Brown-Forman(BF_B) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements for Brown-Forman Corporation for the three and nine months ended January 31, 2019 Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including Statements of Operations, Comprehensive Income, Balance Sheets, and Cash Flows, with detailed notes on accounting policies and financial accounts Condensed Consolidated Statements of Operations For the nine months ended January 31, 2019, net sales increased to $2,580 million from $2,515 million year-over-year, with net income rising to $676 million from $607 million Condensed Consolidated Statements of Operations (Nine Months Ended Jan 31) | Financial Metric | 2018 (in millions) | 2019 (in millions) | Change | |---|---|---|---| | Net Sales | $2,515 | $2,580 | +2.6% | | Gross Profit | $1,690 | $1,684 | -0.4% | | Operating Income | $901 | $916 | +1.7% | | Net Income | $607 | $676 | +11.4% | | Diluted EPS | $1.25 | $1.40 | +12.0% | Condensed Consolidated Balance Sheets As of January 31, 2019, total assets increased to $5,163 million from $4,976 million, primarily due to higher inventories and accounts receivable, while total stockholders' equity grew to $1,493 million Condensed Consolidated Balance Sheet Highlights (in millions) | Account | April 30, 2018 | January 31, 2019 | |---|---|---| | Assets | | | | Cash and cash equivalents | $239 | $260 | | Total inventories | $1,379 | $1,471 | | Total current assets | $2,555 | $2,755 | | Total assets | $4,976 | $5,163 | | Liabilities & Equity | | | | Total current liabilities | $821 | $895 | | Long-term debt | $2,341 | $2,301 | | Total liabilities | $3,660 | $3,670 | | Total stockholders' equity | $1,316 | $1,493 | Condensed Consolidated Statements of Cash Flows For the nine months ended January 31, 2019, cash provided by operating activities was $577 million, while cash used for financing activities significantly increased to $458 million due to treasury stock acquisitions Cash Flow Summary (Nine Months Ended Jan 31, in millions) | Cash Flow Activity | 2018 | 2019 | |---|---|---| | Cash provided by operating activities | $582 | $577 | | Cash used for investing activities | ($121) | ($86) | | Cash used for financing activities | ($380) | ($458) | | Net increase in cash and cash equivalents | $105 | $21 | Notes to the Condensed Consolidated Financial Statements This section details accounting policies, including the adoption of new standards like ASC 606, which reduced retained earnings by $25 million, and the expected material impact of ASC 842 on lease liabilities - Adopted ASU 2014-09 (ASC 606) for revenue recognition, resulting in a cumulative-effect adjustment that reduced retained earnings by $25 million (net of tax) as of May 1, 2018[14] - Adopted ASU 2017-07 for pension cost presentation, which retrospectively increased operating income by $7 million for the nine months ended January 31, 2018, by reclassifying costs to non-operating expense[18] - The company will adopt ASU 2016-02 (ASC 842) for leases on May 1, 2019, which is expected to materially increase lease liabilities and right-of-use assets on the balance sheet[19][20] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting the negative impact of retaliatory tariffs on American whiskey, which reduced underlying net sales growth, while maintaining the fiscal 2019 outlook despite continued tariff pressure and higher input costs - Retaliatory tariffs from the European Union (25%), Mexico (25%), Canada (10%), and others negatively affected results by lowering net sales and increasing cost of sales[116][117] - For the nine months ended Jan 31, 2019, underlying net sales grew 5%, driven by the Jack Daniel's family of brands, premium bourbons, and tequila brands, with incremental costs from tariffs reducing this growth by approximately one percentage point[118] - The company maintains its fiscal 2019 outlook, expecting underlying net sales growth similar to fiscal 2018, but with decelerated underlying operating income growth due to tariffs and high single-digit input cost increases[122][124][125][126] Results of Operations – Fiscal 2019 Year-to-Date Highlights For the nine months ended January 31, 2019, underlying net sales growth was led by Emerging markets (+10%) and the United States (+4%), with Whiskey (+5%) and Tequila (+13%) driving brand performance Underlying Net Sales Growth by Geographic Area (9 Months Ended Jan 31, 2019) | Geographic Area | Underlying Growth | Key Drivers | |---|---|---| | United States | 4% | Woodford Reserve, Old Forester, el Jimador, Herradura | | Developed International | 4% | Germany, Australia, UK; dampened by tariffs | | Emerging | 10% | Mexico, Brazil, China, Ukraine | | Travel Retail | 6% | Woodford Reserve, Scotch expansion | Underlying Net Sales Growth by Brand (9 Months Ended Jan 31, 2019) | Brand/Category | Underlying Growth | Key Drivers | |---|---|---| | Whiskey | 5% | Woodford Reserve, JDTW, JD RTDs | | Jack Daniel's Family | 4% | Broad-based growth outside the US | | Woodford Reserve | 24% | Strong US consumer takeaway | | Tequila | 13% | el Jimador and Herradura in US & Mexico | | Vodka (Finlandia) | (7%) | Unfavorable mix in Poland, lower volumes in Russia | Year-over-Year Period Comparisons For the nine months ended January 31, 2019, reported net sales grew 3% to $2.6 billion, while gross margin declined by 1.9 percentage points to 65.3% due to tariffs and higher costs, and diluted EPS increased 12% to $1.40 due to a lower effective tax rate - For the nine months, underlying cost of sales increased 10%, driven by higher input costs (wood, agave), higher volumes, and incremental costs from tariffs, which added approximately three percentage points to the growth[147] Gross Margin Change (9 Months Ended Jan 31, 2019) | Component | Impact on Gross Margin | |---|---| | Prior Year Gross Margin | 67.2% | | Price/mix | +0.3% | | Cost | (0.7%) | | Tariffs | (1.3%) | | New accounting standard | (0.1%) | | Foreign exchange | (0.1%) | | Current Year Gross Margin | 65.3% | - The effective tax rate for the nine-month period decreased to 19.2% from 28.5% in the prior year, primarily due to the reduction in the U.S. statutory federal tax rate under the Tax Act[167] Liquidity and Financial Condition The company maintains a conservative liquidity position, with cash increasing by $21 million in the first nine months of fiscal 2019, driven by a significant increase in share repurchases and a reduction in long-term debt repayments - Cash used for financing activities increased to $458 million from $380 million year-over-year, largely due to a $205 million increase in share repurchases[172] - The company completed its $200 million share repurchase program in November 2018, acquiring a total of 4.2 million Class A and B shares at an average price of approximately $47.30[181][182] - In the quarter ended January 31, 2019, the company repatriated approximately $120 million of cash from a foreign subsidiary, with no incremental taxes due beyond the repatriation tax recorded in fiscal 2018[178] Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from foreign exchange rates, commodity prices, and interest rates, which it manages through various strategies, with no material changes to its market risk profile since fiscal year-end 2018 - The company confirms no material changes to its market risk disclosures regarding foreign exchange, commodity price, and interest rate risks since its 2018 Form 10-K[183] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of January 31, 2019, with no material changes in internal control over financial reporting during the most recent fiscal quarter - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the reporting period[184] - No changes in internal control over financial reporting occurred during the quarter that materially affected, or are reasonably likely to materially affect, these controls[185] PART II - OTHER INFORMATION This section covers other information, including legal proceedings, risk factors, unregistered sales of equity securities, and a list of exhibits filed with the report Item 1. Legal Proceedings The company operates in a litigious environment but does not anticipate that any pending legal proceedings will have a material adverse effect on its financial position, operations, or liquidity - The company does not expect pending legal proceedings to have a material adverse effect on its financial condition or results[187] Item 1A. Risk Factors The company reports that there have been no material changes to the risk factors previously disclosed in its Annual Report on Form 10-K for the fiscal year ended April 30, 2018 - There have been no material changes to the risk factors disclosed in the 2018 Form 10-K[188] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's share repurchase activity, noting that during the quarter ended January 31, 2019, 1,649,381 shares were acquired at an average price of $47.51, completing a $200 million repurchase program Share Repurchases for Quarter Ended January 31, 2019 | Period | Total Shares Purchased | Average Price Paid per Share | |---|---|---| | Nov 1 - Nov 30, 2018 | 1,649,381 | $47.51 | | Dec 1 - Dec 31, 2018 | — | — | | Jan 1 - Jan 31, 2019 | — | — | - The $200 million share repurchase program announced in July 2018 was completed in November 2018[188] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including amended by-laws, CEO and CFO certifications pursuant to the Sarbanes-Oxley Act, and XBRL data files - Exhibits filed with the report include Sarbanes-Oxley certifications (31.1, 31.2, 32) and financial statements formatted in XBRL (101)[192]