Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Third quarter and nine months of fiscal 2023, ended January 31, 2023. Comparisons are with the corresponding prior-year periods. Dollars are in millions unless noted.
Financial performance
| Metric | Three months ended Jan. 31, 2023 | Nine months ended Jan. 31, 2023 |
|---|---|---|
| Net sales | $1,081; up 4% reported and 5% organic | $3,182; up 8% reported and 12% organic |
| Gross profit / gross margin | $624; 57.7%, down 2.3 percentage points | $1,859; 58.4%, down 1.7 percentage points |
| Operating income / margin | $173; 15.9%, versus $347 and 33.5% | $829; 26.0%, down 13% reported; organic operating income up 9% |
| Net income | $100, versus $259 | $576, versus $687 |
| Diluted EPS | $0.21, down 61% | $1.20, down 16% |
| Cash from operations | Not separately provided in the filing text | $410, versus $683 |
- Quarterly cost of sales rose 10% to $457; nine-month cost of sales rose 13% to $1,323. Input-cost inflation and supply-chain expenses pressured margins; tariff removal and favorable price/mix provided offsets.
- Nine-month operating expenses increased 28% to $1,030, including a $96 non-cash Finlandia impairment and acquisition-related expenses. The quarter also included a $27 pension settlement charge, contributing to lower earnings.
- Nine-month effective tax rate was 23.0%, compared with 23.4%; management expects a full-year rate of approximately 22%–23%.
Cash, debt and liquidity
- Cash and cash equivalents were $428 at January 31, down from $868 at April 30, 2022. Operating cash flow fell mainly because of higher working capital, especially inventory, and $50 of acquisition transaction costs.
- Investing activities used $1,300, including $1,195 paid for acquisitions and $116 of capital expenditures. Financing activities provided $468; dividends paid were $279, compared with $741 in the prior-year period, which included a special dividend.
- Debt carrying value totaled $3,028 at January 31: $1,004 short-term borrowings and $2,024 long-term debt. Short-term borrowings included $404 of commercial paper and a $600 variable-rate, 364-day term loan. The company repaid $250 of notes at maturity during the quarter.
- The company reported an $800 commercial paper program supported by an $800 bank credit facility, with no facility borrowings outstanding at January 31. Management said available liquidity, operating cash generation, and debt capacity should meet expected obligations.
Business developments and material changes
- Nine-month growth reflected higher volumes and price/mix, with gains across geographic clusters and travel retail. Management also cited distributor inventory rebuilding, particularly in certain international markets, as a contributor to reported growth.
- By category, nine-month net sales rose to $2,215 for whiskey, $369 for ready-to-drink products, and $237 for tequila; wine fell to $164 and vodka to $74. New Mix, Woodford Reserve, and Old Forester were notable growth drivers. Finlandia sales were affected by Russia-related disruption and foreign exchange.
- Brown-Forman acquired Gin Mare for $524, including $468 paid in cash and $56 of estimated contingent consideration, and Diplomático for $727 in cash. The acquisitions added brands and goodwill; purchase-price allocations remain preliminary. Acquisition-related transaction expenses were $50 for the nine-month period.
- Currency movements, particularly a stronger U.S. dollar, weighed on results. The company said the removal of EU and UK tariffs on American whiskey benefited nine-month reported net sales growth by about half a percentage point, reduced cost-of-sales growth by about four percentage points, and improved gross margin by about 1.5 percentage points.
Outlook, commentary and risks
- Fiscal 2023 outlook: organic net sales growth of 8%–10%; high-single-digit organic operating income growth; full-year reported gross margin expected to be consistent with the first half; effective tax rate of approximately 22%–23%; and capital expenditures of $190–$210.
- Guidance assumes no full-year impact from estimated distributor inventory changes. Management cautioned that the year-to-date inventory build could be followed by a moderate unfavorable effect as the company compares against prior-year fourth-quarter rebuilding.
- Finlandia’s remaining carrying amount was $90 after the impairment. Management noted that reasonably possible changes in sales forecasts or discount rates could trigger additional impairment.
- Key stated risks include competition and consumer preference shifts, distributor inventory and route-to-market changes, supply-chain and input-cost pressures, foreign exchange, higher interest rates, acquisitions and integration, Russia/Ukraine-related disruption, regulation, and legal or product-liability matters. The filing reported no material change to previously disclosed risk factors and no pending legal proceedings expected to materially affect the company.
Important facts for investors to verify
- Whether distributor inventory rebuilding supports reported sales growth sustainably, and how actual full-year inventory effects compare with guidance assumptions.
- Whether cost inflation, logistics costs, foreign exchange, and tariff changes continue to affect gross margin and the outlook.
- Finlandia valuation assumptions and the potential for further impairment.
- Acquisition integration, final purchase-price allocations, and the size and timing of any Gin Mare earn-out payments.
- Repayment or refinancing plans for the January 2024 term loan maturity and the cost of variable-rate and commercial-paper borrowing.