NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In these notes, “we,” “us,” and “our” refer to Brown-Forman Corporation.
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). 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, 2016 (2016 Form 10-K).
In our opinion, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments (unless otherwise indicated), necessary for a fair statement of our financial results for the periods covered by this report.
We prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2016 Form 10-K, but made the following changes during the first quarter of fiscal 2017:
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|
•
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We changed our presentation of excise taxes from the gross method (included in sales and costs) to the net method (excluded from sales). As a result, the amounts presented as “net sales” in our financial statements now exclude excise taxes. We believe the change in presentation to the net method is preferable because it is more representative of the internal financial information reviewed by management in assessing our performance and more consistent with the presentation used by our major competitors in their external financial statements. Prior period financial statements have been recast to conform to the new presentation.
|
|
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•
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We adopted new guidance related to certain aspects of the accounting for stock-based compensation, including the income tax consequences. Under the new guidance, we recognize all tax benefits related to stock-based compensation as an income tax benefit in our statement of operations, and include all income tax cash flows within operating activities in our statement of cash flows. Under the previous accounting guidance, we recognized some of those tax benefits (excess tax benefits) as additional paid-in capital and classified that amount as a financing activity in our statement of cash flows. We adopted these provisions of the new guidance on a prospective basis as of May 1, 2016. As a result, our net income and operating cash flows for the quarter ended July 31, 2016, include excess tax benefits of
$2 million
. Prior period financial statements have not been adjusted.
|
Also, under the new guidance, we recognize the excess tax benefits during the period in which the related awards vest or are exercised. Under the previous accounting guidance, we recognized those benefits during the period in which they reduced taxes payable. We adopted this provision of the new guidance on a modified retrospective basis with a cumulative-effect adjustment of
$10 million
to retained earnings as of May 1, 2016.
Also, as discussed in Note 12, our Class A and Class B common shares were split on a two-for-one basis during August 2016. As a result, all share and per share amounts reported in the accompanying financial statements and related notes are presented on a split-adjusted basis.
Recent accounting pronouncements.
In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. As issued, the new guidance would have become effective for us beginning fiscal 2018. However, the FASB has since deferred the effective date until our fiscal 2019, though permitting voluntary adoption as of the original effective date. The FASB has also issued various amendments and proposed further amendments to the new guidance. We are currently evaluating the potential impact of the new guidance (as amended) and the proposed amendments on our financial statements.
In February 2016, the FASB issued new guidance on accounting for leases. The new guidance will become effective for us beginning fiscal 2020, although voluntary adoption during an earlier period will be permitted. We are currently evaluating the potential impact of the new guidance on our financial statements.
In June 2016, the FASB issued new guidance on accounting for credit losses. The new guidance will become effective for us beginning fiscal 2021, with voluntary early adoption permitted during our fiscal 2020. We are currently evaluating the potential impact of the new guidance on our financial statements.
2.
Inventories
We use the last-in, first-out (LIFO) method to determine the cost of most of our inventories. If the LIFO method had not been used, inventories at current cost would have been
$248 million
higher than reported as of
April 30, 2016
, and
$253 million
higher than reported as of
July 31, 2016
. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.
3.
Income Taxes
Our consolidated interim effective tax rate is based upon our expected annual operating income, statutory tax rates, and income tax laws in the various jurisdictions in which we operate. Significant or unusual items, including adjustments to accruals for tax uncertainties, are recognized in the quarter in which the related event occurs. The effective tax rate of
28.2%
for the
three months ended
July 31, 2016
, is based on an expected tax rate of
29.5%
on ordinary income for the full fiscal year, as adjusted for the recognition of a net tax benefit related to discrete items arising during the period and interest on previously provided tax contingencies. Our expected tax rate includes current fiscal year additions for existing tax contingency items.
As discussed in Note 1, we adopted new accounting guidance for stock-based compensation, including the income tax consequences. As a result, our effective tax rate for the quarter reflects the impact of
$2 million
of tax benefits related to stock-based compensation that we recognized as a discrete item during the period.
4.
Earnings Per Share
We calculate basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share further includes the dilutive effect of stock-based compensation awards. We calculate that dilutive effect using the “treasury stock method” (as defined by GAAP).
The following table presents information concerning basic and diluted earnings per share:
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|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 31,
|
(Dollars in millions, except per share amounts)
|
2015
|
|
2016
|
Net income available to common stockholders
|
$
|
156
|
|
|
$
|
144
|
|
Share data (in thousands):
|
|
|
|
Basic average common shares outstanding
|
414,526
|
|
|
393,018
|
|
Dilutive effect of stock-based awards
|
2,750
|
|
|
2,991
|
|
Diluted average common shares outstanding
|
417,276
|
|
|
396,009
|
|
|
|
|
|
Basic earnings per share
|
$
|
0.38
|
|
|
$
|
0.37
|
|
Diluted earnings per share
|
$
|
0.37
|
|
|
$
|
0.36
|
|
We excluded common stock-based awards for approximately
1,288,000
shares and
1,173,000
shares from the calculation of diluted earnings per share for the three months ended
July 31, 2015
and
2016
, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.
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 are recorded as of
July 31, 2016
.
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
$21 million
(subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant. As of
July 31, 2016
, our actual exposure under the guaranty of the importer's obligation is approximately
$12 million
.
Based on the financial support we provide to the importer, we believe it meets the definition of a variable interest entity. However, because we do not control this entity, it is not included in our consolidated financial statements.
6.
Debt
Our long-term debt (net of unamortized discount and issuance costs) consisted of:
|
|
|
|
|
|
|
|
|
(Principal and carrying amounts in millions)
|
April 30,
2016
|
|
July 31,
2016
|
1.00% notes, $250 principal amount, due in fiscal 2018
|
$
|
249
|
|
|
$
|
249
|
|
2.25% notes, $250 principal amount, due in fiscal 2023
|
248
|
|
|
248
|
|
1.20% notes, €300 principal amount, due in fiscal 2027
|
—
|
|
|
332
|
|
2.60% notes, £300 principal amount, due in fiscal 2029
|
—
|
|
|
391
|
|
3.75% notes, $250 principal amount, due in fiscal 2043
|
248
|
|
|
248
|
|
4.50% notes, $500 principal amount, due in fiscal 2046
|
485
|
|
|
485
|
|
|
$
|
1,230
|
|
|
$
|
1,953
|
|
We issued senior, unsecured notes with an aggregate principal amount of
300 million
euros in July 2016. Interest on these notes will accrue at a rate of
1.20%
and be paid annually. As of July 31, 2016, the carrying amount of these notes was
$332 million
(
$335 million
principal, less unamortized discounts and issuance costs). These notes are due on July 7, 2026.
In addition, we issued senior, unsecured notes with an aggregate principal amount of
300 million
British pounds in July 2016. Interest on these notes will accrue at a rate of
2.60%
and be paid annually. As of July 31, 2016, the carrying amount of these notes was
$391 million
(
$397 million
principal, less unamortized discounts and issuance costs). These notes are due on July 7, 2028.
As of April 30, 2016, our short-term borrowings of
$271 million
included
$269 million
of commercial paper, with an average interest rate of
0.53%
and a remaining maturity of
26 days
. As of
July 31, 2016
, our short-term borrowings of
$288 million
included
$285 million
of commercial paper, with an average interest rate of
0.66%
and a remaining maturity of
12 days
.
7.
Pension and Other Postretirement Benefits
The following table shows the components of the pension and other postretirement benefit cost recognized for our U.S. benefit plans during the periods covered by this report. Information about similar international plans is not presented due to immateriality.
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|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
July 31,
|
(Dollars in millions)
|
2015
|
|
2016
|
Pension Benefits
:
|
|
|
|
Service cost
|
$
|
6
|
|
|
$
|
6
|
|
Interest cost
|
9
|
|
|
9
|
|
Expected return on plan assets
|
(10
|
)
|
|
(10
|
)
|
Amortization of net actuarial loss
|
7
|
|
|
6
|
|
Net cost
|
$
|
12
|
|
|
$
|
11
|
|
|
|
|
|
Other Postretirement Benefits
:
|
|
|
|
Interest cost
|
1
|
|
|
1
|
|
Amortization of prior service cost (credit)
|
—
|
|
|
(1
|
)
|
Net cost
|
$
|
1
|
|
|
$
|
—
|
|
8.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We categorize the fair values of assets and liabilities into three levels based upon the assumptions (inputs) used to determine those values. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are:
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|
•
|
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 markets that are not active; or other inputs that are observable or can be derived from or corroborated by observable market data.
|
|
|
•
|
Level 3
–
Unobservable inputs that are supported by little or no market activity.
|
The following table summarizes the assets and liabilities measured or disclosed at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
April 30, 2016:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Currency derivatives
|
|
$
|
—
|
|
|
$
|
19
|
|
|
$
|
—
|
|
|
$
|
19
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Currency derivatives
|
|
—
|
|
|
10
|
|
|
—
|
|
|
10
|
|
Short-term borrowings
|
|
—
|
|
|
271
|
|
|
—
|
|
|
271
|
|
Long-term debt
|
|
—
|
|
|
1,293
|
|
|
—
|
|
|
1,293
|
|
July 31, 2016:
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
Currency derivatives
|
|
—
|
|
|
28
|
|
|
—
|
|
|
28
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Currency derivatives
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Short-term borrowings
|
|
—
|
|
|
288
|
|
|
—
|
|
|
288
|
|
Long-term debt
|
|
—
|
|
|
2,122
|
|
|
—
|
|
|
2,122
|
|
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 exchange rates, forward rates, and discount rates. The discount rates are based on the historical U.S. Treasury rates.
The fair value of short-term borrowings approximates their carrying amount. We determine the fair value of long-term debt primarily based on the prices at which similar debt has recently traded in the market and also considering the overall market conditions on the date of valuation.
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.
9.
Fair Value of Financial Instruments
The fair value of cash, cash equivalents, and short-term borrowings approximate the carrying amounts due to the short maturities of these instruments. We determine the fair value of currency derivatives and long-term debt as discussed in Note 8.
Below is a comparison of the fair values and carrying amounts of these instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
April 30, 2016
|
|
July 31, 2016
|
|
Carrying
|
|
Fair
|
|
Carrying
|
|
Fair
|
(Dollars in millions)
|
Amount
|
|
Value
|
|
Amount
|
|
Value
|
Assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
263
|
|
|
$
|
263
|
|
|
$
|
459
|
|
|
$
|
459
|
|
Currency derivatives
|
19
|
|
|
19
|
|
|
28
|
|
|
28
|
|
Liabilities:
|
|
|
|
|
|
|
|
Currency derivatives
|
10
|
|
|
10
|
|
|
5
|
|
|
5
|
|
Short-term borrowings
|
271
|
|
|
271
|
|
|
288
|
|
|
288
|
|
Long-term debt
|
1,230
|
|
|
1,293
|
|
|
1,953
|
|
|
2,122
|
|
10.
Derivative Financial Instruments
and Hedging Activities
Our multinational business exposes us to global market risks, including the effect of fluctuations in currency exchange rates, commodity prices, and interest rates. We use derivatives to help manage financial exposures that occur in the normal course of business. We formally document the purpose of each derivative contract, which includes linking the contract to the financial exposure it is designed to mitigate. We do not hold or issue derivatives for trading or speculative purposes.
We use currency derivative contracts to limit our exposure to the currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges (except any ineffective portion) in accumulated other comprehensive income (AOCI) until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings. We assess the effectiveness of these hedges based on changes in forward exchange rates. The ineffective portion of the changes in fair value of our hedges (recognized immediately in earnings) during the periods presented in this report was not material.
We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts totaling
$1,265 million
at
April 30, 2016
and
$1,164 million
at
July 31, 2016
.
During the quarter ended July 31, 2016, we used some currency derivative forward contracts and foreign currency-denominated long-term debt as after-tax net investment hedges of our 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. As of July 31, 2016,
$569 million
of our foreign currency-denominated debt was designated as a net investment hedge. Our net investment hedges are intended to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates.
We do not designate some of our currency derivatives and foreign currency-denominated debt as hedges because we use them to at least partially offset the immediate earnings impact of changes in foreign exchange rates on existing assets or liabilities. We immediately recognize the change in fair value of these instruments in earnings.
We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to physically take delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than derivative instruments.
During May 2015, we entered into interest rate derivative contracts (U.S. Treasury lock agreements) to manage the interest rate risk related to the anticipated issuance of fixed-rate senior, unsecured notes. We designated the contracts as cash flow hedges of the future interest payments associated with the anticipated notes. Upon issuance in June 2015 of an aggregate principal amount of
$500 million
of the
4.50%
notes, due June 15, 2045, we settled the contracts for a gain of
$8 million
. The entire gain was recorded to AOCI and will be amortized as a reduction of interest expense over the life of the notes.
The following table presents the pre-tax impact that changes in the fair value of our derivative instruments and non-derivative hedging instruments had on AOCI and earnings during the periods covered by this report:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
July 31,
|
(Dollars in millions)
|
Classification
|
2015
|
|
2016
|
Derivative Instruments
|
|
|
|
|
Currency derivatives designated as cash flow hedges:
|
|
|
|
|
|
|
Net gain (loss) recognized in AOCI
|
n/a
|
$
|
29
|
|
|
$
|
29
|
|
Net gain (loss) reclassified from AOCI into income
|
Net sales
|
13
|
|
|
10
|
|
Interest rate derivatives designated as cash flow hedges:
|
|
|
|
|
Net gain (loss) recognized in AOCI
|
n/a
|
8
|
|
|
—
|
|
Currency derivatives designated as net investment hedge:
|
|
|
|
|
Net gain (loss) recognized in AOCI
|
n/a
|
—
|
|
|
8
|
|
Currency derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Net gain (loss) recognized in income
|
Net sales
|
3
|
|
|
1
|
|
Net gain (loss) recognized in income
|
Other income
|
4
|
|
|
(5
|
)
|
Non-Derivative Hedging Instruments
|
|
|
|
|
Foreign currency-denominated debt designated as net investment hedge:
|
|
|
|
|
Net gain (loss) recognized in AOCI
|
n/a
|
—
|
|
|
(10
|
)
|
Foreign currency-denominated debt not designated as hedging instrument:
|
|
|
|
|
Net gain (loss) recognized in income
|
Other income
|
—
|
|
|
(1
|
)
|
We expect to reclassify
$23 million
of deferred net
gains
on cash flow hedges recorded in AOCI as of
July 31, 2016
, 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
July 31, 2016
, the maximum term of our outstanding derivative contracts was
36 months
.
We did not reclassify any deferred gains or losses related to net investment hedges from AOCI to earnings during the three months ended July 31, 2016. Due to the high degree of effectiveness between the hedging instruments and the underlying exposures being hedged, we did not have any ineffectiveness related to net investment hedges during the three months ended July 31, 2016.
The carrying amounts of our foreign currency-denominated debt are presented in Note 6. The following table presents the fair values of our derivative instruments as of
April 30, 2016
and
July 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Classification
|
|
Fair value of derivatives in a
gain position
|
|
Fair value of derivatives in a
loss position
|
April 30, 2016:
|
|
|
|
|
|
Designated as cash flow hedges:
|
|
|
|
|
|
Currency derivatives
|
Other current assets
|
|
$
|
23
|
|
|
$
|
(2
|
)
|
Currency derivatives
|
Other assets
|
|
3
|
|
|
(2
|
)
|
Currency derivatives
|
Accrued expenses
|
|
4
|
|
|
(8
|
)
|
Currency derivatives
|
Other liabilities
|
|
3
|
|
|
(9
|
)
|
Not designated as hedges:
|
|
|
|
|
|
Currency derivatives
|
Other current assets
|
|
1
|
|
|
(4
|
)
|
July 31, 2016:
|
|
|
|
|
|
Designated as cash flow hedges:
|
|
|
|
|
|
Currency derivatives
|
Other current assets
|
|
25
|
|
|
(3
|
)
|
Currency derivatives
|
Other assets
|
|
14
|
|
|
(6
|
)
|
Currency derivatives
|
Accrued expenses
|
|
10
|
|
|
(5
|
)
|
Currency derivatives
|
Other liabilities
|
|
1
|
|
|
(2
|
)
|
Not designated as hedges:
|
|
|
|
|
|
Currency derivatives
|
Other current assets
|
|
—
|
|
|
(2
|
)
|
Currency derivatives
|
Accrued expenses
|
|
—
|
|
|
(9
|
)
|
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 that are subject to net settlement agreements are presented in our balance sheets on a net basis.
In our statement of cash flows, we classify cash flows related to cash flow hedges in the same category as the cash flows from the hedged items.
Credit risk.
We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association (ISDA) agreements that allow for net settlement of the derivative contracts. Also, we have established counterparty credit guidelines that are regularly monitored and that provide for reports to senior management according to prescribed guidelines, 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
$8 million
at
April 30, 2016
and
$5 million
at
July 31, 2016
.
Offsetting.
As noted above, our derivative contracts are governed by ISDA agreements that allow for net settlement of derivative contracts with the same counterparty. It is our policy to present the fair values of current derivatives (i.e., those with a remaining term of 12 months or less) with the same counterparty on a net basis in the balance sheet. Similarly, we present the fair values of noncurrent derivatives with the same counterparty on a net basis. Current derivatives are not netted with noncurrent derivatives in the balance sheet. The following table summarizes the gross and net amounts of our derivative contracts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Gross Amounts of Recognized Assets
(Liabilities)
|
|
Gross Amounts Offset in
Balance Sheet
|
|
Net Amounts Presented in
Balance Sheet
|
|
Gross Amounts Not Offset in
Balance Sheet
|
|
Net Amounts
|
April 30, 2016:
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
34
|
|
|
$
|
(15
|
)
|
|
$
|
19
|
|
|
$
|
(6
|
)
|
|
$
|
13
|
|
Derivative liabilities
|
(25
|
)
|
|
15
|
|
|
(10
|
)
|
|
6
|
|
|
(4
|
)
|
July 31, 2016:
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
50
|
|
|
(22
|
)
|
|
28
|
|
|
(3
|
)
|
|
25
|
|
Derivative liabilities
|
(27
|
)
|
|
22
|
|
|
(5
|
)
|
|
3
|
|
|
(2
|
)
|
No cash collateral was received or pledged related to our derivative contracts as of
April 30, 2016
and
July 31, 2016
.
11.
Goodwill and Other Intangible Assets
The following table summarizes the changes in goodwill and other intangible assets during the three months ended July 31, 2016:
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Goodwill
|
|
Other Intangible
Assets
|
Balance at April 30, 2016
|
$
|
590
|
|
|
$
|
595
|
|
Acquisitions (Note 14)
|
182
|
|
|
65
|
|
Foreign currency translation adjustment
|
(16
|
)
|
|
(11
|
)
|
Balance at July 31, 2016
|
$
|
756
|
|
|
$
|
649
|
|
Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.
12.
Stockholders’ Equity
The following table summarizes the changes in stockholders’ equity during the three months ended July 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Class A Common
Stock
|
|
Class B Common
Stock
|
|
Additional Paid-in
Capital
|
|
Retained
Earnings
|
|
AOCI
|
|
Treasury
Stock
|
|
Total
|
Balance at April 30, 2016
|
$
|
13
|
|
|
$
|
21
|
|
|
$
|
114
|
|
|
$
|
4,065
|
|
|
$
|
(350
|
)
|
|
$
|
(2,301
|
)
|
|
$
|
1,562
|
|
Cumulative effect of change in accounting principle (Note 1)
|
|
|
|
|
|
|
10
|
|
|
|
|
|
|
10
|
|
Net income
|
|
|
|
|
|
|
144
|
|
|
|
|
|
|
144
|
|
Net other comprehensive income (loss)
|
|
|
|
|
|
|
|
|
(52
|
)
|
|
|
|
(52
|
)
|
Cash dividends
|
|
|
|
|
|
|
(134
|
)
|
|
|
|
|
|
(134
|
)
|
Acquisition of treasury stock
|
|
|
|
|
|
|
|
|
|
|
(201
|
)
|
|
(201
|
)
|
Stock-based compensation expense
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
4
|
|
Stock issued under compensation plans
|
|
|
|
|
|
|
|
|
|
|
7
|
|
|
7
|
|
Loss on issuance of treasury stock issued under compensation plans
|
|
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
(10
|
)
|
Stock split
|
12
|
|
|
22
|
|
|
(34
|
)
|
|
|
|
|
|
|
|
—
|
|
Balance at July 31, 2016
|
$
|
25
|
|
|
$
|
43
|
|
|
74
|
|
|
4,085
|
|
|
(402
|
)
|
|
(2,495
|
)
|
|
1,330
|
|
Stock split.
On May 26, 2016, our Board of Directors approved a two-for-one stock split for our Class A and Class B common stock, subject to stockholder approval of an amendment to our Restated Certificate of Incorporation. The amendment, which was approved by stockholders on July 28, 2016, increased the number of authorized shares of Class A common stock from
85,000,000
to
170,000,000
. The amendment did not change the number of authorized Class B common shares, which remains at
400,000,000
.
The stock split, which was effected as a stock dividend, resulted in the issuance of one new share of Class A common stock for each share of Class A common stock outstanding and one new share of Class B common stock for each share of Class B common stock outstanding. The stock split was also applied to our treasury shares. Thus, the stock split increased the number of Class A shares issued from
85,000,000
to
170,000,000
, and increased the number of Class B shares issued from
142,313,000
to
284,626,000
. The new shares were distributed on August 18, 2016, to shareholders of record as of August 8, 2016.
As a result of the stock split, we reclassified approximately
$34 million
from additional paid-in capital to common stock during the quarter ended July 31, 2016. The
$34 million
represents the
$0.15
par value per share of the new shares issued in the stock split.
All share and per share amounts reported in the accompanying financial statements and related notes are presented on a split-adjusted basis.
Dividends.
The following table summarizes the cash dividends declared per share on our Class A and Class B common stock during the three months ended July 31, 2016:
|
|
|
|
|
|
|
|
Declaration Date
|
|
Record Date
|
|
Payable Date
|
|
Amount per Share
|
May 26, 2016
|
|
June 6, 2016
|
|
July 1, 2016
|
|
$0.17
|
July 28, 2016
|
|
September 1, 2016
|
|
October 3, 2016
|
|
$0.17
|
Accumulated Other Comprehensive Income.
The following table summarizes the changes in each component of AOCI, net of tax, during the three months ended July 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
Currency Translation
Adjustments
|
|
Cash Flow Hedge
Adjustments
|
|
Postretirement Benefits
Adjustments
|
|
Total AOCI
|
Balance at April 30, 2016
|
$
|
(131
|
)
|
|
$
|
11
|
|
|
$
|
(230
|
)
|
|
$
|
(350
|
)
|
Net other comprehensive income (loss)
|
(67
|
)
|
|
12
|
|
|
3
|
|
|
(52
|
)
|
Balance at July 31, 2016
|
$
|
(198
|
)
|
|
$
|
23
|
|
|
$
|
(227
|
)
|
|
$
|
(402
|
)
|
13.
Other Comprehensive Income
The following table presents the components of net other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Three Months Ended
|
|
July 31, 2015
|
|
July 31, 2016
|
(Dollars in millions)
|
Pre-Tax
|
|
Tax
|
|
Net
|
|
Pre-Tax
|
|
Tax
|
|
Net
|
Currency translation adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on currency translation
|
$
|
(23
|
)
|
|
$
|
(1
|
)
|
|
$
|
(24
|
)
|
|
$
|
(68
|
)
|
|
$
|
1
|
|
|
$
|
(67
|
)
|
Reclassification to earnings
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other comprehensive income (loss), net
|
(23
|
)
|
|
(1
|
)
|
|
(24
|
)
|
|
(68
|
)
|
|
1
|
|
|
(67
|
)
|
Cash flow hedge adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net gain (loss) on hedging instruments
|
37
|
|
|
(12
|
)
|
|
25
|
|
|
29
|
|
|
(11
|
)
|
|
18
|
|
Reclassification to earnings
1
|
(13
|
)
|
|
4
|
|
|
(9
|
)
|
|
(10
|
)
|
|
4
|
|
|
(6
|
)
|
Other comprehensive income (loss), net
|
24
|
|
|
(8
|
)
|
|
16
|
|
|
19
|
|
|
(7
|
)
|
|
12
|
|
Postretirement benefits adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gain (loss) and prior service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Reclassification to earnings
2
|
7
|
|
|
(3
|
)
|
|
4
|
|
|
5
|
|
|
(2
|
)
|
|
3
|
|
Other comprehensive income (loss), net
|
7
|
|
|
(3
|
)
|
|
4
|
|
|
5
|
|
|
(2
|
)
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss), net
|
$
|
8
|
|
|
$
|
(12
|
)
|
|
$
|
(4
|
)
|
|
$
|
(44
|
)
|
|
$
|
(8
|
)
|
|
$
|
(52
|
)
|
1
Pre-tax amount is classified as net sales in the accompanying consolidated statements of operations.
2
Pre-tax amount is a component of pension and other postretirement benefit expense (as shown in Note 7, except for amounts related to non-U.S. benefit plans, about which no information is presented in Note 7 due to immateriality).
14.
Acquisition of Business
On June 1, 2016, we acquired The BenRiach Distillery Company Limited (BenRiach) for aggregate consideration of approximately
$407 million
, consisting of a purchase price of approximately
$341 million
and approximately
$66 million
in assumed debt and transaction-related obligations that we have since paid. The acquisition, which brings three single malt Scotch whisky brands into our whiskey portfolio, includes brand trademarks, inventories, three malt distilleries, a bottling plant, and BenRiach’s headquarters in Edinburgh, Scotland.
The purchase price of approximately
$341 million
included cash of approximately
$307 million
paid at the acquisition date for
90%
of the voting interests in BenRiach and a liability of approximately
$34 million
related to a put and call option agreement for the remaining
10%
equity shares. Under that agreement, we may choose (or be required) to purchase the remaining
10%
for approximately
24 million
British pounds (approximately
$34 million
at the exchange rate on June 1, 2016) during the one-year period ending November 14, 2017.
The purchase price of approximately
$341 million
was preliminarily allocated based on management’s estimates and independent appraisals as follows:
|
|
|
|
|
(Dollars in millions)
|
June 1,
2016
|
Accounts receivable
|
$
|
11
|
|
Inventories
|
159
|
|
Other current assets
|
1
|
|
Property, plant, and equipment
|
19
|
|
Goodwill
|
182
|
|
Trademarks and brand names
|
65
|
|
Total assets
|
437
|
|
|
|
Accounts payable and accrued expenses
|
12
|
|
Short-term borrowings
|
59
|
|
Deferred tax liabilities
|
25
|
|
Total liabilities
|
96
|
|
|
|
Net assets acquired
|
$
|
341
|
|
Goodwill is calculated as the excess of the purchase price over the fair value of the net identifiable assets acquired. The goodwill resulting from this acquisition is primarily attributable to the following: (a) the value of leveraging our distribution network and brand-building expertise to grow global sales of the existing single malt Scotch whisky brands acquired, (b) the valuable opportunity provided by the combination of the rather scarce identifiable assets to develop new products and line extensions in the especially attractive premium Scotch whisky category, and (c) the accumulated knowledge and expertise of the organized workforce employed by the acquired business. None of the preliminary goodwill amount of
$182 million
is expected to be deductible for tax purposes.
The initial allocation of the purchase price was based on preliminary estimates and may be revised as asset valuations are finalized and further information is obtained on the fair value of liabilities.
BenRiach’s results of operations, which have been included in our financial statements since the acquisition date, were not material for the period ended July 31, 2016. Pro forma results are not presented due to immateriality.