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Section 1: 10-K (10-K)

Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 10-K
(Mark One)
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended April 30, 2019
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                    to                     
Commission File Number 001-00123
 
BROWN-FORMAN CORPORATION
(Exact name of registrant as specified in its charter) 
 
Delaware
 
61-0143150
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification No.)
850 Dixie Highway
Louisville, Kentucky
 
40210
(Address of principal executive offices)
 
(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
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock (voting) $0.15 par value
BFA
New York Stock Exchange
Class B Common Stock (nonvoting) $0.15 par value
BFB
New York Stock Exchange
1.200% Notes due 2026
BF26
New York Stock Exchange
2.600% Notes due 2028
BF28
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  þ     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  þ
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  þ     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  þ     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
þ
 
Accelerated filer
¨
Non-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  þ
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)
168,985,878

Class B Common Stock (nonvoting)
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.

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Table of Contents
 
 
 
Page
PART I
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
 
Item 15.
Item 16.



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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
Decline in the social acceptability of beverage alcohol in significant markets
Production facility, aging warehouse, or supply chain disruption
Imprecision in supply/demand forecasting
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
Failure to attract or retain key executive or employee talent
Our status as a family “controlled company” under New York Stock Exchange rules, and our dual-class share structure
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

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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.”
PART I
Item 1. Business
Overview
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.”

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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
 
el Jimador Tequilas
Jack Daniel’s RTDs2
 
el Jimador New Mix RTDs
Jack Daniel’s Tennessee Honey
 
Herradura Tequilas6
Gentleman Jack Rare Tennessee Whiskey
 
Sonoma-Cutrer California Wines

Jack Daniel’s Tennessee Fire
 
Canadian Mist Canadian Whisky

Jack Daniel’s Single Barrel Collection3
 
GlenDronach Single Malt Scotch Whisky

Jack Daniel’s Tennessee Rye
 
BenRiach Single Malt Scotch Whisky

Jack Daniel’s Sinatra Select
 
Glenglassaugh Single Malt Scotch Whisky

Jack Daniel’s No. 27 Gold Tennessee Whiskey
 
Old Forester Kentucky Straight Bourbon Whisky
Jack Daniel’s Winter Jack
 
Old Forester Whiskey Row Series
Jack Daniel’s Bottled-in-Bond4
 
Old Forester Kentucky Straight Rye Whisky4
Woodford Reserve Kentucky Bourbon
 
Chambord Liqueur
Woodford Reserve Double Oaked
 
Early Times Kentucky Whisky and Bourbon
Woodford Reserve Kentucky Rye Whiskey

 
Pepe Lopez Tequila
Woodford Reserve Kentucky Straight Malt Whiskey4
 
Antiguo Tequila
Finlandia Vodkas

 
Slane Irish Whiskey
Korbel California Champagnes5
 
Coopers’ Craft Kentucky Bourbon
Korbel California Brandy5
 
 
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.

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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
 
Year ended April 30
2015
2016
2017
2018
2019
United States
46
%
48
%
48
%
47
%
47
%
International:
 
 
 
 
 
Europe
27
%
27
%
26
%
27
%
26
%
Australia
6
%
5
%
5
%
5
%
5
%
Other
21
%
20
%
21
%
21
%
22
%
Total International
54
%
52
%
52
%
53
%
53
%
TOTAL
100
%
100
%
100
%
100
%
100
%
Note: Totals may differ due to rounding

 
 
 
 
 
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.

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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.
Principal Raw Materials
Distilled Spirits
 
Liqueurs
 
RTD Products
 
Wines
 
Packaging
Agave
 
Flavorings
 
Flavorings
 
Grapes
 
Aluminum cans
Barley
 
Neutral spirits
 
Malt
 
Wood
 
Cartons
Corn
 
Sugar
 
Neutral spirits
 
 
 
Closures
Malted barley
 
Water
 
Sugar
 
 
 
Glass bottles
Rye
 
Whiskey
 
Tequila
 
 
 
Labels
Sugar
 
Wine
 
Water
 
 
 
PET1 bottles
Water
 
 
 
Whiskey
 
 
 
 
Wood
 
 
 
 
 
 
 
 
 
 
1Polyethylene terephthalate (PET) is a polymer used in non-glass containers.
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.”

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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.

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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.
398316308_bfarrowenglisha01a01a26.jpg
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.

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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.

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Integrated Performance
398316308_capture2a09.jpg
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

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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

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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).

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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
Age
Principal Occupation and Business Experience
Lawson E. Whiting
50
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.
Jane C. Morreau
60
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.
Matthew E. Hamel
59
Executive Vice President, General Counsel, and Secretary since 2007.
Mark I. McCallum
64
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.
Alejandro “Alex” Alvarez
51
Senior Vice President and Chief Production Officer since 2014. Vice President and General Manager for Brown-Forman Tequila Mexico Operations from 2008 to 2014.
Ralph De Chabert
72
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.
Kirsten M. Hawley
49
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.
John V. Hayes
59
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.
Thomas Hinrichs
57
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.
Kelli Nelson
49
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.
Available Information
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

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charge by writing to our Secretary, Matthew E. Hamel, 850 Dixie Highway, Louisville, Kentucky 40210 or emailing him at [email protected]
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.

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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

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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.

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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.


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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, 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.  

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.

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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.



Counterfeiting or inadequate protection of our intellectual property rights could adversely affect our business prospects.


20


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 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;

21


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.
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

22


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.
Significant Properties
Location
Principal Activities
Notes
 
 
 
United States:
Louisville, Kentucky
Corporate offices
Includes several renovated historic structures
 
Distilling, bottling, warehousing
Home of Old Forester
 
Visitors’ center
 
 
Cooperage
Brown-Forman Cooperage
Lynchburg, Tennessee
Distilling, bottling, warehousing
Home of Jack Daniel’s
 
Visitors’ center
 
Woodford County, Kentucky
Distilling, bottling, warehousing
Home of Woodford Reserve
 
Visitors’ center
 
Windsor, California
Vineyards, winery, bottling, warehousing
 
Home of Sonoma-Cutrer
 
Visitors’ center
 
Trinity, Alabama
Cooperage
Jack Daniel Cooperage
Clifton, Tennessee
Stave and heading mill
 
Stevenson, Alabama
Stave and heading mill
 
Spencer, Indiana
Stave and heading mill
 
Jackson, Ohio
Stave and heading mill
Land is leased from a third party
 
 
 
International:
Collingwood, Canada
Distilling, warehousing
Home of Canadian Mist
Cour-Cheverny, France
Distilling, bottling, warehousing
Home of Chambord
Amatitán, Mexico
Distilling, bottling, warehousing
Home of our tequila brands
 
Visitors’ center
 
Slane, Ireland
Distilling
Home of Slane Irish Whiskey
 
Visitors’ center
 
Aberdeenshire, Scotland

Distilling, warehousing
Home of Glendronach
 
Visitors’ center
 
Morayshire, Scotland

Distilling, warehousing
Home of BenRiach
 
Visitors’ center
 
Newbridge, Scotland
Bottling
 
Portsoy, Scotland
Distilling, warehousing
Home of Glenglassaugh
 
Visitors’ center
 
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
 
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
Equity compensation plans approved by Class A common stockholders
 
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.
398316308_chart-1dff00a3cbaf5efaa2b.jpg


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:
Period
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
February 1, 2019 – February 28, 2019
14,204

$
47.07


$

March 1, 2019 – March 31, 2019

$


$

April 1, 2019 – April 30, 2019
1,490

$
51.86


$

Total
15,694

$
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.

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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.”
 
(Dollars in millions, except per share amounts)
 
2015
2016
2017
2018
2019
For Year Ended April 30:
 
 
 
 
 
Sales
$
4,096

$
4,011

$
3,857

$
4,201

$
4,276

Excise taxes
$
962

$
922

$
863

$
953

$
952

Net sales
$
3,134

$
3,089

$
2,994

$
3,248

$
3,324

Gross profit
$
2,183

$
2,144

$
2,021

$
2,202

$
2,166

Operating income
$
1,045

$
1,556

$
1,010

$
1,048

$
1,144

Net income
$
684

$
1,067

$
669

$
717

$
835

Weighted average shares used to calculate earnings per share
 
 
 
 
 
– Basic
529.0

507.4

484.6

480.3

479.0

– Diluted
532.7

510.7

488.1

484.2

482.1

Earnings per share from continuing operations
 
 
 
 
 
– Basic
$
1.29

$
2.10

$
1.38

$
1.49

$
1.74

– Diluted
$
1.28

$
2.09

$
1.37

$
1.48

$
1.73

Gross margin
69.7
%
69.4
%
67.5
%
67.8
%
65.2
%
Operating margin
33.3
%
50.4
%
33.8
%
32.3
%
34.4
%
Effective tax rate
31.7
%
28.3
%
28.3
%
26.6
%
19.8
%
Average invested capital
$
3,196

$
3,221

$
3,591

$
3,832

$
4,125

Return on average invested capital
22.0
%
34.1
%
19.8
%
20.0
%
22.0
%
Cash provided by operations
$
631

$
545

$
656

$
653

$
800

Cash dividends declared per common share
$
0.484

$
0.524

$
0.564

$
1.608

$
0.648

Dividend payout ratio
37.5
%
25.0
%
40.9
%
107.8
%
37.2
%
As of April 30:
 
 
 
 
 
Total assets
$
4,188

$
4,183

$
4,625

$
4,976

$
5,139

Long-term debt
$
743

$
1,230

$
1,689

$
2,341

$
2,290

Total debt
$
1,183

$
1,501

$
2,149

$
2,556

$
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.

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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
 
Page
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.
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.

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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.
 
Fiscal 2017
(Dollars in millions)
Previously Reported
 
Adoption of
ASU 2017-07
 
Reclassifications
 
Currently Reported
Net sales
$
2,994

 
$

 
$

 
$
2,994

Cost of sales
973

 

 

 
973

Gross profit
2,021

 

 

 
2,021

Advertising expenses
383

 

 
(11
)
 
372

Selling, general, and administrative expenses
667

 
(21
)
 
11

 
657

Other expense (income), net
(18
)
 

 

 
(18
)
Operating income
989

 
21

 

 
1,010

Non-operating postretirement expense

 
21

 

 
21

Interest income
(3
)
 

 

 
(3
)
Interest expense
59

 

 

 
59

Income before income taxes
933

 

 

 
933

Income taxes
264

 

 

 
264

Net income
$
669

 
$

 
$

 
$
669


 
Fiscal 2018
(Dollars in millions)
Previously Reported
 
Adoption of
ASU 2017-07
 
Reclassifications
 
Currently Reported
Net sales
$
3,248

 
$

 
$

 
$
3,248

Cost of sales
1,046

 

 

 
1,046

Gross profit
2,202

 

 

 
2,202

Advertising expenses
414

 

 
(9
)
 
405

Selling, general, and administrative expenses
765

 
(9
)
 
9

 
765

Other expense (income), net
(16
)
 

 

 
(16
)
Operating income
1,039

 
9

 

 
1,048

Non-operating postretirement expense

 
9

 

 
9

Interest income
(6
)
 

 

 
(6
)
Interest expense
68

 

 

 
68

Income before income taxes
977

 

 

 
977

Income taxes
260

 

 

 
260

Net income
$
717

 
$

 
$

 
$
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
 
 
 
 
Rate
Geographic Area
 
Effective Date
 
Before

After

European Union
 
June 22, 2018
 
%
25
%
Mexico1
 
June 5, 2018
 
%
25
%
Canada1
 
July 1, 2018
 
%
10
%
Turkey1
 
June 21, 2018
 
%
140
%
China
 
July 6, 2018
 
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
 
 
 
 
 
 
 
Reported Change
 
Underlying Change1
Fiscal year ended April 30
2017
 
2018
 
2019
 
2017 vs. 2018
 
2018 vs. 2019
 
2017 vs. 2018
 
2018 vs. 2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales
$
2,994

 
$
3,248

 
$
3,324

 
8
%
 
2
%
 
6
%
 
5
%
Cost of sales
973

 
1,046

 
1,158

 
7
%
 
11
%
 
8
%
 
12
%
Gross profit
2,021

 
2,202

 
2,166

 
9
%
 
(2
%)
 
6
%
 
2
%
Advertising2
372

 
405

 
396

 
9
%
 
(2
%)
 
6
%
 
3
%
SG&A2
657

 
765

 
641

 
16
%
 
(16
%)
 
4
%
 
(5
%)
Operating income2
$
1,010

 
$
1,048

 
$
1,144

 
4
%
 
9
%
 
6
%
 
5
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total operating expenses3
$
1,011

 
$
1,154

 
$
1,022

 
14
%
 
(11
%)
 
5
%
 
(2
%)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
As a percentage of net sales4
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
67.5
%
 
67.8
%
 
65.2
%
 
0.3
pp
 
(2.6
pp)
 
 
 
 
Operating income
33.8
%
 
32.3
%
 
34.4
%
 
(1.5
pp)
 
2.1
pp
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net
$
56

 
$
62

 
$
80

 
9
%
 
31
%
 
 
 
 
Effective tax rate
28.3
%
 
26.6
%
 
19.8
%
 
(1.7
pp)
 
(6.8
pp)
 
 
 
 
Diluted earnings per share
$
1.37

 
$
1.48

 
$
1.73

 
8
%
 
17
%
 
 
 
 
Return on average invested capital5
19.8
%
 
20.0
%
 
22.0
%
 
0.2
pp
 
2.0
pp
 
 
 
 
 
 
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
 
% of Fiscal 2019 Net Sales
 
Reported
New Accounting Standard
Foreign Exchange
Estimated Net Chg in Distributor Inventories
 
Underlying2
United States
 
47
%
 
2
%
1
%
%
%
 
3
%
Developed International
 
28
%
 
1
%
%
4
%
(2
%)
 
4
%
United Kingdom
 
6
%
 
(4
%)
%
6
%
%
 
3
%
Australia
 
5
%
 
%
%
6
%
%
 
6
%
Germany
 
5
%
 
8
%
%
2
%
%
 
10
%
France
 
4
%
 
(1
%)
%
3
%
%
 
2
%
Japan
 
1
%
 
15
%
1
%
(3
%)
(11
%)
 
2
%
Rest of Developed International
 
7
%
 
%
1
%
3
%
(4
%)
 
(1
%)
Emerging
 
18
%
 
4
%
1
%
6
%
%
 
11
%
Mexico
 
5
%
 
3
%
3
%
6
%
%
 
11
%
Poland
 
3
%
 
9
%
%
1
%
%
 
10
%
Russia
 
2
%
 
16
%
%
4
%
(3
%)
 
17
%
Brazil
 
1
%
 
(13
%)
2
%
13
%
23
%
 
25
%
Rest of Emerging
 
7
%
 
3
%
%
8
%
(4
%)
 
8
%
Travel Retail
 
4
%
 
1
%
1
%
%
4
%
 
6
%
Non-branded and bulk
 
3
%
 
10
%
%
%
%
 
10
%
Total
 
100
%
 
2
%
1
%
2
%
%
 
5
%
Note: Totals may differ due to rounding
 
 
 
 
 
 
 
 
 
 
 
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
 
Volumes
Net Sales % Change vs. 2018
Product category/brand family/brand1
9L Depletions1
 
Reported
New Accounting Standard
Foreign Exchange
Estimated Net Chg in Distributor Inventories
 
Underlying2
Whiskey
4
%
 
3
%
1
%
2
%
%
 
5
%
Jack Daniel’s family of brands
4
%
 
1
%
1
%
2
%
%
 
4
%
JDTW
2
%
 
%
%
2
%
%
 
2
%
JD RTD/RTP
4
%
 
4
%
%
4
%
%
 
8
%
JDTH
6
%
 
5
%
1
%
2
%
(1
%)
 
7
%
Gentleman Jack
9
%
 
6
%
1
%
2
%
%
 
8
%
JDTF
5
%
 
3
%
1
%
1
%
(1
%)
 
4
%
Other Jack Daniel’s whiskey brands
25
%
 
9
%
1
%
2
%
4
%
 
16
%
Woodford Reserve
23
%
 
17
%
1
%
%
4
%
 
22
%
Tequila
3
%
 
6
%
2
%
3
%
%
 
12
%
el Jimador
9
%
 
8
%
2
%
2
%
%
 
13
%
Herradura
10
%
 
8
%
3
%
3
%
%
 
13
%
Vodka (Finlandia)
(1
%)
 
(4
%)
1
%
4
%
(2
%)
 
(1
%)
Wine
%
 
%
1
%
%
(1
%)
 
%
Rest of Portfolio
(8
%)
 
(16
%)
2
%
9
%
1
%
 
(3
%)
Non-branded and bulk
NA

 
10
%
%
%
%
 
10
%
Note: Totals may differ due to rounding
 
 
 
 
 
 
 
 
 
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
2018
 
2019
Change in reported net sales
8
%
 
2
%
New accounting standard
%
 
1
%
Foreign exchange
(1
%)
 
2
%
Estimated net change in distributor inventories
(1
%)
 
%
Change in underlying net sales
6
%
 
5
%
 
 
 
 
Change in underlying net sales attributed to:
 
 
 
Volume
5
%
 
3
%
Net price/mix
2
%
 
2
%
Note: Totals may differ due to rounding
 
 
 
Fiscal 2019 compared to Fiscal 2018
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
2018
 
2019
Change in reported cost of sales
7
%
 
11
%
Acquisitions and divestitures
1
%
 
%
New accounting standard
%
 
%
Foreign exchange
%
 
2
%
Estimated net change in distributor inventories
(1
%)
 
%
Change in underlying cost of sales
8
%
 
12
%
 
 
 
 
Change in underlying cost of sales attributed to:
 
 
 
Volume
5
%
 
3
%
Cost/mix
3
%
 
9
%
Note: Totals may differ due to rounding
 
 
 


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
2018
 
2019
Change in reported gross profit
9
%
 
(2
%)
New accounting standard
%
 
1
%
Foreign exchange
(2
%)
 
2
%
Estimated net change in distributor inventories
(1
%)
 
%
Change in underlying gross profit
6
%
 
2
%
Note: Totals may differ due to rounding
 
 
 
Gross Margin
Fiscal year ended April 30
2018
 
2019
Prior year gross margin
67.5
%
 
67.8
%
Price/mix
0.3
%
 
0.4
%
Cost
(0.7
%)
 
(0.9
%)
Acquisitions and divestitures
0.3
%
 
%
Tariffs1
%
 
(1.6
%)
New accounting standard
%
 
(0.3
%)
Foreign exchange
0.4
%
 
(0.2
%)
Change in gross margin
0.3
%
 
(2.6
%)
Current year gross margin
67.8
%
 
65.2
%
Note: Totals may differ due to rounding
 
 
 
 
 
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
Reported
New Accounting Standard
Foundation
Foreign Exchange
 
Underlying
Advertising1
9
%
%
%
(3
%)
 
6
%
SG&A1
16
%
%
(11
%)
(2
%)
 
4
%
Total operating expenses2
14
%
%
(7
%)
(2
%)
 
5
%
 
 
 
 
 
 
 
2019
 
 
 
 
 
 
Advertising
(2
%)
4
%
%
2
%
 
3
%
SG&A
(16
%)
1
%
8
%
2
%
 
(5
%)
Total operating expenses2
(11
%)
2
%
6
%
2
%
 
(2
%)
Note: Totals may differ due to rounding
 
 
 
 
 
 
 
 
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
20181
 
2019
Change in reported operating income
4
%
 
9
%
Foundation
7
%
 
(7
%)
Foreign exchange
(2
%)
 
3
%
Estimated net change in distributor inventories
(2
%)
 
%
Change in underlying operating income
6
%
 
5
%
Note: Totals may differ due to rounding
 
 
 
 
 
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)
 
2017
 
2018
 
2019
Operating activities
 
$
656

 
$
653

 
$
800

Investing activities:
 
 
 
 
 
 
Acquisition of business
 
(307
)
 

 

Additions to property, plant, and equipment
 
(112
)
 
(127
)
 
(119
)
Other
 
(20
)
 
(22
)
 

 
 
(439
)
 
(149
)
 
(119
)
Financing activities:
 
 
 
 
 
 
Net change in short-term borrowings
 
(122
)
 
(3
)
 
(71
)
Net proceeds from long-term debt
 
717

 
345

 

Acquisition of treasury stock
 
(561
)
 
(1
)
 
(207
)
Dividends paid (regular)
 
(274
)
 
(292
)
 
(310
)
Special dividend payment
 

 
(481
)
 

Other
 
(45
)
 
(34
)
 
(11
)
 
 
(285
)
 
(466
)
 
(599
)
Foreign exchange effect on cash and cash equivalents
 
(13
)
 
19

 
(14
)
Net increase (decrease) in cash and cash equivalents
 
$
(81
)
 
$
57

 
$
68

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
 
Class B
 
Class A
 
Class B
 
(Millions)
May 1, 2016 – April 30, 2017
 
30

 
14,757