United States
Securities and Exchange Commission
Washington, D.C. 20549


FORM 10-Q
(Mark One)
þ
☑		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended JanuaryOctober 31, 20182020
OR
o
☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________


Commission File No. 001-00123


Brown-Forman Corporation
(Exact name of Registrant as specified in its Charter)
Delaware61-0143150
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)
850 Dixie Highway
Louisville, KentuckyKentucky40210
(Address of principal executive offices)(Zip Code)

(502) 585-1100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock (voting), $0.15 par valueBFANew York Stock Exchange
Class B Common Stock (nonvoting), $0.15 par valueBFBNew York Stock Exchange
1.200% Notes due 2026BF26New York Stock Exchange
2.600% Notes due 2028BF28New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   Noo
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ   Noo
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerþ☑Accelerated filer¨☐
Non-accelerated filer¨☐(Do not check if a smaller reporting company)Smaller reporting company¨☐
Emerging growth company¨☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso☐   No  þ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: February 28, 2018November 30, 2020
Class A Common Stock (voting), $0.15 par value169,091,412 
Class B Common Stock (nonvoting), $0.15 par value309,488,902 



BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
Class A Common Stock ($.15 par value, voting)169,062,093
Page
Class B Common Stock ($.15 par value, nonvoting)311,827,161
3


BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
Page
PART I - FINANCIAL INFORMATION
Item 1.
Item 1.
Financial Statements (Unaudited)
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.






2

PART I - FINANCIAL INFORMATION
 
Item 1. Financial Statements (Unaudited)




BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)


Three Months Ended Nine Months EndedThree Months EndedSix Months Ended
January 31, January 31,October 31,October 31,
2017 2018 2017 20182019202020192020
Sales$1,059
 $1,156
 $2,969
 $3,251
Sales$1,248 $1,272 $2,226 $2,259 
Excise taxes251
 278
 670
 736
Excise taxes259 287 471 521 
Net sales808
 878
 2,299
 2,515
Net sales989 985 1,755 1,738 
Cost of sales272
 291
 758
 825
Cost of sales370 404 638 692 
Gross profit536
 587
 1,541
 1,690
Gross profit619 581 1,117 1,046 
Advertising expenses102
 114
 291
 314
Advertising expenses112 95 204 157 
Selling, general, and administrative expenses162
 173
 488
 497
Selling, general, and administrative expenses158 155 322 303 
Gain on sale of businessGain on sale of business0 0 0 (127)
Other expense (income), net(1) (4) (16) (15)Other expense (income), net(3)1 (9)(4)
Operating income273
 304
 778
 894
Operating income352 330 600 717 
Non-operating postretirement expenseNon-operating postretirement expense1 2 2 3 
Interest income1
 2
 2
 4
Interest income(1)(1)(3)(1)
Interest expense16
 17
 44
 49
Interest expense21 20 42 40 
Income before income taxes258
 289
 736
 849
Income before income taxes331 309 559 675 
Income taxes76
 99
 212
 242
Income taxes49 69 91 111 
Net income$182
 $190
 $524
 $607
Net income$282 $240 $468 $564 
Earnings per share:       Earnings per share:
Basic$0.38
 $0.39
 $1.08
 $1.26
Basic$0.59 $0.50 $0.98 $1.18 
Diluted$0.38
 $0.39
 $1.07
 $1.25
Diluted$0.59 $0.50 $0.97 $1.17 
Cash dividends per common share:       
Declared$0.292
 $1.316
 $0.564
 $1.608
Paid$0.146
 $0.158
 $0.418
 $0.450
See notes to the condensed consolidated financial statements.

3


BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
 
Three Months Ended Nine Months EndedThree Months EndedSix Months Ended
January 31, January 31,October 31,October 31,
2017 2018 2017 20182019202020192020
Net income$182
 $190
 $524
 $607
Net income$282 $240 $468 $564 
Other comprehensive income (loss), net of tax:       Other comprehensive income (loss), net of tax:
Currency translation adjustments(25) 38
 (110) 47
Currency translation adjustments11 4 (3)66 
Cash flow hedge adjustments(7) (32) 14
 (48)Cash flow hedge adjustments(7)6 2 (39)
Postretirement benefits adjustments6
 3
 13
 9
Postretirement benefits adjustments3 5 7 12 
Net other comprehensive income (loss)(26) 9
 (83) 8
Net other comprehensive income (loss)7 15 6 39 
Comprehensive income$156
 199
 $441
 $615
Comprehensive income$289 $255 $474 $603 
See notes to the condensed consolidated financial statements.

4


BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
April 30, 2020October 31,
2020
Assets
Cash and cash equivalents$675 $964 
Accounts receivable, less allowance for doubtful accounts of $11 at April 30 and October 31570 879 
Inventories:
Barreled whiskey1,092 1,067 
Finished goods320 337 
Work in process172 181 
Raw materials and supplies101 130 
Total inventories1,685 1,715 
Other current assets335 257 
Total current assets3,265 3,815 
Property, plant and equipment, net848 828 
Goodwill756 759 
Other intangible assets635 654 
Deferred tax assets15 58 
Other assets247 236 
Total assets$5,766 $6,350 
Liabilities
Accounts payable and accrued expenses$517 $601 
Accrued income taxes30 63 
Short-term borrowings333 358 
Total current liabilities880 1,022 
Long-term debt2,269 2,309 
Deferred tax liabilities177 146 
Accrued pension and other postretirement benefits297 297 
Other liabilities168 173 
Total liabilities3,791 3,947 
Commitments and contingencies
Stockholders’ Equity
Common stock:
Class A, voting, $0.15 par value (170,000,000 shares authorized; 170,000,000 shares issued)25 25 
Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 314,532,000 shares issued)47 47 
Retained earnings2,708 3,082 
Accumulated other comprehensive income (loss), net of tax(547)(508)
Treasury stock, at cost (6,323,000 and 5,961,000 shares at April 30 and October 31, respectively)(258)(243)
Total stockholders’ equity1,975 2,403 
Total liabilities and stockholders’ equity$5,766 $6,350 
 April 30,
2017		 January 31,
2018
Assets   
Cash and cash equivalents$182
 $287
Accounts receivable, less allowance for doubtful accounts of $7 at April 30 and January 31557
 725
Inventories:   
Barreled whiskey873
 923
Finished goods186
 204
Work in process119
 122
Raw materials and supplies92
 94
Total inventories1,270
 1,343
Other current assets342
 286
Total current assets2,351
 2,641
Property, plant and equipment, net713
 766
Goodwill753
 768
Other intangible assets641
 680
Deferred tax assets16
 17
Other assets151
 170
Total assets$4,625
 $5,042
Liabilities   
Accounts payable and accrued expenses$501
 $584
Dividends payable—
 557
Accrued income taxes9
 18
Short-term borrowings211
 327
Current portion of long-term debt249
 —
Total current liabilities970
 1,486
Long-term debt1,689
 1,770
Deferred tax liabilities152
 61
Accrued pension and other postretirement benefits314
 282
Other liabilities130
 242
Total liabilities3,255
 3,841
Commitments and contingencies
 
Stockholders’ Equity   
Common stock:   
Class A, voting, $0.15 par value (170,000,000 shares authorized)25
 25
Class B, nonvoting, $0.15 par value (400,000,000 shares authorized)43
 47
Additional paid-in capital65
 7
Retained earnings4,470
 1,620
Accumulated other comprehensive income (loss), net of tax(390) (382)
Treasury stock, at cost (88,175,000 and 3,665,000 shares at April 30 and January 31, respectively)(2,843) (116)
Total stockholders’ equity1,370
 1,201
Total liabilities and stockholders’ equity$4,625
 $5,042
See notes to the condensed consolidated financial statements.


5

BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Nine Months EndedSix Months Ended
January 31,October 31,
2017 2018 20192020
Cash flows from operating activities:   Cash flows from operating activities:  
Net income$524
 $607
Net income$468 $564 
Adjustments to reconcile net income to net cash provided by operations:   Adjustments to reconcile net income to net cash provided by operations: 
Gain on sale of businessGain on sale of business0 (127)
Depreciation and amortization42
 48
Depreciation and amortization36 39 
Stock-based compensation expense10
 14
Stock-based compensation expense6 6 
Deferred income taxes(11) (32)
Changes in assets and liabilities, excluding the effects of acquisition of business(120) (75)
Deferred income tax provisionDeferred income tax provision9 (59)
Other, netOther, net0 (6)
Changes in assets and liabilities, net of business acquisitions and dispositions:Changes in assets and liabilities, net of business acquisitions and dispositions:
Accounts receivableAccounts receivable(216)(295)
InventoriesInventories(133)(29)
Other current assetsOther current assets(38)52 
Accounts payable and accrued expensesAccounts payable and accrued expenses30 85 
Accrued income taxesAccrued income taxes14 35 
Other operating assets and liabilitiesOther operating assets and liabilities11 18 
Cash provided by operating activities445
 562
Cash provided by operating activities187 283 
Cash flows from investing activities:   Cash flows from investing activities:  
Proceeds from sale of businessProceeds from sale of business0 177 
Acquisition of business, net of cash acquired(307) —
Acquisition of business, net of cash acquired(22)0 
Additions to property, plant, and equipment(71) (100)Additions to property, plant, and equipment(48)(29)
Computer software expenditures(2) (1)Computer software expenditures(5)(1)
Cash used for investing activities(380) (101)
Cash provided by (used for) investing activitiesCash provided by (used for) investing activities(75)147 
Cash flows from financing activities:   Cash flows from financing activities:  
Net change in short-term borrowings(24) 111
Repayment of long-term debt—
 (250)
Proceeds from long-term debt717
 —
Debt issuance costs(5) —
Net payments related to exercise of stock-based awards(5) (24)
Proceeds from short-term borrowings, maturities greater than 90 daysProceeds from short-term borrowings, maturities greater than 90 days0 324 
Repayments of short-term borrowings, maturities greater than 90 daysRepayments of short-term borrowings, maturities greater than 90 days0 (230)
Net change in short-term borrowings, maturities of 90 days or lessNet change in short-term borrowings, maturities of 90 days or less2 (68)
Payments of withholding taxes related to stock-based awardsPayments of withholding taxes related to stock-based awards(26)(14)
Acquisition of treasury stock(561) (1)Acquisition of treasury stock(1)0 
Dividends paid(203) (216)Dividends paid(158)(167)
Repayment of short-term obligation associated with acquisition of business(30) —
Cash used for financing activities(111) (380)Cash used for financing activities(183)(155)
Effect of exchange rate changes on cash and cash equivalents(20) 24
Effect of exchange rate changes on cash and cash equivalents(1)14 
Net increase (decrease) in cash and cash equivalents(66) 105
Net increase (decrease) in cash and cash equivalents(72)289 
Cash and cash equivalents, beginning of period263
 182
Cash and cash equivalents, beginning of period307 675 
Cash and cash equivalents, end of period$197
 $287
Cash and cash equivalents, end of period$235 $964 
See notes to the condensed consolidated financial statements.

6


BROWN-FORMAN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


In these notes, “we,” “us,” “our,” “Brown-Forman,” and “our”the “Company” refer to Brown-Forman Corporation.Corporation and its consolidated subsidiaries, collectively.


1.    Condensed Consolidated Financial Statements
We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for interim financial information. In accordance with those rules and regulations, we condensed or omitted certain information and disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). We suggest that you read these condensed financial statements together with the financial statements and footnotes included in our annual report on Form 10-K for the fiscal year ended April 30, 2017 (2017 Form 10-K). We prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2017 Form 10-K.

In our opinion, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments (unless otherwise indicated), necessary for a fair statement of our financial results for the periods covered by this report.presented in these financial statements. The results for interim periods are not necessarily indicative of future or annual results.


The BenRiach acquisition occurred duringWe suggest that you read these condensed financial statements together with the firstfinancial statements and footnotes included in our Annual Report on Form 10-K for the fiscal quarter of 2017 and the purchase price allocation was finalizedyear ended April 30, 2020, as of June 1, 2017. There have been no material changes to the purchase price allocation.

As discussed in Note 11, our shares of common stock were split during February 2018 through the issuance of a stock dividend. As a result, all share and per share amounts reported inamended (2020 Form 10-K). We prepared the accompanying financial statements and related notes are presented on a split-adjusted basis.

Newbasis that is substantially consistent with the accounting pronouncements to be adopted. In May 2014, the Financial Accounting Standards Board (FASB) issued a new revenue recognition standard that, along with various amendments issued in 2015 and 2016, will replace substantially all existing revenue recognition guidance in U.S. GAAP. The core principle of the standard requires an entity to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The new standard also requires significantly more financial statement disclosures than existing revenue standards do.

The new standard can be adopted using either of two transition options: a full retrospective transition method or a modified retrospective method. Under the full retrospective method, the guidance would beprinciples applied to each prior reporting period presented. Under the modified retrospective method, the cumulative effect of initially applying the new guidance would be recorded as an adjustment to the opening balance of retained earnings for the annual reporting period that includes the date of initial application.

We are continuing to assess the potential impact of the new guidance on our financial statements. Based on our assessment to date, we currently expect our accounting for certain customer incentives to be the area most likely affected by the new recognition requirements. We also expect to disclose additional information about revenues under the new standard. As we progress in our assessment, we are also identifying and preparing to make any changes to our accounting policies and practices, systems, processes, and controls that may be required to implement the new standard. We currently expect to choose the modified retrospective method in transitioning to the new standard, which we will adopt effective May 1, 2018.2020 Form 10-K.

We are also currently evaluating the potential impact on our financial statements of the additional new accounting pronouncements described below:
In February 2016, the FASB issued a new standard on accounting for leases. Under the new standard, a lessee should recognize on its balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The standard permits an entity to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. The standard, which also requires additional quantitative and qualitative disclosures about leasing arrangements, will become effective for us beginning fiscal 2020. It is to be applied using a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements.
In August 2016, the FASB issued new guidance on the classification of certain cash receipts and cash payments on the statement of cash flows. The new guidance, which addresses eight specific cash flow classification issues, is intended


to reduce diversity in practice. It will become effective for us beginning fiscal 2019 and is to be applied retrospectively.
In October 2016, the FASB issued revised guidance that requires the recognition of the income tax consequences (expense or benefit) of an intercompany transfer of assets other than inventory when the transfer occurs. It maintains the existing requirement to defer the recognition of the income tax consequences of an intercompany transfer of inventory until the inventory is sold to an outside party. The guidance will become effective for us beginning fiscal 2019 and is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption.
In January 2017, the FASB issued updated guidance that eliminates the second step of the existing two-step quantitative test of goodwill for impairment. Under the new guidance, the quantitative test will consist of a single step in which the carrying amount of the reporting unit will be compared to its fair value. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the amount of the impairment would be limited to the total amount of goodwill allocated to the reporting unit. The guidance does not affect the existing option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. Although adoption is not required until fiscal 2021, we currently expect to adopt the new standard, prospectively, beginning in fiscal 2019.
In March 2017, the FASB issued new guidance for the presentation of the net periodic cost (NPC) associated with pension and other postretirement benefit plans. The guidance requires the service cost component of the NPC to be reported in the income statement in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of the NPC are to be presented separately from the service cost and outside of income from operations. In addition, the guidance allows only the service cost component of NPC to be eligible for capitalization when applicable. The guidance will become effective for us beginning fiscal 2019. It is to be applied retrospectively for the presentation in the income statement and prospectively, on and after the effective date, for the capitalization of service cost.
In August 2017, the FASB issued updated guidance on hedge accounting. The guidance expands hedge accounting for financial and nonfinancial risk components, eliminates the requirement to separately measure and report hedge ineffectiveness, simplifies the way assessments of hedge effectiveness may be performed, and amends some presentation and disclosure requirements for hedges. The guidance will become effective for us beginning fiscal 2020. It is to be applied using a modified retrospective transition approach for cash flow and net investment hedges existing at the date of adoption. The amended presentation and disclosure guidance is required only prospectively. Although we have not yet determined our plans for adoption, we are considering the possibility of adopting this new guidance before the required adoption date.
In February 2018, the FASB issued guidance that would allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted by the U.S. government in December 2017. The guidance will become effective for us beginning fiscal 2020. It is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized.

Early adoption of any of the new accounting pronouncements described above is permitted. However, except as noted above, we do not currently expect to adopt the new pronouncements before their effective dates.

2.    Inventories
Inventories are valued at the lower of cost or market. Some of our consolidated inventories are valued using the last-in, first-out (LIFO) method, which we use for the majority of our U.S. inventories. If the LIFO method had not been used, inventories at current cost would have been $272 million higher than reported as of April 30, 2017, and $293 million higher than reported as of January 31, 2018. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.

3.    Income Taxes
Our consolidated interim effective tax rate is based upon our expected annual operating income, statutory tax rates, and income tax laws in the various jurisdictions in which we operate. Significant or unusual items, including adjustments to accruals for tax uncertainties, are recognized in the quarter in which the related event or a change in judgment occurs. The effective tax rate of 28.5% for the nine months ended January 31, 2018, is higher than the expected tax rate of 26.1% on ordinary income for the full fiscal year, primarily due to (a) the net impact of the Tax Cuts and Jobs Act (discussed below) and (b) true-ups related to


our recently-filed U.S. Federal income tax return, partially offset by (c) the excess tax benefits related to stock-based compensation and (d) a reduction in U.S. tax recorded in the first quarter of fiscal 2018 for certain prior years on foreign exchange gains in non-U.S. entities due to a change in method of accounting for U.S. tax purposes. Our expected tax rate includes current fiscal year additions for existing tax contingency items.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. As we have an April 30 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year ending April 30, 2018, and 21% for subsequent fiscal years. During the quarter ended January 31, 2018, the impact of the lower tax rate resulted in a tax benefit of approximately $20 million for the three and nine months then ended. With the enactment of the Tax Act, we are evaluating our global working capital requirements and may change our current permanent reinvestment assertion in future periods.

There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, the reduction of the U.S. corporate tax rate required us to adjust our U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a provisional net charge of $43 million for the quarter ended January 31, 2018, comprised of a provisional repatriation U.S. tax charge of $91 million and a provisional net deferred tax benefit of $48 million.

The Tax Act also established new tax laws that may impact our financial statements beginning in fiscal 2019. These new laws include, but are not limited to (a) Global Intangible Low-Tax Income (“GILTI”), a new tax on low tax foreign jurisdictions, (b) Base Erosion Anti-abuse Tax (“BEAT”), a new minimum tax, (c) repeal of the domestic production activity deduction, and (d) limitations on certain executive compensation.

The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the above estimates, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates the company has utilized to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign exchange rates of foreign subsidiaries.

Shortly after the Tax Act was enacted, the U.S. Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118). Under SAB 118, companies are provided a measurement period, not to extend beyond one year since the date of enactment. To the extent a company’s accounting for certain income tax effects are incomplete, the company may determine a reasonable estimate and record a provisional amount within the first reporting period in which a reasonable estimate can be determined. 

4.    Earnings Per Share
We calculate basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share further includes the dilutive effect of stock-based compensation awards. We calculate that dilutive effect using the “treasury stock method” (as defined by GAAP).




The following table presents information concerning basic and diluted earnings per share:
Three Months EndedSix Months Ended
October 31,October 31,
(Dollars in millions, except per share amounts)2019202020192020
Net income available to common stockholders$282 $240 $468 $564 
Share data (in thousands):  
Basic average common shares outstanding477,680 478,506 477,522 478,413 
Dilutive effect of stock-based awards2,801 2,242 2,760 2,172 
Diluted average common shares outstanding480,481 480,748 480,282 480,585 
Basic earnings per share$0.59 $0.50 $0.98 $1.18 
Diluted earnings per share$0.59 $0.50 $0.97 $1.17 
 Three Months Ended Nine Months Ended
 January 31, January 31,
(Dollars in millions, except per share amounts)2017 2018 2017 2018
Net income available to common stockholders$182
 $190
 $524
 $607
        
Share data (in thousands):       
Basic average common shares outstanding480,650
 480,361
 486,105
 480,193
Dilutive effect of stock-based awards3,308
 3,883
 3,515
 3,318
Diluted average common shares outstanding483,958
 484,244
 489,620
 483,511
        
Basic earnings per share$0.38
 $0.39
 $1.08
 $1.26
Diluted earnings per share$0.38
 $0.39
 $1.07
 $1.25


We excluded common stock-based awards for approximately 2,789,000522,000 shares and 0301,000 shares from the calculation of diluted earnings per share for the three months ended JanuaryOctober 31, 20172019 and 2018,2020, respectively.We excluded common stock-based awards for approximately 2,225,000442,000 shares and 1,073,000168,000 shares from the calculation of diluted earnings per share for the ninesix months ended JanuaryOctober 31, 20172019 and 2018,2020, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.


3.    Inventories
Inventories are valued at the lower of cost or net realizable value. Some of our consolidated inventories are valued using the last-in, first-out (LIFO) method, which we use for the majority of our U.S. inventories. If the LIFO method had not been used, inventories at current cost would have been $311 million higher than reported as of April 30, 2020, and $331 million higher than reported as of October 31, 2020. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.

7

4.    Goodwill and Other Intangible Assets
The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the six months ended October 31, 2020:
(Dollars in millions)Goodwill
Other Intangible Assets
Balance at April 30, 2020$756 $635 
Sale of business (Note 14)(4)(1)
Foreign currency translation adjustment7 20 
Balance at October 31, 2020$759 $654 

Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.

5.    Commitments and Contingencies
We operate in a litigious environment, and we are sued in the normal course of business. Sometimes plaintiffs seek substantial damages. Significant judgment is required in predicting the outcome of these suits and claims, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and we can make a reasonable estimate of the loss, and then adjust the accrual as appropriate to reflect changes in facts and circumstances. We do not believe it is reasonably possible that these existing loss contingencies, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations, or liquidity. No material accrued loss contingencies arewere recorded as of JanuaryOctober 31, 2018.2020.


We have guaranteed the repayment by a third-party importer of its obligation under a bank credit facility that it uses in connection with its importation of our products in Russia. If the importer were to default on that obligation, which we believe is unlikely, our maximum possible exposure under the existing terms of the guaranty would be approximately $12$8 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant. As of JanuaryOctober 31, 2018,2020, our actual exposure under the guaranty of the importer’s obligation iswas approximately $6$7 million.

We also have accounts receivable from that importer of approximately $11 million at October 31, 2020, which we expect to collect in full. Based on the financial support we provide to the importer, we believe it meets the definition of a variable interest entity. However, because we do not control this entity, it is not included in our consolidated financial statements.



On May 30, 2019, we notified Bacardi Martini Ltd. (“Bacardi”) of our intention not to renew the terms of our United Kingdom (U.K.) Cost Sharing Agreement (the “Agreement”) whereby Bacardi provided certain services (e.g., warehousing and logistics, sales, reporting, treasury, tax, and other services) and Brown-Forman and Bacardi split the associated overhead for those services. For purposes of conducting business, Brown-Forman and Bacardi established a U.K. trade name, “Bacardi Brown-Forman Brands,” through which our products and Bacardi’s products were sold in the U.K. On a monthly basis, Bacardi would remit to us the revenues from sales of our products, net of our agreed contributions for overhead costs under the Agreement. On April 30, 2020, the Agreement expired according to its terms.


Following delivery of our notice and upon expiration of the Agreement, Bacardi alleged that it was entitled to approximately £49 million under the principle of commercial agency in the U.K., as well as additional compensation for the winding up of business conducted under the Agreement and for remitting the associated funds owed to us. From monthly settlements following the expiration of the Agreement, Bacardi withheld over £50 million owed to us, effectively bypassing the dispute resolution process under the Agreement.

In response to Bacardi’s actions, we initiated a lawsuit on August 20, 2020, in the Commercial Court in the U.K. seeking reimbursement of the amounts wrongfully withheld. Shortly thereafter, Bacardi filed a demand for arbitration seeking a determination that it was entitled to compensation as a commercial agent and for additional compensation for the work completed following the expiration of the Agreement.

Since it was raised, we have disputed Bacardi’s claim of commercial agency compensation and issued demands that Bacardi adhere to the dispute resolution process mandated by the Agreement and return the over £50 million that Bacardi has wrongfully withheld from us. Given the early stages of the litigation and arbitration process, we are unable to estimate the range of reasonably possible loss, if any. The withheld amount is included in accounts receivable in the accompanying condensed consolidated balance sheet as of October 31, 2020.
8

6.    Debt
Our long-term debt (net of unamortized discount and issuance costs) consists of:
(Principal and carrying amounts in millions)April 30, 2020October 31,
2020
2.250% senior notes, $250 principal amount, due January 15, 2023$249 $249 
3.500% senior notes, $300 principal amount, due April 15, 2025297 297 
1.200% senior notes, €300 principal amount, due July 7, 2026324 348 
2.600% senior notes, £300 principal amount, due July 7, 2028369 385 
4.000% senior notes, $300 principal amount, due April 15, 2038294 294 
3.750% senior notes, $250 principal amount, due January 15, 2043248 248 
4.500% senior notes, $500 principal amount, due July 15, 2045488 488 
$2,269 $2,309 
(Principal and carrying amounts in millions)April 30,
2017		 January 31,
2018
1.00% senior notes, $250 principal amount, due January 15, 2018$249
 $—
2.25% senior notes, $250 principal amount, due January 15, 2023248
 248
1.20% senior notes, €300 principal amount, due July 7, 2026324
 369
2.60% senior notes, £300 principal amount, due July 7, 2028383
 419
3.75% senior notes, $250 principal amount, due January 15, 2043248
 248
4.50% senior notes, $500 principal amount, due July 15, 2045486
 486
 1,938
 1,770
Less current portion249
 —
 $1,689
 $1,770
We repaid the $250Our short-term borrowings of $333 million principal amount of 1.00% notes on their maturity date of January 15, 2018.
Asas of April 30, 2017,2020, and $358 million as of October 31, 2020, consisted primarily of borrowings under our short-term borrowings of $211 million included $208 million of commercial paper with an average interest rateprogram.
(Dollars in millions)April 30,
2020		October 31,
2020
Commercial paper$333$346
Average interest rate1.29%0.32%
Average remaining days to maturity7383


7.    Stockholders’ Equity
The following table shows the changes in stockholders’ equity by quarter during the six months ended October 31, 2019:
(Dollars in millions)
Class A Common Stock
Class B Common Stock
Additional Paid-in Capital
Retained Earnings
AOCI
Treasury Stock
Total
Balance at April 30, 2019$25 $47 $0 $2,238 $(363)$(300)$1,647 
Adoption of ASU 2018-0243 (43)— 
Net income186 186 
Net other comprehensive income (loss)(1)(1)
Declaration of cash dividends(158)(158)
Acquisition of treasury stock(1)(1)
Stock-based compensation expense3 3 
Stock issued under compensation plans16 16 
Loss on issuance of treasury stock issued under compensation plans(2)(27)(29)
Balance at July 31, 201925 47 1 2,282 (407)(285)1,663 
Net income282 282 
Net other comprehensive income (loss)7 7 
Stock-based compensation expense3 3 
Stock issued under compensation plans11 11 
Loss on issuance of treasury stock issued under compensation plans(4)(20)(24)
Balance at October 31, 2019$25 $47 $0 $2,544 $(400)$(274)$1,942 

9

The following table shows the changes in stockholders’ equity by quarter during the six months ended October 31, 2020:
(Dollars in millions)
Class A Common Stock
Class B Common Stock
Additional Paid-in Capital
Retained Earnings
AOCI
Treasury Stock
Total
Balance at April 30, 2020$25 $47 $0 $2,708 $(547)$(258)$1,975 
Net income324 324 
Net other comprehensive income (loss)24 24 
Declaration of cash dividends(167)(167)
Stock-based compensation expense3 3 
Stock issued under compensation plans10 10 
Loss on issuance of treasury stock issued under compensation plans(3)(16)(19)
Balance at July 31, 202025 47 0 2,849 (523)(248)2,150 
Net income240 240 
Net other comprehensive income (loss)15 15 
Stock-based compensation expense3 3 
Stock issued under compensation plans5 5 
Loss on issuance of treasury stock issued under compensation plans(3)(7)(10)
Balance at October 31, 2020$25 $47 $0 $3,082 $(508)$(243)$2,403 

The following table shows the change in each component of 1.04%accumulated other comprehensive income (AOCI), net of tax, during the six months ended October 31, 2020:
(Dollars in millions)
Currency Translation Adjustments
Cash Flow Hedge Adjustments
Postretirement Benefits Adjustments
Total AOCI
Balance at April 30, 2020$(302)$60 $(305)$(547)
Net other comprehensive income (loss)66 (39)12 39 
Balance at October 31, 2020$(236)$21 $(293)$(508)

The following table shows the cash dividends declared per share on our Class A and a remaining maturityClass B common stock during the six months ended October 31, 2020:
Declaration DateRecord DatePayable DateAmount per Share
May 21, 2020June 8, 2020July 1, 2020$0.1743
July 23, 2020September 4, 2020October 1, 2020$0.1743

As announced on November 19, 2020, our Board of 22 days. AsDirectors increased the quarterly cash dividend on our Class A and Class B common stock from $0.1743 per share to $0.1795 per share. Stockholders of record on December 4, 2020, will receive the cash dividend on January 4, 2021.
10

8.    Net Sales
The following table shows our net sales by geography:
Three Months EndedSix Months Ended
October 31,October 31,
(Dollars in millions)2019202020192020
United States$506 $522 $880 $909 
Developed International1
248 266 453 497 
Emerging2
173 160 306 267 
Travel Retail3
38 22 70 35 
Non-branded and bulk4
24 15 46 30 
Total$989 $985 $1,755 $1,738 
1Represents net sales of branded products to “advanced economies” as defined by the International Monetary Fund (IMF), excluding the United States. Our largest developed international markets are the United Kingdom, Germany, Australia, and France.
2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, and Russia.
3Represents net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer location.
4Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

The following table shows our net sales by product category:
Three Months EndedSix Months Ended
October 31,October 31,
(Dollars in millions)2019202020192020
Whiskey1
$785 $775 $1,385 $1,370 
Tequila2
77 84 145 152 
Wine3
58 71 97 112 
Vodka4
31 26 57 45 
Rest of portfolio14 14 25 29 
Non-branded and bulk5
24 15 46 30 
Total$989 $985 $1,755 $1,738 
1Includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this category are the Jack Daniel's family of brands, the Woodford Reserve family of brands, GlenDronach, BenRiach, Glenglassaugh, the Old Forester family of brands, Slane Irish Whiskey, and Coopers’ Craft. Also includes the Early Times, Canadian Mist, and Collingwood brands, which we divested on July 31, 2018, our short-term borrowings2020 (Note 14).
2Includes el Jimador, the Herradura family of $327 million included $320 millionbrands, New Mix, Pepe Lopez, and Antiguo.
3Includes Korbel Champagnes and Sonoma-Cutrer wines.
4Includes Finlandia.
5Includes net sales of commercial paper, with an average interest rateused barrels, bulk whiskey and wine, and contract bottling regardless of 1.62% and a remaining maturity of 21 days.customer location.
11


7.    
9.    Pension and Other Postretirement Benefits
The following table shows the components of the net cost of pension and other postretirement benefit costbenefits recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.
Three Months EndedSix Months Ended
October 31,October 31,
(Dollars in millions)2019202020192020
Pension Benefits:
  
Service cost$6 $6 $12 $13 
Interest cost8 6 15 12 
Expected return on plan assets(12)(11)(23)(23)
Amortization of:    
Prior service cost (credit)0 0 1 1 
Net actuarial loss5 7 9 13 
Net cost$7 $8 $14 $16 
Other Postretirement Benefits:
  
Interest cost1 1 $1 $1 
Amortization of prior service cost (credit)(1)(1)(1)(1)
Net cost$0 $0 $0 $0 

10.    Income Taxes
 Three Months Ended Nine Months Ended
 January 31, January 31,
(Dollars in millions)2017 2018 2017 2018
Pension Benefits:
       
Service cost$6
 $6
 $19
 $18
Interest cost9
 7
 26
 22
Expected return on plan assets(10) (10) (31) (31)
Amortization of:       
Prior service cost (credit)—
 —
 1
 —
Net actuarial loss6
 6
 19
 16
Settlement loss1
 —
 1
 —
Net cost$12
 $9
 $35
 $25
        
Other Postretirement Benefits:
       
Service cost$—
 $—
 $1
 $1
Interest cost1
 1
 2
 1
Amortization of prior service cost (credit)(1) (1) (2) (2)
Net cost$—
 $—
 $1
 $—
Our consolidated interim effective tax rate is based on our expected annual operating income, statutory tax rates, and income tax laws in the various jurisdictions where we operate. Significant or unusual items, including adjustments to accruals for tax uncertainties, are recognized in the fiscal quarter in which the related event or a change in judgment occurs. The effective tax rate of 16.4% for the six months ended October 31, 2020, was lower than the expected tax rate of 22.0% on ordinary income for the full fiscal year primarily due to a deferred tax benefit related to an intercompany transfer of assets and excess tax benefits related to stock-based compensation.Our expected tax rate includes current fiscal year additions for existing tax contingency items. The effective tax rate for the three months ended October 31, 2020, was 22.1% compared to 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 by a decrease in the foreign derived intangible income deduction, and the absence of the prior year true-up benefit.


We have increasedasserted that the amount we plan to contribute toundistributed earnings of the majority of our pension plans during fiscal 2018 to approximately $155 million.



8.    Fair Value Measurements
The following table summarizesforeign subsidiaries are reinvested indefinitely outside the assets and liabilities measured or disclosed at fair value on a recurring basis:
 April 30, 2017 January 31, 2018
 Carrying Fair Carrying Fair
(Dollars in millions)Amount Value Amount Value
Assets:       
Cash and cash equivalents$182
 $182
 $287
 $287
Currency derivatives25
 25
 2
 2
Liabilities:       
Currency derivatives10
 10
 69
 69
Short-term borrowings211
 211
 327
 327
Current portion of long-term debt249
 249
 —
 —
Long-term debt1,689
 1,752
 1,770
 1,840

Fair value is defined as the exchange price that would be receivedUnited States. Therefore, no income taxes have been provided for an asset or paid to transfer a liabilityany outside basis differences inherent in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We categorize the fair values of assets and liabilities into three levels based upon the assumptions (inputs) used to determine those values. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are:
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 – Observable inputsthese subsidiaries other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in inactive markets; or other inputssubject to the one-time repatriation tax. We have a limited number of subsidiaries that are observable or can be derived from or corroborated by observable market data.
Level 3 – Unobservable inputs that are supported by little or no market activity.

We determinenot permanently reinvested and therefore we have recorded the fair values of our currency derivatives (forward contracts) using standard valuation models. The significant inputs used in these models, which are readily available in public markets or can be derived from observable market transactions, include the applicable spot rates, forward rates, and discount rates. The discount rates are based on the historical U.S. Treasury rates. These fair value measurements are categorized as Level 2 within the valuation hierarchy.

We determine the fair value of long-term debt primarily based on the prices at which similar debt has recently traded in the market and also considering the overall market conditions on the date of valuation. These fair value measurements are categorized as Level 2 within the valuation hierarchy.

The fair values of cash, cash equivalents, and short-term borrowings approximate the carrying amounts duedeferred tax liability related to the short maturities of these instruments.undistributed earnings (but not for their outside basis differences).

We measure some assets and liabilities at fair value on a nonrecurring basis. That is, we do not measure them at fair value on an ongoing basis, but we do adjust them to fair value in some circumstances (for example, when we determine that an asset is impaired). No material nonrecurring fair value measurements were required during the periods presented in these financial statements.

9.    11.    Derivative Financial Instrumentsand Hedging Activities
Our multinational business exposes usWe are subject to global market risks, including the effect of fluctuations in foreign currency exchange rates, commodity prices, and interest rates. We use derivatives to help manage financial exposures that occur in the normal course of business. We formally document the purpose of each derivative contract, which includes linking the contract to the financial exposure it is designed to mitigate. We do not hold or issue derivatives for trading or speculative purposes.


We use currency derivative contracts to limit our exposure to the foreign currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges (except any ineffective portion) in accumulated other comprehensive income (AOCI)AOCI until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings.

We assessdo not designate some of our currency derivatives as hedges because we use them to partially offset the effectivenessimmediate earnings impact of these hedges based on changes in forwardforeign currency exchange rates. The ineffective portion


ofrates on existing assets or liabilities. We immediately recognize the changeschange in fair value of our hedges (recognized immediatelythese contracts in earnings) during the periods presented in this report was not material.earnings.


12

We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts for all hedged currencies totaling $1,188$1,026 million at April 30, 20172020, and $1,100$1,070 million at JanuaryOctober 31, 2018.2020. The maximum term of outstanding derivative contracts was 36 months at both April 30, 2020, and October 31, 2020.


During fiscal 2017, we designated some currency derivative forward contracts andWe also use foreign currency-denominated long-term debt instruments to help manage our foreign currency exchange risk. We designate a portion of those debt instruments as after-tax net investment hedges, of ourwhich are intended to mitigate foreign currency exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries. During fiscal 2018, we have continued to designate some foreign currency-denominated debt for that purpose. Any change in value of the designated portion of the hedging instruments is recorded in AOCI, offsetting the foreign currency translation adjustment of the related net investments that is also recorded in AOCI. AsThe amount of January 31, 2018, $649 million of our foreign currency-denominated debt instruments designated as net investment hedges was $613 million at April 30, 2020, and $640 million at October 31, 2020.

At inception, we expect each financial instrument designated as a net investment hedge. Our net investment hedges are intendedhedge to mitigate foreign exchangebe highly effective in offsetting the financial exposure relatedit is designed to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. There wasmitigate. We also assess the effectiveness on an ongoing basis. If determined to no ineffectiveness related to our net investment hedges in any oflonger be highly effective, designation and accounting for the periods presented.instrument as a hedge would be discontinued.

We do not designate some of our currency derivatives and foreign currency-denominated debt as hedges because we use them to at least partially offset the immediate earnings impact of changes in foreign exchange rates on existing assets or liabilities. We immediately recognize the change in fair value of these instruments in earnings.


We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to physically take physical delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than as derivative instruments.




The following tables present the pre-tax impact that changes in the fair value of our derivative instruments and non-derivative hedging instruments had on AOCI and earnings:
Three Months Ended
October 31,
(Dollars in millions)Classification20192020
Currency derivatives designated as cash flow hedges:   
Net gain (loss) recognized in AOCIn/a$(2)$14 
Net gain (loss) reclassified from AOCI into earningsSales6 5 
Currency derivatives not designated as hedging instruments:   
Net gain (loss) recognized in earningsSales$(1)$1 
Net gain (loss) recognized in earningsOther income (expense), net1 3 
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCIn/a$(20)$6 
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales$1,248 $1,272 
Other income (expense), net3 (1)
13

Six Months Ended
October 31,
(Dollars in millions)(Dollars in millions)Classification20192020
Currency derivatives designated as cash flow hedges:Currency derivatives designated as cash flow hedges:   
Net gain (loss) recognized in AOCINet gain (loss) recognized in AOCIn/a$13 $(35)
Net gain (loss) reclassified from AOCI into earningsNet gain (loss) reclassified from AOCI into earningsSales10 16 
 Three Months Ended
 January 31,
(Dollars in millions)Classification2017 2018
Derivative Instruments    
Currency derivatives designated as cash flow hedges:  
  
Net gain (loss) recognized in AOCIn/a$5
 $(51)
Net gain (loss) reclassified from AOCI into earningsSales15
 (1)
Currency derivatives not designated as hedging instruments:  
  
Currency derivatives not designated as hedging instruments:   
Net gain (loss) recognized in earningsSales—
 (5)Net gain (loss) recognized in earningsSales$(1)$(5)
Net gain (loss) recognized in earningsOther income(5) 3
Net gain (loss) recognized in earningsOther income (expense), net2 11 
Non-Derivative Hedging Instruments    
Foreign currency-denominated debt designated as net investment hedge:    Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCIn/a(5) (42)Net gain (loss) recognized in AOCIn/a$3 $(33)
Foreign currency-denominated debt not designated as hedging instrument:    
Net gain (loss) recognized in earningsOther income4
 (9)
    
 Nine Months Ended
 January 31,
(Dollars in millions)Classification2017 2018
Derivative Instruments    
Currency derivatives designated as cash flow hedges:  
  
Net gain (loss) recognized in AOCIn/a$57
 $(80)
Net gain (loss) reclassified from AOCI into earningsSales34
 (4)
Currency derivatives designated as net investment hedge:    
Net gain (loss) recognized in AOCIn/a8
 —
Currency derivatives not designated as hedging instruments:  
  
Net gain (loss) recognized in earningsSales3
 (8)
Net gain (loss) recognized in earningsOther income(13) 8
Non-Derivative Hedging Instruments    
Foreign currency-denominated debt designated as net investment hedge:    
Net gain (loss) recognized in AOCIn/a19
 (57)
Foreign currency-denominated debt not designated as hedging instrument:    
Net gain (loss) recognized in earningsOther income6
 (24)
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
SalesSales$2,226 $2,259 
Other income (expense), netOther income (expense), net9 4 
We expect to reclassify $34$19 million of deferred net lossesgains on cash flow hedges recorded in AOCI as of JanuaryOctober 31, 2018,2020, to earnings during the next 12 months. This reclassification would offset the anticipated earnings impact of the underlying hedged exposures. The actual amounts that we ultimately reclassify to earnings will depend on the exchange rates in effect when the underlying hedged transactions occur. As of January 31, 2018, the maximum term of our outstanding derivative contracts was 36 months.




The following table presents the fair values of our derivative instruments:
April 30, 2020October 31, 2020
(Dollars in millions)

Classification
Derivative Assets
Derivative Liabilities
Derivative Assets
Derivative Liabilities
Designated as cash flow hedges:
Currency derivativesOther current assets$49 $(1)$25 $(3)
Currency derivativesOther assets30 0 8 (2)
Currency derivativesAccrued expenses0 0 0 (1)
Currency derivativesOther liabilities0 0 1 (2)
Not designated as hedges:
Currency derivativesOther current assets0 0 1 0 
Currency derivativesOther assets0 0 0 0 
Currency derivativesAccrued expenses0 (2)0 0 
Currency derivativesOther liabilities0 0 0 0 

(Dollars in millions)


Classification
 
Fair value of derivatives in a gain position
 
Fair value of derivatives in a
loss position
April 30, 2017:     
Designated as cash flow hedges:     
Currency derivativesOther current assets $21
 $(2)
Currency derivativesOther assets 9
 (4)
Currency derivativesAccrued expenses 2
 (8)
Currency derivativesOther liabilities 1
 (4)
Not designated as hedges:     
Currency derivativesOther current assets 2
 (1)
Currency derivativesAccrued expenses —
 (1)
January 31, 2018:     
Designated as cash flow hedges:     
Currency derivativesOther current assets —
 —
Currency derivativesOther assets —
 —
Currency derivativesAccrued expenses 4
 (40)
Currency derivativesOther liabilities 1
 (34)
Not designated as hedges:     
Currency derivativesOther current assets 3
 (1)
Currency derivativesAccrued expenses —
 —


The fair values reflected in the above table are presented on a gross basis. However, as discussed further below, the fair values of those instruments that are subject to net settlement agreements are presented on a net basis in our balance sheets on a net basis.sheets.


In our statementstatements of cash flows, we classify cash flows related to cash flow hedges in the same category as the cash flows from the hedged items.


Credit risk. We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association (ISDA) agreements that allow for net settlement of the derivative contracts. Also, we have established counterparty credit guidelines that arewe monitor regularly, monitored, and we monetize contracts when we believe it is warranted. Because of these safeguards, we believe we have no derivative positions that warrant credit valuation adjustments.


Some of our derivative instruments require us to maintain a specific level of creditworthiness, which we have maintained. If our creditworthiness were to fall below that level, then the counterparties to our derivative instruments could request immediate
14

payment or collateralization for derivative instruments in net liability positions. The aggregate fair value of all derivatives with creditworthiness requirements that were in a net liability position was $9$2 million at April 30, 20172020, and $67$2 millionat JanuaryOctober 31, 2018.2020.


Offsetting. As noted above, our derivative contracts are governed by ISDA agreements that allow for net settlement of derivative contracts with the same counterparty. It is our policy to present the fair values of current derivatives (i.e., those with a remaining term of 12 months or less) with the same counterparty on a net basis in theour balance sheet.sheets. Similarly, we present the fair values of noncurrent derivatives with the same counterparty on a net basis. CurrentWe do not net current derivatives are not netted with noncurrent derivatives in theour balance sheet.sheets.




The following table summarizes the gross and net amounts of our derivative contracts:
(Dollars in millions)
Gross Amounts of Recognized Assets (Liabilities)
Gross Amounts Offset in Balance Sheet
Net Amounts Presented in Balance Sheet
Gross Amounts Not Offset in Balance Sheet
Net Amounts
April 30, 2020
Derivative assets$79 $(1)$78 $0 $78 
Derivative liabilities(3)1 (2)0 (2)
October 31, 2020
Derivative assets35 (6)29 0 29 
Derivative liabilities(8)6 (2)0 (2)
(Dollars in millions)
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in Balance Sheet
 
Net Amounts Presented in Balance Sheet
 
Gross Amounts Not Offset in Balance Sheet
 Net Amounts
April 30, 2017:         
Derivative assets$35
 $(10) $25
 $(1) $24
Derivative liabilities(20) 10
 (10) 1
 (9)
January 31, 2018:         
Derivative assets8
 (6) 2
 (2) —
Derivative liabilities(75) 6
 (69) 2
 (67)


No cash collateral was received or pledged related to our derivative contracts as of April 30, 20172020, or JanuaryOctober 31, 2018.2020.


10.    Goodwill and Other Intangible Assets12.    Fair Value Measurements
The following table summarizes the changesassets and liabilities measured or disclosed at fair value on a recurring basis:
April 30, 2020October 31, 2020
 CarryingFairCarryingFair
(Dollars in millions)AmountValueAmountValue
Assets  
Cash and cash equivalents$675 $675 $964 $964 
Currency derivatives78 78 29 29 
Liabilities  
Currency derivatives2 2 2 2 
Short-term borrowings333 333 358 358 
Long-term debt2,269 2,486 2,309 2,690 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in goodwillthe principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We categorize the fair values of assets and liabilities into three levels based on the assumptions (inputs) used to determine those values. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are:
•Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2 – Observable inputs other intangiblethan those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in inactive markets; or other inputs that are observable or can be derived from or corroborated by observable market data.
•Level 3 – Unobservable inputs supported by little or no market activity.

We determine the fair values of our currency derivatives (forward contracts) using standard valuation models. The significant inputs used in these models, which are readily available in public markets or can be derived from observable market transactions, include the applicable spot exchange rates, forward exchange rates, and interest rates. These fair value measurements are categorized as Level 2 within the valuation hierarchy.
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We determine the fair value of long-term debt primarily based on the prices at which identical or similar debt has recently traded in the market and also considering the overall market conditions on the date of valuation. These fair value measurements are categorized as Level 2 within the valuation hierarchy.

The fair values of cash, cash equivalents, and short-term borrowings approximate the carrying amounts due to the short maturities of these instruments.

We measure some assets and liabilities at fair value on a nonrecurring basis. That is, we do not measure them at fair value on an ongoing basis, but we do adjust them to fair value in some circumstances (for example, when we determine that an asset is impaired). No material nonrecurring fair value measurements were required during the nine months ended January 31, 2018:
(Dollars in millions)Goodwill 
Other Intangible Assets
Balance at April 30, 2017$753
 $641
Foreign currency translation adjustment15
 39
Balance at January 31, 2018$768
 $680

Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.

11.    Stockholders’ Equity
The following table summarizes the changes in stockholders’ equity during the nine months ended January 31, 2018:
(Dollars in millions)
Class A Common Stock
 
Class B Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 AOCI 
Treasury Stock
 Total
Balance at April 30, 2017$25
 $43
 $65
 $4,470
 $(390) $(2,843) $1,370
Retirement of treasury stock  (10) (8) (2,684)   2,702
 —
Net income      607
     607
Net other comprehensive income (loss)        8
   8
Cash dividends      (773)     (773)
Acquisition of treasury stock          (1) (1)
Stock-based compensation expense    14
       14
Stock issued under compensation plans          26
 26
Loss on issuance of treasury stock issued under compensation plans    (50) 
     (50)
Stock split—
 14
 (14)       —
Balance at January 31, 2018$25
 $47
 $7
 $1,620
 $(382) $(116) $1,201

Common Stock. On May 24, 2017, we retired 67,000,000 shares of Class B common stock previously held as treasury shares. This retirement reduced the number of issued shares of Class B common stock by that same amount.



On January 23, 2018, our Board of Directors approved a stock split, effected in the form of a stock dividend. 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.

The following table shows the effects of the treasury stock retirement and stock split (as if the additional shares issued thereunder were issued on January 31, 2018) on the number of issued common shares:
 Issued Common Shares
(Shares in thousands)Class A Class B Total
Balance at April 30, 2017170,000
 284,627
 454,627
Retirement of treasury stock—
 (67,000) (67,000)
Stock split—
 96,905
 96,905
Balance at January 31, 2018170,000
 314,532
 484,532

Except for the pre-split share balances and activity included in the above table, all share and per share amounts reportedperiods presented in these financial statements and related notes are presented on a split-adjusted basis.

Dividends. The following table summarizes the cash dividends declared per share on our Class A and Class B common stock during the nine months ended January 31, 2018:statements.
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Declaration DateRecord DatePayable DateAmount per Share
May 24, 2017June 5, 2017July 3, 2017$0.1460
July 27, 2017September 7, 2017October 2, 2017$0.1460
November 16, 2017December 7, 2017January 2, 2018$0.1580
January 23, 2018March 5, 2018April 2, 2018$0.1580
January 23, 2018April 2, 2018April 23, 2018$1.0000

Accumulated Other Comprehensive Income. The following table summarizes the changes in each component of AOCI, net of tax, during the nine months ended January 31, 2018:

(Dollars in millions)
Currency Translation Adjustments
 
Cash Flow Hedge Adjustments
 
Postretirement Benefits Adjustments
 Total AOCI
Balance at April 30, 2017$(204) $11
 $(197) $(390)
Net other comprehensive income (loss)47
 (48) 9
 8
Balance at January 31, 2018$(157) $(37) $(188) $(382)




12.    13.    Other Comprehensive Income
The following tables presentshow the components of net other comprehensive income (loss):
Three Months EndedThree Months Ended
October 31, 2019October 31, 2020
(Dollars in millions)Pre-TaxTaxNetPre-TaxTaxNet
Currency translation adjustments:
Net gain (loss) on currency translation$6 $5 $11 $5 $(1)$4 
Reclassification to earnings0 0 0 0 0 0 
Other comprehensive income (loss), net6 5 11 5 (1)4 
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments(2)0 (2)14 (4)10 
Reclassification to earnings1
(6)1 (5)(5)1 (4)
Other comprehensive income (loss), net(8)1 (7)9 (3)6 
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost0 0 0 0 0 0 
Reclassification to earnings2
4 (1)3 7 (2)5 
Other comprehensive income (loss), net4 (1)3 7 (2)5 
Total other comprehensive income (loss), net$2 $5 $7 $21 $(6)$15 
Six Months EndedSix Months Ended
October 31, 2019October 31, 2020
(Dollars in millions)Pre-TaxTaxNetPre-TaxTaxNet
Currency translation adjustments:
Net gain (loss) on currency translation$(2)$(1)$(3)$58 $8 $66 
Reclassification to earnings0 0 0 0 0 0 
Other comprehensive income (loss), net(2)(1)(3)58 8 66 
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments13 (3)10 (35)8 (27)
Reclassification to earnings1
(10)2 (8)(16)4 (12)
Other comprehensive income (loss), net3 (1)2 (51)12 (39)
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost0 0 0 0 0 0 
Reclassification to earnings2
9 (2)7 17 (5)12 
Other comprehensive income (loss), net9 (2)7 17 (5)12 
Total other comprehensive income (loss), net$10 $(4)$6 $24 $15 $39 
 Three Months Ended Three Months Ended
 January 31, 2017 January 31, 2018
(Dollars in millions)Pre-Tax Tax Net Pre-Tax Tax Net
Currency translation adjustments:           
Net gain (loss) on currency translation$(27) $2
 $(25) $24
 $14
 $38
Reclassification to earnings—
 —
 —
 —
 —
 —
Other comprehensive income (loss), net(27) 2
 (25) 24
 14
 38
Cash flow hedge adjustments:           
Net gain (loss) on hedging instruments5
 (3) 2
 (51) 18
 (33)
Reclassification to earnings1
(15) 6
 (9) 1
 —
 1
Other comprehensive income (loss), net(10) 3
 (7) (50) 18
 (32)
Postretirement benefits adjustments:           
Net actuarial gain (loss) and prior service cost2
 (1) 1
 —
 —
 —
Reclassification to earnings2
7
 (2) 5
 5
 (2) 3
Other comprehensive income (loss), net9
 (3) 6
 5
 (2) 3
            
Total other comprehensive income (loss), net$(28) $2
 $(26) $(21) $30
 $9
            
            
 Nine Months Ended Nine Months Ended
 January 31, 2017 January 31, 2018
(Dollars in millions)Pre-Tax Tax Net Pre-Tax Tax Net
Currency translation adjustments:           
Net gain (loss) on currency translation$(99) $(11) $(110) $27
 $20
 $47
Reclassification to earnings—
 —
 —
 —
 —
 —
Other comprehensive income (loss), net(99) (11) (110) 27
 20
 47
Cash flow hedge adjustments:           
Net gain (loss) on hedging instruments57
 (23) 34
 (80) 29
 (51)
Reclassification to earnings1
(34) 14
 (20) 4
 (1) 3
Other comprehensive income (loss), net23
 (9) 14
 (76) 28
 (48)
Postretirement benefits adjustments:           
Net actuarial gain (loss) and prior service cost2
 (1) 1
 —
 —
 —
Reclassification to earnings2
19
 (7) 12
 15
 (6) 9
Other comprehensive income (loss), net21
 (8) 13
 15
 (6) 9
            
Total other comprehensive income (loss), net$(55) $(28) $(83) $(34) $42
 $8
1Pre-tax amount for each period is classified as sales in the accompanying condensed consolidated statements of operations.
2Pre-taxFor the six months ended October 31, 2020, $4 of the pre-tax amount of $17 is classified in gain on sale of business in the accompanying condensed consolidated statements of operations. Otherwise, the pre-tax amount for each period is classified as non-operating postretirement expense.


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14.    Gain on Sale of Business
On July 31, 2020, we sold the Early Times, Canadian Mist, and Collingwood brands for $177 million in cash. The sale reflects the continued evolution of our portfolio strategy to focus on premium spirits brands. The total book value of the related business assets included in the sale was $50 million, consisting largely of inventories, the Canadian Mist production assets, and intellectual property. As a componentresult of pension and other postretirement benefit expense (as shown in Note 7, except for amounts related to non-U.S. benefit plans, about which no information is presented in Note 7 due to immateriality).the sale, we recognized a pre-tax gain of $127 million during the first quarter of fiscal 2021.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with both our unaudited condensed consolidated financial statementsCondensed Consolidated Financial Statements and related notes included in Part I, Item 1 of this Quarterly Report and our 2017Annual Report on Form 10-K.10-K for the fiscal year ended April 30, 2020, as amended (2020 Form 10-K). Note that the results of operations for the ninesix months endedJanuary October 31, 2018 do2020, are not necessarily indicate what our operating results for the full fiscal year will be.indicative of future or annual results. In this Item, “we,” “us,” “our,” “Brown-Forman,” and “our”the “Company” refer to Brown-Forman Corporation.Corporation and its consolidated subsidiaries, collectively.



Presentation Basis
Non-GAAP Financial Measures
We use certain financial measures in this report that are not measures of financial performance under GAAP.U.S. generally accepted accounting principles (GAAP). These non-GAAP measures, defined below, should be viewed as supplements to (not substitutes for) our results of operations and other measures reported under GAAP. TheOther companies may not define or calculate these non-GAAP measures we use in this report may not be defined and calculated by other companies in the same manner.way.
“Underlying change” in income statement measures.measures of statements of operations.We present changes in certain income statement measures, or line items, of the statements of operations that are adjusted to an “underlying” basis. We use “underlying change” for the following income statement measures:measures of the statements of operations: (a) underlying net sales,sales; (b) underlying cost of sales,sales; (c) underlying gross profit,profit; (d) underlying advertising expenses,expenses; (e) underlying selling, general, and administrative (SG&A) expenses,expenses; (f) underlying other expense (income), net; (g) underlying operating expenses1,; and (h) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) acquisitions and divestitures, (b) foreign exchange, and (c) estimated net changeschange in distributor inventories. We explain these adjustments below.
•“Acquisitions and divestitures.” This adjustment removes (a) the gain or loss recognized on sale of divested brands, (b) any non-recurring effects related to our acquisitions and divestitures (e.g., transaction gains or losses, transaction costs and integration costs), and (b)(c) the effects of operating activity related to acquired and divested brands for periods that are not comparable on a year-over-year basisyear over year (non-comparable periods). By excluding non-comparable periods, we therefore include the effects of acquired and divested brands only to the extent that results are comparable on a year-over-year basis.
year over year.
In fiscal 2016,2020, we acquired 100% of the voting interests in The 86 Company, which owns Fords Gin. During the first quarter of fiscal 2021, we sold our Southern ComfortEarly Times, Canadian Mist, and TuacaCollingwood brands and related assets, to Sazerac Company, Inc. and entered intowhich resulted in a related transition services agreement (TSA). During fiscal 2017, we completed our obligations under the TSA. This adjustment removes the net sales, costpre-tax gain of sales, and operating expenses recognized in fiscal 2017 pursuant$127 million. See Note 14 to the TSA related to (a) contract bottling services and (b) distribution services in certain markets.
On June 1, 2016, we acquired The BenRiach Distillery Company Limited (BenRiach).Condensed Consolidated Financial Statements for details. This adjustment removes (a) transaction and integration costs related to the acquisition and divestiture, (b) operating activity for the acquisitionThe 86 Company for the non-comparable period. For bothperiod, which is activity in the first quarter of fiscal 20172021, (c) the gain on sale of Early Times, Canadian Mist, and 2018,Collingwood, and (d) operating activity for the non-comparable period for Early Times, Canadian Mist, and Collingwood, which is activity in the month of May.second quarter for both fiscal 2020 and fiscal 2021. We believe that these adjustments allow for us to better understand our underlying results on a comparable basis.
•“Foreign exchange.” We calculate the percentage change in our income statementcertain line items of the statements of operations in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current yearcurrent-year results at prior-year rates and remove transactional and hedging foreign exchange gains and losses from the currentcurrent- and prior-year periods.
•“Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor inventories on changes in our income statementcertain line items.items of the statements of operations. For each period compared, we use depletionvolume information provided byfrom our distributors to estimate the effect of distributor inventory changes in certain line items of the statements of operations. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in certain line items of the statements of operations and allows us to understand better our income statement line items.underlying results and trends.


1Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
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We use the non-GAAP measures “underlying change” for the following reasons:to: (a) to understand our performance from period to period on a consistent basis; (b) to compare our performance to that of our competitors; (c) in connection withcalculate components of management incentive compensation calculations;compensation; (d) in our planningplan and forecasting processes;forecast; and (e) in communications concerningcommunicate our financial performance withto the board of directors, stockholders, and the investment analysts.community. We provide reconciliations of the “underlying changeschange” in income statement measures”certain line items of the statements of operations to their nearest GAAP measures in the tables below under “Results of Operations - Year-Over-Year Period Comparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

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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.
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•“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
22


•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

23

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.
◦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.
◦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%.
◦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.

24

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 sales272
 291
 7% 8% 758
 825
 9% 8%
Gross profit536
 587
 9% 5% 1,541
 1,690
 10% 7%
Advertising102
 114
 11% 6% 291
 314
 8% 5%
SG&A162
 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 profit66.4% 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 income33.8% 34.6% 0.8 pp   33.8% 35.5% 1.7 pp  
Interest expense, net$15
 15
 —%   $42
 45
 7%  
Effective tax rate29.4% 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)20192020Reported Change
Underlying Change1
20192020Reported Change
Underlying Change1
Net sales$989 $985 — %4 %$1,755 $1,738 (1 %)4 %
Cost of sales370 404 10 %10 %638 692 9 %11 %
Gross profit619 581 (6 %)— %1,117 1,046 (6 %)(1 %)
Advertising112 95 (15 %)(15 %)204 157 (23 %)(23 %)
SG&A158 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 income352 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 profit62.7 %59.0 %(3.7)pp63.7 %60.2 %(3.5)pp
Operating income35.6 %33.5 %(2.1)pp34.2 %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 rate15.0 %22.1 %7.1 pp16.3 %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%.

25
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, 2018Net Sales
Geographic areaReportedAcquisitions & DivestituresForeign ExchangeNet Chg in Est. Distributor Inventories 
Underlying2
United States7%—%—%(2%)
5%
Europe15%—%(6%)1%
9%
United Kingdom10%—%(3%)—%
6%
Germany16%—%(5%)—%
11%
France10%—%(5%)—%
5%
Poland25%—%(15%)—%
10%
Russia62%—%(4%)(22%)
37%
Rest of Europe12%—%(6%)3%
9%
Australia10%1%(2%)—%
10%
Other geographies8%—%(1%)1%
9%
Mexico13%—%(3%)1%
10%
Japan(13%)—%2%4%
(7%)
Canada4%—%1%(2%)
2%
Remaining geographies3
11%—%—%2%
12%
Travel Retail3
17%—%1%(7%)
11%
Other non-branded3
(2%)15%—%—%
13%
Total9%—%(2%)(1%)
7%
Note: Totals may differ due to rounding      
Top Markets1
Six months ended October 31, 2020Net Sales % Change vs. 2020
Geographic area2
ReportedAcquisitions and DivestituresForeign ExchangeEst. Net Chg in Distributor Inventories
Underlying3
United States3 %— %— %6 %9 %
Developed International10 %— %(4 %)4 %10 %
United Kingdom11 %— %(8 %)2 %4 %
Germany26 %— %(4 %)— %23 %
Australia27 %— %(2 %)— %25 %
France17 %— %(4 %)— %13 %
Rest of Developed International(14 %)— %(1 %)9 %(6 %)
Emerging(13 %)— %9 %4 %— %
Mexico(3 %)— %14 %— %11 %
Poland13 %— %(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.
3
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.
◦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.
◦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.

◦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.
◦In Poland, underlying net sales growth was fueled by volume gains of JDTW, which has experienced strong consumer takeaway trends.
◦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.
◦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.
26

◦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.
27

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, 2018Volumes Net Sales
Brand family / brand
9L Depletions2
 ReportedForeign ExchangeNet Chg in Est. Distributor Inventories 
Underlying1
Jack Daniel’s Family8% 10%(2%)(1%) 7%
Jack Daniel’s Tennessee Whiskey6% 7%(2%)—% 5%
Jack Daniel’s Tennessee Honey9% 11%(2%)—% 9%
Jack Daniel’s RTDs/RTP2
11% 17%(3%)—% 14%
Gentleman Jack9% 11%(1%)(1%) 9%
Jack Daniel’s Tennessee Fire14% 22%(1%)(6%) 15%
Other Jack Daniel’s whiskey brands2
22% 29%(1%)(14%) 14%
Woodford Reserve23% 25%—%(3%) 22%
Finlandia3% 14%(6%)(1%) 7%
el Jimador7% 13%—%(4%) 9%
Herradura15% 19%(2%)2% 20%
Note: Totals may differ due to rounding       
Major Brands
Six months ended October 31, 2020VolumesNet Sales % Change vs 2020
Product category / brand family / brand1
9L Depletions1
ReportedAcquisitions and DivestituresForeign ExchangeEst. Net Chg in Distributor Inventories
Underlying2
Whiskey13 %(1 %)— %— %5 %4 %
Jack Daniel’s family of brands13 %(3 %)— %— %5 %2 %
JDTW(6 %)(12 %)— %1 %5 %(7 %)
Jack Daniel’s RTD/RTP36 %37 %— %— %(4 %)34 %
JDTH10 %11 %— %— %— %11 %
Gentleman Jack16 %13 %— %— %2 %16 %
JDTF(1 %)(5 %)— %1 %2 %(2 %)
JDTA143 %(17 %)— %(2 %)115 %96 %
Other Jack Daniel’s whiskey brands(6 %)(8 %)— %(1 %)12 %3 %
Woodford Reserve17 %14 %— %— %5 %19 %
Tequila36 %5 %— %6 %1 %13 %
el Jimador(2 %)4 %— %2 %2 %9 %
Herradura(15 %)(4 %)— %3 %— %(2 %)
Wine8 %15 %— %— %(3 %)11 %
Vodka (Finlandia)(19 %)(21 %)— %2 %(2 %)(20 %)
Rest of Portfolio(3 %)14 %(2 %)(12 %)(3 %)(2 %)
Non-branded and bulkNA(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.
2
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.
28

▪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:
◦
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.
◦
JDTH grew underlying net sales led by the United States, its largest market, Russia, France, and Travel Retail.
◦
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.
◦
Gentleman Jack grew underlying net sales led by volumetric gains in the United States, its largest market, and Travel Retail.
◦
Growth of JDTF was driven by higher volumes in the United States and Germany and the launch of the brand in Brazil and Chile.
◦
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.



Reported net
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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 313 Months6 Months
Change in reported net sales— %(1 %)
Foreign exchange1 %1 %
Estimated net change in distributor inventories3 %4 %
Change in underlying net sales4 %4 %
Change in underlying net sales attributed to:
Volume8 %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 Comparisons
Net Sales
Percentage change versus the prior year period ended January 313 Months 9 Months
Change in reported net sales9% 9%
Acquisitions and divestitures—% —%
Foreign exchange(4%) (2%)
Estimated net change in distributor inventories1% (1%)
Change in underlying net sales6% 7%
    
Change in underlying net sales attributed to:   
Volume3% 5%
Net price/mix3% 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 313 Months6 Months
Change in reported cost of sales10 %9 %
Acquisitions and divestitures(1 %)— %
Foreign exchange(1 %)— %
Estimated net change in distributor inventories2 %3 %
Change in underlying cost of sales10 %11 %
Change in underlying cost of sales attributed to:
Volume8 %15 %
Cost/mix2 %(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 313 Months 9 Months
Change in reported cost of sales7% 9%
Acquisitions and divestitures—% 2%
Foreign exchange—% (2%)
Estimated net change in distributor inventories1% (1%)
Change in underlying cost of sales8% 8%
    
Change in underlying cost of sales attributed to:   
Volume3% 5%
Cost/mix5% 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).
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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 313 Months6 Months
Change in reported gross profit(6 %)(6 %)
Foreign exchange1 %1 %
Estimated net change in distributor inventories4 %5 %
Change in underlying gross profit— %(1 %)
Note: Results may differ due to rounding
Gross Margin
For the period ended October 313 months6 Months
Prior year gross margin62.7 %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 margin59.0 %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).
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Gross Profit
Percentage change versus the prior year period ended January 313 Months 9 Months
Change in reported gross profit9% 10%
Acquisitions and divestitures—% —%
Foreign exchange(5%) (2%)
Estimated net change in distributor inventories1% (1%)
Change in underlying gross profit5% 7%
Note: Totals may differ due to rounding
   
Operating Expenses
Percentage change versus the prior year period ended October 31
3 MonthsReportedAcquisitions and DivestituresForeign ExchangeUnderlying
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 313 months 9 Months
Prior year gross margin66.4% 67.0%
Price/mix0.7% 0.8%
Cost(1.5%) (0.9%)
Acquisitions and divestitures—% 0.3%
Foreign exchange1.2% —%
Change in gross margin0.4% 0.2%
Current year gross margin66.8% 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 MonthsReportedAcquisitions & DivestituresForeign Exchange Underlying
Advertising11%—%(5%) 6%
SG&A7%—%(3%) 4%
Other expense (income), net153%—%(123%) 30%
Total8%—%(3%) 4%
      
9 Months     
Advertising8%—%(2%) 5%
SG&A2%—%(1%) —%
Other expense (income), net(11%)(8%)25% 6%
Total4%—%(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 313 Months6 Months
Change in reported operating income(6 %)19 %
Acquisitions and divestitures1 %(20 %)
Foreign exchange4 %2 %
Estimated net change in distributor inventories8 %10 %
Change in underlying operating income6 %11 %
Note: Results may differ due to rounding
Operating Income
Percentage change versus the prior year period ended January 313 Months 9 Months
Change in reported operating income11% 15%
Acquisitions and divestitures—% —%
Foreign exchange(7%) (1%)
Estimated net change in distributor inventories2% (2%)
Change in underlying operating income5% 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.
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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 313 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.
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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 AverageSix Months Average
October 31,October 31,
(Dollars in millions)2019202020192020
Average commercial paper$310$357$323$358
Average interest rate2.28%0.41%2.42%0.63%
Average days to maturity at issuance3413633119
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.




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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
31.1
CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2
32
101The 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.
104Cover Page Interactive Data File in Inline XBRL format (included in Exhibit 101).






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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, 2020By:/s/ Jane C. Morreau
Jane C. Morreau
Executive Vice President

and Chief Financial Officer
(On behalf of the Registrant and

as Principal Financial Officer)


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