was 37-to-1.
- Capital spending focused on expansion at the Jack Daniel Distillery and the Versailles, Kentucky, facility. The company paid $62 million in dividends and reported $12 million of treasury-stock purchases in the quarter.
Business trends and changes versus the prior year
- Management attributed growth to American whiskey, particularly the Jack Daniel’s family, whose underlying net sales rose 5%. Woodford Reserve, Herradura, el Jimador, and New Mix RTDs also posted underlying growth.
- Underlying net sales increased 3%, attributed to 1% volume growth and 2% net price/mix. Reported sales were affected by currency movements and distributor inventory changes.
- Underlying operating income grew faster than reported operating income, reflecting currency and distributor-inventory effects. Gross margin improved, but operating margin declined as euro-denominated asset revaluation weighed on results.
- Performance was mixed geographically: underlying sales were flat in the United States and Europe overall; France, Turkey, Russia, Mexico, and Australia grew, while the United Kingdom, Germany, and Poland declined. Finlandia was pressured by weak Polish demand after an excise-tax increase and related price rises; Southern Comfort faced consumer and on-premise channel weakness.
Outlook, risks, and unusual items
- No specific full-year revenue, earnings, or EPS guidance is provided in the filing. Management expected freight, logistics, and raw-material costs to rise in the low single digits.
- Management cited continued global growth in American whiskey and said liquidity was sufficient for financial commitments. It also noted deteriorating economic conditions, currency weakness, and legal-interpretation uncertainty as risks to its Russian business.
- Key disclosed risks include foreign exchange, consumer preferences and alcohol-market trends, reliance on the Jack Daniel’s family, supply-chain disruption, distributor inventory fluctuations, regulation, competition, and litigation. The filing reported no material changes to the prior 10-K risk factors.
- The company guaranteed a Russian importer’s bank obligation: maximum possible exposure was approximately $52 million, with actual exposure of approximately $12 million at July 31; receivables from the importer were approximately $22 million. Management expected the receivables to be collected and considered default unlikely.
- No material accrued loss contingencies were recorded, and management did not expect pending lawsuits to materially affect financial position, results, or liquidity. A $0.29-per-share quarterly dividend was declared, payable October 1, 2014. The share-repurchase authorization ran through September 30, 2014; approximately $155 million had been repurchased through August 25, leaving about $95 million available.
Important facts for investors to verify
- Whether reported growth in subsequent quarters is supported by consumer demand and depletions, rather than distributor inventory movements or pricing.
- Whether Jack Daniel’s and other growing brands offset weakness in Finlandia, Southern Comfort, and developed European markets.
- Whether higher SG&A, currency effects, and expected cost inflation affect margins and earnings.
- Cash deployment, capital spending, debt levels, dividend commitments, and completion of the expiring repurchase program.
- Developments in Russia, including importer credit exposure, currency conditions, and local regulatory uncertainty.