Brown-Forman Corporation — Q2 FY2023 Form 10-Q
Reporting period: Quarter and six months ended October 31, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data. The filing is unaudited.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,094; +10% reported, +16% organic | $2,101; +11% reported, +17% organic |
| Gross profit / margin | $613; margin 56.0%, down 3.3 percentage points | $1,235; margin 58.8%, down 1.3 percentage points |
| Operating income / margin | $313; down 2%; margin 28.7%, down 3.6 points | $656; up 8%; margin 31.2%, down 0.9 points |
| Net income | $227, versus $236 | $476, versus $428 |
| Diluted EPS | $0.47, down 4% | $0.99, up 11% |
Six-month operating cash flow was $316, down from $335, with increased working capital—especially inventory—partly offset by improved operating results. Investing cash outflow was $58, including $61 of capital expenditures; financing provided $1, versus $362 of outflow in the prior-year period. Dividends paid were $180.
At October 31, cash and cash equivalents were $1,087. Debt comprised $250 of current long-term debt, $1,974 of long-term debt, and $186 of commercial paper, or $2,410 in total. The company had no borrowings under its $800 million revolving credit facility; it also had an $800 million commercial paper program. Approximately 67% of cash was held by foreign subsidiaries.
Changes and operating drivers
- Growth reflected higher volumes and favorable price/mix, with reported sales also benefiting from an estimated net increase in distributor inventories. Foreign exchange, principally a stronger U.S. dollar, reduced reported results.
- U.S. net sales rose 11% year to date. Travel Retail rose 60%, and Emerging markets rose 14%; Developed International rose 3% reported, with currency headwinds. By category, whiskey sales increased 13% and Ready-to-Drink sales increased 14%; wine fell 9% and vodka fell 17%.
- Gross margin declined as inflation and supply-chain disruption raised costs and foreign exchange was adverse. Higher prices/mix and removal of EU and UK tariffs on American whiskey partly offset these pressures. The company estimated tariff removal improved gross margin by about 1.4 percentage points year to date.
- Advertising expense increased 19% year to date and SG&A rose 7%, reflecting greater brand investment, compensation-related expense, and discretionary spending.
- Organic measures are non-GAAP and exclude specified effects, including foreign exchange; they should be considered alongside GAAP results.
Outlook, risks, and notable items
- FY2023 outlook: high-single-digit organic net sales growth and high-single-digit organic operating income growth; reported gross margin expected to be consistent with the first half; effective tax rate approximately 22%–23%; capital expenditures of $190–$210 million.
- Management cited continuing supply-chain and logistics challenges, higher input and transportation costs, and foreign-exchange pressure. Glass availability improved, while the easing of supply constraints contributed to distributor inventory rebuilding.
- Russia operations were suspended following the invasion of Ukraine; business in Ukraine was also affected. The company noted that tariffs on American whiskey, consumer demand, distributor inventory movements, and acquisition execution could affect results.
- After quarter-end, Brown-Forman acquired Gin Mare for €475 million cash plus up to €90 million contingent consideration. It had also agreed to acquire Diplomático Rum for $725 million, subject to adjustments, plus up to $50 million of certain post-closing costs; closing was expected in Q3 FY2023. Neither deal was reflected in the October 31 financial statements.
- The board raised the quarterly dividend from $0.1885 to $0.2055 per share, payable January 3, 2023. Management reported no material change in disclosed risk factors and no expected material adverse effect from pending legal proceedings.
Important facts for investors to verify
- Whether sales growth and margins persist after accounting for distributor inventory rebuilding and shipment timing.
- How inflation, supply-chain costs, foreign exchange, and tariff changes affect gross margin and the FY2023 outlook.
- Acquisition closing, funding, contingent or post-closing costs, and purchase-price allocations for Gin Mare and Diplomático.
- Commercial paper usage, near-term debt repayment needs, and the allocation or potential repatriation of overseas cash.
- Actual full-year results against organic growth, tax-rate, and capital-expenditure guidance.