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(Exact name of Registrant as specified in its Charter)
iDelaware
i61-0143150
(State
or other jurisdiction of
(IRS Employer
incorporation or organization)
Identification No.)
i850 Dixie Highway
iLouisville,
iKentucky
i40210
(Address
of principal executive offices)
(Zip Code)
(i502) i585-1100
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass A Common Stock (voting), $0.15 par value
iBFA
iNew
York Stock Exchange
iClass B Common Stock (nonvoting), $0.15 par value
iBFB
iNew
York Stock Exchange
i1.200% Notes due 2026
iBF26
iNew
York Stock Exchange
i2.600% Notes due 2028
iBF28
iNew
York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. iYesþ Noo
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). iYesþ Noo
Indicate by check mark whether the
registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge
accelerated filer
☑
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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).
Yesi☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: February 28, 2021
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. iCondensed Consolidated Financial Statements
We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission for interim financial information. In accordance with those rules and
regulations, we condensed or omitted certain information and disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). In our opinion, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments (unless otherwise indicated), necessary for a fair statement of our financial results for the periods presented in these financial statements. The results for interim periods are not necessarily indicative of future or annual results.
We suggest that you read these condensed financial statements together with the financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2020, as amended (2020 Form 10-K). We prepared the accompanying financial statements on a basis that is substantially
consistent with the accounting principles applied in our 2020 Form 10-K.
2. iEarnings 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).
i
The following table presents information concerning basic and diluted earnings per share:
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(Dollars in millions, except per share amounts)
2020
2021
2020
2021
Net
income available to common stockholders
$
i231
$
i219
$
i699
$
i783
Share
data (in thousands):
Basic average common shares outstanding
i477,898
i478,599
i477,643
i478,471
Dilutive
effect of stock-based awards
i2,859
i2,237
i2,793
i2,194
Diluted
average common shares outstanding
i480,757
i480,836
i480,436
i480,665
Basic
earnings per share
$
i0.48
$
i0.46
$
i1.46
$
i1.64
Diluted
earnings per share
$
i0.48
$
i0.45
$
i1.45
$
i1.63
/
We
excluded common stock-based awards for approximately i0 shares and i298,000 shares
from the calculation of diluted earnings per share for the three months ended January 31, 2020 and 2021, respectively.We excluded common stock-based awards for approximately i295,000 shares and i211,000
shares from the calculation of diluted earnings per share for the nine months ended January 31, 2020 and 2021, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.
3. iInventories
iInventories
are valued at the lower of cost or net realizable value. 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 $i311 million higher than reported as of April 30, 2020, and $i342
million higher than reported as of January 31, 2021. Changes in the LIFO valuation reserve for interim periods are based on an allocation of the projected change for the entire fiscal year, recognized proportionately over the remainder of the fiscal year.
7
4. iGoodwill
and Other Intangible Assets
i
The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the nine months ended January 31, 2021:
Our
other intangible assets consist of trademarks and brand names, all with indefinite useful lives.
5. iCommitments and Contingencies
We operate in a litigious environment, and we are sued in the normal course of business. Sometimes plaintiffs seek substantial damages. Significant judgment is required in predicting the outcome of these suits
and claims, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and we can make a reasonable estimate of the loss, and then adjust the accrual as appropriate to reflect changes in facts and circumstances. We do not believe it is reasonably possible that these existing loss contingencies, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations, or liquidity. No material accrued loss contingencies were recorded as of January 31, 2021.
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 $i9 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant. As of January 31, 2021, our actual exposure under the guaranty of the importer’s obligation was approximately $i6
million. We also have accounts receivable from that importer of approximately $i10 million at January 31, 2021, which we expect to collect in full. Based on the financial support we provide to the importer, we believe it meets the definition of a variable interest entity. However, because we do not control this entity, it is not included in our consolidated financial statements.
On May 30, 2019, we notified
Bacardi Martini Ltd. (Bacardi) of our intention not to renew the terms of our United Kingdom (U.K.) Cost Sharing Agreement (the Agreement) whereby Bacardi provided certain services (e.g., warehousing and logistics, sales, reporting, treasury, tax, and other services) and Brown-Forman and Bacardi split the associated overhead for those services. For purposes of conducting business, Brown-Forman and Bacardi established a U.K. trade name, “Bacardi Brown-Forman Brands,” through which our products and Bacardi’s products were sold in the U.K. On a monthly basis, Bacardi would remit to us the cash representing revenues from sales of our products, net of our agreed contributions for overhead costs under the Agreement. On April 30, 2020, the Agreement expired according to its terms.
Following delivery of our notice and upon expiration of the Agreement, Bacardi
alleged that it was entitled to approximately £i49 million under the principle of commercial agency in the U.K., as well as additional compensation for the winding up of business conducted under the Agreement and for remitting the associated funds owed to us. From monthly settlements following the expiration of the Agreement, Bacardi withheld over £i50
million owed to us, effectively bypassing the dispute resolution process under the Agreement.
In response to Bacardi’s actions, we initiated a lawsuit on August 20, 2020, in the Commercial Court in the U.K. seeking reimbursement of the amounts wrongfully withheld. Shortly thereafter, Bacardi filed a demand for arbitration seeking a determination that it was entitled to compensation as a commercial agent and for additional compensation for the work completed following the expiration of the Agreement.
Since it was raised, we have disputed Bacardi’s claim of commercial agency compensation and issued demands that Bacardi adhere to the dispute resolution process mandated by the Agreement and return the over £i50
million that Bacardi has wrongfully withheld from us. Given the early stages of the litigation and arbitration process, we are unable to estimate the range of reasonably possible loss, if any. The withheld amount is included in accounts receivable in the accompanying condensed consolidated balance sheet as of January 31, 2021.
8
6. iDebt
i
Our
long-term debt (net of unamortized discount and issuance costs) consists of:
ii2.250/%
senior notes, $ii250/ principal amount, due iiJanuary 15,
2023/
$
i249
$
i249
ii3.500/%
senior notes, $ii300/ principal amount, due iiApril 15,
2025/
i297
i298
ii1.200/%
senior notes, €ii300/ principal amount, due iiJuly 7,
2026/
i324
i362
ii2.600/%
senior notes, £ii300/ principal amount, due iiJuly 7,
2028/
i369
i408
ii4.000/%
senior notes, $ii300/ principal amount, due iiApril 15,
2038/
i294
i294
ii3.750/%
senior notes, $ii250/ principal amount, due iiJanuary 15,
2043/
i248
i248
ii4.500/%
senior notes, $ii500/ principal amount, due iiJuly 15,
2045/
i488
i488
$
i2,269
$
i2,347
/
Our
short-term borrowings of $i333 million as of April 30, 2020, and $i312 million as of January 31, 2021, consisted
primarily of borrowings under our commercial paper program.
The
following table shows the change in each component of accumulated other comprehensive income (AOCI), net of tax, during the nine months ended January 31, 2021:
The following table shows our net sales by geography:
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(Dollars in millions)
2020
2021
2020
2021
United States
$
i416
$
i425
$
i1,296
$
i1,334
Developed
International1
i263
i292
i716
i789
Emerging2
i171
i171
i477
i438
Travel
Retail3
i34
i12
i104
i47
Non-branded
and bulk4
i15
i11
i61
i41
Total
$
i899
$
i911
$
i2,654
$
i2,649
1Represents
net sales of branded products to “advanced economies” as defined by the International Monetary Fund (IMF), excluding the United States. Our largest developed international markets are the United Kingdom, Germany, Australia, and France.
2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, and Russia.
3Represents net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer location.
4Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
The
following table shows our net sales by product category:
Three Months Ended
Nine Months Ended
January 31,
January 31,
(Dollars
in millions)
2020
2021
2020
2021
Whiskey1
$
i701
$
i731
$
i2,086
$
i2,101
Tequila2
i74
i72
i219
i224
Wine3
i62
i50
i159
i162
Vodka4
i32
i26
i89
i71
Rest
of portfolio
i15
i21
i40
i50
Non-branded
and bulk5
i15
i11
i61
i41
Total
$
i899
$
i911
$
i2,654
$
i2,649
1Includes
all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this category are the Jack Daniel's family of brands, the Woodford Reserve family of brands, the Old Forester family of brands, GlenDronach, BenRiach, Glenglassaugh, Slane Irish Whiskey, and Coopers’ Craft. Also includes the Early Times, Canadian Mist, and Collingwood brands, which we divested on July 31, 2020 (Note 14).
2Includes el Jimador, the Herradura family of brands, New Mix, Pepe Lopez, and Antiguo.
3Includes Korbel Champagnes and Sonoma-Cutrer wines.
4Includes Finlandia.
5Includes net sales of used barrels, bulk whiskey and
wine, and contract bottling regardless of customer location.
/
12
9. iPension
and Other Postretirement Benefits
i
The following table shows the components of the net cost of pension and other postretirement benefits recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.
Three
Months Ended
Nine Months Ended
January 31,
January 31,
(Dollars in millions)
2020
2021
2020
2021
Pension Benefits:
Service
cost
$
i6
$
i7
$
i18
$
i20
Interest
cost
i8
i6
i24
i19
Expected
return on plan assets
(i12)
(i12)
(i35)
(i35)
Amortization
of:
Prior service cost (credit)
i—
i—
i1
i1
Net
actuarial loss
i5
i7
i14
i20
Net
cost
$
i7
$
i8
$
i22
$
i25
Other
Postretirement Benefits:
Service cost
$
i—
$
i—
$
i1
$
i1
Interest
cost
i1
i1
i1
i1
Amortization
of prior service cost (credit)
(i1)
(i1)
(i2)
(i2)
Net
cost
$
i—
$
i—
$
i—
$
i—
/
10. iIncome
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 for the three months ended January 31, 2021, was i15.7% compared to i18.6%
for the same period last year. The decrease in our effective tax rate for the three months ended January 31, 2021, was driven primarily by a deferred tax benefit related to a statutory rate change and an increase in the foreign derived intangible income deduction. The effective tax rate for the nine months ended January 31, 2021, was i16.2% compared to ii17.1/%
for the same period last year. The decrease in our effective tax rate for the nine months ended January 31, 2021, was driven primarily by a deferred tax benefit related to an intercompany transfer of assets partially offset by (a) less stock-based compensation deduction, (b) a decreased benefit in the foreign derived intangible income deduction, and (c) a lower prior-year true-up benefit.
We have asserted that the undistributed earnings of the majority 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. We have a limited number of subsidiaries that are not permanently reinvested and therefore we have recorded the deferred tax liability related to the undistributed earnings (but not for their outside basis differences).
We are subject to market risks, including the effect of fluctuations in foreign currency exchange rates, commodity prices, and interest rates. We use derivatives to help manage financial exposures that occur in the normal course of business. We formally document the purpose of each derivative contract, which includes linking the contract to the financial exposure it is designed to mitigate. We do not hold or issue derivatives for trading or speculative purposes.
We use currency derivative contracts to limit our
exposure to the foreign currency exchange rate 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.
13
We do not designate some of our currency derivatives as hedges because we use them to partially offset the immediate earnings impact of changes in foreign currency exchange rates on existing assets or liabilities. We immediately recognize the change in fair
value of these contracts in earnings.
We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts for all hedged currencies totaling $i1,026 million at April 30, 2020, and $i1,092
million at January 31, 2021. The maximum term of outstanding derivative contracts was ii36/
months at both April 30, 2020, and January 31, 2021.
We also use foreign currency-denominated debt instruments to help manage our foreign currency exchange rate risk. We designate a portion of those debt instruments as net investment hedges, which are intended to mitigate foreign currency 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. The amount of foreign currency-denominated debt instruments designated as net investment hedges was $i613
million at April 30, 2020, and $i673 million at January 31, 2021.
At inception, we expect each financial instrument designated as a hedge to be highly effective in offsetting the financial exposure it is designed to mitigate. We also assess the effectiveness on an ongoing basis. If determined to no longer be highly effective, designation and accounting for the instrument as a hedge would be discontinued.
We
use forward purchase contracts with suppliers to protect against corn price volatility. We expect to take physical delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than as derivative instruments.
i
The
following tables present the pre-tax impact that changes in the fair value of our derivative instruments and non-derivative hedging instruments had on AOCI and earnings:
Three Months Ended
January 31,
(Dollars in millions)
Classification
2020
2021
Currency
derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI
n/a
$
i4
$
(i39)
Net
gain (loss) reclassified from AOCI into earnings
Sales
i5
i4
Currency
derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings
Sales
$
(i1)
$
(i6)
Net
gain (loss) recognized in earnings
Other income (expense), net
i4
i4
Foreign
currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI
n/a
$
(i5)
$
(i33)
Total
amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales
$
i1,178
$
i1,222
Other
income (expense), net
i4
i9
/
14
Nine
Months Ended
January 31,
(Dollars in millions)
Classification
2020
2021
Currency derivatives designated as cash flow hedges:
Net gain (loss)
recognized in AOCI
n/a
$
i17
$
(i73)
Net
gain (loss) reclassified from AOCI into earnings
Sales
i16
i21
Currency
derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings
Sales
$
(i2)
$
(i11)
Net
gain (loss) recognized in earnings
Other income (expense), net
i6
i15
Foreign
currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI
n/a
$
(i2)
$
(i66)
Total
amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales
$
i3,404
$
i3,481
Other
income (expense), net
i13
i13
We
expect to reclassify $i9 million of deferred net losses on cash flow hedges recorded in AOCI as of January 31, 2021, 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.
iThe following table presents the fair values of our derivative instruments:
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.
iIn 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
15
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 $i2
million at April 30, 2020, and $i27 millionat January 31, 2021.
iOffsetting.
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.
i
The
following table summarizes the gross and net amounts of our derivative contracts:
Fair
value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We categorize the fair values of assets and liabilities into three levels based on the assumptions (inputs) used to determine those values. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are:
•Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.
•Level 2 – Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in
inactive markets; or other inputs that are observable or can be derived from or corroborated by observable market data.
•Level 3 – Unobservable inputs supported by little or no market activity.
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.
16
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.
17
13. iOther
Comprehensive Income
i
The following tables show the components of net other comprehensive income (loss):
1Pre-tax
amount for each period is classified as sales in the accompanying condensed consolidated statements of operations.
2For the nine months ended January 31, 2021, $i4 of the pre-tax amount of $i23
is classified in gain on sale of business in the accompanying condensed consolidated statements of operations. Otherwise, the pre-tax amount for each period is classified as non-operating postretirement expense.
/
18
14. iAcquisitions
and Divestitures
On July 31, 2020, we sold the Early Times, Canadian Mist, and Collingwood brands for $i177 million in cash. The sale reflects the continued evolution of our portfolio strategy to focus on premium spirits brands. The total book value of the related business assets included in the sale was $i50
million, consisting largely of inventories, the Canadian Mist production assets, and intellectual property. As a result of the sale, we recognized a pre-tax gain of $i127 million during the first quarter of fiscal 2021.
On December 1, 2020, we acquired i100%
of the voting interests in Part Time Rangers Holdings Limited (Part Time Rangers) for $i14 million in cash (including repayment of debt). Part Time Rangers, which is based in New Zealand, produces spirits-based ready-to-drink products with all-natural fruit flavoring. The purchase price has been preliminarily allocated largely to the intangible assets of the acquired business, including goodwill of $i6 million
and other intangible assets of $i8 million. The goodwill is primarily attributable to the value of leveraging our distribution network and brand-building expertise to grow sales of the Part Time Rangers brand. We do not expect the goodwill to be deductible for tax purposes. Part Time Rangers has been included in our consolidated financial statements since the acquisition date. Actual and pro forma
results are not presented due to immateriality.
19
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 Annual Report on Form 10-K for the fiscal year ended April 30, 2020, as amended (2020 Form 10-K). Note that the results of operations for the nine months ended January 31,
2021, are not necessarily indicative of future or annual results. In this Item, “we,”“us,”“our,”“Brown-Forman,” and the “Company” refer to Brown-Forman Corporation and its consolidated subsidiaries, collectively.
Presentation Basis
Non-GAAP Financial Measures
We use certain financial measures in this report that are not measures of financial performance under U.S. generally accepted accounting principles (GAAP). These non-GAAP measures, defined below, should be viewed as supplements to (not substitutes for) our results of operations and other
measures reported under GAAP. Other companies may not define or calculate these non-GAAP measures in the same way.
“Underlying change” in measures of statements of operations.We present changes in certain measures, or line items, of the statements of operations that are adjusted to an “underlying” basis. We use “underlying change” for the following measures of the statements of operations: (a) underlying net sales; (b) underlying cost of sales; (c) underlying gross profit; (d) underlying advertising expenses; (e) underlying selling, general, and administrative (SG&A) expenses; (f) underlying other expense (income), net; (g) underlying operating expenses1; and (h) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) acquisitions and divestitures,
(b) foreign exchange, and (c) estimated net change in distributor inventories. We explain these adjustments below.
•“Acquisitions and divestitures.” This adjustment removes (a) the gain or loss recognized on sale of divested brands, (b) any non-recurring effects related to our acquisitions and divestitures (e.g., transaction costs and integration costs), and (c) the effects of operating activity related to acquired and divested brands for periods not comparable year over year (non-comparable periods). By excluding non-comparable periods, we therefore include the effects of acquired and divested brands only to the extent that results are comparable year over year.
In fiscal 2020, we acquired The 86 Company, which owns Fords Gin. During the first quarter of fiscal 2021, we sold our Early Times, Canadian Mist, and Collingwood brands
and related assets, which resulted in a pre-tax gain of $127 million. During the third quarter of fiscal 2021, we acquired Part Time Rangers Holdings Limited, which owns Part Time Rangers RTDs. See Note 14 to the Condensed Consolidated Financial Statements for details.
This adjustment removes (a) transaction and integration costs related to the acquisitions and divestitures, (b) operating activity for The 86 Company for the non-comparable period, which is activity in the first quarter of fiscal 2021, (c) the gain on sale of Early Times, Canadian Mist, and Collingwood, (d) operating activity for the non-comparable period for Early Times, Canadian Mist, and Collingwood, which is activity in the second and third quarter for both fiscal 2020 and fiscal 2021, and (e) operating activity for Part Time Rangers Holdings Limited for the non-comparable period, which is activity in the third quarter of fiscal 2021. We believe that these
adjustments allow for us to better understand our underlying results on a comparable basis.
•“Foreign exchange.” We calculate the percentage change in certain line items of the statements of operations in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current-year results at prior-year rates and remove transactional and hedging foreign exchange gains and losses from current- and prior-year periods.
•“Estimated
net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor inventories on changes in certain line items of the statements of operations. For each period compared, we use volume (see Definitions - Other Metrics below) information from our distributors to estimate the effect of distributor inventory changes in certain line items of the statements of operations. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in certain line items of the statements of operations and allows us to understand better our underlying results and trends.
1Operating
expenses include advertising expense, SG&A expense, and other expense (income), net.
20
We use the non-GAAP measures “underlying change” to: (a) understand our performance from period to period on a consistent basis; (b) compare our performance to that of our competitors; (c) calculate components of management incentive compensation; (d) plan and forecast; and (e) communicate our financial performance to the board of directors, stockholders, and the investment community. We provide reconciliations of the “underlying change” in certain line items of the statements of operations to their nearest GAAP measures in the tables under “Results of Operations - Year-Over-Year Period Comparisons.” We have consistently applied the adjustments within our reconciliations
in arriving at each non-GAAP measure.
21
Definitions
Aggregations.
From time to time, to explain our results of operations or to highlight trends and uncertainties affecting our business, we aggregate markets according to stage of economic development as defined by the International Monetary Fund (IMF), and we aggregate brands by product category. We define our geographic and brand aggregations below.
Geographic Aggregations.
In “Results of Operations - Fiscal 2021 Year-to-Date Highlights,” we provide supplemental information
for our largest markets ranked by percentage of total fiscal 2020 net sales. In addition to markets that are listed by country name, we include the following aggregations:
•“Developed International”markets are “advanced economies” as defined by the IMF, excluding the United States. Our largest developed international markets are the United Kingdom, Germany, Australia, and France. This aggregation represents our net sales of branded products to these markets.
•“Emerging”markets are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, and Russia. This aggregation represents our net sales of branded products to these markets.
•“Travel
Retail” represents our net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer location.
•“Non-branded and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
Brand Aggregations.
In “Results of Operations - Fiscal 2021 Year-to-Date Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal 2020 net sales. In addition to brands that are listed by name, we include the following aggregations:
•“Whiskey”
includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink (RTD), and ready-to-pour products (RTP). The brands included in this category are the Jack Daniel’s family of brands, the Woodford Reserve family of brands (Woodford Reserve), the Old Forester family of brands (Old Forester), GlenDronach, BenRiach, Glenglassaugh, Slane Irish Whiskey, and Coopers’ Craft. Also includes the Early Times, Canadian Mist, and Collingwood brands, which we divested on July 31, 2020. See Note 14 to the Condensed Consolidated Financial Statements for details.
•“American whiskey” includes the Jack Daniel’s family of brands, premium bourbons (defined below), super-premium American whiskey (defined below), and Early Times, which we divested on July 31, 2020.
•“Jack
Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and RTP products (JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Tennessee Apple (JDTA), Jack Daniel’s Single Barrel Collection (JDSB), Jack Daniel’s Tennessee Rye Whiskey (JDTR), Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and Jack Daniel’s Bottled-in-Bond.
•“Jack Daniel’s RTD and RTP” products include Jack Daniel’s & Cola, Jack Daniel’s Country Cocktails, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Double Jack, Gentleman Jack & Cola, Jack Daniel’s Lynchburg Lemonade, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Berry, Jack Daniel’s Cider, Jack Daniel’s Whiskey & Seltzer, and the seasonal
Jack Daniel’s Winter Jack RTP.
•“Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft.
•“Super-premium American whiskey” includes Woodford Reserve, Gentleman Jack, JDSB, JDTR, Jack Daniel’s Sinatra Select, and Jack Daniel’s No. 27 Gold Tennessee Whiskey.
•“Tequila” includes el Jimador, the Herradura family of brands (Herradura), New Mix, Pepe Lopez, and Antiguo.
•“Wine” includes Korbel Champagnes and Sonoma-Cutrer wines.
•“Vodka” includes Finlandia.
22
•“Non-branded
and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
Other Metrics.
•“Depletions.”We generally record revenues when we ship our products to our customers. Depletions is a term commonly used in the beverage alcohol industry to describe volume. Depending on the context, depletions means either (a) our shipments directly to retail or wholesale customers for owned distribution markets or (b) shipments from our distributor customers to retailers and wholesalers in other markets. We believe that depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do.
In this document, unless otherwise specified, we refer to depletions when discussing volume.
•“Consumer takeaway.” When discussing trends in the market, we refer to consumer takeaway, a term commonly used in the beverage alcohol industry. Consumer takeaway refers to the purchase of product by consumers from retail outlets, including products purchased through e-premise channels, as measured by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric. We believe consumer takeaway is a leading indicator of how consumer demand is trending.
Important
Information on Forward-Looking Statements:
This report contains statements, estimates, and projections that are “forward-looking statements” as defined under U.S. federal securities laws. Words such as “aim,”“anticipate,”“aspire,”“believe,”“can,”“continue,”“could,”“envision,”“estimate,”“expect,”“expectation,”“intend,”“may,”“might,”“plan,”“potential,”“project,”“pursue,”“see,”“seek,”“should,”“will,”“would,” and similar words indicate forward-looking statements, which speak only as of the date we make them. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risks, uncertainties,
and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. These risks and uncertainties include, but are not limited to:
•Impact of health epidemics and pandemics, including the COVID-19 pandemic, and the resulting negative economic impact and related governmental actions
•Risks associated with being a U.S.-based company with global operations, including commercial, political, and financial risks; local labor policies and conditions; protectionist trade policies, or economic or trade sanctions, including additional retaliatory tariffs on American spirits and the effectiveness of our actions to mitigate the negative impact on our margins, sales, and distributors; compliance
with local trade practices and other regulations; terrorism; and health pandemics
•Failure to comply with anti-corruption laws, trade sanctions and restrictions, or similar laws or regulations
•Fluctuations in foreign currency exchange rates, particularly a stronger U.S. dollar
•Changes in laws, regulatory measures, or governmental policies – especially those that affect the production, importation, marketing, labeling, pricing, distribution, sale, or consumption of our beverage alcohol products
•Tax rate changes (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, or capital gains) or changes in related reserves, changes in tax rules or accounting standards, and
the unpredictability and suddenness with which they can occur
•Unfavorable global or regional economic conditions, particularly related to the COVID-19 pandemic, and related economic slowdowns or recessions, low consumer confidence, high unemployment, weak credit or capital markets, budget deficits, burdensome government debt, austerity measures, higher interest rates, higher taxes, political instability, higher inflation, deflation, lower returns on pension assets, or lower discount rates for pension obligations
•Dependence upon the continued growth of the Jack Daniel’s family of brands
•Changes in consumer preferences, consumption, or purchase patterns – particularly away from larger producers in favor of small distilleries or local producers, or away from brown
spirits, our premium products, or spirits generally, and our ability to anticipate or react to them; legalization of marijuana use on a more widespread basis; shifts in consumer purchase practices from traditional to e-commerce retailers; bar, restaurant, travel, or other on-premise declines; shifts in demographic or health and wellness trends; or unfavorable consumer reaction to new products, line extensions, package changes, product reformulations, or other product innovation
•Decline in the social acceptability of beverage alcohol in significant markets
•Production facility, aging warehouse, or supply chain disruption
•Imprecision in supply/demand forecasting
•Higher costs, lower quality, or unavailability
of energy, water, raw materials, product ingredients, labor, or finished goods
23
•Significant additional labeling or warning requirements or limitations on availability of our beverage alcohol products
•Competitors’ and retailers’ consolidation or other competitive activities, such as pricing actions (including price reductions, promotions, discounting, couponing, or free goods), marketing, category expansion, product introductions, or entry or expansion in our geographic markets or distribution networks
•Route-to-consumer changes that affect the timing of our sales, temporarily disrupt the marketing or sale of
our products, or result in higher fixed costs
•Inventory fluctuations in our products by distributors, wholesalers, or retailers
•Risks associated with acquisitions, dispositions, business partnerships, or investments – such as acquisition integration, termination difficulties or costs, or impairment in recorded value
•Counterfeiting and inadequate protection of our intellectual property rights
•Product recalls or other product liability claims, product tampering, contamination, or quality issues
•Significant legal disputes and proceedings, or government investigations
•Cyber
breach or failure or corruption of key information technology systems, or failure to comply with personal data protection laws
•Negative publicity related to our company, products, brands, marketing, executive leadership, employees, board of directors, family stockholders, operations, business performance, or prospects
•Failure to attract or retain key executive or employee talent
•Our status as a family “controlled company” under New York Stock Exchange rules, and our dual-class share structure
For further information on these and other risks, please see the risks and uncertainties described in Part I,
Item 1A. Risk Factors of our 2020 Form 10-K, those described in Part II, Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarter ended July 31, 2020, (First Quarter 2021 Form 10-Q), and those described from time to time in our future reports filed with the Securities and Exchange Commission.
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Overview
COVID-19
The ongoing COVID-19 pandemic continues to impact the global economy and create economic uncertainty even with multiple vaccines in various stages of deployment around the world. Governments
around the world have imposed restrictions on travel and business operations and have placed limitations on the size of public and private gatherings of their citizens. As a result of such restrictions, many businesses have either been closed or their operations have been modified. The bar, restaurant, airline, cruise, and related hospitality industries have been particularly impacted as the ability to travel and gather has been severely limited or restricted in various countries around the world.
While the financial impact of COVID-19 on our business for the nine months ended January 31, 2021, is difficult to measure, it has had an effect on our financial performance, both positive and negative. For example, the negative impact continued to be concentrated in (a) the on-premise (representing approximately 20% of our business prior to COVID-19) as a result of the restrictions
in the channel, (b) our Travel Retail channel as a result of travel bans and other restrictions, and (c) certain emerging markets where we have seen evidence of consumers trading down from premium spirit categories where our portfolio is focused. Conversely, strong off-premise gains across many of our developed markets, reflecting an increase in at-home consumption and strong growth in the e-premise channel, continued to offset the significant reduction in sales in the negatively affected channels and markets. We further discuss the effect of COVID-19 on our results where relevant below.
We believe we remain in a strong financial position, and our capacity to generate solid operating cash flow remains sound, allowing us to navigate this crisis as circumstances evolve. Additionally, we have no maturities of long-term debt until fiscal 2023. See “Liquidity and Financial Condition” below for details.
Fiscal
2021 Year-to-Date Highlights
•We delivered reported net sales of $2.6 billion, essentially flat compared to the same period last year. Excluding an estimated net decrease in distributor inventories, we grew underlying net sales 2% for the nine months ended January 31, 2021. Net sales for our markets and brands were affected by COVID-19 during the first nine months of fiscal 2021. Underlying growth was driven by (a) JD RTDs; (b) our premium bourbon brands, led by Woodford Reserve and Old Forester; (c) the continued international launch of JDTA; (d) broad-based growth of JDTH; and (e) our tequila brands, fueled by volume growth of New Mix. These gains were partially offset by declines on JDTW in (a) the on-premise (representing approximately 20% of our business prior to COVID-19) as a result of the restrictions in the channel, (b) our Travel Retail channel
as a result of travel bans and other restrictions, and (c) certain emerging markets reflecting the lack of tourism and consumers trading down from premium spirit categories. From a geographic perspective, the United States and developed international markets led the underlying net sales growth with certain emerging markets also contributing. These gains were partially offset by a decline in underlying net sales in our Travel Retail channel, certain other emerging markets, and sales of used barrels.
•Reported advertising expense declined 10% for the nine months ended January 31, 2021. Underlying advertising expense also declined 10% after adjusting for the negative effect of foreign exchange. The decrease in underlying advertising expense was driven by the phasing of spend from the first half to the second half of the fiscal year. Reported SG&A expense
declined 3% for the nine months ended January 31, 2021. Underlying SG&A expense declined 4% after adjusting for the effect of acquisitions and divestitures and the negative effect of foreign exchange. The decrease in underlying SG&A expense was driven by the tight management of discretionary spend.
•We delivered reported operating income of $998 million, an increase of 10% compared to the same period last year. Excluding (a) the effect of acquisitions and divestitures, (b) an estimated net decrease in distributor inventories, and (c) the positive effect of foreign exchange, underlying operating income grew 3%.
•We delivered diluted earnings per share of $1.63 for the nine months ended January 31, 2021, an increase of 12% from
the $1.45 reported for the same period last year, which includes an estimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and Collingwood.
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Summary
of Operating Performance
Three Months Ended January 31,
Nine Months Ended January 31,
(Dollars in millions)
2020
2021
Reported Change
Underlying Change1
2020
2021
Reported
Change
Underlying Change1
Net sales
$
899
$
911
1
%
—
%
$
2,654
$
2,649
—
%
2
%
Cost
of sales
342
361
5
%
4
%
980
1,053
7
%
9
%
Gross
profit
557
550
(1
%)
(1
%)
1,674
1,596
(5
%)
(1
%)
Advertising
104
121
17
%
16
%
308
278
(10
%)
(10
%)
SG&A
153
157
3
%
1
%
475
460
(3
%)
(4
%)
Gain
on sale of business
—
(127)
NA
NA
Other expense (income), net
(4)
(9)
176
%
(21
%)
(13)
(13)
5
%
(37
%)
Operating
income
304
281
(8
%)
(8
%)
904
998
10
%
3
%
Total
operating expenses2
$
253
$
269
7
%
7
%
$
770
$
725
(6
%)
(6
%)
As
a percentage of net sales3
Gross profit
61.9
%
60.4
%
(1.5)
pp
63.1
%
60.3
%
(2.8)
pp
Operating
income
33.8
%
30.9
%
(2.9)
pp
34.1
%
37.7
%
3.6
pp
Non-operating
postretirement expense
$
1
$
1
28
%
$
3
$
4
28
%
Interest
expense, net
$
19
$
21
5
%
$
58
$
60
3
%
Effective
tax rate
18.6
%
15.7
%
(2.9)
pp
17.1
%
16.2
%
(0.9)
pp
Diluted
earnings per share
$
0.48
$
0.45
(5
%)
$
1.45
$
1.63
12
%
Note:
Totals may differ due to rounding
1See “Non-GAAP Financial Measures” above for details on our use of “underlying change,” including how we calculate
these measures and why we believe this information is useful to readers.
2Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
3Year-over-year changes in percentages are reported in percentage points (pp).
Fiscal 2021 Outlook
We continue to face uncertainty related to the evolving COVID-19 pandemic, its effect on the global economy, and ultimately its effect on the consumers of our brands. Our ability to make, ship, and market our brands to our consumers has not been materially impacted by COVID-19. However, we continue to closely monitor the raw material inputs from our suppliers (glass, cans, and other raw materials) and the effect COVID-19 may have on production abilities. How and where we sell our brands looks different
due to COVID-19. As a result, we continue to closely monitor key developments in our markets, including (a) industry and consumer behavior, (b) macroeconomic conditions (government/financial stimulus, employment, and economic recovery, et al.), (c) changes in restrictions related to COVID-19, and (d) the response to the multiple vaccines in various stages of deployment around the world.
As a result of these uncertainties and low visibility on recovery, and consistent with our 2020 Form 10-K, we are not providing quantitative guidance for fiscal 2021, except for our effective tax rate range. From a qualitative perspective, we believe that the Travel Retail and on-premise channels will not recover during this fiscal year and many of our emerging markets and certain developed international markets will remain down for the fiscal year. Our gross margin will remain under pressure for the year driven by the expectation of higher
input costs, lower fixed cost absorption, and mix shifts. However, our full-year gross margin will depend not only on the volumes of our business, but the mix of our business by geography, portfolio, channel, and size.
We expect the overall operating expense growth rate in the fourth quarter of fiscal 2021, particularly our advertising investments, to accelerate significantly compared to the third quarter of fiscal 2021 as we invest behind areas where our business is showing strong momentum along with cycling against last year’s significant decline in spend during the early weeks of COVID-19. Also, as previously announced, we plan to make a $20 million contribution to the Brown-Forman Foundation in the fourth quarter of fiscal 2021. We will remain agile, diligent, focused, and disciplined on our investments as the environment continues to evolve.
We expect our full-year effective
tax rate to be in the range of 17% to 19%.
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Results of Operations – Fiscal 2021 Year-to-Date Highlights
Market Highlights
The following table provides supplemental information for our largest markets. We discuss results of the markets most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the nine months ended January 31, 2021, compared to the same period last year.
1“Top Markets” are ranked based on percentage of total fiscal 2020 net sales. See 2020 Form 10-K “Results of Operations - Fiscal 2020 Market Highlights” and Note 8 to the Condensed Consolidated Financial Statements.
2See “Definitions” above for definitions of market aggregations presented here.
3See
“Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure and why we believe this information is useful to readers.
Net sales in all of the markets discussed below were affected either positively or negatively by COVID-19 during the first three quarters of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our business.
•United States. Reported net sales increased 3%, while underlying net sales grew 7% after adjusting for an estimated net decrease in distributor inventories (following the April 2020 distributor inventory build
due to the uncertainty around potential supply chain disruptions related to COVID-19). The underlying net sales gain was driven by (a) our premium bourbons, led by Woodford Reserve and Old Forester, supported by strong consumer takeaway trends; (b) JD RTDs, fueled by strong consumer demand for Jack Daniel’s Country Cocktails and the launch of new spirit-based RTD products; (c) volumetric growth of JDTH and Gentleman Jack; and (d) our tequilas, due to higher volumes and prices of Herradura and el Jimador. This growth was partially offset by lower net sales of JDTW reflecting unfavorable channel mix related to COVID-19 restrictions in the on-premise channel along with volume declines in the on-premise channel, which was partially offset by increased volumes in the off-premise channel.
•Developed International. Reported net sales increased 10%, while underlying net sales grew 7%
after adjusting for the positive effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was led by Australia, Germany, and France, partially offset by declines in Spain and Czechia reflecting COVID-19 related closures in these heavy tourism and on-premise focused markets.
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◦Germany’s underlying net sales growth was fueled by the volumetric gains of JD RTDs due to strong consumer demand and the launch of JDTA, partially offset by lower JDTW volumes reflecting COVID-19 related closures in the on-premise channel.
◦Australia’s underlying net sales growth was driven by higher volumes of JD RTDs fueled by strong consumer
demand.
◦France’s underlying net sales growth was driven by the launch of JDTA and higher volumes of JDTH and JDTW.
◦Underlying net sales in the Rest of Developed International declined primarily due to lower JDTW volumes in Spain and Czechia as noted above.
•Emerging. Reported net sales decreased 8%, while underlying net sales grew 1% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was driven by higher volumes of JDTW in Brazil, Poland, and China, largely offset by broad-based declines of the brand in Southeast Asia, India, and other Latin American markets as COVID-19 had an adverse effect on results.
◦Mexico’s
underlying net sales growth reflects higher volumes of New Mix supported not only by increased demand and shelf space as a result of the temporary supply disruption of the beer industry in the first quarter due to COVID-19 related shutdowns, but also expanded consumer takeaway. This growth was mostly offset by lower volumes of Herradura and JDTW largely due to consumers trading down to lower-priced brands.
◦Poland’s underlying net sales growth was driven by higher volumes of JDTW and the launch of JDTA.
◦Underlying net sales in the Rest of Emerging were flat as higher JDTW volumes in Brazil and China were offset by lower volumes of the brand in Southeast Asia, India, and other Latin American markets.
•Travel Retail. Reported net
sales declined 55%, while underlying net sales were down 54% after adjusting for an estimated net decrease in distributor inventories. The underlying net sales decline was driven by lower volumes of the Jack Daniel’s family of brands, Woodford Reserve, and Finlandia due to the implementation of travel bans and other restrictions related to COVID-19.
•Non-branded and bulk. Reported net sales declined 32%, while underlying net sales decreased 34% after adjusting for the effect of acquisitions and divestitures and the positive effect of foreign exchange. Lower volumes and prices for used barrels drove the reduction compared to the same period last year.
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Brand Highlights
The
following table provides supplemental information for our largest brands. We discuss results of the brands most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the nine months ended January 31, 2021, compared to the same period last year.
1See
“Definitions” above for definitions of brand aggregations and volume measures presented here.
2See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure and why we believe this information is useful to readers.
Net sales for all of the brands discussed below were affected either positively or negatively by COVID-19 during the first three quarters of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our business.
•Whiskey brands’ reported net sales increased 1%,
while underlying net sales grew 4% after adjusting for an estimated net decrease in distributor inventories. The underlying net sales gain was driven by (a) the growth of JD RTDs; (b) our premium bourbons, led by Woodford Reserve and Old Forester, supported by strong consumer takeaway trends; (c) the continued international launch of JDTA; and (d) volumetric growth of JDTH and Gentleman Jack. This growth was partially offset by JDTW declines.
◦The Jack Daniel’s family of brands grew underlying net sales driven by JD RTDs, the continued international launch of JDTA, and higher volumes of JDTH and Gentleman Jack, partially offset by declines of JDTW.
▪The underlying net sales decline for JDTW was driven by (a) lower volumes in
Travel Retail and certain emerging markets largely reflecting the implementation of travel bans and other restrictions related to COVID-19, (b) lower volumes in the on-premise channel in many developed international markets and the United States, and (c) unfavorable channel mix in the United States and our developed international markets related to COVID-19 restrictions in the on-premise channel, which was partially offset by increased volumes in the off-premise channel in those markets.
29
▪The increase in underlying net sales growth for Jack Daniel’s RTD/RTP was driven by volumetric gains in the United States (fueled by Jack Daniel’s Country Cocktails along with the launch of new spirit-based
RTD products), Australia, and Germany, which was supported by strong consumer takeaway trends.
▪JDTH grew underlying net sales fueled by broad-based volumetric gains, primarily in the United States and Europe, partially offset by declines in Travel Retail due to the implementation of travel bans and other restrictions related to COVID-19.
▪The underlying net sales growth of Gentleman Jack was led by higher volumes in the United States reflecting the brands high exposure to the off-premise channel. These gains were partially offset by declines in Travel Retail due to the implementation of travel bans and other restrictions related to COVID-19.
▪The underlying net sales growth
of JDTA was fueled by the brand’s continued international launch, most notably in the United Kingdom, France, and Germany.
◦Woodford Reserve grew underlying net sales fueled by volumetric growth in the United States, supported by strong consumer takeaway trends, partially offset by lower volumes in Travel Retail due to the implementation of travel bans and other restrictions related to COVID-19.
•Tequila brands grew reported net sales 2%, while underlying net sales grew 6% after adjusting for the negative effect of foreign exchange and an estimated net increase in distributor inventories. Underlying net sales growth reflects higher volumes of New Mix supported not only by increased demand and shelf space as a result of the temporary
supply disruption of the beer industry in the first quarter due to COVID-19 related shutdowns in Mexico, but also expanded consumer takeaway.
•Reported net sales for our Wine business, which is focused primarily in the United States, grew 2%, while underlying net sales grew 9% after adjusting for an estimated net decrease in distributor inventories. The increase in underlying net sales was driven by volumetric growth and higher prices of Korbel Champagne, partially offset by declines of Sonoma-Cutrer reflecting COVID-19 related restrictions in the on-premise channel where this brand is focused.
•Reported net sales for Finlandia declined 21%, while underlying net sales decreased 19% after adjusting for the negative effect of foreign exchange
and an estimated net decrease in distributor inventories. The decrease in underlying net sales was due to the adverse effect of COVID-19, which drove volume declines in Travel Retail, Czechia, and Russia.
•Non-branded and bulk. See discussion for this aggregation in “Market Highlights” above.
30
Year-Over-Year Period Comparisons
COVID-19 affected our results both positively and negatively during the first three quarters of fiscal 2021. See “Overview - COVID-19” above for more information
around the impact of COVID-19 on our business.
Net Sales
Percentage change versus the prior year period ended January 31
3 Months
9 Months
Change in reported net sales
1
%
—
%
Foreign
exchange
(2
%)
—
%
Estimated net change in distributor inventories
1
%
3
%
Change in underlying net sales
—
%
2
%
Change
in underlying net sales attributed to:
Volume
4
%
11
%
Price/mix
(3
%)
(9
%)
Note: Results may differ due to rounding
Net
sales totaled $911 million, an increase of $12 million, or 1%, for the three months ended January 31, 2021, compared to the same period last year. After adjusting reported results for the positive effect of foreign exchange and an estimated net decrease in distributor inventories, primarily in the United States, underlying net sales were essentially flat. The underlying net sales result was driven by volume growth, which was offset by unfavorable price/mix. Volume growth was led by JD RTDs, New Mix, and JDTA, partially offset by declines of JDTW, Finlandia, and el Jimador. Unfavorable price/mix was driven by faster growth from our lower-priced brands (JD RTDs and New Mix) and unfavorable channel mix (primarily for JDTW in the United States) related to COVID-19 restrictions in the on-premise channel.
For the nine months ended January
31, 2021, net sales were $2.6 billion, a decrease of $5 million, or essentially flat, compared to the same period last year. After adjusting reported net sales for an estimated net decrease in distributor inventories, primarily in the United States (following the April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions related to COVID-19), underlying net sales grew 2% compared to the same period last year. The increase in underlying net sales was driven by higher volumes, partially offset by unfavorable price/mix. Volume growth was led by JD RTDs, New Mix, and JDTA, partially offset by declines of JDTW and Finlandia. Unfavorable price/mix was driven by faster growth from our lower-priced brands (JD RTDs and New Mix) and unfavorable channel mix (primarily for JDTW in the United States) related to COVID-19 restrictions in the on-premise channel. See “Results of Operations - Fiscal 2021 Year-to-Date Highlights”
above for further details on underlying net sales for the nine months ended January 31, 2021.
Cost of Sales
Percentage change versus the prior year period ended January 31
3 Months
9 Months
Change in reported cost of sales
5
%
7
%
Acquisitions
and divestitures
(2
%)
(1
%)
Foreign exchange
(1
%)
—
%
Estimated net change in distributor inventories
1
%
2
%
Change
in underlying cost of sales
4
%
9
%
Change in underlying cost of sales attributed to:
Volume
4
%
11
%
Cost/mix
—
%
(2
%)
Note:
Results may differ due to rounding
Cost of sales of $361 million for the three months ended January 31, 2021, increased $19 million, or 5%, compared to the same period last year. Underlying cost of sales increased 4% after adjusting for (a) the effect of acquisitions and divestitures, (b) an estimated net decrease in distributor inventories, and (c) the negative effect of foreign exchange. The increase in underlying cost of sales was driven by higher volumes. Volume growth was led by JD RTDs, New Mix, and JDTA, partially offset by declines of JDTW, Finlandia, and el Jimador. A shift in portfolio mix toward our lower-cost brands (JD RTDs and New Mix) was offset by higher input costs related to agave and wood along with lower fixed cost absorption for JDTW.
31
Cost
of sales of $1.1 billion for the nine months ended January 31, 2021, increased $73 million, or 7%, when compared to the same period last year. Underlying cost of sales increased 9% after adjusting for an estimated net decrease in distributor inventories and the effect of acquisitions and divestitures. The increase in underlying cost of sales was driven by higher volumes, partially offset by favorable cost/mix. Volume growth was driven by JD RTDs, New Mix, and JDTA, partially offset by declines of JDTW and Finlandia. Favorable cost/mix was driven by a shift in portfolio mix toward our lower-cost brands (JD RTDs and New Mix), partially offset by higher input costs related to agave and wood along with lower fixed cost absorption for JDTW.
Gross
Profit
Percentage change versus the prior year period ended January 31
3 Months
9 Months
Change in reported gross profit
(1
%)
(5
%)
Acquisitions and divestitures
1
%
—
%
Foreign
exchange
(2
%)
—
%
Estimated net change in distributor inventories
2
%
3
%
Change in underlying gross profit
(1
%)
(1
%)
Note:
Results may differ due to rounding
Gross Margin
For the period ended January 31
3 months
9 Months
Prior year gross margin
61.9
%
63.1
%
Price/mix
—
%
(0.6)
%
Cost/mix
(1.4)
%
(2.1)
%
Acquisitions
and divestitures
(0.5
%)
(0.2
%)
Foreign exchange
0.4
%
0.1
%
Change in gross margin
(1.5
%)
(2.8
%)
Current
year gross margin
60.4
%
60.3
%
Note: Results may differ due to rounding
—
—
Gross profit of $550 million decreased $7 million, or 1%, for the three months ended January 31, 2021, compared to the same period last year. Underlying gross profit also declined 1% after adjusting for (a) the positive effect of foreign exchange, (b) an estimated net decrease in distributor inventories, and (c) the effect of acquisitions and divestitures. Gross margin for
the three months ended January 31, 2021, decreased 1.5 percentage points to 60.4% from 61.9% in the same period last year. The decrease in gross margin was driven primarily by higher input costs related to agave and wood along with lower fixed cost absorption for JDTW.
Gross profit of $1.6 billion decreased $78 million, or 5%, for the nine months ended January 31, 2021, compared to the same period last year. Underlying gross profit declined 1% after adjusting for an estimated net decrease in distributor inventories. Gross margin for the nine months ended January 31, 2021, decreased 2.8 percentage points to 60.3% from 63.1% in the same period last year. The decrease in gross margin was driven primarily by (a) higher input costs related to agave and wood along with lower fixed
cost absorption for JDTW and (b) an unfavorable shift in portfolio mix toward our lower-margin brands (JD RTDs and New Mix).
32
Operating Expenses
Percentage change versus the prior year period ended
January 31
3 Months
Reported
Acquisitions and Divestitures
Foreign Exchange
Underlying
Advertising
17
%
1
%
(2
%)
16
%
SG&A
3
%
(1
%)
(1
%)
1
%
Total
operating expenses1
7
%
—
%
1
%
7
%
9
Months
Advertising
(10
%)
—
%
(1
%)
(10
%)
SG&A
(3
%)
—
%
—
%
(4
%)
Total
operating expenses1
(6
%)
—
%
—
%
(6
%)
Note: Results may differ due to rounding
1Total
operating expenses include advertising expense, SG&A expense, and other expense (income), net.
Operating expenses totaled $269 million, an increase of $16 million, or 7%, for the three months ended January 31, 2021, compared to the same period last year. Underlying operating expenses were also up 7% after adjusting for the positive effect of foreign exchange.
•Reported advertising expense increased 17% for the three months ended January 31, 2021. Underlying advertising expense increased 16% after adjusting for the negative effect of foreign exchange and the effect of acquisitions and divestitures. The increase in underlying advertising expense was driven by the shift of spend from the first half to the second half of the fiscal year.
•Reported
SG&A expense increased 3% for the three months ended January 31, 2021. Underlying SG&A expense increased 1% after adjusting for the negative effect of foreign exchange and the effect of acquisitions and divestitures. Underlying SG&A expense increased modestly as higher compensation-related costs were partially offset by the tight management of discretionary spend (including hiring and travel freezes) as a result of the COVID-19 environment.
Operating expenses totaled $725 million, a decrease of $45 million, or 6%, for the nine months ended January 31, 2021, compared to the same period last year. Underlying operating expenses were also down 6% compared to the same period last year.
•Reported advertising expense declined 10% for the nine months ended
January 31, 2021. Underlying advertising expense also declined 10% after adjusting for the negative effect of foreign exchange. The decrease in underlying advertising expense was driven by the phasing of spend and a reduction in our investment behind on-premise channel activities and various events and sponsorships that were canceled in fiscal 2021 due to COVID-19.
•Reported SG&A expense declined 3% for the nine months ended January 31, 2021. Underlying SG&A expense declined 4% after adjusting for the effect of acquisitions and divestitures and the negative effect of foreign exchange. The decrease in underlying SG&A expense was driven by the tight management of discretionary spend (including hiring and travel freezes) as a result of the COVID-19 environment.
Operating
Income
Percentage change versus the prior year period ended January 31
3 Months
9 Months
Change in reported operating income
(8
%)
10
%
Acquisitions and divestitures
1
%
(13
%)
Foreign
exchange
(5
%)
(1
%)
Estimated net change in distributor inventories
4
%
7
%
Change in underlying operating income
(8
%)
3
%
Note:
Results may differ due to rounding
Operating income of $281 million decreased $23 million, or 8%, for the three months ended January 31, 2021, compared to the same period last year. Underlying operating income also decreased 8% after adjusting for (a) the positive effect of foreign exchange, (b) an estimated net decrease in distributor inventories, and (c) the effect of acquisitions and divestitures. Operating margin decreased 2.9 percentage points to 30.9% for the three months ended January 31, 2021, from 33.8% in the same period last year.
33
Operating
income of $998 million increased $94 million, or 10%, for the nine months ended January 31, 2021, compared to the same period last year. Underlying operating income grew 3% after adjusting for (a) the effect of acquisitions and divestitures, (b) an estimated net decrease in distributor inventories, and (c) the positive effect of foreign exchange. Operating margin increased 3.6 percentage points to 37.7% for the nine months ended January 31, 2021, from 34.1% in the same period last year. The effect of acquisitions and divestitures (primarily the sale of Early Times, Canadian Mist, and Collingwood) contributed 4.5 percentage points to this increase.
The effective tax rate in the three months ended January 31, 2021, was 15.7% compared
to 18.6% for the same period last year. The decrease in our effective tax rate for the three months ended January 31, 2021, was driven primarily by a deferred tax benefit related to a statutory rate change and an increase in the foreign-derived intangible income deduction.
The effective tax rate in the nine months ended January 31, 2021, was 16.2% compared to 17.1% for the same period last year. The decrease in our effective tax rate for the nine months ended January 31, 2021, was driven primarily by a deferred tax benefit related to an intercompany transfer of assets, partially offset by (a) less stock-based compensation deduction, (b) a decreased benefit in the foreign derived intangible income deduction, and (c) a lower prior-year true-up benefit.
Diluted
earnings per share of $0.45 for the three months ended January 31, 2021, decreased 5% from the $0.48 reported for the same period last year largely due to a decrease in reported operating income, which was partially offset by a lower effective tax rate. Diluted earnings per share of $1.63 for the nine months ended January 31, 2021, increased 12% from the $1.45 reported for the same period last year, which includes an estimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and Collingwood.
Liquidity and Financial Condition
Cash
flows. Cash and cash equivalents increased $431 million during the nine months ended January 31, 2021. Cash provided by operations of $572 million was up $63 million from the same period last year, primarily reflecting lower working capital requirements.
Cash provided by investing activities was $120 million for the nine months ended January 31, 2021, an increase of $231 million compared to the same period last year. The increase primarily reflects (a) the proceeds of $177 million from our divestiture of the Early Times, Canadian Mist, and Collingwood brands and related assets (in the first quarter of fiscal 2021) and (b) a $46 million decline in capital expenditures for fixed assets and computer software.
Cash used for financing activities was $294 million
during the nine months ended January 31, 2021, compared to $426 million for the same period last year. The $132 million change was largely attributable to a $127 million decrease in net repayments of short-term borrowings.
The impact on cash and cash equivalents as a result of exchange rate changes was an increase of $33 million for the nine months ended January 31, 2021, compared to a decrease of $3 million for the same period last year.
Liquidity. We generate strong cash flows from operations, which enable us to meet current obligations, fund capital expenditures, pay regular dividends, and return cash to our stockholders from time to time
through share repurchases and special dividends. Our investment-grade credit ratings (A1 by Moody’s and A- by Standard & Poor’s) provide us with financial flexibility when accessing global credit markets and allow us to reserve adequate debt capacity for investment opportunities and unforeseen events.
To ensure uninterrupted business operations during the ongoing COVID-19 crisis, and to preserve adequate liquidity during these uncertain times, we have (a) managed our operating expenses closely and limited discretionary spending, (b) re-prioritized capital projects where prudent, and (c) actively managed our working capital. To support our business partners, we have extended additional credit to some of our customers who were most directly affected by the crisis. We continue to monitor closely the impact of the pandemic on our customers’ solvency and our ability to collect from them.
Cash
and cash equivalents were $675 million at April 30, 2020, and $1,106 million at January 31, 2021. As of January 31, 2021, approximately 50% of our cash and cash equivalents were held by our foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. We continue to evaluate our future cash deployment and, should we decide to repatriate additional cash held by other foreign subsidiaries, we may be required to provide for and pay additional taxes.
34
We
have an $800 million commercial paper program that we regularly use to fund our short-term operational needs. In order to create a liquidity buffer, we have borrowed in excess of our immediate needs, and for longer maturities than usual. For outstanding commercial paper balances, interest rates, and days to maturity at April 30, 2020, and January 31, 2021, please see Note 6 to the Condensed Consolidated Financial Statements. The average balances, interest rates and original maturities during the periods ended January 31, 2020 and 2021, are presented below.
Three
Months Average
Nine Months Average
January 31,
January 31,
(Dollars in millions)
2020
2021
2020
2021
Average
commercial paper
$164
$308
$270
$342
Average interest rate
1.84%
0.32%
2.31%
0.53%
Average
days to maturity at issuance
31
147
33
127
Our commercial paper program is supported by available commitments under our undrawn $800 million bank credit facility that expires in November 2023. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fund its commitments under our
credit facility. To manage this counterparty credit risk, we partner with banks that have investment grade credit ratings, limit the amount of exposure we have with each bank, and monitor the financial conditions of each bank.
While we expect to meet our short-term liquidity needs largely through cash generated from operations and borrowings under our commercial paper program, a sustained market deterioration resulting in declines in net sales and profit could require us to evaluate alternative sources of liquidity. Should we have additional liquidity needs, we believe that we could access long-term financing in the debt capital markets.
We believe our current liquidity position, supplemented by our ability to generate positive cash flows from operations in the future, and our ample debt capacity enabled by our strong short-term and long-term credit ratings, will be sufficient to
meet all of our future financial commitments.
On January 27, 2021, our Board of Directors declared a regular quarterly cash dividend of $0.1795 per share on our Class A and Class B common stock. Stockholders of record on March 8, 2021, will receive the dividend on April 1, 2021.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
We face market risks arising from changes in foreign currency exchange rates, commodity prices, and interest rates. Foreign currency fluctuations affect our net investments in foreign subsidiaries
and foreign currency-denominated cash flows. Commodity price changes can affect our production and supply chain costs. Interest rate changes affect (a) the fair value of our fixed-rate debt, and (b) cash flows and earnings related to our variable-rate debt and interest-bearing investments. We manage market risks through procurement strategies as well as the use of derivative and other financial instruments. Our risk management program is governed by policies that authorize and control the nature and scope of transactions that we use to mitigate market risks. Since April 30, 2020, there have been no material changes to the market risks faced by us or to our risk management program.
Item 4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) (our principal executive and principal financial officers), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)), as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures: (a) are effective to ensure that information required to be disclosed by the Company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (b) include controls and procedures designed to ensure that information required to
be disclosed by the Company in such reports is accumulated and communicated to the Company’s management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
35
PART
II - OTHER INFORMATION
Item 1. Legal Proceedings
We operate in a litigious environment and we are sued in the normal course of business. We do not anticipate that any pending legal proceedings will have, individually or in the aggregate, a material adverse effect on our financial position, results of operations, or liquidity.
Item 1A. Risk Factors
In addition to the other information set forth in this report, you should carefully consider the risks and uncertainties discussed in Part I, Item 1A. Risk Factors
in our 2020 Form 10-K and Part II, Item 1A. Risk Factors in our First Quarter 2021 Form 10-Q, which could materially adversely affect our business, financial condition, or future results. There have been no material changes to the risk factors disclosed in our 2020 Form 10-K and our First Quarter 2021 Form 10-Q.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item
4. Mine Safety Disclosures
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits
The following documents are filed with this report:
The
following materials from Brown-Forman Corporation's Quarterly Report on Form 10-Q for the quarter ended January 31, 2021, in Inline XBRL (eXtensible Business Reporting Language) format: (a) Condensed Consolidated Statements of Operations, (b) Condensed Consolidated Statements of Comprehensive Income, (c) Condensed Consolidated Balance Sheets, (d) Condensed Consolidated Statements of Cash Flows, and (e) Notes to the Condensed Consolidated Financial Statements.
104
Cover Page Interactive Data File in Inline XBRL format (included in Exhibit 101).
36
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
