B
r
o
w
n
-
F
o
r
m
a
n
|
2
0
1
9
A
n
n
u
a
l
&
C
o
r
p
o
r
a
t
e
R
e
s
p
o
n
s
b
i
i
l
i
t
y
R
e
p
o
r
t
6/19/19 4:13 PM
937865cvr.indd 4-6
Where our past meets our future
For six generations, we’ve been
a company that thinks ahead.
who we are and where we’re headed
as we execute our global growth
Years ahead for aging our whiskeys.
strategy. And it demonstrates our
And decades ahead for building our
ability to drive great results and
brands, developing our people, and
create value in our work.
growing our business.
This report is about what’s new
We’ve long known that corporate
here, and the long‑held values
responsibility is critical to our
behind our company vision. It’s
company’s performance. It serves
about how we’re continuing to
the best interests of our investors,
integrate corporate responsibility
employees, consumers, partners,
and business performance into
and communities.
the future. We’re proud of how far
our heritage has taken us and how
As this next generation begins, we’re
well it equips us to take on the
pleased to present Brown‑Forman’s
next generation.
first integrated Annual & Corporate
Responsibility Report. It reflects
937865nar.indd 1
1
6/19/19 11:55 AM
C E O L E T T E R T O S H A R E HOL DE R S
Dear Brown-Forman Shareholders,
JUNE 25 , 2 019
The theme of this year’s annual
report is The Next Generation. As
F I S C A L 2 019 R E S UL T S
Fiscal 2019 was another year of
you read through this report, I hope
delivering solid top‑line results, but also
you will get a better understanding of
had some very significant challenges.
how we are building this company for
Inadvertently, Brown‑Forman has found
the future through broader portfolio
itself caught up in the global trade war
development, expanding in new
with the retaliatory tariffs against certain
geographies and channels, investing
United States trade policies. So far, we
behind our capabilities, and developing
have chosen to invest in momentum and
the best teams in the business.
absorb the majority of the cost of these
DE L I V E R ING GR E AT R E T UR N S
F OR S H A R E HOL DE R S —
A T E N -Y E A R L OOK
18%
19%
15%
13%
Consumer
Staples
S&P
500
Comp
Set
BFB
Source: Factset, Ten year CAGR through April 30, 2019,
in local currency, assuming dividends reinvested.
Note — Competitive Set is a weighted average based
upon each competitor’s LTM sales
I had the honor of entering my new
role as Chief Executive Officer of
Brown‑Forman in January 2019. As only
the tenth person to assume this great
responsibility over the company’s 149‑
year history, I am grateful to have worked
in various capacities to prepare me for
this journey, including the last decade
under Paul Varga’s leadership. I would
first like to thank Paul, my predecessor,
colleague, and friend, not only for our
company’s past achievements, but for
setting us up for the next generation.
Our track record of successfully
delivering strong growth with great
margins and returns manifests itself in
our outstanding returns for shareholders.
This letter will discuss our most
recent results, detail observations
from the last few months that have
increased my confidence in our long‑
term prospects, as well as share some
additional color on this annual report
and how it is symbolic of the increased
integration and collaboration I believe
will help us achieve great returns in the
next generation.
tariffs. As a result, our underlying net
sales1 grew 5% (2% as reported), which
is generally in line with historical results.
While we have long been accustomed
to delivering operating income growth
ahead of sales growth, this was
extremely challenging with the burden
of these incremental tariffs. However,
look forward to when we are back on a
we still managed to deliver 5% (9% as
level playing field with our competitors
reported) underlying operating income
and delivering top‑tier operating income
growth in these difficult conditions and
growth again.
EXCELLENT
TRACK
RECORD
BFB shares generated an annual
compound return of 19% over
the last ten years.
From a geographic perspective, our
results were very well‑balanced, with
exceptional growth in our emerging
markets and solid growth in the
developed world. Underlying net sales
growth was also balanced across the
portfolio as the Jack Daniel’s family of
brands grew in the mid‑single digits
while we continued to realize strong
double‑digit gains on our premium
bourbon and tequila brands. As another
indicator of the quality of our overall
growth, operating margins came in over
34% and we delivered a 22% return on
average invested capital,2 both of which
are industry leading.
1. In this report, we present both reported (GAAP) and underlying (non-GAAP) changes in net sales and operating income. We use these measures as supplements (not substitutes for) our results of
operations and other measures reported under GAAP. To calculate these measures, we adjust, as applicable, for (a) a new accounting standard, (b) foreign exchange, (c) estimated net changes in distributor
inventories, and (d) the establishment of our charitable foundation. Please refer to the section labeled “Non-GAAP Financial Measures” in Form 10-K of the enclosed report for additional information.
2. Return on average invested capital is defined as the sum of net income and after-tax interest expense, divided by average invested capital. Invested capital equals assets less liabilities, excluding
interest-bearing debt.
2
937865nar.indd 2
6/19/19 12:53 PM
T HE NE X T GE NE R AT ION
OF GR O W T H
While I have been at the company for
over two decades, I have been Brown‑
Forman’s CEO for less than six months,
so I thought I would share some of my
initial observations on the job and why
I believe we can continue to deliver
strong growth into the next generation.
First and foremost, spirits is a great
sector within the world of consumer
products and we have one of the
finest brand portfolios in the world.
Importantly, we believe we are well
positioned in two of the best categories
within spirits, American Whiskey, and
tequila. Second, we have a world of
opportunity to develop our brands
globally, as market share is low and
consumer demand is high, particularly
for our American Whiskey brands.
Third, our teams are engaged, curious,
and motivated to deliver excellent
results. And fourth, we have a strong
base of long‑term shareholders who
understand and support our strategic
ambitions.
Our culture and values run deep
through the organization and permeate
how we go about our day‑to‑day
business. This includes producing
the highest quality products with
sustainability front of mind. It means
growing our business while promoting
responsible alcohol consumption.
And finally, it means supporting the
growth of our employees through
training and development, community
engagement, and investment. After all,
our people build our brands every day.
The combination of all these factors
makes this company incredibly special
and reinforces my belief that Brown‑
Forman will continue to thrive for not
only the next generation, but for many
generations to come.
Lawson E. Whiting,
President and
Chief Executive
Officer
T HE NE X T GE NE R AT ION
OF R E P OR T ING
As you read through this year’s annual
L E A DING B R O W N - F OR M A N
IN T O T HE NE X T GE NE R AT ION
In closing, we are committed to the long‑
report, you might notice it’s a blended
term independence of Brown‑Forman
Annual & Corporate Responsibility
as a leader in the spirits industry,
Report. Fiscal 2019 marks the first
and believe we are well positioned to
year we are sharing with you a report
continue to generate great results over
that integrates corporate responsibility
the next generation through executing
alongside financial data to provide
on our strategic ambitions.
a more comprehensive view of our
business results. The organization of this
year’s report aligns with the four pillars
of our strategic framework: Portfolio,
Geography, Investment, and People.
In each of these areas, we shared
highlights of our financial performance
and corporate responsibility progress.
This is a wider and deeper lens on
our company’s results and illustrates
one way in which we are preparing for
the future. The report also reaffirms our
continued support for the United Nations
Global Compact and the Sustainable
Development Goals. We hope you enjoy
the new report.
I want to thank our team of
approximately 4,700 employees and
many partners around the world who
work tirelessly to build our brands. It is
their hard work and passion that have
helped us deliver consistently strong
results for shareholders. And let me
thank you, our valued shareholders, for
your support of Brown‑Forman over the
years. I look forward to leading Brown‑
Forman into the Next Generation with
your continued support and partnership.
Lawson Whiting
President and Chief Executive Officer
937865nar.indd 3
3
6/19/19 10:36 AM
C H A IR M A N OF T HE B O A R D L E T T E R
Dear Brown-Forman Shareholders,
JUNE 25 , 2 019
JUNE 25 , 2 019
Geo. Garvin Brown IV,
Chairman of the Board
The very core of an annual report is
financial. This is where public companies
performance, we’ve also included our
corporate responsibility metrics side-
report their quantitative and qualitative
by-side with our financials, making it
results to shareholders. In our case,
easier to see how integrated these
we’ve been reporting to the public
commitments are to the broader values
since 1934, the first year of our New
of Brown-Forman.
York Stock Exchange listing after the
repeal of Prohibition. That report was
four pages long — a one-page income
statement, a two-page balance sheet,
and a letter from Owsley Brown, a
great-grandfather and a great-great
grandfather for a few of us pictured in
this year’s report. Annual Reports have
certainly moved on from those early
days, not only in depth of detail, but also
in breadth of content.
Our portfolio has fulfilled many of
the ambitious aspirations that Paul
set for it a decade ago. The Jack
Daniel’s family of brands completed
the year at nearly 18 million cases,3
including Jack Daniel’s ready-to-drink
(RTDs) delivering 9 million cases.4 The
Woodford Reserve family, meanwhile,
came in at just under 900,000 cases,
including the recent introduction of
Baccarat Edition, breaking new ground
3. “Cases” or “volumes” refer to depletions on a 9L
equivalent unit basis (9L cases) unless otherwise
specified. At times, we use a “drinks-equivalent” measure
for volume when comparing single-serve ready-to-drink
or ready-to-pour brands to a parent spirits brand.
“Drinks-equivalent” depletions are RTD and RTP 9L cases
converted to 9L cases of a parent brand on the basis of
the number of drinks in one 9L case of the parent brand.
To convert RTD volumes from a 9L case basis to a drinks-
equivalent 9L case basis, RTD 9L case volumes are divided
by 10, while RTP 9L case volumes are divided by 5.
4. The RTD cases mentioned in this instance are 9L cases
and are not adjusted to a drinks-equivalent basis.
The year’s CEO transition from Paul
at a luxury price point for American
Varga to Lawson Whiting makes it even
Whiskey on the global stage. Casa
more rewarding to share the story of
Herradura, acquired early in Paul’s
the brands, people, governance, and
tenure, continues its acceleration and
culture that lie behind our numbers —
diversification, with the new Herradura
the driving force of Brown-Forman that
Ultra line extension approaching
Paul led so well, work that Lawson is
100,000 cases. In addition to these
so uniquely well placed to continue.
portfolio successes, the company made
To better illustrate the drivers of our
material progress in emerging markets,
4
937865nar.indd 4
6/19/19 12:54 PM
18 MILLION
The Jack Daniel’s Family of Brands
completed the year at nearly 18 million
9L cases.
9 MILLION
Jack Daniel’s RTD sales reached nine
million flat cases.
OL D F OR E S T E R DI S T IL L E R Y
R E T UR N S T O W HI S K E Y R O W
B R O W N - F OR M A N / B R O W N FA MILY S H A R E HOL DE R S C OMMI T T E E
The Family Shareholders Committee, other Brown family members from the fifth and sixth generations, and
members of Brown‑Forman management visited the Jack Daniel Distillery this May.
From Left: Garvin Brown, Brooke Brown Barzun, Lawson Whiting, Dace Brown, Tammy Godwin, Cary Brown,
Charles Joy, Amelia Huneke, Barbara Hurt, Jim Joy, Caitlin Joy, Garvin Deters, Sandra Frazier, Grant Adams,
Clara Brown, Marshall Farrer, Austin Musselman, Louis Brown, Ernie Patterson, Chris Brown, Sara Brown,
Martin Brown, Jr., Davis Kannapell. Not pictured: Owsley Brown III and Elaine Musselman
with countries like Brazil now following
a board member since 2015, to take
in the footsteps of Poland’s and Mexico’s
on this leadership role.
exceptional growth.
The Brown‑Forman Family Shareholders
From a governance perspective,
Committee also welcomed new members
Brown‑Forman thrived under another
to its ranks this year: Cary Brown, Dace
year of Board committee leadership
Brown, and Elaine Musselman. Lawson
from Mike Todman (Chair of Audit),
and I enjoyed visiting the Jack Daniel
Mike Roney (Chair of Compensation),
Distillery with the Committee, along
and John Cook (Chair of Governance &
with other Brown family members,
Nominating, and our Lead Independent
including seven members of the sixth
Director). We also want to thank our
generation — another reminder of the
Director Stuart Brown for one of
“next generation.”
In June of 2018, our founding brand, Old
his other governance functions, his
Forester, returned to Whiskey Row as a
eight years leading the environmental
working urban distillery and homeplace.
sustainability foundation, DendriFund,
which he helped establish in 2012,
when it was seeded with some of
the proceeds of the sale of Brown‑
Forman’s wine business. His board
work, alongside the company’s own
in‑house sustainability efforts, has
been indispensable in incorporating
sustainability as a core company
priority. He is stepping down, and
DendriFund has elected Eliza Brown,
937865nar.indd 5
Of course, no single “people” decision is
more important to a Board than fulfilling
its fiduciary duties in CEO succession
planning. The Board completed its
multi‑year work with Paul Varga, a
31‑year veteran of the company, by
appointing Lawson Whiting, a 21‑year
veteran, to the CEO role. Paul entered
the leadership ranks at a time when
the future of American Whiskey was
in doubt, yet Brown‑Forman delivered
total shareholder return (TSR) during his
5
6/19/19 10:36 AM
C H A IR M A N OF T HE B O A R D L E T T E R
period of service of 15%, making him
arguably the most successful CEO of
our industry’s modern era to date. With
a Best Place to Work for Disability
Inclusion, among Great Places to Work®
for LGBTQ Equality, and a Great Place
into our 149th year as a corporation,
please join me in congratulating the
employees of the company for all that
Lawson, Brown‑Forman has another
to Work in Spain, France, Mexico, and
they do to support and lead this culture,
leader with the strength of character
Brazil. Driving this is our employees
and please accept my own heartfelt
and the intellectual rigor that are
themselves, and our employee resource
thanks for your long‑term, purposeful
uniquely well‑suited to our independent
groups (ERGs), designed to provide
ownership and support.
culture and for leading our teams in
members with support, understanding,
balanced, long‑term thinking, and global
information, and resource sharing.
brand building.
Of course, every people decision
matters, and our company must always
work hard to earn the time and energy
that each employee contributes to the
success of Brown‑Forman. That’s why
we’re so proud to have been named
one of the best employers for veterans
by Military Times for the second year
running; to have received a perfect
In particular, I’d like to thank GROW
(Growing Remarkable and Outstanding
Women) and BUILD (Blacks United In
Leadership and Development) for the
kind welcome that they’ve given our
Board of Directors and me over the
past year, at their events in Louisville
and London.
Owsley Brown may have been brief in
1934 with his letter, but thanks to his
score on the Human Rights Campaign
perseverance during Prohibition, and to
Foundation’s Corporate Equality Index
his wise decision to go into partnership
for the ninth year in a row; and to have
with the public, we now have the ability
been listed as a Leading Inclusion Index
to write about not just financials, but
Company (Diversity Best Practices),
so much more. Thus, as we head
Geo. Garvin Brown IV
Chairman of the Board
E MP L O Y E E R E S OUR C E
GR OUP S
“Take a Walk in Our Shoes” featured a panel
session facilitated by Garvin Brown and
included Carolyn Tandy, Director of Diversity
and Inclusion of Texas Roadhouse, Sadiqa
Reynolds, President and CEO of the Louisville
Urban League, and Michael Todman, Retired
Vice Chairman, Whirlpool Corporation and
Brown‑Forman Board Member. They spoke
about leadership and development essentials
for women and minorities.
6
937865nar.indd 6
6/19/19 10:36 AM
B R O W N - F OR M A N B O A R D OF DIR E C T OR S
Front Row: Tracy L. Skeans (3) Chief Transformation and People Officer, Yum! Brands, Inc. / Michael J. Roney (4) Retired Chief Executive
Officer, Bunzl plc / Laura L. Frazier (#) Owner and Chairman, Bittners LLC / Campbell P. Brown (#) Senior Vice President, President
and Managing Director of Old Forester, Brown‑Forman Corporation / Marshall B. Farrer (#) Senior Vice President, Managing Director of
GTR and Developed APAC Region, Brown‑Forman Corporation / Patrick Bousquet-Chavanne (4,5) Chief Executive Officer, Emaar Malls
Back Row: Paul C. Varga, Former Chairman and Chief Executive Officer, Brown‑Forman Corporation / Geo. Garvin Brown IV (1,5,*,#)
Chairman of the Board, Brown‑Forman Corporation / Lawson E. Whiting (1,*) President and Chief Executive Officer, Brown‑Forman
Corporation / Augusta Brown Holland (#) Founding Partner, Haystack Partners LLC / Michael A. Todman (3) Retired Vice Chairman,
Whirlpool Corporation / John D. Cook (1,2,4,5) Director Emeritus, McKinsey & Company / Bruce L. Byrnes (3,5) Retired Vice Chairman of
the Board, The Procter & Gamble Company / Kathleen M. Gutmann (3) Chief Sales and Solutions Officer, United Parcel Service, Inc. /
Stuart R. Brown (#) Managing Partner, Typha Partners, LLC
(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, (*) Member of Brown‑Forman/Brown Family Shareholders Committee,
(#) Member of Brown Family
B R O W N - F OR M A N E X E C U T I V E L E A DE R S HIP T E A M
From left, standing: John V. Hayes, Senior Vice President, President, USA & Canada / Ralph E. de Chabert, Senior Vice President,
Chief Diversity and Global Community Relations Officer / Jane C. Morreau, Executive Vice President, Chief Financial Officer /
Matthew E. Hamel, Executive Vice President, General Counsel and Secretary / Thomas Hinrichs, Senior Vice President, President,
International Division
From left, seated: Kirsten M. Hawley, Senior Vice President, Chief Human Resources and Corporate Communications Officer /
Lawson E. Whiting, President and Chief Executive Officer / Mark I. McCallum, Executive Vice President, Chief Brands Officer /
Alejandro A. Alvarez, Senior Vice President, Chief Production Officer
937865nar.indd 7
7
6/19/19 10:36 AM
Today, consumers and employees
seek out companies that embrace
diversity, invest in communities,
conserve resources, and encourage
responsible product use. The
adjacent diagram illustrates how
our next‑generation strategic
framework combines with our
corporate responsibility priorities to
structure our integrated reporting.
Our commitment and impact extend
far beyond Brown‑Forman’s walls.
We continue our support for the
United Nations Global Compact
and have adopted the Sustainable
Development Goals (SDGs) most
applicable to us. We are part of
many partnerships and coalitions
driving change because a more
sustainable future requires active
participation by all.
OUR NE X T GE NE R AT ION OF G R O W T H B E G A N A G E NE R AT ION A G O
We measure success through
several lenses including financial
performance and the sustainability
of that performance.
We’ve always been focused
on delivering great results for
We’re positioned for continued
success, thanks to an ongoing
our stakeholders. The results we
focus on diversity and inclusion.
see reflect the planning we do,
We’re also committed to being
often decades prior. Our fiscal
good corporate citizens, creating
2019 results included underlying
a responsible drinking culture, and
net sales growth of 5% (2% as
investing in the communities where
reported), or roughly 6% after
we live and work.
considering the impact from
All of this positions us to deliver
strong results, attract and retain
the best talent, and meet the
evolving expectations of our
stakeholders.
M A IN TA INING T HE B A L A NC E
F OR T HE NE X T G E NE R AT ION
In the past year, we have
achieved a healthy balance between
tariff‑related lower net prices,
and underlying operating income
growth of 5% (9% reported). This
stability and change. With over two
top‑line growth is consistent with
decades at the company, Lawson
the sustained mid‑single digit
Whiting was welcomed as our new
growth we have delivered over
CEO to execute the strategy that
the last decade.
he helped to create. Through our
strong, global portfolio of brands,
To sustain this, we’ve set zero‑
we have remained resilient to
waste goals and have an ambitious
market forces by staying focused
greenhouse gas goal we’ll meet
on this long‑term strategy. We
through a renewable wind energy
welcomed new people, new thinking,
project now under construction.
new brands, and new challenges.
8
937865nar.indd 8
6/19/19 10:36 AM
HO W W E F R A ME OUR IN T E GR AT E D R E P OR T ING
Our view of Brown-Forman’s performance is multi-
faceted, from the quality of our culture to our people,
our values, and our stakeholder relationships.
This integrated lens on performance, including corporate responsibility, recognizes that many aspects of our
company contribute to value creation, our reputation, and our success. It continues with our commitment to
ethics, diversity and inclusion, alcohol responsibility, environmental sustainability, and the communities where
our employees live and work.
A L C OHOL
R E S P ON S IB IL I T Y
P OR T F OL IO
G E OGR A P H Y
E N V IR ONME N TA L
S U S TA IN A B IL I T Y
DI V E R S I T Y & INC L U S ION
IN V E S T ME N T
P E OP L E
C OMMUNI T Y
937865nar.indd 9
9
6/19/19 10:36 AM
10
POrTFOlIO
937865nar.indd 10
6/19/19 10:36 AM
23%
underlying net sales
(19% as reported)
Our premium bourbons, including
Woodford Reserve, Old Forester,
and Coopers’ Craft, grew
underlying net sales6 by 23%
(19% as reported) in fiscal 2019.
P R E MIUM A ME R IC A N W HI S K E Y
We embrace new ideas and
don’t stray from our legacy of
exceeding consumer expectations
through quality.
Quality and social responsibility
became the cornerstone of our
We have always been a whiskey
company, and that remains our
business in 1870, when founder
competitive advantage. In the
George Garvin Brown began selling
current environment, consumers
his whiskey in sealed glass bottles.
around the world are interested
Old Forester Kentucky Straight
in American Whiskey. That was
Bourbon Whisky was the first
our focus when we started, and
bottled bourbon in America, and as
continues to be our focus as our
such, the first to guarantee quality
business evolves internationally.
and safety. It cost more to do it
For example, we launched our own
that way, but George believed the
distribution in Spain two years
investment would pay off in the long
ago. Having our own people on
run. It did.
the ground building our brands
has helped drive strong double‑
Today, we’re the last remaining
digit growth in each of the last
publicly‑traded American spirits
two years.
company, and a top‑ten global
spirits company.5 We own some
of the most valuable spirits
As we enter this next generation,
our ability to lean on our past
trademarks in the world. Global
in order to look forward is our
demand for our American Whiskeys
competitive edge. Quality continues
is high, with vast potential ahead.
to drive us ahead, guided by this
next generation of consumers
who put a high priority on it. We’re
responding with super‑premium
offerings across our brand
portfolio.
5. 2018 IWSR data
6. The 19% reported growth of our premium bourbons was impacted by 1% point due to the new accounting standard and 3%
points due to the estimated net changes in distributor inventories resulting in 23% underlying net sales growth.
937865nar.indd 11
6/19/19 10:36 AM
POrTFOlIO 11
J A C K D A NIE L’ S
J A C K D A NIE L’ S OP E R AT ION
R IDE HOME
In 2018, on a value basis,
IWSR data confirmed Jack
growth in markets outside of the
United States, with underlying sales
Daniel’s Tennessee Whiskey was
growth in the mid-single digits.
recognized as the most valuable
single expression spirit brand
In 2019, a Jack Daniel’s Single Barrel
We’re proud to support our
from the western world. In 2019,
Tennessee Whiskey expression,
service members. We work with
Heritage Barrel, was ranked #3
the Armed Services YMCA to help
among the year’s top 20 whiskies
worldwide by Whisky Advocate.
junior enlisted members cover
travel expenses from base to home
to spend the holidays with loved
Our new rye whiskeys are attracting
ones. Last year, our employees
attention, including Jack Daniel’s
participated in bringing 822
Tennessee Rye. We aim to be a
travelers home.
leader in the rye category, with
over one million cases in 2018 and
growing double-digits.7
Jack Daniel’s Tennessee Whiskey
continues to be the primary driver
of our growth in non-U.S. markets.
2.4 MILLION
CASES
Jack Daniel’s Tennessee Honey
and Fire depleted 2.4 million cases
around the world, and aggregate net
sales are growing mid-single digits.
Z E R O - WA S T E DI S T IL L E R Y
Our Jack Daniel Distillery is one of
our first production sites to meet
the zero-waste to landfill8 goal,
recycling more than 99.9% of the
waste and by-products we generate.
We also conserve and protect
water and promote sustainable
forestry research and practices
to ensure our supply of white
oak for barrels and sugar maple
for charcoal. We’re reducing our
electricity consumption and air
emissions and the carbon footprint
of wood trucks traveling to and
from our plants.
Jack Daniel’s family of brands
sold 17.7 million equivalent 9L
cases. We have diversified the
trademark so that roughly 25%
of our Jack Daniel’s brand family
volumes come from brands other
than Tennessee Whiskey, and
over 60% of our depletions occur
in markets outside of the United
States. Jack Daniel’s Tennessee
Whiskey accounted for 13.4 million
of these cases and continues
to deliver its strongest rates of
12
PortfolIo
937865nar.indd 12
6/19/19 4:17 PM
W OODF OR D R E S E R V E : S UP E R - P R E MIUM GR O W T H
Woodford Reserve delivered
stellar performance results in the
United States, growing underlying
net sales by 22% (17% as reported)
and winning MarketWatch’s Brand
of the Year award. This leading
super-premium American Whiskey
was an increasingly important
contributor to the company in fiscal
2019. Now gaining traction abroad,
Woodford Reserve is on-track
to sell a million cases in 2020.
This room for growth includes
opportunities for developing the
Woodford Reserve brand family with
further premiumization as well as
geographic expansion of the brand.
Supporting this success, the
Woodford Reserve Distillery is
committed to sustainability.
In 2018, the Kentucky Department
for Environmental Protection
recognized Woodford Reserve as a
partner in its Kentucky Excellence
in Environmental Leadership
Program. The distillery partnered
with The Nature Conservancy
Kentucky chapter in a creek-side
restoration project to restore native
plants, animal habitats, and improve
water quality.
T HE K E N T UC K Y DE R B Y ®
P R E S E N T E D B Y W OODF OR D
R E S E R V E ®
The limited-edition 2019 Woodford
Reserve Kentucky Derby bottle once
again featured label artwork designed
by Keith Anderson, a talented Brown-
Forman employee.
NE X T G E NE R AT ION
DE R B Y P A R T IE S
Thanks to the power of new
media, “winning” the Derby
takes on new meaning. There
are 3.3 million Derby parties
held throughout the country.
One bottle of Woodford Reserve
purchased for each of them
would amount to over a quarter
of a million incremental cases.
Promoted via Twitter and using
Amazon and its Alexa apps,
fans can ask, “How do I throw a
Derby party?” and the response
enables online purchase and
home delivery of special-edition
bottles of Woodford Reserve,
a mint julep recipe, cups, and
fresh mint.
7. 2018 IWSR data
8. Zero-waste is defined as sending less than 1% to landfill.
937865nar.indd 13
6/19/19 5:16 PM
Portfolio
13
OL D F OR E S T E R : HOME , S W E E T HOME
Old Forester, Brown-Forman’s
founding brand, returned to
Louisville’s Whiskey Row last
June after nearly 100 years.
Five years ago, we introduced the Whiskey
Row Series as a platform for high‑end, craft
expressions from Old Forester. Recent
launches such as Old Forester 1910 quickly
sold out.
DI S T IL L E R OF T HE Y E A R
Whisky Magazine named Brown‑Forman
the Distiller of the Year and recognized
Juan Merizalde Carrillo of Old Forester
Distilling Co. as Distillery Manager of
the Year at the 2019 Icons of Whisky
America awards.
It’s in a building that once housed
Brown‑Forman offices and is now a
release of Old Forester Rye further
contributed to the brand’s position
state‑of‑the‑art distillery and visitor
as a real leader in the renaissance
experience center.
of American Whiskey.
In the true spirit of Kentucky
Additionally, the Old Forester
hospitality, the roughly $50 million,
70,000‑square‑foot distillery takes
guests through Old Forester’s
Distillery received the highest score
from Better Drinking Culture for
their practices to promote alcohol
bourbon making process and
responsibility.
the brand’s rich history as the
first bottled bourbon. The recent
14
POrTFOlIO
937865nar.indd 14
6/19/19 10:36 AM
E ME R G ING B R A ND S : G R E AT P O T E N T I A L F OR G L OB A L G R O W T H
We lead the
American
Whiskey
category and
aim to lead in
other global
whiskey
categories.
Developing Slane Irish Whiskey
and GlenDronach and BenRiach
single malt Scotch Whiskies are key
elements in that strategy.
In the United States, we’ve cultivated
interest in super‑premium whiskeys,
and we’ve begun to follow suit in
other countries around the world.
From Ireland, Slane Irish Whiskey is
doing well in the premium category.
And from Scotland, our three highly‑
awarded single malt Scotches are
poised for net sales growth.
Last August, we formed our
Emerging Brands team in the United
States to focus on seeding these
aspirational brands so they become
more meaningful over time. With
over 40 dedicated people selling
and marketing these brands in
16 handpicked city centers, we
believe these brands have been
seeded in the right environment to
build strong growth.
HIG H P R A I S E F OR OUR
S C O T C HE S
Our GlenDronach 15 Year Revival Single
Malt Scotch Whisky was ranked #8 in
the 2018 Top 20 Brands of the World by
Whiskey Advocate.
Master Blender Rachel Barrie, Brown‑
Forman Scotch, became the first woman
in Scotch Whisky inducted into Whisky
Magazine’s Hall of Fame.
Sustainable from the start
A t Slane Distillery, we’re
incorporating sustainability best
a natural fertilizer; and growing
our own barley nearby. Also,
practices from the beginning:
our stillage, a grain and yeast
capturing rain water to use in
by‑product, is provided to local
our operations, thereby reducing
farmers for animal feed. We are
the amount we draw from the
participating in Ireland’s Origin
Boyne River; building an anaerobic
Green sustainability program and
digester to produce biogas from
have a goal to achieve ISO 14001
our waste water, which we’ll use as
certification for our environmental
boiler fuel to reduce greenhouse
management practices.
gas emissions; using biomass as
POrTFOlIO 15
937865nar.indd 15
6/19/19 10:36 AM
L E A DING T E QUIL A B R A ND S IN A FA S T- G R O W ING C AT E G OR Y
I n much the same way we
extended our portfolio of whiskeys
two years ago by acquiring
distilleries in Scotland and building
one in Ireland, we added tequila
to our portfolio by acquiring
el Jimador and Casa Herradura
in Mexico.
Tequila is one of the fastest‑
growing categories in the spirits
industry.9 Steady investment
in these brands has delivered
better performance. El Jimador is
significantly more profitable than
when we acquired it, thanks to
premiumization and expansion into
the United States, primarily, and
other select markets. Herradura
continues to grow, driven in part
by successful line extensions such
as Herradura Ultra. Between the
el Jimador and Herradura tequila
brand families, Brown‑Forman sold
almost two million cases of 100%
agave tequila in fiscal 2019.
Our ready‑to‑drink New Mix is
extremely popular, selling almost
7 million cases10 in fiscal 2019.
16
POrTFOlIO
C A S A HE R R A DUR A : A D VA NC ING S U S TA IN A B L E P R A C T IC E S
Casa Herradura is one of Mexico’s
Because water is a key ingredient in
most historic and renowned
tequila and a precious commodity
tequila producers, and its premium
in Mexico, we built a wastewater
products, ranked among the world’s
treatment plant, ensuring we
finest, are attracting attention
release clean water. This process
among the next generation of
also extracts biogas that we use as
consumers.
a fuel source. We’ve also achieved
our goal of zero‑waste to landfill
So is the work we’re doing in
by 2023, four years ahead of
Amatitán, Mexico, to ensure
schedule.
the sustainability of our tequila
production. For example, we’re
finding ways to use agave fibers
that are a by‑product of tequila
making as fuel. We’ve reduced
the amount of energy and water
required to cook agave at Casa
Herradura by 39% and 22%,
respectively, since 2015.
937865nar.indd 16
6/19/19 10:36 AM
C R E AT ING A R E S P ON S IB L E DR INK ING C UL T UR E
550,000+
CASES
Herradura sold over 550,000 cases
globally, including 200,000 cases in
the U.S. in fiscal 2019.
Herradura Ultra, a high‑quality cristalino,
helped contribute to Herradura’s double‑
digit underlying net sales growth in the year.
We are actively creating a
responsible drinking culture to
reduce alcohol-related harm,
promote moderate consumption,
respect the choice not to drink,
and ensure responsible marketing
of our brands.
This year, we launched a new internal campaign called Pause to elevate
responsibility, raise awareness, and inspire more action from our employees.
When we take a second and pause, we will make the best decisions
for ourselves, for the company, and for our communities. It’s all about
encouraging and empowering everyone at Brown‑Forman, and our partners,
to pause, consider, and make responsible decisions around alcohol.
Through our SPIRIT employee resource group, we work to create a place
where all employees and guests feel welcome, whether or not they
drink alcohol.
1.4 MILLION
CASES
El Jimador approached 1.4 million
cases globally, including 600,000
cases in the U.S. in fiscal 2019.
9. Source: IWSR 2018 data, 100% agave tequila grew 15%
in calendar 2018.
10. The RTD cases mentioned in this instance are 9L cases
and are not adjusted to a drinks-equivalent basis.
Externally, we partner with local and global organizations to promote
responsible drinking such as IARD, FISAC, BSI, DrinkWise, Responsibility.org
(FAAR), DrinkAware, Portman Group, and many more.
POrTFOlIO 17
937865nar.indd 17
6/19/19 10:36 AM
18
GeOGrAPhy
937865nar.indd 18
6/19/19 10:36 AM
T HE UNI T E D S TAT E S , OUR L A R G E S T M A R K E T
The United States remains our
largest market, accounting for
nearly half of our revenues.
This is the most valuable
global spirits market in the world,
as whiskey experts in a variety
of promotional activities, including
across numerous categories and
education, advocacy, and point‑
premium‑priced products. We
of‑sale activities such as tasting
offer our most diversified portfolio
flights to compare whiskeys of
here, which is skewed toward
different types.
premium American Whiskies and
tequilas. We continue to grow
through disciplined innovation
and premiumization and believe
we have ample room for further
expansion in this fast‑growing and
profitable market.
Whiskey expertise is what we’re
known for, and we’re building
on that with extensions within our
Jack Daniel’s family of brands,
Woodford Reserve, and Old
Forester trademarks. This includes
flavors, super‑premium offerings,
and rye whiskeys, for which
consumer demand is growing.
We’re leveraging our reputation
Our premium bourbon and tequila
brands grew underlying net sales
by double‑digits in the United
States, led by Woodford Reserve
and our tequilas11 in fiscal 2019.
1.2 MILLION
Jack Daniel’s Ready‑to‑Drinks
surpassed 1.2 million cases12 in
the U.S. in fiscal 2019.
11. Our premium bourbons include Woodford Reserve, Old Forester, and Coopers’ Craft while our tequilas include el Jimador,
Herradura, Pepe Lopez, and Antiguo.
12. Refers to Ready-to-Drink and Ready-to-Pour line extensions of Jack Daniel’s. The RTD cases mentioned in this
instance are 9L cases and are not adjusted to a drinks-equivalent basis.
GeOGrAPhy
19
937865nar.indd 19
6/19/19 10:36 AM
IN T E R N AT ION A L
TOP 10
MARKETS
Each of our top ten markets grew
underlying net sales in fiscal 2019.
7 MILLION
New Mix RTDs approached 7 million
cases13 this year, helped by the
launch of Mineral Orange and
Mineral Lemon.
Jack Daniel’s Tennessee Honey’s
non-U.S. business passed one
million cases, fueled by markets
such as France, Mexico, and the
United Kingdom.
20%
Nearly 20% of Woodford Reserve’s
sales are generated outside the
U.S. — a strong indicator of future
opportunity.
OVER 60%
Currently, over 60% of Jack Daniel’s
Tennessee Whiskey volumes are
international.
11%
underlying net sales growth
(4% as reported)
Our emerging markets grew underlying
net sales by 11% (4% as reported) in
fiscal 2019, with broad-based delivery
from markets big and small.
20 GeoGraphy
The other half of our business
is in the markets outside of
the United States where we see
promising consumer momentum.
In this next generation, we see
for all our products, wherever
a world of opportunity in the
we go. Jack Daniel’s Tennessee
emerging and developed
Whiskey sales outside the United
international markets. In some,
States are almost double the next
we’ve made significant headway
with availability and infrastructure.
Our top five markets include the
United Kingdom, Mexico, Australia,
Germany, and France, accounting
for close to 50% of our international
sales. We believe the greatest
potential lies in markets we’ve just
begun developing.
Jack Daniel’s Tennessee Whiskey
is our flagship trademark globally.
The universal popularity of Jack
Daniel’s Tennessee Whiskey and
the extended Jack Daniel’s family
of brands breaks new ground
leading American Whiskey brand in
value,14 and remains the world’s #1
American Whiskey, and the single
largest expression,14 sold above
$25/750 ml bottle.
DE V E L OP E D M A R K E T S
Other brands in the Jack Daniel’s
family have been further propelling
our growth rates outside of the
United States, including our Jack
Daniel’s ready-to-drink (RTD)
business, Jack Daniel’s Tennessee
Honey, and Gentleman Jack. Jack
Daniel’s RTDs in Australia and
13. The RTD cases mentioned in this instance are 9L cases and are not adjusted to a drinks-equivalent basis.
937865nar.indd 20
6/19/19 4:17 PM
E NG A G ING W I T H
C OMMUNI T IE S E V E R Y W HE R E
Being an active
part of the
places where
we do business
makes for
better business.
In Scotland, 45 Brown‑Forman
employees partnered with Voluntary
Service Aberdeen. They painted
fencing and planted 100 cherry
trees at Easter Anguston Farm,
a training facility for adults with
learning differences.
Brown‑Forman South Africa
sponsored over 10,000 meals
through the Ladles of Love program.
Proper nutrition can help children
graduate from high school, breaking
the cycle of poverty. The team
provided monetary assistance,
volunteer hours, and donations of
mattresses and books.
15,000 HOURS
In fiscal 2019, 800 Brown‑Forman
employee volunteers donated
15,000 hours globally.
GeOGrAPhy
21
Germany are booming, driving
Mexico and Poland have also
our volumes to record levels in
been meaningful growth drivers
aggregate. We’re building a strong
for our company. In Mexico, our
presence in Spain, thanks to the
results have been led by double‑
summer of 2017 investment in
digit underlying net sales growth
owned distribution there. Spain is
of our tequila brands along with
one of the largest whiskey markets
contributions from Jack Daniel’s.
in the world, where Jack Daniel’s
has just 4% market share14 and
is one of the fastest‑growing
Poland’s 10% underlying net sales
growth (9% as reported) was fueled
by Jack Daniel’s but partially offset
whiskey brands. This speaks to
by a challenging vodka market for
the enormous potential we have in
Finlandia.
large Scotch Whiskey markets.
E ME R G ING M A R K E T S
Six billion people live in emerging
markets. Our market shares are
currently low in the majority of
these countries, which means our
opportunities are significant. And
we’re making the most of them.
In 2019, emerging markets grew
underlying net sales in the double‑
digits again, led by Mexico, Brazil,
Russia, and Poland.
14. 2018 IWSR data
Brazil is nearly a 5.5‑million
case whiskey market.14 When we
arrived, American Whiskey was
underdeveloped and, after nearly
a decade, we’re making significant
inroads, growing from just 35,000
cases in fiscal 2009 to roughly
400,000 cases in fiscal 2019.
Our strategy has evolved to focus
tightly on key urban areas with
the Jack Daniel’s product line, and
we’re seeing significant growth as a
result of these efforts.
937865nar.indd 21
6/19/19 10:36 AM
22
InveSTmenT
937865nar.indd 22
6/19/19 10:36 AM
L ONG -T E R M P E R F OR M A NC E
One thing we’ve learned over
nearly a century and a half
is that long-term performance
requires investment.
We understand the need to
invest in our production facilities,
sustained top-line growth, great
margins, and significant cash flow
distillery visitor centers, and
generation.
inventory, and the importance
of investing in our people,
Thanks to the investments we’ve
communities, and environment.
made, we are better positioned
Despite these significant
than ever to keep delivering
investments, we have maintained
excellent products for our loyal
our industry-leading return on
average invested capital (ROIC) 15
of 22%. We’re driving sales growth
consumers around the world.
We have the most capable and
engaged workforce ever. We’ve
and enhanced productivity.
developed unprecedented brand-
building capabilities. We have
We delivered an annual Total
equipped our teams with the
Shareholder Return of 19%
technology and tools necessary
over the last ten years. In other
to win in an increasingly data-driven
words, a $100 investment in
global marketplace.
Brown-Forman’s Class B shares
would have been worth over $550
at the end of this past fiscal year.
Fiscal 2019:
We’ve paid dividends for 73 years
and have been providing dividend
increases for 35 years, making
us proud members of the Dividend
Aristocrats.16 This consistency of
capital returns to our shareholders
is due to a combination of
34.4%
Operating Margin
22.0%
ROIC15
15. Return on average invested capital is defined as the sum of net income and after-tax interest expense, divided by
average invested capital. Invested capital equals assets less liabilities, excluding interest-bearing debt.
16. The Dividend Aristocrats are members of the S&P 500 Index constituents that have increased their dividend
payouts for 25 consecutive years or more.
937865nar.indd 23
6/19/19 12:54 PM
Investment
23
IN V E S T ING IN C OMMUNI T IE S
Whether in our hometown of
Louisville, Kentucky, or the many
other locations where we live and
work around the world, supporting
the communities we work in is
an investment that generates
immediate and long‑term returns.
It’s an expression of our company’s
purpose to enrich the experience
of life.
Thoughtfully leveraging our talent,
time, and resources, we collaborate
with a variety of mission‑driven
organizations focused on enhancing
intellectual and cultural living,
ensuring essential living standards,
and empowering responsible and
sustainable living.
Community engagement provides
professional development for our
employees through non‑profit
board leadership and is a means
to attract, retain, and engage
exceptional talent. It also builds
goodwill and engages consumers
with our brands.
24
InveSTmenT
T HE B R O W N - F OR M A N
F OUND AT ION
Last year, Brown‑Forman
established a $70 million charitable
foundation whose annual proceeds
will provide a consistent revenue
stream for charitable giving for
generations to come, independent
of the company’s annual earnings.
Charitable contributions will be
made from the foundation, as well
as the corporation.
IN V E S T ING IN OUR
HOME T O W N
One of our most important
social investments this year was
giving $2 million to the Republic
Bank Foundation YMCA being
built in west Louisville. This
contribution supports construction
of the new YMCA, subsidizes
access and memberships in the
surrounding neighborhood, and
contributes to Black Achievers
and other programs. Also in our
neighborhood, we’re making new
or increased contributions to
the Louisville Free Public Library
Western Branch programming,
Olmsted Parks Conservancy, and
YouthBuild Louisville.
We continue supporting local
alcohol and substance abuse
recovery centers, educating
our employees on the science
of addiction, creating safe
environments to talk about the
disease, and using inclusive
language to help reduce the
stigma. We have partnerships
with several addiction recovery
centers in Louisville and
around the country.
937865nar.indd 24
6/19/19 10:36 AM
IN V E S T ING IN T HE QU A L I T Y OF OUR E N V IR ONME N T
IN V E S T ING IN R E NE WA B L E E NE R G Y
We’re always finding ways to reduce our greenhouse gas emissions,
and our biggest yet will be the new wind power project when it’s operational
by 2020. This renewable energy source will offset more than 90% of our
electricity usage in the United States, enabling us to fully achieve our
greenhouse gas target of cutting our absolute greenhouse gas emissions
by 15% by 2023 (from 2012 levels).
DE NDR IF UND
DendriFund, an independent
foundation created in 2012 by
Brown-Forman and the Brown
family, brings together diverse
stakeholders inspired to improve
the natural, social, and economic
environment. Focused on issues
related to wood, water, and grains,
signature projects include: the
White Oak Initiative focusing on the
region where white oak grows to
assess woodland conditions and
produce conservation plans; the
Salt River Collaborative with close
to 30 groups working to improve
water quality in the Louisville area;
and the rye project aspiring to
accelerate the adoption of cover
crops that bring commercial and
environmental value to growing
rye in Kentucky.
IN V E S T ING IN
C L E A NE R E NE R G Y
At the Brown-Forman Distillery
we converted to cleaner-burning
natural gas as our boiler fuel.
The estimated savings we’ll realize
is $350,000 annually, and even
more significantly, we estimate
a reduction of emissions by
13,000 tons of CO2 per year. It also
reduces our fuel delivery costs
and carbon footprint. It’s a smart
investment in the dual benefits of
efficiency and sustainability.
Z E R O - WA S T E B Y 2 0 2 0
We have committed to sending
zero-waste17 to landfill for all owned
production facilities by 2020.
The effort begins with designing
our systems so they generate
as little waste as possible. We
also find new uses for materials
when we’re done with them — for
instance our sawdust is used as
boiler fuel and our glass cullet
is recycled back into bottle
production.
As of 2018, eight of our
production facilities achieved
this goal, representing 87%
of our total waste. The rest of
our sites are on track, with five
additional facilities sending less
than 5% of waste to landfill.
17. Zero-waste is defined as sending less than 1%
to landfill.
S U S TA IN A B IL I T Y
S UP P OR T S QU A L I T Y
Sonoma-Cutrer Rosé of Pinot Noir
was launched in the U.S. this year to
excellent reviews, and helped the family
grow underlying net sales. We maintain
California Sustainable Winegrowing Alliance
certification and promote initiatives
affecting fish and wildlife habitat, water
quality, and energy efficiency.
Investment
25
937865nar.indd 25
6/19/19 12:55 PM
26
PeOPle
937865nar.indd 26
6/19/19 10:36 AM
F O S T E R ING DI V E R S I T Y A ND INC L U S ION
Our people are our greatest asset.
The more diverse and inclusive
a group we are, the better we do.
The business advantage of
diversity extends to our suppliers,
C ON S I S T E N T LY AWA R DE D
T OP W OR K P L A C E HONOR S
In our experience, there is definitely
a correlation between investing
in our people and achieving
great results. Case in point:
Brown‑Forman was named one of
the best employers for veterans
by Military Times for the second
year. For the ninth year, we received
a perfect score on the Human
Rights Campaign Foundation’s
Corporate Equality Index. We’re
listed as a Leading Inclusion Index
Company (Diversity Best Practices),
a Best Place to Work for Disability
Inclusion, and among Great Places
to Work® for LGBTQ Equality. We’ve
received recognition for many of
our offices around the world.
Brown-Forman was named a
Great Place to Work® in Brazil,
France, Mexico, and Spain.
It enables us to build brands that
too. Our goal is to procure 16%
connect with a broader spectrum
of our supplier services from
of consumers. We attract the
businesses owned by ethnic
most talented candidates to join
minorities, women, LGBTQ
us, engaging and enabling them to
people, people with disabilities,
grow and develop themselves and
and veterans. We’re currently at
their careers once they’re here.
approximately 11%. This is one of
many ways in which we actively
For these reasons, we embrace
promote and seek constantly to
and foster diversity and inclusion
increase diversity throughout our
to create a culture of belonging,
working relationships.
where every individual brings
their whole and best self to work.
Brown‑Forman has approximately
Employee Resource Groups
4,700 employees around the world.
(ERGs) within Brown‑Forman are
On average, our employees stay
an important part of that. They
eight years, which is more than
act as learning and innovation
double the average tenure for all
hubs, where our people’s unique
industries in the United States,
capabilities can help our business
according to the U.S. Bureau of
and our communities succeed.
Labor Statistics in 2018.
We take care of our employees
with benefits such as the recently
updated flexible work options,
parental leave, and extended
bereavement leave for United
States employees. We also offer
health and wellness programs,
pension and 401(k) plans, and
convenient onsite amenities. On
Glassdoor.com, employees have
rated Brown‑Forman with 4.4 stars
(out of five) for benefits.
937865nar.indd 27
PeOPle
27
6/19/19 10:36 AM
B R INGING OUR P R INC IP L E S W HE R E V E R B U S INE S S TA K E S U S
As we grow
and conduct
business
internationally,
our principles
follow us.
We subscribe to the United
Nations Sustainable Development
Goals (SDGs). We are also a
signatory to the UN Global
Compact concerning human rights,
labor practices, environmental
stewardship, and anti‑corruption.
The Brown‑Forman Code of
While the intent of the SDGs and
Conduct helps us communicate
Global Compact are large scale,
our corporate integrity everywhere
much of our work happens more
we work. “Living Our Values” is its
locally in communities where we
purpose, and it features real‑life
operate or with issues that our
examples and offers decision‑
company affects. By doing our
making advice from leaders in the
part, we can contribute to solving
company. It provides reporting
these broader, more complex
mechanisms, including anonymous
challenges.
reporting without fear of retaliation.
We measure and manage our
Our Global Human Rights Statement
progress, and you can find more
defines our commitment to
details on our performance on our
respecting the fundamental human
website at www.brown‑forman.com/
rights inherent to all people. We
responsibility.
share our policies and practices
with suppliers. These include
Our anti‑corruption guidelines
controls to ensure against modern
prohibit bribery and improper
slavery anywhere in our business
payments, mandate accurate
or supply chain, as set out in our
bookkeeping, and require all
employees to know and comply
with all local laws and regulations.
UK Modern Slavery Act Statement,
published on our website.
R E DUC ING H A R M I S A
T E A M E F F OR T
Irresponsible alcohol
consumption can be a risk
factor associated with
harassment and sexual assault.
We believe our employees and
bartenders should be equipped
with the resources to act.
In response, our Chambord
Black Raspberry Liqueur
partnered with Alteristic, a
national organization dedicated
to reducing power‑based
personal violence, to train
bartenders on bystander
intervention. This helps
them identify early signs and
develop skills to intervene
when appropriate.
28
PeOPle
937865nar.indd 28
6/19/19 10:36 AM
S A F E T Y A ND C OMP L I A NC E C ON T R IB U T E T O P E R F OR M A NC E
This year, Brown‑Forman
launched the Responsible
Production Guiding Principles
program to foster positive
employee behaviors that support
our Key Performance Indicators
(KPIs): Safety and Environment,
Morale, Quality, Productivity,
Delivery, and Cost.
We firmly believe that a safety and
environmental mindset drives all
our KPIs and that a culture of active
caring and compliance results
in fewer product losses across
the board. We know that the best
source of improvement in our
performance is our people.
Employee initiatives inspired
by active caring have already
led to significant improvements
in our operational efficiency.
For example, the Mexico team
completed two projects that
reduce water use by capturing
and recycling water that had been
going to the wastewater treatment
plant. Combined, these two
projects have reduced water use
by 2.6 million gallons in fiscal 2019.
Additionally, two employee‑led
continuous improvement projects at
Brown‑Forman Bottling operations
reduced waste‑to‑landfill by 54%
and 80%, respectively.
K E E P ING E MP L O Y E E S S A F E
Before you can
make whiskey,
you need
barrels, and
we make
sure we have
the best by
making our
own, safely
and efficiently.
We’ve reduced the amount
of repetitive motion by our
employees, which mitigates
injuries. Our Cooperages have
also reduced the number of
trees used by installing vision
systems and machine learning
to cut wood for our barrels in a
way that optimizes materials use.
This reduces the risk of injury,
improves quality, maximizes
warehouse space, and reduces
whiskey loss.
937865nar.indd 29
PeOPle
29
6/19/19 10:37 AM
S E L E C T E D F IN A NC I A L D ATA
Dollars in millions, except per share amounts
FOR YEAR ENDED APRIL 30:
FOR YEAR ENDED APRIL 30:
Sales
Excise taxes
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
Cash provided by operations
Cash dividends declared per common share
2015
2015
$ 4,096
$ 962
$ 3,134
$ 2,183
$ 1,045
$ 684
529.0
532.7
$ 1.29
$ 1.28
2016
2016
4,011
922
3,089
2,144
1,556
1,067
507.4
510.7
2.10
2.09
2017
2017
3,857
863
2,994
2,021
1,010
669
484.6
488.1
1.38
1.37
2018
2018
4,201
953
3,248
2,202
1,048
717
480.3
484.2
1.49
1.48
2019
4,276
952
3,324
2,166
1,144
835
479.0
482.1
1.74
1.73
69.7%
69.4%
67.5%
67.8%
65.2%
33.3%
50.4%
33.8%
32.3%
34.4%
31.7%
28.3%
28.3%
26.6%
19.8%
$ 3,196
3,221
3,591
3,832
4,125
22.0%
34.1%
19.8%
20.0%
22.0%
$ 631
$ 0.484
545
0.524
656
0.564
653
1.608
800
0.648
Dividend payout ratio
37.5%
25.0%
40.9%
107.8%
37.2%
AS OF APRIL 30:
AS OF APRIL 30:
Total assets
Long‑term debt
Total debt
$ 4,188
$ 743
$ 1,183
4,183
1,230
1,501
4,625
1,689
2,149
4,976
2,341
2,556
5,139
2,290
2,440
NOTES: 1. Includes the results of Southern Comfort and Tuaca, both of which were sold in March 2016 at a gain of $485 million (pre-tax). Includes the results of BenRiach since its acquisition
in June 2016. 2. Weighted average shares, earnings per share, and cash dividends declared per common share have been adjusted for a 2-for-1 stock split in August 2016 and a 5-for-4 stock
split in February 2018. 3. As discussed in Note 2 to the Consolidated Financial Statements, we adopted Accounting Standards Updates (ASUs) 2016–15 and 2017–07 as of May 1, 2018.
The amounts presented above for operating income, operating margin, and cash provided by operations differ from previously reported amounts due to the retrospective application of those
ASUs. 4. 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. 5. Cash dividends declared per common share include a special cash dividend
of $1.00 in fiscal 2018. 6. We define dividend payout ratio as cash dividends divided by net income.
30
937865nar.indd 30
6/19/19 10:37 AM
C OR P OR AT E R E S P ON S IB IL I T Y D ATA S UMM A R Y
S UP P L IE R DI V E R S I T Y S P E ND
Percent of procurement from businesses owned by ethnic minorities,
women, LGBTQ people, people with disabilities, and veterans
C A S H DI S T R IB U T E D T O
S TA K E HOL DE R S F Y 19
11.0%
11.2%
12.1%
FY17
FY18
FY19
E N V IR ONME N TA L S U S TA IN A B IL I T Y
16.0%
Goal by
2020
CY16
CY17
CY18
GOAL BY 2023
Absolute decrease in
GHG emissions18
Reduce water use per
unit of product 19
+10.9%
+7.1%
+14.8%
-15.0%
-3.1%
-6.9%
-10.3%
-30.0%
Reduce wastewater discharge
per unit of product19
-8.1%
-16.1%
-8.3%
-30.0%
CY16
CY17
CY18
GOAL BY 2020
Government 45.2%
Investors 20.2%
Employees 18.5%
Lenders 3.4%
Communities <1%
Retained For Growth 12.7%
$70 MILLION
Established $70 Million
Charitable Foundation in fiscal 2018
$7.4 MILLION
Brown-Forman Corporate Charitable
Zero-Waste to landfill
from our facilities* 20
4
5
8
be Zero-Waste
All facilities to
Contributions
*As defined, less than 1% to landfill
18. From CY2013 to CY2018 our production sites continued to focus on greenhouse gas emission reductions projects such as
energy efficiency, process improvements, and fuel switching; however, inclusion of new international operations and overall
growth of existing operations superseded these reductions. As such, to date, our emissions have not trended in the direction
of our targeted 15% decrease in absolute greenhouse gas emissions. Our investment in renewable power in 2018, with an
expected start date of April 2020, is expected to support the timely attainment of our goal.
19. Per unit of product is based on total 9L case equivalent produced.
20. Eight of our facilities have achieved zero-waste to landfill, representing 87% of total waste. Five additional sites have
reached less than 5% waste to landfill.
$2.5 MILLION
Brown-Forman Foundation
Contributions
937865nar.indd 31
31
6/19/19 12:56 PM
C OR P OR AT E R E S P ON S IB IL I T Y D ATA S UMM A R Y (C ON T INUE D)
A L C OHOL R E S P ON S IB IL I T Y IN A D V E R T I S ING
Media Impressions LDA and Above, U.S.21
89
87
95
95
94
90
86
92
94
94
B‑F Standard 80%
TV
Radio
Magazine
Newspaper
Digital
21. The Distilled Spirits Council industry standard is to
advertise only in media with audiences that are 71.6% legal
drinking age (LDA) or higher. Since 2006, our commitment
is for a total media buy averaging 80% LDA or higher.
Jan–June 2017
Jul–Dec 2017
S A F E T Y
Includes any work‑related accident involving global
production and Louisville Corporate Personnel.
Data indicates any work‑related fatalities globally.
Total Recordable Injury Rate
Fatalities
4.8
0
CY16
3.6
0
CY17
Total incident rate per 100 full‑time employees
U. S . W OR K F OR C E DE MOGR A P HIC S *
CATEGORY
Board
Executive Leader
Business Leader
Leader
Professional
Production
Temporary/Seasonal
27%
27%
36%
46%
63%
21%
65%
FEMALE
MALE
WHITE
BL ACK OR
AFRICAN
AMERICAN
HISPANIC OR
L ATINO
ASIAN
73%
73%
64%
54%
37%
79%
93%
84%
79%
83%
81%
80%
35%
78%
7%
4%
6%
7%
9%
13%
15%
—%
3%
4%
7%
6%
6%
7%
—%
—%
5%
3%
2%
<1%
—%
2.8
0
CY18
OTHER
—%
9%
7%
1%
2%
—%
1%
*Diversity data is as of April 30, 2019. Ethnicity data is based on self-disclosed employee information. Board data includes all Directors (U.S. and international). Numbers may not add to 100% due
to rounding. Other includes 2+ races (non hispanic/latino), Native American or Alaskan Indian, or categories left blank
32
937865nar.indd 32
6/19/19 10:37 AM
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended April 30, 2019
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 001-00123
OR
BROWN-FORMAN CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
61-0143150
(IRS Employer Identification No.)
850 Dixie Highway
Louisville, Kentucky
(Address of principal executive offices)
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
1.200% Notes due 2026
2.600% Notes due 2028
Trading
Symbol(s)
BFA
BFB
BF26
BF28
Name of each exchange on which registered
New York Stock Exchange
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 such files). Yes
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging
growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or
revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
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 $16,000,000,000.
The number of shares outstanding for each of the registrant’s classes of Common Stock on May 31, 2019, was:
Class A Common Stock (voting)
Class B Common Stock (nonvoting)
168,985,878
308,288,977
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 25, 2019, are incorporated by reference
into Part III of this report.
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
Item 16.
Form 10-K Summary
SIGNATURES
SCHEDULE II – Valuation and Qualifying Accounts
Page
4
15
23
24
25
25
26
29
30
52
54
90
90
90
90
90
90
90
91
91
93
94
97
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
indicate 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, including additional
retaliatory tariffs on American spirits and the effectiveness of our actions to mitigate the negative impact on our margins,
sales, and distributors; 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, or capital gains) or
changes in related reserves, changes in tax rules or accounting standards, and the unpredictability and suddenness with which
they can occur
• The impact of U.S. tax reform legislation, including as a result of future clarifications and guidance interpreting the statute
• 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
small distilleries or local producers, or away from brown spirits, our premium products, or spirits generally, and our ability
to anticipate or react to them; legalization of marijuana use on a more widespread basis; shifts in consumer purchase practices
from traditional to e-commerce retailers; bar, restaurant, travel, or other on-premise declines; shifts in demographic or health
and wellness 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 fixed costs
Inventory fluctuations in our products by distributors, wholesalers, or retailers
•
• Competitors’ and retailers’ 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,
termination difficulties or costs, or impairment in recorded value
Inadequate protection of our intellectual property rights
Product recalls or other product liability claims, product counterfeiting, tampering, contamination, or 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, and our dual-class share structure
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
3
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 reconcile these measures to the most closely comparable GAAP measures under the
heading “Results of Operations – Year-Over-Year Comparisons.”
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 approximately 4,700 people on six continents (excluding individuals
that work on a part-time or temporary basis), including approximately 1,200 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 because the Brown family owns more than 50% of our voting stock. Taking into account
ownership of shares of our non-voting stock, the Brown family also controls more than 50% of the economic ownership in Brown-
Forman.
For a discussion of recent developments, see “Item 7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Executive Summary.”
4
Brands
Beginning in 1870 with Old Forester Kentucky Straight Bourbon Whisky – our founding brand – and spanning the generations
since, we have built a portfolio of more than 40 spirit, ready-to-drink (RTD) cocktail, and wine 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 was ranked in the 2018 Interbrand “Best Global Brands” as the most valuable global spirits brand in the world
and the second most valuable beverage alcohol brand. Jack Daniel’s Tennessee Whiskey is the largest American whiskey brand
in the world and the fourth-largest spirits brand of any kind, according to Impact Databank’s “Top 100 Premium Spirits Brands
Worldwide” list. Among the top five premium spirits brands on the list, Jack Daniel’s Tennessee Whiskey was the only one to
grow volume in each of the past five years. Our other leading global brands on the Worldwide Impact list are Finlandia, which is
the tenth-largest-selling vodka; Jack Daniel’s Tennessee Honey, which is the second-largest-selling flavored whiskey; and el
Jimador, which grew to become the fourth-largest-selling tequila. Woodford Reserve was once again selected as an Impact “Hot
Brand,”1 marking six consecutive years on the list. Old Forester and Pepe Lopez were also named to the 2018 “Hot Brand”1 list.
Principal Brands
Jack Daniel’s Tennessee Whiskey
Jack Daniel’s RTDs2
Jack Daniel’s Tennessee Honey
Gentleman Jack Rare Tennessee Whiskey
Jack Daniel’s Tennessee Fire
Jack Daniel’s Single Barrel Collection3
Jack Daniel’s Tennessee Rye
Jack Daniel’s Sinatra Select
Jack Daniel’s No. 27 Gold Tennessee Whiskey
Jack Daniel’s Winter Jack
Jack Daniel’s Bottled-in-Bond4
Woodford Reserve Kentucky Bourbon
Woodford Reserve Double Oaked
Woodford Reserve Kentucky Rye Whiskey
Woodford Reserve Kentucky Straight Malt Whiskey4
Finlandia Vodkas
Korbel California Champagnes5
Korbel California Brandy5
el Jimador Tequilas
el Jimador New Mix RTDs
Herradura Tequilas6
Sonoma-Cutrer California Wines
Canadian Mist Canadian Whisky
GlenDronach Single Malt Scotch Whisky
BenRiach Single Malt Scotch Whisky
Glenglassaugh Single Malt Scotch Whisky
Old Forester Kentucky Straight Bourbon Whisky
Old Forester Whiskey Row Series
Old Forester Kentucky Straight Rye Whisky4
Chambord Liqueur
Early Times Kentucky Whisky and Bourbon
Pepe Lopez Tequila
Antiguo Tequila
Slane Irish Whiskey
Coopers’ Craft Kentucky Bourbon
1Impact Databank, March 2019.
2Jack Daniel’s RTDs includes Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails,
Gentleman Jack & Cola, Jack Daniel’s Double Jack, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack
Daniel’s Cider, and Jack Daniel’s Lynchburg Lemonade.
3The 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.
4New brands launched in fiscal 2019.
5Korbel is not an owned brand. We sell Korbel products under contract in the United States and other select markets.
6Herradura Tequilas comprises all expressions of Herradura including Herradura Ultra.
See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations
– Fiscal 2019 Brand Highlights” for brand performance details.
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), consumer and trade promotions, sponsorships, and visitors’ 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.
5
Markets
We sell our products in over 170 countries around the world. The United States, our most important market, accounted for
47% of our net sales in fiscal 2019. We generated 53% of our net sales outside the United States in fiscal 2019. Our largest
international markets include the United Kingdom, Mexico, Australia, Germany, France, Poland, Russia, Japan, and Brazil. We
present the percentage of total net sales by geographic area for our most recent five fiscal years 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
2015
2016
Year ended April 30
2017
2018
2019
46%
48%
48%
47%
47%
27 %
6 %
21 %
54%
100%
27 %
5 %
20 %
52%
100%
26 %
5 %
21 %
52%
100%
27 %
5 %
21 %
53%
100%
26 %
5 %
22 %
53%
100%
For details about net sales in our largest markets, see “Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Fiscal 2019 Market Highlights.” For details about our reportable segment and for additional geographic
information about net sales and long-lived assets, see Note 17 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, or our “route-to-consumer” (RTC), varies 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 spirits and wine 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, which can be grouped into three categories: owned distribution,
partner, and government-controlled markets. We own and operate distribution companies in 11 markets: Australia, Brazil, Canada,
Czechia, France, Germany, Korea, Mexico, Poland, Spain, and Turkey. In these markets, and in a large portion of the Travel Retail
channel, we sell our products directly to retailers or wholesalers. Over the past decade, we began distribution operations in several
markets outside the United States, most recently in Spain during 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 Canada, we sell our products to provincial governments. In many other markets, including Russia,
Japan, Italy, and South Africa, we rely on third parties to distribute our brands, generally under fixed-term distribution contracts.
We believe that our customer relationships are good and our exposure to concentrations of credit risk is limited due to the
diverse geographic areas covered by our operations.
Seasonality
Holiday buying makes the fourth calendar quarter the peak season for our business. Approximately 30%, 31%, and 31% of
our net sales for fiscal 2017, fiscal 2018, and fiscal 2019, respectively, were in the fourth calendar quarter.
6
Competition
Trade information indicates that we are one of the largest global suppliers of premium spirits. According to International
Wine & Spirit Research (IWSR), for calendar year 2018, 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 our brands compete primarily in the industry’s premium-and-higher
price categories. Our competitors include major global spirits and wine companies, such as Bacardi Limited, Becle S.A.B. de C.V.,
Beam Suntory Inc., Davide Campari-Milano S.p.A., Diageo PLC, LVMH Moët Hennessy Louis Vuitton SE, Pernod Ricard SA,
and Rémy Cointreau. In addition, particularly in the United States, we increasingly compete with national companies and craft
spirit brands, many of which are recent entrants to the industry.
Brand recognition, brand provenance, quality of product and packaging, availability, flavor profile, and price affect
consumers’ choices among competing brands in our industry. Several factors influence consumers’ buying decisions, including
advertising, promotions, merchandising at the point of sale, 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, liqueurs, RTD products, and wines
are shown in the table below.
Distilled Spirits
Liqueurs
RTD Products
Wines
Principal Raw Materials
Agave
Barley
Corn
Malted barley
Rye
Sugar
Water
Wood
Flavorings
Neutral spirits
Sugar
Water
Whiskey
Wine
Flavorings
Malt
Neutral spirits
Sugar
Tequila
Water
Whiskey
Grapes
Wood
1Polyethylene terephthalate (PET) is a polymer used in non-glass containers.
Packaging
Aluminum cans
Cartons
Closures
Glass bottles
Labels
PET1 bottles
Currently, none of these raw materials are in short supply, but shortages could occur. From time to time, our agricultural
ingredients (agave, barley, corn, grapes, malted barley, rye, and wood) could be adversely affected by weather and other forces
out of our control that might constrain supply or reduce our inventory below desired levels for optimum production.
Whiskeys, certain tequilas, and other distilled spirits must be aged. Because we must schedule production years in advance
to meet projected future demand, our inventories of these products may be larger in relation to sales and total assets than in many
other businesses.
For details on risks related to the unavailability of raw materials and the inherent uncertainty in forecasting supply and
demand, see “Item 1A. Risk Factors.”
Intellectual Property
Our intellectual property includes 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 around the world, focusing primarily on 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 enhances the awareness and protection of our brands.
For details on risks related to the protection of our intellectual property, see “Item 1A. Risk Factors.” For details on our most
important brands, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results
of Operations – Fiscal 2019 Brand Highlights.”
7
Regulatory Environment
Federal, state, local, and foreign authorities regulate how we produce, store, transport, distribute, and sell our products. Some
countries and local jurisdictions prohibit or restrict the marketing or sale of distilled spirits in whole or in part.
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 spirits and wine 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 non-U.S. jurisdictions where we
sell our products. In addition, beverage alcohol products are subject to customs duties or excise taxation in many countries, including
taxation at the federal, state, and local level in the United States.
Many countries set their own distilling and maturation requirements; for example, under U.S. federal and state regulations,
bourbon and Tennessee whiskeys must be aged in new charred oak barrels; we typically age our whiskeys three to six years.
Canadian whisky must 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). Irish whiskey must be matured at least three years in a wood cask, such as oak, on the island of Ireland. Scotch whisky
must be matured in oak casks for at least three years in Scotland. We comply with all of the above laws and regulations.
Our operations are subject to various environmental protection statutes and regulations, and our policy is to comply with
them.
8
Strategy
Nine 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 purpose as well as the values and behaviors that we expect
our employees to embrace and exhibit. Our purpose, values, and behaviors are a constant, powerful means of connecting our
stakeholders to our shared vision of “Building Forever.” We continue to refresh our strategies to reflect current realities and look
beyond 2020.
We realize that our people are integral to building our brands and growing our business, and to support this strategy we
strive to build a strong, agile workforce emphasizing diversity and inclusion. The strategic ambitions described below demonstrate
both a sustained focus on several drivers of our recent growth and acknowledge today’s emerging opportunities.
Portfolio
We seek to build brands and businesses that create significant shareholder value, by delivering strong and sustainable
growth, solid margins, and high returns on invested capital. 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
and through innovation. As opportunities arise, we also consider acquisitions and partnerships that will enhance our portfolio
and our capacity to deliver growth, margins, and returns in line with our rigorous quantitative and qualitative criteria.
We are the global leader in American whiskey.1 We see significant, additional opportunity to promote the mixability,
versatility, accessibility, and premiumization of our American whiskey brands around the world. We believe that we can leverage
our whiskey-making knowledge, production assets, trademarks, and brand-building skills to realize this opportunity.
The Jack Daniel’s family of brands, led by Jack Daniel’s Tennessee Whiskey (JDTW), is our most valuable asset – the
engine of our overall financial performance and the foundation of our leadership position in the American whiskey category. We
will always work to keep JDTW strong, healthy, and relevant to consumers worldwide while pursuing the abundant opportunities
to grow the Jack Daniel’s family of brands across markets, premium price points, channels, and consumer groups. Product
innovation continues to be a meaningful contributor to our performance. New Jack Daniel’s expressions have led innovation in
the American whiskey category, including Honey (2011), Fire (2015), Rye (2017), and the recently announced launch of Jack
Daniel’s Tennessee Apple, which we expect to introduce in the United States in the fall of 2019.
Beyond the Jack Daniel’s family of brands, we expect to sustain excellent growth around the world with our other whiskey
brands, particularly Woodford Reserve and Old Forester. Woodford Reserve is the leading super-premium American whiskey
globally1, and is poised for continued growth as interest in bourbon continues to increase around the world. Old Forester has
continued its return to prominence in the United States and in select international markets through its unparalleled taste and
quality. Following on the success of its high-end expressions, including the Old Forester Whiskey Row Series, we recently added
Old Forester Rye to the brand line up.
1IWSR, 2018 data.
9
We believe that super- and ultra-premium whiskeys are an attractive long-term business. Through our acquisition of The
BenRiach Distillery Company Limited in June 2016, we added three world-class single malt Scotch whisky brands to our portfolio:
The GlenDronach, BenRiach, and Glenglassaugh. Since acquiring the Scotch business, we have evolved our portfolio and
geographic strategies to ensure that these single malt brands are positioned to become meaningful contributors to Brown-Forman
and significant competitors in the fast-growing single malt category over the longer term. Similarly, Slane Irish Whiskey, which
opened its distillery and visitors’center in 2018 is poised to become a meaningful contributor for the Company in the fast-growing
Irish whiskey category over time.
It has been over a decade since we acquired Casa Herradura, a portfolio led by two tequila brands steeped in Mexican
heritage – Herradura and el Jimador. Despite current cost pressures resulting from the high price of agave, we remain pleased
with the development of our tequila business in both Mexico and the United States, the brands’ two primary markets. We plan
to continue expanding Herradura to reach new consumers in Mexico, the United States, and other high-potential markets. In
addition to the success of the brand’s core expressions, Herradura Ultra – an ultra-premium “cristalino” line extension – continued
to accelerate, surpassing 90,000 nine-liter cases in fiscal 2019. We intend to ensure el Jimador tequila remains a premium brand
in Mexico by increasing pricing again in fiscal 2020, and remain encouraged by our prospects for long-term, profitable growth
there. Outside Mexico, we have more than quadrupled el Jimador’s volumes since fiscal 2008. We remain confident in el Jimador’s
potential to improve its position among the world’s leading tequila brands as the category continues to develop.
Finlandia, one of the top-ten selling vodkas in the world,1 is prominent in several of the world’s largest vodka markets, such
as Poland, Russia, Ukraine, and Czechia. We plan to grow Finlandia where its position is strong, including in its largest market,
Poland, where Finlandia accounts for one out of every two bottles of imported vodka sold.2
Geography
The United States remains our largest market, and continuing to grow there is important to our long-term success. We expect
to foster this growth by emphasizing fast-growing spirits categories such as super-premium whiskeys and tequilas, continued
product and packaging innovation, and brand building within growing consumer segments, including increasing emphasis on
inclusive marketing.
Over the last two decades, our business outside the United States has generally grown faster than our business within it.
Achieving our long-term growth objectives requires us to deliver balanced geographic growth while increasing our
competitiveness through improved routes to consumer. We expect to continue to grow our business in developed markets such
as Australia, France, Germany, and the United Kingdom. We will continue to pursue RTC strategies that will expand our access
to and understanding of consumers, with the most recent example being the establishment of our owned distribution organization
in Spain during fiscal 2018. In addition, we expect increasingly significant contributions to our growth from emerging markets
including Africa, Brazil, China, Eastern Europe, Latin America, Mexico, Poland, Russia, Southeast Asia, and Turkey.
1Impact Databank, March 2019.
2IWSR, 2018 data.
10
Integrated Performance
Having a long-term-focused, committed, and engaged stockholder base, anchored by the Brown family, gives us an important
strategic advantage, particularly in a business with aged products and multi-generational brands. For nearly 150 years, the
Company and the Brown family have been committed to preserving Brown-Forman as a thriving, family-controlled, independent
company.
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.
Our view of Brown-Forman’s performance is multi-faceted, the “what” of our financial and business results are very much
related to “how” we achieve them. This view is shown in the quality of our culture, our people, our values, and our stakeholder
relationships. Our sense of corporate responsibility is informed by our commitment to ethics, diversity and inclusion, alcohol
responsibility, environmental sustainability, and the community in which our employees live and work. This integrated lens on
performance, including Corporate Responsibility, recognizes that many aspects of our company contribute to value creation, our
reputation and our success.
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 whiskey in sealed glass bottles to ensure quality and safety –
an innovation some consider the first act of corporate responsibility in the industry. Today, achieving our stated business purpose,
to “enrich the experience of life,” is possible only within a context of corporate responsibility. This means putting our values in
action by creating a responsible drinking culture; providing a healthy, safe, inclusive, and engaging workplace; protecting the
environment; and making a positive contribution to our communities.
We subscribe to the United Nations Sustainable Development Goals (SDGs), a set of 17 global goals designed to address a
broad range of sustainable development issues from poverty and gender equality to climate change. In 2017, we reviewed our
corporate responsibility strategy against the SDGs to understand where our work aligns with these goals. In 2018, we also became
signatories to the United National Global Compact and submitted our first Communication on Progress.
Our core values of integrity, respect, trust, teamwork, and excellence are the foundation of our culture. Our employee
engagement survey responses demonstrate that we not only state these words as our values, but we live them, too. Our values are
11
reflected in our Code of Conduct that employees are educated on and pledge to comply with. Additionally, in the spirit of teamwork,
we use our values as one set of criteria when evaluating business partners.
Alcohol Responsibility. Our business is based on the belief that beverage alcohol, consumed in moderation, can enrich the
experience of life. However, we are well aware that when consumed irresponsibly, alcohol can have harmful effects on individuals
and society. We appreciate the need for governments to regulate our industry appropriately and effectively, taking into account
national circumstances and local cultures. We also appreciate that some people should not drink or choose not to drink, and we
respect this choice. Acting in partnership with others, we want to create a responsible drinking culture and be part of the solution
to real, complex problems such as underage drinking, drunk driving, overconsumption, and alcoholism.
Since 2009, we have hosted an open forum to share our points of view, post the research of outside experts, and encourage
the opinions of others at www.OurThinkingAboutDrinking.com. As part of our commitment to responsible marketing, and to
enable consumers to make more informed decisions, we provide nutritional information on our brands in our top markets on our
website, nutrition.brown-forman.com.
We also work closely with partners to extend our reach and impact. In Poland, we partnered with Carrefour, a large retailer
chain, to deliver key responsibility messages to consumers across 90 of their stores. For the fifth consecutive year, the New
Hampshire (NH) Liquor Commission and Jack Daniel’s teamed up for the award-winning Live Free & Host Responsibly campaign.
Since its launch in 2015, the campaign has reached thousands of NH Liquor & Wine Outlet customers, promoting responsible
service and consumption of alcohol. This first-of-its-kind collaboration between a control state and a beverage alcohol company
has become a model for the industry, gaining widespread attention and industry praise. 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. We also engage with our customers through our trade associations. For
example, we worked with Avec Modération in France to engage convenience stores on underage drinking prevention.
We are founding members of, and contribute significant resources to, the Foundation for Advancing Alcohol Responsibility
(responsibility.org), an organization created by spirits producers to prevent drunk driving and underage drinking and to promote
responsible decision making. 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 2019,
our Chambord Liqueur brand has partnered with Alteristic, a national organization of social accelerators dedicated to reducing
power-based personal violence, to train bartenders on bystander intervention to help prevent sexual assault. We also supported
alcohol responsibility education of our employees through our recently launched Pause campaign, encouraging everyone to pause,
consider, and make responsible decisions around alcohol consumption. Through our corporate charitable contributions, we support
organizations that offer treatment and recovery for those struggling with alcoholism and addiction. In addition to our financial
contributions, we support these organizations by having Brown-Forman employees serve on their boards of directors.
Sustainability. Our environmental sustainability strategy aims to protect and conserve the resources we depend on. It also
reinforces our business strategy through programs that reduce costs through efficiency, lessen risks to our operations, and improve
effectiveness through innovation. We invest in renewable energy, energy efficiency, and efficient transportation to reduce our
carbon footprint. In 2018, we executed a 15-year power purchase agreement for environmental attributes associated with the energy
output from a wind farm facility located in Kansas. The wind farm is expected to generate the equivalent of more than 90% of
Brown-Forman’s annual electricity use in the United States.
Mindful of our overall impact, in fiscal 2014, we set ambitious environmental sustainability goals for fiscal 2023: reducing
our absolute greenhouse gas emissions by 15% and reducing our water use and wastewater discharges per unit of product by 30%
(compared to metrics in 2012). In addition, we set a goal of sending zero waste to landfills by 2020. These goals support our
ambition to grow our brands and our company responsibly while protecting and enriching the natural environment. We have
refreshed our strategy to include a greater focus beyond our operational borders into our supply chain.
Diversity and Inclusion. We believe that having a diverse, 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. We continue to have diverse representation at the senior level. Four women and one African American serve on our
Board of Directors. Two members of our nine-member Executive Leadership Team are women and two are minorities. In 2019,
we once again earned a perfect score of 100% in the Corporate Equality Index, a national benchmarking survey and report on
corporate policies and practices related to LGBTQ workplace equality administered by the Human Rights Campaign. This makes
us one of the “Best Places to Work for LGBTQ equality”1 in the United States for the ninth consecutive year.
1Human Rights Campaign 2019 Corporate Equity Index at www.hrc.org/cei
12
Our Employee Resource Groups (ERGs) have been core to our diversity culture by supporting employees’ growth while
enhancing their contributions. Our eight ERGs, with sub-chapters globally, foster a diverse, inclusive environment that drives our
high-commitment, high-performance organization and encourages our employees to bring their individuality to work. Our
commitment to diversity extends to our partnerships with small and diverse suppliers. By 2020, our goal is to source at least 16%
of our procurement from businesses owned by ethnic minorities, women, LGBTQ persons, people with disabilities, or veterans.
Currently, we procure approximately 12% of our supplies from such businesses.
In the marketplace, we focus on promoting fair, 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. Our
work in this area helped inform our response to the U.K.’s passage of the Modern Slavery Act in 2015, which is available on our
corporate website.
Community. Our approach to philanthropy reflects our values as a corporate citizen. Brown-Forman believes, 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 by
thoughtfully deploying our time, talent, and resources. We collaborate with a variety of mission-driven organizations focused on
enhancing intellectual and cultural living, ensuring essential living standards, and empowering responsible and sustainable living.
While we focus on our hometown of Louisville, Kentucky, our civic engagement activities extend to the communities around the
globe where our employees work, live, and raise their families.
In fiscal 2019, we made charitable donations of $7.4 million, logged approximately 15,000 volunteer hours, and had 127
employees serve on boards of directors of 201 non-profit organizations. In addition, with the goal of helping fund our ongoing
philanthropic endeavors in the communities where our employees live and work, we created and funded the Brown-Forman
Foundation (the Foundation) with a contribution of $70 million in fiscal 2018. The Foundation distributed $2.5 million in charitable
contributions in fiscal 2019. We anticipate that the Foundation’s earnings will provide a consistent source of revenue for its
charitable giving program independent of our yearly earnings.
We report our ongoing commitment and progress against all of these goals in our integrated Annual and Corporate
Responsibility Report and on our website (www.brown-forman.com/responsibility).
13
Employees and Executive Officers
As of April 30, 2019, we employed approximately 4,700 people worldwide (2,600 in the United States), excluding individuals
that work on a part-time or temporary basis. This includes approximately 15% of our U.S. employees that are represented by a
union. We believe our employee relations are good.
The following persons served as executive officers as of June 13, 2019:
Name
Lawson E. Whiting
Age
50
Jane C. Morreau
Matthew E. Hamel
Mark I. McCallum
Alejandro “Alex”
Alvarez
Ralph De Chabert
Kirsten M. Hawley
60
59
64
51
72
49
John V. Hayes
59
Thomas Hinrichs
57
Kelli Nelson
49
Available Information
Principal Occupation and Business Experience
President and Chief Executive Officer since 2019. Executive Vice President and Chief Operating
Officer from October 2017 to December 2018. Executive Vice President and Chief Brands and
Strategy Officer from 2015 to 2017. 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.
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 Chief Brands Officer since June 2018. Executive Vice President
and President of Jack Daniel’s Brands from February 2015 to June 2018. 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.
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, Chief Diversity and Global Community Relations Officer since March
2019. Senior Vice President and Chief Diversity Officer from December 2007 to February 2019.
Senior Vice President, Chief Human Resources and Corporate Communications Officer since
March 2019. Senior Vice President and Chief Human Resources Officer from February 2015 to
February 2019. Senior Vice President and Director of Human Resources Business Partnerships
from 2013 to 2015. Vice President and Director of Organization and Leader Development from
2011 to 2013. Assistant Vice President and Director of Employee Engagement from 2009 to 2011.
Senior Vice President, President U.S.A. and Canada since June 2018. Senior Vice President, Chief
Marketing Officer of Brown-Forman Brands from February 2015 to June 2018. Senior Vice
President, Managing Director Jack Daniel’s from 2011 to 2015. Senior Vice President, Managing
Director Herradura from 2007 to 2011.
Senior Vice President, International Division since June 2018. Senior Vice President and President
for Europe, North Asia, and ANZSEA from February 2015 to June 2018. 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 and Chief Accounting Officer since August 2018. Vice President and
Director Finance (North America Region) from 2015 to August 2018. Director NAR Division
Finance (North America Region) from 2013 to 2015. Director Business Planning and Analytics
(North America Region) from 2012 to 2013.
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 Securities and Exchange Commission (SEC). The information provided
on our website is not part of this report, and is therefore not incorporated by reference into this report or any other filing we make
with the SEC, unless that information is otherwise specifically incorporated by reference.
On our website, we have posted our Code of Conduct that applies to all our 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, or principal accounting officer 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, as amended, 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
14
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.
Our global business is subject to commercial, political, and financial risks, including foreign currency exchange rate
fluctuations and corruption risk.
Our products are sold in more than 170 countries; accordingly, we are subject to risks associated with doing business
globally, including commercial, political, and financial risks. In the long term, we expect our growth rates in emerging markets,
to surpass our growth rates in the United States and more developed markets. However, we still expect our international
developed markets to 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; and health
pandemics. For example, last year, the United States imposed tariffs on steel and aluminum. In response, a number of countries
imposed retaliatory tariffs on U.S. imports, including on our American whiskey products. Such retaliatory tariffs continue to
remain in place, and any further deterioration of economic relations between the United States and other countries or any
increase in tariffs could result in an increase in the price of our products and could prompt consumers to seek alternative
products. Furthermore, uncertainty related to the future of the European Union may affect our business and financial
performance in Europe. For instance, in June 2016, the United Kingdom voted by referendum to leave the European Union
(Brexit), and, until the United Kingdom’s exit from the European Union is finalized, we face economic and political uncertainty
related to the negotiation of any successor trading arrangement with other countries as well as volatility in exchange rates, risk
to supply chains across the European Union, restrictions on the mobility of employees and consumers, or changes to customs
duties, tariffs, or industry specific requirements and regulations. In addition, any new trade barriers, sanctions, tariffs, or any
retaliatory measures in response to the foregoing could materially and adversely affect our operations. 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.
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 currencies. Because our foreign currency revenues exceed our foreign currency expense, we have a net
exposure to changes in the value of the U.S. dollar relative to those currencies. Over time, our reported financial results
generally will be hurt by a stronger U.S. dollar and improved by a weaker one. We do not attempt to hedge all of our foreign
currency exposure. We may, from time to time, attempt to hedge a portion of our foreign currency exposure through the use of
foreign currency derivatives or other means; however, even in those cases, we may not succeed in fully eliminating our foreign
currency exposure. For details on how foreign exchange affects our business, see “Item 7A. Quantitative and Qualitative
Disclosures about Market Risk – Foreign currency exchange rate risk.”
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 our other 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
continued 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.
15
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 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. Specifically, governments may prohibit, 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. Certain countries
historically have banned all television, newspaper, magazine, and digital commerce/advertising for beverage alcohol products.
Increases in regulation of this nature could substantially reduce consumer awareness of our products in the affected markets and
make the introduction of new products more challenging.
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.
Unfavorable economic conditions could negatively affect our operations and results.
Unfavorable global or regional economic conditions could adversely affect our business and financial results.
Unfavorable economic conditions could cause governments to increase taxes on beverage alcohol to attempt to raise revenue,
reducing 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, disruption in raw material supply, 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 unfavorable 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 10 to the Consolidated Financial Statements in “Item 8.
Financial Statements and Supplementary Data” and “Item 7A. Quantitative and Qualitative Disclosures about Market Risk –
Foreign currency exchange rate risk.”
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.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax
Cuts and Jobs Act (Tax Act). The Tax Act significantly revised the U.S. corporate income tax by, among other things, lowering
U.S. corporate income tax rates and implementing a territorial tax system. Shortly after the Tax Act was enacted, the U.S.
Securities and Exchange Commission issued Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the
Tax Cuts and Jobs Act (SAB 118) to address the application of GAAP. SAB 118 directs taxpayers to consider the impact of the
Tax Act as provisional when a company does not have the necessary information available, prepared, or analyzed (including
computations) in reasonable detail to complete the accounting for the change in tax law. In accordance with SAB 118, we
recorded an original provisional estimate of the effect of the Tax Act in our 2018 consolidated financial statements and have
subsequently finalized our accounting analysis based on the guidance, interpretations, and data available as of December 22,
2018. However, many aspects of the Tax Act are still unclear and may not be clarified for some time. For additional detail
regarding the Tax Act and the final tax amounts recorded in our consolidated financial statements, see Note 13 to the
Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
New tax rules, accounting standards, or pronouncements, and changes in interpretation of existing rules, standards, or
pronouncements could also have a significant adverse effect on our business and financial results. This includes potential
16
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, as well as changes in the interpretation of tax rules arising out of
the European Union State Aid investigations.
Our business operations are also subject to numerous duties or taxes that are not based on income, sometimes referred
to as “indirect taxes.” These indirect taxes include excise taxes, sales or value-added taxes, property taxes, payroll taxes, import
and export duties, and tariffs. 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. As governmental entities look for increased sources of revenue, they may increase
taxes on beverage alcohol products. In 2018, we have observed excise tax increases in Australia, France, and Turkey.
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 authenticity, craftsmanship, and quality. 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
financial results. Additionally, should we not be successful in our efforts to maintain or increase the relevance of the Jack
Daniel’s brand to 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 2019 Brand Highlights.”
Changes in consumer preferences and purchases, any decline in the social acceptability of our products, or governmental
adoption of policies disadvantageous to beverage alcohol could negatively affect our business results.
We are a branded consumer products company in a highly competitive market, and our success depends substantially
on our continued ability to offer consumers appealing, high-quality products. Consumer preferences and purchases may shift,
often in unpredictable ways, due several factors, including health and wellness trends; changes in economic conditions,
demographic, and social trends; public health policies and initiatives; changes in government regulation of beverage alcohol
products; concerns or regulations related to product safety; legalization of marijuana use on a more widespread basis within the
United States, Canada, or elsewhere; and changes in trends related to travel, leisure, dining, gifting, entertaining, and beverage
consumption trends. Consumers may begin to shift their consumption and purchases of our premium and super-premium
products, more commonly found in on-premise establishments, in favor of off-premise purchases or away from alcoholic
beverages entirely. This includes consumption at home as a result of various factors, including shifts in social trends,
proliferation of smoking bans, and stricter laws relating to driving while under the influence of alcohol, as well as shifts to
purchases of our products to e-commerce retailers. Shifts in consumption and purchasing channels such as these could
adversely impact our profitability. Consumers also may begin to prefer the products of competitors or may generally reduce
their demand for brands produced by larger companies. Over the past several years, the number of small, local distilleries in the
United States has grown significantly. This is being driven by a trend of consumers showing increasing interest in locally
produced, regionally sourced products. As more brands enter the market, increased competition could negatively affect demand
for our premium and super-premium American whiskey brands, including Jack Daniel’s. In addition, we could experience
unfavorable business results if we fail to attract consumers from diverse backgrounds and ethnicities in all markets where we
sell our products. Demographic forecasts in the United States for the next couple of years after 2018 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 on 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 plan to launch Jack Daniel’s Tennessee Apple in the United States in
fiscal 2020. If these plans do not succeed, 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.
17
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,
particularly for our core brands, such as our launch of Jack Daniel’s Tennessee Apple, 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.
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 parts of the world continue to seek governmental measures to make beverage alcohol
more expensive, less available, or more difficult to advertise and promote. If future scientific research indicate more widespread
serious health risks associated with alcohol consumption – particularly with moderate consumption – or if for any reason the
social acceptability of beverage alcohol declines significantly, sales of our products could decrease.
Production facility disruption could adversely affect our business.
Some of our largest brands, including Jack Daniel’s, Finlandia Vodka, and our tequilas, are distilled at single locations.
A catastrophic event causing physical damage, disruption, or failure at any one of our major distillation or bottling facilities,
including facilities that support the production of our premium brands such as Woodford Reserve and Old Forester, 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 – 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 prevent us from meeting 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. For example, in addition to our
American, Canadian, and Irish whiskeys and some tequilas, which are aged for various periods, our Scotch whisky brands and
distilleries including The GlenDronach, BenRiach, and Glenglassaugh require long-term maturation on average of 12 years
with limited releases of 30 years or more, making forecasts of demand for such products in future periods subject to significant
uncertainty. Factors that affect our ability to forecast accurately include changes in business strategy, market demand, consumer
preferences, macroeconomic conditions, introductions of competing products, and other changes in market conditions. Any
forecasting error could lead to our inability to meet the objectives of our business strategy, failure to meet future demand, or a
future surplus of inventory and consequent write-down in value of maturing stocks. If we are unable to accurately forecast
demand for our products or efficiently manage inventory, this may have a material adverse effect on our business and financial
results. Further, we cannot be certain that we will be successful in using various levers, such as pricing changes, 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 or to sell used materials.
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 and PET bottles, cans,
18
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 were to
experience a disruption in the supply of American white 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.
Similarly, when energy costs rise, our transportation, freight, and other operating costs, such as distilling and bottling expenses,
also may increase. Our freight cost and the timely delivery of our products could be adversely affected by a number of factors
that could reduce the profitability of our operations, including driver shortages, higher fuel costs, weather conditions, traffic
congestion, increased government regulation, and other matters. Our financial results may be adversely affected if we are not
able to pass along energy and freight cost increases through higher prices to our customers without reducing demand or sales.
International or domestic geopolitical or other events, including the imposition of any tariffs or quotas by
governmental authorities on any raw materials that we use in the production of our products, could adversely affect the supply
and cost of these raw materials to us. If we cannot offset higher raw material costs with higher selling prices, increased sales
volume, or reductions in other costs, our profitability could be adversely affected.
Weather, the effects of climate change, fires, 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, and the timely delivery of our
products.
Water is an essential component 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, Mexico, Scotland, and Ireland, which in turn could adversely affect our business and
financial results.
Our ability to sell used barrels for reuse may be affected by fluctuations in the market. For example, lower prices,
increased competitive supply of used barrels, and weaker demand from Irish and blended scotch industry buyers may make it
difficult to sell our used barrels at sustainable prices and quantities, which could negatively affect our financial results.
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 associated with 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 are imposed
on 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. Further, we cannot predict whether our products will become subject to increased rules and
regulations which, if enacted, could increase our costs or adversely impact sales. For example, advocacy groups in Australia
and the United Kingdom have called for the consideration of requiring the sale of alcohol in plain packaging with more
comprehensive health warnings in an effort to change drinking habits in those countries. These studies could result in additional
governmental regulations concerning the production, marketing, labeling, or availability of our products, any of which could
damage our reputation, make our premium brands unrecognizable, or reduce demand of our products, which could adversely
affect our profitability.
19
We face substantial competition in our industry, including many new entrants into spirits; and consolidation among
beverage alcohol producers, wholesalers, and 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 e-commerce retailers, 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 and the increased growth and popularity
of the e-commerce retail environment across the consumer product goods market 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. Furthermore, consolidation of distributors may lead to the erosion of
margins as newly consolidated distributors take down prices. Changes in distributors’ strategies, including a reduction in the
number of brands they carry, the allocation of shelf space for our competitors’ brands, or private label products, may adversely
affect our sales, margin, outlook, and market share. 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. For
example, we are facing an increasingly competitive pricing environment, and our competitors may have more flexibility to
adjust to such challenges. 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 traditional and e-commerce retailers, could adversely affect
our sales, margins, and business and financial results. 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 private 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, and result in a reduction in our earnings per share and a decrease on our 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
financial 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 results.
20
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 online and in the countries where we do business. We may not succeed 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 where we do business, the ability to register
and enforce intellectual property rights varies from country to country. In some countries, for example, it may be more difficult
to successfully stop counterfeiting or look-alike products, either because the law is inadequate or, even though satisfactory legal
options may exist, it may be difficult to obtain and enforce sanctions against counterfeiters. 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 some of our brands, experience problems with product counterfeiting and other
forms of trademark infringement. We combat counterfeiting by working with other companies in the spirits industry through
our membership in the International Federation of Spirits Producers (IFSP) and with brand owners in other industries via our
membership in React, an anti-counterfeiting network organization. While we believe IFSP and React are effective
organizations, they are not active in every market, and their efforts are subject to obtaining the cooperation of local authorities
and courts in the markets where they are active. Despite the efforts of IFSP, React, and our own teams, lower-quality and
counterfeit products that could be 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 them. 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 financial results. 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 sales and our business and financial results. 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 our 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, and 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 cyber breach, a failure or corruption of one or more of our key information technology systems, networks, processes,
associated sites, or service providers, or a failure to comply with personal data protection laws 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
21
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 products to customers; hosting corporate strategic plans and employee data; 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 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 cybercrimes and cyberattacks 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 and the data of our customers, consumers,
employees, and others. If the IT systems, networks, or service providers we rely upon fail to function properly, or if we suffer a
loss or disclosure of our business strategy or other sensitive information, due to any number of causes, ranging from
catastrophic events to power outages to security breaches to usage errors by employees and other security issues, 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 results. 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 could require a significant amount of time.
In the ordinary course of our business, we receive, process, transmit, and store information relating to identifiable
individuals (personal data), primarily employees and former employees, but also relating to consumers. As a result, we are
subject to various U.S. federal and state and foreign laws and regulations relating to personal data. These laws have been
subject to frequent changes, and new legislation in this area may be enacted in other jurisdictions at any time. In the European
Union, the General Data Protection Regulation (GDPR) became effective on May 25, 2018, for all member states and it has
extraterritorial effect. The GDPR includes operational requirements for companies receiving or processing personal data of
European Union residents that are partially different from those that had previously been in place and includes significant
penalties for noncompliance. The changes introduced by the GDPR, as well as any other changes to existing personal data
protection laws and the introduction of such laws in other jurisdictions, have subjected and may continue in the future to subject
us to, among other things, additional costs and expenses and have required and may in the future require costly changes to our
business practices and security systems, policies, procedures, and practices. Improper disclosure of personal data in violation of
the GDPR and/or of other personal data protection laws could harm our reputation, cause loss of consumer confidence, subject
us to government enforcement actions (including fines), or result in private litigation against us, which could result in loss of
revenue, increased costs, liability for monetary damages, fines and/or criminal prosecution, all of which could negatively affect
our business and operating 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 our 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 resulting in the depletion of our
institutional knowledge base, could have an adverse impact on our business performance, reputation, financial condition, or
results of operations. Given the changing demographics, changes in immigration laws and policies, and increased demand for
talent globally, we, as an American multinational company, may not be able to find the right people with the right skills, at the
right time, and in the right location, to achieve our business objectives. Additionally, companies like ours may face increased
labor costs as a result of aggressive hiring and/or inflated levels of compensation offered by other employers, especially in
emerging markets – notably, India and other parts of Asia.
The Brown family has the ability to control the outcome of matters submitted for stockholder approval.
We are 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.
22
We have two classes of common stock. Our Class A common stock is entitled to full voting powers, including in the
elections of directors, while our Class B common stock may not vote except as provided by the laws of Delaware. We have had
two classes of common stock since 1959, when our stockholders approved the issuance of two shares of Class B non-voting
common stock to every holder of our voting common stock. Such dual-class share structures have increasingly come under the
scrutiny of major indices, institutional investors, and proxy advisory firms, with some calling for the reclassification of non-
voting common stock.
A 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 transactions. 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 believe that it is in the interests of all shareholders that we remain independent and family-controlled, and we
believe the Brown family stockholders share these interests. Thus, our common stock dual class share structure, as it has existed
since 1959, is perpetual, and we do not have a sunset provision in our Restated Certificate of Incorporation or By-laws that
provides for the eventual reclassification of the non-voting common stock to voting common stock. 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 or interests of institutional, short-term, non-
voting, or other non-controlling investors, or that have a negative effect on our stock price. Further, because the Brown family
controls the majority of our voting stock, Brown-Forman might be a less attractive takeover target, which could adversely affect
the market price of both our voting and our non-voting common stock. And the difference in voting rights for our common
stock could also adversely and disproportionately affect the value of our Class B non-voting common stock to the extent that
investors view, or any potential future purchaser of our Company views, the superior voting rights and control represented by
the Class A common stock to have value.
Item 1B. Unresolved Staff Comments
None.
23
Item 2. Properties
Our company-owned production facilities include distilleries, a winery, 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, Latvia, Mexico, the Netherlands, South Africa, and the United States.
In addition to our company-owned production locations and our 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 leased office locations outside
Louisville are:
• United States: Irving, Texas; Irvine, California; Baltimore, Maryland; Atlanta, Georgia; San Rafael, California; and
Washington, D.C.
•
International: Guadalajara, Mexico; Hamburg, Germany; São Paulo, Brazil; Moscow, Russia; Warsaw, Poland; Sydney,
Australia; Paris, France; Prague, Czechia; Amsterdam, Netherlands; London, United Kingdom; Barcelona, Spain; Mexico
City, Mexico; Seoul, South Korea; Gurgaon, India; Istanbul, Turkey; Shanghai, China; Hong Kong; Cape Town, South
Africa; Dubai, United Arab Emirates; Kiev, Ukraine; and Tokyo, Japan.
Location
Principal Activities
Notes
Significant Properties
United States:
Louisville, Kentucky
Lynchburg, Tennessee
Corporate offices
Distilling, bottling, warehousing
Visitors’ center
Cooperage
Distilling, bottling, warehousing
Visitors’ center
Includes several renovated historic structures
Home of Old Forester
Brown-Forman Cooperage
Home of Jack Daniel’s
Woodford County, Kentucky Distilling, bottling, warehousing
Home of Woodford Reserve
Windsor, California
Trinity, Alabama
Clifton, Tennessee
Stevenson, Alabama
Spencer, Indiana
Jackson, Ohio
International:
Collingwood, Canada
Cour-Cheverny, France
Amatitán, Mexico
Slane, Ireland
Aberdeenshire, Scotland
Morayshire, Scotland
Newbridge, Scotland
Portsoy, Scotland
Visitors’ center
Vineyards, winery, bottling, warehousing Home of Sonoma-Cutrer
Visitors’ center
Cooperage
Stave and heading mill
Stave and heading mill
Stave and heading mill
Stave and heading mill
Jack Daniel Cooperage
Land is leased from a third party
Distilling, warehousing
Distilling, bottling, warehousing
Distilling, bottling, warehousing
Visitors’ center
Distilling
Visitors’ center
Distilling, warehousing
Visitors’ center
Distilling, warehousing
Visitors’ center
Bottling
Distilling, warehousing
Visitors’ center
Home of Canadian Mist
Home of Chambord
Home of our tequila brands
Home of Slane Irish Whiskey
Home of Glendronach
Home of BenRiach
Home of Glenglassaugh
We believe that our facilities are in good condition and are adequate for our business.
24
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 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.
25
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, 2019, there were 2,575 holders of record of Class A common stock and 5,271 holders of record of
Class B common stock. Because of overlapping ownership between classes, as of May 31, 2019, we had only 5,327 distinct
common stockholders of record.
Equity Compensation Plan Information
The following table summarizes information as of April 30, 2019, 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
3,141,260
$33.25
14,141,324
1Includes 2,583,815 Class B common shares to be issued upon exercise of stock-settled stock appreciation rights (SSARs); 175,440 Class B
performance-based restricted stock units; 165,579 Class A performance-based restricted stock units; 138,331 Class A common deferred stock
units (DSUs); and 78,095 Class B common DSUs issued under the Brown-Forman 2004 or 2013 Omnibus Compensation Plans. 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 6,851,991 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.
26
Stock Performance Graph
The graph below compares the cumulative total shareholder return of our Class B common stock for the last five fiscal years
with the Standard & Poor’s 500 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, 2014, and that all dividends were reinvested.
The graph shows the value that each of these investments would have had on April 30 in the years since 2014.
27
Share Repurchases
The following table provides information about shares of our common stock (Class A and Class B, in total) that we
acquired during the quarter ended April 30, 2019:
Total
Number of
Shares
Purchased
Average
Price Paid
per Share
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
Period
February 1, 2019 – February 28, 2019
14,204
$
March 1, 2019 – March 31, 2019
April 1, 2019 – April 30, 2019
Total
— $
1,490
15,694
$
$
47.07
—
51.86
47.53
$
$
$
—
—
—
—
—
—
—
The shares presented in the above table were acquired from employees to satisfy income tax withholdings triggered by the
vesting of restricted shares.
28
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.”
For Year Ended April 30:
Sales
Excise taxes
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
Cash provided by operations
Cash dividends declared per common share
Dividend payout ratio
As of April 30:
Total assets
Long-term debt
Total debt
Notes:
(Dollars in millions, except per share amounts)
2015
2016
2017
2018
2019
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,096
962
3,134
2,183
1,045
684
529.0
532.7
1.29
1.28
69.7%
33.3%
31.7%
3,196
22.0%
631
0.484
37.5%
4,188
743
1,183
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,011
922
3,089
2,144
1,556
1,067
507.4
510.7
2.10
2.09
69.4%
50.4%
28.3%
3,221
34.1%
545
0.524
25.0%
4,183
1,230
1,501
$
$
$
$
$
$
$
$
$
$
$
$
$
$
3,857
863
2,994
2,021
1,010
669
484.6
488.1
1.38
1.37
67.5%
33.8%
28.3%
3,591
19.8%
656
0.564
$
$
$
$
$
$
$
$
$
$
$
4,201
953
3,248
2,202
1,048
717
480.3
484.2
1.49
1.48
67.8%
32.3%
26.6%
3,832
20.0%
653
1.608
40.9%
107.8%
4,625
1,689
2,149
$
$
$
4,976
2,341
2,556
$
$
$
$
$
$
$
$
$
$
$
$
$
$
4,276
952
3,324
2,166
1,144
835
479.0
482.1
1.74
1.73
65.2%
34.4%
19.8%
4,125
22.0%
800
0.648
37.2%
5,139
2,290
2,440
1.
Includes the results of Southern Comfort and Tuaca, both of which were sold in March 2016 at a gain of $485 million (pre-tax). Includes the results of
BenRiach since its acquisition in June 2016.
2. Weighted average shares, earnings per share, and cash dividends declared per common share have been adjusted for a 2-for-1 stock split in August 2016
and a 5-for-4 stock split in February 2018.
3. As discussed in Note 2 to the Consolidated Financial Statements, we adopted Accounting Standards Updates (ASUs) 2016-15 and 2017-07 as of May 1,
2018. The amounts presented above for operating income, operating margin, and cash provided by operations differ from previously reported amounts due
to the retrospective application of those ASUs.
4.
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.
5. Cash dividends declared per common share include a special cash dividend of $1.00 in fiscal 2018.
6. We define dividend payout ratio as cash dividends divided by net income.
29
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help
the reader better understand Brown-Forman, our operations, our financial results, and our current business environment. Please
read this MD&A in conjunction with our Consolidated Financial Statements and the accompanying Notes contained in “Item 8.
Financial Statements and Supplementary Data” (the Consolidated Financial Statements).
Our MD&A is organized as follows:
Table of Contents
Presentation basis. This MD&A reflects the basis of presentation described in Note 1 “Accounting Policies”
to the Consolidated Financial Statements. In addition, we define statistical and non-GAAP financial measures
that we believe help readers understand our results of operations and the trends affecting our business.
Reclassifications. We discuss retrospective adjustments to our prior year statements of operations during fiscal
years 2018 and 2017. Please read this section in conjunction with Note 2 to the accompanying financial
statements.
Significant developments. We discuss developments during the most recent three fiscal years. Please read this
section in conjunction with “Item 1. Business,” which provides a general description of our business and strategy.
Executive summary. We discuss (a) fiscal 2019 highlights and (b) our outlook for fiscal 2020, including the
trends, developments, and uncertainties that we expect to affect our business.
Results of operations. We discuss (a) fiscal 2019 results for our largest markets, (b) fiscal 2019 results for our
largest brands, and (c) the causes of year-over-year changes in our statements of operations line items, including
transactions and other items that affect the comparability of our results, for fiscal year 2019 and 2018.
Liquidity and capital resources. We discuss (a) the causes of year-over-year changes in cash flows from
operating activities, investing activities, and financing activities; (b) recent and expected future capital
expenditures; (c) dividends and share repurchases; and (d) our liquidity position, including capital resources
available to us.
Off-balance sheet arrangements and long-term obligations.
Critical accounting policies and estimates. We discuss the critical accounting policies and estimates that
require significant management judgment.
Page
30
33
34
36
39
48
50
51
Presentation Basis
Non-GAAP Financial Measures
We use some financial measures in this report that are not measures of financial performance under U.S. generally accepted
accounting principles (GAAP). These non-GAAP measures, defined below, should be viewed as supplements to (not substitutes
for) our results of operations and other measures reported under GAAP. Other companies may not define or calculate these non-
GAAP measures in the same way.
“Underlying change” in measures of statements of operations. We present changes in certain measures, or line items, of the
statements of operations that are adjusted to an “underlying” basis. We use “underlying change” for the following measures of the
statements of operations: (a) underlying net sales; (b) underlying cost of sales; (c) underlying gross profit; (d) underlying advertising
expenses; (e) underlying selling, general, and administrative (SG&A) expenses; (f) underlying other expense (income) net; (g)
underlying operating expenses1; and (h) underlying operating income. To calculate these measures, we adjust, as applicable, for
(a) acquisitions and divestitures, (b) a new accounting standard, (c) foreign exchange, (d) estimated net changes in distributor
inventories, and (e) the establishment of our charitable foundation. We explain these adjustments below.
•
“Acquisitions and divestitures.” This adjustment removes (a) any non-recurring effects related to our acquisitions and
divestitures (e.g., transaction gains or losses, transaction costs, and integration costs), and (b) the effects of operating activity
related to acquired and divested brands for periods not comparable year over year (non-comparable periods). By excluding
non-comparable periods, we therefore include the effects of acquired and divested brands only to the extent that results are
comparable year over year.
1Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
30
In fiscal 2016, we sold our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. and entered into
a related transition services agreement (TSA). During fiscal 2017, we completed our obligations under the TSA. This adjustment
removes the net sales, cost of sales, and operating expenses recognized in fiscal 2017 pursuant to the TSA related to contract
bottling services and distribution services in certain markets.
•
•
•
•
On June 1, 2016, we acquired The BenRiach Distillery Company Limited (BenRiach). This adjustment removes (a) transaction
and integration costs related to the acquisition and (b) operating activity for the acquired business for the non-comparable
period. With respect to comparisons of fiscal 2018 to fiscal 2017, the non-comparable period is the month of May.
“New accounting standard.” Under Accounting Standards Codification (ASC) 606, “Revenue from Contracts with
Customers,” we recognize the cost of certain customer incentives earlier than we did before adopting ASC 606. Although this
change in timing did not have a significant impact on a full-year basis, there was some change in the timing of recognition
across periods. Additionally, some payments to customers that we classified as expenses before adopting the new standard
are classified as reductions of net sales under our new policy. See Note 2 to the accompanying financial statements for additional
information. This adjustment allows us to look at underlying change on a comparable basis.
“Foundation.” In fiscal 2018, we established the Brown-Forman Foundation (the Foundation) with an initial $70 million
contribution to support the Company’s charitable giving program in the communities where our employees live and work.
This adjustment removes the initial $70 million contribution to the Foundation from our underlying SG&A expenses and
underlying operating income to present our underlying results on a comparable basis.
“Foreign exchange.” We calculate the percentage change in certain line items of the statements of operations in accordance
with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to
understand our business on a constant-dollar basis, as fluctuations in exchange rates can distort the underlying trend both
positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the
effect of foreign exchange fluctuations when comparing across periods, we translate current-year results at prior-year rates
and remove transactional and hedging foreign exchange gains and losses from current- and prior-year periods.
“Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor
inventories on changes in certain line items of the statements of operations. For each period compared, we use volume
information from our distributors to estimate the effect of distributor inventory changes in certain line items of the statements
of operations. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in
certain line items of the statements of operations and allows us to understand better our underlying results and trends.
We use the non-GAAP measures “underlying change” to: (a) understand our performance from period to period on a consistent
basis; (b) compare our performance to that of our competitors; (c) calculate components of management incentive compensation;
(d) plan and forecast; and (e) communicate our financial performance to the board of directors, stockholders, and investment
analysts. We provide reconciliations of the “underlying change” in certain line items of the statements of operations to their nearest
GAAP measures in the tables under “Results of Operations - Year-Over-Year Comparisons.” We have consistently applied the
adjustments within our reconciliations in arriving at each non-GAAP measure.
“Return on average invested capital.” This measure refers to the sum of net income and after-tax interest expense, divided by
average invested capital. Average invested capital equals assets less liabilities, excluding interest-bearing debt, and is calculated
using the average of the most recent 13 month-end balances. After-tax interest expense equals interest expense multiplied by one
minus our effective tax rate. We use this non-GAAP measure because we consider return on average invested capital to be a
meaningful indicator of how effectively and efficiently we invest capital in our business.
Definitions
Aggregations.
From time to time, to explain our results of operations or to highlight trends and uncertainties affecting our business, we
aggregate markets according to stage of economic development as defined by the International Monetary Fund (IMF), and we
aggregate brands by spirits category. Below, we define the geographic and brand aggregations used in this report.
Geographic Aggregations.
In “Results of Operations - Fiscal 2019 Market Highlights,” we provide supplemental information for our largest markets
ranked by percentage of total fiscal 2019 net sales. In addition to markets listed by country name, we include the following
aggregations:
31
•
•
•
•
“Developed International” markets are “advanced economies” as defined by the IMF, excluding the United States. Our largest
developed international markets are the United Kingdom, Australia, Germany, France, and Japan. This aggregation represents
our net sales of branded products to these markets.
“Emerging” markets are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are
Mexico, Poland, Russia, and Brazil. This aggregation represents our net sales of branded products to these markets.
“Travel Retail” represents our net sales of branded products to global duty-free customers, other travel retail customers, and
the U.S. military regardless of customer location.
“Non-branded and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of
customer location.
Brand Aggregations.
In “Results of Operations - Fiscal 2019 Brand Highlights,” we provide supplemental information for our largest brands
ranked by percentage of total fiscal 2019 net sales. In addition to brands listed by name, we include the following aggregations:
•
“Whiskey” includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink (RTD), and ready-to-pour products
(RTP). The brands included in this category are the Jack Daniel's family of brands, Woodford Reserve, Canadian Mist,
GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers’ Craft.
•
“American whiskey” includes the Jack Daniel’s family of brands, premium bourbons (defined below), and Early
Times.
•
•
“Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and
RTP products (JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee
Fire (JDTF), Jack Daniel’s Single Barrel Collection (JDSB), Jack Daniel’s Tennessee Rye Whiskey (JDTR), Jack
Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and Jack Daniel’s Bottled-in-Bond.
“Jack Daniel’s RTD and RTP” products include all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s &
Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, Jack
Daniel’s Double Jack, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Cider
(JD Cider), Jack Daniel’s Lynchburg Lemonade (JD Lynchburg Lemonade), and the seasonal Jack Daniel’s
Winter Jack RTP.
•
“Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft.
“Tequila” includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
“Vodka” includes Finlandia.
“Wine” includes Korbel Champagne and Sonoma-Cutrer wines.
“Non-branded and bulk” includes our net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of
customer location.
•
•
•
•
Other Metrics.
•
•
“Depletions.” We generally record revenues when we ship our products to our customers. Depletions is a term commonly
used in the beverage alcohol industry to describe volume. Depending on the context, depletions means either (a) our shipments
directly to retail or wholesale customers for owned distribution markets or (b) shipments from our distributor customers to
retailers and wholesalers in other markets. We believe that depletions measure volume in a way that more closely reflects
consumer demand than our shipments to distributor customers do. In this document, unless otherwise specified, we refer to
depletions when discussing volume.
“Consumer takeaway.” When discussing trends in the market, we refer to consumer takeaway, a term commonly used in the
beverage alcohol industry. Consumer takeaway refers to the purchase of product by consumers from retail outlets as measured
by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol
Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer
takeaway data using the retail sales value metric. We believe consumer takeaway is a leading indicator of how consumer
demand is trending.
32
Reclassifications
As discussed in Note 2 to the accompanying financial statements, we retrospectively adjusted our prior year statements of
operations in connection with the adoption of Accounting Standards Update (ASU) 2017-07, “Improving the Presentation of Net
Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” We also reclassified some previously reported expense
amounts related to certain marketing research and promotional agency costs. The impact of these changes, which had no effect
on net income, was not material.
The following tables reconcile the previously reported amounts to the currently reported amounts in the statements of
operations for fiscal years 2017 and 2018.
Previously
Reported
Adoption of
ASU 2017-07
Reclassifications
Currently
Reported
Fiscal 2017
$
2,994
$
— $
— $
(Dollars in millions)
Net sales
Cost of sales
Gross profit
Advertising expenses
Selling, general, and administrative expenses
Other expense (income), net
Operating income
Non-operating postretirement expense
Interest income
Interest expense
Income before income taxes
Income taxes
Net income
(Dollars in millions)
Net sales
Cost of sales
Gross profit
Advertising expenses
Selling, general, and administrative expenses
Other expense (income), net
Operating income
Non-operating postretirement expense
Interest income
Interest expense
Income before income taxes
Income taxes
Net income
—
—
—
(21)
—
21
21
—
—
—
—
—
—
(11)
11
—
—
—
—
—
—
—
— $
— $
— $
— $
—
—
—
(9)
—
9
9
—
—
—
—
—
—
(9)
9
—
—
—
—
—
—
—
2,994
973
2,021
372
657
(18)
1,010
21
(3)
59
933
264
669
3,248
1,046
2,202
405
765
(16)
1,048
9
(6)
68
977
260
717
Fiscal 2018
Adoption of
ASU 2017-07
Reclassifications
Currently
Reported
$
— $
— $
$
$
973
2,021
383
667
(18)
989
—
(3)
59
933
264
669
Previously
Reported
3,248
1,046
2,202
414
765
(16)
1,039
—
(6)
68
977
260
717
33
$
$
$
Significant Developments
Below we discuss the significant developments in our business during fiscal 2017, fiscal 2018, and fiscal 2019. These
developments relate to (a) innovation, (b) acquisitions and divestitures, and (c) capital deployment.
Innovation
•
Jack Daniel’s family of brands. Innovation within the Jack Daniel’s family of brands has contributed to our growth over the
last three years as described below. In addition, we recently announced the launch of Jack Daniel’s Tennessee Apple, which
we expect to introduce in the United States in the fall of 2019.
In fiscal 2018, we introduced several new JD RTD products, including Jack Daniel’s Southern Peach Country Cocktails
in the United States and Jack Daniel’s Lynchburg Lemonade in Germany. These introductions contributed to our JD RTD
growth in those markets.
In fiscal 2018, we introduced Jack Daniel’s Tennessee Rye (JDTR), the first full-strength whiskey with a different grain
recipe from the Jack Daniel’s family of brands in over two decades, in the United States and certain international markets.
In fiscal 2019, we expanded JDTR to several additional markets including France, Travel Retail, Germany, and Poland.
In fiscal 2019, we launched Jack Daniel’s Bottled-in-Bond exclusively in Travel Retail.
• Other American whiskeys. We continue to capitalize on consumers’ interest in premium plus whiskey with our wide range of
brands, including Woodford Reserve, Old Forester, and Coopers’ Craft.
In fiscal 2017, we unveiled new packaging for Woodford Reserve Double Oaked, the most successful line extension from
Woodford Reserve to date (first introduced in 2012). The Double Oaked variant of Woodford Reserve continued to
contribute meaningfully to the brand’s growth and surpassed 50,000 nine-liter cases in fiscal 2018. We introduced a new
in Woodford Reserve Straight Malt in fiscal 2019.
Five years ago, we introduced the Whiskey Row Series as a platform for high-end, craft expressions from Old Forester.
From fiscal 2017 through fiscal 2019, we expanded our Old Forester Whiskey Row Series by adding two new craft
expressions. In fiscal 2018, we added another craft expression in Old Forester Statesman. In addition, we launched new
packaging for our core Old Forester bourbons in February 2017. In fiscal 2019, we introduced the brand’s first new grain
recipe with the launch of Old Forester Rye.
In fiscal 2017, we introduced our first entirely new bourbon in 20 years, Coopers’ Craft, a super-premium brand now in
limited distribution in the United States. In fiscal 2019, we unveiled new packaging for Coopers’ Craft and introduced
Coopers’ Craft Barrel Reserve.
• Tequila brands. We experienced another record year for our tequila brands in fiscal 2019, as Herradura, el Jimador, and New
Mix contributed significantly to our overall net sales growth. In fiscal 2015, we released Herradura Ultra to participate in the
fast-growing market for ultra-premium “cristalino” tequilas in Mexico, and it has been a significant driver of our tequila
growth during the last five fiscal years. In fiscal 2019, we added additional “cristalino” expressions for the Mexico market
in el Jimador and Antiguo, with total “cristalino” volume surpassing 120,000 nine-liter cases.
•
Irish whiskey. In April 2017, we unveiled the first product from our Slane Irish Whiskey brand in Travel Retail in Ireland,
and we introduced the brand selectively in the United States, the United Kingdom, and Australia in the summer of 2017. In
fiscal 2019, we expanded Slane nationally in the United States and introduced the brand in France.
Acquisitions and Divestitures
• On June 1, 2016, we acquired The BenRiach Distillery Company Limited (BenRiach). The acquisition, which brought three
single malt Scotch whisky brands to our portfolio, included brand trademarks, inventories, three visitors’ centers, three malt
distilleries, a bottling plant, and BenRiach’s headquarters in Edinburgh, Scotland. In fiscal 2019, we continued to expand
these brands globally, most notably in Travel Retail and several markets in Asia. See Note 13 to the Consolidated Financial
Statements for additional information.
Capital Deployment
• Beyond the acquisition described above, we have focused our capital deployment initiatives on (a) enabling the expected
future growth of our existing businesses through investments in our production capacity, barrel whiskey inventory, and brand-
building efforts; and (b) returning cash to our stockholders.
34
•
Investments. From fiscal 2017 through fiscal 2019, our capital expenditures totaled approximately $360 million and focused
on enabling the growth of our premium whiskey brands:
Jack Daniel’s. We expanded our shipping warehouse facility and built an additional warehouse.
Woodford Reserve. We expanded our bottling facility and built two new warehouses.
Old Forester. We opened the Old Forester Distillery and visitors’ center on Main Street in Louisville, Kentucky, in the
summer of 2018.
Slane Irish Whiskey. We opened a visitors’ center on the historic Slane Castle Estate in the fall of 2017. We also finished
building a new distillery, which opened in the summer of 2018.
• Cash returned to stockholders. From fiscal 2017 through fiscal 2019, we returned $2.1 billion to our stockholders through
$0.9 billion in regular quarterly dividends, $0.5 billion in special dividends, and $0.8 billion in share repurchases. We financed
our dividends and share repurchases with cash on hand and proceeds from the issuance of long-term debt totaling $1.3 billion.
35
Executive Summary
Tariffs
Tariffs negatively affected our results in fiscal 2019. In the highlights and outlook below, we discuss (a) certain facts about
tariffs as they relate to our business, (b) the effect of this development on our fiscal 2019 results, and (c) the expected effect of
tariffs in fiscal 2020.
In response to the U.S. tariffs on steel and aluminum, the European Union, Mexico, Canada, Turkey, and China imposed
retaliatory tariffs on a number of U.S. goods, including American whiskey. The effective dates of the retaliatory tariffs and the
import duty rates before and after the retaliation are summarized below.
Summary of Retaliatory Tariffs in Effect for Fiscal 2019
Geographic Area
European Union
Mexico1
Canada1
Turkey1
China
Effective Date
June 22, 2018
June 5, 2018
July 1, 2018
June 21, 2018
July 6, 2018
Rate
Before After
—% 25%
—% 25%
—% 10%
—% 140%
5% 30%
1Following April 30, 2019, the retaliatory tariffs in Mexico and Canada were rescinded and the tariff rate in Turkey was reduced to 70%. See
“Fiscal 2020 Outlook” below for additional information.
Tariffs negatively affected our fiscal 2019 performance as described below. These costs will continue to negatively impact
our results as long as tariffs are in place.
Lower net sales. Certain customers paid the incremental costs of tariffs. We compensated these customers for these
incremental costs by reducing our net prices.
Higher cost of sales. In markets where we own the inventory, we paid the incremental cost of tariffs.
The combined effect of these tariff-related costs, whether arising as a reduction of net sales or as an increase in cost of sales,
is hereafter referred to as “incremental costs associated with tariffs.”
Fiscal 2019 Highlights
• We delivered net sales of $3.3 billion, an increase of 2% compared to fiscal 2018. Excluding (a) the negative effect of foreign
exchange (reflecting the strengthening of the dollar against the Turkish lira, British pound, euro, Australian dollar, and Mexican
peso) and (b) the adoption of the revenue recognition accounting standard, we grew underlying net sales 5%. We estimate
that incremental costs associated with tariffs reduced our underlying net sales growth by approximately one percentage point.
From a brand perspective, our underlying net sales growth was driven by the Jack Daniel’s family of brands, our premium
bourbon brands, and our tequila brands.
From a geographic perspective, emerging markets led the Company’s growth in underlying net sales. The United States
was our second largest contributor to underlying net sales gains, although the rate of growth slowed compared to fiscal
2018. Developed international markets continued to be a significant driver of our growth, although incremental costs
associated with tariffs dampened the year-over-year gains.
• We delivered operating income of $1.1 billion, an increase of 9% compared to fiscal 2018. Excluding the impact of (a) the
$70 million contribution to establish the Foundation in fiscal 2018 and (b) the negative effect of foreign exchange, underlying
operating income grew 5% driven by our underlying gross profit growth and a decrease in underlying SG&A expenses.
• We incurred a pension settlement charge of $15 million in non-operating postretirement expense, which was reclassified from
accumulated other comprehensive income in accordance with U.S. accounting standards. The settlement resulted from a
significant increase in lump-sum pension payments.
• We delivered diluted earnings per share of $1.73, an increase of 17% compared to fiscal 2018, due to (a) the absence of the
$70 million contribution to establish the Foundation in fiscal 2018, (b) the benefit of a lower effective tax rate from the Tax
36
Cuts and Jobs Act (Tax Act), and (c) an increase in reported operating income. These benefits were partially offset by higher
interest expense, which resulted from a new bond issuance in March 2018, and higher non-operating postretirement expense,
which resulted from the pension settlement charge described above.
• Our return on average invested capital increased to 22.0% in fiscal 2019, compared to 20.0% in fiscal 2018. This increase
was driven by the absence of the Foundation contribution and the benefit of a lower effective tax rate from the Tax Act,
partially offset by higher invested capital.
Summary of Operating Performance Fiscal 2017-2019
Fiscal year ended April 30
2017
2018
2019
Net sales
Cost of sales
Gross profit
Advertising2
SG&A2
Operating income2
$2,994
$ 3,248
$3,324
973
2,021
372
657
1,046
2,202
405
765
1,158
2,166
396
641
$1,010
$ 1,048
$1,144
Total operating expenses3
$1,011
$ 1,154
$1,022
Reported Change
2017 vs.
2018
2018 vs.
2019
Underlying Change1
2018 vs.
2017 vs.
2019
2018
8%
7%
9%
9%
16%
4%
14%
2%
11%
(2%)
(2%)
(16%)
9%
(11%)
6%
8%
6%
6%
4%
6%
5%
5%
12%
2%
3%
(5%)
5%
(2%)
As a percentage of net sales4
Gross profit
Operating income
Interest expense, net
Effective tax rate
67.5%
33.8%
67.8%
32.3%
0.3pp
65.2%
34.4% (1.5pp)
(2.6pp)
2.1pp
$
56
28.3%
$
62
26.6%
$
80
9%
19.8% (1.7pp)
31%
(6.8pp)
17%
2.0pp
Diluted earnings per share
Return on average invested capital5
$ 1.37
$ 1.48
$ 1.73
19.8%
20.0%
22.0%
8%
0.2pp
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.
2We retrospectively adjusted our fiscal 2017 and fiscal 2018 advertising expense, SG&A expense, and operating income as described in Note 2
to the accompanying financial statements and “Reclassifications” above. Our previously disclosed growth rates from fiscal 2017 vs. fiscal 2018
were as follows (reported/underlying): advertising expense (8% / 6%), SG&A expense (15% / 3%), and operating income (5% / 8%).
3Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
4Year-over-year changes in percentages are reported in percentage points (pp).
5See “Non-GAAP Financial Measures” above for details on our use of “return on average invested capital,” including how we calculate this
measure and why we think this information is useful to readers.
Fiscal 2020 Outlook
We are optimistic about our prospects for growth of net sales, operating income, and diluted earnings per share in fiscal
2020. Below we discuss our current expectations for fiscal 2020, including trends, developments, and uncertainties that we expect
may affect our business. When we provide guidance for underlying change for the following line items of the statements of
operations, we do not provide guidance for the corresponding GAAP change because the GAAP measure will include items that
are difficult to quantify or predict with reasonable certainty, including the estimated net change in distributor inventories and
foreign exchange, each of which could have a significant impact to our GAAP line items of the statements of operations.
In response to the U.S. tariffs on steel and aluminum, the European Union, Mexico, Canada, Turkey, and China imposed
retaliatory tariffs on a number of U.S. goods, including American whiskey, in the summer of 2018. Our American whiskeys are
made in the United States and exported around the world. Our fiscal 2019 results were hurt by incremental costs associated with
tariffs through lower net sales and higher cost of sales. Following April 30, 2019, the retaliatory tariffs in Mexico and Canada
were rescinded and the tariff rate in Turkey was reduced from 140% to 70%. These favorable changes to tariffs will slightly reduce
the incremental costs associated with tariffs in fiscal 2020. The outlook below assumes that the remaining tariffs in the European
Union, Turkey, and China remain in place in fiscal 2020. If the tariffs in the European Union, Turkey, and China were rescinded,
37
we would benefit either through higher net sales or lower cost of sales. Conversely, if additional tariffs were imposed on our
products, we would be negatively impacted either through lower net sales or higher cost of sales.
Outlook for key measures:
• Underlying net sales. We expect the underlying net sales growth rate trend from fiscal 2019 to accelerate in fiscal 2020. We
anticipate the Jack Daniel’s family of brands, our portfolio of premium bourbons, and our tequila brands to again drive growth.
We expect that volume will be the most significant driver of underlying net sales growth in fiscal 2020.
• Underlying cost of sales. We expect underlying cost of sales to grow at a significantly higher rate than net sales in fiscal 2020,
reflecting incremental costs associated with tariffs as well as a significant increase in input cost compared to fiscal 2019,
driven by the cost of agave and wood.
• Underlying operating expenses. We expect total underlying operating expenses to grow more slowly than net sales.
Additional considerations related to our fiscal 2020 outlook:
•
Foreign exchange. In fiscal 2019, our reported results were hurt by foreign exchange due to the strengthening of the U.S.
dollar. We cannot predict the movement of foreign exchange rates with reasonable certainty; however, if April 30, 2019 spot
rates were to hold for fiscal 2020, we would expect foreign exchange to negatively affect our fiscal 2020 results, but less so
than in fiscal 2019. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for details about how we
manage foreign exchange risk.
38
Results of Operations
Fiscal 2019 Market Highlights
The following table shows net sales results for our ten largest markets, summarized by geographic area, for fiscal 2019
compared to fiscal 2018. We discuss the most significant changes in net sales for each market.
Top 10 Markets - Percentage of Fiscal 2019 Total Net Sales and Fiscal 2019 Net Sales Growth by Geographic Area
Net Sales % Change vs. 2018
Markets1
United States
Developed International
United Kingdom
Australia
Germany
France
Japan
Rest of Developed International
Emerging
Mexico
Poland
Russia
Brazil
Rest of Emerging
Travel Retail
Non-branded and bulk
Total
Note: Totals may differ due to rounding
% of Fiscal
2019 Net
Sales
New
Accounting
Standard
Foreign
Exchange
Reported
47%
28%
6%
5%
5%
4%
1%
7%
18%
5%
3%
2%
1%
7%
4%
3%
100%
2%
1%
(4%)
—%
8%
(1%)
15%
—%
4%
3%
9%
16%
(13%)
3%
1%
10%
2%
1%
—%
—%
—%
—%
—%
1%
1%
1%
3%
—%
—%
2%
—%
1%
—%
1%
—%
4%
6%
6%
2%
3%
(3%)
3%
6%
6%
1%
4%
13%
8%
—%
—%
2%
Estimated
Net Chg in
Distributor
Inventories Underlying2
3%
4%
3%
6%
10%
2%
2%
(1%)
11%
11%
10%
17%
25%
8%
6%
10%
5%
—%
(2%)
—%
—%
—%
—%
(11%)
(4%)
—%
—%
—%
(3%)
23%
(4%)
4%
—%
—%
1See “Definitions” above for definitions of market aggregations presented here.
2See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure
and why we believe this information is useful to readers.
• The United States, our most important market, accounted for 47% of our reported net sales in fiscal 2019. Reported net sales
in the United States grew 2%, while underlying net sales increased 3%, after adjusting for the adoption of the revenue
recognition accounting standard. Underlying net sales gains were led by (a) volume growth supported by strong takeaway
trends of Woodford Reserve, (b) higher volumes and favorable price/mix of our tequila brands and Old Forester, and
(c) increased volumes of JD RTDs and Gentleman Jack. This growth was partially offset by (a) slight declines of JDTW,
partially related to a route-to-market change in one state, and (b) lower volumes of Canadian Mist.
• Developed International markets accounted for 28% of our reported net sales in fiscal 2019. Reported net sales increased
1%, while underlying net sales grew 4%, after adjusting for (a) the negative effect of foreign exchange (reflecting the
strengthening of the dollar against the British pound, euro, and Australian dollar), and (b) an estimated net increase in distributor
inventories. Underlying net sales growth was driven by gains in Germany, Australia, Spain, and the United Kingdom, partially
offset by the incremental costs associated with tariffs in certain markets in the rest of developed Europe. We estimate that
incremental costs associated with tariffs reduced our underlying net sales growth in Developed International markets by
approximately one percentage point.
In the United Kingdom, underlying net sales growth was driven by higher volumes of JDTW, JDSB, Gentleman Jack,
and JDTH, partially offset by declines of JD Cider and Chambord.
In Australia, underlying net sales growth was driven by higher pricing of JD RTDs and increased volumes of Gentleman
Jack.
39
In Germany, underlying net sales growth was driven by volumetric growth of JDTW and JD RTDs.
In France, underlying net sales growth was driven by higher volumes of JDTH and the launch of JDTR, partially offset
by unfavorable price/mix and lower volumes of JDTW.
In Japan, underlying net sales growth was led by increased distribution of our Scotch brands, while lower pricing offset
volume growth of the Jack Daniel’s family of brands.
Underlying net sales in the Rest of Developed International markets were down as incremental costs associated with
tariffs in certain European markets more than offset the growth in Spain, Belgium, Czechia, and Korea. JDTW grew
volumes in Spain, where our owned-distribution organization continued to lead to an acceleration in performance over
the past fiscal year.
• Emerging markets accounted for 18% of our reported net sales in fiscal 2019. Reported net sales increased 4%, while
underlying net sales grew 11% after adjusting for (a) the negative effect of foreign exchange (reflecting the strengthening of
the dollar against the Turkish lira, Mexican peso, and Brazilian real) and (b) the adoption of the revenue recognition accounting
standard. Underlying net sales growth was led by Mexico, Brazil, Russia, Poland, and China.
In Mexico, underlying net sales growth was driven by higher volumes and favorable price/mix of Herradura and el
Jimador. The growth of Herradura benefited from strong consumer demand for Herradura Ultra, our cristalino tequila
expression. The launch of New Mix mineral water line extensions also contributed to growth.
In Poland, underlying net sales growth was led by higher volumes of JDTW and Gentleman Jack, partially offset by
unfavorable price/mix of Finlandia.
In Russia, underlying net sales growth was led by higher volumes and favorable price/mix of JDTW due in part to our
fiscal 2018 distributor change. Volumetric gains of Finlandia also contributed to growth.
In Brazil, underlying net sales growth continued to be led by increased volumes, higher pricing, and favorable channel
mix of JDTW.
Underlying net sales growth in the Rest of Emerging markets was led by China, Ukraine, and sub-Saharan Africa. All of
these geographic areas benefited from higher volumes of JDTW. Ukraine also benefited from higher volumes and favorable
price/mix of Finlandia.
• Travel Retail accounted for 4% of our reported net sales in fiscal 2019. Reported net sales increased 1%, while underlying
net sales increased 6% after adjusting for (a) an estimated net decrease in distributor inventories and (b) the adoption of the
revenue recognition accounting standard. Underlying net sales growth was led by the launch of Jack Daniel’s Bottled-in-Bond
and JDTR, higher volumes of Woodford Reserve, and the expansion of our Scotch whiskey brands.
• Non-branded and bulk accounted for 3% of our reported net sales in fiscal 2019. Both reported and underlying net sales
increased 10%. Growth came from increased bulk sales and higher volumes and prices for used barrel sales.
1International Wine & Spirit Research (IWSR), 2018 data.
40
Fiscal 2019 Brand Highlights
The following table highlights the worldwide results of our largest brands for fiscal 2019 compared to fiscal 2018. We discuss
results of the brands most affecting our performance below the table.
Major Brands Worldwide Results for Fiscal 2019
Product category/brand family/
brand1
Whiskey
Jack Daniel’s family of brands
JDTW
JD RTD/RTP
JDTH
Gentleman Jack
JDTF
Other Jack Daniel’s whiskey brands
Woodford Reserve
Tequila
el Jimador
Herradura
Vodka (Finlandia)
Wine
Rest of Portfolio
Non-branded and bulk
Note: Totals may differ due to rounding
Volumes
Net Sales % Change vs. 2018
9L Depletions1
Reported
New
Accounting
Standard
Foreign
Exchange
Estimated Net
Chg in
Distributor
Inventories
Underlying2
4%
4%
2%
4%
6%
9%
5%
25%
23%
3%
9%
10%
(1%)
—%
(8%)
NA
3%
1%
—%
4%
5%
6%
3%
9%
17%
6%
8%
8%
(4%)
—%
(16%)
10%
1%
1%
—%
—%
1%
1%
1%
1%
1%
2%
2%
3%
1%
1%
2%
—%
2%
2%
2%
4%
2%
2%
1%
2%
—%
3%
2%
3%
4%
—%
9%
—%
—%
—%
—%
—%
(1%)
—%
(1%)
4%
4%
—%
—%
—%
(2%)
(1%)
1%
—%
5%
4%
2%
8%
7%
8%
4%
16%
22%
12%
13%
13%
(1%)
—%
(3%)
10%
1See “Definitions” above for definitions of brand aggregations and volume measures presented here.
2See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure
and why we believe this information is useful to readers.
• Whiskey brands grew volumes 4% in fiscal 2019. Reported net sales grew 3%, while underlying net sales increased 5% after
adjusting for (a) the negative effect of foreign exchange (reflecting the strengthening of the dollar against the British pound,
Turkish lira, euro, Australian dollar, and Brazilian real) and (b) the adoption of the revenue recognition accounting standard.
Growth was led by the Jack Daniel’s family of brands, Woodford Reserve, Old Forester, and our Scotch brands, partially
offset by declines in Canadian Mist.
The Jack Daniel’s family of brands grew underlying net sales led by (a) JDTW in markets outside of the United States,
(b) broad-based geographic growth of JD RTDs, JDTH, and Gentleman Jack, and (c) further expansion of JDTR along
with the launch of Jack Daniel’s Bottled-in-Bond in Travel Retail.
•
JDTW generates a significant percentage of our total net sales and is our top priority. The brand is the largest one
in the world priced over $25 per 750 ml per bottle1 and the world’s fourth-largest premium spirits brand measured
by both volume and retail value.2 During calendar 2018, JDTW grew volume for the 27th consecutive year1 and,
among the top five premium spirits brands on the list, was the only one to grow volume in each of the past five years2
– an achievement that underscores our belief in the brand’s sustainable appeal and long-term growth potential.
Underlying net sales growth of JDTW was broad based, led by increases in Brazil, Germany, Poland, Russia, Spain,
and China. These increases were partially offset by the incremental costs associated with tariffs in certain markets
in the rest of developed Europe, which reduced the underlying net sales growth of JDTW by approximately one
percentage point. Slight declines in the United States, partially related to a route-to-market change in one state, also
offset these gains.
1IWSR, 2018 data.
2Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in March 2019.
41
• The Jack Daniel’s RTD/RTP brands grew underlying net sales driven by higher pricing in Australia along with
consumer-led volumetric growth in Germany and the United States.
•
Since its introduction in late fiscal 2011, JDTH has contributed significantly to our net sales growth. JDTH remains
one of the top 20 largest brands in the world priced over $25 per 750 ml bottle.1 Underlying net sales gains were
driven by broad-based volume growth, particularly in France, the United States, Mexico, and the United Kingdom.
• Gentleman Jack grew underlying net sales driven by higher volumes in the United States along with broad-based
international volume gains, particularly in the United Kingdom, Poland, and Australia.
•
JDTF grew underlying net sales led by increased volumes and favorable price/mix in the United States along with
higher volumes in the United Kingdom and Brazil. JDTF has grown volumes each year since its introduction in late
fiscal 2015.
• Our Other Jack Daniel’s whiskey brands increased underlying net sales driven by (a) higher volumes of JDSB in
the United States and the United Kingdom, (b) the launch of Jack Daniel’s Bottled-in-Bond in Travel Retail, and (c)
the launch of JDTR in Travel Retail and select European markets. JDTR is the third largest rye brand in the world
in just its second year on the market.1
Woodford Reserve was once again selected as an Impact “Hot Brand.”2 The United States is by far the brand’s most
important market and was responsible for most of its growth during fiscal 2019. However, the brand continued its
momentum outside the United States, growing volumes 17%, driven by Travel Retail. Woodford Reserve is the leading
super-premium American whiskey globally1, and is poised for continued growth as interest in bourbon continues to
increase around the world. We plan to continue devoting substantial resources to Woodford Reserve to support its growth
potential with sustained advertising, including our Kentucky Derby sponsorship, and ongoing capital investments.
• Tequila brands grew volumes 3% in fiscal 2019, while reported net sales increased 6% and underlying net sales grew 12%
after adjusting for (a) the negative effect of foreign exchange (reflecting the strengthening of the dollar against the Mexican
peso) and (b) the adoption of the revenue recognition accounting standard.
el Jimador grew underlying net sales driven by consumer-led volumetric growth and favorable price/mix in the United
States and Mexico. Mexico also benefited from the launch of el Jimador Cristalino.
Herradura grew underlying net sales driven by increased volumes and higher prices in the brand’s largest markets, the
United States and Mexico, as both markets benefited from consumer-led volumetric growth of the brand’s “cristalino”
tequila expression, Herradura Ultra. We remain focused on developing Herradura in the United States, which has
considerable potential for growth, strengthening our position in Mexico, and continuing to build our presence in higher-
value tequila markets throughout the world.
• Finlandia volumes fell 1% in fiscal 2019, while reported net sales decreased 4% and underlying net sales declined 1% after
adjusting for (a) the negative effect of foreign exchange (reflecting the strengthening of the dollar against the Russian ruble,
Turkish lira, and Ukrainian hryvnia), (b) an estimated net increase in distributor inventories, and (c) the adoption of the revenue
recognition accounting standard. The decrease in underlying net sales was driven by unfavorable price/mix in Poland and
lower volumes in the United States, partially offset by increased volumes and favorable price/mix in Russia and Ukraine.
• Wine volumes were flat in fiscal 2019 and both reported and underlying net sales growth were also flat after adjusting
underlying growth for an estimated net increase in distributor inventories and the adoption of the revenue recognition
accounting standard. In the United States, higher volumes and favorable price/mix of Sonoma-Cutrer were offset by
unfavorable price/mix and lower volumes of Korbel Champagne.
• Rest of Portfolio volumes declined 8%, while reported net sales decreased 16% and underlying net sales dropped 3% after
adjusting for (a) the negative effect of foreign exchange (reflecting the strengthening of the dollar against the Australian dollar,
euro, and British pound), (b) the adoption of the revenue recognition accounting standard, and (c) an estimated net decrease
in distributor inventories. The decrease in underlying net sales was due to discontinued agency brands in Turkey and unfavorable
price/mix and lower volumes of Chambord in the United Kingdom.
• Non-branded and bulk reported and underlying net sales grew 10% from increased bulk sales and higher volumes and prices
for used barrels sales.
1IWSR, 2018 data.
2Impact Databank published the Impact’s “Hot Brands - Spirits” list in March 2019.
42
Year-Over-Year Comparisons
Net Sales
Percentage change versus the prior fiscal year ended April 30
Change in reported net sales
New accounting standard
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 2019 compared to Fiscal 2018
2018
2019
8%
—%
(1%)
(1%)
6%
5%
2%
2%
1%
2%
—%
5%
3%
2%
Net sales of $3,324 million increased 2%, or $76 million, in fiscal 2019 compared to fiscal 2018. Underlying net sales grew
5% after adjusting reported results for (a) the negative effect of foreign exchange (reflecting the strengthening of the dollar against
the Turkish lira, British pound, euro, Australian dollar, and Mexican peso) and (b) the adoption of the revenue recognition accounting
standard. The change in underlying net sales comprised 3% volume growth and 2% price/mix. Volume growth was led by the Jack
Daniel’s family of brands, our premium bourbons, and our tequilas brands. Price/mix was driven by (a) favorable portfolio mix
reflecting faster growth from our higher-priced brands, most notably Woodford Reserve, the Jack Daniel’s family of brands, and
our Scotch brands, (b) higher average pricing on our tequila brands and JD RTDs, and (c) favorable portfolio mix reflecting declines
from our lower-priced brands, most notably Canadian Mist and Early Times. We estimate that lower pricing to certain customers
related to tariffs reduced our underlying net sales growth by approximately one percentage point for fiscal 2019. See “Results of
Operations - Fiscal 2019 Market Highlights and Fiscal 2019 Brand Highlights” above for further details on the factors contributing
to the growth in underlying net sales for fiscal 2019.
Fiscal 2018 compared to Fiscal 2017
Net sales of $3,248 million increased 8%, or $254 million, in fiscal 2018 compared to fiscal 2017. Underlying net sales grew
6% after adjusting reported results for (a) the positive effect of foreign exchange (reflecting the weakening of the dollar against
the euro, Polish zloty, and Mexican peso) and (b) an estimated net increase in distributor inventories. The change in underlying
net sales comprised 5% volume growth and nearly 2% price/mix. Volume growth was led by the Jack Daniel's family of brands,
our tequilas brands, and our premium bourbons. Price/mix was driven by (a) an increase in the share of sales of higher-margin
brands, most notably the Jack Daniel’s family of brands and Woodford Reserve, and (b) higher average pricing on JD RTDs and
tequilas.
Cost of Sales
Percentage change versus the prior fiscal year ended April 30
Change in reported cost of sales
Acquisitions and divestitures
New accounting standard
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
2018
2019
7%
1%
—%
—%
(1%)
8%
5%
3%
11%
—%
—%
2%
—%
12%
3%
9%
43
Fiscal 2019 compared to Fiscal 2018
Cost of sales of $1,158 million increased $112 million, or 11%, in fiscal 2019 compared to fiscal 2018. Underlying cost of
sales grew 12% after adjusting reported costs for the positive effect of foreign exchange driven by (a) higher input costs, including
wood, agave, and depreciation expense related to capital expansion; (b) incremental costs associated with tariffs, primarily in
Europe; and (c) higher volumes of the Jack Daniel’s family of brands, our premium bourbons, and our tequila brands. We estimate
that incremental costs associated with tariffs increased our underlying cost of sales by approximately four percentage points.
Fiscal 2018 compared to Fiscal 2017
Cost of sales of $1,046 million increased $73 million, or 7%, in fiscal 2018 compared to fiscal 2017. Underlying cost of
sales grew 8% after adjusting reported costs for (a) the net effect of our Scotch acquisition and the absence of sales related to our
TSA for Southern Comfort and Tuaca and (b) an estimated net increase in distributor inventories. The increase in underlying costs
of sales was driven by higher volumes and an increase in input costs, including wood and agave.
Gross Profit
Percentage change versus the prior fiscal year ended April 30
Change in reported gross profit
New accounting standard
Foreign exchange
Estimated net change in distributor inventories
Change in underlying gross profit
Note: Totals may differ due to rounding
Gross Margin
Fiscal year ended April 30
Prior year gross margin
Price/mix
Cost
Acquisitions and divestitures
Tariffs1
New accounting standard
Foreign exchange
Change in gross margin
Current year gross margin
Note: Totals may differ due to rounding
2018
2019
9%
—%
(2%)
(1%)
6%
2018
67.5%
0.3%
(0.7%)
0.3%
—%
—%
0.4%
0.3%
67.8%
(2%)
1%
2%
—%
2%
2019
67.8%
0.4%
(0.9%)
—%
(1.6%)
(0.3%)
(0.2%)
(2.6%)
65.2%
1“Tariffs” include the combined effect of tariff-related costs, whether arising as a reduction of net sales or as an increase in cost of sales. See
“Executive Summary - Tariffs” for additional details of these costs.
Fiscal 2019 compared to Fiscal 2018
Gross profit of $2,166 million decreased $36 million, or 2%, in fiscal 2019 compared to fiscal 2018. Underlying gross profit
improved 2% after adjusting reported results for the negative effect of foreign exchange and the adoption of the revenue recognition
accounting standard. The increase in underlying gross profit resulted from the same factors that contributed to the increase in
underlying net sales, partially offset by the same factors that drove higher underlying cost of sales.
Gross margin decreased to 65.2% in fiscal 2019, down 2.6 percentage points from 67.8% in fiscal 2018. The decrease in
gross margin was driven by incremental costs associated with tariffs and higher input costs.
Fiscal 2018 compared to Fiscal 2017
Gross profit of $2,202 million increased $181 million, or 9%, in fiscal 2018 compared to fiscal 2017. Gross profit on an
underlying basis improved 6% after adjusting reported gross profit for the positive effect of foreign exchange and an estimated
net increase in distributor inventories. The increase in underlying gross profit resulted from the same factors that contributed to
the increase in underlying net sales, partially offset by the same factors that drove higher underlying cost of sales.
44
Gross margin increased to 67.8% in fiscal 2018, up 0.3 percentage points from 67.5% in fiscal 2017. The increase in gross
margin was primarily due to (a) favorable price/mix, (b) the positive effect of foreign exchange, and (c) the net effect of acquisitions
and divestitures, partially offset by an increase in underlying cost of sales.
Operating Expenses
Percentage change versus the prior year period ended April 30
2018
Advertising1
SG&A1
Total operating expenses2
2019
Advertising
SG&A
Total operating expenses2
Note: Totals may differ due to rounding
Reported
New Accounting
Standard
Foundation
Foreign
Exchange
Underlying
9%
16%
14%
(2%)
(16%)
(11%)
—%
—%
—%
4%
1%
2%
—%
(11%)
(7%)
—%
8%
6%
(3%)
(2%)
(2%)
2%
2%
2%
6%
4%
5%
3%
(5%)
(2%)
1We retrospectively adjusted our fiscal 2017 and fiscal 2018 advertising expense and SG&A expense as described in Note 2 to the accompanying
financial statements and “Reclassifications” above. Our previously disclosed growth rates from fiscal 2017 vs. fiscal 2018 were as follows
(reported/underlying): advertising expense (8% / 6%) and SG&A expense (15% / 3%).
2Operating expenses include advertising expense, SG&A expense, and other expense (income), net.
Fiscal 2019 compared to Fiscal 2018
Operating expenses totaled $1,022 million and decreased $132 million, or 11%, in fiscal 2019 compared to fiscal 2018.
Underlying operating expenses declined 2% after adjusting for (a) the absence of the $70 million contribution to establish the
Foundation in fiscal 2018, (b) the adoption of the revenue recognition accounting standard, and (c) the positive effect of foreign
exchange.
• Reported advertising expenses declined 2% in fiscal 2019 compared to fiscal 2018, while underlying advertising expenses
increased 3% after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard
and the positive effect of foreign exchange. The increase in underlying advertising expense was driven by higher spending
on our American whiskey portfolio with investments in (a) JDTW, led by increased spending in emerging markets;
(b) Woodford Reserve, partially due to our Kentucky Derby sponsorship; and (c) Old Forester, partially due to our new
distillery and visitors’center. Increased investments in our tequila brands in Mexico and the United States also contributed
to our higher underlying advertising expense.
• Reported SG&A expenses declined 16% in fiscal 2019 compared to fiscal 2018, while underlying SG&A declined 5%
after adjusting for (a) the absence of the $70 million contribution to establish the Foundation in fiscal 2018, (b) the positive
effect of foreign exchange, and (c) reclassifications related to the adoption of the revenue recognition accounting standard.
The decrease in underlying SG&A was driven by lower personnel costs, primarily compensation-related costs.
Fiscal 2018 compared to Fiscal 2017
Operating expenses totaled $1,154 million and increased $143 million, or 14%, in fiscal 2018 compared to fiscal 2017.
Underlying operating expenses grew 5% after adjusting for the establishment of the Foundation and the negative effect of foreign
exchange.
• Reported advertising expenses increased 9% in fiscal 2018 compared to fiscal 2017, while underlying advertising expenses
increased 6% after adjusting for the negative effect of foreign exchange. The increase in underlying advertising expense
was driven by higher spending on (a) our American whiskey portfolio in the United States, including JDTW, Woodford
Reserve, Gentleman Jack, and the launch of JDTR; (b) the continued rollout of Slane Irish Whiskey in the United States;
and (c) the expansion of our single-malt Scotch brands.
• Reported SG&A expenses increased 16% in fiscal 2018 compared to fiscal 2017, while underlying SG&A increased 4%
after adjusting reported results for the effect of our $70 million contribution to establish the Foundation and the negative
effect of foreign exchange. The increase in underlying SG&A was driven by higher incentive compensation expenses
and strategic investments, including our new Spain distribution operation, partially offset by continued tight management
of discretionary spending.
45
Operating Income
Percentage change versus the prior fiscal year ended April 30
Change in reported operating income
Foundation
Foreign exchange
Estimated net change in distributor inventories
Change in underlying operating income
Note: Totals may differ due to rounding
20181
4%
7%
(2%)
(2%)
6%
2019
9%
(7%)
3%
—%
5%
1We retrospectively adjusted our fiscal 2017 and fiscal 2018 operating income as described in Note 2 to the accompanying financial statements
and “Reclassifications” above. Our previously disclosed reported and underlying growth rates from fiscal 2017 vs. fiscal 2018 were as follows:
5% reported, 8% underlying.
Fiscal 2019 compared to Fiscal 2018
Operating income was $1,144 million in fiscal 2019, an increase of $96 million, or 9%, compared to fiscal 2018. Underlying
operating income grew 5% after adjusting for (a) the absence of the $70 million contribution to establish the Foundation in fiscal
2018 and (b) the negative effect of foreign exchange. The same factors that contributed to the growth in underlying gross profit
also contributed to the growth in underlying operating income in addition to operating expense leverage driven by a reduction in
underlying SG&A.
Operating margin increased 2.1 percentage points to 34.4% in fiscal 2019 from 32.3% in fiscal 2018. The increase in our
operating margin was due to the absence of the $70 million contribution to establish the Foundation in fiscal 2018 and lower
SG&A spend in fiscal 2019. These factors were partially offset by the decrease in underlying gross margin, largely reflecting the
incremental costs associated with tariffs and higher input costs.
Fiscal 2018 compared to Fiscal 2017
Operating income was $1,048 million in fiscal 2018, an increase of $38 million, or 4%, compared to fiscal 2017. Underlying
operating income growth was 6% after adjusting for (a) the establishment of the Foundation, (b) the positive effect of foreign
exchange, and (c) an estimated net increase in distributor inventories, driven by the United States. The same factors that contributed
to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by meaningful
operating expense leverage, as underlying SG&A spend grew 4% compared to underlying net sales growth of 6%.
Operating margin declined 1.5 percentage points to 32.3% in fiscal 2018 from 33.8% in fiscal 2017. The decrease in our
operating margin was primarily due to the 2.2 percentage point effect of the establishment of the Foundation, partially offset by
operating expense leverage.
Fiscal 2019 compared to Fiscal 2018
Interest expense (net) increased $18 million, or 31%, in fiscal 2019 compared to fiscal 2018, due to a higher average long-
term debt balance and a higher interest rate on our short-term borrowings.
Our effective tax rate for fiscal 2019 was 19.8% compared to 26.6% in fiscal 2018. The decrease in our effective tax rate
was driven by the reduction in the U.S. statutory federal tax rate and a beneficial change in the discrete transitional impacts of the
Tax Act. These reductions were partially offset by (a) a decrease in the beneficial impact of foreign earnings at lower rates, (b) the
absence of the amortization of deferred tax benefit that was reclassified to retained earnings as a result of the application of ASU
2016-16, and (c) the impact of other miscellaneous provisions of the Tax Act. Because our fiscal year ends on April 30, the lower
U.S. corporate income tax rate prescribed by the Tax Act was phased in, resulting in a U.S. statutory federal rate of 30.4% for our
fiscal year ended April 30, 2018, and 21% for our current and subsequent fiscal years. See Note 12 to the Consolidated Financial
Statements for additional information.
Diluted earnings per share were $1.73 in fiscal 2019, up 17% from $1.48 in fiscal 2018. This increase resulted from
(a) the absence of the $70 million contribution to establish the Foundation in fiscal 2018, (b) the benefit of a lower effective tax
rate from the Tax Act, and (c) an increase in reported operating income. These benefits were partially offset by higher interest
expense and non-operating postretirement expense.
46
Fiscal 2018 compared to Fiscal 2017
Interest expense (net) increased $6 million, or 9%, in fiscal 2018 compared to fiscal 2017, due to a higher average long-
term debt balance and a higher interest rate on our short-term borrowings.
Our effective tax rate for fiscal 2018 was 26.6% compared to 28.3% in fiscal 2017. The decrease in our effective tax rate
was driven by an increase in the beneficial impact of foreign earnings at lower rates and an increase in excess tax benefits related
to stock-based compensation, partially offset by the net impact of the Tax Act. See Note 12 to the Consolidated Financial Statements
for additional information.
Diluted earnings per share were $1.48 in fiscal 2018, up 8% from $1.37 in fiscal 2017. This increase resulted from (a) an
increase in reported operating income (net of a $0.10 decrease from the establishment of the Foundation) and (b) the benefit of a
lower effective tax rate.
47
Liquidity and Capital Resources
Our ability to generate cash from operations consistently is one of our most significant financial strengths. Our strong cash
flows enable us to invest in our people, invest in our brands, invest in our assets, pay regular dividends, make strategic acquisitions
that we believe will enhance shareholder value, repurchase shares of common stock, and, from time to time, pay special dividends.
We believe cash flows from operations are sufficient to meet our expected operating and capital requirements for the foreseeable
future.
Cash Flow Summary
(Dollars in millions)
Operating activities
Investing activities:
Acquisition of business
Additions to property, plant, and equipment
Other
Financing activities:
Net change in short-term borrowings
Net proceeds from long-term debt
Acquisition of treasury stock
Dividends paid (regular)
Special dividend payment
Other
2017
2018
2019
$
656
$
653
$
800
(307)
(112)
(20)
(439)
(122)
717
(561)
(274)
—
(45)
(285)
(13)
(81) $
—
(127)
(22)
(149)
(3)
345
(1)
(292)
(481)
(34)
(466)
19
57
$
—
(119)
—
(119)
(71)
—
(207)
(310)
—
(11)
(599)
(14)
68
Foreign exchange effect on cash and cash equivalents
Net increase (decrease) in cash and cash equivalents
$
Fiscal 2019 compared to Fiscal 2018
Cash and cash equivalents increased $68 million in fiscal 2019, compared to an increase of $57 million in fiscal 2018. Cash
provided by operations during fiscal 2019 was $800 million, up $147 million from fiscal 2018. The increase was largely attributable
to certain capital deployment actions announced and implemented during fiscal 2018. Those actions included a special contribution
of $120 million (in addition to other regular funding) for our U.S. pension plans and a $70 million contribution to create the
Foundation. Excluding those items, cash provided by operations declined $43 million from fiscal 2018, due largely to the adverse
effect of higher tariffs.
Cash used for investing activities was $119 million during fiscal 2019, compared to $149 million for the prior year. The $30
million decline primarily reflects an $19 million reduction in payments for corporate-owned life insurance and an $8 million
decrease in capital spending.
Cash used for financing activities was $599 million during fiscal 2019, compared to $466 million for fiscal 2018. The $133
million increase largely reflects a $345 million decline in net proceeds from long-term debt, a $206 million increase in share
repurchases, and a $68 million increase in net repayments of short-term debt, partially offset by a $463 million reduction in
dividends (largely reflecting a special dividend payment of $481 million in fiscal 2018).
The impact on cash and cash equivalents as a result of exchange rate changes was a decrease of $14 million for fiscal 2019,
compared to an increase of $19 million in the prior fiscal year.
Fiscal 2018 compared to Fiscal 2017
Cash and cash equivalents increased $57 million in fiscal 2018, compared to a decrease of $81 million in fiscal 2017. Cash
provided by operations was down $3 million from fiscal 2017, as a $124 million increase in discretionary contributions to our
pension plans was largely offset by higher earnings (net of a $70 million contribution to establish the Foundation) and a $66 million
decline in income tax payments. The decline in income tax payments reflects the impact of the contributions to the pension plans
and charitable foundation and the lower federal tax rates resulting from the enactment of the Tax Act.
Cash used for investing activities was $149 million during fiscal 2018, compared to $439 million for the prior year. The
$290 million decrease largely reflects $307 million in cash paid to acquire BenRiach in June 2016, partially offset by a $15 million
48
increase in capital spending during the current year. The increase in capital spending is largely attributable to the construction of
new distilleries and visitors’ centers for both Slane Irish Whiskey and Old Forester and to the modernization and automation of
our Brown-Forman Cooperage operation.
Cash used for financing activities was $466 million during fiscal 2018, compared to $285 million for fiscal 2017. The $181
million increase largely reflects a special cash dividend payment of $481 million in April 2018, the repayment of $250 million of
notes that matured in January 2018, and a $122 million decrease in proceeds from long-term debt, partially offset by a $560 million
decline in share repurchases and a $119 million decrease in net repayments of short-term borrowings.
The impact on cash and cash equivalents as a result of exchange rate changes was an increase of $19 million for fiscal 2018,
compared to a decline of $13 million in fiscal 2017.
Capital Expenditures
Over the past several fiscal years, we significantly increased the level of our capital spending in order to build the production
platform for our current and expected future growth. Capital expenditures exceeded $100 million for each of the past six fiscal
years from 2014 through 2019 compared to, on average, $60 million for the prior six fiscal years.
In fiscal 2019, we continued to modernize and automate the Brown-Forman Cooperage; we expect to complete that project
in fiscal 2020. We also invested in expanding capacity, especially at Jack Daniel’s Distillery where we completed a multi-year
project that (a) extended both the shipping warehouse and processing building, (b) renovated the bottling house, and (c) improved
the shipping office.
In fiscal 2020, we expect capital expenditures to be approximately $130 million. We expect capital expenditures in fiscal
2021 and fiscal 2022 to remain at similar levels as we continue to evaluate both cost-saving initiatives and warehouse needs.
Share Repurchase Programs
Since the beginning of fiscal 2017, we have repurchased approximately 19 million shares of our common stock under two
separate repurchase programs.
Shares Purchased (Thousands)
Average Price Per Share, Including
Brokerage Commissions
Total Cost of Shares
Period
Class A
May 1, 2016 – April 30, 2017
May 1, 2018 – April 30, 2019
Dividends
30
43
73
Class B
14,757
4,187
18,944
Class A
Class B
$
$
38.77
47.49
$
$
37.75
47.30
(Millions)
558
200
758
$
$
$
From fiscal 2017 through fiscal 2019, we paid dividends totaling $1,357 million, including the $481 million special cash
dividend in fiscal 2018. As announced on May 23, 2019, our Board of Directors declared a regular quarterly cash dividend of
$0.166 per share on our Class A and Class B common stock. Stockholders of record on June 6, 2019, will receive the dividend on
July 1, 2019.
Sources of Liquidity
We manage liquidity to meet current obligations, fund capital expenditures, sustain and grow our regular dividends, and
return cash to our shareholders from time to time through share repurchases and special dividends while reserving adequate debt
capacity for unforeseen events and acquisition opportunities. Investment-grade credit ratings (A1 by Moody’s and A- by Standard &
Poor’s) provide us with financial flexibility when accessing global credit markets.
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 $800 million commercial paper program that we regularly use to fund our short-term
credit needs. Commercial paper outstanding was $215 million at April 30, 2018, and $150 million at April 30, 2019; details of
average commercial paper balances are presented below.
49
Year Ended
April 30,
(Amounts in millions)
Average daily commercial paper balance
2018
2019
$
485
$
421
Average interest rate
Average days to maturity
1.39%
31
2.33%
31
Our commercial paper program is supported by available commitments under our currently undrawn $800 million bank
credit facility that expires on November 10, 2022. Although unlikely, under extreme market conditions, one or more participating
banks may not be able to fund its commitments under our credit facility. We believe the debt capital markets are accessible sources
of long-term financing that could meet any additional liquidity needs. We believe our current liquidity position is sufficient to
meet all of our future financial commitments.
As of April 30, 2019, approximately 70% of our cash and cash equivalents were held by our foreign subsidiaries whose
earnings we expect to reinvest indefinitely outside of the United States. During fiscal 2019, we changed our indefinite reinvestment
assertion with respect to current year earnings and prior year undistributed earnings for one of those foreign subsidiaries and
repatriated approximately $120 million of cash to the United States from this subsidiary. No incremental taxes were due on this
distribution of cash beyond the repatriation tax recorded in fiscal 2018. In addition, we changed our indefinite reinvestment assertion
with respect to current year earnings and prior year undistributed earnings for additional select foreign subsidiaries. The earnings
for these select foreign subsidiaries are no longer indefinitely reinvested and may be distributed within our foreign entity structure;
however, they remain indefinitely reinvested outside of the United States. We continue to evaluate our future cash deployment
and may decide to repatriate additional cash held by other foreign subsidiaries to the United States. Future repatriations to the
United States may require us to provide for and pay additional taxes.
Off-Balance Sheet Arrangements
As of April 30, 2019, 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 6, 7, and 10 to the Consolidated Financial Statements). The following table
summarizes the amounts of those obligations as of April 30, 2019, and the years when they are expected to be paid.1 We expect
to meet these obligations with internally generated funds.
(Dollars in millions)
Long-term debt
Interest on long-term debt
Tax Act repatriation tax
Grape purchases
Operating leases
Postretirement benefits2
Agave purchases3
Total
Total
2020
2021-2022
2023-2024
After 2024
$
$
2,323
1,244
67
24
59
25
25
3,767
$
$
— $
74
—
12
23
25
n/a
134
$
— $
148
8
10
26
n/a
n/a
192
$
250
141
20
1
8
n/a
n/a
420
$
$
2,073
881
39
1
2
n/a
n/a
2,996
1 Excludes liabilities for tax uncertainties, as we cannot reasonably predict their ultimate amount or timing of settlement.
2 As of April 30, 2019, we have unfunded pension and other postretirement benefit obligations of $204 million. Because we cannot determine
the specific periods in which those obligations will be funded, the table above reflects no amounts related to those obligations other than
the $25 million of expected contributions in fiscal 2020.
3 As discussed in Note 6 to the Consolidated Financial Statements, we have obligations to purchase agave, a plant whose sap forms the raw
material for tequila. As of April 30, 2019, based on current market prices, obligations under these contracts totaled $25 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.
50
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. Goodwill is impaired
when the carrying amount of the related reporting unit exceeds its estimated fair value, in which case we write down the goodwill
by the amount of the excess (limited to the carrying amount of the goodwill). We estimate the reporting unit’s fair value using
discounted estimated future cash flows or market information. Similarly, a brand name is impaired when its carrying amount
exceeds its estimated fair value, in which case we write down the brand name to its estimated fair value. We typically estimate
the fair value of a brand name using either the “relief from royalty” or “excess earnings” method. We also consider market values
for similar assets when available. Considerable management judgment is necessary to estimate fair value, including making
assumptions about future cash flows, discount rates, and royalty rates.
We have the option, before quantifying the fair value of a reporting unit or brand name, to evaluate qualitative factors to
assess whether it is more likely than not that our goodwill or brand names are impaired. If we determine that is not the case, then
we are not required to quantify the fair value. That assessment also takes considerable management judgment.
Based on our assumptions, we believe none of our goodwill or other intangibles are impaired. Further, we estimate the fair
values of goodwill and other intangible assets substantially exceed their carrying amounts, with the exception of two brand name
intangible assets. As of April 30, 2019, the carrying amounts of these two brand names totaled $360 million. Net sales attributable
to these two brand names currently represent approximately 5% of our consolidated net sales.
Reasonably possible changes in the assumptions used to estimate the fair value of either brand name could result in a future
impairment charge. For example, we estimate that (a) a 10% decline in projected future cash flows for both brands would result
in a total non-cash impairment charge of approximately $5 million and (b) a 1 percentage point change in the discount rate would
result in a total non-cash impairment charge of approximately $8 million.
Pension and Other Postretirement Benefits
We sponsor various defined benefit pension plans and postretirement plans providing retiree health care and retiree life
insurance benefits. Benefits are based on factors such as years of service and compensation level during employment. We expense
the benefits expected to be paid over employees’ expected service. This requires us to make assumptions to determine the net
benefit 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 costs 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.
Beginning in fiscal 2018, we changed the method used to estimate the service cost and interest cost components of net
periodic benefit cost for our U.S. pension and other postretirement benefit plans. The new estimation approach discounts the
individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield
curve used to discount the cash flows used to measure the benefit obligation at the beginning of the period. Previously, we estimated
these service and interest cost components using a single weighted-average discount rate derived from the yield curve used to
measure the benefit obligation at the beginning of the period. We believe the new approach provides a more precise measurement
of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield
curve rates. We accounted for this change in estimate prospectively, beginning May 1, 2017. The new approach does not affect
the measurement of our plan obligations, but generally results in lower service cost and interest cost in periods when the yield
curve slopes upward.
51
The following table compares the assumed discount rates and expected return on assets used in determining net periodic
benefit cost for fiscal 2019 to those to be used in determining that cost for fiscal 2020.
Discount rate for service cost
Discount rate for interest cost
Expected return on plan assets
Pension Benefits
Medical and Life
Insurance Benefits
2019
2020
2019
2020
4.30%
3.93%
6.50%
4.17%
3.57%
6.50%
4.34%
3.90%
n/a
4.24%
3.53%
n/a
Using these assumptions, we estimate our pension and other postretirement benefit cost for fiscal 2020 will be approximately
$29 million. The following table compares the actual cost for fiscal 2019 to the estimated cost for fiscal 2020.
(Dollars in millions)
Service cost
Non-operating costs
Total
2019 Actual
2020 Estimated
$
$
25
22
47
$
$
24
5
29
Decreasing/increasing the assumed discount rates by 50 basis points would increase/decrease the total fiscal 2020 cost by
approximately $6 million (including $2 million of service cost and $4 million of non-operating costs). Decreasing/increasing the
assumed return on plan assets by 50 basis points would increase/decrease the total fiscal 2020 cost by approximately $4 million
(consisting only of non-operating costs).
Income Taxes
Significant judgment is required in evaluating our tax positions. We establish liabilities when some positions are likely to
be challenged and may not succeed, despite our belief that our tax return positions are fully supportable. We adjust these liabilities
in light of changing circumstances, such as the progress of a tax audit. We believe current liabilities are appropriate for all known
contingencies, but this situation could change.
Years can elapse before we can resolve a particular matter for which we may have established a tax liability. Although
predicting the final outcome or the timing of resolution of any particular tax matter can be difficult, we believe our liabilities reflect
the likely outcome of known tax contingencies. Unfavorable settlement of any particular issue could require use of our cash.
Conversely, a favorable resolution could result in reduced cash tax payments, the reversal of previously established liabilities, or
some combination of these results, which could reduce our effective tax rate.
Updated Accounting Standards
See Note 2 to the Consolidated Financial Statements for information about updated accounting standards that we have
recently adopted or will adopt in future periods.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Risk Management Framework
Success in business requires risk-taking, 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 potential risks and rewards. 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 matters 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 Chief Ethics, Compliance, and Risk Officer is responsible for Enterprise Risk Management and reports to the Board
at least annually. Our Enterprise Risk Management program includes systematically identifying and evaluating the major
52
risks we face, identifying people responsible for managing each risk, ensuring that risk mitigation plans are in place and,
together with internal audit, verifying that mitigation plans 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 our executive leaders. Within Risk Management, our crisis
management team facilitates simulations with the appropriate function and executive leaders to increase awareness and
preparedness.
• Our Internal Audit Department evaluates the ongoing effectiveness of our key internal controls through periodic audit
and review procedures.
• The Chief Ethics, Compliance, and Risk Officer helps ensure that all of our employees’ actions globally comply with all
applicable laws, our Code of Conduct, and our internal policies. The Chief Ethics, Compliance, and Risk Officer reports
the status of our compliance efforts four times a year to the Audit Committee.
Market risks
We face market risks arising from changes in foreign currency exchange rates, commodity prices, and interest rates. We
manage market risks through procurement strategies as well as the use of derivative and other financial instruments. Our risk
management program is governed by policies that authorize and control the nature and scope of transactions that we use to mitigate
market risks. Our policy permits the use of derivative financial instruments to mitigate market risks but prohibits their use for
speculative purposes.
Foreign currency exchange rate risk. Foreign currency fluctuations affect our net investments in foreign subsidiaries and
foreign currency-denominated cash flows. In general, we expect our cash flows to be negatively affected by a stronger dollar and
positively affected by a weaker dollar. Our most significant foreign currency exposures include the euro (EUR), the British pound
(GBP), the Australian dollar (AUD), the Polish zloty (PLN), the Mexican peso (MXN), and the Russian ruble (RUB). We manage
our foreign currency exposures through derivative financial instruments, principally foreign currency forward contracts, and debt
denominated in foreign currency. We had outstanding currency derivatives with notional amounts totaling $1,098 million and
$1,241 million at April 30, 2018 and 2019, respectively.
We estimate that a hypothetical 10% weakening of the dollar compared to exchange rates of hedged currencies as of April
30, 2019, would decrease the fair value of our then-existing foreign currency derivative contracts by approximately $51 million.
This hypothetical change in fair value does not consider the expected inverse change in the underlying foreign currency exposures.
Commodity price risk. Commodity price changes can affect our production and supply chain costs. Our most significant
commodities exposures include corn, malted barely, rye, natural gas, agave, and wood. We manage certain exposures through a
combination of purchase orders and long-term supply contracts.
Interest rate risk. Interest rate changes affect (a) the fair value of our fixed-rate debt, and (b) cash flows and earnings related
to our variable-rate debt and interest-bearing investments. In addition to currently outstanding debt, any potential future debt
offerings are subject to interest rate risk. Our interest rate exposures include U.S. Treasury rates, European Central Bank rates,
British government rates, and LIBOR.
As of April 30, 2019, our cash and cash equivalents ($307 million) and variable-rate debt ($150 million) were exposed to
interest rate changes. Based on the then-existing balances of these items, a hypothetical one percentage point increase in interest
rates would result in a negligible decrease in net interest expense.
See Notes 14 and 15 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data” (the
Consolidated Financial Statements) for additional information on our foreign currency exchange rate risk. See Note 6 to the
Consolidated Financial Statements for details on our grape and agave purchase obligations, which are exposed to commodity price
risk, and “Critical Accounting Policies and 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.
53
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
55
56
58
59
60
61
62
63
89
54
Management’s Responsibility for Financial Statements
Reports of Management
Our management is responsible for preparing, presenting, and ensuring the 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 Corporate Governance
Guidelines, we are firmly committed to adhering to the highest standards of moral and ethical behavior 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 Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. 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, 2019. PwC, which audited and reported on the Company’s consolidated
financial statements, has audited the effectiveness of our internal control over financial reporting as of April 30, 2019, as stated
in their report.
Dated:
June 13, 2019
By:
/s/ Lawson E. Whiting
Lawson E. Whiting
President and Chief Executive Officer
By:
/s/ Jane C. Morreau
Jane C. Morreau
Executive Vice President and Chief Financial Officer
55
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders
of Brown-Forman Corporation
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Brown-Forman Corporation and its subsidiaries (the
“Company”) as of April 30, 2019 and 2018, and the related consolidated statements of operations, comprehensive income,
stockholders’ equity and cash flows for each of the three years in the period ended April 30, 2019, including the related notes and
schedule of valuation and qualifying accounts for each of the three years in the period ended April 30, 2019 appearing under Item
15(a)(2) (collectively referred to as the “consolidated financial statements”). We also have audited the Company’s internal control
over financial reporting as of April 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013)
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of the Company as of April 30, 2019 and 2018, and the results of their operations and their cash flows for each of the
three years in the period ended April 30, 2019 in conformity with accounting principles generally accepted in the United States
of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting
as of April 30, 2019, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these consolidated financial statements, 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 the Company's consolidated financial statements and on the Company’s internal control over financial reporting based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB)
and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform
the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement,
whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement
of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the accounting principles used and significant estimates made by management,
as well as evaluating the overall presentation of the consolidated financial statements. 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.
Definition and Limitations of Internal Control over Financial Reporting
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.
56
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, Kentucky
June 13, 2019
We have served as the Company’s auditor since 1933.
57
Brown-Forman Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in millions, except per share amounts)
Year Ended April 30,
Sales
Excise taxes
Net sales
Cost of sales
Gross profit
Advertising expenses
Selling, general, and administrative expenses
Other expense (income), net
Operating income
Non-operating postretirement expense
Interest income
Interest expense
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
2017
2018
2019
$
$
$
$
3,857
863
2,994
973
2,021
372
657
(18)
1,010
21
(3)
59
933
264
669
1.38
1.37
$
$
$
$
4,201
953
3,248
1,046
2,202
405
765
(16)
1,048
9
(6)
68
977
260
717
1.49
1.48
$
$
$
$
4,276
952
3,324
1,158
2,166
396
641
(15)
1,144
22
(8)
88
1,042
207
835
1.74
1.73
The accompanying notes are an integral part of the consolidated financial statements.
58
Brown-Forman Corporation and Subsidiaries
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
2017
2018
2019
669
$
717
$
(73)
—
33
(40)
629
$
24
(28)
16
12
729
$
835
(27)
48
(6)
15
850
$
$
The accompanying notes are an integral part of the consolidated financial statements.
59
Brown-Forman Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in millions)
Assets
2018
2019
April 30,
Cash and cash equivalents
Accounts receivable, net
Inventories:
Barreled whiskey
Finished goods
Work in process
Raw materials and supplies
Total inventories
Other current assets
Total current assets
Property, plant, and equipment, net
Goodwill
Other intangible assets
Deferred tax assets
Other assets
Total assets
Accounts payable and accrued expenses
Liabilities
Accrued income taxes
Short-term borrowings
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 (170,000,000 shares authorized; 170,000,000 shares issued)
Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 314,532,000 shares issued)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income (loss), net of tax
Treasury stock, at cost (3,531,000 and 7,360,000 shares in 2018 and 2019, respectively)
Total stockholders’ equity
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of the consolidated financial statements.
60
$
$
$
$
$
$
239
639
947
225
117
90
1,379
298
2,555
780
763
670
16
192
4,976
581
25
215
821
2,341
85
191
222
3,660
25
47
4
1,730
(378)
(112)
1,316
$
4,976
$
307
609
1,004
279
152
85
1,520
283
2,719
816
753
645
16
190
5,139
544
9
150
703
2,290
145
197
157
3,492
25
47
—
2,238
(363)
(300)
1,647
5,139
Brown-Forman Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in millions)
Year Ended April 30,
Cash flows from operating activities:
2017
2018
2019
Net income
Adjustments to reconcile net income to net cash provided by operations:
$
669
$
717
$
835
Depreciation and amortization
Stock-based compensation expense
Deferred income tax provision (benefit)
U.S. Tax Act repatriation tax provision (benefit)
Other, net
Changes in assets and liabilities, excluding the effects of acquisition of
business:
Accounts receivable
Inventories
Other current assets
Accounts payable and accrued expenses
Accrued income taxes
Other operating assets and liabilities
Cash provided by operating activities
Cash flows from investing activities:
Acquisition of business, net of cash acquired
Additions to property, plant, and equipment
Payments for corporate-owned life insurance
Proceeds from corporate-owned life insurance
Computer software expenditures
Cash 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
Acquisition of treasury stock
Dividends paid
Repayment of short-term obligation associated with acquisition of
business
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
$
$
$
58
14
(10)
—
11
6
(86)
12
(17)
(11)
10
656
(307)
(112)
(17)
—
(3)
(439)
(122)
—
717
(5)
(10)
(561)
(274)
(30)
(285)
(13)
(81)
263
182
48
266
$
$
$
64
19
(69)
91
(8)
(70)
(102)
29
58
8
(84)
653
—
(127)
(21)
—
(1)
(149)
(3)
(250)
595
(6)
(28)
(1)
(773)
—
(466)
19
57
182
239
65
200
$
$
$
72
14
38
(4)
8
23
(162)
30
(43)
(16)
5
800
—
(119)
(2)
4
(2)
(119)
(71)
—
—
—
(11)
(207)
(310)
—
(599)
(14)
68
239
307
90
201
The accompanying notes are an integral part of the consolidated financial statements.
61
Brown-Forman Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Equity
(Dollars in millions, except per share amounts)
Balance at April 30, 2016
$
13
$
21
$
114
$
4,065
$
(350) $
(2,301) $
1,562
Class A
Common
Stock
Class B
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
AOCI
Treasury
Stock
Total
12
22
(34)
Cumulative effect of change in accounting
principle (Note 2)
Stock split (Note 8)
Net income
Net other comprehensive income (loss)
Cash dividends ($0.564 per share)
Acquisition of treasury stock
Stock-based compensation expense
Stock issued under compensation plans
Loss on issuance of treasury stock issued
under compensation plans
43
(10)
14
Balance at April 30, 2017
25
Retirement of treasury stock (Note 8)
Stock split (Note 8)
Net income
Net other comprehensive income (loss)
Cash dividends ($1.608 per share)
Acquisition of treasury stock
Stock-based compensation expense
Stock issued under compensation plans
Loss on issuance of treasury stock issued
under compensation plans
Balance at April 30, 2018
25
47
Cumulative effect of change in accounting
principle (Note 2)
Net income
Net other comprehensive income (loss)
Cash dividends ($0.648 per share)
Acquisition of treasury stock
Stock-based compensation expense
Stock issued under compensation plans
Loss on issuance of treasury stock issued
under compensation plans
10
669
(274)
4,470
(2,684)
717
(773)
(40)
(561)
19
(390)
(2,843)
2,702
12
(1)
30
1,730
(378)
(112)
(5)
835
(310)
15
(207)
19
14
(29)
65
(8)
(14)
19
(58)
4
14
10
—
669
(40)
(274)
(561)
14
19
(29)
1,370
—
—
717
12
(773)
(1)
19
30
(58)
1,316
(5)
835
15
(310)
(207)
14
19
(30)
(18)
(12)
Balance at April 30, 2019
$
25
$
47
$
— $
2,238
$
(363) $
(300) $
1,647
The accompanying notes are an integral part of the consolidated financial statements.
62
Brown-Forman Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Dollars and other currency amounts 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
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. The allowance for doubtful accounts was $7 as of
both April 30, 2018 and 2019.
Inventories. Inventories are valued at the lower of cost or net realizable value. Approximately 52% 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 $290 and $303 higher than reported
at April 30, 2018 and 2019, 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. Goodwill is impaired
when the carrying amount of the related reporting unit exceeds its estimated fair value, in which case we write down the goodwill
by the amount of the excess (limited to the carrying amount of the goodwill). We estimate the reporting unit’s fair value using
discounted estimated future cash flows or market information. Similarly, a brand name is impaired when its carrying amount
exceeds its estimated fair value, in which case we write down the brand name to its estimated fair value. We typically estimate
the fair value of a brand name using either the “relief from royalty” or “excess earnings” method. We also consider market values
63
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.
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.
Revenue recognition. Our net sales predominantly reflect global sales of beverage alcohol consumer products. We sell these
products under contracts with different types of customers, depending on the market. The customer is most often a distributor,
wholesaler, or retailer.
Each contract typically includes a single performance obligation to transfer control of the products to the customer. Depending
on the contract, control is transferred when the products are either shipped or delivered to the customer, at which point we recognize
the transaction price for those products as net sales. The transaction price recognized at that point reflects our estimate of the
consideration to be received in exchange for the products. The actual amount may ultimately differ due to the effect of various
customer incentives and trade promotion activities. In making our estimates, we consider our historical experience and current
expectations, as applicable. Subsequent adjustments recognized for changes in estimated transaction prices are typically not
material.
Net sales exclude taxes we collect from customers that are imposed by various governments on our sales, and are reduced
by payments to customers unless made in exchange for distinct goods or services with fair values approximating the payments.
Net sales include any amounts we bill customers for shipping and handling activities related to the products. We recognize the
cost of those activities in cost of sales during the same period in which we recognize the related net sales. Sales returns, which
are permitted only in limited situations, are not material. Customer payment terms generally range from 30 to 90 days. There are
no significant amounts of contract assets or liabilities.
Cost of sales. Cost of sales includes the costs of receiving, producing, inspecting, warehousing, insuring, and shipping goods
sold during the period.
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.
Stock-based compensation. We use stock-based awards as part of our incentive compensation for eligible employees and
directors. We recognize the grant-date fair value of an award as compensation expense on a straight-line basis over the requisite
service period, which typically corresponds to the vesting period for the award. Upon forfeiture of an award prior to vesting, we
reverse any previously-recognized compensation expense related to that award. We classify stock-based compensation expense
within selling, general, and administrative expenses.
As we recognize compensation expense for a stock-based award, we concurrently recognize a related deferred tax asset.
The subsequent vesting or exercise of the award will generally result in an actual tax benefit that differs from the deferred tax
asset that had been recorded. The excess (deficiency) of the actual tax benefit over (under) the previously-recorded tax asset is
recognized as income tax benefit (expense) on the date of vesting or exercise.
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 in two steps. 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.
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.
64
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 income and
expenses. We record the resulting translation adjustments in other comprehensive income (loss).
Reclassifications. We have reclassified some previously reported expense amounts related to certain marketing research and
promotional agency costs to conform to the current year classification. These immaterial reclassifications between advertising
expenses and selling, general, and administrative expenses had no impact on operating income or net income.
2. Adoption of Updated Accounting Standards
We adopted the following Accounting Standards Update (ASU) issued by the Financial Accounting Standards Board (FASB)
as of May 1, 2016:
• ASU 2016-09: Improvements to Employee Share-Based Payment Accounting. This new guidance amends certain aspects
of the accounting for stock-based compensation, including the income tax consequences. Under the new guidance, we
recognize all tax benefits related to stock-based compensation as an income tax benefit in our statement of operations,
and include all income tax cash flows within operating activities in our statement of cash flows. Under the previous
accounting guidance, we recognized some of those tax benefits (excess tax benefits) as additional paid-in capital and
classified that amount as a financing activity in our statement of cash flows. We adopted these provisions of the new
guidance on a prospective basis.
Also, under the new guidance, we recognize the excess tax benefits during the period in which the related awards vest
or are exercised. Under the previous accounting guidance, we recognized those benefits during the period in which they
reduced taxes payable. We adopted this provision of the new guidance on a modified retrospective basis through a
cumulative-effect adjustment that increased retained earnings as of May 1, 2016, by $10.
We adopted the following ASUs as of May 1, 2018:
• ASU 2014-09: Revenue from Contracts with Customers. This update, codified along with various amendments as
Accounting Standards Codification Topic 606 (ASC 606), replaces previous revenue recognition guidance. The core
principle of ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to
customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or
services. ASC 606 also requires more financial statement disclosures than were required by previous revenue recognition
standards.
We adopted ASC 606 using the modified retrospective method. As a result, we recorded an adjustment that decreased
retained earnings as of May 1, 2018, by $25 (net of tax). The adjustment reflects the cumulative effect on that date of
applying our updated revenue recognition policy, under which we recognize the cost of certain customer incentives earlier
than we did before adopting ASC 606. Although this change in timing did not have a significant impact on a full-year
basis, there was some change in the timing of recognition across periods. Additionally, some payments to customers that
we classified as expenses before adopting the new standard are classified as reductions of net sales under our new policy.
65
The following table shows how the adoption of ASC 606 impacted our consolidated statement of operations for the year
ended April 30, 2019:
Year Ended April 30, 2019
Sales
Excise taxes
Net sales
Cost of sales
Gross profit
Advertising expenses
Selling, general, and administrative expenses
Other expense (income), net
Operating income
Non-operating postretirement expense
Interest income
Interest expense
Income before income taxes
Income taxes
Net income
Earnings per share:
Basic
Diluted
$
$
$
Under Prior Guidance
4,299
$
$
As Reported Under
ASC 606
Effect of Adoption
4,276
$
952
3,324
1,158
2,166
396
641
(15)
1,144
22
(8)
88
1,042
207
835
1.74
1.73
$
$
$
(23)
—
(23)
1
(24)
(14)
(8)
—
(2)
—
—
—
(2)
(1)
(1)
—
—
952
3,347
1,157
2,190
410
649
(15)
1,146
22
(8)
88
1,044
208
836
1.74
1.73
$
$
$
The following table shows how the adoption of ASC 606 impacted our consolidated balance sheet as of April 30, 2019:
Under Prior Guidance
As of April 30, 2019
As Reported Under
ASC 606
Effect of Adoption
Assets:
Other current assets
Deferred tax assets
Total assets
Liabilities:
Accounts payable and accrued expenses
Accrued income taxes
Deferred tax liabilities
Total liabilities
Stockholders’ Equity:
Retained earnings
Total stockholders’ equity
$
$
$
$
284
15
5,139
$
283
16
5,139
511
$
544
$
8
153
3,466
9
145
3,492
$
2,264
1,673
$
2,238
1,647
(1)
1
—
33
1
(8)
26
(26)
(26)
• ASU 2016-15: Classification of Certain Cash Receipts and Cash Payments. This new guidance addresses eight specific
issues related to the classification of certain cash receipts and cash payments on the statement of cash flows. The impact
of adopting the new guidance was limited to a change in our classification of cash payments for premiums on corporate-
owned life insurance policies, which we previously reflected in operating activities. Under the new guidance, we classify
those payments as investing activities. We retrospectively adjusted prior year cash flow statements to conform to the new
66
classification. As a result, we reclassified payments (from operating activities to investing activities) of $17 and $21 for
fiscal 2017 and 2018, respectively.
• ASU 2016-16: Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. This revised guidance requires the
recognition of the income tax consequences (expense or benefit) of an intercompany transfer of assets other than inventory
when the transfer occurs. It maintains the existing requirement to defer the recognition of the income tax consequences
of an intercompany transfer of inventory until the inventory is sold to an outside party. We applied the guidance on a
modified retrospective basis through a cumulative-effect adjustment that increased retained earnings as of May 1, 2018,
by $20. This includes $27 related to the intercompany transfer of assets described in Note 12. The $7 offset is related to
deferred taxes established for other intercompany transfers of assets.
• ASU 2017-07: Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
This new guidance addresses the presentation of the net periodic cost (NPC) associated with pension and other
postretirement benefit plans. The guidance requires the service cost component of the NPC to be reported in the statement
of operations in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees
during the period. The other components of the NPC are to be presented separately from the service cost and outside of
income from operations. In addition, the guidance allows only the service cost component of NPC to be eligible for
capitalization when applicable. We applied the guidance retrospectively for the presentation in the statement of operations
and prospectively for the capitalization of service cost. The retrospective application increased previously-reported
operating income for fiscal 2017 and fiscal 2018 by $21 and $9, respectively. As the retrospective application merely
reclassified amounts from operating income to non-operating expense, there was no effect on previously-reported net
income or earnings per share.
We will adopt the following ASUs as of May 1, 2019:
• ASU 2016-02: Leases. This update, codified along with various amendments as Accounting Standards Codification Topic
842 (ASC 842), replaces existing lease accounting guidance. Under ASC 842, a lessee should recognize on its balance
sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the
lease term. ASC 842 permits an entity to make an accounting policy election not to recognize lease assets and liabilities
for leases with a term of 12 months or less. It also requires additional quantitative and qualitative disclosures about leasing
arrangements.
We will adopt ASC 842 as of May 1, 2019, using a modified retrospective transition approach for leases existing at that
date. For the transition, we plan to elect to use the package of practical expedients to not reassess (a) whether existing
contracts are or contain leases, (b) the classification of existing leases, and (c) initial direct costs for existing leases.
We are in the final stages of the project to implement the new standard, which has included collecting and evaluating
data about our lease arrangements (including potential embedded leases), assessing policy elections, implementing a new
lease accounting system, and identifying and making other changes to our processes and controls to meet the requirements
of the new standard. Although subject to change as we complete the implementation of the new standard, we currently
expect to record lease liabilities and right-of use assets of approximately $55 upon adoption. We do not currently expect
adoption to have a material impact on our results of operations, stockholders’ equity, or cash flows.
• ASU 2018-02: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This new
guidance would allow a reclassification from accumulated other comprehensive income to retained earnings for stranded
tax effects resulting from the Tax Cuts and Jobs Act enacted by the U.S. government in December 2017. We currently
plan to make the reclassification, which we estimate will increase retained earnings and decrease accumulated other
comprehensive income as of May 1, 2019, by approximately $40.
There are no other new accounting standards or updates to be adopted that we currently believe might have a significant
impact on our consolidated financial statements.
67
3. 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
Accumulated other comprehensive income (loss), net of tax:
Currency translation adjustments
Cash flow hedge adjustments
Postretirement benefits adjustments
4. Earnings per Share
2018
2019
$
$
$
$
$
$
$
$
196
102
298
82
568
725
61
1,436
656
780
154
136
99
77
115
427
581
$
$
$
$
$
$
(180) $
(17)
(181)
(378) $
191
92
283
82
617
769
57
1,525
709
816
150
160
84
63
87
394
544
(207)
31
(187)
(363)
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
2017
2018
2019
669
$
717
$
835
484,635
3,442
488,077
480,319
3,929
484,248
1.38
1.37
$
$
1.49
1.48
$
$
478,956
3,111
482,067
1.74
1.73
$
$
$
We excluded common stock-based awards for approximately 2,145,000 shares, 805,000 shares, and 447,000 shares from
the calculation of diluted earnings per share for 2017, 2018, and 2019, respectively, because they were not dilutive for those periods
under the treasury stock method.
68
5. Goodwill and Other Intangible Assets
The following table shows the changes in goodwill (which include no accumulated impairment losses) and other intangible
assets over the past two years:
Balance as of April 30, 2017
Foreign currency translation adjustment
Impairment
Balance as of April 30, 2018
Foreign currency translation adjustment
Balance as of April 30, 2019
Goodwill
Other
Intangible
Assets
$
$
753
10
—
763
(10)
753
$
$
641
31
(2)
670
(25)
645
Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives. During fiscal 2018, we
recorded a $2 impairment charge related to the write-off of the carrying amount of an immaterial discontinued brand name.
6. Commitments and Contingencies
Commitments. We made rental payments for real estate, vehicles, and office, computer, and manufacturing equipment under
operating leases of $23, $26, and $28 during 2017, 2018, and 2019, respectively. We have commitments related to minimum lease
payments of $23 in 2020, $16 in 2021, $10 in 2022, $5 in 2023, $3 in 2024, and $2 after 2024.
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 $12 in 2020, $6 in 2021, $4 in 2022, $1 in 2023, $0 in 2024, and $1 after 2024.
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, 2019, based on current market prices, obligations under these contracts total $25.
Contingencies. We operate in a litigious environment, and we are sued in the normal course of business. Sometimes plaintiffs
seek substantial damages. Significant judgment is required in predicting the outcome of these suits and claims, many of which
take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and we can make a
reasonable estimate of the loss, and then adjust the accrual as appropriate to reflect changes in facts and circumstances. We do not
believe it is reasonably possible that these existing loss contingencies, individually or in the aggregate, would have a material
adverse effect on our financial position, results of operations, or liquidity. No material accrued loss contingencies are recorded as
of April 30, 2019.
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 $10 (subject
to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant.
As of April 30, 2019, our actual exposure under the guaranty of the importer’s obligation is approximately $4. We also have
accounts receivable from that importer of approximately $5 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.
69
7. Debt and Credit Facilities
Our long-term debt (net of unamortized discounts and issuance costs) consisted of:
April 30,
2.25% senior notes, $250 principal amount, due January 15, 2023
3.50% senior notes, $300 principal amount, due April 15, 2025
1.20% senior notes, €300 principal amount, due July 7, 2026
2.60% senior notes, £300 principal amount, due July 7, 2028
4.00% senior notes, $300 principal amount, due April 15, 2038
3.75% senior notes, $250 principal amount, due January 15, 2043
4.50% senior notes, $500 principal amount, due July 15, 2045
2018
2019
248
296
361
408
293
248
487
2,341
$
$
249
297
333
383
293
248
487
2,290
$
$
Debt payments required over the next five fiscal years consist of $0 in 2020, $0 in 2021, $0 in 2022, $250 in 2023, $0 in
2024, and $2,073 after 2024.
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.
As of April 30, 2018, our short-term borrowings consisted of $215 of commercial paper, with an average interest rate of
2.04% and an average remaining maturity of 23 days. As of April 30, 2019, our short-term borrowings consisted of $150 of
commercial paper, with an average interest rate of 2.60% and an average remaining maturity of 18 days.
We have a committed revolving credit agreement with various U.S. and international banks for $800 that expires in November
2022. At April 30, 2019, there were no borrowings outstanding under this facility.
8. Common Stock
The following table shows the change in outstanding common shares during each of the last three years:
(Shares in thousands)
Balance at April 30, 2016
Acquisition of treasury stock
Stock issued under compensation plans
Balance at April 30, 2017
Acquisition of treasury stock
Stock issued under compensation plans
Balance at April 30, 2018
Acquisition of treasury stock
Stock issued under compensation plans
Balance at April 30, 2019
Outstanding
Class A
Class B
Total
169,060
(77)
68
169,051
(25)
36
169,062
(145)
82
168,999
325,293
(14,768)
530
311,055
(6)
890
311,939
(4,212)
446
308,173
494,353
(14,845)
598
480,106
(31)
926
481,001
(4,357)
528
477,172
During fiscal 2017, our Board of Directors approved a stock split, effected as a stock dividend, that resulted in the issuance
of one new share of Class A common stock for each share of Class A common stock outstanding and one new share of Class B
common stock for each share of Class B common stock outstanding. The new shares were distributed on August 18, 2016, to
stockholders of record as of August 8, 2016.
During fiscal 2018, we retired 67,000,000 shares of Class B common stock previously held as treasury shares.
During fiscal 2018, our Board of Directors approved another stock split effected as a stock dividend. For every four shares
of either Class A or Class B common stock held, shareholders of record as of the close of business on February 7, 2018, received
one share of Class B common stock, with any fractional shares payable in cash. The additional shares and cash for fractional shares
were distributed to stockholders on February 28, 2018.
70
The following table shows the effects of the stock splits and treasury stock retirement on the number of issued common
shares:
(Shares in thousands)
Balance at April 30, 2016
Stock split
Balance at April 30, 2017
Retirement of treasury stock
Stock split
Balance at April 30, 2018 and 2019
Class A
85,000
85,000
170,000
—
—
170,000
Issued
Class B
142,313
142,313
284,626
(67,000)
96,906
314,532
Total
227,313
227,313
454,626
(67,000)
96,906
484,532
Except for the pre-split share balances and activity included in the above table, all share and per share amounts reported in
these consolidated financial statements and related notes are presented on a split-adjusted basis.
9. Net Sales
The following table shows our net sales by geography:
United States
Developed International1
Emerging2
Travel Retail3
Non-branded and bulk4
2017
2018
2019
$
$
1,444
852
487
123
88
2,994
$
$
1,539
908
575
139
87
3,248
$
$
1,574
917
597
140
96
3,324
1Represents net sales of branded products to “advanced economies” as defined by the International Monetary Fund (IMF), excluding the United
States. Our largest developed international markets are the United Kingdom, Australia, Germany, France, and Japan.
2Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are
Mexico, Poland, Russia, and Brazil.
3Represents net sales of branded products to global duty-free customers, other travel retail customers, and the U.S. military regardless of customer
location.
4Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
The following table shows our net sales by product category:
Whiskey1
Tequila2
Vodka3
Wine4
Rest of portfolio
Non-branded and bulk5
2017
2018
2019
$
$
2,328
214
118
188
58
88
2,994
$
$
2,543
247
130
187
54
87
3,248
$
$
2,608
263
124
187
46
96
3,324
1Includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this
category are the Jack Daniel's family of brands, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early
Times, Slane Irish Whiskey, and Coopers' Craft.
2Includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.
3Includes Finlandia.
4Includes Korbel Champagne and Sonoma-Cutrer wines.
5Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.
71
10. 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 projected
benefit obligations 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
2018
2019
2018
2019
$
$
893
24
29
2
6
—
(51)
903
$
$
903
24
34
28
—
—
(81)
908
$
$
52
1
1
(1)
—
1
(4)
50
$
$
50
1
2
—
—
1
(4)
50
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:
2020
2021
2022
2023
2024
2025 – 2029
Pension Benefits
Medical and Life
Insurance Benefits
$
$
59
58
59
60
61
414
3
3
3
3
3
16
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
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,
2019, our target asset allocation is a mix of 40% public equity investments, 47% fixed income investments, and 13% alternative
investments.
72
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 15.)
April 30, 2018
Equity securities
Cash and temporary investments
Limited partnership interest1
Investments measured at net asset value:
Commingled trust funds2:
Equity funds
Fixed income funds
Real estate funds
Short-term investments
Limited partnership interests3
Hedge funds4
Total
April 30, 2019
Equity securities
Cash and temporary investments
Limited partnership interest1
Investments measured at net asset value:
Commingled trust funds2:
Equity funds
Fixed income funds
Real estate funds
Short-term investments
Limited partnership interests3
Hedge funds4
Total
Level 1
Level 2
Level 3
Total
89
—
—
89
$
$
— $
—
—
— $
— $
—
4
4
79
29
—
108
$
$
— $
—
—
— $
$
— $
—
3
3
$
89
—
4
93
226
362
66
5
27
1
780
79
29
3
111
157
370
66
23
27
—
754
1 This limited partnership interest was initially valued at cost and has been adjusted to fair value as determined in good faith by management of
the partnership using various factors, and does not meet the requirements for reporting at the net asset value (NAV). The valuation requires
significant judgment due to the absence of quoted market prices, the inherent lack of liquidity, and the long-term nature of the investment. This
limited partnership has a term expiring in 2020, although this period may be extended.
2 Commingled trust fund valuations are based on the 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. Generally, for
commingled trust funds other than real estate, redemptions are permitted daily with no notice period. The real estate fund is redeemable quarterly
with 110 days’ notice.
3 These limited partnership interests were initially valued at cost and have been adjusted using NAV per audited financial statements. Investments
are generally not eligible for immediate redemption and have original terms averaging 10 to 13 years, although those periods may be extended.
4 Hedge 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.
73
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, 2017
Return on assets held at end of year
Sales and settlements
Balance as of April 30, 2018
Sales and settlements
Balance as of April 30, 2019
Level 3
4
1
(1)
4
(1)
3
$
$
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
2018
2019
2018
2019
$
$
623
53
—
155
(51)
780
$
$
780
34
—
21
(81)
754
$
$
— $
—
1
3
(4)
— $
—
—
1
3
(4)
—
We currently expect to contribute $21 to our pension plans and $4 to our postretirement medical and life insurance benefit
plans during 2020.
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
2018
2019
2018
2019
$
$
$
780
(903)
(123) $
$
754
(908)
(154) $
— $
(50)
(50) $
—
(50)
(50)
74
The funded status is recorded on the accompanying consolidated balance sheets as follows:
April 30,
Other assets
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
2018
2019
2018
2019
$
$
$
$
$
26
(5)
(144)
(123) $
(291) $
(9)
(300) $
$
2
(6)
(150)
(154) $
(298) $
(8)
(306) $
— $
(3)
(47)
(50) $
(10) $
13
3
$
—
(3)
(47)
(50)
(10)
10
—
The following table compares our pension plans whose assets exceed their accumulated benefit obligations with those whose
obligations exceed their assets. (As noted 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
2018
2019
2018
2019
2018
2019
780
$
754
$
669
$
668
$
754
$
—
780
$
—
754
$
123
792
$
136
804
$
149
903
$
752
156
908
Pension cost. The following table shows the components of the pension cost 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)
Settlement charge
Net cost
Pension Benefits
2017
2018
2019
$
$
$
26
35
(41)
1
25
1
47
$
$
24
29
(41)
1
21
—
34
$
24
34
(47)
1
19
15
46
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 cost in 2020 is
$1 and $19, respectively.
75
Other postretirement benefits cost. The following table shows the components of the postretirement medical and life insurance
benefits cost 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 cost
Medical and Life Insurance Benefits
2017
2018
2019
$
$
1
2
(3)
1
1
$
$
$
1
1
(3)
1
— $
1
2
(3)
1
1
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 benefits cost in 2020 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 cost 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
2017
2018
2019
2017
2018
2019
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
$
$
(1) $
24
1
26
50
$
(6) $
10
1
21
26
$
— $
(41)
1
34
(6) $
4
—
(3)
1
2
$
$
— $
1
(3)
1
(1) $
—
—
(3)
1
(2)
Assumptions and sensitivity. We use various assumptions to determine the obligations and cost 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
2018
2019
2018
2019
4.23%
4.00%
4.04%
4.00%
4.20%
n/a
3.98%
n/a
The weighted-average assumptions used in computing benefit plan cost during each of the last three years were as follows:
Discount rate for service cost
Discount rate for interest cost
Rate of salary increase
Expected return on plan assets
Pension Benefits
Medical and Life
Insurance Benefits
2017
2018
2019
2017
2018
2019
4.02%
4.02%
4.00%
7.00%
4.29%
3.40%
4.00%
6.75%
4.30%
3.93%
4.00%
6.50%
3.96%
3.96%
n/a
n/a
4.39%
3.35%
n/a
n/a
4.34%
3.90%
n/a
n/a
The assumed discount rates are determined 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. Beginning in fiscal 2018, we changed the method
used to estimate the service cost and interest cost for these benefit plans. The new estimation approach discounts the individual
expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used
to discount the cash flows used to measure the benefit obligation at the beginning of the period. Previously, we estimated these
service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure
the benefit obligation at the beginning of the period. We believe the new approach provides a more precise measurement of service
and interest costs by improving the correlation between projected benefit cash flows and the corresponding spot yield curve rates.
76
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.
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
2018
2019
7.70%
5.00%
2025
7.30%
5.00%
2025
Aone 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, 2019, or the aggregate service and interest costs for 2019.
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 $11, $12, and $12 for
matching contributions during 2017, 2018, and 2019, 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.
11. Stock-Based Compensation
The Brown-Forman 2013 Omnibus Compensation Plan is our incentive compensation plan, designed to reward participants
(including eligible officers, employees, and non-employee directors) for company performance. Under the Plan, we can grant
stock-based incentive awards for up to 20,750,000 shares of common stock to eligible participants until July 28, 2023. As of
April 30, 2019, awards for approximately 14,141,000 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
(in connection with a publicly announced share repurchase program), in private transactions, or otherwise.
Awards granted under the Plan include stock-settled stock appreciation rights (SSARs), restricted stock units (RSUs), and
deferred stock units (DSUs).
SSARs. We grant SSARs at an exercise price equal to the closing market price of the underlying stock on the grant date.
SSARs become exercisable after three years from the first day of the fiscal year of grant and generally are exercisable for seven
years after that date. The following table presents information about SSARs outstanding as of April 30, 2019, and for the year
then ended.
Outstanding at April 30, 2018
Granted
Exercised
Forfeited or expired
Outstanding at April 30, 2019
Exercisable at April 30, 2019
Number of
SSARs
(in thousands)
Weighted-
Average
Exercise Price
per SSAR
Weighted-
Average
Remaining
Contractual
Term (years)
Aggregate
Intrinsic Value
7,215
605
(903)
(65)
6,852
4,381
$
$
$
29.67
54.00
17.13
52.49
33.25
28.10
4.9
3.6
$
$
138
110
77
We use the Black-Scholes pricing model to calculate the grant-date fair value of a SSAR. The weighted-average grant-date
fair values and related valuation assumptions for the SSARS granted during each of the last three years were as follows:
Grant-date fair value
Valuation assumptions:
Expected term (years)
Risk-free interest rate
Expected volatility
Expected dividend yield
2017
2018
2019
$
5.73
$
6.79
$
11.06
7.00
1.4%
16.3%
1.6%
7.00
2.2%
15.6%
1.5%
7.00
2.9%
17.1%
1.4%
The expected term is based on past exercise experience for similar awards. The risk-free interest rate is based on zero-coupon
U.S. Treasury rates as of the date of grant. Expected volatility and dividend yield are based on historical data, with consideration
of other factors when applicable.
RSUs. RSUs consist predominantly of performance-based RSUs that vest at the end of a three-year performance period that
begins on the first day of the fiscal year of grant. 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%. At the end of the performance period, the RSUs are converted to common shares that are subject to an additional one-
year holding requirement. The number of shares is determined by adjusting the RSUs by the performance multiplier and adjusting
upward to account for dividends paid on our common stock during the second and third years of the performance period.
The following table presents information about RSUs outstanding as of April 30, 2019, and for the year then ended.
Outstanding at April 30, 2018
Granted
Converted to common shares
Forfeited
Outstanding at April 30, 2019
Number of
RSUs
(in thousands)
Weighted-
Average
Fair Value at
Grant Date
$
418
98
$
(123) $
(11) $
$
382
42.90
55.29
45.44
55.15
44.91
We calculate the grant-date fair value of a performance based RSU using a Monte Carlo simulation technique. The weighted
average grant-date fair values and related valuation assumptions for these awards granted during each of the last three years were
as follows:
Grant-date fair value
Valuation assumptions:
Risk-free interest rate
Expected volatility
Expected dividend yield
Remaining performance period (years) as of grant date
2017
2018
2019
$
38.07
$
46.93
$
55.29
0.8%
17.8%
1.3%
2.8
1.5%
18.9%
1.4%
2.8
2.7%
20.8%
1.2%
2.8
DSUs. DSUs are granted to our non-employee directors. Each DSU represents the right to receive one share of common
stock based on the closing price of the shares on the date of grant. Outstanding DSUs are credited with dividend-equivalent DSUs
when dividends are paid on our common stock. Each annual grant vests after one year. DSUs are paid out in shares after the
completion of a director’s tenure on the board plus a six-month waiting period. The director may elect to receive the distribution
either in a single lump sum or in ten equal annual installments. As of April 30, 2019, there were approximately 216,000 outstanding
DSUs, of which approximately 193,000 were vested.
78
The grant-date fair value of a DSU is the closing market price of the underlying stock on the grant date. The weighted
average grant-date fair values for these awards granted during each of the last three years were as follows:
Grant-date fair value
2017
2018
2019
$
42.06
$
41.81
$
54.20
Additional information. The pre-tax stock-based compensation expense and related deferred income tax benefits recognized
during the last three fiscal years were as follows:
Pre-tax compensation expense
Deferred tax benefit
2017
2018
2019
$
$
14
5
$
19
6
14
2
As of April 30, 2019, there was $5 of total unrecognized compensation cost related to non-vested stock-based awards. That
cost is expected to be recognized over a weighted-average period of 1.6 years. Further information related to our stock-based
awards for the last three years is as follows:
Intrinsic value of SSARs exercised
Fair value of shares vested1
Excess tax benefit from exercise / vesting of awards
$
2017
2018
2019
$
28
8
9
$
73
6
18
31
20
7
1The fair value of shares vested in fiscal 2019 includes $10 related to a one-time performance-based special grant of restricted stock issued in
fiscal 2014 to our Chief Executive Officer (who retired in fiscal 2019). During the performance period, dividends accrued and the award was
adjusted for all applicable stock splits during the vesting period, subject to the same performance measures as the initial grant. The resulting
shares vested on June 1, 2018.
12. 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
2017
2018
2019
$
$
806
127
933
$
$
747
230
977
$
$
863
179
1,042
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.
79
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
2017
2018
2019
$
$
226
40
8
274
(1)
(9)
—
(10)
264
$
$
265
47
17
329
(48)
(13)
(8)
(69)
260
$
$
107
34
28
169
37
4
(3)
38
207
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts
and Jobs Act (Tax Act). The Tax Act significantly revised the future, ongoing U.S. corporate income tax by, among other things,
lowering U.S. corporate income tax rates and implementing a territorial tax system. Because we have an April 30 fiscal year-end,
the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year ended
April 30, 2018, and 21% for fiscal 2019 and subsequent fiscal years. For the year ended April 30, 2019, the reduction of the U.S.
statutory federal rate from 35% (the pre-Tax Act rate) to 21% resulted in a tax benefit of $115.
There were also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the
Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, we
adjusted our U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a
provisional net charge of $43 for the year ended April 30, 2018, composed of a provisional repatriation U.S. tax charge of $91
and a provisional net deferred tax benefit of $48. In the fiscal year ended April 30, 2019, we recorded a benefit of $4 as an adjustment
to the provisional repatriation tax.
The changes included in the Tax Act are broad and complex. The U.S. Securities and Exchange Commission issued rules
that allowed for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the
related tax impacts. As of April 30, 2019, the amounts recorded for the Tax Act for the one-time repatriation tax and the adjustment
to our U.S. deferred tax assets and liabilities have been finalized and are no longer deemed to be provisional.
The Tax Act also established new tax provisions that impact our financial statements beginning in fiscal 2019. These new
provisions include (a) Global Intangible Low-Tax Income (GILTI), a new inclusion rule affecting non-routine income earned by
foreign subsidiaries; (b) Base Erosion Anti-Abuse Tax (BEAT), a new minimum tax; (c) Foreign-Derived Intangible Income (FDII),
a new preferential tax rate for domestic income earned from serving foreign markets; (d) repeal of the domestic production activity
deduction; and (e) limitations on the deductibility of certain executive compensation. For the fiscal year ended April 30, 2019, the
net impact of these provisions was $12 of additional tax.
As noted, certain income earned by foreign subsidiaries must be included in U.S. taxable income under the GILTI provisions.
The FASB allows an accounting policy election to recognize deferred taxes for temporary differences expected to reverse as GILTI
either in future years (deferred method) or as a current period expense when incurred (period cost method). We have elected to
account for GILTI using the period cost method.
As of April 30, 2019, we had approximately $1,266 of undistributed earnings from our foreign subsidiaries ($1,270 at April
30, 2018). Most of these earnings have been previously subject to tax, primarily as a result of the one-time repatriation tax on
foreign earnings required by the Tax Act. Historically, we have asserted that the undistributed earnings of our foreign subsidiaries
are reinvested indefinitely outside the United States. During fiscal 2019, we changed our indefinite reinvestment assertion with
respect to current year earnings and prior year undistributed earnings for one of those foreign subsidiaries (but not for its other
outside basis differences) and repatriated $120 of cash to the United States from this subsidiary. No incremental taxes were due
on this distribution of cash beyond the repatriation tax recorded in fiscal year 2018. In addition, we changed our indefinite
reinvestment assertion with respect to current year earnings and prior year undistributed earnings for additional select foreign
subsidiaries (but not other outside basis differences). Although these earnings are no longer indefinitely reinvested and may now
be distributed within our foreign entity structure, they remain indefinitely reinvested outside the United States. No deferred taxes
80
have been recorded, because any applicable income taxes would be insignificant and no withholding taxes would be due on their
distribution. We have not changed the indefinite reinvestment assertion on the undistributed earnings or other outside basis
differences of any of our other remaining foreign subsidiaries, and no deferred taxes have been provided. If the undistributed
earnings were not considered permanently reinvested, deferred tax liabilities would have been provided for any applicable income
taxes and withholding taxes payable in various countries, which would not be significant. A determination of the unrecognized
deferred tax liabilities on the other outside basis differences reinvested indefinitely at April 30, 2019, is not practicable due to the
complexities in the calculations. The other outside basis differences are primarily related to differences between U.S. GAAP and
tax basis that arose through purchase accounting. These basis differences could reverse through sales of foreign subsidiaries or
other transactions, none of which are considered probable as of April 30, 2019.
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 foreign-derived sales
Adjustments related to prior years
Tax benefit from U.S. manufacturing
Amortization of deferred tax benefit from intercompany
transactions
Excess tax benefits from stock-based awards
Impact of Tax Act
Other, net
Effective rate
Percent of Income Before Taxes
2017
2018
2019
35.0%
0.9%
(1.7%)
—%
(0.7%)
(2.4%)
(1.7%)
(1.0%)
—%
(0.1%)
28.3%
30.4%
0.8%
(3.4%)
—%
(0.9%)
(2.5%)
(1.6%)
(1.8%)
2.5%
3.1%
26.6%
Deferred tax assets and liabilities as of the end of each of the last two years were as follows:
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
2018
2019
$
$
$
89
36
48
51
(29)
195
(199)
(64)
(1)
(264)
(69) $
21.0%
2.1%
(0.1%)
(1.7%)
(1.2%)
—%
—%
(0.7%)
(0.4%)
0.8%
19.8%
87
23
34
55
(25)
174
(218)
(73)
(12)
(303)
(129)
81
Details of the loss and credit carryforwards and related valuation allowances as of the end of each of the last two years are
as follows:
April 30, 2018
April 30, 2019
Gross
Amount
Deferred
Tax Asset
Valuation
Allowance
Gross
Amount
Deferred
Tax Asset
Valuation
Allowance
Expiration (as of
April 30, 2019)
Finland net operating losses
$
Brazil net operating losses
United Kingdom non-trading
losses
Various state net operating losses
and credits
Other
94
48
29
34
41
$
$
19
16
— $
(16)
$
21
14
— 2024-2029
(14)
None
6
2
8
(6)
—
(7)
(29) $
5
6
9
(5)
None
Various1
Various2
—
(6)
(25)
$
246
$
51
$
296
$
55
$
105
$
42
27
68
54
1As of April 30, 2019, the net deferred tax asset amount includes credit carryforwards of $2 that do not expire and loss and credit carryforwards of $4 that expire
in varying amounts from 2023 to 2039.
2As of April 30, 2019, the gross amount includes loss carryforwards of $32 that do not expire and $22 that expire in varying amounts over the next 10 years.
Although the losses in Brazil can be carried forward indefinitely, it is uncertain whether we will realize sufficient taxable
income to allow us to use these losses. The non-trading losses in the United Kingdom can also be carried forward indefinitely.
However, we know of no significant transactions that will let us use them.
During fiscal 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 amortized 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 cumulative tax benefit of $68 through
April 30, 2018. The remaining balance of the deferred benefit, which is included in “other liabilities” on the accompanying
consolidated balance sheet as of April 30, 2018, was $27. As discussed in Note 2, revised accounting guidance (ASU 2016-16)
requires the recognition of income tax consequences of intercompany transfers of assets other than inventory when the transfer
occurs. Our adoption of this revised guidance resulted in this balance being recognized as an increase in retained earnings rather
than as a reduction in income tax expense.
At April 30, 2019, we had $11 of gross unrecognized tax benefits, $9 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
Unrecognized tax benefits at end of year
2017
2018
2019
$
$
9
2
—
(2)
9
$
$
9
5
1
(4)
11
$
$
11
1
1
(2)
11
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 2014 for one state in the United States; 2017 in the United Kingdom; 2015 in Australia; 2014 in Finland, Germany,
Poland, and the Netherlands; and 2013 in Brazil and Mexico. The audit of our fiscal 2017 U.S. federal tax return was concluded
in the second quarter of fiscal 2019; we expect the audit of the fiscal 2018 U.S. federal tax return to be concluded in the first half
of fiscal 2020. In addition, we are participating in the Internal Revenue Service’s Compliance Assurance Program for our fiscal
2019 tax year.
We believe there will be no material change in our gross unrecognized tax benefits in the next 12 months.
82
13. Acquisition of Business
On June 1, 2016, we acquired The BenRiach Distillery Company Limited (BenRiach) for aggregate consideration of $407,
consisting of a purchase price of $341 and $66 in assumed debt and transaction-related obligations that we have since paid. The
acquisition, which brought three single malt Scotch whisky brands into our portfolio, included brand trademarks, inventories,
three malt distilleries, a bottling plant, and BenRiach’s headquarters in Edinburgh, Scotland.
The purchase price of $341 included cash of $307 paid at the acquisition date for 90% of the voting interests in BenRiach
and a liability of $34 related to a put and call option agreement for the remaining 10% equity shares. Under that agreement, we
could choose (or be required) to purchase the remaining 10% for £24 ($34 at the exchange rate on June 1, 2016) during the one-
year period ending November 14, 2017.
The purchase price of $341 was allocated based on management’s estimates and independent appraisals as follows:
Accounts receivable
Inventories
Other current assets
Property, plant, and equipment
Goodwill
Trademarks and brand names
Total assets
Accounts payable and accrued expenses
Short-term borrowings
Deferred tax liabilities
Total liabilities
Net assets acquired
June 1,
2016
$
11
158
1
19
183
65
437
12
59
25
96
$
341
Goodwill is calculated as the excess of the purchase price over the fair value of the net identifiable assets acquired. The
goodwill resulting from this acquisition is primarily attributable to: (a) the value of leveraging our distribution network and brand-
building expertise to grow global sales of the existing single malt Scotch whisky brands acquired, (b) the valuable opportunity to
develop new products and line extensions in the especially attractive premium Scotch whisky category, and (c) the accumulated
knowledge and expertise of the organized workforce employed by the acquired business. None of the goodwill amount of $183
is expected to be deductible for tax purposes.
On November 17, 2016, we purchased the remaining 10% interest in BenRiach for cash of £24 ($30 at the exchange rate on
that date) by exercising the call option described above. That cash payment is classified as a financing activity in the accompanying
consolidated statement of cash flows.
BenRiach’s results of operations have been included in our consolidated financial statements since the acquisition date.
Actual and pro forma results are not presented due to immateriality.
83
14. Derivative Financial Instruments and Hedging Activities
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
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 had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with
notional amounts totaling $1,098 and $1,241 at April 30, 2018 and 2019, respectively.
We also use foreign currency-denominated debt to help manage our currency exchange risk. The amount of foreign currency-
denominated debt designated as net investment hedges was $633 and $635 as of April 30, 2018 and 2019, respectively. These net
investment hedges are intended to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign
subsidiaries. Any change in value of the designated portion of the hedging instruments is recorded in AOCI, offsetting the foreign
currency translation adjustment of the related net investments that is also recorded in AOCI. There was no ineffectiveness related
to our net investment hedges in any of the periods presented in these financial statements.
We do not designate some of our currency derivatives and foreign currency-denominated debt 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 instruments in earnings.
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 as derivative instruments.
The following table presents the pre-tax impact that changes in the fair value of our derivative instruments and non-derivative
hedging instruments had on AOCI and earnings during each of the last three years:
Classification in
Statement of
Operations
2017
2018
2019
$
Derivative Instruments
Currency derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI
Net gain (loss) reclassified from AOCI into earnings
Currency derivatives designated as net investment hedge:
Net gain (loss) recognized in AOCI
n/a
Sales
n/a
Currency derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings
Net gain (loss) recognized in earnings
Sales
Other income
Non-Derivative Hedging Instruments
Foreign currency-denominated debt designated as net
investment hedge:
Net gain (loss) recognized in AOCI
n/a
Foreign currency-denominated debt not designated as
hedging instrument:
Net gain (loss) recognized in earnings
Other income
41
40
8
2
(5)
2
3
$
(54) $
(11)
—
(5)
9
(41)
(21)
69
6
—
6
6
45
9
84
We expect to reclassify $15 of deferred net gains on cash flow hedges recorded in AOCI as of April 30, 2019, to earnings
during fiscal 2020. 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 at both April 30, 2018 and 2019.
The following table presents the fair values of our derivative instruments as of April 30, 2018 and 2019:
Balance Sheet
Classification
Fair Value of
Derivatives in a
Gain Position
Fair Value of
Derivatives in a
Loss Position
April 30, 2018
Designated as cash flow hedges:
Currency derivatives
Currency derivatives
Currency derivatives
Currency derivatives
Not designated as hedges:
Currency derivatives
April 30, 2019
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
Accrued expenses
Other current assets
Other assets
Accrued expenses
Other liabilities
Accrued expenses
$
2
1
4
2
1
21
22
—
—
—
(2)
—
(23)
(18)
(5)
(2)
(1)
(5)
(1)
—
The fair values reflected in the above table are presented on a gross basis. However, as discussed further below, the fair
values of those instruments subject to net settlement agreements are presented on a net basis in our balance sheets.
In our statements of cash flows, we classify cash flows related to cash flow hedges in the same category as the cash flows
from the hedged items.
Credit risk. We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk
is limited to the fair value of the contracts. To manage this risk, we contract only with major financial institutions that have 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
we monitor regularly, and we monetize contracts when we believe it is warranted. Because of these safeguards, we believe we
have no derivative positions that warrant credit valuation adjustments.
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 $38 and $6 at April 30, 2018 and 2019, 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 our balance sheets. Similarly, we present the
fair values of noncurrent derivatives with the same counterparty on a net basis. We do not net current derivatives with noncurrent
derivatives in our balance sheets.
85
The following table summarizes the gross and net amounts of our derivative contracts:
April 30, 2018
Derivative assets
Derivative liabilities
April 30, 2019
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
$
$
10
(48)
43
(9)
$
(9)
9
(3)
3
$
1
(39)
40
(6)
$
(1)
1
—
—
—
(38)
40
(6)
No cash collateral was received or pledged related to our derivative contracts as of April 30, 2018 or 2019.
15. Fair Value Measurements
The following table summarizes the assets and liabilities measured or disclosed at fair value on a recurring basis:
April 30,
Assets:
Cash and cash equivalents
Currency derivatives
Liabilities:
Currency derivatives
Short-term borrowings
Long-term debt
2018
2019
Carrying
Amount
Fair
Value
Carrying
Amount
Fair
Value
$
$
239
1
$
239
1
$
307
40
39
215
2,341
39
215
2,386
6
150
2,290
307
40
6
150
2,399
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.
We determine the fair values of our currency derivatives (forward contracts) using standard valuation models. The significant
inputs used in these models, which are readily available in public markets or can be derived from observable market transactions,
include the applicable spot exchange rates, forward exchange rates, and interest rates. These fair value measurements are categorized
as Level 2 within the valuation hierarchy.
We determine the fair value of long-term debt primarily based on the prices at which identical or similar debt has recently
traded in the market and also considering the overall market conditions on the date of valuation. These fair value measurements
are categorized as Level 2 within the valuation hierarchy.
The fair values of cash, cash equivalents, and short-term borrowings approximate the carrying amounts due to the short
maturities of these instruments.
We measure some assets and liabilities at fair value on a nonrecurring basis. That is, we do not measure them at fair value
on an ongoing basis, but we do adjust them to fair value in some circumstances (for example, when we determine that an asset is
impaired). No material nonrecurring fair value measurements were required during the periods presented in these financial
statements.
86
16. Other Comprehensive Income
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, 2017
Currency translation adjustments:
Net gain (loss) on currency translation
Reclassification to earnings
Other comprehensive income (loss), net
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments
Reclassification to earnings1
Other comprehensive income (loss), net
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost
Reclassification to earnings2
Other comprehensive income (loss), net
Total other comprehensive income (loss), net
Year Ended April 30, 2018
Currency translation adjustments:
Net gain (loss) on currency translation
Reclassification to earnings
Other comprehensive income (loss), net
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments
Reclassification to earnings1
Other comprehensive income (loss), net
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost
Reclassification to earnings2
Other comprehensive income (loss), net
Total other comprehensive income (loss), net
Year Ended April 30, 2019
Currency translation adjustments:
Net gain (loss) on currency translation
Reclassification to earnings
Other comprehensive income (loss), net
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments
Reclassification to earnings1
Other comprehensive income (loss), net
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost
Reclassification to earnings2
Other comprehensive income (loss), net
(71) $
3
(68)
41
(40)
1
28
25
53
(4) $
(1)
(5)
(17)
16
(1)
(10)
(10)
(20)
(75)
2
(73)
24
(24)
—
18
15
33
(14) $
(26) $
(40)
$
12
—
12
(54)
11
(43)
5
20
25
$
12
—
12
18
(3)
15
(2)
(7)
(9)
(6) $
18
$
(16) $
—
(16)
69
(6)
63
(41)
33
(8)
(11) $
—
(11)
(16)
1
(15)
10
(8)
2
24
—
24
(36)
8
(28)
3
13
16
12
(27)
—
(27)
53
(5)
48
(31)
25
(6)
15
Total other comprehensive income (loss), net
$
39
$
(24) $
1Pre-tax amount is classified as sales in the accompanying consolidated statements of operations.
2Pre-tax amount is classified as non-operating postretirement expense in the accompanying consolidated statements of operations.
87
17. Supplemental Information
The following table presents net sales by geography:
Net sales:
United States
Europe
Australia
Other
2017
2018
2019
$
$
1,444
770
151
629
2,994
$
$
1,539
864
163
682
3,248
$
$
1,574
871
164
715
3,324
Net sales are attributed to countries based on where customers are located. See Note 9 for additional information about net
sales, including net sales by product category.
The net book value of property, plant, and equipment located outside the United States was $111 and $107 as of April 30,
2018 and 2019, respectively. Other long-lived assets located outside the United States are not significant.
We have concluded that our business constitutes a single operating segment.
88
Quarterly Financial Information (Unaudited)
(Expressed in millions, except per share amounts)
Second
Quarter
914
$
610
239
0.50
0.49
Fiscal 2018
Third
Quarter
878
$
587
190
0.39
0.39
Fourth
Quarter
733
$
512
110
0.23
0.23
Year
$ 3,248
2,202
717
1.49
1.48
First
Quarter
766
$
523
200
0.42
0.41
Second
Quarter
910
$
590
249
0.52
0.52
Fiscal 2019
Third
Quarter
904
$
571
227
0.47
0.47
Fourth
Quarter
744
$
482
159
0.33
0.33
Year
$ 3,324
2,166
835
1.74
1.73
First
Quarter
723
$
493
178
0.37
0.37
Net sales
Gross profit
Net income
Basic EPS
Diluted EPS
Cash dividends per share:
Declared
Paid
Notes:
0.292
0.146
—
0.146
1.316
0.158
—
1.158
1.608
1.608
0.316
0.158
—
0.158
0.332
0.166
—
0.166
0.648
0.648
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. Cash dividends for fiscal 2018 include a special dividend of $1.00 per share.
89
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, as amended
(the “Exchange Act”)) as of the end of fiscal 2019. Based on that evaluation, our CEO and CFO concluded that our disclosure
controls and procedures: (a) 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 (b) 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, 2019, 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, 2019, 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 25, 2019, 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) “Delinquent Section 16(a) Reports” (for information on compliance with Section 16 of the Exchange Act);
(d) “Selection of Directors” (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 25, 2019, which information is incorporated into this report by reference:
(a) “Compensation Discussion and Analysis”; (b) “Compensation Tables”; (c) “Director Compensation”; (d) “Compensation
Committee Interlocks and Insider Participation”; (e) “Compensation Committee Report”; and (f) “Pay Ratio Disclosure.”
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 25, 2019, 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 25, 2019, which information is incorporated into this report by reference: (a) “Certain
Relationships and Related Transactions”; and (b) “Our Independent Directors.”
90
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 25, 2019, 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:
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
(a)(2)
Financial Statement Schedule:
Schedule II – Valuation and Qualifying Accounts
Page
56
58
59
60
61
62
63
97
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
4.1
4.2
4.3
21
23
31.1
31.2
32
101
Description of Brown-Forman Corporation’s Class A Common Stock, par value $0.15 per share, and Class B Common
Stock, par value $0.15 per share.
Description of Brown-Forman Corporation’s 1.200% Notes due 2026.
Description of Brown-Forman Corporation’s 2.600% Notes due 2028.
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, 2019, 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.
The following documents have been previously filed:
Exhibit Index
3.1
3.2
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).
Certificate of Amendment of Restated Certificate of Incorporation of registrant, incorporated into this report by
reference to Exhibit 3.1 of Brown-Forman Corporation’s Form 8-K filed on August 9, 2016 (File No. 001-00123).
91
Exhibit Index
3.3
By-laws of registrant, as amended and restated on January 29, 2019, incorporated into this report by reference to Exhibit
3.2 of Brown-Forman Corporation’s Form 8-K filed on January 30, 2019 (File No. 001-00123).
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
10.1
10.2
10.3
10.4
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 8-K 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 4.3 of Brown-Forman Corporation’s Form
S-3ASR Registration Statement filed on June 24, 2015 (File No. 333-205183).
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 1.200% Note due 2026, incorporated into this report by reference to Exhibit 4.5 of Brown-Forman Corporation’s
Form 8-K filed on July 8, 2016 (File No. 002-26821).
Form of 2.600% Note due Note due 2028, incorporated into this report by reference to Exhibit 4.6 of Brown-Forman
Corporation’s Form 8-K filed on July 8, 2016 (File No. 002-26821).
Form of 3.500% Note due 2025, incorporated into this report by reference to Exhibit 4.5 of Brown-Forman Corporation’s
Form 8-K filed on March 26, 2018 (File No. 001-00123).
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).
Form of 4.00% Note due 2038, incorporated into this report by reference to Exhibit 4.6 of Brown-Forman Corporation’s
Form 8-K filed on March 26, 2018 (File No. 001-00123).
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).
Officer’s Certificate dated December 12, 2012, pursuant to Sections 1.01, 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, between
Brown-Forman Corporation and U.S. Bank National Association, as Trustee, setting forth the terms of 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 4.4 of Brown-Forman Corporation’s Form 8-K filed on June 29, 2015 (File No. 002-26821).
Officers’ Certificate dated July 7, 2016, pursuant to Sections 1.01, 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 1.200% Notes due 2026 and the 2.600% Notes due 2028,
incorporated into this report by reference to Exhibit 4.4 of Brown-Forman Corporation’s Form 8-K filed on July 8,
2016 (File No. 002-26821).
Officers’ Certificate dated March 26, 2018, pursuant to Sections 1.02, 2.02, 3.01, and 3.03 of the Indenture dated 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 3.500% Note due 2025 and the 4.000% Note due 2038, incorporated
into this report by reference to Exhibit 4.4 of Brown-Forman Corporation’s Form 8-K filed on March 26, 2018 (File
No. 001-00123).
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).*
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).*
92
Exhibit Index
10.5
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).*
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
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).*
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).*
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).*
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 August 1, 2016 (File No. 001-00123).*
Form of Performance-Based Restricted Stock Unit Award Agreement (Class A), incorporated into this report by
reference to Exhibit 10.2 of Brown-Forman Corporation’s Form 8-K filed on August 1, 2016 (File No. 001-00123).*
Form of Performance-Based Restricted Stock Unit Award Agreement (Class B), incorporated into this report by
reference to Exhibit 10.3 of Brown-Forman Corporation’s Form 8-K filed on August 1, 2016 (File No. 001-00123).*
Five-Year Credit Agreement, dated as of November 10, 2017, among Brown-Forman Corporation, certain borrowing
subsidiaries and certain lenders party thereto, JPMorgan Chase Bank, N.A., PNC Bank, National Association and Wells
Fargo Bank, National Association, as Co-Documentation Agents, U.S. Bank National Association, as Administrative
Agent, and U.S. Bank National Association, Barclays Bank PLC, Merrill Lynch, Pierce, Fenner & Smith Incorporated,
and Citigroup Global Markets Inc., as Co-Syndication Agents, 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
13, 2017 (File No. 001-00123).
10.21
Letter Agreement between Brown-Forman Corporation and Jill A. Jones dated May 14, 2018, incorporated into this
report by reference to Exhibit 10.1 of Brown-Forman Corporation’s Form 8-K filed on May 16, 2018 (File No.
001-00123).
* Indicates management contract, compensatory plan, or arrangement.
Item 16. Form 10-K Summary
None.
93
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/ Lawson E. Whiting
By: Lawson E. Whiting
President and Chief Executive Officer
Date: June 13, 2019
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 13, 2019, as indicated:
/s/ Geo. Garvin Brown IV
By: Geo. Garvin Brown IV
Director, Chairman of the Board
/s/ Lawson E. Whiting
By: Lawson E. Whiting
Director, President and Chief
Executive Officer of the Company
(Principal Executive Officer)
/s/ Patrick Bousquet-Chavanne
By:
Patrick Bousquet-Chavanne
Director
/s/ Campbell P. Brown
By: Campbell P. Brown
Director
/s/ Stuart R. Brown
By: Stuart R. Brown
Director
94
/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/ Kathleen M. Gutmann
By: Kathleen M. Gutmann
Director
/s/ Augusta Brown Holland
By: Augusta Brown Holland
Director
/s/ Michael J. Roney
By: Michael J. Roney
Director
/s/ Tracy L. Skeans
By: Tracy L. Skeans
Director
95
/s/ Michael A. Todman
By: Michael A. Todman
Director
/s/ Paul C. Varga
By: Paul C. Varga
Director
/s/ Jane C. Morreau
By:
Jane C. Morreau
Executive Vice President and Chief
Financial Officer
(Principal Financial Officer)
/s/ Kelli B. Nelson
By: Kelli B. Nelson
Senior Vice President and Chief
Accounting Officer
(Principal Accounting Officer)
96
Brown-Forman Corporation and Subsidiaries
Schedule II – Valuation and Qualifying Accounts
For the Years Ended April 30, 2017, 2018, and 2019
(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
2017
Allowance for doubtful accounts
Deferred tax valuation allowance
2018
Allowance for doubtful accounts
Deferred tax valuation allowance
2019
Allowance for doubtful accounts
Deferred tax valuation allowance
(1) Doubtful accounts written off, net of recoveries.
$
$
$
$
$
$
9
25
7
30
7
29
$
$
$
$
$
$
—
5
—
3
1
1
$
$
$
$
$
$
—
2
—
1
—
1
$
$
$
$
$
$
2 (1) $
$
2
—
5
$
$
1 (1) $
$
6
7
30
7
29
7
25
97
DESCRIPTION OF CAPITAL STOCK
Exhibit 4.1
General
The following is a description of the material terms of the capital stock of Brown-Forman Corporation (the “Company”).
This description is not complete and is qualified by reference to the Company’s restated certificate of incorporation (the
“Certificate of Incorporation”) and its amended and restated bylaws (the “Bylaws”). The Certificate of Incorporation and the
Bylaws are filed as exhibits to the Company’s Annual Report on Form 10-K and are qualified by reference to such documents.
Additionally, the following description of certain provisions of Delaware law is not complete and is qualified by reference to
the Delaware General Corporation Law (“DGCL”).
Under the Certificate of Incorporation, the Company’s authorized capital stock consists of 570,000,000 shares of
common stock divided into (a) 170,000,000 shares of Class A Common Stock, $0.15 par value per share (“Class A Common
Stock”), and (b) 400,000,000 shares of Class B Common Stock, $0.15 par value per share (“Class B Common Stock,” and
collectively with Class A Common Stock, “Common Stock”).
As of April 30, 2019, 168,999,423 shares of Class A Common Stock were outstanding and 308,172,788 shares of Class B
Common Stock were outstanding. All outstanding shares of Common Stock are fully-paid and non-assessable. Any additional
shares of Common Stock the Company issues will also be fully-paid and non-assessable.
Common Stock
Voting Rights
The holders of Class A Common Stock have full and exclusive voting powers. Each holder of Class A Common Stock is
entitled to one vote for each share of Class A Common Stock held on all matters submitted to a vote of stockholders, except as
otherwise expressly provided in the Certificate of Incorporation or required by applicable law. The Certificate of Incorporation
does not provide for cumulative voting for the election of directors.
Holders of Class B Common Stock have no voting powers, except as provided by the laws of Delaware.
Dividend and Liquidation Rights
Dividends and Distributions. Holders of Common Stock are entitled to receive, when, and if declared by the board of
directors, out of any assets legally available therefor, such dividends as may be declared from time to time by the board of
directors.
Liquidation Rights. In the event of the liquidation, dissolution, or winding-up of the Company, the remaining assets
legally available for distribution to stockholders shall be distributed ratably among the holders of Common Stock.
Other Rights. Holders of Common Stock have no preemptive rights and no right to convert their Common Stock into any
other securities. The Common Stock is not subject to any redemption or sinking fund provisions.
Anti-Takeover Provisions
Certain provisions of the Certificate of Incorporation and the Bylaws and Delaware law could have an anti-takeover effect
and could delay, discourage or prevent a tender offer or takeover attempt that a stockholder might consider to be in its best interests,
including attempts that might otherwise result in a premium being paid over the market price of the Company’s Common Stock.
Certificate of Incorporation and Bylaw Provisions
The Certificate of Incorporation and the Bylaws contain provisions that could have the effect of delaying or preventing
changes in control or changes in the Company’s management without the consent of the Company’s board of directors,
including, among other things:
•
no cumulative voting in the election of directors, which limits the ability of minority stockholders to elect
director candidates;
1
•
•
•
•
the right of the Company’s board of directors to elect a director to fill a vacancy in the Company’s board of
directors, which prevents stockholders from being able to fill vacancies on the Company’s board of directors;
the requirement that a special meeting of stockholders may be called only by a majority vote of the Company’s
board of directors, the executive committee of the Company’s board of directors, the chairman of the
Company’s board of directors (or the presiding chairman), the Company’s president, or by the Company’s
secretary at the request in writing of one or more stockholders owning a majority of the Company’s Class A
Common Stock, which could delay the ability of the Company’s stockholders to force consideration of a
proposal or to take action;
the ability of the Company’s board of directors, by majority vote, to amend the Bylaws, which may allow the
Company’s board of directors to take additional actions to prevent a hostile acquisition and inhibit the ability of
an acquirer to amend the Bylaws to facilitate a hostile acquisition; and
advance notice procedures with which stockholders must comply to nominate candidates to the Company’s
board of directors or to propose matters to be acted upon at a stockholders’ meeting, which may preclude
stockholders from bringing matters before a meeting of stockholders or from making nominations for directors
at a meeting of stockholders if the proper procedures are not followed.
Delaware Law
The Company is subject to Section 203 of the DGCL, which prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder for a period of three years after the date that such stockholder became an
interested stockholder, with the following exceptions:
•
•
•
before such date, the board of directors of the corporation approved either the business combination or the
transaction that resulted in the stockholder becoming an interested stockholder;
upon the closing of the transaction that resulted in the stockholder becoming an interested stockholder, the
interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the
transaction began, excluding for purposes of determining the voting stock outstanding (but not the outstanding
voting stock owned by the interested stockholder) those shares owned by (i) persons who are directors and also
officers and (ii) employee stock plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or
on or after such date, the business combination is approved by the board of directors and authorized at an annual
or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least 66 2/3% of
the outstanding voting stock that is not owned by the interested stockholder.
In general, Section 203 defines business combination to include the following:
•
•
•
•
•
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, pledge, or other disposition of 10% or more of the assets of the corporation involving the
interested stockholder;
subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any
stock of the corporation to the interested stockholder;
any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or
any class or series of the corporation beneficially owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges, or other
financial benefits by or through the corporation.
In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s
affiliates and associates, beneficially owns, or within three years prior to the time of determination of interested stockholder
status did own, 15% or more of the outstanding voting stock of the corporation.
Transfer Agent and Registrar
The transfer agent and registrar for the Common Stock is Computershare Trust Company, N.A.
Listing
Class A Common Stock and Class B Common Stock is listed on the New York Stock Exchange under the symbols
“BFA” and “BFB,” respectively.
2
DESCRIPTION OF 1.200% NOTES DUE 2026
Exhibit 4.2
The following is a description of the material terms of the 1.200% notes due 2026 (the “2026 notes”) of Brown-Forman
Corporation (the “Company”). This description is not complete and is qualified by reference to the indenture (the “base
indenture”) dated as of April 2, 2007 between the Company and U.S. Bank National Association, as trustee, as supplemented
by the first supplemental indenture dated as of December 13, 2010 and the second supplemental indenture dated as of June 24,
2015 (collectively with the base indenture, the “indenture”), and the Officer’s Certificate dated as of July 7, 2016, pursuant to
Section 1.01, 2.02, and 3.01 of the indenture, setting forth the terms of the 2.600% notes due 2028 and the 2026 notes (the
“officer’s certificate”).
General
The Company issued the 2026 notes under the indenture. The 2026 notes are a series of debt securities issued under the
indenture. The 2026 notes are governed by, and construed in accordance with, the laws of the State of New York.
The 2026 notes are listed on the New York Stock Exchange under the symbol “BF26.”
U.S. Bank National Association acts as trustee for the 2026 notes. U.S. Bank National Association also serves as trustee
under certain indentures related to other securities that the Company has issued or guaranteed.
Issuance in Euro
All payments of interest and principal, including payments made upon any redemption or repurchase of the 2026 notes,
will be made in euro; provided that if the euro is unavailable to the Company due to the imposition of exchange controls or
other circumstances beyond the Company’s control or if the euro is no longer being used by the then member states of the
European Monetary Union that have adopted the euro as their currency or for the settlement of transactions by public
institutions of or within the international banking community, then all payments in respect of the 2026 notes will be made in
U.S. dollars until the euro is again available to the Company or so used. In such circumstances, the amount payable on any date
in euro will be converted into U.S. dollars at the rate mandated by the Board of Governors of the Federal Reserve System as of
the close of business on the second business day prior to the relevant payment date or, if the Board of Governors of the Federal
Reserve System has not announced a rate of conversion, on the basis of the most recent U.S. dollar/euro exchange rate
published in The Wall Street Journal on or prior to the second business day prior to the relevant payment date or, in the
event The Wall Street Journal has not published such exchange rate, the rate will be determined in the Company’s sole
discretion on the basis of the most recently available market exchange rate for the euro.
Principal, Maturity and Interest
The 2026 notes were limited initially to €300 million in aggregate principal amount. The Company may re-open the 2026
notes and issue an unlimited aggregate principal amount of additional 2026 notes from time to time. Any such additional 2026
notes, together with the 2026 notes originally issued, will constitute a single series of 2026 notes under the indenture. No
additional 2026 notes may be issued if an Event of Default (as defined below) has occurred with respect to the 2026 notes or if
such additional 2026 notes will not be fungible with the previously issued 2026 notes for Federal income tax purposes. The
Company issued the 2026 notes in denominations of €100,000 and integral multiples of €1,000 in excess thereof.
Interest on the 2026 notes accrues at the rate of 1.200% per year. The Company pays interest on the 2026 notes annually
in arrears on July 7 of each year. The Company makes each interest payment to the persons who are the registered holders of
the 2026 notes on the immediately preceding June 23. Interest on the 2026 notes accrues from the last interest payment date on
which interest was paid on the 2026 notes or, if no interest has been paid on the 2026 notes, from the date of original issue.
Interest on the 2026 notes is computed on the basis of the actual number of days in the period for which interest is being
calculated and the actual number of days from and including the last date on which interest was paid on the 2026 notes (or July
7, 2017, if no interest has been paid on the 2026 notes), to, but excluding, the next scheduled interest payment date. This
payment convention is referred to as ACTUAL/ACTUAL (ICMA) as defined in the rulebook of the International Capital
Market Association.
If any interest payment date would otherwise be a day that is not a business day, such interest payment date will be
postponed to the next date that is a business day. If the maturity date of the 2026 notes falls on a day that is not a business day,
the related payment of principal and interest will be made on the next business day as if it were made on the date such payment
1
was due, and no interest will accrue on the amounts so payable for the period from and after such date to the next business day.
For these purposes, a “business day” is any day that is not a Saturday, Sunday or other day on which banking institutions in
New York City, London or another place of payment on the 2026 notes are authorized or required by law to close and on which
the Trans-European Automated Real-Time Gross Settlement Express Transfer system (the TARGET2 system), or any successor
thereto, is open.
The 2026 notes will mature on July 7, 2026 unless the 2026 notes are previously redeemed or repurchased in whole.
Ranking
The Company’s obligations to pay principal, interest, and premium, if any, on the 2026 notes are the Company’s general
unsecured senior obligations and rank equally with all of its other unsecured senior indebtedness from time to time outstanding.
As of April 30, 2019, the Company had approximately $[•] million of unsecured senior debt. Of that amount, approximately $
[•] million was indebtedness of the Company’s subsidiaries. Because the creditors of the Company’s subsidiaries have direct
claims on the subsidiaries and their assets, the claims of holders of the Company’s debt securities are “structurally
subordinated” to any existing and future liabilities of the Company’s subsidiaries. This means that the creditors of the
Company’s subsidiaries have priority in their claims on the assets of the Company’s subsidiaries over the Company’s creditors.
In addition, a substantial portion of the Company’s ordinary course liabilities, including accounts payable and accrued
liabilities, as reflected on the Company’s consolidated balance sheet at April 30, 2019, were incurred by the Company’s
subsidiaries. The indenture does not contain any covenants or provisions that would afford the holders of the 2026 notes
protection in the event of a highly leveraged or similar transaction.
Certain Covenants
Limitation on Liens
The indenture provides that if the Company or any of its Subsidiaries (as defined in the indenture) incurs, issues, assumes
or guarantees any Indebtedness (as defined in the indenture) secured by a Mortgage (as defined in the indenture) on Principal
Property (as defined in the indenture) of the Company or of any Subsidiary or on any shares of capital stock or Indebtedness
(owed to the Company or any other Subsidiary) of any Subsidiary that owns Principal Property, the Company will secure, or
cause such Subsidiary to secure, all outstanding 2026 notes equally and ratably with such secured Indebtedness, unless after
giving effect thereto the aggregate amount of all such secured Indebtedness, together with all Attributable Debt (as defined in
the indenture) of the Company and of its Subsidiaries in respect of sale and lease-back transactions involving Principal
Properties (other than certain sale and lease-back transactions that are permitted under “Limitation on Sale and Leaseback
Transactions”) would constitute 15% or less of the Company’s and its consolidated Subsidiaries’ Consolidated Net Assets (as
defined in the indenture) upon such incurrence, issuance, assumption or guarantee. This restriction will not apply in the case of:
• Mortgages affecting property of any person existing at the time such person becomes a Subsidiary or at the time it is
acquired by the Company or a Subsidiary or arising thereafter under contractual commitments entered into prior to and
not in contemplation of such person’s becoming a Subsidiary or being acquired by the Company or a Subsidiary;
• Mortgages existing at the time of acquisition of the property affected by such Mortgage, or Mortgages incurred to
secure payment of all or part of the purchase price of such property or to secure Indebtedness incurred prior to, at the
time of, or within 180 days after, the acquisition of such property for the purpose of financing all or part of the
purchase price of such property (provided such Mortgages are limited to such property and improvements to such
property);
• Mortgages placed into effect prior to, at the time of, or within 180 days of completion of construction of new facilities
(or any improvements to existing facilities) to secure all or part of the cost of construction or improvement of such
facilities, or to secure Indebtedness incurred to provide funds for any such purpose (provided such Mortgages are
limited to the property or portion thereof upon which the construction being so financed occurred and improvements
the cost of construction of which is being so financed);
•
Pledges or deposits in the ordinary course of business and in connection with bids, tenders, contracts or statutory
obligations or to secure surety or performance bonds;
• Mortgages imposed by law, such as carriers’, warehousemen’s and mechanics’ and materialmen’s liens, arising in the
ordinary course of business;
2
• Mortgages for taxes or assessments or governmental charges or levies, so long as such taxes or assessments or
governmental charges or levies are not due and payable, or the same can be paid thereafter without penalty, or the
same are being contested in good faith;
• minor encumbrances, easements or reservations that do not in the aggregate materially adversely affect the value of
the properties or impair their use;
• Mortgages in respect of judgments that do not result in an event of default under the indenture;
• Mortgages that secure only debt owing by a Subsidiary to the Company or to a Subsidiary of the Company;
• Mortgages required by any contract or statute in order to permit the Company or a Subsidiary to perform any contract
or subcontract made by it with or at the request of the United States of America or any state, or any department,
agency, instrumentality or political subdivision of any of the foregoing or the District of Columbia, and Mortgages on
property owned or leased by the Company or a Subsidiary (a) to secure any Indebtedness incurred for the purpose of
financing (including any industrial development bond financing) all or any part of the purchase price or the cost of
constructing, expanding or improving the property subject thereto (provided such Mortgages are limited to the
property or portion thereof upon which the construction being so financed occurred and the improvements the cost of
construction of which is being so financed), or (b) needed to permit the construction, improvement, attachment or
removal of any equipment designed primarily for the purpose of air or water pollution control, provided that such
Mortgages will not extend to other property or assets of the Company or any Subsidiary;
•
landlords’ liens on property held under lease;
• Mortgages, if any, in existence on April 2, 2007; and
•
certain extensions, renewals, replacements or refundings of Mortgages referred to in the foregoing clauses.
Limitation on Sale and Lease-back Transactions
The indenture provides that neither the Company nor any of its Subsidiaries may enter into any sale and lease-back
transaction involving Principal Property acquired or placed into service more than 180 days prior to such transaction, whereby
such property has been or is to be sold or transferred by the Company or any Subsidiary, unless:
•
•
the Company or such Subsidiary would at the time of entering into such transaction be entitled to create Indebtedness
secured by a Mortgage on such property as described in “- Limitations on Liens” above in an amount equal to the
Attributable Debt with respect to the sale and lease-back transaction without equally and ratably securing the
outstanding 2026 notes; or
the Company applies to the retirement or prepayment (other than any mandatory retirement or prepayment) of the
Company’s Funded Debt (as defined in the indenture), or to the acquisition, development or improvement of Principal
Property, an amount equal to the net proceeds from the sale of the Principal Property so leased within 180 days of the
effective date of any such sale and lease-back transaction, provided that the amount to be applied to the retirement or
prepayment of our Funded Debt shall be reduced by the principal amount of any 2026 notes delivered by the Company
to the trustee within 180 days after such sale and lease-back transaction for retirement and cancellation.
This restriction will not apply to any sale and lease-back transaction (i) involving the taking back of a lease for a period of
three years or less; (ii) involving industrial development or pollution control financing; or (iii) between the Company and a
Subsidiary or between Subsidiaries.
Merger, Consolidation or Sale of Assets
The indenture prohibits the Company from merging into or consolidating with any other corporation or selling, leasing or
conveying substantially all of its assets and the assets of its Subsidiaries, taken as a whole, to any person, unless:
•
either the Company is the continuing corporation or the successor corporation or the person that acquires by sale, lease
or conveyance all or substantially all of the Company’s or its Subsidiaries’ assets is a corporation organized under the
laws of the United States of America, any state thereof, or the District of Columbia, and expressly assumes the due and
punctual payment of the principal of, and premium, if any, and interest on all the 2026 notes and the due and punctual
performance and observance of every covenant and condition of the indenture to be performed or observed by the
Company, by supplemental indenture satisfactory to the trustee, executed and delivered to the trustee by such
corporation;
3
•
•
immediately after giving effect to such transaction, no Event of Default described under the caption “Events of Default
and Remedies” below or event which, after notice or lapse of time or both would become an Event of Default, has
happened and is continuing; and
the Company has delivered to the trustee an opinion of counsel stating that such transaction and such supplemental
indenture comply with the indenture provisions and that the Company has complied with all conditions precedent in
the indenture relating to such transaction.
Upon any consolidation or merger with or into any other person or any sale, conveyance, lease, or other transfer of all or
substantially all of the Company’s or its Subsidiaries’ assets to any person, the successor corporation will succeed to, and be
substituted for, the Company under the indenture and each outstanding 2026 note, and the Company will be relieved of all
obligations and covenants under the indenture and each outstanding 2026 note to the extent the Company was the predecessor
person.
Events of Default and Remedies
The following constitute “Events of Default” under the indenture governing the 2028 notes:
(1) default in paying interest on the 2026 notes when it becomes due and the default continues for a period of 30 days or
more;
(2) default in paying principal, or premium, if any, on the 2026 notes when due;
(3) default is made in the payment of any sinking or purchase fund or analogous obligation when the same becomes
due, and such default continues for 30 days or more;
(4) default in the performance, or breach, of any covenant in the indenture (other than defaults specified in clause (1),
(2) or (3) above) and the default or breach continues for a period of 60 days or more after the Company receives
written notice from the trustee or the Company and the trustee receive notice from the holders of at least 25% in
aggregate principal amount of the outstanding 2026 notes;
(5)
(6)
the Company defaults in the payment of any scheduled principal of or interest on any of the Company’s
Indebtedness or any Indebtedness of any of its Subsidiaries (other than the 2026 notes), aggregating more than $50
million in principal amount, when due and payable after giving effect to any applicable grace period;
the Company defaults in the performance of any other term or provision of any of the Company’s Indebtedness or
any Indebtedness of any of its Subsidiaries (other than the 2026 notes) in excess of $50 million principal amount
that results in such Indebtedness becoming or being declared due and payable prior to the date on which it would
otherwise become due and payable, and such acceleration has not been rescinded or annulled, or such Indebtedness
has not been discharged, within a period of 15 days after there has been given to the Company by the trustee or to
the Company and the trustee by the holders of at least 25% in aggregate principal amount of the 2026 notes then
outstanding, a written notice specifying such default or defaults;
(7) one or more judgments, decrees, or orders is entered against the Company or any of its Significant Subsidiaries (as
defined in the indenture) by a court from which no appeal may be or is taken for the payment of money, either
individually or in the aggregate, in excess of $50 million, and the continuance of such judgment, decree, or order
remains unsatisfied and in effect for any period of 45 consecutive days after the amount of the judgment, decree or
order is due without a stay of execution; and
(8) certain events of bankruptcy, insolvency, reorganization, administration or similar proceedings with respect to the
Company have occurred.
If an Event of Default (other than an Event of Default specified in clause (8) with respect to the Company) under the
indenture occurs with respect to the 2026 notes and is continuing, then the trustee or the holders of at least 51% in principal
amount of the outstanding 2026 notes may by written notice require the Company to repay immediately the entire principal
amount of the outstanding 2026 notes, together with all accrued and unpaid interest and premium, if any.
If an Event of Default under the indenture specified in clause (8) with respect to the Company occurs and is continuing,
then the entire principal amount of the outstanding 2026 notes will automatically become due and payable immediately without
any declaration or other act on the part of the trustee or any holder.
After a declaration of acceleration, the holders of a majority in principal amount of outstanding 2020 notes may rescind
this accelerated payment requirement if all existing Events of Default, except for nonpayment of the principal and interest on
4
the 2026 notes that has become due solely as a result of the accelerated payment requirement, have been cured or waived and if
the rescission of acceleration would not conflict with any judgment or decree. The holders of a majority in principal amount of
the outstanding 2026 notes also have the right to waive past defaults, except a default in paying principal or interest on any
outstanding debt security, or in respect of a covenant or a provision that cannot be modified or amended without the consent of
all holders of the 2026 notes.
Holders of at least 51% in principal amount of the outstanding 2026 notes may seek to institute a proceeding only after
they have notified the trustee of a continuing Event of Default in writing and made a written request, and offered reasonable
indemnity, to the trustee to institute a proceeding and the trustee has failed to do so within 60 days after it received this notice.
In addition, within this 60-day period the trustee must not have received directions inconsistent with this written request by
holders of a majority in principal amount of the outstanding 2026 notes. These limitations do not apply, however, to a suit
instituted by a holder of a debt security for the enforcement of the payment of principal, interest or any premium on or after the
due dates for such payment.
During the existence of an Event of Default, the trustee is required to exercise the rights and powers vested in it under the
indenture and use the same degree of care and skill in its exercise as a prudent man would under the circumstances in the
conduct of that person’s own affairs. If an Event of Default has occurred and is continuing, the trustee is not under any
obligation to exercise any of its rights or powers at the request or direction of any of the holders unless the holders have offered
to the trustee reasonable security or indemnity. Subject to certain provisions, the holders of a majority in principal amount of
the outstanding 2026 notes have the right to direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or exercising any trust, or power conferred on the trustee.
The trustee will, within 90 days after any default occurs, give notice of the default to the holders of the 2026 notes, unless
the default was already cured or waived. Unless there is a default in paying principal, interest or any premium when due, the
trustee can withhold giving notice to the holders if it determines in good faith that the withholding of notice is in the interest of
the holders.
The indenture requires that the Company must deliver to the trustee within 120 days after the end of each fiscal year an
officers’ certificate stating whether such officers have knowledge of any default under the indenture and, if so, specifying such
default and the nature thereof.
Modification and Waiver
The indenture or the 2026 notes may be amended or modified without the consent of any holder of 2026 notes in order to:
•
•
•
evidence a successor to the trustee;
cure ambiguities, defects or inconsistencies;
provide for the assumption of the Company’s obligations in the case of a merger or consolidation or transfer of all or
substantially all of the Company’s assets that complies with the covenant described above under “- Merger,
Consolidation or Sale of Assets”;
• make any change that would provide any additional rights or benefits to the holders of the 2026 notes;
•
•
•
•
add guarantors or co-obligors with respect to the 2026 notes;
secure the 2026 notes;
establish the form or forms of 2026 notes;
add additional Events of Default with respect to the 2026 notes;
• maintain the qualification of the indenture under the Trust Indenture Act; or
• make any change that does not adversely affect in any material respect the interests of any holder.
Other amendments and modifications of the indenture or the 2026 notes issued may be made with the consent of the
holders of not less than a majority of the aggregate principal amount of the outstanding debt securities of each series affected
by the amendment or modification. However, no modification or amendment may, without the consent of the holder of each
outstanding 2026 note:
•
reduce the principal amount, or extend the fixed maturity, of the 2026 notes;
5
•
•
•
alter or waive the redemption or repayment provisions of the 2026 notes;
change the currency in which principal, any premium or interest is paid;
reduce the percentage in principal amount outstanding of 2026 notes that must consent to an amendment, supplement
or waiver or consent to take any action;
•
impair the right to institute suit for the enforcement of any payment on the 2026 notes;
• waive a payment default with respect to the 2026 notes or any guarantor;
•
•
•
reduce the interest rate or extend the time for payment of interest on the 2026 notes;
adversely affect the ranking of the 2026 notes; or
release any guarantor or co-obligor from any of its obligations under its guarantee or the indenture, except in
compliance with the terms of the indenture.
Satisfaction, Discharge and Covenant Defeasance
The Company may terminate its obligations under the indenture with respect to the outstanding 2026 notes, when:
•
either:
•
•
all 2026 notes issued that have been authenticated and delivered have been delivered to the trustee for
cancellation; or
all 2026 notes issued that have not been delivered to the trustee for cancellation have become due and payable,
will become due and payable within one year, or are to be called for redemption within one year and the Company
has made arrangements satisfactory to the trustee for the giving of notice of redemption by such trustee in the
Company’s name and at its expense, and in each case, the Company has irrevocably deposited or caused to be
deposited with the trustee sufficient funds to pay and discharge the entire indebtedness on the 2026 notes;
•
•
the Company has paid or caused to be paid all other sums then due and payable under the indenture; and
the Company delivered to the trustee an officers’ certificate and an opinion of counsel, each stating that all conditions
precedent under the indenture relating to the satisfaction and discharge of the indenture have been complied with.
The Company may elect to have its obligations under the indenture discharged with respect to the outstanding 2026 notes
(“legal defeasance”). Legal defeasance means that the Company will be deemed to have paid and discharged the entire
indebtedness represented by the outstanding 2026 notes under the indenture, except for:
•
•
•
•
the rights of holders of the 2026 notes to receive principal, interest and any premium when due;
the Company’s obligations with respect to the 2026 notes concerning issuing temporary 2026 notes, registration of
transfer of 2026 notes, mutilated, destroyed, lost or stolen 2026 notes and the maintenance of an office or agency for
payment for security payments held in trust;
the rights, powers, trusts, duties and immunities of the trustee; and
the defeasance provisions of the indenture.
In addition, the Company may elect to have its obligations released with respect to certain covenants in the indenture
(“covenant defeasance”). If the Company so elects, any failure to comply with these obligations will not constitute a default or
an Event of Default with respect to the 2026 notes. In the event covenant defeasance occurs, certain events, not including non-
payment, bankruptcy and insolvency events, described under “Events of Default and Remedies” above will no longer constitute
an Event of Default for the 2026 notes.
In order to exercise either legal defeasance or covenant defeasance with respect to outstanding 2026 notes:
•
the Company must irrevocably have deposited or caused to be deposited with the trustee as trust funds for the purpose
of making the following payments, specifically pledged as security for, and dedicated solely to the benefits of the
holders of the 2026 notes:
• money in an amount;
6
• U.S. government obligations (or equivalent government obligations in the case of 2026 notes denominated in
other than U.S. dollars or a specified currency) that will provide, not later than one day before the due date of any
payment, money in an amount; or
•
a combination of money and U.S. government obligations (or equivalent government obligations, as applicable) in
an amount, in each case sufficient, in the written opinion (with respect to U.S. or equivalent government
obligations or a combination of money and U.S. or equivalent government obligations, as applicable) of a
nationally recognized firm of independent public accountants to pay and discharge, and that will be applied by the
trustee to pay and discharge, all of the principal, interest and premium, if any, at due date or maturity;
in the case of legal defeasance, the Company has delivered to the trustee an opinion of counsel stating that, under then
applicable Federal income tax law or a ruling published by the Internal Revenue Service, the holders of the 2026 notes
will not recognize income, gain or loss for Federal income tax purposes as a result of the deposit, defeasance and
discharge to be effected and will be subject to the same Federal income tax as would be the case if the deposit,
defeasance and discharge did not occur;
in the case of covenant defeasance, the Company has delivered to the trustee an opinion of counsel to the effect that
the holders of the 2026 notes will not recognize income, gain or loss for Federal income tax purposes as a result of the
deposit and covenant defeasance to be effected and will be subject to the same Federal income tax as would be the
case if the deposit and covenant defeasance did not occur;
no Event of Default or default with respect to the outstanding 2026 notes has occurred and is continuing at the time of
such deposit after giving effect to the deposit or, in the case of legal defeasance, no default relating to bankruptcy or
insolvency has occurred and is continuing at any time on or before the 91st day after the date of such deposit, it being
understood that this condition is not deemed satisfied until after the 91st day;
the legal defeasance or covenant defeasance will not cause the trustee to have a conflicting interest within the meaning
of the Trust Indenture Act, assuming all 2026 notes were in default within the meaning of the Trust Indenture Act;
the legal defeasance or covenant defeasance will not result in a breach or violation of, or constitute a default under,
any other agreement or instrument to which the Company is a party;
the legal defeasance or covenant defeasance will not result in the trust arising from such deposit constituting an
investment company within the meaning of the Investment Company Act of 1940, as amended, unless the trust is
registered under the Investment Company Act of 1940, as amended, or exempt from registration;
if the 2026 notes are to be redeemed prior to their maturity, notice of such redemption shall have been duly given; and
the Company has delivered to the trustee an officers’ certificate and an opinion of counsel stating that all conditions
precedent with respect to the legal defeasance or covenant defeasance have been complied with.
•
•
•
•
•
•
•
•
Optional Redemption
The 2026 notes are redeemable at the Company’s option at any time in whole or from time to time in part in €1,000
increments (provided that any remaining principal amount thereof shall be at least the minimum authorized denomination
thereof). If the 2026 notes are redeemed before April 7, 2026 (three months prior to the maturity date, or the “par call date”),
the redemption price will equal the greater of:
•
•
100% of the principal amount of the 2026 notes to be redeemed; and
the sum of the present values of the remaining scheduled payments of principal and interest on the 2026 notes to be
redeemed assuming the 2026 notes mature on the par call date (exclusive of interest accrued to the date of redemption)
discounted to the date of redemption on an annual basis (ACTUAL/ACTUAL (ICMA)), at the Comparable
Government Bond Rate (as defined below) plus 20 basis points.
If the 2026 notes are redeemed on or after the par call date, the redemption price for the 2026 notes will equal 100% of
the principal amount of the 2026 notes being redeemed, plus accrued and unpaid interest to, but not including, the redemption
date.
“Comparable Government Bond” means, in relation to any Comparable Government Bond Rate calculation, at the
discretion of an independent investment bank selected by the Company, a German government bond whose maturity is closest
to the par call date, or if such independent investment bank in its discretion determines that such similar bond is not in issue,
such other German government bond as such independent investment bank may, with the advice of three brokers of, and/or
7
market makers in, German government bonds selected by the Company, determine to be appropriate for determining the
Comparable Government Bond Rate.
“Comparable Government Bond Rate” means the price, expressed as a percentage (rounded to three decimal places, with
0.0005 being rounded upwards), at which the gross redemption yield on the 2026 notes to be redeemed, if they were to be
purchased at such price on the third business day prior to the date fixed for redemption, would be equal to the gross redemption
yield on such business day of the Comparable Government Bond on the basis of the middle market price of the Comparable
Government Bond prevailing at 11:00 a.m. (London time) on such business day as determined by an independent investment
bank selected by the Company.
If less than all of the 2026 notes are to be redeemed, and the 2026 notes are global notes, the 2026 notes to be redeemed
will be selected by Euroclear or Clearsteam in accordance with their standard procedures. If the 2026 notes to be redeemed are
not global notes then held by Euroclear or Clearstream, the trustee will select the 2026 notes to be redeemed on a pro
rata basis, by lot, or by any other method the trustee deems fair and appropriate. If the 2026 notes are listed on any national
securities exchange, Euroclear or Clearstream will select 2026 notes in compliance with the requirements of the principal
national securities exchange on which the 2026 notes are listed. Notwithstanding the foregoing, if less than all of the 2026
notes are to be redeemed, no 2026 notes of a principal amount of €100,000 or less shall be redeemed in part. If money
sufficient to pay the redemption price on the 2026 notes (or portions thereof) to be redeemed on the redemption date is
deposited with the paying agent on or before the redemption date and certain other conditions are satisfied, then on and after
such redemption date, interest will cease to accrue on such 2026 notes (or such portion thereof) called for redemption.
Optional Redemption for Tax Reasons
The 2026 notes may be redeemed at our option in whole, but not in part, on not less than 15 nor more than 45 days’ prior
notice, at 100% of the principal amount, together with accrued and unpaid interest, if any, to, but excluding, the redemption
date if, as a result of any change in, or amendment to, the laws, regulations or rulings of the United States (or any political
subdivision or taxing authority thereof or therein having power to tax), or any change in official position regarding application
or interpretation of those laws, regulations or rulings (including a holding by a court of competent jurisdiction), which change,
amendment, application or interpretation is announced and becomes effective on or after the original issue date with respect to
the 2026 notes, the Company becomes or, based upon a written opinion of independent counsel selected by the Company, will
become obligated to pay additional amounts as described below in “- Payment of Additional Amounts” and that obligation
cannot be avoided by taking reasonable measures available to the Company, as determined by the Company in its sole
discretion acting in good faith.
Payment of Additional Amounts
All payments of principal, interest, and premium, if any, in respect of the 2026 notes will be made free and clear of, and
without withholding or deduction for, any present or future taxes, assessments, duties or governmental charges of whatever
nature imposed, levied or collected by the United States (or any political subdivision or taxing authority thereof or therein
having power to tax), unless such withholding or deduction is required by law or the official interpretation or administration
thereof.
In addition, for so long as the 2026 notes are outstanding and the provisions of the Directive continue to have effect, the
Company will maintain a paying agent in a member state of the European Union that is not obligated to withhold or deduct tax
pursuant to the Directive, or any law implementing or complying with or introduced in order to conform to such directive (so
long as there is such a member state).
The Company will, subject to the exceptions and limitations set forth below, pay as additional interest in respect of the
2026 notes such additional amounts as are necessary in order that the net payment by the Company of the principal of,
premium, if any, and interest in respect of the 2026 notes to a holder who is not a United States person (as defined below), after
withholding or deduction for any present or future tax, assessment, duties or other governmental charge imposed by the United
States (or any political subdivision or taxing authority thereof or therein having power to tax), will not be less than the amount
provided in the 2026 notes to be then due and payable; provided, however, that the foregoing obligation to pay additional
amounts shall not apply:
8
(1)
to the extent any tax, assessment or other governmental charge would not have been imposed but for the
holder (or the beneficial owner for whose benefit such holder holds such note), or a fiduciary, settlor,
beneficiary, member or shareholder of the holder if the holder is an estate, trust, partnership or
corporation, or a person holding a power over an estate or trust administered by a fiduciary holder, being
considered as:
a.
b.
c.
d.
e.
being or having been engaged in a trade or business in the United States or having or having had a
permanent establishment in the United States;
having a current or former connection with the United States (other than a connection arising solely
as a result of the ownership of the 2026 notes, the receipt of any payment or the enforcement of any
rights hereunder), including being or having been a citizen or resident of the United States;
being or having been a personal holding company, a passive foreign investment company or a
controlled foreign corporation for U.S. Federal income tax purposes or a corporation that has
accumulated earnings to avoid U.S. Federal income tax;
being or having been a “10-percent shareholder” of the Company as defined in section 871(h)(3) of
the United States Internal Revenue Code of 1986, as amended (the “Code”) or any successor
provision; or
being a bank receiving payments on an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of its trade or business, as described in section 881(c)(3)(A) of
the Code or any successor provision;
(2)
(3)
to any holder that is not the sole beneficial owner of the 2026 notes, or a portion of the 2026 notes, or that
is a fiduciary, partnership or limited liability company, but only to the extent that a beneficial owner with
respect to the holder, a beneficiary or settlor with respect to the fiduciary, or a beneficial owner or
member of the partnership or limited liability company would not have been entitled to the payment of an
additional amount had the beneficiary, settlor, beneficial owner or member received directly its beneficial
or distributive share of the payment;
to the extent any tax, assessment or other governmental charge that would not have been imposed but for
the failure of the holder or any other person to comply with certification, identification or information
reporting requirements concerning the nationality, residence, identity or connection with the United States
of the holder or beneficial owner of the 2026 notes, if compliance is required by statute, by regulation of
the United States or any taxing authority therein or by an applicable income tax treaty to which the United
States is a party as a precondition to exemption from such tax, assessment or other governmental charge;
(4)
to any tax, assessment or other governmental charge that is imposed otherwise than by withholding by the
Company or a paying agent from the payment;
(5)
to any tax, assessment or other governmental charge required to be withheld by any paying agent from
any payment of principal of or interest on any 2026 notes, if such payment can be made without such
withholding by any other paying agent;
(6)
to any estate, inheritance, gift, sales, transfer, wealth, capital gains or personal property tax or similar tax,
assessment or other governmental charge, or excise tax imposed on the transfer of 2026 notes;
(7)
to any withholding or deduction that is imposed on a payment to an individual and that is required to be
made pursuant to the Directive, or any law implementing or complying with or introduced in order to
conform to, such directive;
9
(8)
(9)
(10)
(11)
to any tax, assessment or other governmental charge required to be withheld by any paying agent from
any payment of principal of or interest on any note as a result of the presentation of any note for payment
(where presentation is required) by or on behalf of a holder of 2026 notes, if such payment could have
been made without such withholding by presenting the relevant note to at least one other paying agent in
a member state of the European Union;
to the extent any tax, assessment or other governmental charge would not have been imposed but for the
presentation by the holder of any note, where presentation is required, for payment on a date more than 30
days after the date on which payment became due and payable or the date on which payment thereof is
duly provided for, whichever occurs later except to the extent that the beneficiary or holder thereof would
have been entitled to the payment of additional amounts had such note been presented for payment on any
day during such 30-day period;
to any tax, assessment or other governmental charge imposed under sections 1471 through 1474 of the
Code (or any amended or successor provisions), any current or future regulations or official
interpretations thereof, any agreement entered into pursuant to section 1471(b) of the Code or any fiscal
or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered
into in connection with the implementation of such sections of the Code; or
in the case of any combination of items (1), (2), (3), (4), (5), (6), (7), (8), (9) and (10).
The 2026 notes are subject in all cases to any tax, fiscal or other law or regulation or administrative or judicial
interpretation applicable to the 2026 notes. Except as specifically provided above, the Company is not required to make any
payment for any tax, assessment or other governmental charge imposed by any government or a political subdivision or taxing
authority of or in any government or political subdivision.
Mandatory Redemption; Sinking Fund
No mandatory redemption obligation is applicable to the 2026 notes. The 2026 notes are not subject to, nor have the
benefit of, a sinking fund.
10
DESCRIPTION OF 2.600% NOTES DUE 2028
Exhibit 4.3
The following is a description of the material terms of the 2.600% notes due 2028 (the “2028 notes”) of Brown-Forman
Corporation (the “Company”). This description is not complete and is qualified by reference to the indenture (the “base
indenture”) dated as of April 2, 2007 between the Company and U.S. Bank National Association, as trustee, as supplemented
by the first supplemental indenture dated as of December 13, 2010 and the second supplemental indenture dated as of June 24,
2015 (collectively with the base indenture, the “indenture”), and the Officer’s Certificate dated as of July 7, 2016, pursuant to
Section 1.01, 2.02, and 3.01 of the indenture, setting forth the terms of the 1.200% notes due 2026 and the 2028 notes (the
“officer’s certificate”).
General
The Company issued the 2028 notes under the indenture. The 2028 notes are a series of debt securities issued under the
indenture. The 2028 notes are governed by, and construed in accordance with, the laws of the State of New York.
The 2028 notes are listed on the New York Stock Exchange under the symbol “BF28.”
U.S. Bank National Association acts as trustee for the 2028 notes. U.S. Bank National Association also serves as trustee
under certain indentures related to other securities that the Company has issued or guaranteed.
Issuance in Sterling
All payments of interest and principal, including payments made upon any redemption or repurchase of the 2028 notes,
will be made in sterling; provided that if the sterling is unavailable to the Company due to the imposition of exchange controls
or other circumstances beyond the Company’s control or for the settlement of transactions by public institutions of or within the
international banking community, then all payments in respect of the 2028 notes will be made in U.S. dollars until the sterling
is again available to the Company or so used. In such circumstances, the amount payable on any date in sterling will be
converted into U.S. dollars at the rate mandated by the Board of Governors of the Federal Reserve System as of the close of
business on the second business day prior to the relevant payment date or, if the Board of Governors of the Federal Reserve
System has not announced a rate of conversion, on the basis of the most recent U.S. dollar/sterling exchange rate published
in The Wall Street Journal on or prior to the second business day prior to the relevant payment date or, in the event The Wall
Street Journal has not published such exchange rate, the rate will be determined in the Company’s sole discretion on the basis
of the most recently available market exchange rate for the sterling.
Principal, Maturity and Interest
The 2028 notes were limited initially to £300 million in aggregate principal amount. The Company may re-open the 2028
notes and issue an unlimited aggregate principal amount of additional 2028 notes from time to time. Any such additional 2028
notes, together with the 2028 notes originally issued, will constitute a single series of 2028 notes under the indenture. No
additional 2028 notes may be issued if an Event of Default (as defined below) has occurred with respect to the 2028 notes or if
such additional 2028 notes will not be fungible with the previously issued 2028 notes for Federal income tax purposes. The
Company issued the 2028 notes in denominations of £100,000 and integral multiples of £1,000 in excess thereof.
Interest on the 2028 notes accrues at the rate of 2.600% per year. The Company pays interest on the 2028 notes annually
in arrears on July 7 of each year. The Company makes each interest payment to the persons who are the registered holders of
the 2028 notes on the immediately preceding June 23. Interest on the 2028 notes accrues from the last interest payment date on
which interest was paid on the 2028 notes or, if no interest has been paid on the 2028 notes, from the date of original issue.
Interest on the 2028 notes is computed on the basis of the actual number of days in the period for which interest is being
calculated and the actual number of days from and including the last date on which interest was paid on the 2028 notes (or
July 7, 2017, if no interest has been paid on the 2028 notes), to, but excluding, the next scheduled interest payment date. This
payment convention is referred to as ACTUAL/ACTUAL (ICMA) as defined in the rulebook of the International Capital
Market Association.
If any interest payment date would otherwise be a day that is not a business day, such interest payment date will be
postponed to the next date that is a business day. If the maturity date of the 2028 notes falls on a day that is not a business day,
the related payment of principal and interest will be made on the next business day as if it were made on the date such payment
was due, and no interest will accrue on the amounts so payable for the period from and after such date to the next business day.
1
For these purposes, a “business day” is any day that is not a Saturday, Sunday or other day on which banking institutions in
New York City, London or another place of payment on the 2028 notes are authorized or required by law to close and on which
the Trans-European Automated Real-Time Gross Settlement Express Transfer system (the TARGET2 system), or any successor
thereto, is open.
The 2028 notes will mature on July 7, 2028 unless the 2028 notes are previously redeemed or repurchased in whole.
Ranking
The Company’s obligations to pay principal, interest, and premium, if any, on the 2028 notes are the Company’s general
unsecured senior obligations and rank equally with all of its other unsecured senior indebtedness from time to time outstanding.
As of April 30, 2019, the Company had approximately $2,440 million of unsecured senior debt. Of that amount, none of that
amount was indebtedness of the Company’s subsidiaries. Because the creditors of the Company’s subsidiaries have direct
claims on the subsidiaries and their assets, the claims of holders of the Company’s debt securities are “structurally
subordinated” to any existing and future liabilities of the Company’s subsidiaries. This means that the creditors of the
Company’s subsidiaries have priority in their claims on the assets of the Company’s subsidiaries over the Company’s creditors.
In addition, a substantial portion of the Company’s ordinary course liabilities, including accounts payable and accrued
liabilities, as reflected on the Company’s consolidated balance sheet at April 30, 2019, were incurred by the Company’s
subsidiaries. The indenture does not contain any covenants or provisions that would afford the holders of the 2028 notes
protection in the event of a highly leveraged or similar transaction.
Certain Covenants
Limitation on Liens
The indenture provides that if the Company or any of its Subsidiaries (as defined in the indenture) incurs, issues, assumes
or guarantees any Indebtedness (as defined in the indenture) secured by a Mortgage (as defined in the indenture) on Principal
Property (as defined in the indenture) of the Company or of any Subsidiary or on any shares of capital stock or Indebtedness
(owed to the Company or any other Subsidiary) of any Subsidiary that owns Principal Property, the Company will secure, or
cause such Subsidiary to secure, all outstanding 2028 notes equally and ratably with such secured Indebtedness, unless after
giving effect thereto the aggregate amount of all such secured Indebtedness, together with all Attributable Debt (as defined in
the indenture) of the Company and of its Subsidiaries in respect of sale and lease-back transactions involving Principal
Properties (other than certain sale and lease-back transactions that are permitted under “Limitation on Sale and Leaseback
Transactions”) would constitute 15% or less of the Company’s and its consolidated Subsidiaries’ Consolidated Net Assets (as
defined in the indenture) upon such incurrence, issuance, assumption or guarantee. This restriction will not apply in the case of:
• Mortgages affecting property of any person existing at the time such person becomes a Subsidiary or at the time it is
acquired by the Company or a Subsidiary or arising thereafter under contractual commitments entered into prior to and
not in contemplation of such person’s becoming a Subsidiary or being acquired by the Company or a Subsidiary;
• Mortgages existing at the time of acquisition of the property affected by such Mortgage, or Mortgages incurred to
secure payment of all or part of the purchase price of such property or to secure Indebtedness incurred prior to, at the
time of, or within 180 days after, the acquisition of such property for the purpose of financing all or part of the
purchase price of such property (provided such Mortgages are limited to such property and improvements to such
property);
• Mortgages placed into effect prior to, at the time of, or within 180 days of completion of construction of new facilities
(or any improvements to existing facilities) to secure all or part of the cost of construction or improvement of such
facilities, or to secure Indebtedness incurred to provide funds for any such purpose (provided such Mortgages are
limited to the property or portion thereof upon which the construction being so financed occurred and improvements
the cost of construction of which is being so financed);
•
Pledges or deposits in the ordinary course of business and in connection with bids, tenders, contracts or statutory
obligations or to secure surety or performance bonds;
• Mortgages imposed by law, such as carriers’, warehousemen’s and mechanics’ and materialmen’s liens, arising in the
ordinary course of business;
• Mortgages for taxes or assessments or governmental charges or levies, so long as such taxes or assessments or
governmental charges or levies are not due and payable, or the same can be paid thereafter without penalty, or the
same are being contested in good faith;
2
• minor encumbrances, easements or reservations that do not in the aggregate materially adversely affect the value of
the properties or impair their use;
• Mortgages in respect of judgments that do not result in an event of default under the indenture;
• Mortgages that secure only debt owing by a Subsidiary to the Company or to a Subsidiary of the Company;
• Mortgages required by any contract or statute in order to permit the Company or a Subsidiary to perform any contract
or subcontract made by it with or at the request of the United States of America or any state, or any department,
agency, instrumentality or political subdivision of any of the foregoing or the District of Columbia, and Mortgages on
property owned or leased by the Company or a Subsidiary (a) to secure any Indebtedness incurred for the purpose of
financing (including any industrial development bond financing) all or any part of the purchase price or the cost of
constructing, expanding or improving the property subject thereto (provided such Mortgages are limited to the
property or portion thereof upon which the construction being so financed occurred and the improvements the cost of
construction of which is being so financed), or (b) needed to permit the construction, improvement, attachment or
removal of any equipment designed primarily for the purpose of air or water pollution control, provided that such
Mortgages will not extend to other property or assets of the Company or any Subsidiary;
•
landlords’ liens on property held under lease;
• Mortgages, if any, in existence on April 2, 2007; and
•
certain extensions, renewals, replacements or refundings of Mortgages referred to in the foregoing clauses.
Limitation on Sale and Lease-back Transactions
The indenture provides that neither the Company nor any of its Subsidiaries may enter into any sale and lease-back
transaction involving Principal Property acquired or placed into service more than 180 days prior to such transaction, whereby
such property has been or is to be sold or transferred by the Company or any Subsidiary, unless:
•
•
the Company or such Subsidiary would at the time of entering into such transaction be entitled to create Indebtedness
secured by a Mortgage on such property as described in “- Limitations on Liens” above in an amount equal to the
Attributable Debt with respect to the sale and lease-back transaction without equally and ratably securing the
outstanding 2028 notes; or
the Company applies to the retirement or prepayment (other than any mandatory retirement or prepayment) of the
Company’s Funded Debt (as defined in the indenture), or to the acquisition, development or improvement of Principal
Property, an amount equal to the net proceeds from the sale of the Principal Property so leased within 180 days of the
effective date of any such sale and lease-back transaction, provided that the amount to be applied to the retirement or
prepayment of our Funded Debt shall be reduced by the principal amount of any 2028 notes delivered by the Company
to the trustee within 180 days after such sale and lease-back transaction for retirement and cancellation.
This restriction will not apply to any sale and lease-back transaction (i) involving the taking back of a lease for a period of
three years or less; (ii) involving industrial development or pollution control financing; or (iii) between the Company and a
Subsidiary or between Subsidiaries.
Merger, Consolidation or Sale of Assets
The indenture prohibits the Company from merging into or consolidating with any other corporation or selling, leasing or
conveying substantially all of its assets and the assets of its Subsidiaries, taken as a whole, to any person, unless:
•
•
either the Company is the continuing corporation or the successor corporation or the person that acquires by sale, lease
or conveyance all or substantially all of the Company’s or its Subsidiaries’ assets is a corporation organized under the
laws of the United States of America, any state thereof, or the District of Columbia, and expressly assumes the due and
punctual payment of the principal of, and premium, if any, and interest on all the 2028 notes and the due and punctual
performance and observance of every covenant and condition of the indenture to be performed or observed by the
Company, by supplemental indenture satisfactory to the trustee, executed and delivered to the trustee by such
corporation;
immediately after giving effect to such transaction, no Event of Default described under the caption “Events of Default
and Remedies” below or event which, after notice or lapse of time or both would become an Event of Default, has
happened and is continuing; and
3
•
the Company has delivered to the trustee an opinion of counsel stating that such transaction and such supplemental
indenture comply with the indenture provisions and that the Company has complied with all conditions precedent in
the indenture relating to such transaction.
Upon any consolidation or merger with or into any other person or any sale, conveyance, lease, or other transfer of all or
substantially all of the Company’s or its Subsidiaries’ assets to any person, the successor corporation will succeed to, and be
substituted for, the Company under the indenture and each outstanding 2028 note, and the Company will be relieved of all
obligations and covenants under the indenture and each outstanding 2028 note to the extent the Company was the predecessor
person.
Events of Default and Remedies
The following constitute “Events of Default” under the indenture governing the 2028 notes:
(1) default in paying interest on the 2028 notes when it becomes due and the default continues for a period of 30 days or
more;
(2) default in paying principal, or premium, if any, on the 2028 notes when due;
(3) default is made in the payment of any sinking or purchase fund or analogous obligation when the same becomes
due, and such default continues for 30 days or more;
(4) default in the performance, or breach, of any covenant in the indenture (other than defaults specified in clause (1),
(2) or (3) above) and the default or breach continues for a period of 60 days or more after the Company receives
written notice from the trustee or the Company and the trustee receive notice from the holders of at least 25% in
aggregate principal amount of the outstanding 2028 notes;
(5)
(6)
the Company defaults in the payment of any scheduled principal of or interest on any of the Company’s
Indebtedness or any Indebtedness of any of its Subsidiaries (other than the 2028 notes), aggregating more than $50
million in principal amount, when due and payable after giving effect to any applicable grace period;
the Company defaults in the performance of any other term or provision of any of the Company’s Indebtedness or
any Indebtedness of any of its Subsidiaries (other than the 2028 notes) in excess of $50 million principal amount
that results in such Indebtedness becoming or being declared due and payable prior to the date on which it would
otherwise become due and payable, and such acceleration has not been rescinded or annulled, or such Indebtedness
has not been discharged, within a period of 15 days after there has been given to the Company by the trustee or to
the Company and the trustee by the holders of at least 25% in aggregate principal amount of the 2028 notes then
outstanding, a written notice specifying such default or defaults;
(7) one or more judgments, decrees, or orders is entered against the Company or any of its Significant Subsidiaries (as
defined in the indenture) by a court from which no appeal may be or is taken for the payment of money, either
individually or in the aggregate, in excess of $50 million, and the continuance of such judgment, decree, or order
remains unsatisfied and in effect for any period of 45 consecutive days after the amount of the judgment, decree or
order is due without a stay of execution; and
(8) certain events of bankruptcy, insolvency, reorganization, administration or similar proceedings with respect to the
Company have occurred.
If an Event of Default (other than an Event of Default specified in clause (8) with respect to the Company) under the
indenture occurs with respect to the 2028 notes and is continuing, then the trustee or the holders of at least 51% in principal
amount of the outstanding 2028 notes may by written notice require the Company to repay immediately the entire principal
amount of the outstanding 2028 notes, together with all accrued and unpaid interest and premium, if any.
If an Event of Default under the indenture specified in clause (8) with respect to the Company occurs and is continuing,
then the entire principal amount of the outstanding 2028 notes will automatically become due and payable immediately without
any declaration or other act on the part of the trustee or any holder.
After a declaration of acceleration, the holders of a majority in principal amount of outstanding 2028 notes may rescind
this accelerated payment requirement if all existing Events of Default, except for nonpayment of the principal and interest on
the 2028 notes that has become due solely as a result of the accelerated payment requirement, have been cured or waived and if
the rescission of acceleration would not conflict with any judgment or decree. The holders of a majority in principal amount of
the outstanding 2028 notes also have the right to waive past defaults, except a default in paying principal or interest on any
4
outstanding debt security, or in respect of a covenant or a provision that cannot be modified or amended without the consent of
all holders of the 2028 notes.
Holders of at least 51% in principal amount of the outstanding 2028 notes may seek to institute a proceeding only after
they have notified the trustee of a continuing Event of Default in writing and made a written request, and offered reasonable
indemnity, to the trustee to institute a proceeding and the trustee has failed to do so within 60 days after it received this notice.
In addition, within this 60-day period the trustee must not have received directions inconsistent with this written request by
holders of a majority in principal amount of the outstanding 2028 notes. These limitations do not apply, however, to a suit
instituted by a holder of a debt security for the enforcement of the payment of principal, interest or any premium on or after the
due dates for such payment.
During the existence of an Event of Default, the trustee is required to exercise the rights and powers vested in it under the
indenture and use the same degree of care and skill in its exercise as a prudent man would under the circumstances in the
conduct of that person’s own affairs. If an Event of Default has occurred and is continuing, the trustee is not under any
obligation to exercise any of its rights or powers at the request or direction of any of the holders unless the holders have offered
to the trustee reasonable security or indemnity. Subject to certain provisions, the holders of a majority in principal amount of
the outstanding 2028 notes have the right to direct the time, method and place of conducting any proceeding for any remedy
available to the trustee, or exercising any trust, or power conferred on the trustee.
The trustee will, within 90 days after any default occurs, give notice of the default to the holders of the 2028 notes, unless
the default was already cured or waived. Unless there is a default in paying principal, interest or any premium when due, the
trustee can withhold giving notice to the holders if it determines in good faith that the withholding of notice is in the interest of
the holders.
The indenture requires that the Company must deliver to the trustee within 120 days after the end of each fiscal year an
officers’ certificate stating whether such officers have knowledge of any default under the indenture and, if so, specifying such
default and the nature thereof.
Modification and Waiver
The indenture or the 2028 notes may be amended or modified without the consent of any holder of 2028 notes in order to:
•
•
•
evidence a successor to the trustee;
cure ambiguities, defects or inconsistencies;
provide for the assumption of the Company’s obligations in the case of a merger or consolidation or transfer of all or
substantially all of the Company’s assets that complies with the covenant described above under “- Merger,
Consolidation or Sale of Assets”;
• make any change that would provide any additional rights or benefits to the holders of the 2028 notes;
•
•
•
•
add guarantors or co-obligors with respect to the 2028 notes;
secure the 2028 notes;
establish the form or forms of 2028 notes;
add additional Events of Default with respect to the 2028 notes;
• maintain the qualification of the indenture under the Trust Indenture Act; or
• make any change that does not adversely affect in any material respect the interests of any holder.
Other amendments and modifications of the indenture or the 2028 notes issued may be made with the consent of the
holders of not less than a majority of the aggregate principal amount of the outstanding debt securities of each series affected
by the amendment or modification. However, no modification or amendment may, without the consent of the holder of each
outstanding 2028 note:
•
•
•
reduce the principal amount, or extend the fixed maturity, of the 2028 notes;
alter or waive the redemption or repayment provisions of the 2028 notes;
change the currency in which principal, any premium or interest is paid;
5
•
•
reduce the percentage in principal amount outstanding of 2028 notes that must consent to an amendment, supplement
or waiver or consent to take any action;
impair the right to institute suit for the enforcement of any payment on the 2028 notes;
• waive a payment default with respect to the 2028 notes or any guarantor;
•
•
•
reduce the interest rate or extend the time for payment of interest on the 2028 notes;
adversely affect the ranking of the 2028 notes; or
release any guarantor or co-obligor from any of its obligations under its guarantee or the indenture, except in
compliance with the terms of the indenture.
Satisfaction, Discharge and Covenant Defeasance
The Company may terminate its obligations under the indenture with respect to the outstanding 2028 notes, when:
•
either:
•
•
all 2028 notes issued that have been authenticated and delivered have been delivered to the trustee for
cancellation; or
all 2028 notes issued that have not been delivered to the trustee for cancellation have become due and payable,
will become due and payable within one year, or are to be called for redemption within one year and the Company
has made arrangements satisfactory to the trustee for the giving of notice of redemption by such trustee in the
Company’s name and at its expense, and in each case, the Company has irrevocably deposited or caused to be
deposited with the trustee sufficient funds to pay and discharge the entire indebtedness on the 2028 notes;
•
•
the Company has paid or caused to be paid all other sums then due and payable under the indenture; and
the Company delivered to the trustee an officers’ certificate and an opinion of counsel, each stating that all conditions
precedent under the indenture relating to the satisfaction and discharge of the indenture have been complied with.
The Company may elect to have its obligations under the indenture discharged with respect to the outstanding 2028 notes
(“legal defeasance”). Legal defeasance means that the Company will be deemed to have paid and discharged the entire
indebtedness represented by the outstanding 2028 notes under the indenture, except for:
•
•
•
•
the rights of holders of the 2028 notes to receive principal, interest and any premium when due;
the Company’s obligations with respect to the 2028 notes concerning issuing temporary 2028 notes, registration of
transfer of 2028 notes, mutilated, destroyed, lost or stolen 2028 notes and the maintenance of an office or agency for
payment for security payments held in trust;
the rights, powers, trusts, duties and immunities of the trustee; and
the defeasance provisions of the indenture.
In addition, the Company may elect to have its obligations released with respect to certain covenants in the indenture
(“covenant defeasance”). If the Company so elects, any failure to comply with these obligations will not constitute a default or
an Event of Default with respect to the 2028 notes. In the event covenant defeasance occurs, certain events, not including non-
payment, bankruptcy and insolvency events, described under “Events of Default and Remedies” above will no longer constitute
an Event of Default for the 2028 notes.
In order to exercise either legal defeasance or covenant defeasance with respect to outstanding 2028 notes:
•
the Company must irrevocably have deposited or caused to be deposited with the trustee as trust funds for the purpose
of making the following payments, specifically pledged as security for, and dedicated solely to the benefits of the
holders of the 2028 notes:
• money in an amount;
• U.S. government obligations (or equivalent government obligations in the case of 2028 notes denominated in
other than U.S. dollars or a specified currency) that will provide, not later than one day before the due date of any
payment, money in an amount; or
6
•
a combination of money and U.S. government obligations (or equivalent government obligations, as applicable) in
an amount, in each case sufficient, in the written opinion (with respect to U.S. or equivalent government
obligations or a combination of money and U.S. or equivalent government obligations, as applicable) of a
nationally recognized firm of independent public accountants to pay and discharge, and that will be applied by the
trustee to pay and discharge, all of the principal, interest and premium, if any, at due date or maturity;
in the case of legal defeasance, the Company has delivered to the trustee an opinion of counsel stating that, under then
applicable Federal income tax law or a ruling published by the Internal Revenue Service, the holders of the 2028 notes
will not recognize income, gain or loss for Federal income tax purposes as a result of the deposit, defeasance and
discharge to be effected and will be subject to the same Federal income tax as would be the case if the deposit,
defeasance and discharge did not occur;
in the case of covenant defeasance, the Company has delivered to the trustee an opinion of counsel to the effect that
the holders of the 2028 notes will not recognize income, gain or loss for Federal income tax purposes as a result of the
deposit and covenant defeasance to be effected and will be subject to the same Federal income tax as would be the
case if the deposit and covenant defeasance did not occur;
no Event of Default or default with respect to the outstanding 2028 notes has occurred and is continuing at the time of
such deposit after giving effect to the deposit or, in the case of legal defeasance, no default relating to bankruptcy or
insolvency has occurred and is continuing at any time on or before the 91st day after the date of such deposit, it being
understood that this condition is not deemed satisfied until after the 91st day;
the legal defeasance or covenant defeasance will not cause the trustee to have a conflicting interest within the meaning
of the Trust Indenture Act, assuming all 2028 notes were in default within the meaning of the Trust Indenture Act;
the legal defeasance or covenant defeasance will not result in a breach or violation of, or constitute a default under,
any other agreement or instrument to which the Company is a party;
the legal defeasance or covenant defeasance will not result in the trust arising from such deposit constituting an
investment company within the meaning of the Investment Company Act of 1940, as amended, unless the trust is
registered under the Investment Company Act of 1940, as amended, or exempt from registration;
if the 2028 notes are to be redeemed prior to their maturity, notice of such redemption shall have been duly given; and
the Company has delivered to the trustee an officers’ certificate and an opinion of counsel stating that all conditions
precedent with respect to the legal defeasance or covenant defeasance have been complied with.
•
•
•
•
•
•
•
•
Optional Redemption
The 2028 notes are redeemable at the Company’s option at any time in whole or from time to time in part in £1,000
increments (provided that any remaining principal amount thereof shall be at least the minimum authorized denomination
thereof). If the 2028 notes are redeemed before April 7, 2028 (three months prior to the maturity date, or the “par call date”),
the redemption price will equal the greater of:
•
•
100% of the principal amount of the 2028 notes to be redeemed; and
the sum of the present values of the remaining scheduled payments of principal and interest on the 2028 notes to be
redeemed assuming the 2028 notes mature on the par call date (exclusive of interest accrued to the date of redemption)
discounted to the date of redemption on an annual basis (ACTUAL/ACTUAL (ICMA)), at the Comparable
Government Bond Rate (as defined below) plus 25 basis points.
If the 2028 notes are redeemed on or after the par call date, the redemption price for the 2028 notes will equal 100% of
the principal amount of the 2028 notes being redeemed, plus accrued and unpaid interest to, but not including, the redemption
date.
“Comparable Government Bond” means, in relation to any Comparable Government Bond Rate calculation, at the
discretion of an independent investment bank selected by the Company, a United Kingdom government bond whose maturity is
closest to the par call date, or if such independent investment bank in its discretion determines that such similar bond is not in
issue, such other United Kingdom government bond as such independent investment bank may, with the advice of three brokers
of, and/or market makers in, United Kingdom government bonds selected by the Company, determine to be appropriate for
determining the Comparable Government Bond Rate.
7
“Comparable Government Bond Rate” means the price, expressed as a percentage (rounded to three decimal places, with
0.0005 being rounded upwards), at which the gross redemption yield on the 2028 notes to be redeemed, if they were to be
purchased at such price on the third business day prior to the date fixed for redemption, would be equal to the gross redemption
yield on such business day of the Comparable Government Bond on the basis of the middle market price of the Comparable
Government Bond prevailing at 11:00 a.m. (London time) on such business day as determined by an independent investment
bank selected by the Company.
If less than all of the 2028 notes are to be redeemed, and the 2028 notes are global notes, the 2028 notes to be redeemed
will be selected by Euroclear or Clearsteam in accordance with their standard procedures. If the 2028 notes to be redeemed are
not global notes then held by Euroclear or Clearstream, the trustee will select the 2028 notes to be redeemed on a pro
rata basis, by lot, or by any other method the trustee deems fair and appropriate. If the 2028 notes are listed on any national
securities exchange, Euroclear or Clearstream will select 2028 notes in compliance with the requirements of the principal
national securities exchange on which the 2028 notes are listed. Notwithstanding the foregoing, if less than all of the 2028
notes are to be redeemed, no 2028 notes of a principal amount of £100,000 or less shall be redeemed in part. If money
sufficient to pay the redemption price on the 2028 notes (or portions thereof) to be redeemed on the redemption date is
deposited with the paying agent on or before the redemption date and certain other conditions are satisfied, then on and after
such redemption date, interest will cease to accrue on such 2028 notes (or such portion thereof) called for redemption.
Optional Redemption for Tax Reasons
The 2028 notes may be redeemed at our option in whole, but not in part, on not less than 15 nor more than 45 days’ prior
notice, at 100% of the principal amount, together with accrued and unpaid interest, if any, to, but excluding, the redemption
date if, as a result of any change in, or amendment to, the laws, regulations or rulings of the United States (or any political
subdivision or taxing authority thereof or therein having power to tax), or any change in official position regarding application
or interpretation of those laws, regulations or rulings (including a holding by a court of competent jurisdiction), which change,
amendment, application or interpretation is announced and becomes effective on or after the original issue date with respect to
the 2028 notes, the Company becomes or, based upon a written opinion of independent counsel selected by the Company, will
become obligated to pay additional amounts as described below in “- Payment of Additional Amounts” and that obligation
cannot be avoided by taking reasonable measures available to the Company, as determined by the Company in its sole
discretion acting in good faith.
Payment of Additional Amounts
All payments of principal, interest, and premium, if any, in respect of the 2028 notes will be made free and clear of, and
without withholding or deduction for, any present or future taxes, assessments, duties or governmental charges of whatever
nature imposed, levied or collected by the United States (or any political subdivision or taxing authority thereof or therein
having power to tax), unless such withholding or deduction is required by law or the official interpretation or administration
thereof.
In addition, for so long as the 2028 notes are outstanding and the provisions of the Directive continue to have effect, the
Company will maintain a paying agent in a member state of the European Union that is not obligated to withhold or deduct tax
pursuant to the Directive, or any law implementing or complying with or introduced in order to conform to such directive (so
long as there is such a member state).
The Company will, subject to the exceptions and limitations set forth below, pay as additional interest in respect of the
2028 notes such additional amounts as are necessary in order that the net payment by the Company of the principal of,
premium, if any, and interest in respect of the 2028 notes to a holder who is not a United States person (as defined below), after
withholding or deduction for any present or future tax, assessment, duties or other governmental charge imposed by the United
States (or any political subdivision or taxing authority thereof or therein having power to tax), will not be less than the amount
provided in the 2028 notes to be then due and payable; provided, however, that the foregoing obligation to pay additional
amounts shall not apply:
(1)
to the extent any tax, assessment or other governmental charge would not have been imposed but for the
holder (or the beneficial owner for whose benefit such holder holds such note), or a fiduciary, settlor,
beneficiary, member or shareholder of the holder if the holder is an estate, trust, partnership or
corporation, or a person holding a power over an estate or trust administered by a fiduciary holder, being
considered as:
8
a.
b.
c.
d.
e.
being or having been engaged in a trade or business in the United States or having or having had a
permanent establishment in the United States;
having a current or former connection with the United States (other than a connection arising solely
as a result of the ownership of the 2028 notes, the receipt of any payment or the enforcement of any
rights hereunder), including being or having been a citizen or resident of the United States;
being or having been a personal holding company, a passive foreign investment company or a
controlled foreign corporation for U.S. Federal income tax purposes or a corporation that has
accumulated earnings to avoid U.S. Federal income tax;
being or having been a “10-percent shareholder” of the Company as defined in section 871(h)(3) of
the United States Internal Revenue Code of 1986, as amended (the “Code”) or any successor
provision; or
being a bank receiving payments on an extension of credit made pursuant to a loan agreement
entered into in the ordinary course of its trade or business, as described in section 881(c)(3)(A) of
the Code or any successor provision;
(2)
(3)
to any holder that is not the sole beneficial owner of the 2028 notes, or a portion of the 2028 notes, or that
is a fiduciary, partnership or limited liability company, but only to the extent that a beneficial owner with
respect to the holder, a beneficiary or settlor with respect to the fiduciary, or a beneficial owner or
member of the partnership or limited liability company would not have been entitled to the payment of an
additional amount had the beneficiary, settlor, beneficial owner or member received directly its beneficial
or distributive share of the payment;
to the extent any tax, assessment or other governmental charge that would not have been imposed but for
the failure of the holder or any other person to comply with certification, identification or information
reporting requirements concerning the nationality, residence, identity or connection with the United States
of the holder or beneficial owner of the 2028 notes, if compliance is required by statute, by regulation of
the United States or any taxing authority therein or by an applicable income tax treaty to which the United
States is a party as a precondition to exemption from such tax, assessment or other governmental charge;
(4)
to any tax, assessment or other governmental charge that is imposed otherwise than by withholding by the
Company or a paying agent from the payment;
(5)
to any tax, assessment or other governmental charge required to be withheld by any paying agent from
any payment of principal of or interest on any 2028 notes, if such payment can be made without such
withholding by any other paying agent;
(6)
to any estate, inheritance, gift, sales, transfer, wealth, capital gains or personal property tax or similar tax,
assessment or other governmental charge, or excise tax imposed on the transfer of 2028 notes;
(7)
to any withholding or deduction that is imposed on a payment to an individual and that is required to be
made pursuant to the Directive, or any law implementing or complying with or introduced in order to
conform to, such directive;
(8)
to any tax, assessment or other governmental charge required to be withheld by any paying agent from
any payment of principal of or interest on any note as a result of the presentation of any note for payment
(where presentation is required) by or on behalf of a holder of 2028 notes, if such payment could have
been made without such withholding by presenting the relevant note to at least one other paying agent in
a member state of the European Union;
9
(9)
to the extent any tax, assessment or other governmental charge would not have been imposed but for the
presentation by the holder of any note, where presentation is required, for payment on a date more than 30
days after the date on which payment became due and payable or the date on which payment thereof is
duly provided for, whichever occurs later except to the extent that the beneficiary or holder thereof would
have been entitled to the payment of additional amounts had such note been presented for payment on any
day during such 30-day period;
(10)
(11)
to any tax, assessment or other governmental charge imposed under sections 1471 through 1474 of the
Code (or any amended or successor provisions), any current or future regulations or official
interpretations thereof, any agreement entered into pursuant to section 1471(b) of the Code or any fiscal
or regulatory legislation, rules or practices adopted pursuant to any intergovernmental agreement entered
into in connection with the implementation of such sections of the Code; or
in the case of any combination of items (1), (2), (3), (4), (5), (6), (7), (8), (9) and (10).
The 2028 notes are subject in all cases to any tax, fiscal or other law or regulation or administrative or judicial
interpretation applicable to the 2028 notes. Except as specifically provided above, the Company is not required to make any
payment for any tax, assessment or other governmental charge imposed by any government or a political subdivision or taxing
authority of or in any government or political subdivision.
Mandatory Redemption; Sinking Fund
No mandatory redemption obligation is applicable to the 2028 notes. The 2028 notes are not subject to, nor have the
benefit of, a sinking fund.
10
SUBSIDIARIES OF THE REGISTRANT
Name
Amercain Investments, C.V.
AMG Trading, L.L.C.
The BenRiach Distillery Company Limited
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 Distillery, Inc.
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 India Private Limited
Brown-Forman International, Inc.
Brown-Forman Italy, Inc.
Brown-Forman Korea Ltd.
Brown-Forman Latvia L.L.C.
Brown-Forman Ljubljana Marketing, d.o.o
Brown-Forman Middle East FZ-LLC
Brown-Forman Netherlands, B.V.
Brown-Forman New Zealand
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 Scotland Limited
Brown-Forman South Africa Pty Ltd.
Brown-Forman Spain, S.L.
Brown-Forman Spirits (Shanghai) Co., Ltd.
Brown-Forman Spirits Trading, L.L.C.
Exhibit 21
Percentage of
State or Jurisdiction
Securities Owned
Of Incorporation
100% (1)
100%
100% (2)
100% (3)
100% (4)
100% (5)
100% (6)
100%
100% (5)
100% (5)
100%
100%
100% (7)
100% (8)
100% (5)
100% (5)
100% (9)
100% (10)
100%
100% (5)
100% (5)
100% (5)
100% (11)
100% (12)
100% (13)
100% (14)
100% (5)
100% (15)
100%
100%
100% (13)
100% (5)
100% (5)
100% (5)
100% (16)
100%
100% (9)
100% (11)
100% (17)
100% (5)
100% (4)
100% (5)
100% (5)
100% (7)
100% (5)
Netherlands
Delaware
Scotland
Mexico
Hungary
Delaware
Ireland
Kentucky
Australia
United Kingdom
Delaware
Delaware
China
Brazil
Bulgaria
Colombia
Czech Republic
Germany
Delaware
Netherlands
Finland
France
Greece
Mexico
Hong Kong
Hungary
Hungary
India
Delaware
Kentucky
Korea
Latvia
Slovenia
United Arab Emirates
Netherlands
New Zealand
Poland
Romania
Russia
Serbia
Scotland
South Africa
Spain
China
Turkey
Name
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
Cosesa-BF S. de R.L. de C.V.
Jack Daniel Distillery, Lem Motlow, Prop., Inc.
Jack Daniel's Properties, Inc.
Limited Liability Company Brown-Forman Ukraine
Longnorth Limited
Magnolia Investments of Alabama, L.L.C.
Slane Castle Irish Whiskey Homeplace Limited
Slane Castle Irish Whiskey Limited
Sonoma-Cutrer Vineyards, Inc.
Valle de Amatitan, S.A. de C.V.
Washington Investments, L.L.C.
Percentage of
State or Jurisdiction
Securities Owned
Of Incorporation
100% (18)
100%
100%
100% (19)
100%
100%
100% (21)
100% (22)
100%
100%
100% (16) (20)
100% (23)
100% (24)
100% (5)
100%
100% (18)
100%
Mexico
Delaware
Delaware
China
Ontario, Canada
France
Mexico
Tennessee
Delaware
Ukraine
Ireland
Delaware
Ireland
Ireland
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 99.991% by Brown-Forman Hungary 1 Kft. and 0.009% by B-F Holding Hungary 2 Kft.
Owned by Brown-Forman Scotland Limited.
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 Brown-Forman Distillery, Inc.
Owned 81.8% by Brown-Forman Netherlands, B.V. and 18.2% by Brown-Forman Beverages Europe, Ltd.
(10) Owned by Brown-Forman Beverages Europe, Ltd.
(11) Owned 90% by Brown-Forman Netherlands B.V. and 10% Brown-Forman Dutch Holding B.V.
(12) Owned 52.01% by Brown-Forman Netherlands, B.V. and 47.99% by Brown-Forman Corporation.
(13) Owned by B-F Korea, L.L.C.
(14) Owned by AMG Trading, L.L.C.
(15) Owned 99.98% by Brown-Forman Netherlands B.V. and 0.02% Brown-Forman Dutch Holding B.V.
(16) Owned by Amercain Investments C.V.
(17) Owned 90% by Brown-Forman Netherlands B.V. and 10% Brown-Forman Deutschland GmbH.
(18) Owned 99% by Brown-Forman Holding Mexico S.A. de C.V. and 1% by Brown-Forman Distillery, Inc.
(19) Owned by Brown-Forman Beverages North Asia, L.L.C.
(20)
Includes qualifying shares assigned to Brown-Forman Corporation.
(21) Owned 99.9972% by BF FINCO S. de R.L. de C.V. and 0.00277% by Brown-Forman Beverages Europe, Ltd.
(22) Owned by Jack Daniel's Properties, Inc.
(23) Owned by Jack Daniel Distillery, Lem Motlow, Prop., Inc.
(24) Owned by Slane Castle Irish Whiskey 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-8 (Nos. 333-38649, 333-74567,
333-89294, 333-117630, 333-169564, and 333-190122) of Brown-Forman Corporation of our report dated June 13, 2019 relating
to the financial statements and 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 13, 2019
Exhibit 31.1
CERTIFICATION PURSUANT TO SECTION 302 OF SARBANES-OXLEY ACT OF 2002
I, Lawson E. Whiting, 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 13, 2019
By:
/s/ Lawson E. Whiting
Lawson E. Whiting
President and Chief Executive
Officer
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 13, 2019
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, 2019, 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 13, 2019
By:
By:
/s/ Lawson E. Whiting
Lawson E. Whiting
President and Chief Executive
Officer
/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
BlankIntentionally.indd 1
6/13/19 6:36 PM
BROWN-FORMAN 2019 Integrated Report
022307
937865fin
06/12/19
page 34
C OR P OR AT E INF OR M AT ION
CORPORATE HEADQUARTERS
850 Dixie Highway / Louisville, Kentucky 40210 / (502) 585-1100
www.brown-forman.com / brown-forman@b-f.com
LISTED
New York Stock Exchange — BFA/BFB
STOCKHOLDERS
As of April 30, 2019, there were 2,527 holders of record of Class A Common
Stock and 5,202 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)
Correspondence: P.O. Box 505000 / Louisville, KY 40233
Overnight Correspondence: 462 South 4th Street, Suite 1600
Louisville, KY 40202
EMPLOYEES
As of April 30, 2019, Brown-Forman employed approximately 4,700
employees, excluding those 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 pertaining to selection, training, transfer,
promotion, compensation, and educational assistance programs.
FORM 10-K
Our 2019 Form 10-K is included with this 2019 Annual & Corporate
Responsibility Report in its entirety except for exhibits. Interested stock-
holders may obtain without charge a copy of our Form 10-K, or a copy
of any exhibit, upon written request to: Investor Relations, 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
The 2019 Annual & Corporate Responsibility Report and the embedded
electronic content 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 information, future events,
or otherwise. For a description of these risks and uncertainties, 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 2019 Annual & Corporate Responsibility Report.
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 2019 Annual & Corporate Responsibility 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 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, 2014, 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 2014.
$180
$160
$140
$120
$100
INDEXED
TOTAL
SHAREHOLDER
RETURN
as of April 30,
2019, dividends
reinvested
BF Class B Shares
S&P 500 Index
Dow Jones U.S.
Consumer Goods
Dow Jones U.S.
Food and Beverage
2014
2015
2016
2017
2018
2019
$100
$100
$100
$100
$102
$113
$111
$114
$110
$114
$122
$128
$110
$135
$133
$137
$168
$153
$130
$134
$162
$173
$145
$152
ENVIRONMENTAL STEWARDSHIP
As a responsible corporate citizen, Brown-Forman is committed to
environmental stewardship and sustainability. Our environmental efforts
focus primarily on the efficient use of natural resources, conserving energy
and water, and minimizing waste.
This Annual Report is printed on FSC®-certified paper.
937865fin.indd 34
6/12/19 8:49 AM
A B OU T T HI S IN T E G R AT E D A NNU A L A ND C OR P OR AT E R E S P ON S IB IL I T Y R E P OR T
This is our seventh report
to provide Corporate Responsibility
We were involved in developing
reporting standards for the
(CR) information. This year we
alcoholic beverages sector through
transitioned from a stand-alone
the Sustainability Accounting
biennial CR report to a blended
Standards Board in 2015, as
annual and CR report to reflect the
members of the “Consumption I”
integration happening within our
industry working group. Insights
business and the expectation of
gained through that process have
stakeholders for this information
helped guide the content of our CR
to be reported together. Unless
reporting. We conducted an issues
otherwise noted, all CR data relates
assessment in 2015, resulting
to fiscal 2019. Our greenhouse gas
in the list of priority issues. For
emissions are externally verified
more information, please visit
annually by Stantec.
our website.
Additional CR information is
If you would like to get in touch
available on www.brown-forman.
with us about any of the issues
com/responsibility:
• Responsibility pages
discussed in this report, please
email brown-forman@b-f.com
including videos, policies, and
or write to us at: Brown-Forman
downloadable documents
Corporation, 850 Dixie Hwy.,
• Data Scorecard
Louisville, Kentucky, 40210, U.S.A.
• GRI Content Index containing
disclosures from the Global
Reporting Initiative (GRI)
Standards sustainability reporting
guidelines
Over the years, Brown-Forman has
conducted formal and informal
assessments to determine the
topics most important to its
stakeholders and to the company,
that represent the greatest impacts
along our value chain.
m
o
c
.
i
n
o
s
d
d
a
.
w
w
w
i
n
o
s
d
d
A
y
b
i
n
g
s
e
D
6/19/19 4:13 PM
r
o
n
-
F
o
r
m
a
n
|
2
0
1
9
A
n
n
u
a
l
&
C
o
r
p
o
r
a
t
e
R
e
s
p
o
n
s
b
i
i
l
i
t
y
R
e
p
o
r
t
E V E R Y T HING W E D O T OD AY DE T E R MINE S W HO
A ND W HE R E W E W IL L B E T OMOR R O W.
As this next generation begins,
so does our 150th year. We look
forward to celebrating our past,
in part by doing what we have
always done: making the most
of our future.
8 5 0 D I X I E H I G H W A Y, L O U I S V I L L E , K E N T U C K Y 4 0 2 10 | B R O W N - F O R M A N . C O M
937865cvr.indd 1-3