“Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor inventories on changes in our income statement line items. For each period compared, we use depletion information provided by our distributors to estimate the effect of distributor inventory changes on our income statement line items.
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| • | “Foreign exchange.” We calculate the percentage change in certain line items of the statements of operations in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current-year results at prior-year rates and remove transactional and hedging foreign exchange gains and losses from current- and prior-year periods. |
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| • | “Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor inventories on changes in certain line items of the statements of operations. For each period compared, we use volume information from our distributors to estimate the effect of distributor inventory changes in certain line items of the statements of operations. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in certain line items of the statements of operations and allows us to understand better our underlying results and trends. |
We use the non-GAAP measures “underlying change” for the following reasons:to: (a) to understand our performance from period to period on a consistent basis; (b) to compare our performance to that of our competitors; (c) in connection withcalculate components of management incentive compensation calculations;compensation; (d) in our planningplan and forecasting processes;forecast; and (e) in communications concerningcommunicate our financial performance withto the board of directors, stockholders, and the investment analysts.community. We provide reconciliations of the “underlying changeschange” in income statement measures”certain line items of the statements of operations to their nearest GAAP measures in the tables below under “Results of Operations - Year-Over-Year Period Comparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.
1Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
Definitions
Aggregations.Aggregations.
From time to time, in order to explain our results of operations or to highlight trends and uncertainties affecting our business, we aggregate markets according to stage of economic development as defined by the International Monetary Fund (IMF), and we aggregate brands by spiritsproduct category. Below are definitions of theWe define our geographic and brand aggregations used in this report.below.
Geographic Aggregations.
“Developed” markets are “advanced economies” as defined by the International Monetary Fund, with the largest for Brown-Forman being the United States, the United Kingdom, and Australia. Developed international markets are developed markets excluding the United States.
“Emerging” markets are “emerging and developing economies” as defined by the International Monetary Fund, with the largest for Brown-Forman being Mexico and Poland.
In “Results of Operations - Fiscal 20182021 Year-to-Date Highlights”,Highlights,” we provide supplemental information for our largest markets ranked by percentage of total fiscal 20172020 net sales. In addition to markets that are listed by country name, we include the following aggregations:
“Rest of Europe” includes all markets in the continent of Europe and the Commonwealth of Independent States other than those specifically listed.
“Remaining geographies.” All other markets (approximately 110), other than those specifically listed or included in “Rest of Europe”, with the largest being Brazil, South Africa, and China.
“Travel Retail” represents our sales to global duty free customers, travel retail customers, and the U.S. military.
“Other non-branded” includes used barrel, bulk whiskey and wine, and contract bottling sales.
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| • | “Developed International” markets are “advanced economies” as defined by the IMF, excluding the United States. Our largest developed international markets are the United Kingdom, Germany, Australia, and France. This aggregation represents our net sales of branded products to these markets. |
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| • | “Emerging” markets are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, and Russia. This aggregation represents our net sales of branded products to these markets. |
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| • | “Travel Retail” represents our net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer location. |
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| • | “Non-branded and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location. |
Brand Aggregations.
“Premium bourbon” products include Woodford Reserve, Old Forester, and Coopers’ Craft.
“American whiskey” products include the Jack Daniel’s family of brands, premium bourbons, and Early Times.
“Tequila” products include el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
In “Results of Operations - Fiscal 20182021 Year-to-Date Highlights”,Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal 20172020 net sales. In addition to brands that are listed by name, we include the following aggregations:
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| • | “Whiskey” includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink (RTD), and ready-to-pour products (RTP). The brands included in this category are the Jack Daniel’s family of brands, the Woodford Reserve family of brands (Woodford Reserve), GlenDronach, BenRiach, Glenglassaugh, the Old Forester family of brands (Old Forester), Slane Irish Whiskey, and Coopers’ Craft. Also includes the Early Times, Canadian Mist, and Collingwood brands, which we divested on July 31, 2020. See Note 14 to the Condensed Consolidated Financial Statements for details. |
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| • | “American whiskey” includes the Jack Daniel’s family of brands, premium bourbons (defined below), super-premium American whiskey (defined below), and Early Times. |
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| • | “Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and RTP products (JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Tennessee Apple (JDTA), Jack Daniel’s Single Barrel Collection (JDSB), Jack Daniel’s Tennessee Rye Whiskey (JDTR), Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and Jack Daniel’s Bottled-in-Bond. |
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| • | “Jack Daniel’s RTD and RTP” products include Jack Daniel’s & Cola, Jack Daniel’s Country Cocktails, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Double Jack, Gentleman Jack & Cola, Jack Daniel’s Lynchburg Lemonade, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Berry, Jack Daniel’s Cider, Jack Daniel’s Whiskey & Seltzer, and the seasonal Jack Daniel’s Winter Jack RTP. |
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| • | “Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft. |
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| • | “Super-premium American whiskey” includes Woodford Reserve, Gentleman Jack, JDSB, JDTR, Jack Daniel’s Sinatra Select, and Jack Daniel’s No. 27 Gold Tennessee Whiskey. |
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| • | “Tequila” includes el Jimador, the Herradura family of brands (Herradura), New Mix, Pepe Lopez, and Antiguo. |
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| • | “Wine” includes Korbel Champagnes and Sonoma-Cutrer wines. |
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| • | “Vodka” includes Finlandia. |
“Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s Tennessee Honey (JDTH), Jack Daniel’s RTD and RTP products (JD RTDs/RTP), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Single Barrel Collection, Jack Daniel’s Tennessee Rye Whiskey, Jack Daniel’s Sinatra Select, and Jack Daniel’s No. 27 Gold Tennessee Whiskey.
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| • | “Non-branded and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling, regardless of customer location. |
“Jack Daniel’s RTD and RTP” products include all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, Jack Daniel’s Double Jack, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Cider (JD Cider), Jack Daniel’s Lynchburg Lemonade (JD Lynchburg Lemonade), and the seasonal Jack Daniel’s Winter Jack RTP.
Other Metrics.Metrics.
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| • | “Depletions.” We generally record revenues when we ship our products to our customers. Depletions is a term commonly used in the beverage alcohol industry to describe volume. Depending on the context, depletions means either (a) our shipments directly to retail or wholesale customers for owned distribution markets or (b) shipments from our distributor customers to retailers and wholesalers in other markets. We believe that depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do. In this document, unless otherwise specified, we refer to depletions when discussing volume. |
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| • | “Consumer takeaway.” When discussing trends in the market, we refer to consumer takeaway, a term commonly used in the beverage alcohol industry. Consumer takeaway refers to the purchase of product by consumers from retail outlets, including products purchased through e-premise channels, as measured by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric. We believe consumer takeaway is a leading indicator of how consumer demand is trending. |
“Depletions.” When discussing volume, unless otherwise specified, we refer to “depletions,” a term commonly used in the beverage alcohol industry. Depending on the context, “depletions” means either (a) our shipments directly to retailers or wholesalers, or (b) shipments from our distributor customers to retailers and wholesalers. We generally record revenues when we ship our products to our customers, so our reported sales for a period do not reflect actual consumer purchases during that period. We believe that our depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do.
“Drinks-equivalent.” Volume is discussed on a nine-liter equivalent unit basis (nine-liter cases) unless otherwise specified. At times, we use a “drinks-equivalent” measure for volume when comparing single-serve ready-to-drink (RTD) or ready-
to-pour (RTP) brands to a parent spirits brand. “Drinks-equivalent” depletions are RTD and RTP nine-liter cases converted to nine-liter cases of a parent brand on the basis of the number of drinks in one nine-liter case of the parent brand. To convert RTD volumes from a nine-liter case basis to a drinks-equivalent nine-liter case basis, RTD nine-liter case volumes are divided by 10, while RTP nine-liter case volumes are divided by 5.
“Consumer takeaway.” When discussing trends in the market, we refer to “consumer takeaway”, a term commonly used in the beverage alcohol industry. “Consumer takeaway” refers to the purchase of product by the consumer from the retail outlet as measured by volume or retail sales value. This information is provided by third-parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric.
Important Information on Forward-Looking Statements:
This report contains statements, estimates, and projections that are “forward-looking statements” as defined under U.S. federal securities laws. Words such as “aim,” “anticipate,” “aspire,” “believe,” “can,” “continue,” “could,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “might,” “plan,” “potential,” “project,” “pursue,” “see,” “seek,” “should,” “will,” “would,” and similar words identifyindicate forward-looking statements, which speak only as of the date we make them. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risks, uncertainties, and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, Item 1A. Risk Factors of our 20172020 Form 10-K, those described in Part II, Item 1A of this report, and those described from time to time in our future reports filed with the Securities and Exchange Commission, including:
Impact of health epidemics and pandemics, including the COVID-19 pandemic, and the resulting negative economic impact and related governmental actions
Risks associated with being a U.S.-based company with global operations, including commercial, political, and financial risks; local labor policies and conditions; protectionist trade policies, or economic or trade sanctions, including additional retaliatory tariffs on American spirits and the effectiveness of our actions to mitigate the negative impact on our margins, sales, and distributors; compliance with local trade practices and other regulations; terrorism; and health pandemics
Failure to comply with anti-corruption laws, trade sanctions and restrictions, or similar laws or regulations
Fluctuations in foreign currency exchange rates, particularly a stronger U.S. dollar
Changes in laws, regulatory measures, or governmental policies – especially those that affect the production, importation, marketing, labeling, pricing, distribution, sale, or consumption of our beverage alcohol products
Tax rate changes (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, or capital gains) or changes in related reserves, changes in tax rules or accounting standards, and the unpredictability and suddenness with which they can occur
Unfavorable global or regional economic conditions, particularly related to the COVID-19 pandemic, and related economic slowdowns or recessions, low consumer confidence, high unemployment, weak credit or capital markets, budget deficits, burdensome government debt, austerity measures, higher interest rates, higher taxes, political instability, higher inflation, deflation, lower returns on pension assets, or lower discount rates for pension obligations
Risks associated with being a U.S.-based company with global operations, including commercial, political, and financial risks; local labor policies and conditions; protectionist trade policies or economic or trade sanctions; compliance with local trade practices and other regulations, including anti-corruption laws; terrorism; and health pandemics
Fluctuations in foreign currency exchange rates, particularly a stronger U.S. dollar
Changes in laws, regulations, or policies – especially those that affect the production, importation, marketing, labeling, pricing, distribution, sale, or consumption of our beverage alcohol products
Tax rate changes (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, capital gains) or changes in related reserves, changes in tax rules (for example, LIFO, foreign income deferral, U.S. manufacturing, and other deductions) or accounting standards, and the unpredictability and suddenness with which they can occur
Dependence upon the continued growth of the Jack Daniel’s family of brands
Changes in consumer preferences, consumption, or purchase patterns – particularly away from larger producers in favor of smallersmall distilleries or local producers, or away from brown spirits, our premium products, or spirits generally, and our ability to anticipate or react to them; legalization of marijuana use on a more widespread basis; shifts in consumer purchase practices from traditional to e-commerce retailers; bar, restaurant, travel, or other on-premise declines; shifts in demographic or health and wellness trends; or unfavorable consumer reaction to new products, line extensions, package changes, product reformulations, or other product innovation
Decline in the social acceptability of beverage alcohol products in significant markets
Production facility, aging warehouse, or supply chain disruption
Imprecision in supply/demand forecasting
Higher costs, lower quality, or unavailability of energy, water, raw materials, product ingredients, labor, or finished goods
Route-to-consumer changes that affect the timingSignificant additional labeling or warning requirements or limitations on availability of our sales, temporarily disrupt the marketing or sale of ourbeverage alcohol products or result in higher implementation-related or fixed costs
Inventory fluctuations in our products by distributors, wholesalers, or retailers
Competitors’ and retailers’ consolidation or other competitive activities, such as pricing actions (including price reductions, promotions, discounting, couponing, or free goods), marketing, category expansion, product introductions, or entry or expansion in our geographic markets or distribution networks
Route-to-consumer changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in higher fixed costs
Inventory fluctuations in our products by distributors, wholesalers, or retailers
Risks associated with acquisitions, dispositions, business partnerships, or investments – such as acquisition integration, termination difficulties or costs, or impairment in recorded value
InadequateCounterfeiting and inadequate protection of our intellectual property rights
Product recalls or other product liability claims;claims, product counterfeiting, tampering, contamination, or product quality issues
Significant legal disputes and proceedings;proceedings, or government investigations (particularly of industry
Cyber breach or company business, tradefailure or marketing practices)
Failure or breachcorruption of key information technology systems, or failure to comply with personal data protection laws
Negative publicity related to our company, products, brands, marketing, personnel,executive leadership, employees, board of directors, family stockholders, operations, business performance, or prospects
Failure to attract or retain key executive or employee talent
Our status as a family “controlled company” under New York Stock Exchange rules, and our dual-class share structure
Overview
Fiscal 2018 Year-to-Date HighlightsCOVID-19
Key highlightsCOVID-19 negatively affected our results in the fourth quarter of fiscal 2020 and continued to impact our operating results for the ninethree months ended JanuaryJuly 31, 2018 include:2020. The impact continues to be concentrated in (a) the on-premise as a result of the restrictions in the channel (representing nearly 20% of our business), (b) our Travel Retail channel as a result of travel bans and other restrictions, and (c) our emerging markets. Solid off-premise gains across many of our developed markets, which reflected an increase in at-home consumption and strong growth in the e-premise channel, offset the significant reduction in sales in the on-premise, Travel Retail, and emerging markets. While the financial impact of COVID-19 on our results is difficult to measure, it has had an impact on our operating income and business operations. We discuss the effect of COVID-19 on our results where relevant below.
Despite the ongoing effects resulting from COVID-19 on our results in the first quarter, we believe we remain in a strong financial position, and our capacity to generate solid operating cash flow remains sound, allowing us to navigate this crisis as circumstances evolve. Additionally, we have no current or impending shareholder distributions beyond regular dividends and no maturities of long-term debt until our fiscal 2023. See “Liquidity and Financial Condition” below for details.
Fiscal 2021 Year-to-Date Highlights
We delivered reported net sales of $2,515$753 million, an increasea decrease of 9%2% compared to the same period last year. Excluding an estimated net decrease in distributor inventories, we grew underlying net sales 3%. Net sales for our markets and brands were affected by COVID-19 during the first quarter of fiscal 2021. Underlying growth was driven by (a) JD RTDs, (b) the continued launch of JDTA, (c) our tequila brands, and (d) our premium bourbon brands, led by Woodford Reserve. Declines of JDTW due to the adverse affect of COVID-19 partially offset this underlying growth. From a geographic perspective, the United States led the underlying net sales growth with developed international markets also contributing. These gains were partially offset by a decline in the underlying net sales in our Travel Retail channel, our used barrel sales, and emerging markets.
We delivered reported operating income of $387 million, an increase of 56% compared to the same period of last year. Excluding (a) the gain on sale of Early Times, Canadian Mist, and Collingwood, (b) an estimated net decrease in distributor inventories, and (c) the positive effect of foreign exchange, driven by the strengthening of the euro, Polish zloty, and British pound and (b) an estimated net increase in distributor inventories in the United States, we grew underlying net sales 7%.
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◦ | From a brand perspective, our underlying net sales growth was driven by the Jack Daniel's family of brands, our premium bourbon brands, and our tequila brands. |
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◦ | From a geographic perspective, emerging markets led the growth in underlying net sales, the United States and developed international markets contributed meaningfully, and Travel Retail accelerated the rate of underlying net sales growth compared to the same period last year. |
We delivered operating income of $894 million, an increase of 15% compared to the same period last year. Excluding the positive effect of foreign exchange and an estimated net increase in distributor inventories, we grew underlying operating income 11%grew 15%.
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◦ | Our underlying operating income benefited from flat underlying SG&A spend, as well as underlying advertising expense growth of 5% compared to underlying net sales growth of 7%. |
We delivered diluted earnings per share of $1.25,$0.67, an increase of 17%73% compared to the same period last year, dueincluding an estimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and Collingwood and an $0.08 per share benefit from a discrete tax item recognized during the quarter related to an increase in reported operating income and a reduction in shares outstanding.intercompany transfer of assets.
On December 22, 2017, the U.S. government enacted the Tax Act, which is discussed in more detail in “Results of Operations - Year-Over-Year Period Comparisons.” See Note 3 to the accompanying financial statements for additional information.
| Summary of Operating Performance | | | | Three months ended January 31, | | Nine months ended January 31, | Three Months Ended July 31, |
| (Dollars in millions) | 2017 | | 2018 | | Reported Change | | Underlying Change1 | | 2017 | | 2018 | | Reported Change | | Underlying Change1 | 2019 | | 2020 | | Reported Change | | Underlying Change1 |
| Net sales | $ | 808 |
| | $ | 878 |
| | 9 | % | | 6 | % | | $ | 2,299 |
| | $ | 2,515 |
| | 9 | % | | 7 | % | $ | 766 |
| | $ | 753 |
| | (2 | %) | | 3 | % |
| Cost of sales | 272 |
| | 291 |
| | 7 | % | | 8 | % | | 758 |
| | 825 |
| | 9 | % | | 8 | % | 268 |
| | 288 |
| | 7 | % | | 12 | % |
| Gross profit | 536 |
| | 587 |
| | 9 | % | | 5 | % | | 1,541 |
| | 1,690 |
| | 10 | % | | 7 | % | 498 |
| | 465 |
| | (7 | %) | | (1 | %) |
| Advertising | 102 |
| | 114 |
| | 11 | % | | 6 | % | | 291 |
| | 314 |
| | 8 | % | | 5 | % | 92 |
| | 62 |
| | (33 | %) | | (34 | %) |
| SG&A | 162 |
| | 173 |
| | 7 | % | | 4 | % | | 488 |
| | 497 |
| | 2 | % | | — | % | 164 |
| | 148 |
| | (10 | %) | | (10 | %) |
| Gain on sale of business | | — |
| | (127 | ) | | NA |
| | — | % |
Other expense (income), net
| (1 | ) | | (4 | ) | | 153 | % | | 30 | % | | (16 | ) | | (15 | ) | | (11 | %) | | 6 | % | (6 | ) | | (5 | ) | | (26 | %) | | (66 | %) |
| Operating income | $ | 273 |
| | $ | 304 |
| | 11 | % | | 5 | % | | $ | 778 |
| | $ | 894 |
| | 15 | % | | 11 | % | 248 |
| | 387 |
| | 56 | % | | 15 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses3 | $ | 263 |
| | $ | 283 |
| | 8 | % | | 4 | % | | $ | 763 |
| | $ | 796 |
| | 4 | % | | 2 | % | |
Total operating expenses2 | | $ | 250 |
| | $ | 205 |
| | (18 | %) | | (17 | %) |
| | | | | | | | | | | | | | | | | | | | | | | |
As a percentage of net sales2 | | | | | | | | | | | | | | | | |
As a percentage of net sales3 | | | | | | | | |
| Gross profit | 66.4 | % | | 66.8 | % | | 0.4 | pp | | | | 67.0 | % | | 67.2 | % | | 0.2 | pp | | | 64.9 | % | | 61.7 | % | | (3.2 | )pp | | |
Operating expenses3 | 32.5 | % | | 32.2 | % | | (0.3 | )pp | | | | 33.2 | % | | 31.7 | % | | (1.5 | )pp | | | |
| Operating income | 33.8 | % | | 34.6 | % | | 0.8 | pp | | | | 33.8 | % | | 35.5 | % | | 1.7 | pp | | | 32.4 | % | | 51.4 | % | | 19.0 | pp | | |
| Non-operating postretirement expense | | $ | 1 |
| | $ | 1 |
| | 28 | % | | |
| Interest expense, net | $ | 15 |
| | 15 |
| | — | % | | | | $ | 42 |
| | 45 |
| | 7 | % | | | $ | 19 |
| | $ | 20 |
| | 4 | % | | |
| Effective tax rate | 29.4 | % | | 34.4 | % | | 5.0 | pp | | | | 28.7 | % | | 28.5 | % | | (0.2 | )pp | | | 18.2 | % | | 11.6 | % | | (6.6 | )pp | | |
| Diluted earnings per share | $ | 0.38 |
| | $ | 0.39 |
| | 4 | % | | | | $ | 1.07 |
| | $ | 1.25 |
| | 17 | % | | | $ | 0.39 |
| | $ | 0.67 |
| | 73 | % | | |
Note: Totals may differ due to rounding
| Note: Totals may differ due to rounding
| | | | | | | | | | | | | | | | | | | | | |
1See “Non-GAAP Financial Measures” above for details on our use of “underlying changes,change,” including how we calculate these measures are calculated and the reasons why we believethink this information is useful to readers.
2Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
3Year-over-year changes in percentages are reported in percentage points (pp).
3See “Non-GAAP Financial Measures” aboveFiscal 2021 Outlook
We continue to face substantial uncertainty related to the evolving COVID-19 pandemic, its effect on the global economy, and ultimately its effect on the consumers of our brands. Our ability to make, ship, and market our brands to our consumers has not been materially impacted by COVID-19, and we do not expect that to change. How we sell our brands looks different due to COVID-19, but we do not expect a material limit on our ability to sell our brands to our consumers. We continue to closely monitor key developments in our markets, including (a) the stage of recovery, (b) industry and consumer behavior, (c) macroeconomic conditions, and (d) the timing, likelihood, severity, and restrictions associated with any future waves of COVID-19.
As a result of these uncertainties and low visibility on recovery, and consistent with our 2020 Form 10-K, we are not able to provide quantitative guidance for definitionsfiscal 2021 at this time. From a qualitative perspective, we believe that (a) the Travel Retail channel will not recover during this fiscal year, (b) the timing and strength of the on-premise channel recovery will depend on a variety of factors, but will likely not be at full capacity by the fiscal-year end, and (c) our emerging markets will remain down for the fiscal year. Our gross margin will likely remain under pressure for the year driven by the expectation of higher input cost and mix shifts. However, where our gross margin ultimately lands will depend not only on the volumes of our business, but the mix of our business by geography, portfolio, channel, and size.
We believe we are well positioned to invest effectively as the recovery occurs. We expect overall operating expenses, presented here.
Fiscal 2018 Outlook
Below we discussnotably our outlook foradvertising investments, to accelerate as the remainderyear-over-year rate of declines seen in the first quarter of fiscal 2018, reflecting2021 will not be sustained throughout the trends, developments, and uncertainties thatyear. Also, as previously announced, we expectplan to affect our business. This updated outlook revises certain aspects of the 2018 outlook included in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2017 Form 10-K.
Net sales. We expect underlying net sales growth in the remainder of fiscal 2018 to be generally in line with the growth in the nine months ended January 31, 2018.
Cost of sales. We expect total cost of sales to grow atmake a higher rate than net sales in the remainder of fiscal 2018. We expect underlying cost of sales growth from cost/mix to grow at a higher rate in the remainder of the year compared to 3% cost/mix growth for the nine months ended January 31, 2018.
Operating expenses. We expect total operating expenses to grow at a higher rate in the remainder of the fiscal year compared$20 million contribution to the growth rate experienced inBrown-Forman Foundation during fiscal 2021. We will remain agile, diligent, focused, and disciplined on our investments as the nine months ended January 31, 2018. For the remainder of fiscal 2018, we expect (a) advertising expensesenvironment continues to grow at a higher rate than net sales growth and (b) underlying SG&A to grow compared to the flat spend for the nine months ended January 31, 2018.
evolve.Operating income. We expect slower growth rates for operating income in the remainder of fiscal 2018 compared to growth rates experienced in the nine months ended January 31, 2018.
Foreign exchange. For the nine months ended January 31, 2018, net sales and operating income were positively affected by foreign exchange and we expect that benefit to continue for the remainder of the fiscal year.
Estimated net change in distributor inventories. Our reported net sales and operating income benefited from an estimated net increase in distributor inventories during the nine months ended January 31, 2018. We expect that benefit to moderate slightly in the remainder of the fiscal year.
Effective tax rate. The provisional effect of the Tax Act was recorded in the third quarter. We expect our full yearfull-year effective tax rate to be approximately 28% based onin the tax raterange of 26.1% on ordinary income for the full fiscal year adjusted for known discrete items.17% to 19%.
Capital Deployment. As announced on January 23, 2018, our Board of Directors approved capital deployment actions aimed at benefiting shareholders, employees, and the community. These actions included a special dividend, additional contributions to our pension plan, and the creation of a $60-$70 million charitable foundation.
Results of Operations – Fiscal 20182021 Year-to-Date Highlights
Market Highlights
The following table provides supplemental information for our largest markets for the ninethree months ended JanuaryJuly 31, 2018,2020, compared to the same period last year. We discuss results forof the markets most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the ninethree months ended JanuaryJuly 31, 2018,2020, compared to the same period last year.
Top 10 Markets1 - Fiscal 2018 Net Sales Growth by Geographic Area |
| | | | | | | | | | | |
| | Percentage change versus prior year period |
| Nine months ended January 31, 2018 | Net Sales |
| Geographic area | Reported | Acquisitions & Divestitures | Foreign Exchange | Net Chg in Est. Distributor Inventories | | Underlying2 |
| United States | 7 | % | — | % | — | % | (2 | %) |
| 5 | % |
| Europe | 15 | % | — | % | (6 | %) | 1 | % |
| 9 | % |
| United Kingdom | 10 | % | — | % | (3 | %) | — | % |
| 6 | % |
| Germany | 16 | % | — | % | (5 | %) | — | % |
| 11 | % |
| France | 10 | % | — | % | (5 | %) | — | % |
| 5 | % |
| Poland | 25 | % | — | % | (15 | %) | — | % |
| 10 | % |
| Russia | 62 | % | — | % | (4 | %) | (22 | %) |
| 37 | % |
| Rest of Europe | 12 | % | — | % | (6 | %) | 3 | % |
| 9 | % |
| Australia | 10 | % | 1 | % | (2 | %) | — | % |
| 10 | % |
| Other geographies | 8 | % | — | % | (1 | %) | 1 | % |
| 9 | % |
| Mexico | 13 | % | — | % | (3 | %) | 1 | % |
| 10 | % |
| Japan | (13 | %) | — | % | 2 | % | 4 | % |
| (7 | %) |
| Canada | 4 | % | — | % | 1 | % | (2 | %) |
| 2 | % |
Remaining geographies3 | 11 | % | — | % | — | % | 2 | % |
| 12 | % |
Travel Retail3 | 17 | % | — | % | 1 | % | (7 | %) |
| 11 | % |
Other non-branded3 | (2 | %) | 15 | % | — | % | — | % |
| 13 | % |
| Total | 9 | % | — | % | (2 | %) | (1 | %) |
| 7 | % |
| Note: Totals may differ due to rounding | | | | | | |
Top Markets1 |
| | | | | | | | | |
| | |
| Three months ended July 31, 2020 | Net Sales % Change vs. 2020 |
Geographic area2 | Reported | Foreign Exchange | Est. Net Chg in Distributor Inventories | | Underlying3 |
| United States | 3 | % | — | % | 5 | % | | 9 | % |
| Developed International | 13 | % | (5 | %) | 5 | % | | 12 | % |
| United Kingdom | 46 | % | (25 | %) | 2 | % | | 24 | % |
| Germany | 20 | % | (3 | %) | — | % | | 17 | % |
| Australia | 29 | % | — | % | — | % | | 28 | % |
| France | 22 | % | (3 | %) | — | % | | 19 | % |
| Rest of Developed International | (24 | %) | — | % | 13 | % | | (10 | %) |
| Emerging | (20 | %) | 10 | % | 7 | % | | (3 | %) |
| Mexico | 9 | % | 21 | % | — | % | | 29 | % |
| Poland | 1 | % | 5 | % | — | % | | 6 | % |
| Russia | (33 | %) | 6 | % | (11 | %) | | (38 | %) |
| Rest of Emerging | (36 | %) | 7 | % | 15 | % | | (14 | %) |
| Travel Retail | (59 | %) | — | % | (5 | %) | | (63 | %) |
| Non-branded and bulk | (31 | %) | (1 | %) | — | % | | (32 | %) |
| Total | (2 | %) | — | % | 5 | % | | 3 | % |
| Note: Results may differ due to rounding | | | | | |
1“Top 10 markets”Markets” are ranked based on percentage of total fiscal 20172020 net sales. See 20172020 Form 10-K “Results of Operations - Fiscal 20172020 Market Highlights” and “Note 15. Supplemental Information.”Note 8 to the Consolidated Financial Statements.
2See “Definitions” above for definitions of market aggregations presented here.
3See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure is calculated and the reasons why we believe this information is useful to readers.
3
Net sales in all of the markets discussed below were affected by COVID-19 during the first quarter of fiscal 2021. See “Definitions”“Overview - COVID-19” above for definitionsmore information around the impact of market aggregations presented here.COVID-19 on our results.
| |
| • | United States. Reported net sales increased 3%, while underlying net sales grew 9% after adjusting for an estimated net decrease in distributor inventories (following the April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions resulting from COVID-19). The underlying net sales gains were led by (a) JD RTDs, fueled by strong consumer demand for Jack Daniel’s Country Cocktails and the launch of new spirit-based RTD products; (b) our premium bourbons, led by Woodford Reserve and Old Forester, supported by strong consumer takeaway trends; (c) the continued launch of JDTA; (d) volumetric growth of JDTH; (e) volumetric growth and higher prices of Korbel Champagne; and (f) our tequilas, due to higher prices and volumes of el Jimador and Herradura. This growth was partially offset by lower net sales of JDTW reflecting unfavorable channel mix resulting from COVID-19 related restrictions in the on-premise channel. |
| |
| • | Developed International. Reported net sales increased 13%, while underlying net sales grew 12% after adjusting for the positive effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was led by Australia, the United Kingdom, Germany, and France, partially offset by declines in Spain. |
| |
| ◦ | The United Kingdom’s underlying net sales growth was driven by the launch of JDTA and volumetric growth of JDTH and JDTW. Favorable comparisons to the first quarter of fiscal 2020 also affected the current-year growth rate. |
United States. Reported net sales grew 7%, while underlying net sales increased 5% after adjusting for an estimated net increase in distributor inventories driven in part by the launch of Jack Daniel’s Tennessee Rye. Underlying net sales gains were driven primarily by the growth of (a) the Jack Daniel’s family of brands; (b) our premium bourbons; and (c) our tequila brands, led by Herradura and el Jimador.
Europe. Reported net sales increased 15%, while underlying net sales grew 9% after adjusting for (a) the positive effect of foreign exchange reflecting the broad weakening of the dollar compared to the same period last year and (b) an estimated net decrease in distributor inventories in Spain, partially offset by an estimated net increase in distributor inventories in Russia. Underlying net sales gains were led by Russia, Germany, the United Kingdom, and Poland.
| |
| ◦ | InGermany’s underlying net sales growth was fueled by the United Kingdom,volumetric gains of JD RTDs due to strong consumer demand along with the launch of JDTA, partially offset by JDTW declines. Favorable comparisons to the first quarter of fiscal 2020 also affected the current year growth rate. |
| |
| ◦ | Australia’s underlying net sales growth was driven by higher volumes of JD RTDs fueled by strong consumer demand. |
| |
| ◦ | France’s underlying net sales growth was driven by higher volumes of JDTW and JD RTDs, the latter of which was fueled byJDTH along with the launch of JD Cider.JDTA. |
| |
| ◦ | In Germany,Underlying net sales in the Rest of Developed International declined led by lower JDTW volumes in Spain reflecting COVID-19 related closures in this heavily on-premise focused market. |
| |
| • | Emerging. Reported net sales decreased 20%, while underlying net sales declined 3% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales declines were led by Russia, Southeast Asia, sub-Saharan Africa, and India as COVID-19 had an adverse effect on results in the first quarter. These declines were partially offset by growth in Mexico and Brazil. |
| |
| ◦ | Mexico’s underlying net sales growth was fueled by higher volumes of New Mix supported by increased demand and shelf space as a result of the temporary supply disruption of the beer industry due to COVID-19 related shutdowns. This growth was partially offset by lower volumes and unfavorable mix of Herradura. |
| |
| ◦ | Poland’s underlying net sales growth was driven by solid growthhigher volumes of JD RTDs, which includedFinlandia and the launch of JD Lynchburg Lemonade, and volumetric growth and favorable price/mix of JDTW. |
| |
◦ | In France, underlying net sales growth was led by JDTW and JDTH, as both experienced higher consumer takeaway comparedJDTA. Favorable comparisons to the total whiskey category in that market.first quarter of fiscal 2020 also affected the current year growth rate. |
| |
| ◦ | In Poland,Russia’s underlying net sales growth was fueleddeclines were driven by volume gainslower volumes of JDTW, which has experienced strong consumer takeaway trends.Finlandia and JDTW. Difficult comparisons to the first quarter of fiscal 2020 coupled with the adverse affect of COVID-19 also affected the current year results. |
| |
| ◦ | In Russia, underlyingUnderlying net sales growth was drivenin the Rest of Emerging declined due to broad-based volume declines of JDTW, partially offset by a buy-in ahead of an upcoming distributor change as well as higher pricing and volumetric growth of Finlandia. The higher price of Finlandia is partly attributed to import duties resulting from a changeJDTW in our route-to-consumer.Brazil. |
| |
◦• | The increase inTravel Retail. Reported net sales declined 59%, while underlying net sales were down 63% after adjusting for an estimated net increase in distributor inventories. The underlying net sales decline was driven by lower volumes of JDTW, Woodford Reserve, and Finlandia due to the Restunprecedented implementation of Europe was led by Turkey, Ukraine,travel bans and Spain. Trends improvedother restrictions resulting from COVID-19. |
| |
| • | Non-branded and bulk reported net sales declined 31%, while underlying net sales decreased 32% after adjusting for JDTW in Turkey, where our results inthe positive effect of foreign exchange. Lower volumes and prices for used barrels drove the reduction compared to the same period last year were negatively affected by geopolitical and economic instability. In Ukraine, growth was led by Finlandia and JDTW. In Spain, JDTW grew volumes along with favorable price/mix, where our new owned-distribution organization has led to recent acceleration in performance.year. |
Australia. Reported net sales increased 10%, while underlying net sales also increased 10% after adjusting for the positive effect of foreign exchange and the loss of net sales related to our TSA for Southern Comfort and Tuaca. Underlying net sales growth was driven by the Jack Daniel’s family of brands due to price increases, a shift in product mix to higher margin RTD brands, and higher volumes of JD RTDs and JDTW.
Other geographies. Reported net sales for our other markets collectively increased 8%, while underlying net sales increased 9% after adjusting for the positive effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was led by continued strong results in Mexico as well as the return to growth of Brazil, China, and Southeast Asia after declines in the same period last year. These gains were partially offset by volume declines in Japan.
Travel Retail. Reported net sales increased 17%, while underlying net sales increased 11% after adjusting for the negative effect of foreign exchange and an estimated net increase in distributor inventories. Underlying net sales growth was led by higher volumes of JDTW, Woodford Reserve, Gentleman Jack, and JDTH.
Other non-branded. Reported net sales decreased 2%, while underlying net sales increased 13% after adjusting for the net effect of our Scotch acquisition and the loss of net sales related to our TSA for Southern Comfort and Tuaca. The underlying net sales growth was driven by higher volumes of used barrel sales, which benefited from increased demand in the current period as well as an easy comparison to a weak prior-year period.
Brand Highlights
The following table highlights the worldwide results ofprovides supplemental information for our largest brands for the ninethree months ended JanuaryJuly 31, 2018,2020, compared to the same period last year. We discuss results of the brands most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the ninethree months ended JanuaryJuly 31, 2018,2020, compared to the same period last year.
| Major Brands Worldwide Results |
| | | | | | | | | | | | |
| | Percentage change versus prior year period |
| Nine months ended January 31, 2018 | Volumes | | Net Sales |
| Brand family / brand | 9L Depletions2 | | Reported | Foreign Exchange | Net Chg in Est. Distributor Inventories | | Underlying1 |
| Jack Daniel’s Family | 8 | % | | 10 | % | (2 | %) | (1 | %) | | 7 | % |
| Jack Daniel’s Tennessee Whiskey | 6 | % | | 7 | % | (2 | %) | — | % | | 5 | % |
| Jack Daniel’s Tennessee Honey | 9 | % | | 11 | % | (2 | %) | — | % | | 9 | % |
Jack Daniel’s RTDs/RTP2 | 11 | % | | 17 | % | (3 | %) | — | % | | 14 | % |
| Gentleman Jack | 9 | % | | 11 | % | (1 | %) | (1 | %) | | 9 | % |
| Jack Daniel’s Tennessee Fire | 14 | % | | 22 | % | (1 | %) | (6 | %) | | 15 | % |
Other Jack Daniel’s whiskey brands2 | 22 | % | | 29 | % | (1 | %) | (14 | %) | | 14 | % |
| Woodford Reserve | 23 | % | | 25 | % | — | % | (3 | %) | | 22 | % |
| Finlandia | 3 | % | | 14 | % | (6 | %) | (1 | %) | | 7 | % |
| el Jimador | 7 | % | | 13 | % | — | % | (4 | %) | | 9 | % |
| Herradura | 15 | % | | 19 | % | (2 | %) | 2 | % | | 20 | % |
| Note: Totals may differ due to rounding | | | | | | | |
| Major Brands |
| | | | | | | | | | | | | | |
| | |
| Three months ended July 31, 2020 | Volumes | | Net Sales % Change vs 2020 |
Product category / brand family / brand1 | 9L Depletions1 | | Reported | Acquisitions and Divestitures | Foreign Exchange | Est. Net Chg in Distributor Inventories | | Underlying2 |
| Whiskey | 14 | % | | (1 | %) | — | % | — | % | 5 | % | | 4 | % |
Jack Daniel’s family of brands | 15 | % | | (2 | %) | — | % | — | % | 5 | % | | 3 | % |
| JDTW | (7 | %) | | (17 | %) | — | % | — | % | 7 | % | | (10 | %) |
| Jack Daniel’s RTD/RTP | 38 | % | | 35 | % | — | % | 2 | % | — | % | | 37 | % |
| JDTH | 17 | % | | 21 | % | — | % | (2 | %) | (3 | %) | | 16 | % |
| Gentleman Jack | 17 | % | | 17 | % | — | % | — | % | (3 | %) | | 14 | % |
| JDTF | — | % | | (10 | %) | — | % | — | % | 7 | % | | (3 | %) |
| Other Jack Daniel’s whiskey brands | 157 | % | | 83 | % | — | % | (4 | %) | 18 | % | | 97 | % |
| Woodford Reserve | 15 | % | | 11 | % | — | % | — | % | 4 | % | | 14 | % |
| Tequila | 69 | % | | — | % | — | % | 8 | % | 8 | % | | 16 | % |
| el Jimador | 3 | % | | (2 | %) | — | % | 3 | % | 10 | % | | 11 | % |
| Herradura | (22 | %) | | (25 | %) | — | % | 2 | % | 7 | % | | (16 | %) |
| Wine | 7 | % | | 3 | % | — | % | — | % | 7 | % | | 10 | % |
| Vodka (Finlandia) | (20 | %) | | (27 | %) | — | % | 3 | % | (1 | %) | | (24 | %) |
| Rest of Portfolio | (5 | %) | | 38 | % | (4 | %) | (30 | %) | (7 | %) | | (4 | %) |
| Non-branded and bulk | NA |
| | (31 | %) | — | % | (1 | %) | — | % | | (32 | %) |
| Note: Results may differ due to rounding | | | | | | | | |
1See “Definitions” above for definitions of brand aggregations and volume measures presented here.
2See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure is calculated and the reasons why we believe this information is useful to readers.
2
Net sales for all of the brands discussed below were affected by COVID-19 during the first quarter of fiscal 2021. See “Definitions”“Overview - COVID-19” above for definitionsmore information around the impact of brand aggregations and volume measures presented here.
Jack Daniel’s family of brands grew reported net sales 10%, while underlying net sales grew 7%, and was the most significant contributor toCOVID-19 on our overall underlying net sales growth. Reported net sales were helped by foreign exchange due to the weakening of the dollar against the euro, British pound, and Polish zloty and an estimated net increase in distributor inventories. The following are details about the underlying performance of the Jack Daniel’s family of brands:
results. | |
◦• | JDTW grewWhiskey brand’s reported net sales declined 1%, while underlying net sales grew 4% after adjusting for an estimated net decrease in distributor inventories. The underlying net sales gain was driven by the majoritygrowth of its markets includingJD RTDs, the United Kingdom, the United States, Poland, Travel Retail, Brazil, Turkey, Germany, Australia,continued launch of JDTA, and France.higher volumes of JDTH and Woodford Reserve, partially offset by declines of JDTW.
|
| |
| ◦ | JDTHThe Jack Daniel’s family of brands grew underlying net sales driven by JD RTDs, the continued launch of JDTA, and higher volumes of JDTH, partially offset by declines of JDTW.
|
| |
| ▪ | The underlying net sales decline for JDTW was driven by (a) lower volumes in emerging markets and Travel Retail reflecting the unprecedented implementation of travel bans and other restrictions related to COVID-19 and (b) unfavorable channel mix in the United States and our international developed markets resulting from COVID-19 related restrictions in the on-premise channel. |
| |
| ▪ | The increase in underlying net sales growth for Jack Daniel’s RTD/RTP was fueled by volumetric gains in the United States (including the launch of new spirit-based RTD products), Australia, and Germany. |
| |
| ▪ | JDTH increased underlying net sales fueled by higher volumes in the United States, the United Kingdom, and France. This growth was partially offset by declines in Travel Retail due to the unprecedented implementation of travel bans and other restrictions resulting from COVID-19. |
| |
| ▪ | Gentleman Jack increased underlying net sales with volumetric growth, partially offset by unfavorable channel mix in the United States resulting from COVID-19 related restrictions in the on-premise channel. |
| |
| ▪ | The underlying net sales decline of JDTF was driven by unfavorable mix in the United States resulting from COVID-19 related restrictions in the on-premise channel. |
| |
| ▪ | The underlying net sales growth of Other Jack Daniel’s whiskey brands was fueled by the continued launch of JDTA led by the United States, its largest market, Russia,the United Kingdom, France, and Travel Retail.Germany. |
| |
| ◦ | The increase inWoodford Reserve grew underlying net sales fueled by volumetric growth for Jack Daniel’s RTDs/RTP was driven primarily by Australia, Germany, andin the United States, with allpartially offset by lower volumes in Travel Retail reflecting the unprecedented implementation of these markets benefiting from new RTD line extensions.travel bans and other restrictions related to COVID-19.
|
| |
| • | Tequila brands reported net sales were flat, while underlying net sales grew 16% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was fueled by higher volumes of New Mix supported by increased demand and shelf space as a result of the temporary supply disruption of the beer industry due to COVID-19 related shutdowns in Mexico. |
| |
| ◦ | Gentleman Jackel Jimador grew underlying net sales leddriven by volumetric gainsgrowth and higher prices in the United States its largest market, and Travel Retail.Mexico.
|
| |
| ◦ | GrowthThe underlying net sales decline ofJDTF Herradura was driven by lower volumes and unfavorable mix in Mexico, partially offset by higher prices, favorable product mix, and higher volumes in the United States and Germany and the launch of the brand in Brazil and Chile.States.
|
| |
◦• | Reported net sales for our Wine business grew 3%, while underlying net sales grew 10% after adjusting for an estimated net decrease in distributor inventories. The launchincrease in underlying net sales was driven by volumetric growth and higher prices of Jack Daniel’s Tennessee Rye in September of this fiscal yearKorbel Champagne in the United States, waspartially offset by declines of Sonoma-Cutrer in the primary driver ofUnited States reflecting COVID-19 related restrictions in the on-premise channel where this brand is focused. |
| |
| • | Reported net sales for Finlandia declined 27%, while underlying net sales growthdecreased 24% after adjusting for Other Jack Daniel’s whiskey brandsthe negative effect of foreign exchange and an estimated net increase in distributor inventories. The decrease in underlying net sales was due to the adverse effect of COVID-19, which drove volume declines in Russia and Travel Retail. |
| |
| • | Rest of portfolio reported net sales increased 38%, while underlying net sales declined 4% after adjusting for (a) the positive effect of foreign exchange, (b) an estimated net increase in distributor inventories, and (c) the effect of our acquisition of The 86 Company (Fords Gin). The decrease in underlying net sales was driven primarily by declines in the United Kingdom for Chambord. |
| |
| • | Non-branded and bulk reported net sales declined 31%, while underlying net sales decreased 32% after adjusting for the positive effect of foreign exchange. Lower volumes and prices for used barrels drove the reduction compared to the same period last year. |
Woodford Reserve led
Year-Over-Year Period Comparisons
COVID-19 affected our results during the growthfirst quarter of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our premium bourbons as the brand’s reported net sales increased 25% and underlying net sales grew 22%. This growth was driven by the United States, where the brand continued to grow volumetrically with strong consumer takeaway trends. Reported net sales were also helped by an estimated net increase in distributor inventories in the United States and Travel Retail.
results.Reported net sales for Finlandia grew 14%, while underlying net sales increased 7% led by higher price and volumetric growth in Russia. The higher price in Russia is partly attributed to import duties resulting from a change in
our route-to-consumer. Reported net sales were helped by foreign exchange due to the weakening of the dollar against the Polish zloty and an estimated net increase in distributor inventories in Russia.
Reported net sales for el Jimador increased 13%, while underlying net sales increased 9% driven by volume gains in the United States supported by strong consumer takeaway trends. Reported net sales were helped by an estimated net increase in distributor inventories in the United States.
Herradura grew reported net sales 19%, while underlying net sales increased 20% driven by higher volumes and favorable price/mix in the brand’s largest markets, Mexico and the United States, the former of which benefited from volumetric growth of Herradura Ultra. Reported net sales were hurt by an estimated net decrease in distributor inventories in the United States, partially offset by favorable foreign exchange.
Year-over-Year Period Comparisons| Net Sales |
| | | | | |
| Percentage change versus the prior year period ended January 31 | 3 Months | | 9 Months |
| Change in reported net sales | 9 | % | | 9 | % |
| Acquisitions and divestitures | — | % | | — | % |
| Foreign exchange | (4 | %) | | (2 | %) |
| Estimated net change in distributor inventories | 1 | % | | (1 | %) |
| Change in underlying net sales | 6 | % | | 7 | % |
| | | | |
| Change in underlying net sales attributed to: | | | |
| Volume | 3 | % | | 5 | % |
| Net price/mix | 3 | % | | 2 | % |
| Note: Totals may differ due to rounding | | | |
| Net Sales |
| | |
| Percentage change versus the prior year period ended July 31 | 3 Months |
| Change in reported net sales | (2 | %) |
| Estimated net change in distributor inventories | 5 | % |
| Change in underlying net sales | 3 | % |
| |
| Change in underlying net sales attributed to: | |
| Volume | 22 | % |
| Price/mix | (19 | %) |
| Note: Results may differ due to rounding | |
For the three months ended JanuaryJuly 31, 2018, 2020, net sales were $878$753 million, an increasea decrease of $70$13 million, or 9%2%, compared to the same period last year. After adjusting reported resultsnet sales for the positive effect of foreign exchange and an estimated net decrease in distributor inventories primarily in the United States (following the April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions resulting from COVID-19), underlying net sales grew 6%.3% compared to the same period last year. The changeincrease in underlying net sales was driven by 3%comprised 22% volume growth and 3% of19% unfavorable price/mix. Volume growth was led by the Jack Daniel’s family, tequilas,New Mix, JDTA, JD RTDs, JDTH, and premium bourbons. Price/Woodford Reserve, partially offset by declines of JDTW and Finlandia. The unfavorable price/mix was driven by (a) an increasefaster growth from our lower-priced brands (New Mix and JD RTDs) and unfavorable channel mix (primarily for JDTW) in sharethe United States and our international developed markets resulting from COVID-19 related restrictions in the on-premise channel. See “Results of sales from higher priced brands, most notably the Jack Daniel’s family and Woodford Reserve, and (b) higher average pricingOperations - Fiscal 2021 Year-to-Date Highlights” above for further details on the Jack Daniel’s family.
The primary factors contributing to the growth in underlying net sales for the three months ended JanuaryJuly 31, 2018 were:
volumetric growth of JDTW in several international markets, most notably, Brazil, the United Kingdom, Travel Retail, Australia, Poland, Germany, Japan, France, and Spain;
growth of brands in our American whiskey portfolio in the United States led by Woodford Reserve, Gentleman Jack, the launch of Jack Daniel’s Tennessee Rye, JDTF, JDTH, and Old Forester;
our tequila brands, led by (a) volumetric growth and favorable price/mix of Herradura in Mexico and the United States and (b) higher prices and volume gains of New Mix in Mexico;
higher volume of JD RTDs led by Germany, Australia, Mexico, and China as well as higher pricing in Australia;
growth of Finlandia in Europe led by Russia;
increased volumes of JDTH in several international markets, most notably Brazil and Travel Retail, and the launch of JDTF in Brazil and Chile;
higher volume of used barrel sales; and
volumetric growth of Woodford Reserve in Travel Retail.
These gains in underlying net sales were partially offset by:
volume declines of Korbel Champagne in the United States;
volume declines of JDTW in the United States, partially offset by favorable price/mix;
declines in our contract bottling operations; and
declines of Chambord in the United Kingdom.
For the nine months ended January 31, 2018, net sales were $2,515 million, an increase of $216 million, or 9%, compared to the same period last year. After adjusting reported results for the positive effect of foreign exchange and an estimated net increase in distributor inventories, underlying net sales grew 7%. The change in underlying net sales was driven by 5% volume growth and 2% of price/mix. Volume growth was led by the Jack Daniel's family, tequilas, and premium bourbons. Price/mix was driven by (a) an increase in share of sales from higher priced brands, most notably the Jack Daniel's family and Woodford Reserve, and (b) higher average pricing on tequilas.
The primary factors contributing to the growth in underlying net sales for the nine months ended January 31, 2018 were:
volumetric growth of JDTW in several international markets, most notably, the United Kingdom, Poland, Travel Retail, Brazil, Turkey, Germany, Australia, and France;
growth of our American whiskey portfolio in the United States, led by the Jack Daniel’s family, Woodford Reserve, and Old Forester;
our tequila brands, led by (a) volumetric growth and favorable price/mix of Herradura in Mexico and the United States, (b) higher prices and volume gains of New Mix in Mexico, and (c) volume growth of el Jimador in the United States;
higher volume of JD RTDs, led by Australia, Germany, and the United Kingdom, all of which benefited from new RTD line extensions;
higher price and volume growth of Finlandia in Russia;
higher volume of used barrel sales; and
increased volumes of JDTH in several international markets, most notably Russia, France, and Travel Retail.
These gains in underlying net sales were partially offset by volume declines of Korbel Champagne in the United States.2020.
| Cost of Sales |
| | | | | |
| Percentage change versus the prior year period ended January 31 | 3 Months | | 9 Months |
| Change in reported cost of sales | 7 | % | | 9 | % |
| Acquisitions and divestitures | — | % | | 2 | % |
| Foreign exchange | — | % | | (2 | %) |
| Estimated net change in distributor inventories | 1 | % | | (1 | %) |
| Change in underlying cost of sales | 8 | % | | 8 | % |
| | | | |
| Change in underlying cost of sales attributed to: | | | |
| Volume | 3 | % | | 5 | % |
| Cost/mix | 5 | % | | 3 | % |
Note: Totals may differ due to rounding
| | | |
| Cost of Sales |
| | |
| Percentage change versus the prior year period ended July 31 | 3 Months |
| Change in reported cost of sales | 7 | % |
| Foreign exchange | 1 | % |
| Estimated net change in distributor inventories | 4 | % |
| Change in underlying cost of sales | 12 | % |
| |
| Change in underlying cost of sales attributed to: | |
| Volume | 22 | % |
| Cost/mix | (10 | %) |
| Note: Results may differ due to rounding | |
Cost of sales of $288 million for the three months ended JanuaryJuly 31, 20182020, increased $19$20 million, or 7%, to $291 million when compared to the same period last year. Underlying cost of sales increased 8%12% after adjusting reported costs for an estimated net decrease in distributor inventories. The increase in underlying cost of sales for three months ended January 31, 2018 was driven by higher input costs including wood, higher volumes, and incremental value-added packaging, partially offset by a shift in product mix to lower-cost brands.
Cost of sales for the nine months ended January 31, 2018 increased $67 million, or 9%, to $825 million when compared to the same period last year. Underlying cost of sales increased 8% after adjusting reported costs for (a) the net effect of our Scotch acquisitioninventories and the loss of net sales related to our TSA for Southern Comfort and Tuaca, (b) the negativepositive effect of foreign exchange, and (c) an estimated net increase in distributor inventories.exchange. The increase in underlying cost of sales for the ninethree months ended JanuaryJuly 31, 20182020, was driven by higher volumes higher input(New Mix and JD RTDs) and increased costs including wood,(primarily agave), partially offset by a shift in portfolio mix toward our lower-cost brands (New Mix and incremental value-added packaging. Looking ahead to the remainder of fiscal 2018, we expect that cost/mix will increase in the mid-single digits.JD RTDs).
| Gross Profit |
| | | | | |
| Percentage change versus the prior year period ended January 31 | 3 Months | | 9 Months |
| Change in reported gross profit | 9 | % | | 10 | % |
| Acquisitions and divestitures | — | % | | — | % |
| Foreign exchange | (5 | %) | | (2 | %) |
| Estimated net change in distributor inventories | 1 | % | | (1 | %) |
| Change in underlying gross profit | 5 | % | | 7 | % |
Note: Totals may differ due to rounding
| | | |
| Gross Profit |
| | |
| Percentage change versus the prior year period ended July 31 | 3 Months |
| Change in reported gross profit | (7 | %) |
| Estimated net change in distributor inventories | 5 | % |
| Change in underlying gross profit | (1 | %) |
| Note: Results may differ due to rounding | |
| Gross Margin |
| | | | | |
| For the period ended January 31 | 3 months | | 9 Months |
| Prior year gross margin | 66.4 | % | | 67.0 | % |
| Price/mix | 0.7 | % | | 0.8 | % |
| Cost | (1.5 | %) | | (0.9 | %) |
| Acquisitions and divestitures | — | % | | 0.3 | % |
| Foreign exchange | 1.2 | % | | — | % |
| Change in gross margin | 0.4 | % | | 0.2 | % |
| Current year gross margin | 66.8 | % | | 67.2 | % |
Note: Totals may differ due to rounding
| | | |
| Gross Margin |
| | |
| For the period ended July 31 | 3 months |
| Prior year gross margin | 64.9 | % |
| Price/mix | (1.1 | %) |
| Cost | (2.4 | %) |
| Foreign exchange | 0.3 | % |
| Change in gross margin | (3.2 | %) |
| Current year gross margin | 61.7 | % |
| Note: Results may differ due to rounding | 0.00 |
|
Gross profit of $587$465 million increased $51decreased $33 million, or 9%7%, for the three months ended JanuaryJuly 31, 2018.2020, compared to the same period last year. Underlying gross profit grew 5%declined 1% after adjusting reported results for the positive effect of foreign exchange and an estimated net decrease in distributor inventories. The increase in underlying gross profit resulted from the same factors that contributed to the increase in underlying net sales and the increase in underlying cost of sales.
ForGross margin for the three months ended JanuaryJuly 31, 2018, gross margin increased approximately 0.42020, decreased to 61.7%, down 3.2 percentage points to 66.8%, from 66.4%64.9% in the same period last yearyear. The decrease in gross margin was driven by the positive effect of foreign exchange and favorable price/mix, partially offset by an increase in underlying cost of sales.
Gross profit of $1,690 million increased $149 million, or 10%, for the nine months ended January 31, 2018. Underlying gross profit grew 7% after adjusting reported results for the positive effect of foreign exchangehigher input costs (primarily agave) and an estimated net increaseunfavorable shift in distributor inventories. The increase in underlying gross profit resultedchannel and portfolio mix resulting from the same factors that contributed to the increase in underlying net sales and the increase in underlying cost of sales.
For the nine months ended January 31, 2018, gross margin increased approximately 0.2 percentage points to 67.2%, from 67.0%COVID-19 related restrictions in the same period last year driven by favorable price/mix and the loss of lower margin net sales related to our TSA for Southern Comfort and Tuaca, partially offset by an increase in underlying cost of sales.
on-premise channel.
| Operating Expenses |
| | | | | | | | | |
| Percentage change versus the prior year period ended January 31 |
| 3 Months | Reported | Acquisitions & Divestitures | Foreign Exchange | | Underlying |
| Advertising | 11 | % | — | % | (5 | %) | | 6 | % |
| SG&A | 7 | % | — | % | (3 | %) | | 4 | % |
| Other expense (income), net | 153 | % | — | % | (123 | %) | | 30 | % |
| Total | 8 | % | — | % | (3 | %) | | 4 | % |
| | | | | | |
| 9 Months | | | | | |
| Advertising | 8 | % | — | % | (2 | %) | | 5 | % |
| SG&A | 2 | % | — | % | (1 | %) | | — | % |
| Other expense (income), net | (11 | %) | (8 | %) | 25 | % | | 6 | % |
| Total | 4 | % | — | % | (2 | %) | | 2 | % |
| Note: Totals may differ due to rounding | | | | | |
| Operating Expenses |
| | | | | | | | | |
| Percentage change versus the prior year period ended July 31 |
| 3 Months | Reported | Acquisitions and Divestitures | Foreign Exchange | | Underlying |
| Advertising | (33 | %) | (1 | %) | — | % | | (34 | %) |
| SG&A | (10 | %) | — | % | 1 | % | | (10 | %) |
Total operating expenses1 | (18 | %) | (1 | %) | 1 | % | | (17 | %) |
| Note: Results may differ due to rounding | | | | |
1Total operating expenses include advertising expense, SG&A expense, and other expense (income), net. |
Operating expenses totaled $283$205 million, and increased $20down $45 million, or 8%18%, for the three months ended JanuaryJuly 31, 20182020, compared to the same period last year. Underlying operating expenses grew 4%were down 17% after adjusting for the negativeeffect of our acquisition of The 86 Company (Fords Gin) and the positive effect of foreign exchange.
Reported advertising expenses grew 11%expense declined 33% for the three months ended JanuaryJuly 31, 2018,2020, while underlying advertising expenses grew 6%expense decreased 34% after adjusting for the negativeeffect of our acquisition of The 86 Company (Fords Gin). The decrease in underlying advertising expense was driven by a change in the timing of spend and a reduction in our investment behind on-premise channel activities and various events and sponsorships that were canceled in the first quarter of fiscal 2021 due to COVID-19.
Reported SG&A expense declined 10% for the three months ended July 31, 2020, and underlying SG&A expense also declined 10% after adjusting for the positive effect of foreign exchange. The increasedecrease in the underlying SG&A expense was driven by lower discretionary spend (including hiring and travel freezes) as COVID-19 continued investment in the Jack Daniel’s family, including the launch of Jack Daniel’s Tennessee Rye, andto affect our premium bourbon brands, most notably Woodford Reserve.
Reported SG&A expenses grew 7% for the three months ended January 31, 2018, while underlying SG&A grew 4% after adjusting for the negative effect of foreign exchange. The increase in underlying SG&A was driven by higher incentive compensation related expenses, partially offset by continued tight management of discretionary spending.
For the three months ended January 31, 2018, operating expenses as a percentage of net sales declined 0.3 percentage points to 32.2%, from 32.5% in the same period last year. Our operating expenses as a percentage of net sales declined as combined underlying operating expenses grew at a slower rate than underlying net sales.
Operating expenses totaled $796 million and increased $33 million, or 4%, for the nine months ended January 31, 2018 compared to the same period last year. Underlying operating expenses grew 2% after adjusting for the negative effect of foreign exchange.
Reported advertising expenses grew 8% for the nine months ended January 31, 2018, while underlying advertising expenses grew 5% after adjusting for the negative effect of foreign exchange. Underlying advertising expense increased as we supported the launch of Jack Daniel’s Tennessee Rye and Slane Irish Whiskey, and continued investing in (a) the Jack Daniel's family, (b) our premium bourbon brands, and (c) our tequila brands, most notably Herradura.
Reported SG&A expenses increased 2% for the nine months ended January 31, 2018, while underlying SG&A expenses were flat after adjusting for the negative effect of foreign exchange. Underlying SG&A expenses were driven by lower pension expense and continued tight management of discretionary spending, offset by higher incentive compensation related expenses and personnel costs, driven in part by investments in our new Spain distribution operation.
For the nine months ended January 31, 2018, operating expenses as a percentage of net sales declined 1.5 percentage points to 31.7%, from 33.2% in the same period last year. Our operating expenses as a percentage of net sales declined as combined underlying operating expenses grew at a slower rate than underlying net sales driven by flat year-over-year SG&A spend.results.
| Operating Income |
| | | | | |
| Percentage change versus the prior year period ended January 31 | 3 Months | | 9 Months |
| Change in reported operating income | 11 | % | | 15 | % |
| Acquisitions and divestitures | — | % | | — | % |
| Foreign exchange | (7 | %) | | (1 | %) |
| Estimated net change in distributor inventories | 2 | % | | (2 | %) |
| Change in underlying operating income | 5 | % | | 11 | % |
Note: Totals may differ due to rounding
| | | |
| Operating Income |
| | |
| Percentage change versus the prior year period ended July 31 | 3 Months |
| Change in reported operating income | 56 | % |
| Acquisitions and divestitures | (51 | %) |
| Foreign exchange | (1 | %) |
| Estimated net change in distributor inventories | 11 | % |
| Change in underlying operating income | 15 | % |
| Note: Results may differ due to rounding | |
Operating income of $304$387 million increased $31$139 million, or 11%56%, for the three months ended JanuaryJuly 31, 20182020, compared to the same period last year. Underlying operating income grew 5%15% after adjusting for (a) the positivegain on sale of Early Times, Canadian Mist, and Collingwood; (b) the effect of foreign exchange andour acquisition of The 86 Company (Fords Gin); (c) an estimated net decrease in distributor inventories. The same factors that contributedinventories; and (d) the positive effect of foreign exchange. Operating margin increased 19.0 percentage points to the growth in underlying gross profit also contributed to the growth in underlying operating income, while an increase in total underlying operating expenses partially offset these gains.
51.4% for the three months ended JanuaryJuly 31, 2018, operating margin increased 0.8 percentage points to 34.6%,2020, from 33.8%32.4% in the same period last year. The increasegain on sale of Early Times, Canadian Mist, and Collingwood contributed 16.5 percentage points to this increase.
The effective tax rate for the three months ended July 31, 2020, was 11.6% compared to 18.2% for the same period last year. The decrease in our operating margineffective tax rate for the three months ended July 31, 2020, was driven primarily by foreign exchange and operating expense leverage as combined operating expenses grew at a slower rate than underlying net sales.deferred tax benefit related to an intercompany transfer of assets.
Operating incomeDiluted earnings per share of $894 million$0.67 in the three months ended July 31, 2020, increased $116 million, or 15%,73% from the $0.39 reported for the ninesame period last year, including an estimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and Collingwood and an $0.08 per share benefit from a discrete tax item recognized during the quarter related to an intercompany transfer of assets.
Liquidity and Financial Condition
Cash flows. Cash and cash equivalents increased $233 million during the three months ended JanuaryJuly 31, 20182020. Cash provided by operations of $91 million was up $19 million from the same period last year, primarily reflecting lower working capital requirements.
Cash provided by investing activities was $162 million for the three months ended July 31, 2020, an increase of $205 million compared to the same period last year. Underlying operating income grew 11% after adjusting for the positive effect of foreign exchange and an estimated net increase in distributor inventories. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, while an increase in total underlying operating expenses partially offset these gains.
Operating margin increased 1.7 percentage points to 35.5% for the nine months ended January 31, 2018 from 33.8% in the same period last year. The increase inprimarily reflects the proceeds of $177 million from our operating margindivestiture of the Early Times, Canadian Mist, and Collingwood brands (in July 2020) and our acquisition of The 86 Company for $22 million (in July 2019).
Cash used for financing activities was driven by operating expense leverage as underlying SG&A spend was flat year-over-year and underlying advertising expenses grew 5% compared to underlying net sales growth of 7%.
| Effective Tax Rate |
| | | | | | | | | | | |
| For the period ended January 31 | 3 Months | | 9 Months |
| Prior year effective tax rate | | 29.4 | % | | | 28.7 | % |
| Change in effective tax rate - before impact of Tax Act | | (2.9 | %) | | | (2.9 | %) |
| Tax Act | | | | | |
| Repatriation tax on overseas earnings | $ | 91 |
| | | $ | 91 |
| |
| Re-measurement of U.S. deferred tax assets and liabilities | (48 | ) | | | (48 | ) | |
| Net tax rate reduction | (20 | ) | | | (20 | ) | |
| Total Tax Act effect | $ | 23 |
| 7.9 | % | | $ | 23 |
| 2.7 | % |
| Current year effective tax rate |
|
| 34.4 | % | |
|
| 28.5 | % |
Note: Totals may differ due to rounding
| | | | | |
The effective tax rate in$37 million during the three months ended JanuaryJuly 31, 2018 was 34.4%2020, compared to 29.4% for the same period last year. The increase in our effective tax rate was primarily driven by the net impact of the Tax Act, partially offset by an increase in the excess tax benefits related to stock-based compensation.
The effective tax rate in the nine months ended January 31, 2018 was 28.5% compared to 28.7% for the same period last year.The decrease in our effective tax rate was primarily driven by a decrease in foreign exchange gains in non-U.S. entities that are currently subject to U.S. tax and an increase in excess tax benefits related to stock-based compensation, partially offset by the net impact of the Tax Act.
Diluted earnings per share of $0.39 in the three months ended January 31, 2018 increased 4% from the $0.38 reported for the same period last year. The increase in diluted earnings per share for the three months ended January 31, 2018 resulted from an increase in reported operating income, offset by the negative effect of a higher effective tax rate. Diluted earnings per share of $1.25 in the nine months ended January 31, 2018 increased 17% from the $1.07 reported for the same period last year. The increase in diluted earnings per share for the nine months ended January 31, 2018 resulted from an increase in reported operating income and a reduction in shares outstanding.
Liquidity and Financial Condition
Cash flows. Cash and cash equivalents increased $105 million during the nine months ended January 31, 2018, compared to a decrease of $66 million during the same period last year. Cash provided by operations of $562 million was up $117 million from the same period last year, reflecting higher earnings and a lower seasonal increase in working capital. Cash used for investing activities was $101 million during the nine months ended January 31, 2018, compared to $380$26 million for the same period last year. The $279$11 million decrease largely reflects $307 million in cash paid to acquire BenRiach in June 2016, partially offset by a $29 million increase in capital spending during the current nine-month period. The increase in capital spending ischange was largely attributable to the construction of new distilleries and homeplaces for both Slane Irish Whiskey and Old Forester and to the modernization and automation of our Brown-Forman Cooperage operation.
Cash used for financing activities was $380a $12 million during the nine months ended January 31, 2018, compared to $111 million for the same period last year. The $269 million increase largely reflects a $717 million decrease in proceeds from long-term debt issuance and the repayment of $250 million of notes that matured in January 2018, partially offset by a $560 million decline in share repurchases and a $135 million increase in net proceeds from short-term borrowings.
The impact on cash and cash equivalents as a result of exchange rate changes was an increase of $24$17 million for the ninethree months ended JanuaryJuly 31, 2018,2020, compared to a declinedecrease of $20$3 million for the same period last year.
Liquidity. We continue to manage liquidity conservativelygenerate strong cash flows from operations, which enables us to meet current obligations, fund capital expenditures, sustain and grow ourpay regular dividends, and repurchase sharesreturn cash to our shareholders from time to time while reservingthrough share repurchases and special dividends. Our investment-grade credit ratings (A1 by Moody’s and A- by Standard & Poor’s) provide us with financial flexibility when accessing global credit markets and allow us to reserve adequate debt capacity for acquisition opportunities.investment opportunities and unforeseen events.
In additionThe ongoing COVID-19 crisis has affected our results of operations. To ensure uninterrupted business operations and to preserve adequate liquidity during these uncertain times, we have (a) managed our cashoperating expenses closely and limited discretionary spending, (b) re-prioritized capital projects where prudent, and (c) actively managed our working capital. To support our business partners, we have extended additional credit to some of our customers who were most directly affected by the crisis. We continue to monitor closely the impact of the pandemic on our customers’ solvency and our ability to collect from them.
Cash and cash equivalent balances, we have access to several liquidity sources to supplement our cash flow from operations. One of those sources is our $800 million commercial paper program that we regularly use to fund our short-term credit needs and to maintain our access to the capital markets. During the three months ended January 31, 2018, our commercial paper borrowings averaged $536 million, with an average maturity of 35 days and an average interest rate of 1.43%. During the nine months ended January 31, 2018, our commercial paper borrowings averaged $508 million, with an average maturity of 31 days and an average interest rate of 1.31%. Commercial paper outstanding was $208equivalents were $675 million at April 30, 2017,2020, and $320$908 million at JanuaryJuly 31, 2018.
On November 10, 2017, we entered an amended and restated five-year credit agreement with various U.S. and international banks. The credit agreement provides an $800 million unsecured revolving credit commitment that expires on November 10, 2022. This agreement amended and restated our previous credit agreement dated November 18, 2011. The new agreement does not contain any financial covenants.
The $800 million revolving credit facility is currently undrawn and supports our commercial paper program. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fully fund its commitments under our credit facility. The debt capital markets for bonds and private placements are accessible sources of long-term financing that could meet any additional liquidity needs. We believe our current liquidity position is sufficient to meet all of our future financial commitments. We have high credit standards when initiating transactions with counterparties, and we closely monitor our counterparty risks with respect to our cash balances and derivative contracts. If a counterparty’s credit quality were to deteriorate below our credit standards, we would expect either to liquidate exposures or require the counterparty to post appropriate collateral.
2020. As of JanuaryJuly 31, 2018,2020, approximately 78%43% of our cash and cash equivalents were held by our foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. WithWe continue to evaluate our future cash deployment and should we decide to repatriate additional cash held by other foreign subsidiaries, we may be required to provide for and pay additional taxes.
We have an $800 million commercial paper program that we regularly use to fund our short-term operational needs. In the enactmentsecond half of March 2020, as the Tax Act,COVID-19 crisis fueled widespread economic uncertainty, the commercial paper market was disrupted. Despite the heightened volatility, we sustained our access to short-term funding in the commercial paper market and expect to continue to be able to do so in the future. In order to create a liquidity buffer, we have borrowed in excess of our immediate needs, and for longer maturities than usual. For outstanding commercial paper balances, interest rates, and days to maturity at April 30, 2020 and July 31, 2020, please see Note 6 to the Condensed Consolidated Financial Statements. The average balances, interest rates and original maturities during the periods ended July 31, 2019 and 2020, are evaluatingpresented below.
|
| | | |
| | Three Months Average |
| | July 31, |
| (Dollars in millions) | 2019 | | 2020 |
| Commercial paper outstanding | $336 | | $360 |
| Interest rate | 2.56% | | 0.93% |
| Average days to maturity at issuance | 32 | | 103 |
Our commercial paper program is supported by available commitments under our global workingcurrently undrawn $800 million bank credit facility that expires in November 2023. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fund its commitments under our credit facility.
While we expect to meet our short-term liquidity needs largely through cash generated from operations and borrowings under our commercial paper program, a sustained market deterioration resulting in continued declines in net sales and profit could require us to evaluate alternative sources of liquidity. The debt capital requirements and may changemarkets are accessible sources of long-term financing that we believe could meet any additional liquidity needs.
We believe our current permanent reinvestment assertion in future periods.
As announced on January 23, 2018,liquidity position, supplemented by our Board of Directors has approved a number of capital deployment actions aimed at benefiting shareholders, employees, and the community. As further described below, these actions include a stock split and a special dividend. Additionally, U.S. tax reform afforded us an opportunityability to tax-efficiently fund our pension plan and charitable giving programs that would have otherwise been funded in future years. We anticipate funding these actions with incremental debt.
The stock split was effectedgenerate positive cash flows from operations in the formfuture, and our ample debt capacity enabled by our strong short-term and long-term credit ratings, will be sufficient to meet all of our future financial commitments.
On July 1, 2020, we paid a regular quarterly cash dividend of $0.1743 per share on bothour Class A and Class B common stock, payable in sharesstock. On July 23, 2020, our Board of Class B common stock. For every four shares of either Class A or Class B common stock held, shareholders of record as of the close of business on February 7, 2018, received one share of Class B common stock, with any fractional shares payable in cash. The additional shares and cash for fractional shares were distributed to stockholders on February 28, 2018.
In addition, the BoardDirectors declared a specialregular quarterly cash dividend of $1.00$0.1743 per share on our Class A and Class B common stock. Stockholders of record on April 2, 2018,September 4, 2020, will receive the special cash dividend on April 23, 2018. This equates to roughly $480 million after the implementation of the stock split.
The Board also approved additional funding of $120 million for our pension plan, further strengthening an important employee retirement benefit. Further, with the goal of helping to fund our ongoing philanthropic endeavors in the communities where our employees live and work, we intend to create a foundation with a contribution of $60-$70 million in our fourth quarter. The charitable foundation is expected to partially reduce ongoing expenses related to our annual giving programs.
As also announced on January 23, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.158 per share on our Class A and Class B common stock, which took into account the five-for-four stock split. Stockholders of record on March 5, 2018 will receive the quarterly cash dividend on April 2, 2018.October 1, 2020.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed toface market risks arising from adverse changes in (a) foreign currency exchange rates, (b) commodity prices affecting the cost of our raw materials and energy, and (c) interest rates. We try to manage risk through a variety of strategies, including production initiatives and hedging strategies. Our foreign currency hedging contracts are subject to changes in exchange rates, our commodity forward purchase contracts are subject to changes in commodity prices, and someinterest rates. Foreign currency fluctuations affect our net investments in foreign subsidiaries and foreign currency-denominated cash flows. Commodity price changes can affect our production and supply chain costs. Interest rate changes affect (a) the fair value of our fixed-rate debt, obligations are subjectand (b) cash flows and earnings related to changes in interest rates. Established proceduresour variable-rate debt and internal processes governinterest-bearing investments. We manage market risks through procurement strategies as well as the use of derivative and other financial instruments. Our risk management program is governed by policies that authorize and control the nature and scope of thesetransactions that we use to mitigate market risks. Since April 30, 2017,2020, there have been no material changes to the disclosure on this matter made inmarket risks faced by us or to our 2017 Form 10-K.
risk management program.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) (our principal executive and principal financial officers), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and proceduresprocedures: (a) are effective to ensure that information required to be disclosed by the
company Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (b) include controls and procedures designed to ensure that information required to be disclosed by the companyCompany in such reports is accumulated and communicated to the company’sCompany’s management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We operate in a litigious environment and we are sued in the normal course of business. We do not anticipate that any currently pending suitslegal proceedings will have, individually or in the aggregate, a material adverse effect on our financial position, results of operations, or liquidity.
Item 1A. Risk Factors
In addition to the other information set forth in this Quarterly Report,report, you should carefully consider the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our 20172020 Form 10-K, which could materially adversely affect our business, financial condition, or future results. ThereThe information presented below updates, and should be read in conjunction with, the risk factors disclosed in our 2020 Form 10-K. Otherwise, except as presented below, there have been no material changes to the risk factors disclosed in our 20172020 Form 10-K.
A cyber breach, a failure or corruption of one or more of our key information technology systems, networks, processes, associated sites, or service providers, or a failure to comply with personal data protection laws could have a material adverse impact on our business.
We rely on information technology (IT) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software, and technical applications and platforms, some of which are managed, hosted, provided, or used by third parties or their vendors, to help us manage our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting our internal network and communication systems; ordering and managing materials from suppliers; supply/demand planning; production; shipping products to customers; hosting corporate strategic plans and employee data; hosting our branded websites and marketing products to consumers; collecting and storing customer, consumer, employee, investor, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing, and sharing confidential and proprietary research, business plans, and financial information; complying with regulatory, legal, or tax requirements; providing data security; and handling other processes necessary to manage our business.
Increased IT security threats and more sophisticated cybercrimes and cyberattacks, including computer viruses and other malicious codes, ransomware, unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking, and other types of attacks, pose a potential risk to the security and availability of our IT systems, networks, and services, including those that are managed, hosted, provided, or used by third parties, as well as the confidentiality, availability, and integrity of our data and the data of our employees, stockholders, customers, suppliers, consumers, and others. For example, in July 2020, we discovered a data breach incident involving malware and related behaviors that resulted in unauthorized access to our IT networks. We do not believe this incident had or will have any significant impacts on our business operations, financial results, systems and processes, or the effectiveness of our internal control environment; however, any failure of our IT systems, networks, or service providers to function properly, or the loss or disclosure of our business strategy or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches to usage errors by employees and other security issues, could cause us to suffer interruptions in our ability to manage operations and reputational, competitive, or business harm, which may adversely affect our business operations or financial results. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, former employees, stockholders, customers, suppliers, consumers, or others. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach, to repair or replace networks and IT systems, which could require a significant amount of time, or to respond to claims from employees, former employees, stockholders, customers, suppliers, consumers or others or pay significant fines to regulatory agencies. As a result of the COVID-19 pandemic, a greater number of our employees are working remotely and accessing our technology infrastructure remotely, which may further increase our vulnerability to the cyber risks described above.
In the ordinary course of our business, we receive, process, transmit, and store information relating to identifiable individuals (personal data), primarily employees and former employees, but also relating to customers and consumers. As a result, we are subject to various U.S. federal and state and foreign laws and regulations relating to personal data. These laws have been subject to frequent changes, and new legislation in this area may be enacted in other jurisdictions at any time, such as, for example, the California Consumer Protection Act which took effect on January 1, 2020. In the European Union, the General Data Protection Regulation (GDPR) became effective in May 2018, for all member states and has extraterritorial effect. The GDPR includes operational requirements for companies receiving or processing personal data of European Union residents that are partially
different from those that had previously been in place and includes significant penalties for noncompliance. The changes introduced by the GDPR, as well as any other changes to existing personal data protection laws and the introduction of such laws in other jurisdictions, have subjected and may continue in the future to subject us to, among other things, additional costs and expenses and have required and may in the future require costly changes to our business practices and security systems, policies, procedures, and practices. Improper disclosure of personal data in violation of the GDPR and/or of other personal data protection laws could harm our reputation, cause loss of consumer confidence, subject us to government enforcement actions (including fines), or result in private litigation against us, which could result in loss of revenue, increased costs, liability for monetary damages, fines and/or criminal prosecution, all of which could negatively affect our business and operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following documents are filed with this Report:report: |
| | |
| 10.1 | | |
| 10.2 | | Fiscal 2021 Form of November 10, 2017, among Brown-Forman Corporation, certain borrowing subsidiaries and certain lenders party thereto, JPMorgan Chase Bank, N.A., PNC Bank, National Association and Wells Fargo Bank, National Association, as Co-Documentation Agents, U.S. Bank National Association, as Administrative Agent, and U.S. Bank National Association, Barclays Bank PLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc., as Co-Syndication Agents, Joint Lead Arrangers and Joint Bookrunners, incorporated into this report by reference to Exhibit 10.1 of Brown-Forman Corporation’s Form 8-K filed on November 13, 2017 (File No.001-00123).Performance-Based Restricted Stock Unit Award Agreement (Class B) |
| 31.1 | | |
| 31.2 | | |
| 32 | | |
| 101 | | The following materials from Brown-Forman Corporation's Quarterly Report on Form 10-Q for the quarter ended JanuaryJuly 31, 2018, formatted2020, in Inline XBRL (eXtensible Business Reporting Language): format: (a) Condensed Consolidated Statements of Operations, (b) Condensed Consolidated Statements of Comprehensive Income, (c) Condensed Consolidated Balance Sheets, (d) Condensed Consolidated Statements of Cash Flows, and (e) Notes to the Condensed Consolidated Financial Statements. |
| 104 | | Cover Page Interactive Data File in Inline XBRL format (included in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | BROWN-FORMAN CORPORATION |
| | | (Registrant) |
| | | | |
| Date: | March 7, 2018September 2, 2020 | By: | /s/ Jane C. Morreau |
| | | | Jane C. Morreau |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (On behalf of the Registrant and as Principal Financial Officer) |