Brown-Forman Corporation — Form 10-Q Summary
Reporting period: Three months ended July 31, 2022 (the first quarter of fiscal 2023). Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. Comparisons are with the three months ended July 31, 2021 unless noted.
Financial performance
| Metric | Q1 FY2023 | Prior year | Change |
|---|---|---|---|
| Net sales | $1,007 | $906 | +11% reported; +17% organic |
| Gross profit / margin | $622 / 61.8% | $553 / 61.0% | +13% profit; margin +0.8 percentage points |
| Operating income / margin | $343 / 34.0% | $289 / 31.9% | +19% reported; +32% organic; margin +2.1 points |
| Net income | $249 | $192 | +30% |
| Diluted EPS | $0.52 | $0.40 | +30% |
| Cash provided by operations | $173 | $185 | Down $12 |
| Capital expenditures | $33 | $14 | Up $19 |
Reported net sales growth reflected higher volume and favorable price/mix, partly offset by foreign exchange. Organic measures are non-GAAP and exclude specified effects, including foreign exchange; they should be considered alongside GAAP results. The lower effective tax rate (23.6% versus 28.5%) also contributed to EPS growth.
Sales trends and material changes
- Growth was broad across the United States, developed and emerging international markets, and Travel Retail. Travel Retail reported sales rose 77%, with travel recovery and distributor inventory rebuilding contributing.
- By product category, whiskey sales increased to $707 from $616; ready-to-drink sales rose to $126 from $108. Tequila declined to $70 from $73, wine to $46 from $53, and vodka to $23 from $25.
- Management said estimated net increases in distributor inventories positively affected reported sales in several markets and brands. The company no longer adjusts its organic measures for estimated distributor inventory changes.
- Foreign exchange, reflecting a stronger U.S. dollar, reduced reported results. The removal of EU and UK tariffs on American whiskey supported results; management estimated it added about 1.5 percentage points to gross margin.
Cash, debt, and liquidity
- At July 31, cash and cash equivalents were $899, up from $868 at April 30, 2022. Approximately 62% was held by foreign subsidiaries and expected to be reinvested abroad.
- Total debt carrying value was $2,248, including $250 current and $1,998 long-term, versus $2,269 at April 30. Debt less cash was approximately $1.35 billion.
- Working capital use increased, principally because inventory rose to $1,912 from $1,818, reflecting higher input costs and supply-chain effects. Operating cash flow fell to $173 from $185.
- The company reported no commercial paper or bank credit facility borrowings at quarter-end. Its $800 million commercial paper program is supported by an $800 million credit facility expiring November 2024. It reported investment-grade ratings of A1 from Moody’s and A- from S&P.
- Cash used for financing was $94, including $90 of dividends paid. Investing cash use was $34, largely reflecting increased spending to expand production capacity.
Outlook, risks, and unusual items
- Management reiterated fiscal 2023 expectations: organic net sales growth in the mid-single digits; slight reported gross-margin expansion; mid-single-digit organic operating-income growth; an effective tax rate of approximately 22%–23%; and capital expenditures of $190–$210 million.
- Supply-chain logistics and transportation constraints continued to limit product movement and raise input and freight costs, although glass supply improved. Inflation remained a cost pressure.
- Russia’s invasion of Ukraine affected sales through suspended commercial operations in Russia and diminished ability to conduct business in Ukraine. The filing also identifies currency movements, distributor inventory fluctuations, competition, consumer preference shifts, supply disruptions, and regulatory and economic conditions as risks.
- No material accrued loss contingencies were recorded at July 31; management did not expect pending legal proceedings to materially affect financial position, results, or liquidity. The filing reports no material changes to previously disclosed risk factors.
- The quarter’s effective tax rate benefited primarily from a valuation-allowance reversal and prior-year tax true-ups, partly offset by a tax contingency. These items helped make the quarter’s tax rate lower than the expected full-year rate.
Important facts for investors to verify
- How much sales growth reflected underlying consumer demand versus distributor inventory rebuilding, especially in the United States and Travel Retail.
- Whether foreign exchange, tariff relief, inflation, and supply-chain costs change the expected gross-margin trajectory.
- Whether inventory growth and planned production-capacity spending affect cash conversion and liquidity in subsequent quarters.
- Progress against fiscal 2023 guidance, including organic growth, margin, tax-rate, and capital-spending assumptions.
- Ongoing effects of the Russia-Ukraine conflict, currency volatility, and the company’s reliance on the Jack Daniel’s family of brands.