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Section 1: 10-Q (10-Q)

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

FORM 10-Q
(Mark One)
 
  þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2018
OR
  o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________

Commission File No. 001-00123

Brown-Forman Corporation
(Exact name of Registrant as specified in its Charter)
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)
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, 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
þ
 
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 o     No  þ
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:  November 30, 2018
Class A Common Stock ($.15 par value, voting)
169,010,917

Class B Common Stock ($.15 par value, nonvoting)
307,948,847





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
 
Six Months Ended
 
October 31,
 
October 31,
 
2017
 
2018
 
2017
 
2018
Sales
$
1,166

 
$
1,161

 
$
2,095

 
$
2,148

Excise taxes
252

 
251

 
458

 
472

Net sales
914

 
910

 
1,637

 
1,676

Cost of sales
304

 
320

 
534

 
563

Gross profit
610

 
590

 
1,103

 
1,113

Advertising expenses
109

 
102

 
196

 
200

Selling, general, and administrative expenses
162

 
161

 
323

 
329

Other expense (income), net
(10
)
 
(5
)
 
(11
)
 
(12
)
Operating income
349

 
332

 
595

 
596

Non-operating postretirement expense
3

 
2

 
5

 
4

Interest income
(1
)
 
(2
)
 
(2
)
 
(4
)
Interest expense
16

 
22

 
32

 
44

Income before income taxes
331

 
310

 
560

 
552

Income taxes
92

 
61

 
143

 
103

Net income
$
239

 
$
249

 
$
417

 
$
449

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.50

 
$
0.52

 
$
0.87

 
$
0.93

Diluted
$
0.49

 
$
0.52

 
$
0.86

 
$
0.93

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
 
Six Months Ended
 
October 31,
 
October 31,
 
2017
 
2018
 
2017
 
2018
Net income
$
239

 
$
249

 
$
417

 
$
449

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Currency translation adjustments
(25
)
 
(27
)
 
9

 
(39
)
Cash flow hedge adjustments
7

 
22

 
(16
)
 
45

Postretirement benefits adjustments
3

 
4

 
6

 
7

Net other comprehensive income (loss)
(15
)
 
(1
)
 
(1
)
 
13

Comprehensive income
$
224

 
248

 
$
416

 
$
462

See notes to the condensed consolidated financial statements.

4



BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
 
April 30,
2018
 
October 31,
2018
Assets
 
 
 
Cash and cash equivalents
$
239

 
$
193

Accounts receivable, less allowance for doubtful accounts of $7 at April 30 and October 31
639

 
768

Inventories:
 
 
 
Barreled whiskey
947

 
937

Finished goods
225

 
303

Work in process
117

 
145

Raw materials and supplies
90

 
92

Total inventories
1,379

 
1,477

Other current assets
298

 
305

Total current assets
2,555

 
2,743

Property, plant and equipment, net
780

 
785

Goodwill
763

 
750

Other intangible assets
670

 
648

Deferred tax assets
16

 
16

Other assets
192

 
207

Total assets
$
4,976

 
$
5,149

Liabilities
 
 
 
Accounts payable and accrued expenses
$
581

 
$
620

Accrued income taxes
25

 
17

Short-term borrowings
215

 
258

Total current liabilities
821

 
895

Long-term debt
2,341

 
2,288

Deferred tax liabilities
85

 
113

Accrued pension and other postretirement benefits
191

 
193

Other liabilities
222

 
163

Total liabilities
3,660

 
3,652

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

Additional paid-in capital
4

 
4

Retained earnings
1,730

 
2,016

Accumulated other comprehensive income (loss), net of tax
(378
)
 
(365
)
Treasury stock, at cost (3,531,000 and 5,932,000 shares at April 30 and October 31, respectively)
(112
)
 
(230
)
Total stockholders’ equity
1,316

 
1,497

Total liabilities and stockholders’ equity
$
4,976

 
$
5,149

 See notes to the condensed consolidated financial statements.

5



BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
 
Six Months Ended
 
October 31,
 
2017
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
417

 
$
449

Adjustments to reconcile net income to net cash provided by operations:
 
 
 
Depreciation and amortization
31

 
36

Stock-based compensation expense
9

 
9

Deferred income taxes
(10
)
 
4

Changes in assets and liabilities
(229
)
 
(226
)
Cash provided by operating activities
218

 
272

Cash flows from investing activities:
 
 
 
Additions to property, plant, and equipment
(64
)
 
(53
)
Payments for corporate-owned life insurance
(4
)
 
(2
)
Computer software expenditures
(1
)
 
(2
)
Cash used for investing activities
(69
)
 
(57
)
Cash flows from financing activities:
 
 
 
Net change in short-term borrowings
21

 
42

Net payments related to exercise of stock-based awards
(7
)
 
(5
)
Acquisition of treasury stock
(1
)
 
(128
)
Dividends paid
(140
)
 
(152
)
Cash used for financing activities
(127
)
 
(243
)
Effect of exchange rate changes on cash and cash equivalents
8

 
(18
)
Net increase (decrease) in cash and cash equivalents
30

 
(46
)
Cash and cash equivalents, beginning of period
182

 
239

Cash and cash equivalents, end of period
$
212

 
$
193

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 (SEC) for interim financial information. In accordance with those rules and regulations, we condensed or omitted certain information and disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). In our opinion, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments (unless otherwise indicated), necessary for a fair statement of our financial results for the periods covered by this report. The results for interim periods are not necessarily indicative of future or annual results.

We suggest that you read these condensed financial statements together with the financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2018 (2018 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 2018 Form 10-K.

Recently adopted accounting standards. As of May 1, 2018, we adopted the following Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB):
ASU 2014-09: Revenue from Contracts with Customers. This update, codified along with various amendments as Accounting Standards Codification Topic 606 (ASC 606), replaces previous revenue recognition guidance. The core principle of ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. ASC 606 also requires more financial statement disclosures than were required by previous revenue recognition standards. We applied this new guidance on a modified retrospective basis through a cumulative-effect adjustment that reduced retained earnings as of May 1, 2018, by $25 million (net of tax). See Note 2 for additional information about our revenues and the impact of adopting ASC 606.
ASU 2016-15: Classification of Certain Cash Receipts and Cash Payments. This new guidance addresses eight specific issues related to the classification of certain cash receipts and cash payments on the statement of cash flows. The impact of adopting the new guidance was limited to a change in our classification of cash payments for premiums on corporate-owned life insurance policies, which we previously reflected in operating activities. Under the new guidance, we classify those payments as investing activities. We retrospectively adjusted prior period cash flow statements to conform to the new classification. As a result, we reclassified payments of $4 million from operating activities to investing activities for the six months ended October 31, 2017.
ASU 2016-16: Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. This revised guidance requires the recognition of the income tax consequences (expense or benefit) of an intercompany transfer of assets other than inventory when the transfer occurs. It maintains the existing requirement to defer the recognition of the income tax consequences of an intercompany transfer of inventory until the inventory is sold to an outside party. We applied the guidance on a modified retrospective basis through a cumulative-effect adjustment that increased retained earnings as of May 1, 2018, by $20 million.
ASU 2017-04: Simplifying the Test for Goodwill Impairment. This updated guidance eliminates the second step of the previous two-step quantitative test of goodwill for impairment. Under the new guidance, the quantitative test consists of a single step in which the carrying amount of the reporting unit is compared to its fair value. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the amount of the impairment would be limited to the total amount of goodwill allocated to the reporting unit. The guidance does not affect the existing option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. The prospective adoption of the new standard had no impact on our consolidated financial statements.
ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This new guidance addresses the presentation of the net periodic cost (NPC) associated with pension and other

7



postretirement benefit plans. The guidance requires the service cost component of the NPC to be reported in the income statement in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of the NPC are to be presented separately from the service cost and outside of income from operations. In addition, the guidance allows only the service cost component of NPC to be eligible for capitalization when applicable. We applied the guidance retrospectively for the presentation in the income statement and prospectively for the capitalization of service cost. The retrospective application increased previously-reported operating income by $3 million and $5 million for the three and six months ended October 31, 2017, respectively. As the retrospective application merely reclassified amounts from operating income to non-operating expense, there was no effect on previously-reported net income or earnings per share.

New accounting standards to be adopted. The FASB has issued the ASUs described below that we are not required to adopt until May 1, 2019 (although early adoption is permitted). We are currently evaluating their potential impact on our consolidated financial statements.
ASU 2016-02: Leases. This update, codified along with various amendments as Accounting Standards Codification Topic 842 (ASC 842), replaces existing lease accounting guidance. Under ASC 842, a lessee should recognize on its balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASC 842 permits an entity to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. It also requires additional quantitative and qualitative disclosures about leasing arrangements.
We are continuing to assess the potential impact on our financial statements of adopting ASC 842. As we progress in our assessment, we are identifying and preparing to make any changes to our accounting policies and practices, systems, processes, and controls that may be required to implement the new standard. Although we are unable to quantify the impact of adoption at this time, the amount of lease liabilities and right-of-use assets to be recognized on our balance sheet could be material. We do not currently expect adoption to have a material impact on our results of operations, stockholders’ equity, or cash flows.
We will adopt ASC 842 as of May 1, 2019, using a modified retrospective transition approach for leases existing at that date. For the transition, we expect to elect to use the package of practical expedients to not reassess (a) whether existing contracts are or contain leases, (b) the classification of existing leases, and (c) initial direct costs for existing leases.
ASU 2017-12: Targeted Improvements to Accounting for Hedging Activities. This new guidance is intended to better align hedge accounting with an entity’s risk management activities and improve disclosures about hedges. The guidance expands hedge accounting for financial and nonfinancial risk components, eliminates the requirement to separately measure and report hedge ineffectiveness, simplifies the way assessments of hedge effectiveness may be performed, and amends some presentation and disclosure requirements for hedges. It is to be applied using a modified retrospective transition approach for cash flow and net investment hedges existing at the date of adoption. The amended presentation and disclosure guidance is required only prospectively. We have not yet determined our plans for adoption, but currently do not expect to adopt this new guidance before the required adoption date.
ASU 2018-02: Reclassification of Certain Effects from Accumulated Other Comprehensive Income. This new guidance would allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted by the U.S. government in December 2017. It is to be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. We have not yet determined our plans for adoption, but currently do not expect to adopt this new guidance before the required adoption date.

There are no other new accounting standards to be adopted that we currently believe might have a significant impact on our consolidated financial statements.

Reclassifications. We have reclassified some previously reported expense amounts related to certain marketing research and promotional agency costs to conform to the current year classification. These immaterial reclassifications between advertising expenses and selling, general, and administrative expenses had no impact on net income.


8



2.    Net Sales 
Effective May 1, 2018, we updated our policy for recognizing revenue (“net sales”) to reflect the adoption of ASC 606. We describe the updated policy below. Also, we show how the adoption impacted our financial statements and we present disaggregated net sales information in accordance with the new standard.

Revenue recognition policy. Our net sales predominantly reflect global sales of beverage alcohol consumer products. We sell these products under contracts with different types of customers, depending on the market. The customer is most often a distributor, wholesaler, or retailer.
Each contract typically includes a single performance obligation to transfer control of the products to the customer. Depending on the contract, control is transferred when the products are either shipped or delivered to the customer, at which point we recognize the transaction price for those products as net sales. The transaction price recognized at that point reflects our estimate of the consideration to be received in exchange for the products. The actual amount may ultimately differ due to the effect of various customer incentives and trade promotion activities. In making our estimates, we consider our historical experience and current expectations, as applicable. Adjustments recognized during the three and six months ended October 31, 2018, for changes in estimated transaction prices of products sold in prior periods were not material.
Net sales exclude taxes we collect from customers that are imposed by various governments on our sales, and are reduced by payments to customers unless made in exchange for distinct goods or services with fair values approximating the payments.
Net sales include any amounts we bill customers for shipping and handling activities related to the products. We recognize the cost of those activities in cost of sales during the same period in which we recognize the related net sales.
Sales returns, which are permitted only in limited situations, are not material.
Customer payment terms generally range from 30 to 90 days. There are no significant amounts of contract assets or liabilities.

Impact of adoption. We adopted ASC 606 using the modified retrospective method. As a result, we recorded an adjustment that decreased retained earnings as of May 1, 2018, by $25 million (net of tax). The adjustment reflects the cumulative effect on that date of applying our updated revenue recognition policy, under which we recognize the cost of certain customer incentives earlier than we did before adopting ASC 606. Although we do not expect this change in timing to have a significant impact on a full-year basis, we do anticipate some change in the pattern of recognition among fiscal quarters. Additionally, some payments to customers that we classified as expenses before adopting the new standard are classified as reductions of net sales under our new policy.

9



The following table shows how the adoption of ASC 606 impacted our consolidated statement of operations for the three months ended October 31, 2018:
 
Three Months Ended October 31, 2018
 
Under Prior
 
As Reported Under
 
Effect of
(Dollars in millions, except per share amounts)
Guidance
 
ASC 606
 
Adoption
Sales
$
1,169

 
$
1,161

 
$
(8
)
Excise taxes
251

 
251

 

Net sales
918

 
910

 
(8
)
Cost of sales
320

 
320

 

Gross profit
598

 
590

 
(8
)
Advertising expenses
107

 
102

 
(5
)
Selling, general, and administrative expenses
162

 
161

 
(1
)
Other expense (income), net
(5
)
 
(5
)
 

Operating income
334

 
332

 
(2
)
Non-operating postretirement expense
2

 
2

 

Interest income
(2
)
 
(2
)
 

Interest expense
22

 
22

 

Income before income taxes
312

 
310

 
(2
)
Income taxes
61

 
61

 

Net income
$
251

 
$
249

 
$
(2
)
Earnings per share:
 
 
 
 
 
Basic
$
0.52

 
$
0.52

 
$

Diluted
$
0.52

 
$
0.52

 
$

The following table shows how the adoption of ASC 606 impacted our consolidated statement of operations for the six months ended October 31, 2018:
 
Six Months Ended October 31, 2018
 
Under Prior
 
As Reported Under
 
Effect of
(Dollars in millions, except per share amounts)
Guidance
 
ASC 606
 
Adoption
Sales
$
2,166

 
$
2,148

 
$
(18
)
Excise taxes
472

 
472

 

Net sales
1,694

 
1,676

 
(18
)
Cost of sales
563

 
563

 

Gross profit
1,131

 
1,113

 
(18
)
Advertising expenses
208

 
200

 
(8
)
Selling, general, and administrative expenses
331

 
329

 
(2
)
Other expense (income), net
(12
)
 
(12
)
 

Operating income
604

 
596

 
(8
)
Non-operating postretirement expense
4

 
4

 

Interest income
(4
)
 
(4
)
 

Interest expense
44

 
44

 

Income before income taxes
560

 
552

 
(8
)
Income taxes
105

 
103

 
(2
)
Net income
$
455

 
$
449

 
$
(6
)
Earnings per share:
 
 
 
 
 
Basic
$
0.94

 
$
0.93

 
$
(0.01
)
Diluted
$
0.94

 
$
0.93

 
$
(0.01
)

10



The following table shows how the adoption of ASC 606 impacted our consolidated balance sheet as of October 31, 2018:
 
As of October 31, 2018
 
Under Prior
 
As Reported Under
 
Effect of
(Dollars in millions)
Guidance
 
ASC 606
 
Adoption
Assets
 
 
 
 


Other current assets
$
306

 
$
305

 
$
(1
)
Deferred tax assets
15

 
16

 
1

Total assets
5,149

 
5,149

 

 
 
 
 
 
 
Liabilities
 
 
 
 


Accounts payable and accrued expenses
$
580

 
$
620

 
$
40

Deferred tax liabilities
122

 
113

 
(9
)
Total liabilities
3,621

 
3,652

 
31

 
 
 
 
 


Stockholders’ Equity
 
 
 
 


Retained earnings
$
2,047

 
$
2,016

 
$
(31
)
Total stockholders’ equity
1,528

 
1,497

 
(31
)

Disaggregated revenues.
The following table shows our net sales by geography:
 
Three Months Ended
 
Six Months Ended
 
October 31,
 
October 31,
(Dollars in millions)
2017
 
2018
 
2017
 
2018
United States
$
438

 
$
447

 
$
793

 
$
804

Developed International1
248

 
234

 
441

 
449

Emerging2
159

 
164

 
282

 
295

Travel Retail3
44

 
38

 
74

 
76

Non-branded and bulk4
25

 
27

 
47

 
52

Total
$
914

 
$
910

 
$
1,637

 
$
1,676

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









11



The following table shows our net sales by product category:
 
Three Months Ended
 
Six Months Ended
 
October 31,
 
October 31,
(Dollars in millions)
2017
 
2018
 
2017
 
2018
Whiskey1
$
713

 
$
706

 
$
1,270

 
$
1,308

Tequila2
64

 
70

 
122

 
132

Vodka3
35

 
34

 
66

 
60

Wine4
63

 
62

 
105

 
102

Rest of portfolio
14

 
11

 
27

 
22

Non-branded and bulk5
25

 
27

 
47

 
52

Total
$
914

 
$
910

 
$
1,637

 
$
1,676

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


3.    Income Taxes
Our consolidated interim effective tax rate is based upon our expected annual operating income, statutory tax rates, and income tax laws in the various jurisdictions in which we operate. Significant or unusual items, including adjustments to accruals for tax uncertainties, are recognized in the fiscal quarter in which the related event or a change in judgment occurs. The effective tax rate of 18.6% for the six months ended October 31, 2018, is lower than the expected tax rate of 21.4% on ordinary income for the full fiscal year, primarily due to (a) the impact of discrete items, including true-ups to prior year tax returns, (b) the impact of the current year net adjustment to the provisional repatriation U.S. tax charge that was made during fiscal 2018 (discussed below), and (c) the excess tax benefits related to stock-based compensation. Our expected tax rate includes current fiscal year additions for existing tax contingency items.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. As we have an April 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year ended April 30, 2018, and 21% for our current and subsequent fiscal years. For the six months ended October 31, 2018, the impact of reducing the U.S. statutory federal rate from 35% (the pre-Tax Act rate) to 21% resulted in a tax benefit of approximately $60 million.

There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, the reduction of the U.S. corporate tax rate caused us to adjust our U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a provisional net charge of $43 million for the year ended April 30, 2018, comprised of a provisional repatriation U.S. tax charge of $91 million and a provisional net deferred tax benefit of $48 million. In the six months ended October 31, 2018, we recorded a benefit of $4 million as an adjustment to the provisional repatriation tax.

Historically, we have asserted that the undistributed earnings of our foreign subsidiaries are reinvested indefinitely outside the United States. Therefore, no income taxes have been provided for any outside basis differences inherent in these subsidiaries other than those subject to the one-time repatriation tax. As of October 31, 2018, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for one of those foreign subsidiaries (but not for its other outside basis differences). We intend to repatriate approximately $120 million of cash to the United States from this subsidiary during the fiscal quarter ending January 31, 2019. No incremental taxes are due on this distribution of cash beyond the repatriation tax recorded in fiscal year 2018. We have not changed the indefinite reinvestment assertion for

12



undistributed earnings or other outside basis differences for any of the other foreign subsidiaries. We will continue to evaluate our future cash deployment and may change our indefinite reinvestment assertion in future periods.
The Tax Act also established new tax laws that impact our financial statements beginning in the current fiscal year. These new laws include, but are not limited to (a) Global Intangible Low-Tax Income (GILTI), a new provision for tax on low-tax foreign earnings; (b) Base Erosion Anti-abuse Tax (BEAT), a new minimum tax; (c) Foreign-Derived Intangible Income (FDII), a new provision for deductions related to foreign-derived intangibles; (d) repeal of the domestic production activity deduction; and (e) limitations on certain executive compensation. For the six months ended October 31, 2018, the net impact of these provisions was approximately $7 million of additional tax.

As noted, certain income earned by foreign subsidiaries must be included in U.S. taxable income under the GILTI provisions. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to recognize these taxes as a current period expense when incurred.
The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the current estimates, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have used to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign currency exchange rates. The SEC has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of October 31, 2018, the amounts recorded for the Tax Act remain provisional for the one-time repatriation tax and the adjustment to our U.S. deferred tax assets and liabilities. We will finalize and record any additional adjustments within the allowed measurement period.

4.    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
 
Six Months Ended
 
October 31,
 
October 31,
(Dollars in millions, except per share amounts)
2017
 
2018
 
2017
 
2018
Net income available to common stockholders
$
239

 
$
249

 
$
417

 
$
449

 
 
 
 
 
 
 
 
Share data (in thousands):
 
 
 
 
 
 
 
Basic average common shares outstanding
480,150

 
480,436

 
480,095

 
480,647

Dilutive effect of stock-based awards
3,134

 
3,155

 
3,035

 
3,316

Diluted average common shares outstanding
483,284

 
483,591

 
483,130

 
483,963

 
 
 
 
 
 
 
 
Basic earnings per share
$
0.50

 
$
0.52

 
$
0.87

 
$
0.93

Diluted earnings per share
$
0.49

 
$
0.52

 
$
0.86

 
$
0.93


We excluded common stock-based awards for approximately 1,501,000 shares and 347,000 shares from the calculation of diluted earnings per share for the three months ended October 31, 2017 and 2018, respectively. We excluded common stock-based awards for approximately 1,610,000 shares and 595,000 shares from the calculation of diluted earnings per share for the six months ended October 31, 2017 and 2018, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.

5.    Inventories 
Inventories are valued at the lower of cost or market. Some of our consolidated inventories are valued using the last-in, first-out (LIFO) method, which we use for the majority of our U.S. inventories. If the LIFO method had not been used, inventories at current cost would have been $290 million higher than reported as of April 30, 2018, and $298 million higher than reported as

13



of October 31, 2018. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.

6.    Goodwill and Other Intangible Assets
The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the six months ended October 31, 2018:
(Dollars in millions)
Goodwill
 
Other Intangible Assets
Balance at April 30, 2018
$
763

 
$
670

Foreign currency translation adjustment
(13
)
 
(22
)
Balance at October 31, 2018
$
750

 
$
648


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

7.    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 are recorded as of October 31, 2018.

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 October 31, 2018, our actual exposure under the guaranty of the importer’s obligation is approximately $7 million. We also have accounts receivable from that importer of approximately $11 million at October 31, 2018, which we expect to collect in full.

Based on the financial support we provide to the importer, we believe it meets the definition of a variable interest entity. However, because we do not control this entity, it is not included in our consolidated financial statements.

8.    Debt
Our long-term debt (net of unamortized discount and issuance costs) consists of:
(Principal and carrying amounts in millions)
April 30,
2018
 
October 31,
2018
2.25% senior notes, $250 principal amount, due January 15, 2023
$
248

 
$
248

3.50% senior notes, $300 principal amount, due April 15, 2025
296

 
296

1.20% senior notes, €300 principal amount, due July 7, 2026
361

 
338

2.60% senior notes, £300 principal amount, due July 7, 2028
408

 
377

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

 
293

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

 
248

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

 
488

 
$
2,341

 
$
2,288

As of April 30, 2018, our short-term borrowings consisted of $215 million of commercial paper, with an average interest rate of 2.04%, and an average remaining maturity of 23 days. As of October 31, 2018, our short-term borrowings of $258 million included $257 million of commercial paper, with an average interest rate of 2.37%, and an average remaining maturity of 21 days.

14



9.    Fair Value Measurements
The following table summarizes the assets and liabilities measured or disclosed at fair value on a recurring basis:
 
April 30, 2018
 
October 31, 2018
 
Carrying
 
Fair
 
Carrying
 
Fair
(Dollars in millions)
Amount
 
Value
 
Amount
 
Value
Assets
 
 
 
 
 
 
 
Cash and cash equivalents
$
239

 
$
239

 
$
193

 
$
193

Currency derivatives
1

 
1

 
31

 
31

Liabilities
 
 
 
 
 
 
 
Currency derivatives
39

 
39

 
6

 
6

Short-term borrowings
215

 
215

 
258

 
258

Long-term debt
2,341

 
2,386

 
2,288

 
2,294


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

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

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

The fair values of cash, cash equivalents, and short-term borrowings approximate the carrying amounts 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.

15




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

We use currency derivative contracts to limit our exposure to the currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges (except any ineffective portion) in accumulated other comprehensive income (AOCI) until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings. We assess the effectiveness of these hedges based on changes in forward exchange rates. The ineffective portion of the changes in fair value of our hedges (recognized immediately in earnings) during the periods presented in this report was not material.

We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts totaling $1,098 million at April 30, 2018 and $1,255 million at October 31, 2018.

We also use foreign currency-denominated debt to help manage our currency exchange risk. As of October 31, 2018, $615 million of our foreign currency-denominated debt instruments were designated as net investment hedges. These net investment hedges are intended to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries. Any change in value of the designated portion of the hedging instruments is recorded in AOCI, offsetting the foreign currency translation adjustment of the related net investments that is also recorded in AOCI. There was no ineffectiveness related to our net investment hedges in any of the periods presented.

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

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

16




The following tables present the pre-tax impact that changes in the fair value of our derivative instruments and non-derivative hedging instruments had on AOCI and earnings:
 
 
Three Months Ended
 
 
October 31,
(Dollars in millions)
Classification
2017
 
2018
Derivative Instruments
 
 
 
 
Currency derivatives designated as cash flow hedges:
 
 

 
 

Net gain (loss) recognized in AOCI
n/a
$
7

 
$
30

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

Currency derivatives not designated as hedging instruments:
 
 

 
 

Net gain (loss) recognized in earnings
Sales
1

 
3

Net gain (loss) recognized in earnings
Other income
(4
)
 
(4
)
Non-Derivative Hedging Instruments
 
 
 
 
Foreign currency-denominated debt designated as net investment hedge:
 
 
 
 
Net gain (loss) recognized in AOCI
n/a
1

 
19

Foreign currency-denominated debt not designated as hedging instrument:
 
 
 
 
Net gain (loss) recognized in earnings
Other income
1

 
3

 
 
 
 
 
 
 
Six Months Ended
 
 
October 31,
(Dollars in millions)
Classification
2017
 
2018
Derivative Instruments
 
 
 
 
Currency derivatives designated as cash flow hedges:
 
 

 
 

Net gain (loss) recognized in AOCI
n/a
$
(29
)
 
$
57

Net gain (loss) reclassified from AOCI into earnings
Sales
(3
)
 
(2
)
Currency derivatives not designated as hedging instruments:
 
 

 
 

Net gain (loss) recognized in earnings
Sales
(2
)
 
6

Net gain (loss) recognized in earnings
Other income
5

 
(1
)
Non-Derivative Hedging Instruments
 
 
 
 
Foreign currency-denominated debt designated as net investment hedge:
 
 
 
 
Net gain (loss) recognized in AOCI
n/a
(15
)
 
47

Foreign currency-denominated debt not designated as hedging instrument:
 
 
 
 
Net gain (loss) recognized in earnings
Other income
(15
)
 
8


We expect to reclassify $13 million of deferred net gains on cash flow hedges recorded in AOCI as of October 31, 2018, to earnings during the next 12 months. This reclassification would offset the anticipated earnings impact of the underlying hedged exposures. The actual amounts that we ultimately reclassify to earnings will depend on the exchange rates in effect when the underlying hedged transactions occur. As of October 31, 2018, the maximum term of our outstanding derivative contracts was 36 months.


17



The following table presents the fair values of our derivative instruments:

(Dollars in millions)


Classification
 
Fair value of derivatives in a gain position
 
Fair value of derivatives in a
loss position
April 30, 2018
 
 
 
 
 
Designated as cash flow hedges:
 
 
 
 
 
Currency derivatives
Other current assets
 
$
2

 
$
(2
)
Currency derivatives
Other assets
 
1

 

Currency derivatives
Accrued expenses
 
4

 
(23
)
Currency derivatives
Other liabilities
 
2

 
(18
)
Not designated as hedges:
 
 
 
 
 
Currency derivatives
Accrued expenses
 
1

 
(5
)
October 31, 2018
 
 
 
 
 
Designated as cash flow hedges:
 
 
 
 
 
Currency derivatives
Other current assets
 
18

 
(3
)
Currency derivatives
Other assets
 
18

 
(2
)
Currency derivatives
Accrued expenses
 
1

 
(3
)
Currency derivatives
Other liabilities
 

 

Not designated as hedges:
 
 
 
 
 
Currency derivatives
Accrued expenses
 

 
(4
)

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

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

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

Some of our derivative instruments require 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 $38 million at April 30, 2018 and $6 million at October 31, 2018.

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


18



The following table summarizes the gross and net amounts of our derivative contracts:
(Dollars in millions)
Gross Amounts of Recognized Assets (Liabilities)
 
Gross Amounts Offset in Balance Sheet
 
Net Amounts Presented in Balance Sheet
 
Gross Amounts Not Offset in Balance Sheet
 
Net Amounts
April 30, 2018
 
 
 
 
 
 
 
 
 
Derivative assets
$
10

 
$
(9
)
 
$
1

 
$
(1
)
 
$

Derivative liabilities
(48
)
 
9

 
(39
)
 
1

 
(38
)
October 31, 2018
 
 
 
 
 
 
 
 
 
Derivative assets
37

 
(6
)
 
31

 

 
31

Derivative liabilities
(12
)
 
6

 
(6
)
 

 
(6
)

No cash collateral was received or pledged related to our derivative contracts as of April 30, 2018 or October 31, 2018.

11.    Pension and Other Postretirement Benefits 
The following table shows the 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
 
Six Months Ended
 
October 31,
 
October 31,
(Dollars in millions)
2017
 
2018
 
2017
 
2018
Pension Benefits:
 
 
 
 
 
 
 
Service cost
$
6

 
$
6

 
$
12

 
$
12

Interest cost
7

 
9

 
15

 
17

Expected return on plan assets
(10
)
 
(12
)
 
(21
)
 
(24
)
Amortization of:
 
 
 
 
 
 
 
Prior service cost (credit)

 

 

 
1

Net actuarial loss
6

 
5

 
11

 
10

Net cost
$
9

 
$
8

 
$
17

 
$
16

 
 
 
 
 
 
 
 
Other Postretirement Benefits:
 
 
 
 
 
 
 
Interest cost
$
1

 
$
1

 
$
1

 
$
1

Amortization of prior service cost (credit)
(1
)
 
(1
)
 
(1
)
 
(1
)
Net cost
$

 
$

 
$

 
$



19



12.    Stockholders’ Equity
The following table shows the changes in stockholders’ equity by quarter during the six months ended October 31, 2017:
(Dollars in millions)
Class A Common Stock
 
Class B Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
AOCI
 
Treasury Stock
 
Total
Balance at April 30, 2017
$
25

 
$
43

 
$
65

 
$
4,470

 
$
(390
)
 
$
(2,843
)
 
$
1,370

Retirement of treasury stock
 
 
(10
)
 
(8
)
 
(2,684
)
 
 
 
2,702

 

Net income
 
 
 
 
 
 
178

 
 
 
 
 
178

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
14

 
 
 
14

Cash dividends
 
 
 
 
 
 
(140
)
 
 
 
 
 
(140
)
Acquisition of treasury stock
 
 
 
 
 
 
 
 
 
 
(1
)
 
(1
)
Stock-based compensation expense
 
 
 
 
4

 
 
 
 
 
 
 
4

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
9

 
9

Loss on issuance of treasury stock issued under compensation plans
 
 
 
 
(14
)
 
 
 
 
 
 
 
(14
)
Balance at July 31, 2017
25

 
33

 
47

 
1,824

 
(376
)
 
(133
)
 
1,420

Net income
 
 
 
 
 
 
239

 
 
 
 
 
239

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
(15
)
 
 
 
(15
)
Stock-based compensation expense
 
 
 
 
5

 
 
 
 
 
 
 
5

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
1

 
1

Loss on issuance of treasury stock issued under compensation plans
 
 
 
 
(3
)
 
 
 
 
 
 
 
(3
)
Balance at October 31, 2017
$
25

 
$
33

 
$
49

 
$
2,063

 
$
(391
)
 
$
(132
)
 
$
1,647


The following table shows the changes in stockholders’ equity by quarter during the six months ended October 31, 2018:
(Dollars in millions)
Class A Common Stock
 
Class B Common Stock
 
Additional Paid-in Capital
 
Retained Earnings
 
AOCI
 
Treasury Stock
 
Total
Balance at April 30, 2018
$
25

 
$
47

 
$
4

 
$
1,730

 
$
(378
)
 
$
(112
)
 
$
1,316

Cumulative effect of changes in accounting standards (Note 1)
 
 
 
 
 
 
(5
)
 
 
 
 
 
(5
)
Net income
 
 
 
 
 
 
200

 
 
 
 
 
200

Net other comprehensive income (loss)
 
 
 
 
 
 
 
 
14

 
 
 
14

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

 
 
 
 
 
 
 
5

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
9

 
9

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

 
47

 
2

 
1,767

 
(364
)
 
(109
)
 
1,368

Net income
 
 
 
 
 
 
249

 
 
 
 
 
249

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

 
 
 
 
 
 
 
4

Stock issued under compensation plans
 
 
 
 
 
 
 
 
 
 
1

 
1

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

 
$
47

 
$
4

 
$
2,016

 
$
(365
)
 
$
(230
)
 
$
1,497


20




Dividends. The following table shows the cash dividends declared per share on our Class A and Class B common stock during the six months ended October 31, 2018:
Declaration Date
 
Record Date
 
Payable Date
 
Amount per Share
May 24, 2018
 
June 6, 2018
 
July 3, 2018
 
$0.158
July 26, 2018
 
September 6, 2018
 
October 1, 2018
 
$0.158
As announced on November 15, 2018, our Board of Directors increased the quarterly cash dividend on our Class A and Class B common stock from $0.158 per share to $0.166 per share. Stockholders of record on December 6, 2018 will receive the quarterly cash dividend on January 2, 2019.

Accumulated other comprehensive income. The following table shows the change in each component of AOCI, net of tax, during the six months ended October 31, 2018:
(Dollars in millions)
Currency Translation Adjustments
 
Cash Flow Hedge Adjustments
 
Postretirement Benefits Adjustments
 
Total AOCI
Balance at April 30, 2018
$
(180
)
 
$
(17
)
 
$
(181
)
 
$
(378
)
Net other comprehensive income (loss)
(39
)
 
45

 
7

 
13

Balance at October 31, 2018
$
(219
)
 
$
28

 
$
(174
)
 
$
(365
)

21




13.    Other Comprehensive Income
The following table shows the components of net other comprehensive income (loss):
 
Three Months Ended
 
Three Months Ended
 
October 31, 2017
 
October 31, 2018
(Dollars in millions)
Pre-Tax
 
Tax
 
Net
 
Pre-Tax
 
Tax
 
Net
Currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) on currency translation
$
(25
)
 
$

 
$
(25
)
 
$
(23
)
 
$
(4
)
 
$
(27
)
Reclassification to earnings

 

 

 

 

 

Other comprehensive income (loss), net
(25
)
 

 
(25
)
 
(23
)
 
(4
)
 
(27
)
Cash flow hedge adjustments:
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) on hedging instruments
7

 
(3
)
 
4

 
30

 
(8
)
 
22

Reclassification to earnings1
5

 
(2
)
 
3

 

 

 

Other comprehensive income (loss), net
12

 
(5
)
 
7

 
30

 
(8
)
 
22

Postretirement benefits adjustments:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain (loss) and prior service cost
(1
)
 

 
(1
)
 

 

 

Reclassification to earnings2
6

 
(2
)
 
4

 
5

 
(1
)
 
4

Other comprehensive income (loss), net
5

 
(2
)
 
3

 
5

 
(1
)
 
4

 
 
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss), net
$
(8
)
 
$
(7
)
 
$
(15
)
 
$
12

 
$
(13
)
 
$
(1
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Six Months Ended
 
Six Months Ended
 
October 31, 2017
 
October 31, 2018
(Dollars in millions)
Pre-Tax
 
Tax
 
Net
 
Pre-Tax
 
Tax
 
Net
Currency translation adjustments:
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) on currency translation
$
3

 
$
6

 
$
9

 
$
(28
)
 
$
(11
)
 
$
(39
)
Reclassification to earnings

 

 

 

 

 

Other comprehensive income (loss), net
3

 
6

 
9

 
(28
)
 
(11
)
 
(39
)
Cash flow hedge adjustments:
 
 
 
 
 
 
 
 
 
 
 
Net gain (loss) on hedging instruments
(29
)
 
11

 
(18
)
 
57

 
(14
)
 
43

Reclassification to earnings1
3

 
(1
)
 
2

 
2

 

 
2

Other comprehensive income (loss), net
(26
)
 
10

 
(16
)
 
59

 
(14
)
 
45

Postretirement benefits adjustments:
 
 
 
 
 
 
 
 
 
 
 
Net actuarial gain (loss) and prior service cost

 

 

 

 

 

Reclassification to earnings2
10

 
(4
)
 
6

 
9

 
(2
)
 
7

Other comprehensive income (loss), net
10

 
(4
)
 
6

 
9

 
(2
)
 
7

 
 
 
 
 
 
 
 
 
 
 
 
Total other comprehensive income (loss), net
$
(13
)
 
$
12

 
$
(1
)
 
$
40

 
$
(27
)
 
$
13

1Pre-tax amount is classified as sales in the accompanying condensed consolidated statements of operations.
2Pre-tax amount is classified as non-operating postretirement expense in the accompanying condensed consolidated statements of operations.

22



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 2018 Form 10-K. Note that the results of operations for the six months ended October 31, 2018 do not necessarily indicate what our operating results for the full fiscal year will be. In this Item, “we,” “us,” “our,” “Brown-Forman,” and the “Company” refer to Brown-Forman Corporation and its consolidated subsidiaries, collectively.

Presentation Basis
Non-GAAP Financial Measures
We use certain financial measures in this report that are not measures of financial performance under U.S. generally accepted accounting principles (GAAP). These non-GAAP measures, defined below, should be viewed as supplements to (not substitutes for) our results of operations and other measures reported under GAAP. Other companies may not define or calculate these non-GAAP measures in the same way.
“Underlying change” in income statement measures. We present changes in certain income statement measures, or line items, that are adjusted to an “underlying” basis. We use “underlying change” for the following income statement measures: (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) a new accounting standard, (b) foreign exchange, and (c) estimated net change in distributor inventories. We explain these adjustments below.
“New accounting standard.” Under ASC 606 (Revenue from Contracts with Customers), we recognize the cost of certain customer incentives earlier than we did before adopting ASC 606. Although we do not expect this change in timing to have a significant impact on a full-year basis, we do anticipate some change in the pattern of recognition among fiscal quarters. Additionally, some payments to customers that we classified as expenses before adopting the new standard are classified as reductions of net sales under our new policy. See Note 2 to the accompanying financial statements for additional information. This adjustment allows us to look at underlying change on a comparable basis.
“Foreign exchange.” We calculate the percentage change in our income statement line items in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current-year results at prior-year rates and remove foreign exchange gains and losses from current- and prior-year periods.
“Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of change in distributor inventories on changes in our income statement line items. For each period compared, we use volume information from our distributors to estimate the effect of distributor inventory changes on our income statement line items. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in our income statement measures and allows us to understand better our underlying results and trends.
We use the non-GAAP measures “underlying change” for the following reasons: (a) to understand our performance from period to period on a consistent basis; (b) to compare our performance to that of our competitors; (c) to determine management incentive compensation calculations; (d) to plan and forecast; and (e) to communicate our financial performance to the board of directors, stockholders, and investment analysts. We provide reconciliations of the “underlying change” in income statement measures to their nearest GAAP measures in the tables below under “Results of Operations - Year-Over-Year Period Comparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.




 
 
1Operating expenses include advertising expense, SG&A expense, and other expense (income), net.

23



Definitions
Aggregations.
From time to time, to explain our results of operations or to highlight trends and uncertainties affecting our business, we aggregate markets according to stage of economic development as defined by the International Monetary Fund (IMF), and we aggregate brands by spirits category. Below, we define aggregations used in this report.
Geographic Aggregations.
In “Results of Operations - Fiscal 2019 Year-to-Date Highlights,” we provide supplemental information for our largest markets ranked by percentage of total fiscal 2018 net sales. In addition to markets that are listed by country name, we include the following aggregations:
“Developed International” markets are “advanced economies” as defined by the IMF, excluding the United States. Our largest developed international markets are the United Kingdom, Australia, and Germany. This aggregation represents our sales of branded products to these markets.
“Emerging” markets are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico and Poland. This aggregation represents our sales of branded products to these markets.
“Travel Retail” represents our sales of branded products to global duty-free customers, travel retail customers, and the U.S. military regardless of customer location.
“Non-branded and bulk” includes our sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
Brand Aggregations.
In “Results of Operations - Fiscal 2019 Year-to-Date Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal 2018 net sales. In addition to brands that are listed by name, we include the following aggregations:
“Whiskey” includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink (RTD), and ready-to-pour products (RTP). The brands included in this category are the Jack Daniel's family of brands, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers’ Craft.
“American whiskey” includes the Jack Daniel’s family of brands, premium bourbons, and Early Times.
“Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and RTP products (JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Single Barrel Collection (JDSB), Jack Daniel’s Tennessee Rye Whiskey (JDTR), Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and Jack Daniel’s Bottled-in-Bond.
“Jack Daniel’s RTD and RTP” products include all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, Jack Daniel’s Double Jack, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Cider (JD Cider), Jack Daniel’s Lynchburg Lemonade (JD Lynchburg Lemonade), and the seasonal Jack Daniel’s Winter Jack RTP.
“Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft.
“Tequila” includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
“Vodka” includes Finlandia.
“Wine” includes Korbel Champagne and Sonoma-Cutrer wines.
“Non-branded and bulk” includes our sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.


24



Other Metrics.
“Depletions.” We generally record revenues when we ship our products to our customers. Depending on our route-to-consumer (RTC), we ship products to either (a) retail or wholesale customers in owned distribution markets or (b) our distributor customers in other markets. “Depletions” is a term commonly used in the beverage alcohol industry to describe volume. Depending on the context, “depletions” means either (a) our shipments directly to retail or wholesale customers for owned distribution markets or (b) shipments from our distributor customers to retailers and wholesalers in other markets. We believe that depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do. In this document, unless otherwise specified, we refer to “depletions” when discussing volume.
“Consumer takeaway.” When discussing trends in the market, we refer to “consumer takeaway,” a term commonly used in the beverage alcohol industry. “Consumer takeaway” refers to the purchase of product by consumers from retail outlets as measured by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric.
Reclassifications
As discussed in Note 1 to the accompanying financial statements, we retrospectively adjusted our prior year income statements in connection with the adoption of ASU 2017-07 and reclassified some previously reported expense amounts related to certain marketing research and promotional agency costs. The impact of these reclassifications, which had no effect on net income, was not material.
The following tables reconcile the previously reported income statement amounts to the currently reported amounts for the three and six months ended October 31, 2017.
 
Three Months Ended October 31, 2017
 
Previously
 
Adoption of
 
 
 
Currently
(Dollars in millions)
Reported
 
ASU 2017-07
 
Reclassifications
 
Reported
Net sales
$
914

 
$

 
$

 
$
914

Cost of sales
304

 

 

 
304

Gross profit
610

 

 

 
610

Advertising expenses
111

 

 
(2
)
 
109

Selling, general, and administrative expenses
163

 
(3
)
 
2

 
162

Other expense (income), net
(10
)
 

 

 
(10
)
Operating income
346

 
3

 

 
349

Non-operating postretirement expense

 
3

 

 
3

Interest income
(1
)
 

 

 
(1
)
Interest expense
16

 

 

 
16

Income before income taxes
331

 

 

 
331

Income taxes
92

 

 

 
92

Net income
$
239

 
$

 
$

 
$
239


25




 
Six Months Ended October 31, 2017
 
Previously
 
Adoption of