Brown-Forman Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended April 30, 2021. The request metadata says “2020 Q4,” but the supplied filing is the FY2021 annual report, not a standalone quarterly filing. Brown-Forman manufactures and markets spirits, ready-to-drink cocktails, and wine in more than 170 countries; the United States generated 50% of FY2021 net sales. Its portfolio is substantially dependent on the Jack Daniel’s family of brands.
Financial performance
| Metric | FY2021 | Change vs. FY2020 |
|---|---|---|
| Net sales | $3.461 billion | +3% reported; +6% underlying |
| Gross profit / gross margin | $2.094 billion / 60.5% | Gross profit -2%; margin down 2.7 percentage points |
| Operating income / operating margin | $1.166 billion / 33.7% | +7%; margin up 1.3 percentage points |
| Net income | $903 million | Up from $827 million |
| Diluted EPS | $1.88 | +9% |
| Cash from operations | $817 million | Up from $724 million |
| Cash and cash equivalents | $1.150 billion | Up from $675 million |
| Total debt | $2.559 billion | Down from $2.602 billion |
Underlying figures are company-defined non-GAAP measures. Underlying net sales growth reflected volume growth of 12%, partly offset by unfavorable price/mix of 6%. Reported diluted EPS included an estimated $0.20-per-share benefit from the business sale described below. The effective tax rate was 16.5%, versus 18.0% in FY2020, including a deferred tax benefit tied to an intercompany asset transfer. Return on average invested capital declined to 19.6% from 20.4%.
Operating cash flow increased largely due to lower working-capital requirements. Investing cash flow was positive $98 million, including $177 million of sale proceeds; financing cash used was $485 million, including $338 million of dividends paid. The company had an undrawn $800 million revolving credit facility expiring in November 2023 and reported no long-term debt maturities until FY2023. Approximately 55% of cash was held by foreign subsidiaries expected to be reinvested abroad.
Material changes and operating developments
- On July 31, 2020, Brown-Forman sold Early Times, Canadian Mist, and Collingwood and related assets for $177 million cash, recognizing a $127 million pretax gain. The sale supported a strategic focus on premium spirits.
- FY2021 underlying growth was led by Jack Daniel’s RTDs, premium bourbons including Woodford Reserve and Old Forester, tequila, and launches of Jack Daniel’s Tennessee Apple. Jack Daniel’s Tennessee Whiskey underlying sales declined 4%; Finlandia underlying sales fell 16%.
- Travel Retail underlying net sales fell 48%, reflecting pandemic-related travel restrictions. Stronger off-premise and e-commerce demand partly offset weakness in bars, restaurants, and travel channels.
- Gross margin pressure reflected higher wood and agave costs, lower fixed-cost absorption for Jack Daniel’s Tennessee Whiskey, and an unfavorable shift toward lower-margin RTDs and channel mix. Reported operating-income growth and margin also benefited from the divestiture gain and related portfolio changes.
- The company acquired Part Time Rangers, a New Zealand spirits-based RTD business, for $14 million, and previously acquired Fords Gin. The Board approved a $125 million Kentucky bourbon-capacity expansion.
Outlook, risks, and contingencies
- FY2022 outlook: Management expected underlying net sales and underlying operating income growth in the mid-single digits, and underlying operating expense growth in the mid-single digits. Expected capital expenditures were $130–$150 million. The company expected a tax rate closer to 21%–22%, above FY2021’s 16.5%, due to the absence of discrete benefits.
- Management anticipated recovery in on-premise sales and Travel Retail, and expected emerging markets and Travel Retail to grow against FY2021 declines. It cited potentially favorable gross-margin effects from lower agave costs, improved channel and portfolio mix, and the absence of divested-brand sales, offset by supply-chain costs, inflation in commodities and freight, and U.S. whiskey tariffs in the EU.
- COVID-19 effects remained uncertain. Risks include renewed restrictions, uneven market recovery, changing consumer demand, distribution and supply-chain disruption, and distributor inventory fluctuations. The filing noted glass and transportation constraints, though the company said then-current shortages were not significant or expected to materially affect results.
- Other significant risks include reliance on Jack Daniel’s, intense competition, aged-inventory forecasting, agricultural and water availability, foreign exchange, higher input costs, regulatory or excise-tax changes, and possible increases in retaliatory tariffs. The EU had postponed a planned doubling of retaliatory tariffs on American whiskey; further increases could harm margins and sales.
- A July 2020 malware-related data breach resulted in unauthorized access to IT networks; the company said it did not believe the incident had or would have a material effect. The company also identified cybersecurity and privacy compliance as ongoing risks.
- Bacardi dispute: Brown-Forman reported that Bacardi withheld more than £50 million owed following the end of their UK cost-sharing agreement. A UK court declined to order repayment pending arbitration, scheduled for July 2021; Brown-Forman said it could not estimate the reasonably possible loss, if any. The withheld amount was included in accounts receivable.
- Management said pending ordinary-course litigation was not expected to have a material adverse effect. No material loss contingencies were accrued. One indefinite-lived brand name, with a $264 million carrying value and about 3% of sales, was sensitive to valuation assumptions and could incur a future impairment.
Important facts for investors to verify
- How much reported earnings and EPS depended on the $127 million divestiture gain, and how comparable underlying growth is after the company’s non-GAAP adjustments.
- Whether underlying sales growth and margin recovery are sustained as on-premise and travel channels reopen, and whether lower price/mix and higher input and freight costs persist.
- The resolution, timing, and financial exposure of the Bacardi arbitration, including recovery of the withheld receivable.
- Actual progress on the $125 million capacity project, planned capital spending, and the company’s ability to manage aged inventory and supply constraints.
- The effect of tariffs, currency movements, tax-rate normalization, and the concentration of sales and brand value in Jack Daniel’s.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of April 30, 2021.