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).
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)
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Net income available to common stockholders
|
$
|
249
|
|
|
$
|
282
|
|
|
$
|
449
|
|
|
$
|
468
|
|
|
|
|
|
|
|
|
|
Share data (in thousands):
|
|
|
|
|
|
|
|
Basic average common shares outstanding
|
480,436
|
|
|
477,680
|
|
|
480,647
|
|
|
477,522
|
|
Dilutive effect of stock-based awards
|
3,155
|
|
|
2,801
|
|
|
3,316
|
|
|
2,760
|
|
Diluted average common shares outstanding
|
483,591
|
|
|
480,481
|
|
|
483,963
|
|
|
480,282
|
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.52
|
|
|
$
|
0.59
|
|
|
$
|
0.93
|
|
|
$
|
0.98
|
|
Diluted earnings per share
|
$
|
0.52
|
|
|
$
|
0.59
|
|
|
$
|
0.93
|
|
|
$
|
0.97
|
|
We excluded common stock-based awards for approximately 595,000 shares and 522,000 shares from the calculation of diluted earnings per share for the three months ended October 31, 2018 and 2019, respectively. We excluded common stock-based awards for approximately 347,000 shares and 442,000 shares from the calculation of diluted earnings per share for the six months ended October 31, 2018 and 2019, 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 $309 million higher than reported as of October 31, 2019. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.
4. Goodwill and Other Intangible Assets
The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the six months ended October 31, 2019:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Goodwill
|
|
Other Intangible Assets
|
Balance at April 30, 2019
|
$
|
753
|
|
|
$
|
645
|
|
Acquisition (Note 15)
|
11
|
|
|
12
|
|
Foreign currency translation adjustment
|
(2
|
)
|
|
(2
|
)
|
Balance at October 31, 2019
|
$
|
762
|
|
|
$
|
655
|
|
Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.
5. Commitments and Contingencies
We operate in a litigious environment, and we are sued in the normal course of business. Sometimes plaintiffs seek substantial damages. Significant judgment is required in predicting the outcome of these suits and claims, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and we can make a reasonable estimate of the loss, and then adjust the accrual as appropriate to reflect changes in facts and circumstances. We do not believe it is reasonably possible that these existing loss contingencies, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations, or liquidity. No material accrued loss contingencies were recorded as of October 31, 2019.
We have guaranteed the repayment by a third-party importer of its obligation under a bank credit facility that it uses in connection with its importation of our products in Russia. If the importer were to default on that obligation, which we believe is unlikely, our maximum possible exposure under the existing terms of the guaranty would be approximately $10 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant.
As of October 31, 2019, our actual exposure under the guaranty of the importer’s obligation was approximately $8 million. We also have accounts receivable from that importer of approximately $17 million at October 31, 2019, which we expect to collect in full.
Based on the financial support we provide to the importer, we believe it meets the definition of a variable interest entity. However, because we do not control this entity, it is not included in our consolidated financial statements.
6. Debt
Our long-term debt (net of unamortized discount and issuance costs) consists of:
|
|
|
|
|
|
|
|
|
(Principal and carrying amounts in millions)
|
April 30,
2019
|
|
October 31,
2019
|
2.25% senior notes, $250 principal amount, due January 15, 2023
|
$
|
249
|
|
|
$
|
249
|
|
3.50% senior notes, $300 principal amount, due April 15, 2025
|
297
|
|
|
297
|
|
1.20% senior notes, €300 principal amount, due July 7, 2026
|
333
|
|
|
331
|
|
2.60% senior notes, £300 principal amount, due July 7, 2028
|
383
|
|
|
382
|
|
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
|
|
|
$
|
2,288
|
|
Our short-term borrowings consist of:
|
|
|
|
|
(Dollars in millions)
|
April 30,
2019
|
|
October 31,
2019
|
Commercial paper
|
$150
|
|
$156
|
Average interest rate
|
2.60%
|
|
1.99%
|
Average remaining days to maturity
|
18
|
|
28
|
7. Stockholders’ Equity
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
|
|
|
|
|
|
|
(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
|
|
The following table shows the changes in stockholders’ equity by quarter during the six months ended October 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Class A Common Stock
|
|
Class B Common Stock
|
|
Additional Paid-in Capital
|
|
Retained Earnings
|
|
AOCI
|
|
Treasury Stock
|
|
Total
|
Balance at April 30, 2019
|
$
|
25
|
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
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
|
|
Acquisition of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
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
|
|
The following table shows the change in each component of AOCI, net of tax, during the six months ended October 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Currency Translation Adjustments
|
|
Cash Flow Hedge Adjustments
|
|
Postretirement Benefits Adjustments
|
|
Total AOCI
|
Balance at April 30, 2019
|
$
|
(207
|
)
|
|
$
|
31
|
|
|
$
|
(187
|
)
|
|
$
|
(363
|
)
|
Adoption of ASU 2018-02 (Note 1)
|
(1
|
)
|
|
(1
|
)
|
|
(41
|
)
|
|
(43
|
)
|
Net other comprehensive income (loss)
|
(3
|
)
|
|
2
|
|
|
7
|
|
|
6
|
|
Balance at October 31, 2019
|
$
|
(211
|
)
|
|
$
|
32
|
|
|
$
|
(221
|
)
|
|
$
|
(400
|
)
|
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, 2019:
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payable Date
|
|
Amount per Share
|
May 23, 2019
|
|
June 6, 2019
|
|
July 1, 2019
|
|
$0.166
|
July 25, 2019
|
|
September 6, 2019
|
|
October 1, 2019
|
|
$0.166
|
As announced on November 21, 2019, our Board of Directors increased the quarterly cash dividend on our Class A and Class B common stock from $0.1660 per share to $0.1743 per share. Stockholders of record on December 5, 2019, will receive the cash dividend on January 2, 2020.
8. Net Sales
The following table shows our net sales by geography:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
October 31,
|
|
October 31,
|
(Dollars in millions)
|
2018
|
|
2019
|
|
2018
|
|
2019
|
United States
|
$
|
444
|
|
|
$
|
506
|
|
|
$
|
798
|
|
|
$
|
880
|
|
Developed International1
|
234
|
|
|
248
|
|
|
449
|
|
|
453
|
|
Emerging2
|
164
|
|
|
173
|
|
|
295
|
|
|
306
|
|
Travel Retail3
|
38
|
|
|
38
|
|
|
76
|
|
|
70
|
|
Non-branded and bulk4
|
30
|
|
|
24
|
|
|
58
|
|
|
46
|
|
Total
|
$
|
910
|
|
|
$
|
989
|
|
|
$
|
1,676
|
|
|
$
|
1,755
|
|
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
|
|
Six Months Ended
|
|
October 31,
|
|
October 31,
|
(Dollars in millions)
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Whiskey1
|
$
|
703
|
|
|
$
|
785
|
|
|
$
|
1,300
|
|
|
$
|
1,385
|
|
Tequila2
|
70
|
|
|
77
|
|
|
132
|
|
|
145
|
|
Vodka3
|
34
|
|
|
31
|
|
|
62
|
|
|
57
|
|
Wine4
|
62
|
|
|
58
|
|
|
102
|
|
|
97
|
|
Rest of portfolio
|
11
|
|
|
14
|
|
|
22
|
|
|
25
|
|
Non-branded and bulk5
|
30
|
|
|
24
|
|
|
58
|
|
|
46
|
|
Total
|
$
|
910
|
|
|
$
|
989
|
|
|
$
|
1,676
|
|
|
$
|
1,755
|
|
1Includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this category are the Jack Daniel's family of brands, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers’ Craft.
2Includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
3Includes Finlandia.
4Includes Korbel Champagne and Sonoma-Cutrer wines.
5Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
9. Pension and Other Postretirement Benefits
The following table shows the components of the net cost of pension and other postretirement benefits recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
October 31,
|
|
October 31,
|
(Dollars in millions)
|
2018
|
|
2019
|
|
2018
|
|
2019
|
Pension Benefits:
|
|
|
|
|
|
|
|
Service cost
|
$
|
6
|
|
|
$
|
6
|
|
|
$
|
12
|
|
|
$
|
12
|
|
Interest cost
|
9
|
|
|
8
|
|
|
17
|
|
|
15
|
|
Expected return on plan assets
|
(12
|
)
|
|
(12
|
)
|
|
(24
|
)
|
|
(23
|
)
|
Amortization of:
|
|
|
|
|
|
|
|
Prior service cost (credit)
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
Net actuarial loss
|
5
|
|
|
5
|
|
|
10
|
|
|
9
|
|
Net cost
|
$
|
8
|
|
|
$
|
7
|
|
|
$
|
16
|
|
|
$
|
14
|
|
|
|
|
|
|
|
|
|
Other Postretirement Benefits:
|
|
|
|
|
|
|
|
Interest cost
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Amortization of prior service cost (credit)
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Net cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
10. Income Taxes
Our consolidated interim effective tax rate is based on our expected annual operating income, statutory tax rates, and income tax laws in the various jurisdictions where we operate. Significant or unusual items, including adjustments to accruals for tax uncertainties, are recognized in the fiscal quarter in which the related event or a change in judgment occurs. The effective tax rate of 16.3% for the six months ended October 31, 2019, 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 currency exchange rates, commodity prices, and interest rates. We use derivatives to help manage financial exposures that occur in the normal course of business. We formally document the purpose of each derivative contract, which includes linking the contract to the financial exposure it is designed to mitigate. We do not hold or issue derivatives for trading or speculative purposes.
We use currency derivative contracts to limit our exposure to the currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges in AOCI until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings.
We do not designate some of our currency derivatives as hedges because we use them to at least partially offset the immediate earnings impact of changes in foreign exchange rates on existing assets or liabilities. We immediately recognize the change in fair value of these contracts in earnings.
We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts for all hedged currencies totaling $1,241 million at April 30, 2019 and $1,257 million at October 31, 2019.
We also use foreign currency-denominated debt to help manage our currency exchange risk. As of October 31, 2019, $621 million of our foreign currency-denominated debt instruments were designated as net investment hedges. These net investment hedges are intended to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries. Any change in value of the designated portion of the hedging instruments is recorded in AOCI, offsetting the foreign currency translation adjustment of the related net investments that is also recorded in AOCI.
At inception, we expect each financial instrument designated as a hedge to be highly effective in offsetting the financial exposure it is designed to mitigate. We also assess the effectiveness on an ongoing basis. If determined to no longer be highly effective, designation and accounting for the instrument as a hedge would be discontinued.
We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to physically take delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than as derivative instruments.
The following 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
|
2018
|
|
2019
|
Currency derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Net gain (loss) recognized in AOCI
|
n/a
|
$
|
30
|
|
|
$
|
(2
|
)
|
Net gain (loss) reclassified from AOCI into earnings
|
Sales
|
—
|
|
|
6
|
|
Currency derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Net gain (loss) recognized in earnings
|
Sales
|
$
|
3
|
|
|
$
|
(1
|
)
|
Net gain (loss) recognized in earnings
|
Other income (expense), net
|
(4
|
)
|
|
1
|
|
Foreign currency-denominated debt designated as net investment hedge:
|
|
|
|
|
Net gain (loss) recognized in AOCI
|
n/a
|
$
|
19
|
|
|
$
|
(20
|
)
|
|
|
|
|
|
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
|
|
|
|
Sales
|
|
$
|
1,161
|
|
|
$
|
1,248
|
|
Other income (expense), net
|
|
5
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
October 31,
|
(Dollars in millions)
|
Classification
|
2018
|
|
2019
|
Currency derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Net gain (loss) recognized in AOCI
|
n/a
|
$
|
57
|
|
|
$
|
13
|
|
Net gain (loss) reclassified from AOCI into earnings
|
Sales
|
(2
|
)
|
|
10
|
|
Currency derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Net gain (loss) recognized in earnings
|
Sales
|
$
|
6
|
|
|
$
|
(1
|
)
|
Net gain (loss) recognized in earnings
|
Other income (expense), net
|
(1
|
)
|
|
2
|
|
Foreign currency-denominated debt designated as net investment hedge:
|
|
|
|
|
Net gain (loss) recognized in AOCI
|
n/a
|
$
|
47
|
|
|
$
|
3
|
|
|
|
|
|
|
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
|
|
|
|
Sales
|
|
$
|
2,148
|
|
|
$
|
2,226
|
|
Other income (expense), net
|
|
12
|
|
|
9
|
|
We expect to reclassify $20 million of deferred net gains on cash flow hedges recorded in AOCI as of October 31, 2019, to earnings during the next 12 months. This reclassification would offset the anticipated earnings impact of the underlying hedged exposures. The actual amounts that we ultimately reclassify to earnings will depend on the exchange rates in effect when the underlying hedged transactions occur. As of October 31, 2019, the maximum term of our outstanding derivative contracts was 36 months.
The following table presents the fair values of our derivative instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2019
|
|
October 31, 2019
|
(Dollars in millions)
|
Classification
|
|
Derivative Assets
|
|
Derivative Liabilities
|
|
Derivative Assets
|
|
Derivative Liabilities
|
Designated as cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Currency derivatives
|
Other current assets
|
|
$
|
21
|
|
|
$
|
(2
|
)
|
|
$
|
28
|
|
|
$
|
(2
|
)
|
Currency derivatives
|
Other assets
|
|
22
|
|
|
(1
|
)
|
|
22
|
|
|
(2
|
)
|
Currency derivatives
|
Accrued expenses
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
(6
|
)
|
Currency derivatives
|
Other liabilities
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
Not designated as hedges:
|
|
|
|
|
|
|
|
|
|
Currency derivatives
|
Other current assets
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
The fair values reflected in the above table are presented on a gross basis. However, as discussed further below, the fair values of those instruments subject to net settlement agreements are presented on a net basis in our balance sheets.
In our statements of cash flows, we classify cash flows related to cash flow hedges in the same category as the cash flows from the hedged items.
Credit risk. We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association (ISDA) agreements that allow for net settlement of the derivative contracts. Also, we have established counterparty credit guidelines that we monitor regularly, and we monetize contracts when we believe it is warranted. Because of these safeguards, we believe we have no derivative positions that warrant credit valuation adjustments.
Some of our derivative instruments require us to maintain a specific level of creditworthiness, which we have maintained. If our creditworthiness were to fall below that level, then the counterparties to our derivative instruments could request immediate payment or collateralization for derivative instruments in net liability positions. The aggregate fair value of all derivatives with
creditworthiness requirements that were in a net liability position was $6 million at April 30, 2019, and $7 million at October 31, 2019.
Offsetting. As noted above, our derivative contracts are governed by ISDA agreements that allow for net settlement of derivative contracts with the same counterparty. It is our policy to present the fair values of current derivatives (i.e., those with a remaining term of 12 months or less) with the same counterparty on a net basis in our balance sheets. Similarly, we present the fair values of noncurrent derivatives with the same counterparty on a net basis. We do not net current derivatives with noncurrent derivatives in our balance sheets.
The following table summarizes the gross and net amounts of our derivative contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Gross Amounts of Recognized Assets (Liabilities)
|
|
Gross Amounts Offset in Balance Sheet
|
|
Net Amounts Presented in Balance Sheet
|
|
Gross Amounts Not Offset in Balance Sheet
|
|
Net Amounts
|
April 30, 2019
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
43
|
|
|
$
|
(3
|
)
|
|
$
|
40
|
|
|
$
|
—
|
|
|
$
|
40
|
|
Derivative liabilities
|
(9
|
)
|
|
3
|
|
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
October 31, 2019
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
51
|
|
|
(4
|
)
|
|
47
|
|
|
(1
|
)
|
|
46
|
|
Derivative liabilities
|
(12
|
)
|
|
4
|
|
|
(8
|
)
|
|
1
|
|
|
(7
|
)
|
No cash collateral was received or pledged related to our derivative contracts as of April 30, 2019, or October 31, 2019.
12. Fair Value Measurements
The following table summarizes the assets and liabilities measured or disclosed at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2019
|
|
October 31, 2019
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(Dollars in millions)
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Assets
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
307
|
|
|
$
|
307
|
|
|
$
|
235
|
|
|
$
|
235
|
|
Currency derivatives
|
40
|
|
|
40
|
|
|
47
|
|
|
47
|
|
Liabilities
|
|
|
|
|
|
|
|
Currency derivatives
|
6
|
|
|
6
|
|
|
8
|
|
|
8
|
|
Short-term borrowings
|
150
|
|
|
150
|
|
|
156
|
|
|
156
|
|
Long-term debt
|
2,290
|
|
|
2,399
|
|
|
2,288
|
|
|
2,561
|
|
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We categorize the fair values of assets and liabilities into three levels based upon the assumptions (inputs) used to determine those values. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are:
|
|
•
|
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2 – Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in inactive markets; or other inputs that are observable or can be derived from or corroborated by observable market data.
|
|
|
•
|
Level 3 – Unobservable inputs supported by little or no market activity.
|
We determine the fair values of our currency derivatives (forward contracts) using standard valuation models. The significant inputs used in these models, which are readily available in public markets or can be derived from observable market transactions, include the applicable spot exchange rates, forward exchange rates, and interest rates. These fair value measurements are categorized as Level 2 within the valuation hierarchy.
We determine the fair value of long-term debt primarily based on the prices at which identical or similar debt has recently traded in the market and also considering the overall market conditions on the date of valuation. These fair value measurements are categorized as Level 2 within the valuation hierarchy.
The fair values of cash, cash equivalents, and short-term borrowings approximate the carrying amounts due to the short maturities of these instruments.
We measure some assets and liabilities at fair value on a nonrecurring basis. That is, we do not measure them at fair value on an ongoing basis, but we do adjust them to fair value in some circumstances (for example, when we determine that an asset is impaired). No material nonrecurring fair value measurements were required during the periods presented in these financial statements.
13. Leases
We enter into lease arrangements, which we use primarily for office space, vehicles, and land. Substantially all of our leases are operating leases. Our finance leases are not material.
Effective May 1, 2019, we updated our accounting policy for leases to reflect the adoption of ASC 842. Under ASC 842, we record lease liabilities and right-of-use (ROU) assets on our balance sheet for leases with terms exceeding 12 months. We do not record lease liabilities or ROU assets for short-term leases.
The amounts recorded for lease liabilities and ROU assets are based on the estimated present value, as of the lease commencement date, of the future payments to be made over the lease term. We calculate the present value using our incremental borrowing rate that corresponds to the term of the lease. We include the effect of an option to renew or terminate a lease in the lease term when it is reasonably certain that we will exercise the option.
Some of our leases contain non-lease components (e.g., maintenance or other services) in addition to lease components. For our land leases, we have elected the practical expedient not to separate the non-lease components from the lease components.
The following table shows the amounts and classification of ROU assets and lease liabilities on our balance sheet as of October 31, 2019:
|
|
|
|
|
|
|
|
October 31,
|
(Dollars in millions)
|
Classification
|
2019
|
Right-of-use assets
|
Other assets
|
$
|
60
|
|
|
|
|
Lease liabilities:
|
|
|
Current
|
Accounts payable and accrued expenses
|
$
|
17
|
|
Non-current
|
Other liabilities
|
43
|
|
Total
|
|
$
|
60
|
|
The following table shows information about the effects of leases during the three-month and six-month periods ended October 31, 2019:
|
|
|
|
|
|
|
|
|
|
Three Months
|
|
Six Months
|
|
Ended
|
|
Ended
|
(Dollars in millions)
|
October 31, 2019
|
|
October 31, 2019
|
Total lease cost1
|
$
|
6
|
|
|
$
|
11
|
|
Cash paid for amounts included in the measurement of lease liabilities2
|
6
|
|
|
11
|
|
Right-of-use assets obtained in exchange for new lease liabilities
|
13
|
|
|
16
|
|
1Consists primarily of operating lease cost. Other components of lease cost were not material.
2Classified within operating activities in the accompanying condensed consolidated statement of cash flows.
The following table includes a maturity analysis of future (undiscounted) operating lease payments and a reconciliation of those payments to the lease liabilities recorded on our balance sheet as of October 31, 2019:
|
|
|
|
|
|
October 31,
|
(Dollars in millions)
|
2019
|
Fiscal 2020 (six months remaining)
|
$
|
9
|
|
Fiscal 2021
|
16
|
|
Fiscal 2022
|
12
|
|
Fiscal 2023
|
8
|
|
Fiscal 2024
|
6
|
|
Thereafter
|
13
|
|
Total lease payments
|
64
|
|
Less: Present value discount
|
(4
|
)
|
Lease liabilities
|
$
|
60
|
|
|
|
Weighted-average discount rate
|
3.0%
|
Weighted-average remaining term
|
4.7 years
|
Future operating lease payments, as disclosed in our 2019 Form 10-K under the prior accounting standard (ASC Topic 840), were as follows as of April 30, 2019:
|
|
|
|
|
|
April 30,
|
(Dollars in millions)
|
2019
|
Fiscal 2020
|
$
|
23
|
|
Fiscal 2021
|
16
|
|
Fiscal 2022
|
10
|
|
Fiscal 2023
|
5
|
|
Fiscal 2024
|
3
|
|
Thereafter
|
2
|
|
Total lease payments
|
$
|
59
|
|
14. Other Comprehensive Income
The following tables show the components of net other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
October 31, 2018
|
|
October 31, 2019
|
(Dollars in millions)
|
Pre-Tax
|
|
Tax
|
|
Net
|
|
Pre-Tax
|
|
Tax
|
|
Net
|
Currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on currency translation
|
$
|
(23
|
)
|
|
$
|
(4
|
)
|
|
$
|
(27
|
)
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
11
|
|
Reclassification to earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net
|
(23
|
)
|
|
(4
|
)
|
|
(27
|
)
|
|
6
|
|
|
5
|
|
|
11
|
|
Cash flow hedge adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on hedging instruments
|
30
|
|
|
(8
|
)
|
|
22
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Reclassification to earnings1
|
—
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
1
|
|
|
(5
|
)
|
Other comprehensive income (loss), net
|
30
|
|
|
(8
|
)
|
|
22
|
|
|
(8
|
)
|
|
1
|
|
|
(7
|
)
|
Postretirement benefits adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) and prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification to earnings2
|
5
|
|
|
(1
|
)
|
|
4
|
|
|
4
|
|
|
(1
|
)
|
|
3
|
|
Other comprehensive income (loss), net
|
5
|
|
|
(1
|
)
|
|
4
|
|
|
4
|
|
|
(1
|
)
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net
|
$
|
12
|
|
|
$
|
(13
|
)
|
|
$
|
(1
|
)
|
|
$
|
2
|
|
|
$
|
5
|
|
|
$
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Six Months Ended
|
|
October 31, 2018
|
|
October 31, 2019
|
(Dollars in millions)
|
Pre-Tax
|
|
Tax
|
|
Net
|
|
Pre-Tax
|
|
Tax
|
|
Net
|
Currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on currency translation
|
$
|
(28
|
)
|
|
$
|
(11
|
)
|
|
$
|
(39
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
(3
|
)
|
Reclassification to earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net
|
(28
|
)
|
|
(11
|
)
|
|
(39
|
)
|
|
(2
|
)
|
|
(1
|
)
|
|
(3
|
)
|
Cash flow hedge adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on hedging instruments
|
57
|
|
|
(14
|
)
|
|
43
|
|
|
13
|
|
|
(3
|
)
|
|
10
|
|
Reclassification to earnings1
|
2
|
|
|
—
|
|
|
2
|
|
|
(10
|
)
|
|
2
|
|
|
(8
|
)
|
Other comprehensive income (loss), net
|
59
|
|
|
(14
|
)
|
|
45
|
|
|
3
|
|
|
(1
|
)
|
|
2
|
|
Postretirement benefits adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) and prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification to earnings2
|
9
|
|
|
(2
|
)
|
|
7
|
|
|
9
|
|
|
(2
|
)
|
|
7
|
|
Other comprehensive income (loss), net
|
9
|
|
|
(2
|
)
|
|
7
|
|
|
9
|
|
|
(2
|
)
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net
|
$
|
40
|
|
|
$
|
(27
|
)
|
|
$
|
13
|
|
|
$
|
10
|
|
|
$
|
(4
|
)
|
|
$
|
6
|
|
1Pre-tax amount is classified as sales in the accompanying condensed consolidated statements of operations.
2Pre-tax amount is classified as non-operating postretirement expense in the accompanying condensed consolidated statements of operations.
15. Acquisition of Business
On July 3, 2019, we acquired 100% of the voting interests in The 86 Company, which owns Fords Gin, for $22 million in cash. The purchase price has been preliminarily allocated largely to the intangible assets that were acquired, including goodwill of $11 million and other indefinite-lived intangibles of $12 million, net of deferred tax liabilities of $1 million. The goodwill is primarily attributable to the value of leveraging our distribution network and brand-building expertise to grow global sales of the Fords Gin brand and to the knowledge and expertise of the organized workforce employed by the acquired business. We do not expect the goodwill to be deductible for tax purposes. The initial allocation of the purchase price was based on preliminary estimates and may be revised as the intangible asset valuations are finalized. The 86 Company has been included in our consolidated financial statements since the acquisition date. Actual and pro forma results are not presented due to immateriality.