Brown Forman
Annual Report 2016

Plain-text annual report

DEEP ROOTS DYNAMIC VISION 2016 ANNUAL REPORT 2016 marks the 150th anniversary of the Jack Daniel Distillery and 60 years of nurturing its growth since it was acquired by Brown- Forman. We look forward to great things yet to come for this iconic brand. VISION It’s not every family that gets to celebrate a milestone like this: one hundred and fifty years of crafting great American whiskey. We think family has a lot to do with it. The family we’ve built over the years. The one that goes beyond blood and weaves together a rich diversity of builders and visionaries, united by a dedication to doing things the right way for the long term. When you’ve had the good fortune to grow over multiple centuries, you develop an understanding of who you are. From this comes a wisdom in caretaking and a confidence in innovating. It is from this perspective, and with great gratitude, that we report another year of record results. 0 / 1 LONG-TERM THINKING. IT COMES WITH THE CRAFT. In 1865, Jack Daniel purchased Cave Spring Hollow, and in 1866, he registered the Jack Daniel Distillery, which stands today as America’s oldest registered distillery. He was quite a long-term thinker, that Jack. A REWARDING PERSPECTIVE – When we think about the long term, we think about how we can continue to “enrich the experience of life,” as Owsley Brown II (1942–2011) liked to put it. It is our touchstone as we hone strategies to grow and sustain strong brands in an increasingly competitive environment. We look at Jack Daniel’s Tennessee Whiskey, a brand that has delivered 7% compound annual volume growth¹ since 1956, and bucked the trend of most other large brands. Its deep appeal and increasing breadth give us confidence in new market share opportunities for the future. Consistent outperformance, measured through value share gains, has been a hallmark of Brown- Forman. We have our employees and partners to thank for that. Over decades, we have carefully grown our company to be the formidable com- petitor it is today. We are continuously evolving our structure For 60 years, our family has grown and developed this American classic, whose appeal endures among long-standing brand loyalists and expands every day to new discoverers. We think in decades, not years and developing our talent so that we can be as nimble and or quarters. effective as possible. A case in point: decision makers have been moved closer to markets and consumers, enabling our teams to cultivate opportunities with greater speed, quality, and creativity. We continue to distinguish ourselves by being great partners, seeking to grow our business while doing what’s best for our stakeholders. Strong relationships have always been, and will always be, a key component of our success. In all the things we do, long-term thinking both enriches and disciplines our perspective. It’s a vital part of what makes us who we are today. 1. “Cases” or “volumes” refer to depletions on a 9L drinks equivalent basis. Please see the section titled Volume and Depletions under Management’s Discussion and Analysis in the Form 10-K. To a savvy new generation seeking authentic history, what better story than that of George Garvin Brown’s Old Forester? We are growing it thoughtfully with the intent of restoring the brand to its former glory. 2 / 3 In 1945, we completed the construction of our first cooperage in Louisville, Kentucky. In 2015, we added the Jack Daniel Cooperage in Decatur, Alabama. The fact that we make our own barrels is unique among the competition. It is a mark of our long-term dedication to fine whiskey making. WHEN YOU’RE THIS GOOD AT SOMETHING, YOU DO MORE OF IT – building of Slane Irish Whiskey, and the global spirits categories,2 and we believe acquisition of The BenRiach Distillery positions us for sustained long-term Company, we are firmly establishing growth in the future. ourselves as global whiskey leaders. Woodford Reserve continues to build The BenRiach Distillery Company on prior years’ momentum, with net sales3 brings us three true gems of single malt growth of 28% (29% as reported), aug- Whiskey. It’s a talent we’ve been refining Scotch whisky: GlenDronach, BenRiach, mented by its Double Oaked, Master’s for some time now. and Glenglassaugh. The acquisition of Collection, and Kentucky Straight Rye During the past decade, we have these premium brands marks Brown- expressions. Old Forester is enjoying a focused on it as our core strength. With Forman’s re-entry into the single malt renaissance with net sales growth of investments in talent and production, the category, one of the fastest- growing 47% (48% as reported), and we are 2. IWSR 2015 data. 3. Changes in net sales growth and operating income are presented in the Annual Report on an underlying basis, with as-reported changes noted where there is a difference. We use these measures to understand the growth of our business with the cost or benefit of foreign currency movements, changes in distributor inventories, and the impact of acquisition and divestiture activities removed. Please refer to “Use of Non-GAAP Financial Information” on the last page of this Annual Report for additional information. 4 / 5 SHARPENING OUR FOCUS ON WHISKEY carefully securing its place among bour- bon aficionados and mixologists. And then of course there’s our birth- day boy, Jack. His family of brands grew net sales 6% (–1% as reported) in its 150th year, putting it well ahead of most other global brands. We are grateful to the employees and partners who’ve made it possible for us to celebrate this special anniversary year with such strong momentum. With the building of Slane Distillery in Ireland, we’re investing in the future. We will leverage our barrel- and whiskey- making expertise to create world class whiskey, eventually offering a range of blended, pot still, and single grain Irish whiskeys in the premium and super-premium segments. The first Slane Irish whiskeys will be launched to market in 2017. Launching in select markets in the summer of 2016, this is our first new bourbon brand in two decades. It’s a natural extension of our American whiskey heritage, emphasizing our deep reverence for the wood and craftsmanship that go into a distinctive bourbon whiskey. 6 / 7 A BALANCE OF DEPTH AND BREADTH – With 150 years of loyal support, Jack Daniel’s has cause to celebrate. It’s also reason for us to stay inspired and continue developing new expres- sions that will broaden our appeal for the next 150 years. That’s how Gentleman Jack, Jack Daniel’s Tennessee Honey, and Jack Daniel’s Tennessee Fire were born. And it’s why we are rolling out Jack Daniel’s Single Barrel Rye today. We’ve been very pleased with the success of these new brands. While Jack Daniel’s Tennessee Whiskey is by far our most important contributor, with 12.3 million cases depleted last year, Honey and Fire are steadily opening up new markets for us, with 1.9 million cases depleted globally. We’re seeing these expressions bring new friends to the trademark, including women, Hispanics, and African Americans. We are excited about the long- term potential for these brands. What holds true for each of our innovations is that quality, craftsmanship, and authenticity guide everything we do. These are the qualities that have defined us across multiple centuries, and that we intend to build upon for generations to come. We believe they are at the heart of the loyalty we’ve earned among consumers, and the reason people respond so positively to our new ideas. Cr aft and authenticity keep people loyal and inspire newcomers. Launched in 2015, Herradura Ultra has delivered strong results in Mexico. It is also being launched in select U.S. markets, and we anticipate that its extra- smooth, aged profile will satisfy a growing interest in luxury, handcrafted tequilas. With Jack Daniel’s Single Barrel Select, we’ve tapped into the growing consumer passion for one-of-a-kind experiences. Each individ- ual barrel is masterfully matured to allow its own unique characteristics to develop, giving people a premium expression of the iconic spirit they love. INNOVATION: TRUE TO OUR SPIRIT Jack Daniel’s Tennessee Honey was introduced in 2011 and has become one of the most popular flavored spirits in the world. It reached nearly 1.5  million cases this year. We estimate that Jack Daniel’s Tennessee Honey is now the 13th largest brand in the world priced over $25 per 750ml bottle.2 In 2015, Jack Daniel’s Tennessee Fire enjoyed a solid launch in the United States, and is now being rolled out to other select markets. FAMILY AS WE DEFINE IT – We are a family of builders. Across multiple centuries, we have worked together to create the quality spirits upon which our rep- utation has been built. Everyone at Brown- Forman, from barrel makers to graphic designers, master distillers to local sales representatives, is part of this family. It’s what makes us spe- cial. It’s what makes us strong. And it’s what helps us deliver top-tier results and position ourselves for future success. Our family roots began in Louisville and now extend around the world. Our unique culture is rich in heritage and energized by our diversity. And every day, we work together to make the exceptional spirits that our customers have come to appreciate in their lives. Around the world, our family culture thrives, thanks to consistent values, strong communications, and supportive col- laboration. New offices and new people are welcomed to the family through programs that allow them to experience and join our special culture first-hand. International programs include guided tastings from visiting master distillers, in-house dining inspired by Brown- Forman’s whiskey recipes, and team visits to the Louisville office and our distilleries. The Brown- Forman story began long ago in 1870. And, thanks to the support of our long-term family shareholders and employees, our story keeps getting better and better. We may not be the biggest spirits company in the world, but we do believe we are a leader. At the Woodford Reserve Visitors’ Center, the Master Taster leads guests through a tasting of our award-winning craft bourbon. Employees and partners work together like family. Our strong results come from diverse and talented people around the world. The four Motlow brothers with W.L. Lyons Brown, Sr. and George Garvin Brown II at the closing of the Jack Daniel Distillery purchase in 1956. A delivery of Old Forester arrives at 117–19 West Main Street, an early Brown-Forman headquarters in Louisville. George Garvin Brown, creator of the first bottled bourbon and founder of Brown-Forman. 8 / 9 Working together respectfully creates an inclusive and safe environment. The Brown-Forman Cooperage team works together to produce more than 600,000 barrels per year. Jack Daniel’s is dripped slowly — drop-by-drop — through ten feet of firmly packed charcoal. A THRIVING FAMILY SPIRIT Mr. Jack (in bowtie) with some Jack Daniel Distillery workers. W.L. Lyons Brown, Sr., and the portfolio he helped build. Sixty years ago, a meeting of two great families marked an important moment. It was then that the Motlows entrusted the Brown family to carry forward the legendary Jack Daniel’s name. The Brown- Forman France office was ranked among the “Best Places to Work” in 2016 by the Great Place to Work Institute. An anonymous employee survey measured five categories: credibility, respect, equity, pride, and conviviality. Casa Herradura in Jalisco, Mexico, received the 2015 Environmental Excellence Award from Mexico’s Federal Attorney for Environmental Protection, recognizing its clean technology, environmental awareness and continuous improvement pro- grams, and sustainability targets for water and greenhouse gas emissions. For the sixth consecutive year, Brown- Forman received a perfect score on the Corporate Equality Index (CEI), a national survey and report on corporate policies and practices related to LGBT workplace equality, administered by the Human Rights Campaign Foundation in the U.S. Paul C. Varga Chairman and Chief Executive Officer June 28, 2016 DEAR VALUED SHAREHOLDERS, – This year’s annual report theme — Deep Roots, Dynamic were again hurt by the strong dollar, but those same results Vision — is an apt descriptor of Brown-Forman. The intent is did benefit significantly from a one-time gain on the sale of to convey that our company is blessed with the values, tradi- Southern Comfort and Tuaca. tions, and know-how derived from decades of experience and Brown-Forman was propelled once again by our portfolio family ownership, while also possessing the creative spirit and of premium American Whiskeys, with the Jack Daniel’s trade- growth mindset that is so vital to enduring success. I can think mark continuing to be the primary driver. The Jack Daniel’s of no finer example of “Deep Roots” and “Dynamic Vision” than family performance continued to benefit from innovation as our own Jack Daniel’s brand, which continues to propel our Jack Daniel’s Tennessee Honey and Jack Daniel’s Tennessee company forward at the same time that it celebrates its own Fire contributed nicely to growth, and reached 1.9 million 150th anniversary. FISCAL YEAR 2016 OUR UNDERLYING GROWTH STORY CONTINUES – cases in total volumes. Gentleman Jack, Woodford Reserve, Old Forester, and Sonoma-Cutrer continued to post excellent results, and our Casa Herradura tequila portfolio had perhaps its best year yet since becoming part of the Brown-Forman family nearly a decade ago. Building on so many years of excellent progress, this past year We continued to benefit from our balanced geographic was another rewarding year for Brown-Forman. And the story diversification. While fiscal 2016 was a more challenging of fiscal 2016 was not unlike recent years. year for our emerging markets business and travel retail We grew net sales 5% (-2% as reported) and operating channel, the United States and other developed markets income 8% (49% as reported), with both of these metrics delivered consistently solid growth, helping to pick up some ahead of our industry competitive set. Our reported results of the slack. 10 / 11 Brown-Forman’s Return on Invested Capital (ROIC) was 23%, the highest in a decade. Our excellent ROIC is emblem- atic of the company’s capital efficiency and organic growth emphasis. Total Shareholder Return (TSR) for the year was a solid 8%. The company’s TSRs over the 5-year (+18%) and 10-year (+12%) horizons remain well above our industry, the S&P 500, and Consumer Staples. While fiscal 2016 results were similar in many ways to prior years, you should not interpret that they were easily attained. We operate in an intensely competitive industry that is exposed to a dizzying array of economic, social, and regulatory influ- 5-YEAR TOTAL SHAREHOLDER RETURN* – based on compound annual growth rate BFB Consumer Staples Campari Diageo S&P 500 ences. Rest assured, the Brown-Forman management team Competitive Set is constantly making adjustments that we believe will ensure continued success. Pernod Remy INVESTING TODAY FOR TOMORROW’S GROWTH – In addition to delivering solid short-term results in fiscal 2016, I believe this past year will be remembered for the work we undertook to position the company for success in 2025 and beyond. While we have always taken the long view of our busi- ness (somewhat by necessity, given the aging cycles for many of our products), I believe that the last 12 months have been even more exemplary of Brown-Forman’s long-term orientation. The acquisition of GlenDronach, BenRiach, and Glenglas- saugh single malt Scotches, the investment in Slane Irish 0% 5% 10% 15% 20% *Source: FactSet, as of April 30, 2016, in local currency, assuming dividends reinvested. Note – the Competitive set is a weighted average based upon each competitor’s LTM sales. 10-YEAR TOTAL SHAREHOLDER RETURN* – based on compound annual growth rate Whiskey, and the creation of Coopers’ Craft Bourbon all BFB transpired in the last year. When considered alongside the Consumer Staples disposition of Southern Comfort and Tuaca liqueurs, we again demonstrated a willingness to sacrifice some short-term sales and profits for the benefit of improved rates of growth and superior value creation over the longer term. This long-term view is also evident through our continuing capital investments behind Jack Daniel’s, Woodford Reserve, and Old Forester. These investments will expand production capacity and enhance our hospitality platforms as we plan for greater consumption and additional visitors to our brand homeplaces in the years ahead. This current period of investment for Brown-Forman is reminiscent of similar occasions in our recent history when we made meaningful changes to benefit our long-term future. Our geographic expansion of the early 1990s certainly Diageo Campari Competitive Set Remy S&P 500 Pernod 0% 5% 10% 15% In addition to delivering solid results in fiscal 2016, I believe this past comes to mind, as do our dispositions of consumer durables year will be remembered for the work in the mid-2000s and the sale of our popular-priced wines to enable a stronger focus on premium spirits. Similar to today, these prior moves directed the company toward the very best opportunities for growth and value creation over the foresee- able future. we undertook to position the company for success in 2025 and beyond. 00000000 0 7 777777 888888 8 111111 1 TTTTTTT T SSSSS S EEEEEE E Jack Daniel’s Tennessee Whiskey sold 12.3 million cases in fiscal 2016. Our super- and ultra- premium whiskey brands grew net sales by double digits in fiscal 2016.* 1.2 MILLION CASES Old Forester grew net sales by 47% (48% as s reported). 12.3 MILLION CASES A FUTURE AS BRIGHT AS OUR PAST – I am often asked to discuss the company’s prospects for the future. Stakeholders of Brown-Forman appreciate our combi- nation of high margins, high returns, organic growth, strong capital stewardship, and acceptable risk tolerance. Of these five, the sustainability of our growth is the most probed by followers of the company. They wonder, “Can we keep it going, and if so, for how long?” My response will sometimes reference our 10-year Total Shareholder Return. Since past performance is no guarantee of future performance, my audience usually wants more proof. I offer this by citing my belief in our brands, their long runways for growth as evidenced by their relatively low market shares, and the quality of both our people and our culture (these last two being the most essential ingredients to our company’s enduring success). 47% In recent years, curiosity in the United States has naturally centered on the resurgence (and sustainability) of the American Whiskey category. The category momentum is observable by studying industry metrics, by looking at any restaurant’s back bar, or by listening to someone order an Old Forester or Our commitment to corpor ate Gentleman Jack at a bar. Bourbons and American Whiskeys are on a roll of late. And while this is a source of both momentum and competition for Brown-Forman, the category’s growth, in my view, is deci- responsibility is intrinsically linked sively more of an opportunity than a threat. Regardless of how to our values, guiding our decisions about the business and the way we do it. For the Kentucky Derby, Old Forester Mint Julep offered more than 1,000 vouchers for rides with Yellow Cab in nine locations. 1000 FREE RIDES In 2015, Newsweek magazine named Brown-Forman the third “greenest” U.S. beverage company. Total company-led charitable cash contributions in 2016 approached $11 million. $11 MILLION 3RD GREENEST * Super/Ultra-premium whiskey brands include the Woodford Reserve family, Jack Daniel’s Single Barrel, Gentleman Jack, Sinatra Select, No. 27 Gold, and Collingwood. 12 / 13 one views this particular point, it is important to remember that Brown-Forman had exceptional success prior to American Whiskey’s surge — and I believe we will continue to succeed even if the category momentum slows at some point down the road. It’s my personal belief, however, that the category growth can continue well into the future (if for no other reason than the fact that Brown-Forman is its leader and we intend to do our very best to grow our brands). To be convinced that American Whiskey can continue the roll it has been on, it’s necessary to understand why it enjoys the momentum it does today. While it would be easier to understand if there were a singular “silver bullet” explana- tion, a comprehensive consideration yields many factors that, in combination, are some of the most likely contributors to today’s American Whiskey boom. To start, on a broader level, today’s consumers are increas- ingly seeking out brands that are authentic and real. As part of this, they often appreciate things that are down-to-earth, unpretentious, humble, folksy, and sometimes rugged. Evidence of this can be observed in the beer business (craft beers), the soft drink business (old-time sodas), the apparel business (where more substantive materials like flannel or rough-hewn designs are more prominent), and even in our own personal appearances (as heavy beards are far more commonplace). In addition to this desire for authenticity is a longing for a simpler, less hectic time than we typically experience today. As a result, things that have “retro” or “throwback” appeal are attractive to today’s consumer. Consider vinyl records, the “Mad Men” television series, and even Old Forester as such examples. Important to this is having a real history and the * C I O R 30% 20% interesting stories that support it. Today, it’s pretty cool to cel- 10% ebrate a 150th anniversary or to have lasted through a couple of World Wars or, in the case of Old Forester, to have survived the outright prohibition of your industry. Provenance is also playing an important role. When we are introduced to another person, we often ask them, “Where are you from?” The same is increasingly true of brands. And it seems the smaller the locale the better. Reflecting the longing for a simpler life, rural towns, town squares, and neighbor- hoods are more hip today than big cities or suburbia. Paramount to American Whiskey’s appeal has been a AN EXCELLENT BUSINESS – as of April 30, 2016 BFB Competitive Set Consumer Staples S&P 500 0% 0% 15% 30% OPERATING MARGIN Source: Company information & Factset for the indices and Competitive Set, which is based upon weighted average operating income for Diageo, Pernod, Campari, and Remy. * Return on invested capital is defined as the sum of net income (excluding the gain on the sale of Southern Comfort and Tuaca) and after-tax interest expense, divided by average invested capital. Invested capital equals assets less liabilities, excluding interest-bearing debt. growing interest by consumers in how (and by whom) Robust and flavorful on the palate, yet accessible and ver- things are made. Bourbon has always been well-crafted, and satile, American Whiskey is not too challenging of an acquired when consumers decide to learn more about their brands, taste for the experimental drinker. And, of added benefit for bourbon’s story as well as its easygoing hospitality fit consumers, it mixes as easily as it goes down straight. It’s a beautifully with their newfound curiosity. How nice that real drink that you can actually enjoy drinking. America’s whiskey distilleries will open their front doors and So, American Whiskey possesses appealing traits such as welcome guests to observe their production operations authenticity, history, craftsmanship, hospitality, unpretentious- and hear their stories. The fact that visitors seem to love the ness, humility, great taste, and versatility. And most of the experience does not surprise me. Visiting Woodford Reserve world’s more than 7 billion people have never even tried it — yet. or Jack Daniel’s Distillery sounds a lot more fun to me than Is American Whiskey here to stay? I believe it is, and at touring the manufacturing facility of my favorite ketchup or Brown-Forman, we are certainly going to do our part to ensure cereal brand. that it remains. And in doing so, we will strive to prove that As a person who has worked my entire adult life in the these timeless attributes indeed stand the test of time. American Whiskey business, I can honestly say that I have In closing, let me again thank our valued employees and been waiting three decades for some things to become cool — partners across the world for another year of excellent prog- like flannel and ball caps, overalls and beards, and small towns ress. Their actions make Brown-Forman a place with Deep and old-time virtues. And guess what? It is happening. Roots and Dynamic Vision. I also thank you, our shareholders, I also believe that our increasingly chaotic lives have played for your continuous support of the company. a role in American Whiskey’s appeal. The realities and threat of terrorism alone have made life more stressful. Additionally, Sincerely, technological advances have enabled a world that is “on call” and over-stimulated, far beyond what our brains and bodies have been conditioned to absorb. We struggle to unplug and when we do, we are woeful in our attempts to truly relax for a sustained period. Paul C. Varga As a result of this stress, the world decided it needed a real Chairman and Chief Executive Officer drink — and bourbon is it. June 28, 2016 BROWN-FORMAN BOARD OF DIRECTORS BROWN-FORMAN EXECUTIVE LEADERSHIP – The senior executives pictured here have extensive global experience in a variety of industries and, combined, more than 280 years of varied, cross-functional service with Brown-Forman. From left: Michael  J. Roney (4) Retired Chief Executive Officer, Bunzl plc / Sandra  A. Frazier (6,*, #) Founder and Partner, Tandem Public Relations, LLC / Joan  C. Lordi Amble (3,6) Retired Executive Vice President, American Express Company / Paul  C. Varga (1,*) Chairman and Chief Executive Officer, Brown-Forman Corporation / Michael  A. Todman (3) Retired Vice Chairman, Whirlpool International / James  S. Welch, Jr. (1,6) Retired Vice Chairman, Brown-Forman Corporation / Martin  S. Brown,  Jr. (6,*, #) Attorney, Adams and Reese LLP / Augusta Brown Holland (*, #) Founding Partner, Haystack Partners, LLC / Bruce  L. Byrnes (3,5) Retired Vice Chairman of the Board, The Procter & Gamble Company / Geo. Garvin Brown IV (1,5,*, #) Chairman of the Board, Brown-Forman Corporation / Stuart  R. Brown (*, #) Managing Partner, Typha Partners, LLC, and President, DendriFund, Inc. / John D. Cook (2,4,5) Director Emeritus, McKinsey & Company / (Not pictured) Patrick Bousquet-Chavanne (4,5) Executive Director of Marketing and International, Marks and Spencer Group PLC (1) Member of Executive Committee of the Board of Directors, (2) Lead Independent Director, (3) Member of Audit Committee, (4) Member of Compensation Committee, (5) Member of Corporate Governance and Nominating Committee, (6) Not standing for re-election in July, (*) Member of Brown-Forman/Brown Family Shareholders Committee, (#) Member of Brown Family BROWN-FORMAN/BROWN FAMILY SHAREHOLDERS COMMITTEE – Family Committee members hold their May 2016 meeting at our company’s Louisville, Kentucky headquarters. From left: Alejandro  A. Alvarez Senior Vice President, Chief Production Officer / Ralph E. de Chabert Senior Vice President, Chief Diversity Officer / Matthew E. Hamel Executive Vice President, General Counsel and Secretary / Kirsten  M. Hawley Senior Vice President, Chief Human Resources Officer / John  V. Hayes Senior Vice President, Chief Marketing Officer, Brown-Forman Brands / Thomas Hinrichs Senior Vice President and President, Europe, North Asia, Australia, New Zealand, and South East Asia / Jill  A. Jones Executive Vice President and President, North America, Caribbean, Central America, South America, India, Middle East, Africa, and Global Travel Retail / Michael  J.  Keyes Senior Vice President and President, North America Region / Michael  A. Masick Vice President, Director Corporate Strategy and Business Development / Mark  I. McCallum Executive Vice President and President, Jack Daniel’s Brands / Jane C. Morreau Executive Vice President, Chief Financial Officer / Lisa  P.  Steiner Senior Vice President, Chief of Staff / Paul C. Varga Chairman and Chief Executive Officer / James  S. Welch, Jr. Retired Vice Chairman / Lawson  E. Whiting Executive Vice President, Chief Brands and Strategy Officer, Brown-Forman Brands From left: Austin Musselman, Jr., Jim Joy, Garvin Brown (Co-Chair), Marshall Farrer, Barbara Hurt, Campbell Brown, Augusta Brown Holland, Stuart Brown, Tammy Godwin (Recording Secretary), Paul Varga (Co-Chair), Phil Lichtenfels, Chris Brown, Sandra Frazier and Ernie Patterson (Other Family Committee members not pictured: Laura Lee Gastis, Laura Frazier and Martin Brown, Jr.) 14 / 15 in Glenmorangie 12 years ago. During these intervening years, we took considered, thoughtful, and patient steps toward reentering the category, at the right time, in the right manner. I’m so pleased to share that my family’s fifth generation has approached its own stewardship of our Board of Directors in the same way. It has been 10 years since Martin S. Brown Jr., Sandra A. Frazier, and I joined our Board, as part of our family’s succes- sion planning process, and nine years since James S. Welch, the retiring Vice Chairman of the corporation and member of what we affectionately refer to as the “Brown-Forman family,” joined the Board. These three will step down from their service this year, completing a process that also saw several family director changes last year, with Dace Brown Stubbs retiring, and Stuart R. Brown and Augusta Brown Holland joining. Martin, Sandra, and Jim have been critical contributors to Brown-Forman’s balanced and sustainable performance. Martin and Sandra also look forward to their ongoing coauthorship of Brown family governance and succession planning. All four of us are particularly grateful to John D. Cook, our Lead Independent Director, for the way in which he helped steward this work over the past two years. As part of this process, we welcomed our three newest fifth- generation family directors, Campbell P. Brown, Marshall B. Farrer, and Laura L. Frazier, onto the Board. As founding members of the Brown-Forman Brown Family Shareholders Committee in 2007, they have worked hard to strengthen the bonds between long- term shareholders and the company. They now bring that learning and experience, along with their other life experiences, into the boardroom, on behalf of all shareholders and the company. Of course, the Board has remained thoughtful about its own long-term succession planning, thanks in no small part to the great success of the business itself. Whether it has been the patient long-term installation of Lynchburg postcards around the world, the repositioning of our portfolio through dispositions and the acquisition of new distilleries in appropriate categories, or making the right capital investments in the current portfolio, Paul Varga continues to lead one of our industry’s most successful companies. On behalf of the Board, please join me in congratulating Paul and his team, and on behalf of Brown-Forman, please accept my own thanks for being such engaged and strategic long-term shareholders. With best regards, The London Underground celebrated its 150th anniversary in 2013, making it the oldest public transport network in the world, and just three years older than the Jack Daniel distillery, which will celebrate its 150th anniversary this year. But that’s not all that these two iconic brands have in common. For more than 30 years, the Underground has also been home to a Jack Daniel’s advertising campaign that we call postcards from Lynchburg. The postcards are simple black-and-white photographs of Lynchburg, Tenn., with long copy, telling authentic stories from home. If you take the Underground often enough, you get to know where to stand on the platform to read the latest postcard. The celebration of Jack’s birthday in September usually generates a bounty of these. One of my favorites shows a field of used barrels, and describes how our barrels get to enjoy a second life in Scotland, as part of the whisky aging process. Like other ads, it is in the voice of Lynchburg: “Next time you’re inclined to enjoy a sip of Old No. 7,” it says, “raise a glass to the Scots for lending us folks down in Lynchburg a hand.” By choice, many Scots age their whisky in secondhand barrels, which contribute to the subtlety of the spirit, and necessitate a longer aging cycle, as their whisky requires more time to absorb the flavors from a second-generation barrel. And so, I trust that it came as no surprise this year to see that Brown-Forman decided to follow its barrels across the ocean, with the acquisition of three distilleries: GlenDronach, BenRiach, and Glenglassaugh. The culture from which these brands have sprung is not only a real example of Brown-Forman’s long-term approach to investment decisions, but also an apt metaphor for many of the things that we undertook in the past year. For example, we continued to expand production capacity in distillation, wine production, barrels, warehousing, and logistics for a variety of brands, including Jack Daniel’s, Woodford Reserve, Sonoma-Cutrer, Casa Herradura, and Old Forester, not to men- tion the introduction of Coopers’ Craft, our first new bourbon brand in two decades, and ongoing work at a new distillery on the Slane Castle Estate in Ireland. Like our new Scottish distilleries, these investments are long-term in nature and well-positioned in the growing and “premiumizing” sectors of our industry; traits Geo. Garvin Brown IV that not only make for good storytelling, but also great business. Chairman of the Board Brown-Forman exited Scotland with the sale of its minority stake June 28, 2016 SELECTED FINANCIAL DATA – Dollars in millions, except per share amounts CONTINUING OPERATIONS: Year Ended April 30, Net sales Gross profi t Operating income Net income Weighted average shares used to calculate earnings per share - Basic - Diluted Earnings per share from continuing operations - Basic - Diluted Gross margin Operating margin Effective tax rate 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $2,806 3,282 3,192 3,226 3,404 3,614 3,784 3,946 4,096 4,011 $1,481 1,695 1,577 1,611 1,724 1,795 1,955 2,078 2,183 2,144 $ 602 $ 400 685 440 661 435 710 449 855 572 788 513 898 591 971 1,027 1,533 659 684 1,067 230.4 229.6 225.7 221.8 218.4 214.5 213.4 213.5 211.6 203.0 232.8 231.6 227.1 222.9 219.8 216.1 215.0 215.1 213.1 204.3 $ 1.74 1.91 1.92 2.02 2.61 2.39 2.77 3.08 3.23 $ 1.72 1.89 1.91 2.01 2.60 2.37 2.75 3.06 3.21 5.26 5.22 52.8% 51.6% 49.4% 50.0% 50.7% 49.7% 51.7% 52.7% 53.3% 53.4% 21.5% 20.9% 20.7% 22.0% 25.1% 21.8% 23.7% 24.6% 25.1% 38.2% 31.7% 31.7% 31.1% 34.1% 31.0% 32.5% 31.7% 30.5% 31.7% 28.3% Average invested capital $2,431 2,747 2,893 2,825 2,711 2,803 2,834 3,131 3,196 3,221 Return on average invested capital 17.4% 17.2% 15.9% 16.6% 21.8% 19.1% 21.7% 21.6% 22.0% 34.1% TOTAL COMPANY: Year Ended April 30, Cash dividends declared per common share 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $ 0.62 0.69 0.75 0.78 1.49 0.89 4.98 1.09 1.21 1.31 Total assets at April 30 $3,551 3,405 3,475 3,383 3,712 3,477 3,626 4,103 4,188 4,183 Long-term debt at April 30 $ 422 417 Total debt at April 30 $1,177 1,006 Cash fl ow from operations $ 355 534 509 999 491 508 699 545 504 759 527 503 997 997 743 1,230 510 1,002 1,005 1,183 1,501 516 537 649 608 524 Dividend payout ratio 36.8% 35.8% 38.9% 38.7% 57.0% 37.4% 179.8% 35.3% 37.5% 25.0% NOTES: 1. Includes the consolidated results of Chambord and Casa Herradura since their acquisitions in May 2006 and January 2007, respectively. Includes the results of our Hopland-based wine brands, which were sold in April 2011 but retained in our portfolio as agency brands through December 2011. Includes the results of Southern Comfort and Tuaca, both of which were sold on March 1, 2016. 2. Weighted average shares, earnings per share, and cash dividends declared per common share have been adjusted for a 5-for-4 stock split in October 2008 and a 3-for-2 stock split in August 2012. 3. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Non-GAAP Financial Measures” 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. 4. Cash dividends declared per common share include special cash dividends of $0.67 per share in fiscal 2011 and $4.00 per share in fiscal 2013. 5. We define dividend payout ratio as cash dividends divided by net income. 6. Results for fiscal 2016 include a gain of $485 million on the sale of Southern Comfort and Tuaca. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation — Executive Summary — Fiscal 2016 Financial Highlights” for additional information about the impact of that sale on our operating results for fiscal 2016. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) Form 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended April 30, 2016 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 002-26821 BROWN-FORMAN CORPORATION (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 850 Dixie Highway Louisville, Kentucky (Address of principal executive offices) 61-0143150 (IRS Employer Identification No.) 40210 (Zip Code) Registrant’s telephone number, including area code (502) 585-1100 Securities registered pursuant to Section 12(b) of the Act: Title of each class Class A Common Stock (voting) $0.15 par value Class B Common Stock (nonvoting) $0.15 par value Name of each exchange on which registered New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No The aggregate market value, as of the last business day of the most recently completed second fiscal quarter, of the voting and nonvoting equity held by nonaffiliates of the registrant was approximately $15,400,000,000. The number of shares outstanding for each of the registrant’s classes of Common Stock on May 31, 2016, was: Class A Common Stock (voting) Class B Common Stock (nonvoting) 84,509,838 112,418,105 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement of Registrant for use in connection with the Annual Meeting of Stockholders to be held July 28, 2016, are incorporated by reference into Part III of this report. 1 Table of Contents PART I Item 1. Business Item 1A. Risk Factors Item 1B. Unresolved Staff Comments Item 2. Properties Item 3. Legal Proceedings Item 4. Mine Safety Disclosures PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Item 6. Selected Financial Data Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Item 7A. Quantitative and Qualitative Disclosures about Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information PART III Item 10. Directors, Executive Officers, and Corporate Governance Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Item 13. Certain Relationships and Related Transactions, and Director Independence Item 14. Principal Accounting Fees and Services PART IV Item 15. Exhibits and Financial Statements Schedules SIGNATURES SCHEDULE II – Valuation and Qualifying Accounts Page 4 11 17 18 18 18 19 21 22 44 46 75 75 75 75 75 75 75 76 76 79 82 2 Forward-Looking Statement Information. Certain matters discussed in this report, including the information presented in Part II under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” contain statements, estimates, and projections that are “forward-looking statements” as defined under U.S. federal securities laws. Words such as “aim,” “anticipate,” “aspire,” “believe,”, “can,” “continue,” “could,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “might,” “plan,” “potential,” “project,” “pursue,” “see,” “seek,” “should,” “will,” “would,” and similar words identify forward-looking statements, which speak only as of the date we make them. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risks, uncertainties, and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I under “Item 1A. Risk Factors” and those described from time to time in our future reports filed with the Securities and Exchange Commission, including: • Unfavorable global or regional economic conditions, and related low consumer confidence, high unemployment, weak credit or capital markets, budget deficits, burdensome government debt, austerity measures, higher interest rates, higher taxes, political instability, higher inflation, deflation, lower returns on pension assets, or lower discount rates for pension obligations • Risks associated with being a U.S.-based company with global operations, including commercial, political, and financial risks; local labor policies and conditions; protectionist trade policies or economic or trade sanctions; compliance with local trade practices and other regulations, including anti-corruption laws; terrorism; and health pandemics Fluctuations in foreign currency exchange rates, particularly a stronger U.S. dollar • • Changes in laws, regulations, or policies – especially those that affect the production, importation, marketing, labeling, pricing, distribution, sale, or consumption of our beverage alcohol products • Tax rate changes (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, capital gains) or changes in related reserves, changes in tax rules (for example, LIFO, foreign income deferral, U.S. manufacturing, and other deductions) or accounting standards, and the unpredictability and suddenness with which they can occur • Dependence upon the continued growth of the Jack Daniel’s family of brands • Changes in consumer preferences, consumption, or purchase patterns – particularly away from larger producers in favor of smaller distilleries or local producers, or away from brown spirits, our premium products, or spirits generally, and our ability to anticipate or react to them; bar, restaurant, travel, or other on-premise declines; shifts in demographic trends; or unfavorable consumer reaction to new products, line extensions, package changes, product reformulations, or other product innovation Production facility, aging warehouse, or supply chain disruption Imprecision in supply/demand forecasting • Decline in the social acceptability of beverage alcohol in significant markets • • • Higher costs, lower quality, or unavailability of energy, water, raw materials, product ingredients, labor, or finished goods • Route-to-consumer changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in higher implementation-related or fixed costs Inventory fluctuations in our products by distributors, wholesalers, or retailers • • Competitors’ consolidation or other competitive activities, such as pricing actions (including price reductions, promotions, discounting, couponing, or free goods), marketing, category expansion, product introductions, or entry or expansion in our geographic markets or distribution networks • Risks associated with acquisitions, dispositions, business partnerships, or investments – such as acquisition integration, or • • termination difficulties or costs, or impairment in recorded value Inadequate protection of our intellectual property rights Product recalls or other product liability claims; or product counterfeiting, tampering, contamination, or product quality issues Significant legal disputes and proceedings; or government investigations Failure or breach of key information technology systems • • • Negative publicity related to our company, brands, marketing, personnel, operations, business performance, or prospects • • Our status as a family “controlled company” under New York Stock Exchange rules Failure to attract or retain key executive or employee talent Use of Non-GAAP Financial Information. Certain matters discussed in this report, including the information presented in Part II under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” include measures that are not measures of financial performance under U.S. generally accepted accounting principles (GAAP). These non-GAAP measures should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP, and also may be inconsistent with similarly-titled measures presented by other companies. In Part II under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” we present the reasons we use these measures under the heading, “Non-GAAP Financial Measures,” and we present reconciliations of these measures to the most closely comparable GAAP measures under the heading “Results of Operations – Year-Over-Year Comparisons.” 3 Item 1. Business Overview PART I Brown-Forman Corporation (the “Company,” “Brown-Forman,” “we,” “us,” or “our” below) was incorporated under the laws of the State of Delaware in 1933, successor to a business founded in 1870 as a partnership and later incorporated under the laws of the Commonwealth of Kentucky in 1901. We primarily manufacture, bottle, import, export, market, and sell a wide variety of alcoholic beverages under recognized brands. We employ over 4,600 people on six continents, including about 1,300 people in Louisville, Kentucky, USA, home of our world headquarters. We are the largest American-owned spirits and wine company with global reach. We are a “controlled company” under New York Stock Exchange rules, and the Brown family owns a majority of our voting stock. For a discussion of recent developments, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary – Overview.” Brands Beginning in 1870 with Old Forester Bourbon Whisky – our founding brand – and spanning the generations since, we have built a portfolio of more than 40 spirit, wine, and ready-to-drink cocktail (RTD) brands that includes some of the best-known and most-loved trademarks in our industry. The most important brand in our portfolio is Jack Daniel’s Tennessee Whiskey, which is the fourth-largest spirits brand of any kind and the largest American whiskey brand in the world, according to Impact Databank’s “Top 100 Premium Spirits Brands Worldwide” list.1 In its third year on the list, Jack Daniel’s Tennessee Honey is the second- largest-selling flavored whiskey on the Worldwide Impact list, selling over 1.5 million nine-liter cases in calendar year 2015, up 13% from the prior calendar year.1 Additionally, Jack Daniel’s Tennessee Fire was designated as an Impact “Hot Brand”1 in its first full calendar year (2015). Our other leading global brands on the Worldwide Impact list are Finlandia, the ninth-largest-selling vodka; Canadian Mist, the fourth-largest-selling Canadian whisky; and el Jimador, which is the fourth-largest-selling tequila and designated as an Impact “Hot Brand”.1 Principal Brands Jack Daniel’s Tennessee Whiskey Jack Daniel’s RTDs Jack Daniel’s Tennessee Honey Gentleman Jack Rare Tennessee Whiskey Jack Daniel’s Tennessee Fire Jack Daniel’s Single Barrel Collection2 Jack Daniel’s Sinatra Select Jack Daniel’s Winter Jack Jack Daniel’s No. 27 Gold Tennessee Whiskey Finlandia Vodkas Finlandia RTDs Korbel California Champagnes3 Korbel California Brandy3 Woodford Reserve Kentucky Bourbons el Jimador Tequilas el Jimador New Mix RTDs Herradura Tequilas Canadian Mist Canadian Whisky Sonoma-Cutrer California Wines Early Times Kentucky Whisky and Bourbon Chambord Liqueur Old Forester Kentucky Bourbon Antiguo Tequila Pepe Lopez Tequila Santa Dose Cachaça Collingwood Canadian Whisky See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Fiscal 2015 Brand Highlights” for details on the performance of our brands. 1Impact Databank, a well-known U.S. trade publication, published these industry statistics in March 2016. 2The Jack Daniel’s Single Barrel Collection includes Jack Daniel’s Single Barrel Select, Jack Daniel’s Single Barrel Barrel Proof, Jack Daniel’s Single Barrel Rye, and Jack Daniel’s Single Barrel 100 Proof. 3While Korbel is not an owned brand, we sell Korbel products under contract in the United States and other select markets. 4 Our vision in marketing is to “be the best brand builders in the industry.” We build our brands by investing in programs that we believe create enduring connections with our consumers. These programs cover a wide spectrum of activities, including media (TV, radio, print, outdoor, and, increasingly, digital and social media), consumer and trade promotions, sponsorships, and visitor center programs at our distilleries and our winery. We expect to grow our sales and profits by consistently delivering creative, responsible marketing programs that drive brand recognition, brand trial, brand loyalty, and, ultimately, consumer demand around the world. Markets We sell our products in approximately 160 countries around the world. The United States, our largest, most important market, accounted for 46% of our net sales in fiscal 2016. Our largest international markets include the United Kingdom, Australia, Mexico, Germany, Poland, France, Turkey, Russia, Canada, and Brazil. Over the last 10 years, we have greatly expanded our international footprint. In fiscal 2016, we generated 54% of our net sales outside the United States compared to 41% ten years ago. The U.S. proportion of net sales has grown from fiscal 2014 to fiscal 2016, mainly due to the negative impact of foreign exchange on our international business. We present the percentage of total net sales by geographic area for our most recent three fiscal years and, to provide historical context, fiscal 2006, below: Percentage of Total Net Sales by Geographic Area United States International: Europe Australia Other Total International* TOTAL Note: Totals may differ due to rounding 2006 ... 59% ... ... ... ... ... 41% ... 100% Year ended April 30 2014 2015 2016 41% 43% 46% 32 % 12 % 15 % 59% 100% 31 % 11 % 15 % 57% 100% 31 % 9 % 14 % 54% 100% For details about net sales in our largest markets, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Fiscal 2016 Market Highlights.” For details about our reportable segment and for additional geographic information about net sales and long-lived assets, refer to Note 14 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.” For details on risks related to our global operations, see “Item 1A. Risk Factors.” Distribution Network and Customers Our distribution network, which we sometimes refer to as our “route-to-consumer” (RTC), takes a variety of forms, depending on (a) a market’s laws and regulatory framework for trade in beverage alcohol, (b) our assessment of a market’s long-term attractiveness and competitive dynamics, (c) the relative profitability of distribution options available to us, (d) the structure of the retail and wholesale trade in a market, and (e) our portfolio’s development stage in a market. As these factors change, we evaluate our RTC strategy and, from time to time, adapt our model. In the United States, which generally prohibits wine and spirits manufacturers from selling their products directly to consumers, we sell our brands either to distributors or (in states that directly control alcohol sales) to state governments that then sell to retail customers and consumers. Outside the United States, we use a variety of RTC models. We own and operate distribution companies in 13 markets: Australia, Brazil, Canada, China, the Czech Republic, France, Germany, Hong Kong, South Korea, Mexico, Poland, Thailand, and Turkey. In these markets, and in a large portion of the travel retail channel, we sell our products directly to retailers, to wholesalers, or, in Canada, to provincial governments. In fiscal 2017, we plan to establish a new distribution company in Spain, which we expect to begin operating in fiscal 2018. In the United Kingdom, we partner in a cost-sharing arrangement with another supplier, Bacardi Limited, to sell a portfolio of both companies’ brands. In many other markets, including Italy, Japan, Russia, and South Africa, we rely on others to distribute our brands, generally under fixed-term distribution contracts. We believe that our customer relationships are good. We believe our exposure to concentrations of credit risk is limited due to the diverse geographic areas covered by our operations. 5 Seasonality Holiday buying makes the fourth calendar quarter the peak season for our business. For the fiscal years ended April 30, 2014, 2015, and 2016, approximately 32% of our net sales were in the fourth calendar quarter. Competition Trade information indicates that we are one of the largest global suppliers of premium spirits and wine. According to International Wine & Spirit Research (the IWSR), for calendar year 2015, the ten largest global spirits companies controlled less than 20% of the total global market for spirits (on a volume basis). While we believe that the overall market environment offers considerable growth opportunities for us, our industry is now, and will remain, highly competitive. We compete against many global, regional, and local brands in a variety of categories of beverage alcohol, but most of our brands compete primarily in the industry’s premium-and-higher price categories. Our competitors include major global wine and spirits companies, such as Bacardi Limited, Beam Suntory Inc., Davide Campari-Milano S.p.A., Diageo PLC, LVMH Moët Hennessy Louis Vuitton SE, Pernod Ricard SA, and Rémy Cointreau SA. In addition, particularly in the United States, we increasingly compete with (a) national companies, and (b) entrepreneurs, many of whom are recent entrants to the industry – typically with small-batch or craft spirit brands. Brand recognition, brand provenance, quality of product and packaging, availability, taste, and price affect consumers’ choices among competing brands in our industry. Several factors influence consumers’ buying decisions, including: advertising; promotions; merchandising in bars, restaurants, and shops; expert or celebrity endorsement; social media and word-of-mouth; and the timing and relevance of new product introductions. Although some competitors have substantially greater resources than we do, we believe that our competitive position is strong, particularly as it relates to brand recognition, quality, availability, and relevance of new product introductions. Ingredients and Other Supplies The principal raw materials used in manufacturing and packaging our distilled spirits are water, corn, rye, malted barley, agave, sugar, glass, cartons, PET (polyethylene terephthalate, a polymer used in non-glass containers), labels, and wood for barrels (used for storing whiskey and some tequilas). The principal raw materials used in liqueurs are neutral spirits, sugar, and wine, while the principal raw materials used in our RTD products are sugar, flavorings, neutral spirits, whiskey, tequila, and malt. The principal raw materials used in producing wines are grapes, packaging materials, and wood barrels. Our grape supply comes from a combination of our California vineyards and contracts with independent growers. We believe that our relationships with our growers are good. Currently, none of these raw materials is in short supply, but shortages could occur. From time to time, our agricultural ingredients (corn, rye, malted barley, agave, and grapes) could be adversely affected by weather and other forces that might constrain supply. Whiskeys, certain tequilas, and other distilled spirits must be aged. Because we must schedule production to meet demand for these products years in the future, our inventories of them may be larger in relation to sales and total assets than in many other businesses. For details on risks related to the availability of raw materials and the uncertainty inherent in forecasting supply and demand, refer to “Item 1A. Risk Factors.” Intellectual Property Our intellectual property rights include trademarks, copyrights, proprietary packaging and trade dress, proprietary manufacturing technologies, know-how, and patents. Our intellectual property, especially our trademarks, is essential to our business. We register our trademarks broadly – some of them in every country where registration is possible. We register others where we sell or expect to sell our products. We protect our intellectual property rights vigorously but fairly. We have licensed some of our trademarks to third parties for use with services or on products other than alcoholic beverages, which we believe enhances the awareness and protection of our brands. For details on risks related to the protection of our intellectual property, refer to “Item 1A. Risk Factors.” For details on our most important brands, refer to “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Fiscal 2016 Brand Highlights.” Regulatory Environment Federal, state, local, and foreign authorities regulate the production, storage, transportation, distribution, and sale of our products. Some countries and local jurisdictions prohibit or restrict the marketing or sale of distilled spirits in whole or in part. 6 In the United States, at the federal level, the Alcohol and Tobacco Tax and Trade Bureau of the U.S. Department of the Treasury regulates the wine and spirits industry with respect to the production, blending, bottling, labeling, sales, advertising, and transportation of beverage alcohol. Similar regulatory regimes exist at the state level and in most of the non-U.S. jurisdictions where we sell our products. In addition, distilled spirits products are subject to customs duties or excise taxation in many countries, including in the United States, at the federal, state, and local level. Under U.S. federal regulations, bourbon and Tennessee whiskeys must be aged in new charred oak barrels for at least two years; we typically age our whiskeys three to six years. Federal regulations also require Canadian whisky to be manufactured in Canada in compliance with Canadian laws. Mexican authorities regulate the production and bottling of tequilas; they mandate minimum aging periods for extra anejo (three years), anejo (one year), and reposado (two months) tequilas. We comply with these regulations. Our operations are subject to various environmental protection statutes and regulations, and our policy is to comply with them. Strategy Six years ago, we introduced our “Brown-Forman 150” long-term strategy, focused on driving sustainable growth toward our 150th anniversary in 2020. The B-F Arrow articulates our core principles: our purpose as well as the vision, values, and behaviors that we expect our employees to embrace and exhibit. While these core principles are a constant and powerful means of connecting our stakeholders to a shared vision of “Building Forever”, we continue to refresh our strategies to reflect current realities. The strategic ambitions described below both demonstrate a sustained focus on several drivers of our recent growth, which we believe remain relevant, and acknowledge the new and changing opportunities of today. We seek to build brands and businesses that can create shareholder value – ones that deliver strong growth, solid margins, and high returns. In addition, given our growing size and scale, we focus on building brands that can be meaningful for our company over time. Our first priority is to grow our premium spirits portfolio organically. But as opportunities arise, we will pursue innovation and consider acquisitions and partnerships that meet our rigorous quantitative and qualitative criteria. The Jack Daniel’s family of brands, including Jack Daniel’s Tennessee Whiskey, is our most valuable asset. We will always work to keep Jack Daniel’s Tennessee Whiskey strong, healthy, and relevant to consumers worldwide, and to take advantage of the abundant opportunities for growing the Jack Daniel’s family of brands across markets, price points, channels, and consumer groups. As product innovation has become increasingly important to the brand in recent years, we will continue to evaluate opportunities to grow the Jack Daniel’s family of brands through thoughtful new product introductions, such as our U.S. launch of Jack Daniel’s Tennessee Fire and our recent introduction of Jack Daniel’s Single Barrel Rye. We are the global leader in American whiskey, and we will continue to pursue growth in the broader global, premium whiskey category. We believe that we can leverage our whiskey-making knowledge, production assets, trademarks, and brand- building skills to accomplish this objective. We will focus first on the global growth of our most important whiskey, Jack Daniel’s. In addition, we expect to generate excellent growth for our other whiskey brands around the world, particularly Woodford Reserve and Old Forester, which have both experienced rapid growth in recent years. 7 We aim to grow Finlandia, el Jimador, and Herradura. We plan to focus primarily on growing Finlandia in Poland and Eastern Europe. We will work to expand the reach of Herradura tequila to new consumers, emphasizing Mexico, the United States, and other high-potential markets. We have taken steps to reposition el Jimador tequila as a more premium brand in Mexico, its largest market by volume. As a result, volumes have declined over the past couple of years in Mexico, though we expect the brand’s overall performance to improve there over time. In the United States and select international markets, we continue to experience solid growth with el Jimador, and we believe in this brand’s long-term potential. We recently announced the launch of Coopers’ Craft, our first new bourbon trademark in more than 20 years, which we will begin selling in select United States markets in July 2016. We are in the development stage of our Slane Irish Whiskey brand, which we anticipate launching in the spring of 2017. Lastly, on June 1, 2016, we acquired The BenRiach Distillery Company Limited. This purchase added three single malt Scotch whisky brands into our growing whiskey portfolio: The GlenDronach, BenRiach, and Glenglassaugh. We believe that super- and ultra-premium whiskeys are attractive long-term businesses for us, and we will continue to pursue global growth in these categories. In fiscal 2016, as part of our evolving portfolio strategy and our efforts to focus resources on our highest strategic priorities, we sold our Southern Comfort and Tuaca brands. This decision reflects our continuing efforts to reshape our portfolio by developing, divesting, and acquiring brands to create value and improve growth. The United States remains our largest market, and continuing to grow in this market is important to our long-term success. We expect to foster this growth by emphasizing fast-growing spirits categories such as super-premium whiskies and tequila, continued product and packaging innovation, continued route-to-consumer proficiency, and brand building within growing consumer segments (with increasing emphasis on multicultural marketing). Over the last two decades, our business outside the United States has grown more quickly than our business within it. Although the past two years have been an exception to this trend, as our net sales in the United States grew faster than our international business, we expect the longer-term trend to resume. Our ability to achieve our long-term growth objectives requires further development of our business globally, especially in emerging markets. We expect to grow our business in developed markets such as France, Germany, Australia, and the United Kingdom, as well as in emerging markets such as Mexico, Poland, and Turkey. Over time, we expect increasingly significant contributions to our growth from other emerging markets such as Brazil, China, Russia, Southeast Asia, Africa, and Eastern Europe. We will continue to pursue RTC strategies that will expand our access to and understanding of consumers in these diverse markets. We believe that having a long-term-focused, committed, engaged shareholder base, including the Brown family, gives us an important strategic advantage, particularly in a business with aged products and multi-generational brands. Recognizing the strong cash-generating capacity and the capital efficiency of our business, we will continue to pursue what we believe to be well-balanced capital deployment strategies aimed at perpetuating Brown-Forman’s strength and independence. Corporate Responsibility In pursuing the objectives described above, we will strive to be responsible in everything we do. Our history of responsibility began in 1870, when our founder, George Garvin Brown, first sold medicinal whiskey in glass bottles to ensure quality and safety – an innovative idea back when whiskey was usually sold by the barrel. Today, achieving our stated business purpose, to “enrich the experience of life,” is possible only within a context of corporate responsibility. This means promoting responsible consumer enjoyment of our brands; working to reduce alcohol abuse and misuse; protecting the environment; providing a healthy, safe, and inclusive workplace; and contributing to the communities where we operate around the globe. Alcohol Responsibility. We promote responsible consumption of our products, as we believe this will enhance our relationships with consumers, business partners, stakeholders, and society at large. It is also essential for the long-term prosperity of our company and our industry. When abused or misused, alcohol can contribute to significant harm to both individuals and the community. We appreciate the need for governments to regulate our industry appropriately and effectively, taking into account national circumstances and local cultures. Acting in partnership with others, we want to be part of the solution to real, complex problems such as underage drinking, drunk driving, and overconsumption. As a significant player in the global beverage alcohol industry, we foster collective action with our peers. Working together with other producers, we are able to leverage our views on a scale that can create change. For example, we are working with 13 other industry leaders that signed the Beer, Wine, and Spirits Producers’ Commitments to Reduce Harmful Drinking. The group made significant progress in 2015, resulting from the collaboration among all signatories and with stakeholders where we do business. By engaging non-governmental organizations, we reached more people across a broader geographic footprint with underage drinking programs. Drunk driving prevention pilot programs expanded to another four countries, with two more planned 8 for 2016. With our retail business partners, we developed and launched responsible retailing principles that are increasing the number of retail programs focused on enforcing legal purchase age and responsible beverage service. Our collective progress on these commitments will be reported annually, and more information can be found at www.producerscommitments.org. Since 2009, we have hosted an open forum to share our point of view and encourage engagement of others at www.OurThinkingAboutDrinking.com. In the United States, we support The Ad Council’s “Buzzed Driving is Drunk Driving” campaigns, designated-driver services such as BeMyDD, and the Responsible Retailing Forum, which brings together diverse stakeholders seeking to reduce underage sales, among other initiatives. In our consumer relationships, we seek to communicate through responsible advertising content and placement, relying on our comprehensive internal marketing code and adhering to industry marketing and advertising guidelines. As part of our commitment to responsible marketing, and to enable consumers to make more informed decisions, we will be adding nutritional information to our brand websites later this year. We also are founding members of, and contribute significant resources to, the Foundation for Advancing Alcohol Responsibility, an organization created by spirits producers to combat harmful use of alcohol. While this is a U.S. organization, we participate actively in similar organizations in other markets, such as DrinkWise in Australia, BSI in Germany, The Portman Group in the United Kingdom, and FISAC in Mexico. In the European Union, we helped form the Responsible Marketing Pact with seven other major beverage alcohol manufacturers to develop industry-led standards for responsible advertising and marketing. The standards focus on decreasing exposure of those under legal drinking age to alcohol-related advertisements. We also recognize that some individuals can’t or shouldn’t drink beverage alcohol and respect the choice of those who don’t drink for whatever reason. To this end, we have an internal employee resource group (ERGs), SPIRIT, that supports an environment where all employees and guests feel welcome, regardless of whether they choose to drink. Environmental Sustainability. Our vision – Building Forever – is inherently linked to environmental sustainability. A key component of our environmental sustainability strategy is reducing our energy consumption and greenhouse gas (GHG) emissions. In fiscal 2014, we set new, more ambitious environmental sustainability goals, focused on reducing our absolute GHG emissions by 15% by 2023, sending zero waste to landfill, and reducing our water use and wastewater discharges per unit of product by 30% by 2023 (versus 2012 baseline year). These goals support our ambition to be a sustainability leader within our industry, and extend programs beyond our operational borders into the supply chain. We report on our progress toward these goals in our biennial Corporate Responsibility Reports, available online. In 2016, Newsweek magazine named Brown-Forman the third “greenest” U.S. beverage company, and number 52 among the 500 largest publicly traded companies in the United States. Rankings are based on eight measures of corporate sustainability and environmental performance. In addition, we have been identified as a global leader for our actions and strategies in response to climate change and have been awarded a position on The Climate “A” List by CDP, an international not-for-profit organization that produces the list at the request of 822 investors who represent more than a third of the world’s invested capital. Diversity, Inclusion, and Human Rights. We believe that having a diverse and inclusive workforce is central to our success. As we work to increase our brands’ relevance and appeal to diverse consumer groups, we need a diversity of experiences and outlooks within our own workforce. We also want employees to feel comfortable in contributing their whole selves and different perspectives to their work. Over the past year, we’ve made progress with diverse representation at the senior level. Three women and one African American serve on our Board of Directors. Four members of our 15-member Executive Leadership Team are women and two are minorities. In 2016, we once again earned a perfect score of 100% in the Corporate Equality Index by the Human Rights Campaign, a civil rights organization promoting equality for lesbian, gay, bisexual, and transgender Americans. This makes us one of the “Best Places to Work for LGBT equality”1 in the United States for the sixth consecutive year. Our ERGs have been the core of our diversity culture by supporting employees’ growth while enhancing their contributions. Our eight ERGs foster a diverse and inclusive environment that drives our high-commitment, high-performance organization and encourages employees to bring their individuality to work. In the marketplace, we focus on promoting fair and ethical business practices. We remain committed to the guidelines set forth in our Global Human Rights Statement, defining our commitment to respecting the fundamental rights of all human beings. We share our human rights policies and practices with our suppliers through our Suppliers Guiding Principles on Human Rights. Our work in this area will help inform our response to the U.K.’s recent passage of the Modern Slavery Act. Community Involvement. Our approach to philanthropy reflects our values as a corporate citizen. Our civic engagement supports non-profit organizations that improve the lives of individuals and the vitality of our communities. We believe, as a responsible and caring corporate citizen, it is vital that we give back to the communities that support both our employees and our business. Through our contributions, we work to create communities that ensure basic living standards, support healthy and sustainable living, and enhance intellectual and cultural living. While we focus on our hometown of Louisville, Kentucky, our civic engagement activities extend to the communities around the globe where our employees live, work, and raise their families. 1Human Rights Campaign 2016 Corporate Equity Index at www.hrc.org/resources/best-places-to-work-2016. 9 In fiscal 2016, we donated more than $10.8 million in cash, logged approximately 16,000 volunteer hours, and had over 132 employees serve on boards of directors of 192 non-profit organizations. Our Corporate Responsibility reports are available at www.brown-forman.com/responsibility. Employees and Executive Officers As of April 30, 2016, we employed approximately 4,600 people, including about 200 employed on a part-time or temporary basis. We employ about 2,800 people in the United States, approximately 17% represented by a union. We believe our employee relations are good. The following persons serve as executive officers as of June 15, 2016: Name Paul C. Varga Jane C. Morreau Matthew E. Hamel Jill Ackerman Jones Age 52 57 56 50 Mark I. McCallum 61 Lawson E. Whiting 47 Alejandro “Alex” Alvarez Ralph De Chabert Brian P. Fitzgerald Kirsten M. Hawley Thomas Hinrichs Lisa P. Steiner 48 69 43 46 54 56 Available Information Principal Occupation and Business Experience Company Chairman and Chief Executive Officer since 2007. Chief Executive Officer since 2005. Executive Vice President and Chief Financial Officer since 2014. Senior Vice President, Chief Production Officer, and Head of Information Technology from 2013 to 2014. Senior Vice President and Director of Financial Management, Accounting and Technology from 2008 to 2013. Executive Vice President, General Counsel, and Secretary since 2007. Executive Vice President and President for North America, CCSA, IMEA, and Global Travel Retail since February 2015. Executive Vice President and President for North America and Latin America Regions from 2013 to 2015. Executive Vice President and Chief Production Officer from 2007 to 2012. Executive Vice President and President of Jack Daniel’s Brands since February 2015. Executive Vice President and President for Europe, Africa, Middle East, Asia Pacific, and Travel Retail from 2013 to 2015. Executive Vice President and Chief Operating Officer from 2009 to 2013. Executive Vice President and Chief Brands Officer from 2006 to 2009. Executive Vice President and Chief Brands and Strategy Officer since February 2015. Senior Vice President and Chief Brands Officer from 2013 to 2015. Senior Vice President and Managing Director for Western Europe from 2011 to 2013. Vice President and Finance Director for Western Europe from 2010 to 2011. Vice President and Finance Director for North America from 2009 to 2010. Senior Vice President and Chief Production Officer since 2014. Vice President and General Manager for Brown-Forman Tequila Mexico Operations from 2008 to 2014. Senior Vice President and Chief Diversity Officer since 2007. Senior Vice President and Chief Accounting Officer since 2013. Vice President and Finance Director for Greater Europe and Africa from 2009 to 2013. Senior Vice President and Chief Human Resources Officer since February 2015. Senior Vice President and Director of HR Business Partnerships from 2013 to 2015. Vice President and Director of Organization and Leader Development 2011 to 2013. Assistant Vice President and Director of Employee Engagement from 2009 to 2011. Senior Vice President and President for Europe, North Asia, and ANZSEA since February 2015. Senior Vice President and Managing Director for Europe from 2013 to 2015. Senior Vice President and Managing Director for Greater Europe and Africa from 2006 to 2013. Senior Vice President, Chief of Staff, and Director of Global Corporate Communications and Services since February 2015. Senior Vice President and Chief Human Resources Officer from 2009 to 2015. Senior Vice President and Director of Global Human Resources from 2007 to 2009. You can read and copy any materials that we file with the SEC in its Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC at www.sec.gov. Our website address is www.brown-forman.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports are available free of charge on our website as soon as reasonably practicable after we electronically file those reports with the SEC. The information provided on our website is not part of this report, and is therefore not incorporated by reference, unless that information is otherwise specifically referenced elsewhere in this report. 10 On our website, we have posted our Corporate Governance Guidelines, our Code of Conduct that applies to all directors and employees, and our Code of Ethics that applies specifically to our senior financial officers. If we amend or waive any of the provisions of our Code of Conduct or our Code of Ethics applicable to our principal executive officer, principal financial officer, principal accounting officer, or controller that relates to any element of the definition of “code of ethics” enumerated in Item 406 (b) of Regulation S-K under the Securities Act of 1934 Act, we intend to disclose these actions on our website. We have also posted on our website our Corporate Governance Guidelines and the charters of our Audit Committee, Compensation Committee, Corporate Governance and Nominating Committee, and Executive Committee of our Board of Directors. Copies of these materials are also available free of charge by writing to our Secretary, Matthew E. Hamel, 850 Dixie Highway, Louisville, Kentucky 40210 or emailing him at Secretary@b-f.com. Item 1A. Risk Factors We believe the following discussion identifies the most significant risks and uncertainties that could adversely affect our business. If any of the following risks were actually to occur, our business, results of operations, cash flows, or financial condition could be materially and adversely affected. Additional risks not currently known to us, or that we currently deem to be immaterial, could also materially and adversely affect our business, results of operations, cash flows, or financial condition. Unfavorable economic conditions could negatively affect our operations and results. Unfavorable global or regional economic conditions, including uncertainty caused by unstable geopolitical environments in many parts of the world, such as Russia, Brazil, and Turkey, could adversely affect our business and financial results. While the major economic disruptions of the 2008-2009 financial crisis have largely subsided, many markets where our products are sold still face significant economic challenges resulting from the ensuing global economic downturn that followed, including low consumer confidence, high unemployment, budget deficits, burdensome governmental debt, austerity measures, increased taxes, and weak financial, credit, and housing markets. Unfavorable economic conditions such as these can cause governments to increase taxes on beverage alcohol to attempt to raise revenue or reduce consumers’ willingness to make discretionary purchases of beverage alcohol products or pay for premium brands such as ours. In unfavorable economic conditions, consumers may make more value- driven and price-sensitive purchasing choices and drink more at home rather than at restaurants, bars, and hotels, which tend to favor many of our premium and super-premium products. Unfavorable economic conditions could also adversely affect our suppliers, distributors, and retailers, who in turn could experience cash flow problems, more costly or unavailable financing, credit defaults, and other financial hardships. This could lead to distributor or retailer destocking, increase our bad debt expense, or cause us to increase the levels of unsecured credit that we provide to customers. Other potential negative consequences to our business from poor economic conditions include higher interest rates, an increase in the rate of inflation, deflation, exchange rate fluctuations, credit or capital market instability, or lower returns on pension assets or lower discount rates for pension obligations (possibly requiring higher contributions to our pension plans). For details on the effects of changes in the value of our benefit plan obligations and assets on our financial results, see Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.” Our global business is subject to commercial, political, and financial risks, including foreign currency exchange rate fluctuations. Our products are sold in approximately 160 countries; accordingly, we are subject to risks associated with doing business globally, including commercial, political, and financial risks. In the long term, we continue to expect our growth rates in non-U.S. markets to surpass our growth rates in the United States. Emerging regions, such as eastern Europe, Latin America, Asia, and Africa, as well as more developed markets, such as the United Kingdom, France, Germany, and Australia, provide growth opportunities for us. If shipments of our products – particularly Jack Daniel’s Tennessee Whiskey – to our global markets were to experience significant disruption due to these risks or for other reasons, it could have a material adverse effect on our financial results. In addition, we are subject to potential business disruption caused by military conflicts; potentially unstable governments or legal systems; civil or political upheaval or unrest; local labor policies and conditions; possible expropriation, nationalization, or confiscation of assets; problems with repatriation of foreign earnings; economic or trade sanctions; closure of markets to imports; anti-American sentiment; terrorism or other types of violence in or outside the United States; health pandemics; and a significant reduction in global travel. For example, Europe is a key commercial and production region for some of our products, and further outbreaks of violence there could disrupt our operations. In addition, our ability to sell into Russia depends on our products being imported, and any economic or trade sanctions could materially adversely affect our operations there. Our success will depend, in part, on our ability to overcome the challenges we encounter with respect to these risks and other factors affecting U.S. companies with global operations. 11 The more we expand our business globally, the more exchange rate fluctuations relative to the U.S. dollar influence our financial results. In many markets outside the United States, we sell our products and pay for some goods, services, and labor primarily in local currency. Because our foreign currency revenues for each foreign currency exceed the corresponding foreign currency expense, we have a net exposure to changes in the value of the U.S. dollar relative to each of those currencies. Over time, our reported financial results generally will be hurt by a stronger U.S. dollar and improved by a weaker one. For instance, profits from our overseas businesses for fiscal 2016 were adversely affected by the recent strengthening of the U.S. dollar against currencies in our major markets, including the euro, Russian ruble, and Australian dollar. We do not attempt to hedge all of our foreign currency risk. We may, from time to time, attempt to hedge foreign currency risk, but, even in those cases, we may not be successful in limiting foreign currency risk through the use of foreign currency derivatives or other means. For details on how foreign exchange affects our business, see “Item 7A. Quantitative and Qualitative Disclosures about Market Risk – Foreign Exchange.” National and local governments may adopt regulations or undertake investigations that could limit our business activities or increase our costs. Our business is subject to extensive regulatory requirements regarding production, exportation, importation, marketing and promotion, labeling, distribution, pricing, and trade practices, among others. Changes in laws, regulatory measures, or governmental policies, or in the manner in which current ones are interpreted, could cause us to incur material additional costs or liabilities, and jeopardize the growth of our business in the affected market. For instance, in fiscal 2016, we experienced disruption of our business in Indonesia due to recent changes in industry regulation and import duties. Specifically, governments may prohibit, or impose or increase limitations on, advertising and promotional activities, or times or locations where beverage alcohol may be sold or consumed, or adopt other measures that could limit our opportunities to reach consumers or sell our products. In Europe, for example, regulators in a number of countries have adopted or are considering severe limitations on the marketing and sale of beverage alcohol. Certain countries historically have banned all television, newspaper, magazine, and internet advertising for beverage alcohol products. Increases in regulation of this nature could substantially reduce consumer awareness for our products in the affected markets. Some countries where we do business have a higher risk of corruption than others. While we are committed to doing business in accordance with applicable anti-corruption and other laws, our Code of Conduct, Code of Ethics for Senior Financial Officers, and other Company policies, we remain subject to the risk that an employee will violate our policies, or that any of our many affiliates or agents, such as importers, wholesalers, distributors, or other business partners, may take action determined to be in violation of international trade, money laundering, anti-corruption, or other laws, including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act 2010, or equivalent local laws. Any determination that our operations or activities are not, or were not, in compliance with U.S. or foreign laws or regulations could result in investigations, interruption of business, loss of business partner relationships, suspension or termination of licenses and permits (our own or those of our partners), imposition of fines, legal or equitable sanctions, negative publicity, and management distraction. Further, our compliance with applicable anti-corruption or other laws, our Code of Conduct, Code of Ethics for Senior Financial Officers, and our other policies could result in higher operating costs. Additional regulation in the United States and other countries addressing climate change, use of water, and other environmental issues could increase our operating costs. Increasing regulation of fuel emissions could increase the cost of energy, including fuel, required to operate our facilities or transport and distribute our products, thereby substantially increasing the production, distribution, and supply chain costs associated with our products. Tax increases and changes in tax rules could adversely affect our financial results. Our business is sensitive to changes in both direct and indirect taxes. As a multinational company based in the United States, we are more exposed to the impact of U.S. tax changes than most of our major competitors, especially those that affect the effective corporate income tax rate. Certain tax changes that have been or are currently proposed by the U.S. Congress or the President exemplify this risk, including repealing LIFO (last-in, first-out accounting treatment of inventory) for tax purposes, decreasing or eliminating the ability of U.S.-based companies to receive a tax credit for foreign taxes paid or to obtain a current U.S. tax deduction for certain expenses in the United States related to foreign earnings, changing the U.S. tax treatment of income related to foreign intangibles, decreasing or eliminating the U.S. manufacturing deduction, or changing the rules relating to the depreciation of capital expenditures or the deduction of advertising expenses. Our business operations are also subject to numerous duties or taxes that are not based on income, sometimes referred to as “indirect taxes,” which include excise taxes, sales or value-added taxes, property taxes, and payroll taxes. Increases in or the imposition of new indirect taxes on our operations or products would increase the cost of our products or, to the extent levied directly on consumers, make our products less affordable, which could negatively affect our financial results by reducing purchases of our products and encouraging consumers to switch to lower-priced or lower-taxed product categories. For example, certain jurisdictions, such as Brazil, have increased and may continue to increase excise taxes on beverage alcohol products, which could 12 increase the cost of our products to consumers and could reduce consumer demand in those jurisdictions. Our global business can also be negatively affected by import and export duties, tariff barriers, and related local governmental protectionist measures, and the suddenness and unpredictability with which these can occur. As governmental entities look for increased sources of revenue, it is possible that they may increase taxes on beverage alcohol products. New tax rules, accounting standards, or pronouncements, and changes in interpretation of existing ones, could also have a significant adverse effect on our business and financial results. This includes potential changes in tax rules or the interpretation of tax rules arising out of the Base Erosion & Profit Shifting project initiated by the Organization for Economic Co-operation and Development. Our business performance is substantially dependent upon the continued health of the Jack Daniel’s family of brands. The Jack Daniel’s family of brands is the primary driver of our revenue and growth. Jack Daniel’s is an iconic global trademark with a loyal consumer fan base, and we invest much effort and many resources to protect and preserve the brand’s reputation for quality, craftsmanship, and authenticity. A brand’s reputational value is based in large part on consumer perceptions, and even an isolated incident that causes harm – particularly one resulting in widespread negative publicity – could adversely influence these perceptions and erode consumer trust and confidence in the brand. Significant damage to the brand equity of Jack Daniel’s would adversely affect our business. Given the importance of Jack Daniel’s to our overall success, a significant or sustained decline in volume or selling price of our Jack Daniel’s products would have a negative effect on our growth and our stock price. Additionally, should we not be successful in our efforts to maintain or increase the relevance of the Jack Daniel’s brand in the minds of current and future consumers, our business and operating results could suffer. For details on the importance of the Jack Daniel’s family of brands to our business, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Fiscal 2016 Brand Highlights.” Changes in consumer preferences and purchases, and our ability to anticipate or react to them, could negatively affect our business results. We are a branded consumer products company in a highly competitive market, and our success depends on our continued ability to offer consumers appealing, high-quality products. Consumer preferences and purchases may shift due to a host of factors, many of which are difficult to predict, including changes in economic conditions, demographic and social trends, public health policies and initiatives, changes in government regulation of beverage alcohol products, the potential legalization of marijuana use on a more widespread basis within the United States or elsewhere, and changes in travel, leisure, dining, gifting, entertaining, and beverage consumption trends. Consumers also may begin to prefer the products of competitors or may generally reduce their demand for brands produced by larger companies. For example, smaller local distilleries are experiencing accelerated growth as a result of shifting consumer preferences toward locally-produced, regionally-sourced products. In addition, we could experience unfavorable business results if we fail to attract consumers from diverse backgrounds and ethnicities in the United States and in our other non-U.S. markets. Forecasts in the United States for several years after 2016 indicate a slight decrease in the population segment aged 21 to 24; fewer potential consumers in this age bracket could have a negative effect on industry growth rates and our business. To continue to succeed, we must anticipate or react effectively to shifts in demographics, consumer behavior, consumer preferences, drinking tastes, and drinking occasions. Our plans call for the continued growth of the Jack Daniel’s family of brands. In particular, we plan to continue to grow Jack Daniel’s Tennessee Honey sales globally and to launch Jack Daniel’s Tennessee Fire in select international markets in fiscal 2017. If these plans are unsuccessful, or if we otherwise fail to develop or implement effective business, portfolio, and brand strategies, our growth, stock price, or financial results could suffer. More broadly, if consumers shift away from spirits (particularly brown spirits such as American whiskey and bourbon), our premium-priced brands, or our RTD products, our financial results could be adversely affected. We believe that new products, line extensions, label and bottle changes, product reformulations, and similar product innovations by both our competitors and us will compete increasingly for consumer drinking occasions. Product innovation is a significant element of our growth strategy; however, there can be no assurance that we will continue to develop and implement successful line extensions, packaging, formulation or flavor changes, or new products. Unsuccessful implementation or short- lived popularity of our product innovations could result in inventory write-offs and other costs, reduction in profits from one year to the next, and also could damage consumers’ perception of the brand family. Our inability to attract consumers to our product innovations relative to our competitors’ products – especially over time – could negatively affect our growth, business, and financial results. Production facility disruption could adversely affect our business. Some of our largest brands, including Jack Daniel’s and Finlandia Vodka, are distilled at single locations. A catastrophic event causing physical damage, disruption, or failure at one of our major distillation or bottling facilities could adversely affect our business. Further, because whiskeys and some tequilas are aged for various periods, we maintain a substantial inventory of aged and maturing products in warehouses at a number of different sites. The loss of a substantial amount of aged inventory – 13 through fire, other natural or man-made disaster, contamination, or otherwise – could significantly reduce the supply of the affected product or products. A consequence of any of these or other supply or supply chain disruptions could result in our inability to meet consumer demand for the affected products for a period of time. In addition, insurance proceeds may be insufficient to cover the replacement value of our inventory of maturing products and other assets if they were to be lost. Disaster recovery plans may not prevent business disruption, and reconstruction of any damaged facilities could require a significant amount of time. The inherent uncertainty in supply/demand forecasting could adversely affect our business, particularly with respect to our aged products. There is an inherent risk of forecasting imprecision in determining the quantity of aged and maturing products to produce and hold in inventory in a given year for future sale. The forecasting strategies we use to balance product supply with fluctuations in consumer demand may not be effective for particular years or products. We cannot be certain that we will be successful in using various levers, such as price, to create the desired balance of available supply and consumer demand for particular years or products. As a consequence, we may be unable to meet consumer demand for the affected products for a period of time. Furthermore, not having our products in the market on a consistent basis may adversely affect our brand equity and future sales. Higher costs or unavailability of materials could adversely affect our financial results, as could our inability to obtain certain finished goods. Our products use materials and ingredients that we purchase from suppliers. Our ability to make and sell our products depends upon the availability of the raw materials, product ingredients, finished products, wood, glass, bottles, cans, bottle closures, packaging, and other materials used to produce and package them. Without sufficient quantities of one or more key materials, our business and financial results could suffer. For instance, only a few glass producers make bottles on a scale sufficient for our requirements, and a single producer supplies most of our glass requirements. In addition, if we experienced a disruption in the supply of American oak logs to produce the new charred oak barrels in which we age our whiskeys, our production capabilities would be compromised. If any of our key suppliers were no longer able to meet our timing, quality, or capacity requirements, ceased doing business with us, or significantly raised prices, and we could not promptly develop alternative cost-effective sources of supply or production, our operations and financial results could suffer. Higher costs or insufficient availability of suitable grain, agave, water, grapes, wood, glass, closures, and other input materials, or higher associated labor costs or insufficient availability of labor, may adversely affect our financial results, because we may not be able to pass along such cost increases or the cost of such shortages through higher prices to customers without reducing demand or sales. Similarly, when energy costs rise, our transportation, freight, and other operating costs, such as distilling and bottling expenses, also may increase. Our financial results may be adversely affected if we are not able to pass along energy cost increases through higher prices to our customers without reducing demand or sales. Weather, the effects of climate change, diseases, and other agricultural uncertainties that affect the mortality, health, yield, quality, or price of the various raw materials used in our products also present risks for our business, including in some cases potential impairment in the recorded value of our inventory. Changes in weather patterns or intensity can disrupt our supply chain as well, which may affect production operations, insurance costs and coverage, as well as the timely delivery of our products. Water is one of the major components of our products, so the quality and quantity of available water is important to our ability to operate our business. If droughts become more common or severe, or if our water supply were interrupted for other reasons, high-quality water could become scarce in some key production regions for our products, including Tennessee, Kentucky, California, Finland, Canada, and Mexico. If the social acceptability of our products declines, or governments adopt policies disadvantageous to beverage alcohol, our business could be adversely affected. Our ability to market and sell our products depends heavily on societal attitudes toward drinking and governmental policies that both flow from and affect those attitudes. In recent years, increased social and political attention has been directed at the beverage alcohol industry. For example, there remains continued attention focused largely on public health concerns related to alcohol abuse, including drunk driving, underage drinking, and the negative health impacts of the abuse and misuse of beverage alcohol. While most people who drink enjoy alcoholic beverages in moderation, it is commonly known and well reported that excessive levels or inappropriate patterns of drinking can lead to increased risk of a range of health conditions and, for certain people, can result in alcohol dependence. Some academics, public health officials, and critics of the alcohol industry in the United States, Europe, and other countries continue to seek governmental measures to make beverage alcohol more expensive, less available, or more difficult to advertise and promote. If future research indicated more widespread serious health risks associated with alcohol consumption – particularly with moderate consumption – or if for any reason the social acceptability of beverage alcohol were to decline significantly, sales of our products could decrease. 14 Significant additional labeling or warning requirements or limitations on the availability of our products could inhibit sales of affected products. Various jurisdictions have adopted or may seek to adopt significant additional product labeling or warning requirements or limitations on the availability of our products relating to the content or perceived adverse health consequences of some of our products. Several such labeling regulations or laws require warnings on any product with substances that the state lists as potentially causing cancer or birth defects. Our products already raise health and safety concerns for some regulators, and heightened requirements could be imposed. If additional or more severe requirements of this type become applicable to one or more of our major products under current or future health, environmental, or other laws or regulations, they could inhibit sales of such products. We face substantial competition in our industry, including many new entrants into spirits as well as from consolidation among beverage alcohol producers, wholesalers, or retailers, or changes to our route-to-consumer model, could hinder the marketing, sale, or distribution of our products. We use different business models to market and distribute our products in different countries around the world. In the United States, we sell our products either to distributors for resale to retail outlets or, in those states that control alcohol sales, to state governments who then sell them to retail customers and consumers. In our non-U.S. markets, we use a variety of route-to-consumer models – including, in many markets, reliance on others to market and sell our products. Consolidation among spirits producers, distributors, wholesalers, suppliers, or retailers could create a more challenging competitive landscape for our products. Consolidation at any level could hinder the distribution and sale of our products as a result of reduced attention and resources allocated to our brands both during and after transition periods, because our brands might represent a smaller portion of the new business portfolio. Expansion into new product categories by other suppliers, or innovation by new entrants into the market, could increase competition in our product categories. For example, we are experiencing increased competition for some of our products from new entrants in the small-batch or craft spirits category. Changes to our route-to-consumer models or partners in important markets could result in temporary or longer-term sales disruption, could result in higher costs, and could negatively affect other business relationships we might have with that partner. Disruption of our distribution network or fluctuations in our product inventory levels at distributors, wholesalers, or retailers could negatively affect our results for a particular period. Further, while we believe we have sufficient scale to succeed relative to our major competitors, we nevertheless face a risk that continuing consolidation of large beverage alcohol companies could put us at a competitive disadvantage. Our competitors may respond to industry and economic conditions more rapidly or effectively than we do. Other suppliers, as well as wholesalers and retailers of our brands, offer products that compete directly with ours for shelf space, promotional displays, and consumer purchases. Pricing (including price promotions, discounting, couponing, and free goods), marketing, new product introductions, entry into our distribution networks, and other competitive behavior by other suppliers, and by wholesalers and retailers, could adversely affect our sales, margins, and profitability. While we seek to take advantage of the efficiencies and opportunities that large retail customers can offer, they often seek lower pricing and purchase volume flexibility, offer competing own-label products, and represent a large number of other competing products. If the buying power of these large retail customers continues to increase, it could negatively affect our financial results. We might not succeed in our strategies for acquisitions and dispositions. From time to time, we acquire or invest in additional brands or businesses. We expect to continue to seek acquisition and investment opportunities that we believe will increase long-term shareholder value, but we may not be able to find and purchase brands or businesses at acceptable prices and terms. Acquisitions involve risks and uncertainties, including potential difficulties integrating acquired brands and personnel; the possible loss of key customers or employees most knowledgeable about the acquired business; implementing and maintaining consistent U.S. public company standards, controls, procedures, policies, and information systems; exposure to unknown liabilities; business disruption; and management distraction. Acquisitions, investments, or joint ventures could also lead us to incur additional debt and related interest expenses, issue additional shares, become exposed to contingent liabilities, and lead to dilution in our earnings per share and reduction in our return on average invested capital. We could incur future restructuring charges or record impairment losses on the value of goodwill or other intangible assets resulting from previous acquisitions, which may also negatively affect our financial results. We also evaluate from time to time the potential disposition of assets or businesses that may no longer meet our growth, return, or strategic objectives. In selling assets or businesses, we may not get prices or terms as favorable as we anticipated. We could also encounter difficulty in finding buyers on acceptable terms in a timely manner, which could delay our accomplishment of strategic objectives. Expected cost savings from reduced overhead relating to the sold assets may not materialize, and the overhead reductions could temporarily disrupt our other business operations. Any of these outcomes could negatively affect our financial performance. 15 Product counterfeiting or inadequate protection of our intellectual property rights could adversely affect our business prospects. Our brand names, trademarks, and related intellectual property rights are critical assets, and our business depends on our protecting them in the countries where we do business. We may be unsuccessful in protecting our intellectual property rights in a given market or in challenging those who infringe our rights or imitate or counterfeit our products. Although we believe that our intellectual property rights are legally protected in the markets in which we do business, the ability to register and enforce intellectual property rights varies from country to country. In some developing countries, for example, it may be more difficult to use legal process to stop counterfeiting. We may not be able to register our trademarks in every country where we want to sell a particular product, and we may not obtain favorable decisions by courts or trademark offices. Many global spirits brands, including our brands, experience problems with product counterfeiting and other forms of trademark infringement. We work cooperatively with other spirits industry companies through our membership in the International Federation of Spirits Producers (IFSP) to combat spirits counterfeiting. While we believe IFSP is an effective organization, it is not active in every market, and its efforts are subject to cooperation with local authorities and courts in the markets where it is active. Despite our and IFSP’s efforts, confusingly similar, lower-quality, or even counterfeit products harmful to consumers could reach the market and adversely affect our intellectual property rights, brand equity, corporate reputation, and financial results. In addition, the industry as a whole could suffer negative effects related to the manufacture, sale, and consumption of illegally produced beverage alcohol. Product recalls or other product liability claims could materially and adversely affect our sales. The success of our brands depends upon the positive image that consumers have of those brands. We could decide to, or be required to, recall products due to suspected or confirmed product contamination, product tampering, spoilage, or other quality issues. Any of these events could adversely affect our sales. Actual contamination, whether deliberate or accidental, could lead to inferior product quality and even illness, injury, or death to consumers, potential liability claims, and material loss. Should a product recall become necessary, or we voluntarily recall a product in the event of contamination, damage, or other quality issue, sales of the affected product or our broader portfolio of brands could be adversely affected. A significant product liability judgment or widespread product recall may negatively impact the sales and profitability of the affected brand or brands. Even if a product liability claim is unsuccessful or is not fully pursued, resulting negative publicity could adversely affect our reputation with existing and potential customers and our corporate and brand image. Litigation and legal disputes could expose our business to financial and reputational risk. Major private or governmental litigation challenging the production, marketing, promotion, distribution, or sale of beverage alcohol or specific brands could affect our ability to sell products. Because litigation and other legal proceedings can be costly to defend, even actions that are ultimately decided in our favor could have a negative impact on our business reputation or financial results. Lawsuits have been brought against beverage alcohol companies alleging problems related to alcohol abuse, negative health consequences from drinking, problems from alleged marketing or sales practices, or underage drinking. While these lawsuits have been largely unsuccessful in the past, others may succeed in the future. We could also experience employment-related class actions, environmental claims, commercial disputes, product liability actions stemming from a beverage or container production defect, a whistleblower suit, or other major litigation that could adversely affect our business results, particularly if there is negative publicity or to the extent the losses or expenses were not covered by insurance. Governmental actions around the world to enforce trade practice, anti-money-laundering, anti-corruption, competition, tax, environmental, and other laws are also a continuing compliance risk for global companies such as ours. In addition, as a U.S. public company, we are exposed to the risk of securities-related class action suits, particularly following a precipitous drop in the share price of our stock. Adverse developments in major lawsuits concerning these or other matters could result in management distraction and have a material adverse effect on our business. A failure or corruption of one or more of our key information technology systems, networks, processes, associated sites, or service providers could have a material adverse impact on our business. We rely on information technology (IT) systems, networks, and services, including internet sites, data hosting and processing facilities and tools, hardware (including laptops and mobile devices), software, and technical applications and platforms, some of which are managed, hosted, provided, or used by third parties or their vendors, to help us manage our business. The various uses of these IT systems, networks, and services include, but are not limited to: hosting our internal network and communication systems; ordering and managing materials from suppliers; supply/demand planning; production; shipping product to customers; hosting our branded websites and marketing products to consumers; collecting and storing customer, consumer, employee, investor, and other data; processing transactions; summarizing and reporting results of operations; hosting, processing, and sharing 16 confidential and proprietary research, business plans, and financial information; complying with regulatory, legal, or tax requirements; providing data security; and handling other processes necessary to manage our business. Increased IT security threats and more sophisticated cyber crime pose a potential risk to the security and availability of our IT systems, networks, and services, including those that are managed, hosted, provided, or used by third parties, as well as the confidentiality, availability, and integrity of our data. If the IT systems, networks, or service providers we rely upon fail to function properly, or if we suffer a loss or disclosure of business or other sensitive information, due to any number of causes, ranging from catastrophic events to power outages to security breaches, and our business continuity plans do not effectively and timely address these failures, we may suffer interruptions in our ability to manage operations and reputational, competitive, or business harm, which may adversely affect our business operations or financial condition. In addition, such events could result in unauthorized disclosure of material confidential information, and we may suffer financial and reputational damage because of lost or misappropriated confidential information belonging to us or to our partners, our employees, customers, suppliers, or consumers. In any of these events, we could also be required to spend significant financial and other resources to remedy the damage caused by a security breach or to repair or replace networks and IT systems, which, in any case, could require a significant amount of time. Negative publicity could affect our stock price and business performance. Unfavorable publicity, whether accurate or not, related to our industry or to us or our brands, marketing, personnel, operations, business performance, or prospects could negatively affect our corporate reputation, stock price, ability to attract high-quality talent, or the performance of our business. Adverse publicity or negative commentary on social media outlets, particularly any that goes “viral,” could cause consumers to react by avoiding our brands or choosing brands offered by our competitors, which could materially negatively affect our financial results. Our failure to attract or retain key executive or employee talent could adversely affect our business. Our success depends upon the efforts and abilities of our senior management team, other key employees, and a high-quality employee base, as well as our ability to attract, motivate, reward, and retain them. Difficulties in hiring or retaining key executive or other employee talent, or the unexpected loss of experienced employees, could have an adverse impact on our business performance. The Brown family has the ability to control the outcome of matters submitted for stockholder approval. We are considered a “controlled company” under New York Stock Exchange rules. Controlled companies are exempt from New York Stock Exchange listing standards that require a board composed of a majority of independent directors, a fully independent nominating/corporate governance committee, and a fully independent compensation committee. We avail ourselves of the exemptions from having a board composed of a majority of independent directors and a fully independent nominating/corporate governance committee. Notwithstanding the available exemption, our Compensation Committee is composed exclusively of independent directors. As a result of our use of some “controlled company” exemptions, our corporate governance practices differ from those of non-controlled companies, which are subject to all of the New York Stock Exchange corporate governance requirements. A substantial majority of our voting stock is controlled by members of the Brown family, and collectively, they have the ability to control the outcome of stockholder votes, including the election of all of our directors and the approval or rejection of any merger, change of control, or other significant corporate transaction. We believe that having a long-term-focused, committed, and engaged shareholder base provides us with an important strategic advantage, particularly in a business with aged products and multi-generational brands. This advantage could be eroded or lost, however, should Brown family members cease, collectively, to be controlling stockholders of the Company. We desire to remain independent and family-controlled, and we believe the Brown family stockholders share these interests. However, the Brown family’s interests may not always be aligned with other stockholders’ interests. By exercising their control, the Brown family could cause the Company to take actions that are at odds with the investment goals of institutional, short-term, non-voting, or other non-controlling investors, or that have a negative effect on our stock price. Item 1B. Unresolved Staff Comments None. 17 Item 2. Properties Company-owned production facilities include distilleries, a winery, a concentrate plant, bottling plants, warehousing operations, sawmills, and cooperages. We also have agreements with other parties for contract production in Australia, Belgium, Brazil, China, Estonia, Finland, Ireland, Mexico, the Netherlands, South Africa, and the United States. In addition to Company-owned corporate offices in Louisville, Kentucky, we lease office space for use in our sales, marketing, and administrative operations in the United States and in over 40 other cities around the globe. The lease terms expire at various dates and are generally renewable. Our most significant office locations outside Louisville are: • United States: Irvine, California; Irving, Texas; Atlanta, Georgia; Baltimore, Maryland; and Washington, D.C. • International: Guadalajara, Mexico; Hamburg, Germany; Sydney, Australia; London, United Kingdom; Warsaw, Poland; Paris, France; Mexico City, Mexico; Prague, Czech Republic; São Paulo, Brazil; Istanbul, Turkey; Amsterdam, Netherlands; Moscow, Russia; Shanghai, China; Hong Kong; and Gurgaon, India. Location United States: Significant Properties Principal Activities Notes Louisville, Kentucky Corporate offices Includes several renovated historic structures Distilling, bottling, warehousing Cooperage Brown-Forman Cooperage Lynchburg, Tennessee Distilling, bottling, warehousing Home of Jack Daniel’s Visitors’ center Woodford County, Kentucky Distilling, bottling, warehousing Home of Woodford Reserve Windsor, California Winery, bottling, warehousing Home of Sonoma-Cutrer Visitors’ center Decatur, Alabama Clifton, Tennessee Visitors’ center Cooperage Stave and heading mill Stevenson, Alabama Stave and heading mill Jack Daniel Cooperage Spencer, Indiana Jackson, Ohio International: Stave and heading mill Stave and heading mill Acquired in first quarter fiscal 2016 Land is leased from a third party Collingwood, Canada Distilling, warehousing Home of Canadian Mist Cour-Cheverny, France Distilling, bottling, warehousing Home of Chambord Amatitán, Mexico Distilling, bottling, warehousing Home of our tequilas and New Mix RTDs Slane, Ireland Distilling, visitors’ center Future home of Slane Irish Whiskey Visitors’ center We believe that our facilities are in good condition and are adequate for our business. Item 3. Legal Proceedings We operate in a litigious environment and we are sued in the normal course of business. We do not anticipate that any currently pending suits will have, individually or in the aggregate, a material adverse effect on our financial position, results of operations, or liquidity. Item 4. Mine Safety Disclosures Not applicable. 18 PART II Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Our Class A and Class B common stock is traded on the New York Stock Exchange under the symbols “BFA” and “BFB,” respectively. As of May 31, 2016, there were 2,736 holders of record of Class A common stock and 5,154 holders of record of Class B common stock. Because of overlapping ownership between classes, as of May 31, 2016, we had only 5,719 distinct common stockholders of record. The following table sets forth, for the periods indicated, the high and low sales prices per share for our Class A and Class B common stock, as reported on the New York Stock Exchange composite tape, and dividend per share information: Fiscal 2015 Fiscal 2016 First Quarter Second Quarter Third Quarter Fourth Quarter Year First Quarter Second Quarter Third Quarter Fourth Quarter Year Market price per share: Class A high Class A low Class B high Class B low $ 95.29 85.98 97.15 86.48 $ 93.09 81.38 93.62 81.89 $ 98.00 85.33 97.97 85.43 Cash dividends per share: Declared Paid 0.580 0.290 — 0.290 0.630 0.315 95.23 86.85 93.99 86.71 — 0.315 $ 98.00 81.38 97.97 81.89 $119.49 93.09 108.41 90.65 $ 122.30 105.87 110.81 95.21 $117.53 99.50 106.88 90.60 $ 112.24 100.40 103.39 93.25 $ 122.30 93.09 110.81 90.60 1.210 1.210 0.630 0.315 — 0.315 0.680 0.340 — 0.340 1.310 1.310 Note: Quarterly amounts may not add to amounts for the year due to rounding. Equity Compensation Plan Information The following table summarizes information as of April 30, 2016, about our equity compensation plans under which we have made grants of stock options, stock appreciation rights, restricted stock, market value units, performance units, or other equity awards. Plan Category Equity compensation plans approved by Class A common stockholders Number of Securities to Be Issued Upon Exercise of Outstanding Options, Warrants and Rights1 Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights2 Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans 1,532,196 $56.83 6,803,869 1Includes 1,411,701 Class B common shares to be issued upon exercise of stock-settled stock appreciation rights (SSARs); 67,426 Class B common restricted stock units (RSUs); 31,676 Class A common deferred stock units (DSUs); and 21,393 Class B common DSUs issued under the Brown-Forman 2004 or 2013 Omnibus Compensation Plans. Does not include issued shares of performance-based restricted stock. SSARs are exercisable for an amount of our common stock with a value equal to the increase in the fair market value of the common stock from the date the SSARs were granted. The fair market value of our common stock at fiscal year-end has been used for the purposes of reporting the number of shares to be issued upon exercise of the 3,426,162 SSARs outstanding at fiscal year-end. 2RSUs and DSUs have no exercise price because their value depends on continued employment or service over time, and are to be settled for shares of Class B common stock. Accordingly, these have been disregarded for purposes of computing the weighted-average exercise price. 19 Stock Performance Graph The graph below compares the cumulative total shareholder return of our Class B common stock for the last five years with the Standard & Poor’s 500 Stock Index, the Dow Jones U.S. Consumer Goods Index, and the Dow Jones U.S. Food & Beverage Index. The information presented assumes an initial investment of $100 on April 30, 2011, and that all dividends were reinvested. The cumulative returns shown represent the value that these investments would have had on April 30 in the years since 2011. Share Repurchases The following table provides information about shares of our common stock that we acquired during the quarter ended April 30, 2016: Period February 1, 2016 - February 29, 2016 March 1, 2016 - March 31, 2016 April 1, 2016 - April 30, 2016 Total Total Number of Shares Purchased 1,133,637 1,282,310 1,165,013 3,580,960 Average Price Paid per Share $96.03 $97.38 $95.70 $96.41 Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs 1,133,637 1,282,310 1,165,013 3,580,960 $ $ $ 1,124,800,000 1,000,000,000 888,500,000 As we announced on October 15, 2014, our Board of Directors authorized us to repurchase up to $250 million of our outstanding Class A and Class B common shares from October 15, 2014, through October 14, 2015, subject to market and other conditions. As we announced on March 25, 2015, the Board approved a $1 billion increase to the share repurchase authorization and extended it through March 24, 2016, subject to market and other conditions. As we announced on January 28, 2016, the Board approved a new $1 billion share repurchase authorization, commencing April 1, 2016, through March 31, 2017, subject to market and other conditions. The shares presented in the table above were acquired under these Board authorizations. 20 Item 6. Selected Financial Data This selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the accompanying Notes contained in “Item 8. Financial Statements and Supplementary Data.” BROWN-FORMAN CORPORATION SELECTED FINANCIAL DATA (Dollars in millions, except per share amounts) 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 $2,806 $1,481 $ 602 $ 400 3,282 1,695 685 440 3,192 1,577 661 435 3,226 1,611 710 449 3,404 1,724 855 572 3,614 1,795 788 513 3,784 1,955 898 591 3,946 2,078 971 659 4,096 2,183 1,027 684 4,011 2,144 1,533 1,067 230.4 232.8 229.6 231.6 225.7 227.1 221.8 222.9 218.4 219.8 214.5 216.1 213.4 215.0 213.5 215.1 211.6 213.1 203.0 204.3 $ 1.74 $ 1.72 1.91 1.89 1.92 1.91 2.02 2.01 2.61 2.60 2.39 2.37 2.77 2.75 3.08 3.06 3.23 3.21 5.26 5.22 52.8% 51.6% 49.4% 50.0% 50.7% 49.7% 51.7% 52.7% 53.3% 53.4% 21.5% 20.9% 20.7% 22.0% 25.1% 21.8% 23.7% 24.6% 25.1% 38.2% 31.7% 31.7% 31.1% 34.1% 31.0% 32.5% 31.7% 30.5% 31.7% 28.3% $2,431 2,747 2,893 2,825 2,711 2,803 2,834 3,131 3,196 3,221 17.4% 17.2% 15.9% 16.6% 21.8% 19.1% 21.7% 21.6% 22.0% 34.1% $ 0.62 0.69 0.75 0.78 1.49 0.89 4.98 1.09 1.21 $3,551 3,405 3,475 3,383 3,712 3,477 3,626 4,103 4,188 $ 422 417 $1,177 1,006 $ 355 534 509 999 491 508 699 545 504 759 527 503 510 516 997 997 743 1,002 1,005 1,183 537 649 608 1.31 4,183 1,230 1,501 524 36.8% 35.8% 38.9% 38.7% 57.0% 37.4% 179.8% 35.3% 37.5% 25.0% Year Ended April 30, Continuing Operations: Net sales Gross profit Operating income Net income Weighted average shares used to calculate earnings per share – Basic – Diluted Earnings per share from continuing operations – Basic – Diluted Gross margin Operating margin Effective tax rate Average invested capital Return on average invested capital Total Company: Cash dividends declared per common share Total assets at April 30 Long-term debt at April 30 Total debt at April 30 Cash flow from operations Dividend payout ratio Notes: 1. Includes the consolidated results of Chambord and Casa Herradura since their acquisitions in May 2006 and January 2007, respectively. Includes the results of our Hopland-based wine brands, which were sold in April 2011 but retained in our portfolio as agency brands through December 2011. Includes the results of Southern Comfort and Tuaca, both of which were sold on March 1, 2016. 2. Weighted average shares, earnings per share, and cash dividends declared per common share have been adjusted for a 5-for-4 stock split in October 2008 and a 3-for-2 stock split in August 2012. 3. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Non-GAAP Financial Measures” 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. 4. Cash dividends declared per common share include special cash dividends of $0.67 per share in fiscal 2011 and $4.00 per share in fiscal 2013. 5. We define dividend payout ratio as cash dividends divided by net income. 6. Results for fiscal 2016 include a gain of $485 million on the sale of Southern Comfort and Tuaca. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Executive Summary – Fiscal 2016 Financial Highlights” for additional information about the impact of that sale on our operating results for fiscal 2016. 21 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Brown-Forman, our operations, our financial results, and our current business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our Consolidated Financial Statements and the accompanying Notes contained in “Item 8. Financial Statements and Supplementary Data.” Volume and Depletions When discussing volume, unless otherwise specified, we refer to “depletions,” a term commonly used in the beverage alcohol industry. Depending on the context, “depletions” means either (a) our shipments directly to retailers or wholesalers, or (b) shipments from our distributor customers to retailers and wholesalers. We generally record revenues when we ship our products to our customers, so our reported sales for a period do not necessarily reflect actual consumer purchases during that period. We believe that our depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do. Volume is discussed on a nine-liter equivalent unit basis (nine-liter cases) unless otherwise specified. At times, we use a “drinks-equivalent” measure for volume when comparing single-serve ready-to-drink (RTD) or ready-to-pour (RTP) brands to a parent spirits brand. “Drinks-equivalent” depletions are RTD and RTP nine-liter cases converted to nine-liter cases of a parent brand on the basis of the number of drinks in one nine-liter case of the parent brand. To convert RTD volumes from a nine-liter case basis to a drinks-equivalent nine-liter case basis, RTD nine-liter case volumes are divided by 10, while RTP nine-liter case volumes are divided by 5. Non-GAAP Financial Measures We use certain financial measures in this report that are not measures of financial performance under GAAP. These non- GAAP measures, which are defined below, should be viewed as supplements to (not substitutes for) our results of operations and other measures reported under GAAP. The non-GAAP measures we use in this report may not be defined and calculated by other companies in the same manner. We present changes in certain income statement line-items that are adjusted to an “underlying” basis, which we believe assists in understanding both our performance from period to period on a consistent basis, and the trends of our business. Non-GAAP “underlying” measures include changes in (a) underlying net sales, (b) underlying cost of sales, (c) underlying excise taxes, (d) underlying gross profit, (e) underlying advertising expenses, (f) underlying selling, general, and administrative (SG&A) expenses, and (g) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) foreign currency exchange, (b) estimated net changes in distributor inventories, and (c) the impact of acquisition and divestiture activity. We explain these adjustments below. • • • “Foreign exchange.” We calculate the percentage change in our income statement line items 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. “Estimated net change in distributor inventories.” This measure refers to the estimated net effect of changes in distributor inventories on changes in our measures. For each period compared, we estimate the effect of distributor inventory changes on our results using depletion information provided by our distributors. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in our measures and allows us to understand better our underlying results and trends. “Sale of Southern Comfort and Tuaca.” On January 14, 2016, we reached an agreement to sell our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. The transaction closed March 1, 2016, for $543 million in cash (subject to a post-closing inventory adjustment), which resulted in a one-time gain of $485 million in the fourth quarter of fiscal 2016. This adjustment removes (a) the gain on sale, (b) those transaction-related costs not included in the gain on sale, and (c) operating activity for the non-comparable period, March and April in fiscal 2015 and 2016. We believe that these adjustments allow us to understand better our underlying results on a comparable basis. Management uses “underlying” measures of performance to assist it in comparing and measuring our performance from period to period on a consistent basis, and in comparing our performance to that of our competitors. We also use underlying measures in connection with management incentive compensation calculations. Management also uses underlying measures in its planning and forecasting and in communications with the board of directors, stockholders, analysts, and investors concerning our financial performance. We have provided reconciliations of the non-GAAP measures adjusted to an “underlying” basis to their 22 nearest GAAP measures in the tables below under “Results of Operations – Year-Over-Year Comparisons” and have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure. We also use the following additional non-GAAP financial measures in “Item 6. Selected Financial Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary”: • • “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 consider return on average invested capital to be a meaningful indicator of how effectively and efficiently we use capital invested in our business. “Adjusted” measures for (a) operating income, (b) operating margin, (c) effective tax rate, (d) diluted earnings per share, and (e) return on average invested capital. We provide these adjusted measures to identify the effect of the sale of Southern Comfort and Tuaca on reported income from operations and other key measures derived therefrom; this effect is expected not be part of our sustainable results or trends. These measures remove the effects of (a) the gain on sale, (b) those transaction-related costs not included in the gain on sale, and (c) operating activity related to the brands for the period subsequent to their divestiture (March and April in fiscal 2016). Tax effects on items (c), (d), and (e) are calculated consistent with the nature of the underlying transaction. 23 Our MD&A includes the following sections: EXECUTIVE SUMMARY RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES LONG-TERM OBLIGATIONS CRITICAL ACCOUNTING POLICIES AND ESTIMATES Page 24 30 40 42 43 Overview EXECUTIVE SUMMARY Over the past several years, including fiscal 2016, we have made progress toward realizing the ambitions of our long-term strategy, which was first set forth in fiscal 2010 and has evolved along with our business since then. See “Item 1. Business – Strategy” for details. Here is a discussion of recent developments: • We have further developed the Jack Daniel’s family of brands through innovations designed to create new demand for products from the world’s foremost maker of American whiskey. These efforts resulted in the successful launch of Jack Daniel’s Tennessee Honey (JDTH), Jack Daniel’s Tennessee Fire (JDTF), and a series of ultra-premium-priced line extensions including Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and several additions to the Jack Daniel’s Single Barrel Collection. At the same time, we have invested steadily in our core Jack Daniel’s Tennessee Whiskey (JDTW) brand to support its growth around the world. We are partway through a multiyear production capacity expansion project for Jack Daniel's. In fiscal 2014, we completed construction of the Jack Daniel Cooperage in Decatur, Alabama. We announced a major expansion of our distilling capacity in August 2013, and we completed construction of a new distillery on our property in Lynchburg, Tennessee during the first quarter of fiscal 2016. The next stage of our expansion in Lynchburg will add bottling capacity and finished product warehousing, to be completed in the next few years. • The continued growth of the Jack Daniel’s family of brands is the most important measure of our progress toward becoming a global leader in whiskey. Woodford Reserve’s growth has also helped us move forward on this ambition, as this super- premium brand grew volume at a compound annual rate of approximately 25% from fiscal 2011 to fiscal 2016 – more than doubling its annual volume to approximately 500,000 nine-liter cases by the end of fiscal 2016. In June 2013, we announced a more than $35 million expansion at our Woodford Reserve Distillery to support our expected growth. During fiscal 2014, we completed a renovation of our visitors’ center at the Woodford Reserve Distillery, as visitors have increased over 20% since fiscal 2014 to almost 125,000 visitors in fiscal 2016. During fiscal 2016, we completed the construction of two new warehouses, and we entered into the second phase of a bottling expansion. In fiscal 2017, we expect to complete two new warehouses. • Brown-Forman was founded in 1870 with Old Forester, the world’s first bottled bourbon brand. Old Forester is attracting a new generation of fans, as it has grown net sales by approximately 20% annually since fiscal 2011, including growth of nearly 50% in fiscal 2016. We plan to leverage the current momentum of Old Forester and the favorable trends in American whiskey to reestablish Old Forester as an iconic bourbon brand. To support our ambition, we announced the construction of the Old Forester Distillery and visitors’ center in fiscal 2014, and in May 2015 purchased two historic buildings on Main Street in Louisville for its location. We began construction of the Old Forester Distillery in February 2016, and we expect to open late in 2017. We anticipate investing approximately $50 million in this project. • Over the past five years, we have divested certain businesses to enable better alignment of our resources with our long- term strategy. We divested our Hopland-based wine brands in 2011, leaving us with a portfolio primarily focused on spirits. Since then, we have pursued growth of our spirits portfolio mostly by organic means, with innovation playing a key role (see discussion below). In March 2016, we sold Southern Comfort and Tuaca to dedicate additional resources to opportunities with greater long-term growth prospects. See ‘‘Financial Highlights’’ below, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations,” and Note 15 to the accompanying financial statements for details about the financial impact of the sale of Southern Comfort and Tuaca. • In addition to our successful efforts to develop and introduce new products and line extensions for the Jack Daniel’s family of brands, we have pursued growth through innovation in the rest of our portfolio. Notable introductions have included Woodford Reserve Double Oaked (fiscal 2012) and Herradura Ultra (fiscal 2015). In April 2016, we announced plans to release our first new bourbon trademark in 20 years, Coopers’ Craft, in the summer of 2016 (fiscal 2017). 24 • • In June 2015 (fiscal 2016), we purchased all of the shares of Slane Castle Irish Whiskey Limited and announced plans to invest approximately $40 million to build a new distillery, construct warehouses, and develop a consumer experience on the historic Slane Castle Estate (in County Meath, about 30 miles north of Dublin). We plan to open the Slane Castle Whiskey Distillery and to introduce new Irish whiskeys in the spring of 2017, using high-quality whiskey purchased from other Irish distilleries and finished to Slane’s specifications while the whiskey made at the new Slane Distillery matures. In June 2016 (fiscal 2017), we purchased The BenRiach Distillery Company Limited and, with it, three single malt Scotch whisky brands and distilleries – The GlenDronach, BenRiach, and Glenglassaugh. This purchase included other trademarks, a bottling plant, and The BenRiach Distillery Company Limited’s headquarters in Edinburgh, Scotland. We believe that these super-premium brands will provide us an immediate opportunity to participate in the growing single malt Scotch category and strengthen our portfolio’s long-term growth prospects in markets such as the United States, the United Kingdom, Taiwan, Germany, and in travel retail. We plan to build three new warehouses in fiscal 2017 to support the growth of these brands. • Our focus on the importance of the barrel in crafting whiskeys of the highest quality is perhaps unique in the industry. We believe we are the largest maker of new whiskey barrels in the world and, within the global spirits industry, only we own manufacturing facilities for new whiskey barrels. Our control over this critical input to the whiskey-making process gives us a competitive advantage – one that applies both to Jack Daniel’s and to our other aged spirits, including bourbons and tequilas today and – over time – Irish and Scotch whiskeys. For example, our barrel-making expertise enables us to introduce unique characteristics into our products, as we did with our successful recent innovation, Woodford Reserve Double Oaked. In addition, newly-introduced Coopers’ Craft bourbon was created to celebrate our more than 70 years of expertise raising barrels at the Brown-Forman Cooperage. While we expect it to benefit from a generally favorable craft spirits trend, we also believe that linking its identity to our distinctive barrel-making expertise will benefit Coopers’. As we progress toward becoming a global leader in whiskey, we will continue to take advantage of this source of differentiation for our existing portfolio and across the range of new opportunities. • Over the past several decades, we have pursued international growth both in larger, developed markets and in the emerging world. In recent years, our most visible progress has been the evolution of our RTC strategy in several key markets. We set up new distribution companies in three of our current top ten countries (Germany, France, and Turkey) and also in Brazil, a market that we believe is among our most promising long-term growth opportunities. In fiscal 2017, we plan to establish a new distribution company in Spain, which we expect to begin operating in fiscal 2018. We have added substantially to our employee base outside the United States, mostly in markets where we evolved our RTC strategy. • Our capital deployment initiatives have been focused on (1) enabling the expected future growth of our existing businesses through investments in our production capacity, innovation, and brand-building efforts for our existing portfolio; and (2) returning cash to our shareholders. From fiscal 2010 through 2016, we returned over $4.6 billion to our shareholders through $1.5 billion in regular quarterly dividends, $1.0 billion in two special dividends, and $2.1 billion in share repurchases. 25 Summary and Timing of Recent Developments Fiscal year 2011 2012 2013 2014 PORTFOLIO ROUTE-TO-CONSUMER PRODUCTION Introduced Jack Daniel’s Tennessee Honey in Q4 Started distribution operations in Germany Sold Hopland-based wine brands and properties Started distribution operations in Brazil Introduced Woodford Reserve Double Oaked Started distribution operations in Turkey Introduced Jack Daniel’s Winter Jack Introduced Jack Daniel’s Sinatra Select Introduced Jack Daniel’s Tennessee Rye Whiskey Announced plans for the Jack Daniel Cooperage Opened the Stevenson Mill Introduced Jack Daniel’s No. 27 Gold Tennessee Whiskey Started distribution operations in France Announced capacity expansion at the Woodford Reserve Distillery Introduced Jack Daniel’s Tennessee Fire (limited test) 2015 Introduced Herradura Ultra in Mexico in Q2 Introduced Jack Daniel’s Tennessee Fire nationwide in the United States in Q4 Introduced Woodford Reserve Rye Whiskey 2016 Purchased Slane Castle Irish Whiskey Limited in Q1 Sold Southern Comfort and Tuaca in Q4 2017 Announced Coopers’ Craft bourbon to be released in Q1 Purchased The BenRiach Distillery Company Limited in Q1 Announced capacity expansion at the Jack Daniel Distillery Opened the Jack Daniel Cooperage Announced plans for the Old Forester Distillery and bourbon experience Completed new barrel warehouses at Jack Daniel's and Woodford Reserve Announced plans to construct a new distillery at Slane Castle in Ireland Opened the Spencer Mill 26 Fiscal 2016 Financial Highlights Summary of Operating Performance Fiscal 2014 - 2016 Fiscal year ended April 30 2014 2015 2016 2015 vs. 2014 2016 vs. 2015 2015 vs. 2014 2016 vs. 2015 Reported Change Underlying Change1 Net sales Excise taxes Cost of sales Gross profit Advertising SG&A Operating income Gross margin Operating margin Interest expense, net Effective tax rate Diluted earnings per share Return on average invested capital2 $ 3,946 $ 4,096 $ 4,011 955 913 962 951 922 945 2,078 2,183 2,144 436 686 971 52.7% 24.6% 24 30.5% 3.06 21.6% 437 697 417 688 $ 1,027 $ 1,533 53.3% 25.1% 25 31.7% 3.21 22.0% $ $ 53.4% 38.2% 44 28.3% 5.22 34.1% $ $ $ $ $ 4 % 1 % 4 % 5 % — % 2 % 6 % 0.6pp 0.5pp 6 % 1.2pp 5 % 0.4pp (2 )% (4 )% (1 )% (2 )% (4 )% (1 )% 49 % 0.1pp 13.1pp 70 % (3.4)pp 63 % 12.1pp 6% 5% 7% 7% 4% 4% 9% 5% 6% 3% 5% 2% 2% 8% 1See “Non-GAAP Financial Measures” above for details on our use of “underlying changes,” including how we calculate these measures and why we think this information is useful to readers. 2See “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. On March 1, 2016, we sold our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. for $543 million in cash (subject to a post-closing inventory adjustment). The following table shows the impact of the sale of Southern Comfort and Tuaca on our operating results. Sale of Southern Comfort and Tuaca Fiscal year ended April 30, 2016 Reported Sale of Southern Comfort and Tuaca1 Adjusted Operating income Operating margin Effective tax rate Diluted earnings per share Return on average invested capital2 $ $ $ $ 1,533 38.2% 28.3% 5.22 34.1% $ $ 486 12.0 % (1.1)% 1.76 11.1 % 1,047 26.2% 29.4% 3.46 23.0% 1See “Non-GAAP Financial Measures” above for details on the sale of Southern Comfort and Tuaca. The $486 million adjustment above includes the sum of: (a) the $485 million gain on the sale of Southern Comfort and Tuaca, (b) those transaction-related costs not included in the gain on sale, and (c) operating activity related to the brands for the period subsequent to their divestiture (March and April in fiscal 2016). 2See “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. In fiscal 2016, we delivered net sales of $4.0 billion, a decrease of 2% compared to fiscal 2015, but an increase of 5% on an underlying basis; operating income of $1.5 billion, an increase of 49% compared to fiscal 2015, or 8% on an underlying basis; 27 and, diluted earnings per share of $5.22, or $3.46 after removing the $1.76 impact of the sale of Southern Comfort and Tuaca. We improved our operating margin in fiscal 2016, as we added 1.1 percentage points from our continuing business and 12.0 percentage points attributed to the sale of Southern Comfort and Tuaca. Our operating results were driven largely by the gain on the sale of our Southern Comfort and Tuaca businesses, as well as the continued growth of our American whiskey portfolio, led by the Jack Daniel’s family of brands. From a geographic perspective, the United States and our developed international markets led the growth, while emerging markets grew more slowly compared to fiscal 2015, and our business in the travel retail channel declined. Foreign exchange negatively affected our reported operating results as the U.S. dollar strengthened compared to most foreign currencies. In fiscal 2016, our return on average invested capital improved to 34.1% driven by the sale of Southern Comfort and Tuaca. Excluding the effect of the sale of Southern Comfort and Tuaca, adjusted return on average invested capital increased to 23.0%, despite capital spending of $108 million and increased working capital related to our maturing whiskey inventory. Also during fiscal 2016, we returned $1.4 billion in cash to our shareholders through dividend payments of $266 million and share repurchases of $1.1 billion while maintaining investment-grade credit ratings. Outlook Looking ahead to fiscal 2017, we are optimistic about our prospects for net sales and operating income growth, and we expect to make further progress toward our strategic ambitions. We describe below the trends, developments, and uncertainties that we expect to affect our business. • Favorable global whiskey trends. The markets for American, Irish, and single malt Scotch whiskey are growing faster than total distilled spirits globally, and premium whiskey is among the best-performing components of the broader whiskey category.1 We face strong competition, and the size of the opportunity is bringing new entrants to the market. Even so, we believe that our whiskey brands are poised to benefit from this trend, including JDTW, Gentleman Jack, Woodford Reserve, Old Forester, Slane, and our newly acquired Scotch whisky brands (The GlenDronach, BenRiach, and Glenglassaugh). Furthermore, we believe that we are well positioned to access emerging growth opportunities driven by consumer trends affecting these categories, including increased interest in luxury, craft, and small-batch whiskeys. We should benefit from these trends with our existing portfolio of American whiskeys, Slane, and the newly acquired single malt Scotch whiskeys. In addition, we expect that Coopers’ Craft, our new bourbon to be introduced in the summer of 2016, will further allow us to benefit from favorable premium whiskey trends. • Growing competitive intensity of flavored whiskeys. Flavored whiskey continues to be the fastest-growing component of the whiskey category1, and we have participated fully in this market opportunity through our successful introductions of both JDTH and JDTF. Competition in the flavored whiskey category has intensified recently as industry participants seek to capitalize on the trend through sequential new product introductions. Our strategy has been to limit our flavored whiskey portfolio while investing to build JDTH and JDTF as sustainable growth brands in the United States and to expand both brands internationally. We believe that our strategy will allow us to benefit from this trend in a manner compatible with the long-term value of the Jack Daniel’s brand, but we may forgo growth opportunities in the nearer term. Because we essentially concluded the global rollout of JDTH in fiscal 2015, its growth slowed in fiscal 2016; however, we expect it will continue to be an important contributor to our growth in fiscal 2017. We launched JDTF in the United States in fiscal 2015 and then tested it in a few international markets in fiscal 2016. We will continue to roll out JDTF globally in fiscal 2017, and we expect it to continue to be an important contributor to our growth. • Challenging pricing environment. During fiscal years 2013 and 2014, and to a lesser extent in fiscal 2015 and 2016, our operating results have benefited from price increases for several of our brands, including, most importantly, JDTW. Looking ahead, we anticipate volume will be the more significant driver of growth compared to the last few years. We have not raised prices generally in international markets in response to the strengthened U.S. dollar, but we have recently increased prices in higher-inflation economies including Russia, Turkey, Brazil, and certain other markets. In many emerging markets, and for many of our travel retail customers around the world, we price our products in dollars. As foreign currencies generally weakened in fiscal 2015 and 2016, we believe that lower purchasing power in dollar terms of emerging-market consumers has dampened demand for our products; we do not expect improvement in fiscal 2017. In fiscal 2017, we expect lower prices for our used barrels as a result of weaker demand from blended Scotch industry buyers. 1 The IWSR, 2015 data. 28 • Uncertain increase in costs of sales. We expect that freight, logistics, and raw materials costs will generally increase in the low single digits during fiscal 2017. Our cost of sales are somewhat sensitive to variation in prices of certain commodities, including prices of corn, natural gas, oil, and wood used in our barrels, among others. In addition, we have been investing in our production capacity over the last four years at more than twice the rate of historical capital expenditure investment, which will also contribute to rising costs as we depreciate these investments. Wood barrels are an essential input to our whiskeys. We believe that manufacturing our own barrels ensures both high quality and consistent, timely availability for our whiskey distilleries. In addition to our cooperages, where we assemble finished barrels, we manufacture wood staves and headings at four mills. Higher demand and lower supply in the market for wood inputs (American white oak logs and barrel components, such as wood staves and headings), have resulted in higher prices from time to time. While many factors drive demand, among these is the recent, sustained rise in the popularity of American whiskey. While American white oak is not in short supply, we believe that market forces have led to higher prices of wood inputs, which we expect will lead to higher costs for our barreled whiskey. • Uncertain impact of excise taxes and government regulations restricting trade in spirits and wine. From time to time, governments increase excise taxes or duties on spirits and introduce other regulatory measures that either restrict our ability to sell and market our brands or raise the cost of our doing so. For example, Brazil increased excise taxes in December 2015, and we expect that the increase will weaken our results there due to the higher costs of our products to consumers combined with current local economic trends. In fiscal 2016, our business was also disrupted by regulatory measures in certain countries, most notably Indonesia. In fiscal 2017, we are aware of several enacted (or proposed and likely-to-be-enacted) excise tax increases. Whenever practicable, we increase our prices to the extent of those tax increases. We do not believe that any one known or expected excise tax increase will have a significant negative effect on our results, nor do we expect that they collectively will. But because excise tax increases can lead to inflation in consumer prices, the cumulative effect over time in a given market could soften demand for our products. • Emerging-market uncertainty. During fiscal 2016, we grew underlying net sales in emerging markets, led by the Jack Daniel’s family of brands. While our competition reported a general slowdown or declines in emerging markets, we grew, but our rate of growth slowed. In fiscal 2016, we experienced challenges in Russia and Southeast Asia, and looking ahead to fiscal 2017, we are cautious about our growth outlook in emerging markets given the geopolitical uncertainty in Brazil, Turkey, and Russia. These three countries have contributed to our growth from emerging markets in recent years. Looking beyond the current challenges, we believe that emerging markets will be important to our sustained, long-term growth potential, and we remain committed to developing our business there. • Foreign currency headwinds anticipated to continue. The more we expand our business globally, the more exchange rate fluctuations relative to the U.S. dollar influence our financial results. We sell more in local currencies than we purchase – for example, Jack Daniel’s Tennessee Whiskey can be distilled only in Tennessee. Accordingly, we have a net negative exposure to a strengthening U.S. dollar relative to other currencies. Additionally, the U.S. dollar is the functional currency for most of our consolidated operations. Our reported results were significantly affected in fiscal 2016 by negative foreign exchange due to the strength of the U.S. dollar, and we anticipate our fiscal 2017 results will be negatively affected as well. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for more information about foreign exchange and our business. We believe that we are well positioned to take advantage of the opportunities and to address the challenges related to the trends and uncertainties noted above. However, we may not succeed in taking full advantage of these opportunities, and any of these challenges could have a material adverse effect on our business. See ‘‘Item 1A. Risk Factors’’ for details about risks and uncertainties that could affect our business or results. 29 RESULTS OF OPERATIONS – FISCAL 2016 MARKET HIGHLIGHTS The following table shows net sales results for our ten largest markets, summarized by geographic area, for fiscal 2016, compared to fiscal 2015. We discuss the most significant changes in net sales for each geography. Top 10 Markets - Percentage of Fiscal 2016 Total Net Sales and Fiscal 2016 Net Sales Growth by Geographic Area Markets United States Europe United Kingdom Germany Poland France Turkey Russia Rest of Europe Australia Other Mexico Canada Rest of Other Total Note: Totals may differ due to rounding Net Sales1 % Change vs. 2015 % of Fiscal 2016 Net Sales Reported Sale of Southern Comfort and Tuaca Foreign Exchange Net Chg in Est. Distributor Inventories Underlylng 46% 31% 10 % 5 % 3 % 3 % 2 % 1 % 7 % 9% 14% 5 % 1 % 8 % 100% 3 % (2)% 5 % (1 )% (12 )% 6 % (2 )% (26 )% (5 )% (12)% (10)% (11 )% (1 )% (11 )% (2)% 1 % — % 1 % — % — % — % — % — % — % — % — % — % — % — % 1 % —% 10% 3 % 7 % 13 % 8 % 19 % 43 % 11 % 14% 12% 18 % 12 % 8 % 6% 1 % (3)% — % — % — % — % — % (33 )% (4 )% — % 2 % — % (4 )% 3 % — % 6 % 6 % 9 % 7 % 1 % 13 % 17 % (17)% 2 % 2 % 3 % 6 % 7 % — % 5 % 1See “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 think this information is useful to readers. The United States, our largest and most important market, accounted for 46% of our reported net sales in fiscal 2016 and 43% of net sales in fiscal 2015. In fiscal 2016, reported net sales in the United States grew 3%, while underlying net sales increased 6%, after adjusting for (a) the negative effect of the absence of normal revenues in March and April following the sale of Southern Comfort and Tuaca and (b) the negative year-over-year effect of distributors’ inventory buy-ins related to the launch of JDTF at the end of fiscal 2015. The growth in underlying net sales was driven by the Jack Daniel’s family of brands, including higher volumes for JDTF, following its launch in the fourth quarter of fiscal 2015, and for JDTW. Volume gains for Woodford Reserve also contributed to the underlying net sales growth, while lower volumes from Southern Comfort (before we sold the brand) and Canadian Mist partially offset these gains. Overall, we believe our brands grew market share in fiscal 2016 in both the on-premise and off-premise channels. Europe accounted for 31% of our net sales in both fiscal 2016 and fiscal 2015. For fiscal 2016, reported net sales in Europe were down 2%, while underlying net sales were up 6%, after adjusting for the negative effect of foreign exchange and the positive effect of a net increase in distributor inventories in Russia. The growth in underlying net sales was driven by gains in the United Kingdom, France, Germany, and Turkey, partially offset by declines in Russia. • • • In the United Kingdom, underlying net sales growth was driven by the Jack Daniel’s family of brands, led by volume growth for JDTW reflecting strong consumer demand, volume growth for JD RTDs, and the test market introduction of JDTF. In Germany, underlying net sales growth was primarily driven by higher volumes of JDTW. Volume growth of JDTH and JD RTDs also contributed. In Poland, volume gains for JDTW led underlying net sales growth, partially offset by a decline in volume of a lower- margin brand that we discontinued in fiscal 2016. 30 • • • In France, underlying net sales growth was primarily driven by higher volumes for JDTW and JDTH, as the Jack Daniel’s family of brands continued to gain market share in the world’s third largest whiskey market. In Turkey, price increases, higher volumes, and a beneficial channel mix for JDTW drove underlying net sales growth. In Russia, volume declines for both Finlandia and JDTW were responsible for the decrease in underlying net sales. We believe that our results in this market were driven by factors common to all premium spirits companies – namely, challenging economic conditions and consumer trends toward less expensive, local products. Australia accounted for 9% of our net sales in fiscal 2016, down from 11% in fiscal 2015. In fiscal 2016, reported net sales were down 12%, but underlying net sales were up 2% after adjusting for the negative effect of a weaker Australian dollar. Underlying net sales growth was driven by the Jack Daniel’s family of brands, led by volume gains for JD RTDs and JDTW, as well as the introduction of JDTF late in the fiscal year. Net sales for our other markets constituted 14% of our total net sales in fiscal 2016, down from 15% in fiscal 2015. Reported net sales were down 10% in fiscal 2016, but underlying net sales were up 3% after adjusting reported results for the negative effect of a stronger U.S. dollar and the negative impact of a net decrease in distributor inventories. The increase in underlying net sales was led by Mexico, Brazil, and sub-Saharan Africa. Decreased volume in travel retail and Southeast Asia partially offset the overall growth in this grouping. 31 RESULTS OF OPERATIONS – FISCAL 2016 BRAND HIGHLIGHTS The following table highlights the worldwide results of our largest brands for fiscal 2016, compared to the results for fiscal 2015. We discuss results of the brands most affecting our performance below the table. Major Brands Worldwide Results for Fiscal 20161 Depletion Volume Net Sales % Change vs. 2015 Nine-Liter Cases (Millions) % Change vs. 2015 Drinks Equivalent (Millions) % Change vs. 2015 Reported Foreign Exchange Net Chg in Est. Distributor Inventories Underlying 22.3 12.3 1.5 1.2 7.3 5.9 3.0 1.3 1.1 0.5 0.4 5% 3% 8% 30% 4% 14% (12%) (11%) (4%) 26% 6% 15.7 12.3 1.5 1.2 0.7 0.6 3.0 1.3 1.1 0.5 0.4 5% 3% 8% 30% 4% 14% (1%) (1%) —% 11% 6% 6% 5% 5% 1% (1%) 4% 6% 4% 9% 12% 28% (7%) 11% —% 4% 2% 20% —% 23% (9%) (16%) 13% (2%) (5%) (11%) (10%) —% (1%) (11%) (4%) (5%) 26% 6% 29% —% 9% 2% 1% (3%) 11% 1% 5% 28% 13% Brand family / brand Jack Daniel’s Family Jack Daniel’s Tennessee Whiskey Jack Daniel’s Tennessee Honey Other Jack Daniel’s whiskey brands2 Jack Daniel’s RTDs/RTP3 New Mix RTDs Finlandia Canadian Mist El Jimador Woodford Reserve Herradura Note: Totals may differ due to rounding 1See “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 think this information is useful to readers; see “Volume and Depletions” above for definitions of volume measures presented here. 2In addition to the brands separately listed here, the Jack Daniel’s family of brands includes Gentleman Jack, Jack Daniel’s Single Barrel Collection, Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, Jack Daniel’s 1907 Tennessee Whiskey, Jack Daniel’s Tennessee Rye Whiskeys, and Jack Daniel’s Tennessee Fire. 3Jack Daniel’s RTD and RTP products include all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, and the seasonal Jack Daniel’s Winter Jack RTP. In fiscal 2016, the Jack Daniel’s family of brands grew volumes 5% globally to nearly 16 million drinks-equivalent nine- liter cases across all expressions of the brand. Underlying net sales for the family of brands increased 6% (reported declined 1%) and was the most significant contributor to our total underlying net sales growth. In fiscal 2016, JDTW led the family of brand’s overall global growth, followed by (a) JDTF, which we introduced in the United States nationwide in the fourth quarter of fiscal 2015 and rolled out in select international markets in fiscal 2016; and (b) JDTH, which declined slightly in the United States but grew in most other markets. 32 Jack Daniel’s Tennessee Whiskey generates a significant percentage of our total net sales, and it is our top priority. As the world’s fourth-largest premium spirits brand measured by both volume and retail value,1 JDTW is one of the most valuable spirits brands in the world. During calendar 2015, JDTW grew volume for a 24th consecutive year and outpaced the average volume growth rate of the top 25 premium spirits brands1 – an achievement that underscores our belief in the brand’s long-term appeal and sustainable growth potential. JDTW grew volumes 3% globally in fiscal 2016, down from its 4% growth rate in fiscal 2015. JDTW underlying net sales grew 4% (reported declined 1%) led by the United States, the United Kingdom, Turkey, Germany, and France. These increases were partially offset by declines in travel retail and a slowdown in growth in emerging markets, driven by declines in Southeast Asia and Russia. Since its introduction in late fiscal 2011, Jack Daniel’s Tennessee Honey has contributed significantly to our net sales growth. We estimate that JDTH is now the 13th largest brand in the world priced over $25 per 750ml bottle.2 In fiscal 2016, JDTH grew volumes by 8%, down from its 29% growth rate last year. A slowing growth rate was expected, considering that we essentially completed the international rollout of JDTH in fiscal 2015. JDTH grew underlying net sales 9% (reported were flat) driven by higher volumes in Brazil and France, and, to a lesser extent, growth in the United Kingdom, Germany, and Czech Republic. These gains were partially offset by declines in the United States, where takeaway trends weakened due to increased competition. Among our Other Jack Daniel’s whiskey brands, the most significant contributor to underlying net sales growth was JDTF, launched nationally in the United States at the end of fiscal 2015 and rolled out to select international markets in fiscal 2016, including the United Kingdom (test market), Czech Republic, and Australia (introduced late in fiscal 2016). JDTF was designated as an Impact “Hot Brand”3 in its first calendar year. JDTF contributed over 20% of the underlying net sales growth delivered by the Jack Daniel’s family of brands in fiscal 2016. The Jack Daniel’s RTDs/RTPs brands grew volume 4% and underlying net sales 4% (reported declined 7%) in fiscal 2016. JD RTDs underlying net sales growth was driven by volume gains in the United Kingdom, Australia, Mexico, and Germany. These gains were partially offset by declines for Jack Daniel’s Winter Jack. In fiscal 2016, New Mix volumes increased 14%, while underlying net sales growth of 23% (reported increased 2%) was helped by a price increase. Growth was helped by low trade inventories at the beginning of fiscal 2016, as well as by higher takeaway trends relative to fiscal 2015, new size offerings, and distribution expansion within Mexico. In fiscal 2016, Finlandia volumes declined 12%, while underlying net sales were down 5% (reported declined 16%). The decline in underlying net sales was driven predominantly by lower volumes in travel retail and Russia. In Poland, the brand’s largest market, Finlandia grew modestly compared to last year, but continued to suffer from generally weak consumer demand for premium vodkas in this competitive marketplace. In addition, Finlandia RTDs were discontinued in Mexico. Canadian Mist volumes declined 11% while underlying net sales also decreased 11% (reported declined 10%) in fiscal 2016. The net sales declines were driven by lower volumes in the United States. In fiscal 2017, we plan to introduce new packaging and related marketing programs in an effort to stabilize the brand. el Jimador volumes declined 4% in fiscal 2016, but underlying net sales were up 5% (reported declined 5%). Underlying net sales growth was driven by higher volumes in the United States, partially offset by volume declines in Mexico. We expected short-term volume declines in Mexico, as we decided to begin raising prices strategically in fiscal 2015. el Jimador continued to grow market share in the United States, its largest market, and returned to Impact’s “Hot Brands” list3 in calendar 2015. In the rest of the world, el Jimador grew volumes more than 15% to surpass 200,000 nine-liter cases. Woodford Reserve grew volumes 26% in fiscal 2016 (after growing 30% in fiscal 2015 and 24% in fiscal 2014) and was named to Impact’s “Hot Brands” list3. In addition, underlying net sales grew 28% (reported increased 29%) in fiscal 2016. The United States is by far the brand’s most important market and was responsible for most of its growth during fiscal 2016. Woodford Reserve continued its momentum outside the United States as well, growing volumes 33%, driven by the United Kingdom. During fiscal 2016, we increased our advertising investment in Woodford Reserve both in the United States and internationally. Woodford Reserve led a fast-growing competitive set of super-premium American whiskeys, and we believe it is poised for continued growth as interest in bourbon increases around the world. We plan to devote substantial resources to Woodford Reserve to support its growth potential, including sustained advertising investment focused on consumer communications and capital spending for two new warehouses in fiscal 2017. 1Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in March 2016. 2The IWSR, 2015 data. 3Impact Databank published the Impact’s “Hot Brands - Spirits” list in March 2016. 33 In fiscal 2016, Herradura volumes grew 6% and underlying net sales were up 13% (reported were flat). This growth was driven primarily by improved price/mix and increased volumes in the brand’s largest markets, Mexico and the United States. We remain focused on developing Herradura in the United States (where we see considerable potential for growth), strengthening our position in Mexico, and continuing to build our presence in higher-value tequila markets throughout the world. 34 RESULTS OF OPERATIONS – YEAR-OVER-YEAR COMPARISONS NET SALES Percentage change versus the prior fiscal year ended April 30 2016 2015 Change in reported net sales Sale of Southern Comfort and Tuaca Foreign exchange Estimated net change in distributor inventories Change in underlying net sales Change in underlying net sales attributed to: Volume Net price/mix Note: Totals may differ due to rounding Fiscal 2016 compared to Fiscal 2015 (2)% 1 % 6 % — % 5 % 4 % — % 3 % (1)% 6 % 1% 4% 4% 3% Net sales of $4,011 million decreased 2%, or $85 million, in fiscal 2016 compared to fiscal 2015. Underlying net sales growth was 5%, after adjusting reported results for the negative effects of foreign exchange and the sale of Southern Comfort and Tuaca. The negative effect of foreign exchange was driven primarily by the dollar’s broad strengthening against most currencies. The change in underlying net sales was driven by the 4% positive impact of price/mix and 1% volume growth. Improved price/mix was driven by a shift in sales out of lower-priced brands, most notably Finlandia and Canadian Mist, to higher-priced brands, led by the Jack Daniel’s family of brands and Woodford Reserve. The primary factors contributing to growth in underlying net sales were: • broad-based, consumer-oriented growth of JDTW volumes, led by the United States, the United Kingdom, Germany, France, Mexico, and Poland, and beneficial channel mix in Turkey; • • • • • launch of JDTF in the United States, the United Kingdom (test market), Czech Republic, and Australia (introduced late in fiscal 2016); growth of our tequila brands led by (1) higher volumes of New Mix in Mexico, (2) higher prices and volumes of Herradura in Mexico and the United States, and (3) higher volumes of el Jimador in the United States; volume growth of Woodford Reserve in the United States; broad-based volume growth of JDTH outside the United States, led by Brazil and France; and higher volumes of JD RTDs in the United Kingdom and Australia. The primary factors partially offsetting growth in underlying net sales were: • • • • • broad-based declines of Finlandia in Europe, most notably in Russia; volume declines for lower-margin brands that we discontinued in fiscal 2016 and for lower-margin agency brands that we no longer distribute; declines in Southern Comfort in the United States before we sold it; volume declines of el Jimador in Mexico; and volume declines of JDTW in Russia. Fiscal 2015 compared to Fiscal 2014 Net sales of $4,096 million increased 4%, or $150 million, in fiscal 2015 compared to fiscal 2014. Underlying net sales growth was 6%, after adjusting reported results for the negative effect of foreign exchange and the estimated net increase in distributor inventories. The negative effect of foreign exchange, after taking into consideration our hedging activities, was driven primarily by weaker European currencies. The estimated net increase in distributor inventories resulted from distributor buy-ins related to the nationwide rollout of Jack Daniel’s Tennessee Fire in the United States and the year-over-year effect of our January 2014 RTC change in France. In fiscal 2014, our former distributor in France fully depleted inventories of our brands during November and December – during which time there were essentially no shipments – before we began selling directly to customers in France in January 2014. Going forward, we will not adjust France’s underlying results for changes in distributor inventories because fiscal 2015 fully reflected owned distribution. The change in underlying net sales was driven by the 4% positive impact 35 of volume growth and the 3% positive impact of price/mix due to favorable whiskey portfolio mix driven by the growth of higher- priced brands. The primary factors contributing to growth in underlying net sales were: • broad-based, consumer-oriented growth of JDTW volumes, led by (1) the United States; (2) several large European markets, including Turkey, the United Kingdom, and Ukraine; and (3) Brazil, despite worsening economic trends; • • • • • • Jack Daniel’s family of brands in France, driven by volume growth and higher pricing related to the RTC change; JDTH volume growth, led by increases in existing markets, including the United States, the United Kingdom, and the Czech Republic, and by volumes in recent launch markets, including France (launched at the end of fiscal 2014) and Brazil; volume growth from the nationwide launch of Jack Daniel’s Tennessee Fire in the United States in the fourth quarter of fiscal 2015; volume growth of Woodford Reserve in the United States; better mix in our tequila portfolio with the launch of Herradura Ultra and price increases for el Jimador in Mexico; and higher prices for our used barrel sales driven by higher demand from makers of Scotch whisky and other aged spirits. The primary factors partially offsetting growth in underlying net sales were: • • • declines in Finlandia Vodka, driven predominantly by Poland, where year-over-year volumes declined due to a buy-in in advance of a significant excise tax increase and weaker consumer demand during fiscal 2015; lower volumes for the Southern Comfort family of brands, primarily in the United States, driven by weaker demand in the on-premise channel; and lower volumes of Jack Daniel’s RTDs in Australia, driven by weaker consumer demand for spirits and spirit-based RTDs and by increased competition. COST OF SALES Percentage change versus the prior fiscal year ended April 30 2016 2015 Change in reported cost of sales Sale of Southern Comfort and Tuaca Foreign exchange Estimated net change in distributor inventories Change in underlying cost of sales Change in underlying cost of sales attributed to: Volume Cost/mix Note: Totals may differ due to rounding Fiscal 2016 compared to Fiscal 2015 (1)% — % 4 % — % 3 % 4 % — % 3 % — % 7 % 1% % 2 . 4% 3% Cost of sales of $945 million decreased $6 million, or 1%, in fiscal 2016 compared to fiscal 2015. Underlying cost of sales grew 3% after adjusting reported costs for the positive effect of foreign exchange. About one-third of the underlying increase in costs of sales was driven by growth in sales volumes, while the other two-thirds related to higher input costs, including wood and grain, and a shift in product mix to higher-cost brands. Looking ahead to fiscal 2017, we expect that input costs will increase in the low single digits. 36 Fiscal 2015 compared to Fiscal 2014 Cost of sales of $951 million increased $38 million, or 4%, in fiscal 2015 compared to fiscal 2014. Underlying cost of sales grew 7% after adjusting reported costs for the positive effect of foreign exchange. About half of the underlying increase in costs of sales was driven by growth in sales volumes, while the other half related to higher input costs, including additional value-added packaging expenses and, to a lesser extent, a shift in product mix to higher-cost brands, compared to the prior year. GROSS PROFIT Percentage change versus the prior fiscal year ended April 30 2016 2015 Change in reported gross profit Sale of Southern Comfort and Tuaca Foreign exchange Estimated net change in distributor inventories Change in underlying gross profit Note: Totals may differ due to rounding Fiscal 2016 compared to Fiscal 2015 (2)% 1 % 6 % — % 5 % 5 % — % 3 % (1)% 7 % Gross profit of $2,144 million decreased $39 million, or 2%, in fiscal 2016 compared to fiscal 2015. Gross profit on an underlying basis improved 5% after adjusting reported gross profit for the negative effects of foreign exchange and the sale of Southern Comfort and Tuaca. The increase resulted from the same factors that contributed to the increase in underlying net sales for the year. Gross margin improved to 53.4% in fiscal 2016, up 10 basis points from 53.3% in fiscal 2015. The increase in gross margin was primarily due to a favorable mix shift. Fiscal 2015 compared to Fiscal 2014 Gross profit of $2,183 million increased $105 million, or 5%, in fiscal 2015 compared to fiscal 2014. Gross profit on an underlying basis improved 7% after adjusting reported gross profit for the negative effects of foreign exchange and the estimated net increase in distributor inventories. The increase resulted from the same factors that contributed to the increase in underlying net sales for the year and was enhanced by the smaller combined increase in underlying excise taxes and cost of sales for the year. Gross margin improved to 53.3% in fiscal 2015, up 60 basis points from 52.7% in fiscal 2014. The increase in gross margin was primarily due to higher pricing and a favorable mix shift. ADVERTISING EXPENSES Percentage change versus the prior fiscal year ended April 30 2016 2015 Change in reported advertising Sale of Southern Comfort and Tuaca Foreign exchange Change in underlying advertising Note: Totals may differ due to rounding Fiscal 2016 compared to Fiscal 2015 (4)% 2 % 5 % 2 % —% —% 4% 4% Advertising expenses of $417 million decreased $20 million, or 4% in fiscal 2016 compared to fiscal 2015. Underlying advertising expenses increased 2% after adjusting reported results for the positive effects of foreign exchange and the sale of Southern Comfort and Tuaca. The increase in underlying advertising expenses was driven primarily by investments in the United States for Woodford Reserve, JDTW, and JDTF, as well as higher spending outside the United States on the Jack Daniel’s family of brands. These increases were partially offset by lower spending for Southern Comfort globally and Finlandia Vodka in many markets. 37 Fiscal 2015 compared to Fiscal 2014 Advertising expenses of $437 million increased $1 million in fiscal 2015 compared to fiscal 2014, essentially unchanged on a reported basis. Underlying advertising expenses increased 4% after adjusting reported results for the benefit of foreign exchange. The increase in underlying advertising expenses was driven primarily by (a) investments in United States related to the nationwide launch of JDTF, (b) higher spending on JDTW in the United States, and (c) higher spending outside the United States on the Jack Daniel’s family of brands. These increases were partially offset by lower spending for Southern Comfort and Finlandia in many markets. SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES Percentage change versus the prior fiscal year ended April 30 2016 2015 Change in reported SG&A Sale of Southern Comfort and Tuaca Foreign exchange Change in underlying SG&A Note: Totals may differ due to rounding Fiscal 2016 compared to Fiscal 2015 (1)% — % 4 % 2 % 2% —% 2% 4% SG&A expenses of $688 million decreased $9 million, or 1%, in fiscal 2016 compared to fiscal 2015, while underlying SG&A grew 2% after adjusting reported results for the positive effect of foreign exchange. The most significant contributors to the year-over-year increase in underlying SG&A were higher compensation and related expenses. Fiscal 2015 compared to Fiscal 2014 SG&A expenses of $697 million increased $11 million, or 2%, in fiscal 2015 compared to fiscal 2014, while underlying SG&A grew 4% after adjusting reported results for the favorable effect of foreign exchange. The most significant contributors to the year-over-year increase in underlying SG&A were higher compensation and related expenses due to higher salaries, additional employees in various markets, and a full year of costs related to employees added during fiscal 2014 for our new distribution company in France. OPERATING INCOME Percentage change versus the prior fiscal year ended April 30 2016 2015 Change in reported operating income Sale of Southern Comfort and Tuaca Foreign exchange Estimated net change in distributor inventories Change in underlying operating income Note: Totals may differ due to rounding Fiscal 2016 compared to Fiscal 2015 49 % (46)% 4 % 1 % 8 % 6 % — % 6 % (3)% 9 % Operating income was $1,533 million in fiscal 2016, an increase of $506 million, or 49% compared to fiscal 2015. Underlying operating income growth was 8% after adjusting for (a) the positive effect of the sale of Southern Comfort and Tuaca; (b) the negative effect of foreign exchange related to the broad strengthening of the dollar; and (c) the estimated net decrease in distributor inventories, driven primarily by the absence of the pipeline fill in the United States associated with the nationwide rollout of JDTF in the fourth quarter of fiscal 2015. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by a slower rate of growth in operating expenses. 38 Operating margin grew 13.1 percentage points to 38.2% in fiscal 2016 from 25.1% in fiscal 2015. The same factors that drove the increase in our gross margin benefited our operating margin, additionally enhanced by a slower rate of growth in operating expenses compared to the gross profit growth rate. The sale of Southern Comfort and Tuaca increased our operating margin 12.0 percentage points. Fiscal 2015 compared to Fiscal 2014 Operating income was $1,027 million in fiscal 2015, an increase of $56 million, or 6%, compared to fiscal 2014. Underlying operating income growth was 9% after adjusting for (a) the estimated net increase in U.S. distributor inventories in anticipation of the nationwide rollout of JDTF, (b) the year-over-year effect of our January 2014 RTC change in France, and (c) the negative effect of foreign exchange, mostly related to weaker European currencies. Included in the negative effect of foreign exchange was $30 million in other expense (income), net, in fiscal 2015 related to the revaluation of foreign-currency-denominated net assets. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by a slower rate of growth in operating expenses. Operating margin grew 50 basis points to 25.1% in fiscal 2015 from 24.6% in fiscal 2014. The same factors that drove the increase in our gross margin benefited our operating margin, additionally enhanced by operating expenses, which grew at a slower rate than gross profit growth. These factors were partially offset by the negative effect of the revaluation of certain largely euro- denominated net assets. Fiscal 2016 compared to Fiscal 2015 Interest expense (net) increased by $19 million, or 70%, in fiscal 2016 compared to fiscal 2015, primarily due to our June 2015 issuance of $500 million 4.50% senior unsecured notes due on July 15, 2045 and the increase in our commercial paper borrowing. Our effective tax rate for fiscal 2016 was 28.3% compared to 31.7% in fiscal 2015. The decrease in our effective tax rate was driven primarily by an increase in the beneficial impact of foreign earnings and the impact of the sale of the Southern Comfort and Tuaca business. Diluted earnings per share were $5.22 in fiscal 2016, up 63% from $3.21 for fiscal 2015. This increase resulted from (a) the same factors that contributed to the increase in operating income, including $1.76 from the sale of Southern Comfort and Tuaca, (b) the reduction in the shares outstanding resulting from share repurchases, and (c) the decrease in the effective tax rate. Fiscal 2015 compared to Fiscal 2014 Our effective tax rate for fiscal 2015 was 31.7% compared to 30.5% in fiscal 2014. The effective tax rates include the amortization ($15 million in fiscal 2015 and $5 million in fiscal 2014) of a deferred tax benefit that resulted from the release of certain deferred tax liabilities in connection with an intercompany transfer of assets on January 31, 2014. The increase in our effective tax rate was driven primarily by the reduction in the beneficial impact of foreign earnings, partially offset by the increase in the amortization of this deferred tax benefit. Diluted earnings per share were $3.21 in fiscal 2015, up 5% from $3.06 for fiscal 2014. This increase resulted from the same factors that contributed to the increase in operating income and the reduction in the shares outstanding resulting from share repurchases, partially offset by the increase in the effective tax rate. 39 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, our brands, and our assets, pay dividends, make strategic acquisitions that we believe will enhance shareholder value, repurchase shares of common stock, and, from time to time, pay special dividends. Investment-grade credit ratings (A1 by Moody’s, A by Fitch, and A- by Standard & Poor’s) provide us with financial flexibility when accessing global credit markets. We believe cash flows from operations are sufficient to meet our expected operating and capital requirements. CASH FLOW SUMMARY (Dollars in millions) Operating activities Investing activities: Proceeds from sale of business Additions to property, plant, and equipment Other Financing activities: Net change in short-term borrowings Net issuance (repayment) of long-term debt Acquisition of treasury stock Dividends paid Other Foreign exchange effect Change in cash and cash equivalents Fiscal 2016 compared to Fiscal 2015 2014 2015 2016 $ 649 $ 608 $ 524 — (126) (1) (127) 5 (2) (49) (233) (9) (288) (1) 233 $ — (120) (5) (125) 183 — (462) (256) 4 (531) (19) (67) $ 543 (108) (2) 433 80 240 (1,107) (266) (7) (1,060) (4) (107) $ Cash and cash equivalents declined $107 million in fiscal 2016, compared to a decline of $67 million in fiscal 2015. Cash provided by operations during fiscal 2016 was $524 million, compared to $608 million in the prior year. The $84 million decline was primarily due to a $55 million increase in income tax payments, largely reflecting a $125 million payment made during the fourth quarter of fiscal 2016 for the estimated taxes incurred on the sale of the Southern Comfort and Tuaca business, partially offset by the absence of $64 million paid during fiscal 2015 in connection with an intercompany transfer of assets. The decline in cash provided by operations also reflects a $14 million increase in interest payments, due to higher debt balances and interest rates. Cash provided by investing activities was $433 million in fiscal 2016. The increase of $558 million over the prior year primarily reflects the proceeds of $543 million from the sale of the Southern Comfort and Tuaca business in fiscal 2016. Cash used for financing activities was $1,060 million during fiscal 2016, compared to $531 million for fiscal 2015. The $529 million increase largely reflects a $645 million increase in share repurchases and the repayment of $250 million in aggregate principal amount of 2.5% notes that matured in January 2016, partially offset by proceeds of $490 million from the issuance of 4.50% senior notes due 2045 issued in June 2015, and an $80 million increase in short-term borrowings. The impact on cash and cash equivalents as a result of exchange rate changes was a decline of $4 million in fiscal 2016, compared to a decline of $19 million in the prior fiscal year. Fiscal 2015 compared to Fiscal 2014 Cash and cash equivalents declined $67 million in fiscal 2015, compared to an increase of $233 million in fiscal 2014. Cash provided by operating activities declined $41 million compared to fiscal 2014, primarily reflecting a $94 million increase in income tax payments, partially offset by higher earnings. Cash used for investing activities declined slightly, to $125 million in fiscal 2015 from $127 million in fiscal 2014. Cash used for financing activities was $531 million during fiscal 2015 compared to $288 million during fiscal 2014. The $243 million increase largely reflected a $413 million increase in share repurchases and a $23 million increase in dividends, partially offset by a $178 million increase in short-term borrowings. The impact on cash and cash equivalents as a result of exchange rate changes was a decline of $19 million in fiscal 2015, compared to a decline of $1 million in fiscal 2014. 40 Capital expenditures. Investments in property, plant, and equipment were $126 million in fiscal 2014, $120 million in fiscal 2015, and $108 million in fiscal 2016. Expenditures over the three-year period primarily included investments to maintain and expand capacity as well as improve production efficiency, reduce costs, and build our brands. Capital investments remained high in fiscal 2016, with continued spending on production operations representing approximately 80% of the total spend. For fiscal 2017, we expect capital expenditures to range from $150 million to $200 million. Our capital spending plans for fiscal 2017 include continued investment in our whiskey strategy, led by an expansion of our bottling facilities at Jack Daniel’s. Capital spending will continue for the Old Forester Distillery, Woodford Reserve Distillery, and the Slane Castle Irish Whiskey Distillery. We also plan to expand warehousing for our newly acquired Scotch business. We expect capital expenditures in fiscal 2018 and fiscal 2019 to remain high as we complete several key, multiyear projects. Share repurchases. We have repurchased approximately 18.3 million shares of our common stock since the beginning of fiscal 2014. The following table summarizes information about those share repurchases by period. Period May 1, 2013 – April 30, 2014 May 1, 2014 – April 30, 2015 May 1, 2015 – April 30, 2016 May 1, 2016 – June 10, 2016 Shares Purchased Class A 24,800 65,105 21,041 — 110,946 Class B 661,472 5,034,330 11,357,349 1,121,306 18,174,457 Average Price Per Share, Including Brokerage Commissions Class A Class B $ $ $ $ 68.03 90.21 95.43 $ $ $ — $ 69.04 90.36 96.98 96.71 Total Cost of Shares (Millions) 47 461 1,104 108 1,720 $ $ $ $ $ We repurchased these shares under three separate repurchase programs, including one that began on April 1, 2016, and remains in progress. Under that one, we may repurchase up to $1 billion of our Class A and Class B common shares through March 31, 2017, subject to market and other conditions. We may repurchase those shares in open market purchases, block transactions, or privately negotiated transactions in accordance with federal securities laws. We can modify, suspend, or terminate this repurchase program at any time without prior notice. As of June 10, 2016, we have repurchased a total of 2,286,319 shares under this program for approximately $220 million, leaving $780 million available for additional repurchases through March 31, 2017. The results of the three share repurchase programs are summarized in the following table. Dates (1) Shares Purchased Starting October 2013 October 2014 April 2016 Ending September 2014 March 2016 March 2017 Class A 47,463 63,483 — 110,946 Class B 2,861,626 13,026,512 2,286,319 18,174,457 (1) For the stock repurchase program begun in April 2016, data is through June 10, 2016. Average Price Per Share, Including Brokerage Commissions Class A Class B $ $ $ 78.81 91.80 $ $ — $ 86.08 95.51 96.19 Total Spent on Stock Repurchase Program (Millions) 250 1,250 220 1,720 $ $ $ $ Liquidity. We continue to manage liquidity conservatively to meet current obligations, fund capital expenditures, maintain dividends, and continue share repurchases while reserving adequate debt capacity for acquisition opportunities. In addition to our cash and cash equivalent balances, we have access to several liquidity sources to supplement our cash flow from operations. One of those sources is our $1.2 billion commercial paper program that we regularly use to fund our short-term credit needs and to maintain our access to the capital markets. During fiscal 2015, our commercial paper borrowings averaged $191 million, with an average maturity of 14 days and an average interest rate of 0.17%. During fiscal 2016, our commercial paper borrowings averaged $331 million, with an average maturity of 29 days and an average interest rate of 0.42%. Commercial paper outstanding was $183 million at April 30, 2015, and $269 million at April 30, 2016. Our commercial paper program is supported with available commitments under our currently undrawn $800 million bank credit facility that matures on November 20, 2018, and undrawn $400 million 364-day credit facility that matures on May 5, 2017. Further, we believe that the markets for investment-grade bonds and private placements are accessible sources of long-term financing that could meet any additional liquidity needs. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fully fund its commitments under our credit facility. 41 We have high credit standards when initiating transactions with counterparties, and we closely monitor our counterparty risks with respect to our cash balances and derivative contracts. If a counterparty’s credit quality were to deteriorate below our credit standards, we would expect either to liquidate exposures or require the counterparty to post appropriate collateral. As of April 30, 2016, we had total cash and cash equivalents of $263 million. Of this amount, $220 million was held by foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. We do not expect to need the cash generated by those foreign subsidiaries to fund our domestic operations. In the unforeseen event that we were to repatriate cash from those foreign subsidiaries, we would be required to provide for and pay U.S. taxes on permanently repatriated earnings. See Note 11 to our Consolidated Financial Statements for further information about the taxes that would have been provided on the undistributed earnings of these foreign subsidiaries if not considered indefinitely reinvested. As announced on May 26, 2016, our Board of Directors declared a regular quarterly cash dividend of $0.34 per share on our Class A and Class B common stock. Stockholders of record on June 6, 2016, will receive the dividend on July 1, 2016. On June 1, 2016, we acquired 90% of the voting equity interests in The BenRiach Distillery Company Limited for approximately $307 million in cash. The acquisition included our assumption of the company’s debts and transaction-related obligations totaling approximately $66 million, which we have since paid. We financed the transaction with a combination of cash on hand and short-term commercial paper borrowing. The transaction includes a put and call option agreement for the remaining 10% equity shares. Under that agreement, we may choose (or be required) to purchase the remaining 10% for approximately 24 million British pounds (approximately $34 million at the exchange rate on June 1, 2016) during the one-year period ending November 14, 2017. We believe our current liquidity position is strong and sufficient to meet all of our future financial commitments. A quantitative covenant of our $800 million bank credit facility requires the ratio of consolidated EBITDA (as defined in the agreement) to consolidated interest expense to be at least 3 to 1. At April 30, 2016, with a ratio of 24 to 1, we were well within the covenant’s parameters. The $400 million 364-day credit facility has no quantitative covenant requirement. OFF-BALANCE SHEET ARRANGEMENTS As of April 30, 2016, 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 4, 5, and 9 to our Consolidated Financial Statements). The following table summarizes the amounts of those obligations as of April 30, 2016, and the years when they must be paid: LONG-TERM OBLIGATIONS1 (Dollars in millions) Total 2017 2018-2019 2020-2021 After 2021 Long-term debt Interest on long-term debt Grape purchase obligations Operating leases Postretirement benefit obligations2 Agave purchase obligations3 Total $ $ 1,250 950 20 46 33 2 2,301 $ $ — $ 40 10 18 33 n/a 101 $ 250 77 7 18 n/a n/a 352 $ $ — $ 75 2 7 n/a n/a 84 $ 1,000 758 1 3 n/a n/a 1,762 1 Excludes liabilities for tax uncertainties, as we cannot reasonably predict the ultimate amount or timing of settlement. 2 As of April 30, 2016, we have unfunded pension and other postretirement benefit obligations of $360 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 $33 million of expected contributions (including $26 million of expected discretionary contributions) in fiscal 2017. 3 As discussed in Note 4 to our Consolidated Financial Statements, we have obligations to purchase agave, a plant whose sap forms the raw material for tequila. As of April 30, 2016, based on current market prices, obligations under these contracts totaled $2 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. We expect to meet these obligations with internally generated funds or issuance of debt. 42 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. If an asset’s fair value is less than its book value, we write it down to its estimated fair value. For goodwill, if the book value of the reporting unit exceeds its estimated fair value, we measure for potential impairment by comparing the implied fair value of the reporting unit’s goodwill, determined in the same manner as in a business combination, to the goodwill’s book value. We estimate the reporting unit’s fair value using discounted estimated future cash flows or market information. We typically estimate the fair value of a brand name using the “relief from royalty” 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, 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 to substantially exceed the carrying values of all of our goodwill and other intangible assets. Pension and other postretirement benefits. We sponsor various defined benefit pension plans as well as 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 expense and obligations, such as interest rates, return on plan assets, the rate of salary increases, expected service, and health care cost trend rates. The assets, obligations, and assumptions used to measure pension and retiree medical expenses are determined at the beginning of the year (“measurement date”). Because obligations are measured on a discounted basis, the discount rate is a significant assumption. It is based on interest rates for high-quality, long-term corporate debt at each measurement date. 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 other assumptions also reflect our historical experience and management’s best judgment regarding future expectations. We review our assumptions on each annual measurement date. As of April 30, 2016, we have decreased the weighted-average discount rate for pension obligations from 4.09% to 4.02%, and for other postretirement benefit obligations from 4.09% to 3.96%. Our expected return on plan assets of 7.0% has not changed. Using these assumptions, we estimate our pension and postretirement benefit expense for fiscal 2017 will be approximately $47 million, compared to $51 million for fiscal 2016. A decrease/increase of 25 basis points in the assumed discount rate would increase/decrease the fiscal 2017 expense by approximately $3 million. A decrease/increase of 25 basis points in the assumed return on plan assets would increase/decrease the fiscal 2017 expense by approximately $2 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 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. 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. 43 Item 7A. Quantitative and Qualitative Disclosures about Market Risk Risk Management Framework Success in business requires risk taking. Only by taking risks can we seize opportunities that will enhance brand performance and improve earnings, but we must balance risk and reward appropriately. Our enterprise risk management process is intended to ensure that we take risks knowingly and thoughtfully and that we balance risks and potential rewards appropriately. Our integrated enterprise risk management framework is designed to identify, evaluate, communicate, and appropriately mitigate risks across our operations. Within this framework: • Our Board of Directors is responsible for overseeing our enterprise risk assessment and mitigation processes and procedures. The Board itself oversees some strategic enterprise risks and delegates responsibility for other risks to committees that report to the Board regularly on risks within their purview, and to management. The Audit Committee oversees policies and processes related to enterprise risk management, compliance with legal and regulatory requirements, and financial reporting and accounting control risks. The Compensation Committee periodically reviews our compensation policies and practices to assess whether they could lead to unnecessary risk taking. • Our Risk Committee, composed of managers from an array of levels, functions, and geographies, reports to the Board at least annually. It leads our enterprise risk management program, which systematically identifies and evaluates the major risks we face, identifies “owners” for each risk, and ensures that risk mitigation plans are in place and are being followed. • Our Risk Management function identifies and assesses potential operational hazards and safety and security risks, and facilitates ongoing communication about those risks with the Risk Committee and our executive leaders. • Our Internal Audit Department evaluates the ongoing effectiveness of our key internal controls through periodic audit and review procedures, in coordination with our external auditors. • The Chief Compliance Officer in our legal department helps ensure that all of our employees’ actions globally comply with all internal policies and applicable laws. Market Risks We are exposed to market risks arising from adverse changes in foreign exchange rates, commodity prices affecting the cost of our raw materials and energy, and interest rates. We try to manage risk responsibly through a variety of strategies, including production initiatives and hedging. Our foreign currency hedging contracts are subject to exchange rate changes, our commodity forward purchase contracts are subject to commodity price changes, and some of our debt obligations are subject to interest rate changes. Below, we discuss these exposures and provide a sensitivity analysis as to how these changes could affect our results of operations. See Notes 6 and 8 to our Consolidated Financial Statements for details. See Note 4 to our Consolidated Financial Statements for details on our grape and agave purchase obligations, which are exposed to commodity price risk, and “Critical Accounting Estimates” in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of our pension and other postretirement plans’ exposure to interest rate risks. Also see “Item 1A. Risk Factors” for details on how economic conditions affecting market risks also affect the demand for and pricing of our products and how we are affected by exchange rate fluctuations. Foreign Exchange. The more we expand our business outside the United States, the more our financial results will be exposed to exchange rate fluctuations. This exposure includes sales of our products in currencies other than the dollar and the cost of goods, services, and manpower we purchase in currencies other than the dollar. Because we sell more in local currencies than we purchase, we have a net exposure to changes in the dollar’s value. To buffer these exchange rate fluctuations, we regularly hedge a portion of our foreign currency exposure. But over the long term, our reported financial results will generally be negatively affected by a stronger dollar and positively affected by a weaker dollar. We estimate that our foreign currency revenue for our largest exposures will exceed our foreign currency expenses by approximately $650 million in fiscal 2017. Foreign exchange rates also affect the carrying value of our foreign-currency- denominated assets and liabilities. We routinely use foreign currency forward and option contracts to hedge a portion of our transactional foreign exchange risk and, in some circumstances, our net asset exposure. If these contracts remain effective, we will not recognize any unrealized gains or losses until we either recognize the underlying hedged transactions in earnings or convert the underlying hedged net asset 44 exposures. At April 30, 2016, our total foreign currency hedges had a notional value of $1,265 million, with a maximum term outstanding of 36 months, and were recorded as a net asset at their fair value of of $9 million. As of April 30, 2016, we hedged approximately 75% of our total transactional exposure to foreign exchange fluctuations in fiscal 2017 for our major currencies by entering into foreign currency forward contracts. Considering these hedges, we estimate that a 10% increase/decrease in the average value of the dollar in fiscal 2017 relative to fiscal 2016’s effective exchange rates for our significant currency exposures would decrease/increase our fiscal 2017 operating income by approximately $18 million. Commodity Prices. Commodity prices are affected by weather, supply and demand, as well as geopolitical and economic variables. To reduce price volatility, we use deliverable contracts for corn (in which we take physical delivery of the corn underlying each contract) rather than futures contracts or options. Interest Rates. Our cash and cash equivalents ($263 million as of April 30, 2016) and variable-rate debt ($271 million as of April 30, 2016) are exposed to the risk of interest rate changes. Based on the net balance of these items as of April 30, 2016, a 1% increase in interest rates would result in a negligible increase in net interest expense. 45 Item 8. Financial Statements and Supplementary Data Table of Contents Reports of Management Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders’ Equity Notes to Consolidated Financial Statements Quarterly Financial Information (Unaudited) Page 47 48 49 50 51 52 53 54 74 46 MANAGEMENT’S RESPONSIBILITY FOR FINANCIAL STATEMENTS REPORTS OF MANAGEMENT Our management is responsible for the preparation, presentation, and integrity of the financial information presented in this report. The consolidated financial statements were prepared in conformity with accounting principles generally accepted in the United States, including amounts based on management’s best estimates and judgments. In management’s opinion, the consolidated financial statements fairly present the Company’s financial position, results of operations, and cash flows. The Audit Committee of the Board of Directors, comprising only independent directors, meets regularly with our external auditors, the independent registered public accounting firm PricewaterhouseCoopers LLP (PwC), with our internal auditors, and with representatives of management to review accounting, internal control structure, and financial reporting matters. Our internal auditors and PwC have full, free access to the Audit Committee. As set forth in our Code of Conduct and Compliance Guidelines, we are firmly committed to adhering to the highest standards of moral and ethical behaviors in our business activities. MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management is also responsible for establishing and maintaining effective internal control over financial reporting, as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. As of the end of our fiscal year, management conducted an assessment of the effectiveness of our internal control over financial reporting based on the framework and criteria in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that our internal control over financial reporting was effective as of April 30, 2016. PwC has audited the effectiveness of our internal control over financial reporting as of April 30, 2016, as stated in their report. Dated: June 15, 2016 By: /s/ Paul C. Varga Paul C. Varga Chief Executive Officer and Chairman of the Company By: /s/ Jane C. Morreau Jane C. Morreau Executive Vice President and Chief Financial Officer 47 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Brown-Forman Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, cash flows, and stockholders’ equity present fairly, in all material respects, the financial position of Brown- Forman Corporation and its subsidiaries (the “Company”) at April 30, 2016, and April 30, 2015, and the results of their operations and their cash flows for each of the three years in the period ended April 30, 2016, in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of April 30, 2016, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying “Management’s Report on Internal Control over Financial Reporting.” Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it classifies deferred taxes in 2016. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ PricewaterhouseCoopers LLP Louisville, KY June 15, 2016 48 BROWN-FORMAN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in millions, except per share amounts) Year Ended April 30, Net sales Excise taxes Cost of sales Gross profit Advertising expenses Selling, general, and administrative expenses Gain on sale of business Other expense (income), net Operating income Interest income Interest expense Income before income taxes Income taxes Net income Earnings per share: Basic Diluted 2014 2015 2016 $ $ $ $ 3,946 955 913 2,078 436 686 — (15) 971 2 26 947 288 659 3.08 3.06 $ $ $ $ 4,096 962 951 2,183 437 697 — 22 1,027 2 27 1,002 318 684 3.23 3.21 $ $ $ $ 4,011 922 945 2,144 417 688 (485) (9) 1,533 2 46 1,489 422 1,067 5.26 5.22 The accompanying notes are an integral part of the consolidated financial statements. 49 BROWN-FORMAN CORPORATION CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in millions) Year Ended April 30, Net income Other comprehensive income (loss), net of tax: Currency translation adjustments Cash flow hedge adjustments Postretirement benefits adjustments Net other comprehensive income (loss) Comprehensive income 2014 2015 2016 659 $ 684 $ 1,067 (4) (4) 31 23 682 $ (114) 32 (30) (112) 572 $ (23) (17) (10) (50) 1,017 $ $ The accompanying notes are an integral part of the consolidated financial statements. 50 BROWN-FORMAN CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in millions) April 30, 2015 2016 Cash and cash equivalents Accounts receivable, less allowance for doubtful accounts of $10 in 2015 and $9 in 2016 Inventories: ASSETS Barreled whiskey Finished goods Work in process Raw materials and supplies Total inventories Current deferred tax assets Other current assets Total current assets Property, plant, and equipment, net Goodwill Other intangible assets Deferred tax assets Other assets Total assets LIABILITIES Accounts payable and accrued expenses Accrued income taxes Current deferred tax liabilities Short-term borrowings Current portion of long-term debt Total current liabilities Long-term debt Deferred tax liabilities Accrued pension and other postretirement benefits Other liabilities Total liabilities Commitments and contingencies Common stock: STOCKHOLDERS’ EQUITY Class A, voting, $0.15 par value (85,000,000 shares authorized; 85,000,000 shares issued) Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 142,313,000 shares issued) Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss), net of tax Treasury stock, at cost (18,613,000 and 29,571,000 shares in 2015 and 2016, respectively) Total stockholders’ equity Total liabilities and stockholders’ equity $ $ $ $ $ $ 370 583 571 200 121 61 953 16 332 2,254 586 607 611 18 112 4,188 497 12 9 190 250 958 743 107 311 164 2,283 13 21 99 3,300 (300) (1,228) 1,905 $ 4,188 $ 263 559 666 187 116 85 1,054 — 357 2,233 629 590 595 17 119 4,183 501 19 — 271 — 791 1,230 101 353 146 2,621 13 21 114 4,065 (350) (2,301) 1,562 4,183 The accompanying notes are an integral part of the consolidated financial statements. 51 BROWN-FORMAN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in millions) Year Ended April 30, Cash flows from operating activities: 2014 2015 2016 Net income Adjustments to reconcile net income to net cash provided by operations: $ 659 $ 684 $ 1,067 Gain on sale of business Depreciation and amortization Stock-based compensation expense Deferred income taxes Other, net Changes in assets and liabilities, excluding the effects of sale of business: Accounts receivable Inventories Other current assets Accounts payable and accrued expenses Accrued income taxes Noncurrent assets and liabilities Cash provided by operating activities Cash flows from investing activities: Proceeds from sale of business Additions to property, plant, and equipment Proceeds from sale of property, plant, and equipment Acquisition of brand names and trademarks Computer software expenditures Cash provided by (used for) investing activities Cash flows from financing activities: Net change in short-term borrowings Repayment of long-term debt Proceeds from long-term debt Debt issuance costs Net payments related to exercise of stock-based awards Excess tax benefits from stock-based awards Acquisition of treasury stock Dividends paid Cash used for financing activities Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental disclosure of cash paid for: Interest Income taxes — 50 13 (5) 1 (34) (67) (43) 31 60 (16) 649 — (126) 2 (1) (2) (127) 5 (2) — — (19) 10 (49) (233) (288) (1) 233 204 437 28 281 $ $ $ — 51 15 6 9 (50) (102) (30) 64 (58) 19 608 — (120) — (4) (1) (125) 183 — — — (14) 18 (462) (256) (531) (19) (67) 437 370 27 375 $ $ $ (485) 56 15 10 2 8 (127) (57) 29 7 (1) 524 543 (108) — — (2) 433 80 (250) 490 (5) (17) 15 (1,107) (266) (1,060) (4) (107) 370 263 41 430 $ $ $ The accompanying notes are an integral part of the consolidated financial statements. 52 BROWN-FORMAN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (Dollars in millions, except per share amounts) Year Ended April 30, Class A common stock: Balance at beginning and end of year Class B common stock: Balance at beginning and end of year Additional paid-in capital: Balance at beginning of year Stock-based compensation expense Loss on issuance of treasury stock issued under compensation plans Excess tax benefits from stock-based awards Balance at end of year Retained earnings: Balance at beginning of year Net income Cash dividends ($1.09, $1.21, and $1.31 per share in 2014, 2015, and 2016, respectively) Loss on issuance of treasury stock issued under compensation plans Balance at end of year Accumulated other comprehensive income (loss), net of tax: Balance at beginning of year Net other comprehensive income (loss) Balance at end of year Treasury stock, at cost: Balance at beginning of year Acquisition of treasury stock Stock issued under compensation plans Balance at end of year Total stockholders’ equity Class A common shares outstanding (in thousands): Balance at beginning of year Acquisition of treasury stock Stock issued under compensation plans Balance at end of year Class B common shares outstanding (in thousands): Balance at beginning of year Acquisition of treasury stock Stock issued under compensation plans Balance at end of year Total common shares outstanding (in thousands) 2014 2015 2016 $ 13 $ 13 $ 21 71 13 (13) 10 81 2,500 659 (233) (32) 2,894 (211) 23 (188) (766) (49) 26 (789) $ 2,032 $ 84,446 (46) 62 84,462 129,261 (661) 393 128,993 213,455 21 81 15 (15) 18 99 2,894 684 (256) (22) 3,300 (188) (112) (300) (789) (462) 23 (1,228) 1,905 $ 84,462 (85) 86 84,463 128,993 (5,034) 278 124,237 208,700 13 21 99 15 (15) 15 114 3,300 1,067 (266) (36) 4,065 (300) (50) (350) (1,228) (1,107) 34 (2,301) 1,562 84,463 (57) 124 84,530 124,237 (11,357) 332 113,212 197,742 The accompanying notes are an integral part of the consolidated financial statements. 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in millions, except per share data) 1. ACCOUNTING POLICIES We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States (GAAP). We also apply the following accounting policies when preparing our consolidated financial statements: Principles of consolidation. Our consolidated financial statements include the accounts of all subsidiaries in which we have a controlling financial interest. We eliminate all intercompany transactions. Estimates. To prepare financial statements that conform with GAAP, our management must make informed estimates that affect how we report revenues, expenses, assets, and liabilities, including contingent assets and liabilities. Actual results could (and probably will) differ from these estimates. Cash equivalents. Cash equivalents include bank demand deposits and all highly liquid investments with original maturities of three months or less. Allowance for doubtful accounts. We evaluate the collectability of accounts receivable based on a combination of factors. When we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations, we record a specific allowance to reduce the net recognized receivable to the amount we believe will be collected. We write off the uncollectable amount against the allowance when we have exhausted our collection efforts. Inventories. Inventories are valued at the lower of cost or market value. Approximately 59% of our consolidated inventories are valued using the last-in, first-out (LIFO) cost method, which we use for the majority of our U.S. inventories. We value the remainder of our inventories primarily using the first-in, first-out (FIFO) cost method. FIFO cost approximates current replacement cost. If we had used the FIFO method for all inventories, they would have been $234 and $248 higher than reported at April 30, 2015 and 2016, respectively. Because we age most of our whiskeys in barrels for three to six years, we bottle and sell only a portion of our whiskey inventory each year. Following industry practice, we classify all barreled whiskey as a current asset. We include warehousing, insurance, ad valorem taxes, and other carrying charges applicable to barreled whiskey in inventory costs. We classify bulk wine, agave inventories, tequila, and liquid in bottling tanks as work in process. Property, plant, and equipment. We state property, plant, and equipment at cost less accumulated depreciation. We calculate depreciation on a straight-line basis using our estimates of useful life, which are 20–40 years for buildings and improvements; 3– 10 years for machinery, equipment, vehicles, furniture, and fixtures; and 3–7 years for capitalized software. We assess our property, plant, and equipment for impairment whenever events or changes in circumstances indicate that the carrying value of those assets may not be recoverable. When we do not expect to recover the carrying value of an asset (or asset group) through undiscounted future cash flows, we write it down to its estimated fair value. We determine fair value using discounted estimated future cash flows, considering market values for similar assets when available. When we retire or dispose of property, plant, and equipment, we remove its cost and accumulated depreciation from our balance sheet and reflect any gain or loss in operating income. We expense the costs of repairing and maintaining our property, plant, and equipment as we incur them. 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. If an asset’s fair value is less than its book value, we write it down to its estimated fair value. For goodwill, if the book value of the reporting unit exceeds its estimated fair value, we measure for potential impairment by comparing the implied fair value of the reporting unit’s goodwill, determined in the same manner as in a business combination, to the goodwill’s book value. We estimate the reporting unit’s fair value using discounted estimated future cash flows or market information. We typically estimate the fair value of a brand name using the “relief from royalty” method. We also consider market values for similar assets when available. Considerable management judgment is necessary to estimate fair value, including the selection of assumptions about future cash flows, discount rates, and royalty rates. 54 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. Foreign currency transactions and translation. We report all gains and losses from foreign currency transactions (those denominated in a currency other than the entity’s functional currency) in current income. The U.S. dollar is the functional currency for most of our consolidated entities. The local currency is the functional currency for some of our consolidated foreign entities. We translate the financial statements of those foreign entities into U.S. dollars, using the exchange rate in effect at the balance sheet date to translate assets and liabilities, and using the average exchange rate for the reporting period to translate translate income and expenses. We record the resulting translation adjustments in other comprehensive income (loss). Revenue recognition. We recognize revenue when title and risk of loss pass to the customer, typically when the product is shipped. Some sales contracts contain customer acceptance provisions that grant a right of return on the basis of either subjective or objective criteria. We record revenue net of estimated sales returns, allowances, and discounts. Excise taxes. Our sales are often subject to excise taxes that we collect from our customers and remit to governmental authorities. We present these taxes on a gross basis (included in net sales and costs before gross profit) in the consolidated statement of operations. Cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring, and shipping goods sold during the period. Shipping and handling fees and costs. We report the amounts we bill to our customers for shipping and handling as net sales, and we report the costs we incur for shipping and handling as cost of sales. Advertising costs. We expense the costs of advertising during the year when the advertisements first take place. Selling, general, and administrative expenses. Selling, general, and administrative expenses include the costs associated with our sales force, administrative staff and facilities, and other expenses related to our non-manufacturing functions. Income taxes. We base our annual provision for income taxes on the pre-tax income reflected in our consolidated statement of operations. We establish deferred tax liabilities or assets for temporary differences between GAAP and tax reporting bases and later adjust them to reflect changes in tax rates expected to be in effect when the temporary differences reverse. We record a valuation allowance as necessary to reduce a deferred tax asset to the amount that we believe is more likely than not to be realized. We do not provide deferred income taxes on undistributed earnings of foreign subsidiaries that we expect to permanently reinvest. We record a deferred tax charge in prepaid taxes for the difference between GAAP and tax reporting bases with respect to the elimination of intercompany profit in ending inventory. We assess our uncertain income tax positions using a two-step process. First, we evaluate whether the tax position will more likely than not, based on its technical merits, be sustained upon examination, including resolution of any related appeals or litigation. For a tax position that does not meet this first criterion, we recognize no tax benefit. For a tax position that does meet the first criterion, we recognize a tax benefit in an amount equal to the largest amount of benefit that we believe has more than a 50% likelihood of being realized upon ultimate resolution. We record interest and penalties on uncertain tax positions as income tax expense. Recent accounting pronouncements. In May 2014, the Financial Accounting Standards Board (FASB) issued new guidance on the recognition of revenue from contracts with customers. As issued, the new guidance would have become effective for us beginning fiscal 2018. However, the FASB has since deferred the effective date until our fiscal 2019, though permitting voluntary adoption as of the original effective date. The FASB has also issued various amendments and proposed further amendments to the new guidance. We are currently evaluating the potential impact of the new guidance (as amended) and the proposed amendments on our financial statements. In April 2015, FASB issued new guidance for the presentation of debt issuance costs, which we adopted during the first quarter of fiscal 2016. Under the new guidance, debt issuance costs are presented as a direct deduction from the debt liability rather than as an asset. In adopting the new guidance, we retrospectively adjusted our balance sheet as of April 30, 2015. As a result, the carrying amounts of other assets (noncurrent) and long-term debt have decreased by $5 million from the amounts previously reported as of that date. In November 2015, the FASB issued new guidance that requires all deferred tax assets and deferred tax liabilities to be presented as noncurrent on our balance sheet. We adopted this new guidance prospectively as of April 30, 2016. Accordingly, prior period balances have not been adjusted. 55 In February 2016, the FASB issued new guidance on accounting for leases. The new guidance will become effective for us beginning fiscal 2020, although voluntary adoption during an earlier period will be permitted. We are currently evaluating the potential impact of the new guidance on our financial statements. In March 2016, the FASB issued new guidance related to certain aspects of the accounting for stock-based compensation, including the income tax consequences. Under the new guidance, all excess tax benefits and tax deficiencies will be recognized as income tax expense or benefit in our consolidated statement of operations, and excess tax benefits will be classified along with other income tax cash flows as an operating activity in our consolidated statement of cash flows. The new guidance will become effective for us beginning fiscal 2018, although early adoption is permitted. We currently expect to adopt the new guidance during fiscal 2017. 2. BALANCE SHEET INFORMATION Supplemental information on our year-end balance sheets is as follows: April 30, Other current assets: Prepaid taxes Other Property, plant, and equipment: Land Buildings Equipment Construction in process Less accumulated depreciation Accounts payable and accrued expenses: Accounts payable, trade Accrued expenses: Advertising and promotion Compensation and commissions Excise and other non-income taxes Other Other liabilities: Deferred benefit – tax (Note 11) Other 2015 2016 $ $ $ $ $ $ $ $ 181 151 332 72 419 561 88 1,140 554 586 123 128 110 59 77 374 497 75 89 164 $ $ $ $ $ $ $ $ 208 149 357 76 468 619 54 1,217 588 629 121 133 105 58 84 380 501 59 87 146 3. GOODWILL AND OTHER INTANGIBLE ASSETS The following table shows the changes in the amounts recorded as goodwill (which include no accumulated impairment losses) over the past two years: Balance as of April 30, 2014 Foreign currency translation adjustment Balance as of April 30, 2015 Sale of business (Note 15) Foreign currency translation adjustment Balance as of April 30, 2016 56 $ $ 620 (13) 607 (16) (1) 590 As of April 30, 2015 and 2016, our other intangible assets consisted of trademarks and brand names, all with indefinite useful lives. 4. COMMITMENTS AND CONTINGENCIES Commitments. We made rental payments for real estate, vehicles, and office, computer, and manufacturing equipment under operating leases of $24, $23, and $23 during 2014, 2015, and 2016, respectively. We have commitments related to minimum lease payments of $18 in 2017, $10 in 2018, $8 in 2019, $5 in 2020, $2 in 2021, and $3 after 2021. We have contracted with various growers and wineries to supply some of our future grape and bulk wine requirements. Many of these contracts call for prices to be adjusted annually up or down, according to market conditions. Some contracts set a fixed purchase price that might be higher or lower than prevailing market prices. We have total purchase obligations related to both types of contracts of $10 in 2017, $4 in 2018, $3 in 2019, $1 in 2020, $1 in 2021, and $1 after 2021. We also have contracts for the purchase of agave, which is used to produce tequila. These contracts provide for prices to be determined based on market conditions at the time of harvest, which, although not specified, is expected to occur over the next 10 years. As of April 30, 2016, based on current market prices, obligations under these contracts total $2. 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 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 are recorded as of April 30, 2016. Guaranty. 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 $22 (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant. As of April 30, 2016, our actual exposure under the guaranty of the importer’s obligation is approximately $17. We also have accounts receivable from that importer of approximately $9 at that date, 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. 57 5. DEBT AND CREDIT FACILITIES Our long-term debt (net of unamortized discounts and issuance costs) consisted of: April 30, 2.50% senior notes, $250 principal amount, due in fiscal 2016 1.00% senior notes, $250 principal amount, due in fiscal 2018 2.25% senior notes, $250 principal amount, due in fiscal 2023 3.75% senior notes, $250 principal amount, due in fiscal 2043 4.50% senior notes, $500 principal amount, due in fiscal 2046 Less current portion 2015 2016 250 248 247 248 — 993 250 743 $ $ — 249 248 248 485 1,230 — 1,230 $ $ Debt payments required over the next five fiscal years consist of $0 in 2017, $250 in 2018, $0 in 2019, $0 in 2020, $0 in 2021, and $1,000 after 2021. The senior notes contain terms and covenants customary of these types of unsecured securities, including limitations on the amount of secured debt we can issue. We issued senior, unsecured notes with an aggregate principal amount of $500 in June 2015. Interest on the notes will accrue at a rate of 4.50% and be paid semi-annually. As of April 30, 2016, the carrying amount of the notes was $485 ($500 principal, less unamortized discounts of $10 and issuance costs of $5). The notes are due on July 15, 2045. We repaid our $250 of 2.50% notes on their maturity date of January 15, 2016. As of April 30, 2015, our short-term borrowings of $190 included $183 of commercial paper, with an average interest rate of 0.17%, and an average remaining maturity of 13 days. As of April 30, 2016, our short-term borrowings of $271 included $269 of commercial paper, with an average interest rate of 0.53%, and an average remaining maturity of 26 days. We have a committed revolving credit agreement with various U.S. and international banks for $800 that expires in November 2018. Its most restrictive quantitative covenant requires that the ratio of our consolidated EBITDA (as defined in the agreement) to consolidated interest expense not be less than 3 to 1. At April 30, 2016, with a ratio of 24 to 1, we were well within this covenant’s parameters and had no borrowing outstanding under this facility. We recently entered into a $400 364-day credit facility agreement that matures on May 5, 2017, for additional liquidity. This credit facility has no quantitative covenants. 6. FAIR VALUE MEASUREMENTS 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 upon 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. 58 The following table summarizes the assets and liabilities measured at fair value on a recurring basis: Level 1 Level 2 Level 3 Total April 30, 2015: Assets: Currency derivatives Liabilities: Currency derivatives Short-term borrowings Current portion of long-term debt Long-term debt April 30, 2016: Assets: Currency derivatives Liabilities: Currency derivatives Short-term borrowings Long-term debt $ — $ 59 $ — $ — — — — — — — — 18 190 253 735 19 10 271 1,293 — — — — — — — — 59 18 190 253 735 19 10 271 1,293 We determine the fair values of our currency derivatives (forwards 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 exchange rates, forward rates, and discount rates. The discount rates are based on the historical U.S. Treasury rates. The fair value of short-term borrowings approximates their carrying value. We determine the fair value of long-term debt primarily based on the prices at which similar debt has recently traded in the market and also considering the overall market conditions on the date of valuation. 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). No material nonrecurring fair value measurements were required during the periods presented in these financial statements. 7. FAIR VALUE OF FINANCIAL INSTRUMENTS The fair values of cash, cash equivalents, and short-term borrowings approximate the carrying amounts due to the short maturities of these instruments. We determine the fair values of currency derivatives and long-term debt as discussed in Note 6. Below is a comparison of the fair values and carrying amounts of these instruments: April 30, Assets: Cash and cash equivalents Currency derivatives Liabilities: Currency derivatives Short-term borrowings Current portion of long-term debt Long-term debt 2015 2016 Carrying Amount Fair Value Carrying Amount Fair Value $ $ 370 59 18 190 250 743 370 59 18 190 253 735 $ $ 263 19 10 271 — 1,230 263 19 10 271 — 1,293 8. DERIVATIVE FINANCIAL INSTRUMENTS Our multinational business exposes us to global market risks, including the effect of fluctuations in currency exchange rates, commodity prices, and interest rates. We use derivatives to help manage financial exposures that occur in the normal course of 59 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 currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges (except any ineffective portion) in accumulated other comprehensive income (AOCI) until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings. We assess the effectiveness of these hedges based on changes in forward exchange rates. The ineffective portion of the changes in fair value of our hedges (recognized immediately in earnings) during the periods presented in this report was not material. We do not designate some of our currency derivatives as hedges because we use them to at least partially offset the immediate earnings impact of changes in foreign 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 totaling $1,212 and $1,265 at April 30, 2015 and 2016, respectively. We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to physically take 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 derivative instruments. From time to time, we manage our interest rate risk with swap contracts. However, no such swaps were outstanding at April 30, 2015 or 2016. During May 2015, we entered into interest rate derivative contracts (U.S. Treasury lock agreements) to manage the interest rate risk related to the anticipated issuance of fixed-rate senior, unsecured notes. We designated the contracts as cash flow hedges of the future interest payments associated with the anticipated notes. Upon issuance of the notes in June 2015 (see Note 5), we settled the contracts for a gain of $8. The entire gain was recorded to AOCI and will be amortized as a reduction of interest expense over the life of the notes. The following table presents the pre-tax impact that changes in the fair value of our derivative instruments had on AOCI and earnings in 2015 and 2016: Currency derivatives designated as cash flow hedges: Net gain (loss) recognized in AOCI Net gain (loss) reclassified from AOCI into earnings Interest rate derivatives designated as cash flow hedges: Net gain (loss) recognized in AOCI Derivatives not designated as hedging instruments: Classification in Statement of Operations $ n/a Net sales n/a Currency derivatives – net gain (loss) recognized in earnings Currency derivatives – net gain (loss) recognized in earnings Net sales Other income 2015 2016 $ 96 41 — 26 4 22 60 8 1 (5) We expect to reclassify $13 of deferred net gains recorded in AOCI as of April 30, 2016, to earnings during fiscal 2017. 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 maximum term of outstanding derivative contracts was 36 months and 36 months at April 30, 2015 and 2016, respectively. 60 The following table presents the fair values of our derivative instruments as of April 30, 2015 and 2016: Balance Sheet Classification Fair Value of Derivatives in a Gain Position Fair Value of Derivatives in a Loss Position April 30, 2015: Designated as cash flow hedges: Currency derivatives Currency derivatives Currency derivatives Currency derivatives Not designated as hedges: Currency derivatives Currency derivatives April 30, 2016: Designated as cash flow hedges: Currency derivatives Currency derivatives Currency derivatives Currency derivatives Not designated as hedges: Currency derivatives $ Other current assets Other assets Accrued expenses Other liabilities Other current assets Accrued expenses Other current assets Other assets Accrued expenses Other liabilities Other current assets $ 42 20 — — 3 1 23 3 4 3 1 (2) (3) (6) (6) (1) (7) (2) (2) (8) (9) (4) 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 the accompanying consolidated balance sheets. In our statement of cash flows, we classify cash flows related to cash flow hedges in the same category as the cash flows from the hedged items. Credit risk. We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association (ISDA) agreements that allow for net settlement of the derivative contracts. Also, we have established counterparty credit guidelines that are regularly monitored and that provide for reports to senior management according to prescribed guidelines, and we monetize contracts when we believe it is warranted. Because of these safeguards, we believe we have no derivative positions that warrant credit valuation adjustments. Some of our derivative instruments require us to maintain a specific level of creditworthiness, which we have maintained. If our creditworthiness were to fall below that level, then the counterparties to our derivative instruments could request immediate 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 $18 and $8 at April 30, 2015 and 2016, respectively. 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 the balance sheet. Similarly, we present the fair values of noncurrent derivatives with the same counterparty on a net basis. Current derivatives are not netted with noncurrent derivatives in the balance sheet. The following table summarizes the gross and net amounts of our derivative contracts: 61 April 30, 2015: Derivative assets Derivative liabilities April 30, 2016: Derivative assets Derivative liabilities 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 $ $ 65 (24) 34 (25) $ (6) 6 (15) 15 $ 59 (18) 19 (10) — $ — (6) 6 59 (18) 13 (4) No cash collateral was received or pledged related to our derivative contracts as of April 30, 2015 or 2016. 9. PENSION AND OTHER POSTRETIREMENT BENEFITS We sponsor various defined benefit pension plans as well as postretirement plans providing retiree health care and retiree life insurance benefits. Below, we discuss our obligations related to these plans, the assets dedicated to meeting the obligations, and the amounts we recognized in our financial statements as a result of sponsoring these plans. Obligations. We provide eligible employees with pension and other postretirement benefits based on factors such as years of service and compensation level during employment. The pension obligation shown below (“projected benefit obligation”) consists of: (a) benefits earned by employees to date based on current salary levels (“accumulated benefit obligation”); and (b) benefits to be received by employees as a result of expected future salary increases. (The obligation for medical and life insurance benefits is not affected by future salary increases.) The following table shows how the present value of our obligation changed during each of the last two years. Obligation at beginning of year Service cost Interest cost Net actuarial loss (gain) Plan amendments Retiree contributions Benefits paid Obligation at end of year Pension Benefits Medical and Life Insurance Benefits 2015 2016 2015 2016 $ $ 785 22 34 91 — — (45) 887 $ $ 887 26 35 8 — — (58) 898 $ $ 69 1 3 3 (16) 1 (4) 57 $ $ 57 1 2 (1) — 1 (4) 56 Service cost represents the present value of the benefits attributed to service rendered by employees during the year. Interest cost is the increase in the present value of the obligation due to the passage of time. Net actuarial loss (gain) is the change in value of the obligation resulting from experience different from that assumed or from a change in an actuarial assumption. (We discuss actuarial assumptions used at the end of this note.) Plan amendments may also change the value of the obligation. As shown in the previous table, the change in the value of our pension and other postretirement benefit obligations also includes the effect of benefit payments and retiree contributions. Expected benefit payments (net of retiree contributions) over the next 10 years are as follows: 2017 2018 2019 2020 2021 2022 – 2026 Pension Benefits Medical and Life Insurance Benefits $ $ 51 52 53 54 56 303 3 3 3 3 3 18 Assets. We invest in specific assets to fund our pension benefit obligations. Our investment goal is to earn a total return that, over time, will grow assets sufficiently to fund our plans’ liabilities, after providing appropriate levels of contributions and accepting prudent levels of investment risk. To achieve this goal, plan assets are invested primarily in funds or portfolios of funds managed 62 by outside managers. Investment risk is managed by company policies that require diversification of asset classes, manager styles, and individual holdings. We measure and monitor investment risk through quarterly and annual performance reviews, and through periodic asset/liability studies. Asset allocation is the most important method for achieving our investment goals and is based on our assessment of the plans’ long-term return objectives and the appropriate balances needed for liquidity, stability, and diversification. As of April 30, 2016, our target asset allocation is a mix of 47% public equity investments, 35% fixed income investments, and 18% alternative investments. The following table shows the fair value of pension plan assets by category as of the end of the last two years. (Fair value levels are defined in Note 6.) April 30, 2015: Commingled trust funds1: Equity funds Fixed income funds Real estate funds Short-term investments Total commingled trust funds Hedge funds2 Private equity3 Equity securities Total April 30, 2016: Commingled trust funds1: Equity funds Fixed income funds Real estate funds Short-term investments Total commingled trust funds Hedge funds2 Private equity3 Equity securities Total Level 1 Level 2 Level 3 Total $ $ $ $ — $ — — — — — — 76 76 $ — $ — — — — — — 78 78 $ 248 185 20 4 457 — — — 457 197 197 — 4 398 — — — 398 $ $ $ $ — $ — 36 — 36 31 26 — 93 $ — $ — 59 — 59 30 29 — 118 $ 248 185 56 4 493 31 26 76 626 197 197 59 4 457 30 29 78 594 1Commingled trust fund valuations are based on the net asset value (NAV) of the funds as determined by the fund administrators and reviewed by us. NAV represents the underlying assets owned by the fund, minus liabilities and divided by the number of shares or units outstanding. 2Hedge fund valuations are based primarily on the NAV of the funds as determined by fund administrators and reviewed by us. During our review, we determine whether it is necessary to adjust a valuation for inherent liquidity and redemption issues that may exist within a fund’s underlying assets or fund unit values. 3As of April 30, 2015 and 2016, consists only of limited partnership interests, which are valued at the percentage ownership of total partnership equity as determined by the general partner. These valuations require significant judgment due to the absence of quoted market prices, the inherent lack of liquidity, and the long-term nature of these investments. 63 The following table shows how the fair value of the Level 3 assets changed during each of the last two years. There were no transfers of assets between Level 3 and either of the other two levels. Balance as of April 30, 2014 Return on assets held at end of year Purchases and settlements Sales and settlements Balance as of April 30, 2015 Return on assets held at end of year Purchases and settlements Sales and settlements Balance as of April 30, 2016 Real Estate Funds Hedge Funds Private Equity Total $ $ 32 4 — — 36 4 19 — 59 $ $ 30 1 — — 31 (1) — — 30 $ $ 25 1 4 (4) 26 1 5 (3) 29 $ $ 87 6 4 (4) 93 4 24 (3) 118 The following table shows how the total fair value of all pension plan assets changed during each of the last two years. (We do not have assets set aside for postretirement medical or life insurance benefits.) Assets at beginning of year Actual return on assets Retiree contributions Company contributions Benefits paid Assets at end of year Pension Benefits Medical and Life Insurance Benefits 2015 2016 2015 2016 $ $ 605 52 — 14 (45) 626 $ $ 626 2 — 24 (58) 594 $ $ — $ — 1 3 (4) — $ — — 1 3 (4) — We currently expect to contribute $30 to our pension plans and $3 to our postretirement medical and life insurance benefit plans during 2017. Funded status. The funded status of a plan refers to the difference between its assets and its obligations. The following table shows the funded status of our plans. April 30, Assets Obligations Funded status Pension Benefits Medical and Life Insurance Benefits 2015 2016 2015 2016 $ $ $ 626 (887) (261) $ $ 594 (898) (304) $ — $ (57) (57) $ — (56) (56) The funded status reflected above includes obligations attributable to our non-qualified Supplemental Executive Retirement Plan that is not funded with those plan assets presented above. However, we have set aside investments in corporate-owned life insurance policies to cover these obligations. The value of those investments, which are included in “other assets” on the accompanying balance sheets, is $48 and $64 as of April 30, 2015 and 2016, respectively. 64 The funded status is recorded on the accompanying consolidated balance sheets as follows: April 30, Accounts payable and accrued expenses Accrued postretirement benefits Net liability Accumulated other comprehensive income (loss), before tax: Net actuarial gain (loss) Prior service credit (cost) Pension Benefits Medical and Life Insurance Benefits 2015 2016 2015 2016 (4) (257) (261) $ (353) $ (4) (357) $ (4) (300) (304) $ (372) $ (4) (376) $ $ $ $ (3) (54) (57) $ (16) $ 18 2 $ (3) (53) (56) (13) 15 2 The following table compares our pension plans whose assets exceed their accumulated benefit obligations with those whose obligations exceed their assets. (As discussed above, we have no assets set aside for postretirement medical or life insurance benefits.) April 30, Plans with assets in excess of accumulated benefit obligation Plans with accumulated benefit obligation in excess of assets Total $ $ Plan Assets Accumulated Benefit Obligation Projected Benefit Obligation 2015 2016 2015 2016 2015 2016 53 $ — $ 50 $ — $ 52 $ 573 626 $ 594 594 $ 710 760 $ 776 776 $ 835 887 $ — 898 898 Pension expense. The following table shows the components of the pension expense recognized during each of the last three years. The amount for each year includes amortization of the prior service cost/credit and net actuarial loss/gain included in accumulated other comprehensive loss as of the beginning of the year. Service cost Interest cost Expected return on assets Amortization of: Prior service cost (credit) Net actuarial loss (gain) Net expense Pension Benefits 2014 2015 2016 $ $ 21 31 (40) 1 31 44 $ $ 22 34 (41) 1 22 38 $ $ 26 35 (40) 1 27 49 The prior service cost/credit, which represents the effect of plan amendments on benefit obligations, is amortized on a straight-line basis over the average remaining service period of the employees expected to receive the benefits. The net actuarial loss/gain results from experience different from that assumed or from a change in actuarial assumptions (including the difference between actual and expected return on plan assets), and is amortized over at least that same period. The estimated amount of prior service cost and net actuarial loss that will be amortized from accumulated other comprehensive loss into pension expense in 2017 is $1 and $25, respectively. 65 Other postretirement benefit expense. The following table shows the components of the postretirement medical and life insurance benefit expense that we recognized during each of the last three years. Service cost Interest cost Amortization of: Prior service cost (credit) Net actuarial loss (gain) Net expense Medical and Life Insurance Benefits 2014 2015 2016 $ $ 2 3 — — 5 $ $ 1 3 (2) 1 3 $ $ 1 2 (2) 1 2 The estimated amount of prior service credit and net actuarial loss that will be amortized from accumulated other comprehensive loss into postretirement medical and life insurance benefit expense in 2017 is $3 and $1, respectively. Other comprehensive income (loss). Prior service cost/credit and net actuarial loss/gain are recognized in other comprehensive income or loss (OCI) during the period in which they arise. These amounts are later amortized from accumulated OCI into pension and other postretirement benefit expense over future periods as described above. The following table shows the pre-tax effect of these amounts on OCI during each of the last three years. Pension Benefits Medical and Life Insurance Benefits 2014 2015 2016 2014 2015 2016 Prior service credit (cost) Net actuarial gain (loss) Amortization reclassified to earnings: Prior service cost (credit) Net actuarial loss (gain) Net amount recognized in OCI $ $ — $ 9 1 31 41 $ — $ (80) 1 22 (57) $ — $ (46) 1 27 (18) $ $ 10 (3) — — 7 $ $ 16 (3) (2) 1 12 $ — 1 (2) 1 — Assumptions and sensitivity. We use various assumptions to determine the obligations and expense related to our pension and other postretirement benefit plans. The weighted-average assumptions used in computing benefit plan obligations as of the end of the last two years were as follows: Discount rate Rate of salary increase Pension Benefits Medical and Life Insurance Benefits 2015 2016 2015 2016 4.09% 4.00% 4.02% 4.00% 4.09% n/a 3.96% n/a The weighted-average assumptions used in computing benefit plan expense during each of the last three years were as follows: Discount rate Rate of salary increase Expected return on plan assets Pension Benefits Medical and Life Insurance Benefits 2014 2015 2016 2014 2015 2016 4.08% 4.00% 7.50% 4.46% 4.00% 7.50% 4.09% 4.00% 7.00% 4.36% n/a n/a 4.67% n/a n/a 4.09% n/a n/a The discount rate represents the interest rate used to discount the cash-flow stream of benefit payments to a net present value as of the calculation date. A lower assumed discount rate increases the present value of the benefit obligation. We determined the discount rate 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 assumed rate of salary increase reflects the expected average annual increase in salaries as a result of inflation, merit increases, and promotions over the service period of the plan participants. A lower assumed rate decreases the present value of the benefit obligation. 66 The expected return on plan assets represents the long-term rate of return that we assume will be earned over the life of the pension assets. The assumption reflects expected capital market returns for each asset class, which are based on historical returns, adjusted for the expected effects of diversification and active management (net of fees). The assumed health care cost trend rates as of the end of the last two years were as follows: Health care cost trend rate assumed for next year Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) Year that the rate reaches the ultimate trend rate Medical and Life Insurance Benefits 2015 2016 7.50% 5.00% 2023 7.25% 5.00% 2024 A one percentage point change in the assumed health care cost trend rate would not have significantly changed the accumulated postretirement benefit obligation as of April 30, 2016, or the aggregate service and interest costs for 2016. Savings plans. We also sponsor various defined contribution benefit plans that together cover substantially all U.S. employees. Employees can make voluntary contributions in accordance with their respective plans, which include a 401(k) tax deferral option. We match a percentage of each employee’s contributions in accordance with plan terms. We expensed $10, $10, and $11 for matching contributions during 2014, 2015, and 2016, respectively. International plans. The information presented above for defined benefit plans and defined contribution benefit plans reflects amounts for U.S. plans only. Information about similar international plans is not presented due to immateriality. 10. STOCK-BASED COMPENSATION The Brown-Forman 2013 Omnibus Compensation Plan is our incentive compensation plan, which is designed to reward its participants (including our eligible officers, employees, and non-employee directors) for company performance. Under the Plan, we can grant stock-based incentive awards for up to 8,300,000 shares of common stock to eligible participants until July 28, 2023. As of April 30, 2016, awards for approximately 6,804,000 shares remain available for issuance under the Plan. We try to limit the source of shares delivered to participants under the Plan to treasury shares that we purchase from time to time on the open market (at times in connection with a publicly announced share repurchase program), in private transactions, or otherwise. The following table presents information about stock options and stock-settled stock appreciation rights (SSARs) granted under the Plan (or its predecessor plans) as of April 30, 2016, and for the year then ended. Outstanding at April 30, 2015 Granted Exercised Forfeited or expired Outstanding at April 30, 2016 Exercisable at April 30, 2016 Number of Underlying Shares (in thousands) Weighted Average Exercise Price per Award Weighted Average Remaining Contractual Term (years) Aggregate Intrinsic Value 3,817 378 (758) (11) 3,426 2,293 $ $ $ 48.46 102.25 36.88 87.71 56.83 41.24 5.0 3.6 $ $ 138 126 The total intrinsic value of options and SSARs exercised during 2014, 2015, and 2016 was $48, $35, and $47, respectively. 67 We grant stock options and SSARs at an exercise price equal to the market price of the underlying stock on the grant date. Stock options and SSARs become exercisable after three years from the first day of the fiscal year of grant and expire seven years after that date. The grant-date fair values of these awards granted during 2014, 2015, and 2016 were $14.84, $19.67, and $19.06 per award, respectively. We estimated the fair values using the Black-Scholes pricing model with the following assumptions: Risk-free interest rate Expected volatility Expected dividend yield Expected term (years) 2014 2015 2016 1.9% 22.5% 1.8% 6.75 2.2% 22.3% 1.7% 6.75 2.1% 19.1% 1.6% 6.75 We have also granted restricted stock units (RSUs), deferred stock units (DSUs), and shares of performance-based restricted stock (PBRS) under the Plan (or its predecessor plans). Approximately 274,000 shares underlying these awards, with a weighted- average remaining vesting period of 1.6 years, were nonvested at April 30, 2016. The following table summarizes the changes in the number of shares underlying these awards during 2016. Nonvested at April 30, 2015 Granted Adjusted for dividends or performance Vested Forfeited Nonvested at April 30, 2016 Number of Underlying Shares (in thousands) Weighted Average Fair Value at Grant Date 319 55 (1) (98) (1) 274 $ $ 72.25 119.37 68.43 62.59 79.36 85.22 For PBRS awards, performance is measured based on the relative ranking of the total shareholder return of our Class B common stock during the three-year performance period compared to that of the companies within the Standard & Poor’s Consumer Staples Index at the end of the performance period, with specific payout levels ranging from 50% to 150%. The total fair value of RSUs, PBRS awards, and DSUs vested during 2014, 2015, and 2016 was $11, $11, and $10, respectively. The accompanying consolidated statements of operations reflect compensation expense related to stock-based incentive awards on a pre-tax basis of $13 in 2014, $15 in 2015, and $15 in 2016, partially offset by deferred income tax benefits of $5 in 2014, $6 in 2015, and $6 in 2016. As of April 30, 2016, there was $13 of total unrecognized compensation cost related to non- vested stock-based compensation. That cost is expected to be recognized over a weighted-average period of 1.9 years. 11. INCOME TAXES We incur income taxes on the earnings of our U.S. and foreign operations. The following table, based on the locations of the taxable entities from which sales were derived (rather than the location of customers), presents the U.S. and foreign components of our income before income taxes: United States Foreign 2014 2015 2016 $ $ 797 150 947 $ $ 912 90 1,002 $ $ 1,184 305 1,489 The income shown above was determined according to GAAP. Because those standards sometimes differ from the tax rules used to calculate taxable income, there are differences between: (a) the amount of taxable income and pretax financial income for a year; and (b) the tax bases of assets or liabilities and their amounts as recorded in our financial statements. As a result, we recognize a current tax liability for the estimated income tax payable on the current tax return, and deferred tax liabilities (income tax payable on income that will be recognized on future tax returns) and deferred tax assets (income tax refunds from deductions that will be recognized on future tax returns) for the estimated effects of the differences mentioned above. 68 Deferred tax assets and liabilities as of the end of each of the last two years were as follows: 2015 2016 April 30, Deferred tax assets: Postretirement and other benefits Accrued liabilities and other Inventories Loss and credit carryforwards Valuation allowance Total deferred tax assets, net Deferred tax liabilities: Intangible assets Property, plant, and equipment Other Total deferred tax liabilities Net deferred tax liability $ $ $ 164 22 12 46 (27) 217 (207) (61) (31) (299) (82) $ 183 10 26 39 (25) 233 (225) (83) (9) (317) (84) As of April 30, 2016, the gross amounts of loss carryforwards include a $35 net operating loss in Brazil (no expiration); a U.K. non-trading loss of $31 (no expiration); a $51 net operating loss in Finland (expires in varying amounts between 2024 and 2026); a $19 net operating loss in Mexico (expires in varying amounts in 2017 and 2018); and other foreign net operating losses of $27 ($9 that do not expire and $18 that expire in varying amounts between 2017 and 2026). The $25 valuation allowance at April 30, 2016 ($27 at April 30, 2015), relates primarily to a $12 ($12 at April 30, 2015) net operating loss in Brazil. Although the losses in Brazil can be carried forward indefinitely, it is uncertain that we will realize sufficient taxable income to allow us to use these losses. The valuation allowance also includes $7 ($8 at April 30, 2015) related to other foreign net operating losses that expire between 2017 and 2026. The remaining valuation allowance relates to a $6 ($7 at April 30, 2015) non-trading loss carryforward in the United Kingdom that was generated during 2009. Although the non-trading losses can be carried forward indefinitely, we know of no significant transactions that will let us use them. During 2014, we deferred a tax benefit of $95 that resulted primarily from the release of certain deferred tax liabilities in connection with an intercompany transfer of assets, composed primarily of an intangible asset. We are amortizing the deferred benefit to tax expense over approximately six years for financial reporting purposes, in accordance with Accounting Standard Codification (ASC) 740-10-25-3(e) (Income Taxes) and ASC 810-45-8 (Consolidation), resulting in a tax benefit of $5 in 2014, $15 in 2015, and $16 in 2016. The remaining balance of the deferred benefit, which is included in “other liabilities” on the accompanying balance sheet, was $59 as of April 30, 2016. Deferred tax liabilities were not provided on undistributed earnings of foreign subsidiaries ($803 and $1,005 at April 30, 2015 and 2016, respectively) because we expect these undistributed earnings to be reinvested indefinitely outside the United States. If these amounts were not considered permanently reinvested, additional deferred tax liabilities of approximately $163 and $222 would have been provided as of April 30, 2015 and 2016, respectively. 69 Total income tax expense for a year includes the tax associated with the current tax return (“current tax expense”) and the change in the net deferred tax asset or liability (“deferred tax expense”). Our total income tax expense for each of the last three years was as follows: Current: U.S. federal Foreign State and local Deferred: U.S. federal Foreign State and local 2014 2015 2016 $ $ $ 243 49 1 293 3 (6) (2) (5) 288 $ $ $ 259 42 11 312 15 (11) 2 6 318 $ $ $ 347 47 18 412 24 (17) 3 10 422 Our consolidated effective tax rate usually differs from current statutory rates due to the recognition of amounts for events or transactions with no tax consequences. The following table reconciles our effective tax rate to the federal statutory tax rate in the United States: U.S. federal statutory rate State taxes, net of U.S. federal tax benefit Income taxed at other than U.S. federal statutory rate Tax benefit from U.S. manufacturing Tax impact of sale of business Amortization of deferred tax benefit from intercompany transactions Other, net Effective rate Percent of Income Before Taxes 2014 2015 2016 35.0 % 0.7 % (2.2)% (2.8)% — % (0.4)% 0.2 % 30.5 % 35.0 % 1.0 % (0.5)% (2.5)% — % (1.6)% 0.3 % 31.7 % 35.0 % 1.0 % (2.5)% (2.4)% (1.1)% (1.6)% (0.1)% 28.3 % At April 30, 2016, we had $9 of gross unrecognized tax benefits, $6 of which would reduce our effective income tax rate if recognized. A reconciliation of the beginning and ending unrecognized tax benefits follows: Unrecognized tax benefits at beginning of year Additions for tax positions provided in prior periods Additions for tax positions provided in current period Decreases for tax positions provided in prior years Settlements of tax positions in the current period Lapse of statutes of limitations Unrecognized tax benefits at end of year 2014 2015 2016 $ $ 11 1 1 (1) (1) — 11 $ $ 11 2 1 (1) — — 13 $ $ 13 1 — (4) (1) — 9 We file income tax returns in the United States, including several state and local jurisdictions, as well as in several other countries in which we conduct business. The major jurisdictions and their earliest fiscal years that are currently open for tax examinations are 2011 for one state in the United States; 2013 in the United Kingdom; 2012 in Australia and Ireland; 2011 in Brazil and the Netherlands; 2010 in Poland; 2008 in Finland; and 2005 in Mexico. The audit of our fiscal 2014 U.S. federal tax return was concluded in the first quarter of fiscal 2016. In addition, we are participating in the Internal Revenue Service’s Compliance Assurance Program for our fiscal 2016 tax year. We believe there will be no material change in our gross unrecognized tax benefits in the next 12 months. 70 12. 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: Net income available to common stockholders Share data (in thousands): Basic average common shares outstanding Dilutive effect of stock-based awards Diluted average common shares outstanding Basic earnings per share Diluted earnings per share 2014 2015 2016 659 $ 684 $ 1,067 213,454 1,628 215,082 211,593 1,490 213,083 3.08 3.06 $ $ 3.23 3.21 $ $ 202,977 1,303 204,280 5.26 5.22 $ $ $ We excluded common stock-based awards for approximately 309,000 shares, 361,000 shares, and 453,000 shares from the calculation of diluted earnings per share for 2014, 2015, and 2016, respectively, because they were not dilutive for those periods under the treasury stock method. 71 13. ACCUMULATED OTHER COMPREHENSIVE INCOME The following table summarizes the change in each component of AOCI, net of tax, during 2016: Balance at April 30, 2015 Net other comprehensive income (loss) Balance at April 30, 2016 Currency Translation Adjustments Cash Flow Hedge Adjustments Postretirement Benefits Adjustments Total AOCI $ $ (108) (23) (131) $ $ 28 (17) 11 $ $ (220) (10) (230) $ $ (300) (50) (350) The following table presents the components of net other comprehensive income (loss) during each of the last three years: Pre-Tax Tax Net Year Ended April 30, 2014 Currency translation adjustments Cash flow hedge adjustments: Net gain (loss) on hedging instruments Reclassification to earnings1 Postretirement benefits adjustments: Net actuarial gain (loss) and prior service cost Reclassification to earnings2 Net other comprehensive income (loss) Year Ended April 30, 2015 Currency translation adjustments Cash flow hedge adjustments: Net gain (loss) on hedging instruments Reclassification to earnings1 Postretirement benefits adjustments: Net actuarial gain (loss) and prior service cost Reclassification to earnings2 Net other comprehensive income (loss) Year Ended April 30, 2016 Currency translation adjustments Cash flow hedge adjustments: Net gain (loss) on hedging instruments Reclassification to earnings1 Postretirement benefits adjustments: Net actuarial gain (loss) and prior service cost Reclassification to earnings2 Net other comprehensive income (loss) $ $ $ $ $ $ (2) $ (2) $ (7) — 18 32 41 $ 3 — (7) (12) (18) $ (4) (4) — 11 20 23 (120) $ 6 $ (114) 96 (41) (70) 22 (113) $ (40) 17 26 (8) 1 $ (22) $ (1) $ 30 (60) (47) 30 (69) $ (10) 23 19 (12) 19 $ 56 (24) (44) 14 (112) (23) 20 (37) (28) 18 (50) 1Pre-tax amount is classified as net sales in the accompanying consolidated statements of operations. 2Pre-tax amount is a component of pension and other postretirement benefit expense (as shown in Note 9, except for amounts related to non- U.S. benefit plans, about which no information is presented in Note 9 due to immateriality). 72 14. SUPPLEMENTAL INFORMATION The following table presents net sales by product category: Net sales: Spirits Wine The following table presents net sales by geography: Net sales: United States Europe Australia Other 2014 2015 2016 $ $ $ $ 2014 3,765 181 3,946 1,624 1,264 469 589 3,946 $ $ $ $ 2015 3,903 193 4,096 1,780 1,270 431 615 4,096 $ $ $ $ 2016 3,809 202 4,011 1,838 1,242 379 552 4,011 Net sales are attributed to countries based on where customers are located. The net book value of property, plant, and equipment located in Mexico was $40 and $33 as of April 30, 2015 and 2016, respectively. Other long-lived assets located outside the United States are not significant. We have concluded that our business constitutes a single operating segment. 15. GAIN ON SALE OF BUSINESS On March 1, 2016, we sold our Southern Comfort and Tuaca brands to Sazerac Company, Inc. for $543 in cash (subject to a post-closing inventory adjustment). The total book value of the related business assets included in the sale was $49, and consisted of $11 in inventories, $16 in goodwill, and $22 in other intangible assets. As a result of the sale, we recognized a gain of $485 (net of transaction costs of $9) during the fourth quarter of fiscal 2016. 16. SUBSEQUENT EVENTS Stock split. On May 26, 2016, our Board of Directors approved a two-for-one stock split, to be paid in the form of a stock dividend, for all outstanding shares of our Class A and Class B common stock. Implementing the stock split is subject to the approval of an increase in the number of authorized shares of Class A common stock at our annual meeting of shareholders, scheduled to be held on July 28, 2016. If approved, we expect the new shares will be distributed on or about August 18, 2016, to shareholders of record on or about August 8, 2016. Acquisition. On June 1, 2016, we acquired 90% of the voting equity interests in The BenRiach Distillery Company Limited for approximately $307 in cash. The acquisition included our assumption of the company’s debts and transaction-related obligations totaling approximately $66, which we have since paid. The acquisition, which brings three single malt Scotch whisky brands into our whiskey portfolio, includes brand trademarks, inventories, three malt distilleries, a bottling plant, and BenRiach’s headquarters in Edinburgh, Scotland. The transaction includes a put and call option agreement for the remaining 10% equity shares. Under that agreement, we may choose (or be required) to purchase the remaining 10% for approximately 24 million British pounds (approximately $34 at the exchange rate on June 1, 2016) during the one-year period ending November 14, 2017. 73 QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (Expressed in millions, except per share amounts) Second Quarter $ 1,135 609 208 0.98 0.97 Fiscal 2015 Third Quarter $ 1,093 553 186 0.88 0.87 Fourth Quarter 947 $ 527 140 0.67 0.66 Year $ 4,096 2,183 684 3.23 3.21 First Quarter 900 $ 491 156 0.75 0.75 Second Quarter $ 1,096 586 200 0.98 0.97 Fiscal 2016 Third Quarter $ 1,083 555 190 0.94 0.94 Fourth Quarter 933 $ 513 522 2.62 2.60 Year $ 4,011 2,144 1,067 5.26 5.22 — 0.290 93.09 81.38 93.62 81.89 0.630 0.315 98.00 85.33 97.97 85.43 — 0.315 95.23 86.85 93.99 86.71 1.210 1.210 98.00 81.38 97.97 81.89 0.630 0.315 — 0.315 0.680 0.340 — 0.340 1.310 1.310 119.49 93.09 108.41 90.65 122.30 105.87 110.81 95.21 117.53 99.50 106.88 90.60 112.24 100.40 103.39 93.25 122.30 93.09 110.81 90.60 First Quarter 921 $ 495 150 0.70 0.70 Net sales Gross profit Net income Basic EPS Diluted EPS Cash dividends per share: Declared Paid 0.580 0.290 Market price per share: Class A high Class A low Class B high Class B low Notes: 95.29 85.98 97.15 86.48 1. Quarterly amounts may not add to amounts for the year due to rounding. Further, quarterly earnings per share (EPS) amounts may not add to amounts for the year because quarterly and annual EPS calculations are performed separately. 2. Results for the fourth quarter of fiscal 2016 include a gain of $485 million on the divestiture of our Southern Comfort and Tuaca brands. 74 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) (our principal executive and principal financial officers), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of fiscal 2016. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and procedures: are effective to ensure that information required to be disclosed by the company in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and include controls and procedures designed to ensure that information required to be disclosed by the company in such reports is accumulated and communicated to the company’s management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure. Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the quarter ended April 30, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Management’s Report on Internal Control over Financial Reporting and Report of Independent Registered Public Accounting Firm. Management’s report on our internal control over financial reporting as of April 30, 2016, and our independent registered public accounting firm’s report on our internal control over financial reporting are set forth in “Item 8. Financial Statements and Supplementary Data.” Item 9B. Other Information None. Item 10. Directors, Executive Officers, and Corporate Governance PART III Information on our Executive Officers is included under the caption “Employees and Executive Officers” in Part I of this report. For the other information required by this item, see the following sections of our definitive proxy statement for the Annual Meeting of Stockholders to be held July 28, 2016, which information is incorporated into this report by reference: (a) “Election of Directors” (for biographical information on directors and family relationships); (b) “Code of Conduct” (for information on our Code of Ethics); (c) “Section 16(a) Beneficial Ownership Reporting Compliance” (for information on compliance with Section 16 of the Exchange Act); (d) “Corporate Governance and Nominating Committee” (for information on the procedures by which security holders may recommend nominees to the Company’s Board of Directors); and (e) “Corporate Governance” (for information on our Audit Committee). Item 11. Executive Compensation For the information required by this item, refer to the following sections of our definitive proxy statement for the Annual Meeting of Stockholders to be held July 28, 2016, which information is incorporated into this report by reference: (a) “Compensation Discussion and Analysis”; (b) “Compensation Tables”; (c) “Director Compensation”; and (d) “Compensation Committee Interlocks and Insider Participation.” Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters For equity compensation plan information, refer to “Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.” For the other information required by this item, refer to the section entitled “Stock Ownership” of our definitive proxy statement for the Annual Meeting of Stockholders to be held July 28, 2016, which information is incorporated into this report by reference. Item 13. Certain Relationships and Related Transactions, and Director Independence For the information required by this item, refer to the following sections of our definitive proxy statement for the Annual Meeting of Stockholders to be held July 28, 2016, which information is incorporated into this report by reference: (a) “Certain Relationships and Related Transactions”; and (b) “Our Independent Directors.” 75 Item 14. Principal Accounting Fees and Services For the information required by this item, refer to the following sections of our definitive proxy statement for the Annual Meeting of Stockholders to be held July 28, 2016, which information is incorporated into this report by reference: (a) “Fees Paid to Independent Registered Public Accounting Firm”; and (b) “Audit Committee Pre-Approval Policies and Procedures.” Item 15. Exhibits and Financial Statement Schedules PART IV (a)(1) Financial Statements The following documents are included in Item 8 of this report: Consolidated Statements of Operations Consolidated Statements of Comprehensive Income Consolidated Balance Sheets Consolidated Statements of Cash Flows Consolidated Statements of Stockholders’ Equity Notes to Consolidated Financial Statements Report of Independent Registered Public Accounting Firm (a)(2) Financial Statement Schedule: Schedule II – Valuation and Qualifying Accounts Page 49 50 51 52 53 54 48 82 We have omitted all other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission either because they are not required under the related instructions, because the information required is included in the consolidated financial statements and notes thereto, or because they do not apply. (a)(3) Exhibits: The following documents are filed with this report: Exhibit Index 12 21 23 31.1 31.2 32 101 Statement re Computation of Ratio of Earnings to Fixed Charges. Subsidiaries of the Registrant. Consent of PricewaterhouseCoopers LLP, independent registered public accounting firm. CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002. CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002. CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (not considered to be filed). The following materials from Brown-Forman Corporation’s Annual Report on Form 10-K for the fiscal year ended April 30, 2016, formatted in XBRL (eXtensible Business Reporting Language): (a) Consolidated Statements of Operations, (b) Consolidated Statements of Comprehensive Income, (c) Consolidated Balance Sheets, (d) Consolidated Statements of Cash Flows, (e) Consolidated Statements of Stockholders’ Equity, and (f) Notes to Consolidated Financial Statements. 76 The following documents have been previously filed: Exhibit Index 3.1 3.2 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 Restated Certificate of Incorporation of registrant, incorporated into this report by reference to Exhibit 3.1 of Brown- Forman Corporation’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2012, filed on September 5, 2012 (File No. 002-26821). By-laws of registrant, as amended and restated on May 21, 2014, incorporated into this report by reference to Exhibit 3.2 of Brown-Forman Corporation’s Form 8-K filed on May 22, 2014 (File No. 002-26821). Indenture dated as of April 2, 2007, between Brown-Forman Corporation and U.S. Bank National Association, as Trustee, incorporated into this report by reference to Exhibit 4.1 of Brown-Forman Corporation’s Form filed on April 3, 2007 (File No. 002-26821). First Supplemental Indenture dated as of December 13, 2010, between Brown-Forman Corporation and U.S. Bank National Association, as Trustee, incorporated into this report by reference to Exhibit 4.2 of Brown-Forman Corporation’s Form S-3ASR Registration Statement filed on December 13, 2010 (File No. 333-171126). Second Supplemental Indenture dated as of June 24, 2015, between Brown-Forman Corporation and U.S. Bank National Association, as Trustee, incorporated into this report by reference to Exhibit 4.4 of Brown-Forman Corporation’s Form 8-K filed on June 29, 2015 (File No. 002-26821). Form of 1.00% Note due 2018, incorporated into this report by reference to Exhibit 4.4 of Brown-Forman Corporation’s Form 8-K filed on December 12, 2012 (File No. 002-26821). Form of 2.25% Note due 2023, incorporated into this report by reference to Exhibit 4.5 of Brown-Forman Corporation’s Form 8-K filed on December 12, 2012 (File No. 002-26821). Form of 3.75% Note due 2043, incorporated into this report by reference to Exhibit 4.6 of Brown-Forman Corporation’s Form 8-K filed on December 12, 2012 (File No. 002-26821). Officer’s Certificate dated December 12, 2012, pursuant to Sections 1.01, 2.02, and 3.01 of the Indenture dated as of April 2, 2007, as supplemented by the First Supplemental Indenture dated as of December 13, 2010, between Brown- Forman Corporation and U.S. Bank National Association, as Trustee, setting forth the terms of the 1.00% Notes due 2018, the 2.25% Notes due 2023, and the 3.75% Notes due 2043, incorporated into this report by reference to Exhibit 4.3 of Brown-Forman Corporation’s Form 8-K filed on December 12, 2012 (File No. 002-26821). Officer’s Certificate dated June 29, 2015, pursuant to Sections 1.02, 2.02, 3.01 and 3.03 of the Indenture dated as of April 2, 2007, as supplemented by the First Supplemental Indenture dated as of December 13, 2010 and the Second Supplemental Indenture dated as of June 24, 2015, between Brown-Forman Corporation and U.S. Bank National Association, as Trustee, setting forth the terms of the 4.500% Notes due 2045, incorporated into this report by reference to Exhibit 4.3 of Brown-Forman Corporation’s Form S-3ASR Registration Statement filed on June 24, 2015 (File No. 333-205183). Form of 4.500% Notes due 2045, incorporated into this report by reference to Exhibit 4.5 of Brown-Forman Corporation’s Form 8-K filed on June 29, 2015 (File No. 002-26821). A description of the Brown-Forman Savings Plan, incorporated into this report by reference to page 10 of Brown- Forman Corporation’s definitive proxy statement filed on June 27, 1996, in connection with its 1996 Annual Meeting of Stockholders (File No. 001-00123).* A description of the Brown-Forman Corporation Nonqualified Savings Plan, incorporated into this report by reference to Exhibit 4.1 of Brown-Forman Corporation’s Form S-8 Registration Statement filed on September 24, 2010 (File No. 333-169564).* Brown-Forman Corporation 2004 Omnibus Compensation Plan, as amended, incorporated into this report by reference to Exhibit A of Brown-Forman Corporation’s proxy statement filed on June 26, 2009, in connection with its 2009 Annual Meeting of Stockholders (File No. 002-26821).* Form of Employee Stock Appreciation Right Award Agreement, incorporated into this report by reference to Exhibit 10(g) of Brown-Forman Corporation’s Form 8-K filed on August 2, 2006 (File No. 002-26821).* Form of Non-Employee Director Stock Appreciation Right Award Agreement, incorporated into this report by reference to Exhibit 10(i) of Brown-Forman Corporation’s Form 8-K filed on August 2, 2006 (File No. 002-26821).* 2010 Form of Employee Stock-Settled Stock Appreciation Right Award Agreement, incorporated into this report by reference to Exhibit 10.1 of Brown-Forman Corporation’s Form 8-K filed on July 23, 2010 (File No. 002-26821).* 2010 Form of Non-Employee Director Stock-Settled Stock Appreciation Right Award Agreement, incorporated into this report by reference to Exhibit 10.2 of Brown-Forman Corporation’s Form 8-K filed on July 23, 2010 (File No. 002-26821).* 2010 Form of Restricted Stock Award Agreement, incorporated into this report by reference to Exhibit 10.3 of Brown- Forman Corporation’s Form 8-K filed on July 23, 2010 (File No. 002-26821).* 2010 Form of Restricted Stock Unit Award Agreement, incorporated into this report by reference to Exhibit 10.4 of Brown-Forman Corporation’s Form 8-K filed on July 23, 2010 (File No. 002-26821).* 77 Exhibit Index 10.10 10.11 10.12 10.13 10.14 10.15 10.16 10.17 10.18 10.19 10.20 Brown-Forman Corporation Amended and Restated Supplemental Executive Retirement Plan and First Amendment thereto, incorporated into this report by reference to Exhibit 10(a) of Brown-Forman Corporation’s Annual Report on Form 10-K for the year ended April 30, 2010, filed on June 25, 2010 (File No. 002-26821).* Second Amendment to the Brown-Forman Corporation Amended and Restated Supplemental Executive Retirement Plan, incorporated into this report by reference to Exhibit 10(a) of Brown-Forman Corporation’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2011, filed on March 9, 2011 (File No. 002-26821).* Five-Year Credit Agreement, dated as of November 18, 2011, among Brown-Forman Corporation, certain borrowing subsidiaries and certain lenders party thereto, Barclays Capital as Syndication Agent, Bank of America, N.A. and Citibank, N.A., as Co-Documentation Agents, U.S. Bank National Association, as Administrative Agent, and U.S. Bank National Association, Barclays Capital, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets Inc. as Joint Lead Arrangers and Joint Bookrunners, incorporated into this report by reference to Exhibit 10.1 of Brown-Forman Corporation’s Form 8-K filed on November 21, 2011 (File No. 002-26821). Amendment No. 1 to Five-Year Credit Agreement, dated as of September 27, 2013, among Brown-Forman Corporation, the Lenders party to the Credit Agreement, and U.S. Bank National Association, as Administrative Agent, incorporated into this report by reference to Exhibit 10 of Brown-Forman Corporation’s Quarterly Report on Form 10-Q for the quarter ended October 31, 2013, filed on December 4, 2013 (File No. 002-26821). 364-Day Credit Agreement, dated as of May 6, 2016, among Brown-Forman Corporation, certain lenders party thereto, Barclays Capital, as Syndication Agent, Bank of America, N.A. and Citibank, N.A. as Co-Documentation Agents, U.S. Bank National Association, as Administrative Agent, and U.S. Bank National Association, Barclays Capital, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Citigroup Global Markets, Inc., as Joint Lead Arrangers and Joint Bookrunners, incorporated into this report by reference to Exhibit 10.1 of Brown-Forman Corporation’s Form 8-K filed on May 6, 2016 (File No. 002-26821). Brown-Forman Corporation Amended and Restated Non-Employee Director Deferred Stock Unit Program, incorporated into this report by reference to Exhibit 10.2 of Brown-Forman Corporation’s Form 8-K filed on July 26, 2013 (File No. 002-26821).* Brown-Forman Corporation 2013 Omnibus Compensation Plan, incorporated into this report by reference to Exhibit 10.1 of Brown-Forman Corporation’s Form 8-K filed on July 26, 2013 (File No. 002-26821).* Form of Employee Stock-Settled Stock Appreciation Right Award Agreement, incorporated into this report by reference to Exhibit 10.3 of Brown-Forman Corporation’s Form 8-K filed on July 26, 2013 (File No. 002-26821).* Form of Restricted Stock Unit Award Agreement, incorporated into this report by reference to Exhibit 10.4 of Brown- Forman Corporation’s Form 8-K filed on July 26, 2013 (File No. 002-26821).* Form of Restricted Stock Award Agreement, incorporated into this report by reference to Exhibit 10.5 of Brown- Forman Corporation’s Form 8-K filed on July 26, 2013 (File No. 002-26821).* Paul C. Varga July 25, 2013 Special Restricted Stock Award Agreement, incorporated into this report by reference to Exhibit 10.1 of Brown-Forman Corporation’s Form 8-K filed on July 30, 2014 (File No. 002-26821).* * Indicates management contract, compensatory plan, or arrangement. 78 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES BROWN-FORMAN CORPORATION (Registrant) /s/ Paul C. Varga By: Paul C. Varga Chief Executive Officer and Chairman of the Company Date: June 15, 2016 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities on June 15, 2016, as indicated: /s/ Geo. Garvin Brown IV By: Geo. Garvin Brown IV Director, Chairman of the Board /s/ Paul C. Varga By: Paul C. Varga Director, Chief Executive Officer, and Chairman of the Company /s/ Joan C. Lordi Amble By: Joan C. Lordi Amble Director /s/ Patrick Bousquet-Chavanne By: Patrick Bousquet-Chavanne Director 79 /s/ Campbell P. Brown By: Campbell P. Brown Director /s/ Martin S. Brown, Jr. By: Martin S. Brown, Jr. Director /s/ Stuart R. Brown By: Stuart R. Brown Director /s/ Bruce L. Byrnes By: Bruce L. Byrnes Director /s/ John D. Cook By: John D. Cook Director /s/ Marshall B. Farrer By: Marshall B. Farrer Director /s/ Laura L. Frazier By: Laura L. Frazier Director /s/ Sandra A. Frazier By: Sandra A. Frazier Director 80 /s/ Augusta Brown Holland By: Augusta Brown Holland Director /s/ Michael J. Roney By: Michael J. Roney Director /s/ Michael A. Todman By: Michael A. Todman Director /s/ James S. Welch, Jr. By: James S. Welch, Jr. Director /s/ Jane C. Morreau By: Jane C. Morreau Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Brian P. Fitzgerald By: Brian P. Fitzgerald Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) 81 BROWN-FORMAN CORPORATION AND SUBSIDIARIES SCHEDULE II – VALUATION AND QUALIFYING ACCOUNTS For the Years Ended April 30, 2014, 2015, and 2016 (Expressed in millions) Col. A Description Col. B Balance at Beginning of Period Col. C(1) Additions Charged to Costs and Expenses Col. C(2) Additions Charged to Other Accounts Col. D Col. E Deductions Balance at End of Period 2014 Allowance for Doubtful Accounts 2015 Allowance for Doubtful Accounts 2016 Allowance for Doubtful Accounts (1) Doubtful accounts written off, net of recoveries. $ $ $ 9 9 10 $ $ $ — 2 1 $ $ $ — — — $ $ $ — $ 1 (1) $ 2 (1) $ 9 10 9 82 Exhibit 12 RATIO OF EARNINGS TO FIXED CHARGES The following table sets forth our historical ratio of earnings to fixed charges for the periods indicated. Earnings consist of income from continuing operations before income taxes, excluding undistributed minority interest in income of affiliates and fixed charges. Fixed charges consist of interest charges, whether expensed or capitalized and is inclusive of that portion of tax reserves we believe to be representative of interest and that portion of rental expense we believe to be representative of interest. Ratio of earnings to fixed charges 2012 22.1x For the Years Ended April 30, 2013 20.9x 2014 26.9x 2015 28.1x 2016 28.8x SUBSIDIARIES OF THE REGISTRANT Exhibit 21 Percentage of State or Jurisdiction Securities Owned Of Incorporation Name Amercain Investments, C.V. AMG Trading, L.L.C. BF FINCO, S. de R.L. de C.V. B-F Holding Hungary 2 Kft. B-F Korea, L.L.C. BFC Tequila Limited Brown-Forman Arrow Continental Europe, L.L.C. Brown-Forman Australia Pty. Ltd. Brown-Forman Beverages Europe, Ltd. Brown-Forman Beverages Japan, L.L.C. Brown-Forman Beverages North Asia, L.L.C. Brown-Forman Beverages (Shanghai) Co., Ltd. Brown-Forman Beverages Worldwide, Comercio de Bebidas Ltda. Brown-Forman Bulgaria, e.o.o.d. Brown-Forman Colombia S.A.S Brown-Forman Czechia, s.r.o. Brown-Forman Deutschland GmbH Brown-Forman Dutch Holding, B.V. Brown-Forman Finland Oy Brown-Forman France Brown-Forman Greece E.P.E. Brown-Forman Holding Mexico S.A. de C.V. Brown-Forman Hong Kong Ltd. Brown-Forman Hungary 1 Kft. Brown-Forman Hungary Kft. Brown-Forman International, Inc. Brown-Forman Italy, Inc. Brown-Forman Korea Ltd. Brown-Forman Latvia L.L.C. Brown-Forman Netherlands, B.V. Brown-Forman Polska Sp. z o.o. Brown-Forman Ro S.R.L. Brown-Forman Rus L.L.C. Brown-Forman S1, d.o.o. Brown-Forman S2, d.o.o. Brown-Forman South Africa Pty Ltd. Brown-Forman Spain, S.L. Brown-Forman Spirits (Shanghai) Co., Ltd. Brown-Forman Spirits Trading, L.L.C. Brown-Forman Tequila Mexico, S. de R.L. de C.V. Brown-Forman Thailand, L.L.C. Brown-Forman Worldwide, L.L.C. Brown-Forman Worldwide (Shanghai) Co., Ltd. Canadian Mist Distillers, Limited Chambord Liqueur Royale de France 100% (1) 100% 100% (2) 100% (3) 100% (4) 100% (5) 100% 100% (4) 100% (4) 100% 100% 100% (6) 100% (7) 100% (4) 100% (4) 100% (8) 100% (9) 100% (4) 100% (4) 100% (4) 100% (10) 100% (11) 100% (12) 100% (13) 100% (4) 100% 100% 100% (12) 100% (4) 100% (14) 100% (8) 100% (10) 100% (15) 100% (4) 100% (4) 100% (4) 100% (4) 100% (6) 100% (4) 100% (16) 100% 100% 100% (17) 100% 100% Netherlands Delaware Mexico Hungary Delaware Ireland Kentucky Australia United Kingdom Delaware Delaware China Brazil Bulgaria Colombia Czech Republic Germany Netherlands Finland France Greece Mexico Hong Kong Hungary Hungary Delaware Kentucky Korea Latvia Netherlands Poland Romania Russia Serbia Slovenia South Africa Spain China Turkey Mexico Delaware Delaware China Ontario, Canada France Name Clintock Limited Cosesa-BF S. de R.L. de C.V. Distillerie Tuoni e Canepa S.R.L. Early Times Distillers Company Finlandia Vodka Worldwide Ltd. Jack Daniel Distillery, Lem Motlow, Prop., Inc. Jack Daniel's Properties, Inc. Limited Liability Company Brown-Forman Ukraine Longnorth Limited Lothian Shelf (724) Limited Magnolia Investments of Alabama, L.L.C. SCHE Properties Limited Slane Castle Irish Whiskey Limited Sonoma-Cutrer Vineyards, Inc. Southern Comfort Properties, Inc. Valle de Amatitan, S.A. de C.V. Washington Investments, L.L.C. Percentage of State or Jurisdiction Securities Owned Of Incorporation 100% (5) (18) 100% (19) 100% (20) 100% 100% 100% (21) 100% 100% 100% (14) (18) 100% (3) 100% (22) 100% (23) 100% (4) 100% 100% 100% (16) 100% Ireland Mexico Italy Delaware Finland Tennessee Delaware Ukraine Ireland Scotland Delaware Ireland Ireland California California Mexico Kentucky The companies listed above constitute all active subsidiaries in which Brown-Forman Corporation owns, either directly or indirectly, the majority of the voting securities. No other active affiliated companies are controlled by Brown-Forman Corporation. (1) (2) (3) (4) (5) (6) (7) (8) (9) Owned 99% by Brown-Forman Hungary 1 Kft. and 1% by B-F Holding Hungary 2 Kft. Owned 99% by Brown-Forman Dutch Holding B.V. and 1% by Brown-Forman Beverages Europe, Ltd. Owned by Brown-Forman Hungary 1 Kft. Owned by Brown-Forman Netherlands, B.V. Owned by Longnorth Limited. Owned by Brown-Forman Hong Kong Ltd. Owned 99% by Brown-Forman Corporation and 1% by Early Times Distillers Company. Owned 81.8% by Brown-Forman Netherlands, B.V. and 18.2% by Brown-Forman Beverages Europe, Ltd. Owned by Brown-Forman Beverages Europe, Ltd. (10) Owned 90% by Brown-Forman Netherlands B.V. and 10% Brown-Forman Dutch Holding B.V. (11) Owned 52.01% by Brown-Forman Netherlands, B.V. and 47.99% by Brown-Forman Corporation. (12) Owned by B-F Korea, L.L.C. (13) Owned by AMG Trading, L.L.C. (14) Owned by Amercain Investments C.V. (15) Owned 90% by Brown-Forman Netherlands B.V. and 10% Brown-Forman Deutschland GmbH. (16) Owned 99% by Brown-Forman Holding Mexico S.A. de C.V. and 1% by Early Times Distillers Company. (17) Owned by Brown-Forman Beverages North Asia, L.L.C. (18) Includes qualifying shares assigned to Brown-Forman Corporation. (19) Owned 99.9972% by BF FINCO S. de R.L. de C.V. and 0.00277% by Brown-Forman Beverages Europe, Ltd. (20) Owned 63% by Brown-Forman Italy, Inc. and 37% by Brown-Forman Netherlands, B.V. (21) Owned by Jack Daniel's Properties, Inc. (22) Owned by Jack Daniel Distillery, Lem Motlow, Prop., Inc. (23) Owned by Clintock Limited. Consent of Independent Registered Public Accounting Firm Exhibit 23 We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-205183) and S-8 (Nos. 333-38649, 333-74567, 333-89294, 333-126988, 333-117630, 333-169564, and 333-190122) of Brown-Forman Corporation of our report dated June 15, 2016 relating to the financial statements, financial statement schedule, and the effectiveness of internal control over financial reporting, which appears in this Form 10-K. /s/ PricewaterhouseCoopers LLP Louisville, Kentucky June 15, 2016 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, Paul C. Varga, certify that: 1. I have reviewed this Annual Report on Form 10-K of Brown-Forman Corporation; 2. 3. 4. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: June 15, 2016 By: /s/ Paul C. Varga Paul C. Varga Chief Executive Officer and Chairman of the Company Exhibit 31.2 1. 2. 3. 4. CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002 I, Jane C. Morreau, certify that: I have reviewed this Annual Report on Form 10-K of Brown-Forman Corporation; Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Dated: June 15, 2016 By: /s/ Jane C. Morreau Jane C. Morreau Executive Vice President and Chief Financial Officer Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Brown-Forman Corporation (“the Company”) on Form 10-K for the period ended April 30, 2016, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned hereby certifies, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, in the capacity as an officer of the Company, that: (1) (2) The Report fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934; and The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: June 15, 2016 By: By: /s/ Paul C. Varga Paul C. Varga Chief Executive Officer and Chairman of the Company /s/ Jane C. Morreau Jane C. Morreau Executive Vice President and Chief Financial Officer A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This certificate is being furnished solely for purposes of Section 906 and is not being filed as part of the Report. (This page intentionally left blank.)                         (This page intentionally left blank.)                         CORPORATE INFORMATION CORPORATE HEADQUARTERS 850 Dixie Highway / Louisville, Kentucky 40210 / (502) 585-1100 www.brown-forman.com / brown-forman@b-f.com information, future events, or otherwise. For a description of these risks and uncer- tainties, please see “Forward-Looking Statement Information”, which precedes Part I, Item 1, Business, as well as Item 1A, Risk Factors of the Form 10-K included with this 2016 Annual Report. LISTED New York Stock Exchange — BFA/BFB STOCKHOLDERS As of April 30, 2016, there were 2,755 holders of record of Class A Common Stock and 5,171 holders of record of Class B Common Stock. Stockholders reside in all 50 states and in 20 foreign countries. REGISTRAR, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT Computershare web.queries@computershare.com (866) 622-1917 (U.S., Canada, Puerto Rico) (781) 575-4735 (International) P.O. Box 30170 / College Station, Texas 77842-3170 EMPLOYEES As of April 30, 2016, Brown-Forman employed approximately 4,600 people, including about 200 employed on a part-time or temporary basis. Brown-Forman Corporation is committed to equality of opportunity in all aspects of employment. It has been and will continue to be the policy of Brown-Forman to provide full and equal employment opportunities to all employees and potential employees without regard to race, color, religion, national or ethnic origin, veteran status, age, gender, gender identity or expression, sexual orientation, genetic information, physical or mental disability, or any other legally protected status. It is also the policy of Brown-Forman to take affirmative action to employ and to advance in employment, all persons regardless of race, color, religion, national or ethnic origin, veteran status, age, gender, gender identity or expression, sexual orientation, genetic information, physical or mental disability or any other legally protected status, and to base all employment decisions only on valid job requirements. This policy applies to all terms, conditions and privileges of employment, such as those per- taining to selection, training, transfer, promotion, compensation, and educational assistance programs. FORM 10-K Our 2016 Form  10-K is included with this 2016 Annual Report in its entirety except for exhibits. Interested stockholders may obtain without charge a copy of our Form 10-K, or a copy of any exhibit, upon written request to: Stockholder Services, Brown-Forman Corporation, 850 Dixie Highway, Louisville, Kentucky 40210. The Form 10-K can also be downloaded from the company’s website at www.brown-forman.com. Click on the Investors section of the website and then on Financial Reports & Filings to view the Form 10-K and other important documents. FORWARD-LOOKING STATEMENTS This 2016 Annual Report, the embedded electronic content, and the Fiscal 2016 Videos referenced herein contain “forward-looking statements” as defined under U.S. federal securities laws. By their nature, forward-looking statements involve risks, uncertainties and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new USE OF NON-GAAP FINANCIAL INFORMATION Certain matters discussed in this Annual Report include measures not derived in accordance with generally accepted accounting principles (“GAAP”), including “return on average invested capital” and “underlying” changes in income statement line items. Reconciliations of these measures to the most closely comparable GAAP measures, and reasons for the company’s use of these measures, are presented in Part II, Item 7, around “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading, “Non-GAAP Financial Measures” of the Form 10-K incorporated into this 2016 Annual Report. INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP STOCK PERFORMANCE GRAPH This graph compares the cumulative total shareholder return of our Class  B Common Stock against the Standard & Poor’s 500 Stock Index, the Dow Jones U.S. Consumer Goods Index, and the Dow Jones U.S. Food & Beverage Index. The graph assumes $100 was invested on April 30, 2011, and that all dividends were reinvested. The cumulative returns shown on the graph represent the value that these investments would have had on April 30 in the years since 2011. 250 200 150 100 INDEXED TOTAL SHAREHOLDER RETURN as of April 30, 2016, dividends reinvested BF Class B Shares S&P 500 Index Dow Jones U.S. Consumer Goods Dow Jones U.S. Food and Beverage 2011 2012 2013 2014 2015 2016 $100 $100 $100 $100 $122 $105 $110 $109 $161 $122 $133 $135 $208 $147 $151 $150 $212 $167 $168 $170 $230 $169 $184 $192 ENVIRONMENTAL STEWARDSHIP As a responsible corporate citizen, Brown-Forman is committed to environmental stewardship and sustainability. Our environmental efforts focus primarily on the effi- cient use of natural resources, conserving energy and water, and minimizing waste. FSC LOGO This Annual Report is printed on FSC®-certified paper. FISCAL 2016 VIDEOS To see and hear Brown-Forman Chairman and CEO Paul Varga and Board Chairman Geo. Garvin Brown IV discuss highlights of the company’s fiscal year 2016 perfor- mance, please visit the Investor Relations section on www.brown-forman.com. m o c . n o s i d d a . w w w n o s i d d A y b n g i s e D PLANT TREES, SO THAT OTHERS MIGHT ENJOY THEIR SHADE. – OWSLEY BROWN II (1942–2011) REFERENCING A FAVORITE GREEK PROVERB 850 DIXIE HIGHWAY LOUISVILLE, KENTUCKY 40210 | BROWN-FORMAN.COM 

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