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Section 1: 10-Q (10-Q)

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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 January 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

Brown-Forman Corporation
(Exact name of Registrant as specified in its Charter)
Delaware
61-0143150
(State or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
 
 
 
850 Dixie Highway
 
Louisville,
Kentucky
40210
(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
Class A Common Stock (voting), $0.15 par value
BFA
New York Stock Exchange
Class B Common Stock (nonvoting), $0.15 par value
BFB
New York Stock Exchange
1.200% Notes due 2026
BF26
New York Stock Exchange
2.600% Notes due 2028
BF28
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ   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.
Large accelerated filer
 
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: February 29, 2020
Class A Common Stock (voting), $0.15 par value
169,039,764

Class B Common Stock (nonvoting), $0.15 par value
309,100,414





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
 
Nine Months Ended
 
January 31,
 
January 31,
 
2019
 
2020
 
2019
 
2020
Sales
$
1,181

 
$
1,178

 
$
3,329

 
$
3,404

Excise taxes
277

 
279

 
749

 
750

Net sales
904

 
899

 
2,580

 
2,654

Cost of sales
333

 
342

 
896

 
980

Gross profit
571

 
557

 
1,684

 
1,674

Advertising expenses
103

 
104

 
303

 
308

Selling, general, and administrative expenses
149

 
153

 
478

 
475

Other expense (income), net
(1
)
 
(4
)
 
(13
)
 
(13
)
Operating income
320

 
304

 
916

 
904

Non-operating postretirement expense
15

 
1

 
19

 
3

Interest income
(2
)
 
(1
)
 
(6
)
 
(4
)
Interest expense
23

 
20

 
67

 
62

Income before income taxes
284

 
284

 
836

 
843

Income taxes
57

 
53

 
160

 
144

Net income
$
227

 
$
231

 
$
676

 
$
699

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.47

 
$
0.48

 
$
1.41

 
$
1.46

Diluted
$
0.47

 
$
0.48

 
$
1.40

 
$
1.45

See notes to the condensed consolidated financial statements.

3



BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
 
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
 
2019
 
2020
 
2019
 
2020
Net income
$
227

 
$
231

 
$
676

 
$
699

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
18

 
6

 
(21
)
 
3

Cash flow hedge adjustments
(8
)
 
(1
)
 
37

 
1

Postretirement benefits adjustments
(5
)
 
3

 
2

 
10

Net other comprehensive income (loss)
5

 
8

 
18

 
14

Comprehensive income
$
232

 
$
239

 
$
694

 
$
713

See notes to the condensed consolidated financial statements.

4



BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
 
April 30,
2019
 
January 31,
2020
Assets
 
 
 
Cash and cash equivalents
$
307

 
$
276

Accounts receivable, less allowance for doubtful accounts of $7 at April 30 and January 31
609

 
732

Inventories:
 
 
 
Barreled whiskey
1,004

 
1,067

Finished goods
279

 
314

Work in process
152

 
191

Raw materials and supplies
85

 
96

Total inventories
1,520

 
1,668

Other current assets
283

 
318

Total current assets
2,719

 
2,994

Property, plant and equipment, net
816

 
840

Goodwill
753

 
765

Other intangible assets
645

 
654

Deferred tax assets
16

 
19

Other assets
190

 
246

Total assets
$
5,139

 
$
5,518

Liabilities
 
 
 
Accounts payable and accrued expenses
$
544

 
$
558

Dividends payable

 
83

Accrued income taxes
9

 
19

Short-term borrowings
150

 
4

Total current liabilities
703

 
664

Long-term debt
2,290

 
2,293

Deferred tax liabilities
145

 
187

Accrued pension and other postretirement benefits
197

 
198

Other liabilities
157

 
171

Total liabilities
3,492

 
3,513

Commitments and contingencies

 

Stockholders’ Equity
 
 
 
Common stock:
 
 
 
Class A, voting, $0.15 par value (170,000,000 shares authorized; 170,000,000 shares issued)
25

 
25

Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 314,532,000 shares issued)
47

 
47

Retained earnings
2,238

 
2,588

Accumulated other comprehensive income (loss), net of tax
(363
)
 
(392
)
Treasury stock, at cost (7,360,000 and 6,457,000 shares at April 30 and January 31, respectively)
(300
)
 
(263
)
Total stockholders’ equity
1,647

 
2,005

Total liabilities and stockholders’ equity
$
5,139

 
$
5,518

 See notes to the condensed consolidated financial statements.

5



BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
Nine Months Ended
 
January 31,
 
2019
 
2020
Cash flows from operating activities:
 
 
 
Net income
$
676

 
$
699

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation and amortization
52

 
55

Stock-based compensation expense
12

 
8

Deferred income tax provision
13

 
30

U.S Tax Act repatriation tax benefit
(4
)
 

Other, net
7

 
6

Changes in assets and liabilities, excluding the effects of acquisition of business:
 
 
 
Accounts receivable
(102
)
 
(125
)
Inventories
(109
)
 
(142
)
Other current assets
19

 
(33
)
Accounts payable and accrued expenses
(1
)
 
(6
)
Accrued income taxes
(3
)
 
10

Other operating assets and liabilities
17

 
7

Cash provided by operating activities
577

 
509

Cash flows from investing activities:
 
 
 
Acquisition of business, net of cash acquired

 
(22
)
Additions to property, plant, and equipment
(84
)
 
(84
)
Payments for corporate-owned life insurance
(2
)
 

Proceeds from corporate-owned life insurance
2

 

Computer software expenditures
(2
)
 
(5
)
Cash used for investing activities
(86
)
 
(111
)
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
(13
)
 
(150
)
Payments of withholding taxes related to stock-based awards
(8
)
 
(33
)
Acquisition of treasury stock
(206
)
 
(1
)
Dividends paid
(231
)
 
(242
)
Cash used for financing activities
(458
)
 
(426
)
Effect of exchange rate changes on cash and cash equivalents
(12
)
 
(3
)
Net increase (decrease) in cash and cash equivalents
21

 
(31
)
Cash and cash equivalents, beginning of period
239

 
307

Cash and cash equivalents, end of period
$
260

 
$
276

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, 2019 (2019 Form 10-K). Except for adopting the new accounting standards discussed below, we prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2019 Form 10-K.

As of May 1, 2019, we adopted the following Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board:
ASU 2016-02: Leases. This update, codified along with various amendments as Accounting Standards Codification Topic 842 (ASC 842), replaces previous lease accounting guidance. Under ASC 842, a lessee should recognize on its balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASC 842 permits an entity to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. It also requires additional quantitative and qualitative disclosures about leasing arrangements.
We adopted ASC 842 using a modified retrospective transition approach for leases existing at the date of adoption. For the transition, we elected to use the package of practical expedients to not reassess (a) whether existing contracts are or contain leases, (b) the classification of existing leases, and (c) initial direct costs for existing leases. Upon adoption, we recorded lease liabilities and right-of-use assets of $54 million. The adoption did not have a material impact on our results of operations, stockholders’ equity, or cash flows. See Note 13 for additional information about our leases.
ASU 2018-02: Reclassification of Certain Effects from Accumulated Other Comprehensive Income (AOCI). This new guidance allows a reclassification from AOCI to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted by the U.S. government in December 2017. We elected to make the reclassification, which increased retained earnings and decreased AOCI as of May 1, 2019, by $43 million.

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).


7



The following table presents information concerning basic and diluted earnings per share:
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
(Dollars in millions, except per share amounts)
2019
 
2020
 
2019
 
2020
Net income available to common stockholders
$
227

 
$
231

 
$
676

 
$
699

 
 
 
 
 
 
 
 
Share data (in thousands):
 
 
 
 
 
 
 
Basic average common shares outstanding
477,301

 
477,898

 
479,522

 
477,643

Dilutive effect of stock-based awards
2,798

 
2,859

 
3,143

 
2,793

Diluted average common shares outstanding
480,099

 
480,757

 
482,665

 
480,436

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.47

 
$
0.48

 
$
1.41

 
$
1.46

Diluted earnings per share
$
0.47

 
$
0.48

 
$
1.40

 
$
1.45



We excluded common stock-based awards for approximately 548,000 shares and 0 shares from the calculation of diluted earnings per share for the three months ended January 31, 2019 and 2020, respectively. We excluded common stock-based awards for approximately 414,000 shares and 295,000 shares from the calculation of diluted earnings per share for the nine months ended January 31, 2019 and 2020, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.

3.    Inventories 
Inventories are valued at the lower of cost or market. Some of our consolidated inventories are valued using the last-in, first-out (LIFO) method, which we use for the majority of our U.S. inventories. If the LIFO method had not been used, inventories at current cost would have been $303 million higher than reported as of April 30, 2019, and $313 million higher than reported as of January 31, 2020. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.

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 nine months ended January 31, 2020:
(Dollars in millions)
Goodwill
 
Other Intangible Assets
Balance at April 30, 2019
$
753

 
$
645

Acquisition (Note 15)
11

 
12

Foreign currency translation adjustment
1

 
(3
)
Balance at January 31, 2020
$
765

 
$
654



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

8



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 January 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 $10 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant.

As of January 31, 2020, our actual exposure under the guaranty of the importer’s obligation was approximately $6 million. We also have accounts receivable from that importer of approximately $13 million at January 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.

6.    Debt
Our long-term debt (net of unamortized discount and issuance costs) consists of:
(Principal and carrying amounts in millions)
April 30,
2019
 
January 31,
2020
2.25% senior notes, $250 principal amount, due January 15, 2023
$
249

 
$
249

3.50% senior notes, $300 principal amount, due April 15, 2025
297

 
297

1.20% senior notes, €300 principal amount, due July 7, 2026
333

 
329

2.60% senior notes, £300 principal amount, due July 7, 2028
383

 
389

4.00% senior notes, $300 principal amount, due April 15, 2038
293

 
294

3.75% senior notes, $250 principal amount, due January 15, 2043
248

 
248

4.50% senior notes, $500 principal amount, due July 15, 2045
487

 
487

 
$
2,290

 
$
2,293


Our short-term borrowing included commercial paper of $150 million as of April 30, 2019, and $1 million as of January 31, 2020.
(Dollars in millions)
April 30,
2019
 
January 31,
2020
Commercial paper
$150
 
$1
Average interest rate
2.60%
 
1.63%
Average remaining days to maturity
18
 
3



9



7.    Stockholders’ Equity
The following table shows the changes in stockholders’ equity by quarter during the nine months ended January 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, 2018
$
25

 
$
47

 
$
4

 
$
1,730

 
$
(378
)
 
$
(112
)
 
$
1,316

Cumulative effect of changes in accounting standards
 
 
 
 
 
 
(5
)
 
 
 
 
 
(5
)
Net income
 
 
 
 
 
 
200

 
 
 
 
 
200

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
14

 
 
 
14

Declaration of cash dividends
 
 
 
 
 
 
(152
)
 
 
 
 
 
(152
)
Acquisition of treasury stock
 
 
 
 
 
 
 
 
 
 
(6
)
 
(6
)
Stock-based compensation expense
 
 
 
 
5

 
 
 
 
 
 
 
5

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
9

 
9

Loss on issuance of treasury stock issued under compensation plans
 
 
 
 
(7
)
 
(6
)
 
 
 
 
 
(13
)
Balance at July 31, 2018
25

 
47

 
2

 
1,767

 
(364
)
 
(109
)
 
1,368

Net income
 
 
 
 
 
 
249

 
 
 
 
 
249

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
Acquisition of treasury stock
 
 
 
 
 
 
 
 
 
 
(122
)
 
(122
)
Stock-based compensation expense
 
 
 
 
4

 
 
 
 
 
 
 
4

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
1

 
1

Loss on issuance of treasury stock issued under compensation plans
 
 
 
 
(2
)
 
 
 
 
 
 
 
(2
)
Balance at October 31, 2018
25

 
47

 
4

 
2,016

 
(365
)
 
(230
)
 
1,497

Net income
 
 
 
 
 
 
227

 
 
 
 
 
227

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
5

 
 
 
5

Declaration of cash dividends
 
 
 
 
 
 
(158
)
 
 
 
 
 
(158
)
Acquisition of treasury stock
 
 
 
 
 
 
 
 
 
 
(78
)
 
(78
)
Stock-based compensation expense
 
 
 
 
3

 
 
 
 
 
 
 
3

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
1

 
1

Loss on issuance of treasury stock issued under compensation plans
 
 
 
 
(4
)
 
 
 
 
 
 
 
(4
)
Balance at January 31, 2019
$
25

 
$
47

 
$
3

 
$
2,085

 
$
(360
)
 
$
(307
)
 
$
1,493




10



The following table shows the changes in stockholders’ equity by quarter during the nine months ended January 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, 2019
$
25

 
$
47

 
$

 
$
2,238

 
$
(363
)
 
$
(300
)
 
$
1,647

Adoption of ASU 2018-02 (Note 1)
 
 
 
 
 
 
43

 
(43
)
 
 
 

Net income
 
 
 
 
 
 
186

 
 
 
 
 
186

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
(1
)
 
 
 
(1
)
Declaration of cash dividends
 
 
 
 
 
 
(158
)
 
 
 
 
 
(158
)
Acquisition of treasury stock
 
 
 
 
 
 
 
 
 
 
(1
)
 
(1
)
Stock-based compensation expense
 
 
 
 
3

 
 
 
 
 
 
 
3

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
16

 
16

Loss on issuance of treasury stock issued under compensation plans
 
 
 
 
(2
)
 
(27
)
 
 
 
 
 
(29
)
Balance at July 31, 2019
25

 
47

 
1

 
2,282

 
(407
)
 
(285
)
 
1,663

Net income
 
 
 
 
 
 
282

 
 
 
 
 
282

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
7

 
 
 
7

Stock-based compensation expense
 
 
 
 
3

 
 
 
 
 
 
 
3

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
11

 
11

Loss on issuance of treasury stock issued under compensation plans
 
 
 
 
(4
)
 
(20
)
 
 
 
 
 
(24
)
Balance at October 31, 2019
25

 
47

 

 
2,544

 
(400
)
 
(274
)
 
1,942

Net income
 
 
 
 
 
 
231

 
 
 
 
 
231

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
8

 
 
 
8

Declaration of cash dividends
 
 
 
 
 
 
(167
)
 
 
 
 
 
(167
)
Stock-based compensation expense
 
 
 
 
2

 
 
 
 
 
 
 
2

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
11

 
11

Loss on issuance of treasury stock issued under compensation plans
 
 
 
 
(2
)
 
(20
)
 
 
 
 
 
(22
)
Balance at January 31, 2020
$
25

 
$
47

 
$

 
$
2,588

 
$
(392
)
 
$
(263
)
 
$
2,005



The following table shows the change in each component of AOCI, net of tax, during the nine months ended January 31, 2020:
(Dollars in millions)
Currency Translation Adjustments
 
Cash Flow Hedge Adjustments
 
Postretirement Benefits Adjustments
 
Total AOCI
Balance at April 30, 2019
$
(207
)
 
$
31

 
$
(187
)
 
$
(363
)
Adoption of ASU 2018-02 (Note 1)
(1
)
 
(1
)
 
(41
)
 
(43
)
Net other comprehensive income (loss)
3

 
1

 
10

 
14

Balance at January 31, 2020
$
(205
)
 
$
31

 
$
(218
)
 
$
(392
)


The following table shows the cash dividends declared per share on our Class A and Class B common stock during the nine months ended January 31, 2020:
Declaration Date
 
Record Date
 
Payable Date
 
Amount per Share
May 23, 2019
 
June 6, 2019
 
July 1, 2019
 
$0.1660
July 25, 2019
 
September 6, 2019
 
October 1, 2019
 
$0.1660
November 21, 2019
 
December 5, 2019
 
January 2, 2020
 
$0.1743
January 28, 2020
 
March 9, 2020
 
April 1, 2020
 
$0.1743



11



8.    Net Sales 
The following table shows our net sales by geography:
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
(Dollars in millions)
2019
 
2020
 
2019
 
2020
United States
$
411

 
$
416

 
$
1,209

 
$
1,296

Developed International1
269

 
263

 
718

 
716

Emerging2
165

 
171

 
460

 
477

Travel Retail3
33

 
34

 
109

 
104

Non-branded and bulk4
26

 
15

 
84

 
61

Total
$
904

 
$
899

 
$
2,580

 
$
2,654


 
 
1Represents net sales of branded products to “advanced economies” as defined by the International Monetary Fund (IMF), excluding the United States. Our largest developed international markets are the United Kingdom, Australia, Germany, France, and Japan.
2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, Russia, and Brazil.
3Represents net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer location.
4Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

The following table shows our net sales by product category:
 
Three Months Ended
 
Nine Months Ended
 
January 31,
 
January 31,
(Dollars in millions)
2019
 
2020
 
2019
 
2020
Whiskey1
$
707

 
$
701

 
$
2,007

 
$
2,086

Tequila2
68

 
74

 
200

 
219

Vodka3
36

 
32

 
98

 
89

Wine4
51

 
62

 
153

 
159

Rest of portfolio
16

 
15

 
38

 
40

Non-branded and bulk5
26

 
15

 
84

 
61

Total
$
904

 
$
899

 
$
2,580

 
$
2,654


 
 
1Includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this category are the Jack Daniel's family of brands, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers’ Craft.
2Includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
3Includes Finlandia.
4Includes Korbel Champagne and Sonoma-Cutrer wines.
5Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

12



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
 
Nine Months Ended
 
January 31,
 
January 31,
(Dollars in millions)
2019
 
2020
 
2019
 
2020
Pension Benefits:
 
 
 
 
 
 
 
Service cost
$
6

 
$
6

 
$
18

 
$
18

Interest cost
9

 
8

 
26

 
24

Expected return on plan assets
(12
)
 
(12
)
 
(35
)
 
(35
)
Amortization of:
 
 
 
 
 
 
 
Prior service cost (credit)

 

 
1

 
1

Net actuarial loss
5

 
5

 
15

 
14

Settlement charge
13

 

 
13

 

Net cost
$
21

 
$
7

 
$
38

 
$
22

 
 
 
 
 
 
 
 
Other Postretirement Benefits:
 
 
 
 
 
 
 
Service cost
$

 
$

 
$
1

 
$
1

Interest cost
1

 
1

 
1

 
1

Amortization of prior service cost (credit)
(1
)
 
(1
)
 
(2
)
 
(2
)
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 17.1% for the nine months ended January 31, 2020, is lower than the expected tax rate of 20.4% on ordinary income for the full fiscal year primarily due to excess tax benefits related to stock-based compensation and the impact of other discrete items. Our expected tax rate includes current fiscal year additions for existing tax contingency items.

Historically, we have asserted that the undistributed earnings of our foreign subsidiaries are reinvested indefinitely outside the United States. Therefore, no income taxes have been provided for any outside basis differences inherent in these subsidiaries other than those subject to the one-time repatriation tax. During fiscal 2019, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for select foreign subsidiaries (but not for their other outside basis differences). Although these earnings are no longer indefinitely reinvested and may now be distributed within our foreign entity structure, they remain indefinitely reinvested outside the United States. No deferred taxes have been recorded as no withholding taxes would be due on their distribution. No further changes have been made to our indefinite reinvestment assertion.

11.    Derivative Financial 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.

13




We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts for all hedged currencies totaling $1,241 million at April 30, 2019 and $1,169 million at January 31, 2020. As of January 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 January 31, 2020, $621 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 physically take delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than as derivative instruments.

The following tables present the pre-tax impact that changes in the fair value of our derivative instruments and non-derivative hedging instruments had on AOCI and earnings:
 
 
Three Months Ended
 
 
January 31,
(Dollars in millions)
Classification
2019
 
2020
Currency derivatives designated as cash flow hedges:
 
 

 
 

Net gain (loss) recognized in AOCI
n/a
$
(5
)
 
$
4

Net gain (loss) reclassified from AOCI into earnings
Sales
5

 
5

Currency derivatives not designated as hedging instruments:
 
 

 
 

Net gain (loss) recognized in earnings
Sales
$
(1
)
 
$
(1
)
Net gain (loss) recognized in earnings
Other income (expense), net
6

 
4

Foreign currency-denominated debt designated as net investment hedge:
 
 
 
 
Net gain (loss) recognized in AOCI
n/a
$
(11
)
 
$
(5
)
 
 
 
 
 
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
 
 
 
Sales
 
$
1,181

 
$
1,178

Other income (expense), net
 
1

 
4



14



 
 
Nine Months Ended
 
 
January 31,
(Dollars in millions)
Classification
2019
 
2020
Currency derivatives designated as cash flow hedges: