Brown-Forman Corporation — Form 10-Q summary
Business context and period: The filing reports the fiscal second quarter and first six months ended October 31, 2021. Brown-Forman sells spirits and other beverage alcohol products, including the Jack Daniel’s family of brands. Management cited reopening of on-premise channels and some recovery in travel, alongside supply-chain constraints, particularly glass availability. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended Oct. 31, 2021 | Six months ended Oct. 31, 2021 |
|---|---|---|
| Net sales | $994; +1% reported, +7% underlying | $1,900; +9% reported, +12% underlying |
| Gross profit / margin | $590; 59.3%, up 0.3 percentage points | $1,143; 60.1%, down 0.1 percentage points |
| Operating income / margin | $322; 32.3%, down 1.2 percentage points | $611; 32.1%, down 9.1 percentage points |
| Net income | $236 | $428 |
| Diluted EPS | $0.49, down 2% | $0.89, down 24% |
| Cash from operations | Not provided for the quarter in the filing text | $335, versus $283 in prior-year period |
For the six-month period, operating expenses were $532, up 17% reported; advertising rose 24% and SG&A rose 10%. The six-month effective tax rate was 24.9%, versus 16.4% a year earlier. Management’s expected full-year rate on ordinary income was 23.1%; its fiscal-year outlook remained approximately 22%–23%.
Balance sheet, liquidity and cash flow
- At October 31, cash and cash equivalents were $1,073, down from $1,150 at April 30. Current assets were $4,032 and current liabilities $783.
- Long-term debt was $2,331; short-term borrowings were $19, versus $205 at April 30. No commercial paper was outstanding at period end. The company had an $800 commercial paper program supported by an undrawn $800 bank credit facility, extended to November 10, 2024.
- Six-month operating cash flow was $335; investing activities used $35, including $33 of capital expenditures; financing activities used $362, including $172 of dividends paid and net short-term borrowing repayments. Cash declined by $77 over the period.
- Stockholders’ equity was $2,923. The company stated that cash generation, available credit and debt-market access were expected to support financial commitments.
Changes versus prior period and notable items
- Six-month reported operating income fell 15%, while underlying operating income increased 13%. The prior-year period included a $127 gain on the sale of Early Times, Canadian Mist and Collingwood; management estimated that gain contributed $0.19 per share to prior-year six-month EPS.
- Reported net sales growth was broad across developed international, emerging and travel-retail markets. U.S. six-month sales were flat. Whiskey net sales rose 8% for the six months, tequila 16%, wine 9% and vodka 26%; the tequila volume comparison was affected by lower New Mix volumes.
- Supply-chain disruption adversely affected sales and input costs. Cost pressure included agave, transportation and other supply-chain impacts. First-half results also included $9 of noncash fixed-asset impairment charges.
- Cash from operations increased year over year, while investing cash flow shifted from a $147 inflow to a $35 outflow, largely because the prior-year period included $177 of divestiture proceeds. Financing outflow rose, mainly due to increased net repayments of short-term borrowings.
Outlook, risks and contingencies
- Management raised its fiscal 2022 underlying net-sales outlook from mid-single-digit to high-single-digit growth and its underlying operating-expense outlook from mid-single-digit to high-single-digit growth. It expected high-single-digit underlying operating-income growth.
- Full-year reported gross margin was expected to be flat or slightly down versus fiscal 2021, reflecting supply constraints, higher commodity and transportation costs; the outlook included a modest benefit from the scheduled January 1, 2022 suspension of EU tariffs on American whiskey. Management expected supply disruptions to persist through the fiscal year but become less significant in the second half, and cautioned that quarterly results could remain volatile.
- Key disclosed risks include continued dependence on Jack Daniel’s, competition, distributor inventory and route-to-market changes, consumer and channel shifts, production and supply-chain disruption, COVID-19 and economic conditions, inflation and input costs, foreign exchange, regulation and taxes, litigation, and cyber or systems disruption. The company reported no material changes to its previously disclosed risk factors.
- In the Bacardi U.K. dispute, more than £50 million withheld by Bacardi remained included in accounts receivable at October 31. An arbitration decision rendered December 8, 2021, confirmed Bacardi was not entitled to commercial-agent compensation and awarded an immaterial amount for wind-up work. The company said other existing loss contingencies were not expected to materially affect its financial position, results or liquidity; no material accrued loss contingencies were recorded at period end.
- After the quarter, the board increased the quarterly dividend from $0.1795 to $0.1885 per share and declared a $1.00-per-share special dividend, both payable in December 2021.
Most important facts for investors to verify
- Whether high-single-digit underlying sales and operating-income growth expectations are achieved, and how underlying results reconcile to GAAP.
- Whether glass and other supply constraints ease as expected, and their ongoing effect on shipments, distributor inventories, costs and margins.
- How much of reported growth reflects underlying consumer demand versus foreign exchange, portfolio changes and distributor inventory movements.
- The cash and working-capital effects of the Bacardi receivable and the final resolution of the dispute.
- Debt, liquidity and cash deployment after the declared special dividend, including the effect of foreign-held cash and any repatriation taxes.