See notes to the condensed consolidated financial statements.
See notes to the condensed consolidated financial statements.
See notes to the condensed consolidated financial statements.
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, “we,” “us,” “our,” “Brown-Forman,” and the “Company” refer to Brown-Forman 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 (SEC) 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). 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.
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, 2018 (20182019 (2019 Form 10-K). Except for adopting the new accounting standards discussed below, we prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 20182019 Form 10-K.
Recently adopted accounting standards.As of May 1, 2018,2019, we adopted the following Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB):Board:
| |
| • | ASU 2016-02: Leases. This update, codified along with various amendments as Accounting Standards Codification Topic 842 (ASC 842), replaces previous lease accounting guidance. Under ASC 842, 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. ASC 842 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. It also requires additional quantitative and qualitative disclosures about leasing arrangements. |
ASU 2014-09: Revenue from Contracts with Customers. This update, codified along with various amendments as Accounting Standards Codification Topic 606 (ASC 606), replaces previous revenue recognition guidance. The core principle ofWe adopted ASC 606 requires an entity to recognize revenue to depict the transfer of promised 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. ASC 606 also requires more financial statement disclosures than were required by previous revenue recognition standards. We applied this new guidance on a modified retrospective basis through a cumulative-effect adjustment that reduced retained earnings as of May 1, 2018, by $25 million (net of tax). See Note 2 for additional information about our revenues and the impact of adopting ASC 606.
ASU 2016-15: Classification of Certain Cash Receipts and Cash Payments. This new guidance addresses eight specific issues related to the classification of certain cash receipts and cash payments on the statement of cash flows. The impact of adopting the new guidance was limited to a change in our classification of cash payments for premiums on corporate-owned life insurance policies, which we previously reflected in operating activities. Under the new guidance, we classify those payments as investing activities. We retrospectively adjusted prior period cash flow statements to conform to the new classification. As a result, we reclassified payments of $4 million from operating activities to investing activities for the six months ended October 31, 2017.
ASU 2016-16: Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. This revised guidance 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. We applied the guidance on a modified retrospective basis through a cumulative-effect adjustment that increased retained earnings as of May 1, 2018, by $20 million.
ASU 2017-04: Simplifying the Test for Goodwill Impairment. This updated guidance eliminates the second step of the previous two-step quantitative test of goodwill for impairment. Under the new guidance, the quantitative test consists of a single step in which the carrying amount of the reporting unit is 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. The prospective adoption of the new standard had no impact on our consolidated financial statements.
ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This new guidance addresses 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. We applied the guidance retrospectively for the presentation in the income statement and prospectively for the capitalization of service cost. The retrospective application increased previously-reported operating income by $3 million and $5 million for the three and six months ended October 31, 2017, respectively. As the retrospective application merely reclassified amounts from operating income to non-operating expense, there was no effect on previously-reported net income or earnings per share.
New accounting standards to be adopted. The FASB has issued the ASUs described below that we are not required to adopt until May 1, 2019 (although early adoption is permitted). We are currently evaluating their potential impact on our consolidated financial statements.
ASU 2016-02: Leases. This update, codified along with various amendments as Accounting Standards Codification Topic 842 (ASC 842), replaces existing lease accounting guidance. Under ASC 842, 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. ASC 842 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. It also requires additional quantitative and qualitative disclosures about leasing arrangements.
We are continuing to assess the potential impact on our financial statements of adopting ASC 842. As we progress in our assessment, we are 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. Although we are unable to quantify the impact of adoption at this time, the amount of lease liabilities and right-of-use assets to be recognized on our balance sheet could be material. We do not currently expect adoption to have a material impact on our results of operations, stockholders’ equity, or cash flows.
We will adopt ASC 842 as of May 1, 2019, using a modified retrospective transition approach for leases existing at that date.the date of adoption. For the transition, we expect to electelected to use the package of practical expedients to not reassess (a) whether existing contracts are or contain leases, (b) the classification of existing leases, and (c) initial direct costs for existing leases.
ASU 2017-12: Targeted Improvements to Accounting for Hedging Activities. This new guidance is intended to better align hedge accounting with an entity’s risk management activities Upon adoption, we recorded lease liabilities and improve disclosures about hedges.right-of-use assets of $54 million. 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. 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. We haveadoption did not yet determined our plans for adoption, but currently do not expect to adopt this new guidance before the required adoption date.
ASU 2018-02: Reclassification of Certain Effects from Accumulated Other Comprehensive Income. This new guidance 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. 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. We have not yet determined our plans for adoption, but currently do not expect to adopt this new guidance before the required adoption date.
There are no other new accounting standards to be adopted that we currently believe might have a significantmaterial impact on our consolidated financial statements.
Reclassifications. We have reclassified some previously reported expense amounts related to certain marketing research and promotional agency costs to conform to the current year classification. These immaterial reclassifications between advertising expenses and selling, general, and administrative expenses had no impact on net income.
2. Net Sales
Effective May 1, 2018, we updated our policy for recognizing revenue (“net sales”) to reflect the adoption of ASC 606. We describe the updated policy below. Also, we show how the adoption impacted our financial statements and we present disaggregated net sales information in accordance with the new standard.
Revenue recognition policy. Our net sales predominantly reflect global sales of beverage alcohol consumer products. We sell these products under contracts with different types of customers, depending on the market. The customer is most often a distributor, wholesaler, or retailer.
Each contract typically includes a single performance obligation to transfer control of the products to the customer. Depending on the contract, control is transferred when the products are either shipped or delivered to the customer, at which point we recognize the transaction price for those products as net sales. The transaction price recognized at that point reflects our estimate of the consideration to be received in exchange for the products. The actual amount may ultimately differ due to the effect of various customer incentives and trade promotion activities. In making our estimates, we consider our historical experience and current expectations, as applicable. Adjustments recognized during the three and six months ended October 31, 2018, for changes in estimated transaction prices of products sold in prior periods were not material.
Net sales exclude taxes we collect from customers that are imposed by various governments on our sales, and are reduced by payments to customers unless made in exchange for distinct goods or services with fair values approximating the payments.
Net sales include any amounts we bill customers for shipping and handling activities related to the products. We recognize the cost of those activities in cost of sales during the same period in which we recognize the related net sales.
Sales returns, which are permitted only in limited situations, are not material.
Customer payment terms generally range from 30 to 90 days. There are no significant amounts of contract assets or liabilities.
Impact of adoption. We adopted ASC 606 using the modified retrospective method. As a result, we recorded an adjustment that decreased retained earnings as of May 1, 2018, by $25 million (net of tax). The adjustment reflects the cumulative effect on that date of applying our updated revenue recognition policy, under which we recognize the cost of certain customer incentives earlier than we did before adopting ASC 606. Although we do not expect this change in timing to have a significant impact on a full-year basis, we do anticipate some change in the pattern of recognition among fiscal quarters. Additionally, some payments to customers that we classified as expenses before adopting the new standard are classified as reductions of net sales under our new policy.
The following table shows how the adoption of ASC 606 impacted our consolidated statementresults of operations, stockholders’ equity, or cash flows. See Note 13 for the three months ended October 31, 2018: |
| | | | | | | | | | | |
| | Three Months Ended October 31, 2018 |
| | Under Prior | | As Reported Under | | Effect of |
| (Dollars in millions, except per share amounts) | Guidance | | ASC 606 | | Adoption |
| Sales | $ | 1,169 |
| | $ | 1,161 |
| | $ | (8 | ) |
| Excise taxes | 251 |
| | 251 |
| | — |
|
| Net sales | 918 |
| | 910 |
| | (8 | ) |
| Cost of sales | 320 |
| | 320 |
| | — |
|
| Gross profit | 598 |
| | 590 |
| | (8 | ) |
| Advertising expenses | 107 |
| | 102 |
| | (5 | ) |
| Selling, general, and administrative expenses | 162 |
| | 161 |
| | (1 | ) |
| Other expense (income), net | (5 | ) | | (5 | ) | | — |
|
| Operating income | 334 |
| | 332 |
| | (2 | ) |
| Non-operating postretirement expense | 2 |
| | 2 |
| | — |
|
| Interest income | (2 | ) | | (2 | ) | | — |
|
| Interest expense | 22 |
| | 22 |
| | — |
|
| Income before income taxes | 312 |
| | 310 |
| | (2 | ) |
| Income taxes | 61 |
| | 61 |
| | — |
|
| Net income | $ | 251 |
| | $ | 249 |
| | $ | (2 | ) |
| Earnings per share: | | | | | |
| Basic | $ | 0.52 |
| | $ | 0.52 |
| | $ | — |
|
| Diluted | $ | 0.52 |
| | $ | 0.52 |
| | $ | — |
|
The following table shows how the adoption of ASC 606 impactedadditional information about our consolidated statement of operations for the six months ended October 31, 2018:leases.
|
| | | | | | | | | | | |
| | Six Months Ended October 31, 2018 |
| | Under Prior | | As Reported Under | | Effect of |
| (Dollars in millions, except per share amounts) | Guidance | | ASC 606 | | Adoption |
| Sales | $ | 2,166 |
| | $ | 2,148 |
| | $ | (18 | ) |
| Excise taxes | 472 |
| | 472 |
| | — |
|
| Net sales | 1,694 |
| | 1,676 |
| | (18 | ) |
| Cost of sales | 563 |
| | 563 |
| | — |
|
| Gross profit | 1,131 |
| | 1,113 |
| | (18 | ) |
| Advertising expenses | 208 |
| | 200 |
| | (8 | ) |
| Selling, general, and administrative expenses | 331 |
| | 329 |
| | (2 | ) |
| Other expense (income), net | (12 | ) | | (12 | ) | | — |
|
| Operating income | 604 |
| | 596 |
| | (8 | ) |
| Non-operating postretirement expense | 4 |
| | 4 |
| | — |
|
| Interest income | (4 | ) | | (4 | ) | | — |
|
| Interest expense | 44 |
| | 44 |
| | — |
|
| Income before income taxes | 560 |
| | 552 |
| | (8 | ) |
| Income taxes | 105 |
| | 103 |
| | (2 | ) |
| Net income | $ | 455 |
| | $ | 449 |
| | $ | (6 | ) |
| Earnings per share: | | | | | |
| Basic | $ | 0.94 |
| | $ | 0.93 |
| | $ | (0.01 | ) |
| Diluted | $ | 0.94 |
| | $ | 0.93 |
| | $ | (0.01 | ) |
The following table shows how the adoption of ASC 606 impacted our consolidated balance sheet as of October 31, 2018: |
| | | | | | | | | | | |
| | As of October 31, 2018 |
| | Under Prior | | As Reported Under | | Effect of |
| (Dollars in millions) | Guidance | | ASC 606 | | Adoption |
| Assets | | | | |
|
|
| Other current assets | $ | 306 |
| | $ | 305 |
| | $ | (1 | ) |
| Deferred tax assets | 15 |
| | 16 |
| | 1 |
|
| Total assets | 5,149 |
| | 5,149 |
| | — |
|
| | | | | | |
| Liabilities | | | | |
|
|
| Accounts payable and accrued expenses | $ | 580 |
| | $ | 620 |
| | $ | 40 |
|
| Deferred tax liabilities | 122 |
| | 113 |
| | (9 | ) |
| Total liabilities | 3,621 |
| | 3,652 |
| | 31 |
|
| | | | | |
|
|
| Stockholders’ Equity | | | | |
|
|
| Retained earnings | $ | 2,047 |
| | $ | 2,016 |
| | $ | (31 | ) |
| Total stockholders’ equity | 1,528 |
| | 1,497 |
| | (31 | ) |
Disaggregated revenues.
The following table shows our net sales by geography: |
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | October 31, | | October 31, |
| (Dollars in millions) | 2017 | | 2018 | | 2017 | | 2018 |
| United States | $ | 438 |
| | $ | 447 |
| | $ | 793 |
| | $ | 804 |
|
Developed International1 | 248 |
| | 234 |
| | 441 |
| | 449 |
|
Emerging2 | 159 |
| | 164 |
| | 282 |
| | 295 |
|
Travel Retail3 | 44 |
| | 38 |
| | 74 |
| | 76 |
|
Non-branded and bulk4 | 25 |
| | 27 |
| | 47 |
| | 52 |
|
| Total | $ | 914 |
| | $ | 910 |
| | $ | 1,637 |
| | $ | 1,676 |
|
|
| |
| • | ASU 2018-02: Reclassification of Certain Effects from Accumulated Other Comprehensive Income (AOCI). This new guidance allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted by the U.S. government in December 2017. We elected to make the reclassification, which increased retained earnings and decreased AOCI as of May 1, 2019, by $43 million. |
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, Australia, and Germany.
2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico and Poland.
3Represents net sales of branded products to global duty-free customers, 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 Ended | | Six Months Ended |
| | October 31, | | October 31, |
| (Dollars in millions) | 2017 | | 2018 | | 2017 | | 2018 |
Whiskey1 | $ | 713 |
| | $ | 706 |
| | $ | 1,270 |
| | $ | 1,308 |
|
Tequila2 | 64 |
| | 70 |
| | 122 |
| | 132 |
|
Vodka3 | 35 |
| | 34 |
| | 66 |
| | 60 |
|
Wine4 | 63 |
| | 62 |
| | 105 |
| | 102 |
|
| Rest of portfolio | 14 |
| | 11 |
| | 27 |
| | 22 |
|
Non-branded and bulk5 | 25 |
| | 27 |
| | 47 |
| | 52 |
|
| Total | $ | 914 |
| | $ | 910 |
| | $ | 1,637 |
| | $ | 1,676 |
|
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, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers' Craft.
2Includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
3Includes Finlandia.
4Includes Korbel Champagne and Sonoma-Cutrer wines.
5Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
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 fiscal quarter in which the related event or a change in judgment occurs. The effective tax rate of 18.6% for the six months ended October 31, 2018, is lower than the expected tax rate of 21.4% on ordinary income for the full fiscal year, primarily due to (a) the impact of discrete items, including true-ups to prior year tax returns, (b) the impact of the current year net adjustment to the provisional repatriation U.S. tax charge that was made during fiscal 2018 (discussed below), and (c) the excess tax benefits related to stock-based compensation. 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 (Tax Act). The Tax Act significantly revised 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 was phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year ended April 30, 2018, and 21% for our current and subsequent fiscal years. For the six months ended October 31, 2018, the impact of reducing the U.S. statutory federal rate from 35% (the pre-Tax Act rate) to 21% resulted in a tax benefit of approximately $60 million.
There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposed 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 caused 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 year ended April 30, 2018, comprised of a provisional repatriation U.S. tax charge of $91 million and a provisional net deferred tax benefit of $48 million. In the six months ended October 31, 2018, we recorded a benefit of $4 million as an adjustment to the provisional repatriation tax.
Historically, we have asserted that the undistributed earnings of our foreign subsidiaries are reinvested indefinitely outside the United States. Therefore, no income taxes have been provided for any outside basis differences inherent in these subsidiaries other than those subject to the one-time repatriation tax. As of October 31, 2018, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for one of those foreign subsidiaries (but not for its other outside basis differences). We intend to repatriate approximately $120 million of cash to the United States from this subsidiary during the fiscal quarter ending January 31, 2019. No incremental taxes are due on this distribution of cash beyond the repatriation tax recorded in fiscal year 2018. We have not changed the indefinite reinvestment assertion for
undistributed earnings or other outside basis differences for any of the other foreign subsidiaries. We will continue to evaluate our future cash deployment and may change our indefinite reinvestment assertion in future periods.
The Tax Act also established new tax laws that impact our financial statements beginning in the current fiscal year. These new laws include, but are not limited to (a) Global Intangible Low-Tax Income (GILTI), a new provision for tax on low-tax foreign earnings; (b) Base Erosion Anti-abuse Tax (BEAT), a new minimum tax; (c) Foreign-Derived Intangible Income (FDII), a new provision for deductions related to foreign-derived intangibles; (d) repeal of the domestic production activity deduction; and (e) limitations on certain executive compensation. For the six months ended October 31, 2018, the net impact of these provisions was approximately $7 million of additional tax.
As noted, certain income earned by foreign subsidiaries must be included in U.S. taxable income under the GILTI provisions. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to recognize these taxes as a current period expense when incurred.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the current 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 we have used to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign currency exchange rates. The SEC has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of October 31, 2018, the amounts recorded for the Tax Act remain provisional for the one-time repatriation tax and the adjustment to our U.S. deferred tax assets and liabilities. We will finalize and record any additional adjustments within the allowed measurement period.
4. 2. 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 Ended |
| | July 31, |
| (Dollars in millions, except per share amounts) | 2018 | | 2019 |
| Net income available to common stockholders | $ | 200 |
| | $ | 186 |
|
| | | | |
| Share data (in thousands): | | | |
| Basic average common shares outstanding | 480,964 |
| | 477,369 |
|
| Dilutive effect of stock-based awards | 3,477 |
| | 2,719 |
|
| Diluted average common shares outstanding | 484,441 |
| | 480,088 |
|
| | | | |
| Basic earnings per share | $ | 0.42 |
| | $ | 0.39 |
|
| Diluted earnings per share | $ | 0.41 |
| | $ | 0.39 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | October 31, | | October 31, |
| (Dollars in millions, except per share amounts) | 2017 | | 2018 | | 2017 | | 2018 |
| Net income available to common stockholders | $ | 239 |
| | $ | 249 |
| | $ | 417 |
| | $ | 449 |
|
| | | | | | | | |
| Share data (in thousands): | | | | | | | |
| Basic average common shares outstanding | 480,150 |
| | 480,436 |
| | 480,095 |
| | 480,647 |
|
| Dilutive effect of stock-based awards | 3,134 |
| | 3,155 |
| | 3,035 |
| | 3,316 |
|
| Diluted average common shares outstanding | 483,284 |
| | 483,591 |
| | 483,130 |
| | 483,963 |
|
| | | | | | | | |
| Basic earnings per share | $ | 0.50 |
| | $ | 0.52 |
| | $ | 0.87 |
| | $ | 0.93 |
|
| Diluted earnings per share | $ | 0.49 |
| | $ | 0.52 |
| | $ | 0.86 |
| | $ | 0.93 |
|
We excluded common stock-based awards for approximately 1,501,000100,000 shares and 347,000362,000 shares from the calculation of diluted earnings per share for the three months ended OctoberJuly 31, 20172018 and 2018, respectively. We excluded common stock-based awards for approximately 1,610,000 shares and 595,000 shares from the calculation of diluted earnings per share for the six months ended October 31, 2017 and 2018,2019, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.
5. 3. 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 $290$303 million higher than reported as of April 30, 2018,2019, and $298$306 million higher than reported as
of OctoberJuly 31, 2018.2019. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.
6. 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 sixthree months ended OctoberJuly 31, 2018:2019:
|
| | | | | | | |
| (Dollars in millions) | Goodwill | | Other Intangible Assets |
| Balance at April 30, 2019 | $ | 753 |
| | $ | 645 |
|
| Acquisition (Note 15) | 11 |
| | 12 |
|
| Foreign currency translation adjustment | (10 | ) | | (3 | ) |
| Balance at July 31, 2019 | $ | 754 |
| | $ | 654 |
|
|
| | | | | | | |
| (Dollars in millions) | Goodwill | | Other Intangible Assets |
| Balance at April 30, 2018 | $ | 763 |
| | $ | 670 |
|
| Foreign currency translation adjustment | (13 | ) | | (22 | ) |
| Balance at October 31, 2018 | $ | 750 |
| | $ | 648 |
|
Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.
7. 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 OctoberJuly 31, 2018.2019.
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 $10 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant.
As of OctoberJuly 31, 2018,2019, our actual exposure under the guaranty of the importer’s obligation iswas approximately $7$5 million. We also have accounts receivable from that importer of approximately $11$8 million at OctoberJuly 31, 2018,2019, 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.
8. 6. Debt
Our long-term debt (net of unamortized discount and issuance costs) consists of:
|
| | | | | | | |
| (Principal and carrying amounts in millions) | April 30,
2019 | | July 31,
2019 |
| 2.25% senior notes, $250 principal amount, due January 15, 2023 | $ | 249 |
| | $ | 249 |
|
| 3.50% senior notes, $300 principal amount, due April 15, 2025 | 297 |
| | 297 |
|
| 1.20% senior notes, €300 principal amount, due July 7, 2026 | 333 |
| | 332 |
|
| 2.60% senior notes, £300 principal amount, due July 7, 2028 | 383 |
| | 361 |
|
| 4.00% senior notes, $300 principal amount, due April 15, 2038 | 293 |
| | 293 |
|
| 3.75% senior notes, $250 principal amount, due January 15, 2043 | 248 |
| | 248 |
|
| 4.50% senior notes, $500 principal amount, due July 15, 2045 | 487 |
| | 487 |
|
| | $ | 2,290 |
| | $ | 2,267 |
|
Our short-term borrowings consist of:
|
| | | |
| (Dollars in millions) | April 30,
2019 | | July 31,
2019 |
| Commercial paper | $150 | | $220 |
| Average interest rate | 2.60% | | 2.45% |
| Average remaining days to maturity | 18 | | 27 |
7. Stockholders’ Equity
The following table shows the changes in stockholders’ equity during the three months ended July 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, 2018 | $ | 25 |
| | $ | 47 |
| | $ | 4 |
| | $ | 1,730 |
| | $ | (378 | ) | | $ | (112 | ) | | $ | 1,316 |
|
| Cumulative effect of changes in accounting standards | | | | | | | (5 | ) | | | | | | (5 | ) |
| Net income | | | | | | | 200 |
| | | | | | 200 |
|
| Net other comprehensive income (loss) | | | | | | | | | 14 |
| | | | 14 |
|
| Declaration of cash dividends | | | | | | | (152 | ) | | | | | | (152 | ) |
| Acquisition of treasury stock | | | | | | | | | | | (6 | ) | | (6 | ) |
| Stock-based compensation expense | | | | | 5 |
| | | | | | | | 5 |
|
| Stock issued under compensation plans | | | | | | | | | | | 9 |
| | 9 |
|
| Loss on issuance of treasury stock issued under compensation plans | | | | | (7 | ) | | (6 | ) | | | | | | (13 | ) |
| Balance at July 31, 2018 | $ | 25 |
| | $ | 47 |
| | $ | 2 |
| | $ | 1,767 |
| | $ | (364 | ) | | $ | (109 | ) | | $ | 1,368 |
|
The following table shows the changes in stockholders’ equity during the three months ended July 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 |
| | $ | — |
| | $ | 2,238 |
| | $ | (363 | ) | | $ | (300 | ) | | $ | 1,647 |
|
| Adoption of ASU 2018-02 (Note 1) | | | | | | | 43 |
| | (43 | ) | | | | — |
|
| Net income | | | | | | | 186 |
| | | | | | 186 |
|
| Net other comprehensive income (loss) | | | | | | | | | (1 | ) | | | | (1 | ) |
| Declaration of cash dividends | | | | | | | (158 | ) | | | | | | (158 | ) |
| Acquisition of treasury stock | | | | | | | | | | | (1 | ) | | (1 | ) |
| Stock-based compensation expense | | | | | 3 |
| | | | | | | | 3 |
|
| Stock issued under compensation plans | | | | | | | | | | | 16 |
| | 16 |
|
| Loss on issuance of treasury stock issued under compensation plans | | | | | (2 | ) | | (27 | ) | | | | | | (29 | ) |
| Balance at July 31, 2019 | $ | 25 |
| | $ | 47 |
| | $ | 1 |
| | $ | 2,282 |
| | $ | (407 | ) | | $ | (285 | ) | | $ | 1,663 |
|
The following table shows the change in each component of AOCI, net of tax, during the three months ended July 31, 2019:
|
| | | | | | | | | | | | | | | |
| (Dollars in millions) | Currency Translation Adjustments | | Cash Flow Hedge Adjustments | | Postretirement Benefits Adjustments | | Total AOCI |
| Balance at April 30, 2019 | $ | (207 | ) | | $ | 31 |
| | $ | (187 | ) | | $ | (363 | ) |
| Adoption of ASU 2018-02 (Note 1) | (1 | ) | | (1 | ) | | (41 | ) | | (43 | ) |
| Net other comprehensive income (loss) | (13 | ) | | 9 |
| | 3 |
| | (1 | ) |
| Balance at July 31, 2019 | $ | (221 | ) | | $ | 39 |
| | $ | (225 | ) | | $ | (407 | ) |
The following table shows the cash dividends declared per share on our Class A and Class B common stock during the three months ended July 31, 2019:
|
| | | | | | |
| Declaration Date | | Record Date | | Payable Date | | Amount per Share |
May 23, 2019 | | June 6, 2019 | | July 1, 2019 | | $0.166 |
July 25, 2019 | | September 6, 2019 | | October 1, 2019 | | $0.166 |
|
| | | | | | | |
| (Principal and carrying amounts in millions) | April 30,
2018 | | October 31,
2018 |
| 2.25% senior notes, $250 principal amount, due January 15, 2023 | $ | 248 |
| | $ | 248 |
|
| 3.50% senior notes, $300 principal amount, due April 15, 2025 | 296 |
| | 296 |
|
| 1.20% senior notes, €300 principal amount, due July 7, 2026 | 361 |
| | 338 |
|
| 2.60% senior notes, £300 principal amount, due July 7, 2028 | 408 |
| | 377 |
|
| 4.00% senior notes, $300 principal amount, due April 15, 2038 | 293 |
| | 293 |
|
| 3.75% senior notes, $250 principal amount, due January 15, 2043 | 248 |
| | 248 |
|
| 4.50% senior notes, $500 principal amount, due July 15, 2045 | 487 |
| | 488 |
|
| | $ | 2,341 |
| | $ | 2,288 |
|
8. Net Sales
The following table shows our net sales by geography: |
| | | | | | | |
| | Three Months Ended |
| | July 31, |
| (Dollars in millions) | 2018 | | 2019 |
| United States | $ | 354 |
| | $ | 374 |
|
Developed International1 | 215 |
| | 205 |
|
Emerging2 | 131 |
| | 133 |
|
Travel Retail3 | 38 |
| | 32 |
|
Non-branded and bulk4 | 28 |
| | 22 |
|
| Total | $ | 766 |
| | $ | 766 |
|
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, Australia, Germany, France, and Japan.
2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, Russia, and Brazil.
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 Ended |
| | July 31, |
| (Dollars in millions) | 2018 | | 2019 |
Whiskey1 | $ | 597 |
| | $ | 600 |
|
Tequila2 | 62 |
| | 68 |
|
Vodka3 | 28 |
| | 26 |
|
Wine4 | 40 |
| | 39 |
|
| Rest of portfolio | 11 |
| | 11 |
|
Non-branded and bulk5 | 28 |
| | 22 |
|
| Total | $ | 766 |
| | $ | 766 |
|
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, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers’ Craft.
2Includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
3Includes Finlandia.
4Includes Korbel Champagne and Sonoma-Cutrer wines.
5Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
9. Pension and Other Postretirement Benefits
The following table shows the components of the net cost of pension and other postretirement benefits recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.
|
| | | | | | | |
| | Three Months Ended |
| | July 31, |
| (Dollars in millions) | 2018 | | 2019 |
Pension Benefits: | | | |
| Service cost | $ | 6 |
| | $ | 6 |
|
| Interest cost | 9 |
| | 8 |
|
| Expected return on plan assets | (12 | ) | | (12 | ) |
| Amortization of net actuarial loss | 5 |
| | 5 |
|
| Net cost | $ | 8 |
| | $ | 7 |
|
| | | | |
Other Postretirement Benefits: | | | |
| Interest cost | $ | 1 |
| | $ | 1 |
|
| Amortization of prior service cost (credit) | (1 | ) | | (1 | ) |
| Net cost | $ | — |
| | $ | — |
|
10. Income Taxes
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 18.2% for the three months ended July 31, 2019, is lower than the expected tax rate of 21.0% on ordinary income for the full fiscal year primarily due to (a) excess tax benefits related to stock-based compensation and (b) the impact of other discrete items. Our expected tax rate includes current fiscal year additions for existing tax contingency items.
Historically, we have asserted that the undistributed earnings of our foreign subsidiaries are reinvested indefinitely outside the United States. Therefore, no income taxes have been provided for any outside basis differences inherent in these subsidiaries other than those subject to the one-time repatriation tax. During fiscal 2019, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for select foreign subsidiaries (but not for their other outside basis differences). Although these earnings are no longer indefinitely reinvested and may now be distributed within our foreign entity structure, they remain indefinitely reinvested outside the United States. No deferred taxes have been recorded as no withholding taxes would be due on their distribution. No further changes have been made to our indefinite reinvestment assertion.
11. Derivative Financial Instrumentsand Hedging Activities
Our multinational business exposes us to global market risks, including the effect of fluctuations in 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 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 in AOCI until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings.
We do not designate some of our currency derivatives 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 contracts in earnings.
We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts for all hedged currencies totaling $1,241 million at April 30, 2019 and $1,215 million at July 31, 2019.
We also use foreign currency-denominated debt to help manage our currency exchange risk. As of July 31, 2019, $609 million of our foreign currency-denominated debt instruments were designated as net investment hedges. These net investment hedges are intended to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries. 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.
At inception, we expect each financial instrument designated as a hedge to be highly effective in offsetting the financial exposure it is designed to mitigate. We also assess the effectiveness on an ongoing basis. If determined to no longer be highly effective, designation and accounting for the instrument as a hedge would be discontinued.
We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to physically take 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 table presents 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 |
| | | July 31, |
| (Dollars in millions) | Classification | 2018 | | 2019 |
| Currency derivatives designated as cash flow hedges: | | |
| | |
|
| Net gain (loss) recognized in AOCI | n/a | $ | 27 |
| | $ | 15 |
|
| Net gain (loss) reclassified from AOCI into earnings | Sales | (2 | ) | | 4 |
|
| Currency derivatives not designated as hedging instruments: | | |
| | |
|
| Net gain (loss) recognized in earnings | Sales | $ | 3 |
| | $ | — |
|
| Net gain (loss) recognized in earnings | Other income (expense), net | 3 |
| | 1 |
|
| Foreign currency-denominated debt designated as net investment hedge: | | | | |
| Net gain (loss) recognized in AOCI | n/a | $ | 28 |
| | $ | 23 |
|
| | | | | |
| Total amounts presented in the accompanying consolidated statements of operations for line items affected by the net gains (losses) shown above: | | | | |
| Sales | | $ | 987 |
| | $ | 978 |
|
| Other income (expense), net | | 7 |
| | 6 |
|
We expect to reclassify $23 million of deferred net gains on cash flow hedges recorded in AOCI as of July 31, 2019, 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 July 31, 2019, the maximum term of our outstanding derivative contracts was 36 months.
The following table presents the fair values of our derivative instruments: |
| | | | | | | | | | | | | | | | | |
| | | | April 30, 2019 | | July 31, 2019 |
| (Dollars in millions) |
Classification | | Derivative Assets | | Derivative Liabilities | | Derivative Assets | | Derivative Liabilities |
| Designated as cash flow hedges: | | | | | | | | | |
| Currency derivatives | Other current assets | | $ | 21 |
| | $ | (2 | ) | | $ | 30 |
| | $ | (2 | ) |
| Currency derivatives | Other assets | | 22 |
| | (1 | ) | | 27 |
| | — |
|
| Currency derivatives | Accrued expenses | | — |
| | (5 | ) | | — |
| | (6 | ) |
| Currency derivatives | Other liabilities | | — |
| | (1 | ) | | — |
| | (2 | ) |
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 subject to net settlement agreements are presented on a net basis in our balance sheets.
In our statements 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 we monitor regularly, 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 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 $6 million at April 30, 2019 and $8 million at July 31, 2019.
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 our balance sheets. Similarly, we present the fair values of noncurrent derivatives with the same counterparty on a net basis. We do not net current derivatives with noncurrent derivatives in our balance 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, 2019 | | | | | | | | | |
| Derivative assets | $ | 43 |
| | $ | (3 | ) | | $ | 40 |
| | $ | — |
| | $ | 40 |
|
| Derivative liabilities | (9 | ) | | 3 |
| | (6 | ) | | — |
| | (6 | ) |
| July 31, 2019 | | | | | | | | | |
| Derivative assets | 57 |
| | (2 | ) | | 55 |
| | — |
| | 55 |
|
| Derivative liabilities | (10 | ) | | 2 |
| | (8 | ) | | — |
| | (8 | ) |
No cash collateral was received or pledged related to our derivative contracts as of April 30, 2018, our short-term borrowings consisted of $215 million of commercial paper, with an average interest rate of 2.04%, and an average remaining maturity of 23 days. As of October2019 or July 31, 2018, our short-term borrowings of $258 million included $257 million of commercial paper, with an average interest rate of 2.37%, and an average remaining maturity of 21 days.2019.
9. 12. Fair Value Measurements
The following table summarizes the assets and liabilities measured or disclosed at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
| | April 30, 2019 | | July 31, 2019 |
| | Carrying | | Fair | | Carrying | | Fair |
| (Dollars in millions) | Amount | | Value | | Amount | | Value |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 307 |
| | $ | 307 |
| | $ | 307 |
| | $ | 307 |
|
| Currency derivatives | 40 |
| | 40 |
| | 55 |
| | 55 |
|
| Liabilities | | | | | | | |
| Currency derivatives | 6 |
| | 6 |
| | 8 |
| | 8 |
|
| Short-term borrowings | 150 |
| | 150 |
| | 220 |
| | 220 |
|
| Long-term debt | 2,290 |
| | 2,399 |
| | 2,267 |
| | 2,501 |
|
|
| | | | | | | | | | | | | | | |
| | April 30, 2018 | | October 31, 2018 |
| | Carrying | | Fair | | Carrying | | Fair |
| (Dollars in millions) | Amount | | Value | | Amount | | Value |
| Assets | | | | | | | |
| Cash and cash equivalents | $ | 239 |
| | $ | 239 |
| | $ | 193 |
| | $ | 193 |
|
| Currency derivatives | 1 |
| | 1 |
| | 31 |
| | 31 |
|
| Liabilities | | | | | | | |
| Currency derivatives | 39 |
| | 39 |
| | 6 |
| | 6 |
|
| Short-term borrowings | 215 |
| | 215 |
| | 258 |
| | 258 |
|
| Long-term debt | 2,341 |
| | 2,386 |
| | 2,288 |
| | 2,294 |
|
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability 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 inputs 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 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 discount rates. The discount rates are based on the historical U.S. Treasuryinterest 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 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 periods presented in these financial statements.
13. Leases
10. Derivative Financial InstrumentsWe enter into lease arrangements, which we use primarily for office space, vehicles, and Hedging Activitiesland. Substantially all of our leases are operating leases. Our finance leases are not material.
Our multinational business exposes us
Effective May 1, 2019, we updated our accounting policy for leases to global market risks, includingreflect the adoption of ASC 842. Under ASC 842, we record lease liabilities and right-of-use (ROU) assets on our balance sheet for leases with terms exceeding 12 months. We do not record lease liabilities or ROU assets for short-term leases.
The amounts recorded for lease liabilities and ROU assets are based on the estimated present value, as of the lease commencement date, of the future payments to be made over the lease term. We calculate the present value using our incremental borrowing rate that corresponds to the term of the lease. We include the effect of fluctuations in currency exchange rates, commodity prices, and interest rates. We use derivativesan option to help manage financial exposures that occurrenew or terminate a lease in the normal course of business. We formally document the purpose of each derivative contract, which includes linking the contract to the financial exposurelease term when 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 currency exchange riskreasonably certain 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 inwill exercise the fair value of cash flow hedges (except any ineffective portion) in accumulated other comprehensive income (AOCI) until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings. We assess the effectiveness of these hedges based on changes in forward exchange rates. The ineffective portion of the changes in fair value of our hedges (recognized immediately in earnings) during the periods presented in this report was not material.option.
We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts totaling $1,098 million at April 30, 2018 and $1,255 million at October 31, 2018.
We also use foreign currency-denominated debt to help manage our currency exchange risk. As of October 31, 2018, $615 million of our foreign currency-denominated debt instruments were designated as net investment hedges. These net investment hedges are intended to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries. 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. There was no ineffectiveness related to our net investment hedges in any of the periods presented.
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 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) | Classification | 2017 | | 2018 |
| Derivative Instruments | | | | |
| Currency derivatives designated as cash flow hedges: | | |
| | |
|
| Net gain (loss) recognized in AOCI | n/a | $ | 7 |
| | $ | 30 |
|
| Net gain (loss) reclassified from AOCI into earnings | Sales | (5 | ) | | — |
|
| Currency derivatives not designated as hedging instruments: | | |
| | |
|
| Net gain (loss) recognized in earnings | Sales | 1 |
| | 3 |
|
| Net gain (loss) recognized in earnings | Other income | (4 | ) | | (4 | ) |
| Non-Derivative Hedging Instruments | | | | |
| Foreign currency-denominated debt designated as net investment hedge: | | | | |
| Net gain (loss) recognized in AOCI | n/a | 1 |
| | 19 |
|
| Foreign currency-denominated debt not designated as hedging instrument: | | | | |
| Net gain (loss) recognized in earnings | Other income | 1 |
| | 3 |
|
| | | | | |
| | | Six Months Ended |
| | | October 31, |
| (Dollars in millions) | Classification | 2017 | | 2018 |
| Derivative Instruments | | | | |
| Currency derivatives designated as cash flow hedges: | | |
| | |
|
| Net gain (loss) recognized in AOCI | n/a | $ | (29 | ) | | $ | 57 |
|
| Net gain (loss) reclassified from AOCI into earnings | Sales | (3 | ) | | (2 | ) |
| Currency derivatives not designated as hedging instruments: | | |
| | |
|
| Net gain (loss) recognized in earnings | Sales | (2 | ) | | 6 |
|
| Net gain (loss) recognized in earnings | Other income | 5 |
| | (1 | ) |
| Non-Derivative Hedging Instruments | | | | |
| Foreign currency-denominated debt designated as net investment hedge: | | | | |
| Net gain (loss) recognized in AOCI | n/a | (15 | ) | | 47 |
|
| Foreign currency-denominated debt not designated as hedging instrument: | | | | |
| Net gain (loss) recognized in earnings | Other income | (15 | ) | | 8 |
|
We expect to reclassify $13 million of deferred net gains on cash flow hedges recorded in AOCI as of October 31, 2018, 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 October 31, 2018, the maximum term of our outstanding derivative contracts was 36 months.
The following table presents the fair values of our derivative instruments: |
| | | | | | | | | |
(Dollars in millions) |
Classification | | Fair value of derivatives in a gain position | | Fair value of derivatives in a loss position |
| April 30, 2018 | | | | | |
| Designated as cash flow hedges: | | | | | |
| Currency derivatives | Other current assets | | $ | 2 |
| | $ | (2 | ) |
| Currency derivatives | Other assets | | 1 |
| | — |
|
| Currency derivatives | Accrued expenses | | 4 |
| | (23 | ) |
| Currency derivatives | Other liabilities | | 2 |
| | (18 | ) |
| Not designated as hedges: | | | | | |
| Currency derivatives | Accrued expenses | | 1 |
| | (5 | ) |
| October 31, 2018 | | | | | |
| Designated as cash flow hedges: | | | | | |
| Currency derivatives | Other current assets | | 18 |
| | (3 | ) |
| Currency derivatives | Other assets | | 18 |
| | (2 | ) |
| Currency derivatives | Accrued expenses | | 1 |
| | (3 | ) |
| Currency derivatives | Other liabilities | | — |
| | — |
|
| Not designated as hedges: | | | | | |
| Currency derivatives | Accrued expenses | | — |
| | (4 | ) |
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 subject to net settlement agreements are presented on a net basis in our balance sheets.
In our statement 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 are 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 usleases contain non-lease components (e.g., maintenance or other services) in addition to maintain a specific level of creditworthiness, whichlease components. For our land leases, we have maintained. If our creditworthiness wereelected the practical expedient not to fall below that level, thenseparate the counterparties to our derivative instruments could request immediate 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 $38 million at April 30, 2018 and $6 million at October 31, 2018.non-lease components from the lease components.
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 the balance sheet. Similarly, we present the fair values of noncurrent derivatives with the same counterparty on a net basis. Current derivatives are not netted with noncurrent derivatives in the balance sheet.
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, 2018 | | | | | | | | | |
| Derivative assets | $ | 10 |
| | $ | (9 | ) | | $ | 1 |
| | $ | (1 | ) | | $ | — |
|
| Derivative liabilities | (48 | ) | | 9 |
| | (39 | ) | | 1 |
| | (38 | ) |
| October 31, 2018 | | | | | | | | | |
| Derivative assets | 37 |
| | (6 | ) | | 31 |
| | — |
| | 31 |
|
| Derivative liabilities | (12 | ) | | 6 |
| | (6 | ) | | — |
| | (6 | ) |
No cash collateral was received or pledged related to our derivative contracts as of April 30, 2018 or October 31, 2018.
11. Pension and Other Postretirement Benefits
The following table shows the componentsamounts and classification of the net costROU assets and lease liabilities on our balance sheet as of pension and other postretirement benefits recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.July 31, 2019:
|
| | | | |
| | | July 31, |
| (Dollars in millions) | Classification | 2019 |
| Right-of-use assets | Other assets | $ | 50 |
|
| | | |
| Lease liabilities: | | |
| Current | Accounts payable and accrued expenses | $ | 17 |
|
| Non-current | Other liabilities | 33 |
|
| Total | | $ | 50 |
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | October 31, | | October 31, |
| (Dollars in millions) | 2017 | | 2018 | | 2017 | | 2018 |
Pension Benefits: | | | | | | | |
| Service cost | $ | 6 |
| | $ | 6 |
| | $ | 12 |
| | $ | 12 |
|
| Interest cost | 7 |
| | 9 |
| | 15 |
| | 17 |
|
| Expected return on plan assets | (10 | ) | | (12 | ) | | (21 | ) | | (24 | ) |
| Amortization of: | | | | | | | |
| Prior service cost (credit) | — |
| | — |
| | — |
| | 1 |
|
| Net actuarial loss | 6 |
| | 5 |
| | 11 |
| | 10 |
|
| Net cost | $ | 9 |
| | $ | 8 |
| | $ | 17 |
| | $ | 16 |
|
| | | | | | | | |
Other Postretirement Benefits: | | | | | | | |
| Interest cost | $ | 1 |
| | $ | 1 |
| | $ | 1 |
| | $ | 1 |
|
| Amortization of prior service cost (credit) | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
| Net cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
12. Stockholders’ Equity
The following table shows information about the changes in stockholders’ equity by quartereffects of leases during the sixthree months ended OctoberJuly 31, 2017:2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (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, 2017 | $ | 25 |
| | $ | 43 |
| | $ | 65 |
| | $ | 4,470 |
| | $ | (390 | ) | | $ | (2,843 | ) | | $ | 1,370 |
|
| Retirement of treasury stock | | | (10 | ) | | (8 | ) | | (2,684 | ) | | | | 2,702 |
| | — |
|
| Net income | | | | | | | 178 |
| | | | | | 178 |
|
| Net other comprehensive income (loss) | | | | | | | | | 14 |
| | | | 14 |
|
| Cash dividends | | | | | | | (140 | ) | | | | | | (140 | ) |
| Acquisition of treasury stock | | | | | | | | | | | (1 | ) | | (1 | ) |
| Stock-based compensation expense | | | | | 4 |
| | | | | | | | 4 |
|
| Stock issued under compensation plans | | | | | | | | | | | 9 |
| | 9 |
|
| Loss on issuance of treasury stock issued under compensation plans | | | | | (14 | ) | | | | | | | | (14 | ) |
| Balance at July 31, 2017 | 25 |
| | 33 |
| | 47 |
| | 1,824 |
| | (376 | ) | | (133 | ) | | 1,420 |
|
| Net income | | | | | | | 239 |
| | | | | | 239 |
|
| Net other comprehensive income (loss) | | | | | | | | | (15 | ) | | | | (15 | ) |
| Stock-based compensation expense | | | | | 5 |
| | | | | | | | 5 |
|
| Stock issued under compensation plans | | | | | | | | | | | 1 |
| | 1 |
|
| Loss on issuance of treasury stock issued under compensation plans | | | | | (3 | ) | | | | | | | | (3 | ) |
| Balance at October 31, 2017 | $ | 25 |
| | $ | 33 |
| | $ | 49 |
| | $ | 2,063 |
| | $ | (391 | ) | | $ | (132 | ) | | $ | 1,647 |
|
|
| | | |
| | Three Months |
| | Ended |
| (Dollars in millions) | July 31, 2019 |
Total lease cost1 | $ | 5 |
|
Cash paid for amounts included in the measurement of lease liabilities2 | 5 |
|
| Right-of-use assets obtained in exchange for new lease liabilities | 3 |
|
1Consists primarily of operating lease cost. Other components of lease cost were not material.
2Classified within operating activities in the accompanying consolidated statement of cash flows.
The following table showsincludes a maturity analysis of future (undiscounted) operating lease payments and a reconciliation of those payments to the changes in stockholders’ equity by quarter during the six months ended October 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, 2018 | $ | 25 |
| | $ | 47 |
| | $ | 4 |
| | $ | 1,730 |
| | $ | (378 | ) | | $ | (112 | ) | | $ | 1,316 |
|
| Cumulative effect of changes in accounting standards (Note 1) | | | | | | | (5 | ) | | | | | | (5 | ) |
| Net income | | | | | | | 200 |
| | | | | | 200 |
|
| Net other comprehensive income (loss) | | | | | | | | | 14 |
| | | | 14 |
|
| Cash dividends | | | | | | | (152 | ) | | | | | | (152 | ) |
| Acquisition of treasury stock | | | | | | | | | | | (6 | ) | | (6 | ) |
| Stock-based compensation expense | | | | | 5 |
| | | | | | | | 5 |
|
| Stock issued under compensation plans | | | | | | | | | | | 9 |
| | 9 |
|
| Loss on issuance of treasury stock issued under compensation plans | | | | | (7 | ) | | (6 | ) | | | | | | (13 | ) |
| Balance at July 31, 2018 | 25 |
| | 47 |
| | 2 |
| | 1,767 |
| | (364 | ) | | (109 | ) | | 1,368 |
|
| Net income | | | | | | | 249 |
| | | | | | 249 |
|
| Net other comprehensive income (loss) | | | | | | | | | (1 | ) | | | | (1 | ) |
| Acquisition of treasury stock | | | | | | | | | | | (122 | ) | | (122 | ) |
| Stock-based compensation expense | | | | | 4 |
| | | | | | | | 4 |
|
| Stock issued under compensation plans | | | | | | | | | | | 1 |
| | 1 |
|
| Loss on issuance of treasury stock issued under compensation plans | | | | | (2 | ) | | | | | | | | (2 | ) |
| Balance at October 31, 2018 | $ | 25 |
| | $ | 47 |
| | $ | 4 |
| | $ | 2,016 |
| | $ | (365 | ) | | $ | (230 | ) | | $ | 1,497 |
|
Dividends. The following table shows the cash dividends declared per sharelease liabilities recorded on our Class A and Class B common stock duringbalance sheet as of July 31, 2019:
|
| | | |
| | July 31, |
| (Dollars in millions) | 2019 |
| Fiscal 2020 (nine months remaining) | $ | 14 |
|
| Fiscal 2021 | 15 |
|
| Fiscal 2022 | 10 |
|
| Fiscal 2023 | 5 |
|
| Fiscal 2024 | 4 |
|
| Thereafter | 5 |
|
| Total lease payments | 53 |
|
| Less: Present value discount | (3 | ) |
| Lease liabilities | $ | 50 |
|
| | |
| Weighted-average discount rate | 2.9% |
| Weighted-average remaining term | 4.0 years |
Future operating lease payments, as disclosed in our 2019 Form 10-K under the six months ended October 31, 2018:prior accounting standard (ASC Topic 840), were as follows as of April 30, 2019:
|
| | | |
| | April 30, |
| (Dollars in millions) | 2019 |
| Fiscal 2020 | $ | 23 |
|
| Fiscal 2021 | 16 |
|
| Fiscal 2022 | 10 |
|
| Fiscal 2023 | 5 |
|
| Fiscal 2024 | 3 |
|
| Thereafter | 2 |
|
| Total lease payments | $ | 59 |
|
|
| | | | | | |
Declaration Date | | Record Date | | Payable Date | | Amount per Share |
May 24, 2018 | | June 6, 2018 | | July 3, 2018 | | $0.158 |
July 26, 2018 | | September 6, 2018 | | October 1, 2018 | | $0.158 |
As announced on November 15, 2018, our Board of Directors increased the quarterly cash dividend on our Class A and Class B common stock from $0.158 per share to $0.166 per share. Stockholders of record on December 6, 2018 will receive the quarterly cash dividend on January 2, 2019.
Accumulated other comprehensive income. The following table shows the change in each component of AOCI, net of tax, during the six months ended October 31, 2018:
|
| | | | | | | | | | | | | | | |
| (Dollars in millions) | Currency Translation Adjustments | | Cash Flow Hedge Adjustments | | Postretirement Benefits Adjustments | | Total AOCI |
| Balance at April 30, 2018 | $ | (180 | ) | | $ | (17 | ) | | $ | (181 | ) | | $ | (378 | ) |
| Net other comprehensive income (loss) | (39 | ) | | 45 |
| | 7 |
| | 13 |
|
| Balance at October 31, 2018 | $ | (219 | ) | | $ | 28 |
| | $ | (174 | ) | | $ | (365 | ) |
13. 14. Other Comprehensive Income
The following table shows the components of net other comprehensive income (loss):
| | | | Three Months Ended | | Three Months Ended | Three Months Ended | | Three Months Ended |
| | October 31, 2017 | | October 31, 2018 | July 31, 2018 | | July 31, 2019 |
| (Dollars in millions) | Pre-Tax | | Tax | | Net | | Pre-Tax | | Tax | | Net | Pre-Tax | | Tax | | Net | | Pre-Tax | | Tax | | Net |
| Currency translation adjustments: | | | | | | | | | | | | | | | | | | | | | | |
| Net gain (loss) on currency translation | $ | (25 | ) | | $ | — |
| | $ | (25 | ) | | $ | (23 | ) | | $ | (4 | ) | | $ | (27 | ) | $ | (5 | ) | | $ | (7 | ) | | $ | (12 | ) | | $ | (8 | ) | | $ | (5 | ) | | $ | (13 | ) |
| Reclassification to earnings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Other comprehensive income (loss), net | (25 | ) | | — |
| | (25 | ) | | (23 | ) | | (4 | ) | | (27 | ) | (5 | ) | | (7 | ) | | (12 | ) | | (8 | ) | | (5 | ) | | (13 | ) |
| Cash flow hedge adjustments: | | | | | | | | | | | | | | | | | | | | | | |
| Net gain (loss) on hedging instruments | 7 |
| | (3 | ) | | 4 |
| | 30 |
| | (8 | ) | | 22 |
| 27 |
| | (6 | ) | | 21 |
| | 15 |
| | (3 | ) | | 12 |
|
Reclassification to earnings1 | 5 |
| | (2 | ) | | 3 |
| | — |
| | — |
| | — |
| 2 |
| | — |
| | 2 |
| | (4 | ) | | 1 |
| | (3 | ) |
| Other comprehensive income (loss), net | 12 |
| | (5 | ) | | 7 |
| | 30 |
| | (8 | ) | | 22 |
| 29 |
| | (6 | ) | | 23 |
| | 11 |
| | (2 | ) | | 9 |
|
| Postretirement benefits adjustments: | | | | | | | | | | | | | | | | | | | | | | |
| Net actuarial gain (loss) and prior service cost | (1 | ) | | — |
| | (1 | ) | | — |
| | — |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Reclassification to earnings2 | 6 |
| | (2 | ) | | 4 |
| | 5 |
| | (1 | ) | | 4 |
| 4 |
| | (1 | ) | | 3 |
| | 4 |
| | (1 | ) | | 3 |
|
| Other comprehensive income (loss), net | 5 |
| | (2 | ) | | 3 |
| | 5 |
| | (1 | ) | | 4 |
| 4 |
| | (1 | ) | | 3 |
| | 4 |
| | (1 | ) | | 3 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total other comprehensive income (loss), net | $ | (8 | ) | | $ | (7 | ) | | $ | (15 | ) | | $ | 12 |
| | $ | (13 | ) | | $ | (1 | ) | $ | 28 |
| | $ | (14 | ) | | $ | 14 |
| | $ | 7 |
| | $ | (8 | ) | | $ | (1 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | Six Months Ended | | Six Months Ended | |
| | October 31, 2017 | | October 31, 2018 | |
| (Dollars in millions) | Pre-Tax | | Tax | | Net | | Pre-Tax | | Tax | | Net | |
| Currency translation adjustments: | | | | | | | | | | | | |
| Net gain (loss) on currency translation | $ | 3 |
| | $ | 6 |
| | $ | 9 |
| | $ | (28 | ) | | $ | (11 | ) | | $ | (39 | ) | |
| Reclassification to earnings | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Other comprehensive income (loss), net | 3 |
| | 6 |
| | 9 |
| | (28 | ) | | (11 | ) | | (39 | ) | |
| Cash flow hedge adjustments: | | | | | | | | | | | | |
| Net gain (loss) on hedging instruments | (29 | ) | | 11 |
| | (18 | ) | | 57 |
| | (14 | ) | | 43 |
| |
Reclassification to earnings1 | 3 |
| | (1 | ) | | 2 |
| | 2 |
| | — |
| | 2 |
| |
| Other comprehensive income (loss), net | (26 | ) | | 10 |
| | (16 | ) | | 59 |
| | (14 | ) | | 45 |
| |
| Postretirement benefits adjustments: | | | | | | | | | | | | |
| Net actuarial gain (loss) and prior service cost | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
Reclassification to earnings2 | 10 |
| | (4 | ) | | 6 |
| | 9 |
| | (2 | ) | | 7 |
| |
| Other comprehensive income (loss), net | 10 |
| | (4 | ) | | 6 |
| | 9 |
| | (2 | ) | | 7 |
| |
| | | | | | | | | | | | | |
| Total other comprehensive income (loss), net | $ | (13 | ) | | $ | 12 |
| | $ | (1 | ) | | $ | 40 |
| | $ | (27 | ) | | $ | 13 |
| |
1Pre-tax amount is classified as sales in the accompanying condensed consolidated statements of operations.
2Pre-tax amount is classified as non-operating postretirement expense in the accompanying condensed consolidated statements of operations.
15. Acquisition of Business
On July 3, 2019, we acquired 100% of the voting interests in The 86 Company, which owns Fords Gin, for $22 million in cash. The purchase price has been preliminarily allocated largely to the intangible assets that were acquired, including goodwill of $11 million and other indefinite-lived intangibles of $12 million, net of deferred tax liabilities of $1 million. The goodwill is primarily attributable to the value of leveraging our distribution network and brand-building expertise to grow global sales of the Fords Gin brand and to the knowledge and expertise of the organized workforce employed by the acquired business. We do not expect the goodwill to be deductible for tax purposes. The initial allocation of the purchase price was based on preliminary estimates and may be revised as the intangible asset valuations are finalized. The 86 Company has been included in our consolidated financial statements since the acquisition date. Actual and pro forma results are not presented due to immateriality.
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 statements and related notes included in Part I, Item 1 of this Quarterly Report and our 20182019 Form 10-K. Note that the results of operations for the sixthree months endedOctoberJuly 31, 20182019 do not necessarily indicate what our operating results for the full fiscal year will be. In this Item, “we,” “us,” “our,” “Brown-Forman,” and the “Company” refer to Brown-Forman 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 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. Other companies may not define or calculate these non-GAAP measures in the same way.
“Underlying change” in income statement 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,net; (g) underlying operating expenses1,; and (h) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) a new accounting standard, (b) foreign exchange and (c) estimated net change in distributor inventories. We explain these adjustments below.
“New accounting standard.” Under ASC 606 (Revenue from Contracts with Customers), we recognize the cost of certain customer incentives earlier than we did before adopting ASC 606. Although we do not expect this change in timing to have a significant impact on a full-year basis, we do anticipate some change in the pattern of recognition among fiscal quarters. Additionally, some payments to customers that we classified as expenses before adopting the new standard are classified as reductions of net sales under our new policy. See Note 2 to the accompanying financial statements for additional information. This adjustment allows us to look at underlying change on a comparable basis.
“Foreign exchange.” We calculate the percentage change in our income statement line items in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current-year results at prior-year rates and remove foreign exchange gains and losses from current- and prior-year periods.
“Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of change in distributor inventories on changes in our income statement line items. For each period compared, we use volume information from our distributors to estimate the effect of distributor inventory changes on our income statement line items. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in our income statement measures and allows us to understand better our underlying results and trends.
| |
| • | “Foreign exchange.” We calculate the percentage change in certain line items of the statements of operations in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current-year results at prior-year rates and remove transactional and hedging foreign exchange gains and losses from current- and prior-year periods. |
| |
| • | “Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor inventories on changes in certain line items of the statements of operations. For each period compared, we use volume information from our distributors to estimate the effect of distributor inventory changes in certain line items of the statements of operations. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in certain line items of the statements of operations and allows us to understand better our underlying results and trends. |
We use the non-GAAP measures “underlying change” for the following reasons:to: (a) to understand our performance from period to period on a consistent basis; (b) to compare our performance to that of our competitors; (c) to determinecalculate components of management incentive compensation calculations;compensation; (d) to plan and forecast; and (e) to communicate our financial performance to the board of directors, stockholders, and investment analysts. We provide reconciliations of the “underlying change” in income statement measurescertain line items of the statements of operations to their nearest GAAP measures in the tables below under “Results of Operations - Year-Over-Year Period Comparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.
1Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
Definitions
Aggregations.
From time to time, 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 spirits category. Below, we define the geographic and brand aggregations used in this report.
Geographic Aggregations.
In “Results of Operations - Fiscal 20192020 Year-to-Date Highlights,” we provide supplemental information for our largest markets ranked by percentage of total fiscal 20182019 net sales. In addition to markets that are listed by country name, we include the following aggregations:
“Developed International” markets are “advanced economies” as defined by the IMF, excluding the United States. Our largest developed international markets are the United Kingdom, Australia, and Germany. This aggregation represents our sales of branded products to these markets.
“Emerging” markets are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico and Poland. This aggregation represents our sales of branded products to these markets.
“Travel Retail” represents our sales of branded products to global duty-free customers, travel retail customers, and the U.S. military regardless of customer location.
“Non-branded and bulk” includes our sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
| |
| • | “Developed International” markets are “advanced economies” as defined by the IMF, excluding the United States. Our largest developed international markets are the United Kingdom, Australia, Germany, France, and Japan. This aggregation represents our net sales of branded products to these markets. |
| |
| • | “Emerging” markets are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, Russia, and Brazil. This aggregation represents our net sales of branded products to these markets. |
| |
| • | “Travel Retail” represents our net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer location. |
| |
| • | “Non-branded and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location. |
Brand Aggregations.
In “Results of Operations - Fiscal 20192020 Year-to-Date Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal 20182019 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, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers’ Craft.
“American whiskey” includes the Jack Daniel’s family of brands, premium bourbons, and Early Times.
“Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and RTP products (JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s 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 all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, Jack Daniel’s Double Jack, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Cider (JD Cider), Jack Daniel’s Lynchburg Lemonade (JD Lynchburg Lemonade), and the seasonal Jack Daniel’s Winter Jack RTP.
| |
▪• | “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, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers’ Craft. |
| |
| • | “American whiskey” includes the Jack Daniel’s family of brands, premium bourbons (defined below), and Early Times. |
| |
| • | “Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and RTP products (JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s 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 all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, Jack Daniel’s Double Jack, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Cider (JD Cider), Jack Daniel’s Lynchburg Lemonade (JD Lynchburg Lemonade), and the seasonal Jack Daniel’s Winter Jack RTP. |
| |
| • | “Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft. |
| |
| • | “Tequila” includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo. |
| |
| • | “Vodka” includes Finlandia. |
| |
| • | “Wine” includes Korbel Champagne and Sonoma-Cutrer wines. |
| |
| • | “Non-branded and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location. |
“Tequila” includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
“Vodka” includes Finlandia.
“Wine” includes Korbel Champagne and Sonoma-Cutrer wines.
“Non-branded and bulk” includes our sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
Other Metrics.
| |
| • | “Depletions.” We generally record revenues when we ship our products to our customers. Depletions is a term commonly used in the beverage alcohol industry to describe volume. Depending on the context, depletions means either (a) our shipments directly to retail or wholesale customers for owned distribution markets or (b) shipments from our distributor customers to retailers and wholesalers in other markets. We believe that depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do. In this document, unless otherwise specified, we refer to depletions when discussing volume. |
| |
| • | “Consumer takeaway.” When discussing trends in the market, we refer to consumer takeaway, a term commonly used in the beverage alcohol industry. Consumer takeaway refers to the purchase of product by consumers from retail outlets as measured by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric. We believe consumer takeaway is a leading indicator of how consumer demand is trending. |
“Depletions.” We generally record revenues when we ship our products to our customers. Depending on our route-to-consumer (RTC), we ship products to either (a) retail or wholesale customers in owned distribution markets or (b) our distributor customers in other markets. “Depletions” is a term commonly used in the beverage alcohol industry to describe volume. Depending on the context, “depletions” means either (a) our shipments directly to retail or wholesale customers for owned distribution markets or (b) shipments from our distributor customers to retailers and wholesalers in other markets. We believe that depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do. In this document, unless otherwise specified, we refer to “depletions” when discussing volume.
“Consumer takeaway.” When discussing trends in the market, we refer to “consumer takeaway,” a term commonly used in the beverage alcohol industry. “Consumer takeaway” refers to the purchase of product by consumers from retail outlets as measured by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric.
Reclassifications
As discussed in Note 1 to the accompanying financial statements, we retrospectively adjusted our prior year income statements in connection with the adoption of ASU 2017-07 and reclassified some previously reported expense amounts related to certain marketing research and promotional agency costs. The impact of these reclassifications, which had no effect on net income, was not material.
The following tables reconcile the previously reported income statement amounts to the currently reported amounts for the three and six months ended October 31, 2017. |
| | | | | | | | | | | | | | | |
| | Three Months Ended October 31, 2017 |
| | Previously | | Adoption of | | | | Currently |
| (Dollars in millions) | Reported | | ASU 2017-07 | | Reclassifications | | Reported |
| Net sales | $ | 914 |
| | $ | — |
| | $ | — |
| | $ | 914 |
|
| Cost of sales | 304 |
| | — |
| | — |
| | 304 |
|
| Gross profit | 610 |
| | — |
| | — |
| | 610 |
|
| Advertising expenses | 111 |
| | — |
| | (2 | ) | | 109 |
|
| Selling, general, and administrative expenses | 163 |
| | (3 | ) | | 2 |
| | 162 |
|
| Other expense (income), net | (10 | ) | | — |
| | — |
| | (10 | ) |
| Operating income | 346 |
| | 3 |
| | — |
| | 349 |
|
| Non-operating postretirement expense | — |
| | 3 |
| | — |
| | 3 |
|
| Interest income | (1 | ) | | — |
| | — |
| | (1 | ) |
| Interest expense | 16 |
| | — |
| | — |
| | 16 |
|
| Income before income taxes | 331 |
| | — |
| | — |
| | 331 |
|
| Income taxes | 92 |
| | — |
| | — |
| | 92 |
|
| Net income | $ | 239 |
| | $ | — |
| | $ | — |
| | $ | 239 |
|
|
| | | | | | | | | | | | | | | |
| | Six Months Ended October 31, 2017 |
| | Previously | | Adoption of | | | | Currently |
| (Dollars in millions) | Reported | | ASU 2017-07 | | Reclassifications | | Reported |
| Net sales | $ | 1,637 |
| | $ | — |
| | $ | — |
| | $ | 1,637 |
|
| Cost of sales | 534 |
| | — |
| | — |
| | 534 |
|
| Gross profit | 1,103 |
| | — |
| | — |
| | 1,103 |
|
| Advertising expenses | 200 |
| | — |
| | (4 | ) | | 196 |
|
| Selling, general, and administrative expenses | 324 |
| | (5 | ) | | 4 |
| | 323 |
|
| Other expense (income), net | (11 | ) | | — |
| | — |
| | (11 | ) |
| Operating income | 590 |
| | 5 |
| | — |
| | 595 |
|
| Non-operating postretirement expense | — |
| | 5 |
| | — |
| | 5 |
|
| Interest income | (2 | ) | | — |
| | — |
| | (2 | ) |
| Interest expense | 32 |
| | — |
| | — |
| | 32 |
|
| Income before income taxes | 560 |
| | — |
| | — |
| | 560 |
|
| Income taxes | 143 |
| | — |
| | — |
| | 143 |
|
| Net income | $ | 417 |
| | $ | — |
| | $ | — |
| | $ | 417 |
|
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 indicate 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 20182019 Form 10-K and those described from time to time in our future reports filed with the Securities and Exchange Commission, including:
Unfavorable global or regional economic conditions and related 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, including potentialadditional retaliatory tariffs on American spirits and the effectiveness of our actions to mitigate the potential negative impact on our margins, sales, and distributors; 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, 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
The impact of the recently enacted U.S. tax reform legislation, including as a result of future regulationsclarifications and guidance interpreting the statute
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 small 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 in significant markets
Production facility, aging warehouse, or supply chain disruption
Imprecision in supply/demand forecasting
Higher costs, lower quality, or unavailability of energy, water, raw materials, product ingredients, labor, or finished goods
Route-to-consumer changes that affect the timing 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
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
Risks associated with acquisitions, dispositions, business partnerships, or investments – such as acquisition integration, termination difficulties or costs, or impairment in recorded value
Inadequate protection of our intellectual property rights
Product recalls or other product liability claims, product counterfeiting, tampering, contamination, or quality issues
Significant legal disputes and proceedings, or government investigations
Failure or breach of key information technology systems
Negative publicity related to our company, brands, marketing, personnel, 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 classdual-class share structure
Overview
Tariffs
An important development onTariffs negatively affected our results beginning in the second quarter of fiscal 2019, results has been the impact of tariffs. In the overview and outlook below, we discuss (a) certain facts about tariffs as they relateare expected to our business, (b) the effect of this development on our results for the three and six months ended October 31, 2018, and (c) the expected effect of tariffs in the remainder of fiscal 2019.
In response to the new U.S. tariffs on certain foreign goods, the European Union, Mexico, Canada, Turkey, and China imposed retaliatory tariffs on a number of U.S. goods, including American whiskey. The effective dates of the retaliatory tariffs and the import duty rates before and after the retaliation are summarized below.
| Summary of Retaliatory Tariffs |
| | | | | | | |
| | | | | Rate |
| Geographic Area | | Effective Date | | Before |
| After |
|
| European Union | | June 22, 2018 | | — | % | 25 | % |
| Mexico | | June 5, 2018 | | — | % | 25 | % |
| Canada | | July 1, 2018 | | — | % | 10 | % |
| Turkey | | June 21, 2018 | | — | % | 140 | % |
| China | | July 6, 2018 | | 5 | % | 30 | % |
Our fiscal 2019 results were affected by tariffs through the two costs discussed below, which will continue to have a negative impact on our results as long as tariffs are in place.
Lower pricing to certain customers. Certain customers paid Our results for the incremental costs of tariffs in the sixthree months ended OctoberJuly 31, 2018. We compensated these customers for these incremental costs through additional discounts and lower prices. These discounts and lower prices reduced our net sales.
Incremental costs of2019 were negatively affected by tariffs included in our cost of sales. In certain markets where we own the inventory, we paid the incremental cost of tariffs in the six months ended October 31, 2018, which increased our cost of sales.as described below.
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| • | Lower net sales. Certain customers paid the incremental costs of tariffs, and we compensated these customers for these incremental costs by reducing our net prices, which lowered our net sales. |
| |
| • | Higher cost of sales. In markets where we own inventory, we paid the incremental cost of tariffs, which increased our cost of sales. |
The combined effect of these tariff-related costs, whether arising as a reduction of net sales or as an increase in cost of sales, is hereafter referred to as “incremental costs associated with tariffs.“tariff-related costs.”
Our results for the three months ended OctoberJuly 31, 20182019 were also affected by the timing relatedtiming-related impact of tariffs as discussed below.
Timing of sales related to customer inventory movements.in the same period last year. In the first quarter of fiscal 2019, our net sales in majora number of European Union countriesmarkets were higher than normal as many retail and wholesale customers increased purchases to build inventory ahead of anticipated price increases related to tariffs (hereafter referred to as “first quarter“prior-year tariff-related buy-ins”). In the second quarter of fiscal 2019, our net sales in major European Union countries were lower than normal as most of these retail and wholesale customers reduced purchases to return their inventory to normal levels (hereafter referred to as “second quarter tariff-related inventory reductions”).
We discuss the estimated effect of the tariffs on our results and outlook where relevant below.
Fiscal 20192020 Year-to-Date Highlights
We delivered reported net sales of $1.7 billion, an increase of 2%$766 million, flat on both a reported and underlying basis compared to the same period last year. Excluding (a) the negative effect of foreign exchange driven by the weakening of the Turkish lira, the British pound, the Australian dollar, and the Mexican peso, and (b) the adoption of the revenue recognition accounting standard, we grew underlying net sales 5%. We estimate that lower pricing to certain customers related to tariffsprior-year tariff-related buy-ins and tariff-related costs reduced our underlying net sales growth by approximately onethree percentage point.points.
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| ◦ | From a brand perspective, our underlying net sales growth was driven by the Jack Daniel'sDaniel’s family of brands (excluding JDTW); our premium bourbon brands, fueled by Woodford Reserve; and our tequila brands.brands all positively contributed to underlying net sales. Declines of JDTW, resulting from prior-year tariff-related buy-ins and tariff-related costs, offset this growth. |
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| ◦ | From a geographic perspective, growth in the United States and emerging markets ledwas offset by declines in developed international markets and Travel Retail. Declines in developed international markets were driven by prior-year tariff-related buy-ins and tariff-related costs. Travel Retail’s underlying net sales growth. Developed international markets and the United States both contributed meaningfully. Travel Retail accelerated the rate of underlying net sales growth compared to the same period last year partially duewere down primarily related to timing of customer orders in the currentsame period last year. |
We delivered reported operating income of $596$248 million, which was flata decrease of 6% compared to the same period last year. Excluding (a) the negativepositive effect of foreign exchange and (b) the adoption of the revenue recognition accounting standard, we grew
an estimated net change in distributor inventories, underlying operating income 4%. We estimate that incrementaldeclined 8% driven by prior-year tariff-related buy-ins, tariff-related costs, associated with tariffs reduced our underlying operating income growth by approximately two percentage points.and higher input costs.
We delivered diluted earnings per share of $0.93, an increase$0.39, a decrease of 8%6% compared to the same period last year due to the the benefit of a lower effective tax rate from the Tax Cuts and Jobs Act (Tax Act), partially offset by higher interest expense, which resulted from a new bond issuancedecline in March 2018.our reported operating income.
| Summary of Operating Performance | | | | Three Months Ended October 31, | | Six months ended October 31, | Three Months Ended July 31, | | | | |
| (Dollars in millions) | 2017 | | 2018 | | Reported Change | | Underlying Change1 | | 2017 | | 2018 | | Reported Change | | Underlying Change1 | 2018 | | 2019 | | Reported Change | | Underlying Change1 |
| Net sales | $ | 914 |
| | $ | 910 |
| | — | % | | 3 | % | | $ | 1,637 |
| | $ | 1,676 |
| | 2 | % | | 5 | % | $ | 766 |
| | $ | 766 |
| | — | % | | — | % |
| Cost of sales | 304 |
| | 320 |
| | 5 | % | | 7 | % | | 534 |
| | 563 |
| | 6 | % | | 7 | % | 243 |
| | 268 |
| | 10 | % | | 11 | % |
| Gross profit | 610 |
| | 590 |
| | (3 | %) | | 1 | % | | 1,103 |
| | 1,113 |
| | 1 | % | | 5 | % | 523 |
| | 498 |
| | (5 | %) | | (5 | %) |
| Advertising | 109 |
| | 102 |
| | (7 | %) | | — | % | | 196 |
| | 200 |
| | 2 | % | | 7 | % | 98 |
| | 92 |
| | (6 | %) | | (4 | %) |
| SG&A | 162 |
| | 161 |
| | (1 | %) | | 1 | % | | 323 |
| | 329 |
| | 2 | % | | 3 | % | 168 |
| | 164 |
| | (2 | %) | | (1 | %) |
| Operating income | 349 |
| | 332 |
| | (5 | %) | | — | % | | 595 |
| | 596 |
| | — | % | | 4 | % | 264 |
| | 248 |
| | (6 | %) | | (8 | %) |
| | | | | | | | | | | | | | | | | | | | | | | |
Total operating expenses2 | $ | 261 |
| | $ | 258 |
| | (1 | %) | | 2 | % | | $ | 508 |
| | $ | 517 |
| | 2 | % | | 5 | % | $ | 259 |
| | $ | 250 |
| | (3 | %) | | (2 | %) |
| | | | | | | | | | | | | | | | | | | | | | | |
As a percentage of net sales3 | | | | | | | | | | | | | | | | | | | | | | |
| Gross profit | 66.8 | % | | 64.8 | % | | (2.0 | )pp | | | | 67.4 | % | | 66.4 | % | | (1.0 | )pp | | | 68.2 | % | | 64.9 | % | | (3.3 | )pp | | |
| Operating income | 38.2 | % | | 36.5 | % | | (1.7 | )pp | | | | 36.3 | % | | 35.6 | % | | (0.7 | )pp | | | 34.5 | % | | 32.4 | % | | (2.1 | )pp | | |
| Non-operating postretirement expense | | $ | 2 |
| | $ | 1 |
| | (32 | %) | | |
| Interest expense, net | $ | 15 |
| | $ | 20 |
| | 32 | % | | | | $ | 30 |
| | $ | 40 |
| | 34 | % | | | $ | 20 |
| | $ | 19 |
| | (7 | %) | | |
| Effective tax rate | 27.9 | % | | 19.5 | % | | (8.4 | )pp | | | | 25.5 | % | | 18.6 | % | | (6.9 | )pp | | | 17.4 | % | | 18.2 | % | | 0.8 | pp | | |
| Diluted earnings per share | $ | 0.49 |
| | $ | 0.52 |
| | 4 | % | | | | $ | 0.86 |
| | $ | 0.93 |
| | 8 | % | | | $ | 0.41 |
| | $ | 0.39 |
| | (6 | %) | | |
| Note: Totals may differ due to rounding | Note: Totals may differ due to rounding | | | | | | | | | | | | | | | | | | | | | |
1See “Non-GAAP Financial Measures” above for details on our use of “underlying changes,change,” including how we calculate these measures are calculated and the reasons why we believethink this information is useful to readers.
2See “Non-GAAP Financial Measures” above for definitions of operatingOperating expenses presented here.include advertising expense, SG&A expense, and other expense (income), net.
3Year-over-year changes in percentages are reported in percentage points (pp).
Fiscal 2019 Outlook
Below we discuss our outlook for the remainder of fiscal 2019, reflecting the trends, developments, and uncertainties that we expect to affect our business. This outlook is unchanged from our first quarter 10-Q, which revised certain aspects of the 2019 outlook included in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our 2018 Form 10-K. When we provide guidance for underlying change for the following income statement measures we do not provide guidance for the corresponding GAAP change because the GAAP measure will include items that are difficult to quantify or predict with reasonable certainty, including the estimated net change in distributor inventories and foreign exchange, each of which could have a significant impact to our GAAP income statement measures.
Tariffs. In response to the U.S. tariffs on certain foreign goods, the European Union, Mexico, Canada, Turkey, and China imposed retaliatory tariffs on a number of U.S. goods, including American whiskey. Our American whiskeys are made in the United States and exported around the world. Our results in the six months ended October 31, 2018 were hurt by lower pricing to certain customers related to tariffs and incremental costs of tariffs included in our cost of sales. Our full year outlook, which is discussed below, has been adjusted to reflect the anticipated negative effect of tariffs, net of mitigation plans, over the remainder of our fiscal year. The effect of tariffs will largely result in higher cost of sales.
Net sales. We expect underlying net sales growth in the remainder of fiscal 2019 to be slightly higher than the growth in the six months ended October 31, 2018. We continue to expect the fiscal 2019 underlying net sales growth rate to be similar to our fiscal 2018 growth rate.
Cost of sales. We expect underlying total cost of sales to grow at a significantly higher rate than net sales over the remainder of fiscal 2019, reflecting incremental costs associated with tariffs as well as input cost increases in the mid-
single digits. Combined, these costs are expected to reduce gross margin over the remainder of the fiscal year compared to the six months ended October 31, 2018.
Operating expenses. We expect the rate of change in total underlying operating expenses to decline over the remainder of the fiscal year compared to the growth rate experienced in the six months ended October 31, 2018.
Operating income. We expect underlying operating income over the remainder of fiscal 2019 to grow in line with growth rates experienced in the six months ended October 31, 2018.
Foreign exchange. For the six months ended October 31, 2018, net sales and operating income were negatively affected by foreign exchange. Considering the spot rates as of October 31, 2018, we expect that negative trend to continue for the remainder of the fiscal year.
New accounting standard. Our reported net sales and operating income were negatively affected by timing differences related to the implementation of the revenue recognition accounting standard during the six months ended October 31, 2018. We expect that negative trend to moderate over the remainder of the fiscal year.
Effective tax rate. We expect our full year effective tax rate to be between 19.5% and 20.5% based on the tax rate of 21.4% on ordinary income for the full fiscal year adjusted for known discrete items.
Results of Operations – Fiscal 20192020 Year-to-Date Highlights
Market Highlights
The following table provides supplemental information for our largest markets for the sixthree months ended OctoberJuly 31, 2018,2019, compared to the same period last year. We discuss results for the markets most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the sixthree months ended OctoberJuly 31, 2018,2019, compared to the same period last year.
Top 10 Markets1 - Fiscal 2019 Net Sales Growth by Geographic Area | |
Top 10 Markets1 - Fiscal 2020 Net Sales Growth by Geographic Area | | Top 10 Markets1 - Fiscal 2020 Net Sales Growth by Geographic Area |
| | | Percentage change versus prior year period | Percentage change versus prior year period |
| Six months ended October 31, 2018 | Net Sales | |
| Three months ended July 31, 2019 | | Net Sales |
Geographic area2 | Reported | New Accounting Standard | Foreign Exchange | Est. Net Chg in Distributor Inventories | | Underlying3 | Reported | Foreign Exchange | Est. Net Chg in Distributor Inventories | | Underlying3 |
| United States | 1 | % | 1 | % | — | % | — | % | | 3 | % | 6 | % | — | % | (1 | %) | | 4 | % |
| Developed International | 2 | % | 1 | % | 3 | % | (1 | %) | | 5 | % | (5 | %) | 1 | % | 1 | % | | (3 | %) |
| United Kingdom | (5 | %) | — | % | 9 | % | — | % | | 4 | % | (21 | %) | 7 | % | — | % | | (14 | %) |
| Australia | 1 | % | — | % | 6 | % | — | % | | 7 | % | (2 | %) | 3 | % | — | % | | 1 | % |
| Germany | 14 | % | — | % | 2 | % | — | % | | 16 | % | (6 | %) | (3 | %) | — | % | | (9 | %) |
| France | 2 | % | — | % | 1 | % | 1 | % | | 4 | % | 7 | % | (1 | %) | — | % | | 6 | % |
| Canada | (10 | %) | 2 | % | 3 | % | 2 | % | | (4 | %) | |
| Japan | | 11 | % | (3 | %) | (12 | %) | | (3 | %) |
| Rest of Developed International | 2 | % | 3 | % | (1 | %) | (3 | %) | | — | % | (1 | %) | (1 | %) | 5 | % | | 2 | % |
| Emerging | 5 | % | 2 | % | 7 | % | (3 | %) | | 10 | % | 1 | % | — | % | 2 | % | | 3 | % |
| Mexico | 2 | % | 3 | % | 6 | % | — | % | | 12 | % | 6 | % | (2 | %) | (1 | %) | | 3 | % |
| Poland | 4 | % | — | % | (2 | %) | — | % | | 2 | % | (15 | %) | 1 | % | — | % | | (14 | %) |
| Russia | 18 | % | — | % | (5 | %) | (16 | %) | | (2 | %) | 34 | % | 2 | % | 27 | % | | 62 | % |
| Brazil | 7 | % | 2 | % | 18 | % | 10 | % | | 36 | % | 14 | % | (2 | %) | (5 | %) | | 7 | % |
| Rest of Emerging | 4 | % | 2 | % | 11 | % | (6 | %) | | 10 | % | (3 | %) | — | % | 3 | % | | — | % |
| Travel Retail | 3 | % | — | % | (1 | %) | 11 | % | | 14 | % | (15 | %) | 1 | % | — | % | | (14 | %) |
| Non-branded and bulk | 11 | % | — | % | (1 | %) | — | % | | 10 | % | (22 | %) | 1 | % | — | % | | (21 | %) |
| Total | 2 | % | 1 | % | 2 | % | — | % | | 5 | % | — | % | — | % | — | % | | — | % |
| Note: Totals may differ due to rounding | | | | | | |
1“Top 10 markets” are ranked based on percentage of total fiscal 20182019 net sales. See 20182019 Form 10-K “Results of Operations - Fiscal 20182019 Market Highlights” and “Note 14. Supplemental Information.9. Net Sales.”
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.
| |
| • | United States. Reported net sales increased 6%, while underlying net sales grew 4% after adjusting for an estimated net increase in distributor inventories. The underlying net sales gains were driven by the growth of (a) our premium bourbons, led by Woodford Reserve; (b) the Jack Daniel’s family of brands, led by JDTW; and (c) tequilas, led by Herradura. Woodford Reserve growth was supported by continued strong consumer takeaway trends and JDTW growth reflects volume gains driven in part by increased media spend and promotional activities. |
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| • | Developed International. Reported net sales declined 5%, while underlying net sales were down 3% after adjusting for (a) the negative effect of foreign exchange (reflecting the strengthening of the dollar primarily against the British pound) and (b) an estimated net decrease in distributor inventories. The decline in underlying net sales was driven primarily by the United Kingdom and Germany, largely reflecting tough comparisons against prior-year tariff-related buy-ins. Buy-ins in advance of regulatory changes in Korea and growth in France only partially offset these declines. We estimate that prior-year tariff-related buy-ins and tariff-related costs reduced our underlying net sales growth in this geographic area by approximately six percentage points. |
United States. Reported net sales increased 1%, while underlying net sales increased 3% after adjusting for the adoption of the revenue recognition accounting standard. Underlying net sales gains were driven by the growth of Woodford Reserve, el Jimador, JD RTDs, Gentleman Jack, Herradura, and Old Forester. These gains were partially offset by declines of JDTW, which was largely related to (a) timing of promotional activity compared to the same period last year, (b) an inventory adjustment from a change in route-to-market in one state, and (c) comparisons against strong growth in the six months ended October 31, 2017. Declines of Canadian Mist also partially offset these gains.
Developed International. Reported net sales increased 2%, while underlying net sales grew 5% after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the British pound, Australian dollar, and euro, and (c) an estimated net increase in distributor inventories. Underlying net sales growth was led by Germany, Australia, Spain, and the United Kingdom.
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| ◦ | In the United Kingdom, the underlying net sales growthdecline was driven by higherlower volumes and unfavorable channel mix of JDTW, and JDTH, partially offset by declinesdue to prior-year tariff-related buy-ins as well as timing associated with order patterns of JD Cider.certain customers in the same period last year. |
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| ◦ | In Australia, the underlying net sales growth was driven by higher pricing and volume growthfavorable price/mix of JD RTDs, partiallymostly offset by volume declines of JDTW due to slowing consumer takeaway trends following ana buy-in ahead of the August 1, 2018 price increase associated with higher excise taxes.increase. |
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| ◦ | In Germany, the underlying net sales growthdecline was driven by volumetriclower volumes of JDTW, partially due to (a) prior-year tariff-related buy-ins and (b) timing associated with order patterns of certain customers in the same period last year. These declines were modestly offset by volume growth of JDTW and JD RTDs. |
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| ◦ | In France, the underlying net sales growth was leddriven by the launch of JD RTDs and higher volumes of JDTH, and the launch of JDTR,which was partially offset by unfavorable price/mix and volume declines of JDTW.JDTW due to prior-year tariff-related buy-ins. |
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| ◦ | In Canada,Japan, the underlying net sales decline was driven by unfavorable price/mix of JDTW, partially offset by volumetric gains of Early Times. |
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| ◦ | Underlying net sales in the Rest of Developed International increased as volume growth of JDTW in Korea, due to buy-ins in advance of regulatory changes, was partially offset by prior-year tariff-related buy-ins in certain other European markets not listed above. |
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| • | Emerging. Reported net sales increased 1%, while underlying net sales grew 3% after adjusting for an estimated net decrease in distributor inventories, primarily in Russia. Underlying net sales growth was led by Russia and China, partially offset by declines in Poland. We estimate that prior-year tariff-related buy-ins and tariff-related costs reduced our underlying net sales growth in this geographic area by approximately three percentage points. |
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| ◦ | In Mexico, the underlying net sales growth was led by higher prices and volume growth of Herradura, partially offset by volume declines of JD RTDs and New Mix. |
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| ◦ | In Poland, the underlying net sales decline was driven by lower volumes of JDTW, partially due to prior-year tariff-related buy-ins, and lower volumes and prices of Finlandia due to the competitive retail environment for vodka. |
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| ◦ | In Russia, the underlying net sales growth reflected higher volumes of JDTW and Finlandia due in part to easy comparisons to the late fiscal 2017 route-to-consumer change as well as strong consumer demand in the current year. |
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| ◦ | In Brazil, the underlying net sales growth was fueled by higher volumes of JDTF and JDTW. |
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| ◦ | Underlying net sales in the Rest of Emerging were flat as growth of JDTW in China and Southeast Asia was offset by declines of JDTW in Turkey and Romania due to prior-year tariff-related buy-ins. |
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| • | Travel Retail. Reported net sales declined 15%, while underlying net sales were down 14% after adjusting for the negative effect of foreign exchange. The underlying net sales decline was driven by lower volumes of the Jack Daniel’s family of brands due to a changethe timing of customer orders in distributor.the same period last year. |
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◦• | UnderlyingNon-branded and bulk. Reported net sales in the Rest of Developed International were flat as growth in Spain and Czechia were offset in the rest of developed Europe. In Spain, JDTW grew volumes along with favorable price/mix, where our new owned-distribution organization has led to an acceleration in performance over the past 12 months. In Czechia, growth was led by increased volumes of JDTW and JDTH. |
Emerging. Reported net sales increased 5%declined 22%, while underlying net sales grew 10% after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the Turkish lira and Mexican peso, and (c) an estimated net increase in distributor inventories. Underlying net sales growth was led by Mexico, Brazil, Commonwealth of Independent States (CIS), and China.
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◦ | In Mexico, underlying net sales growth was ledwere down 21% after adjusting for the negative effect of foreign exchange. Declines were driven by volume growthlower volumes and favorable price/mix of Herraduraprices for used barrels along with volume growth and higher prices of New Mix. The growtha decrease in Herradura benefited from consumer-led volumetric growth of Herradura Ultra, our “cristalino” tequila expression. |
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◦ | In Poland, underlying net sales growth was driven by increased volumes of JDTW, mostly offset by unfavorable product and channel mix of Finlandia. |
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◦ | In Russia, the underlying net sales decline was driven by Finlandia and Early Times, which was mostly due to the change to a new distributor in late fiscal 2018 and related buying patterns. Volume growth of JDTW partially offset the decline for these brands. |
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◦ | In Brazil, underlying net sales growth was fueled by higher volumes and pricing of JDTW, which was partially due to timing of buying patterns compared to the same period last year. |
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◦ | The increase in underlying net sales in the Rest of Emerging was led by CIS, China, sub-Saharan Africa, and Turkey. All of these geographic areas benefited from higher volumes of JDTW.contract bottling sales. |
Travel Retail. Reported net sales increased 3%, while underlying net sales increased 14% after adjusting for the positive effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was led by (a) higher volumes of JDTW and Woodford Reserve due to the timing of customer orders in the current year, strong consumer demand, and increased travel and (b) the launch of Jack Daniel’s Bottled-in-Bond and JDTR.
Non-branded and bulk. Reported net sales increased 11%, while underlying net sales increased 10% after adjusting for the positive effect of foreign exchange. Underlying net sales growth was driven by increased bulk whiskey and wine sales along with higher pricing of used barrels.
Brand Highlights
The following table provides supplemental information for our largest brands for the sixthree months ended OctoberJuly 31, 2018,2019, compared to the same period last year. We discuss results of the brands most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the sixthree months ended OctoberJuly 31, 2018,2019, compared to the same period last year.
| Major Brands Worldwide Results | | | | Percentage change versus prior year period | Percentage change versus prior year period |
| Six months ended October 31, 2018 | Volumes | | Net Sales | |
| Three months ended July 31, 2019 | | Volumes | | Net Sales |
Product category / brand family / brand1 | 9L Depletions1 | | Reported | New Accounting Standard | Foreign Exchange | Est. Net Chg in Distributor Inventories | | Underlying2 | 9L Depletions1 | | Reported | Foreign Exchange | Est. Net Chg in Distributor Inventories | | Underlying2 |
| Whiskey | 5 | % | | 3 | % | 1 | % | 2 | % | — | % | | 6 | % | — | % | | 1 | % | — | % | (1 | %) | | — | % |
| Jack Daniel's family of brands | 5 | % | | 2 | % | 1 | % | 2 | % | — | % | | 5 | % | — | % | | (1 | %) | — | % | (1 | %) | | (1 | %) |
| JDTW | 3 | % | | — | % | 1 | % | 2 | % | (1 | %) | | 3 | % | (5 | %) | | (3 | %) | — | % | (2 | %) | | (4 | %) |
| Jack Daniel's RTD/RTP | 7 | % | | 6 | % | — | % | 5 | % | — | % | | 12 | % | |
| JD Tennessee Honey | 8 | % | | 11 | % | 1 | % | 2 | % | (6 | %) | | 8 | % | |
| JD RTD/RTP | | 4 | % | | 6 | % | 1 | % | — | % | | 7 | % |
| JDTH | | 5 | % | | (3 | %) | 1 | % | 7 | % | | 5 | % |
| Gentleman Jack | 10 | % | | 5 | % | 1 | % | 2 | % | 2 | % | | 10 | % | 5 | % | | 10 | % | — | % | (3 | %) | | 7 | % |
| JD Tennessee Fire | 8 | % | | 7 | % | 1 | % | 1 | % | (3 | %) | | 7 | % | |
| JDTF | | 3 | % | | (2 | %) | — | % | 5 | % | | 2 | % |
| Other Jack Daniel's whiskey brands | 35 | % | | — | % | 1 | % | 1 | % | 18 | % | | 20 | % | 3 | % | | (4 | %) | 1 | % | (1 | %) | | (4 | %) |
| Woodford Reserve | 24 | % | | 24 | % | 1 | % | 1 | % | (1 | %) | | 25 | % | 18 | % | | 22 | % | — | % | (7 | %) | | 15 | % |
| Tequila | 6 | % | | 7 | % | 3 | % | 4 | % | (1 | %) | | 12 | % | (2 | %) | | 9 | % | — | % | 3 | % | | 12 | % |
| el Jimador | 6 | % | | 8 | % | 3 | % | 2 | % | (3 | %) | | 11 | % | 6 | % | | — | % | 1 | % | 8 | % | | 10 | % |
| Herradura | 12 | % | | 11 | % | 3 | % | 3 | % | (2 | %) | | 15 | % | 13 | % | | 22 | % | — | % | 1 | % | | 22 | % |
| Vodka (Finlandia) | (2 | %) | | (9 | %) | 1 | % | 4 | % | (3 | %) | | (8 | %) | (6 | %) | | (9 | %) | (1 | %) | 5 | % | | (5 | %) |
| Wine | (1 | %) | | (3 | %) | 2 | % | — | % | 1 | % | | — | % | — | % | | (1 | %) | — | % | 2 | % | | 1 | % |
| Rest of Portfolio | (8 | %) | | (17 | %) | — | % | 7 | % | 1 | % | | (8 | %) | 3 | % | | (1 | %) | (3 | %) | 1 | % | | (3 | %) |
| Non-branded and bulk | NM |
| | 11 | % | — | % | (1 | %) | — | % | | 10 | % | NA |
| | (22 | %) | 1 | % | — | % | | (21 | %) |
| Note: Totals 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.
Whiskey brands grew reported net sales 3%, while underlying net sales grew 6% after adjusting for (a) the adoption of the revenue recognition accounting standard and (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the Turkish lira, British pound, Australian dollar, and euro. Growth was led by the Jack Daniel’s family of brands and Woodford Reserve.
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| • | Whiskey brands grew reported net sales 1%, while underlying net sales were flat after adjusting for an estimated net increase in distributor inventories. Growth of Woodford Reserve, JD RTDs, JDTH, and our Scotch brands was offset by declines of JDTW driven by prior-year tariff-related buy-ins and tariff-related costs. |
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| ◦ | The Jack Daniel’s family of brands underlying net sales growthdecline was leddriven by lower JDTW in markets outside of the United States along withvolumes, partially offset by broad-based geographic growth of JD RTDs and JDTH. |
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| ▪ | JDTW grew underlying net sales declines were due to lower volumes in the majority of itsdeveloped international markets, including Brazil, Germany, Spain, Travel Retail, Poland, the United Kingdom,largely reflecting prior-year tariff-related buy-ins, and Turkey, partially offset by volume declines in the United States, which was largely relatedTravel Retail due to (a)the timing of promotional activity compared tocustomer orders in the same period last year, (b) an inventory adjustmentyear. This growth was partially offset by increased volumes in Russia and the United States, the latter of which benefited from a change in route-to-market in one state,increased media spend and (c) comparisons against strongpromotional activities. We estimate that prior-year tariff-related buy-ins and tariff-related costs reduced our underlying net sales growth in the six months ended October 31, 2017.for this brand by approximately five percentage points. |
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| ▪ | The increase in underlying net sales growth for Jack Daniel’s RTD/RTP was driven by higher pricesthe product launch in France, favorable price/mix in Australia, along with continuedand volume growth in Germany where consumer momentum in Germany and the United States.remained strong. |
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| ▪ | JDTH increased underlying net sales with broad-based volume growth led by France and Poland driven by strong consumer demand. |
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| ▪ | Gentleman Jack grew underlying net sales with higher volumes in the United States as well as broad-based international gains led by volume gains in France, Brazil, the United Kingdom, and Travel Retail.Kingdom. |
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| ▪ | Gentleman Jack grewThe growth in underlying net sales with volume growthof JDTF was driven by increased volumes in the United States along with broad-based international growth led by the United Kingdom and Poland.Brazil.
|
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| ▪ | Growth ofThe underlying net sales decline of JDTF was driven by higher volumes in the United States.
|
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▪ | Underlying net sales growth for Other Jack Daniel’s whiskey brands was leddriven by JDTR, which launched in select European markets and Travel Retail in fiscal 2019, the growth of Jack Daniel’s Single Barrel declines in the United States and Germany, and the launch of Jack Daniel’s Bottled-in-Bond in Travel Retail.certain developed international markets.
|
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| ◦ | Woodford Reserve led continued to lead the growth of our premium bourbons. Underlyingbourbons as the underlying net sales growth was drivengains were fueled by the United States where volumetric growth was supported by strong consumer takeaway trends led to volumetric gains. Higher volumes in Travel Retail also contributed to the brand’s growth.trends. |
Tequila brands grew reported net sales 7%, while underlying net sales grew 12% after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the Mexican peso, and (c) an estimated net increase in distributor inventories.
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| • | Tequila brands grew reported net sales 9%, while underlying net sales grew 12% after adjusting for an estimated net decrease in distributor inventories. |
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| ◦ | el Jimador grew underlying net sales driven byreflecting higher volumes and prices in the United States and Mexico, as takeaway trends remain strong in Mexico.strong. |
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| ◦ | Herradura grew underlying net sales driven by volumetric growthhigher prices and favorable mixvolumes in Mexico and higheralong with increased volumes and prices in the United States. Consumer-led volumetric |
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| • | Reported net sales for Finlandia declined 9%, while underlying net sales decreased 5% after adjusting for (a) an estimated net decrease in distributor inventories and (b) the positive effect of foreign exchange (reflecting the weakening of the dollar primarily against the Turkish lira). The decrease in underlying net sales was driven by lower volumes and prices in Poland due to the competitive retail environment for vodka, partially offset by volume growth in Russia. |
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| • | Reported net sales of our wine brands declined 1%, while underlying net sales increased 1% after adjusting for an estimated net decrease in distributor inventories. Volume growth of Herradura Ultra droveSonoma-Cutrer was partially offset by lower volumes of Korbel Champagne, both in the growthUnited States. |
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| • | Rest of portfolio reported net sales declined 1%, while underlying net sales decreased 3% after adjusting for the positive effect of foreign exchange and an estimated net decrease in Mexico.distributor inventories. The decline was driven by lower volumes and unfavorable price/mix of Chambord in the United Kingdom. |
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| • | Non-branded and bulk reported net sales decreased 22%, while underlying net sales decreased 21% after adjusting for the negative effect of foreign exchange. Declines were driven by lower volumes and prices for used barrels along with a decrease in contract bottling sales. |
Reported net sales for Finlandia declined 9%, while underlying net sales decreased 8% after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the Russian ruble and Turkish lira, and (c) an estimated net increase in distributor inventories. Unfavorable product and channel mix in Poland and lower volumes in Russia and the United States drove the decrease in underlying net sales.Wine brands reported net sales declined 3%, while underlying net sales were flat after adjusting for the adoption of the revenue recognition accounting standard and an estimated net decrease in distributor inventories. Volume declines of Korbel Champagne were offset by growth of Sonoma-Cutrer in the United States.
Rest of portfolio reported net sales declined 17%, while underlying net sales decreased 8% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. The decline was due to discontinued agency brands in Turkey.
Non-branded and bulk. Reported net sales increased 11%, while underlying net sales increased 10% after adjusting for the positive effect of foreign exchange. Underlying net sales growth was driven by increased bulk whiskey and wine sales along with higher pricing of used barrels.
Year-over-Year Period Comparisons | Net Sales |
| | | | | |
| Percentage change versus the prior year period ended October 31 | 3 Months | | 6 Months |
| Change in reported net sales | — | % | | 2 | % |
| New accounting standard | 1 | % | | 1 | % |
| Foreign exchange | 2 | % | | 2 | % |
| Estimated net change in distributor inventories | — | % | | — | % |
| Change in underlying net sales | 3 | % | | 5 | % |
| | | | |
| Change in underlying net sales attributed to: | | | |
| Volume | 2 | % | | 3 | % |
| Net price/mix | 1 | % | | 2 | % |
| Note: Totals may differ due to rounding | | | |
| Net Sales |
| | |
| Percentage change versus the prior year period ended July 31 | 3 Months |
| Change in reported net sales | — | % |
| Foreign exchange | — | % |
| Estimated net change in distributor inventories | — | % |
| Change in underlying net sales | — | % |
| |
| Change in underlying net sales attributed to: | |
| Volume | (1 | %) |
| Price/mix | 1 | % |
| Note: Totals may differ due to rounding | |
ForNet sales of $766 million for the three months ended OctoberJuly 31, 2018, net sales2019 were $910 million, a decrease of $4 million, or flat compared to the same period last year. After adjustingyear on both a reported results for (a) the adoption of the revenue recognition accounting standard and (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the Turkish lira, British pound, and Australian dollar, underlying net sales grew 3%. The change in underlying net sales was driven by 2%basis as favorable price/mix offset volume growth and 1% of net price/mix. Volume growth was led by our tequila brands, Woodford Reserve, and JD RTDs. Net price/declines. Price/mix was driven by (a) favorable portfolio mix of fast growing higher-pricedled by our American whiskey brands most notably the Jack Daniel’s family of brands and Woodford Reserve, and (b) higher average pricing on tequilasour tequila brands. Volume declines were driven by JDTW, reflecting prior-year tariff-related buy-ins, and JD RTDs,Finlandia. These declines were partially offset by lower average pricing to certain customers on JDTW related to tariffs in certain European markets.volumetric growth of our premium bourbons and our tequila brands. We estimate that the second quarter tariff-related inventory reductionscosts and lower pricing to certain customers related to tariffsprior-year tariff-related buy-ins reduced our underlying net sales growth by approximately twothree percentage points for the three months ended OctoberJuly 31, 2018.
The primary factors contributing to the growth in2019. See “Results of Operations - Fiscal 2020 Year-to-Date Highlights” above for further details on underlying net sales for the three months ended OctoberJuly 31, 2018 were:
growth of several American whiskey brands in the United States led by Woodford Reserve, JDTW, Gentleman Jack, and Old Forester;
higher volume of JD RTDs led by Australia, Germany, and the United States;
growth of our tequila brands, led by (a) volumetric growth and favorable price/mix of Herradura and el Jimador in Mexico and the United States and (b) higher volumes and prices of New Mix in Mexico;
volumetric growth of JDTW in several international markets, most notably, Brazil, Russia, Spain, and sub-Saharan Africa;
broad-based international growth of JDTH led by France, Brazil, Russia, and Travel Retail;
increased bulk whiskey and wine contract sales;
expansion of JDTR to France and Travel Retail;
higher volume and favorable price/mix of Sonoma-Cutrer in the United States; and
the launch of Jack Daniel’s Bottled-in-Bond in Travel Retail.
These gains in underlying net sales were partially offset by:
volume declines of JDTW in the United Kingdom, Germany, and France, as many European markets were down due to second quarter tariff-related inventory reductions, and volume declines in Australia following an August 2018 price increase associated with higher excise taxes;
declines of JDTR in the United States as the brand cycled its September 2017 launch;
declines of Finlandia in Poland and Russia, the former of which is partially due to unfavorable product and channel mix;
declines in our contract bottling operations;
declines of Canadian Mist in the United States; and
declines of JD Cider in the United Kingdom.
For the six months ended October 31, 2018, net sales were $1.7 billion, an increase of $39 million, or 2%, compared to the same period last year. Underlying net sales grew 5% after adjusting reported results for (a) the adoption of the revenue recognition accounting standard and (b) the negative effect of foreign exchange reflecting the strengthening of the dollar
against the Turkish lira, British pound, Australian dollar, and Mexican peso. The change in underlying net sales was driven by 3% volume growth and 2% of net price/mix. Volume growth was led by the Jack Daniel's family of brands, tequilas, and premium bourbons, partially offset by declines in Canadian Mist. Net price/mix was driven by (a) favorable portfolio mix of fast growing higher-priced brands, most notably, the Jack Daniel’s family of brands and Woodford Reserve, and (b) higher average pricing on tequilas and JD RTDs. We estimate that lower pricing to certain customers related to tariffs reduced our underlying net sales growth by approximately one percentage point for the six months ended October 31, 2018. See “Results of Operations - Fiscal 2019 Year-to-Date Highlights” above for further details on the factors contributing to the growth in underlying net sales for the six months ended October 31, 2018.2019.
| Cost of Sales |
| | | | | |
| Percentage change versus the prior year period ended October 31 | 3 Months | | 6 Months |
| Change in reported cost of sales | 5 | % | | 6 | % |
| New accounting standard | — | % | | — | % |
| Foreign exchange | 2 | % | | 2 | % |
| Estimated net change in distributor inventories | — | % | | — | % |
| Change in underlying cost of sales | 7 | % | | 7 | % |
| | | | |
| Change in underlying cost of sales attributed to: | | | |
| Volume | 2 | % | | 3 | % |
| Cost/mix | 5 | % | | 4 | % |
Note: Totals may differ due to rounding
| | | |
| Cost of Sales |
| | |
| Percentage change versus the prior year period ended July 31 | 3 Months |
| Change in reported cost of sales | 10 | % |
| Foreign exchange | — | % |
| Estimated net change in distributor inventories | 1 | % |
| Change in underlying cost of sales | 11 | % |
| |
| Change in underlying cost of sales attributed to: | |
| Volume | (1 | %) |
| Cost/mix | 12 | % |
Note: Totals may differ due to rounding
| |
Cost of sales of $268 million for the three months ended OctoberJuly 31, 20182019 increased $16$25 million, or 5%10%, to $320 million when compared to the same period last year. Underlying cost of sales increased 7%11% after adjusting reported costs for the positive effect of foreign exchange.
Cost of sales for the six months ended October 31, 2018 increased $29 million, or 6%, to $563 million when compared to the same period last year. Underlying cost of sales increased 7% after adjusting reported costs for the positive effect of foreign exchange.an estimated net decrease in distributor inventories. The increase in underlying cost of sales for the three and six months ended OctoberJuly 31, 20182019 was driven by higher volumes,tariff-related costs and higher input costs, including woodagave and agave, a shift in product mix to higher-cost brands, and incremental costs associated with tariffs. Looking ahead towood. We estimate that approximately half of the remainder of fiscal 2019, we expect (a) input costs tooverall increase in the mid-single digits largelyunderlying cost of sales was due to highertariff-related costs.
| Gross Profit |
| | |
| Percentage change versus the prior year period ended July 31 | 3 Months |
| Change in reported gross profit | (5 | %) |
| Foreign exchange | — | % |
| Estimated net change in distributor inventories | — | % |
| Change in underlying gross profit | (5 | %) |
Note: Totals may differ due to rounding
| |
| Gross Margin |
| | |
| For the period ended July 31 | 3 Months |
| Prior year gross margin | 68.2 | % |
| Price/mix | 0.5 | % |
| Cost | (1.5 | %) |
Tariffs1 | (2.1 | %) |
| Foreign exchange | (0.2 | %) |
| Change in gross margin | (3.3 | %) |
| Current year gross margin | 64.9 | % |
Note: Totals may differ due to rounding
| |
1“Tariffs” include the combined effect of tariff-related costs, whether arising as a reduction of net sales or as an increase in cost of wood and agave, and (b) incremental costs associated with tariffs to increase significantly relative to the six months ended October 31, 2018.
| Gross Profit |
| | | | | |
| Percentage change versus the prior year period ended October 31 | 3 Months | | 6 Months |
| Change in reported gross profit | (3 | %) | | 1 | % |
| New accounting standard | 1 | % | | 2 | % |
| Foreign exchange | 2 | % | | 2 | % |
| Estimated net change in distributor inventories | — | % | | — | % |
| Change in underlying gross profit | 1 | % | | 5 | % |
Note: Totals may differ due to rounding
| | | |
| Gross Margin |
| | | | | |
| For the period ended October 31 | 3 months | | 6 Months |
| Prior year gross margin | 66.8 | % | | 67.4 | % |
| Price/mix | (0.1 | %) | | 0.1 | % |
| Cost | (1.4 | %) | | (0.7 | %) |
| New accounting standard | (0.3 | %) | | (0.4 | %) |
| Foreign exchange | (0.2 | %) | | — | % |
| Change in gross margin | (2.0 | %) | | (1.0 | %) |
| Current year gross margin | 64.8 | % | | 66.4 | % |
Note: Totals may differ due to rounding
| | | |
sales. See “Overview - Tariffs” for additional details of these costs.
Gross profit of $590$498 million decreased $20$25 million, or 3%5%, for the three months ended OctoberJuly 31, 20182019 compared to the same period last year. Underlying gross profit grew 1% after adjusting reported results for the adoption of the revenue recognition accounting standard and the negative effect of foreign exchange. The increase in underlying gross profit resulted fromalso declined 5% due to the same factors that contributed to the increase inflat underlying net sales and the increase in underlying cost of sales.
For the three months ended OctoberJuly 31, 2018,2019, gross margin decreased approximately 2.03.3 percentage points to 64.8%64.9% from 66.8%68.2% in the same period last year driven by (a)tariff-related costs and an increase in input costs, (b) incremental costs associated with tariffs, (c) the adoption of the revenue recognition accounting standard, and (d) the negative effect of foreign exchange.
Gross profit of $1.1 billion increased $10 million, or 1%, for the six months ended October 31, 2018 compared to the same period last year. Underlying gross profit grew 5% after adjusting reported results for the adoption of the revenue recognition accounting standard and the negative effect of foreign exchange. 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 six months ended October 31, 2018, gross margin decreased approximately 1.0 percentage point to 66.4% from 67.4% in the same period last year driven by (a) an increase in input costs, (b) the adoption of the revenue recognition accounting standard, and (c) incremental costs associated with tariffs.costs.
| Operating Expenses | | | Percentage change versus the prior year period ended October 31 | |
| Percentage change versus the prior year period ended July 31 | | Percentage change versus the prior year period ended July 31 |
| 3 Months | Reported | New Accounting Standard | Foreign Exchange | | Underlying | Reported | Foreign Exchange | | Underlying |
| Advertising | (7 | %) | 4 | % | 3 | % | | — | % | (6 | %) | 2 | % | | (4 | %) |
| SG&A | (1 | %) | 1 | % | 2 | % | | 1 | % | (2 | %) | 2 | % | | (1 | %) |
Total operating expenses1 | (1 | %) | 2 | % | 1 | % | | 2 | % | (3 | %) | 1 | % | | (2 | %) |
| | | | | |
| 6 Months | | | | |
| Advertising | 2 | % | 4 | % | 1 | % | | 7 | % | |
| SG&A | 2 | % | — | % | 1 | % | | 3 | % | |
Total operating expenses1 | 2 | % | 2 | % | 2 | % | | 5 | % | |
| Note: Totals may differ due to rounding | | | | | | |
1Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
| |
1Total operating expenses include advertising expense, SG&A expense, and other expense (income), net.
| | 1Total operating expenses include advertising expense, SG&A expense, and other expense (income), net.
|
Operating expenses totaled $258$250 million, down $3$9 million, or 1%3%, for the three months ended OctoberJuly 31, 20182019 compared to the same period last year. Underlying operating expenses grewdecreased 2% after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard and the positive effect of foreign exchange.
Reported advertising expenses declined 7%6% for the three months ended OctoberJuly 31, 2018,2019, while underlying advertising expenses were flatdecreased 4% after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard and the positive effect of foreign exchange. Underlying advertising expenses were drivenIncreased media spend on JDTW in the United States was more than offset by continued investment in our American whiskey portfolio, including JDTW and Woodford Reserve, as well as investment in Korbel Champagne. These increases were offset bythe timing of spending on our tequila brandstequilas and JD RTDs.the rest of the Jack Daniel’s family of brands.
Reported SG&A expenses declined 1%decreased 2% for the three months ended OctoberJuly 31, 2018, while underlying SG&A grew 1% after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard and the positive effect of foreign exchange. The increase in underlying SG&A was driven by higher personnel costs, partially offset by lower incentive compensation-related expenses.
Operating expenses totaled $517 million, up $9 million, or 2%, for the six months ended October 31, 2018 compared to the same period last year. Underlying operating expenses grew 5% after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard and the positive effect of foreign exchange.
Reported advertising expenses grew 2% for the six months ended October 31, 2018, while underlying advertising expenses grew 7% after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard and the positive effect of foreign exchange. Underlying advertising expense increased as we invested in our American whiskey brands, including the first year of our Woodford Reserve Kentucky Derby sponsorship, investment in the Jack Daniel’s family of brands, and the new Old Forester homeplace and distillery.
Reported SG&A expenses increased 2% for the six months ended October 31, 2018,2019, while underlying SG&A expenses grew 3%decreased 1% after adjusting for the positive effect of foreign exchange. The increasedecrease in underlying SG&A expenses was driven by higher personnel costs, partially offset by lower incentive compensation-related expenses.costs.
| Operating Income |
| | | | | |
| Percentage change versus the prior year period ended October 31 | 3 Months | | 6 Months |
| Change in reported operating income | (5 | %) | | — | % |
| New accounting standard | 1 | % | | 1 | % |
| Foreign exchange | 3 | % | | 3 | % |
| Estimated net change in distributor inventories | 1 | % | | — | % |
| Change in underlying operating income | — | % | | 4 | % |
Note: Totals may differ due to rounding
| | | |
| Operating Income |
| | |
| Percentage change versus the prior year period ended July 31 | 3 Months |
| Change in reported operating income | (6 | %) |
| Foreign exchange | (1 | %) |
| Estimated net change in distributor inventories | (1 | %) |
| Change in underlying operating income | (8 | %) |
Note: Totals may differ due to rounding
| |
Operating income of $332$248 million decreased $17$16 million, or 5%6%, for the three months ended OctoberJuly 31, 20182019 compared to the same period last year. Underlying operating income was flatdeclined 8% after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negativepositive effect of foreign exchange and (c)
an estimated net decreasechange in distributor inventories. The same factors that contributed to the growthdecrease in underlying gross profit also contributed to the growthdecline in underlying operating income, while an increasepartially offset by the decrease in total underlying operating expenses partially offset these gains. We estimate that (a) second quarter tariff-related inventory reductions and (b) incremental costs associated with tariffs lowered our underlying operating income growth by approximately sixexpenses.
Operating margin decreased 2.1 percentage points to 32.4% for the three months ended OctoberJuly 31, 2018.
For the three months ended October 31, 2018, operating margin decreased 1.7 percentage points to 36.5%,2019 from 38.2% in the same period last year. The decrease in our operating margin was driven by the decrease in underlying gross margin, partially due to the incremental costs associated with tariffs, and the negative effect of foreign exchange.
Operating income of $596 million increased $1 million, or flat, for the six months ended October 31, 2018 compared to the same period last year. Underlying operating income grew 4% after adjusting for the adoption of the revenue recognition accounting standard and the negative effect of foreign exchange. 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. We estimate that the incremental costs associated with tariffs lowered our underlying operating income growth by approximately two percentage points.
Operating margin decreased 0.7 percentage points to 35.6% for the six months ended October 31, 2018 from 36.3%34.5% in the same period last year. The decrease in our operating margin was due mainly to the decreasedecline in underlying gross margin, largely reflecting the incrementaltariff-related costs associated with tariffs,and higher input costs of agave and wood. These factors were partially offset by slower growth of SG&Alower operating expenses.
The effective tax rate in the three months ended OctoberJuly 31, 20182019 was 19.5%18.2% compared to 27.9% for the same period last year. The decrease in our effective tax rate was primarily driven by the net impact of the Tax Act (including the current quarter increase to the provisional repatriation U.S. tax charge recorded in fiscal 2018).
The effective tax rate in the six months ended October 31, 2018 was 18.6% compared to 25.5% for the same period last year. The decrease in our effective tax rate was primarily driven by the net impact of the Tax Act (including the current year reduction to the provisional repatriation U.S. tax charge recorded in fiscal 2018), partially offset by the absence of the amortization of the deferred tax benefit that was reclassified to retained earnings as a result of the adoption of ASU 2016-16. See Note 1 to the accompanying financial statements for additional information.
Diluted earnings per share of $0.52 in the three months ended October 31, 2018 increased 4% from the $0.49 reported for the same period last year. Diluted earnings per share of $0.93 in the six months ended October 31, 2018 increased 8% from the $0.86 reported17.4% for the same period last year. The increase in diluted earnings per share for the three and six months ended October 31, 2018 resulted from the benefit of a lowerour effective tax rate fromwas driven by the absence of the prior-year beneficial change in the transitional impacts of the Tax Cuts and Jobs Act, partially offset by higher interestan increase in excess tax benefits related to stock-based compensation and a decrease in tax expense which resultedrelated to other discrete items.
Diluted earnings per share of $0.39 in the three months ended July 31, 2019 decreased 6% from a new bond issuancethe $0.41 reported for the same period last year due to the decrease in March 2018.reported operating income.
Liquidity and Financial Condition
Cash flows. Cash and cash equivalents decreased $46 million during the six months ended October 31, 2018, compared to an increase of $30 million during the same period last year. Cash provided by operations was $272$72 million during the sixthree months ended OctoberJuly 31, 2018,2019, compared to $218$126 million for the same period last year. The $54 million increase primarily reflects a $47 million reduction in U.S. federal income tax payments, duedecrease was attributable largely to the effecteffects of tariffs and higher input costs of wood and agave, all of which negatively affected our operating results and increased the Tax Act. The increase also reflects a $30 million reduction in discretionary contributions tocost of our qualified pension plans (which became fully funded as a result of a contribution made during the fourth quarter of last fiscal year), partially offset by a higher seasonal increase in working capital.inventories.
Cash used for investing activities was $57$43 million during the sixthree months ended OctoberJuly 31, 2018,2019, compared to $69$25 million for the same period last year. The $12$18 million decline was largely attributable to the timingincrease reflects our acquisition of The 86 Company for $22 million (in July 2019), partially offset by a $2 million reduction in payments for corporate-owned life insurance and a $2 million decrease in capital projects.spending.
Cash used for financing activities was $243$26 million during the sixthree months ended OctoberJuly 31, 2018,2019, compared to $127$122 million for the same period last year. The $116$96 million increasedecrease largely reflects a $127$108 million increasedecline in share repurchases and a $12 million increase in dividend payments,net repayments of short-term borrowings, partially offset by a $21$9 million increase in net proceedspayments for shares withheld from short-term borrowings.employees to satisfy their withholding tax obligations on stock-based awards.
The impact on cash and cash equivalents as a result of exchange rate changes was a decrease of $18$3 million for the sixthree months ended OctoberJuly 31, 2018,2019, compared to an increasea decrease of $8$7 million for the same period last year.
Liquidity. We continue to manage liquidity conservatively to meet current obligations, fund capital expenditures, sustain and grow our regular dividends, and return cash to our shareholders from time to time through share repurchases and special dividends while reserving adequate debt capacity for acquisition opportunities.
In addition to our 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. During the three months ended October 31, 2018, our commercial paper borrowings averaged $479 million, with an average maturity of 31 days and an average interest rate of 2.20%. During the six months ended October 31, 2018, our commercial paper borrowings averaged $471 million, with an average maturity of 31 days and an average interest rate of 2.14%. Commercial paper outstanding was $215$150 million at April 30, 2019, and $220 million at July 31, 2019. The average balances, interest rates, and maturities during the periods ended July 31, 2018 and $257 million at October 31, 2018.2019 are presented below.
|
| | | |
| | Three Months |
| | Ended July 31, |
| (Dollars in millions) | 2018 | | 2019 |
| Average daily commercial paper | $463 | | $336 |
| Average interest rate | 2.09% | | 2.56% |
| Average remaining days to maturity | 31 | | 32 |
Our commercial paper program is supported by available commitments under our currently undrawn $800 million bank credit facility that expires on November 10, 2022. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fully fund its commitments under our credit facility. We believe 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.
As of OctoberJuly 31, 2018,2019, approximately $160 million82% of our cash and cash equivalents were held by our foreign subsidiaries whose earnings we had expected to reinvestare reinvested indefinitely outside of the United States. As discussed in Note 310 to the accompanying financial statements, during fiscal 2019, we intendchanged our indefinite reinvestment assertion with respect to repatriate approximately $120 million of that cash to the United States from one of thosecurrent-year earnings and prior-year undistributed earnings for select foreign subsidiaries during the fiscal quarter ending January 31, 2019.(but not for their other outside basis differences). No incremental taxes will be due on this distribution of cash beyond the repatriation tax recorded in fiscal 2018.further changes have been made to our indefinite reinvestment assertion. We continue to evaluate our future cash deployment and may decide to repatriate additional cash held by thoseother foreign subsidiaries. However, futuresubsidiaries to the United States. Future repatriations to the United States may require us to provide for and pay additional taxes.
As announced on November 15, 2018,July 25, 2019, our Board of Directors increased thedeclared a regular quarterly cash dividend of $0.166 per share on our Class A and Class B common stock from $0.158 per share to $0.166 per share.stock. Stockholders of record on DecemberSeptember 6, 20182019, will receive the quarterly cash dividend on January 2,October 1, 2019.
Share repurchases. As announced on July 13, 2018, our Board of Directors authorized the repurchase of up to $200 million of our outstanding shares of Class A and Class B common stock from July 13, 2018, through July 12, 2019, subject to market and other conditions. As of October 31, 2018, we had repurchased a total of 2,580,635 shares under this program for approximately $122 million. We completed this program with $78 million of additional repurchases during November 2018.
The results of this share repurchase program are summarized in the following table.
|
| | | | | | | | | | | | | | | | | | |
| | | Shares Purchased | | Average Price Per Share, Including Brokerage Commissions | | Total Cost of Shares |
| Period | | Class A | | Class B | | Class A | | Class B | | (Millions) |
| May 1, 2018 – July 31, 2018 | | — |
| | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
| August 1, 2018 – October 31, 2018 | | 28,460 |
| | 2,552,175 |
| | $ | 47.40 |
| | $ | 47.17 |
| | $ | 122 |
|
| November 1, 2018 - November 30, 2018 | | 14,953 |
| | 1,634,428 |
| | $ | 47.65 |
| | $ | 47.50 |
| | $ | 78 |
|
| | | 43,413 |
| | 4,186,603 |
| | $ | 47.49 |
| | $ | 47.30 |
| | $ | 200 |
|
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risks arising from adverse changes in (a) foreign 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 foreign exchange rate changes, our commodity forward purchase contracts are subject to commodity price changes, and some of our debt obligations are subject to interest rate changes. Established procedures and internal processes govern the management of these market risks. Since April 30, 2018,2019, there have been no material changes to the disclosure on this matter made in our 20182019 Form 10-K.
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 procedures: (a) are effective to ensure that information required to be disclosed by the companyCompany in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (b) include controls and procedures designed to ensure that information required to be disclosed by the companyCompany in such reports is accumulated and communicated to the company’sCompany’s management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We operate in a litigious environment and we are sued in the normal course of business. We do not anticipate that any pending legal 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 20182019 Form 10-K, 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 20182019 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information about shares of our common stock (Class A and Class B, in total) that we acquired during the quarter ended OctoberJuly 31, 2018:2019:
|
| | | | | | | | | | |
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs |
| August 1, 2018 – August 31, 2018 | — |
| $ | — |
| — |
| $ | 200,000,000 |
|
| September 1, 2018 – September 30, 2018 | 18,107 |
| $ | 48.52 |
| 18,107 |
| $ | 199,100,000 |
|
| October 1, 2018 – October 31, 2018 | 2,563,948 |
| $ | 47.16 |
| 2,562,528 |
| $ | 78,300,000 |
|
| Total | 2,582,055 |
| $ | 47.17 |
| 2,580,635 |
| |
|
| | | | | | | | | | |
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs |
| May 1, 2019 – May 31, 2019 | 16,941 |
| $ | 52.50 |
| — |
| $ | — |
|
| June 1, 2019 – June 30, 2019 | — |
| $ | — |
| — |
| $ | — |
|
| July 1, 2019 – July 31, 2019 | — |
| $ | — |
| — |
| $ | — |
|
| Total | 16,941 |
| $ | 52.50 |
| — |
| |
As announced on July 13, 2018, our Board of Directors has authorized the repurchase of up to $200 million of our outstandingThe shares of Class A and Class B common stock from July 13, 2018, through July 12, 2019, subject to market and other conditions. Of the 2,582,055 total shares presented in the above table, 2,580,635 were acquired as part of this repurchase program. The remaining 1,420 shares presented in the above table were acquired from an employeeemployees to satisfy income tax withholdingwithholdings triggered by the vesting of restricted shares.
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: |
| | |
| 31.1 | | |
| 31.2 | | |
| 32 | | |
| 101 | | The following materials from Brown-Forman Corporation's Quarterly Report on Form 10-Q for the quarter ended OctoberJuly 31, 2018, formatted2019, in Inline XBRL (eXtensible Business Reporting Language): format: (a) Condensed Consolidated Statements of Operations, (b) Condensed Consolidated Statements of Comprehensive Income, (c) Condensed Consolidated Balance Sheets, (d) Condensed Consolidated Statements of Cash Flows, and (e) Notes to the Condensed Consolidated Financial Statements. |
| 104 | | Cover Page Interactive Data File in Inline XBRL format (included in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | |
| | | BROWN-FORMAN CORPORATION |
| | | (Registrant) |
| | | | |
| Date: | December 6, 2018August 28, 2019 | By: | /s/ Jane C. Morreau |
| | | | Jane C. Morreau |
| | | | Executive Vice President and Chief Financial Officer |
| | | | (On behalf of the Registrant and as Principal Financial Officer) |