Net Sales

9 Months Ended

Jan. 31, 2019

Revenue from Contract with Customer [Text Block]

Net Sales

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

Revenue recognition policy. Our net sales predominantly reflect global sales of beverage alcohol consumer products. We sell these products under contracts with different types of customers, depending on the market. The customer is most often a distributor, wholesaler, or retailer.

Each contract typically includes a single performance obligation to transfer control of the products to the customer. Depending on the contract, control is transferred when the products are either shipped or delivered to the customer, at which point we recognize the transaction price for those products as net sales. The transaction price recognized at that point reflects our estimate of the consideration to be received in exchange for the products. The actual amount may ultimately differ due to the effect of various customer incentives and trade promotion activities. In making our estimates, we consider our historical experience and current expectations, as applicable. Adjustments recognized during the three and nine months ended January 31, 2019, for changes in estimated transaction prices of products sold in prior periods were not material.

Net sales exclude taxes we collect from customers that are imposed by various governments on our sales, and are reduced by payments to customers unless made in exchange for distinct goods or services with fair values approximating the payments.

Net sales include any amounts we bill customers for shipping and handling activities related to the products. We recognize the cost of those activities in cost of sales during the same period in which we recognize the related net sales.

Sales returns, which are permitted only in limited situations, are not material.

Customer payment terms generally range from 30 to 90 days. There are no significant amounts of contract assets or liabilities.

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

The following table shows how the adoption of ASC 606 impacted our consolidated statement of operations for the three months ended January 31, 2019:



	Three Months Ended January 31, 2019
	Under Prior			As Reported Under			Effect of
(Dollars in millions, except per share amounts)	Guidance			ASC 606			Adoption
Sales	$	1,178		$	1,181		$	3
Excise taxes	277			277			—
Net sales	901			904			3
Cost of sales	333			333			—
Gross profit	568			571			3
Advertising expenses	105			103			(2		)
Selling, general, and administrative expenses	149			149			—
Other expense (income), net	(1		)	(1		)	—
Operating income	315			320			5
Non-operating postretirement expense	15			15			—
Interest income	(2		)	(2		)	—
Interest expense	23			23			—
Income before income taxes	279			284			5
Income taxes	56			57			1
Net income	$	223		$	227		$	4
Earnings per share:
Basic	$	0.46		$	0.47		$	0.01
Diluted	$	0.46		$	0.47		$	0.01

The following table shows how the adoption of ASC 606 impacted our consolidated statement of operations for the nine months ended January 31, 2019:



	Nine Months Ended January 31, 2019
	Under Prior			As Reported Under			Effect of
(Dollars in millions, except per share amounts)	Guidance			ASC 606			Adoption
Sales	$	3,344		$	3,329		$	(15	)
Excise taxes	749			749			—
Net sales	2,595			2,580			(15		)
Cost of sales	896			896			—
Gross profit	1,699			1,684			(15		)
Advertising expenses	313			303			(10		)
Selling, general, and administrative expenses	480			478			(2		)
Other expense (income), net	(13		)	(13		)	—
Operating income	919			916			(3		)
Non-operating postretirement expense	19			19			—
Interest income	(6		)	(6		)	—
Interest expense	67			67			—
Income before income taxes	839			836			(3		)
Income taxes	161			160			(1		)
Net income	$	678		$	676		$	(2	)
Earnings per share:
Basic	$	1.41		$	1.41		$	—
Diluted	$	1.40		$	1.40		$	—

The following table shows how the adoption of ASC 606 impacted our consolidated balance sheet as of January 31, 2019:



	As of January 31, 2019
	Under Prior		As Reported Under		Effect of
(Dollars in millions)	Guidance		ASC 606		Adoption
Assets
Other current assets	$	288	$	287	$	(1	)
Deferred tax assets	19		20		1
Total assets	5,163		5,163		—

Liabilities
Accounts payable and accrued expenses	$	553	$	587	$	34
Deferred tax liabilities	126		119		(7		)
Total liabilities	3,643		3,670		27

Stockholders’ Equity
Retained earnings	$	2,112	$	2,085	$	(27	)
Total stockholders’ equity	1,520		1,493		(27		)

Disaggregated revenues.

The following table shows our net sales by geography:



	Three Months Ended				Nine Months Ended
	January 31,				January 31,
(Dollars in millions)	2018		2019		2018		2019
United States	$	387	$	413	$	1,180	$	1,217
Developed International¹	275		269		716		718
Emerging²	163		165		445		460
Travel Retail³	34		33		108		109
Non-branded and bulk⁴	19		24		66		76
Total	$	878	$	904	$	2,515	$	2,580

¹Represents net sales of branded products to “advanced economies” as defined by the International Monetary Fund (IMF), excluding the United States. Our largest developed international markets are the United Kingdom, Australia, and Germany.

²Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico and Poland.

³Represents net sales of branded products to global duty-free customers, travel retail customers, and the U.S. military regardless of customer location.

⁴Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

The following table shows our net sales by product category:



	Three Months Ended				Nine Months Ended
	January 31,				January 31,
(Dollars in millions)	2018		2019		2018		2019
Whiskey¹	$	688	$	709	$	1,958	$	2,017
Tequila²	63		68		185		200
Vodka³	39		36		105		96
Wine⁴	50		51		155		153
Rest of portfolio	19		16		46		38
Non-branded and bulk⁵	19		24		66		76
Total	$	878	$	904	$	2,515	$	2,580

¹Includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this category are the Jack Daniel's family of brands, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers' Craft.

²Includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.

³Includes Finlandia.

⁴Includes Korbel Champagne and Sonoma-Cutrer wines.

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