þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 61-0143150 |
(State or other jurisdiction of | (IRS Employer |
incorporation or organization) | Identification No.) |
850 Dixie Highway | |
Louisville, Kentucky | 40210 |
(Address of principal executive offices) | (Zip Code) |
Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer o (Do not check if a smaller reporting company) | Smaller reporting company o |
Class A Common Stock ($.15 par value, voting) | 84,505,212 | |
Class B Common Stock ($.15 par value, nonvoting) | 126,920,334 |
BROWN-FORMAN CORPORATION | ||
Index to Quarterly Report Form 10-Q | ||
Page | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | Legal Proceedings | |
Item 1A. | Risk Factors | |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 3. | Defaults Upon Senior Securities | |
Item 4. | Mine Safety Disclosures | |
Item 5. | Other Information | |
Item 6. | ||
Three Months Ended | Six Months Ended | ||||||||||||||
October 31, | October 31, | ||||||||||||||
2013 | 2014 | 2013 | 2014 | ||||||||||||
Net sales | $ | 1,079 | $ | 1,135 | $ | 1,975 | $ | 2,056 | |||||||
Excise taxes | 246 | 258 | 455 | 474 | |||||||||||
Cost of sales | 257 | 268 | 467 | 478 | |||||||||||
Gross profit | 576 | 609 | 1,053 | 1,104 | |||||||||||
Advertising expenses | 111 | 123 | 214 | 223 | |||||||||||
Selling, general, and administrative expenses | 162 | 178 | 318 | 348 | |||||||||||
Other expense (income), net | (8 | ) | 5 | (7 | ) | 10 | |||||||||
Operating income | 311 | 303 | 528 | 523 | |||||||||||
Interest income | 1 | — | 1 | 1 | |||||||||||
Interest expense | 7 | 7 | 13 | 14 | |||||||||||
Income before income taxes | 305 | 296 | 516 | 510 | |||||||||||
Income taxes | 99 | 88 | 167 | 152 | |||||||||||
Net income | $ | 206 | $ | 208 | $ | 349 | $ | 358 | |||||||
Earnings per share: | |||||||||||||||
Basic | $ | 0.97 | $ | 0.98 | $ | 1.63 | $ | 1.68 | |||||||
Diluted | $ | 0.96 | $ | 0.97 | $ | 1.62 | $ | 1.67 | |||||||
Cash dividends per common share: | |||||||||||||||
Declared | $ | — | $ | — | $ | 0.510 | $ | 0.580 | |||||||
Paid | $ | 0.255 | $ | 0.290 | $ | 0.510 | $ | 0.580 |
Three Months Ended | Six Months Ended | ||||||||||||||
October 31, | October 31, | ||||||||||||||
2013 | 2014 | 2013 | 2014 | ||||||||||||
Net income | $ | 206 | $ | 208 | $ | 349 | $ | 358 | |||||||
Other comprehensive income (loss), net of tax: | |||||||||||||||
Currency translation adjustments | 7 | (30 | ) | (5 | ) | (46 | ) | ||||||||
Cash flow hedge adjustments | (10 | ) | 22 | (4 | ) | 27 | |||||||||
Postretirement benefits adjustments | 14 | 12 | 19 | 16 | |||||||||||
Net other comprehensive income (loss) | 11 | 4 | 10 | (3 | ) | ||||||||||
Comprehensive income | $ | 217 | $ | 212 | $ | 359 | $ | 355 |
April 30, 2014 | October 31, 2014 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | 437 | $ | 235 | |||
Accounts receivable, less allowance for doubtful accounts of $9 and $8 at April 30 and October 31, respectively | 569 | 761 | |||||
Inventories: | |||||||
Barreled whiskey | 504 | 530 | |||||
Finished goods | 187 | 232 | |||||
Work in process | 144 | 150 | |||||
Raw materials and supplies | 47 | 59 | |||||
Total inventories | 882 | 971 | |||||
Current deferred tax assets | 33 | 25 | |||||
Other current assets | 256 | 307 | |||||
Total current assets | 2,177 | 2,299 | |||||
Property, plant and equipment, net | 526 | 556 | |||||
Goodwill | 620 | 614 | |||||
Other intangible assets | 677 | 651 | |||||
Deferred tax assets | 18 | 17 | |||||
Other assets | 85 | 106 | |||||
Total assets | $ | 4,103 | $ | 4,243 | |||
Liabilities | |||||||
Accounts payable and accrued expenses | $ | 474 | $ | 535 | |||
Accrued income taxes | 71 | 12 | |||||
Current deferred tax liabilities | 8 | 7 | |||||
Short-term borrowings | 8 | 124 | |||||
Total current liabilities | 561 | 678 | |||||
Long-term debt | 997 | 998 | |||||
Deferred tax liabilities | 102 | 113 | |||||
Accrued pension and other postretirement benefits | 244 | 226 | |||||
Other liabilities | 167 | 153 | |||||
Total liabilities | 2,071 | 2,168 | |||||
Commitments and contingencies | |||||||
Stockholders’ Equity | |||||||
Common stock: | |||||||
Class A, voting (85,000,000 shares authorized; 85,000,000 shares issued) | 13 | 13 | |||||
Class B, nonvoting (400,000,000 shares authorized; 142,313,000 shares issued) | 21 | 21 | |||||
Additional paid-in capital | 81 | 99 | |||||
Retained earnings | 2,894 | 3,114 | |||||
Accumulated other comprehensive income (loss), net of tax | (188 | ) | (191 | ) | |||
Treasury stock, at cost (13,858,000 and 15,899,000 shares at April 30 and October 31, respectively) | (789 | ) | (981 | ) | |||
Total stockholders’ equity | 2,032 | 2,075 | |||||
Total liabilities and stockholders’ equity | $ | 4,103 | $ | 4,243 |
Six Months Ended | |||||||
October 31, | |||||||
2013 | 2014 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | 349 | $ | 358 | |||
Adjustments to reconcile net income to net cash provided by operations: | |||||||
Depreciation and amortization | 24 | 25 | |||||
Stock-based compensation expense | 6 | 6 | |||||
Deferred income taxes | (6 | ) | (18 | ) | |||
Changes in assets and liabilities | (172 | ) | (301 | ) | |||
Cash provided by operating activities | 201 | 70 | |||||
Cash flows from investing activities: | |||||||
Additions to property, plant, and equipment | (60 | ) | (59 | ) | |||
Acquisition of brand names and trademarks | — | (3 | ) | ||||
Computer software expenditures | — | (1 | ) | ||||
Cash used for investing activities | (60 | ) | (63 | ) | |||
Cash flows from financing activities: | |||||||
Net increase in short-term borrowings | 3 | 117 | |||||
Repayment of long-term debt | (1 | ) | — | ||||
Net payments related to exercise of stock-based awards | (6 | ) | (6 | ) | |||
Excess tax benefits from stock-based awards | 9 | 17 | |||||
Acquisition of treasury stock | (49 | ) | (205 | ) | |||
Dividends paid | (109 | ) | (124 | ) | |||
Cash used for financing activities | (153 | ) | (201 | ) | |||
Effect of exchange rate changes on cash and cash equivalents | — | (8 | ) | ||||
Net increase (decrease) in cash and cash equivalents | (12 | ) | (202 | ) | |||
Cash and cash equivalents, beginning of period | 204 | 437 | |||||
Cash and cash equivalents, end of period | $ | 192 | $ | 235 |
Three Months Ended | Six Months Ended | ||||||||||||||
October 31, | October 31, | ||||||||||||||
(Dollars in millions, except per share amounts) | 2013 | 2014 | 2013 | 2014 | |||||||||||
Net income available to common stockholders | $ | 206 | $ | 208 | $ | 349 | $ | 358 | |||||||
Share data (in thousands): | |||||||||||||||
Basic average common shares outstanding | 213,587 | 212,087 | 213,634 | 212,674 | |||||||||||
Dilutive effect of stock-based awards | 1,617 | 1,482 | 1,614 | 1,528 | |||||||||||
Diluted average common shares outstanding | 215,204 | 213,569 | 215,248 | 214,202 | |||||||||||
Basic earnings per share | $ | 0.97 | $ | 0.98 | $ | 1.63 | $ | 1.68 | |||||||
Diluted earnings per share | $ | 0.96 | $ | 0.97 | $ | 1.62 | $ | 1.67 |
Three Months Ended | Six Months Ended | ||||||||||||||
October 31, | October 31, | ||||||||||||||
(Dollars in millions) | 2013 | 2014 | 2013 | 2014 | |||||||||||
Pension Benefits: | |||||||||||||||
Service cost | $ | 5 | $ | 5 | $ | 11 | $ | 11 | |||||||
Interest cost | 8 | 8 | 15 | 17 | |||||||||||
Expected return on plan assets | (10 | ) | (10 | ) | (20 | ) | (21 | ) | |||||||
Amortization of: | |||||||||||||||
Prior service cost | — | — | — | 1 | |||||||||||
Net actuarial loss | 8 | 6 | 16 | 11 | |||||||||||
Net cost | $ | 11 | $ | 9 | $ | 22 | $ | 19 | |||||||
Other Postretirement Benefits: | |||||||||||||||
Service cost | $ | — | $ | — | $ | 1 | $ | 1 | |||||||
Interest cost | 1 | 1 | 2 | 2 | |||||||||||
Amortization of prior service cost | — | — | — | (1 | ) | ||||||||||
Net cost | $ | 1 | $ | 1 | $ | 3 | $ | 2 |
• | Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
• | Level 2 – Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data. |
• | Level 3 – Unobservable inputs that are supported by little or no market activity. |
(Dollars in millions) | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
April 30, 2014: | ||||||||||||||||
Assets: | ||||||||||||||||
Currency derivatives | $ | — | $ | 7 | $ | — | $ | 7 | ||||||||
Liabilities: | ||||||||||||||||
Currency derivatives | — | 7 | — | 7 | ||||||||||||
Short-term borrowings | — | 8 | — | 8 | ||||||||||||
Long-term debt | — | 963 | — | 963 | ||||||||||||
October 31, 2014: | ||||||||||||||||
Assets: | ||||||||||||||||
Currency derivatives | — | 51 | — | 51 | ||||||||||||
Liabilities: | ||||||||||||||||
Short-term borrowings | — | 124 | — | 124 | ||||||||||||
Long-term debt | — | 975 | — | 975 |
April 30, 2014 | October 31, 2014 | ||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||
(Dollars in millions) | Amount | Value | Amount | Value | |||||||||||
Assets: | |||||||||||||||
Cash and cash equivalents | $ | 437 | $ | 437 | $ | 235 | $ | 235 | |||||||
Currency derivatives | 7 | 7 | 51 | 51 | |||||||||||
Liabilities: | |||||||||||||||
Currency derivatives | 7 | 7 | — | — | |||||||||||
Short-term borrowings | 8 | 8 | 124 | 124 | |||||||||||
Long-term debt | 997 | 963 | 998 | 975 |
Three Months Ended | ||||||||
October 31, | ||||||||
(Dollars in millions) | Classification | 2013 | 2014 | |||||
Currency derivatives designated as cash flow hedge: | ||||||||
Net gain (loss) recognized in AOCI | n/a | $ | (15 | ) | $ | 42 | ||
Net gain (loss) reclassified from AOCI into income | Net sales | — | 6 | |||||
Derivatives not designated as hedging instruments: | ||||||||
Currency derivatives – net gain (loss) recognized in income | Net sales | (5 | ) | 11 | ||||
Currency derivatives – net gain (loss) recognized in income | Other income | — | 3 | |||||
Six Months Ended | ||||||||
October 31, | ||||||||
(Dollars in millions) | Classification | 2013 | 2014 | |||||
Currency derivatives designated as cash flow hedge: | ||||||||
Net gain (loss) recognized in AOCI | n/a | $ | (5 | ) | $ | 47 | ||
Net gain (loss) reclassified from AOCI into income | Net sales | 1 | 4 | |||||
Derivatives not designated as hedging instruments: | ||||||||
Currency derivatives – net gain (loss) recognized in income | Net sales | (1 | ) | 8 | ||||
Currency derivatives – net gain (loss) recognized in income | Other income | 2 | (6 | ) |
(Dollars in millions) | Classification | Fair value of derivatives in a gain position | Fair value of derivatives in a loss position | ||||||
April 30, 2014: | |||||||||
Designated as cash flow hedges: | |||||||||
Currency derivatives | Other current assets | $ | 6 | $ | (6 | ) | |||
Currency derivatives | Other assets | 2 | — | ||||||
Currency derivatives | Accrued expenses | 2 | (6 | ) | |||||
Currency derivatives | Other liabilities | — | (4 | ) | |||||
Not designated as hedges: | |||||||||
Currency derivatives | Other current assets | 5 | — | ||||||
Currency derivatives | Accrued expenses | 1 | — | ||||||
October 31, 2014: | |||||||||
Designated as cash flow hedges: | |||||||||
Currency derivatives | Other current assets | 33 | (2 | ) | |||||
Currency derivatives | Other assets | 16 | (1 | ) | |||||
Not designated as hedges: | |||||||||
Currency derivatives | Other current assets | 6 | (1 | ) |
(Dollars in millions) | Gross Amounts of Recognized Assets (Liabilities) | Gross Amounts Offset in Balance Sheet | Net Amounts Presented in Balance Sheet | Gross Amounts Not Offset in Balance Sheet | Net Amounts | ||||||||||||||
April 30, 2014: | |||||||||||||||||||
Derivative assets | $ | 17 | $ | (10 | ) | $ | 7 | $ | (2 | ) | $ | 5 | |||||||
Derivative liabilities | (17 | ) | 10 | (7 | ) | 2 | (5 | ) | |||||||||||
October 31, 2014: | |||||||||||||||||||
Derivative assets | 55 | (4 | ) | 51 | — | 51 | |||||||||||||
Derivative liabilities | (4 | ) | 4 | — | — | — |
Currency Translation Adjustments | Cash Flow Hedge Adjustments | Postretirement Benefits Adjustments | Total AOCI | ||||||||||||
Balance at July 31, 2013 | $ | (2 | ) | $ | 6 | $ | (216 | ) | $ | (212 | ) | ||||
Net other comprehensive income (loss) | 7 | (10 | ) | 14 | 11 | ||||||||||
Balance at October 31, 2013 | $ | 5 | $ | (4 | ) | $ | (202 | ) | $ | (201 | ) | ||||
Balance at July 31, 2014 | $ | (10 | ) | $ | 1 | $ | (186 | ) | $ | (195 | ) | ||||
Net other comprehensive income (loss) | (30 | ) | 22 | 12 | 4 | ||||||||||
Balance at October 31, 2014 | $ | (40 | ) | $ | 23 | $ | (174 | ) | $ | (191 | ) |
Pre-Tax | Tax | Net | |||||||||
Three Months Ended October 31, 2013 | |||||||||||
Currency translation adjustments | $ | 9 | $ | (2 | ) | $ | 7 | ||||
Cash flow hedge adjustments: | |||||||||||
Net gain (loss) on hedging instruments | (15 | ) | 5 | (10 | ) | ||||||
Reclassification to earnings1 | — | — | — | ||||||||
Postretirement benefits adjustments: | |||||||||||
Net actuarial gain (loss) and prior service cost | 14 | (5 | ) | 9 | |||||||
Reclassification to earnings2 | 8 | (3 | ) | 5 | |||||||
Net other comprehensive income (loss) | $ | 16 | $ | (5 | ) | $ | 11 | ||||
Three Months Ended October 31, 2014 | |||||||||||
Currency translation adjustments | $ | (32 | ) | $ | 2 | $ | (30 | ) | |||
Cash flow hedge adjustments: | |||||||||||
Net gain (loss) on hedging instruments | 42 | (16 | ) | 26 | |||||||
Reclassification to earnings1 | (6 | ) | 2 | (4 | ) | ||||||
Postretirement benefits adjustments: | |||||||||||
Net actuarial gain (loss) and prior service cost | 14 | (5 | ) | 9 | |||||||
Reclassification to earnings2 | 6 | (3 | ) | 3 | |||||||
Net other comprehensive income (loss) | $ | 24 | $ | (20 | ) | $ | 4 |
Currency Translation Adjustments | Cash Flow Hedge Adjustments | Postretirement Benefits Adjustments | Total AOCI | ||||||||||||
Balance at April 30, 2013 | $ | 10 | $ | — | $ | (221 | ) | $ | (211 | ) | |||||
Net other comprehensive income (loss) | (5 | ) | (4 | ) | 19 | 10 | |||||||||
Balance at October 31, 2013 | $ | 5 | $ | (4 | ) | $ | (202 | ) | $ | (201 | ) | ||||
Balance at April 30, 2014 | $ | 6 | $ | (4 | ) | $ | (190 | ) | $ | (188 | ) | ||||
Net other comprehensive income (loss) | (46 | ) | 27 | 16 | (3 | ) | |||||||||
Balance at October 31, 2014 | $ | (40 | ) | $ | 23 | $ | (174 | ) | $ | (191 | ) |
Pre-Tax | Tax | Net | |||||||||
Six Months Ended October 31, 2013 | |||||||||||
Currency translation adjustments | $ | (3 | ) | $ | (2 | ) | $ | (5 | ) | ||
Cash flow hedge adjustments: | |||||||||||
Net gain (loss) on hedging instruments | (5 | ) | 2 | (3 | ) | ||||||
Reclassification to earnings1 | (1 | ) | — | (1 | ) | ||||||
Postretirement benefits adjustments: | |||||||||||
Net actuarial gain (loss) and prior service cost | 14 | (5 | ) | 9 | |||||||
Reclassification to earnings2 | 16 | (6 | ) | 10 | |||||||
Net other comprehensive income (loss) | $ | 21 | $ | (11 | ) | $ | 10 | ||||
Six Months Ended October 31, 2014 | |||||||||||
Currency translation adjustments | $ | (48 | ) | $ | 2 | $ | (46 | ) | |||
Cash flow hedge adjustments: | |||||||||||
Net gain (loss) on hedging instruments | 47 | (17 | ) | 30 | |||||||
Reclassification to earnings1 | (4 | ) | 1 | (3 | ) | ||||||
Postretirement benefits adjustments: | |||||||||||
Net actuarial gain (loss) and prior service cost | 14 | (5 | ) | 9 | |||||||
Reclassification to earnings2 | 12 | (5 | ) | 7 | |||||||
Net other comprehensive income (loss) | $ | 21 | $ | (24 | ) | $ | (3 | ) |
• | “Foreign exchange.” We calculate the percentage change in our income statement line-items in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless clearly denoted otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current period results at prior-period rates. |
• | “Estimated net change in distributor inventories” refers to the estimated net effect of changes in distributor inventories on changes in our measures. For each period being compared, we estimate the effect of distributor inventory changes on our results using depletion information provided to us by our distributors. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in our measures and allows to understand better our underlying results and trend. |
• | Unfavorable global or regional economic conditions, and related low consumer confidence, high unemployment, weak credit or capital markets, sovereign debt defaults, sequestrations, austerity measures, higher interest rates, political instability, higher inflation, deflation, lower returns on pension assets, or lower discount rates for pension obligations |
• | Risks associated with being a U.S.-based company with global operations, including commercial, political and financial risks; local labor policies and conditions; protectionist trade policies or economic or trade sanctions; compliance with local trade practices and other regulations, including anti-corruption laws; terrorism; and health pandemics |
• | Fluctuations in foreign currency exchange rates |
• | Changes in laws, regulations, or policies - especially those that affect the production, importation, marketing, sale, or consumption of our beverage alcohol products |
• | Tax rate changes (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, capital gains) or changes in related reserves, changes in tax rules (e.g., LIFO, foreign income deferral, U.S. manufacturing and other deductions) or accounting standards, and the unpredictability and suddenness with which they can occur |
• | Dependence upon the continued growth of the Jack Daniel’s family of brands |
• | Changes in consumer preferences, consumption, or purchase patterns - particularly away from brown spirits, our premium products, or spirits generally, and our ability to anticipate and react to them; bar, restaurant, travel, or other on-premise declines; or unfavorable consumer reaction to new products, line extensions, package changes, product reformulations, or other product innovation |
• | Decline in the social acceptability of beverage alcohol products in significant markets |
• | Production facility, aging warehouse, or supply chain disruption |
• | Imprecision in supply/demand forecasting |
• | Higher costs, lower quality, or unavailability of energy, input materials, labor, or finished goods |
• | Route-to-consumer changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in higher implementation-related or fixed costs |
• | Inventory fluctuations in our products by distributors, wholesalers, or retailers |
• | Competitors’ consolidation or other competitive activities, such as pricing actions (including price reductions, promotions, discounting, couponing, or free goods), marketing, category expansion, product introductions, or entry or expansion in our geographic markets or distribution networks |
• | Risks associated with acquisitions, dispositions, business partnerships or investments - such as acquisition integration, or termination difficulties or costs, or impairment in recorded value |
• | Insufficient protection of our intellectual property rights |
• | Product recalls or other product liability claims; product counterfeiting, tampering or product quality issues |
• | Significant legal disputes and proceedings; government investigations (particularly of industry or company business, trade or marketing practices) |
• | Failure or breach of key information technology systems |
• | Negative publicity related to our company, brands, marketing, personnel, operations, business performance, or prospects |
• | Our status as a family “controlled company” under New York Stock Exchange rules |
• | Business disruption, decline, or costs related to organizational changes, reductions in workforce, or other cost-cutting measures, or our failure to attract or retain key executive or employee talent |
Summary of Operating Performance | ||||||||||||||||||||||||||||
Three months ended October 31, | Six months ended October 31, | |||||||||||||||||||||||||||
2013 | 2014 | Reported Change | Underlying Change1 | 2013 | 2014 | Reported Change | Underlying Change1 | |||||||||||||||||||||
Net sales | $ | 1,079 | $ | 1,135 | 5 | % | 7 | % | $ | 1,975 | $ | 2,056 | 4 | % | 5 | % | ||||||||||||
Excise taxes | 246 | 258 | 5 | % | 5 | % | 455 | 474 | 4 | % | 4 | % | ||||||||||||||||
Cost of sales | 257 | 268 | 4 | % | 6 | % | 467 | 478 | 3 | % | 3 | % | ||||||||||||||||
Gross profit | 576 | 609 | 6 | % | 9 | % | 1,053 | 1,104 | 5 | % | 7 | % | ||||||||||||||||
Advertising | 111 | 123 | 11 | % | 14 | % | 214 | 223 | 4 | % | 5 | % | ||||||||||||||||
SG&A | 162 | 178 | 10 | % | 12 | % | 318 | 348 | 10 | % | 10 | % | ||||||||||||||||
Operating income | $ | 311 | $ | 303 | (3 | )% | 5 | % | $ | 528 | $ | 523 | (1 | )% | 6 | % | ||||||||||||
Gross margin | 53.4 | % | 53.6 | % | 0.2pp | 53.3 | % | 53.7 | % | 0.4pp | ||||||||||||||||||
Operating margin | 28.8 | % | 26.6 | % | (2.2)pp | 26.7 | % | 25.4 | % | (1.3)pp | ||||||||||||||||||
Interest expense, net | $ | 6 | $ | 7 | (14 | )% | $ | 12 | $ | 13 | (10 | )% | ||||||||||||||||
Effective tax rate | 32.4 | % | 29.9 | % | (2.5)pp | 32.4 | % | 29.9 | % | (2.5)pp | ||||||||||||||||||
Diluted earnings per share | $ | 0.96 | $ | 0.97 | 1 | % | $ | 1.62 | $ | 1.67 | 3 | % |
Major Brands Worldwide Results | ||||||||||||
Percentage change versus prior year | ||||||||||||
Six months ended October 31 | Net Sales1 | |||||||||||
Brand family / brand | Volumes | Reported | Foreign Exchange | Net Chg in Est. Distributor Inventories | Underlying * | |||||||
Jack Daniel’s Family | 5 | % | 5 | % | 1 | % | — | % | 7 | % | ||
Jack Daniel’s Tennessee Whiskey | 2 | % | 2 | % | 1 | % | 1 | % | 4 | % | ||
Jack Daniel’s Tennessee Honey | 32 | % | 39 | % | (1 | %) | (6 | %) | 32 | % | ||
Other Jack Daniel’s whiskey brands2 | 18 | % | 23 | % | 1 | % | (5 | %) | 18 | % | ||
Jack Daniel’s RTDs/RTP3 | 5 | % | 2 | % | 1 | % | — | % | 3 | % | ||
Southern Comfort | (4 | %) | (4 | %) | — | % | — | % | (4 | %) | ||
Finlandia | (7 | %) | (7 | %) | 3 | % | (2 | %) | (6 | %) | ||
El Jimador | (1 | %) | 9 | % | 1 | % | (6 | %) | 4 | % | ||
New Mix RTDs | 13 | % | 9 | % | 3 | % | — | % | 12 | % | ||
Herradura | 12 | % | 20 | % | 2 | % | (3 | %) | 19 | % | ||
Woodford Reserve | 30 | % | 34 | % | — | % | (1 | %) | 33 | % | ||
Canadian Mist | (5 | %) | (6 | %) | — | % | — | % | (6 | %) | ||
* Totals may differ due to rounding |
• | Jack Daniel’s family of brands grew underlying net sales 7% (reported 5%) and was the most significant contributor to our underlying net sales growth for the six months ended October 31, 2014. Here are details about the performance of the Jack Daniel’s family of brands in the six month period: |
◦ | Jack Daniel’s Tennessee Whiskey (JDTW) grew volumes in emerging markets and the United States, as well as in important developed international markets including France and the United Kingdom, partially offset by declines in Germany and Australia. Improved price/mix for JDTW in the United States and the improved net sales price due to owned distribution in France were important contributors to sales growth in the period. |
◦ | The continued global expansion of Jack Daniel’s Tennessee Honey (JDTH) contributed significantly to our underlying net sales growth as several recently-launched international markets added volume while existing markets continued to grow, although, in the United States, at a slower rate than in fiscal 2014. |
◦ | Among our Other Jack Daniel’s whiskey brands, the most significant contributors to underlying net sales growth included Jack Daniel’s Tennessee Fire, launched earlier this year in three, and then expanded to five, test markets in the United States. After a favorable consumer and trade response to Jack Daniel’s Tennessee Fire, we plan to roll-out the line extension to the rest of the United States in the fourth quarter of fiscal 2015. We believe Jack Daniel’s Tennessee Fire represents a good opportunity for us to participate further in flavored whiskeys, particularly in cinnamon flavors, which has become the largest flavored whiskey category. Also contributing to net sales growth were Jack Daniel’s Sinatra Select, which benefited from a favorable comparison to a low sales base in the same period last year in the United States, as well as Gentleman Jack and Jack Daniel’s Single Barrel. |
◦ | Germany, the United Kingdom, Canada, and Mexico led the growth of Jack Daniel’s RTDs/RTP. Net sales growth in Mexico benefited from volumes of Jack Daniel’s Apple; net sales growth in Canada benefited from volumes on Jack Daniel’s Country Cocktails. |
• | Underlying net sales for Southern Comfort declined 4% (reported declined 4%). Net sales declined in Australia and the United States, partially offset by growth in the United Kingdom and South Africa. In the United States, the brand continued to be affected negatively by competitive pressure from other flavored whiskeys, particularly in the on-premise channel. |
• | Underlying net sales for Finlandia declined 6% (reported declined 7%) driven predominately by lower volumes in Poland and the United Kingdom. In Poland, volume declined due to high retail and wholesale trade inventories and weaker consumer demand following an excise tax hike and our related price increases in fiscal 2014. In the United Kingdom, volume declined due to weaker consumer demand. |
• | Underlying net sales of Herradura increased 19% (reported 20%) driven primarily by gains in Mexico and the United States. Net sales growth in Mexico benefited from volumes of a recent ultra-premium line extension, Herradura Ultra. |
• | Woodford Reserve led the growth of our super- and ultra-premium American whiskeys with underlying net sales growth of 33% (reported 34%). In the United States, Woodford gained share of the super-premium bourbon category and sustained double-digit volume growth. The brand continued its international expansion and increased sales most notably in both France and the United Kingdom. |
Top 10 Markets1 - Fiscal 2015 Net Sales Growth by Geographic Area | |||||||||
Percentage change versus prior year period | |||||||||
Six months ended October 31, 2014 | Net Sales2 | ||||||||
Geographic area | Reported | Foreign Exchange | Net Chg in Est. Distributor Inventories | Underlying * | |||||
United States | 6 | % | — | % | (1 | %) | 5 | % | |
Europe: | |||||||||
United Kingdom | 8 | % | — | % | — | % | 8 | % | |
Germany | (5 | %) | (1 | %) | — | % | (6 | %) | |
Poland | (14 | %) | 2 | % | — | % | (12 | %) | |
Russia | (7 | %) | 5 | % | 6 | % | 5 | % | |
France | 39 | % | (1 | %) | 14 | % | 52 | % | |
Turkey | 26 | % | 15 | % | — | % | 41 | % | |
Rest of Europe | 5 | % | 2 | % | (2 | %) | 5 | % | |
Europe | 4 | % | 2 | % | 1 | % | 7 | % | |
Australia | (3 | %) | 2 | % | — | % | (1 | %) | |
Other: | |||||||||
Mexico | (1 | %) | 3 | % | — | % | 2 | % | |
Canada | 5 | % | 5 | % | 1 | % | 11 | % | |
Rest of Other | 7 | % | 2 | % | 5 | % | 14 | % | |
Other | 4 | % | 3 | % | 2 | % | 9 | % | |
TOTAL | 4 | % | 1 | % | — | % | 5 | % | |
* Totals may differ due to rounding |
• | United States. Underlying net sales in the United States accelerated in the second quarter, lifting year-to-date underlying net sales growth to 5% (reported 6%). Underlying net sales growth for the six month period was driven by JDTW pricing and volume, and volume growth for Woodford Reserve, JDTH, Korbel Champagne, and el Jimador as well as new line extension Jack Daniel’s Tennessee Fire and agency brand Korbel Brandy, but was offset slightly by lower volumes for Canadian Mist and Southern Comfort. |
• | Europe. Underlying net sales growth in the United Kingdom, France, Turkey, and Russia was partially offset by declines in Germany and Poland. |
◦ | In the United Kingdom, underlying net sales growth, primarily from volume, was driven by JDTW and JDTH partially offset by declines in Finlandia. |
◦ | In France, net sales growth from pricing was driven by our comparatively higher direct-to-trade prices, which resulted from our fiscal 2014 route-to-consumer change. In addition, net sales growth from volume was driven by JDTW and JDTH, the latter of which was introduced in the second half of our fiscal 2014. |
◦ | In Turkey, underlying net sales growth, from both volume and price, was driven by JDTW. |
◦ | In Russia, while underlying net sales grew 5% in the first half, reported net sales decreased 7% due to the negative effect of a much weaker Russian ruble compared to the same period last year and an estimated net reduction in distributor inventories. We believe that there is increasing risk to consumer sentiment and spending in Russia given the deteriorating economic situation there, including slowing GDP growth, inflationary pressure and a weaker currency. In addition, our business faces risks related to uncertainty about how local laws may be interpreted and enforced in Russia. |
◦ | In Germany, variability in buying patterns contributed to the declines, which were driven primarily by declines in JDTW. |
◦ | In Poland, the decline in underlying net sales was driven largely by weaker consumer demand for Finlandia following an excise tax increase and our related price increases in fiscal 2014. We believe that higher pricing has weakened consumer demand generally for vodkas, including Finlandia. |
• | Australia. In Australia, a modest decline in underlying net sales was driven by lower volumes for JDTW as a result of deteriorating consumer demand and increasing competition, nearly offset by volume growth of an agency brand that we began distributing in July 2013. |
• | Other. Higher consumer demand was the primary driver of growth for our brands in Brazil, Canada, and for our travel retail customers. |
NET SALES | |||||||||
Percentage change versus the prior year period ended October 31 | 3 Months | 6 Months | |||||||
Change in reported net sales | 5 | % | 4 | % | |||||
Foreign exchange | 3 | % | 1 | % | |||||
Estimated net change in distributor inventories | (1 | )% | — | % | |||||
Change in underlying net sales | 7 | % | 5 | % | |||||
Change in underlying net sales attributed to:* | |||||||||
Volume | 4 | % | 2 | % | |||||
Net price/mix | 4 | % | 3 | % | |||||
* Totals may differ due to rounding |
• | Higher sales of JDTW driven by volume growth in the United States, the United Kingdom, and France, as well as across most emerging markets, and by improved price/mix in the United States and improved net sales price due to owned distribution in France. |
• | Higher volumes for JDTH in the United States, the United Kingdom, and across many markets where the brand was recently introduced, including France and Brazil. |
• | Higher sales of super- and ultra-premium products, including Woodford Reserve globally, driven by both higher volumes and improved price/mix in the United States, and higher volumes for Herradura tequila in its two largest markets, the United States and Mexico, the latter of which benefited from the launch of Herradura Ultra. |
• | Lower volumes for the Jack Daniel’s family of brands in Australia, where consumer demand declined. |
• | Lower volumes for el Jimador and New Mix RTDs in Mexico, due to reduced promotional activity and, for el Jimador, increased prices. |
• | Higher sales of JDTW driven by volume growth across most emerging markets and the United States, as well as in important developed international markets, including France and the United Kingdom, and by higher pricing in the United States and France. |
• | Higher volumes for JDTH in the United States and across many markets where the brand was recently introduced, including France, although volumes grew in the United States at a slower rate than in fiscal 2014. |
• | Higher volumes for New Mix RTDs and Herradura tequila in Mexico, both of which benefited from comparison to the prior-year first quarter when net sales were negatively affected by higher customer inventories. |
• | Higher sales of Woodford Reserve globally, driven primarily by higher volumes in the United States. |
• | Lower volumes for JDTW in Germany, due to variability in trade buying patterns, and Australia, due to trade buying patterns and lower consumer demand. |
• | Lower volumes for Southern Comfort in Australia and the United States, driven by lower consumer demand, particularly in the on-premise channel. |
• | Lower volumes for Finlandia Vodka driven primarily by declines in Poland, where we believe that higher pricing has weakened consumer demand generally for vodkas following an excise tax increase last fiscal year. |
COST OF SALES | |||||||||
Percentage change versus the prior year period ended October 31 | 3 Months | 6 Months | |||||||
Change in reported cost of sales | 4 | % | 3 | % | |||||
Foreign exchange | 4 | % | — | % | |||||
Estimated net change in distributor inventories | (2 | )% | — | % | |||||
Change in underlying cost of sales | 6 | % | 3 | % | |||||
Change in underlying cost of sales attributed to:* | |||||||||
Volume | 4 | % | 2 | % | |||||
Cost/mix | 3 | % | 1 | % | |||||
* Totals may differ due to rounding |
GROSS PROFIT | |||||||||
Percentage change versus the prior year period ended October 31 | 3 Months | 6 Months | |||||||
Change in reported gross profit | 6 | % | 5 | % | |||||
Foreign exchange | 3 | % | 2 | % | |||||
Estimated net change in distributor inventories | — | % | — | % | |||||
Change in underlying gross profit | 9 | % | 7 | % |
ADVERTISING | |||||||||
Percentage change versus the prior year period ended October 31 | 3 Months | 6 Months | |||||||
Change in reported advertising | 11 | % | 4 | % | |||||
Foreign exchange | 3 | % | 1 | % | |||||
Change in underlying advertising | 14 | % | 5 | % |
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES | |||||||||
Percentage change versus the prior year period ended October 31 | 3 Months | 6 Months | |||||||
Change in reported SG&A | 10 | % | 10 | % | |||||
Foreign exchange | 2 | % | — | % | |||||
Change in underlying SG&A | 12 | % | 10 | % |
OPERATING INCOME | |||||||||
Percentage change versus the prior year period ended October 31 | 3 Months | 6 Months | |||||||
Change in reported operating income | (3 | )% | (1 | )% | |||||
Foreign exchange | 10 | % | 7 | % | |||||
Estimated net change in distributor inventories | (2 | )% | — | % | |||||
Change in underlying operating income | 5 | % | 6 | % |
Shares Purchased | Average Price Per Share, Including Brokerage Commissions | Total Cost of Shares | ||||||||||||||||
Period | Class A | Class B | Class A | Class B | (Millions) | |||||||||||||
October 1, 2013 – April 30, 2014 | 24,800 | 661,472 | $ | 68.03 | $ | 69.04 | $ | 47 | ||||||||||
May 1, 2014 – July 31, 2014 | 1,601 | 111,000 | $ | 89.56 | $ | 90.87 | $ | 10 | ||||||||||
August 1, 2014 – September 30, 2014 | 21,062 | 2,089,154 | $ | 90.68 | $ | 91.22 | $ | 193 | ||||||||||
47,463 | 2,861,626 | $ | 78.81 | $ | 86.08 | $ | 250 |
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||
August 1, 2014 - August 31, 2014 | 1,143,612 | $90.95 | 1,143,612 | $88,400,000 | ||
September 1, 2014 - September 30, 2014 | 966,604 | $91.52 | 966,604 | — | ||
October 1, 2014 - October 31, 2014 | 2,550 | $87.94 | 2,550 | $249,800,000 | ||
Total | 2,112,766 | $91.21 | 2,112,766 | — |
31.1 | CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
31.2 | CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002. | |
32 | CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (not considered to be filed). | |
101 | The following materials from Brown-Forman Corporation's Quarterly Report on Form 10-Q for the quarter ended October 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (a) Condensed Consolidated Statements of Operations, (b) Condensed Consolidated Statements of Comprehensive Income, (c) Condensed Consolidated Balance Sheets, (d) Condensed Consolidated Statements of Cash Flows, and (e) Notes to the Condensed Consolidated Financial Statements. |
BROWN-FORMAN CORPORATION | |||
(Registrant) | |||
Date: | December 3, 2014 | By: | /s/ Jane C. Morreau |
Jane C. Morreau | |||
Executive Vice President and Chief Financial Officer | |||
(On behalf of the Registrant and as Principal Financial Officer) |
1. | I have reviewed this Quarterly report on Form 10-Q of Brown-Forman Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Dated: | December 3, 2014 | By: | /s/ Paul C. Varga |
Paul C. Varga | |||
Chief Executive Officer and Chairman of the Company |
1. | I have reviewed this Quarterly report on Form 10-Q of Brown-Forman Corporation; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
c) | Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): |
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. |
Dated: | December 3, 2014 | By: | /s/ Jane C. Morreau |
Jane C. Morreau | |||
Executive Vice President and Chief Financial Officer |
(1) | The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and |
(2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: | December 3, 2014 | ||
By: | /s/ Paul C. Varga | ||
Paul C. Varga | |||
Chief Executive Officer and Chairman of the Company | |||
By: | /s/ Jane C. Morreau | ||
Jane C. Morreau | |||
Executive Vice President and Chief Financial Officer |
Changes in Accumulated Other Comprehensive Income (Details) (USD $)
In Millions, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Oct. 31, 2014
|
Oct. 31, 2013
|
Oct. 31, 2014
|
Oct. 31, 2013
|
Oct. 31, 2014
Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges [Member]
|
Jul. 31, 2014
Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges [Member]
|
Apr. 30, 2014
Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges [Member]
|
Oct. 31, 2013
Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges [Member]
|
Jul. 31, 2013
Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges [Member]
|
Apr. 30, 2013
Accumulated Net Gain (Loss) from Designated or Qualifying Cash Flow Hedges [Member]
|
Oct. 31, 2014
Accumulated Translation Adjustment [Member]
|
Jul. 31, 2014
Accumulated Translation Adjustment [Member]
|
Apr. 30, 2014
Accumulated Translation Adjustment [Member]
|
Oct. 31, 2013
Accumulated Translation Adjustment [Member]
|
Jul. 31, 2013
Accumulated Translation Adjustment [Member]
|
Apr. 30, 2013
Accumulated Translation Adjustment [Member]
|
Oct. 31, 2014
Accumulated Defined Benefit Plans Adjustment [Member]
|
Jul. 31, 2014
Accumulated Defined Benefit Plans Adjustment [Member]
|
Apr. 30, 2014
Accumulated Defined Benefit Plans Adjustment [Member]
|
Oct. 31, 2013
Accumulated Defined Benefit Plans Adjustment [Member]
|
Jul. 31, 2013
Accumulated Defined Benefit Plans Adjustment [Member]
|
Apr. 30, 2013
Accumulated Defined Benefit Plans Adjustment [Member]
|
|
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||||||||||||||||||||||
Beginning balance | $ (195) | $ (212) | $ (188) | $ (211) | $ 23 | $ 1 | $ (4) | $ (4) | $ 6 | $ 0 | $ (40) | $ (10) | $ 6 | $ 5 | $ (2) | $ 10 | $ (174) | $ (186) | $ (190) | $ (202) | $ (216) | $ (221) |
Other Comprehensive Income (Loss), Foreign Currency Transaction and Translation Adjustment, Net of Tax | (30) | 7 | (46) | (5) | ||||||||||||||||||
Other Comprehensive Income (Loss), Derivatives Qualifying as Hedges, Net of Tax, Portion Attributable to Parent | 22 | (10) | 27 | (4) | ||||||||||||||||||
Other Comprehensive (Income) Loss, Pension and Other Postretirement Benefit Plans, Adjustment, Net of Tax, Portion Attributable to Parent | 12 | 14 | 16 | 19 | ||||||||||||||||||
Other Comprehensive Income (Loss), Net of Tax, Portion Attributable to Parent | 4 | 11 | (3) | 10 | ||||||||||||||||||
Ending balance | $ (191) | $ (201) | $ (191) | $ (201) | $ 23 | $ 1 | $ (4) | $ (4) | $ 6 | $ 0 | $ (40) | $ (10) | $ 6 | $ 5 | $ (2) | $ 10 | $ (174) | $ (186) | $ (190) | $ (202) | $ (216) | $ (221) |
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