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:
•“RestDeveloped 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 Europe” includes all branded products to these markets.
•“Emerging” markets inare “emerging and developing economies” as defined by the continentIMF. Our largest emerging markets are Mexico, Poland, and Russia. This aggregation represents our net sales of Europe and the Commonwealth of Independent States other than those specifically listed.
branded products to these markets.“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 net sales of branded products to global duty freeduty-free customers, other travel retail customers, and the U.S. military.
military regardless of customer location.•“Other non-branded”Non-branded and bulk” includes our net sales of used barrel,barrels, bulk whiskey and wine, and contract bottling sales.
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:
•“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.
•“American whiskey” includes the Jack Daniel’s family of brands, premium bourbons (defined below), super-premium American whiskey (defined below), and Early Times, which we divested on July 31, 2020.
•“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/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.
•“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.
•“Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft.
•“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.
•“Tequila” includes el Jimador, the Herradura family of brands (Herradura), New Mix, Pepe Lopez, and Antiguo.
•“Wine” includes Korbel Champagnes and Sonoma-Cutrer wines.
•“Vodka” includes Finlandia.
•“Jack Daniel’s RTDNon-branded and RTP” products include all RTD line extensionsbulk” includes our net sales 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),used barrels, bulk whiskey and the seasonal Jack Daniel’s Winter Jack RTP.
wine, and contract bottling regardless of customer location.Other Metrics.Metrics.
•“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. 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 sofor owned distribution markets or (b) shipments from our reported sales for a period do not reflect actual consumer purchases during that period.distributor customers to retailers and wholesalers in other markets. 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) In this document, unless otherwise specified. At times,specified, we use a “drinks-equivalent” measure for volumerefer to depletions when comparing single-serve ready-to-drink (RTD) or ready-
discussing volume.
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”,consumer takeaway, a term commonly used in the beverage alcohol industry. “Consumer takeaway”Consumer takeaway refers to the purchase of product by the consumerconsumers from the retail outletoutlets, including products purchased through e-premise channels, as measured by volume or retail sales value. This information is provided by third-parties,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.
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. Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended July 31, 2020 (First Quarter 2021 Form 10-Q), 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 timing•Significant 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
Inadequate•Counterfeiting 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
COVID-19
The ongoing COVID-19 pandemic continues to impact the global economy and create economic uncertainty. Governments around the world have imposed restrictions on travel and business operations and have placed limitations on the size of public and private gatherings of their citizens. As a result of such restrictions, many businesses have either been closed or their operations have modified. The airline, cruise, and related hospitality industries have been particularly impacted as the ability to travel has been severely limited or restricted in various countries around the world.
While the financial impact of COVID-19 on our business for the six months ended October 31, 2020, is difficult to measure, it has had an effect on our financial performance, both positive and negative. For example, the negative impact continued to be concentrated in (a) the on-premise (representing nearly 20% of our business) as a result of the restrictions in the channel, (b) our Travel Retail channel as a result of travel bans and other restrictions, and (c) certain emerging markets. Conversely, 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, continued to offset the significant reduction in sales in the negatively affected channels and markets. We further discuss the effect of COVID-19 on our results where relevant below.
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 maturities of long-term debt until fiscal 2023. See “Liquidity and Financial Condition” below for details.
Fiscal 20182021 Year-to-Date Highlights
Key highlights of our operating results for the nine months ended January 31, 2018 include:
•We delivered reported net sales of $2,515 million, an increase$1.7 billion, a decrease of 9%1% compared to the same period last year. Excluding (a)an estimated net decrease in distributor inventories and the positivenegative 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%.4% for the six months ended October 31, 2020. Net sales for our markets and brands were affected by COVID-19 during the first half of fiscal 2021. Underlying growth was driven by (a) JD RTDs, (b) our premium bourbon brands, led by Woodford Reserve, (c) our tequila brands, and (d) the continued international launch of JDTA. This growth was partially offset by JDTW declines in (a) the on-premise (representing nearly 20% of our business) as a result of the restrictions in the channel, (b) our Travel Retail channel as a result of travel bans and other restrictions, and (c) certain emerging markets. 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 underlying net sales in our Travel Retail channel, certain emerging markets, and sales of used barrels.
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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 reported operating income of $894$717 million, an increase of 15%19% compared to the same period of last year. Excluding (a) the positivegain on sale of Early Times, Canadian Mist, and Collingwood, (b) an estimated net decrease in distributor inventories, and (c) the negative effect of foreign exchange, and an estimated net increase in distributor inventories, we grew underlying operating income grew 11%.
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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,$1.17, an increase of 17%20% compared to the same period last year, due toincluding an increase in reported operating incomeestimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and a reduction in shares outstanding.Collingwood.
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, |
(Dollars in millions) | 2017 | | 2018 | | Reported Change | | Underlying Change1 | | 2017 | | 2018 | | Reported Change | | Underlying Change1 |
Net sales | $ | 808 |
| | $ | 878 |
| | 9 | % | | 6 | % | | $ | 2,299 |
| | $ | 2,515 |
| | 9 | % | | 7 | % |
Cost of sales | 272 |
| | 291 |
| | 7 | % | | 8 | % | | 758 |
| | 825 |
| | 9 | % | | 8 | % |
Gross profit | 536 |
| | 587 |
| | 9 | % | | 5 | % | | 1,541 |
| | 1,690 |
| | 10 | % | | 7 | % |
Advertising | 102 |
| | 114 |
| | 11 | % | | 6 | % | | 291 |
| | 314 |
| | 8 | % | | 5 | % |
SG&A | 162 |
| | 173 |
| | 7 | % | | 4 | % | | 488 |
| | 497 |
| | 2 | % | | — | % |
Other expense (income), net
| (1 | ) | | (4 | ) | | 153 | % | | 30 | % | | (16 | ) | | (15 | ) | | (11 | %) | | 6 | % |
Operating income | $ | 273 |
| | $ | 304 |
| | 11 | % | | 5 | % | | $ | 778 |
| | $ | 894 |
| | 15 | % | | 11 | % |
| | | | | | | | | | | | | | | |
Total operating expenses3 | $ | 263 |
| | $ | 283 |
| | 8 | % | | 4 | % | | $ | 763 |
| | $ | 796 |
| | 4 | % | | 2 | % |
| | | | | | | | | | | | | | | |
As a percentage of net sales2 | | | | | | | | | | | | | | | |
Gross profit | 66.4 | % | | 66.8 | % | | 0.4 | pp | | | | 67.0 | % | | 67.2 | % | | 0.2 | 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 | | |
Interest expense, net | $ | 15 |
| | 15 |
| | — | % | | | | $ | 42 |
| | 45 |
| | 7 | % | | |
Effective tax rate | 29.4 | % | | 34.4 | % | | 5.0 | pp | | | | 28.7 | % | | 28.5 | % | | (0.2 | )pp | | |
Diluted earnings per share | $ | 0.38 |
| | $ | 0.39 |
| | 4 | % | | | | $ | 1.07 |
| | $ | 1.25 |
| | 17 | % | | |
Note: Totals may differ due to rounding
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Summary of Operating Performance |
| Three Months Ended October 31, | | Six Months Ended October 31, | |
(Dollars in millions) | 2019 | | 2020 | | | Reported Change | | Underlying Change1 | | 2019 | | 2020 | | | Reported Change | | Underlying Change1 | |
Net sales | $ | 989 | | | $ | 985 | | | | — | % | | 4 | % | | $ | 1,755 | | | $ | 1,738 | | | | (1 | %) | | 4 | % | |
Cost of sales | 370 | | | 404 | | | | 10 | % | | 10 | % | | 638 | | | 692 | | | | 9 | % | | 11 | % | |
Gross profit | 619 | | | 581 | | | | (6 | %) | | — | % | | 1,117 | | | 1,046 | | | | (6 | %) | | (1 | %) | |
Advertising | 112 | | | 95 | | | | (15 | %) | | (15 | %) | | 204 | | | 157 | | | | (23 | %) | | (23 | %) | |
SG&A | 158 | | | 155 | | | | (2 | %) | | (2 | %) | | 322 | | | 303 | | | | (6 | %) | | (6 | %) | |
Gain on sale of business | | | | | | | | | | — | | | (127) | | | | NA | | — | % | |
Other expense (income), net | (3) | | | 1 | | | | (133 | %) | | 1 | % | | (9) | | | (4) | | | | (53 | %) | | (46 | %) | |
Operating income | 352 | | | 330 | | | | (6 | %) | | 6 | % | | 600 | | | 717 | | | | 19 | % | | 11 | % | |
| | | | | | | | | | | | | | | | | | |
Total operating expenses2 | $ | 267 | | | $ | 251 | | | | (6 | %) | | (7 | %) | | $ | 517 | | | $ | 456 | | | | (12 | %) | | (12 | %) | |
| | | | | | | | | | | | | | | | | | |
As a percentage of net sales3 | | | | | | | | | | | | | | | | | | |
Gross profit | 62.7 | % | | 59.0 | % | | | (3.7) | pp | | | | 63.7 | % | | 60.2 | % | | | (3.5) | pp | | | |
| | | | | | | | | | | | | | | | | | |
Operating income | 35.6 | % | | 33.5 | % | | | (2.1) | pp | | | | 34.2 | % | | 41.2 | % | | | 7.0 | pp | | | |
Non-operating postretirement expense | $ | 1 | | | $ | 2 | | | | 28 | % | | | | $ | 2 | | | $ | 3 | | | | 28 | % | | | |
Interest expense, net | $ | 20 | | | $ | 19 | | | | (1 | %) | | | | $ | 39 | | | $ | 39 | | | | 1 | % | | | |
Effective tax rate | 15.0 | % | | 22.1 | % | | | 7.1 | pp | | | | 16.3 | % | | 16.4 | % | | | 0.1 | pp | | | |
Diluted earnings per share | $ | 0.59 | | | $ | 0.50 | | | | (15 | %) | | | | $ | 0.97 | | | $ | 1.17 | | | | 20 | % | | | |
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. However, we will continue to closely monitor the raw material inputs from our suppliers (glass, cans, and other raw materials) and the effect COVID-19 may have on production abilities. How and where we sell our brands looks different due to COVID-19. As a result, we continue to closely monitor key developments in our markets, including (a) industry and consumer behavior, (b) macroeconomic conditions (government/financial stimulus, employment, and economic recovery, et al.), and (c) the timing and severity of restrictions associated with COVID-19.
As a result of these uncertainties and low visibility on recovery, and consistent with our 2020 Form 10-K, we are not providing quantitative guidance for definitionsfiscal 2021. From a qualitative perspective, we believe that (a) the Travel Retail channel will not recover during this fiscal year, (b) the performance of the on-premise channel will depend on a variety of external factors; however, we do not expect a recovery during this fiscal year, and (c) many of our emerging markets will remain down for the fiscal year. Our gross margin will remain under pressure for the year driven by the expectation of higher input costs, lower fixed cost absorption, and mix shifts. However, our full-year gross margin will depend not only on the volumes of our business, but the mix of our business by geography, portfolio, channel, and size.
We expect overall operating expenses, presented here.
Fiscal 2018 Outlook
Below we discussnotably our outlook foradvertising investments, to accelerate significantly as the remainderyear-over-year rate of fiscal 2018, reflecting the trends, developments, and uncertainties that we expect 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 at 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 to the growth ratedeclines experienced in the nine months ended January 31, 2018. For the remainderfirst half of fiscal 2018,2021 will not be sustained throughout the year. Also, as previously announced, we expect (a) advertising expensesplan to grow atmake a higher rate than net sales growth and (b) underlying SG&A to grow compared$20 million contribution to the flat spend for the nine months ended January 31, 2018.
Operating income. We expect slower growth rates for operating incomeBrown-Forman Foundation in the remaindersecond half of fiscal 2018 compared2021. We will remain agile, diligent, focused, and disciplined on our investments as the environment continues to growth rates experienced in the nine months ended January 31, 2018.
evolve.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 nine months ended January 31, 2018, compared to the same period last year.markets. We discuss results forof the markets most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the ninesix months ended JanuaryOctober 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 | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
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Top Markets1 |
Six months ended October 31, 2020 | Net Sales % Change vs. 2020 |
Geographic area2 | Reported | Acquisitions and Divestitures | | Foreign Exchange | Est. Net Chg in Distributor Inventories | | Underlying3 |
United States | 3 | % | — | % | | — | % | 6 | % | | 9 | % |
Developed International | 10 | % | — | % | | (4 | %) | 4 | % | | 10 | % |
United Kingdom | 11 | % | — | % | | (8 | %) | 2 | % | | 4 | % |
Germany | 26 | % | — | % | | (4 | %) | — | % | | 23 | % |
Australia | 27 | % | — | % | | (2 | %) | — | % | | 25 | % |
France | 17 | % | — | % | | (4 | %) | — | % | | 13 | % |
| | | | | | | |
| | | | | | | |
Rest of Developed International | (14 | %) | — | % | | (1 | %) | 9 | % | | (6 | %) |
Emerging | (13 | %) | — | % | | 9 | % | 4 | % | | — | % |
Mexico | (3 | %) | — | % | | 14 | % | — | % | | 11 | % |
Poland | 13 | % | — | % | | (2 | %) | — | % | | 11 | % |
Russia | (25 | %) | 1 | % | | 10 | % | (1 | %) | | (15 | %) |
Rest of Emerging | (22 | %) | — | % | | 9 | % | 8 | % | | (6 | %) |
Travel Retail | (49 | %) | (1 | %) | | — | % | (10 | %) | | (59 | %) |
Non-branded and bulk | (34 | %) | 1 | % | | (1 | %) | — | % | | (33 | %) |
Total | (1 | %) | — | % | | 1 | % | 4 | % | | 4 | % |
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 Condensed 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.
Net sales in all of the markets discussed below were affected by COVID-19 during the first half of fiscal 2021. See “Definitions”“Overview - COVID-19” above for definitionsmore information around the impact of market aggregations presented here.COVID-19 on our business.
•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%3%, 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,(following the April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions resulting from COVID-19). The underlying net sales gain was driven by (a) our premium bourbons, led by Woodford Reserve and Old Forester, supported by strong consumer takeaway trends; (b) JD RTDs, fueled by strong consumer demand for Jack Daniel’s Country Cocktails and the launch of new spirit-based RTD products; (c) volumetric growth of JDTH and Gentleman Jack; (d) our tequilas, due to higher volumes and prices of Herradura and el Jimador; and (e) volumetric growth and higher prices of Korbel Champagne. This growth was partially offset by an estimated net increase in distributor inventories in Russia. Underlyinglower net sales gains were led by Russia, Germany,of JDTW reflecting unfavorable channel mix resulting from COVID-19 related restrictions in the United Kingdom, and Poland.
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◦ | In the United Kingdom, underlying net sales growth was driven by higher volumes of JDTW and JD RTDs, the latter of which was fueled by the launch of JD Cider. |
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◦ | In Germany, underlying net sales growth was driven by solid growth of JD RTDs, which included the launch of JD Lynchburg Lemonade, and volumetric growth and favorable price/mix of JDTW. |
on-premise channel.
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◦ | In France, underlying net sales growth was led by JDTW and JDTH, as both experienced higher consumer takeaway compared to the total whiskey category in that market. |
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◦ | In Poland, underlying net sales growth was fueled by volume gains of JDTW, which has experienced strong consumer takeaway trends. |
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◦ | In Russia, underlying net sales growth was driven 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 change in our route-to-consumer. |
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◦ | The increase in underlying net sales in the Rest of Europe was led by Turkey, Ukraine, and Spain. Trends improved for JDTW in Turkey, where our results in 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. |
Australia.•Developed International. Reported net sales increased 10%, while underlying net sales also increasedgrew 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,Australia, Germany, and Southeast Asia after declines in the same period last year. These gains wereFrance, partially offset by volume declines in Japan.Spain.
◦Germany’s underlying net sales growth was fueled by the volumetric gains of JD RTDs due to strong consumer demand, the launch of JDTA, and higher JDTW volumes.
◦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 the launch of JDTA and higher volumes of JDTW and JDTH.
Travel Retail. ◦Underlying net sales in the Rest of Developed International declined due primarily to lower JDTW volumes in Spain reflecting COVID-19 related closures in this heavily on-premise focused market.
•Emerging.Reported net sales increased 17%decreased 13%, while underlying net sales increased 11%were flat after adjusting for the negative effect of foreign exchange and an estimated net increasedecrease in distributor inventories. UnderlyingFlat underlying net sales results reflect growth in Brazil, Mexico, and Poland, offset by broad-based declines in Southeast Asia, Russia, India, and many of our other Latin American markets as COVID-19 had an adverse effect on results.
◦Mexico’s underlying net sales growth was ledfueled primarily by higher volumes of JDTW, Woodford Reserve, Gentleman Jack,New Mix supported by increased demand and JDTH.
shelf space as a result of the temporary supply disruption of the beer industry in the first quarter due to COVID-19 related shutdowns. This growth was partially offset by lower volumes and unfavorable product mix of Herradura.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◦Poland’s underlying net sales growth was driven by higher volumes of used barrelJDTW.
◦Russia’s underlying net sales which benefited from increased demanddeclines were driven by lower volumes of Finlandia. Difficult comparisons to the first half of fiscal 2020 coupled with the adverse effect of COVID-19 also affected the current year results.
◦Underlying net sales in the current period as well as an easy comparisonRest of Emerging declined due to a weak prior-year period.
Brand Highlights
The following table highlights the worldwide resultsbroad-based volume declines of JDTW, primarily in Southeast Asia, India, and many of our largest brandsother Latin American markets, partially offset by the strong growth of the brand in Brazil.
•Travel Retail. Reported net sales declined 49%, while underlying net sales were down 59% after adjusting for an estimated net increase in distributor inventories and the effect of acquisitions and divestitures. The underlying net sales decline was led by lower volumes of JDTW, Woodford Reserve, and Finlandia due to the implementation of travel bans and other restrictions resulting from COVID-19.
•Non-branded and bulk. Reported net sales declined 34%, while underlying net sales decreased 33% after adjusting for the nine months ended January 31, 2018,effect of acquisitions and divestitures and the positive effect of foreign exchange. Lower volumes and prices for used barrels drove the reduction compared to the same period last year.
Brand Highlights
The following table provides supplemental information for our largest brands. We discuss results of the brands most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the ninesix months ended JanuaryOctober 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 | | | | | | | |
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| | | | | | | | |
Major Brands | |
Six months ended October 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 | 13 | % | | (1 | %) | — | % | — | % | 5 | % | | 4 | % |
Jack Daniel’s family of brands | 13 | % | | (3 | %) | — | % | — | % | 5 | % | | 2 | % |
JDTW | (6 | %) | | (12 | %) | — | % | 1 | % | 5 | % | | (7 | %) |
Jack Daniel’s RTD/RTP | 36 | % | | 37 | % | — | % | — | % | (4 | %) | | 34 | % |
JDTH | 10 | % | | 11 | % | — | % | — | % | — | % | | 11 | % |
Gentleman Jack | 16 | % | | 13 | % | — | % | — | % | 2 | % | | 16 | % |
JDTF | (1 | %) | | (5 | %) | — | % | 1 | % | 2 | % | | (2 | %) |
JDTA | 143 | % | | (17 | %) | — | % | (2 | %) | 115 | % | | 96 | % |
Other Jack Daniel’s whiskey brands | (6 | %) | | (8 | %) | — | % | (1 | %) | 12 | % | | 3 | % |
Woodford Reserve | 17 | % | | 14 | % | — | % | — | % | 5 | % | | 19 | % |
Tequila | 36 | % | | 5 | % | — | % | 6 | % | 1 | % | | 13 | % |
el Jimador | (2 | %) | | 4 | % | — | % | 2 | % | 2 | % | | 9 | % |
Herradura | (15 | %) | | (4 | %) | — | % | 3 | % | — | % | | (2 | %) |
Wine | 8 | % | | 15 | % | — | % | — | % | (3 | %) | | 11 | % |
Vodka (Finlandia) | (19 | %) | | (21 | %) | — | % | 2 | % | (2 | %) | | (20 | %) |
Rest of Portfolio | (3 | %) | | 14 | % | (2 | %) | (12 | %) | (3 | %) | | (2 | %) |
Non-branded and bulk | NA | | (34 | %) | 1 | % | (1 | %) | — | % | | (33 | %) |
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.
Net sales for all of the brands discussed below were affected by COVID-19 during the first half of fiscal 2021. See “Definitions”“Overview - COVID-19” above for definitionsmore information around the impact of brand aggregations and volume measures presented here.COVID-19 on our business.
Jack Daniel’s family of brands grew•Whiskey brands’ reported net sales 10%declined 1%, while underlying net sales grew 7%, and was the most significant contributor to our overall4% after adjusting for an estimated net decrease in distributor inventories. The underlying net sales growth. gain was driven by (a) the growth of JD RTDs; (b) our premium bourbons, led by Woodford Reserve and Old Forester, supported by strong consumer takeaway trends; (c) the continued international launch of JDTA; and (d) volumetric growth of JDTH and Gentleman Jack. This growth was partially offset by declines of JDTW.
◦The Jack Daniel’s family of brands grew underlying net sales driven by JD RTDs, the continued launch of JDTA, and higher volumes of JDTH and Gentleman Jack, partially offset by declines of JDTW.
▪The underlying net sales decline for JDTW was driven by (a) lower volumes in Travel Retail and certain emerging markets reflecting the 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, which is partially offset by increased volumes in the off-premise channel in those markets.
▪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, which was supported by strong consumer takeaway trends.
▪JDTH increased underlying net sales fueled by broad-based volumetric gains, primarily in the United States and Europe, partially offset by declines in Travel Retail due to the implementation of travel bans and other restrictions resulting from COVID-19.
▪The underlying net sales growth of Gentleman Jack was led by higher volumes in the United States, partially offset by declines in Travel Retail due to the implementation of travel bans and other restrictions resulting from COVID-19.
▪The underlying net sales growth of JDTA was fueled by the continued international launch led by the United Kingdom, France, and Germany.
◦Woodford Reserve grew underlying net sales fueled by volumetric growth and favorable product mix in the United States, supported by strong consumer takeaway trends, partially offset by lower volumes in Travel Retail reflecting the implementation of travel bans and other restrictions related to COVID-19.
•Tequila brands grew reported net sales 5%, while underlying net sales grew 13% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was driven primarily 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 in the first quarter due to COVID-19 related shutdowns in Mexico.
◦el Jimador grew underlying net sales driven by volumetric growth and higher prices in the United States.
◦The underlying net sales decline of Herradura was driven by lower volumes, primarily in Mexico, mostly offset by higher volumes and prices along with favorable product mix in the United States.
•Reported net sales were helpedfor our Wine business grew 15%, while underlying net sales grew 11% after adjusting for an estimated net increase in distributor inventories. The increase in underlying net sales was driven by volumetric growth and higher prices of Korbel Champagne in the United States, partially offset by declines of Sonoma-Cutrer in the United States reflecting COVID-19 related restrictions in the on-premise channel where this brand is focused.
•Reported net sales for Finlandia declined 21%, while underlying net sales decreased 20% after adjusting for the negative effect of 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:
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◦ | JDTW grew underlying net salesdecrease in the majority of its markets including the United Kingdom, the United States, Poland, Travel Retail, Brazil, Turkey, Germany, Australia, and France.
|
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◦ | JDTH grew underlying net sales led by the United States, its largest market, Russia, France, and Travel Retail.
|
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◦ | The increase in underlying net sales growth for Jack Daniel’s RTDs/RTP was driven primarily by Australia, Germany, and the United States, with all of these markets benefiting from new RTD line extensions.
|
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◦ | Gentleman Jack grew underlying net sales led by volumetric gains in the United States, its largest market, and Travel Retail.
|
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◦ | Growth of JDTF was driven by higher volumes in the United States and Germany and the launch of the brand in Brazil and Chile.
|
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◦ | The launch of Jack Daniel’s Tennessee Rye in September of this fiscal year in the United States was the primary driver of underlying net sales growth for Other Jack Daniel’s whiskey brands.
|
Woodford Reserve led the growth of 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.
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 weakeningadverse effect of the dollar against the Polish zlotyCOVID-19, which drove volume declines in Travel Retail and an estimated net increase in distributor inventories in Russia.
•Non-branded and bulk. See discussion for this aggregation in “Market Highlights” above.
Year-Over-Year Period Comparisons
COVID-19 affected our results during the first two quarters of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our business.
| | | | | | | | | | | |
Net Sales |
Percentage change versus the prior year period ended October 31 | 3 Months | | 6 Months |
Change in reported net sales | — | % | | (1 | %) |
| | | |
| | | |
Foreign exchange | 1 | % | | 1 | % |
Estimated net change in distributor inventories | 3 | % | | 4 | % |
Change in underlying net sales | 4 | % | | 4 | % |
| | | |
Change in underlying net sales attributed to: | | | |
Volume | 8 | % | | 15 | % |
Price/mix | (5 | %) | | (12 | %) |
Note: Results may differ due to rounding | | | |
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 formertotaled $985 million, a decrease 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 ComparisonsNet 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 | | | |
For$4 million, or essentially flat, for the three months ended JanuaryOctober 31, 2018, net sales were $878 million, an increase of $70 million, or 9%,2020, compared to the same period last year. After adjusting reported results for the positive effect of foreign exchange and an estimated net decrease in distributor inventories, primarily in the United States, and the negative effect of foreign exchange, underlying net sales grew 6%4%. The changeincrease in underlying net sales was driven by 3%comprised 8% volume growth, and 3% ofpartially offset by 5% unfavorable price/mix. Volume growth was led by the Jack Daniel’s family, tequilas,JD RTDs and premium bourbons. Price/New Mix, partially offset by declines of JDTW and Finlandia. Unfavorable price/mix was driven by (a) an increase in share of salesfaster growth from higher pricedour lower-priced brands most notably(JD RTDs and New Mix).
For the Jack Daniel’s family and Woodford Reserve, and (b) higher average pricing on the Jack Daniel’s family.
The primary factors contributing to the growth in underlying net sales for the threesix months ended JanuaryOctober 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 underlying2020, net sales were partially offset by:
volume declines$1.7 billion, a decrease 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$16 million, or 9%1%, compared to the same period last year. After adjusting reported resultsnet sales for an estimated net decrease in distributor inventories, primarily in the positiveUnited States (following the April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions resulting from COVID-19), and the negative effect of foreign exchange, and an estimated net increase in distributor inventories, underlying net sales grew 7%.4% compared to the same period last year. The changeincrease in underlying net sales was driven by 5%comprised 15% volume growth, and 2% ofpartially offset by 12% unfavorable price/mix. Volume growth was led by the Jack Daniel's family, tequilas,JD RTDs and premium bourbons. Price/New Mix, partially offset by declines of JDTW and Finlandia. 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 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 tequilas.
The primary factors contributing to the growth in underlying net sales for the ninesix months ended JanuaryOctober 31, 2018 were:2020.
volumetric growth of JDTW in several international markets, most notably, the United Kingdom, Poland, Travel Retail, Brazil, Turkey, Germany, Australia, and France; | | | | | | | | | | | |
Cost of Sales |
Percentage change versus the prior year period ended October 31 | 3 Months | | 6 Months |
Change in reported cost of sales | 10 | % | | 9 | % |
Acquisitions and divestitures | (1 | %) | | — | % |
| | | |
Foreign exchange | (1 | %) | | — | % |
Estimated net change in distributor inventories | 2 | % | | 3 | % |
Change in underlying cost of sales | 10 | % | | 11 | % |
| | | |
Change in underlying cost of sales attributed to: | | | |
Volume | 8 | % | | 15 | % |
Cost/mix | 2 | % | | (4 | %) |
Note: Results may differ due to rounding | | | |
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.
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 of $404 million for the three months ended JanuaryOctober 31, 20182020, increased $19$34 million, or 7%10%, compared to $291the same period last year. Underlying cost of sales also increased 10% after adjusting for an estimated net decrease in distributor inventories, the negative effect of foreign exchange, and the effect of acquisitions and divestitures. The increase in underlying cost of sales comprised 8% volume growth and 2% unfavorable cost/mix. Volume growth was driven by JD RTDs and New Mix. Unfavorable cost/mix was driven primarily by higher input costs related to agave and wood along with lower fixed cost absorption for JDTW. These increases were partially offset by a shift in portfolio mix toward our lower-cost brands (JD RTDs and New Mix).
Cost of sales of $692 million for the six months ended October 31, 2020, increased $54 million, or 9%, when compared to the same period last year. Underlying cost of sales increased 8%11% 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, 2018comprised 15% volume growth, partially offset by 4% favorable cost/mix. Volume growth was driven by JD RTDs and New Mix. Favorable cost/mix was driven by a shift in portfolio mix toward our lower-cost brands (New Mix and JD RTDs), partially offset by higher input costs includingrelated to agave and wood higher volumes, and incremental value-added packaging, partially offset by a shift in product mix to lower-cost brands.along with lower fixed cost absorption for JDTW.
Cost | | | | | | | | | | | |
Gross Profit |
Percentage change versus the prior year period ended October 31 | 3 Months | | 6 Months |
Change in reported gross profit | (6 | %) | | (6 | %) |
| | | |
| | | |
Foreign exchange | 1 | % | | 1 | % |
Estimated net change in distributor inventories | 4 | % | | 5 | % |
Change in underlying gross profit | — | % | | (1 | %) |
Note: Results may differ due to rounding | | | |
| | | | | | | | | | | |
Gross Margin |
For the period ended October 31 | 3 months | | 6 Months |
Prior year gross margin | 62.7 | % | | 63.7 | % |
Price/mix | (1.1) | % | | (1.1) | % |
Cost | (1.9) | % | | (2.2) | % |
Acquisitions and divestitures | (0.2 | %) | | (0.1 | %) |
| | | |
Foreign exchange | (0.5 | %) | | (0.1 | %) |
Change in gross margin | (3.7 | %) | | (3.5 | %) |
Current year gross margin | 59.0 | % | | 60.2 | % |
Note: Results may differ due to rounding | — | | — |
Gross profit of sales$581 million decreased $38 million, or 6%, for the ninethree months ended JanuaryOctober 31, 2018 increased $67 million, or 9%, to $825 million when2020, compared to the same period last year. Underlying cost of sales increased 8%gross profit was essentially flat after adjusting reported costs for (a) thean estimated net effect of our Scotch acquisitiondecrease in distributor inventories and the loss of net sales related to our TSA for Southern Comfort and Tuaca, (b) the negative effect of foreign exchange,exchange. Gross margin for the three months ended October 31, 2020, decreased 3.7 percentage points to 59.0% from 62.7% in the same period last year. The decrease in gross margin was driven primarily by (a) higher input costs (primarily higher input costs related to agave and wood along with lower fixed cost absorption for JDTW), (b) an unfavorable shift in channel mix resulting from COVID-19 related restrictions in the on-premise channel, (c) an unfavorable shift in portfolio mix toward our lower-margin brands (JD RTDs and New Mix), and (d) the negative effect of foreign exchange.
Gross profit of $1.0 billion decreased $71 million, or 6%, for the six months ended October 31, 2020, compared to the same period last year. Underlying gross profit declined 1% after adjusting for an estimated net decrease in distributor inventories and the negative effect of foreign exchange. Gross margin for the six months ended October 31, 2020, decreased 3.5 percentage points to 60.2% from 63.7% in the same period last year. The decrease in gross margin was driven primarily by (a) higher input costs (primarily higher input costs related to agave and wood along with lower fixed cost absorption for JDTW), (b) an unfavorable shift in channel and mix resulting from COVID-19 related restrictions in the on-premise channel, and (c) an estimated net increaseunfavorable shift in distributor inventories. The increase in underlying cost of sales for the nine months ended January 31, 2018 was driven by higher volumes, higher input costs including wood,portfolio mix toward our lower-margin brands (JD RTDs 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.New Mix).
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
| | | |
| | | | | | | | | | | | | | | | | | | | |
Operating Expenses |
Percentage change versus the prior year period ended October 31 |
3 Months | Reported | Acquisitions and Divestitures | | Foreign Exchange | | | | Underlying |
Advertising | (15 | %) | 1 | % | | — | % | | | | (15 | %) |
SG&A | (2 | %) | — | % | | — | % | | | | (2 | %) |
| | | | | | | | |
| | | | | | | | |
Total operating expenses1 | (6 | %) | — | % | | (1 | %) | | | | (7 | %) |
| | | | | | | | |
6 Months | | | | | | | | |
Advertising | (23 | %) | — | % | | — | % | | | | (23 | %) |
SG&A | (6 | %) | — | % | | — | % | | | | (6 | %) |
| | | | | | | | |
Total operating expenses1 | (12 | %) | — | % | | — | % | | | | (12 | %) |
Note: Results may differ due to rounding | | | | | | | |
1Total operating expenses include advertising expense, SG&A expense, and other expense (income), net. |
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 profit of $587Operating expenses totaled $251 million, increased $51down $16 million, or 9%6%, for the three months ended JanuaryOctober 31, 2018. Underlying gross profit grew 5% 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.
For the three months ended January 31, 2018, gross margin increased approximately 0.4 percentage points to 66.8%, from 66.4% in the same period last year 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 exchange and an estimated net increase 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.
For the nine months ended January 31, 2018, gross margin increased approximately 0.2 percentage points to 67.2%, from 67.0% 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.
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 totaled $283 million and increased $20 million, or 8%, for the three months ended January 31, 20182020, compared to the same period last year. Underlying operating expenses grew 4%were down 7% after adjusting for the negativepositive effect of foreign exchange.
•Reported advertising expenses grew 11%expense declined 15% for the three months ended JanuaryOctober 31, 2018, while underlying2020. Underlying advertising expenses grew 6%expense also declined 15% after adjusting for the negative effect of foreign exchange.acquisitions and divestitures. The increasedecrease in the underlying advertising expense was driven by continuedthe phasing of spend and a reduction in our investment inbehind on-premise channel activities and various events and sponsorships that were canceled during the Jack Daniel’s family, including the launch of Jack Daniel’s Tennessee Rye,quarter due to COVID-19.
•Reported and our premium bourbon brands, most notably Woodford Reserve.
Reported underlying SG&A expenses grew 7%expense declined 2% for the three months ended JanuaryOctober 31, 2018, while underlying SG&A grew 4% after adjusting for the negative effect of foreign exchange.2020. The increasedecrease in underlying SG&A expense was driven by higher incentive compensation related expenses, partially offset by continuedthe tight management of discretionary spending.
For the three months ended January 31, 2018, operating expensesspend (including hiring and travel freezes) as a percentageresult 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.COVID-19 environment.
Operating expenses totaled $796$456 million, and increased $33down $61 million, or 4%12%, for the ninesix months ended JanuaryOctober 31, 20182020, compared to the same period last year. Underlying operating expenses grew 2% after adjustingwere also down 12% compared to the same period last year.
•Reported and underlying advertising expense declined 23% for the negative effectsix months ended October 31, 2020. The decrease in underlying advertising expense was driven by the phasing of foreign exchange.spend and a reduction in our investment behind on-premise channel activities and various events and sponsorships that were canceled in the first half of fiscal 2021 due to COVID-19.
•Reported advertising expenses grew 8%and underlying SG&A expense declined 6% for the ninesix months ended JanuaryOctober 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 investing2020. The decrease 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 wereexpense was driven by lower pension expense and continuedthe tight management of discretionary spending, offset by higher incentive compensation related expensesspend (including hiring and personnel costs, driven in part by investments in our new Spain distribution operation.
For the nine months ended January 31, 2018, operating expensestravel freezes) as a percentageresult 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.COVID-19 environment.
| | | | | | | | | | | |
Operating Income |
Percentage change versus the prior year period ended October 31 | 3 Months | | 6 Months |
Change in reported operating income | (6 | %) | | 19 | % |
Acquisitions and divestitures | 1 | % | | (20 | %) |
| | | |
Foreign exchange | 4 | % | | 2 | % |
Estimated net change in distributor inventories | 8 | % | | 10 | % |
Change in underlying operating income | 6 | % | | 11 | % |
Note: Results may differ due to rounding | | | |
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 of $304$330 million increased $31decreased $22 million, or 11%6%, for the three months ended JanuaryOctober 31, 20182020, compared to the same period last year. Underlying operating income grew 5%increased 6% after adjusting for the positive effect of foreign exchange and(a) an estimated net decrease in distributor inventories. The same factors that contributedinventories, (b) the negative effect of foreign exchange, and (c) the effect of acquisitions and divestitures. Operating margin decreased 2.1 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.
For33.5% for the three months ended JanuaryOctober 31, 2018, operating margin increased 0.8 percentage points to 34.6%,2020, from 33.8%35.6% in the same period last year. The increase in our operating margin was driven by foreign exchange and operating expense leverage as combined operating expenses grew at a slower rate than underlying net sales.
Operating income of $894$717 million increased $116$117 million, or 15%19%, for the ninesix months ended JanuaryOctober 31, 20182020, compared to the same period last year. Underlying operating income grew 11% after adjusting for (a) the positiveeffect of acquisitions and divestitures, including the gain on sale of Early Times, Canadian Mist, and Collingwood; (b) an estimated net decrease in distributor inventories; and (c) the negative 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.
exchange. Operating margin increased 1.77.0 percentage points to 35.5%41.2% for the ninesix months ended JanuaryOctober 31, 20182020, from 33.8%34.2% in the same period last year. The increase in our operating margin was driven by operating expense leverage as underlying SG&A spend was flat year-over-yeargain on sale of Early Times, Canadian Mist, and underlying advertising expenses grew 5% comparedCollingwood contributed 7.2 percentage points to underlying net sales growth of 7%.this increase.
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 the three months ended JanuaryOctober 31, 20182020, was 34.4%22.1% compared to 29.4%15.0% for the same period last year. The increase in our effective tax rate for the three months ended October 31, 2020, was driven primarily driven by a decrease in the net impactforeign derived intangible income deduction, and the absence of the Tax Act, partially offset by an increase in the excess tax benefits related to stock-based compensation.prior year true-up benefit.
The effective tax rate infor the ninesix months ended JanuaryOctober 31, 20182020, was 28.5%16.4% 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 reported16.3% for the same period last year. The increase in dilutedour effective tax rate for the six months ended October 31, 2020, was driven by (a) a decreased benefit in the foreign-derived intangible income deduction, (b) the absence of the prior year true-up benefit, and (c) less stock based compensation deduction, which was offset by the deferred tax benefit related to an intercompany transfer of assets.
Diluted earnings per share for of $0.50 in the three months ended JanuaryOctober 31, 2018 resulted2020, decreased 15% from an increase inthe $0.59 reported operating income, offset byfor the negative effect ofsame period last year due to a higher effective tax rate.rate and a decrease in reported operating income. Diluted earnings per share of $1.25$1.17 in the ninesix months ended JanuaryOctober 31, 20182020, increased 17%20% from the $1.07$0.97 reported for the same period last year, including an estimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and Collingwood.
Liquidity and Financial Condition
Cash flows. Cash and cash equivalents increased $289 million during the six months ended October 31, 2020. Cash provided by operations of $283 million was up $96 million from the same period last year, primarily reflecting lower working capital requirements.
Cash provided by investing activities was $147 million for the six months ended October 31, 2020, an increase of $222 million compared to the same period last year. The increase in diluted earnings per shareprimarily reflects the proceeds of $177 million from our divestiture of the Early Times, Canadian Mist, and Collingwood brands and related assets (in the first quarter of fiscal 2021); our acquisition of The 86 Company for the nine months ended January 31, 2018 resulted from an increase in reported operating income$22 million (in fiscal 2020); and a reduction$23 million decline in shares outstanding.capital expenditures for fixed assets and computer software.
Liquidity and Financial Condition
Cash flows. Cash and cash equivalents increased $105used for financing activities was $155 million during the ninesix months ended JanuaryOctober 31, 2018,2020, 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$183 million for the same period last year. The $279$28 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 $380 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$24 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$14 million for the ninesix months ended JanuaryOctober 31, 2018,2020, compared to a declinedecrease of $20$1 million for the same period last year.
Liquidity. We continue to manage liquidity conservativelygenerate strong cash flows from operations, which enable us to meet current obligations, fund capital expenditures, sustain and grow ourpay regular dividends, and repurchase sharesreturn cash to our stockholders 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 adversely 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$964 million at JanuaryOctober 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 JanuaryOctober 31, 2018,2020, approximately 78%46% 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 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 October 31, 2020, please see Note 6 to the enactmentCondensed Consolidated Financial Statements. The average balances, interest rates and original maturities during the periods ended October 31, 2019 and 2020, are presented below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Average | | Six Months Average | | |
| | | | | | | October 31, | | October 31, | | |
(Dollars in millions) | | | | | | | 2019 | | 2020 | | 2019 | | 2020 | | | | |
Average commercial paper | | | | | | | $310 | | $357 | | $323 | | $358 | | | | |
Average interest rate | | | | | | | 2.28% | | 0.41% | | 2.42% | | 0.63% | | | | |
Average days to maturity at issuance | | | | | | | 34 | | 136 | | 33 | | 119 | | | | |
Our commercial paper program is supported by available commitments under our 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 declines in net sales and profit could require us to evaluate alternative sources of liquidity. Should we have additional liquidity needs, we believe that we could access long-term financing in the Tax Act, we are evaluating our global workingdebt capital requirements and may changemarkets.
We believe our current permanent reinvestment assertionliquidity position, supplemented by our ability to generate positive cash flows from operations in the future, periods.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.
As announced on January 23, 2018,On November 19, 2020, 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 opportunity 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 effected in the form of a dividend on both Class A and Class B common stock, payable in shares 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 Board declared a specialregular quarterly cash dividend of $1.00$0.1795 per share on our Class A and Class B common stock. Stockholders of record on April 2, 2018,December 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.January 4, 2021.
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.
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 and Part II, Item 1A. Risk Factors in our First Quarter 2021 Form 10-Q, which could materially adversely affect our business, financial condition, or future results. There have been no material changes to the risk factors disclosed in our 20172020 Form 10-K.10-K and our First Quarter 2021 Form 10-Q.
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: |
| | | | | | | |
10.131.1 | | Five-Year Credit Agreement, dated as 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). |
31.1 | | |
31.2 | | |
32 | | |
101 | | The following materials from Brown-Forman Corporation's Quarterly Report on Form 10-Q for the quarter ended JanuaryOctober 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, 2018December 8, 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)
|