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,
			2022						2023						2022						2023
Sales			$	1,365					$	1,406					$	3,831					$	4,078
Excise taxes			328						325						894						896
Net sales			1,037						1,081						2,937						3,182
Cost of sales			415						457						1,172						1,323
Gross profit			622						624						1,765						1,859
Advertising expenses			117						141						311						372
Selling, general, and administrative expenses			162						186						495						541
Other expense (income), net			(4)						124						1						117
Operating income			347						173						958						829
Non-operating postretirement expense			—						27						2						27
Interest income			(1)						(2)						(3)						(7)
Interest expense			20						24						61						61
Income before income taxes			328						124						898						748
Income taxes			69						24						211						172
Net income			$	259					$	100					$	687					$	576
Earnings per share:
Basic			$	0.54					$	0.21					$	1.43					$	1.20
Diluted			$	0.54					$	0.21					$	1.43					$	1.20

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,
			2022						2023						2022						2023
Net income			$	259					$	100					$	687					$	576
Other comprehensive income (loss), net of tax:
Currency translation adjustments			(27)						119						(49)						108
Cash flow hedge adjustments			16						(34)						40						(24)
Postretirement benefits adjustments			5						6						13						10
Net other comprehensive income (loss)			(6)						91						4						94
Comprehensive income			$	253					$	191					$	691					$	670

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions, except per share amounts)

			April 30, 2022						January 31, 2023
Assets
Cash and cash equivalents			$	868					$	428
Accounts receivable, less allowance for doubtful accounts of $13 at April 30 and $5 at January 31			813						944
Inventories:
Barreled whiskey			1,155						1,204
Finished goods			312						469
Work in process			225						316
Raw materials and supplies			126						171
Total inventories			1,818						2,160
Other current assets			277						311
Total current assets			3,776						3,843
Property, plant and equipment, net			875						955
Goodwill			761						1,455
Other intangible assets			586						1,145
Deferred tax assets			74						87
Other assets			301						269
Total assets			$	6,373					$	7,754
Liabilities
Accounts payable and accrued expenses			$	703					$	787
Dividends payable			—						98
Accrued income taxes			81						44
Short-term borrowings			—						1,004
Current portion of long-term debt			250						—
Total current liabilities			1,034						1,933
Long-term debt			2,019						2,024
Deferred tax liabilities			219						341
Accrued pension and other postretirement benefits			183						171
Other liabilities			181						247
Total liabilities			3,636						4,716
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			—						6
Retained earnings			3,242						3,437
Accumulated other comprehensive income (loss), net of tax			(352)						(258)
Treasury stock, at cost (5,511,000 and 5,370,000 shares at April 30 and January 31, respectively)			(225)						(219)
Total stockholders’ equity			2,737						3,038
Total liabilities and stockholders’ equity			$	6,373					$	7,754

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,
			2022						2023
Cash flows from operating activities:
Net income			$	687					$	576
Adjustments to reconcile net income to net cash provided by operations:
Asset impairment charges			9						96
Depreciation and amortization			60						59
Stock-based compensation expense			11						13
Deferred income tax benefit			(3)						(6)
Other, net			15						17
Changes in assets and liabilities, excluding the effects of business acquisitions:
Accounts receivable			(59)						(106)
Inventories			(33)						(288)
Other current assets			—						(19)
Accounts payable and accrued expenses			(32)						66
Accrued income taxes			30						(36)
Other operating assets and liabilities			(2)						38
Cash provided by operating activities			683						410
Cash flows from investing activities:
Business acquisitions, net of cash acquired			—						(1,195)
Additions to property, plant, and equipment			(62)						(116)
Proceeds from sale of property, plant, and equipment			2						12
Computer software expenditures			(3)						(1)
Cash used for investing activities			(63)						(1,300)
Cash flows from financing activities:
Proceeds from short-term borrowings, maturities greater than 90 days			—						600
Net change in other short-term borrowings			(181)						402
Repayment of long-term debt			—						(250)
Payments of withholding taxes related to stock-based awards			(8)						(5)
Dividends paid			(741)						(279)
Cash provided by (used for) financing activities			(930)						468
Effect of exchange rate changes on cash, cash equivalents, and restricted cash			(28)						(15)
Net increase (decrease) in cash, cash equivalents, and restricted cash			(338)						(437)
Cash, cash equivalents, and restricted cash at beginning of period			1,150						874
Cash, cash equivalents, and restricted cash at end of period			812						437
Less: Restricted cash (included in other current assets) at end of period			—						(9)
Cash and cash equivalents at end of period			$	812					$	428

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, 2022 (2022 Form 10-K). We prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2022 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)			2022						2023						2022						2023
Net income available to common stockholders			$	259					$	100					$	687					$	576
Share data (in thousands):
Basic average common shares outstanding			478,887						479,152						478,844						479,121
Dilutive effect of stock-based awards			1,680						1,308						1,755						1,361
Diluted average common shares outstanding			480,567						480,460						480,599						480,482
Basic earnings per share			$	0.54					$	0.21					$	1.43					$	1.20
Diluted earnings per share			$	0.54					$	0.21					$	1.43					$	1.20

We excluded common stock-based awards for approximately 789,000 shares and 1,257,000 shares from the calculation of diluted earnings per share for the three months ended January 31, 2022 and 2023, respectively. We excluded common stock-based awards for approximately 623,000 shares and 1,059,000 shares from the calculation of diluted earnings per share for the nine months ended January 31, 2022 and 2023, 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 $385 million higher than reported as of April 30, 2022, and $429 million higher than reported as of January 31, 2023. 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, 2023:

(Dollars in millions)			Goodwill						Other Intangible Assets
Balance at April 30, 2022			$	761					$	586
Acquisitions (Note 14)			653						620
Foreign currency translation adjustment			41						35
Impairment			—						(96)
Balance at January 31, 2023			$	1,455					$	1,145

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

During the third quarter of fiscal 2023, in connection with the preparation of the condensed consolidated financial statements for the three and nine months ended January 31, 2023, we determined that it was more likely than not that the Finlandia brand name had become impaired due to macroeconomic conditions, including rising interest rates. Accordingly, we performed an interim impairment assessment for the Finlandia brand name. Based on that assessment, we recognized a non-cash impairment charge of $96 million during the third quarter of fiscal 2023. The impairment largely reflects the effects of higher discount rates and input costs. The impairment charge is included in “other expense (income), net” in the accompanying consolidated statement of operations.

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, 2023.

6. Debt

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

(Principal and carrying amounts in millions)			April 30, 2022						January 31, 2023
2.250% senior notes, $250 principal amount, due January 15, 2023			$	250					$	—
3.500% senior notes, $300 principal amount, due April 15, 2025			298						299
1.200% senior notes, €300 principal amount, due July 7, 2026			315						325
2.600% senior notes, £300 principal amount, due July 7, 2028			374						368
4.000% senior notes, $300 principal amount, due April 15, 2038			295						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			489						489
			2,269						2,024
Less current portion			250						—
			$	2,019					$	2,024

We repaid the $250 million principal amount of 2.25% notes on their maturity date of January 15, 2023.

Our short-term borrowings of $1,004 million as of January 31, 2023, included $404 million of borrowings under our commercial paper program. There were no borrowings under that program as of April 30, 2022.

(Dollars in millions)			April 30, 2022						January 31, 2023
Commercial paper			$—						$404
Average interest rate			—%						4.71%
Average remaining days to maturity			0						18

Our short-term borrowings as of January 31, 2023, also included $600 million of borrowings under a $600 million senior unsecured 364-day term loan credit agreement entered into with various U.S. and international banks on January 3, 2023. Borrowings under the credit agreement bear interest at variable rate reflecting the Secured Overnight Financing Rate applicable to the term of particular borrowing plus a margin based on our credit ratings. As of January 31, 2023, the weighted-average interest rate on these borrowings was 5.21%.

7. Stockholders’ Equity

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 changes in stockholders’ equity by quarter during the nine months ended January 31, 2023:

(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, 2022			$	25					$	47					$	—					$	3,242					$	(352)					$	(225)					$	2,737
Net income																					249																		249
Net other comprehensive income (loss)																											1												1
Declaration of cash dividends																					(180)																		(180)
Stock-based compensation expense															4																								4
Stock issued under compensation plans																																	4						4
Loss on issuance of treasury stock issued under compensation plans															(4)						(4)																		(8)
Balance at July 31, 2022			25						47						—						3,307						(351)						(221)						2,807
Net income																					227																		227
Net other comprehensive income (loss)																											2												2
Stock-based compensation expense															5																								5
Stock issued under compensation plans																																	1						1
Loss on issuance of treasury stock issued under compensation plans															(2)																								(2)
Balance at October 31, 2022			25						47						3						3,534						(349)						(220)						3,040
Net income																					100																		100
Net other comprehensive income (loss)																											91												91
Declaration of cash dividends																					(197)																		(197)
Stock-based compensation expense															4																								4
Stock issued under compensation plans																																	1						1
Loss on issuance of treasury stock issued under compensation plans															(1)																								(1)
Balance at January 31, 2023			$	25					$	47					$	6					$	3,437					$	(258)					$	(219)					$	3,038

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, 2023:

(Dollars in millions)			Currency Translation Adjustments						Cash Flow Hedge Adjustments						Postretirement Benefits Adjustments						Total AOCI
Balance at April 30, 2022			$	(239)					$	37					$	(150)					$	(352)
Net other comprehensive income (loss)			108						(24)						10						94
Balance at January 31, 2023			$	(131)					$	13					$	(140)					$	(258)

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, 2023:

Declaration Date						Record Date						Payable Date						Amount per Share
May 26, 2022						June 8, 2022						July 1, 2022						$0.1885
July 28, 2022						September 6, 2022						October 3, 2022						$0.1885
November 17, 2022						December 2, 2022						January 3, 2023						$0.2055
January 24, 2023						March 8, 2023						April 3, 2023						$0.2055

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)			2022						2023						2022						2023
United States			$	488					$	439					$	1,400					$	1,455
Developed International1			318						345						884						927
Emerging2			196						245						533						629
Travel Retail3			25						32						74						110
Non-branded and bulk4			10						20						46						61
Total			$	1,037					$	1,081					$	2,937					$	3,182

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 Germany, Australia, 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 Chile.

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, contract bottling, and bulk whiskey and wine, 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)			2022						2023						2022						2023
Whiskey1			$	744					$	754					$	2,036					$	2,215
Ready-to-Drink2			112						121						329						369
Tequila3			69						79						212						237
Wine4			54						53						176						164
Vodka5			29						27						86						74
Non-branded and bulk6			10						20						46						61
Rest of portfolio7			19						27						52						62
Total			$	1,037					$	1,081					$	2,937					$	3,182

1Includes all whiskey spirits and whiskey-based flavored liqueurs. The brands included in this category are the Jack Daniel's family of brands (excluding the “ready-to-drink” products outlined below), the Woodford Reserve family of brands, the Old Forester family of brands, GlenDronach, Benriach, Glenglassaugh, Slane Irish Whiskey, and Coopers’ Craft.

2Includes the Jack Daniel’s ready-to-drink (RTD) and ready-to-pour (RTP) products, New Mix, and other RTD/RTP products.

3Includes the Herradura family of brands, el Jimador, and other tequilas.

4Includes Korbel California Champagne and Sonoma-Cutrer wines.

5Includes Finlandia.

6Includes net sales of used barrels, contract bottling, and bulk whiskey and wine.

7Includes Chambord, Korbel Brandy, Fords Gin, Gin Mare, and Diplomático.

9. Pension Costs

The following table shows the components of the net cost recognized for our U.S. pension plans. Similar information for other defined benefit plans is not presented due to immateriality.

			Three Months Ended												Nine Months Ended
			January 31,												January 31,
(Dollars in millions)			2022						2023						2022						2023
Service cost			$	7					$	5					$	20					$	16
Interest cost			5						8						16						24
Expected return on plan assets			(11)						(11)						(34)						(33)
Amortization of:
Prior service cost			—						—						1						1
Net actuarial loss			6						2						18						7
Settlement charge			—						27						1						27
Net cost			$	7					$	31					$	22					$	42

During the three months ended January 31, 2023, we recognized a pension settlement charge of $27 million, triggered by fiscal year-to-date lump-sum payments under certain pension plans surpassing total annual service and interest cost for those plans.

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 24.3%, which is greater than the U.S. federal statutory rate of 21.0%, due to state taxes, effects of foreign operations and the impact of prior intercompany sales of inventory taxed at rates higher than current statutory tax rates, partially offset by the impact of the foreign-derived intangible income deduction.

The effective tax rate of 23.0% for the nine months ended January 31, 2023, is lower than the expected tax rate of 24.3% on ordinary income for the full fiscal year, primarily due to the reversal of valuation allowances in the current period and the beneficial impact of prior fiscal year true-ups, which is partially offset by increased contingent tax liabilities and deferred taxes recorded in connection with a change in our indefinite reinvestment assertion. The effective tax rate of 23.0% for the nine months ended January 31, 2023, was lower than the effective tax rate of 23.4% for the same period last year, primarily due to increased beneficial impact of prior year true-ups and the reversal of valuation allowances in the current period, which is partially offset by increased state taxes and increased contingent tax liabilities.

During the second quarter of fiscal 2023, we lifted our indefinite reinvestment assertion for certain additional foreign subsidiaries with respect to their current earnings and prior year undistributed earnings (but not for their other outside basis differences) and have recorded deferred taxes for any income tax impacts that would result from cash distributions, including any withholding taxes. For most of our other foreign subsidiaries, we continue to assert that their outside basis differences, including current year and prior year undistributed earnings, are indefinitely reinvested outside the United States and no income taxes have been provided on those earnings, other than the one-time repatriation tax related to the 2017 Tax Cuts and Jobs Act.

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 $801 million at April 30, 2022, and $703 million at January 31, 2023. The maximum term of outstanding derivative contracts was 36 months at April 30, 2022 and 27 months at January 31, 2023.

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 $636 million at April 30, 2022, and $487 million at January 31, 2023.

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 their effectiveness continually. If determined to be no longer highly effective, we discontinue designating and accounting for the instrument as a hedge.

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 table presents the pre-tax impact that changes in the fair value of our derivative instruments and non-derivative hedging instruments had on AOCI and earnings:

						Three Months Ended
						January 31,
(Dollars in millions)			Classification			2022						2023
Currency derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI			n/a			$	23					$	(33)
Net gain (loss) reclassified from AOCI into earnings			Sales			2						11
Currency derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings			Sales			$	5					$	(11)
Net gain (loss) recognized in earnings			Other income (expense), net			(1)						2
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI			n/a			$	17					$	(32)
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales						$	1,365					$	1,406
Other income (expense), net						4						(124)

						Nine Months Ended
						January 31,
(Dollars in millions)			Classification			2022						2023
Currency derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI			n/a			$	53					$	3
Net gain (loss) reclassified from AOCI into earnings			Sales			1						34
Currency derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings			Sales			$	8					$	(2)
Net gain (loss) recognized in earnings			Other income (expense), net			(1)						11
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI			n/a			$	38					$	10
Total amounts presented in the accompanying condensed consolidated statements of operations for line items affected by the net gains (losses) shown above:
Sales						$	3,831					$	4,078
Other income (expense), net						(1)						(117)

We expect to reclassify $9 million of deferred net gains on cash flow hedges recorded in AOCI as of January 31, 2023, 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, 2022												January 31, 2023
(Dollars in millions)			Classification						Derivative Assets						Derivative Liabilities						Derivative Assets						Derivative Liabilities
Designated as cash flow hedges:
Currency derivatives			Other current assets						$	32					$	(3)					$	18					$	(8)
Currency derivatives			Other assets						20						(1)						6						(1)
Currency derivatives			Accrued expenses						—						—						1						(2)
Not designated as hedges:
Currency derivatives			Other current assets						—						—						3						—
Currency derivatives			Accrued expenses						—						(1)						—						—

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. None of our derivatives with creditworthiness requirements were in a net liability position at April 30, 2022 and January 31, 2023.

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 (that is, 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, 2022
Derivative assets			$	52					$	(4)					$	48					$	(1)					$	47
Derivative liabilities			(5)						4						(1)						1						—
January 31, 2023
Derivative assets			28						(10)						18						(1)						17
Derivative liabilities			(11)						10						(1)						1						—

No cash collateral was received or pledged related to our derivative contracts as of April 30, 2022, or January 31, 2023.

12. Fair Value Measurements

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

			April 30, 2022												January 31, 2023
			Carrying						Fair						Carrying						Fair
(Dollars in millions)			Amount						Value						Amount						Value
Assets
Cash and cash equivalents			$	868					$	868					$	428					$	428
Currency derivatives, net			48						48						18						18
Liabilities
Currency derivatives, net			1						1						1						1
Short-term borrowings			—						—						1,004						1,004
Long-term debt (including current portion)			2,269						2,239						2,024						1,915

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). As discussed in Note 4, during the third quarter of fiscal 2023, we recognized a non-cash impairment charge of $96 million related to the Finlandia brand name. The impairment charge was based on the estimated fair value of the brand name, which we determined using the relief from royalty method. As discussed in Note 14, we used the relief-from-royalty method and the Monte Carlo simulation model to determine fair values in connection with our accounting for business combinations. The fair value measurements determined using these models are categorized as Level 3 within the valuation hierarchy. No other material nonrecurring fair value measurements were required during the periods presented in these financial statements.

13. Other Comprehensive Income

The following table shows the components of net other comprehensive income (loss):

			Three Months Ended																		Three Months Ended
			January 31, 2022																		January 31, 2023
(Dollars in millions)			Pre-Tax						Tax						Net						Pre-Tax						Tax						Net
Currency translation adjustments:
Net gain (loss) on currency translation			$	(23)					$	(4)					$	(27)					$	111					$	8					$	119
Reclassification to earnings			—						—						—						—						—						—
Other comprehensive income (loss), net			(23)						(4)						(27)						111						8						119
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments			23						(5)						18						(33)						7						(26)
Reclassification to earnings1			(2)						—						(2)						(11)						3						(8)
Other comprehensive income (loss), net			21						(5)						16						(44)						10						(34)
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost			—						—						—						(21)						5						(16)
Reclassification to earnings2			6						(1)						5						29						(7)						22
Other comprehensive income (loss), net			6						(1)						5						8						(2)						6
Total other comprehensive income (loss), net			$	4					$	(10)					$	(6)					$	75					$	16					$	91
			Nine Months Ended																		Nine Months Ended
			January 31, 2022																		January 31, 2023
(Dollars in millions)			Pre-Tax						Tax						Net						Pre-Tax						Tax						Net
Currency translation adjustments:
Net gain (loss) on currency translation			$	(40)					$	(9)					$	(49)					$	110					$	(2)					$	108
Reclassification to earnings			—						—						—						—						—						—
Other comprehensive income (loss), net			(40)						(9)						(49)						110						(2)						108
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments			53						(12)						41						3						(1)						2
Reclassification to earnings1			(1)						—						(1)						(34)						8						(26)
Other comprehensive income (loss), net			52						(12)						40						(31)						7						(24)
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost			(1)						—						(1)						(21)						5						(16)
Reclassification to earnings2			19						(5)						14						34						(8)						26
Other comprehensive income (loss), net			18						(5)						13						13						(3)						10
Total other comprehensive income (loss), net			$	30					$	(26)					$	4					$	92					$	2					$	94

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

2Pre-tax amount for each period is classified as non-operating postretirement expense in the accompanying condensed consolidated statements of operations.

14. Acquisitions

As discussed below, we completed two acquisitions during the third quarter of fiscal 2023. Each acquisition was accounted for as a business combination.

On November 3, 2022, we acquired the Gin Mare and Gin Mare Capri brands through our purchase of 100% of the equity interests of Gin Mare Brand, S.L.U., a Spanish company, and Mareliquid Vantguard, S.L.U., a Spanish company (the “Gin Mare acquisition”). The purchase price of the Gin Mare acquisition was $524 million, which consisted of $468 million in cash paid at the acquisition date plus contingent consideration of $56 million.

We preliminarily allocated the purchase price based on management’s estimates and independent valuations as follows:

(Dollars in millions)			Initial Allocation
Trademarks and brand names (indefinite-lived)			$	308
Goodwill			288
Total assets			596
Deferred tax liabilities			72
Net assets acquired			$	524

The contingent consideration of $56 million reflects the estimated fair value, at the acquisition date, of contingent future cash payments of up to €90 million to the sellers under an “earn-out” provision of the acquisition agreement. The estimated fair value of the contingent consideration was determined using a Monte Carlo simulation, which requires the use of significant assumptions, such as projected future net sales, discount rates, and volatility rates.

Any contingent consideration earned by the sellers will be payable in cash no earlier than July 2024 and no later than July 2027, depending on when the sellers choose to exercise the right to receive the payment. The amount payable will depend on the achievement of net sales targets for Gin Mare for the latest fiscal year completed prior to the date of exercise by the sellers. The possible payments range from zero to a maximum of €90 million (approximately $89 million as of the acquisition date).

At the acquisition date, we also entered into a supply agreement with the sellers for the production and supply of Gin Mare products to us, at market terms, for an initial period of 10 years (subject to subsequent renewal periods).

On January 5, 2023, we acquired the Diplomático and Botucal rum brands through our purchase of 100% of the equity interests of (a) International Rum and Spirits Distributors Unipessoal, Lda., a Portuguese company, (b) Diplomático Branding Unipessoal Lda., a Portuguese company, (c) International Bottling Services, S.A., a Panamanian corporation, and (d) International Rum & Spirits Marketing Solutions, S.L., a Spanish company; and (ii) certain assets of Destilerias Unidas Corp. (the “Diplomático acquisition”). The purchase price of the Diplomático acquisition consisted of cash of $727 million.

We preliminarily allocated the purchase price based on management’s estimates and independent valuations as follows:

(Dollars in millions)			Initial Allocation
Accounts receivable			$	11
Inventories			33
Other current assets			25
Property, plant, and equipment			36
Trademarks and brand names (indefinite-lived)			312
Goodwill			365
Total assets			782
Accounts payable and accrued expenses			10
Deferred tax liabilities			45
Total liabilities			55
Net assets acquired			$	727

At the acquisition date, we also entered into a supply agreement with the sellers for their production and supply of rum to us, at market terms, for an initial period of 10 years (subject to subsequent renewal periods).

The initial allocation of the purchase price for each acquisition was based on preliminary estimates and may be revised as asset valuations are finalized and further information is obtained on the fair value of liabilities. The primary matters to be finalized consist of the identification and valuation of identifiable intangible assets, any related tax effects, and any resulting impact on residual goodwill.

The amounts initially allocated to trademarks and brand names for each acquisition were estimated using the relief-from royalty method, which requires the use of significant assumptions, such as projected future net sales, discount rates, and royalty rates.

Goodwill is calculated as the excess of the purchase price over the fair value of the net identifiable assets acquired. The goodwill recorded for each acquisition is primarily attributable to the value of leveraging our distribution network and brand-building expertise to grow sales of the acquired brands. For the Gin Mare acquisition, we expect none of the preliminary goodwill of $288 million to be deductible for tax purposes. For the Diplomático acquisition, we expect $109 million of the preliminary goodwill of $365 million to be deductible for tax purposes.

Results for Gin Mare and Diplomático have been included in our consolidated financial statements since their acquisition dates. Pro forma results are not presented as the aggregate impact is not material to our consolidated statements of operations.

In connection with the acquisitions, we recognized transaction expenses of $50 million during the nine months ended January 31, 2023, of which $45 million was recognized during the third quarter. The following table shows the classification of the transaction expenses in the accompanying consolidated statements of operations.

(Dollars in millions)			Three Months Ended January 31, 2023						Nine Months Ended January 31, 2023
Selling, general, and administrative expenses			$	3					$	8
Other expense (income), net			42						42
Total transaction expenses			$	45					$	50

The transaction expenses largely reflects payments made to terminate certain distribution contracts related to the acquired brands.