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United States
Securities and Exchange Commission
Washington, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 2020
OR
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)
Delaware61-0143150
(State or other jurisdiction of(IRS Employer
incorporation or organization)Identification No.)
 
850 Dixie Highway 
Louisville,Kentucky40210
(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 classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock (voting), $0.15 par valueBFANew York Stock Exchange
Class B Common Stock (nonvoting), $0.15 par valueBFBNew York Stock Exchange
1.200% Notes due 2026BF26New York Stock Exchange
2.600% Notes due 2028BF28New 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 filerAccelerated filer
Non-accelerated filerSmaller 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, 2020
Class A Common Stock (voting), $0.15 par value169,091,412 
Class B Common Stock (nonvoting), $0.15 par value309,488,902 




BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.


2


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 EndedSix Months Ended
October 31,October 31,
2019202020192020
Sales$1,248 $1,272 $2,226 $2,259 
Excise taxes259 287 471 521 
Net sales989 985 1,755 1,738 
Cost of sales370 404 638 692 
Gross profit619 581 1,117 1,046 
Advertising expenses112 95 204 157 
Selling, general, and administrative expenses158 155 322 303 
Gain on sale of business   (127)
Other expense (income), net(3)1 (9)(4)
Operating income352 330 600 717 
Non-operating postretirement expense1 2 2 3 
Interest income(1)(1)(3)(1)
Interest expense21 20 42 40 
Income before income taxes331 309 559 675 
Income taxes49 69 91 111 
Net income$282 $240 $468 $564 
Earnings per share:
Basic$0.59 $0.50 $0.98 $1.18 
Diluted$0.59 $0.50 $0.97 $1.17 
See notes to the condensed consolidated financial statements.
3


BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(Dollars in millions)
 
Three Months EndedSix Months Ended
October 31,October 31,
2019202020192020
Net income$282 $240 $468 $564 
Other comprehensive income (loss), net of tax:
Currency translation adjustments11 4 (3)66 
Cash flow hedge adjustments(7)6 2 (39)
Postretirement benefits adjustments3 5 7 12 
Net other comprehensive income (loss)7 15 6 39 
Comprehensive income$289 $255 $474 $603 
See notes to the condensed consolidated financial statements.
4


BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in millions)
April 30, 2020October 31,
2020
Assets
Cash and cash equivalents$675 $964 
Accounts receivable, less allowance for doubtful accounts of $11 at April 30 and October 31
570 879 
Inventories:
Barreled whiskey1,092 1,067 
Finished goods320 337 
Work in process172 181 
Raw materials and supplies101 130 
Total inventories1,685 1,715 
Other current assets335 257 
Total current assets3,265 3,815 
Property, plant and equipment, net848 828 
Goodwill756 759 
Other intangible assets635 654 
Deferred tax assets15 58 
Other assets247 236 
Total assets$5,766 $6,350 
Liabilities
Accounts payable and accrued expenses$517 $601 
Accrued income taxes30 63 
Short-term borrowings333 358 
Total current liabilities880 1,022 
Long-term debt2,269 2,309 
Deferred tax liabilities177 146 
Accrued pension and other postretirement benefits297 297 
Other liabilities168 173 
Total liabilities3,791 3,947 
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 
Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 314,532,000 shares issued)
47 47 
Retained earnings2,708 3,082 
Accumulated other comprehensive income (loss), net of tax(547)(508)
Treasury stock, at cost (6,323,000 and 5,961,000 shares at April 30 and October 31, respectively)
(258)(243)
Total stockholders’ equity1,975 2,403 
Total liabilities and stockholders’ equity$5,766 $6,350 
 See notes to the condensed consolidated financial statements.
5


BROWN-FORMAN CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in millions)
Six Months Ended
October 31,
 20192020
Cash flows from operating activities:  
Net income$468 $564 
Adjustments to reconcile net income to net cash provided by operations: 
Gain on sale of business (127)
Depreciation and amortization36 39 
Stock-based compensation expense6 6 
Deferred income tax provision9 (59)
Other, net (6)
Changes in assets and liabilities, net of business acquisitions and dispositions:
Accounts receivable(216)(295)
Inventories(133)(29)
Other current assets(38)52 
Accounts payable and accrued expenses30 85 
Accrued income taxes14 35 
Other operating assets and liabilities11 18 
Cash provided by operating activities187 283 
Cash flows from investing activities:  
Proceeds from sale of business 177 
Acquisition of business, net of cash acquired(22) 
Additions to property, plant, and equipment(48)(29)
Computer software expenditures(5)(1)
Cash provided by (used for) investing activities(75)147 
Cash flows from financing activities:  
Proceeds from short-term borrowings, maturities greater than 90 days 324 
Repayments of short-term borrowings, maturities greater than 90 days (230)
Net change in short-term borrowings, maturities of 90 days or less2 (68)
Payments of withholding taxes related to stock-based awards(26)(14)
Acquisition of treasury stock(1) 
Dividends paid(158)(167)
Cash used for financing activities(183)(155)
Effect of exchange rate changes on cash and cash equivalents(1)14 
Net increase (decrease) in cash and cash equivalents(72)289 
Cash and cash equivalents, beginning of period307 675 
Cash and cash equivalents, end of period$235 $964 
See notes to the condensed consolidated financial statements.
6


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, 2020, as amended (2020 Form 10-K). We prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2020 Form 10-K.

2.    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 EndedSix Months Ended
October 31,October 31,
(Dollars in millions, except per share amounts)2019202020192020
Net income available to common stockholders$282 $240 $468 $564 
Share data (in thousands):  
Basic average common shares outstanding477,680 478,506 477,522 478,413 
Dilutive effect of stock-based awards2,801 2,242 2,760 2,172 
Diluted average common shares outstanding480,481 480,748 480,282 480,585 
Basic earnings per share$0.59 $0.50 $0.98 $1.18 
Diluted earnings per share$0.59 $0.50 $0.97 $1.17 

We excluded common stock-based awards for approximately 522,000 shares and 301,000 shares from the calculation of diluted earnings per share for the three months ended October 31, 2019 and 2020, respectively. We excluded common stock-based awards for approximately 442,000 shares and 168,000 shares from the calculation of diluted earnings per share for the six months ended October 31, 2019 and 2020, 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 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 $311 million higher than reported as of April 30, 2020, and $331 million higher than reported as of October 31, 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.

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4.    Goodwill and Other Intangible Assets
The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the six months ended October 31, 2020:
(Dollars in millions)Goodwill
Other Intangible Assets
Balance at April 30, 2020
$756 $635 
Sale of business (Note 14)(4)(1)
Foreign currency translation adjustment7 20 
Balance at October 31, 2020
$759 $654 

Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.

5.    Commitments and Contingencies
We operate in a litigious environment, and we are sued in the normal course of business. Sometimes plaintiffs seek substantial damages. Significant judgment is required in predicting the outcome of these suits and claims, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and we can make a reasonable estimate of the loss, and then adjust the accrual as appropriate to reflect changes in facts and circumstances. We do not believe it is reasonably possible that these existing loss contingencies, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations, or liquidity. No material accrued loss contingencies were recorded as of October 31, 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 $8 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant. As of October 31, 2020, our actual exposure under the guaranty of the importer’s obligation was approximately $7 million. We also have accounts receivable from that importer of approximately $11 million at October 31, 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 over £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. The withheld amount is included in accounts receivable in the accompanying condensed consolidated balance sheet as of October 31, 2020.
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6.    Debt
Our long-term debt (net of unamortized discount and issuance costs) consists of:
(Principal and carrying amounts in millions)April 30, 2020October 31,
2020
2.250% senior notes, $250 principal amount, due January 15, 2023
$249 $249 
3.500% senior notes, $300 principal amount, due April 15, 2025
297 297 
1.200% senior notes, €300 principal amount, due July 7, 2026
324 348 
2.600% senior notes, £300 principal amount, due July 7, 2028
369 385 
4.000% senior notes, $300 principal amount, due April 15, 2038
294 294 
3.750% senior notes, $250 principal amount, due January 15, 2043
248 248 
4.500% senior notes, $500 principal amount, due July 15, 2045
488 488 
$2,269 $2,309 
Our short-term borrowings of $333 million as of April 30, 2020, and $358 million as of October 31, 2020, consisted primarily of borrowings under our commercial paper program.
(Dollars in millions)April 30,
2020
October 31,
2020
Commercial paper$333$346
Average interest rate1.29%0.32%
Average remaining days to maturity7383


7.    Stockholders’ Equity
The following table shows the changes in stockholders’ equity by quarter during the six months ended October 31, 2019:
(Dollars in millions)
Class A Common Stock
Class B Common Stock
Additional Paid-in Capital
Retained Earnings
AOCI
Treasury Stock
Total
Balance at April 30, 2019$25 $47 $ $2,238 $(363)$(300)$1,647 
Adoption of ASU 2018-02
43 (43)— 
Net income186 186 
Net other comprehensive income (loss)(1)(1)
Declaration of cash dividends (158)(158)
Acquisition of treasury stock(1)(1)
Stock-based compensation expense3 3 
Stock issued under compensation plans16 16 
Loss on issuance of treasury stock issued under compensation plans
(2)(27)(29)
Balance at July 31, 201925 47 1 2,282 (407)(285)1,663 
Net income282 282 
Net other comprehensive income (loss)7 7 
Stock-based compensation expense3 3 
Stock issued under compensation plans11 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 

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The following table shows the changes in stockholders’ equity by quarter during the six months ended October 31, 2020:
(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, 2020$25 $47 $ $2,708 $(547)$(258)$1,975 
Net income324 324 
Net other comprehensive income (loss)24 24 
Declaration of cash dividends(167)(167)
Stock-based compensation expense3 3 
Stock issued under compensation plans10 10 
Loss on issuance of treasury stock issued under compensation plans
(3)(16)(19)
Balance at July 31, 202025 47  2,849 (523)(248)2,150 
Net income240 240 
Net other comprehensive income (loss)15 15 
Stock-based compensation expense3 3 
Stock issued under compensation plans5 5 
Loss on issuance of treasury stock issued under compensation plans
(3)(7)(10)
Balance at October 31, 2020$25 $47 $ $3,082 $(508)$(243)$2,403 

The following table shows the change in each component of accumulated other comprehensive income (AOCI), net of tax, during the six months ended October 31, 2020:
(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)66 (39)12 39 
Balance at October 31, 2020
$(236)$21 $(293)$(508)

The following table shows the cash dividends declared per share on our Class A and Class B common stock during the six months ended October 31, 2020:
Declaration DateRecord DatePayable DateAmount per Share
May 21, 2020June 8, 2020July 1, 2020$0.1743
July 23, 2020September 4, 2020October 1, 2020$0.1743

As announced on November 19, 2020, our Board of Directors increased the quarterly cash dividend on our Class A and Class B common stock from $0.1743 per share to $0.1795 per share. Stockholders of record on December 4, 2020, will receive the cash dividend on January 4, 2021.
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8.    Net Sales 
The following table shows our net sales by geography:
Three Months EndedSix Months Ended
October 31,October 31,
(Dollars in millions)2019202020192020
United States$506 $522 $880 $909 
Developed International1
248 266 453 497 
Emerging2
173 160 306 267 
Travel Retail3
38 22 70 35 
Non-branded and bulk4
24 15 46 30 
Total$989 $985 $1,755 $1,738 
1Represents net sales of branded products to “advanced economies” as defined by the International Monetary Fund (IMF), excluding the United States. Our largest developed international markets are the United Kingdom, Germany, Australia, and France.
2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, and Russia.
3Represents net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer location.
4Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

The following table shows our net sales by product category:
Three Months EndedSix Months Ended
October 31,October 31,
(Dollars in millions)2019202020192020
Whiskey1
$785 $775 $1,385 $1,370 
Tequila2
77 84 145 152 
Wine3
58 71 97 112 
Vodka4
31 26 57 45 
Rest of portfolio14 14 25 29 
Non-branded and bulk5
24 15 46 30 
Total$989 $985 $1,755 $1,738 
1Includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this category are the Jack Daniel's family of brands, the Woodford Reserve family of brands, GlenDronach, BenRiach, Glenglassaugh, the Old Forester 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 Korbel Champagnes and Sonoma-Cutrer wines.
4Includes Finlandia.
5Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
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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 EndedSix Months Ended
October 31,October 31,
(Dollars in millions)2019202020192020
Pension Benefits:
  
Service cost$6 $6 $12 $13 
Interest cost8 6 15 12 
Expected return on plan assets(12)(11)(23)(23)
Amortization of:    
Prior service cost (credit)  1 1 
Net actuarial loss5 7 9 13 
Net cost$7 $8 $14 $16 
Other Postretirement Benefits:
  
Interest cost1 1 $1 $1 
Amortization of prior service cost (credit)(1)(1)(1)(1)
Net cost$ $ $ $ 

10.    Income Taxes
Our consolidated interim effective tax rate is based on our expected annual operating income, statutory tax rates, and income tax laws in the various jurisdictions where we operate. Significant or unusual items, including adjustments to accruals for tax uncertainties, are recognized in the fiscal quarter in which the related event or a change in judgment occurs. The effective tax rate of 16.4% for the six months ended October 31, 2020, was lower than the expected tax rate of 22.0% 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. Our expected tax rate includes current fiscal year additions for existing tax contingency items. The effective tax rate for the three months ended October 31, 2020, was 22.1% compared to 15.0% for the same period last year. The increase in our effective tax rate for the three months ended October 31, 2020, was driven primarily by a decrease in the foreign derived intangible income deduction, and the absence of the prior year true-up benefit.

We have asserted that the undistributed earnings of the majority of our foreign subsidiaries are reinvested indefinitely outside the United States. Therefore, no income taxes have been provided for any outside basis differences inherent in these subsidiaries other than those subject to the one-time repatriation tax. We have a limited number of subsidiaries that are not permanently reinvested and therefore we have recorded the deferred tax liability related to the undistributed earnings (but not for their outside basis differences).

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

We use currency derivative contracts to limit our exposure to the foreign currency exchange 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 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.

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We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts for all hedged currencies totaling $1,026 million at April 30, 2020, and $1,070 million at October 31, 2020. The maximum term of outstanding derivative contracts was 36 months at both April 30, 2020, and October 31, 2020.

We also use foreign currency-denominated debt instruments to help manage our foreign currency exchange risk. We designate a portion of those debt instruments as net investment hedges, which 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. The amount of foreign currency-denominated debt instruments designated as net investment hedges was $613 million at April 30, 2020, and $640 million at October 31, 2020.

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

We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to take physical delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than as derivative instruments.

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)Classification20192020
Currency derivatives designated as cash flow hedges:   
Net gain (loss) recognized in AOCIn/a$(2)$14 
Net gain (loss) reclassified from AOCI into earningsSales6 5 
Currency derivatives not designated as hedging instruments:   
Net gain (loss) recognized in earningsSales$(1)$1 
Net gain (loss) recognized in earningsOther income (expense), net1 3 
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCIn/a$(20)$6 
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales$1,248 $1,272 
Other income (expense), net3 (1)
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Six Months Ended
October 31,
(Dollars in millions)Classification20192020
Currency derivatives designated as cash flow hedges:   
Net gain (loss) recognized in AOCIn/a$13 $(35)
Net gain (loss) reclassified from AOCI into earningsSales10 16 
Currency derivatives not designated as hedging instruments:   
Net gain (loss) recognized in earningsSales$(1)$(5)
Net gain (loss) recognized in earningsOther income (expense), net2 11 
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCIn/a$3 $(33)
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales$2,226 $2,259 
Other income (expense), net9 4 
We expect to reclassify $19 million of deferred net gains on cash flow hedges recorded in AOCI as of October 31, 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.

The following table presents the fair values of our derivative instruments:
April 30, 2020October 31, 2020
(Dollars in millions)

Classification
Derivative Assets
Derivative Liabilities
Derivative Assets
Derivative Liabilities
Designated as cash flow hedges:
Currency derivativesOther current assets$49 $(1)$25 $(3)
Currency derivativesOther assets30  8 (2)
Currency derivativesAccrued expenses   (1)
Currency derivativesOther liabilities  1 (2)
Not designated as hedges:
Currency derivativesOther current assets  1  
Currency derivativesOther assets    
Currency derivativesAccrued expenses (2)  
Currency derivativesOther liabilities    

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
14


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 $2 million at April 30, 2020, and $2 million at October 31, 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
April 30, 2020
Derivative assets$79 $(1)$78 $ $78 
Derivative liabilities(3)1 (2) (2)
October 31, 2020
Derivative assets35 (6)29  29 
Derivative liabilities(8)6 (2) (2)

No cash collateral was received or pledged related to our derivative contracts as of April 30, 2020, or October 31, 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, 2020October 31, 2020
 CarryingFairCarryingFair
(Dollars in millions)AmountValueAmountValue
Assets