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
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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.
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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.
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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.
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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.
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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