Brown-Forman(BF_B) - 2021 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements for Brown-Forman Corporation for the three and six months ended October 31, 2020 Condensed Consolidated Statements of Operations For the six months ended October 31, 2020, net sales slightly decreased to $1,738 million, while operating income increased to $717 million due to a $127 million gain on sale of a business Condensed Consolidated Statements of Operations (Six Months Ended Oct 31) | Financial Metric | 2019 (in millions) | 2020 (in millions) | Change | | :--- | :--- | :--- | :--- | | Net Sales | $1,755 | $1,738 | -1.0% | | Gross Profit | $1,117 | $1,046 | -6.4% | | Operating Income | $600 | $717 | +19.5% | | Net Income | $468 | $564 | +20.5% | | Diluted EPS | $0.97 | $1.17 | +20.6% | - A significant pre-tax gain of $127 million was recognized from the sale of a business during the six months ended October 31, 2020, which substantially boosted operating and net income[6] Condensed Consolidated Balance Sheets As of October 31, 2020, total assets increased to $6,350 million, driven by a rise in cash and accounts receivable, while total liabilities and stockholders' equity also grew Balance Sheet Summary (as of Oct 31, 2020 vs. Apr 30, 2020) | Account | April 30, 2020 (in millions) | October 31, 2020 (in millions) | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $675 | $964 | | Total current assets | $3,265 | $3,815 | | Total assets | $5,766 | $6,350 | | Liabilities & Equity | | | | Total current liabilities | $880 | $1,022 | | Long-term debt | $2,269 | $2,309 | | Total liabilities | $3,791 | $3,947 | | Total stockholders' equity | $1,975 | $2,403 | Condensed Consolidated Statements of Cash Flows For the six months ended October 31, 2020, cash provided by operating activities was $283 million, with a net increase in cash and cash equivalents of $289 million Cash Flow Summary (Six Months Ended Oct 31, 2020) | Cash Flow Activity | Amount (in millions) | | :--- | :--- | | Cash provided by operating activities | $283 | | Cash provided by investing activities | $147 | | Cash used for financing activities | ($155) | | Net increase in cash | $289 | - The primary source of cash from investing activities was the $177 million in proceeds from the sale of a business[14] Notes to the Condensed Consolidated Financial Statements The notes detail financial statements, including net sales by geography and product, the $127 million gain from brand sales, debt structure, and derivative use for hedging - On July 31, 2020, the company sold the Early Times, Canadian Mist, and Collingwood brands for $177 million in cash, resulting in a pre-tax gain of $127 million, aligning with a focus on premium spirits[68] Net Sales by Geography (Six Months Ended Oct 31) | Geography | 2019 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | | United States | $880 | $909 | | Developed International | $453 | $497 | | Emerging | $306 | $267 | | Travel Retail | $70 | $35 | | Total | $1,755 | $1,738 | Net Sales by Product Category (Six Months Ended Oct 31) | Product Category | 2019 (in millions) | 2020 (in millions) | | :--- | :--- | :--- | | Whiskey | $1,385 | $1,370 | | Tequila | $145 | $152 | | Wine | $97 | $112 | | Vodka | $57 | $45 | | Total | $1,755 | $1,738 | - The Board of Directors increased the quarterly cash dividend from $0.1743 to $0.1795 per share, payable on January 4, 2021[34] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial results, highlighting underlying net sales growth driven by off-premise and e-premise performance, strong liquidity, and operational adjustments due to COVID-19 Overview For the first half of fiscal 2021, reported net sales decreased 1% to $1.7 billion, while underlying net sales grew 4%, with operating income rising 19% to $717 million due to a brand divestiture gain - The financial impact of COVID-19 was mixed: negative effects on the on-premise (nearly 20% of business) and Travel Retail channels were offset by solid off-premise gains and growth in the e-premise channel due to increased at-home consumption[94] Fiscal 2021 Year-to-Date Highlights (Six Months Ended Oct 31, 2020) | Metric | Value | Change vs. Prior Year | | :--- | :--- | :--- | | Reported Net Sales | $1.7 billion | -1% | | Underlying Net Sales | - | +4% | | Reported Operating Income | $717 million | +19% | | Underlying Operating Income | - | +11% | | Diluted EPS | $1.17 | +20% | Fiscal 2021 Outlook Due to COVID-19 uncertainties, the company is not providing quantitative guidance for fiscal 2021, anticipating no recovery in Travel Retail and on-premise channels, and expecting gross margin pressure and accelerated operating expenses - The company is not providing quantitative guidance for fiscal 2021 due to uncertainties related to COVID-19[101] - Key qualitative expectations for fiscal 2021 include: - No recovery in the Travel Retail and on-premise channels[101] - Continued pressure on gross margin due to higher input costs and mix shifts[102] - Significant acceleration in operating expenses, especially advertising, in the second half[102] - A planned $20 million contribution to the Brown-Forman Foundation[102] - The expected full-year effective tax rate for fiscal 2021 is projected to be in the range of 17% to 19%[103] Results of Operations – Fiscal 2021 Year-to-Date Highlights For the first half of fiscal 2021, underlying net sales grew in the U.S. and Developed International markets, driven by premium bourbons and RTDs, offsetting a decline in Jack Daniel's Tennessee Whiskey Underlying Net Sales % Change by Market (Six Months Ended Oct 31, 2020) | Market | Underlying Change | | :--- | :--- | | United States | 9% | | Developed International | 10% | | Emerging | 0% | | Travel Retail | -59% | | Non-branded and bulk | -33% | Underlying Net Sales % Change by Brand (Six Months Ended Oct 31, 2020) | Brand/Category | Underlying Change | | :--- | :--- | | Jack Daniel's Tennessee Whiskey | -7% | | Jack Daniel's RTD/RTP | 34% | | Woodford Reserve | 19% | | Tequila (Portfolio) | 13% | | Vodka (Finlandia) | -20% | Liquidity and Financial Condition The company maintains a strong liquidity position, with cash and cash equivalents increasing by $289 million to $964 million, supported by an $800 million commercial paper program and undrawn bank credit facility - Cash and cash equivalents increased by $289 million to end the period at $964 million[146][151] - The company has an $800 million commercial paper program, supported by an undrawn $800 million bank credit facility expiring in November 2023, ensuring financial flexibility[153][154] - To preserve liquidity during the COVID-19 crisis, the company has closely managed operating expenses, limited discretionary spending, and re-prioritized capital projects[150] Quantitative and Qualitative Disclosures about Market Risk The company manages market risks from foreign currency, commodity prices, and interest rates through derivatives and procurement strategies, with no material changes since April 30, 2020 - The company identifies its primary market risks as fluctuations in foreign currency exchange rates, commodity prices, and interest rates, using derivatives and other financial instruments to mitigate these exposures[157] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective, with no material changes in internal control over financial reporting during the last fiscal quarter - The CEO and CFO concluded that the company's disclosure controls and procedures are effective[158] - No changes have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting during the last fiscal quarter[159] PART II - OTHER INFORMATION Legal Proceedings The company operates in a litigious environment but does not anticipate any pending legal proceedings will have a material adverse effect on its financial position, operations, or liquidity - The company does not expect any pending legal proceedings to have a material adverse effect on its financial condition or results[160] Risk Factors There have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K for fiscal year 2020 and the Quarterly Report for the first quarter of fiscal 2021 - No material changes have been made to the risk factors disclosed in the 2020 Form 10-K and the Q1 2021 Form 10-Q[161] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the period - None[162] Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications pursuant to the Sarbanes-Oxley Act and the financial statements in Inline XBRL format Filed Exhibits | Exhibit | Description | | :--- | :--- | | 31.1 | CEO Certification (Section 302) | | 31.2 | CFO Certification (Section 302) | | 32 | CEO and CFO Certification (Section 906) | | 101 | Inline XBRL Financial Statements | | 104 | Cover Page Interactive Data File |