Brown-Forman Corporation — Form 10-Q Summary
Business context and reporting period: Brown-Forman sells spirits and wines globally. This filing covers its fiscal third quarter and nine months ended January 31, 2021; comparisons are with the periods ended January 31, 2020. Amounts are in U.S. dollars unless noted.
Financial performance
| Metric | Three months ended Jan. 31, 2021 | Nine months ended Jan. 31, 2021 |
|---|---|---|
| Net sales | $911 million, up 1% reported; underlying change was flat | $2.649 billion, essentially flat reported; underlying growth was 2% |
| Gross profit and margin | $550 million, down 1%; margin 60.4%, down 1.5 percentage points | $1.596 billion, down 5%; margin 60.3%, down 2.8 percentage points |
| Operating income and margin | $281 million, down 8%; margin 30.9%, down 2.9 percentage points | $998 million, up 10%; margin 37.7%, up 3.6 percentage points |
| Net income | $219 million, versus $231 million | $783 million, versus $699 million |
| Diluted EPS | $0.45, versus $0.48 | $1.63, versus $1.45 |
| Cash from operations | Not separately reported for the quarter | $572 million, versus $509 million |
Cash, debt, and liquidity: Cash and cash equivalents were $1.106 billion at January 31, 2021, up $431 million from April 30, 2020. Nine-month investing activities provided $120 million, including $177 million of divestiture proceeds; financing activities used $294 million, including $253 million of dividends paid. Short-term borrowings were $312 million and long-term debt was $2.347 billion. The company had an undrawn $800 million credit facility supporting its commercial paper program and reported no long-term debt maturities until fiscal 2023.
Changes versus the prior comparable periods
- For the quarter, reported sales rose modestly but underlying sales were flat; operating income and diluted EPS declined.
- For the nine months, underlying sales increased 2%, primarily on volume growth, partly offset by unfavorable price and mix. U.S. and developed international underlying sales each grew 7%; emerging markets grew 1%, while Travel Retail fell 54%.
- Nine-month reported operating income included a $127 million gain from selling the Early Times, Canadian Mist, and Collingwood brands. The sale contributed an estimated $0.19 per diluted share; excluding specified adjustments, underlying operating income grew 3%.
- Gross margins fell in both periods, reflecting higher agave and wood costs, lower fixed-cost absorption for Jack Daniel’s Tennessee Whiskey, and, year to date, mix shifting toward lower-margin products.
- Sales strength included Jack Daniel’s ready-to-drink products, premium bourbons, and selected tequila products. Weakness included traditional Jack Daniel’s Tennessee Whiskey in affected channels and markets, Finlandia, and Travel Retail.
Outlook, commentary, and risks
- The company provided no quantitative fiscal 2021 guidance other than an expected full-year effective tax rate of 17%–19%. It expects Travel Retail and on-premise channels not to recover during the fiscal year and anticipates continued pressure in some markets.
- Management expects full-year gross margin to remain under pressure from input costs, lower fixed-cost absorption, and mix. Fourth-quarter operating-expense growth, particularly advertising, was expected to accelerate; the company also planned a $20 million contribution to the Brown-Forman Foundation in that quarter.
- COVID-19 continued to weigh on bars, restaurants, travel, and some emerging markets, while off-premise and e-commerce gains supported results. Management said production and distribution had not been materially disrupted but was monitoring supply inputs and customer credit.
- Bacardi withheld more than £50 million that Brown-Forman says is owed under a U.K. cost-sharing arrangement. The amount remains in accounts receivable; litigation and arbitration are ongoing, and the company said it could not estimate a reasonably possible loss range.
- The filing cites foreign exchange, commodity costs, changing consumer preferences, regulation, supply-chain disruption, distributor inventory changes, and pandemic-related uncertainty among its risks. Management reported no material changes to previously disclosed risk factors or market-risk exposures.
Important facts for investors to verify
- How much of reported year-to-date earnings and margin improvement depends on the $127 million divestiture gain, versus underlying performance.
- Whether underlying sales growth persists as distributor inventories normalize, and whether growth in ready-to-drink and premium brands offsets weakness in traditional whiskey and Travel Retail.
- How gross margin responds to input costs, product and channel mix, and fixed-cost absorption.
- Whether the disputed Bacardi receivable is recovered and whether the legal proceedings result in any material payment or loss.
- Whether cash generation, debt levels, and customer collections remain resilient as pandemic-related conditions and foreign-exchange movements evolve.