Brown-Forman(BF_B) - 2020 Q4 - Annual Report

Part I Business Brown-Forman is a 150-year-old American-owned spirits and wine company with global operations, centered on the Jack Daniel's brand family - Founded in 1870, Brown-Forman is the largest American-owned spirits and wine company with global reach, employing approximately 4,800 people on six continents[7] - The company is a "controlled company" as the Brown family owns over 50% of the voting stock and economic ownership[7] - The Jack Daniel's brand family is the company's most valuable asset, with Jack Daniel's Tennessee Whiskey being the largest American whiskey brand globally[9][35] Principal Brands Portfolio | Category | Brands | | :--- | :--- | | American Whiskey | Jack Daniel's Family (Tennessee Whiskey, Honey, Fire, Apple, etc.), Woodford Reserve, Old Forester, Coopers' Craft, Early Times | | Tequila | Herradura, el Jimador, Pepe Lopez, Antiguo | | Scotch & Irish Whiskey | GlenDronach, BenRiach, Glenglassaugh, Slane Irish Whiskey | | Other Spirits & Wine | Finlandia Vodkas, Korbel California Champagnes, Sonoma-Cutrer Wines, Chambord Liqueur, Fords Gin | Net Sales by Geographic Area | Geographic Area | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | United States | 47% | 47% | 50% | | United Kingdom | 6% | 6% | 5% | | Germany | 5% | 5% | 5% | | Australia | 5% | 5% | 5% | | Mexico | 5% | 5% | 5% | | Other | 32% | 32% | 30% | - The company's two largest customers, Republic National Distributing Company and Breakthru Beverage Group, accounted for approximately 18% and 13% of consolidated net sales in 2020, respectively[17] - The company's integrated strategy focuses on its portfolio, geography, people, and investments, guided by core values and a commitment to sustainability and diversity[28] Risk Factors The company faces significant risks from health pandemics, global trade policies, brand dependence, evolving consumer preferences, supply chain disruptions, and cybersecurity threats - COVID-19 Pandemic: The pandemic poses risks of global recession, demand volatility, supply chain disruptions, and changes in consumer behavior, including liquor sale bans[61][62][63] - Global & Political Risks: The company faces risks from trade policies like retaliatory tariffs on American whiskey, which have negatively impacted net sales and cost of sales, with potential for increased tariffs by June 2021[64][65] - Brand Dependence: Performance is substantially dependent on the Jack Daniel's brand family; a decline in its volume or reputation would adversely affect financial results[77] - Consumer Preferences & Competition: The business is vulnerable to shifts in consumer preferences and increased competition from a growing number of small, local distilleries, particularly in the U.S[78][79] - Supply Chain & Forecasting: Risks include production disruptions, imprecise forecasting for aged products, and higher costs or unavailability of key raw materials like American white oak, agave, and glass[83][85][87] - Cybersecurity & Data Privacy: Cyber breaches or IT system failures could cause business interruptions and reputational harm, compounded by increasingly stringent data protection laws like GDPR and CCPA[110][111][113] - Family Control: The Brown family's majority voting stock control provides long-term focus but may not always align with other stockholders' interests and could deter takeovers[117][119][120] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[121] Properties The company owns significant production facilities, including distilleries, a winery, bottling plants, and cooperages, primarily in the United States, Canada, Mexico, France, Ireland, and Scotland Significant Owned Properties | Location | Principal Activities | | :--- | :--- | | Louisville, Kentucky | Corporate offices, Distilling (Old Forester), Cooperage | | Lynchburg, Tennessee | Distilling, bottling, warehousing (Jack Daniel's) | | Woodford County, Kentucky | Distilling, bottling, warehousing (Woodford Reserve) | | Windsor, California | Vineyards, winery, bottling (Sonoma-Cutrer) | | Amatitán, Mexico | Distilling, bottling, warehousing (Tequila brands) | | Aberdeenshire, Scotland | Distilling, warehousing (Glendronach) | | Morayshire, Scotland | Distilling, warehousing (BenRiach) | Legal Proceedings The company is involved in litigation in the normal course of business but does not anticipate any pending suits will have a material adverse effect on its financial position, results of operations, or liquidity - The company does not expect any pending legal proceedings to have a material adverse effect on its financial position, results, or liquidity[127] Mine Safety Disclosures This item is not applicable to the company - Not applicable[128] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's Class A and B common stock trade on the NYSE, with details on equity compensation plans and a five-year stock performance graph included - Class A (BFA) and Class B (BFB) common stock are traded on the NYSE, with 2,552 holders of Class A and 5,127 holders of Class B stock as of May 31, 2020[128] Equity Compensation Plan Information as of April 30, 2020 | Plan Category | Number of Securities to Be Issued Upon Exercise | Weighted-Average Exercise Price | Number of Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by Class A common stockholders | 2,438,446 | $38.19 | 13,513,565 | Selected Financial Data This section provides a five-year summary of key financial data, including fiscal 2020 net sales of $3,363 million and net income of $827 million Selected Financial Data (Fiscal Years 2018-2020) | (In millions, except per share data) | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | | Net sales | $3,248 | $3,324 | $3,363 | | Gross profit | $2,202 | $2,166 | $2,127 | | Operating income | $1,048 | $1,144 | $1,091 | | Net income | $717 | $835 | $827 | | Diluted EPS | $1.48 | $1.73 | $1.72 | | Gross margin | 67.8% | 65.2% | 63.2% | | Operating margin | 32.3% | 34.4% | 32.4% | | Cash provided by operations | $653 | $800 | $724 | | Total assets (at year-end) | $4,976 | $5,139 | $5,766 | | Total debt (at year-end) | $2,556 | $2,440 | $2,602 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Fiscal 2020 saw 1% reported net sales growth to $3.4 billion but flat underlying sales, impacted by COVID-19, tariffs, and higher input costs, leading to a 5% operating income decline Significant Developments Fiscal 2020 saw significant developments including COVID-19 impacts, ongoing tariffs, the launch of Jack Daniel's Tennessee Apple, the acquisition of Fords Gin, and $230 million in capital investments - COVID-19 Impact: The pandemic negatively affected results starting in Q4 2020, with on-premise and Travel Retail channels nearly halting, partially offset by strong off-premise and e-premise growth[159] - Tariffs: Retaliatory tariffs continued to negatively affect results in fiscal 2020 by lowering net sales and increasing cost of sales[161][162][163] - Innovation & Acquisition: The company launched Jack Daniel's Tennessee Apple in fiscal 2020 and acquired Fords Gin in July 2019 for $22 million in cash[165][166] - Capital Deployment: Over fiscal 2019-2020, the company invested approximately $230 million in capital expenditures, primarily for whiskey production, and returned $0.8 billion to stockholders via dividends and share repurchases[167][169] Executive Summary Fiscal 2020 reported net sales rose 1% to $3.4 billion, but underlying sales were flat, with operating income down 5% due to COVID-19, and no quantitative guidance for fiscal 2021 Fiscal 2020 vs. 2019 Performance Summary | Metric | FY 2020 | FY 2019 | Reported Change | Underlying Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $3,363M | $3,324M | +1% | 0% | | Gross Profit | $2,127M | $2,166M | -2% | -3% | | Operating Income | $1,091M | $1,144M | -5% | -6% | | Diluted EPS | $1.72 | $1.73 | -1% | N/A | - Due to substantial uncertainty from the COVID-19 pandemic, the company is not providing quantitative guidance for fiscal 2021[179] Results of Operations Fiscal 2020 saw 5% underlying net sales growth in the U.S., offset by declines in international and Travel Retail markets due to COVID-19, with gross margin compressed by 2.0 percentage points due to higher input costs and tariffs FY2020 Underlying Net Sales Growth by Market | Geographic Area | % of Net Sales | Underlying Change vs. 2019 | | :--- | :--- | :--- | | United States | 50% | +5% | | Developed International | 27% | -1% | | Emerging | 17% | -1% | | Travel Retail | 4% | -10% | | Non-branded and bulk | 2% | -29% | | Total | 100% | 0% | FY2020 Underlying Net Sales Growth by Brand | Brand Family / Brand | Underlying Change vs. 2019 | | :--- | :--- | | Jack Daniel's family of brands | 0% | | - JDTW | -4% | | - JD RTD/RTP | +7% | | - Other Jack Daniel's (incl. Apple) | +41% | | Woodford Reserve | +19% | | Tequila (el Jimador & Herradura) | +2% | | Vodka (Finlandia) | -12% | - Gross margin decreased by 2.0 percentage points to 63.2% in fiscal 2020, driven by higher input costs and tariff-related costs[226] - Operating income decreased 5% to $1.1 billion, with underlying operating income declining 6%, reflecting lower gross profit and a 1% increase in underlying SG&A expenses[232] Liquidity and Capital Resources The company maintains strong liquidity, with cash increasing by $368 million to $675 million in fiscal 2020, supported by robust cash from operations and an $800 million undrawn credit facility Cash Flow Summary (in millions) | Activity | FY 2020 | FY 2019 | | :--- | :--- | :--- | | Cash from Operating Activities | $724 | $800 | | Cash for Investing Activities | ($141) | ($119) | | Cash for Financing Activities | ($191) | ($599) | | Net Increase in Cash | $368 | $68 | - The company has an $800 million commercial paper program, supported by an undrawn $800 million bank credit facility expiring in November 2023[247] - To preserve liquidity during the COVID-19 crisis, the company has managed operating expenses, re-prioritized capital projects, and actively managed working capital[243] Critical Accounting Policies and Estimates The company's critical accounting policies involve significant management judgment, particularly for goodwill and intangible assets, pension benefits, and income taxes, including a $13 million impairment charge for the Chambord brand in Q4 2020 - A non-cash impairment charge of $13 million was recognized for the Chambord brand name in Q4 2020 due to a weakened outlook from COVID-19's impact on the on-premise channel, with a remaining carrying amount of $104 million[260][337] - The fair values of goodwill and other intangible assets are estimated to substantially exceed their carrying amounts, with the exception of the Chambord brand name[259] - Pension and other postretirement benefit costs are sensitive to changes in assumptions; a 50 basis point change in the discount rate would alter the fiscal 2021 cost by approximately $5 million[265] Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from foreign currency exchange rates, commodity prices, and interest rates, managed through derivative contracts and procurement strategies - The company's most significant foreign currency exposures are to the euro, British pound, Australian dollar, Polish zloty, Mexican peso, and Russian ruble[270] - As of April 30, 2020, the company had outstanding currency derivatives with notional amounts totaling $1,026 million to manage foreign currency exposures[270] - Commodity price exposures include corn, malted barley, rye, natural gas, agave, and wood, managed through purchase orders and long-term supply contracts[272] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements for fiscal year 2020, including reports from management and PricewaterhouseCoopers LLP, highlighting $3,363 million in net sales and a $13 million Chambord brand impairment Consolidated Statement of Operations Highlights (FY 2020) | (In millions) | Amount | | :--- | :--- | | Net Sales | $3,363 | | Gross Profit | $2,127 | | Operating Income | $1,091 | | Net Income | $827 | Consolidated Balance Sheet Highlights (as of April 30, 2020) | (In millions) | Amount | | :--- | :--- | | Total Current Assets | $3,265 | | Total Assets | $5,766 | | Total Current Liabilities | $880 | | Long-Term Debt | $2,269 | | Total Liabilities | $3,791 | | Total Stockholders' Equity | $1,975 | - PricewaterhouseCoopers LLP issued an unqualified opinion on the financial statements and internal control effectiveness, highlighting the quantitative impairment assessment of brand name intangible assets as a critical audit matter[283][284][292] - Subsequent to year-end, on June 12, 2020, the company agreed to sell the Early Times, Canadian Mist, and Collingwood brands to Sazerac Company, with closing expected by October 31, 2020[446] Controls and Procedures Management, including the CEO and CFO, evaluated the company's disclosure controls and procedures as effective, with no material changes to internal control over financial reporting during Q4 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of fiscal 2020[451] - No material changes in internal control over financial reporting occurred during the quarter ended April 30, 2020[452] Part III Directors, Executive Compensation, and Corporate Governance This part incorporates information by reference from the company's definitive proxy statement for the Annual Meeting of Stockholders, covering directors, executive compensation, security ownership, related transactions, and accounting fees - Information regarding Directors, Executive Officers, and Corporate Governance (Item 10) is incorporated by reference from the company's proxy statement[454] - Details on Executive Compensation (Item 11) are incorporated by reference from the proxy statement[455] - Information on Security Ownership (Item 12) and Certain Relationships and Related Transactions (Item 13) is incorporated by reference from the proxy statement[456][457] - Information on Principal Accounting Fees and Services (Item 14) is incorporated by reference from the proxy statement[458] Part IV Exhibits and Financial Statement Schedules This section lists financial statements, schedules, and exhibits filed with the Form 10-K, including descriptions of common stock, subsidiary lists, auditor consent, and CEO/CFO certifications - The report includes Financial Statement Schedule II – Valuation and Qualifying Accounts[458] - Filed exhibits include CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act, and financial data in Inline XBRL format[459] Form 10-K Summary The company reports that there is no Form 10-K summary - None[463]