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 winespirits and spiritswine industry with respect to the production, blending, bottling, labeling, sales, advertising, and transportation of beverage alcohol. Similar regulatory regimes exist at the state level and in most of the non-U.S. jurisdictions where we sell our products. In addition, distilled spiritsbeverage alcohol products are subject to customs duties or excise taxation in many countries, including in the United States,taxation at the federal, state, and local level.level in the United States.
Our operations are subject to various environmental protection statutes and regulations, and our policy is to comply with them.
Strategy
SixNine years ago, we introduced our “Brown-Forman 150” long-term strategy, focused on driving sustainable growth toward our 150th anniversary in 2020. The B-F Arrow articulates our core principles: our purpose as well as the vision, values and behaviors that we expect our employees to embrace and exhibit.
While these core principles Our purpose, values, and behaviors are a constant, and powerful means of connecting our stakeholders to aour shared vision of “Building Forever”, weForever.” We continue to refresh our strategies to reflect current realities.realities and look beyond 2020.
We realize that our people are integral to building our brands and growing our business, and to support this strategy we strive to build a strong, agile workforce emphasizing diversity and inclusion. The strategic ambitions described below demonstrate both demonstrate a sustained focus on several drivers of our recent growth which we believe remain relevant, and acknowledge the new and changing opportunities of today.today’s emerging opportunities.
Portfolio
We seek to build brands and businesses that can create significant shareholder value, – ones that deliverby delivering strong and sustainable growth, solid margins, and high returns.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. But asorganically and through innovation. As opportunities arise, we will pursue innovation andalso consider acquisitions and partnerships that meetwill enhance our portfolio and our capacity to deliver growth, margins, and returns in line with our rigorous quantitative and qualitative criteria.
The Jack Daniel’s family of brands, including Jack Daniel’s Tennessee Whiskey, is our most valuable asset. We will always work to keep Jack Daniel’s Tennessee Whiskey strong, healthy, and relevant to consumers worldwide, and to take advantage of the abundant opportunities for growing the Jack Daniel’s family of brands across markets, price points, channels, and consumer groups. As product innovation has become increasingly important to the brand in recent years, we will continue to evaluate opportunities to grow the Jack Daniel’s family of brands through thoughtful new product introductions, such as our U.S. launch of Jack Daniel’s Tennessee Fire and our recent introduction of Jack Daniel’s Single Barrel Rye.
We are the global leader in American whiskey.1 We see significant, additional opportunity to promote the mixability, versatility, accessibility, and premiumization of our American whiskey and we will continue to pursue growth inbrands around the broader global, premium whiskey category.world. We believe that we can leverage our whiskey-making knowledge, production assets, trademarks, and brand- buildingbrand-building skills to accomplishrealize this objective.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 focus first onalways work to keep JDTW strong, healthy, and relevant to consumers worldwide while pursuing the global growthabundant 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 most importantperformance. 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. In addition,Daniel’s Tennessee Apple, which we expect to generateintroduce in the United States in the fall of 2019.
Beyond the Jack Daniel’s family of brands, we expect to sustain excellent growth foraround the world with our other whiskey brands, around the world, 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 which have both experienced rapid growthhas continued its return to prominence in recent years.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.
We aimbelieve 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 grow Finlandia,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,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 Herradura.the United States, the brands’ two primary markets. We plan to focus primarily on growing Finlandia in Poland and Eastern Europe. We will workcontinue expanding Herradura to expand the reach of Herradura tequila to new consumers emphasizingin 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 have taken stepsintend to repositionensure el Jimador tequila asremains a more 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, by volume. As a result, volumes have declined over the past couplePoland, where Finlandia accounts for one out of years in Mexico, though we expect the brand’s overall performance to improve there over time. In the United States and select international markets, we continue to experience solid growth with el Jimador, and we believe in this brand’s long-term potential.every two bottles of imported vodka sold.2
We recently announced the launch of Coopers’ Craft, our first new bourbon trademark in more than 20 years, which we will begin selling in select United States markets in July 2016. We are in the development stage of our Slane Irish Whiskey brand, which we anticipate launching in the spring of 2017. Lastly, on June 1, 2016, we acquired The BenRiach Distillery Company Limited. This purchase added three single malt Scotch whisky brands into our growing whiskey portfolio: The GlenDronach, BenRiach, and Glenglassaugh. We believe that super- and ultra-premium whiskeys are attractive long-term businesses for us, and we will continue to pursue global growth in these categories.
In fiscal 2016, as part of our evolving portfolio strategy and our efforts to focus resources on our highest strategic priorities, we sold our Southern Comfort and Tuaca brands. This decision reflects our continuing efforts to reshape our portfolio by developing, divesting, and acquiring brands to create value and improve growth.Geography
The United States remains our largest market, and continuing to grow in this marketthere is important to our long-term success. We expect to foster this growth by emphasizing fast-growing spirits categories such as super-premium whiskieswhiskeys and tequila,tequilas, continued product and packaging innovation, continued route-to-consumer proficiency, and brand building within growing consumer segments, (withincluding increasing emphasis on multicultural marketing).inclusive marketing.
Over the last two decades, our business outside the United States has generally grown more quicklyfaster than our business within it. Although the past two years have been an exception to this trend, as our net sales in the United States grew faster than our international business, we expect the longer-term trend to resume. Our ability to achieveAchieving our long-term growth objectives requires further development ofus to deliver balanced geographic growth while increasing our business globally, especially in emerging markets.competitiveness through improved routes to consumer. We expect to continue to grow our business in developed markets such as Australia, France, Germany, Australia, and the United Kingdom, as well as in emerging markets such as Mexico, Poland, and Turkey. Over time, we expect increasingly significant contributions to our growth from other emerging markets such as Brazil, China, Russia, Southeast Asia, Africa, and Eastern Europe.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 these diverse markets.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.
We believe that having
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1Impact Databank, March 2019.
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2IWSR, 2018 data. |
Integrated Performance
Having a long-term-focused, committed, and engaged shareholderstockholder base, includinganchored 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 medicinal whiskey in sealed glass bottles to ensure quality and safety – an innovative idea back when whiskey was usually sold byinnovation some consider the barrel.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 promotingputting our values in action by creating a responsible consumer enjoyment of our brands; working to reduce alcohol abuse and misuse; protecting the environment;drinking culture; providing a healthy, safe, inclusive, and inclusiveengaging workplace; protecting the environment; and contributingmaking a positive contribution to our communities.
We subscribe to the communitiesUnited 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 operate aroundalso became signatories to the globe.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
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. We promote responsible consumptionOur business is based on the belief that beverage alcohol, consumed in moderation, can enrich the experience of our products, aslife. However, we believe this will enhance our relationships with consumers, business partners, stakeholders, and society at large. It is also essential for the long-term prosperity of our company and our industry. When abused or misused,are well aware that when consumed irresponsibly, alcohol can contribute to significant harm to bothhave harmful effects on individuals and the community.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 overconsumption.alcoholism.
As a significant player in the global beverage alcohol industry, we foster collective action with our peers. Working together with other producers, we are able to leverage our views on a scale that can create change. For example, we are working with 13 other industry leaders that signed the Beer, Wine, and Spirits Producers’ Commitments to Reduce Harmful Drinking. The group made significant progress in 2015, resulting from the collaboration among all signatories and with stakeholders where we do business. By engaging non-governmental organizations, we reached more people across a broader geographic footprint with underage drinking programs. Drunk driving prevention pilot programs expanded to another four countries, with two more planned
for 2016. With our retail business partners, we developed and launched responsible retailing principles that are increasing the number of retail programs focused on enforcing legal purchase age and responsible beverage service. Our collective progress on these commitments will be reported annually, and more information can be found at www.producerscommitments.org.
Since 2009, we have hosted an open forum to share our pointpoints of view, post the research of outside experts, and encourage engagementthe 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 United States, we support The Ad Council’s “Buzzed Driving is Drunk Driving” campaigns, designated-driver services such as BeMyDD,fifth consecutive year, the New Hampshire (NH) Liquor Commission and Jack Daniel’s teamed up for the Responsible Retailing Forum, which brings together diverse stakeholders seeking to reduce underage sales, among other initiatives.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. As part ofWe also engage with our commitmentcustomers through our trade associations. For example, we worked with Avec Modération in France to responsible marketing, and to enable consumers to make more informed decisions, we will be adding nutritional information to our brand websites later this year. engage convenience stores on underage drinking prevention.
We also are founding members of, and contribute significant resources to, the Foundation for Advancing Alcohol Responsibility (responsibility.org), an organization created by spirits producers to combat harmful use of alcohol.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 the European Union, we helped form the Responsible Marketing Pact2019, our Chambord Liqueur brand has partnered with seven other major beverage alcohol manufacturersAlteristic, a national organization of social accelerators dedicated to develop industry-led standards for responsible advertising and marketing. The standards focusreducing power-based personal violence, to train bartenders on decreasing exposure of those under legal drinking agebystander intervention to alcohol-related advertisements.help prevent sexual assault. We also recognizesupported 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 some individuals can’t or shouldn’t drink beverage alcoholoffer treatment and respect the choicerecovery 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 those who don’t drink for whatever reason. To this end, we have an internal employee resource group (ERGs), SPIRIT, that supports an environment where all employees and guests feel welcome, regardless of whether they choose to drink.directors.
Environmental Sustainability. Our vision – Building Forever – is inherently linked to environmental sustainability. A key component of 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 reducingexpected to generate the equivalent of more than 90% of Brown-Forman’s annual electricity use in the United States.
Mindful of our energy consumption and greenhouse gas (GHG) emissions. Inoverall impact, in fiscal 2014, we set new, more ambitious environmental sustainability goals focused onfor fiscal 2023: reducing our absolute GHGgreenhouse gas emissions by 15% by 2023, sending zero waste to landfill, 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 2023 (versus 2012 baseline year).2020. These goals support our ambition to begrow our brands and our company responsibly while protecting and enriching the natural environment. We have refreshed our strategy to include a sustainability leader within our industry, and extend programsgreater focus beyond our operational borders into theour supply chain. We report on our progress toward these goals in our biennial Corporate Responsibility Reports, available online. In 2016, Newsweek magazine named Brown-Forman the third “greenest” U.S. beverage company, and number 52 among the 500 largest publicly traded companies in the United States. Rankings are based on eight measures of corporate sustainability and environmental performance. In addition, we have been identified as a global leader for our actions and strategies in response to climate change and have been awarded a position on The Climate “A” List by CDP, an international not-for-profit organization that produces the list at the request of 822 investors who represent more than a third of the world’s invested capital.
Diversity Inclusion, and Human RightsInclusion. We believe that having a diverse, and inclusive workforce is central to our success. As we work to increase our brands’ relevance and appeal to diverse consumer groups, we need a diversity of experiences and outlooks within our own workforce. We also want employees to feel comfortable in contributing their whole selves and different perspectives to their work. Over the past year, we’ve made progress withWe continue to have diverse representation at the senior level. ThreeFour women and one African American serve on our Board of Directors. FourTwo members of our 15-membernine-member Executive Leadership Team are women and two are minorities. In 2016,2019, 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, a civil rights organization promoting equality for lesbian, gay, bisexual, and transgender Americans.Campaign. This makes us one of the “Best Places to Work for LGBTLGBTQ equality”1 in the United States for the sixthninth consecutive year.
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1Human Rights Campaign 2019 Corporate Equity Index at www.hrc.org/cei |
Our ERGsEmployee Resource Groups (ERGs) have been the core ofto our diversity culture by supporting employees’ growth while enhancing their contributions. Our eight ERGs, with sub-chapters globally, foster a diverse, and 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, and ethical business practices. We remain committed to the guidelines set forth in our Global Human Rights Statement, defining our commitment to respecting the fundamental rights of all human beings. We share our human rights policies and practices with our suppliers through our Suppliers Guiding Principles on Human Rights. Our work in this area will helphelped inform our response to the U.K.’s recent passage of the Modern Slavery Act.
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1Human Rights Campaign 2016 Corporate Equity Index at www.hrc.org/resources/best-places-to-work-2016.
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Act in 2015, which is available on our corporate website.Community Involvement. Our approach to philanthropy reflects our values as a corporate citizen. Our civic engagement supports non-profit organizations that improve the lives of individuals and the vitality of our communities. We believe,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. Throughbusiness by thoughtfully deploying our contributions, we work to create communities that ensure basictime, talent, and resources. We collaborate with a variety of mission-driven organizations focused on enhancing intellectual and cultural living, ensuring essential living standards, support healthyand empowering responsible and sustainable living, and enhance intellectual and cultural living. While we focus on our hometown of Louisville, Kentucky, our civic engagement activities extend to the communities around the globe where our employees work, live, work, and raise their families.
In fiscal 2016,2019, we donated more than $10.8made charitable donations of $7.4 million, in cash, logged approximately 16,00015,000 volunteer hours, and had over 132127 employees serve on boards of directors of 192201 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.
OurWe report our ongoing commitment and progress against all of these goals in our integrated Annual and Corporate Responsibility reports are available at www.brown-forman.com/responsibility.Report and on our website (www.brown-forman.com/responsibility).
Employees and Executive Officers
As of April 30, 2016,2019, we employed approximately 4,6004,700 people including about 200 employedworldwide (2,600 in the United States), excluding individuals that work on a part-time or temporary basis. We employ about 2,800 people in the United States,This includes approximately 17%15% of our U.S. employees that are represented by a union. We believe our employee relations are good.
The following persons serveserved as executive officers as of June 15, 2016:13, 2019:
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Name | Age | Principal Occupation and Business Experience |
Paul C. VargaLawson E. Whiting | 5250 | Company ChairmanPresident and Chief Executive Officer since 2007. Chief Executive Officer since 2005. |
Jane C. Morreau | 57 | 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 | 56 | Executive Vice President, General Counsel, and Secretary since 2007. |
Jill Ackerman Jones | 50 | Executive Vice President and President for North America, CCSA, IMEA, and Global Travel Retail since February 2015. Executive Vice President and President for North America and Latin America Regions from 2013 to 2015. Executive Vice President and Chief Production Officer from 2007 to 2012. |
Mark I. McCallum | 61 | Executive Vice President and President of Jack Daniel’s Brands since February 2015. Executive Vice President and President for Europe, Africa, Middle East, Asia Pacific, and Travel Retail from 2013 to 2015.2019. Executive Vice President and Chief Operating Officer from 2009October 2017 to 2013. Executive Vice President and Chief Brands Officer from 2006 to 2009. |
Lawson E. Whiting | 47 | December 2018. Executive Vice President and Chief Brands and Strategy Officer since February 2015.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 | 4851 | 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 | 6972 | Senior Vice President, Chief Diversity and Global Community Relations Officer since March 2019. Senior Vice President and Chief Diversity Officer since 2007. |
Brian P. Fitzgerald | 43 | Senior Vice President and Chief Accounting Officer since 2013. Vice President and Finance Director for Greater Europe and Africa from 2009December 2007 to 2013.February 2019. |
Kirsten M. Hawley | 4649 | Senior Vice President, Chief Human Resources and Corporate Communications Officer since March 2019. Senior Vice President and Chief Human Resources Officer sincefrom February 2015.2015 to February 2019. Senior Vice President and Director of HRHuman 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 | 5457 | Senior Vice President, International Division since June 2018. Senior Vice President and President for Europe, North Asia, and ANZSEA sincefrom February 2015.2015 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. |
Lisa P. SteinerKelli Nelson | 5649 | Senior Vice President, Chief of Staff, and Director of Global Corporate Communications and Services since February 2015. Senior Vice President and Chief Human ResourcesAccounting Officer from 2009 to 2015. Seniorsince August 2018. Vice President and Director of Global Human ResourcesFinance (North America Region) from 20072015 to 2009.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
You can read and copy any materials that we file with the SEC in its Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains a website that contains reports, proxy and information statements, and other information regarding issuers that file with the SEC at www.sec.gov.
Our website address is www.brown-forman.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports are available free of charge on our website as soon as reasonably practicable after we electronically file those reports with the SEC.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 referenced elsewhere in this report.
incorporated by reference.
On our website, we have posted our Corporate Governance Guidelines, 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 or controller that relates to any element of the definition of “code of ethics” enumerated in Item 406(b) of Regulation S-K under the Securities Act of 1934 Act, 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
charge by writing to our Secretary, Matthew E. Hamel, 850 Dixie Highway, Louisville, Kentucky 40210 or emailing him at Secretary@b-f.com.
Item 1A. Risk Factors
We believe the following discussion identifies the most significant risks and uncertainties that could adversely affect our business. If any of the following risks were actually to occur, our business, results of operations, cash flows, or financial condition could be materially and adversely affected. Additional risks not currently known to us, or that we currently deem to be immaterial, could also materially and adversely affect our business, results of operations, cash flows, or financial condition.
Unfavorable economic conditions could negatively affect our operations and results.
Unfavorable global or regional economic conditions, including uncertainty caused by unstable geopolitical environments in many parts of the world, such as Russia, Brazil, and Turkey, could adversely affect our business and financial results. While the major economic disruptions of the 2008-2009 financial crisis have largely subsided, many markets where our products are sold still face significant economic challenges resulting from the ensuing global economic downturn that followed, including low consumer confidence, high unemployment, budget deficits, burdensome governmental debt, austerity measures, increased taxes, and weak financial, credit, and housing markets. Unfavorable economic conditions such as these can cause governments to increase taxes on beverage alcohol to attempt to raise revenue or reduce consumers’ willingness to make discretionary purchases of beverage alcohol products or pay for premium brands such as ours. In unfavorable economic conditions, consumers may make more value-driven and price-sensitive purchasing choices and drink more at home rather than at restaurants, bars, and hotels, which tend to favor many of our premium and super-premium products.
Unfavorable economic conditions could also adversely affect our suppliers, distributors, and retailers, who in turn could experience cash flow problems, more costly or unavailable financing, credit defaults, and other financial hardships. This could lead to distributor or retailer destocking, increase our bad debt expense, or cause us to increase the levels of unsecured credit that we provide to customers. Other potential negative consequences to our business from poor economic conditions include higher interest rates, an increase in the rate of inflation, deflation, exchange rate fluctuations, credit or capital market instability, or lower returns on pension assets or lower discount rates for pension obligations (possibly requiring higher contributions to our pension plans). For details on the effects of changes in the value of our benefit plan obligations and assets on our financial results, see Note 9 to the Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”
Our global business is subject to commercial, political, and financial risks, including foreign currency exchange rate fluctuations.fluctuations and corruption risk.
Our products are sold in approximately 160more 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 continue to expect our growth rates in non-U.S.emerging markets, to surpass our growth rates in the United States. Emerging regions, such as eastern Europe, Latin America, Asia,States and Africa, as well as more developed markets. However, we still expect our international developed markets such as the United Kingdom, France, Germany, and Australia,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; and a significant reduction in global travel.pandemics. For example, Europe islast year, the United States imposed tariffs on steel and aluminum. In response, a key commercialnumber of countries imposed retaliatory tariffs on U.S. imports, including on our American whiskey products. Such retaliatory tariffs continue to remain in place, and production region for someany 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 further outbreakscould prompt consumers to seek alternative products. Furthermore, uncertainty related to the future of violence there could disruptthe European Union may affect our operations.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, our abilityany new trade barriers, sanctions, tariffs, or any retaliatory measures in response to sell into Russia depends on our products being imported, and any economic or trade sanctionsthe foregoing could materially and adversely affect our operations there.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 currency.currencies. Because our foreign currency revenues for each foreign currency exceed the correspondingour foreign currency expense, we have a net exposure to changes in the value of the U.S. dollar relative to each of those currencies. Over time, our reported financial results generally will be hurt by a stronger U.S. dollar and improved by a weaker one. For instance, profits from our overseas businesses for fiscal 2016 were adversely affected by the recent strengthening of the U.S. dollar against currencies in our major markets, including the euro, Russian ruble, and Australian dollar.We do not attempt to hedge all of our foreign currency risk.exposure. We may, from time to time, attempt to hedge a portion of our foreign currency risk, but, even in those cases, we may not be successful in limiting foreign currency riskexposure through the use of foreign currency derivatives or other means.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 Exchange.currency exchange rate risk.”
National and local governments may adopt regulations or undertake investigations that could limit our business activities or increase our costs.
Our business is subject to extensive regulatory requirements regarding production, exportation, importation, marketing and promotion, labeling, distribution, pricing, and trade practices, among others. Changes in laws, regulatory measures, or governmental policies, or in the manner in which current ones are interpreted, could cause us to incur material additional costs or liabilities, and jeopardize the growth of our business in the affected market. For instance, in fiscal 2016, we experienced disruption of our business in Indonesia due to recent changes in industry regulation and import duties. Specifically, governments may prohibit, or impose or increase limitations on, advertising and promotional activities, or times or locations where beverage alcohol may be sold or consumed, or adopt other measures that could limit our opportunities to reach consumers or sell our products. In Europe, for example, regulators in a number of countries have adopted or are considering severe limitations on the marketing and sale of beverage alcohol. Certain countries historically have banned all television, newspaper, magazine, and internet advertising for beverage alcohol products. Increases in regulation of this nature could substantially reduce consumer awareness for our products in the affected markets.
Some countries where we do business have a higher risk of corruption than others. While we are committed to doing business in accordance with applicable anti-corruption and other laws, our Code of Conduct, Code of Ethics for Senior Financial Officers, and our other Company policies, we remain subject to the risk that an employee will violate our policies, or that any of our many affiliates or agents, such as importers, wholesalers, distributors, or other business partners, may take action determined to be in violation of international trade, money laundering, anti-corruption, or other laws, including the U.S. Foreign Corrupt Practices Act of 1977, the U.K. Bribery Act 2010, or equivalent local laws. Any determination that our operations or activities are not, or were not, in compliance with U.S. or foreign laws or regulations could result in investigations, interruption of business, loss of business partner relationships, suspension or termination of licenses and permits (our own or those of our partners), imposition of fines, legal or equitable sanctions, negative publicity, and management distraction. Further, our 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.
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. Certain
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 thatin interpretation of existing rules, standards, or pronouncements could also have beena significant adverse effect on our business and financial results. This includes potential
changes in tax rules or are currently proposedthe interpretation of tax rules arising out of the Base Erosion & Profit Shifting project initiated by the U.S. Congress or the President exemplify this risk, including repealing LIFO (last-in, first-out accounting treatment of inventory)Organization for tax purposes, decreasing or eliminating the ability of U.S.-based companies to receive a tax credit for foreign taxes paid or to obtain a current U.S. tax deduction for certain expensesEconomic Co-operation and Development, as well as changes in the United States related to foreign earnings, changinginterpretation of tax rules arising out of the U.S. tax treatment of income related to foreign intangibles, decreasing or eliminating the U.S. manufacturing deduction, or changing the rules relating to the depreciation of capital expenditures or the deduction of advertising expenses.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,taxes.” whichThese indirect taxes include excise taxes, sales or value-added taxes, property taxes, payroll taxes, import and payroll taxes.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. For example, certain jurisdictions, such as Brazil, have increased and may continue to increase excise taxes on beverage alcohol products, which could
increase the cost of our products to consumers and could reduce consumer demand in those jurisdictions. Our global business can also be negatively affected by import and export duties, tariff barriers, and related local governmental protectionist measures, and the suddenness and unpredictability with which these can occur. As governmental entities look for increased sources of revenue, it is possible that they may increase taxes on beverage alcohol products. NewIn 2018, we have observed excise tax rules, accounting standards, or pronouncements,increases in Australia, France, and changes in interpretation of existing ones, could also have a significant adverse effect on our business and financial results. This includes potential changes in tax rules or the interpretation of tax rules arising out of the Base Erosion & Profit Shifting project initiated by the Organization for Economic Co-operation and Development.Turkey.
Our business performance is substantially dependent upon the continued health of the Jack Daniel’sDaniel’s family of brands.
The Jack Daniel’s family of brands is the primary driver of our revenue and growth. Jack Daniel’s is an iconic global trademark with a loyal consumer fan base, and we invest much effort and many resources to protect and preserve the brand’s reputation for quality,authenticity, craftsmanship, and authenticity.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 growth and our stock price.financial results. Additionally, should we not be successful in our efforts to maintain or increase the relevance of the Jack Daniel’s brand in the minds ofto 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 20162019 Brand Highlights.”
Changes in consumer preferences and purchases, andany decline in the social acceptability of our abilityproducts, or governmental adoption of policies disadvantageous to anticipate or react to them,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 to a host ofseveral factors, many of which are difficult to predict, including health and wellness trends; changes in economic conditions, demographic, and social trends,trends; public health policies and initiatives,initiatives; changes in government regulation of beverage alcohol products, the potentialproducts; concerns or regulations related to product safety; legalization of marijuana use on a more widespread basis within the United States, Canada, or elsewhere,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. For example, smallerOver the past several years, the number of small, local distilleries are experiencing accelerated growth asin the United States has grown significantly. This is being driven by a resulttrend of shifting consumer preferences toward locally-produced, regionally-sourcedconsumers 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 the United States and inall markets where we sell our other non-U.S. markets. Forecastsproducts. Demographic forecasts in the United States for severalthe next couple of years after 20162018 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 FireApple in select international marketsthe United States in fiscal 2017.2020. If these plans are unsuccessful,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.
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.
Production facility disruption could adversely affect our business.
Some of our largest brands, including Jack Daniel’s and Finlandia Vodka, are distilled at single locations. A catastrophic event causing physical damage, disruption, or failure at one of our major distillation or bottling facilities could adversely affect our business. Further, because whiskeys and some tequilas are aged for various periods, we maintain a substantial inventory of aged and maturing products in warehouses at a number of different sites. The loss of a substantial amount of aged inventory –
through fire, other natural or man-made disaster, contamination, or otherwise – could significantly reduce the supply of the affected product or products. A consequence of any of these or other supply or supply chain disruptions could result in our inability to meet consumer demand for the affected products for a period of time. In addition, insurance proceeds may be insufficient to cover the replacement value of our inventory of maturing products and other assets if they were to be lost. Disaster recovery plans may not prevent business disruption, and reconstruction of any damaged facilities could require a significant amount of time.
The inherent uncertainty in supply/demand forecasting could adversely affect our business, particularly with respect to our aged products.
There is an inherent risk of forecasting imprecision in determining the quantity of aged and maturing products to produce and hold in inventory in a given year for future sale. The forecasting strategies we use to balance product supply with fluctuations in consumer demand may not be effective for particular years or products. We cannot be certain that we will be successful in using various levers, such as price, to create the desired balance of available supply and consumer demand for particular years or products. As a consequence, we may be unable to meet consumer demand for the affected products for a period of time. Furthermore, not having our products in the market on a consistent basis may adversely affect our brand equity and future sales.
Higher costs or unavailability of materials could adversely affect our financial results, as could our inability to obtain certain finished goods.
Our products use materials and ingredients that we purchase from suppliers. Our ability to make and sell our products depends upon the availability of the raw materials, product ingredients, finished products, wood, glass, bottles, cans, bottle closures, packaging, and other materials used to produce and package them. Without sufficient quantities of one or more key materials, our business and financial results could suffer. For instance, only a few glass producers make bottles on a scale sufficient for our requirements, and a single producer supplies most of our glass requirements. In addition, if we experienced a disruption in the supply of American oak logs to produce the new charred oak barrels in which we age our whiskeys, our production capabilities would be compromised. If any of our key suppliers were no longer able to meet our timing, quality, or capacity requirements, ceased doing business with us, or significantly raised prices, and we could not promptly develop alternative cost-effective sources of supply or production, our operations and financial results could suffer.
Higher costs or insufficient availability of suitable grain, agave, water, grapes, wood, glass, closures, and other input materials, or higher associated labor costs or insufficient availability of labor, may adversely affect our financial results, because we may not be able to pass along such cost increases or the cost of such shortages through higher prices to customers without reducing demand or sales. Similarly, when energy costs rise, our transportation, freight, and other operating costs, such as distilling and bottling expenses, also may increase. Our financial results may be adversely affected if we are not able to pass along energy cost increases through higher prices to our customers without reducing demand or sales.
Weather, the effects of climate change, diseases, and other agricultural uncertainties that affect the mortality, health, yield, quality, or price of the various raw materials used in our products also present risks for our business, including in some cases potential impairment in the recorded value of our inventory. Changes in weather patterns or intensity can disrupt our supply chain as well, which may affect production operations, insurance costs and coverage, as well as the timely delivery of our products.
Water is one of the major components of our products, so the quality and quantity of available water is important to our ability to operate our business. If droughts become more common or severe, or if our water supply were interrupted for other reasons, high-quality water could become scarce in some key production regions for our products, including Tennessee, Kentucky, California, Finland, Canada, and Mexico.
If the social acceptability of our products declines, or governments adopt policies disadvantageous to beverage alcohol, our business could be adversely affected.
Our ability to market and sell our products depends heavily on societal attitudes toward drinking and governmental policies that both flow from and affect those attitudes. In recent years, increased social and political attention has been directed at the beverage alcohol industry. For example, there remains continued attention focused largely on public health concerns related to alcohol abuse, including drunk driving, underage drinking, and the negative health impacts of the abuse and misuse of beverage alcohol. While most people who drink enjoy alcoholic beverages in moderation, it is commonly known and well reported that excessive levels or inappropriate patterns of drinking can lead to increased risk of a range of health conditions and, for certain people, can result in alcohol dependence. Some academics, public health officials, and critics of the alcohol industry in the United States, Europe, and other countriesparts 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 indicatedindicate more widespread serious health risks associated with alcohol consumption – particularly with moderate consumption – or if for any reason the social acceptability of beverage alcohol were to declinedeclines significantly, sales of our products could decrease.
Production facility disruption could adversely affect our business.
Some of our largest brands, including Jack Daniel’s, Finlandia Vodka, and our tequilas, are distilled at single locations. A catastrophic event causing physical damage, disruption, or failure at any one of our major distillation or bottling facilities, including facilities that support the production of our premium brands such as Woodford Reserve and Old Forester, could adversely affect our business. Further, because whiskeys and some tequilas are aged for various periods, we maintain a substantial inventory of aged and maturing products in warehouses at a number of different sites. The loss of a substantial amount of aged inventory – through fire, other natural or man-made disaster, contamination, or otherwise – could significantly reduce the supply of the affected product or products. A consequence of any of these or other supply or supply chain disruptions could prevent us from meeting consumer demand for the affected products for a period of time. In addition, insurance proceeds may be insufficient to cover the replacement value of our inventory of maturing products and other assets if they were to be lost. Disaster recovery plans may not prevent business disruption, and reconstruction of any damaged facilities could require a significant amount of time.
The inherent uncertainty in supply/demand forecasting could adversely affect our business, particularly with respect to our aged products.
There is an inherent risk of forecasting imprecision in determining the quantity of aged and maturing products to produce and hold in inventory in a given year for future sale. The forecasting strategies we use to balance product supply with fluctuations in consumer demand may not be effective for particular years or products. For example, in addition to our American, Canadian, and Irish whiskeys and some tequilas, which are aged for various periods, our Scotch whisky brands and distilleries including The GlenDronach, BenRiach, and Glenglassaugh require long-term maturation on average of 12 years with limited releases of 30 years or more, making forecasts of demand for such products in future periods subject to significant uncertainty. Factors that affect our ability to forecast accurately include changes in business strategy, market demand, consumer preferences, macroeconomic conditions, introductions of competing products, and other changes in market conditions. Any forecasting error could lead to our inability to meet the objectives of our business strategy, failure to meet future demand, or a future surplus of inventory and consequent write-down in value of maturing stocks. If we are unable to accurately forecast demand for our products or efficiently manage inventory, this may have a material adverse effect on our business and financial results. Further, we cannot be certain that we will be successful in using various levers, such as pricing changes, to create the desired balance of available supply and consumer demand for particular years or products. As a consequence, we may be unable to meet consumer demand for the affected products for a period of time. Furthermore, not having our products in the market on a consistent basis may adversely affect our brand equity and future sales.
Higher costs or unavailability of materials could adversely affect our financial results, as could our inability to obtain certain finished goods or to sell used materials.
Our products use materials and ingredients that we purchase from suppliers. Our ability to make and sell our products depends upon the availability of the raw materials, product ingredients, finished products, wood, glass and PET bottles, cans, 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 causingassociated 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 become applicable toare 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 as well as fromspirits; and consolidation among beverage alcohol producers, wholesalers, orand retailers, or changes to our route-to-consumer model, could hinder the marketing, sale, or distribution of our products.
We use different business models to market and distribute our products in different countries around the world. In the United States, we sell our products either to distributors for resale to retail outlets or e-commerce retailers, in those states that control alcohol sales, to state governments who then sell them to retail customers and consumers. In our non-U.S. markets, we use a variety of route-to-consumer models – including, in many markets, reliance on others to market and sell our products. Consolidation among spirits producers, distributors, wholesalers, suppliers, or retailers and the increased growth and popularity of the e-commerce retail environment across the consumer product goods market could create a more challenging competitive landscape for our products. Consolidation at any level could hinder the distribution and sale of our products as a result of reduced attention and resources allocated to our brands both during and after transition periods, because our brands might represent a smaller portion of the new business portfolio. Furthermore, consolidation of distributors may lead to the erosion of margins as newly consolidated distributors take down prices. Changes in distributors’ strategies, including a reduction in the number of brands they carry, the allocation of shelf space for our competitors’ brands, or private label products, may adversely affect our sales, margin, outlook, and market share. Expansion into new product categories by other suppliers, or innovation by new entrants into the market, could increase competition in our product categories.
For example, we are experiencing increased competition for some of our products from new entrants in the small-batch or craft spirits category.
Changes to our route-to-consumer models or partners in important markets could result in temporary or longer-term sales disruption, could result in higher costs, and could negatively affect other business relationships we might have with that partner. Disruption of our distribution network or fluctuations in our product inventory levels at distributors, wholesalers, or retailers could negatively affect our results for a particular period. Further, while we believe we have sufficient scale to succeed relative to our major competitors, we nevertheless face a risk that continuing consolidation of large beverage alcohol companies could put us at a competitive disadvantage.
Our competitors may respond to industry and economic conditions more rapidly or effectively than we do. For example, we are facing an increasingly competitive pricing environment, and our competitors may have more flexibility to adjust to such challenges. Other suppliers, as well as wholesalers and retailers of our brands, offer products that compete directly with ours for shelf space, promotional displays, and consumer purchases. Pricing (including price promotions, discounting, couponing, and free goods), marketing, new product introductions, entry into our distribution networks, and other competitive behavior by other suppliers, and by wholesalers and traditional and e-commerce retailers, could adversely affect our sales, margins, and profitability.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 own-labelprivate label products, and represent a large number of other competing products. If the buying power of these large retail customers continues to increase, it could negatively affect our financial results.
We might not succeed in our strategies for acquisitions and dispositions.
From time to time, we acquire or invest in additional brands or businesses. We expect to continue to seek acquisition and investment opportunities that we believe will increase long-term shareholder value, but we may not be able to find and purchase brands or businesses at acceptable prices and terms. Acquisitions involve risks and uncertainties, including potential difficulties integrating acquired brands and personnel; the possible loss of key customers or employees most knowledgeable about the acquired business; implementing and maintaining consistent U.S. public company standards, controls, procedures, policies, and information systems; exposure to unknown liabilities; business disruption; and management distraction. Acquisitions, investments, or joint ventures could also lead us to incur additional debt and related interest expenses, issue additional shares, become exposed to contingent liabilities, and lead to dilutionresult in a reduction in our earnings per share and reduction ina decrease on our return on average invested capital. Wecapital.We could incur future restructuring charges or record impairment losses on the value of goodwill or other intangible assets resulting from previous acquisitions, which may also negatively affect our financial results.
We also evaluate from time to time the potential disposition of assets or businesses that may no longer meet our growth, return,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 performance.results.
Product counterfeiting
Counterfeiting or inadequate protection of our intellectual property rights could adversely affect our business prospects.
Our brand names, trademarks, and related intellectual property rights are critical assets, and our business depends on our protecting them online and in the countries where we do business. We may be unsuccessfulnot 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 in whichwhere we do business, the ability to register and enforce intellectual property rights varies from country to country. In some developing countries, for example, it may be more difficult to usesuccessfully stop counterfeiting or look-alike products, either because the law is inadequate or, even though satisfactory legal processoptions may exist, it may be difficult to stop counterfeiting.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 work cooperativelycombat counterfeiting by working with other companies in the spirits industry companies through our membership in the International Federation of Spirits Producers (IFSP) to combat spirits counterfeiting.and with brand owners in other industries via our membership in React, an anti-counterfeiting network organization. While we believe IFSP is anand React are effective organization, it isorganizations, they are not active in every market, and itstheir efforts are subject to obtaining the cooperation withof local authorities and courts in the markets where it isthey are active. Despite the efforts of IFSP, React, and our and IFSP’s efforts, confusingly similar,own teams, lower-quality or evenand 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 those brands.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 sales.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 the sales and profitability of the affected brand or brands.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, orand 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.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;
shipping productproducts 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 cyber crimecybercrimes 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.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 our business continuity plans do not effectively and timely address these failures,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 condition.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 in any case, could require a significant amount of time.
Negative publicity could affect
In the ordinary course of our stock pricebusiness, we receive, process, transmit, and business performance.
Unfavorable publicity, whether accuratestore 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 not, relatedprocessing 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 industry 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 our brands, marketing, personnel, operations, business performance, or prospectscriminal prosecution, all of which could negatively affect our corporate reputation, stock price, ability to attract high-quality talent, or the performance of our business. Adverse publicity or negative commentary on social media outlets, particularly any that goes “viral,” could cause consumers to react by avoiding our brands or choosing brands offered by our competitors, which could materially negatively affect our financialbusiness and operating results.
Our failure to attract or retain key executive or employee talent could adversely affect our business.business.
Our success depends upon the efforts and abilities of our senior management team, other key employees, and aour 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.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.approval.
We are considered a “controlled company” under New York Stock Exchange rules. Controlled companies are exempt from New York Stock Exchange listing standards that require a board composed of a majority of independent directors, a fully independent nominating/corporate governance committee, and a fully independent compensation committee. We avail ourselves of the exemptions from having a board composed of a majority of independent directors and a fully independent nominating/corporate governance committee. Notwithstanding the available exemption, our Compensation Committee is composed exclusively of independent directors. As a result of our use of some “controlled company” exemptions, our corporate governance practices differ from those of non-controlled companies, which are subject to all of the New York Stock Exchange corporate governance requirements.
We have two classes of common stock. Our Class A substantialcommon stock is entitled to full voting powers, including in the elections of directors, while our Class B common stock may not vote except as provided by the laws of Delaware. We have had
two classes of common stock since 1959, when our stockholders approved the issuance of two shares of Class B non-voting common stock to every holder of our voting common stock. Such dual-class share structures have increasingly come under the scrutiny of major indices, institutional investors, and proxy advisory firms, with some calling for the reclassification of non-voting common stock.
A majority of our voting stock is controlled by members of the Brown family, and, collectively, they have the ability to control the outcome of stockholder votes, including the election of all of our directors and the approval or rejection of any merger, change of control, or other significant corporate transaction.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 desire tobelieve 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.
Item 2. Properties
Company-ownedOur company-owned production facilities include distilleries, a winery, a concentrate plant, bottling plants, warehousing operations, sawmills, and cooperages. We also have agreements with other parties for contract production in Australia, Belgium, Brazil, China, Estonia, Finland, Ireland, Latvia, Mexico, the Netherlands, South Africa, and the United States.
In addition to Company-ownedour 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; Irving, Texas;Baltimore, Maryland; Atlanta, Georgia; Baltimore, Maryland;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; Warsaw, Poland; Paris, France;Barcelona, Spain; Mexico City, Mexico; Prague, Czech Republic; São Paulo, Brazil;Seoul, South Korea; Gurgaon, India; Istanbul, Turkey; Amsterdam, Netherlands; Moscow, Russia; Shanghai, China; Hong Kong; Cape Town, South Africa; Dubai, United Arab Emirates; Kiev, Ukraine; and Gurgaon, India.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 | Winery,Vineyards, winery, bottling, warehousing | Home of Sonoma-Cutrer |
| Visitors’ center | |
Decatur,Trinity, Alabama | Cooperage | Jack Daniel Cooperage |
Clifton, Tennessee | Stave and heading mill | |
Stevenson, Alabama | Stave and heading mill | |
Spencer, Indiana | Stave and heading mill | Acquired in first quarter fiscal 2016 |
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 tequilas and New Mix RTDstequila brands |
| Visitors’ center | |
Slane, Ireland | Distilling visitors’ center | Future homeHome 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.
Item 3. Legal Proceedings
We operate in a litigious environment and we are sued in the normal course of business. We do not anticipate that any currently pending suits will have, individually or in the aggregate, a material adverse effect on our financial position, results of operations, or liquidity.
Item 4. Mine Safety Disclosures
Not applicable.
PART II
Item 5. Market for the Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our Class A and Class B common stock is traded on the New York Stock Exchange under the symbols “BFA” and “BFB,” respectively. As of May 31, 2016,2019, there were 2,7362,575 holders of record of Class A common stock and 5,1545,271 holders of record of Class B common stock. Because of overlapping ownership between classes, as of May 31, 2016,2019, we had only 5,7195,327 distinct common stockholders of record.
The following table sets forth, for the periods indicated, the high and low sales prices per share for our Class A and Class B common stock, as reported on the New York Stock Exchange composite tape, and dividend per share information:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2015 | | Fiscal 2016 |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Year |
Market price per share: | | | | | | | | | | | | | | | | | | |
Class A high | | $ | 95.29 |
| | $ | 93.09 |
| | $ | 98.00 |
| | 95.23 |
| | $ | 98.00 |
| | $ | 119.49 |
| | $ | 122.30 |
| | $ | 117.53 |
| | $ | 112.24 |
| | $ | 122.30 |
|
Class A low | | 85.98 |
| | 81.38 |
| | 85.33 |
| | 86.85 |
| | 81.38 |
| | 93.09 |
| | 105.87 |
| | 99.50 |
| | 100.40 |
| | 93.09 |
|
Class B high | | 97.15 |
| | 93.62 |
| | 97.97 |
| | 93.99 |
| | 97.97 |
| | 108.41 |
| | 110.81 |
| | 106.88 |
| | 103.39 |
| | 110.81 |
|
Class B low | | 86.48 |
| | 81.89 |
| | 85.43 |
| | 86.71 |
| | 81.89 |
| | 90.65 |
| | 95.21 |
| | 90.60 |
| | 93.25 |
| | 90.60 |
|
Cash dividends per share: | | | | | | | | | | | | | | | | | | |
Declared | | 0.580 |
| | — |
| | 0.630 |
| | — |
| | 1.210 |
| | 0.630 |
| | — |
| | 0.680 |
| | — |
| | 1.310 |
|
Paid | | 0.290 |
| | 0.290 |
| | 0.315 |
| | 0.315 |
| | 1.210 |
| | 0.315 |
| | 0.315 |
| | 0.340 |
| | 0.340 |
| | 1.310 |
|
Note: Quarterly amounts may not add to amounts for the year due to rounding.
Equity Compensation Plan Information
The following table summarizes information as of April 30, 2016,2019, 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 | 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 | 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 | Equity compensation plans approved by Class A common stockholders | | 1,532,196 | | $56.83 | | 6,803,869 | Equity compensation plans approved by Class A common stockholders | | 3,141,260 | | $33.25 | | 14,141,324 |
1Includes 1,411,7012,583,815 Class B common shares to be issued upon exercise of stock-settled stock appreciation rights (SSARs); 67,426175,440 Class B commonperformance-based restricted stock units (RSUs); 31,676units; 165,579 Class A performance-based restricted stock units; 138,331 Class A common deferred stock units (DSUs); and 21,39378,095 Class B common DSUs issued under the Brown-Forman 2004 or 2013 Omnibus Compensation Plans. Does not include issued shares of performance-based restricted stock. SSARs are exercisable for an amount of our common stock with a value equal to the increase in the fair market value of the common stock from the date the SSARs were granted. The fair market value of our common stock at fiscal year-end has been used for the purposes of reporting the number of shares to be issued upon exercise of the 3,426,1626,851,991 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.
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 Stock Index, the Dow Jones U.S. Consumer Goods Index, and the Dow Jones U.S. Food & Beverage Index. The information presented assumes an initial investment of $100 on April 30, 2011,2014, and that all dividends were reinvested. The cumulative returns shown representgraph shows the value that each of these investments would have had on April 30 in the years since 2011.2014.
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, 2016:2019: |
| | | | | | | | |
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, 2016 - February 29, 2016 | 1,133,637 |
| $96.03 | 1,133,637 |
| $ | 1,124,800,000 |
|
March 1, 2016 - March 31, 2016 | 1,282,310 |
| $97.38 | 1,282,310 |
| $ | 1,000,000,000 |
|
April 1, 2016 - April 30, 2016 | 1,165,013 |
| $95.70 | 1,165,013 |
| $ | 888,500,000 |
|
Total | 3,580,960 |
| $96.41 | 3,580,960 |
| |
|
| | | | | | | | | | |
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 |
| — |
| |
As we announced on October 15, 2014, our Board of Directors authorized us to repurchase up to $250 million of our outstanding Class A and Class B common shares from October 15, 2014, through October 14, 2015, subject to market and other conditions. As we announced on March 25, 2015, the Board approved a $1 billion increase to the share repurchase authorization and extended it through March 24, 2016, subject to market and other conditions. As we announced on January 28, 2016, the Board approved a new $1 billion share repurchase authorization, commencing April 1, 2016, through March 31, 2017, subject to market and other conditions. The shares presented in the above table above were acquired under these Board authorizations.from employees to satisfy income tax withholdings triggered by the vesting of restricted shares.
Item 6. Selected Financial Data
This selected financial data should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our Consolidated Financial Statements and the accompanying Notes contained in “Item 8. Financial Statements and Supplementary Data.”
BROWN-FORMAN CORPORATION
SELECTED FINANCIAL DATA
(Dollars in millions, except per share amounts)
| | Year Ended April 30, | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | |
Continuing Operations: | | | |
| | (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 | $ | 2,806 |
| 3,282 |
| 3,192 |
| 3,226 |
| 3,404 |
| 3,614 |
| 3,784 |
| 3,946 |
| 4,096 |
| 4,011 |
| $ | 3,134 |
| $ | 3,089 |
| $ | 2,994 |
| $ | 3,248 |
| $ | 3,324 |
|
Gross profit | $ | 1,481 |
| 1,695 |
| 1,577 |
| 1,611 |
| 1,724 |
| 1,795 |
| 1,955 |
| 2,078 |
| 2,183 |
| 2,144 |
| $ | 2,183 |
| $ | 2,144 |
| $ | 2,021 |
| $ | 2,202 |
| $ | 2,166 |
|
Operating income | $ | 602 |
| 685 |
| 661 |
| 710 |
| 855 |
| 788 |
| 898 |
| 971 |
| 1,027 |
| 1,533 |
| $ | 1,045 |
| $ | 1,556 |
| $ | 1,010 |
| $ | 1,048 |
| $ | 1,144 |
|
Net income | $ | 400 |
| 440 |
| 435 |
| 449 |
| 572 |
| 513 |
| 591 |
| 659 |
| 684 |
| 1,067 |
| $ | 684 |
| $ | 1,067 |
| $ | 669 |
| $ | 717 |
| $ | 835 |
|
Weighted average shares used to calculate earnings per share | | | |
– Basic | 230.4 |
| 229.6 |
| 225.7 |
| 221.8 |
| 218.4 |
| 214.5 |
| 213.4 |
| 213.5 |
| 211.6 |
| 203.0 |
| 529.0 |
| 507.4 |
| 484.6 |
| 480.3 |
| 479.0 |
|
– Diluted | 232.8 |
| 231.6 |
| 227.1 |
| 222.9 |
| 219.8 |
| 216.1 |
| 215.0 |
| 215.1 |
| 213.1 |
| 204.3 |
| 532.7 |
| 510.7 |
| 488.1 |
| 484.2 |
| 482.1 |
|
Earnings per share from continuing operations | | | |
– Basic | $ | 1.74 |
| 1.91 |
| 1.92 |
| 2.02 |
| 2.61 |
| 2.39 |
| 2.77 |
| 3.08 |
| 3.23 |
| 5.26 |
| $ | 1.29 |
| $ | 2.10 |
| $ | 1.38 |
| $ | 1.49 |
| $ | 1.74 |
|
– Diluted | $ | 1.72 |
| 1.89 |
| 1.91 |
| 2.01 |
| 2.60 |
| 2.37 |
| 2.75 |
| 3.06 |
| 3.21 |
| 5.22 |
| $ | 1.28 |
| $ | 2.09 |
| $ | 1.37 |
| $ | 1.48 |
| $ | 1.73 |
|
Gross margin | 52.8 | % | 51.6 | % | 49.4 | % | 50.0 | % | 50.7 | % | 49.7 | % | 51.7 | % | 52.7 | % | 53.3 | % | 53.4 | % | 69.7 | % | 69.4 | % | 67.5 | % | 67.8 | % | 65.2 | % |
Operating margin | 21.5 | % | 20.9 | % | 20.7 | % | 22.0 | % | 25.1 | % | 21.8 | % | 23.7 | % | 24.6 | % | 25.1 | % | 38.2 | % | 33.3 | % | 50.4 | % | 33.8 | % | 32.3 | % | 34.4 | % |
Effective tax rate | 31.7 | % | 31.7 | % | 31.1 | % | 34.1 | % | 31.0 | % | 32.5 | % | 31.7 | % | 30.5 | % | 31.7 | % | 28.3 | % | 31.7 | % | 28.3 | % | 28.3 | % | 26.6 | % | 19.8 | % |
Average invested capital | $ | 2,431 |
| 2,747 |
| 2,893 |
| 2,825 |
| 2,711 |
| 2,803 |
| 2,834 |
| 3,131 |
| 3,196 |
| 3,221 |
| $ | 3,196 |
| $ | 3,221 |
| $ | 3,591 |
| $ | 3,832 |
| $ | 4,125 |
|
Return on average invested capital | 17.4 | % | 17.2 | % | 15.9 | % | 16.6 | % | 21.8 | % | 19.1 | % | 21.7 | % | 21.6 | % | 22.0 | % | 34.1 | % | 22.0 | % | 34.1 | % | 19.8 | % | 20.0 | % | 22.0 | % |
Total Company: | | | |
Cash provided by operations | | $ | 631 |
| $ | 545 |
| $ | 656 |
| $ | 653 |
| $ | 800 |
|
Cash dividends declared per common share | $ | 0.62 |
| 0.69 |
| 0.75 |
| 0.78 |
| 1.49 |
| 0.89 |
| 4.98 |
| 1.09 |
| 1.21 |
| 1.31 |
| $ | 0.484 |
| $ | 0.524 |
| $ | 0.564 |
| $ | 1.608 |
| $ | 0.648 |
|
Total assets at April 30 | $ | 3,551 |
| 3,405 |
| 3,475 |
| 3,383 |
| 3,712 |
| 3,477 |
| 3,626 |
| 4,103 |
| 4,188 |
| 4,183 |
| |
Long-term debt at April 30 | $ | 422 |
| 417 |
| 509 |
| 508 |
| 504 |
| 503 |
| 997 |
| 997 |
| 743 |
| 1,230 |
| |
Total debt at April 30 | $ | 1,177 |
| 1,006 |
| 999 |
| 699 |
| 759 |
| 510 |
| 1,002 |
| 1,005 |
| 1,183 |
| 1,501 |
| |
Cash flow from operations | $ | 355 |
| 534 |
| 491 |
| 545 |
| 527 |
| 516 |
| 537 |
| 649 |
| 608 |
| 524 |
| |
Dividend payout ratio | 36.8 | % | 35.8 | % | 38.9 | % | 38.7 | % | 57.0 | % | 37.4 | % | 179.8 | % | 35.3 | % | 37.5 | % | 25.0 | % | 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 consolidated results of Chambord and Casa Herradura since their acquisitions in May 2006 and January 2007, respectively. Includes the results of our Hopland-based wine brands, which were sold in April 2011 but retained in our portfolio as agency brands through December 2011. Includes the results of Southern Comfort and Tuaca, both of which were sold onin March 1,2016 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 October 2008 and a 3-for-2 stock split in August 2012.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. |
4.5. | Cash dividends declared per common share include a special cash dividendsdividend of $0.67 per share$1.00 in fiscal 2011 and $4.00 per share in fiscal 2013.2018. |
5.6 | We define dividend payout ratio as cash dividends divided by net income. |
6. | Results for fiscal 2016 include a gain of $485 million on the sale of Southern Comfort and Tuaca. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation – Executive Summary – Fiscal 2016 Financial Highlights” for additional information about the impact of that sale on our operating results for fiscal 2016. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The followingIntroduction
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 is provided as a supplement to – and should be read in conjunction with – our Consolidated Financial Statements and the accompanying Notes contained in “Item 8. Financial Statements and Supplementary Data.”Data” (the Consolidated Financial Statements).
Volume and DepletionsOur MD&A is organized as follows:
When discussing volume, unless otherwise specified, we refer to “depletions,” a term commonly used in the beverage alcohol industry. Depending on the context, “depletions” means either (a) our shipments directly to retailers or wholesalers, or (b) shipments from our distributor customers to retailers and wholesalers. We generally record revenues when we ship our products to our customers, so our reported sales for a period do not necessarily reflect actual consumer purchases during that period. We believe that our depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do.Volume is discussed on a nine-liter equivalent unit basis (nine-liter cases) unless otherwise specified. At times, we use a “drinks-equivalent” measure for volume when comparing single-serve ready-to-drink (RTD) or ready-to-pour (RTP) brands to a parent spirits brand. “Drinks-equivalent” depletions are RTD and RTP nine-liter cases converted to nine-liter cases of a parent brand on the basis of the number of drinks in one nine-liter case of the parent brand. To convert RTD volumes from a nine-liter case basis to a drinks-equivalent nine-liter case basis, RTD nine-liter case volumes are divided by 10, while RTP nine-liter case volumes are divided by 5. |
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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 certainsome financial measures in this report that are not measures of financial performance under GAAP.U.S. generally accepted accounting principles (GAAP). These non-GAAP measures, which are defined below, should be viewed as supplements to (not substitutes for) our results of operations and other measures reported under GAAP. TheOther companies may not define or calculate these non-GAAP measures we use in this report may not be defined and calculated by other companies in the same manner.way.
“Underlying change” in measures of statements of operations.We present changes in certain income statement line-itemsmeasures, or line items, of the statements of operations that are adjusted to an “underlying” basis, which we believe assists in understanding both our performance from period to period on a consistent basis, andbasis. We use “underlying change” for the trendsfollowing measures of our business. Non-GAAP “underlying” measures include changes inthe statements of operations: (a) underlying net sales,sales; (b) underlying cost of sales,sales; (c) underlying excise taxes,gross profit; (d) underlying gross profit,advertising expenses; (e) underlying advertising expenses, (f) underlying selling, general, and administrative (SG&A) expenses; (f) underlying other expense (income) net; (g) underlying operating expenses1; and (g)(h) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) acquisitions and divestitures, (b) a new accounting standard, (c) foreign currency exchange, (b)(d) estimated net changes in distributor inventories, and (c)(e) the impactestablishment of acquisition and divestiture activity.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.
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 our income statementcertain 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 yearcurrent-year results at prior-year rates.rates and remove transactional and hedging foreign exchange gains and losses from current- and prior-year periods.
“Estimated net change in distributor inventories.” This measureadjustment refers to the estimated net effect of changes in distributor inventories on changes in our measures.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 on our results using depletion information provided by our distributors.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 our measurescertain line items of the statements of operations and allows us to understand better our underlying results and trends.
“Sale of Southern Comfort and Tuaca.” On January 14, 2016, we reached an agreement to sell our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. The transaction closed March 1, 2016, for $543 million in cash (subject to a post-closing inventory adjustment), which resulted in a one-time gain of $485 million inWe use the fourth quarter of fiscal 2016. This adjustment removesnon-GAAP measures “underlying change” to: (a) the gain on sale, (b) those transaction-related costs not included in the gain on sale, and (c) operating activity for the non-comparable period, March and April in fiscal 2015 and 2016. We believe that these adjustments allow us to understand better our underlying results on a comparable basis.
Management uses “underlying” measures of performance to assist it in comparing and measuring our performance from period to period on a consistent basis, and in comparingbasis; (b) compare our performance to that of our competitors. We also use underlying measures in connection withcompetitors; (c) calculate components of management incentive compensation calculations. Management also uses underlying measures in its planningcompensation; (d) plan and forecastingforecast; and in communications with(e) communicate our financial performance to the board of directors, stockholders, analysts, and investors concerning our financial performance.investment analysts. We have providedprovide reconciliations of the non-GAAP measures adjusted“underlying change” in certain line items of the statements of operations to an “underlying” basis to their
nearest GAAP measures in the tables below under “Results of Operations –- Year-Over-Year Comparisons” andComparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.
We also use the following additional non-GAAP financial measures in “Item 6. Selected Financial Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary”:
“Return on average invested capital.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 useinvest capital invested in our business.
“Adjusted” measuresDefinitions
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 (a) operating income, (b) operating margin, (c) effective tax rate, (d) diluted earnings per share,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:
“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 (e) return on average invested capital. WeJapan. 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 these adjusted measuressupplemental information for our largest brands ranked by percentage of total fiscal 2019 net sales. In addition to identifybrands listed by name, we include the effect of the sale of Southern Comfortfollowing aggregations:
“Whiskey” includes all whiskey spirits and Tuaca on reported income from operationswhiskey-based flavored liqueurs, ready-to-drink (RTD), and other key measures derived therefrom; this effect is expected not be part of our sustainable results or trends. These measures remove the effects of (a) the gain on sale, (b) those transaction-related costs notready-to-pour products (RTP). The brands included in this category are the gain on sale,Jack Daniel's family of brands, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and (c) operating activity related to the brands for the period subsequent to their divestiture (March and April in fiscal 2016). Tax effects on items (c), (d), and (e) are calculated consistent with the nature of the underlying transaction.Coopers’ Craft.
Our MD&A includes the following sections:
EXECUTIVE SUMMARY
Overview
Over the past several years, including fiscal 2016, we have made progress toward realizing the ambitions of our long-term strategy, which was first set forth in fiscal 2010 and has evolved along with our business since then. See “Item 1. Business – Strategy” for details. Here is a discussion of recent developments:
We have further developed“American whiskey” includes the Jack Daniel’s family of brands, through innovations designed to create new demand forpremium 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 from the world’s foremost maker of American whiskey. These efforts resulted in the successful launch of(JD RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), and a series of ultra-premium-priced line extensions includingJack 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 several additions to the Jack Daniel’s Single Barrel Collection. At the same time, we have invested steadily in our coreBottled-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 Whiskey (JDTW) brandHoney 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 support its growth around the world.
We are partway throughour customers. Depletions is a multiyear production capacity expansion project for Jack Daniel's. In fiscal 2014, we completed construction of the Jack Daniel Cooperage in Decatur, Alabama. We announced a major expansion of our distilling capacity in August 2013, and we completed construction of a new distillery on our property in Lynchburg, Tennessee during the first quarter of fiscal 2016. The next stage of our expansion in Lynchburg will add bottling capacity and finished product warehousing, to be completedterm commonly used in the next few years.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.
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 continued growthfollowing tables reconcile the previously reported amounts to the currently reported amounts in the statements of operations for fiscal years 2017 and 2018.
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| | | | | | | | | | | | | | | |
| 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 |
|
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 ishas contributed to our growth over the most important measurelast three years as described below. In addition, we recently announced the launch of our progress toward becoming a global leader in whiskey. Woodford Reserve’s growth has also helped us move forward on this ambition, as this super-premium brand grew volume at a compound annual rate of approximately 25% from fiscal 2011 to fiscal 2016 – more than doubling its annual volume to approximately 500,000 nine-liter cases by the end of fiscal 2016. In June 2013, we announced a more than $35 million expansion at our Woodford Reserve Distillery to support our expected growth. During fiscal 2014, we completed a renovation of our visitors’ center at the Woodford Reserve Distillery, as visitors have increased over 20% since fiscal 2014 to almost 125,000 visitors in fiscal 2016. During fiscal 2016, we completed the construction of two new warehouses, and we entered into the second phase of a bottling expansion. In fiscal 2017,Jack Daniel’s Tennessee Apple, which we expect to complete two new warehouses.
Brown-Forman was foundedintroduce in 1870the United States in the fall of 2019.
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◦ | 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. |
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◦ | 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. |
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◦ | 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 Old Forester, the world’s first bottled bourbon brand. Old Forester is attracting a new generationour wide range of fans, as it has grown net sales by approximately 20% annually since fiscal 2011,brands, including growth of nearly 50% in fiscal 2016. We plan to leverage the current momentum ofWoodford Reserve, Old Forester, and the favorable trends in American whiskey to reestablish Old Forester as an iconic bourbon brand. To support our ambition, we announced the construction of the Old Forester Distillery and visitors’ center in fiscal 2014, and in May 2015 purchased two historic buildings on Main Street in Louisville for its location. We began construction of the Old Forester Distillery in February 2016, and we expect to open late in 2017. We anticipate investing approximately $50 million in this project.Coopers’ Craft.
Over the past five years, we have divested certain businesses to enable better alignment of our resources with our long-term strategy. We divested our Hopland-based wine brands in 2011, leaving us with a portfolio primarily focused on spirits. Since then, we have pursued growth of our spirits portfolio mostly by organic means, with innovation playing a key role (see discussion below). In March 2016, we sold Southern Comfort and Tuaca to dedicate additional resources to opportunities with greater long-term growth prospects. See ‘‘Financial Highlights’’ below, “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations,” and Note 15 to the accompanying financial statements for details about the financial impact of the sale of Southern Comfort and Tuaca.
In addition to our successful efforts to develop and introduce new products and line extensions for the Jack Daniel’s family of brands, we have pursued growth through innovation in the rest of our portfolio. Notable introductions have included Woodford Reserve Double Oaked (fiscal 2012) and Herradura Ultra (fiscal 2015). In April 2016, we announced plans to release | |
◦ | 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. |
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◦ | 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. |
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◦ | In fiscal 2017, we introduced our first entirely new bourbon trademark 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 2016 (fiscal 2017).
2017. In June 2015 (fiscal 2016),fiscal 2019, we purchased all of the shares ofexpanded Slane Castle Irish Whiskey Limited and announced plans to invest approximately $40 million to build a new distillery, construct warehouses, and develop a consumer experience on the historic Slane Castle Estate (in County Meath, about 30 miles north of Dublin). We plan to open the Slane Castle Whiskey Distillery and to introduce new Irish whiskeysnationally in the spring of 2017, using high-quality whiskey purchased from other Irish distilleriesUnited States and finished to Slane’s specifications whileintroduced the whiskey made at the new Slane Distillery matures.brand in France.
InAcquisitions and Divestitures
On June 1, 2016, (fiscal 2017), we purchasedacquired The BenRiach Distillery Company Limited and, with it,(BenRiach). The acquisition, which brought three single malt Scotch whisky brands andto our portfolio, included brand trademarks, inventories, three visitors’ centers, three malt distilleries, – The GlenDronach, BenRiach, and Glenglassaugh. This purchase included other trademarks, a bottling plant, and The BenRiach Distillery Company Limited’sBenRiach’s headquarters in Edinburgh, Scotland. We believe thatIn fiscal 2019, we continued to expand these super-premium brands will provide us an immediate opportunity to participateglobally, most notably in the growing single malt Scotch categoryTravel Retail and strengthen our portfolio’s long-term growth prospectsseveral markets in markets such as the United States, the United Kingdom, Taiwan, Germany, and in travel retail. We plan to build three new warehouses in fiscal 2017 to support the growth of these brands.
Our focus on the importance of the barrel in crafting whiskeys of the highest quality is perhaps unique in the industry. We believe we are the largest maker of new whiskey barrels in the world and, within the global spirits industry, only we own manufacturing facilities for new whiskey barrels. Our control over this critical inputAsia. See Note 13 to the whiskey-making process gives us a competitive advantage – one that applies both to Jack Daniel’s and to our other aged spirits, including bourbons and tequilas today and – over time – Irish and Scotch whiskeys. For example, our barrel-making expertise enables us to introduce unique characteristics into our products, as we did with our successful recent innovation, Woodford Reserve Double Oaked. In addition, newly-introduced Coopers’ Craft bourbon was created to celebrate our more than 70 years of expertise raising barrels atConsolidated Financial Statements for additional information.
Capital Deployment
Beyond the Brown-Forman Cooperage. While we expect it to benefit from a generally favorable craft spirits trend, we also believe that linking its identity to our distinctive barrel-making expertise will benefit Coopers’. As we progress toward becoming a global leader in whiskey, we will continue to take advantage of this source of differentiation for our existing portfolio and across the range of new opportunities.
Over the past several decades,acquisition described above, we have pursued international growth both in larger, developed markets and in the emerging world. In recent years,focused our most visible progress has been the evolution of our RTC strategy in several key markets. We set up new distribution companies in three of our current top ten countries (Germany, France, and Turkey) and also in Brazil, a market that we believe is among our most promising long-term growth opportunities. In fiscal 2017, we plan to establish a new distribution company in Spain, which we expect to begin operating in fiscal 2018. We have added substantially to our employee base outside the United States, mostly in markets where we evolved our RTC strategy.
Our capital deployment initiatives have been focused on (1)(a) enabling the expected future growth of our existing businesses through investments in our production capacity, innovation,barrel whiskey inventory, and brand-building efforts for our existing portfolio;efforts; and (2)(b) returning cash to our shareholders.stockholders.
Investments. From fiscal 20102017 through 2016,fiscal 2019, our capital expenditures totaled approximately $360 million and focused on enabling the growth of our premium whiskey brands:
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◦ | Jack Daniel’s.We expanded our shipping warehouse facility and built an additional warehouse. |
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◦ | Woodford Reserve. We expanded our bottling facility and built two new warehouses. |
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◦ | Old Forester.We opened the Old Forester Distillery and visitors’ center on Main Street in Louisville, Kentucky, in the summer of 2018. |
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◦ | 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 over $4.6$2.1 billion to our shareholdersstockholders through $1.5$0.9 billion in regular quarterly dividends, $1.0$0.5 billion in two special dividends, and $2.1$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.
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 | % |
Summary and Timing of Recent Developments |
| | | | | | |
Fiscal year | | PORTFOLIO | | ROUTE-TO-CONSUMER | | PRODUCTION |
| | | | | | |
2011 | | Introduced Jack Daniel’s Tennessee Honey in Q4 | | Started distribution operations in Germany | | |
| | Sold Hopland-based wine brands and properties
| | Started distribution operations in Brazil | | |
2012 | | Introduced Woodford Reserve Double Oaked | | Started distribution operations in Turkey | | |
| | Introduced Jack Daniel’s Winter Jack | | | | |
2013 | | Introduced Jack Daniel’s Sinatra Select | | | | Announced plans for the Jack Daniel Cooperage |
| | Introduced Jack Daniel’s Tennessee Rye Whiskey | | | | Opened the Stevenson Mill |
2014 | | Introduced Jack Daniel’s No. 27 Gold Tennessee Whiskey | | Started distribution operations in France | | Announced capacity expansion at the Woodford Reserve Distillery |
| | Introduced Jack Daniel’s Tennessee Fire (limited test) | | | | Announced capacity expansion at the Jack Daniel Distillery |
| | | | | | Opened the Jack Daniel Cooperage |
2015 | | Introduced Herradura Ultra in Mexico in Q2 | | | | Announced plans for the Old Forester Distillery and bourbon experience |
| | Introduced Jack Daniel’s Tennessee Fire nationwide in the United States in Q4 | | | | Completed new barrel warehouses at Jack Daniel's and Woodford Reserve |
| | Introduced Woodford Reserve Rye Whiskey | | | | |
2016 | | Purchased Slane Castle Irish Whiskey Limited in Q1 | | | | Announced plans to construct a new distillery at Slane Castle in Ireland |
| | Sold Southern Comfort and Tuaca in Q4 | | | | Opened the Spencer Mill |
2017 | | Announced Coopers’ Craft bourbon to be released in Q1 | | | | |
| | Purchased The BenRiach Distillery Company Limited in Q1 | | | | |
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.
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◦ | Lower net sales. Certain customers paid the incremental costs of tariffs. We compensated these customers for these incremental costs by reducing our net prices. |
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◦ | 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 2016 Financial2019 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.
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◦ | 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. |
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◦ | 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
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 2014 - 2016 | |
Summary of Operating Performance Fiscal 2017-2019 | | Summary of Operating Performance Fiscal 2017-2019 |
| | | | | | | | Reported Change | | Underlying Change1 | | | | | | | Reported Change | | Underlying Change1 |
Fiscal year ended April 30 | 2014 | | 2015 | | 2016 | | 2015 vs. 2014 | | 2016 vs. 2015 | | 2015 vs. 2014 | | 2016 vs. 2015 | 2017 | | 2018 | | 2019 | | 2017 vs. 2018 | | 2018 vs. 2019 | | 2017 vs. 2018 | | 2018 vs. 2019 |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net sales | $ | 3,946 |
| | $ | 4,096 |
| | $ | 4,011 |
|
| 4 | % | | (2 | )% | | 6 | % | | 5 | % | $ | 2,994 |
| | $ | 3,248 |
| | $ | 3,324 |
| | 8 | % | | 2 | % | | 6 | % | | 5 | % |
Excise taxes | 955 |
| | 962 |
| | 922 |
| | 1 | % | | (4 | )% | | 5 | % | | 6 | % | |
Cost of sales | 913 |
| | 951 |
| | 945 |
| | 4 | % | | (1 | )% | | 7 | % | | 3 | % | 973 |
| | 1,046 |
| | 1,158 |
| | 7 | % | | 11 | % | | 8 | % | | 12 | % |
Gross profit | 2,078 |
| | 2,183 |
| | 2,144 |
| | 5 | % | | (2 | )% | | 7 | % | | 5 | % | 2,021 |
| | 2,202 |
| | 2,166 |
| | 9 | % | | (2 | %) | | 6 | % | | 2 | % |
Advertising | 436 |
| | 437 |
| | 417 |
| | — | % | | (4 | )% | | 4 | % | | 2 | % | |
SG&A | 686 |
| | 697 |
| | 688 |
| | 2 | % | | (1 | )% | | 4 | % | | 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 | $ | 971 |
| | $ | 1,027 |
| | $ | 1,533 |
| | 6 | % | | 49 | % | | 9 | % | | 8 | % | 33.8 | % | | 32.3 | % | | 34.4 | % | | (1.5 | pp) | | 2.1 | pp | | | | |
| | | | | | | | | | | | | | |
Gross margin | 52.7 | % | | 53.3 | % | | 53.4 | % | | 0.6pp |
| | 0.1pp |
| | | | | |
Operating margin | 24.6 | % | | 25.1 | % | | 38.2 | % | | 0.5pp |
| | 13.1pp |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest expense, net | $ | 24 |
| | $ | 25 |
| | $ | 44 |
| | 6 | % | | 70 | % | | | | | $ | 56 |
| | $ | 62 |
| | $ | 80 |
| | 9 | % | | 31 | % | | | | |
Effective tax rate | 30.5 | % | | 31.7 | % | | 28.3 | % | | 1.2pp |
| | (3.4)pp |
| | | | | 28.3 | % | | 26.6 | % | | 19.8 | % | | (1.7 | pp) | | (6.8 | pp) | | | | |
Diluted earnings per share | $ | 3.06 |
| | $ | 3.21 |
| | $ | 5.22 |
| | 5 | % | | 63 | % | | | | | $ | 1.37 |
| | $ | 1.48 |
| | $ | 1.73 |
| | 8 | % | | 17 | % | | | | |
Return on average invested capital2 | 21.6 | % | | 22.0 | % | | 34.1 | % | | 0.4pp |
| | 12.1pp |
| | | | | |
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.
2See “Non-GAAP Financial Measures” above for details onWe retrospectively adjusted our use of “return on average invested capital,” including how we calculate this measurefiscal 2017 and why we think this information is useful to readers.
On March 1, 2016, we sold our Southern Comfortfiscal 2018 advertising expense, SG&A expense, and Tuaca brands and related assets to Sazerac Company, Inc. for $543 millionoperating income as described in cash (subject to a post-closing inventory adjustment). The following table shows the impact of the sale of Southern Comfort and Tuaca on our operating results.
Sale of Southern Comfort and Tuaca |
| | | | | | | | | | | |
Fiscal year ended April 30, 2016 | Reported | | Sale of Southern Comfort and Tuaca1 | | Adjusted |
| | | | | |
Operating income | $ | 1,533 |
| | $ | 486 |
| | $ | 1,047 |
|
Operating margin | 38.2 | % | | 12.0 | % | | 26.2 | % |
Effective tax rate | 28.3 | % | | (1.1 | )% | | 29.4 | % |
Diluted earnings per share | $ | 5.22 |
| | $ | 1.76 |
| | $ | 3.46 |
|
Return on average invested capital2 | 34.1 | % | | 11.1 | % | | 23.0 | % |
1See “Non-GAAP Financial Measures” above for details on the sale of Southern Comfort and Tuaca. The $486 million adjustment above includes the sum of: (a) the $485 million gain on the sale of Southern Comfort and Tuaca, (b) those transaction-related costs not included in the gain on sale, and (c) operating activity relatedNote 2 to the brands for the period subsequent to their divestiture (Marchaccompanying financial statements and April in“Reclassifications” above. Our previously disclosed growth rates from fiscal 2016)2017 vs. fiscal 2018 were as follows (reported/underlying): advertising expense (8% / 6%), SG&A expense (15% / 3%), and operating income (5% / 8%).
23Operating 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.
In fiscal 2016, we delivered net sales of $4.0 billion, a decrease of 2% compared to fiscal 2015, but an increase of 5% on an underlying basis; operating income of $1.5 billion, an increase of 49% compared to fiscal 2015, or 8% on an underlying basis;
and, diluted earnings per share of $5.22, or $3.46 after removing the $1.76 impact of the sale of Southern Comfort and Tuaca. We improved our operating margin in fiscal 2016, as we added 1.1 percentage points from our continuing business and 12.0 percentage points attributed to the sale of Southern Comfort and Tuaca. Our operating results were driven largely by the gain on the sale of our Southern Comfort and Tuaca businesses, as well as the continued growth of our American whiskey portfolio, led by the Jack Daniel’s family of brands. From a geographic perspective, the United States and our developed international markets led the growth, while emerging markets grew more slowly compared to fiscal 2015, and our business in the travel retail channel declined. Foreign exchange negatively affected our reported operating results as the U.S. dollar strengthened compared to most foreign currencies.
In fiscal 2016, our return on average invested capital improved to 34.1% driven by the sale of Southern Comfort and Tuaca. Excluding the effect of the sale of Southern Comfort and Tuaca, adjusted return on average invested capital increased to 23.0%, despite capital spending of $108 million and increased working capital related to our maturing whiskey inventory. Also during fiscal 2016, we returned $1.4 billion in cash to our shareholders through dividend payments of $266 million and share repurchases of $1.1 billion while maintaining investment-grade credit ratings.
Fiscal 2020 Outlook
Looking ahead to fiscal 2017, weWe are optimistic about our prospects for growth of net sales, and operating income, growth, and diluted earnings per share in fiscal 2020. Below we expect to make further progress towarddiscuss our strategic ambitions. We describe below thecurrent expectations for fiscal 2020, including trends, developments, and uncertainties that we expect tomay affect our business.
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• | Favorable global whiskey trends. The markets for American, Irish, and single malt Scotch whiskey are growing faster than total distilled spirits globally, and premium whiskey is among the best-performing components of the broader whiskey category.1 We face strong competition, and the size of the opportunity is bringing new entrants to the market. Even so, we believe that our whiskey brands are poised to benefit from this trend, including JDTW, Gentleman Jack, Woodford Reserve, Old Forester, Slane, and our newly acquired Scotch whisky brands (The GlenDronach, BenRiach, and Glenglassaugh). Furthermore, we believe that we are well positioned to access emerging growth opportunities driven by consumer trends affecting these categories, including increased interest in luxury, craft, and small-batch whiskeys. We should benefit from these trends with our existing portfolio of American whiskeys, Slane, and the newly acquired single malt Scotch whiskeys. In addition, we expect that Coopers’ Craft, our new bourbon to be introduced in the summer of 2016, will further allow us to benefit from favorable premium whiskey trends.
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• | Growing competitive intensity of flavored whiskeys. Flavored whiskey continues to be the fastest-growing component of the whiskey category1, and we have participated fully in this market opportunity through our successful introductions of both JDTH and JDTF. Competition in the flavored whiskey category has intensified recently as industry participants seek to capitalize on the trend through sequential new product introductions. Our strategy has been to limit our flavored whiskey portfolio while investing to build JDTH and JDTF as sustainable growth brands in the United States and to expand both brands internationally. We believe that our strategy will allow us to benefit from this trend in a manner compatible with the long-term value of the Jack Daniel’s brand, but we may forgo growth opportunities in the nearer term. Because we essentially concluded the global rollout of JDTH in fiscal 2015, its growth slowed in fiscal 2016; however, we expect it will continue to be an important contributor to our growth in fiscal 2017. We launched JDTF in the United States in fiscal 2015 and then tested it in a few international markets in fiscal 2016. We will continue to roll out JDTF globally in fiscal 2017, and we expect it to continue to be an important contributor to our growth.
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Challenging pricing environment. During fiscal years 2013 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 2014, andforeign exchange, each of which could have a significant impact to a lesser extent in fiscal 2015 and 2016, our operating results have benefited from price increases for severalGAAP line items of our brands, including, most importantly, JDTW. Looking ahead, we anticipate volume will be the more significant driverstatements of growth compared to the last few years. We have not raised prices generally in international markets inoperations.
In response to the strengthened U.S. dollar, but we have recently increased pricestariffs 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 higher-inflation economies including Russia, Turkey, Brazil,the summer of 2018. Our American whiskeys are made in the United States and certain other markets. In many emerging markets, and for many of our travel retail customersexported around the world, 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,
we pricewould benefit either through higher net sales or lower cost of sales. Conversely, if additional tariffs were imposed on our products, in dollars. As foreign currencies generally weakened in fiscal 2015 and 2016, we believe thatwould be negatively impacted either through lower purchasing power in dollar termsnet sales or higher cost of emerging-market consumers has dampened demandsales.
Outlook for our products; we do not expect improvement in fiscal 2017. In fiscal 2017, we expect lower prices for our used barrels as a result of weaker demand from blended Scotch industry buyers.
key measures:
Uncertain increase in costs of sales.Underlying net sales. We expect that freight, logistics, and raw materials costs will generally increase in the low single digits during fiscal 2017. Our cost of sales are somewhat sensitive to variation in prices of certain commodities, including prices of corn, natural gas, oil, and wood used in our barrels, among others. In addition, we have been investing in our production capacity over the last four years at more than twice the rate of historical capital expenditure investment, which will also contribute to rising costs as we depreciate these investments.
Wood barrels are an essential input to our whiskeys. We believe that manufacturing our own barrels ensures both high quality and consistent, timely availability for our whiskey distilleries. In addition to our cooperages, where we assemble finished barrels, we manufacture wood staves and headings at four mills. Higher demand and lower supply in the market for wood inputs (American white oak logs and barrel components, such as wood staves and headings), have resulted in higher prices from time to time. While many factors drive demand, among these is the recent, sustained rise in the popularity of American whiskey. While American white oak is not in short supply, we believe that market forces have led to higher prices of wood inputs, which we expect will lead to higher costs for our barreled whiskey.
Uncertain impact of excise taxes and government regulations restricting trade in spirits and wine. From time to time, governments increase excise taxes or duties on spirits and introduce other regulatory measures that either restrict our ability to sell and market our brands or raise the cost of our doing so. For example, Brazil increased excise taxes in December 2015, and we expect that the increase will weaken our results there due to the higher costs of our products to consumers combined with current local economic trends. In fiscal 2016, our business was also disrupted by regulatory measures in certain countries, most notably Indonesia. In fiscal 2017, we are aware of several enacted (or proposed and likely-to-be-enacted) excise tax increases.Whenever practicable, we increase our prices to the extent of those tax increases. We do not believe that any one known or expected excise tax increase will have a significant negative effect on our results, nor do we expect that they collectively will. But because excise tax increases can lead to inflation in consumer prices, the cumulative effect over time in a given market could soften demand for our products.
Emerging-market uncertainty. During fiscal 2016, we grew underlying net sales growth rate trend from fiscal 2019 to accelerate in emerging markets, led byfiscal 2020. We anticipate the Jack Daniel’s family of brands. Whilebrands, our competition reported a general slowdown or declines in emerging markets, we grew, butportfolio of premium bourbons, and our rate of growth slowed. In fiscal 2016, we experienced challenges in Russia and Southeast Asia, and looking aheadtequila brands to fiscal 2017, we are cautious about our growth outlook in emerging markets given the geopolitical uncertainty in Brazil, Turkey, and Russia. These three countries have contributed to our growth from emerging markets in recent years. Looking beyond the current challenges, we believeagain drive growth. We expect that emerging marketsvolume will be important to our sustained, long-termthe most significant driver of underlying net sales growth potential, and we remain committed to developing our business there.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 currency headwinds anticipated to continue.exchange The more we expand. In fiscal 2019, our business globally, the more exchange rate fluctuations relative to the U.S. dollar influence our financial results. We sell more in local currencies than we purchase – for example, Jack Daniel’s Tennessee Whiskey can be distilled only in Tennessee. Accordingly, we have a net negative exposure to a strengthening U.S. dollar relative to other currencies. Additionally, the U.S. dollar is the functional currency for most of our consolidated operations. Our reported results were significantly affected in fiscal 2016hurt by negative foreign exchange due to the strengthstrengthening of the U.S. dollar, anddollar. 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 anticipatewould expect foreign exchange to negatively affect our fiscal 20172020 results, will be negatively affected as well.but less so than in fiscal 2019. See “Item 7A.Quantitative and Qualitative Disclosures about Market Risk” for more informationdetails about how we manage foreign exchange and our business.risk.
We believe that we are well positioned to take advantage of the opportunities and to address the challenges related to the trends and uncertainties noted above. However, we may not succeed in taking full advantage of these opportunities, and any of these challenges could have a material adverse effect on our business.
See ‘‘Item 1A. Risk Factors’’ for details about risks and uncertainties that could affect our business or results.
RESULTS OF OPERATIONS – FISCAL 2016 MARKET HIGHLIGHTSResults of Operations
Fiscal 2019 Market Highlights
The following table shows net sales results for our ten largest markets, summarized by geographic area, for fiscal 2016,2019 compared to fiscal 2015.2018. We discuss the most significant changes in net sales for each geography.market.
Top 10 Markets - Percentage of Fiscal 2016 Total Net Sales and Fiscal 2016 Net Sales Growth by Geographic Area | |
Top 10 Markets - Percentage of Fiscal 2019 Total Net Sales and Fiscal 2019 Net Sales Growth by Geographic Area | | Top 10 Markets - Percentage of Fiscal 2019 Total Net Sales and Fiscal 2019 Net Sales Growth by Geographic Area |
| | | | | Net Sales1 % Change vs. 2015 | | | | Net Sales % Change vs. 2018 |
Markets | | % of Fiscal 2016 Net Sales | | Reported | Sale of Southern Comfort and Tuaca | Foreign Exchange | Net Chg in Est. Distributor Inventories | | Underlylng | |
Markets1 | | | % of Fiscal 2019 Net Sales | | Reported | New Accounting Standard | Foreign Exchange | Estimated Net Chg in Distributor Inventories | | Underlying2 |
United States | | 46 | % | | 3 | % | 1 | % | — | % | 1 | % | | 6 | % | | 47 | % | | 2 | % | 1 | % | — | % | — | % | | 3 | % |
Europe | | 31 | % | | (2 | )% | — | % | 10 | % | (3 | )% | | 6 | % | |
Developed International | | | 28 | % | | 1 | % | — | % | 4 | % | (2 | %) | | 4 | % |
United Kingdom | | 10 | % | | 5 | % | 1 | % | 3 | % | — | % | | 9 | % | | 6 | % | | (4 | %) | — | % | 6 | % | — | % | | 3 | % |
Australia | | | 5 | % | | — | % | — | % | 6 | % | — | % | | 6 | % |
Germany | | 5 | % | | (1 | )% | — | % | 7 | % | — | % | | 7 | % | | 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 | % | | (12 | )% | — | % | 13 | % | — | % | | 1 | % | | 3 | % | | 9 | % | — | % | 1 | % | — | % | | 10 | % |
France | | 3 | % | | 6 | % | — | % | 8 | % | — | % | | 13 | % | |
Turkey | | 2 | % | | (2 | )% | — | % | 19 | % | — | % | | 17 | % | |
Russia | | 1 | % | | (26 | )% | — | % | 43 | % | (33 | )% | | (17 | )% | | 2 | % | | 16 | % | — | % | 4 | % | (3 | %) | | 17 | % |
Rest of Europe | | 7 | % | | (5 | )% | — | % | 11 | % | (4 | )% | | 2 | % | |
Australia | | 9 | % | | (12 | )% | — | % | 14 | % | — | % | | 2 | % | |
Other | | 14 | % | | (10 | )% | — | % | 12 | % | 2 | % | | 3 | % | |
Mexico | | 5 | % | | (11 | )% | — | % | 18 | % | — | % | | 6 | % | |
Canada | | 1 | % | | (1 | )% | — | % | 12 | % | (4 | )% | | 7 | % | |
Rest of Other | | 8 | % | | (11 | )% | — | % | 8 | % | 3 | % | | — | % | |
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 | % | 6 | % | — | % | | 5 | % | | 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 thinkbelieve this information is useful to readers.
The United States, our largest and most important market, accounted for 46%47% of our reported net sales in fiscal 2016 and 43% of net sales in fiscal 2015. In fiscal 2016, reported2019. Reported net sales in the United States grew 3%2%, while underlying net sales increased 6%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 absencestrengthening of normal revenues in Marchthe dollar against the British pound, euro, and April following the sale of Southern Comfort and TuacaAustralian dollar), and (b) the negative year-over-year effect of distributors’ inventory buy-ins related to the launch of JDTF at the end of fiscal 2015. The growth in underlying net sales was driven by the Jack Daniel’s family of brands, including higher volumes for JDTF, following its launch in the fourth quarter of fiscal 2015, and for JDTW. Volume gains for Woodford Reserve also contributed to the underlying net sales growth, while lower volumes from Southern Comfort (before we sold the brand) and Canadian Mist partially offset these gains. Overall, we believe our brands grew market share in fiscal 2016 in both the on-premise and off-premise channels.
Europe accounted for 31% of our net sales in both fiscal 2016 and fiscal 2015. For fiscal 2016, reported net sales in Europe were down 2%, while underlying net sales were up 6%, after adjusting for the negative effect of foreign exchange and the positive effect of aan estimated net increase in distributor inventories in Russia. The growth in underlying net sales was driven by gains in the United Kingdom, France, Germany, and Turkey, partially offset by declines in Russia.
In the United Kingdom, underlying net sales growth was driven by the Jack Daniel’s family of brands, led by volume growth for JDTW reflecting strong consumer demand, volume growth for JD RTDs, and the test market introduction of JDTF.
In Germany, underlying net sales growth was primarily driven by higher volumes of JDTW. Volume growth of JDTH and JD RTDs also contributed.
In Poland, volume gains for JDTW led underlying net sales growth, partially offset by a decline in volume of a lower-margin brand that we discontinued in fiscal 2016.
In France, underlying net sales growth was primarily driven by higher volumes for JDTW and JDTH, as the Jack Daniel’s family of brands continued to gain market share in the world’s third largest whiskey market.
In Turkey, price increases, higher volumes, and a beneficial channel mix for JDTW drove underlying net sales growth.
In Russia, volume declines for both Finlandia and JDTW were responsible for the decrease in underlying net sales. We believe that our results in this market were driven by factors common to all premium spirits companies – namely, challenging economic conditions and consumer trends toward less expensive, local products.
Australia accounted for 9% of our net sales in fiscal 2016, down from 11% in fiscal 2015. In fiscal 2016, reported net sales were down 12%, but underlying net sales were up 2% after adjusting for the negative effect of a weaker Australian dollar.inventories. Underlying net sales growth was driven by gains in Germany, Australia, Spain, and the Jack Daniel’s family of brands, ledUnited Kingdom, partially offset by volume gains for JD RTDs and JDTW, as well as the introduction of JDTF lateincremental costs associated with tariffs in certain markets in the fiscal year.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.
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◦ | 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. |
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◦ | In Australia, underlying net sales growth was driven by higher pricing of JD RTDs and increased volumes of Gentleman Jack. |
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◦ | In Germany, underlying net sales growth was driven by volumetric growth of JDTW and JD RTDs. |
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◦ | 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. |
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◦ | 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. |
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◦ | 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. |
Net sales for our other marketsEmerging constituted 14%markets accounted for 18% of our totalreported net sales in fiscal 2016, down from 15% in fiscal 2015.2019. Reported net sales were down 10% in fiscal 2016, butincreased 4%, while underlying net sales were up 3%grew 11% after adjusting reported results for (a) the negative effect of a stronger U.S.foreign exchange (reflecting the strengthening of the dollar against the Turkish lira, Mexican peso, and Brazilian real) and (b) the negative impactadoption of a net decrease in distributor inventories. The increase in underlyingthe revenue recognition accounting standard. Underlying net sales growth was led by Mexico, Brazil, Russia, Poland, and sub-Saharan Africa. Decreased volumeChina.
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◦ | 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. |
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◦ | In Poland, underlying net sales growth was led by higher volumes of JDTW and Gentleman Jack, partially offset by unfavorable price/mix of Finlandia. |
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◦ | 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. |
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◦ | In Brazil, underlying net sales growth continued to be led by increased volumes, higher pricing, and favorable channel mix of JDTW. |
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◦ | 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 travel retailfiscal 2019.Reported net sales increased 1%, while underlying net sales increased 6% after adjusting for (a) an estimated net decrease in distributor inventories and Southeast Asia partially offset(b) the overalladoption 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 this grouping.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.
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1International Wine & Spirit Research (IWSR), 2018 data. |
RESULTS OF OPERATIONS – FISCAL 2016 BRAND HIGHLIGHTSFiscal 2019 Brand Highlights
The following table highlights the worldwide results of our largest brands for fiscal 2016,2019 compared to the results for fiscal 2015.2018. We discuss results of the brands most affecting our performance below the table.
Major Brands Worldwide Results for Fiscal 20161 |
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| Depletion Volume | | Net Sales % Change vs. 2015 |
Brand family / brand | Nine-Liter Cases (Millions) | % Change vs. 2015 | | Drinks Equivalent (Millions) | % Change vs. 2015 | | Reported | Foreign Exchange | Net Chg in Est. Distributor Inventories | | Underlying |
Jack Daniel’s Family | 22.3 |
| 5 | % | | 15.7 |
| 5 | % | | (1 | %) | 6 | % | 1 | % | | 6 | % |
Jack Daniel’s Tennessee Whiskey | 12.3 |
| 3 | % | | 12.3 |
| 3 | % | | (1 | %) | 6 | % | (1 | %) | | 4 | % |
Jack Daniel’s Tennessee Honey | 1.5 |
| 8 | % | | 1.5 |
| 8 | % | | — | % | 5 | % | 4 | % | | 9 | % |
Other Jack Daniel’s whiskey brands2 | 1.2 |
| 30 | % | | 1.2 |
| 30 | % | | 11 | % | 5 | % | 12 | % | | 28 | % |
Jack Daniel’s RTDs/RTP3 | 7.3 |
| 4 | % | | 0.7 |
| 4 | % | | (7 | %) | 11 | % | — | % | | 4 | % |
New Mix RTDs | 5.9 |
| 14 | % | | 0.6 |
| 14 | % | | 2 | % | 20 | % | — | % | | 23 | % |
Finlandia | 3.0 |
| (12 | %) | | 3.0 |
| (9 | %) | | (16 | %) | 13 | % | (2 | %) | | (5 | %) |
Canadian Mist | 1.3 |
| (11 | %) | | 1.3 |
| (11 | %) | | (10 | %) | — | % | (1 | %) | | (11 | %) |
El Jimador | 1.1 |
| (4 | %) | | 1.1 |
| (4 | %) | | (5 | %) | 9 | % | 1 | % | | 5 | % |
Woodford Reserve | 0.5 |
| 26 | % | | 0.5 |
| 26 | % | | 29 | % | 2 | % | (3 | %) | | 28 | % |
Herradura | 0.4 |
| 6 | % | | 0.4 |
| 6 | % | | — | % | 11 | % | 1 | % | | 13 | % |
Note: Totals may differ due to rounding | | | | | | | | | | |
Major Brands Worldwide Results for Fiscal 2019 |
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| 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 thinkbelieve this information is useful to readers; see “Volume and Depletions” above for definitions of volume measures presented here.
2In addition to the brands separately listed here, the Jack Daniel’s family of brands includes Gentleman Jack, Jack Daniel’s Single Barrel Collection, Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, Jack Daniel’s 1907 Tennessee Whiskey, Jack Daniel’s Tennessee Rye Whiskeys, and Jack Daniel’s Tennessee Fire.
3Jack Daniel’s RTD and RTP products include all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, and the seasonal Jack Daniel’s Winter Jack RTP.readers.
In fiscal 2016, the WhiskeyJack Daniel’s family of brands grew volumes 5% globally to nearly 16 million drinks-equivalent nine-liter cases across all expressions of the brand. Underlying4% in fiscal 2019. Reported net sales for the family of brands increased 6% (reported declined 1%) and was the most significant contributor to our totalgrew 3%, while underlying net sales growth. In fiscal 2016, JDTW ledincreased 5% after adjusting for (a) the familynegative effect of brand’s overall global growth, followed by (a) JDTF, which we introduced inforeign exchange (reflecting the United States nationwide instrengthening of the fourth quarter of fiscal 2015dollar against the British pound, Turkish lira, euro, Australian dollar, and rolled out in select international markets in fiscal 2016;Brazilian real) and (b) JDTH, which declined slightly in the United States but grew in most other markets.
Jack Daniel’s Tennessee Whiskey generates a significant percentage of our total net sales, and it is our top priority. As the world’s fourth-largest premium spirits brand measured by both volume and retail value,1 JDTW is oneadoption of the most valuable spirits brands in the world. During calendar 2015, JDTW grew volume for a 24thconsecutive year and outpaced the average volume growth rate of the top 25 premium spirits brands1 – an achievement that underscores our belief in the brand’s long-term appeal and sustainable growth potential. JDTW grew volumes 3% globally in fiscal 2016, down from its 4% growth rate in fiscal 2015. JDTW underlying net sales grew 4% (reported declined 1%)revenue recognition accounting standard. Growth was led by the United States, the United Kingdom, Turkey, Germany, and France. These increases were partially offset by declines in travel retail and a slowdown in growth in emerging markets, driven by declines in Southeast Asia and Russia.
Since its introduction in late fiscal 2011, Jack Daniel’s Tennessee Honey has contributed significantly to our net sales growth. We estimate that JDTH is now the 13th largest brand in the world priced over $25 per 750ml bottle.2 In fiscal 2016, JDTH grew volumes by 8%, down from its 29% growth rate last year. A slowing growth rate was expected, considering that we essentially completed the international rollout of JDTH in fiscal 2015. JDTH grew underlying net sales 9% (reported were flat) driven by higher volumes in Brazil and France, and, to a lesser extent, growth in the United Kingdom, Germany, and Czech Republic. These gains were partially offset by declines in the United States, where takeaway trends weakened due to increased competition.
Among our Other Jack Daniel’s whiskey brands, the most significant contributor to underlying net sales growth was JDTF, launched nationally in the United States at the end of fiscal 2015 and rolled out to select international markets in fiscal 2016, including the United Kingdom (test market), Czech Republic, and Australia (introduced late in fiscal 2016). JDTF was designated as an Impact “Hot Brand”3 in its first calendar year. JDTF contributed over 20% of the underlying net sales growth delivered by the Jack Daniel’s family of brands, Woodford Reserve, Old Forester, and our Scotch brands, partially offset by declines in fiscal 2016.Canadian Mist.
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◦ | 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. |
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• | 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 27thconsecutive 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. |
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1IWSR, 2018 data. | |
2Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in March 2019. |
The Jack Daniel’s RTDs/RTPsRTD/RTP brands grew volume 4% and underlying net sales 4% (reported declined 7%)driven by higher pricing in fiscal 2016. JD RTDsAustralia along with consumer-led volumetric growth in Germany and the United States.
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• | 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 growth was driven by volume gains in the United Kingdom, Australia, Mexico, and Germany. These gains were partially offset by declines for Jack Daniel’s Winter Jack.
In fiscal 2016, New Mix volumes increased 14%, while underlying net sales growth of 23% (reported increased 2%) was helped by a price increase. Growth was helped by low trade inventories at the beginning of fiscal 2016, as well as by higher takeaway trends relative to fiscal 2015, new size offerings, and distribution expansion within Mexico.
In fiscal 2016, Finlandia volumes declined 12%, while underlying net sales were down 5% (reported declined 16%). The decline in underlying net sales was driven predominantly by lower volumes in travel retail and Russia. In Poland, the brand’s largest market, Finlandia grew modestly compared to last year, but continued to suffer from generally weak consumer demand for premium vodkas in this competitive marketplace. In addition, Finlandia RTDs were discontinued in Mexico.
Canadian Mist volumes declined 11% while underlying net sales also decreased 11% (reported declined 10%) in fiscal 2016. The net sales declines were driven by lower volumes in the United States. In fiscal 2017, we plan to introduce new packaging and related marketing programs in an effort to stabilize the brand.
el Jimador volumes declined 4% in fiscal 2016, but underlying net sales were up 5% (reported declined 5%). Underlying net sales growth was driven by higher volumes in the United States partially offsetalong with broad-based international volume gains, particularly in the United Kingdom, Poland, and Australia.
JDTF grew underlying net sales led by volume declines in Mexico. We expected short-term volume declines in Mexico, as we decided to begin raising prices strategically in fiscal 2015. el Jimador continued to grow market shareincreased 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 largest market, and returned to Impact’s “Hot Brands” listintroduction in late fiscal 2015.
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• | 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 |
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◦ | 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. |
Tequila3 in calendar 2015. In the rest of the world, el Jimador brands grew volumes more than 15% to surpass 200,000 nine-liter cases.
Woodford Reserve grew volumes 26%3% in fiscal 2016 (after growing 30% in fiscal 20152019, while reported net sales increased 6% and 24% in fiscal 2014) and was named to Impact’s “Hot Brands” list3. In addition, underlying net sales grew 28% (reported increased 29%)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.
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◦ | 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. |
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◦ | 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 2016.2019, 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 United States is by far the brand’s most important market anddecrease in underlying net sales was responsible for most of its growth during fiscal 2016. Woodford Reserve continued its momentum outside the United States as well, growing volumes 33%, driven by the United Kingdom. During fiscal 2016, we increased our advertising investmentunfavorable price/mix in Woodford Reserve bothPoland and lower volumes in the United States, partially offset by increased volumes and internationally. Woodford Reserve led a fast-growing competitive set of super-premium American whiskeys,favorable price/mix in Russia and we believe it is poised for continued growth as interest in bourbon increases around the world. We plan to devote substantial resources to Woodford Reserve to support its growth potential, including sustained advertising investment focused on consumer communications and capital spending for two new warehousesUkraine.
Wine volumes were flat in fiscal 2017.2019 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.
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1Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in March 2016.IWSR, 2018 data. | |
2The IWSR, 2015 data. |
3Impact Databank published the Impact’s “Hot Brands - Spirits” list in March 2016.2019.
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In fiscal 2016, Herradura volumes grew 6% and underlying net sales were up 13% (reported were flat). This growth was driven primarily by improved price/mix and increased volumes in the brand’s largest markets, Mexico and the United States. We remain focused on developing Herradura in the United States (where we see considerable potential for growth), strengthening our position in Mexico, and continuing to build our presence in higher-value tequila markets throughout the world.
RESULTS OF OPERATIONS – YEAR-OVER-YEAR COMPARISONSYear-Over-Year Comparisons
NET SALES | |
Net Sales | | Net Sales |
| Percentage change versus the prior fiscal year ended April 30 | | 2016 | | | 2015 | 2018 | | 2019 |
Change in reported net sales | | (2 | )% | | | 4 | % | 8 | % | | 2 | % |
Sale of Southern Comfort and Tuaca | | 1 | % | | | — | % | |
New accounting standard | | — | % | | 1 | % |
Foreign exchange | | 6 | % | | | 3 | % | (1 | %) | | 2 | % |
Estimated net change in distributor inventories | | — | % | | | (1 | )% | (1 | %) | | — | % |
Change in underlying net sales | | 5 | % | | | 6 | % | 6 | % | | 5 | % |
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Change in underlying net sales attributed to: | | | | | | |
Volume | 1 | % | | | 4 | % | | 5 | % | | 3 | % |
Net price/mix | 4 | % | | | 3 | % | | 2 | % | | 2 | % |
Note: Totals may differ due to rounding | | | | | | |
Fiscal 20162019 compared to Fiscal 20152018
Net sales of $4,011$3,324 million decreasedincreased 2%, or $85$76 million, in fiscal 20162019 compared to fiscal 2015.2018. Underlying net sales growth wasgrew 5%, after adjusting reported results for (a) the negative effects of foreign exchange and the sale of Southern Comfort and Tuaca. The negative effect of foreign exchange was driven primarily by(reflecting the dollar’s broad strengthening of the dollar against most currencies.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 was driven by the 4% positive impact of price/mixcomprised 3% volume growth and 1% volume growth. Improved2% price/mixmix. Volume growth was driven by a shift in sales out of lower-priced brands, most notably Finlandia and Canadian Mist, to higher-priced brands, led by the Jack Daniel’s family of brands, 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 primaryReserve, 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 were:
broad-based, consumer-oriented growth of JDTW volumes, led by the United States, the United Kingdom, Germany, France, Mexico, and Poland, and beneficial channel mix in Turkey;
launch of JDTF in the United States, the United Kingdom (test market), Czech Republic, and Australia (introduced late infor fiscal 2016);
growth of our tequila brands led by (1) higher volumes of New Mix in Mexico, (2) higher prices and volumes of Herradura in Mexico and the United States, and (3) higher volumes of el Jimador in the United States;
volume growth of Woodford Reserve in the United States;
broad-based volume growth of JDTH outside the United States, led by Brazil and France; and
higher volumes of JD RTDs in the United Kingdom and Australia.
The primary factors partially 2019.offsetting growth in underlying net sales were:
broad-based declines of Finlandia in Europe, most notably in Russia;
volume declines for lower-margin brands that we discontinued in fiscal 2016 and for lower-margin agency brands that we no longer distribute;
declines in Southern Comfort in the United States before we sold it;
volume declines of el Jimador in Mexico; and
volume declines of JDTW in Russia.
Fiscal 20152018 compared to Fiscal 20142017
Net sales of $4,096$3,248 million increased 4%8%, or $150$254 million, in fiscal 20152018 compared to fiscal 2014.2017. 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 6%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 |
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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 | % |
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Change in underlying cost of sales attributed to: | | | |
Volume | 5 | % | | 3 | % |
Cost/mix | 3 | % | | 9 | % |
Note: Totals may differ due to rounding
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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 estimated netadoption of the revenue recognition accounting standard. The increase in distributor inventories. The negative effect of foreign exchange, after taking into consideration our hedging activities, was driven primarily by weaker European currencies. The estimated net increase in distributor inventories resulted from distributor buy-ins related to the nationwide rollout of Jack Daniel’s Tennessee Fire in the United States and the year-over-year effect of our January 2014 RTC change in France. In fiscal 2014, our former distributor in France fully depleted inventories of our brands during November and December – during which time there were essentially no shipments – before we began selling directly to customers in France in January 2014. Going forward, we will not adjust France’s underlying results for changes in distributor inventories because fiscal 2015 fully reflected owned distribution. The change in underlying net sales was driven by the 4% positive impact
of volume growth and the 3% positive impact of price/mix due to favorable whiskey portfolio mix driven by the growth of higher-priced brands.
The primary factors contributing to growth in underlying net sales were:
broad-based, consumer-oriented growth of JDTW volumes, led by (1) the United States; (2) several large European markets, including Turkey, the United Kingdom, and Ukraine; and (3) Brazil, despite worsening economic trends;
Jack Daniel’s family of brands in France, driven by volume growth and higher pricing related to the RTC change;
JDTH volume growth, led by increases in existing markets, including the United States, the United Kingdom, and the Czech Republic, and by volumes in recent launch markets, including France (launched at the end of fiscal 2014) and Brazil;
volume growth from the nationwide launch of Jack Daniel’s Tennessee Fire in the United States in the fourth quarter of fiscal 2015;
volume growth of Woodford Reserve in the United States;
better mix in our tequila portfolio with the launch of Herradura Ultra and price increases for el Jimador in Mexico; and
higher prices for our used barrel sales driven by higher demand from makers of Scotch whisky and other aged spirits.
The primary factors partially offsetting growth in underlying net sales were:
declines in Finlandia Vodka, driven predominantly by Poland, where year-over-year volumes declined due to a buy-in in advance of a significant excise tax increase and weaker consumer demand during fiscal 2015;
lower volumes for the Southern Comfort family of brands, primarily in the United States, driven by weaker demand in the on-premise channel; and
lower volumes of Jack Daniel’s RTDs in Australia, driven by weaker consumer demand for spirits and spirit-based RTDs and by increased competition.
COST OF SALES |
| | | | | | | | | |
Percentage change versus the prior fiscal year ended April 30 | | 2016 | | | 2015 |
Change in reported cost of sales | | (1 | )% | | | 4 | % |
Sale of Southern Comfort and Tuaca | | — | % | | | — | % |
Foreign exchange | | 4 | % | | | 3 | % |
Estimated net change in distributor inventories | | — | % | | | — | % |
Change in underlying cost of sales | | 3 | % | | | 7 | % |
| | | | | |
Change in underlying cost of sales attributed to: | | | | | |
Volume | 1 | % | | | 4 | % | |
Cost/mix | 2.4 | % | | | 3 | % | |
Note: Totals may differ due to rounding
| | | | | |
Fiscal 2016 compared to Fiscal 2015
Cost of sales of $945 million decreased $6 million, or 1%, in fiscal 2016 compared to fiscal 2015. Underlying cost of sales grew 3% after adjusting reported costs for the positive effect of foreign exchange. About one-third of the underlying increase in costs of sales was driven by growth in sales volumes, while the other two-thirds related to higher input costs, including wood and grain, and a shift in product mix to higher-cost brands. Looking ahead to fiscal 2017, we expect that input costs will increase in the low single digits.
Fiscal 2015 compared to Fiscal 2014
Cost of sales of $951 million increased $38 million, or 4%, in fiscal 2015 compared to fiscal 2014. Underlying cost of sales grew 7% after adjusting reported costs for the positive effect of foreign exchange. About half of the underlying increase in costs of sales was driven by growth in sales volumes, while the other half related to higher input costs, including additional value-added packaging expenses and, to a lesser extent, a shift in product mix to higher-cost brands, compared to the prior year.
GROSS PROFIT |
| | | | | |
Percentage change versus the prior fiscal year ended April 30 | 2016 | | 2015 |
Change in reported gross profit | (2 | )% | | 5 | % |
Sale of Southern Comfort and Tuaca | 1 | % | | — | % |
Foreign exchange | 6 | % | | 3 | % |
Estimated net change in distributor inventories | — | % | | (1 | )% |
Change in underlying gross profit | 5 | % | | 7 | % |
Note: Totals may differ due to rounding
| | | |
Fiscal 2016 compared to Fiscal 2015
Gross profit of $2,144 million decreased $39 million, or 2%, in fiscal 2016 compared to fiscal 2015. Gross profit on an underlying basis improved 5% after adjusting reported gross profit for the negative effects of foreign exchange and the sale of Southern Comfort and Tuaca. The increase resulted from the same factors that contributed to the increase in underlying net sales, forpartially offset by the year.same factors that drove higher underlying cost of sales.
Gross margin improveddecreased to 53.4%65.2% in fiscal 2016, up 10 basis2019, down 2.6 percentage points from 53.3%67.8% in fiscal 2015.2018. The increasedecrease in gross margin was primarily due to a favorable mix shift.driven by incremental costs associated with tariffs and higher input costs.
Fiscal 20152018 compared to Fiscal 20142017
Gross profit of $2,183$2,202 million increased $105$181 million, or 5%9%, in fiscal 20152018 compared to fiscal 2014.2017. Gross profit on an underlying basis improved 7%6% after adjusting reported gross profit for the negative effectspositive effect of foreign exchange and thean 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, for the year and was enhancedpartially offset by the smaller combined increase insame factors that drove higher underlying excise taxes and cost of sales for the year.sales.
Gross margin improvedincreased to 53.3%67.8% in fiscal 2015,2018, up 60 basis0.3 percentage points from 52.7%67.5% in fiscal 2014.2017. The increase in gross margin was primarily due to higher pricing and a(a) favorable price/mix, shift.
ADVERTISING EXPENSES |
| | | | | |
Percentage change versus the prior fiscal year ended April 30 | 2016 | | 2015 |
Change in reported advertising | (4 | )% | | — | % |
Sale of Southern Comfort and Tuaca | 2 | % | | — | % |
Foreign exchange | 5 | % | | 4 | % |
Change in underlying advertising | 2 | % | | 4 | % |
Note: Totals may differ due to rounding | | | |
Fiscal 2016 compared to Fiscal 2015
Advertising expenses of $417 million decreased $20 million, or 4% in fiscal 2016 compared to fiscal 2015. Underlying advertising expenses increased 2% after adjusting reported results for(b) the positive effectseffect of foreign exchange, and (c) the salenet effect of Southern Comfortacquisitions and Tuaca.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 expensesexpense 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 investmentshigher spending on (a) our American whiskey portfolio in the United States, forincluding JDTW, Woodford Reserve, JDTW,Gentleman Jack, and JDTF, as well as higher spending outsidethe launch of JDTR; (b) the continued rollout of Slane Irish Whiskey in the United States onStates; and (c) the Jack Daniel’s familyexpansion of our single-malt Scotch brands. These increases were partially offset by lower spending for Southern Comfort globally and Finlandia Vodka in many markets.
Fiscal 2015 compared to Fiscal 2014
AdvertisingReported SG&A expenses of $437 million increased $1 million16% in fiscal 20152018 compared to fiscal 2014, essentially unchanged on a reported basis. Underlying advertising expenses2017, while underlying SG&A increased 4% after adjusting reported results for the benefiteffect of our $70 million contribution to establish the Foundation and the negative effect of foreign exchange. The increase in underlying advertising expensesSG&A was driven primarily by (a)higher incentive compensation expenses and strategic investments, in United States related to the nationwide launch of JDTF, (b) higher spending on JDTW in the United States, and (c) higher spending outside the United States on the Jack Daniel’s family of brands. These increases wereincluding our new Spain distribution operation, partially offset by lower spending for Southern Comfort and Finlandia in many markets.continued tight management of discretionary spending.
SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES |
| | | | | |
Percentage change versus the prior fiscal year ended April 30 | 2016 | | 2015 |
Change in reported SG&A | (1 | )% | | 2 | % |
Sale of Southern Comfort and Tuaca | — | % | | — | % |
Foreign exchange | 4 | % | | 2 | % |
Change in underlying SG&A | 2 | % | | 4 | % |
Note: Totals may differ due to rounding | | | |
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 20162019 compared to Fiscal 2015
SG&A expenses of $688 million decreased $9 million, or 1%, in fiscal 2016 compared to fiscal 2015, while underlying SG&A grew 2% after adjusting reported results for the positive effect of foreign exchange. The most significant contributors to the year-over-year increase in underlying SG&A were higher compensation and related expenses.
Fiscal 2015 compared to Fiscal 2014
SG&A expenses of $697 million increased $11 million, or 2%, in fiscal 2015 compared to fiscal 2014, while underlying SG&A grew 4% after adjusting reported results for the favorable effect of foreign exchange. The most significant contributors to the year-over-year increase in underlying SG&A were higher compensation and related expenses due to higher salaries, additional employees in various markets, and a full year of costs related to employees added during fiscal 2014 for our new distribution company in France.
OPERATING INCOME |
| | | | | |
Percentage change versus the prior fiscal year ended April 30 | 2016 | | 2015 |
Change in reported operating income | 49 | % | | 6 | % |
Sale of Southern Comfort and Tuaca | (46 | )% | | — | % |
Foreign exchange | 4 | % | | 6 | % |
Estimated net change in distributor inventories | 1 | % | | (3 | )% |
Change in underlying operating income | 8 | % | | 9 | % |
Note: Totals may differ due to rounding
| | | |
Fiscal 2016 compared to Fiscal 20152018
Operating income was $1,533$1,144 million in fiscal 2016,2019, an increase of $506$96 million, or 49%9%, compared to fiscal 2015.2018. Underlying operating income growth was 8%grew 5% after adjusting for (a) the positive effectabsence of the sale of Southern Comfort$70 million contribution to establish the Foundation in fiscal 2018 and Tuaca; (b) the negative effect of foreign exchange relatedexchange. The same factors that contributed to the broad strengtheninggrowth 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 dollar;$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) thean estimated net decreaseincrease in distributor inventories, driven primarily by the absence of the pipeline fill in the United States associated with the nationwide rollout of JDTF in the fourth quarter of fiscal 2015.States. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by a slower rate of growth inmeaningful operating expenses.
Operating marginexpense leverage, as underlying SG&A spend grew 13.1 percentage points to 38.2% in fiscal 2016 from 25.1% in fiscal 2015. The same factors that drove the increase in our gross margin benefited our operating margin, additionally enhanced by a slower rate of growth in operating expenses4% compared to the gross profitunderlying net sales growth rate. The sale of Southern Comfort and Tuaca increased our operating margin 12.0 percentage points.
Fiscal 2015 compared to Fiscal 2014
Operating income was $1,027 million in fiscal 2015, an increase of $56 million, or 6%, compared to fiscal 2014. Underlying operating income growth was 9% after adjusting for (a) the estimated net increase in U.S. distributor inventories in anticipation of the nationwide rollout of JDTF, (b) the year-over-year effect of our January 2014 RTC change in France, and (c) the negative effect of foreign exchange, mostly related to weaker European currencies. Included in the negative effect of foreign exchange was $30 million in other expense (income), net, in fiscal 2015 related to the revaluation of foreign-currency-denominated net assets. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by a slower rate of growth in operating expenses..
Operating margin grew 50 basisdeclined 1.5 percentage points to 25.1%32.3% in fiscal 20152018 from 24.6%33.8% in fiscal 2014.2017. The same factors that drove the increasedecrease in our gross margin benefited our operating margin additionally enhanced by operating expenses, which grew at a slower rate than gross profit growth. These factors werewas primarily due to the 2.2 percentage point effect of the establishment of the Foundation, partially offset by the negative effect of the revaluation of certain largely euro-denominated net assets.operating expense leverage.
Fiscal 20162019 compared to Fiscal 20152018
Interest expense (net) increased by $19$18 million, or 70%31%, in fiscal 20162019 compared to fiscal 2015, primarily2018, due to a higher average long-term debt balance and a higher interest rate on our June 2015 issuance of $500 million 4.50% senior unsecured notes due on July 15, 2045 and the increase in our commercial paper borrowing.short-term borrowings.
Our effective tax rate for fiscal 20162019 was 28.3%19.8% compared to 31.7%26.6% in fiscal 2015.2018. The decrease in our effective tax rate was driven primarilyby 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.
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 sale ofTax Act. See Note 12 to the Southern Comfort and Tuaca business.Consolidated Financial Statements for additional information.
Diluted earnings per share were $5.22$1.48 in fiscal 2016,2018, up 63%8% from $3.21 for$1.37in fiscal 2015.2017. This increase resulted from (a) the same factors that contributed to thean increase in reported operating income including $1.76(net of a $0.10 decrease from the saleestablishment of Southern Comfortthe Foundation) and Tuaca, (b) the reduction in the shares outstanding resulting from share repurchases, and (c) the decrease in the effective tax rate.
Fiscal 2015 compared to Fiscal 2014
Our effective tax rate for fiscal 2015 was 31.7% compared to 30.5% in fiscal 2014. The effective tax rates include the amortization ($15 million in fiscal 2015 and $5 million in fiscal 2014)benefit of a deferred tax benefit that resulted from the release of certain deferred tax liabilities in connection with an intercompany transfer of assets on January 31, 2014. The increase in our effective tax rate was driven primarily by the reduction in the beneficial impact of foreign earnings, partially offset by the increase in the amortization of this deferred tax benefit.
Diluted earnings per share were $3.21 in fiscal 2015, up 5% from $3.06 for fiscal 2014. This increase resulted from the same factors that contributed to the increase in operating income and the reduction in the shares outstanding resulting from share repurchases, partially offset by the increase in thelower effective tax rate.
LIQUIDITY AND CAPITAL RESOURCESLiquidity 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, andinvest 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
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 |
| | $ | 38.77 |
| | $ | 37.75 |
| | $ | 558 |
|
May 1, 2018 – April 30, 2019 | | 43 |
| | 4,187 |
| | $ | 47.49 |
| | $ | 47.30 |
| | $ | 200 |
|
| | 73 |
| | 18,944 |
| | | | | | $ | 758 |
|
Dividends
From fiscal 2017 through fiscal 2019, we paid dividends totaling $1,357 million, including the $481 million special cash dividend in fiscal 2018. As announced on May 23, 2019, our Board of Directors declared a regular quarterly cash dividend of $0.166 per share on our Class A and Class B common stock. Stockholders of record on June 6, 2019, will receive the dividend on July 1, 2019.
Sources of Liquidity
We manage liquidity to meet current obligations, fund capital expenditures, sustain and grow our regular dividends, and return cash to our shareholders from time to time through share repurchases and special dividends while reserving adequate debt capacity for unforeseen events and acquisition opportunities. Investment-grade credit ratings (A1 by Moody’s A by Fitch, and A- by Standard & Poor’s) provide us with financial flexibility when accessing global credit markets. We believe cash flows from operations are sufficient to meet our expected operating and capital requirements.
CASH FLOW SUMMARY
|
| | | | | | | | | | | | |
(Dollars in millions) | | 2014 | | 2015 | | 2016 |
Operating activities | | $ | 649 |
| | $ | 608 |
| | $ | 524 |
|
Investing activities: | | | | | | |
Proceeds from sale of business | | — |
| | — |
| | 543 |
|
Additions to property, plant, and equipment | | (126 | ) | | (120 | ) | | (108 | ) |
Other | | (1 | ) | | (5 | ) | | (2 | ) |
| | (127 | ) | | (125 | ) | | 433 |
|
Financing activities: | | | | | | |
Net change in short-term borrowings | | 5 |
| | 183 |
| | 80 |
|
Net issuance (repayment) of long-term debt | | (2 | ) | | — |
| | 240 |
|
Acquisition of treasury stock | | (49 | ) | | (462 | ) | | (1,107 | ) |
Dividends paid | | (233 | ) | | (256 | ) | | (266 | ) |
Other | | (9 | ) | | 4 |
| | (7 | ) |
| | (288 | ) | | (531 | ) | | (1,060 | ) |
Foreign exchange effect | | (1 | ) | | (19 | ) | | (4 | ) |
Change in cash and cash equivalents | | $ | 233 |
| | $ | (67 | ) | | $ | (107 | ) |
Fiscal 2016 compared to Fiscal 2015
Cash and cash equivalents declined $107 million in fiscal 2016, compared to a decline of $67 million in fiscal 2015. Cash provided by operations during fiscal 2016 was $524 million, compared to $608 million in the prior year. The $84 million decline was primarily due to a $55 million increase in income tax payments, largely reflecting a $125 million payment made during the fourth quarter of fiscal 2016 for the estimated taxes incurred on the sale of the Southern Comfort and Tuaca business, partially offset by the absence of $64 million paid during fiscal 2015 in connection with an intercompany transfer of assets. The decline in cash provided by operations also reflects a $14 million increase in interest payments, due to higher debt balances and interest rates.
Cash provided by investing activities was $433 million in fiscal 2016. The increase of $558 million over the prior year primarily reflects the proceeds of $543 million from the sale of the Southern Comfort and Tuaca business in fiscal 2016. Cash used for financing activities was $1,060 million during fiscal 2016, compared to $531 million for fiscal 2015. The $529 million increase largely reflects a $645 million increase in share repurchases and the repayment of $250 million in aggregate principal amount of 2.5% notes that matured in January 2016, partially offset by proceeds of $490 million from the issuance of 4.50% senior notes due 2045 issued in June 2015, and an $80 million increase in short-term borrowings. The impact on cash and cash equivalents as a result of exchange rate changes was a decline of $4 million in fiscal 2016, compared to a decline of $19 million in the prior fiscal year.
Fiscal 2015 compared to Fiscal 2014
Cash and cash equivalents declined $67 million in fiscal 2015, compared to an increase of $233 million in fiscal 2014. Cash provided by operating activities declined $41 million compared to fiscal 2014, primarily reflecting a $94 million increase in income tax payments, partially offset by higher earnings. Cash used for investing activities declined slightly, to $125 million in fiscal 2015 from $127 million in fiscal 2014. Cash used for financing activities was $531 million during fiscal 2015 compared to $288 million during fiscal 2014. The $243 million increase largely reflected a $413 million increase in share repurchases and a $23 million increase in dividends, partially offset by a $178 million increase in short-term borrowings. The impact on cash and cash equivalents as a result of exchange rate changes was a decline of $19 million in fiscal 2015, compared to a decline of $1 million in fiscal 2014.
Capital expenditures.Investments in property, plant, and equipment were $126 million in fiscal 2014, $120 million in fiscal 2015, and $108 million in fiscal 2016. Expenditures over the three-year period primarily included investments to maintain and expand capacity as well as improve production efficiency, reduce costs, and build our brands.Capital investments remained high in fiscal 2016, with continued spending on production operations representing approximately 80% of the total spend.
For fiscal 2017, we expect capital expenditures to range from $150 million to $200 million. Our capital spending plans for fiscal 2017 include continued investment in our whiskey strategy, led by an expansion of our bottling facilities at Jack Daniel’s. Capital spending will continue for the Old Forester Distillery, Woodford Reserve Distillery, and the Slane Castle Irish Whiskey Distillery. We also plan to expand warehousing for our newly acquired Scotch business. We expect capital expenditures in fiscal 2018 and fiscal 2019 to remain high as we complete several key, multiyear projects.
Share repurchases.We have repurchased approximately 18.3 million shares of our common stock since the beginning of fiscal 2014. The following table summarizes information about those share repurchases by period.
|
| | | | | | | | | | | | | | | | | | |
| | Shares Purchased | | Average Price Per Share, Including Brokerage Commissions | | Total Cost of Shares |
Period | | Class A | | Class B | | Class A | | Class B | | (Millions) |
May 1, 2013 – April 30, 2014 | | 24,800 |
| | 661,472 |
| | $ | 68.03 |
| | $ | 69.04 |
| | $ | 47 |
|
May 1, 2014 – April 30, 2015 | | 65,105 |
| | 5,034,330 |
| | $ | 90.21 |
| | $ | 90.36 |
| | $ | 461 |
|
May 1, 2015 – April 30, 2016 | | 21,041 |
| | 11,357,349 |
| | $ | 95.43 |
| | $ | 96.98 |
| | $ | 1,104 |
|
May 1, 2016 – June 10, 2016 | | — |
| | 1,121,306 |
| | $ | — |
| | $ | 96.71 |
| | $ | 108 |
|
| | 110,946 |
| | 18,174,457 |
| | | | | | $ | 1,720 |
|
We repurchased these shares under three separate repurchase programs, including one that began on April 1, 2016, and remains in progress. Under that one, we may repurchase up to $1 billion of our Class A and Class B common shares through March 31, 2017, subject to market and other conditions. We may repurchase those shares in open market purchases, block transactions, or privately negotiated transactions in accordance with federal securities laws. We can modify, suspend, or terminate this repurchase program at any time without prior notice. As of June 10, 2016, we have repurchased a total of 2,286,319 shares under this program for approximately $220 million, leaving $780 million available for additional repurchases through March 31, 2017.
The results of the three share repurchase programs are summarized in the following table.
|
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Average Price Per Share, Including | | Total Spent on Stock Repurchase |
Dates (1) | | Shares Purchased | | Brokerage Commissions | | Program |
Starting | | Ending | | Class A | | Class B | | Class A | | Class B | | (Millions) |
October 2013 | | September 2014 | | 47,463 |
| | 2,861,626 |
| | $ | 78.81 |
| | $ | 86.08 |
| | $ | 250 |
|
October 2014 | | March 2016 | | 63,483 |
| | 13,026,512 |
| | $ | 91.80 |
| | $ | 95.51 |
| | $ | 1,250 |
|
April 2016 | | March 2017 | | — |
| | 2,286,319 |
| | $ | — |
| | $ | 96.19 |
| | $ | 220 |
|
| | | | 110,946 |
| | 18,174,457 |
| | | | | | $ | 1,720 |
|
(1) For the stock repurchase program begun in April 2016, data is through June 10, 2016.
Liquidity.We continue to manage liquidity conservatively to meet current obligations, fund capital expenditures, maintain dividends, and continue share repurchases while reserving adequate debt capacity for acquisition opportunities.
In addition to our cash and cash equivalent balances, we have access to several liquidity sources to supplement our cash flow from operations. One of those sources is our $1.2 billion$800 million commercial paper program that we regularly use to fund our short-term credit needs and to maintain our access to the capital markets. During fiscal 2015, our commercial paper borrowings averaged $191 million, with an average maturity of 14 days and an average interest rate of 0.17%. During fiscal 2016, our commercial paper borrowings averaged $331 million, with an average maturity of 29 days and an average interest rate of 0.42%.needs. Commercial paper outstanding was $183$215 million at April 30, 2015,2018, and $269$150 million at April 30, 2016.2019; details of average commercial paper balances are presented below.
|
| | | | | | | |
| Year Ended |
| April 30, |
(Amounts in millions) | 2018 | | 2019 |
Average daily commercial paper balance | $ | 485 |
| | $ | 421 |
|
Average interest rate | 1.39 | % | | 2.33 | % |
Average days to maturity | 31 |
| | 31 |
|
Our commercial paper program is supported withby available commitments under our currently undrawn $800 million bank credit facility that maturesexpires on November 20, 2018, and undrawn $400 million 364-day credit facility that matures on May 5, 2017. Further, we believe that the markets for investment-grade bonds and private placements are accessible sources of long-term financing that could meet any additional liquidity needs.10, 2022. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fully fund its commitments under our credit facility.
We have high credit standards when initiating transactions with counterparties, and we closely monitorbelieve the debt capital markets are accessible sources of long-term financing that could meet any additional liquidity needs. We believe our counterparty risks with respectcurrent liquidity position is sufficient to meet all of our cash balances and derivative contracts. If a counterparty’s credit quality were to deteriorate below our credit standards, we would expect either to liquidate exposures or require the counterparty to post appropriate collateral.future financial commitments.
As of April 30, 2016, we had total2019, approximately 70% of our cash and cash equivalents of $263 million. Of this amount, $220 million waswere held by our foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. We do not expectDuring fiscal 2019, we changed our indefinite reinvestment assertion with respect to need the cash generated bycurrent year earnings and prior year undistributed earnings for one of those foreign subsidiaries and repatriated approximately $120 million of cash to fundthe United States from this subsidiary. No incremental taxes were due on this distribution of cash beyond the repatriation tax recorded in fiscal 2018. In addition, we changed our domestic operations. Inindefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for additional select foreign subsidiaries. The earnings for these select foreign subsidiaries are no longer indefinitely reinvested and may be distributed within our foreign entity structure; however, they remain indefinitely reinvested outside of the unforeseen event that we wereUnited States. We continue to evaluate our future cash deployment and may decide to repatriate additional cash from thoseheld by other foreign subsidiaries we would be requiredto the United States. Future repatriations to the United States may require us to provide for and pay U.S. taxes on permanently repatriated earnings. See Note 11 to our Consolidated Financial Statements for further information about the taxes that would have been provided on the undistributed earnings of these foreign subsidiaries if not considered indefinitely reinvested.
As announced on May 26, 2016, our Board of Directors declared a regular quarterly cash dividend of $0.34 per share on our Class A and Class B common stock. Stockholders of record on June 6, 2016, will receive the dividend on July 1, 2016.
On June 1, 2016, we acquired 90% of the voting equity interests in The BenRiach Distillery Company Limited for approximately $307 million in cash. The acquisition included our assumption of the company’s debts and transaction-related obligations totaling approximately $66 million, which we have since paid. We financed the transaction with a combination of cash on hand and short-term commercial paper borrowing. The transaction includes a put and call option agreement for the remaining 10% equity shares. Under that agreement, we may choose (or be required) to purchase the remaining 10% for approximately 24 million British pounds (approximately $34 million at the exchange rate on June 1, 2016) during the one-year period ending November 14, 2017.
We believe our current liquidity position is strong and sufficient to meet all of our future financial commitments. A quantitative covenant of our $800 million bank credit facility requires the ratio of consolidated EBITDA (as defined in the agreement) to consolidated interest expense to be at least 3 to 1. At April 30, 2016, with a ratio of 24 to 1, we were well within the covenant’s parameters. The $400 million 364-day credit facility has no quantitative covenant requirement.
additional taxes.
OFF-BALANCE SHEET ARRANGEMENTSOff-Balance Sheet Arrangements
As of April 30, 2016,2019, we were not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations, or liquidity.
LONG-TERM OBLIGATIONSLong-Term Obligations
We have long-term obligations related to contracts, leases, borrowing arrangements, and employee benefit plans that we enter into in the normal course of business (see Notes 4, 5,6, 7, and 910 to ourthe Consolidated Financial Statements). The following table summarizes the amounts of those obligations as of April 30, 2016,2019, and the years when they mustare expected to be paid:
LONG-TERM OBLIGATIONSpaid.1 We expect to meet these obligations with internally generated funds.
| | (Dollars in millions) | | Total | | 2017 | | 2018-2019 | | 2020-2021 | | After 2021 | | Total | | 2020 | | 2021-2022 | | 2023-2024 | | After 2024 |
Long-term debt | | $ | 1,250 |
| | $ | — |
| | $ | 250 |
| | $ | — |
| | $ | 1,000 |
| | $ | 2,323 |
| | $ | — |
| | $ | — |
| | $ | 250 |
| | $ | 2,073 |
|
Interest on long-term debt | | 950 |
| | 40 |
| | 77 |
| | 75 |
| | 758 |
| | 1,244 |
| | 74 |
| | 148 |
| | 141 |
| | 881 |
|
Grape purchase obligations | | 20 |
| | 10 |
| | 7 |
| | 2 |
| | 1 |
| |
Tax Act repatriation tax | | | 67 |
| | — |
| | 8 |
| | 20 |
| | 39 |
|
Grape purchases | | | 24 |
| | 12 |
| | 10 |
| | 1 |
| | 1 |
|
Operating leases | | 46 |
| | 18 |
| | 18 |
| | 7 |
| | 3 |
| | 59 |
| | 23 |
| | 26 |
| | 8 |
| | 2 |
|
Postretirement benefit obligations2 | | 33 |
| | 33 |
| | n/a |
| | n/a |
| | n/a |
| |
Agave purchase obligations3 | | 2 |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
| |
Postretirement benefits2 | | | 25 |
| | 25 |
| | n/a |
| | n/a |
| | n/a |
|
Agave purchases3 | | | 25 |
| | n/a |
| | n/a |
| | n/a |
| | n/a |
|
Total | | $ | 2,301 |
| | $ | 101 |
| | $ | 352 |
| | $ | 84 |
| | $ | 1,762 |
| | $ | 3,767 |
| | $ | 134 |
| | $ | 192 |
| | $ | 420 |
| | $ | 2,996 |
|
Our financial statements reflect some estimates involved in applying the following critical accounting policies that entail uncertainties and subjectivity. Using different estimates or policies could have a material effect on our operating results and financial condition.
We have obtained most of our brands by acquiring other companies. When we acquire another company, we first allocate the purchase price to identifiable assets and liabilities, including intangible brand names and trademarks (“brand names”), based on estimated fair value. We then record any remaining purchase price as goodwill. We do not amortize goodwill or other intangible assets with indefinite lives. We consider all of our brand names to have indefinite lives.
We assess our goodwill and other indefinite-lived intangible assets for impairment at least annually. If an asset’s fair valueGoodwill is less than its book value, we write it down to its estimated fair value. For goodwill, ifimpaired when the book valuecarrying amount of the related reporting unit exceeds its estimated fair value, in which case we measure for potential impairmentwrite down the goodwill by comparing the implied fair valueamount of the reporting unit’s goodwill, determined in the same manner as in a business combination,excess (limited to the goodwill’s book value.carrying amount of the goodwill). We estimate the reporting unit’s fair value using discounted estimated future cash flows or market information. Similarly, a brand name is impaired when its carrying amount exceeds its estimated fair value, in which case we write down the brand name to its estimated fair value. We typically estimate the fair value of a brand name using either the “relief from royalty” or “excess earnings” method. We also consider market values for similar assets when available. Considerable management judgment is necessary to estimate fair value, including making assumptions about future cash flows, discount rates, and royalty rates.
We have the option, before quantifying the fair value of a reporting unit or brand name, to evaluate qualitative factors to assess whether it is more likely than not that our goodwill or brand names are impaired. If we determine that is not the case, then we are not required to quantify the fair value. That assessment also takes considerable management judgment.
Based on our assumptions, we believe none of our goodwill or other intangibles are impaired. Further, we estimate the fair values to substantially exceed the carrying values of all of our goodwill and other intangible assets substantially exceed their carrying amounts, with the exception of two brand name intangible assets. As of April 30, 2019, the carrying amounts of these two brand names totaled $360 million. Net sales attributable to these two brand names currently represent approximately 5% of our consolidated net sales.
The assets, obligations, and assumptions used to measure pension and retiree medical expensescosts are determined at the beginning of the year (“measurement date”). Because obligations are measured on a discounted basis, the discount rate is a significant assumption. It is based on interest rates for high-quality, long-term corporate debt at each measurement date. The expected return on pension plan assets reflects expected capital market returns for each asset class that are based on historical returns, adjusted for the expected effects of diversification and active management (net of fees) of the assets. The other assumptions also reflect our historical experience and management’s best judgment regarding future expectations.
Significant judgment is required in evaluating our tax positions. We establish liabilities when some positions are likely to be challenged and may not succeed, despite our belief that our tax return positions are fully supportable. We adjust these liabilities in light of changing circumstances, such as the progress of a tax audit. We believe current liabilities are appropriate for all known contingencies, but this situation could change.
The accompanying notes are an integral part of the consolidated financial statements.