United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)



☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR ~~15 (d)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~October~~July 31, ~~2019~~2020



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File No. 001-00123

Brown-Forman Corporation

(Exact name of Registrant as specified in its Charter)



Delaware		61-0143150
(State or other jurisdiction of		(IRS Employer
incorporation or organization)		Identification No.)

850 Dixie Highway
Louisville,	Kentucky	40210
(Address of principal executive offices)		(Zip Code)

(502) 585-1100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock (voting), $0.15 par value	BFA	New York Stock Exchange
Class B Common Stock (nonvoting), $0.15 par value	BFB	New York Stock Exchange
1.200% Notes due 2026	BF26	New York Stock Exchange
2.600% Notes due 2028	BF28	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☑

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: ~~November 30, 2019~~August 31, 2020



Class A Common Stock (voting), $0.15 par value	~~169,038,689~~169,091,412
Class B Common Stock (nonvoting), $0.15 par value	~~308,807,242~~309,360,023



BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q

		Page
PART I - FINANCIAL INFORMATION		3

Item 1.	Financial Statements (Unaudited)	3

Item 2.	~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations	2116

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3629

Item 4.	Controls and Procedures	3629

PART II - OTHER INFORMATION		3730

Item 1.	Legal Proceedings	3730

Item 1A.	Risk Factors	3730

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3731

Item 3.	Defaults Upon Senior Securities	3731

Item 4.	Mine Safety Disclosures	3731

Item 5.	Other Information	3731

Item 6.	Exhibits	3831

SIGNATURES		3932

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in millions, except per share amounts)


	Three Months Ended						Six Months Ended						Three Months Ended
	October 31,						October 31,						July 31,
	2018			2019			2018			2019			2019			2020
Sales	$	1,161		$	1,248		$	2,148		$	2,226		$	978		$	987
Excise taxes	251			259			472			471			212			234
Net sales	910			989			1,676			1,755			766			753
Cost of sales	320			370			563			638			268			288
Gross profit	590			619			1,113			1,117			498			465
Advertising expenses	102			112			200			204			92			62
Selling, general, and administrative expenses	161			158			329			322			164			148
Gain on sale of business													0			(127		)
Other expense (income), net	(5		)	(3		)	(12		)	(9		)	(6		)	(5		)
Operating income	332			352			596			600			248			387
Non-operating postretirement expense	2			1			4			2			1			1
Interest income	(2		)	(1		)	(4		)	(3		)	(2		)	0
Interest expense	22			21			44			42			21			20
Income before income taxes	310			331			552			559			228			366
Income taxes	61			49			103			91			42			42
Net income	$	249		$	282		$	449		$	468		$	186		$	324
Earnings per share:
Basic	$	0.52		$	0.59		$	0.93		$	0.98		$	0.39		$	0.68
Diluted	$	0.52		$	0.59		$	0.93		$	0.97		$	0.39		$	0.67

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in millions)


	Three Months Ended						Six Months Ended						Three Months Ended
	October 31,						October 31,						July 31,
	2018			2019			2018			2019			2019			2020
Net income	$	249		$	282		$	449		$	468		$	186		$	324
Other comprehensive income (loss), net of tax:
Currency translation adjustments	(27		)	11			(39		)	(3		)	(13		)	62
Cash flow hedge adjustments	22			(7		)	45			2			9			(45		)
Postretirement benefits adjustments	4			3			7			7			3			7
Net other comprehensive income (loss)	(1		)	7			13			6			(1		)	24
Comprehensive income	$	248		$	289		$	462		$	474		$	185		$	348

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions)


	April 30, 2019			October 31, 2019			April 30, 2020			July 31, 2020
Assets
Cash and cash equivalents	$	307		$	235		$	675		$	908
Accounts receivable, less allowance for doubtful accounts of $7 at April 30 and October 31	609			823
Accounts receivable, less allowance for doubtful accounts of $11 and $12 at April 30 and July 31, respectively							570			721
Inventories:
Barreled whiskey	1,004			1,026			1,092			1,074
Finished goods	279			348			320			352
Work in process	152			177			172			189
Raw materials and supplies	85			103			101			126
Total inventories	1,520			1,654			1,685			1,741
Other current assets	283			327			335			276
Total current assets	2,719			3,039			3,265			3,646
Property, plant and equipment, net	816			828			848			834
Goodwill	753			762			756			760
Other intangible assets	645			655			635			657
Deferred tax assets	16			16			15			58
Other assets	190			253			247			236
Total assets	$	5,139		$	5,553		$	5,766		$	6,191
Liabilities
Accounts payable and accrued expenses	$	544		$	592		$	517		$	545
Dividends payable							0			84
Accrued income taxes	9			23			30			73
Short-term borrowings	150			156			333			389
Total current liabilities	703			771			880			1,091
Long-term debt	2,290			2,288			2,269			2,316
Deferred tax liabilities	145			162			177			156
Accrued pension and other postretirement benefits	197			198			297			297
Other liabilities	157			192			168			181
Total liabilities	3,492			3,611			3,791			4,041
Commitments and contingencies
Stockholders’ Equity
Common stock:
Class A, voting, $0.15 par value (170,000,000 shares authorized; 170,000,000 shares issued)	25			25			25			25
Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 314,532,000 shares issued)	47			47			47			47
Retained earnings	2,238			2,544			2,708			2,849
Accumulated other comprehensive income (loss), net of tax	(363		)	(400		)	(547		)	(523		)
Treasury stock, at cost (7,360,000 and 6,714,000 shares at April 30 and October 31, respectively)	(300		)	(274		)
Treasury stock, at cost (6,323,000 and 6,089,000 shares at April 30 and July 31, respectively)							(258		)	(248		)
Total stockholders’ equity	1,647			1,942			1,975			2,150
Total liabilities and stockholders’ equity	$	5,139		$	5,553		$	5,766		$	6,191

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in millions)


	Six Months Ended						Three Months Ended
	October 31,						July 31,
	2018			2019			2019			2020
Cash flows from operating activities:
Net income	$	449		$	468		$	186		$	324
Adjustments to reconcile net income to net cash provided by operations:
Gain on sale of business							0			(127		)
Depreciation and amortization	36			36			18			19
Stock-based compensation expense	9			6			3			3
Deferred income tax provision	4			9			(9		)	(43		)
U.S Tax Act repatriation tax benefit	(4		)	—
Other, net	10			—			1			(9		)
Changes in assets and liabilities, excluding the effects of acquisition of business:
Changes in assets and liabilities, net of business acquisitions and dispositions:
Accounts receivable	(142		)	(216		)	(20		)	(133		)
Inventories	(124		)	(133		)	(100		)	(57		)
Other current assets	5			(38		)	(4		)	31
Accounts payable and accrued expenses	42			30			(34		)	26
Accrued income taxes	(8		)	14			35			45
Other operating assets and liabilities	(5		)	11			(4		)	12
Cash provided by operating activities	272			187			72			91
Cash flows from investing activities:
Proceeds from sale of business							0			177
Acquisition of business, net of cash acquired	—			(22		)	(22		)	0
Additions to property, plant, and equipment	(53		)	(48		)	(21		)	(15		)
Payments for corporate-owned life insurance	(2		)	—
Computer software expenditures	(2		)	(5		)
Cash used for investing activities	(57		)	(75		)
Cash provided by (used for) investing activities							(43		)	162
Cash flows from financing activities:
Net change in short-term borrowings	42			2
Proceeds from short-term borrowings, maturities greater than 90 days							0			159
Repayments of short-term borrowings, maturities greater than 90 days							0			(70		)
Net change in short-term borrowings, maturities of 90 days or less							67			(34		)
Payments of withholding taxes related to stock-based awards	(5		)	(26		)	(13		)	(9		)
Acquisition of treasury stock	(128		)	(1		)	(1		)	0
Dividends paid	(152		)	(158		)	(79		)	(83		)
Cash used for financing activities	(243		)	(183		)	(26		)	(37		)
Effect of exchange rate changes on cash and cash equivalents	(18		)	(1		)	(3		)	17
Net decrease in cash and cash equivalents	(46		)	(72		)
Net increase in cash and cash equivalents							0			233
Cash and cash equivalents, beginning of period	239			307			307			675
Cash and cash equivalents, end of period	$	193		$	235		$	307		$	908

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In these notes, “we,” “us,” “our,” “Brown-Forman,” and the “Company” refer to Brown-Forman Corporation and its consolidated subsidiaries, collectively.

1. Condensed Consolidated Financial Statements

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

We suggest that you read these condensed financial statements together with the financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended April 30, ~~2019 (2019~~2020, as amended (2020 Form 10-K). ~~Except for adopting the new accounting standards discussed below, we~~We prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our ~~2019~~2020 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				Three Months Ended
	October 31,				October 31,				July 31,
(Dollars in millions, except per share amounts)	2018		2019		2018		2019		2019		2020
Net income available to common stockholders	$	249	$	282	$	449	$	468	$	186	$	324

Share data (in thousands):
Basic average common shares outstanding	480,436		477,680		480,647		477,522		477,369		478,327
Dilutive effect of stock-based awards	3,155		2,801		3,316		2,760		2,719		2,102
Diluted average common shares outstanding	483,591		480,481		483,963		480,282		480,088		480,429

Basic earnings per share	$	0.52	$	0.59	$	0.93	$	0.98	$	0.39	$	0.68
Diluted earnings per share	$	0.52	$	0.59	$	0.93	$	0.97	$	0.39	$	0.67

We excluded common stock-based awards for approximately ~~595,000~~362,000 shares and ~~522,000~~34,000 shares from the calculation of diluted earnings per share for the three months ended ~~October~~July 31, ~~2018~~2019 and ~~2019,~~2020, 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.~~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 ~~$303~~$311 million higher than reported as of April 30, ~~2019,~~2020, and ~~$309~~$321 million higher than reported as of ~~October~~July 31, ~~2019.~~2020. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.

4. Goodwill and Other Intangible Assets

The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the ~~six~~three months ended ~~October~~July 31, ~~2019:~~2020:

(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



(Dollars in millions)	Goodwill			Other Intangible Assets
Balance at April 30, 2020	$	756		$	635
Sale of business (Note 14)	(4		)	(1		)
Foreign currency translation adjustment	8			23
Balance at July 31, 2020	$	760		$	657

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~~July 31, ~~2019.~~2020.

We have guaranteed the repayment by a third-party importer of its obligation under a bank credit facility that it uses in connection with its importation of our products in Russia. If the importer were to default on that obligation, which we believe is unlikely, our maximum possible exposure under the existing terms of the guaranty would be approximately ~~$10~~$9 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant.

As of ~~October~~July 31, ~~2019,~~2020, our actual exposure under the guaranty of the importer’s obligation was approximately $8$3 million. We also have accounts receivable from that importer of approximately ~~$17~~$6 million at ~~October~~July 31, ~~2019,~~2020, which we expect to collect in full.

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

On May 30, 2019, we notified Bacardi Martini Ltd. (“Bacardi”) of our intention not to renew the terms of our United Kingdom (U.K.) Cost Sharing Agreement (the “Agreement”) whereby Bacardi provided certain services (e.g., warehousing and logistics, sales, reporting, treasury, tax, and other services) and Brown-Forman and Bacardi split the associated overhead for those services. For purposes of conducting business, Brown-Forman and Bacardi established a U.K. trade name, “Bacardi Brown-Forman Brands,” through which our products and Bacardi’s products were sold in the U.K. On a monthly basis, Bacardi would remit to us the revenues from sales of our products, net of our agreed contributions for overhead costs under the Agreement. On April 30, 2020, the Agreement expired according to its terms.

Following delivery of our notice and upon expiration of the Agreement, Bacardi alleged that it was entitled to approximately £49 million under the principle of commercial agency in the U.K., as well as additional compensation for the winding up of business conducted under the Agreement and for remitting the associated funds owed to us. From monthly settlements following the expiration of the Agreement, Bacardi withheld over £50 million owed to us, effectively bypassing the dispute resolution process under the Agreement.

In response to Bacardi’s actions, we initiated a lawsuit on August 20, 2020, in the Commercial Court in the U.K. seeking reimbursement of the amounts wrongfully withheld. Shortly thereafter, Bacardi filed a demand for arbitration seeking a determination that it was entitled to compensation as a commercial agent and for additional compensation for the work completed following the expiration of the Agreement.

Since it was raised, we have disputed Bacardi’s claim of commercial agency compensation and issued demands that Bacardi adhere to the dispute resolution process mandated by the Agreement and return the in excess of £50 million that Bacardi has wrongfully withheld from us. Given the early stages of the litigation and arbitration process, we are unable to estimate the range of reasonably possible loss, if any.

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		April 30, 2020		July 31, 2020
2.25% senior notes, $250 principal amount, due January 15, 2023	$	249	$	249	$	249	$	249
3.50% senior notes, $300 principal amount, due April 15, 2025	297		297		297		297
1.20% senior notes, €300 principal amount, due July 7, 2026	333		331		324		352
2.60% senior notes, £300 principal amount, due July 7, 2028	383		382		369		388
4.00% senior notes, $300 principal amount, due April 15, 2038	293		294		294		294
3.75% senior notes, $250 principal amount, due January 15, 2043	248		248		248		248
4.50% senior notes, $500 principal amount, due July 15, 2045	487		487		488		488
	$	2,290	$	2,288	$	2,269	$	2,316

Our short-term borrowings ~~consist of:~~of $333 million as of April 30, 2020, and $389 million as of July 31, 2020, consisted primarily of borrowings under our commercial paper program.


(Dollars in millions)	April 30, 2019	October 31, 2019	April 30, 2020	July 31, 2020
Commercial paper	$150	$156	$333	$377
Average interest rate	2.60%	1.99%	1.29%	0.54%
Average remaining days to maturity	18	28	73	66

7. Stockholders’ Equity

The following table shows the changes in stockholders’ equity by quarter during the ~~six~~three months ended ~~October~~July 31, ~~2018:~~2019:


(Dollars in millions)	Class A Common Stock		Class B Common Stock		Additional Paid-in Capital			Retained Earnings			AOCI			Treasury Stock			Total			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		)
Balance at April 30, 2019																				$	25	$	47	$	0		$	2,238		$	(363	)	$	(300	)	$	1,647
Adoption of ASU 2018-02																											43			(43		)				—
Net income								200									200										186									186
Net other comprehensive income (loss)											14						14													(1		)				(1		)
Declaration of cash dividends								(152		)							(152		)								(158		)							(158		)
Acquisition of treasury stock														(6		)	(6		)														(1		)	(1		)
Stock-based compensation expense					5												5							3												3
Stock issued under compensation plans														9			9																16			16
Loss on issuance of treasury stock issued under compensation plans					(7		)	(6		)							(13		)					(2		)	(27		)							(29		)
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
Balance at July 31, 2019																				$	25	$	47	$	1		$	2,282		$	(407	)	$	(285	)	$	1,663

The following table shows the changes in stockholders’ equity by quarter during the ~~six~~three months ended ~~October~~July 31, ~~2019:~~2020:


(Dollars in millions)	Class A Common Stock		Class B Common Stock		Additional Paid-in Capital			Retained Earnings			AOCI			Treasury Stock			Total			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		)				—
Balance at April 30, 2020																				$	25	$	47	$	0		$	2,708		$	(547	)	$	(258	)	$	1,975
Net income								186									186										324									324
Net other comprehensive income (loss)											(1		)				(1		)											24						24
Declaration of cash dividends								(158		)							(158		)								(167		)							(167		)
Acquisition of treasury stock														(1		)	(1		)
Stock-based compensation expense					3												3							3												3
Stock issued under compensation plans														16			16																10			10
Loss on issuance of treasury stock issued under compensation plans					(2		)	(27		)							(29		)					(3		)	(16		)							(19		)
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
Balance at July 31, 2020																				$	25	$	47	$	0		$	2,849		$	(523	)	$	(248	)	$	2,150

The following table shows the change in each component of ~~AOCI,~~accumulated other comprehensive income (AOCI), net of tax, during the ~~six~~three months ended ~~October~~July 31, ~~2019:~~2020:

(Dollars in millions)
Currency Translation Adjustments

Cash Flow Hedge Adjustments

Postretirement Benefits Adjustments
Total AOCI
Balance at April 30, 2019 $ (207 ) $ 31
$ (187 ) $ (363 )
Adoption of ASU 2018-02 (Note 1) (1 ) (1 ) (41 ) (43 )
Net other comprehensive income (loss) (3 ) 2
7
6
Balance at October 31, 2019 $ (211 ) $ 32
$ (221 ) $ (400 )



(Dollars in millions)	Currency Translation Adjustments			Cash Flow Hedge Adjustments			Postretirement Benefits Adjustments			Total AOCI
Balance at April 30, 2020	$	(302	)	$	60		$	(305	)	$	(547	)
Net other comprehensive income (loss)	62			(45		)	7			24
Balance at July 31, 2020	$	(240	)	$	15		$	(298	)	$	(523	)

The following table shows the cash dividends declared per share on our Class A and Class B common stock during the ~~six~~three months ended ~~October~~July 31, ~~2019:~~2020:



Declaration Date	Record Date	Payable Date	Amount per Share
May ~~23, 2019~~21, 2020	June ~~6, 2019~~8, 2020	July 1, ~~2019~~2020	$~~0.166~~0.1743
July ~~25, 2019~~23, 2020	September ~~6, 2019~~4, 2020	October 1, ~~2019~~2020	$~~0.166~~0.1743

~~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				Three Months Ended
	October 31,				October 31,				July 31,
(Dollars in millions)	2018		2019		2018		2019		2019		2020
United States	$	444	$	506	$	798	$	880	$	374	$	387
Developed International¹	234		248		449		453		205		231
Emerging²	164		173		295		306		133		107
Travel Retail³	38		38		76		70		32		13
Non-branded and bulk⁴	30		24		58		46		22		15
Total	$	910	$	989	$	1,676	$	1,755	$	766	$	753

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, ~~Germany, France,~~ and ~~Japan.~~France.

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.~~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				Six Months Ended				Three Months Ended
	October 31,				October 31,				July 31,
(Dollars in millions)	2018		2019		2018		2019		2019		2020
Whiskey¹	$	703	$	785	$	1,300	$	1,385	$	600	$	595
Tequila²	70		77		132		145		68		68
Vodka³	34		31		62		57
Wine⁴	62		58		102		97
Wine³									39		41
Vodka⁴									26		19
Rest of portfolio	11		14		22		25		11		15
Non-branded and bulk⁵	30		24		58		46		22		15
Total	$	910	$	989	$	1,676	$	1,755	$	766	$	753

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 ~~Canadian Mist,~~family of brands, GlenDronach, BenRiach, Glenglassaugh, the Old Forester ~~Early Times,~~family of brands, Slane Irish Whiskey, and Coopers’ Craft. Also includes the Early Times, Canadian Mist, and Collingwood brands, which we divested on July 31, 2020 (Note 14).

²Includes el Jimador, the Herradura family of brands, New Mix, Pepe Lopez, and Antiguo.

³Includes ~~Finlandia.~~Korbel Champagnes and Sonoma-Cutrer wines.

⁴Includes ~~Korbel Champagne and Sonoma-Cutrer wines.~~Finlandia.

⁵Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

9. Pension and Other Postretirement Benefits

The following table shows the components of the net cost of pension and other postretirement benefits recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.


	Three Months Ended						Six Months Ended						Three Months Ended
	October 31,						October 31,						July 31,
(Dollars in millions)	2018			2019			2018			2019			2019			2020
Pension Benefits:
Service cost	$	6		$	6		$	12		$	12		$	6		$	7
Interest cost	9			8			17			15			8			6
Expected return on plan assets	(12		)	(12		)	(24		)	(23		)	(12		)	(12		)
Amortization of:
Prior service cost (credit)	—			—			1			1
Net actuarial loss	5			5			10			9
Amortization of net actuarial loss													5			7
Net cost	$	8		$	7		$	16		$	14		$	7		$	8

Other Postretirement Benefits:
Interest cost	$	1		$	1		$	1		$	1		$	1		$	1
Amortization of prior service cost (credit)	(1		)	(1		)	(1		)	(1		)	(1		)	(1		)
Net cost	$	—		$	—		$	—		$	—		$	0		$	0

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%~~11.6% for the ~~six~~three months ended ~~October~~July 31, ~~2019, is~~2020, was lower than the expected tax rate of ~~20.4%~~21.0% on ordinary income for the full fiscal year primarily due to a deferred tax benefit related to an intercompany transfer of assets and excess tax benefits related to stock-based ~~compensation and~~compensation. The effective tax rate of 11.6% for the ~~impact~~three months ended July 31, 2020, was lower than the effective tax rate of ~~other discrete items.~~18.2% for the three months ended July 31, 2019, primarily due to a deferred tax benefit related to an intercompany transfer of assets. Our expected tax ~~rate includes~~rates include 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,~~2020, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for select foreign subsidiaries (but not for their other outside basis differences). Although these earnings are no longer indefinitely reinvested and may now be distributed within our foreign entity structure, they remain indefinitely reinvested outside the United States. No deferred taxes have been recorded as no withholding taxes would be due on their distribution. No further changes have been made to our indefinite reinvestment assertion.

11. Derivative Financial Instruments and Hedging Activities

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

We use currency derivative contracts to limit our exposure to the foreign currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges in AOCI until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings.

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

We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts for all hedged currencies totaling ~~$1,241~~$1,026 million at April 30, ~~2019~~2020 and ~~$1,257~~$986 million at ~~October~~July 31, ~~2019.~~2020. As of July 31, 2020, the maximum term of our outstanding derivative contracts was 36 months.

We also use foreign currency-denominated debt to help manage our foreign currency exchange risk. As of ~~October~~July 31, ~~2019, $621~~2020, $646 million of our foreign currency-denominated debt instruments were designated as net investment hedges. These net investment hedges are intended to mitigate foreign currency exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries. Any change in value of the designated portion of the hedging instruments is recorded in AOCI, offsetting the foreign currency translation adjustment of the related net investments that is also recorded in AOCI.

At inception, we expect each financial instrument designated as a hedge to be highly effective in offsetting the financial exposure it is designed to mitigate. We also assess the effectiveness on an ongoing basis. If determined to no longer be highly effective, designation and accounting for the instrument as a hedge would be discontinued.

We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to ~~physically~~ 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.

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							Three Months Ended
		October 31,							July 31,
(Dollars in millions)	Classification	2018			2019			Classification	2019		2020
Currency derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI	n/a	$	57		$	13		n/a	$	15	$	(49	)
Net gain (loss) reclassified from AOCI into earnings	Sales	(2		)	10			Sales	4		11
Currency derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings	Sales	$	6		$	(1	)	Sales	$	0	$	(6	)
Net gain (loss) recognized in earnings	Other income (expense), net	(1		)	2			Other income (expense), net	1		8
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI	n/a	$	47		$	3		n/a	$	23	$	(39	)

Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:	Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:							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			$	978	$	987
Other income (expense), net		12			9				6		5

We expect to reclassify ~~$20~~$14 million of deferred net gains on cash flow hedges recorded in AOCI as of ~~October~~July 31, ~~2019,~~2020, to earnings during the next 12 months. This reclassification would offset the anticipated earnings impact of the underlying hedged exposures. The actual amounts that we ultimately reclassify to earnings will depend on the exchange rates in effect when the underlying hedged transactions occur. ~~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						April 30, 2020					July 31, 2020
(Dollars in millions)	Classification	Derivative Assets		Derivative Liabilities			Derivative Assets		Derivative Liabilities			Classification	Derivative Assets		Derivative Liabilities			Derivative Assets		Derivative Liabilities
Designated as cash flow hedges:
Currency derivatives	Other current assets	$	21	$	(2	)	$	28	$	(2	)	Other current assets	$	49	$	(1	)	$	19	$	(2	)
Currency derivatives	Other assets	22		(1		)	22		(2		)	Other assets	30		0			4		(1		)
Currency derivatives	Accrued expenses	—		(5		)	—		(6		)	Accrued expenses	0		0			2		(3		)
Currency derivatives	Other liabilities	—		(1		)	—		(2		)	Other liabilities	0		0			3		(8		)
Not designated as hedges:
Currency derivatives	Other current assets	—		—			1		—			Other current assets	0		0			4		0
Currency derivatives												Other assets	0		0			0		0
Currency derivatives												Accrued expenses	0		(2		)	0		0
Currency derivatives												Other liabilities	0		0			0		0

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$2 million at April 30, ~~2019,~~2020, and $7$5 million at ~~October~~July 31, ~~2019~~2020.

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			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
April 30, 2020
Derivative assets	$	43		$	(3	)	$	40		$	—		$	40		$	79		$	(1	)	$	78		$	0		$	78
Derivative liabilities	(9		)	3			(6		)	—			(6		)	(3		)	1			(2		)	0			(2		)
October 31, 2019
July 31, 2020
Derivative assets	51			(4		)	47			(1		)	46			32			(8		)	24			(1		)	23
Derivative liabilities	(12		)	4			(8		)	1			(7		)	(14		)	8			(6		)	1			(5		)

No cash collateral was received or pledged related to our derivative contracts as of April 30, ~~2019,~~2020, or ~~October~~July 31, ~~2019~~2020.

12. Fair Value Measurements

The following table summarizes the assets and liabilities measured or disclosed at fair value on a recurring basis:


	April 30, 2019				October 31, 2019				April 30, 2020				July 31, 2020
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in millions)	Amount		Value		Amount		Value		Amount		Value		Amount		Value
Assets
Cash and cash equivalents	$	307	$	307	$	235	$	235	$	675	$	675	$	908	$	908
Currency derivatives	40		40		47		47		78		78		24		24
Liabilities
Currency derivatives	6		6		8		8		2		2		6		6
Short-term borrowings	150		150		156		156		333		333		389		389
Long-term debt	2,290		2,399		2,288		2,561		2,269		2,486		2,316		2,757

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~~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.

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

¹~~Consists primarily of operating lease cost. Other components of lease cost were not material.~~

²~~Classified 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									Three Months Ended									Three Months Ended
	October 31, 2018									October 31, 2019									July 31, 2019									July 31, 2020
(Dollars in millions)	Pre-Tax			Tax			Net			Pre-Tax			Tax			Net			Pre-Tax			Tax			Net			Pre-Tax			Tax			Net
Currency translation adjustments:
Net gain (loss) on currency translation	$	(23	)	$	(4	)	$	(27	)	$	6		$	5		$	11		$	(8	)	$	(5	)	$	(13	)	$	53		$	9		$	62
Reclassification to earnings	—			—			—			—			—			—			0			0			0			0			0			0
Other comprehensive income (loss), net	(23		)	(4		)	(27		)	6			5			11			(8		)	(5		)	(13		)	53			9			62
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments	30			(8		)	22			(2		)	—			(2		)	15			(3		)	12			(49		)	12			(37		)
Reclassification to earnings¹	—			—			—			(6		)	1			(5		)	(4		)	1			(3		)	(11		)	3			(8		)
Other comprehensive income (loss), net	30			(8		)	22			(8		)	1			(7		)	11			(2		)	9			(60		)	15			(45		)
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost	—			—			—			—			—			—			0			0			0			0			0			0
Reclassification to earnings²	5			(1		)	4			4			(1		)	3			4			(1		)	3			10			(3		)	7
Other comprehensive income (loss), net	5			(1		)	4			4			(1		)	3			4			(1		)	3			10			(3		)	7

Total other comprehensive income (loss), net	$	12		$	(13	)	$	(1	)	$	2		$	5		$	7		$	7		$	(8	)	$	(1	)	$	3		$	21		$	24


	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.

²~~Pre-tax~~For three months ended July 31, 2019, the pre-tax amount of $4 is classified as non-operating postretirement expense in the accompanying condensed consolidated statements of operations. For three months ended July 31, 2020, $6 of the pre-tax amount is classified as non-operating postretirement expense; $4 of the pretax amount is classified in gain on sale of business.

~~15.~~14. ~~Acquisition~~Gain on Sale of Business

On July ~~3, 2019,~~31, 2020, we ~~acquired 100%~~sold the Early Times, Canadian Mist, and Collingwood brands for $177 million in cash (subject to a post-closing inventory adjustment). The sale reflects the continued evolution of our portfolio strategy to focus on premium spirits brands. The total book value of the ~~voting interests~~related business assets included in ~~The 86 Company, which owns Fords Gin, for $22~~the sale was $50 million, ~~in cash. The purchase price has been preliminarily allocated~~consisting largely toof inventories, the ~~intangible~~Canadian Mist production 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 salesintellectual property. As a result of the ~~Fords Gin brand and to~~sale, we recognized a pre-tax gain of $127 million during the ~~knowledge and expertise~~first quarter 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.

fiscal 2021.

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 ~~2019~~2020 Form ~~10-K.~~10-K, as amended (2020 Form 10-K). Note that the results of operations for the ~~six~~three months ended ~~October~~July 31, ~~2019~~2020, do not necessarily indicate what our operating results for the full fiscal year will be. In this Item, “we,” “us,” “our,” “Brown-Forman,” and the “Company” refer to Brown-Forman Corporation and its consolidated subsidiaries, collectively.

Presentation Basis

Non-GAAP Financial Measures

We use certain financial measures in this report that are not measures of financial performance under U.S. generally accepted accounting principles (GAAP). These non-GAAP measures, defined below, should be viewed as supplements to (not substitutes for) our results of operations and other measures reported under GAAP. Other companies may not define or calculate these non-GAAP measures in the same way.

“Underlying change” in measures of statements of operations. We present changes in certain measures, or line items, of the statements of operations that are adjusted to an “underlying” basis. We use “underlying change” for the following measures of the statements of operations: (a) underlying net sales; (b) underlying cost of sales; (c) underlying gross profit; (d) underlying advertising expenses; (e) underlying selling, general, and administrative (SG&A) expenses; (f) underlying other expense (income) net; (g) underlying operating expenses¹; and (h) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) acquisitions and divestitures, (b) foreign exchange, and (c) estimated net change in distributor inventories. We explain these adjustments below.

•

“Acquisitions and divestitures.” This adjustment removes (a) any non-recurring effects related to our acquisitions and divestitures (e.g., transaction costs and integration costs), and (b) the effects of operating activity related to acquired and divested brands for periods not comparable year over year (non-comparable periods). By excluding non-comparable periods, we therefore include the effects of acquired and divested brands only to the extent that results are comparable year over year.

~~On July 3, 2019,~~In fiscal 2020, we acquired 100% of the voting interests in The 86 Company, which owns Fords ~~Gin,~~Gin. During the first quarter of fiscal 2021, we sold our Early Times, Canadian Mist, and Collingwood brands and related assets, which resulted in a one-time pre-tax gain of $127 million. See Note 14 to the Condensed Consolidated Financial Statements for ~~$22 million in cash.~~details. This adjustment removes (a) transaction and integration costs related to the acquisition and divestiture, (b) operating activity for ~~the acquired business~~The 86 Company for the non-comparable period, which is activity in the first quarter of fiscal ~~2020 activity for The 86 Company.~~2021, and (c) the gain on sale of Early Times, Canadian Mist, and Collingwood. We believe that these adjustments allow for us to better understand our underlying results on a comparable basis.

•

“Foreign exchange.” We calculate the percentage change in certain line items of the statements of operations in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current-year results at prior-year rates and remove transactional and hedging foreign exchange gains and losses from current- and prior-year periods.

•

“Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor inventories on changes in certain line items of the statements of operations. For each period compared, we use volume information from our distributors to estimate the effect of distributor inventory changes in certain line items of the statements of operations. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in certain line items of the statements of operations and allows us to understand better our underlying results and trends.

We use the non-GAAP measures “underlying change” to: (a) understand our performance from period to period on a consistent basis; (b) compare our performance to that of our competitors; (c) calculate components of management incentive compensation; (d) plan and forecast; and (e) communicate our financial performance to the board of directors, stockholders, and the investment ~~analysts.~~community. We provide reconciliations of the “underlying change” in certain line items of the statements of operations to their nearest GAAP measures in the tables under “Results of Operations - Year-Over-Year Period Comparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

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

Definitions

Aggregations.

From time to time, to explain our results of operations or to highlight trends and uncertainties affecting our business, we aggregate markets according to stage of economic development as defined by the International Monetary Fund (IMF), and we aggregate brands by ~~spirits~~product category. ~~Below, we~~We define ~~the~~our geographic and brand aggregations ~~used in this report.~~below.

Geographic Aggregations.

In “Results of Operations - Fiscal ~~2020~~2021 Year-to-Date Highlights,” we provide supplemental information for our largest markets ranked by percentage of total fiscal ~~2019~~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, ~~Germany, France,~~ and ~~Japan.~~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, ~~Russia,~~ and ~~Brazil.~~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 ~~2020~~2021 Year-to-Date Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal ~~2019~~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 ~~Canadian Mist,~~family of brands (Woodford Reserve), GlenDronach, BenRiach, Glenglassaugh, the Old Forester ~~Early Times,~~family of brands (Old Forester), Slane Irish Whiskey, and Coopers’ Craft. Also includes the Early Times, Canadian Mist, and Collingwood brands, which we divested on July 31, 2020. See Note 14 to the Condensed Consolidated Financial Statements for details.


•	“American whiskey” includes the Jack Daniel’s family of brands, premium bourbons (defined below), super-premium American whiskey (defined below), and Early Times.

•

“Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and RTP products (JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Tennessee Apple (JDTA), Jack Daniel’s Single Barrel Collection (JDSB), Jack Daniel’s Tennessee Rye Whiskey (JDTR), Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, ~~Jack Daniel’s Bottled-in-Bond,~~ and Jack Daniel’s ~~Tennessee Apple (JDTA).~~Bottled-in-Bond.

•

“Jack Daniel’s RTD and RTP” products include ~~all RTD line extensions of Jack Daniel’s, such as~~ Jack Daniel’s & Cola, Jack Daniel’s Country Cocktails, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s ~~Country Cocktails,~~Double Jack, Gentleman Jack & Cola, Jack Daniel’s ~~Double Jack,~~Lynchburg Lemonade, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s ~~Cider (JD Cider),~~Berry, Jack Daniel’s ~~Lynchburg Lemonade (JD Lynchburg Lemonade),~~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.


•	“~~Vodka”~~Wine” includes ~~Finlandia.~~Korbel Champagnes and Sonoma-Cutrer wines.


•	“~~Wine”~~Vodka” includes ~~Korbel Champagne and Sonoma-Cutrer wines.~~Finlandia.


•	“Non-branded and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling, regardless of customer location.

Other Metrics.

•

“Depletions.” We generally record revenues when we ship our products to our customers. Depletions is a term commonly used in the beverage alcohol industry to describe volume. Depending on the context, depletions means either (a) our shipments directly to retail or wholesale customers for owned distribution markets or (b) shipments from our distributor customers to retailers and wholesalers in other markets. We believe that depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do. In this document, unless otherwise specified, we refer to depletions when discussing volume.

•

“Consumer takeaway.” When discussing trends in the market, we refer to consumer takeaway, a term commonly used in the beverage alcohol industry. Consumer takeaway refers to the purchase of product by consumers from retail outlets, including products purchased through e-premise channels, as measured by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric. We believe consumer takeaway is a leading indicator of how consumer demand is trending.

Important Information on Forward-Looking Statements:

This report contains statements, estimates, and projections that are “forward-looking statements” as defined under U.S. federal securities laws. Words such as “aim,” “anticipate,” “aspire,” “believe,” “can,” “continue,” “could,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “might,” “plan,” “potential,” “project,” “pursue,” “see,” “seek,” “should,” “will,” “would,” and similar words indicate forward-looking statements, which speak only as of the date we make them. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risks, uncertainties, and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, Item 1A. Risk Factors of our ~~2019~~2020 Form 10-K, those described in Part II, Item 1A of this report, and those described from time to time in our future reports filed with the Securities and Exchange Commission, including:

~~Unfavorable global or regional~~

Impact of health epidemics and pandemics, including the COVID-19 pandemic, and the resulting negative economic ~~conditions~~impact and related 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 obligationsgovernmental 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, including anti-corruption laws;~~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, ~~regulations,~~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

~~The impact of U.S. tax reform legislation, including as a result of future clarifications~~Unfavorable global or regional economic conditions, particularly related to the COVID-19 pandemic, and ~~guidance interpreting the statute~~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

~~Route-to-consumer changes that affect the timing~~Significant additional labeling or warning requirements or limitations on availability of our ~~sales, temporarily disrupt the marketing or sale of our~~beverage alcohol products ~~or result in higher fixed costs~~

~~Inventory fluctuations in our products by distributors, wholesalers, or retailers~~

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

~~Inadequate~~Counterfeiting and inadequate protection of our intellectual property rights

Product recalls or other product liability claims, product ~~counterfeiting,~~ tampering, contamination, or quality issues

Significant legal disputes and proceedings, or government investigations

~~Failure~~Cyber breach or ~~breach~~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, ~~personnel,~~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

Overview

~~Tariffs~~COVID-19

~~Tariffs~~COVID-19 negatively affected our results ~~beginning~~ in the ~~second~~fourth quarter of fiscal ~~2019,~~2020 and ~~are expected~~continued to ~~continue to have a negative~~ impact on our ~~results as long as tariffs are in place. Our results for the six months ended October 31, 2019, were negatively affected by tariffs as described below.~~


•	~~Lower net sales. Certain customers paid the incremental costs of tariffs, and we compensated these customers for these incremental costs by reducing our net prices, which lowered our net sales.~~


•	~~Higher cost of sales. In markets where we own inventory, we paid the incremental cost of tariffs, which increased our cost of sales.~~

~~The combined effect of these tariff-related costs, whether arising as a reduction of net sales or as an increase in cost of sales, is hereafter referred to as “tariff-related costs.”~~

~~Our~~ results for the three months ended ~~October~~July 31, ~~2019, were also affected by~~2020. The impact continues to be concentrated in (a) the ~~timing-related~~on-premise as a result of the restrictions in the channel (representing nearly 20% of our business), (b) our Travel Retail channel as a result of travel bans and other restrictions, and (c) our emerging markets. Solid off-premise gains across many of our developed markets, which reflected an increase in at-home consumption and strong growth in the e-premise channel, offset the significant reduction in sales in the on-premise, Travel Retail, and emerging markets. While the financial impact of ~~tariffs that occurred in fiscal 2019. In the first quarter of fiscal 2019,~~COVID-19 on our ~~net sales in a number of European Union countries were higher than normal as many retail~~results is difficult to measure, it has had an impact on our operating income and wholesale customers increased purchases to build inventory ahead of anticipated price increases related to tariffs (hereafter referred to as “prior-year tariff-related buy-ins”). In the second quarter of fiscal 2019, our net sales in a number of European Union countries were lower than normal as most of these retail and wholesale customers reduced purchases to return their inventory to normal levels (hereafter referred to as “second quarter tariff-related inventory reductions”).

business operations. We discuss the ~~estimated~~ effect of ~~the tariffs~~COVID-19 on our results where relevant below.

Despite the ongoing effects resulting from COVID-19 on our results in the first quarter, we believe we remain in a strong financial position, and our capacity to generate solid operating cash flow remains sound, allowing us to navigate this crisis as circumstances evolve. Additionally, we have no current or impending shareholder distributions beyond regular dividends and no maturities of long-term debt until our fiscal 2023. See “Liquidity and Financial Condition” below for details.

Fiscal ~~2020~~2021 Year-to-Date Highlights


•	~~We delivered reported net sales of $1.8 billion, an increase of 5% compared to the same period last year.~~ ~~Excluding an estimated net increase in distributor inventories~~ ~~(primarily driven by the October launch of JDTA in the United States), we grew underlying net sales~~3%.


◦	From a brand perspective, our underlying net sales growth was driven by the Jack Daniel’s family of brands (excluding JDTW); our premium bourbon brands, fueled by Woodford Reserve; and our tequila brands. Declines of JDTW were partially timing related and somewhat offset this growth.


◦	From a geographic perspective, the United States led the underlying net sales growth with emerging and developed international markets also contributing. These gains were partially offset by a decline in the underlying net sales in our Travel Retail channel due in part to the timing of customer orders in the same period last year.

We delivered reported ~~operating income~~net sales of ~~$600~~$753 million, ~~an increase~~a decrease of 1%2% compared to the same period last year. Excluding ~~(a)~~ an estimated net ~~change~~decrease in distributor inventories, we grew underlying net sales 3%. Net sales for our markets and brands were affected by COVID-19 during the first quarter of fiscal 2021. Underlying growth was driven by (a) JD RTDs, (b) the continued launch of JDTA, (c) our tequila brands, and (d) our premium bourbon brands, led by Woodford Reserve. Declines of JDTW due to the adverse affect of COVID-19 partially offset this underlying growth. From a geographic perspective, the United States led the underlying net sales growth with developed international markets also contributing. These gains were partially offset by a decline in the underlying net sales in our Travel Retail channel, our used barrel sales, and emerging markets.

We delivered reported operating income of $387 million, an increase of 56% compared to the same period of last year. Excluding (a) the gain on sale of Early Times, Canadian Mist, and Collingwood, (b) an estimated net decrease in distributor inventories, and ~~(b)~~(c) the positive effect of foreign exchange, underlying operating income ~~declined 5% driven by tariff-related costs and higher input costs.~~grew 15%.

We delivered diluted earnings per share of ~~$0.97,~~$0.67, an increase of 5%73% compared to the same period last year, ~~due~~including an estimated $0.19 per share benefit from the gain on sale of Early Times, Canadian Mist, and Collingwood and an $0.08 per share benefit from a discrete tax item recognized during the quarter related to ~~higher reported operating income and a lower effective tax rate.~~an intercompany transfer of assets.

Summary of Operating Performance
	Three Months Ended October 31,										Six Months Ended October 31,										Three Months Ended July 31,
(Dollars in millions)	2018			2019			Reported Change		Underlying Change¹		2018			2019			Reported Change		Underlying Change¹		2019			2020			Reported Change		Underlying Change¹
Net sales	$	910		$	989		9	%	6	%	$	1,676		$	1,755		5	%	3	%	$	766		$	753		(2	%)	3	%
Cost of sales	320			370			15	%	16	%	563			638			13	%	14	%	268			288			7	%	12	%
Gross profit	590			619			5	%	—	%	1,113			1,117			—	%	(2	%)	498			465			(7	%)	(1	%)
Advertising	102			112			10	%	11	%	200			204			2	%	4	%	92			62			(33	%)	(34	%)
SG&A	161			158			(1	%)	(1	%)	329			322			(2	%)	(1	%)	164			148			(10	%)	(10	%)
Gain on sale of business																					—			(127		)	NA		—	%
Other expense (income), net																					(6		)	(5		)	(26	%)	(66	%)
Operating income	332			352			6	%	(3	%)	596			600			1	%	(5	%)	248			387			56	%	15	%

Total operating expenses²	$	258		$	267		4	%	4	%	$	517		$	517		—	%	1	%	$	250		$	205		(18	%)	(17	%)

As a percentage of net sales³
Gross profit	64.8		%	62.7		%	(2.1	)pp			66.4		%	63.7		%	(2.7	)pp			64.9		%	61.7		%	(3.2	)pp
Operating income	36.5		%	35.6		%	(0.9	)pp			35.6		%	34.2		%	(1.4	)pp			32.4		%	51.4		%	19.0	pp
Non-operating postretirement expense	$	2		$	1		(43	%)			$	4		$	2		(38	%)			$	1		$	1		28	%
Interest expense, net	$	20		$	20		(2	%)			$	40		$	39		(4	%)			$	19		$	20		4	%
Effective tax rate	19.5		%	15.0		%	(4.5	)pp			18.6		%	16.3		%	(2.3	)pp			18.2		%	11.6		%	(6.6	)pp
Diluted earnings per share	$	0.52		$	0.59		14	%			$	0.93		$	0.97		5	%			$	0.39		$	0.67		73	%
Note: Totals may differ due to rounding	Note: Totals may differ due to rounding

¹See “Non-GAAP Financial Measures” above for details on our use of “underlying change,” including how we calculate these measures and why we think this information is useful to readers.

²Operating expenses include advertising expense, SG&A expense, and other expense (income), net.

³Year-over-year changes in percentages are reported in percentage points (pp).

Fiscal 2021 Outlook

We continue to face substantial uncertainty related to the evolving COVID-19 pandemic, its effect on the global economy, and ultimately its effect on the consumers of our brands. Our ability to make, ship, and market our brands to our consumers has not been materially impacted by COVID-19, and we do not expect that to change. How we sell our brands looks different due to COVID-19, but we do not expect a material limit on our ability to sell our brands to our consumers. We continue to closely monitor key developments in our markets, including (a) the stage of recovery, (b) industry and consumer behavior, (c) macroeconomic conditions, and (d) the timing, likelihood, severity, and restrictions associated with any future waves of COVID-19.

As a result of these uncertainties and low visibility on recovery, and consistent with our 2020 Form 10-K, we are not able to provide quantitative guidance for fiscal 2021 at this time. From a qualitative perspective, we believe that (a) the Travel Retail channel will not recover during this fiscal year, (b) the timing and strength of the on-premise channel recovery will depend on a variety of factors, but will likely not be at full capacity by the fiscal-year end, and (c) our emerging markets will remain down for the fiscal year. Our gross margin will likely remain under pressure for the year driven by the expectation of higher input cost and mix shifts. However, where our gross margin ultimately lands will depend not only on the volumes of our business, but the mix of our business by geography, portfolio, channel, and size.

We believe we are well positioned to invest effectively as the recovery occurs. We expect overall operating expenses, notably our advertising investments, to accelerate as the year-over-year rate of declines seen in the first quarter of fiscal 2021 will not be sustained throughout the year. Also, as previously announced, we plan to make a $20 million contribution to the Brown-Forman Foundation during fiscal 2021. We will remain agile, diligent, focused, and disciplined on our investments as the environment continues to evolve.

We expect our full-year effective tax rate to be in the range of 17% to 19%.

Results of Operations – Fiscal ~~2020~~2021 Year-to-Date Highlights

Market Highlights

The following table provides supplemental information for our largest markets for the ~~six~~three months ended ~~October~~July 31, ~~2019,~~2020, compared to the same period last year. We discuss results ~~for~~of the markets most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the ~~six~~three months ended ~~October~~July 31, ~~2019,~~2020, compared to the same period last year.

Top 10 Markets¹- Fiscal 2020 Net Sales Growth by Geographic Area
Top Markets¹											Top Markets¹

	Percentage change versus prior year period
Six months ended October 31, 2019	Net Sales
Three months ended July 31, 2020											Net Sales % Change vs. 2020
Geographic area²	Reported		Acquisitions and Divestitures		Foreign Exchange		Est. Net Chg in Distributor Inventories		Underlying³		Reported		Foreign Exchange		Est. Net Chg in Distributor Inventories		Underlying³
United States	10	%	—	%	—	%	(4	%)	6	%	3	%	—	%	5	%	9	%
Developed International	1	%	—	%	—	%	1	%	2	%	13	%	(5	%)	5	%	12	%
United Kingdom	(2	%)	—	%	1	%	—	%	(1	%)	46	%	(25	%)	2	%	24	%
Germany											20	%	(3	%)	—	%	17	%
Australia	—	%	—	%	2	%	—	%	2	%	29	%	—	%	—	%	28	%
Germany	2	%	—	%	(2	%)	—	%	—	%
France	4	%	—	%	—	%	—	%	3	%	22	%	(3	%)	—	%	19	%
Japan	(1	%)	—	%	(2	%)	3	%	—	%
Rest of Developed International	2	%	—	%	1	%	4	%	7	%	(24	%)	—	%	13	%	(10	%)
Emerging	4	%	—	%	—	%	1	%	5	%	(20	%)	10	%	7	%	(3	%)
Mexico	2	%	—	%	1	%	1	%	4	%	9	%	21	%	—	%	29	%
Poland	(7	%)	—	%	4	%	—	%	(4	%)	1	%	5	%	—	%	6	%
Russia	27	%	—	%	1	%	(6	%)	22	%	(33	%)	6	%	(11	%)	(38	%)
Brazil	16	%	—	%	3	%	(12	%)	7	%
Rest of Emerging	1	%	—	%	(3	%)	6	%	5	%	(36	%)	7	%	15	%	(14	%)
Travel Retail	(9	%)	—	%	1	%	—	%	(8	%)	(59	%)	—	%	(5	%)	(63	%)
Non-branded and bulk	(21	%)	—	%	1	%	—	%	(21	%)	(31	%)	(1	%)	—	%	(32	%)
Total	5	%	—	%	—	%	(1	%)	3	%	(2	%)	—	%	5	%	3	%
Note: Totals may differ due to rounding
Note: Results may differ due to rounding

¹“Top ~~10 markets”~~Markets” are ranked based on percentage of total fiscal ~~2019~~2020 net sales. See ~~2019~~2020 Form 10-K “Results of Operations - Fiscal ~~2019~~2020 Market Highlights” and ~~“Note 9. Net Sales.”~~Note 8 to the Consolidated Financial Statements.

²See “Definitions” above for definitions of market aggregations presented here.

³See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure and why we believe this information is useful to readers.

Net sales in all of the markets discussed below were affected by COVID-19 during the first quarter of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our results.

•

United States. Reported net sales increased ~~10%~~3%, while underlying net sales grew 6%9% after adjusting for an estimated net ~~increase~~decrease in distributor inventories ~~(primarily driven by~~(following the ~~October launch of JDTA)~~April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions resulting from COVID-19). The underlying net sales gains were ~~driven~~led by ~~the growth of~~ (a) ~~the~~JD RTDs, fueled by strong consumer demand for Jack Daniel’s ~~family~~Country Cocktails and the launch of ~~brands (launch of JDTA);~~new spirit-based RTD products; (b) our premium bourbons, led by Woodford Reserve and Old Forester, ~~(continued~~supported by strong consumer takeaway ~~trends);~~trends; (c) the continued launch of JDTA; (d) volumetric growth of JDTH; (e) volumetric growth and ~~(c)~~higher prices of Korbel Champagne; and (f) our tequilas, ~~led~~due to higher prices and volumes of el Jimador and Herradura. This growth was partially offset by ~~volume gains~~lower net sales of ~~Herradura.~~JDTW reflecting unfavorable channel mix resulting from COVID-19 related restrictions in the on-premise channel.

•

Developed International. Reported net sales increased 1%13%, while underlying net sales grew 2%12% after adjusting for the positive effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales growth was led by ~~France, Taiwan,~~ Australia, ~~Spain,~~the United Kingdom, Germany, and ~~Italy,~~France, partially offset by declines in ~~the United Kingdom.~~Spain.


◦	The United Kingdom’s underlying net sales ~~decline~~growth was driven by ~~lower volumes in one channel~~the launch of JDTA and ~~unfavorable mix~~volumetric growth of ~~JDTW compared~~JDTH and JDTW. Favorable comparisons to the ~~same period last year.~~first quarter of fiscal 2020 also affected the current-year growth rate.


◦	Germany’s underlying net sales growth was fueled by the volumetric gains of JD RTDs due to strong consumer demand along with the launch of JDTA, partially offset by JDTW declines. Favorable comparisons to the first quarter of fiscal 2020 also affected the current year growth rate.


◦	Australia’s underlying net sales growth was driven by higher ~~prices and increased~~ volumes of ~~JDTW, partially offset~~JD RTDs fueled by ~~declines of JD RTDs.~~


◦	~~Germany’s underlying net sales were flat as lower volumes of JDTW, due in part to timing associated with order patterns of certain customers, were offset by the continued volume growth of JD RTDs.~~strong consumer demand.


◦	France’s underlying net sales growth was driven by higher volumes of JDTW and JDTH ~~and~~along with the launch of ~~JD RTDs, partially offset by JDTW declines.~~


◦	~~Japan’s underlying net sales were flat as volumetric growth was offset by unfavorable price/mix.~~JDTA.


◦	Underlying net sales in the Rest of Developed International ~~increased due to (a) volume growth of GlenDronach in Taiwan largely reflecting timing associated with customer buying patterns, (b) higher~~declined led by lower JDTW volumes in Spain ~~and Italy, and (c) volumetric growth of JDTW~~reflecting COVID-19 related closures in ~~Korea.~~this heavily on-premise focused market.

•

Emerging. Reported net sales ~~increased 4%~~decreased 20%, while underlying net sales ~~grew 5%~~declined 3% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Underlying net sales ~~growth was~~declines were led by Russia, ~~China,~~Southeast Asia, sub-Saharan Africa, and ~~Mexico.~~India as COVID-19 had an adverse effect on results in the first quarter. These declines were partially offset by growth in Mexico and Brazil.

◦

Mexico’s underlying net sales growth was fueled by higher ~~pricing~~volumes of ~~Herradura~~New Mix supported by increased demand and ~~el Jimador, with Herradura also benefiting from higher volumes. These gains were~~shelf space as a result of the temporary supply disruption of the beer industry due to COVID-19 related shutdowns. This growth was partially offset by ~~volume declines~~lower volumes and unfavorable mix of ~~New Mix.~~Herradura.

◦

Poland’s underlying net sales ~~decline~~growth was driven by ~~lower~~higher volumes ~~and net prices~~ of Finlandia ~~along with lower JDTW volumes due~~and the launch of JDTA. Favorable comparisons to ~~timing~~the first quarter of ~~customer order patterns. These declines were partially offset by volumetric~~fiscal 2020 also affected the current year growth ~~and favorable price/mix in the rest of the Jack Daniel’s family of brands.~~rate.


◦	Russia’s underlying net sales ~~growth reflected higher~~declines were driven by lower volumes of ~~JDTW~~Finlandia and ~~Finlandia due in part to easy~~JDTW. Difficult comparisons to the ~~late~~first quarter of fiscal ~~2018 route-to-consumer change as well as strong consumer demand in~~2020 coupled with the adverse affect of COVID-19 also affected the current ~~year.~~


◦	~~Brazil’s underlying net sales growth was fueled by higher volumes of JDTW and JDTF.~~year results.


◦	Underlying net sales in the Rest of Emerging ~~increased as~~declined due to broad-based volume declines of JDTW, partially offset by growth of JDTW in ~~China, Turkey, and Southeast Asia was partially offset by declines of the brand in sub-Saharan Africa.~~Brazil.

•

Travel Retail. Reported net sales declined 9%59%, while underlying net sales were down 8%63% after adjusting for ~~the negative effect of foreign exchange.~~an estimated net increase in distributor inventories. The underlying net sales decline was driven by lower volumes of ~~the Jack Daniel’s family of brands largely~~JDTW, Woodford Reserve, and Finlandia due to the ~~timing~~unprecedented implementation of ~~customer orders in the same period last year, partially offset by Woodford Reserve volume growth.~~travel bans and other restrictions resulting from COVID-19.

•

Non-branded and ~~bulk.~~bulk ~~Reported~~reported net sales declined ~~21% and~~31%, while underlying net sales ~~also declined 21%~~decreased 32% after adjusting for the ~~negative~~positive effect of foreign exchange. ~~Declines were driven by lower~~Lower volumes and prices for used barrels ~~along with a decrease in bulk whiskey and contract bottling sales.~~drove the reduction compared to the same period last year.

Brand Highlights

The following table provides supplemental information for our largest brands for the ~~six~~three months ended ~~October~~July 31, ~~2019,~~2020, compared to the same period last year. We discuss results of the brands most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the ~~six~~three months ended ~~October~~July 31, ~~2019,~~2020, compared to the same period last year.

Major Brands Worldwide Results
Major Brands													Major Brands

	Percentage change versus prior year period
Six months ended October 31, 2019	Volumes		Net Sales
Three months ended July 31, 2020													Volumes		Net Sales % Change vs 2020
Product category / brand family / brand¹	9L Depletions¹		Reported		Acquisitions and Divestitures		Foreign Exchange		Est. Net Chg in Distributor Inventories		Underlying²		9L Depletions¹		Reported		Acquisitions and Divestitures		Foreign Exchange		Est. Net Chg in Distributor Inventories		Underlying²
Whiskey	3	%	7	%	—	%	—	%	(2	%)	4	%	14	%	(1	%)	—	%	—	%	5	%	4	%
Jack Daniel's family of brands	2	%	5	%	—	%	—	%	(2	%)	2	%
Jack Daniel’s family of brands													15	%	(2	%)	—	%	—	%	5	%	3	%
JDTW	—	%	1	%	—	%	—	%	(2	%)	(1	%)	(7	%)	(17	%)	—	%	—	%	7	%	(10	%)
Jack Daniel’s RTD/RTP	3	%	6	%	—	%	2	%	(1	%)	7	%	38	%	35	%	—	%	2	%	—	%	37	%
JDTH	8	%	3	%	—	%	1	%	3	%	7	%	17	%	21	%	—	%	(2	%)	(3	%)	16	%
Gentleman Jack	6	%	5	%	—	%	—	%	(1	%)	4	%	17	%	17	%	—	%	—	%	(3	%)	14	%
JDTF	4	%	—	%	—	%	—	%	3	%	3	%	—	%	(10	%)	—	%	—	%	7	%	(3	%)
Other Jack Daniel's whiskey brands	70	%	93	%	—	%	—	%	(46	%)	47	%
Other Jack Daniel’s whiskey brands													157	%	83	%	—	%	(4	%)	18	%	97	%
Woodford Reserve	22	%	25	%	—	%	—	%	(5	%)	20	%	15	%	11	%	—	%	—	%	4	%	14	%
Tequila	(3	%)	10	%	—	%	1	%	1	%	11	%	69	%	—	%	—	%	8	%	8	%	16	%
el Jimador	7	%	8	%	—	%	1	%	4	%	13	%	3	%	(2	%)	—	%	3	%	10	%	11	%
Herradura	13	%	21	%	—	%	1	%	(3	%)	19	%	(22	%)	(25	%)	—	%	2	%	7	%	(16	%)
Wine													7	%	3	%	—	%	—	%	7	%	10	%
Vodka (Finlandia)	(6	%)	(8	%)	—	%	—	%	1	%	(7	%)	(20	%)	(27	%)	—	%	3	%	(1	%)	(24	%)
Wine	1	%	(5	%)	—	%	—	%	7	%	2	%
Rest of Portfolio	2	%	15	%	(4	%)	(8	%)	(1	%)	1	%	(5	%)	38	%	(4	%)	(30	%)	(7	%)	(4	%)
Non-branded and bulk	NA		(21	%)	—	%	1	%	—	%	(21	%)	NA		(31	%)	—	%	(1	%)	—	%	(32	%)
Note: Totals may differ due to rounding
Note: Results may differ due to rounding

¹See “Definitions” above for definitions of brand aggregations and volume measures presented here.

²See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure and why we believe this information is useful to readers.

Net sales for all of the brands discussed below were affected by COVID-19 during the first quarter of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our results.

•

Whiskey ~~brands grew~~brand’s reported net sales 7%declined 1%, while underlying net sales grew 4% after adjusting for an estimated net ~~increase~~decrease in distributor ~~inventories (primarily driven by the launch of JDTA in the United States).~~inventories. The underlying net sales gain was driven by the growth of JD RTDs, the ~~Jack Daniel’s family~~continued launch of ~~brands~~JDTA, and higher volumes of JDTH and Woodford ~~Reserve.~~Reserve, partially offset by declines of JDTW.


◦	The Jack Daniel’s family of brands grew underlying net sales ~~growth was~~ driven by JD RTDs, the continued launch of JDTA, ~~in the United States~~ and ~~broad-based growth~~higher volumes of ~~JD RTDs and~~ JDTH, partially offset by declines of JDTW.

▪

~~JDTW~~The underlying net sales ~~declines were due to~~decline for JDTW was driven by (a) lower volumes in ~~certain developed international~~emerging markets and Travel ~~Retail. These declines were partially offset by growth~~Retail reflecting the unprecedented implementation of travel bans and other restrictions related to COVID-19 and (b) unfavorable channel mix in ~~emerging~~the United States and our international developed markets ~~led by Russia and China.~~resulting from COVID-19 related restrictions in the on-premise channel.


▪	The increase in underlying net sales growth for Jack Daniel’s RTD/RTP was ~~driven~~fueled by volumetric gains in ~~Germany,~~ the United States (including the launch of new spirit-based RTD products), Australia, and ~~the United Kingdom along with the fiscal 2020 RTD launch in France. These gains were partially offset by lower volumes in Australia.~~Germany.


▪	JDTH increased underlying net sales ~~with broad-based volume growth led~~fueled by ~~France,~~higher volumes in the United States, the United Kingdom, and ~~Poland,~~France. This growth was partially offset by ~~lower volumes~~declines in Travel ~~Retail.~~Retail due to the unprecedented implementation of travel bans and other restrictions resulting from COVID-19.


▪	Gentleman Jack increased underlying net sales with ~~broad-based international~~volumetric growth, ~~led by the United Kingdom and Poland,~~ partially offset by ~~declines~~unfavorable channel mix in the United States ~~that were largely~~resulting from COVID-19 related ~~to timing.~~restrictions in the on-premise channel.


▪	The ~~growth in~~ underlying net sales decline of JDTF was ~~led~~driven by ~~increased volumes~~unfavorable mix in ~~Brazil and Poland, partially offset by lower volumes~~the United States resulting from COVID-19 related restrictions in ~~Travel Retail.~~the on-premise channel.


▪	The underlying net sales growth of Other Jack Daniel’s whiskey brands was fueled by the continued launch of JDTA inled by the United ~~States.~~States, the United Kingdom, France, and Germany.

◦

Woodford Reserve ~~continued to lead the growth of our premium bourbons as the~~grew underlying net sales ~~gains were~~ fueled by volumetric growth in the United States, ~~where volumetric growth was supported~~partially offset by ~~continued strong consumer takeaway trends.~~lower volumes in Travel Retail reflecting the unprecedented implementation of travel bans and other restrictions related to COVID-19.

•

Tequila brands ~~grew~~ reported net sales ~~10%,~~were flat, while underlying net sales grew ~~11%~~16% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor ~~inventories~~inventories. Underlying net sales growth was fueled by higher volumes of New Mix supported by increased demand and shelf space as a result of the ~~negative effect~~temporary supply disruption of ~~foreign exchange.~~the beer industry due to COVID-19 related shutdowns in Mexico.


◦	el Jimador grew underlying net sales ~~reflecting (a)~~driven by volumetric growth ~~in the United States as consumer takeaway trends remain strong, (b) higher pricing in Mexico, and (c) volume growth~~ and higher ~~pricing in a number of other international markets.~~


◦	~~Herradura~~ ~~grew underlying net sales driven by higher volumes and~~ prices in the United States and Mexico.

•◦

~~Reported net sales for~~ ~~Finlandia~~ ~~declined 8%, while~~The underlying net sales ~~decreased 7% after adjusting for an estimated net decrease in distributor inventories. The decrease in underlying net sales~~decline of Herradura was driven by lower volumes and ~~net prices~~unfavorable mix in ~~Poland, which was somewhat~~Mexico, partially offset by ~~volume growth~~higher prices, favorable product mix, and higher volumes in ~~Russia.~~the United States.

•

Reported net sales offor our ~~wine~~Wine ~~brands declined 5%~~business grew 3%, while underlying net sales ~~increased 2%~~grew 10% after adjusting for an estimated net decrease in distributor inventories. The increase in underlying net sales was driven by ~~volume~~volumetric growth and higher prices of ~~Sonoma-Cutrer and~~ Korbel Champagne in the United ~~States.~~States, partially offset by declines of Sonoma-Cutrer in the United States reflecting COVID-19 related restrictions in the on-premise channel where this brand is focused.


•	Reported net sales for Finlandia declined 27%, while underlying net sales decreased 24% after adjusting for the negative effect of foreign exchange and an estimated net increase in distributor inventories. The decrease in underlying net sales was due to the adverse effect of COVID-19, which drove volume declines in Russia and Travel Retail.

•

Rest of portfolio reported net sales increased ~~15%~~38%, while underlying net sales ~~grew 1%~~declined 4% after adjusting for (a) the positive effect of foreign exchange, (b) an estimated net increase in distributor inventories, and (c) the effect of our acquisition of The 86 Company (Fords Gin)~~, and (c) an estimated net increase in distributor inventories.~~. The ~~increase~~decrease in underlying net sales was driven primarily by ~~volume growth~~declines in the United ~~States.~~Kingdom for Chambord.

•

Year-Over-Year Period Comparisons

COVID-19 affected our results during the first quarter of fiscal 2021. See “Overview - COVID-19” above for more information around the impact of COVID-19 on our results.

Net Sales
Percentage change versus the prior year period ended October 31 3 Months 6 Months
Change in reported net sales 9 % 5 %
Acquisitions and divestitures — % — %
Foreign exchange — % — %
Estimated net change in distributor inventories (3 %) (1 %)
Change in underlying net sales 6 % 3 %

Change in underlying net sales attributed to:
Volume 5 % 2 %
Price/mix 1 % 1 %
Note: Totals may differ due to rounding

Net Sales

Percentage change versus the prior year period ended July 31	3 Months
Change in reported net sales	(2	%)
Estimated net change in distributor inventories	5	%
Change in underlying net sales	3	%

Change in underlying net sales attributed to:
Volume	22	%
Price/mix	(19	%)
Note: Results may differ due to rounding

For the three months ended ~~October~~July 31, ~~2019,~~2020, net sales were ~~$989~~$753 million, ~~an increase~~a decrease of ~~$79~~$13 million, or 9%2%, compared to the same period last year. After adjusting reported ~~results~~net sales for an estimated net ~~increase~~decrease in distributor inventories ~~(primarily driven by the October launch of JDTA~~primarily in the United ~~States)~~States (following the April 2020 distributor inventory build due to the uncertainty around potential supply chain disruptions resulting from COVID-19), underlying net sales grew ~~6%.~~3% compared to the same period last year. The increase in underlying net sales comprised 5%22% volume growth and 1%19% unfavorable price/mix. Volume growth was led by ~~JDTW (largely due to lower volumes in the same period last year due to second quarter tariff-related inventory reductions),~~New Mix, JDTA, ~~(launch in the United States),~~JD RTDs, JDTH, and Woodford Reserve, ~~and JDTH,~~ partially offset by declines of JDTW and Finlandia. ~~Price/~~The unfavorable price/mix was driven by ~~(a) favorable portfolio mix reflecting~~ faster growth from our ~~higher-priced brands (the Jack Daniel’s family of brands and Woodford Reserve) and volume declines of our~~ lower-priced brands ~~(Finlandia)~~(New Mix and ~~(b) higher pricing on tequilas. These price/~~JD RTDs) and unfavorable channel mix ~~gains were partially offset by lower net pricing~~(primarily for ~~JDTW.~~

~~The primary factors~~ ~~contributing~~ ~~to the growth in underlying net sales for the three months ended October 31, 2019, were:~~

~~the launch of JDTA in the United States;~~

~~higher volumes of Woodford Reserve~~JDTW) in the United States and ~~Travel Retail and volumetric growth and favorable price/mix of Old Forester~~our international developed markets resulting from COVID-19 related restrictions in the ~~United States;~~

~~broad-based international growth of JDTW led by Australia, Turkey, the United Kingdom, and China;~~

~~broad-based volume growth of JDTH led by the United States, France, and the United Kingdom;~~

growth of our tequila brands led by (a) volumetric growth and higher pricing of Herradura in the United States and Mexico, (b) higher volumes of el Jimador in the United States, and (c) higher pricing of el Jimador in Mexico;

~~higher volumes of JD RTDs in Germany and the United States along with favorable price/mix and increased volumes in the United Kingdom; and~~

~~higher volumes of GlenDronach in Taiwan.~~

~~These gains in underlying net sales were partially~~ ~~offset~~ ~~by:~~

~~JDTW declines due to lower net pricing in the United States and volume declines in sub-Saharan Africa;~~

~~lower volumes and prices for used barrels sales along with decreased bulk whiskey sales;~~

~~unfavorable price/mix and lower volumes of Finlandia in Poland and Travel Retail;~~

~~volume declines and unfavorable price/mix of Gentleman Jack in the United States;~~

~~volume declines of JD RTDs in Australia; and~~

~~lower volumes of New Mix in Mexico.~~

For the six months ended October 31, 2019, net sales were $1.8 billion, an increase of $79 million, or 5% compared to the same period last year. Underlying net sales grew 3% after adjusting reported results for an estimated net increase in distributor inventories (primarily driven by the October launch of JDTA in the United States). The increase in underlying net sales comprised 2% volume growth and 1% price/mix. Volume growth was led by JDTA (launch in the United States), Woodford Reserve, JDTH, and our tequilas, partially offset by declines of Finlandia. Price/mix was driven by (a) favorable portfolio mix reflecting faster growth from our higher-priced brands (the Jack Daniel’s family of brands and Woodford Reserve) and (b) higher pricing on tequilas. These price/mix gains were partially offset by lower net pricing for JDTW.on-premise channel. See “Results of Operations - Fiscal ~~2020~~2021 Year-to-Date Highlights” above for further details on underlying net sales for the ~~six~~three months ended ~~October~~July 31, ~~2019.~~

2020.

Cost of Sales
Percentage change versus the prior year period ended October 31 3 Months 6 Months
Change in reported cost of sales 15 % 13 %
Acquisitions and divestitures — % — %
Foreign exchange 1 % 1 %
Estimated net change in distributor inventories — % — %
Change in underlying cost of sales 16 % 14 %

Change in underlying cost of sales attributed to:
Volume 5 % 2 %
Cost/mix 12 % 12 %
Note: Totals may differ due to rounding

Cost of Sales

Percentage change versus the prior year period ended July 31	3 Months
Change in reported cost of sales	7	%
Foreign exchange	1	%
Estimated net change in distributor inventories	4	%
Change in underlying cost of sales	12	%

Change in underlying cost of sales attributed to:
Volume	22	%
Cost/mix	(10	%)
Note: Results may differ due to rounding

Cost of sales of ~~$370~~$288 million for the three months ended ~~October~~July 31, ~~2019,~~2020, increased ~~$50~~$20 million, or ~~15%~~7%, when compared to the same period last year. Underlying cost of sales increased ~~16%~~12% after adjusting ~~reported costs~~ for an estimated net decrease in distributor inventories and the positive effect of foreign exchange. The increase in underlying cost of sales for the three months ended ~~October~~July 31, ~~2019,~~2020, was driven by ~~tariff-related costs,~~ higher volumes (New Mix and ~~higher input~~JD RTDs) and increased costs ~~of agave~~(primarily agave), partially offset by a shift in portfolio mix toward our lower-cost brands (New Mix and ~~wood. We estimate that over one third of the increase in underlying cost of sales was due to tariff-related costs.~~

Cost of sales of $638 million for the six months ended October 31, 2019, increased $75 million, or 13% when compared to the same period last year. Underlying cost of sales increased 14% after adjusting for the positive effect of foreign exchange. The increase in underlying cost of sales for the six months ended October 31, 2019, was driven by tariff-related costs, higher input costs of agave and wood, and higher volumes. We estimate that nearly half of the increase in underlying cost of sales was due to tariff-related costs.

Gross Profit
Percentage change versus the prior year period ended October 31 3 Months 6 Months
Change in reported gross profit 5 % — %
Acquisitions and divestitures — % — %
Foreign exchange (1 %) — %
Estimated net change in distributor inventories (4 %) (2 %)
Change in underlying gross profit — % (2 %)
Note: Totals may differ due to rounding

Gross Margin
For the period ended October 31 3 months 6 Months
Prior year gross margin 64.8 % 66.4 %
Price/mix 0.7 % 0.8 %
Cost (1.5 %) (1.7 %)
Tariffs¹
(1.7 %) (2.0 %)
Acquisitions and divestitures — % — %
Foreign exchange 0.4 % 0.2 %
Change in gross margin (2.1 %) (2.7 %)
Current year gross margin 62.7 % 63.7 %
Note: Totals may differ due to rounding
0.00
0.000

JD RTDs).

Gross Profit

Percentage change versus the prior year period ended July 31	3 Months
Change in reported gross profit	(7	%)
Estimated net change in distributor inventories	5	%
Change in underlying gross profit	(1	%)
Note: Results may differ due to rounding

¹“Tariffs” include the combined effect of tariff-related costs, whether arising as a reduction of net sales or as an increase in cost of sales. See “Overview - Tariffs” for additional details of these costs.

Gross Margin

For the period ended July 31	3 months
Prior year gross margin	64.9	%
Price/mix	(1.1	%)
Cost	(2.4	%)
Foreign exchange	0.3	%
Change in gross margin	(3.2	%)
Current year gross margin	61.7	%
Note: Results may differ due to rounding	0.00

Gross profit of ~~$619~~$465 million ~~increased $29~~decreased $33 million, or 5%7%, for the three months ended ~~October~~July 31, 2019, compared to the same period last year. Underlying gross profit was flat after adjusting for the positive effect of foreign exchange and an estimated net increase in distributor inventories. The flat underlying gross profit resulted from the same factors that contributed to the increase in underlying net sales offset by the same factors that drove higher underlying cost of sales.

For the three months ended October 31, 2019, gross margin decreased approximately 2.1 percentage points to 62.7% from 64.8% in the same period last year driven by an increase in tariff-related costs and input costs, partially offset by the positive effect of price/mix and foreign exchange.

~~Gross profit of $1.1 billion for the six months ended October 31, 2019, was flat~~2020, compared to the same period last year. Underlying gross profit declined 2%1% after adjusting for an estimated net ~~increase~~decrease in distributor inventories. ~~The decrease in underlying gross profit resulted from~~Gross margin for the ~~same factors that contributed to the increase in underlying net sales more than offset by the same factors that contributed to the increase in underlying cost of sales.~~

~~For the six~~three months ended ~~October~~July 31, ~~2019, gross margin~~2020, decreased ~~approximately 2.7~~to 61.7%, down 3.2 percentage points ~~to 63.7%~~ from ~~66.4%~~64.9% in the same period last ~~year~~year. The decrease in gross margin was driven by ~~an increase in tariff-related costs and~~higher input costs ~~partially offset by~~(primarily agave) and an unfavorable shift in channel and portfolio mix resulting from COVID-19 related restrictions in the ~~positive effect of price/mix and foreign exchange.~~on-premise channel.

Operating Expenses
Percentage change versus the prior year period ended October 31
Percentage change versus the prior year period ended July 31									Percentage change versus the prior year period ended July 31
3 Months	Reported		Acquisitions and Divestitures		Foreign Exchange		Underlying		Reported		Acquisitions and Divestitures		Foreign Exchange		Underlying
Advertising	10	%	—	%	2	%	11	%	(33	%)	(1	%)	—	%	(34	%)
SG&A	(1	%)	(1	%)	1	%	(1	%)	(10	%)	—	%	1	%	(10	%)
Total operating expenses¹	4	%	(1	%)	1	%	4	%	(18	%)	(1	%)	1	%	(17	%)

6 Months
Advertising	2	%	—	%	2	%	4	%
SG&A	(2	%)	—	%	1	%	(1	%)
Total operating expenses¹	—	%	—	%	1	%	1	%
Note: Totals may differ due to rounding
Note: Results may differ due to rounding									Note: Results may differ due to rounding
¹Total operating expenses include advertising expense, SG&A expense, and other expense (income), net.	¹Total operating expenses include advertising expense, SG&A expense, and other expense (income), net.								¹Total operating expenses include advertising expense, SG&A expense, and other expense (income), net.

Operating expenses totaled ~~$267~~$205 million, ~~up $9~~down $45 million, or 4%18%, for the three months ended ~~October~~July 31, ~~2019,~~2020, compared to the same period last year. Underlying operating expenses ~~also grew 4%~~were down 17% after adjusting for ~~the positive effect of foreign exchange and~~ the effect of our acquisition of ~~Fords Gin.~~

Reported advertising expense increased 10% for the three months ended October 31, 2019, while underlying advertising expenses increased 11% after adjusting for the positive effect of foreign exchange. Underlying advertising expense was higher reflecting the investment to support the launch of JDTA as well as increased spending on JDTH, Woodford Reserve,The 86 Company (Fords Gin) and ~~Gentleman Jack.~~

Reported SG&A expense declined 1% for the three months ended October 31, 2019, while underlying SG&A also dropped 1% after adjusting for the positive effect of foreign exchange and the effect of our acquisition of Fords Gin. The decrease in underlying SG&A was largely timing related.

Operating expenses totaled $517 million, which were flat for the six months ended October 31, 2019, compared to the same period last year. Underlying operating expenses increased 1% after adjusting for the positive effect of foreign exchange.

Reported advertising expense ~~grew 2%~~declined 33% for the ~~six~~three months ended ~~October~~July 31, ~~2019,~~2020, while underlying advertising ~~expenses increased 4%~~expense decreased 34% after adjusting for the ~~positive~~ effect of ~~foreign exchange. Underlying~~our acquisition of The 86 Company (Fords Gin). The decrease in underlying advertising expense was ~~higher reflecting the investment to support the launch of JDTA as well as increased media spend on JDTW~~driven by a change in ~~the United States, partially offset by~~ the timing of ~~spending on~~spend and a reduction in our investment behind on-premise channel activities and various events and sponsorships that were canceled in the ~~rest~~first quarter of ~~the Jack Daniel’s family of brands.~~fiscal 2021 due to COVID-19.

Reported SG&A expense ~~decreased 2%~~declined 10% for the ~~six~~three months ended ~~October~~July 31, ~~2019, while~~2020, and underlying SG&A ~~expenses decreased 1%~~expense also declined 10% after adjusting for the positive effect of foreign exchange. The decrease in underlying SG&A expense was driven by lower ~~compensation-related costs. Looking ahead~~discretionary spend (including hiring and travel freezes) as COVID-19 continued to ~~the remainder of fiscal 2020, we expect underlying SG&A to increase.~~

affect our results.

Operating Income
Percentage change versus the prior year period ended October 31 3 Months 6 Months
Change in reported operating income 6 % 1 %
Acquisitions and divestitures — % — %
Foreign exchange (2 %) (1 %)
Estimated net change in distributor inventories (7 %) (4 %)
Change in underlying operating income (3 %) (5 %)
Note: Totals may differ due to rounding

Operating Income

Percentage change versus the prior year period ended July 31	3 Months
Change in reported operating income	56	%
Acquisitions and divestitures	(51	%)
Foreign exchange	(1	%)
Estimated net change in distributor inventories	11	%
Change in underlying operating income	15	%
Note: Results may differ due to rounding

Operating income of ~~$352~~$387 million increased ~~$20~~$139 million, or 6%56%, for the three months ended ~~October~~July 31, ~~2019,~~2020, compared to the same period last year. Underlying operating income ~~declined 3%~~grew 15% after adjusting for (a) the gain on sale of Early Times, Canadian Mist, and Collingwood; (b) the effect of our acquisition of The 86 Company (Fords Gin); (c) an estimated net ~~increase~~decrease in distributor ~~inventories~~inventories; and (d) the positive effect of foreign exchange. ~~The same factors that contributed~~Operating margin increased 19.0 percentage points to ~~the increase in underlying net sales were more than offset by the increase in underlying costs of sales and underlying operating expenses.~~

~~For~~

51.4% for the three months ended ~~October~~July 31, ~~2019, operating margin decreased 0.9 percentage points to 35.6%,~~2020, from ~~36.5%~~32.4% in the same period last year. The ~~decrease in our operating margin was due to the decline in gross margin, largely reflecting tariff-related costs~~gain on sale of Early Times, Canadian Mist, and ~~higher input costs of agave and wood, partially offset by operating expense leverage and foreign exchange.~~

Operating income of $600 million increased $4 million, or 1%, for the six months ended October 31, 2019, compared to the same period last year. Underlying operating income declined 5% after adjusting for an estimated net increase in distributor inventories and the positive effect of foreign exchange. The same factors thatCollingwood contributed ~~to the decrease in gross profit also contributed to the decline in underlying operating income along with the increase in underlying operating expenses.~~

~~Operating margin decreased 1.4~~16.5 percentage points to 34.2% for the six months ended October 31, 2019, from 35.6% in the same period last year. The decrease in our operating margin was due to the decline in gross margin, largely reflecting tariff-related costs and higher input costs of agave and wood, partially offset by operating expense leverage and foreign exchange.this increase.

The effective tax rate ~~in in~~for the three months ended ~~October~~July 31, ~~2019,~~2020, was ~~15.0%~~11.6% compared to ~~19.5% for the same period last year. The effective tax rate in the six months ended October 31, 2019, was 16.3% compared to 18.6%~~18.2% for the same period last year. The decrease in our effective tax rate for ~~both~~ the three ~~and six~~ months ended ~~October~~July 31, ~~2019,~~2020, was driven primarily by ~~an increase in excess~~a deferred tax ~~benefits~~benefit related to ~~stock-based compensation and the net beneficial impact~~an intercompany transfer of ~~other discrete items.~~assets.

Diluted earnings per share of ~~$0.59~~$0.67 in the three months ended ~~October~~July 31, ~~2019,~~2020, increased ~~14%~~73% from the ~~$0.52~~$0.39 reported for the same period last year, ~~due to the increase in reported operating income and a lower effective tax rate. Diluted earnings~~including an estimated $0.19 per share ~~of $0.97 in the six months ended October 31, 2019, increased 5%~~benefit from the ~~$0.93 reported for~~gain on sale of Early Times, Canadian Mist, and Collingwood and an $0.08 per share benefit from a discrete tax item recognized during the ~~same period last year largely due~~quarter related to ~~a lower effective tax rate.~~an intercompany transfer of assets.

Liquidity and Financial Condition

Cash flows. Cash and cash equivalents increased $233 million during the three months ended July 31, 2020. Cash provided by operations of $91 million was ~~$187~~up $19 million ~~during~~from the ~~six~~same period last year, primarily reflecting lower working capital requirements.

Cash provided by investing activities was $162 million for the three months ended ~~October~~July 31, ~~2019,~~2020, an increase of $205 million compared to ~~$272 million for~~ the same period last year. The ~~$85~~increase primarily reflects the proceeds of $177 million ~~decrease was largely attributable to the timing of sales and the collection~~from our divestiture of the ~~related accounts receivable.~~

~~Cash used for investing activities was $75 million during the six months ended October 31, 2019, compared to $57 million for the same period last year. The $18 million increase largely reflects~~Early Times, Canadian Mist, and Collingwood brands (in July 2020) and our acquisition of The 86 Company for $22 million (in July 2019)~~, partially offset by a $5 million decrease in capital spending.~~.

Cash used for financing activities was ~~$183~~$37 million during the ~~six~~three months ended ~~October~~July 31, ~~2019,~~2020, compared to ~~$243~~$26 million for the same period last year. The ~~$60~~$11 million ~~decrease reflects~~change was largely attributable to a ~~$127 million decline in share repurchases, partially offset by a $40~~$12 million decline in net proceeds from short-term ~~borrowing, a $21 million increase in payments for shares withheld from employees to satisfy their withholding tax obligations on stock-based awards, and a $6 million increase in dividend payments.~~borrowings.

The impact on cash and cash equivalents as a result of exchange rate changes was ~~a decrease~~an increase of $1$17 million for the ~~six~~three months ended ~~October~~July 31, ~~2019,~~2020, compared to a decrease of ~~$18~~$3 million for the same period last year.

Liquidity. We generate strong cash ~~flow~~flows from operations, which enables us to meet current obligations, fund capital expenditures, ~~sustain and grow our~~pay regular dividends, and return cash to our shareholders from time to time through share repurchases and special dividends. Our investment-grade credit ratings (A1 by Moody’s and A- by Standard & Poor’s) provide us with financial flexibility when accessing global credit markets and allow us to reserve adequate debt capacity for investment opportunities and unforeseen events.

~~Our cash flow~~The ongoing COVID-19 crisis has affected our results of operations. To ensure uninterrupted business operations and to preserve adequate liquidity during these uncertain times, we have (a) managed our operating expenses closely and limited discretionary spending, (b) re-prioritized capital projects where prudent, and (c) actively managed our working capital. To support our business partners, we have extended additional credit to some of our customers who were most directly affected by the crisis. We continue to monitor closely the impact of the pandemic on our customers’ solvency and our ability to collect from ~~operations is supplemented by our cash and cash equivalent balances, as well as access to several liquidity sources.~~ them.

Cash and cash equivalents were ~~$307~~$675 million at April 30, ~~2019,~~2020, and ~~$235~~$908 million at ~~October~~July 31, ~~2019.~~2020. As of ~~October~~July 31, ~~2019,~~2020, approximately ~~73%~~43% of our cash and cash equivalents were held by our foreign subsidiaries whose earnings ~~are reinvested~~we expect to reinvest indefinitely outside of the United States. As discussed in Note 10 to the accompanying financial statements, 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). No further changes have been made to our indefinite reinvestment assertion. We continue to evaluate our future cash deployment and ~~may~~should we decide to repatriate additional cash held by other foreign subsidiaries, ~~to the United States. Future repatriations to the United States~~we may ~~require us~~be required to provide for and pay additional taxes.

~~An additional source of liquidity is our~~

We have an $800 million commercial paper program that we regularly use to fund our short-term ~~credit~~operational needs. ~~Commercial~~In the second half of March 2020, as the COVID-19 crisis fueled widespread economic uncertainty, the commercial paper market was disrupted. Despite the heightened volatility, we sustained our access to short-term funding in the commercial paper market and expect to continue to be able to do so in the future. In order to create a liquidity buffer, we have borrowed in excess of our immediate needs, and for longer maturities than usual. For outstanding ~~was $150 million~~commercial paper balances, interest rates, and days to maturity at April 30, ~~2019,~~2020 and ~~$156 million at October~~July 31, ~~2019.~~2020, please see Note 6 to the Condensed Consolidated Financial Statements. The average balances, interest rates and original maturities during the periods ended ~~October~~July 31, ~~2018~~2019 and ~~2019~~2020, are presented below.

Three Months Ended Six Months Ended
October 31, October 31,
(Dollars in millions) 2018 2019 2018 2019
Average daily commercial paper $479 $310 $471 $323
Average interest rate 2.20% 2.28% 2.14% 2.42%
Average days to maturity 31 34 31 33



	Three Months Average
	July 31,
(Dollars in millions)	2019	2020
Commercial paper outstanding	$336	$360
Interest rate	2.56%	0.93%
Average days to maturity at issuance	32	103

Our commercial paper program is supported by available commitments under our currently undrawn $800 million bank credit ~~facility. The credit~~ facility ~~which was extended for an additional year on~~that expires in November ~~10, 2019, is now scheduled to expire on November 10,~~ 2023. Although unlikely, under extreme market conditions, one or more participating banks may not be able to ~~fully~~ fund its commitments under our credit facility. ~~We believe the~~

While we expect to meet our short-term liquidity needs largely through cash generated from operations and borrowings under our commercial paper program, a sustained market deterioration resulting in continued declines in net sales and profit could require us to evaluate alternative sources of liquidity. The debt capital markets are accessible sources of long-term financing that we believe could meet any additional liquidity needs.

We believe our current liquidity position, supplemented by our ability to generate positive cash flows from operations in the future, and our ample debt capacity isenabled by our strong short-term and long-term credit ratings, will be sufficient to meet all of our future financial commitments.

~~We have high credit standards when initiating transactions with counterparties, and~~On July 1, 2020, we ~~closely monitor our counterparty risks with respect to our cash balances and derivative contracts. If~~paid a ~~counterparty’s credit quality were to deteriorate below our credit standards, we would expect either to liquidate exposures or require the counterparty to post appropriate collateral.~~

~~As announced on November 21, 2019, our Board of Directors increased the~~regular quarterly cash dividend of $0.1743 per share on our Class A and Class B common ~~stock from $0.1660~~stock. On July 23, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.1743 per share ~~to $0.1743 per share.~~on our Class A and Class B common stock. Stockholders of record on ~~December 5, 2019,~~September 4, 2020, will receive the ~~quarterly cash~~ dividend on ~~January 2,~~October 1, 2020.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We ~~are exposed to~~face market risks arising from ~~adverse~~ changes in ~~(a)~~ foreign currency exchange rates, ~~(b)~~ commodity prices, ~~affecting~~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 ~~cost~~fair value of our ~~raw materials~~fixed-rate debt, and ~~energy,~~(b) cash flows and ~~(c) interest rates.~~earnings related to our variable-rate debt and interest-bearing investments. We ~~try~~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 manage risk through a variety of strategies, including production initiatives and hedging strategies. Our foreign currency hedging contracts are subject to foreign exchange rate changes, our commodity forward purchase contracts are subject to commodity price changes, and some of our debt obligations are subject to interest rate changes. Established procedures and internal processes govern the management of thesemitigate market risks. Since April 30, ~~2019,~~2020, there have been no material changes to the ~~disclosure on this matter made in~~market risks faced by us or to our ~~2019 Form 10-K.~~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.

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 ~~2019~~2020 Form 10-K, which could materially adversely affect our business, financial condition, or future results. ~~There~~The information presented below updates, and should be read in conjunction with, the risk factors disclosed in our 2020 Form 10-K. Otherwise, except as presented below, there have been no material changes to the risk factors disclosed in our ~~2019~~2020 Form 10-K.

A cyber breach, a failure or corruption of one or more of our key information technology systems, networks, processes, associated sites, or service providers, or a failure to comply with personal data protection laws could have a material adverse impact on our business.

We rely on information technology (IT) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software, and technical applications and platforms, some of which are managed, hosted, provided, or used by third parties or their vendors, to help us manage our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting our internal network and communication systems; ordering and managing materials from suppliers; supply/demand planning; production; shipping products to customers; hosting corporate strategic plans and employee data; hosting our branded websites and marketing products to consumers; collecting and storing customer, consumer, employee, investor, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing, and sharing confidential and proprietary research, business plans, and financial information; complying with regulatory, legal, or tax requirements; providing data security; and handling other processes necessary to manage our business.

Increased IT security threats and more sophisticated cybercrimes and cyberattacks, including computer viruses and other malicious codes, ransomware, unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking, and other types of attacks, pose a potential risk to the security and availability of our IT systems, networks, and services, including those that are managed, hosted, provided, or used by third parties, as well as the confidentiality, availability, and integrity of our data and the data of our employees, stockholders, customers, suppliers, consumers, and others. For example, in July 2020, we discovered a data breach incident involving malware and related behaviors that resulted in unauthorized access to our IT networks. We do not believe this incident had or will have any significant impacts on our business operations, financial results, systems and processes, or the effectiveness of our internal control environment; however, any failure of our IT systems, networks, or service providers to function properly, or the loss or disclosure of our business strategy or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches to usage errors by employees and other security issues, could cause us to suffer interruptions in our ability to manage operations and reputational, competitive, or business harm, which may adversely affect our business operations or financial results. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, former employees, stockholders, customers, suppliers, consumers, or others. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach, to repair or replace networks and IT systems, which could require a significant amount of time, or to respond to claims from employees, former employees, stockholders, customers, suppliers, consumers or others or pay significant fines to regulatory agencies. As a result of the COVID-19 pandemic, a greater number of our employees are working remotely and accessing our technology infrastructure remotely, which may further increase our vulnerability to the cyber risks described above.

In the ordinary course of our business, we receive, process, transmit, and store information relating to identifiable individuals (personal data), primarily employees and former employees, but also relating to customers and consumers. As a result, we are subject to various U.S. federal and state and foreign laws and regulations relating to personal data. These laws have been subject to frequent changes, and new legislation in this area may be enacted in other jurisdictions at any time, such as, for example, the California Consumer Protection Act which took effect on January 1, 2020. In the European Union, the General Data Protection Regulation (GDPR) became effective in May 2018, for all member states and has extraterritorial effect. The GDPR includes operational requirements for companies receiving or processing personal data of European Union residents that are partially

different from those that had previously been in place and includes significant penalties for noncompliance. The changes introduced by the GDPR, as well as any other changes to existing personal data protection laws and the introduction of such laws in other jurisdictions, have subjected and may continue in the future to subject us to, among other things, additional costs and expenses and have required and may in the future require costly changes to our business practices and security systems, policies, procedures, and practices. Improper disclosure of personal data in violation of the GDPR and/or of other personal data protection laws could harm our reputation, cause loss of consumer confidence, subject us to government enforcement actions (including fines), or result in private litigation against us, which could result in loss of revenue, increased costs, liability for monetary damages, fines and/or criminal prosecution, all of which could negatively affect our business and operating results.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The following documents are filed with this report:



10.1		Fiscal 2021 Form of Performance-Based Restricted Stock Unit Award Agreement (Class A)
10.2		Fiscal 2021 Form of Performance-Based Restricted Stock Unit Award Agreement (Class B)
31.1		CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2		CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32		CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (not considered to be filed).
101		The following materials from Brown-Forman Corporation's Quarterly Report on Form 10-Q for the quarter ended ~~October~~July 31, ~~2019,~~2020, in Inline XBRL (eXtensible Business Reporting Language) format: (a) Condensed Consolidated Statements of Operations, (b) Condensed Consolidated Statements of Comprehensive Income, (c) Condensed Consolidated Balance Sheets, (d) Condensed Consolidated Statements of Cash Flows, and (e) Notes to the Condensed Consolidated Financial Statements.
104		Cover Page Interactive Data File in Inline XBRL format (included in Exhibit 101).

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		BROWN-FORMAN CORPORATION
		(Registrant)

Date:	~~December 5, 2019~~September 2, 2020	By:	/s/ Jane C. Morreau
			Jane C. Morreau
			Executive Vice President and Chief Financial Officer
			(On behalf of the Registrant and as Principal Financial Officer)

3932



	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



	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

Gross Margin

For the period ended October 31	3 months		6 Months
Prior year gross margin	64.8	%	66.4	%
Price/mix	0.7	%	0.8	%
Cost	(1.5	%)	(1.7	%)
Tariffs¹	(1.7	%)	(2.0	%)
Acquisitions and divestitures	—	%	—	%
Foreign exchange	0.4	%	0.2	%
Change in gross margin	(2.1	%)	(2.7	%)
Current year gross margin	62.7	%	63.7	%
Note: Totals may differ due to rounding	0.00		0.000