Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Introduction

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader better understand Brown-Forman, our operations, our financial results, and our current business environment. Please read this MD&A in conjunction with our Consolidated Financial Statements and the accompanying Notes contained in “Item 8. Financial Statements and Supplementary Data” (the Consolidated Financial Statements).

Our MD&A is organized as follows:

Table of Contents
	Page
Presentation basis. This MD&A reflects the basis of presentation described in Note 1 “Accounting Policies” to the Consolidated Financial Statements. In addition, we define statistical and non-GAAP financial measures that we believe help readers understand our results of operations and the trends affecting our business.	28
Significant developments. We discuss developments during the most recent two fiscal years. Please read this section in conjunction with “Item 1. Business,” which provides a general description of our business and strategy.	31
Executive summary. We discuss (a) fiscal 2020 highlights and (b) our outlook for fiscal 2021, including the trends, developments, and uncertainties that we expect to affect our business.	33
Results of operations. We discuss (a) fiscal 2020 results for our largest markets, (b) fiscal 2020 results for our largest brands, and (c) the causes of year-over-year changes in our statements of operations line items, including transactions and other items that affect the comparability of our results, for fiscal years 2020 and 2019.	35
Liquidity and capital resources. We discuss (a) the causes of year-over-year changes in cash flows from operating activities, investing activities, and financing activities; (b) recent and expected future capital expenditures; (c) dividends and share repurchases; and (d) our liquidity position, including capital resources available to us.	42
Off-balance sheet arrangements.	43
Long-term obligations.	44
Critical accounting policies and estimates. We discuss the critical accounting policies and estimates that require significant management judgment.	44

Presentation Basis

Non-GAAP Financial Measures

We use some 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, (c) estimated net changes in distributor inventories, and (d) a non-cash write-down of the Chambord brand name. We explain these adjustments below.

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“Acquisitions and divestitures.” This adjustment removes (a) any non-recurring effects related to our acquisitions and divestitures (e.g., transaction gains or losses, 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). Excluding non-comparable periods allows us to include the effects of acquired and divested brands only to the extent that results are comparable year over year.

On July 3, 2019, we acquired 100% of the voting interests in The 86 Company, which owns Fords Gin, for $22 million in cash. This adjustment removes (a) transaction and integration costs related to the acquisition and (b) operating activity for the acquired business for the non-comparable period, which is fiscal 2020 activity for The 86 Company. We believe that these adjustments allow for us to better understand our underlying results on a comparable basis. See Note 12 to the Consolidated Financial Statements for details.

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

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“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.

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“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.

•	“Chambord impairment.” During the fourth quarter of fiscal 2020, we recognized a non-cash impairment charge of $13 million for our Chambord brand name. See “Critical Accounting Policies and Estimates” below and Note 4 to the Consolidated Financial Statements for details.

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 investment community. We provide reconciliations of the “underlying change” in certain line items of the statements of operations to their nearest GAAP measures in the tables under “Results of Operations - Year-Over-Year Comparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

“Return on average invested capital.” This measure refers to the sum of net income and after-tax interest expense, divided by average invested capital. Average invested capital equals assets less liabilities, excluding interest-bearing debt, and is calculated using the average of the most recent 13 month-end balances. After-tax interest expense equals interest expense multiplied by one minus our effective tax rate. We use this non-GAAP measure because we consider return on average invested capital to be a meaningful indicator of how effectively and efficiently we invest capital in our business.

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 category. Below, we define the geographic and brand aggregations used in this report.

Geographic Aggregations.

In “Results of Operations - Fiscal 2020 Market Highlights,” we provide supplemental information for our largest markets ranked by percentage of total fiscal 2020 net sales. In addition to markets 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, France, Japan, and Canada. This aggregation represents our net sales of branded products to these markets.

•	“Emerging” markets are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, and Russia. This aggregation represents our net sales of branded products to these markets.

•	“Travel Retail” represents our net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military, regardless of customer location.

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

Brand Aggregations.

In “Results of Operations - Fiscal 2020 Brand Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal 2020 net sales. In addition to brands listed by name, we include the following aggregations:

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

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

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

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“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 Double Jack, Gentleman Jack & Cola, Jack Daniel’s Lynchburg Lemonade, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Berry, Jack Daniel’s Cider, and the seasonal Jack Daniel’s Winter Jack RTP.

•	“Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft.

•	“Super-premium American whiskey” includes Woodford Reserve, Gentleman Jack, JDSB, JDTR, Jack Daniel’s Sinatra Select, and Jack Daniel’s No. 27 Gold Tennessee Whiskey.

•	“Tequila” includes el Jimador, the Herradura family of brands (Herradura), New Mix, Pepe Lopez, and Antiguo.

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

•	“Vodka” includes Finlandia.

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

Other Metrics.

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“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.

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“Consumer takeaway.” When discussing trends in the market, we refer to consumer takeaway, a term commonly used in the beverage alcohol industry that refers to the purchase of product by consumers from retail outlets 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.

Significant Developments

Below we discuss the significant developments in our business during fiscal 2019 and fiscal 2020. These developments relate to the COVID-19 pandemic (COVID-19), tariffs, innovation, acquisitions and divestitures, and capital deployment.

COVID-19

COVID-19 negatively affected our results beginning in the fourth quarter of fiscal 2020. Year-to-date underlying net sales for the nine months ended January 31, 2020, grew in the low single digits and were adversely affected by COVID-19 during the fourth quarter of fiscal 2020. This was largely reflected in both on-premise (representing nearly 20% of our business) and Travel Retail channels essentially coming to a halt in March and April. Solid off-premise gains across some of our developed markets, which reflected an increase in at-home consumption, pantry loading, and strong growth in the e-premise channel only partially offset the on-premise and Travel Retail declines. While the financial impact of COVID-19 on our results is difficult to measure, it has had an unfavorable impact on our operating income and business operations. We discuss the estimated effect of COVID-19 on our results where relevant below.

Despite the negative effects of COVID-19 on our results in the fourth quarter and the full year, we ended the fiscal year in a strong financial position, and we believe that 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 Capital Resources” below for details.

Tariffs

Tariffs negatively affected our results beginning in the second quarter of fiscal 2019, and are expected to continue to have a negative impact on our results as long as tariffs are in place. While our results for fiscal 2020 were negatively affected by tariffs as described below, the year-over-year impact began to ease during the third quarter of fiscal 2020.

•	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.” We discuss the estimated effect of the tariffs on our results where relevant below.

Innovation

•	Jack Daniel’s family of brands. Innovation within the Jack Daniel’s family of brands has contributed to our growth over the last two years as described below.

◦	In fiscal 2019, we expanded JDTR to several additional markets including France, Travel Retail, Germany, and Poland, and we launched Jack Daniel’s Bottled-in-Bond exclusively in Travel Retail.

◦	In fiscal 2020, we launched Jack Daniel’s Tennessee Apple, which was introduced in the United States in the fall of 2019 and a few select international markets in the spring of 2020.

•	Other American whiskeys. We continue to capitalize on consumers’ interest in premium-plus whiskey with our wide range of brands, including Woodford Reserve and Old Forester.

◦	We introduced Woodford Reserve Straight Malt and Woodford Reserve Straight Wheat in fiscal 2019 and fiscal 2020, respectively.

◦	In fiscal 2019, we introduced Old Forester’s first new grain recipe with the launch of Old Forester Rye.

Acquisitions and Divestitures

•	On July 3, 2019, we acquired 100% of the voting interests in The 86 Company, which owns Fords Gin, for $22 million in cash.

Capital Deployment

•	Beyond the acquisition described above, we have focused our capital deployment initiatives on (a) enabling the expected future growth of our existing businesses through investments in our production capacity, barrel whiskey inventory, and brand-building efforts; and (b) returning cash to our stockholders.

•	Investments. During fiscal 2019 and fiscal 2020, our capital expenditures totaled approximately $230 million and focused on enabling the growth of our premium whiskey brands:

◦	Jack Daniel’s. We expanded our shipping warehouse facility and built two additional warehouses.

◦	Woodford Reserve. We built two additional new warehouses, to support the brand’s strong growth.

◦	Old Forester. We opened the Old Forester Distillery and visitors’ center on Main Street in Louisville, Kentucky, in the summer of 2018.

◦	Slane Irish Whiskey. We opened a new distillery in the summer of 2018.

◦	Brown-Forman Cooperage. We invested in the modernization of our cooperage.

•	Cash returned to stockholders. During fiscal 2019 and fiscal 2020, we returned $0.8 billion to our stockholders through $0.6 billion in regular quarterly dividends, and $0.2 billion in share repurchases.

Executive Summary

Fiscal 2020 Highlights

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We delivered reported net sales of $3.4 billion, an increase of 1% compared to fiscal 2019. Excluding the negative effect of foreign exchange and an estimated net increase in distributor inventories, underlying net sales were flat. Growth of our premium bourbon brands, the launch of JDTA, and JD RTDs was offset by declines of JDTW and Finlandia. From a geographic perspective, the United States was the largest contributor to our underlying net sales. Declines in Travel Retail, developed international, and emerging markets offset this growth. COVID-19 had a negative impact on our results from both a brand and geographic perspective.

•	We delivered reported operating income of $1.1 billion, a decrease of 5% compared to fiscal 2019. Excluding an estimated net increase in distributor inventories and the Chambord impairment, underlying operating income declined 6% reflecting higher input and tariff-related costs (defined above) along with an increase in SG&A expense.

•	We delivered diluted earnings per share of $1.72, a decrease of 1% compared to fiscal 2019, as a reduction in reported operating income was only partially offset by a lower effective tax rate and a decline in non-operating postretirement expense.

•	Our return on average invested capital decreased to 20.4% in fiscal 2020, compared to 22.0% in fiscal 2019. This decrease was driven by higher average invested capital.

Summary of Operating Performance Fiscal 2019 and Fiscal 2020
									2019 vs. 2020
Fiscal year ended April 30	2019				2020				Reported Change			Underlying Change****1
Net sales	$	3,324			$	3,363			1	%		—	%
Cost of sales	1,158				1,236				7	%		7	%
Gross profit	2,166				2,127				(2	%)		(3	%)
Advertising	396				383				(3	%)		(2	%)
SG&A	641				642				—	%		1	%
Operating income	$	1,144			$	1,091			(5	%)		(6	%)
Total operating expenses**2	$	1,022			$	1,036			1	%		—	%
As a percentage of net sales**3
Gross profit	65.2		%		63.2		%		(2.0	pp)
Operating income	34.4		%		32.4		%		(2.0	pp)
Interest expense, net	$	80			$	77			(4	%)
Effective tax rate	19.8		%		18.0		%		(1.8	pp)
Diluted earnings per share	$	1.73			$	1.72			(1	%)
Return on average invested capital**4	22.0		%		20.4		%		(1.6	pp)

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).

4See “Non-GAAP Financial Measures” above for details on our use of “return on average invested capital,” including how we calculate this measure and why we think this information is useful to readers.

Fiscal 2021 Outlook

Since the COVID-19 pandemic began, we have taken a “People First” approach to this crisis, taking numerous measures ensuring the health and safety of our employees. We face substantial uncertainty related to the evolving COVID-19 pandemic and its effect on the global economy. We currently expect no material impact on our ability to make, ship, market, and sell our brands to our consumers. Our total number of employees has remained essentially unchanged (since COVID-19), and at this time we

expect this to continue as we leverage our people resources by reallocating them toward the off-premise channel and the rapidly growing e-premise channel.

We have increased our focus on the management of our uses of cash, such as reducing spend behind on-premise and global travel retail activities as well as discretionary spend (including hiring and travel freezes), and deferring certain capital expenditures and re-prioritizing where necessary, while continuing to invest behind the business where appropriate.

Further, as COVID-19 and its effect on the global economy continues to evolve, we will 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, we are not able to provide quantitative guidance for fiscal 2021 at this time. From a qualitative perspective, we believe that the Travel Retail channel will not recover in fiscal 2021, the on-premise channel recovery will depend on a variety of factors, and emerging markets will likely be slower to recover.

We currently believe that with a strong balance sheet, solid cash flows, and ample liquidity, we will fund ongoing investments in the business and pay regular dividends. See “Liquidity and Capital Resources” below for details.

Results of Operations

Fiscal 2020 Market Highlights

The following table shows net sales results for our ten largest markets, summarized by geographic area, for fiscal 2020 compared to fiscal 2019. We discuss the most significant changes in net sales for each market below the table.

Top 10 Markets
					Net Sales % Change vs. 2019
Geographic area****1		% of Fiscal 2020 Net Sales			Reported		Foreign Exchange		Estimated Net Chg in Distributor Inventories			Underlying****2
United States		50	%		8	%	—	%	(3	%)		5	%
Developed International		27	%		(2	%)	1	%	(1	%)		(1	%)
United Kingdom		5	%		(10	%)	2	%	—	%		(8	%)
Germany		5	%		8	%	(1	%)	—	%		7	%
Australia		5	%		(5	%)	4	%	—	%		(1	%)
France		4	%		(1	%)	—	%	—	%		(1	%)
Japan		1	%		17	%	(2	%)	(14	%)		1	%
Canada		1	%		8	%	—	%	(8	%)		—	%
Rest of Developed International		5	%		(5	%)	1	%	1	%		(2	%)
Emerging		17	%		(4	%)	1	%	1	%		(1	%)
Mexico		5	%		(7	%)	—	%	—	%		(7	%)
Poland		3	%		(1	%)	3	%	—	%		2	%
Russia		2	%		6	%	5	%	(3	%)		8	%
Rest of Emerging		8	%		(5	%)	1	%	2	%		(1	%)
Travel Retail		4	%		(11	%)	1	%	1	%		(10	%)
Non-branded and bulk		2	%		(30	%)	—	%	—	%		(29	%)
Total		100	%		1	%	1	%	(2	%)		—	%
Note: Results may differ due to rounding

1See “Definitions” above for definitions of market aggregations 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 in all of the markets discussed below were adversely affected by COVID-19 during the fourth quarter of fiscal 2020. See “Significant Developments - COVID-19” above for more information around the impact of COVID-19 on our results.

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The United States, our most important market, represented 50% of our reported net sales, which grew 8% in fiscal 2020. Underlying net sales increased 5% after adjusting for an estimated net increase in distributor inventories (as a result of distributors building their inventory levels in April 2020 due to the uncertainty around potential supply chain disruptions resulting from COVID-19). Underlying net sales were adversely affected by COVID-19 during the fourth quarter largely due to the closures in the on-premise channel. The underlying net sales gains for the fiscal year were driven by (a) our premium bourbons, led by Woodford Reserve and Old Forester, supported by strong consumer takeaway trends; and (b) the launch of JDTA. This growth was partially offset by declines of JDTW, as lower net pricing partly offset an increase in volumes.

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Developed International markets represented 27% of our reported net sales, which declined 2% in fiscal 2020. Underlying net sales decreased 1%, after adjusting for the negative effect of foreign exchange and an estimated net increase in distributor inventories. Year-to-date underlying net sales for the nine months ended January 31, 2020, grew in the low single digits and were adversely affected by COVID-19 during the fourth quarter of fiscal 2020 largely due to the closures in the on-premise channel. The full-year underlying net sales declines were driven by the United Kingdom, partially offset by growth in Germany.

◦	The United Kingdom’s underlying net sales decline was primarily driven by a planned reduction in promotional activities for JDTW, which resulted in lower volumes and an unfavorable channel and size mix. COVID-19 had a further adverse effect on results primarily due to the closures in the on-premise channel.

◦	Germany’s underlying net sales growth was fueled by continued volumetric gains of JD RTDs. COVID-19 had an adverse effect on JDTW primarily due to the closures in the on-premise channel, while JD RTDs continued their strong growth in the fourth quarter.

◦	Australia’s underlying net sales decline was driven by lower volumes of JD RTDs and JDTW, partially offset by the volumetric growth of our super-premium American whiskey portfolio. COVID-19 had an adverse effect on results primarily due to the closures in the on-premise channel as underlying net sales declined in the fourth quarter.

◦	France’s underlying net sales decline was driven by lower volumes and prices of JDTW, partially offset by the volumetric growth of JDTH along with the launch of JD RTDs. COVID-19 had an adverse effect on results primarily due to the closures in the on-premise channel in the fourth quarter.

◦	Japan’s underlying net sales growth was driven by higher volumes of Early Times.

◦	Canada’s underlying net sales were flat as favorable price/mix was offset by lower volumes. COVID-19 had an adverse effect on results in the fourth quarter.

◦	Underlying net sales in the Rest of Developed International decreased primarily due to lower JDTW volumes in Spain, a heavily on-premise market, as COVID-19 had an adverse effect on results primarily due to the closures in this channel.

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Emerging markets represented 17% of our reported net sales and declined 4% in fiscal 2020. Underlying net sales decreased 1% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Year-to-date underlying net sales for the nine months ended January 31, 2020, grew in the mid-single digits and were adversely affected by COVID-19 during the fourth quarter of fiscal 2020, which drove our underlying net sales down for the fiscal year. The full-year underlying net sales declines were led by Mexico, partially offset by growth in Turkey, Russia, and China.

◦	Mexico’s underlying net sales declines were driven by lower volumes of New Mix, el Jimador, and JDTW, partially offset by higher pricing of el Jimador. These declines partly reflect the recessionary economy, and were further negatively impacted by COVID-19 in the fourth quarter.

◦	Poland’s underlying net sales growth was driven by the volumetric growth of the Jack Daniel’s family of brands led by JDTW, Gentleman Jack, and JDTH, partially offset by lower volumes and net prices of Finlandia. Tough comparisons to the fourth quarter of fiscal 2019 along with the adverse effects of COVID-19 negatively impacted full-year growth.

◦	Russia’s underlying net sales growth was driven by higher volumes of JDTW supported by strong consumer demand. COVID-19 had an adverse effect on results in the fourth quarter.

◦	Underlying net sales in the Rest of Emerging decreased as declines of JDTW in sub-Saharan Africa, Romania, and Chile were partially offset by growth for the brand in Turkey and China. COVID-19 had an adverse effect on results in these markets.

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Travel Retail represented 4% of our reported net sales and declined 11% in fiscal 2020. Underlying net sales decreased 10% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. Year-to-date underlying net sales for the nine months ended January 31, 2020, declined in the low single digits and were significantly adversely affected by COVID-19 during the fourth quarter of fiscal 2020 largely reflecting the unprecedented implementation of travel bans and other restrictions. The full-year underlying net sales decline was driven by lower volumes of JDTW and Finlandia, partially offset by the volumetric growth of Woodford Reserve.

•	Non-branded and bulk represented 2% of our reported net sales and declined 30% in fiscal 2020. Underlying net sales decreased 29% after adjusting for the negative effect of foreign exchange. Declines were driven by lower volumes and prices for used barrels along with a decrease in bulk whiskey sales.

Fiscal 2020 Brand Highlights

The following table highlights the worldwide results of our largest brands for fiscal 2020 compared to fiscal 2019. We discuss results of the brands most affecting our performance below the table.

Major Brands
	Volumes			Net Sales % Change vs. 2019
Product category / brand family / brand****1	9L Depletions****1			Reported		Acquisitions & Divestitures		Foreign Exchange		Estimated Net Chg in Distributor Inventories			Underlying****2
Whiskey	2	%		3	%	—	%	1	%	(2	%)		2	%
Jack Daniel’s family of brands	2	%		1	%	—	%	1	%	(2	%)		—	%
JDTW	(3	%)		(3	%)	—	%	1	%	(2	%)		(4	%)
JD RTD/RTP	4	%		6	%	—	%	2	%	(1	%)		7	%
JDTH	6	%		3	%	—	%	1	%	1	%		5	%
Gentleman Jack	7	%		5	%	—	%	—	%	1	%		7	%
JDTF	(1	%)		(4	%)	—	%	1	%	1	%		(3	%)
Other Jack Daniel’s whiskey brands	73	%		58	%	—	%	1	%	(17	%)		41	%
Woodford Reserve	20	%		23	%	—	%	—	%	(4	%)		19	%
Tequila	(7	%)		5	%	—	%	—	%	(2	%)		2	%
el Jimador	(3	%)		8	%	—	%	—	%	(3	%)		5	%
Herradura	1	%		11	%	—	%	(1	%)	(4	%)		7	%
Wine	(1	%)		—	%	—	%	—	%	—	%		(1	%)
Vodka (Finlandia)	(9	%)		(13	%)	—	%	1	%	1	%		(12	%)
Rest of Portfolio	1	%		1	%	(5	%)	3	%	(2	%)		(3	%)
Non-branded and bulk	NA			(30	%)	—	%	—	%	—	%		(29	%)
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 adversely affected by COVID-19 during the fourth quarter of fiscal 2020. See “Significant Developments - COVID-19” above for more information around the impact of COVID-19 on our results.

•	Whiskey brands grew volumes 2% in fiscal 2020. Reported net sales grew 3%, while underlying net sales increased 2% after adjusting for the negative effect of foreign exchange and an estimated net increase in distributor inventories. The underlying net sales gain was driven by Woodford Reserve, the launch of JDTA, and JD RTDs, partially offset by JDTW declines.

◦	The Jack Daniel’s family of brands had flat underlying net sales as (a) the launch of JDTA, (b) growth of JD RTDs in Germany and the United States, and (c) broad-based geographic gains of JDTH were offset by broad-based declines of JDTW as COVID-19 had an adverse effect on results primarily due to on-premise and Travel Retail channels essentially coming to a halt in March and April.

•

JDTW generates a significant percentage of our total net sales and is our top priority. The brand is the largest in the world priced over $25 per 750 ml per bottle1 and the world’s fourth-largest premium spirits brand measured by volume.2 During calendar 2019, JDTW grew volume for the 28th consecutive year1 and, among the top five premium spirits brands on the list, was the only one to grow volume in each of the past five years2 – an achievement that underscores our belief in the brand’s sustainable appeal and long-term growth potential. Despite these accomplishments, the brand has experienced a number of challenges, including retaliatory tariffs, primarily in Europe, and the negative impact of COVID-19 across many of our major markets in the fourth quarter. Underlying net sales declines of JDTW were broad based, led by decreases in the United Kingdom, the United States, Travel Retail, and France. These declines were partially offset by growth in Turkey and Russia.

1IWSR, 2019 data.
2Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in March 2020

•	JD RTD/RTP increased underlying net sales with volumetric gains in Germany and the United States.

•

Since its introduction in late fiscal 2011, JDTH has contributed significantly to our net sales growth. JDTH is the second-largest selling flavored whiskey1 and remains one of the top 25 largest brands in the world priced over $25 per 750 ml bottle.2 Despite the adverse affect of COVID-19 in the fourth quarter, underlying net sales gains for the brand were broad-based, reflecting higher volumes, particularly in the United States and France.

•	Gentleman Jack increased underlying net sales with broad-based volumetric growth led by the United States, Poland, and Germany.

•	JDTF has been one of the top five largest selling flavored whiskeys since 2015.2 Underlying net sales declines were driven by lower volumes and unfavorable price/mix in the United States and lower volumes in the on-premise and Travel Retail channels as COVID-19 had an adverse effect on results in the fourth quarter.

•	The increase in underlying net sales for our Other Jack Daniel’s whiskey brands was fueled by the launch of JDTA in the United States in the fall of 2019.

◦

Woodford Reserve is the leading super-premium American whiskey globally2, and is poised for continued growth as interest in bourbon continues to increase around the world. The brand was once again selected as an Impact “Hot Brand.”1 The United States is by far the brand’s most important market and was responsible for most of its growth during fiscal 2020. However, the brand continued its momentum outside the United States, growing volumes 16%, led by the United Kingdom and Travel Retail. We plan to continue devoting substantial resources to Woodford Reserve to support its growth potential with sustained advertising, including our Kentucky Derby sponsorship, and ongoing capital investments.

•	Tequila volumes declined 7% in fiscal 2020, while reported net sales increased 5% and underlying net sales grew 2% after adjusting for an estimated net increase in distributor inventories. These results were negatively affected by the recessionary economy in Mexico and the fourth-quarter effect of COVID-19.

◦	el Jimador remains one of the top ten largest selling tequilas measured by volume.2 Underlying net sales growth reflects higher volumes in the United States, where consumer takeaway trends remained strong, partially offset by lower volumes in Mexico.

◦	Herradura’s underlying net sales growth was driven by increased volumes, higher prices, and favorable product mix in the United States. We remain focused on developing Herradura in this important market (which we believe has considerable potential for growth), strengthening our position in Mexico, and continuing to build our presence in higher-value tequila markets throughout the world.

•	Wine volumes declined 1% in fiscal 2020, while reported net sales were flat and underlying net sales declined 1% after adjusting for an estimated net increase in distributor inventories. The decrease in underlying net sales was driven by lower volumes in the United States as COVID-19 had an adverse effect on results in the fourth quarter.

•

Finlandia volumes fell 9% in fiscal 2020, while reported net sales decreased 13% and underlying net sales declined 12% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. The decrease in underlying net sales was driven by lower volumes and net prices in Poland, along with lower volumes in Travel Retail as COVID-19 had an adverse effect on results in the fourth quarter.

•

Rest of Portfolio volumes increased 1%, while reported net sales increased 1% and underlying net sales declined 3% after adjusting for (a) the effect of our acquisition of Fords Gin, (b) the negative effect of foreign exchange, and (c) an estimated net increase in distributor inventories. The decrease in underlying net sales was driven by lower volumes of Chambord in the United Kingdom as COVID-19 had a further adverse effect on results in the fourth quarter.

•	Non-branded and bulk reported net sales declined 30%, while underlying net sales decreased 29% after adjusting for the negative effect of foreign exchange. Declines were driven by lower volumes and prices for used barrels along with a decrease in bulk whiskey sales.

1Impact Databank published the Impact’s “Hot Brands - Spirits” list in March 2020.
2IWSR, 2019 data.

Year-Over-Year Comparisons

Commentary below compares fiscal 2020 to fiscal 2019 results. A comparison of fiscal 2019 to fiscal 2018 results may be found in “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended April 30, 2019.

COVID-19 adversely affected our results during the fourth quarter of fiscal 2020. See “Significant Developments - COVID-19” above for more information around the impact of COVID-19 on our results.

Net Sales
Percentage change versus the prior fiscal year ended April 30	2020
Change in reported net sales	1	%
Foreign exchange	1	%
Estimated net change in distributor inventories	(2	%)
Change in underlying net sales	—	%
Change in underlying net sales attributed to:
Volume	(1	%)
Net price/mix	1	%
Note: Results may differ due to rounding

Net sales of $3.4 billion increased 1%, or $39 million, in fiscal 2020 compared to fiscal 2019. Underlying net sales were flat after adjusting reported results for an estimated net increase in distributor inventories (primarily as a result of distributors in the United States building their inventory levels in April 2020 due to the uncertainty around potential supply chain disruptions resulting from COVID-19) and the negative effect of foreign exchange. Flat underlying net sales comprised 1% volume decline, which was offset by 1% price/mix. Volume declines were led by JDTW, Finlandia, and our tequila brands, partially offset by the launch of JDTA along with higher volumes of Woodford Reserve and JDTH. Price/mix was driven by (a) faster growth from our higher-priced brands (Woodford Reserve and the Jack Daniel’s family of brands) and declines of our lower-priced brands (Finlandia) and (b) higher pricing on tequilas. This price/mix benefit was partially offset by lower net pricing of JDTW. See “Results of Operations - Fiscal 2020 Market Highlights and Fiscal 2020 Brand Highlights” above for details on the factors contributing to the change in underlying net sales for fiscal 2020, including the impact of COVID-19.

Cost of Sales
Percentage change versus the prior fiscal year ended April 30	2020
Change in reported cost of sales	7	%
Foreign exchange	1	%
Estimated net change in distributor inventories	(1	%)
Change in underlying cost of sales	7	%
Change in underlying cost of sales attributed to:
Volume	(1	%)
Cost/mix	7	%
Note: Results may differ due to rounding

Cost of sales of $1.2 billion increased $78 million, or 7%, in fiscal 2020 compared to fiscal 2019. Underlying cost of sales also grew 7% after adjusting reported costs for the positive effect of foreign exchange and an estimated net increase in distributor inventories. The increase in underlying cost of sales was driven by higher input costs of agave and wood along with tariff-related costs. We estimate that over one-third of the increase in underlying cost of sales was due to tariff-related costs.

Gross Profit
Percentage change versus the prior fiscal year ended April 30	2020
Change in reported gross profit	(2	%)
Estimated net change in distributor inventories	(2	%)
Change in underlying gross profit	(3	%)
Note: Results may differ due to rounding

Gross Margin
Fiscal year ended April 30	2020
Prior year gross margin	65.2	%
Price/mix	0.4	%
Cost	(1.5	%)
Tariffs1	(0.9	%)
Change in gross margin	(2.0	%)
Current year gross margin	63.2	%
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 “Significant Developments - Tariffs” for details.

Gross profit of $2.1 billion decreased $39 million, or 2%, in fiscal 2020 compared to fiscal 2019. Underlying gross profit declined 3% after adjusting reported results for an estimated net increase in distributor inventories. Gross margin decreased to 63.2% in fiscal 2020, down 2.0 percentage points from 65.2% in fiscal 2019. The decrease in gross margin was driven by higher input costs and tariff-related costs.

Operating Expenses
Percentage change versus the prior year period ended April 30
2020	Reported		Acquisitions & Divestitures		Chambord Impairment		Foreign Exchange		Underlying
Advertising	(3	%)	—	%	—	%	1	%	(2	%)
SG&A	—	%	(1	%)	—	%	2	%	1	%
Total operating expenses****1	1	%	—	%	(1	%)	—	%	—	%
Note: Results may differ due to rounding

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

Operating expenses totaled $1.0 billion and increased $14 million, or 1%, in fiscal 2020 compared to fiscal 2019. Underlying operating expenses were flat after adjusting for the effect of the Chambord impairment.

•

Reported advertising expenses declined 3% in fiscal 2020 compared to fiscal 2019, while underlying advertising expenses decreased 2% after adjusting for the positive effect of foreign exchange. The decrease in underlying advertising expense was driven by the reduction in spending behind on-premise channel activities and various events and sponsorships that were canceled in the fourth quarter of fiscal 2020 due to COVID-19.

•	Reported SG&A expenses were flat in fiscal 2020 compared to fiscal 2019, while underlying SG&A increased 1% after adjusting for the positive effect of foreign exchange and the effect of our acquisition of Fords Gin. The increase in underlying SG&A was driven by higher personnel costs.

Operating Income
Percentage change versus the prior fiscal year ended April 30	2020
Change in reported operating income	(5	%)
Chambord Impairment	1	%
Estimated net change in distributor inventories	(3	%)
Change in underlying operating income	(6	%)
Note: Results may differ due to rounding

Operating income was $1.1 billion in fiscal 2020, a decrease of $53 million, or 5%, compared to fiscal 2019. Underlying operating income declined 6% after adjusting for an estimated net increase in distributor inventories and the effect of the Chambord impairment. Operating margin declined 2.0 percentage points to 32.4% in fiscal 2020 from 34.4% in fiscal 2019. COVID-19 had an adverse effect on our fourth quarter and full-year results as discussed above.

Interest expense (net) decreased $3 million, or 4%, in fiscal 2020 compared to fiscal 2019, due to a lower average short-term debt balance and a lower interest rate on our short-term borrowings.

Our effective tax rate for fiscal 2020 was 18.0% compared to 19.8% in fiscal 2019. The decrease in our effective tax rate was driven by increased excess tax benefits related to stock-based compensation and increased benefits from foreign derived sales. See Note 11 to the Consolidated Financial Statements for details.

Diluted earnings per share were $1.72 in fiscal 2020, down 1% from $1.73 in fiscal 2019 as a reduction in reported operating income was only partially offset by a lower effective tax rate and a decline in non-operating postretirement expense.

Liquidity and Capital Resources

Our ability to generate cash from operations consistently is one of our most significant financial strengths. Our strong cash flows enable us to invest in our people, invest in our brands, invest in our assets, pay regular dividends, make strategic acquisitions that we believe will enhance shareholder value, repurchase shares of common stock, and, from time to time, pay special dividends.

Cash Flow Summary

(Dollars in millions)		2019				2020
Operating activities		$	800			$	724
Investing activities:
Acquisition of business		—				(22		)
Additions to property, plant, and equipment		(119		)		(113		)
Other		—				(6		)
		(119		)		(141		)
Financing activities:
Net change in short-term borrowings		(71		)		178
Acquisition of treasury stock		(207		)		(1		)
Dividends paid		(310		)		(325		)
Other		(11		)		(43		)
		(599		)		(191		)
Foreign exchange effect on cash and cash equivalents		(14		)		(24		)
Net increase in cash and cash equivalents		$	68			$	368

Cash and cash equivalents increased $368 million in fiscal 2020, compared to an increase of $68 million in fiscal 2019. Cash provided by operations of $724 million was down $76 million from fiscal 2019, reflecting a larger increase in working capital and lower earnings.

Cash used for investing activities was $141 million during fiscal 2020, compared to $119 million for the prior year. The $22 million increase reflects our acquisition of The 86 Company in July 2019.

Cash used for financing activities was $191 million during fiscal 2020, compared to $599 million for fiscal 2019. The $408 million decline largely reflects a $249 million increase in net proceeds from short-term borrowings and a $206 million decrease in share repurchases, partially offset by a $32 million increase in payments for shares withheld from employees to satisfy their withholding tax obligations on stock-based awards, and a $15 million increase in dividend payments.

The impact on cash and cash equivalents as a result of exchange rate changes was a decrease of $24 million for fiscal 2020, compared to a decrease of $14 million in the prior fiscal year.

A discussion of our cash flows for fiscal 2019 compared to fiscal 2018 may be found in “Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended April 30, 2019.

Sources of Liquidity

We generate strong cash flow from operations, which enables us to meet current obligations, fund capital expenditures, pay growing 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.

The ongoing COVID-19 crisis has adversely affected our operations and our financial results. 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, including availing ourselves of certain tax deferral programs as permitted under various government relief efforts. To support our business partners, we have extended additional credit to some of our customers who were most directly affected by the crisis. We continue to monitor closely the impact of the pandemic on our customers’ solvency and our ability to collect from them.

Our cash flow from operations is supplemented by our cash and cash equivalent balances, as well as access to other liquidity sources. Cash and cash equivalents were $307 million at April 30, 2019, and $675 million at April 30, 2020.

As of April 30, 2020, approximately 46% of our cash and cash equivalents were held by our foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. We continue to evaluate our future cash deployment and may decide to repatriate additional cash held by our foreign subsidiaries, which may require us to provide for and pay additional taxes.

We have an $800 million commercial paper program that we regularly use to fund our short-term operational needs. 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. The outstanding commercial paper balances, interest rates, and maturities during the periods ended April 30, 2019 and 2020, are presented below.

(Amounts in millions)	April 30,								Fiscal Year Average
	2019				2020				2019				2020
Commercial paper outstanding	$	150			$	333			$	421			$	251
Interest rate	2.60		%		1.29		%		2.33		%		2.14		%
Average days to maturity	18				73				31				35

Our commercial paper program is supported by available commitments under our currently undrawn $800 million bank credit facility that expires in November 2023. Although unlikely, continued disruption in global financial markets could impair the ability of one or more participating banks to fund its commitments under our credit facility.

As announced on May 21, 2020, our Board of Directors declared a regular quarterly cash dividend of $0.1743 per share on our Class A and Class B common stock. Stockholders of record on June 8, 2020, will receive the dividend on July 1, 2020.

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. Despite recent disruptions, 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 enabled by our strong short-term and long-term credit ratings, will be sufficient to meet all of our future financial commitments.

Off-Balance Sheet Arrangements

As of April 30, 2020, we were not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations, or liquidity.

Long-Term Obligations

We have long-term obligations related to contracts, leases, borrowing arrangements, and employee benefit plans that we enter into in the normal course of business (see Notes 5, 6, 9 and 15 to the Consolidated Financial Statements). The following table summarizes the amounts of those obligations as of April 30, 2020, and the years when they are expected to be paid.1 We expect to meet these obligations with internally generated funds.

(Dollars in millions)		Total				2021				2022-2023				2024-2025				After 2025
Long-term debt		$	2,299			$	—			$	250			$	300			$	1,749
Interest on long-term debt		1,168				74				146				136				812
Tax Act repatriation tax		63				6				12				26				19
Grape purchases		20				11				9				—				—
Leases		57				17				22				9				9
Postretirement benefits2		25				25				n/a				n/a				n/a
Agave purchases3		29				n/a				n/a				n/a				n/a
Total		$	3,661			$	133			$	439			$	471			$	2,589

1	Excludes liabilities for tax uncertainties, as we cannot reasonably predict their ultimate amount or timing of settlement.

2	As of April 30, 2020, we have unfunded pension and other postretirement benefit obligations of $307 million. Because we cannot determine the specific periods in which those obligations will be funded, the table above reflects no amounts related to those obligations other than the $25 million of expected contributions in fiscal 2021.

3

As discussed in Note 5 to the Consolidated Financial Statements, we have obligations to purchase agave, a plant whose sap forms the raw material for tequila. As of April 30, 2020, based on current market prices, obligations under these contracts totaled $29 million. Because we cannot determine the specific periods in which those obligations will be paid, the above table reflects only the total related to those obligations.

Critical Accounting Policies and Estimates

Our financial statements reflect some estimates involved in applying the following critical accounting policies that entail uncertainties and subjectivity. Using different estimates or policies could have a material effect on our operating results and financial condition.

Goodwill and Other Intangible Assets

We have obtained most of our brands by acquiring other companies. When we acquire another company, we first allocate the purchase price to identifiable assets and liabilities, including intangible brand names and trademarks (“brand names”), based on estimated fair value. We then record any remaining purchase price as goodwill. We do not amortize goodwill or other intangible assets with indefinite lives. We consider all of our brand names to have indefinite lives.

We assess our goodwill and other indefinite-lived intangible assets for impairment at least annually, or more frequently if circumstances indicate the carrying amount may be impaired. Goodwill is impaired when the carrying amount of the related reporting unit exceeds its estimated fair value, in which case we write down the goodwill by the amount of the excess (limited to the carrying amount of the goodwill). We estimate the reporting unit’s fair value using discounted estimated future cash flows or market information. Similarly, a brand name is impaired when its carrying amount exceeds its estimated fair value, in which case we write down the brand name to its estimated fair value. We typically estimate the fair value of a brand name using either the “relief from royalty” or “excess earnings” method. We also consider market values for similar assets when available. Considerable management judgment is necessary to estimate fair value, including making assumptions about future cash flows, net sales, discount rates, and royalty rates.

We have the option, before quantifying the fair value of a reporting unit or brand name, to evaluate qualitative factors to assess whether it is more likely than not that our goodwill or brand names are impaired. If we determine that is not the case, then we are not required to quantify the fair value. That assessment also takes considerable management judgment.

Based on our assumptions, we believe none of our goodwill or other intangibles are impaired. Further, we estimate the fair values of goodwill and other intangible assets substantially exceed their carrying amounts, except for our Chambord brand name. As of April 30, 2020, the carrying amount of the Chambord brand name was $104 million.

During the fourth quarter of fiscal 2020, we recognized a non-cash impairment charge of $13 million for our Chambord brand name. The impairment reflects a decline in our long-term outlook for Chambord, which has a significant on-premise presence and is expected to be considerably affected by the closures and restrictions in this channel in response to the COVID-19 pandemic.

We determined Chambord’s fair value based on the relief from royalty method, using current assumptions. Reasonably possible changes in those assumptions could result in additional non-cash impairment charges in the future. For example, we estimate that (a) a 10% decline in projected future net sales would result in an impairment charge of approximately $9 million and (b) a 1 percentage point increase in the discount rate would result in an impairment charge of approximately $18 million.

Pension and Other Postretirement Benefits

We sponsor various defined benefit pension plans and postretirement plans providing retiree health care and retiree life insurance benefits. Benefits are based on factors such as years of service and compensation level during employment. We expense the benefits expected to be paid over employees’ expected service. This requires us to make assumptions to determine the net benefit costs and obligations, such as discount rates, return on plan assets, the rate of salary increases, expected service, and health care cost trend rates. We review these assumptions annually and modify them based on current rates and trends when appropriate. The assumptions also reflect our historical experience and management’s best judgment regarding future expectations. We believe the discount rates and and expected return on plan assets are the most significant assumptions.

The discount rate used to measure the benefit obligations is determined at the beginning of each fiscal year using a yield curve based on the interest rates of high-quality debt securities with maturities corresponding to the expected timing of our benefit payments. The service cost and interest cost components are measured by applying the specific spot rates along that yield curve. The expected return on pension plan assets reflects expected capital market returns for each asset class that are based on historical returns, adjusted for the expected effects of diversification and active management (net of fees) of the assets.

The following table compares the assumed discount rates and expected return on assets used in determining net periodic benefit cost for fiscal 2020 to those to be used in determining that cost for fiscal 2021.

	Pension Benefits						Medical and Life Insurance Benefits
	2020			2021			2020			2021
Discount rate for service cost	4.17	%		3.49	%		4.24	%		3.59	%
Discount rate for interest cost	3.57	%		2.56	%		3.53	%		2.47	%
Expected return on plan assets	6.50	%		6.50	%		n/a			n/a

Using these assumptions, we estimate our pension and other postretirement benefit cost for fiscal 2021 will be approximately $33 million, compared to $29 million for fiscal 2020. Decreasing/increasing the assumed discount rates by 50 basis points would increase/decrease the total fiscal 2021 cost by approximately $5 million. Decreasing/increasing the assumed return on plan assets by 50 basis points would increase/decrease the total fiscal 2021 cost by approximately $4 million.

Income Taxes

Significant judgment is required in evaluating our tax positions. We establish liabilities when some positions are likely to be challenged and may not succeed, despite our belief that our tax return positions are fully supportable. We adjust these liabilities in light of changing circumstances, such as the progress of a tax audit. We believe current liabilities are appropriate for all known contingencies, but this situation could change.

Years can elapse before we can resolve a particular matter for which we may have established a tax liability. Although predicting the final outcome or the timing of resolution of any particular tax matter can be difficult, we believe our liabilities reflect the likely outcome of known tax contingencies. Unfavorable settlement of any particular issue could require use of our cash and increase our effective tax rate. Conversely, a favorable resolution could result in reduced cash tax payments, the reversal of previously established liabilities, or some combination of these results, which could reduce our effective tax rate.

Updated Accounting Standards

See Note 1 to the Consolidated Financial Statements for information about updated accounting standards that we have recently adopted.