Brown Forman Corp 10-Q for FY2021 Q1
Brown Forman Corp (BF-B)
10-Q
2020-09-02
For: 2020-07-31
View Original
Added on
April 04, 2026
About this 10-Q
Brown Forman Corp filed this 10-Q on September 2, 2020, covering the quarter ended July 31, 2020 (FY2021 Q1).
Headline figures
Quarter ended July 31, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $753M
- down 1.7% from $766M a year earlier
- Net income
- $324M
- up 74.2% from net income of $186M a year earlier
- Diluted EPS
- $0.67
- up 71.8% from $0.39 a year earlier
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended July 31, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from _______________ to _______________
Commission File No. 001-00123
(Exact name of Registrant as specified in its Charter)
(State or other jurisdiction of | (IRS Employer | |
incorporation or organization) | Identification No.) | |
(Address of principal executive offices) | (Zip Code) | |
(502 ) 585-1100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
☑ | Accelerated filer | ☐ | ||
Non-accelerated filer | ☐ | Smaller reporting company | ||
Emerging growth company | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: August 31, 2020
Class A Common Stock (voting), $0.15 par value | ||
Class B Common Stock (nonvoting), $0.15 par value | ||
BROWN-FORMAN CORPORATION | ||
Index to Quarterly Report Form 10-Q | ||
Page | ||
Item 1. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(Dollars in millions, except per share amounts)
Three Months Ended | |||||||
July 31, | |||||||
2019 | 2020 | ||||||
Sales | $ | $ | |||||
Excise taxes | |||||||
Net sales | |||||||
Cost of sales | |||||||
Gross profit | |||||||
Advertising expenses | |||||||
Selling, general, and administrative expenses | |||||||
Gain on sale of business | ( | ) | |||||
Other expense (income), net | ( | ) | ( | ) | |||
Operating income | |||||||
Non-operating postretirement expense | |||||||
Interest income | ( | ) | |||||
Interest expense | |||||||
Income before income taxes | |||||||
Income taxes | |||||||
Net income | $ | $ | |||||
Earnings per share: | |||||||
Basic | $ | $ | |||||
Diluted | $ | $ | |||||
See notes to the condensed consolidated financial statements.
3
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
Three Months Ended | |||||||
July 31, | |||||||
2019 | 2020 | ||||||
Net income | $ | $ | |||||
Other comprehensive income (loss), net of tax: | |||||||
Currency translation adjustments | ( | ) | |||||
Cash flow hedge adjustments | ( | ) | |||||
Postretirement benefits adjustments | |||||||
Net other comprehensive income (loss) | ( | ) | |||||
Comprehensive income | $ | $ | |||||
See notes to the condensed consolidated financial statements.
4
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
April 30, 2020 | July 31, 2020 | ||||||
Assets | |||||||
Cash and cash equivalents | $ | $ | |||||
Accounts receivable, less allowance for doubtful accounts of $11 and $12 at April 30 and July 31, respectively | |||||||
Inventories: | |||||||
Barreled whiskey | |||||||
Finished goods | |||||||
Work in process | |||||||
Raw materials and supplies | |||||||
Total inventories | |||||||
Other current assets | |||||||
Total current assets | |||||||
Property, plant and equipment, net | |||||||
Goodwill | |||||||
Other intangible assets | |||||||
Deferred tax assets | |||||||
Other assets | |||||||
Total assets | $ | $ | |||||
Liabilities | |||||||
Accounts payable and accrued expenses | $ | $ | |||||
Dividends payable | |||||||
Accrued income taxes | |||||||
Short-term borrowings | |||||||
Total current liabilities | |||||||
Long-term debt | |||||||
Deferred tax liabilities | |||||||
Accrued pension and other postretirement benefits | |||||||
Other liabilities | |||||||
Total liabilities | |||||||
Commitments and contingencies | |||||||
Stockholders’ Equity | |||||||
Common stock: | |||||||
Class A, voting, $0.15 par value (170,000,000 shares authorized; 170,000,000 shares issued) | |||||||
Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 314,532,000 shares issued) | |||||||
Retained earnings | |||||||
Accumulated other comprehensive income (loss), net of tax | ( | ) | ( | ) | |||
Treasury stock, at cost (6,323,000 and 6,089,000 shares at April 30 and July 31, respectively) | ( | ) | ( | ) | |||
Total stockholders’ equity | |||||||
Total liabilities and stockholders’ equity | $ | $ | |||||
See notes to the condensed consolidated financial statements.
5
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Three Months Ended | |||||||
July 31, | |||||||
2019 | 2020 | ||||||
Cash flows from operating activities: | |||||||
Net income | $ | $ | |||||
Adjustments to reconcile net income to net cash provided by operations: | |||||||
Gain on sale of business | ( | ) | |||||
Depreciation and amortization | |||||||
Stock-based compensation expense | |||||||
Deferred income tax provision | ( | ) | ( | ) | |||
Other, net | ( | ) | |||||
Changes in assets and liabilities, net of business acquisitions and dispositions: | |||||||
Accounts receivable | ( | ) | ( | ) | |||
Inventories | ( | ) | ( | ) | |||
Other current assets | ( | ) | |||||
Accounts payable and accrued expenses | ( | ) | |||||
Accrued income taxes | |||||||
Other operating assets and liabilities | ( | ) | |||||
Cash provided by operating activities | |||||||
Cash flows from investing activities: | |||||||
Proceeds from sale of business | |||||||
Acquisition of business, net of cash acquired | ( | ) | |||||
Additions to property, plant, and equipment | ( | ) | ( | ) | |||
Cash provided by (used for) investing activities | ( | ) | |||||
Cash flows from financing activities: | |||||||
Proceeds from short-term borrowings, maturities greater than 90 days | |||||||
Repayments of short-term borrowings, maturities greater than 90 days | ( | ) | |||||
Net change in short-term borrowings, maturities of 90 days or less | ( | ) | |||||
Payments of withholding taxes related to stock-based awards | ( | ) | ( | ) | |||
Acquisition of treasury stock | ( | ) | |||||
Dividends paid | ( | ) | ( | ) | |||
Cash used for financing activities | ( | ) | ( | ) | |||
Effect of exchange rate changes on cash and cash equivalents | ( | ) | |||||
Net increase in cash and cash equivalents | |||||||
Cash and cash equivalents, beginning of period | |||||||
Cash and cash equivalents, end of period | $ | $ | |||||
See notes to the condensed consolidated financial statements.
6
BROWN-FORMAN CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, “we,” “us,” “our,” “Brown-Forman,” and 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 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 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, 2020, as amended (2020 Form 10-K). We prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2020 Form 10-K.
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) | 2019 | 2020 | |||||
Net income available to common stockholders | $ | $ | |||||
Share data (in thousands): | |||||||
Basic average common shares outstanding | |||||||
Dilutive effect of stock-based awards | |||||||
Diluted average common shares outstanding | |||||||
Basic earnings per share | $ | $ | |||||
Diluted earnings per share | $ | $ | |||||
We excluded common stock-based awards for approximately 362,000 shares and 34,000 shares from the calculation of diluted earnings per share for the three months ended July 31, 2019 and 2020, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.
3. Inventories
7
4. Goodwill and Other Intangible Assets
The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the three months ended July 31, 2020:
(Dollars in millions) | Goodwill | Other Intangible Assets | |||||
Balance at April 30, 2020 | $ | $ | |||||
Sale of business (Note 14) | ( | ) | ( | ) | |||
Foreign currency translation adjustment | |||||||
Balance at July 31, 2020 | $ | $ | |||||
Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.
5. Commitments and Contingencies
We operate in a litigious environment, and we are sued in the normal course of business. Sometimes plaintiffs seek substantial damages. Significant judgment is required in predicting the outcome of these suits and claims, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and we can make a reasonable estimate of the loss, and then adjust the accrual as appropriate to reflect changes in facts and circumstances. We do not believe it is reasonably possible that these existing loss contingencies, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations, or liquidity. No material accrued loss contingencies were recorded as of July 31, 2020.
We have guaranteed the repayment by a third-party importer of its obligation under a bank credit facility that it uses in connection with its importation of our products in Russia. If the importer were to default on that obligation, which we believe is unlikely, our maximum possible exposure under the existing terms of the guaranty would be approximately $9 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant. As of July 31, 2020, our actual exposure under the guaranty of the importer’s obligation was approximately $3 million. We also have accounts receivable from that importer of approximately $6 million at July 31, 2020, which we expect to collect in full. Based on the financial support we provide to the importer, we believe it meets the definition of a variable interest entity. However, because we do not control this entity, it is not included in our consolidated financial statements.
On May 30, 2019, we notified Bacardi Martini Ltd. (“Bacardi”) of our intention not to renew the terms of our United Kingdom (U.K.) Cost Sharing Agreement (the “Agreement”) whereby Bacardi provided certain services (e.g., warehousing and logistics, sales, reporting, treasury, tax, and other services) and Brown-Forman and Bacardi split the associated overhead for those services. For purposes of conducting business, Brown-Forman and Bacardi established a U.K. trade name, “Bacardi Brown-Forman Brands,” through which our products and Bacardi’s products were sold in the U.K. On a monthly basis, Bacardi would remit to us the revenues from sales of our products, net of our agreed contributions for overhead costs under the Agreement. On April 30, 2020, the Agreement expired according to its terms.
Following delivery of our notice and upon expiration of the Agreement, Bacardi alleged that it was entitled to approximately £49 million under the principle of commercial agency in the U.K., as well as additional compensation for the winding up of business conducted under the Agreement and for remitting the associated funds owed to us. From monthly settlements following the expiration of the Agreement, Bacardi withheld over £50 million owed to us, effectively bypassing the dispute resolution process under the Agreement.
In response to Bacardi’s actions, we initiated a lawsuit on August 20, 2020, in the Commercial Court in the U.K. seeking reimbursement of the amounts wrongfully withheld. Shortly thereafter, Bacardi filed a demand for arbitration seeking a determination that it was entitled to compensation as a commercial agent and for additional compensation for the work completed following the expiration of the Agreement.
Since it was raised, we have disputed Bacardi’s claim of commercial agency compensation and issued demands that Bacardi adhere to the dispute resolution process mandated by the Agreement and return the in excess of £50 million that Bacardi has wrongfully withheld from us. Given the early stages of the litigation and arbitration process, we are unable to estimate the range of reasonably possible loss, if any.
8
6. Debt
Our long-term debt (net of unamortized discount and issuance costs) consists of:
(Principal and carrying amounts in millions) | April 30, 2020 | July 31, 2020 | |||||
2.25% senior notes, $250 principal amount, due January 15, 2023 | $ | $ | |||||
3.50% senior notes, $300 principal amount, due April 15, 2025 | |||||||
1.20% senior notes, €300 principal amount, due July 7, 2026 | |||||||
2.60% senior notes, £300 principal amount, due July 7, 2028 | |||||||
4.00% senior notes, $300 principal amount, due April 15, 2038 | |||||||
3.75% senior notes, $250 principal amount, due January 15, 2043 | |||||||
4.50% senior notes, $500 principal amount, due July 15, 2045 | |||||||
$ | $ | ||||||
Our short-term borrowings of $333 million as of April 30, 2020, and $389 million as of July 31, 2020, consisted primarily of borrowings under our commercial paper program.
(Dollars in millions) | April 30, 2020 | July 31, 2020 | |
Commercial paper | $ | $ | |
Average interest rate | |||
Average remaining days to maturity | |||
7. Stockholders’ Equity
The following table shows the changes in stockholders’ equity by quarter 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 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
Adoption of ASU 2018-02 | ( | ) | — | ||||||||||||||||||||||||
Net income | |||||||||||||||||||||||||||
Net other comprehensive income (loss) | ( | ) | ( | ) | |||||||||||||||||||||||
Declaration of cash dividends | ( | ) | ( | ) | |||||||||||||||||||||||
Acquisition of treasury stock | ( | ) | ( | ) | |||||||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||||||
Stock issued under compensation plans | |||||||||||||||||||||||||||
Loss on issuance of treasury stock issued under compensation plans | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Balance at July 31, 2019 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
9
The following table shows the changes in stockholders’ equity by quarter during the three months ended July 31, 2020:
(Dollars in millions) | Class A Common Stock | Class B Common Stock | Additional Paid-in Capital | Retained Earnings | AOCI | Treasury Stock | Total | ||||||||||||||||||||
Balance at April 30, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
Net income | |||||||||||||||||||||||||||
Net other comprehensive income (loss) | |||||||||||||||||||||||||||
Declaration of cash dividends | ( | ) | ( | ) | |||||||||||||||||||||||
Stock-based compensation expense | |||||||||||||||||||||||||||
Stock issued under compensation plans | |||||||||||||||||||||||||||
Loss on issuance of treasury stock issued under compensation plans | ( | ) | ( | ) | ( | ) | |||||||||||||||||||||
Balance at July 31, 2020 | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||||||||||
The following table shows the change in each component of accumulated other comprehensive income (AOCI), net of tax, during the three months ended July 31, 2020:
(Dollars in millions) | Currency Translation Adjustments | Cash Flow Hedge Adjustments | Postretirement Benefits Adjustments | Total AOCI | |||||||||||
Balance at April 30, 2020 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||
Net other comprehensive income (loss) | ( | ) | |||||||||||||
Balance at July 31, 2020 | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | |||||
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, 2020:
Declaration Date | Record Date | Payable Date | Amount per Share | |||
$ | ||||||
$ | ||||||
8. Net Sales
The following table shows our net sales by geography:
Three Months Ended | |||||||
July 31, | |||||||
(Dollars in millions) | 2019 | 2020 | |||||
United States | $ | $ | |||||
Developed International1 | |||||||
Emerging2 | |||||||
Travel Retail3 | |||||||
Non-branded and bulk4 | |||||||
Total | $ | $ | |||||
1Represents net sales of branded products to “advanced economies” as defined by the International Monetary Fund (IMF), excluding the United States. Our largest developed international markets are the United Kingdom, Germany, Australia, and France.
2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, and Russia.
3Represents net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer location.
4Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
10
The following table shows our net sales by product category:
Three Months Ended | |||||||
July 31, | |||||||
(Dollars in millions) | 2019 | 2020 | |||||
Whiskey1 | $ | $ | |||||
Tequila2 | |||||||
Wine3 | |||||||
Vodka4 | |||||||
Rest of portfolio | |||||||
Non-branded and bulk5 | |||||||
Total | $ | $ | |||||
1Includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this category are the Jack Daniel's family of brands, the Woodford Reserve family of brands, GlenDronach, BenRiach, Glenglassaugh, the Old Forester family of brands, Slane Irish Whiskey, and Coopers’ Craft. Also includes the Early Times, Canadian Mist, and Collingwood brands, which we divested on July 31, 2020 (Note 14).
2Includes el Jimador, the Herradura family of brands, New Mix, Pepe Lopez, and Antiguo.
3Includes Korbel Champagnes and Sonoma-Cutrer wines.
4Includes Finlandia.
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) | 2019 | 2020 | |||||
Pension Benefits: | |||||||
Service cost | $ | $ | |||||
Interest cost | |||||||
Expected return on plan assets | ( | ) | ( | ) | |||
Amortization of net actuarial loss | |||||||
Net cost | $ | $ | |||||
Other Postretirement Benefits: | |||||||
Interest cost | $ | $ | |||||
Amortization of prior service cost (credit) | ( | ) | ( | ) | |||
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 11.6 % for the three months ended July 31, 2020, was lower than the expected tax rate of 21.0 % on ordinary income for the full fiscal year primarily due to a deferred tax benefit related to an intercompany transfer of assets and excess tax benefits related to stock-based compensation. The effective tax rate of 11.6 % for the three months ended July 31, 2020, was lower than the effective tax rate of 18.2 % for the three months ended July 31, 2019, primarily due to a deferred tax benefit related to an intercompany transfer of assets. Our expected tax rates include current fiscal year additions for existing tax contingency items.
11
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 2020, 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). No further changes have been made to our indefinite reinvestment assertion.
11. Derivative Financial Instruments and Hedging Activities
Our multinational business exposes us to global market risks, including the effect of fluctuations in foreign currency exchange rates, commodity prices, and interest rates. We use derivatives to help manage financial exposures that occur in the normal course of business. We formally document the purpose of each derivative contract, which includes linking the contract to the financial exposure it is designed to mitigate. We do not hold or issue derivatives for trading or speculative purposes.
We use currency derivative contracts to limit our exposure to the foreign currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges 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 partially offset the immediate earnings impact of changes in foreign currency 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 $1,026 million at April 30, 2020 and $986 million at July 31, 2020. As of July 31, 2020, the maximum term of our outstanding derivative contracts was 36 months.
We also use foreign currency-denominated debt to help manage our foreign currency exchange risk. As of July 31, 2020, $646 million of our foreign currency-denominated debt instruments were designated as net investment hedges. These net investment hedges are intended to mitigate foreign currency 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 take physical delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than as derivative instruments.
12
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 | ||||||||
July 31, | ||||||||
(Dollars in millions) | Classification | 2019 | 2020 | |||||
Currency derivatives designated as cash flow hedges: | ||||||||
Net gain (loss) recognized in AOCI | n/a | $ | $ | ( | ) | |||
Net gain (loss) reclassified from AOCI into earnings | Sales | |||||||
Currency derivatives not designated as hedging instruments: | ||||||||
Net gain (loss) recognized in earnings | Sales | $ | $ | ( | ) | |||
Net gain (loss) recognized in earnings | Other income (expense), net | |||||||
Foreign currency-denominated debt designated as net investment hedge: | ||||||||
Net gain (loss) recognized in AOCI | n/a | $ | $ | ( | ) | |||
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above: | ||||||||
Sales | $ | $ | ||||||
Other income (expense), net | ||||||||
We expect to reclassify $14 million of deferred net gains on cash flow hedges recorded in AOCI as of July 31, 2020, to earnings during the next 12 months. This reclassification would offset the anticipated earnings impact of the underlying hedged exposures. The actual amounts that we ultimately reclassify to earnings will depend on the exchange rates in effect when the underlying hedged transactions occur.
The following table presents the fair values of our derivative instruments:
April 30, 2020 | July 31, 2020 | ||||||||||||||||
(Dollars in millions) | Classification | Derivative Assets | Derivative Liabilities | Derivative Assets | Derivative Liabilities | ||||||||||||
Designated as cash flow hedges: | |||||||||||||||||
Currency derivatives | Other current assets | $ | $ | ( | ) | $ | $ | ( | ) | ||||||||
Currency derivatives | Other assets | ( | ) | ||||||||||||||
Currency derivatives | Accrued expenses | ( | ) | ||||||||||||||
Currency derivatives | Other liabilities | ( | ) | ||||||||||||||
Not designated as hedges: | |||||||||||||||||
Currency derivatives | Other current assets | ||||||||||||||||
Currency derivatives | Other assets | ||||||||||||||||
Currency derivatives | Accrued expenses | ( | ) | ||||||||||||||
Currency derivatives | Other liabilities | ||||||||||||||||
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
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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 $2 million at April 30, 2020, and $5 million at July 31, 2020.
The following table summarizes the gross and net amounts of our derivative contracts:
(Dollars in millions) | Gross Amounts of Recognized Assets (Liabilities) | Gross Amounts Offset in Balance Sheet | Net Amounts Presented in Balance Sheet | Gross Amounts Not Offset in Balance Sheet | Net Amounts | ||||||||||||||
April 30, 2020 | |||||||||||||||||||
Derivative assets | $ | $ | ( | ) | $ | $ | $ | ||||||||||||
Derivative liabilities | ( | ) | ( | ) | ( | ) | |||||||||||||
July 31, 2020 | |||||||||||||||||||
Derivative assets | ( | ) | ( | ) | |||||||||||||||
Derivative liabilities | ( | ) | ( | ) | ( | ) | |||||||||||||
No cash collateral was received or pledged related to our derivative contracts as of April 30, 2020, or July 31, 2020.
12. Fair Value Measurements
The following table summarizes the assets and liabilities measured or disclosed at fair value on a recurring basis:
April 30, 2020 | July 31, 2020 | ||||||||||||||
Carrying | Fair | Carrying | Fair | ||||||||||||
(Dollars in millions) | Amount | Value | Amount | Value | |||||||||||
Assets | |||||||||||||||
Cash and cash equivalents | $ | $ | $ | $ | |||||||||||
Currency derivatives | |||||||||||||||
Liabilities | |||||||||||||||
Currency derivatives | |||||||||||||||
Short-term borrowings | |||||||||||||||
Long-term debt | |||||||||||||||
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 on the assumptions (inputs) used to determine those values. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are:
• | Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities. |
• | Level 2 – Observable inputs other 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. |
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We determine the fair values of our currency derivatives (forward contracts) using standard valuation models. The significant inputs used in these models, which are readily available in public markets or can be derived from observable market transactions, include the applicable spot exchange rates, forward exchange rates, and interest rates. These fair value measurements are categorized as Level 2 within the valuation hierarchy.
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. Other Comprehensive Income
The following tables show the components of net other comprehensive income (loss):
Three Months Ended | Three Months Ended | ||||||||||||||||||||||
July 31, 2019 | July 31, 2020 | ||||||||||||||||||||||
(Dollars in millions) | Pre-Tax | Tax | Net | Pre-Tax | Tax | Net | |||||||||||||||||
Currency translation adjustments: | |||||||||||||||||||||||
Net gain (loss) on currency translation | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||
Reclassification to earnings | |||||||||||||||||||||||
Other comprehensive income (loss), net | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Cash flow hedge adjustments: | |||||||||||||||||||||||
Net gain (loss) on hedging instruments | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Reclassification to earnings1 | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||||||
Other comprehensive income (loss), net | ( | ) | ( | ) | ( | ) | |||||||||||||||||
Postretirement benefits adjustments: | |||||||||||||||||||||||
Net actuarial gain (loss) and prior service cost | |||||||||||||||||||||||
Reclassification to earnings2 | ( | ) | ( | ) | |||||||||||||||||||
Other comprehensive income (loss), net | ( | ) | ( | ) | |||||||||||||||||||
Total other comprehensive income (loss), net | $ | $ | ( | ) | $ | ( | ) | $ | $ | $ | |||||||||||||
1Pre-tax amount is classified as sales in the accompanying condensed consolidated statements of operations.
2For three months ended July 31, 2019, the pre-tax amount of $4 is classified as non-operating postretirement expense in the accompanying condensed consolidated statements of operations. For three months ended July 31, 2020, $6 of the pre-tax amount is classified as non-operating postretirement expense; $4 of the pretax amount is classified in gain on sale of business.
14. Gain on Sale of Business
On July 31, 2020, we sold the Early Times, Canadian Mist, and Collingwood brands for $177 million in cash (subject to a post-closing inventory adjustment). The sale reflects the continued evolution of our portfolio strategy to focus on premium spirits brands. The total book value of the related business assets included in the sale was $50 million, consisting largely of inventories, the Canadian Mist production assets, and intellectual property. As a result of the sale, we recognized a pre-tax gain of $127 million during the first quarter of fiscal 2021.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion and analysis in conjunction with both our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report and our 2020 Form 10-K, as amended (2020 Form 10-K). Note that the results of operations for the three months ended July 31, 2020, 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 measures of statements of operations. We present changes in certain measures, or line items, of the statements of operations that are adjusted to an “underlying” basis. We use “underlying change” for the following measures of the statements of operations: (a) underlying net sales; (b) underlying cost of sales; (c) underlying gross profit; (d) underlying advertising expenses; (e) underlying selling, general, and administrative (SG&A) expenses; (f) underlying other expense (income) net; (g) underlying operating expenses1; and (h) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) acquisitions and divestitures, (b) foreign exchange, and (c) estimated net change in distributor inventories. We explain these adjustments below.
• | “Acquisitions and divestitures.” This adjustment removes (a) any non-recurring effects related to our acquisitions and divestitures (e.g., transaction costs and integration costs), and (b) the effects of operating activity related to acquired and divested brands for periods not comparable year over year (non-comparable periods). By excluding non-comparable periods, we therefore include the effects of acquired and divested brands only to the extent that results are comparable year over year. |
In fiscal 2020, we acquired 100% of the voting interests in The 86 Company, which owns Fords Gin. During the first quarter of fiscal 2021, we sold our Early Times, Canadian Mist, and Collingwood brands and related assets, which resulted in a one-time pre-tax gain of $127 million. See Note 14 to the Condensed Consolidated Financial Statements for details. This adjustment removes (a) transaction and integration costs related to the acquisition and divestiture, (b) operating activity for The 86 Company for the non-comparable period, which is activity in the first quarter of fiscal 2021, and (c) the gain on sale of Early Times, Canadian Mist, and Collingwood. We believe that these adjustments allow for us to better understand our underlying results on a comparable basis.
• | “Foreign exchange.” We calculate the percentage change in 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” to: (a) understand our performance from period to period on a consistent basis; (b) compare our performance to that of our competitors; (c) calculate components of management incentive compensation; (d) plan and forecast; and (e) communicate our financial performance to the board of directors, stockholders, and the investment community. We provide reconciliations of the “underlying change” in certain line items of the statements of operations to their nearest GAAP measures in the tables 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.
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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 product category. We define our geographic and brand aggregations below.
Geographic Aggregations.
In “Results of Operations - Fiscal 2021 Year-to-Date Highlights,” we provide supplemental information for our largest markets ranked by percentage of total fiscal 2020 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, Germany, Australia, and France. 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, and Russia. 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 2021 Year-to-Date Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal 2020 net sales. In addition to brands that are listed by name, we include the following aggregations:
• | “Whiskey” includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink (RTD), and ready-to-pour products (RTP). The brands included in this category are the Jack Daniel’s family of brands, the Woodford Reserve family of brands (Woodford Reserve), GlenDronach, BenRiach, Glenglassaugh, the Old Forester family of brands (Old Forester), Slane Irish Whiskey, and Coopers’ Craft. Also includes the Early Times, Canadian Mist, and Collingwood brands, which we divested on July 31, 2020. See Note 14 to the Condensed Consolidated Financial Statements for details. |
• | “American whiskey” includes the Jack Daniel’s family of brands, premium bourbons (defined below), super-premium American whiskey (defined below), and Early Times. |
• | “Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and RTP products (JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Tennessee Apple (JDTA), Jack Daniel’s Single Barrel Collection (JDSB), Jack Daniel’s Tennessee Rye Whiskey (JDTR), Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and Jack Daniel’s Bottled-in-Bond. |
• | “Jack Daniel’s RTD and RTP” products include Jack Daniel’s & Cola, Jack Daniel’s Country Cocktails, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Double Jack, Gentleman Jack & Cola, Jack Daniel’s Lynchburg Lemonade, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Berry, Jack Daniel’s Cider, Jack Daniel’s Whiskey & Seltzer, and the seasonal Jack Daniel’s Winter Jack RTP. |
• | “Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft. |
• | “Super-premium American whiskey” includes Woodford Reserve, Gentleman Jack, JDSB, JDTR, Jack Daniel’s Sinatra Select, and Jack Daniel’s No. 27 Gold Tennessee Whiskey. |
• | “Tequila” includes el Jimador, the Herradura family of brands (Herradura), New Mix, Pepe Lopez, and Antiguo. |
• | “Wine” includes Korbel Champagnes and Sonoma-Cutrer wines. |
• | “Vodka” includes Finlandia. |
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• | “Non-branded and bulk” includes our net 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, including products purchased through e-premise channels, as measured by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric. We believe consumer takeaway is a leading indicator of how consumer demand is trending. |
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 2020 Form 10-K, those described in Part II, Item 1A of this report, and those described from time to time in our future reports filed with the Securities and Exchange Commission, including:
• | Impact of health epidemics and pandemics, including the COVID-19 pandemic, and the resulting negative economic impact and related governmental actions |
• | Risks associated with being a U.S.-based company with global operations, including commercial, political, and financial risks; local labor policies and conditions; protectionist trade policies, or economic or trade sanctions, including additional retaliatory tariffs on American spirits and the effectiveness of our actions to mitigate the negative impact on our margins, sales, and distributors; compliance with local trade practices and other regulations; terrorism; and health pandemics |
• | Failure to comply with anti-corruption laws, trade sanctions and restrictions, or similar laws or regulations |
• | Fluctuations in foreign currency exchange rates, particularly a stronger U.S. dollar |
• | Changes in laws, regulatory measures, or governmental policies – especially those that affect the production, importation, marketing, labeling, pricing, distribution, sale, or consumption of our beverage alcohol products |
• | Tax rate changes (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, or capital gains) or changes in related reserves, changes in tax rules or accounting standards, and the unpredictability and suddenness with which they can occur |
• | Unfavorable global or regional economic conditions, particularly related to the COVID-19 pandemic, and related economic slowdowns or recessions, low consumer confidence, high unemployment, weak credit or capital markets, budget deficits, burdensome government debt, austerity measures, higher interest rates, higher taxes, political instability, higher inflation, deflation, lower returns on pension assets, or lower discount rates for pension obligations |
• | 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 |
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• | Imprecision in supply/demand forecasting |
• | Higher costs, lower quality, or unavailability of energy, water, raw materials, product ingredients, labor, or finished goods |
• | Significant additional labeling or warning requirements or limitations on availability of our beverage alcohol products |
• | Competitors’ and retailers’ consolidation or other competitive activities, such as pricing actions (including price reductions, promotions, discounting, couponing, or free goods), marketing, category expansion, product introductions, or entry or expansion in our geographic markets or distribution networks |
• | Route-to-consumer changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in higher fixed costs |
• | Inventory fluctuations in our products by distributors, wholesalers, or retailers |
• | Risks associated with acquisitions, dispositions, business partnerships, or investments – such as acquisition integration, termination difficulties or costs, or impairment in recorded value |
• | Counterfeiting and inadequate protection of our intellectual property rights |
• | Product recalls or other product liability claims, product tampering, contamination, or quality issues |
• | Significant legal disputes and proceedings, or government investigations |
• | Cyber breach or failure or corruption of key information technology systems, or failure to comply with personal data protection laws |
• | Negative publicity related to our company, products, brands, marketing, executive leadership, employees, board of directors, family stockholders, operations, business performance, or prospects |
• | Failure to attract or retain key executive or employee talent |
• | Our status as a family “controlled company” under New York Stock Exchange rules, and our dual-class share structure |
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Overview
COVID-19
COVID-19 negatively affected our results in the fourth quarter of fiscal 2020 and continued to impact our results for the three months ended July 31, 2020. The impact continues to be concentrated in (a) the on-premise as a result of the restrictions in the channel (representing nearly 20% of our business), (b) our Travel Retail channel as a result of travel bans and other restrictions, and (c) our emerging markets. Solid off-premise gains across many of our developed markets, which reflected an increase in at-home consumption and strong growth in the e-premise channel, offset the significant reduction in sales in the on-premise, Travel Retail, and emerging markets. While the financial impact of COVID-19 on our results is difficult to measure, it has had an impact on our operating income and business operations. We discuss the effect of COVID-19 on our results where relevant below.
Despite the ongoing effects resulting from COVID-19 on our results in the first quarter, we believe we remain in a strong financial position, and our capacity to generate solid operating cash flow remains sound, allowing us to navigate this crisis as circumstances evolve. Additionally, we have no current or impending shareholder distributions beyond regular dividends and no maturities of long-term debt until our fiscal 2023. See “Liquidity and Financial Condition” below for details.
Fiscal 2021 Year-to-Date Highlights
• | We delivered reported net sales of $753 million, a decrease of 2% compared to the same period last year. Excluding an estimated net decrease in distributor inventories, we grew underlying net sales 3%. Net sales for our markets and brands were affected by COVID-19 during the first quarter of fiscal 2021. Underlying growth was driven by (a) JD RTDs, (b) the continued launch of JDTA, (c) our tequila brands, and (d) our premium bourbon brands, led by Woodford Reserve. Declines of JDTW due to the adverse affect of COVID-19 partially offset this underlying growth. From a geographic perspective, the United States led the underlying net sales growth with developed international markets also contributing. These gains were partially offset by a decline in the underlying net sales in our Travel Retail channel, our used barrel sales, and emerging markets. |
• | We delivered reported operating income of $387 million, an increase of 56% compared to the same period of last year. Excluding (a) the gain on sale of Early Times, Canadian Mist, and Collingwood, (b) an estimated net decrease in distributor inventories, and (c) the positive effect of foreign exchange, underlying operating income grew 15%. |
• | We delivered diluted earnings per share of $0.67, an increase of 73% compared to the same period last year, including an estimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and Collingwood and an $0.08 per share benefit from a discrete tax item recognized during the quarter related to an intercompany transfer of assets. |
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Summary of Operating Performance | |||||||||||||
Three Months Ended July 31, | |||||||||||||
(Dollars in millions) | 2019 | 2020 | Reported Change | Underlying Change1 | |||||||||
Net sales | $ | 766 | $ | 753 | (2 | %) | 3 | % | |||||
Cost of sales | 268 | 288 | 7 | % | 12 | % | |||||||
Gross profit | 498 | 465 | (7 | %) | (1 | %) | |||||||
Advertising | 92 | 62 | (33 | %) | (34 | %) | |||||||
SG&A | 164 | 148 | (10 | %) | (10 | %) | |||||||
Gain on sale of business | — | (127 | ) | NA | — | % | |||||||
Other expense (income), net | (6 | ) | (5 | ) | (26 | %) | (66 | %) | |||||
Operating income | 248 | 387 | 56 | % | 15 | % | |||||||
Total operating expenses2 | $ | 250 | $ | 205 | (18 | %) | (17 | %) | |||||
As a percentage of net sales3 | |||||||||||||
Gross profit | 64.9 | % | 61.7 | % | (3.2 | )pp | |||||||
Operating income | 32.4 | % | 51.4 | % | 19.0 | pp | |||||||
Non-operating postretirement expense | $ | 1 | $ | 1 | 28 | % | |||||||
Interest expense, net | $ | 19 | $ | 20 | 4 | % | |||||||
Effective tax rate | 18.2 | % | 11.6 | % | (6.6 | )pp | |||||||
Diluted earnings per share | $ | 0.39 | $ | 0.67 | 73 | % | |||||||
Note: Totals may differ due to rounding | |||||||||||||
1See “Non-GAAP Financial Measures” above for details on our use of “underlying change,” including how we calculate these measures and why we think this information is useful to readers.
2Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
3Year-over-year changes in percentages are reported in percentage points (pp).
Fiscal 2021 Outlook
We continue to face substantial uncertainty related to the evolving COVID-19 pandemic, its effect on the global economy, and ultimately its effect on the consumers of our brands. Our ability to make, ship, and market our brands to our consumers has not been materially impacted by COVID-19, and we do not expect that to change. How we sell our brands looks different due to COVID-19, but we do not expect a material limit on our ability to sell our brands to our consumers. We continue to closely monitor key developments in our markets, including (a) the stage of recovery, (b) industry and consumer behavior, (c) macroeconomic conditions, and (d) the timing, likelihood, severity, and restrictions associated with any future waves of COVID-19.
As a result of these uncertainties and low visibility on recovery, and consistent with our 2020 Form 10-K, we are not able to provide quantitative guidance for fiscal 2021 at this time. From a qualitative perspective, we believe that (a) the Travel Retail channel will not recover during this fiscal year, (b) the timing and strength of the on-premise channel recovery will depend on a variety of factors, but will likely not be at full capacity by the fiscal-year end, and (c) our emerging markets will remain down for the fiscal year. Our gross margin will likely remain under pressure for the year driven by the expectation of higher input cost and mix shifts. However, where our gross margin ultimately lands will depend not only on the volumes of our business, but the mix of our business by geography, portfolio, channel, and size.
We believe we are well positioned to invest effectively as the recovery occurs. We expect overall operating expenses, notably our advertising investments, to accelerate as the year-over-year rate of declines seen in the first quarter of fiscal 2021 will not be sustained throughout the year. Also, as previously announced, we plan to make a $20 million contribution to the Brown-Forman Foundation during fiscal 2021. We will remain agile, diligent, focused, and disciplined on our investments as the environment continues to evolve.
We expect our full-year effective tax rate to be in the range of 17% to 19%.
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Results of Operations – Fiscal 2021 Year-to-Date Highlights
Market Highlights
The following table provides supplemental information for our largest markets for the three months ended July 31, 2020, compared to the same period last year. We discuss results of the markets most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the three months ended July 31, 2020, compared to the same period last year.
Top Markets1 | |||||||||
Three months ended July 31, 2020 | Net Sales % Change vs. 2020 | ||||||||
Geographic area2 | Reported | Foreign Exchange | Est. Net Chg in Distributor Inventories | Underlying3 | |||||
United States | 3 | % | — | % | 5 | % | 9 | % | |
Developed International | 13 | % | (5 | %) | 5 | % | 12 | % | |
United Kingdom | 46 | % | (25 | %) | 2 | % | 24 | % | |
Germany | 20 | % | (3 | %) | — | % | 17 | % | |
Australia | 29 | % | — | % | — | % | 28 | % | |
France | 22 | % | (3 | %) | — | % | 19 | % | |
Rest of Developed International | (24 | %) | — | % | 13 | % | (10 | %) | |
Emerging | (20 | %) | 10 | % | 7 | % | (3 | %) | |
Mexico | 9 | % | 21 | % | — | % | 29 | % | |
Poland | 1 | % | 5 | % | — | % | 6 | % | |
Russia | (33 | %) | 6 | % | (11 | %) | (38 | %) | |
Rest of Emerging | (36 | %) | 7 | % | 15 | % | (14 | %) | |
Travel Retail | (59 | %) | — | % | (5 | %) | (63 | %) | |
Non-branded and bulk | (31 | %) | (1 | %) | — | % | (32 | %) | |
Total | (2 | %) | — | % | 5 | % | 3 | % | |
Note: Results may differ due to rounding | |||||||||
1“Top Markets” are ranked based on percentage of total fiscal 2020 net sales. See 2020 Form 10-K “Results of Operations - Fiscal 2020 Market Highlights” and Note 8 to the Consolidated Financial Statements.
2See “Definitions” above for definitions of market aggregations presented here.
3See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure and why we believe this information is useful to readers.
Net sales in all of the markets discussed below were affected by COVID-19 during the first quarter of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our results.
• | United States. Reported net sales increased 3%, while underlying net sales grew 9% after adjusting for an estimated net decrease in distributor inventories (following the April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions resulting from COVID-19). The underlying net sales gains were led by (a) JD RTDs, fueled by strong consumer demand for Jack Daniel’s Country Cocktails and the launch of new spirit-based RTD products; (b) our premium bourbons, led by Woodford Reserve and Old Forester, supported by strong consumer takeaway trends; (c) the continued launch of JDTA; (d) volumetric growth of JDTH; (e) volumetric growth and higher prices of Korbel Champagne; and (f) our tequilas, due to higher prices and volumes of el Jimador and Herradura. This growth was partially offset by lower net sales of JDTW reflecting unfavorable channel mix resulting from COVID-19 related restrictions in the on-premise channel. |
• | Developed International. Reported net sales increased 13%, while underlying net sales grew 12% after adjusting for the positive effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was led by Australia, the United Kingdom, Germany, and France, partially offset by declines in Spain. |
◦ | The United Kingdom’s underlying net sales growth was driven by the launch of JDTA and volumetric growth of JDTH and JDTW. Favorable comparisons to the first quarter of fiscal 2020 also affected the current-year growth rate. |
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◦ | Germany’s underlying net sales growth was fueled by the volumetric gains of JD RTDs due to strong consumer demand along with the launch of JDTA, partially offset by JDTW declines. Favorable comparisons to the first quarter of fiscal 2020 also affected the current year growth rate. |
◦ | Australia’s underlying net sales growth was driven by higher volumes of JD RTDs fueled by strong consumer demand. |
◦ | France’s underlying net sales growth was driven by higher volumes of JDTW and JDTH along with the launch of JDTA. |
◦ | Underlying net sales in the Rest of Developed International declined led by lower JDTW volumes in Spain reflecting COVID-19 related closures in this heavily on-premise focused market. |
• | Emerging. Reported net sales decreased 20%, while underlying net sales declined 3% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales declines were led by Russia, Southeast Asia, sub-Saharan Africa, and India as COVID-19 had an adverse effect on results in the first quarter. These declines were partially offset by growth in Mexico and Brazil. |
◦ | Mexico’s underlying net sales growth was fueled by higher volumes of New Mix supported by increased demand and shelf space as a result of the temporary supply disruption of the beer industry due to COVID-19 related shutdowns. This growth was partially offset by lower volumes and unfavorable mix of Herradura. |
◦ | Poland’s underlying net sales growth was driven by higher volumes of Finlandia and the launch of JDTA. Favorable comparisons to the first quarter of fiscal 2020 also affected the current year growth rate. |
◦ | Russia’s underlying net sales declines were driven by lower volumes of Finlandia and JDTW. Difficult comparisons to the first quarter of fiscal 2020 coupled with the adverse affect of COVID-19 also affected the current year results. |
◦ | Underlying net sales in the Rest of Emerging declined due to broad-based volume declines of JDTW, partially offset by growth of JDTW in Brazil. |
• | Travel Retail. Reported net sales declined 59%, while underlying net sales were down 63% after adjusting for an estimated net increase in distributor inventories. The underlying net sales decline was driven by lower volumes of JDTW, Woodford Reserve, and Finlandia due to the unprecedented implementation of travel bans and other restrictions resulting from COVID-19. |
• | Non-branded and bulk reported net sales declined 31%, while underlying net sales decreased 32% after adjusting for the positive effect of foreign exchange. Lower volumes and prices for used barrels drove the reduction compared to the same period last year. |
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Brand Highlights
The following table provides supplemental information for our largest brands for the three months ended July 31, 2020, compared to the same period last year. We discuss results of the brands most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the three months ended July 31, 2020, compared to the same period last year.
Major Brands | ||||||||||||||
Three months ended July 31, 2020 | Volumes | Net Sales % Change vs 2020 | ||||||||||||
Product category / brand family / brand1 | 9L Depletions1 | Reported | Acquisitions and Divestitures | Foreign Exchange | Est. Net Chg in Distributor Inventories | Underlying2 | ||||||||
Whiskey | 14 | % | (1 | %) | — | % | — | % | 5 | % | 4 | % | ||
Jack Daniel’s family of brands | 15 | % | (2 | %) | — | % | — | % | 5 | % | 3 | % | ||
JDTW | (7 | %) | (17 | %) | — | % | — | % | 7 | % | (10 | %) | ||
Jack Daniel’s RTD/RTP | 38 | % | 35 | % | — | % | 2 | % | — | % | 37 | % | ||
JDTH | 17 | % | 21 | % | — | % | (2 | %) | (3 | %) | 16 | % | ||
Gentleman Jack | 17 | % | 17 | % | — | % | — | % | (3 | %) | 14 | % | ||
JDTF | — | % | (10 | %) | — | % | — | % | 7 | % | (3 | %) | ||
Other Jack Daniel’s whiskey brands | 157 | % | 83 | % | — | % | (4 | %) | 18 | % | 97 | % | ||
Woodford Reserve | 15 | % | 11 | % | — | % | — | % | 4 | % | 14 | % | ||
Tequila | 69 | % | — | % | — | % | 8 | % | 8 | % | 16 | % | ||
el Jimador | 3 | % | (2 | %) | — | % | 3 | % | 10 | % | 11 | % | ||
Herradura | (22 | %) | (25 | %) | — | % | 2 | % | 7 | % | (16 | %) | ||
Wine | 7 | % | 3 | % | — | % | — | % | 7 | % | 10 | % | ||
Vodka (Finlandia) | (20 | %) | (27 | %) | — | % | 3 | % | (1 | %) | (24 | %) | ||
Rest of Portfolio | (5 | %) | 38 | % | (4 | %) | (30 | %) | (7 | %) | (4 | %) | ||
Non-branded and bulk | NA | (31 | %) | — | % | (1 | %) | — | % | (32 | %) | |||
Note: Results may differ due to rounding | ||||||||||||||
1See “Definitions” above for definitions of brand aggregations and volume measures presented here.
2See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure and why we believe this information is useful to readers.
Net sales for all of the brands discussed below were affected by COVID-19 during the first quarter of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our results.
• | Whiskey brand’s reported net sales declined 1%, while underlying net sales grew 4% after adjusting for an estimated net decrease in distributor inventories. The underlying net sales gain was driven by the growth of JD RTDs, the continued launch of JDTA, and higher volumes of JDTH and Woodford Reserve, partially offset by declines of JDTW. |
◦ | The Jack Daniel’s family of brands grew underlying net sales driven by JD RTDs, the continued launch of JDTA, and higher volumes of JDTH, partially offset by declines of JDTW. |
▪ | The underlying net sales decline for JDTW was driven by (a) lower volumes in emerging markets and Travel Retail reflecting the unprecedented implementation of travel bans and other restrictions related to COVID-19 and (b) unfavorable channel mix in the United States and our international developed markets resulting from COVID-19 related restrictions in the on-premise channel. |
▪ | The increase in underlying net sales growth for Jack Daniel’s RTD/RTP was fueled by volumetric gains in the United States (including the launch of new spirit-based RTD products), Australia, and Germany. |
▪ | JDTH increased underlying net sales fueled by higher volumes in the United States, the United Kingdom, and France. This growth was partially offset by declines in Travel Retail due to the unprecedented implementation of travel bans and other restrictions resulting from COVID-19. |
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▪ | Gentleman Jack increased underlying net sales with volumetric growth, partially offset by unfavorable channel mix in the United States resulting from COVID-19 related restrictions in the on-premise channel. |
▪ | The underlying net sales decline of JDTF was driven by unfavorable mix in the United States resulting from COVID-19 related restrictions in the on-premise channel. |
▪ | The underlying net sales growth of Other Jack Daniel’s whiskey brands was fueled by the continued launch of JDTA led by the United States, the United Kingdom, France, and Germany. |
◦ | Woodford Reserve grew underlying net sales fueled by volumetric growth in the United States, partially offset by lower volumes in Travel Retail reflecting the unprecedented implementation of travel bans and other restrictions related to COVID-19. |
• | Tequila brands reported net sales were flat, while underlying net sales grew 16% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was fueled by higher volumes of New Mix supported by increased demand and shelf space as a result of the temporary supply disruption of the beer industry due to COVID-19 related shutdowns in Mexico. |
◦ | el Jimador grew underlying net sales driven by volumetric growth and higher prices in the United States and Mexico. |
◦ | The underlying net sales decline of Herradura was driven by lower volumes and unfavorable mix in Mexico, partially offset by higher prices, favorable product mix, and higher volumes in the United States. |
• | Reported net sales for our Wine business grew 3%, while underlying net sales grew 10% after adjusting for an estimated net decrease in distributor inventories. The increase in underlying net sales was driven by volumetric growth and higher prices of Korbel Champagne in the United States, partially offset by declines of Sonoma-Cutrer in the United States reflecting COVID-19 related restrictions in the on-premise channel where this brand is focused. |
• | Reported net sales for Finlandia declined 27%, while underlying net sales decreased 24% after adjusting for the negative effect of foreign exchange and an estimated net increase in distributor inventories. The decrease in underlying net sales was due to the adverse effect of COVID-19, which drove volume declines in Russia and Travel Retail. |
• | Rest of portfolio reported net sales increased 38%, while underlying net sales declined 4% after adjusting for (a) the positive effect of foreign exchange, (b) an estimated net increase in distributor inventories, and (c) the effect of our acquisition of The 86 Company (Fords Gin). The decrease in underlying net sales was driven primarily by declines in the United Kingdom for Chambord. |
• | Non-branded and bulk reported net sales declined 31%, while underlying net sales decreased 32% after adjusting for the positive effect of foreign exchange. Lower volumes and prices for used barrels drove the reduction compared to the same period last year. |
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Year-Over-Year Period Comparisons
COVID-19 affected our results during the first quarter of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our results.
Net Sales | ||
Percentage change versus the prior year period ended July 31 | 3 Months | |
Change in reported net sales | (2 | %) |
Estimated net change in distributor inventories | 5 | % |
Change in underlying net sales | 3 | % |
Change in underlying net sales attributed to: | ||
Volume | 22 | % |
Price/mix | (19 | %) |
Note: Results may differ due to rounding | ||
For the three months ended July 31, 2020, net sales were $753 million, a decrease of $13 million, or 2%, compared to the same period last year. After adjusting reported net sales for an estimated net decrease in distributor inventories primarily in the United States (following the April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions resulting from COVID-19), underlying net sales grew 3% compared to the same period last year. The increase in underlying net sales comprised 22% volume growth and 19% unfavorable price/mix. Volume growth was led by New Mix, JDTA, JD RTDs, JDTH, and Woodford Reserve, partially offset by declines of JDTW and Finlandia. The unfavorable price/mix was driven by faster growth from our lower-priced brands (New Mix and JD RTDs) and unfavorable channel mix (primarily for JDTW) in the United States and our international developed markets resulting from COVID-19 related restrictions in the on-premise channel. See “Results of Operations - Fiscal 2021 Year-to-Date Highlights” above for further details on underlying net sales for the three months ended July 31, 2020.
Cost of Sales | ||
Percentage change versus the prior year period ended July 31 | 3 Months | |
Change in reported cost of sales | 7 | % |
Foreign exchange | 1 | % |
Estimated net change in distributor inventories | 4 | % |
Change in underlying cost of sales | 12 | % |
Change in underlying cost of sales attributed to: | ||
Volume | 22 | % |
Cost/mix | (10 | %) |
Note: Results may differ due to rounding | ||
Cost of sales of $288 million for the three months ended July 31, 2020, increased $20 million, or 7%, when compared to the same period last year. Underlying cost of sales increased 12% after adjusting for an estimated net decrease in distributor inventories and the positive effect of foreign exchange. The increase in underlying cost of sales for the three months ended July 31, 2020, was driven by higher volumes (New Mix and JD RTDs) and increased costs (primarily agave), partially offset by a shift in portfolio mix toward our lower-cost brands (New Mix and JD RTDs).
Gross Profit | ||
Percentage change versus the prior year period ended July 31 | 3 Months | |
Change in reported gross profit | (7 | %) |
Estimated net change in distributor inventories | 5 | % |
Change in underlying gross profit | (1 | %) |
Note: Results may differ due to rounding | ||
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Gross Margin | ||
For the period ended July 31 | 3 months | |
Prior year gross margin | 64.9 | % |
Price/mix | (1.1 | %) |
Cost | (2.4 | %) |
Foreign exchange | 0.3 | % |
Change in gross margin | (3.2 | %) |
Current year gross margin | 61.7 | % |
Note: Results may differ due to rounding | 0.00 | |
Gross profit of $465 million decreased $33 million, or 7%, for the three months ended July 31, 2020, compared to the same period last year. Underlying gross profit declined 1% after adjusting for an estimated net decrease in distributor inventories. Gross margin for the three months ended July 31, 2020, decreased to 61.7%, down 3.2 percentage points from 64.9% in the same period last year. The decrease in gross margin was driven by higher input costs (primarily agave) and an unfavorable shift in channel and portfolio mix resulting from COVID-19 related restrictions in the on-premise channel.
Operating Expenses | |||||||||
Percentage change versus the prior year period ended July 31 | |||||||||
3 Months | Reported | Acquisitions and Divestitures | Foreign Exchange | Underlying | |||||
Advertising | (33 | %) | (1 | %) | — | % | (34 | %) | |
SG&A | (10 | %) | — | % | 1 | % | (10 | %) | |
Total operating expenses1 | (18 | %) | (1 | %) | 1 | % | (17 | %) | |
Note: Results may differ due to rounding | |||||||||
1Total operating expenses include advertising expense, SG&A expense, and other expense (income), net. | |||||||||
Operating expenses totaled $205 million, down $45 million, or 18%, for the three months ended July 31, 2020, compared to the same period last year. Underlying operating expenses were down 17% after adjusting for the effect of our acquisition of The 86 Company (Fords Gin) and the positive effect of foreign exchange.
• | Reported advertising expense declined 33% for the three months ended July 31, 2020, while underlying advertising expense decreased 34% after adjusting for the effect of our acquisition of The 86 Company (Fords Gin). The decrease in underlying advertising expense was driven by a change in the timing of spend and a reduction in our investment behind on-premise channel activities and various events and sponsorships that were canceled in the first quarter of fiscal 2021 due to COVID-19. |
• | Reported SG&A expense declined 10% for the three months ended July 31, 2020, and underlying SG&A expense also declined 10% after adjusting for the positive effect of foreign exchange. The decrease in underlying SG&A expense was driven by lower discretionary spend (including hiring and travel freezes) as COVID-19 continued to affect our results. |
Operating Income | ||
Percentage change versus the prior year period ended July 31 | 3 Months | |
Change in reported operating income | 56 | % |
Acquisitions and divestitures | (51 | %) |
Foreign exchange | (1 | %) |
Estimated net change in distributor inventories | 11 | % |
Change in underlying operating income | 15 | % |
Note: Results may differ due to rounding | ||
Operating income of $387 million increased $139 million, or 56%, for the three months ended July 31, 2020, compared to the same period last year. Underlying operating income grew 15% after adjusting for (a) the gain on sale of Early Times, Canadian Mist, and Collingwood; (b) the effect of our acquisition of The 86 Company (Fords Gin); (c) an estimated net decrease in distributor inventories; and (d) the positive effect of foreign exchange. Operating margin increased 19.0 percentage points to
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51.4% for the three months ended July 31, 2020, from 32.4% in the same period last year. The gain on sale of Early Times, Canadian Mist, and Collingwood contributed 16.5 percentage points to this increase.
The effective tax rate for the three months ended July 31, 2020, was 11.6% compared to 18.2% for the same period last year. The decrease in our effective tax rate for the three months ended July 31, 2020, was driven primarily by a deferred tax benefit related to an intercompany transfer of assets.
Diluted earnings per share of $0.67 in the three months ended July 31, 2020, increased 73% from the $0.39 reported for the same period last year, including an estimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and Collingwood and an $0.08 per share benefit from a discrete tax item recognized during the quarter related to an intercompany transfer of assets.
Liquidity and Financial Condition
Cash flows. Cash and cash equivalents increased $233 million during the three months ended July 31, 2020. Cash provided by operations of $91 million was up $19 million from the same period last year, primarily reflecting lower working capital requirements.
Cash provided by investing activities was $162 million for the three months ended July 31, 2020, an increase of $205 million compared to the same period last year. The increase primarily reflects the proceeds of $177 million from our divestiture of the Early Times, Canadian Mist, and Collingwood brands (in July 2020) and our acquisition of The 86 Company for $22 million (in July 2019).
Cash used for financing activities was $37 million during the three months ended July 31, 2020, compared to $26 million for the same period last year. The $11 million change was largely attributable to a $12 million decline in net proceeds from short-term borrowings.
The impact on cash and cash equivalents as a result of exchange rate changes was an increase of $17 million for the three months ended July 31, 2020, compared to a decrease of $3 million for the same period last year.
Liquidity. We generate strong cash flows from operations, which enables us to meet current obligations, fund capital expenditures, pay regular dividends, and return cash to our shareholders from time to time through share repurchases and special dividends. Our investment-grade credit ratings (A1 by Moody’s and A- by Standard & Poor’s) provide us with financial flexibility when accessing global credit markets and allow us to reserve adequate debt capacity for investment opportunities and unforeseen events.
The ongoing COVID-19 crisis has affected our results of operations. To ensure uninterrupted business operations and to preserve adequate liquidity during these uncertain times, we have (a) managed our operating expenses closely and limited discretionary spending, (b) re-prioritized capital projects where prudent, and (c) actively managed our working capital. To support our business partners, we have extended additional credit to some of our customers who were most directly affected by the crisis. We continue to monitor closely the impact of the pandemic on our customers’ solvency and our ability to collect from them.
Cash and cash equivalents were $675 million at April 30, 2020, and $908 million at July 31, 2020. As of July 31, 2020, approximately 43% of our cash and cash equivalents were held by our foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. We continue to evaluate our future cash deployment and should we decide to repatriate additional cash held by other foreign subsidiaries, we may be required to provide for and pay additional taxes.
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We have an $800 million commercial paper program that we regularly use to fund our short-term operational needs. In the second half of March 2020, as the COVID-19 crisis fueled widespread economic uncertainty, the commercial paper market was disrupted. Despite the heightened volatility, we sustained our access to short-term funding in the commercial paper market and expect to continue to be able to do so in the future. In order to create a liquidity buffer, we have borrowed in excess of our immediate needs, and for longer maturities than usual. For outstanding commercial paper balances, interest rates, and days to maturity at April 30, 2020 and July 31, 2020, please see Note 6 to the Condensed Consolidated Financial Statements. The average balances, interest rates and original maturities during the periods ended July 31, 2019 and 2020, are presented below.
Three Months Average | |||
July 31, | |||
(Dollars in millions) | 2019 | 2020 | |
Commercial paper outstanding | $336 | $360 | |
Interest rate | 2.56% | 0.93% | |
Average days to maturity at issuance | 32 | 103 | |
Our commercial paper program is supported by available commitments under our currently undrawn $800 million bank credit facility that expires in November 2023. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fund its commitments under our credit facility.
While we expect to meet our short-term liquidity needs largely through cash generated from operations and borrowings under our commercial paper program, a sustained market deterioration resulting in continued declines in net sales and profit could require us to evaluate alternative sources of liquidity. The debt capital markets are accessible sources of long-term financing that we believe could meet any additional liquidity needs.
We believe our current liquidity position, supplemented by our ability to generate positive cash flows from operations in the future, and our ample debt capacity enabled by our strong short-term and long-term credit ratings, will be sufficient to meet all of our future financial commitments.
On July 1, 2020, we paid a regular quarterly cash dividend of $0.1743 per share on our Class A and Class B common stock. On July 23, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.1743 per share on our Class A and Class B common stock. Stockholders of record on September 4, 2020, will receive the dividend on October 1, 2020.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We face market risks arising from changes in foreign currency exchange rates, commodity prices, and interest rates. Foreign currency fluctuations affect our net investments in foreign subsidiaries and foreign currency-denominated cash flows. Commodity price changes can affect our production and supply chain costs. Interest rate changes affect (a) the fair value of our fixed-rate debt, and (b) cash flows and earnings related to our variable-rate debt and interest-bearing investments. We manage market risks through procurement strategies as well as the use of derivative and other financial instruments. Our risk management program is governed by policies that authorize and control the nature and scope of transactions that we use to mitigate market risks. Since April 30, 2020, there have been no material changes to the market risks faced by us or to our risk management program.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) (our principal executive and principal financial officers), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures: (a) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (b) include controls and procedures designed to ensure that information required to be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We operate in a litigious environment and we are sued in the normal course of business. We do not anticipate that any 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 report, you should carefully consider the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our 2020 Form 10-K, which could materially adversely affect our business, financial condition, or future results. The information presented below updates, and should be read in conjunction with, the risk factors disclosed in our 2020 Form 10-K. Otherwise, except as presented below, there have been no material changes to the risk factors disclosed in our 2020 Form 10-K.
A cyber breach, a failure or corruption of one or more of our key information technology systems, networks, processes, associated sites, or service providers, or a failure to comply with personal data protection laws could have a material adverse impact on our business.
We rely on information technology (IT) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software, and technical applications and platforms, some of which are managed, hosted, provided, or used by third parties or their vendors, to help us manage our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting our internal network and communication systems; ordering and managing materials from suppliers; supply/demand planning; production; shipping products to customers; hosting corporate strategic plans and employee data; hosting our branded websites and marketing products to consumers; collecting and storing customer, consumer, employee, investor, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing, and sharing confidential and proprietary research, business plans, and financial information; complying with regulatory, legal, or tax requirements; providing data security; and handling other processes necessary to manage our business.
Increased IT security threats and more sophisticated cybercrimes and cyberattacks, including computer viruses and other malicious codes, ransomware, unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking, and other types of attacks, pose a potential risk to the security and availability of our IT systems, networks, and services, including those that are managed, hosted, provided, or used by third parties, as well as the confidentiality, availability, and integrity of our data and the data of our employees, stockholders, customers, suppliers, consumers, and others. For example, in July 2020, we discovered a data breach incident involving malware and related behaviors that resulted in unauthorized access to our IT networks. We do not believe this incident had or will have any significant impacts on our business operations, financial results, systems and processes, or the effectiveness of our internal control environment; however, any failure of our IT systems, networks, or service providers to function properly, or the loss or disclosure of our business strategy or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches to usage errors by employees and other security issues, could cause us to suffer interruptions in our ability to manage operations and reputational, competitive, or business harm, which may adversely affect our business operations or financial results. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, former employees, stockholders, customers, suppliers, consumers, or others. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach, to repair or replace networks and IT systems, which could require a significant amount of time, or to respond to claims from employees, former employees, stockholders, customers, suppliers, consumers or others or pay significant fines to regulatory agencies. As a result of the COVID-19 pandemic, a greater number of our employees are working remotely and accessing our technology infrastructure remotely, which may further increase our vulnerability to the cyber risks described above.
In the ordinary course of our business, we receive, process, transmit, and store information relating to identifiable individuals (personal data), primarily employees and former employees, but also relating to customers and consumers. As a result, we are subject to various U.S. federal and state and foreign laws and regulations relating to personal data. These laws have been subject to frequent changes, and new legislation in this area may be enacted in other jurisdictions at any time, such as, for example, the California Consumer Protection Act which took effect on January 1, 2020. In the European Union, the General Data Protection Regulation (GDPR) became effective in May 2018, for all member states and has extraterritorial effect. The GDPR includes operational requirements for companies receiving or processing personal data of European Union residents that are partially
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different from those that had previously been in place and includes significant penalties for noncompliance. The changes introduced by the GDPR, as well as any other changes to existing personal data protection laws and the introduction of such laws in other jurisdictions, have subjected and may continue in the future to subject us to, among other things, additional costs and expenses and have required and may in the future require costly changes to our business practices and security systems, policies, procedures, and practices. Improper disclosure of personal data in violation of the GDPR and/or of other personal data protection laws could harm our reputation, cause loss of consumer confidence, subject us to government enforcement actions (including fines), or result in private litigation against us, which could result in loss of revenue, increased costs, liability for monetary damages, fines and/or criminal prosecution, all of which could negatively affect our business and operating results.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following documents are filed with this report:
10.1 | ||
10.2 | ||
31.1 | ||
31.2 | ||
32 | ||
101 | The following materials from Brown-Forman Corporation's Quarterly Report on Form 10-Q for the quarter ended July 31, 2020, 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). | |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BROWN-FORMAN CORPORATION | |||
(Registrant) | |||
Date: | September 2, 2020 | By: | /s/ Jane C. Morreau |
Jane C. Morreau | |||
Executive Vice President and Chief Financial Officer | |||
(On behalf of the Registrant and as Principal Financial Officer) | |||
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