Item 1. Financial Statements (Unaudited)

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in millions, except per share amounts)

			Three Months Ended												Nine Months Ended
			January 31,												January 31,
			2021						2022						2021						2022
Sales			$	1,222					$	1,365					$	3,481					$	3,831
Excise taxes			311						328						832						894
Net sales			911						1,037						2,649						2,937
Cost of sales			361						415						1,053						1,172
Gross profit			550						622						1,596						1,765
Advertising expenses			121						117						278						311
Selling, general, and administrative expenses			157						162						460						495
Gain on sale of business			—						—						(127)						—
Other expense (income), net			(9)						(4)						(13)						1
Operating income			281						347						998						958
Non-operating postretirement expense			1						—						4						2
Interest income			—						(1)						(1)						(3)
Interest expense			21						20						61						61
Income before income taxes			259						328						934						898
Income taxes			40						69						151						211
Net income			$	219					$	259					$	783					$	687
Earnings per share:
Basic			$	0.46					$	0.54					$	1.64					$	1.43
Diluted			$	0.45					$	0.54					$	1.63					$	1.43

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in millions)

			Three Months Ended												Nine Months Ended
			January 31,												January 31,
			2021						2022						2021						2022
Net income			$	219					$	259					$	783					$	687
Other comprehensive income (loss), net of tax:
Currency translation adjustments			47						(27)						113						(49)
Cash flow hedge adjustments			(33)						16						(72)						40
Postretirement benefits adjustments			5						5						17						13
Net other comprehensive income (loss)			19						(6)						58						4
Comprehensive income			$	238					$	253					$	841					$	691

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions)

			April 30, 2021						January 31, 2022
Assets
Cash and cash equivalents			$	1,150					$	812
Accounts receivable, less allowance for doubtful accounts of $7 at April 30 and $6 at January 31			753						796
Inventories:
Barreled whiskey			1,101						1,126
Finished goods			323						302
Work in process			199						220
Raw materials and supplies			128						121
Total inventories			1,751						1,769
Other current assets			263						276
Total current assets			3,917						3,653
Property, plant and equipment, net			832						818
Goodwill			779						771
Other intangible assets			676						652
Deferred tax assets			70						67
Other assets			248						265
Total assets			$	6,522					$	6,226
Liabilities
Accounts payable and accrued expenses			$	679					$	629
Dividends payable			—						90
Accrued income taxes			34						64
Short-term borrowings			205						16
Current portion of long-term debt			—						250
Total current liabilities			918						1,049
Long-term debt			2,354						2,061
Deferred tax liabilities			169						190
Accrued pension and other postretirement benefits			219						216
Other liabilities			206						191
Total liabilities			3,866						3,707
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
Additional paid-in capital			—						3
Retained earnings			3,243						3,091
Accumulated other comprehensive income (loss), net of tax			(422)						(418)
Treasury stock, at cost (5,803,000 and 5,613,000 shares at April 30 and January 31, respectively)			(237)						(229)
Total stockholders’ equity			2,656						2,519
Total liabilities and stockholders’ equity			$	6,522					$	6,226

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in millions)

			Nine Months Ended
			January 31,
			2021						2022
Cash flows from operating activities:
Net income			$	783					$	687
Adjustments to reconcile net income to net cash provided by operations:
Gain on sale of business			(127)						—
Non-cash asset write-downs			—						9
Depreciation and amortization			58						60
Stock-based compensation expense			9						11
Deferred income tax provision (benefit)			(56)						(3)
Other, net			(15)						15
Changes in assets and liabilities, excluding the effects of sale of business:
Accounts receivable			(219)						(59)
Inventories			(14)						(33)
Other current assets			30						—
Accounts payable and accrued expenses			68						(32)
Accrued income taxes			16						30
Other operating assets and liabilities			39						(2)
Cash provided by operating activities			572						683
Cash flows from investing activities:
Proceeds from sale of business			177						—
Proceeds from sale of property, plant, and equipment			—						2
Acquisition of business, net of cash acquired			(14)						—
Additions to property, plant, and equipment			(41)						(62)
Computer software expenditures			(2)						(3)
Cash provided by (used for) investing activities			120						(63)
Cash flows from financing activities:
Proceeds from short-term borrowings, maturities greater than 90 days			344						—
Repayments of short-term borrowings, maturities greater than 90 days			(342)						—
Net change in short-term borrowings, maturities of 90 days or less			(25)						(181)
Payments of withholding taxes related to stock-based awards			(18)						(8)
Dividends paid			(253)						(741)
Cash used for financing activities			(294)						(930)
Effect of exchange rate changes on cash and cash equivalents			33						(28)
Net increase (decrease) in cash and cash equivalents			431						(338)
Cash and cash equivalents, beginning of period			675						1,150
Cash and cash equivalents, end of period			$	1,106					$	812

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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

1. Condensed Consolidated Financial Statements

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

We suggest that you read these condensed financial statements together with the financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2021 (2021 Form 10-K). We prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2021 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 Ended												Nine Months Ended
			January 31,												January 31,
(Dollars in millions, except per share amounts)			2021						2022						2021						2022
Net income available to common stockholders			$	219					$	259					$	783					$	687
Share data (in thousands):
Basic average common shares outstanding			478,599						478,887						478,471						478,844
Dilutive effect of stock-based awards			2,237						1,680						2,194						1,755
Diluted average common shares outstanding			480,836						480,567						480,665						480,599
Basic earnings per share			$	0.46					$	0.54					$	1.64					$	1.43
Diluted earnings per share			$	0.45					$	0.54					$	1.63					$	1.43

We excluded common stock-based awards for approximately 298,000 shares and 789,000 shares from the calculation of diluted earnings per share for the three months ended January 31, 2021 and 2022, respectively. We excluded common stock-based awards for approximately 211,000 shares and 623,000 shares from the calculation of diluted earnings per share for the nine months ended January 31, 2021 and 2022, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.

3. Inventories

We value some of our consolidated inventories, including most of our U.S. inventories, at the lower of cost, using the last-in, first-out (LIFO) method or market value. If the LIFO method had not been used, inventories at current cost would have been $353 million higher than reported as of April 30, 2021, and $388 million higher than reported as of January 31, 2022. Changes in the LIFO valuation reserve for interim periods are based on an allocation of the projected change for the entire fiscal year, recognized proportionately over the remainder of the fiscal year.

4. Goodwill and Other Intangible Assets

The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the nine months ended January 31, 2022:

(Dollars in millions)			Goodwill						Other Intangible Assets
Balance at April 30, 2021			$	779					$	676
Foreign currency translation adjustment			(8)						(24)
Balance at January 31, 2022			$	771					$	652

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 January 31, 2022.

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 $11 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant. As of January 31, 2022, our actual exposure under the guaranty of the importer’s obligation was approximately $4 million. We also have accounts receivable from that importer of approximately $9 million at January 31, 2022, 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 cash representing 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 (the Commercial Court Action). 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 (the Arbitration).

Since it was raised, we have disputed Bacardi’s claim of commercial agency compensation and issued a demand that Bacardi adhere to the dispute resolution process mandated by the Agreement. The ruling for the Commercial Court Action was issued on May 19, 2021, in which the Court declined to order Bacardi to return the amounts withheld pending the outcome of the Arbitration. The Arbitration took place the week of July 12, 2021, and the decision was rendered December 8, 2021. The decision confirmed that Bacardi was not entitled to compensation as a commercial agent but was awarded an immaterial amount for its work in winding up the business. In December 2021, Bacardi remitted £47 million related to this matter.

6. Debt

Our long-term debt (net of unamortized discount and issuance costs) consists of:

(Principal and carrying amounts in millions)			April 30, 2021						January 31, 2022
2.250% senior notes, $250 principal amount, due January 15, 2023			$	249					$	250
3.500% senior notes, $300 principal amount, due April 15, 2025			298						298
1.200% senior notes, €300 principal amount, due July 7, 2026			362						333
2.600% senior notes, £300 principal amount, due July 7, 2028			415						399
4.000% senior notes, $300 principal amount, due April 15, 2038			294						295
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
			2,354						2,311
Less current portion			—						250
			$	2,354					$	2,061

Our short-term borrowings of $205 million as of April 30, 2021 included of $195 million of borrowings under our commercial paper program. There were no borrowings under that program as of January 31, 2022.

(Dollars in millions)			April 30, 2021						January 31, 2022
Commercial paper			$195						$—
Average interest rate			0.16%						—%
Average remaining days to maturity			24						0

7. Stockholders’ Equity

The following table shows the changes in stockholders’ equity by quarter during the nine months ended January 31, 2021:

(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 income																					324																		324
Net other comprehensive income (loss)																											24												24
Declaration of cash dividends																					(167)																		(167)
Stock-based compensation expense															3																								3
Stock issued under compensation plans																																	10						10
Loss on issuance of treasury stock issued under compensation plans															(3)						(16)																		(19)
Balance at July 31, 2020			25						47						—						2,849						(523)						(248)						2,150
Net income																					240																		240
Net other comprehensive income (loss)																											15												15
Stock-based compensation expense															3																								3
Stock issued under compensation plans																																	5						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
Net income																					219																		219
Net other comprehensive income (loss)																											19												19
Declaration of cash dividends																					(172)																		(172)
Stock-based compensation expense															3																								3
Stock issued under compensation plans																																	3						3
Loss on issuance of treasury stock issued under compensation plans															(3)						(4)																		(7)
Balance at January 31, 2021			$	25					$	47					$	—					$	3,125					$	(489)					$	(240)					$	2,468

The following table shows the changes in stockholders’ equity by quarter during the nine months ended January 31, 2022:

(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, 2021			$	25					$	47					$	—					$	3,243					$	(422)					$	(237)					$	2,656
Net income																					192																		192
Net other comprehensive income (loss)																											8												8
Declaration of cash dividends																					(172)																		(172)
Stock-based compensation expense															4																								4
Stock issued under compensation plans																																	5						5
Loss on issuance of treasury stock issued under compensation plans															(2)						(8)																		(10)
Balance at July 31, 2021			25						47						2						3,255						(414)						(232)						2,683
Net income																					236																		236
Net other comprehensive income (loss)																											2												2
Stock-based compensation expense															3																								3
Stock issued under compensation plans																																	1						1
Loss on issuance of treasury stock issued under compensation plans															(2)																								(2)
Balance at October 31, 2021			25						47						3						3,491						(412)						(231)						2,923
Net income																					259																		259
Net other comprehensive income (loss)																											(6)												(6)
Declaration of cash dividends																					(659)																		(659)
Stock-based compensation expense															4																								4
Stock issued under compensation plans																																	2						2
Loss on issuance of treasury stock issued under compensation plans															(4)																								(4)
Balance at January 31, 2022			$	25					$	47					$	3					$	3,091					$	(418)					$	(229)					$	2,519

The following table shows the change in each component of accumulated other comprehensive income (AOCI), net of tax, during the nine months ended January 31, 2022:

(Dollars in millions)			Currency Translation Adjustments						Cash Flow Hedge Adjustments						Postretirement Benefits Adjustments						Total AOCI
Balance at April 30, 2021			$	(179)					$	(16)					$	(227)					$	(422)
Net other comprehensive income (loss)			(49)						40						13						4
Balance at January 31, 2022			$	(228)					$	24					$	(214)					$	(418)

The following table shows the cash dividends declared per share on our Class A and Class B common stock during the nine months ended January 31, 2022:

Declaration Date						Record Date						Payable Date						Amount per Share
May 27, 2021						June 8, 2021						July 1, 2021						$0.1795
July 22, 2021						September 3, 2021						October 1, 2021						$0.1795
November 18, 2021						December 3, 2021						December 28, 2021						$0.1885
November 18, 2021						December 9, 2021						December 29, 2021						$1.0000
January 25, 2022						March 8, 2022						April 1, 2022						$0.1885

8. Net Sales

The following table shows our net sales by geography:

			Three Months Ended												Nine Months Ended
			January 31,												January 31,
(Dollars in millions)			2021						2022						2021						2022
United States			$	425					$	488					$	1,334					$	1,400
Developed International1			292						318						789						884
Emerging2			171						196						438						533
Travel Retail3			12						25						47						74
Non-branded & bulk4			11						10						41						46
Total			$	911					$	1,037					$	2,649					$	2,937

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 Australia, Germany, the United Kingdom, France, and Canada.

2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico, Poland, Brazil, 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 Ended												Nine Months Ended
			January 31,												January 31,
(Dollars in millions)			2021						2022						2021						2022
Whiskey1			$	731					$	835					$	2,101					$	2,309
Tequila2			72						90						224						266
Wine3			50						54						162						176
Vodka4			26						29						71						86
Non-branded and bulk5			11						10						41						46
Rest of portfolio			21						19						50						54
Total			$	911					$	1,037					$	2,649					$	2,937

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, the Old Forester family of brands, GlenDronach, Benriach, Glenglassaugh, Slane Irish Whiskey, and Coopers’ Craft.

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

3Includes Korbel Champagne and Sonoma-Cutrer wines.

4Includes Finlandia.

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

9. Pension and Other Postretirement Benefits

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

			Three Months Ended												Nine Months Ended
			January 31,												January 31,
(Dollars in millions)			2021						2022						2021						2022
Pension Benefits:
Service cost			$	7					$	7					$	20					$	20
Interest cost			6						5						19						16
Expected return on plan assets			(12)						(11)						(35)						(34)
Amortization of:
Prior service cost (credit)			—						—						1						1
Net actuarial loss			7						6						20						18
Settlement charge			—						—						—						1
Net cost			$	8					$	7					$	25					$	22
Other Postretirement Benefits:
Service cost			$	—					$	—					$	1					$	1
Interest cost			1						—						1						1
Amortization of prior service cost (credit)			(1)						—						(2)						(1)
Net cost			$	—					$	—					$	—					$	1

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 expected effective tax rate on ordinary income for the fiscal year is 22.7%, which is greater than the U.S. federal statutory rate of 21.0%, due to (a) state income taxes, (b) the effects of foreign operations, (c) the tax effects of prior intercompany sales of inventory that are recognized at tax rates higher than current statutory tax rates and (d) the impact of intercompany profit elimination on the foreign derived intangible income deduction.

The effective tax rate of 23.4% for the nine months ended January 31, 2022, is higher than the expected tax rate of 22.7% on ordinary income for the full fiscal year, primarily due to the true-up of prior-year deferred tax liabilities and the impact of tax rate changes enacted in certain foreign jurisdictions, partially offset by the excess tax benefits related to stock-based compensation. The 23.4% effective tax rate for the nine months ended January 31, 2022, is higher than the effective tax rate of 16.2% for the same period last year, primarily due to (a) the absence of a deferred tax benefit recognized in the prior-year period related to an intercompany transfer of assets, (b) the impact of prior intercompany sales taxed at rates higher than current statutory tax rates, (c) the impact of the intercompany profit eliminations on the foreign derived intangible income deduction, and (d) increased true-ups of prior-year tax liabilities.

We continue to assert that the undistributed earnings of most 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 that were subject to the one-time repatriation tax. We previously changed our indefinite reinvestment assertion with respect to current year earnings and prior-year undistributed earnings for select foreign subsidiaries (but not for their outside basis differences). We have accrued applicable taxes for select entities which are not currently reinvested. No further changes have been made to our indefinite reinvestment assertion.

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 rate 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 to earnings.

Some of our currency derivatives are not designated 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.

We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts for all hedged currencies totaling $1,218 million at April 30, 2021, and $860 million at January 31, 2022. The maximum term of outstanding derivative contracts was approximately 36 months at both April 30, 2021, and January 31, 2022.

We also use foreign currency-denominated debt instruments to help manage our foreign currency exchange rate risk. We designate a portion of those debt instruments as net investment hedges, which are intended to mitigate foreign currency 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 $680 million at April 30, 2021, and $676 million at January 31, 2022.

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 be no longer 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
						January 31,
(Dollars in millions)			Classification			2021						2022
Currency derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI			n/a			$	(39)					$	23
Net gain (loss) reclassified from AOCI into earnings			Sales			4						2
Currency derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings			Sales			$	(6)					$	5
Net gain (loss) recognized in earnings			Other income (expense), net			4						(1)
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI			n/a			$	(33)					$	17
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales						$	1,222					$	1,365
Other income (expense), net						9						4

						Nine Months Ended
						January 31,
(Dollars in millions)			Classification			2021						2022
Currency derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI			n/a			$	(73)					$	53
Net gain (loss) reclassified from AOCI into earnings			Sales			21						1
Currency derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings			Sales			$	(11)					$	8
Net gain (loss) recognized in earnings			Other income (expense), net			15						(1)
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI			n/a			$	(66)					$	38
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales						$	3,481					$	3,831
Other income (expense), net						13						(1)

We expect to reclassify $15 million of deferred net gains on cash flow hedges recorded in AOCI as of January 31, 2022, 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, 2021												January 31, 2022
(Dollars in millions)			Classification						Derivative Assets						Derivative Liabilities						Derivative Assets						Derivative Liabilities
Designated as cash flow hedges:
Currency derivatives			Other current assets						$	4					$	(2)					$	21					$	(3)
Currency derivatives			Other assets						—						—						13						(1)
Currency derivatives			Accrued expenses						4						(18)						—						(1)
Currency derivatives			Other liabilities						1						(18)						—						—
Not designated as hedges:
Currency derivatives			Other current assets						1						—						—						—
Currency derivatives			Other assets						—						—						—						—
Currency derivatives			Accrued expenses						—						—						—						(1)
Currency derivatives			Other 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 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.

Our derivative instruments require us to maintain a specific level of creditworthiness, which we have maintained. If our creditworthiness were to fall below that level, then the counterparties to our derivative instruments could request immediate

payment or collateralization for derivative instruments in net liability positions. The aggregate fair value of all derivatives with creditworthiness requirements that were in a net liability position was $30 million at April 30, 2021, and $2 million at January 31, 2022.

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, 2021
Derivative assets			$	10					$	(7)					$	3					$	(1)					$	2
Derivative liabilities			(38)						7						(31)						1						(30)
January 31, 2022
Derivative assets			34						(4)						30						—						30
Derivative liabilities			(6)						4						(2)						—						(2)

No cash collateral was received or pledged related to our derivative contracts as of April 30, 2021, or January 31, 2022.

12. Fair Value Measurements

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

			April 30, 2021												January 31, 2022
			Carrying						Fair						Carrying						Fair
(Dollars in millions)			Amount						Value						Amount						Value
Assets
Cash and cash equivalents			$	1,150					$	1,150					$	812					$	812
Currency derivatives			3						3						30						30
Liabilities
Currency derivatives			31						31						2						2
Short-term borrowings			205						205						16						16
Long-term debt (including current portion)			2,354						2,663						2,311						2,537

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We categorize the fair values of assets and liabilities into three levels based on the assumptions (inputs) used to determine those values. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are:

• Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

• Level 2 – Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in inactive markets; or other inputs that are observable or can be derived from or corroborated by observable market data.

• Level 3 – Unobservable inputs supported by little or no market activity.

We determine the fair values of our currency derivatives (forward contracts) using standard valuation models. The significant inputs used in these models, which are readily available in public markets or can be derived from observable market transactions, include the applicable spot exchange rates, forward exchange rates, and interest rates. These fair value measurements are categorized as Level 2 within the valuation hierarchy.

We determine the fair value of long-term debt primarily based on the prices at which identical or similar debt has recently traded in the market and also considering the overall market conditions on the date of valuation. These fair value measurements are categorized as Level 2 within the valuation hierarchy.

The fair values of cash, cash equivalents, and short-term borrowings approximate the carrying amounts due to the short maturities of these instruments.

We measure some assets and liabilities at fair value on a nonrecurring basis. That is, we do not measure them at fair value on an ongoing basis, but we do adjust them to fair value in some circumstances (for example, when we determine that an asset is impaired). During the nine months ended January 31, 2022, we recognized non-cash impairment charges of $9 million for certain fixed assets. The impairment charges, which were based on our measurements of the estimated fair values of those assets, are categorized as Level 2 within the valuation hierarchy. The remaining carrying amount of those assets is not significant. No other material nonrecurring fair value measurements were required during the periods presented in these financial statements.

13. Other Comprehensive Income

The following tables show the components of net other comprehensive income (loss):

			Three Months Ended																		Three Months Ended
			January 31, 2021																		January 31, 2022
(Dollars in millions)			Pre-Tax						Tax						Net						Pre-Tax						Tax						Net
Currency translation adjustments:
Net gain (loss) on currency translation			$	39					$	8					$	47					$	(23)					$	(4)					$	(27)
Reclassification to earnings			—						—						—						—						—						—
Other comprehensive income (loss), net			39						8						47						(23)						(4)						(27)
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments			(39)						9						(30)						23						(5)						18
Reclassification to earnings1			(4)						1						(3)						(2)						—						(2)
Other comprehensive income (loss), net			(43)						10						(33)						21						(5)						16
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost			—						—						—						—						—						—
Reclassification to earnings2			6						(1)						5						6						(1)						5
Other comprehensive income (loss), net			6						(1)						5						6						(1)						5
Total other comprehensive income (loss), net			$	2					$	17					$	19					$	4					$	(10)					$	(6)
			Nine Months Ended																		Nine Months Ended
			January 31, 2021																		January 31, 2022
(Dollars in millions)			Pre-Tax						Tax						Net						Pre-Tax						Tax						Net
Currency translation adjustments:
Net gain (loss) on currency translation			$	97					$	16					$	113					$	(40)					$	(9)					$	(49)
Reclassification to earnings			—						—						—						—						—						—
Other comprehensive income (loss), net			97						16						113						(40)						(9)						(49)
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments			(73)						17						(56)						53						(12)						41
Reclassification to earnings1			(21)						5						(16)						(1)						—						(1)
Other comprehensive income (loss), net			(94)						22						(72)						52						(12)						40
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost			—						—						—						(1)						—						(1)
Reclassification to earnings2			23						(6)						17						19						(5)						14
Other comprehensive income (loss), net			23						(6)						17						18						(5)						13
Total other comprehensive income (loss), net			$	26					$	32					$	58					$	30					$	(26)					$	4

1Pre-tax amount for each period is classified as sales in the accompanying condensed consolidated statements of operations.

2For the nine months ended January 31, 2021, $4 of the pre-tax amount of $23 is classified in gain on sale of business in the accompanying condensed consolidated statements of operations. Otherwise, the pre-tax amount for each period is classified as non-operating postretirement expense.