Brown-Forman Corporation — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended January 31, 2022. Dollar amounts are in millions, except per-share data. Comparisons are with the corresponding prior-year periods.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $1,037; +14% reported, +22% organic | $2,937; +11% reported, +14% organic |
| Gross profit / margin | $622; 60.0% (down 0.4 percentage points) | $1,765; 60.1% (down 0.2 percentage points) |
| Operating income / margin | $347; 33.5% (up 2.6 percentage points) | $958; 32.6% (down 5.1 percentage points) |
| Net income | $259, versus $219 | $687, versus $783 |
| Diluted EPS | $0.54, versus $0.45 | $1.43, versus $1.63 |
| Effective tax rate | 21.0%, versus 15.7% | 23.4%, versus 16.2% |
Quarterly sales growth reflected higher volumes, led by Jack Daniel’s Tennessee Whiskey (JDTW), New Mix, and Jack Daniel’s RTDs; distributor inventory increases also benefited reported sales. Year-to-date gains reflected favorable price/mix and volume, with growth across geographies and Travel Retail. Whiskey net sales rose 10% reported for the nine months; tequila rose 19%. Organic operating income increased 43% for the quarter and 19% year to date.
Cash, liquidity, and debt
- Nine-month operating cash flow was $683, versus $572. Investing activities used $63, compared with $120 provided in the prior year, which included $177 of divestiture proceeds. Financing activities used $930, including the special dividend.
- Cash declined from $1,150 at April 30, 2021, to $812 at January 31, 2022. Current assets were $3,653 and current liabilities $1,049.
- Debt carrying value was $2,311, including $250 current long-term debt, $2,061 long-term debt, and $16 short-term borrowings. No commercial paper was outstanding at period end. The company cited investment-grade ratings and an undrawn $800 credit facility, scheduled to expire November 10, 2024.
- Capital expenditures were $62 for the nine months. Cash dividends paid were $741, including a $1.00-per-share special dividend paid in December.
Changes, outlook, and notable items
- Year-to-date reported operating income fell 4% despite 11% sales growth. The prior-year period included a $127 gain on the sale of Early Times, Canadian Mist, and Collingwood; management estimated that gain contributed $0.19 to prior-year nine-month diluted EPS. The prior-year tax rate was also lower.
- Cost/mix and higher input and supply-chain costs, including grain and agave, pressured gross margin. Disruptions, particularly glass supply, constrained finished-goods and distributor/retailer inventories. Management also cited higher compensation, advertising investment, and non-income-based tax contingency accruals.
- Fiscal 2022 outlook: organic net sales growth of 11%–13%; organic operating income growth of 12%–16%; organic operating expenses growth of 7%–9%; reported gross margin flat or slightly down versus FY2021; and effective tax rate approximately 22%–23%. The outlook assumes the year-to-date positive distributor-inventory effect persists for the rest of the fiscal year. Organic guidance is not directly comparable with prior “underlying” guidance, which included a distributor-inventory adjustment.
- The Bacardi U.K. dispute was decided in December 2021: Bacardi was denied commercial-agent compensation, awarded an immaterial amount for winding up the business, and remitted £47 million. Brown-Forman reported collecting approximately $62 million of receivables in December.
- Management said existing legal proceedings were not expected to have a material adverse effect and reported no material changes to previously disclosed risk factors. Key risks include dependence on Jack Daniel’s, competition and consumer shifts, supply-chain disruption and input costs, distributor inventory movements, foreign exchange, taxes, and regulatory or geopolitical developments. The company uses derivatives for risk management, not speculation.
Important facts for investors to verify
- Whether the forecast distributor-inventory benefit persists and how shipments compare with downstream demand.
- Progress toward organic sales and operating-income guidance, particularly given glass shortages, input-cost inflation, and expected gross-margin pressure.
- How higher tax rates, foreign exchange, and the absence of the prior-year divestiture gain affect reported earnings and EPS comparisons.
- Cash generation, capital spending, dividend commitments, and debt levels after the special dividend.
- Whether market recovery, premiumization, and growth in major brands continue across regions and channels.