Brown-Forman Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2022, the three months ended July 31, 2021; comparisons are with the three months ended July 31, 2020. Amounts are in U.S. dollars unless otherwise noted.
Business context and performance
Brown-Forman sells spirits, wine, and related products, led by the Jack Daniel’s family of brands. Management attributed strong year-over-year growth to reopening of on-premise channels, returning travel, premiumization, and comparisons with COVID-19-affected results in the prior-year quarter. Results also faced supply-chain disruptions, particularly glass availability.
Reported net sales rose 20% to $906 million. On the company’s non-GAAP underlying basis, which adjusts for items including distributor inventory changes, acquisitions and divestitures, and foreign exchange, net sales increased 18%. Growth was broad-based geographically; whiskey net sales were $707 million and tequila net sales were $90 million.
Financial results and liquidity
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $1,183 million | $987 million |
| Excise taxes | $277 million | $234 million |
| Net sales | $906 million | $753 million |
| Gross profit / gross margin | $553 million / 61.0% | $465 million / 61.7% |
| Operating income | $289 million | $387 million |
| Net income | $192 million | $324 million |
| Diluted EPS | $0.40 | $0.67 |
| Cash provided by operations | $185 million | $91 million |
Underlying operating income increased 15%, although reported operating income fell 25%. The prior-year quarter included a $127 million gain on the sale of the Early Times, Canadian Mist, and Collingwood brands; the gain contributed an estimated $0.19 per share to prior-year diluted EPS. Gross margin declined 0.7 percentage points, mainly from agave costs and supply-chain constraints, partly offset by favorable portfolio and channel mix. The effective tax rate was 28.5%, versus 11.6%, primarily reflecting prior-year tax benefits and other tax adjustments.
Cash and equivalents were $1,172 million at July 31, 2021, versus $1,150 million at April 30, 2021. Long-term debt was $2,346 million and short-term borrowings were $155 million. Operating cash flow improved year over year; investing activities used $15 million and financing activities used $141 million, including $86 million of dividends paid. The company reported an $800 million commercial paper program supported by an undrawn $800 million credit facility expiring in November 2023. A quarterly dividend of $0.1795 per share was declared.
Outlook, risks, and unusual items
- For fiscal 2022, management expects mid-single-digit growth in underlying net sales, underlying operating expenses, and underlying operating income. It expects full-year gross margin to be flat or slightly down and an effective tax rate of about 22%–23%.
- Management expects global supply-chain disruptions to persist during the fiscal year, with a less significant impact in the second half. Higher agave, transportation, and commodity costs are expected to pressure gross margin. Management cautioned that results may be volatile because of seasonality and unusual comparisons.
- A $6 million non-cash impairment charge for certain fixed assets was recorded in the quarter. The filing also reports a dispute with Bacardi over more than £50 million withheld from amounts owed to Brown-Forman; the amount is included in accounts receivable. Arbitration was completed in July 2021, with a decision expected in the coming months. The company could not estimate the range of reasonably possible loss, if any.
- The company identified risks including COVID-19 and economic conditions, supply and distribution disruptions, competition and consumer shifts, foreign-exchange and commodity-price movements, regulation, and legal proceedings. It said there were no material changes to the risk factors in its 2021 Form 10-K and no material accrued loss contingencies at quarter-end.
Important facts for investors to verify
- Track whether underlying growth translates into reported results, bearing in mind the company’s non-GAAP adjustments and distributor-inventory estimates.
- Monitor glass availability and other supply constraints, input and transportation costs, and their effects on gross margin and product availability.
- Follow the Bacardi arbitration outcome and collection of the disputed receivable.
- Assess the fiscal 2022 outlook against the reported 28.5% quarterly tax rate and the expected full-year rate of 22%–23%.
- Consider the prior-year divestiture gain when comparing reported operating income, net income, margins, and EPS.