Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader understand Brown-Forman, our operations, our financial results, and our current business environment. MD&A is provided as a supplement to – and should be read in conjunction with – our Consolidated Financial Statements and the accompanying Notes contained in “Item 8. Financial Statements and Supplementary Data.”

Volume and Depletions

When discussing volume, unless otherwise specified, we refer to “depletions,” a term commonly used in the beverage alcohol industry. We define “depletions” as either (a) our shipments directly to retailers or wholesalers, or (b) shipments from our distributor customers to retailers and wholesalers. Because we generally record revenues when we ship our products to our customers, our reported sales for a period do not necessarily reflect actual consumer purchases during that period. We believe that our depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do.

Volume is discussed on a nine-liter equivalent unit basis (nine-liter cases) unless otherwise specified. At times, we use a “drinks-equivalent” measure for volume when comparing single-serve ready-to-drink (RTD) or ready-to-pour (RTP) brands to a parent spirits brand. “Drinks-equivalent” depletions are RTD and RTP nine-liter cases converted to nine-liter cases of a parent brand on the basis of the number of drinks in one nine-liter case of the parent brand. To convert RTD volumes from a nine-liter case basis to a drinks-equivalent nine-liter case basis, RTD nine-liter case volumes are divided by 10, while RTP nine-liter case volumes are divided by 5.

Non-GAAP Financial Measures

We use certain financial measures in this report that are not measures of financial performance under GAAP. These non-GAAP measures, which are defined below, should be viewed as supplements to (not substitutes for) our results of operations and other measures reported under GAAP. The non-GAAP measures we use in this report may not be defined and calculated by other companies in the same manner.

We present changes in certain income statement line-items that are adjusted to an “underlying” basis, which we believe assists in understanding both our performance from period to period on a consistent basis, and the trends of our business. Non-GAAP “underlying” measures include changes in (a) underlying net sales, (b) underlying cost of sales, (c) underlying excise taxes, (d) underlying gross profit, (e) underlying advertising expenses, (f) underlying selling, general, and administrative expenses, and (g) underlying operating income. To calculate each of these measures, we adjust for (a) foreign currency exchange and (b) if applicable, estimated net changes in distributor inventories. We explain these adjustments below.

•

“Foreign exchange.” We calculate the percentage change in our income statement line-items in accordance with GAAP and adjust to exclude the cost or benefit of currency fluctuations. Adjusting for foreign exchange allows us to understand our business on a constant dollar basis, as fluctuations in exchange rates can distort the underlying trend both positively and negatively. (In this report, “dollar” always means the U.S. dollar unless stated otherwise.) To eliminate the effect of foreign exchange fluctuations when comparing across periods, we translate current year results at prior-year rates.

•

“Estimated net change in distributor inventories.” This measure refers to the estimated net effect of changes in distributor inventories on changes in our measures. For each period being compared, we estimate the effect of distributor inventory changes on our results using depletion information provided to us by our distributors. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in our measures and allows us to understand better our underlying results and trends.

Management uses “underlying” measures of performance to assist it in comparing and measuring our performance from period to period on a consistent basis, and in comparing our performance to that of our competitors. We also use underlying measures as metrics of management incentive compensation calculations. Management also uses underlying measures in its planning and forecasting and in communications with the board of directors, stockholders, analysts, and investors concerning our financial performance. We have provided reconciliations of the non-GAAP measures adjusted to an “underlying” basis to their nearest GAAP measures in the tables below under “Results of Operations – Year-Over-Year Comparisons” and have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

We also use the following additional non-GAAP financial measures:

“Net debt.” This measure refers to the sum of (a) long-term debt, (b) the current portion of long-term debt, and (c) short-term borrowings, less (d) cash and cash equivalents. Management uses net debt as an additional measure of liquidity.

“Return on average invested capital.” This measure refers to the sum of net income and after-tax interest expense, divided by average invested capital. Average invested capital equals assets less liabilities, excluding interest-bearing debt and is calculated

using the average of the most recent 13 month-end balances. After-tax interest expense equals interest expense multiplied by one minus our effective tax rate. We consider return on average invested capital to be a meaningful indicator of how effectively and efficiently we use invested capital in our business.

Our MD&A includes the following sections:

EXECUTIVE SUMMARY		24
RESULTS OF OPERATIONS		30
LIQUIDITY AND CAPITAL RESOURCES		39
LONG-TERM OBLIGATIONS		42
CRITICAL ACCOUNTING POLICIES AND ESTIMATES		42

EXECUTIVE SUMMARY

Overview

Over the past several years, including fiscal 2015, 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. Here is a discussion of recent developments:

•

We have further developed the Jack Daniel’s family of brands through innovations designed to create new demand for products from the world’s foremost maker of American whiskey. These efforts resulted in the successful launch of Jack Daniel’s Tennessee Honey (JDTH) and a series of ultra-premium-priced line extensions. We began testing Jack Daniel’s Tennessee Fire in the United States in April 2014 in three states, expanded to five additional states during the second quarter of fiscal 2015, and, encouraged by the positive consumer reaction, launched the line extension nationwide in the fourth quarter of fiscal 2015. At the same time, we have invested steadily in our core Jack Daniel’s Tennessee Whiskey (JDTW) brand to support its growth broadly around the world and to support our price increases in recent years.

We have been expanding our production capacity for the Jack Daniel’s family of brands so that we can satisfy expected demand. In fiscal 2014, we completed construction of the Jack Daniel Cooperage in Decatur, Alabama. We believe that we were already the largest maker of new whiskey barrels in the world before the new cooperage significantly added to our capacity. We believe that our ownership of new whiskey barrel manufacturing facilities is unique among our competitors, and that our control over this critical input to the whiskey-making process gives us a competitive advantage. We announced a major expansion of our distilling capacity in August 2013, and we expect to complete 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 over a two-year period, to be completed in fiscal 2017.

•

The recent growth of the Jack Daniel’s family of brands is the most important measure of our progress toward becoming a global leader in whiskey. Woodford Reserve’s growth has also helped us move forward on this ambition, as this super-premium brand grew volume at a compound annual rate of more than 22% from fiscal 2010 to fiscal 2015 – more than doubling its volume to just under 400,000 nine-liter cases in fiscal 2015. 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 to better serve the large and growing number of Woodford Reserve brand lovers who visit annually. As part of the expansion, during fiscal 2015, we completed the construction of two new warehouses.

•

Brown-Forman was founded in 1870 with Old Forester, the world’s first bottled bourbon brand. Old Forester has remained a favorite among true bourbon aficionados while attracting a new generation of fans; its underlying net sales increased a substantial 35% (38% reported) in fiscal 2015. We plan to leverage the current momentum of Old Forester and the favorable trends in American whiskeys to develop Old Forester as a national and international iconic bourbon brand. In support of this ambition, we announced the construction of the Old Forester Distillery and urban bourbon experience in fiscal 2014, and in May 2015 purchased two historic buildings on Main Street in Louisville for its location. We expect to open the Old Forester Distillery in the fall of 2016 and anticipate investing approximately $45 million in this project.

•

We divested our Hopland-based wine brands in 2011, leaving us with a portfolio primarily focused on spirits. We have not made any material acquisitions since then (but see the next paragraph for a description of a recent minor acquisition). During this time, we have pursued growth of our spirits portfolio mostly through organic growth, with innovation playing a key role. 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 Southern Comfort Lime (introduced in fiscal 2011) and Woodford Reserve Double Oaked (fiscal 2012). In fiscal 2015, we launched Herradura Ultra in Mexico during our second quarter and Southern Comfort Caramel in the United States during our third quarter.

•

In June 2015 (fiscal 2016), we purchased all of the shares of Slane Castle Irish Whiskey Limited and announced our plans to invest $50 million to build a new distillery, construct warehouses, and develop a consumer experience, on the historic Slane Castle Estate in Ireland. We decided to add an Irish whiskey to our portfolio because it has been one of the fastest-growing components of the global whiskey category recently, and we believe that with our expertise in whiskey making, the new whiskeys from the Slane Castle Irish Whiskey Distillery will have a bright future. We plan to open the Slane Castle Whiskey Distillery in late 2016 and to introduce new Irish whiskeys in the spring of 2017, initially using high-quality whiskey purchased from other Irish distilleries and then finished to Slane’s specifications while the whiskey made at the new Slane Distillery matures.

•

Since 2010, we have pursued international growth both in our larger, developed markets and with increasing focus in the emerging world. Our most visible progress has been the evolution of our route-to-consumer 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. We have added substantially to our employee base outside the United States, mostly in markets where we evolved our route-to-consumer strategy.

•

Our capital deployment initiatives have been focused on (1) enabling the expected future growth of our existing businesses through investments in our production capacity and innovation (discussed above) as well as in resources needed to grow our existing portfolio (advertising and promotions, and SG&A) and (2) returning cash to our shareholders. From fiscal 2010 through 2015, we have returned over $3.2 billion to our shareholders through $1.2 billion in regular quarterly dividends, $1.0 billion in two special dividends, and $1 billion through share repurchases.

Summary and Timing of Recent Developments
Fiscal year		PORTFOLIO		ROUTE-TO-CONSUMER		PRODUCTION
2011		Introduced Jack Daniel’s Tennessee Honey in April		Started distribution operations in Germany
		Introduced Southern Comfort Lime		Started distribution operations in Brazil
		Sold Hopland-based wine brands and properties
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
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 the second quarter				Announced plans for the Old Forester Distillery and bourbon experience
		Introduced Southern Comfort Caramel in the United States (Q3)				Completed new barrel warehouses at Jack Daniel's and Woodford Reserve
		Introduced Jack Daniel’s Tennessee Fire nationwide in the United States (Q4)
2016		Announced purchase of Slane Castle Irish Whiskey Limited in the first quarter				Announced plans for the construction of new distillery at Slane Castle in Ireland

Fiscal 2015 Financial Highlights

Summary of Operating Performance Fiscal 2013 - 2015
													Reported Change						Underlying Change1
Fiscal year ended April 30	2013				2014				2015				2014 vs. 2013			2015 vs. 2014			2014 vs. 2013			2015 vs. 2014
Net sales	$	3,784			$	3,946			$	4,096			4	%		4	%		6	%		6	%
Excise taxes	935				955				962				2	%		1	%		5	%		5	%
Cost of sales	894				913				951				2	%		4	%		3	%		7	%
Gross profit	1,955				2,078				2,183				6	%		5	%		8	%		7	%
Advertising	408				436				437				7	%		—	%		8	%		5	%
SG&A	650				686				697				6	%		2	%		6	%		4	%
Operating income	$	898			$	971			$	1,027			8	%		6	%		11	%		9	%
Gross margin	51.7		%		52.7		%		53.3		%		1.0pp			0.6pp
Operating margin	23.7		%		24.6		%		25.1		%		0.9pp			0.5pp
Interest expense, net	$	33			$	24			$	25			(27	)%		6	%
Effective tax rate	31.7		%		30.5		%		31.7		%		(1.2)pp			1.2pp
Diluted earnings per share	$	2.75			$	3.06			$	3.21			11	%		5	%
Return on average invested capital2	21.7		%		21.6		%		22.0		%		(0.1)pp			0.4pp

1See “Non-GAAP Financial Measures” above for details on our use of “underlying changes” for net sales, excise taxes, cost of sales, gross profit, advertising expenses, SG&A expenses, and operating income, including how these measures are calculated and the reasons why we think this information is useful to readers.

2See “Non-GAAP Financial Measures” above for details on our use of “return on average invested capital,” including how this measure is calculated and the reasons why we think this information is useful to readers.

In fiscal 2015 compared to fiscal 2014, we grew our underlying net sales by 6% (4% reported), increased underlying operating income by 9% (6% reported), and delivered a 5% increase in diluted earnings per share. We improved our margins in fiscal 2015, as we added 60 basis points to our gross margin and 50 basis points to our operating margin. These operating results were driven largely by our American whiskey portfolio, led by the Jack Daniel’s family of brands. Our net sales growth was driven by the United States, France, and emerging markets while the rest of the developed international markets grew more slowly. Foreign exchange negatively affected our reported operating results. In fiscal 2015, our return on average invested capital improved modestly, despite near record levels of capital spending of $120 million in our capacity expansion projects and increased working capital related to our maturing whiskey inventory. Also during fiscal 2015, we returned $718 million in cash to our shareholders through dividend payments of $256 million and share repurchases of $462 million, while maintaining investment-grade credit ratings.

Outlook

Looking ahead to fiscal 2016, we are optimistic about our prospects for continued net sales and operating income growth, and we expect to make further progress toward our strategic ambitions. We describe below the trends, developments, and uncertainties that we expect to affect our business.

•

Favorable American whiskey trends. We believe that the market for American whiskey is growing faster than total distilled spirits globally and that premium American 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 Jack Daniel’s Tennessee Whiskey, Woodford Reserve, and Old Forester. Furthermore, we believe that we are well positioned to access emerging

1 The IWSR, 2014 data.

growth opportunities driven by consumer trends affecting the category, including increased interest in luxury, craft, and small-batch whiskeys. We believe that we can benefit from these trends with our existing portfolio of American whiskeys, and – when our assessment of opportunity supports it – we expect to bring other new products and line extensions to the market.

•

Growing importance of flavored whiskeys. Flavored whiskey continues to be the fastest-growing category of whiskey.1 Because we essentially concluded the global rollout of Jack Daniel’s Tennessee Honey in fiscal 2015, its growth rates are slowing; however, we expect it will still be an important contributor to our growth in fiscal 2016. Additionally, since the rollout of Jack Daniel’s Tennessee Honey, cinnamon flavors have become the largest component of the flavored whiskey category. Accordingly, we anticipate that Jack Daniel’s Tennessee Fire, recently launched nationwide in the United States, will be an important contributor of growth for the Jack Daniel’s family of brands in fiscal 2016.

•

Uncertain reaction to our pricing plans. During fiscal years 2013 and 2014, and to a lesser extent in fiscal 2015, our operating results have benefited from price increases for several of our brands, including, most importantly, JDTW. Higher pricing has contributed strongly to net sales growth, gross margin improvement, and operating profit improvement over the past three years. Looking ahead, we anticipate volume will be the more significant driver of growth compared with the last few years. We plan to increase prices in fiscal 2016, but not as much as in recent years. We generally have not raised prices in international markets in response to the strengthened U.S. dollar, however, we have recently increased prices in Russia and certain other markets. Overall, we believe that our balanced approach to pricing will continue to support net sales growth, but we are unsure how our customers and consumers will react – especially in those markets where we have increased prices recently. We may need to reduce prices if consumers react negatively to our price increases or to changes in relative pricing compared to our main competitors.

•

Uncertain increase in costs of sales. We expect that freight, logistics, and raw materials costs will generally increase in the low single digits during fiscal 2016. 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. Wood barrels are an essential input to our whiskeys, and we believe that our vertical integration with respect to the manufacture of barrels ensures high quality and consistent, timely availability for our whiskey distilleries. In addition to our cooperages where we assemble finished barrels, we currently manufacture wood staves and headings at three mills and will be adding to capacity with a fourth mill acquired in the first quarter of fiscal 2016.

Current dynamics in the markets for American white oak logs and partially-processed barrel components, such as wood staves and headings (collectively, wood inputs), have led to simultaneously higher demand and lower supply resulting in, from time to time, higher prices. While many factors are driving demand, among these is the recent and sustained rise in the popularity of whiskey, particularly American whiskey. While American white oak, the raw material used to make our barrels, is not in short supply, we believe that supply of wood inputs is constrained primarily by stave and heading mill capacity, and to a lesser extent, by logging capacity. These market forces could cause prices for wood inputs to rise, which could lead to higher cost of sales for our whiskeys. We believe that our investments in barrel manufacturing partially mitigate this risk.

•

Uncertain impact of excise taxes and government regulations restricting trade in wine and spirits. 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. In fiscal 2016, 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. For example, excise taxes in Australia have steadily increased because they are indexed to the consumer price index and adjusted twice a year – cumulatively increasing 20% since 2008, to the point where excise taxes on spirits in Australia are currently over 50% higher than the average of other OECD countries. We believe that this situation negatively affected consumer demand and contributed to the slowdown in our results there in fiscal 2015. Although calls for excise tax reform in Australia have been raised, we believe the country is currently planning on continued increases.

•

Emerging-market uncertainty. During fiscal 2015, we grew net sales in emerging markets, led by the Jack Daniel’s family of brands, while our competition reported generally stable results in emerging markets. We experienced challenges in Poland and to a lesser extent in Mexico and Russia but, collectively, our emerging markets have grown net sales consistently and at higher rates than our developed markets in recent years. We expect this to continue, but we are cautious about our

1 The IWSR, 2014 data.

growth outlook given the geopolitical uncertainty in Russia and Ukraine. These two countries, and more broadly the emerging markets in eastern Europe and central Asia, have been important to our emerging markets net sales growth in recent years, including in fiscal 2015.

•

Foreign currency headwinds anticipated to continue. The more we expand our business globally, the more exchange rate fluctuations relative to the U.S. dollar influence our financial results. We sell more in local currencies than we purchase – for example, Jack Daniel’s Tennessee Whiskey can be produced only in Tennessee. Accordingly, we have a net exposure to changes in the value of the 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 2015 by negative foreign exchange due to the strength of the U.S. dollar, and we anticipate our fiscal 2016 results will be negatively affected as well. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for more information about foreign exchange and our business.

We believe that we are well-positioned to take advantage of the opportunities and to address the challenges related to the trends and uncertainties noted above. However, we may not succeed in taking full advantage of these opportunities, and any of these challenges could have a material adverse effect on our business.

See ‘‘Item 1A. Risk Factors’’ for details about risks and uncertainties that could affect our business or results.

RESULTS OF OPERATIONS – FISCAL 2015 MARKET HIGHLIGHTS

The following table shows net sales results for our ten largest markets, summarized by geographic area, for the fiscal year ended April 30, 2015, compared to the prior fiscal year. We discuss the most significant changes in net sales for each geography.

Top 10 Markets - Percentage of Fiscal 2015 Total Net Sales and Fiscal 2015 Net Sales Growth by Geographic Area
					Net Sales1 % Change vs. 2014
Markets		% of Fiscal 2015 Net Sales			Reported		Foreign Exchange		Net Chg in Est. Distributor Inventories			Underlylng
United States		43	%		10	%	—	%	(2	)%		8	%
Europe		31	%		1	%	6	%	(1	)%		6	%
United Kingdom		9	%		2	%	4	%	—	%		5	%
Germany		4	%		(9	)%	7	%	—	%		(2	)%
Poland		4	%		(14	)%	7	%	—	%		(7	)%
France		3	%		77	%	12	%	(47	)%		42	%
Russia		2	%		(6	)%	2	%	7	%		4	%
Turkey		2	%		19	%	13	%	—	%		32	%
Rest of Europe		8	%		(2	)%	7	%	2	%		7	%
Australia		11	%		(8	)%	7	%	—	%		(1	)%
Other		15	%		4	%	4	%	1	%		10	%
Mexico		6	%		(3	)%	6	%	—	%		3	%
Canada		1	%		1	%	6	%	3	%		10	%
Rest of Other		8	%		10	%	3	%	2	%		15	%
TOTAL		100	%		4	%	3	%	(1	)%		6	%
* Totals may differ due to rounding

1See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how this measure is calculated and the reasons why we think this information is useful to readers.

The United States, our largest and most important market, accounted for 43% of our reported net sales in fiscal 2015 and 41% of net sales in fiscal 2014. In fiscal 2015, underlying net sales in the United States increased 8%, driven by the Jack Daniel’s family of brands, including JDTW volume growth and price/mix improvement, JDTH volume growth, as well as volumes from the new line extension, Jack Daniel’s Tennessee Fire. Volume growth for Woodford Reserve also contributed to the underlying net sales growth, while lower volumes from Southern Comfort and Canadian Mist partially offset these gains. Overall, we believe our brands grew market share in fiscal 2015 in both the on-premise and off-premise markets.

Europe accounted for 31% of our net sales in fiscal 2015, decreasing from 32% in fiscal 2014. Reported net sales were hurt across Europe by foreign exchange due to the dollar strengthening against all currencies. For fiscal 2015, underlying net sales in Europe were up 6%, driven by gains in France, the United Kingdom, Turkey, Russia, and smaller markets, partially offset by declines in Poland and Germany.

•

In France, underlying net sales growth was primarily driven by higher direct-to-trade prices for JDTW associated with our fiscal 2014 route-to-consumer change. In addition, volumetric gains on JDTH, which was introduced in the second half of fiscal 2014, boosted net sales. (Underlying net sales growth was lower than reported net sales growth after excluding the effect of a favorable comparison to the prior year, when our former distributor reduced its inventory ahead of our January 2014 route-to-consumer change.)

•	In the United Kingdom, underlying net sales growth was driven by higher volumes of JDTH and JDTW, and to a lesser extent, by Jack Daniel’s RTDs/RTPs. These gains were only partially offset by declines in Finlandia and Southern Comfort.

•	In Turkey, underlying net sales growth was driven by JDTW volume and price increases and a more favorable customer mix.

•	In Russia, underlying net sales growth was driven by higher volumes of JDTW.

•	In Poland, volumes were lower compared with those of the prior year, which included a buy-in prior to a 15% excise tax increase not repeated in fiscal 2015, as well as weaker consumer demand following the excise tax hike.

•	In Germany, underlying net sales were down due to decreased volumes related to reduced trade promotional activity.

Australia accounted for 11% of our net sales in fiscal 2015, down from 12% in fiscal 2014. For fiscal 2015, reported net sales were down 8%, but underlying net sales were down only 1% after adjusting for the negative effect of a weaker Australian dollar. This modest decline in underlying net sales was driven by lower volumes for Jack Daniel’s RTDs as a result of weak consumer demand for spirits and spirit-based RTDs and increasing competition. JD & Cola, an RTD and our largest brand in Australia, declined, reflecting changing consumer preferences, but was partially offset by gains in a recent RTD line extension, JD Double Jack.

Net sales for our other markets constituted 15% of our total net sales in both fiscal 2015 and fiscal 2014. Reported net sales grew 4% in fiscal 2015 and 10% on an underlying basis after adjusting reported results for the negative effect of a stronger U.S. dollar. The increase in underlying net sales was driven by broad growth across most of our other markets, led by Brazil, Mexico, markets in Africa, markets in Southeast Asia, and Canada, offset slightly by net sales declines in Korea and China. In Mexico, underlying net sales growth of 3% was driven by increases in the Jack Daniel’s family of brands and Herradura, partially offset by volume declines on el Jimador associated with our decision to increase pricing to reposition the brand, as well as our decision to discontinue selling a lower-margin third-party brand.

RESULTS OF OPERATIONS – FISCAL 2015 BRAND HIGHLIGHTS

The following table highlights the worldwide results of our largest brands for the fiscal year ended April 30, 2015, compared to the results for the same period last year. We discuss results of the brands most affecting our performance below the table.

Major Brands Worldwide Results for Fiscal 20151
	Depletion Volume										Net Sales % Change vs. 2014
Brand family / brand	Nine-Liter Cases (Millions)		% Change vs. 2014			Drinks Equivalent (Millions)		% Change vs. 2014			Reported		Foreign Exchange		Net Chg in Est. Distributor Inventories			Underlying
Jack Daniel’s Family	21.3		7	%		15.0		8	%		5	%	4	%	(1	%)		8	%
Jack Daniel’s Tennessee Whiskey	12.0		4	%		12.0		4	%		3	%	3	%	—	%		6	%
Jack Daniel’s Tennessee Honey	1.4		29	%		1.4		29	%		27	%	3	%	(2	%)		28	%
Other Jack Daniel’s whiskey brands2	0.9		38	%		0.9		38	%		35	%	3	%	(10	%)		27	%
Jack Daniel’s RTDs/RTP3	7.0		3	%		0.7		3	%		(4	%)	6	%	—	%		2	%
New Mix RTDs	5.1		4	%		0.5		4	%		(3	%)	7	%	—	%		4	%
Finlandia	3.4		(5	%)		3.2		(5	%)		(11	%)	6	%	(1	%)		(5	%)
Southern Comfort Family	2.2		(4	%)		1.9		(4	%)		(7	%)	2	%	(1	%)		(5	%)
Canadian Mist	1.5		(5	%)		1.5		(5	%)		(6	%)	—	%	1	%		(6	%)
El Jimador Family	1.2		(1	%)		1.2		(1	%)		6	%	4	%	(3	%)		6	%
Woodford Reserve Family	0.4		30	%		0.4		30	%		33	%	1	%	(2	%)		32	%
Herradura	0.4		18	%		0.4		18	%		24	%	4	%	(3	%)		25	%
* Totals may differ due to rounding

1See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how this measure is calculated and the reasons why we think this information is useful to readers; see “Volume and Depletions” above for definitions of volume measures presented here.

2In addition to the brands separately listed here, the Jack Daniel’s family of brands includes Gentleman Jack, Jack Daniel’s Single Barrel, Jack Daniel’s Sinatra™ Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, Jack Daniel’s 1907 Tennessee Whiskey, Jack Daniel’s Tennessee Rye Whiskeys, and Jack Daniel’s Tennessee Fire.

3Jack Daniel’s RTD and RTP products include all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, and the seasonal Jack Daniel’s Winter Jack RTP.

In fiscal 2015, the Jack Daniel’s family of brands grew volumes 7% globally to nearly 15 million drinks-equivalent nine-liter cases across all expressions of the brand. Reported net sales grew 5% while underlying net sales increased 8%, after adjusting for the negative effects of foreign exchange and for the estimated net increase in distributor inventories, driven primarily by filling the distributor pipeline in the United States for the nationwide rollout of Jack Daniel’s Tennessee Fire and the year-over-year effect of our January 2014 route-to-consumer change in France. In fiscal 2015, JDTW sustained its global growth rate while innovations boosted the overall growth rate of the family of brands. Growth due to innovation was led by two products: (a) JDTH, which was introduced in several new international markets while continuing to grow in the United States and the United Kingdom, among others; and (b) Jack Daniel’s Tennessee Fire, which we introduced in the United States nationwide in the fourth quarter.

Jack Daniel’s Tennessee Whiskey generates a significant percentage of our total net sales, and it is our top priority. As the world’s fourth-largest premium spirits brand measured by both volume and retail value,1 JDTW is one of the most valuable spirits brands in the world. JDTW grew volume for the 23rd consecutive year and outpaced the average volume growth rate of the top 25 premium spirits brands2 during calendar 2014. That achievement reinforces our belief in the brand’s long-term appeal and sustainable growth potential. JDTW grew volumes 4% globally in fiscal 2015, consistent with its fiscal 2014 growth rate. Based primarily on these volume gains, JDTW grew reported net sales 3% and underlying net sales 6%. The brand grew in emerging markets, including in three of our four largest: volume in Turkey increased 11%; Russia, 9%; and Poland, 5%. The brand also grew in developed markets, including 7% volume growth in France and 6% volume growth in the United Kingdom. In the United States, volume increased 4%.

Since its introduction in late fiscal 2011, Jack Daniel’s Tennessee Honey has become a significant contributor to our net sales growth. After surpassing the one-million-case milestone in fiscal 2014, JDTH grew volumes by 29% in fiscal 2015, and was named to Impact’s “Hot Brands” list3 for a fourth consecutive year. We estimate that Jack Daniel’s Tennessee Honey is now the 16th largest brand in the world priced over $25 per 750ml bottle.4 In the United Kingdom, JDTH’s second largest market, the brand grew volumes 36% compared to fiscal 2014, its third year in that market. We essentially completed the global rollout of JDTH in fiscal 2015 with launches in our remaining important international markets, including Brazil and other Latin American countries and Southeast Asia. JDTH has contributed significantly to our growth since its introduction, having become our 5th largest brand as measured by drinks-equivalent volume. Looking ahead, we expect JDTH to continue to be a meaningful contributor to our net sales growth, although we expect it to grow at a slower rate than it did in fiscal 2015.

JDTH Depletion Volume by Year and Introduction History by Major Market
Year Ended April 30,	2012	2013	2014	2015
Nine-Liter Cases (Thousands)	450	770	1,050	1,355
Major launch markets:	United States*	United Kingdom	Mexico	Brazil and other Latin America
	Canada	Australia	France
	Travel Retail	Poland	Germany	China
		South Africa	Russia	Southeast Asia
			Japan	Italy
			Czech Republic
*Introduced at the end of fiscal year 2011

We began testing Jack Daniel’s Tennessee Fire (JDTF) in three states in the United States in April 2014, expanded to five additional test markets during the second quarter of fiscal 2015, and launched the line extension nationwide in the fourth quarter. We believe JDTF represents a good opportunity for us to participate further in the flavored whiskey category, particularly cinnamon, which has become the category’s largest flavor. Despite having only a partial year of sales, JDTF was a significant contributor to net sales growth in fiscal 2015. We expect JDTF will be an important contributor of growth for the Jack Daniel’s family of brands in fiscal 2016.

The Jack Daniel’s RTDs/RTPs brands (JD RTDs) grew volume 3% in fiscal 2015, while reported sales decreased 4% due to the negative effect of foreign exchange. Adjusted for foreign exchange, JD RTDs grew underlying net sales 2% during fiscal 2015. Among top markets for JD RTDs, underlying net sales grew in the United Kingdom and Germany; however, in Australia, the brand’s largest market, volumes were down 4% and underlying net sales down 2% in the face of a challenging economic and industry environment. The United Kingdom grew underlying net sales by double digits driven by JD & Cola and our seasonal Jack Daniel’s Winter Jack.

In fiscal 2015, Finlandia reported an 11% decline in reported net sales, while underlying net sales were down 5%. Finlandia’s underlying net sales decline was led by volume losses in the brand’s largest market, Poland, where much of the year was spent working through trade re-balancing after last year’s excise tax driven buy-ins.

The Southern Comfort family of brands’ volume declined 4% in fiscal 2015, and underlying net sales declined 5%. Underlying net sales declined in Southern Comfort’s top three markets, the United States, the United Kingdom, and Australia.

1Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in February and March 2015.
2Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in February 2015.
3Impact Databank published the Impact’s “Hot Brands - Spirits” list in March 2015.
4The IWSR, 2014 data.

Our Southern Comfort business in the United States faces persistent consumer challenges affecting the liqueurs category generally and increased competition from flavored whiskeys. We recently launched new packaging for Southern Comfort designed to drive visibility at the point of purchase in the off-premise channel and aimed at recruiting millennials. We also recently introduced Southern Comfort Caramel, a flavored line extension in the United States.

In fiscal 2015, the underlying net sales growth rate of our two most important tequila brands, el Jimador and Herradura, accelerated compared with fiscal 2014. For both brands, the United States and Mexico are the most important markets. In Mexico, we launched Herradura Ultra, an ultra-premium line extension, which drove net sales growth and, we believe, created a halo effect for the Herradura brand more broadly in Mexico. With el Jimador in Mexico, we made a strategic decision to raise prices with the expectation that we would lose volume in the near term. Volumes for el Jimador in Mexico were down 13% and underlying net sales declined 5%. In the United States, super-premium Herradura grew volumes and underlying net sales in the high single-digits to outpace its competitive set and gain market share, while el Jimador grew volumes and underlying net sales in the low double digits. We remain focused on developing our tequila portfolio 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.

In fiscal 2015, New Mix, our market-leading RTD brand in Mexico, increased both volumes and underlying net sales 4%. We also increased our advertising and promotional support for the brand to maintain its visibility in the trade and awareness among consumers in an increasingly competitive RTD market.

Woodford Reserve, our super-premium bourbon brand, grew volumes 30% (after growing 24% in fiscal 2014 and 26% in fiscal 2013) and was named to Impact’s “Hot Brands” list1. The United States is by far the brand’s most important market and was responsible for most of its growth during fiscal 2015. Woodford Reserve continued its momentum outside the United States, growing volumes 32%, driven by our travel retail business and some markets in Europe where American whiskey trends are favorable, such as France and the United Kingdom. During fiscal 2015, we increased our advertising investment in Woodford Reserve and invested in television advertising for only the second year since the brand’s introduction in the United States. With its 30% volume growth rate in fiscal 2015, we believe that Woodford Reserve led a fast-growing competitive set of super-premium American whiskeys and 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 future growth potential, including in capital spending to expand capacity and in consumer communications.

1Impact Databank published the Impact’s “Hot Brands - Spirits” list in March 2015.

RESULTS OF OPERATIONS – YEAR-OVER-YEAR COMPARISONS

NET SALES
Percentage change versus the prior fiscal year ended April 30			2015					2014
Change in reported net sales			4	%				4	%
Foreign exchange			3	%				1	%
Estimated net change in distributor inventories			(1	)%				1	%
Change in underlying net sales			6	%				6	%
Change in underlying net sales attributed to:*
Volume	4	%				3	%
Net price/mix	3	%				3	%
* Totals may differ due to rounding

Fiscal 2015 compared to Fiscal 2014

Net sales of $4,096 million increased 4% or $150 million, compared to fiscal 2014. Underlying net sales growth was 6%, after adjusting reported results for the negative effect of foreign exchange and the estimated net increase in distributor inventories. The negative effect of foreign exchange, after taking into consideration our hedging activities, was driven primarily by weaker European currencies. The estimated net increase in distributor inventories resulted from distributor buy-ins related to the nationwide rollout of Jack Daniel’s Tennessee Fire in the United States and the year-over-year effect of our January 2014 route-to-consumer change in France. Last fiscal year, 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 primary factors contributing to growth in underlying net sales were:

•	Net price/mix driven by:

◦	the Jack Daniel’s family of brands, particularly JDTW and JDTH, led by the United States and improved net sales price due to owned distribution in France;

◦	better mix in our tequila portfolio with the launch of Herradura Ultra and price increases for el Jimador in Mexico;

◦	favorable whiskey portfolio mix driven by the growth of higher priced brands such as Woodford Reserve; and

◦	higher prices for our used barrel sales driven by higher demand from makers of Scotch whisky and other aged spirits. In recent years, we have benefited from strong demand for used barrels, growing units sold at higher prices, and we expect our used barrel sales to remain healthy in fiscal 2016.

•	Volume driven by:

◦	JDTW, which grew broadly driven by strong consumer-oriented growth, led by (1) the United States; (2) several large European markets, including France, Turkey, the United Kingdom, and Ukraine; and (3) Brazil, despite worsening economic trends;

◦	JDTH, led by increases in existing markets, including the United States, the United Kingdom, and the Czech Republic, and also by volumes in recent launch markets, including France (launched at the end of fiscal 2014), and Brazil; and

◦	the nationwide launch of Jack Daniel’s Tennessee Fire in the United States in the fourth quarter of fiscal 2015.

The primary factors partially offsetting underlying net sales growth were lower volumes for:

•	Finlandia Vodka, driven predominantly by Poland, where volumes were lower compared with the prior year, due to a buy-in in advance of a significant excise tax increase not repeated in fiscal 2015, as well as weaker consumer demand during fiscal 2015;

•	Southern Comfort family of brands, primarily in the United States, driven by weaker demand in the on-premise channel; and

•	Jack Daniel’s RTDs in Australia, driven by weaker consumer demand for spirits and spirit-based RTDs and increased competition.

Fiscal 2014 compared to Fiscal 2013

Net sales of $3,946 million increased 4%, or $162 million, compared to fiscal 2013. Underlying net sales growth was 6%, after adjusting reported results for the negative effect of foreign exchange and the estimated net reduction in distributor inventories. The primary factor driving the estimated net reduction in distributor inventories was decreased shipments corresponding to our former distributor’s inventory reduction ahead of our route-to-consumer change in France.

The primary factors contributing to growth in underlying net sales were:

•	Net price/mix driven by:

◦	The United States, which accounted for half of the increase from pricing, primarily related to price increases for JDTW, JDTH, and Korbel; and

◦	Better price/mix in Germany, Poland, Brazil, Turkey, China, and France (which increased as a result of our route-to-consumer change in January 2014).

•	Volume driven by:

◦	JDTW, which accounted for about half of the net sales growth from volume, led by Germany, France, Russia, Turkey, the United Kingdom, Brazil, Mexico, and Japan;

◦	JDTH, led by increases in the United States and the United Kingdom, and also by volumes from fiscal 2014 launch markets, including Mexico, Germany, the Czech Republic, and France;

◦	Our super-premium American whiskey brands, including Woodford Reserve in the United States and Gentleman Jack in the United States and in several international markets; and

◦	Other recent innovations from Jack Daniel’s, most importantly Jack Daniel’s Winter Jack and Jack Daniel’s Sinatra™ Select.

The primary factors partially offsetting underlying net sales growth were lower volumes for:

•	Our tequila brands and New Mix RTDs in Mexico, driven by (1) excess trade inventory of New Mix and Herradura at the beginning of fiscal 2014, and (2) lower consumer demand for our tequila brands in Mexico;

•	JDTH in Australia, driven by weak consumer acceptance of the brand and a difficult comparison to our launch in fiscal 2013; and

•	The Southern Comfort family of brands, primarily in the United States, driven by weaker demand in the on-premise channel.

COST OF SALES
Percentage change versus the prior fiscal year ended April 30			2015					2014
Change in reported cost of sales			4	%				2	%
Foreign exchange			3	%				—	%
Estimated net change in distributor inventories			—	%				1	%
Change in underlying cost of sales			7	%				3	%
Change in underlying cost of sales attributed to:
Volume	4	%				2	%
Cost/mix	3	%				1	%

Fiscal 2015 compared to Fiscal 2014

Cost of sales of $951 million increased $38 million, or 4%, during fiscal 2015. 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.

Fiscal 2014 compared to Fiscal 2013

Cost of sales of $913 million increased $19 million, or 2%, during fiscal 2014. Underlying cost of sales grew 3% after adjusting reported results for the positive effect of the estimated reduction in net distributor inventories. About two-thirds of the underlying increase in costs of sales was driven by growth in sales volumes, while the balance of the increase related to higher input costs and additional value-added packaging compared to the prior fiscal year.

GROSS PROFIT
Percentage change versus the prior fiscal year ended April 30	2015			2014
Change in reported gross profit	5	%		6	%
Foreign exchange	3	%		1	%
Estimated net change in distributor inventories	(1	)%		1	%
Change in underlying gross profit	7	%		8	%

Fiscal 2015 compared to Fiscal 2014

Gross profit of $2,183 million increased $105 million, or 5%, during fiscal 2015. Gross profit on an underlying basis improved 7% after adjusting reported gross profit for the negative effects of foreign exchange and the estimated net increase in distributor inventories. The increase resulted from the same factors that contributed to the increase in underlying net sales for the year and was enhanced by the smaller combined increase in underlying excise taxes and cost of sales for the year.

Gross margin improved to 53.3% in fiscal 2015, up 60 basis points from 52.7% in fiscal 2014. The increase in gross margin was primarily due to higher pricing and a favorable mix shift.

Fiscal 2014 compared to Fiscal 2013

Gross profit of $2,078 million increased $123 million, or 6%, during fiscal 2014. Underlying change in gross profit was higher at 8% after excluding the negative effects of both foreign exchange and the estimated net change in distributor inventories. The increase resulted from the same factors that contributed to the increase in underlying net sales for the year and was enhanced by the smaller combined increase in underlying excise taxes and cost of sales for the year.

Gross margin improved to 52.7% in fiscal 2014, up 1.0% from 51.7% in fiscal 2013. The increase in gross margin was primarily due to higher pricing and a favorable mix shift.

ADVERTISING EXPENSES
Percentage change versus the prior fiscal year ended April 30	2015			2014
Change in reported advertising	—	%		7	%
Foreign exchange	4	%		1	%
Change in underlying advertising	4	%		8	%

Fiscal 2015 compared to Fiscal 2014

Advertising expenses of $437 million increased $1 million, essentially unchanged on a reported basis. Underlying advertising expenses increased 4% after adjusting reported results for the benefit of foreign exchange. The increase in underlying advertising expenses was driven primarily by (a) investments in United States related to the nationwide launch of JDTF, (b) higher spending on JDTW in the United States, and (c) higher spending outside the United States on the Jack Daniel’s family of brands. These increases were partially offset by lower spending for Southern Comfort and Finlandia Vodka in many markets.

Fiscal 2014 compared to Fiscal 2013

Advertising expenses of $436 million increased $28 million, or 7% on a reported basis. Underlying advertising expenses increased 8% after adjusting reported results for the benefit of foreign exchange. The increase in underlying advertising expenses was driven by advertising investments in (a) Woodford Reserve in the United States, (b) Gentleman Jack globally, (c) JDTH in fiscal 2014 launch markets, and (d) JDTW broadly but especially in emerging markets. These increases were partially offset by lower advertising expenses in Australia, where we reduced spending for JDTH compared to fiscal 2013, its launch year there.

SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES
Percentage change versus the prior fiscal year ended April 30	2015			2014
Change in reported SG&A	2	%		5	%
Foreign exchange	2	%		1	%
Change in underlying SG&A	4	%		6	%

Fiscal 2015 compared to Fiscal 2014

SG&A expenses of $697 million increased $11 million, or 2% on a reported basis in fiscal 2015, 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.

Fiscal 2014 compared to Fiscal 2013

SG&A expenses of $686 increased $36 million, or 5% on a reported basis in fiscal 2014, while underlying SG&A growth was 6% 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 inflation on salary and related expenses, and costs related to setting up our distribution company in France and our new employees there.

OPERATING INCOME
Percentage change versus the prior fiscal year ended April 30	2015			2014
Change in reported operating income	6	%		8	%
Foreign exchange	6	%		—	%
Estimated net change in distributor inventories	(3	)%		3	%
Change in underlying operating income	9	%		11	%

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 the estimated net increase in distributor inventories, driven primarily from filling the distributor pipeline in the United States for the nationwide rollout of Jack Daniel’s Tennessee Fire and the year-over-year effect of our January 2014 route-to-consumer change in France, as well as the negative effect of foreign exchange, mostly related to weaker European currencies. Included in the negative effect of foreign exchange was $30 million in Other expense (income), net, in fiscal 2015 related to the revaluation of foreign-currency denominated net assets. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by a slower rate of growth in operating expenses.

Operating margin grew 50 basis points to 25.1% in fiscal 2015 from 24.6% in fiscal 2014. The same factors that drove the increase in our gross margin benefited our operating margin, additionally enhanced by operating expenses which grew at a slower rate than gross profit growth. These factors were partially offset by the negative effect of the revaluation of certain largely euro-denominated net assets.

Fiscal 2014 compared to Fiscal 2013

Operating income was $971 million in fiscal 2014, an increase of $73 million, or 8% compared to fiscal 2013. Underlying operating income growth was 11% after adjusting reported results for the negative effect of the estimated net change in distributor

inventories. 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 to 24.6% in fiscal 2014 from 23.7% in fiscal 2013. The same factors that drove the increase in our gross margin benefited our operating margin. In addition, our operating margin was helped by lower operating expense growth compared to gross profit growth.

Fiscal 2015 compared to Fiscal 2014

Interest expense (net) increased by $1 million compared to fiscal 2014, reflecting no meaningful underlying changes.

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; $5 million in fiscal 2014) of a deferred tax benefit that resulted from the release of certain deferred tax liabilities in connection with an intercompany transfer of assets on January 31, 2014. The increase in our effective tax rate was driven primarily by the reduction in the beneficial impact of foreign earnings, partially offset by the increase in the amortization of this deferred tax benefit.

Diluted earnings per share were $3.21 in fiscal 2015, up 5% from $3.06 reported for fiscal 2014. This increase resulted from the same factors that contributed to the increase in operating income as well as the reduction in the shares outstanding resulting from share repurchases, partially offset by the increase in the effective tax rate.

Fiscal 2014 compared to Fiscal 2013

Interest expense (net) decreased by $9 million in fiscal 2014 compared to fiscal 2013, primarily due to the $9 million charge we recognized in fiscal 2013 for the early redemption of our $250 million 5% notes due February 1, 2014.

Our effective tax rate for fiscal 2014 was 30.5%, 1.2 percentage points lower than the 31.7% rate in fiscal 2013. The decrease in our effective tax rate was driven primarily by an increase in the beneficial impact of foreign earnings at lower tax rates and by the favorable effect of higher U.S. tax benefits related to domestic manufacturing activities, partially offset by a reduction in benefits from discrete items.

Diluted earnings per share were $3.06 in fiscal 2014, up 11% from $2.75 reported for fiscal 2013. This increase resulted from the same factors that contributed to the increase in operating income, as well as the lower net interest expense and a reduction in the effective tax rate.

LIQUIDITY AND CAPITAL RESOURCES

Our ability to generate cash from operations consistently is one of our most significant financial strengths. Our strong cash flows enable us to invest in our people, our brands, and our assets, pay dividends, make strategic acquisitions that we believe will enhance shareholder value, repurchase shares of common stock, and, from time to time, pay special dividends. Investment-grade credit ratings (A1 by Moody’s, A+ by Fitch, and A- by Standard & Poor’s) provide us with financial flexibility when accessing global credit markets. We believe cash flows from operations are more than adequate to meet our expected operating and capital requirements.

CASH FLOW SUMMARY

(Dollars in millions)		2013				2014				2015
Operating activities		$	537			$	649			$	608
Investing activities:
Additions to property, plant, and equipment		(95		)		(126		)		(120		)
Other		(2		)		(1		)		(5		)
		(97		)		(127		)		(125		)
Financing activities:
Net issuance (repayment) of debt		493				3				183
Acquisition of treasury stock		—				(49		)		(462		)
Dividends paid		(1,063		)		(233		)		(256		)
Other		(6		)		(9		)		4
		(576		)		(288		)		(531		)
Foreign exchange effect		2				(1		)		(19		)
Change in cash and cash equivalents		$	(134	)		$	233			$	(67	)

Cash and cash equivalents declined $67 million in fiscal 2015, compared to an increase of $233 million in fiscal 2014. Cash provided by operations during fiscal 2015 was $608 million, compared to $649 million for fiscal 2014. The $41 million decline primarily reflects a $94 million increase in income tax payments, partially offset by higher earnings. The increase in income tax payments was largely timing-related, and reflects the effect of an intercompany transfer of assets that occurred during fiscal 2014. The intercompany transaction resulted in the payment of $64 million in taxes during fiscal 2015. However, the transaction reduced taxes paid in fiscal 2014 by $38 million and is expected to result in a tax refund of $13 million in fiscal 2016.

Cash used for investing activities was $125 million in fiscal 2015, down slightly from $127 million in fiscal 2014. Cash used for financing activities was $531 million during fiscal 2015, compared to $288 million for the same period last year. The $243 million increase largely reflects a $413 million increase in share repurchases and a $23 million increase in dividends, partially offset by a $180 million net increase in 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.

In comparing fiscal 2014 to fiscal 2013, cash provided by operating activities increased $112 million, reflecting higher earnings and a smaller increase in working capital. Cash used for investing activities increased $30 million during fiscal 2014, largely reflecting a higher level of capital spending, primarily related to the construction of the Jack Daniel Cooperage in Decatur, Alabama, that began operations in April 2014. Cash used for financing activities was $288 million during fiscal 2014 compared to $576 million for the prior year. The fiscal 2014 amount consisted largely of regular dividends of $233 million and share repurchases of $49 million. The fiscal 2013 amount of $576 million consisted largely of dividend payments of $1,063 million (including $854 million related to a $4.00 per share special dividend paid in December 2012) offset partially by $747 million in proceeds from bonds issued in December 2012 to fund the special dividend payment. It also included the early redemption in February 2013 of $250 million of 5% notes.

Capital expenditures. Investments in property, plant, and equipment were $95 million in fiscal 2013, $126 million in fiscal 2014, and $120 million in fiscal 2015. 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 2015, with continued spending on production operations to support the growing demand for the Jack Daniel’s family of brands and the expected startup of the new distillery in Lynchburg, Tennessee, scheduled for the first quarter of fiscal 2016.

For fiscal 2016, we expect capital expenditures to be in a range of $190 million to $220 million, and that these investments will be funded by cash provided by operations. Our capital spending plans for fiscal 2016 include continued investment in our whiskey strategy, led by Jack Daniel’s, as we expect to complete its new distillery and begin a major expansion of its bottling facilities. Additionally, our plans include the first phases of building the Old Forester Distillery and the Slane Castle Irish Whiskey Distillery. We expect to reduce capital spending after 2017, to be more in line with historical spending rates in relation to net sales.

Share repurchases. We have repurchased approximately 7.7 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 – June 12, 2015		21,041			1,939,259			$	95.43			$	94.13			$	185
		110,946			7,635,061											$	693

We repurchased these shares under two separate repurchase programs. One of the programs began in October 2013 and was completed in September 2014. The other one, which began in October 2014, remains in progress. Under it, we may repurchase up to $1.25 billion of our Class A and Class B common shares through March 24, 2016, subject to market and other conditions. We may repurchase those shares in open market purchases, block transactions, and privately negotiated transactions in accordance with applicable federal securities laws. We can modify, suspend, or terminate this repurchase program at any time without prior notice. As of June 12, 2015, we have repurchased a total of 4,836,918 shares under this program for approximately $443 million, leaving $807 million available for additional repurchases through March 24, 2016.

The results of these two 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			4,773,435			$	91.80			$	91.51			$	443
				110,946			7,635,061											$	693

(1) For the stock repurchase program begun in October 2014, data is through June 12, 2015.

Liquidity. We continue to manage liquidity conservatively to meet current obligations, fund capital expenditures, and maintain dividends, 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 billion commercial paper program that we regularly use to fund our short-term credit needs and to maintain our access to the capital markets. During fiscal 2015, our commercial paper borrowings averaged $191 million, with an average maturity of 14 days and an average interest rate of 0.17%. During fiscal 2014, our commercial paper borrowings averaged $467 million, with an average maturity of 36 days and an average interest rate of 0.22%. Commercial paper outstanding was $0 at April 30, 2014, and $183 million at April 30, 2015.

Our commercial paper program is supported by cash and cash equivalent balances and available commitments under our currently undrawn $800 million bank credit facility that matures on November 20, 2018, which also serves as a source of liquidity. Further, we believe that the markets for investment-grade bonds and private placements are very accessible sources of long-term financing that could provide for any additional liquidity needs. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fully fund our credit facility.

We have high credit standards when initiating transactions with counterparties and closely monitor our counterparty risks with respect to our cash balances and derivative contracts. If a counterparty’s credit quality were to deteriorate below our credit standards, we would expect either to liquidate exposures or require the counterparty to post appropriate collateral.

As of April 30, 2015, we had total cash and cash equivalents of $370 million. Of this amount, $256 million was held by foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. We do not expect to need the cash generated by those foreign subsidiaries to fund our domestic operations. But in the unforeseen event that we were to repatriate cash from those foreign subsidiaries, we would be required to provide for and pay U.S. taxes on permanently repatriated funds. 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 21, 2015, our Board of Directors declared a regular quarterly cash dividend of $0.315 per share on our Class A and Class B common stock. Stockholders of record on June 3, 2015, will receive the dividend on July 1, 2015.

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, 2015, with a ratio of 38 to 1, we were well within the covenant’s parameters.

OFF-BALANCE SHEET ARRANGEMENTS

As of April 30, 2015, we were not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations, or liquidity.

LONG-TERM OBLIGATIONS

We have long-term obligations related to contracts, leases, borrowing arrangements, and employee benefit plans that we enter into in the normal course of business (see Notes 4, 5, and 9 to our Consolidated Financial Statements). The following table summarizes the amounts of those obligations as of April 30, 2015, and the years when they must be paid:

LONG-TERM OBLIGATIONS1

(Dollars in millions)		Total				2016				2017-2018				2019-2020				After 2020
Long-term debt		$	1,000			$	250			$	250			$	—			$	500
Interest on long-term debt		314				22				34				30				228
Grape purchase obligations		18				7				7				3				1
Operating leases		40				17				19				4				—
Postretirement benefit obligations2		27				27				n/a				n/a				n/a
Agave purchase obligations3		3				n/a				n/a				n/a				n/a
Total		$	1,402			$	323			$	310			$	37			$	729

1	Excludes liabilities for tax uncertainties, as we cannot reasonably predict the ultimate amount or timing of settlement.

2	As of April 30, 2015, we have unfunded pension and other postretirement benefit obligations of $318 million. Because we cannot determine the specific periods in which those obligations will be funded, the table above reflects no amounts related to those obligations other than the $27 million of expected contributions (including $20 million of expected discretionary contributions) in fiscal 2016.

3

As discussed in Note 4 to our Consolidated Financial Statements, we have obligations to purchase agave, a plant whose sap forms the raw material for tequila. As of April 30, 2015, based on current market prices, obligations under these contracts totaled $3 million. Because we cannot determine the specific periods in which those obligations will be paid, the above table reflects only the total related to those obligations.

We expect to meet these obligations with internally generated funds or refinancing debt in the short term.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our financial statements reflect some estimates involved in applying the following critical accounting policies that entail uncertainties and subjectivity. Using different estimates or policies could have a material effect on our operating results and financial condition.

Goodwill and other intangible assets. We have obtained most of our brands by acquiring other companies. When we acquire another company, we first allocate the purchase price to identifiable assets and liabilities, including intangible brand names and trademarks (“brand names”), based on estimated fair value. We then record any remaining purchase price as goodwill. We do not amortize goodwill or other intangible assets with indefinite lives. We consider all of our brand names to have indefinite lives.

We assess our goodwill and other indefinite-lived intangible assets for impairment at least annually. If the fair value of an asset is less than its book value, we write it down to its estimated fair value. For goodwill, if the book value of its reporting unit exceeds its estimated fair value, we measure for potential impairment by comparing the implied fair value of the reporting unit’s goodwill, determined in the same manner as in a business combination, to the book value of the goodwill. We estimate the fair value of a reporting unit using discounted estimated future cash flows. We typically estimate the fair value of a brand name using the “relief from royalty” method. We also consider market values for similar assets when available. Considerable management judgment is necessary to estimate fair value, including making assumptions about future cash flows, discount rates, and royalty rates.

We have the option, before quantifying the fair value of a reporting unit or brand name, to evaluate qualitative factors to assess whether it is more likely than not that our goodwill or brand names are impaired. If we determine that is not the case, then we are not required to quantify the fair value. That assessment also takes considerable management judgment.

Based on our assumptions, we believe none of our goodwill or other intangibles are impaired. Further, we estimate the fair values to substantially exceed the carrying values of all of our goodwill and other intangible assets.

Pension and other postretirement benefits. We sponsor various defined benefit pension plans as well as postretirement plans providing retiree health care and retiree life insurance benefits. Benefits are based on factors such as years of service and compensation level during employment. We expense the benefits expected to be paid over employees’ expected service. This requires us to make assumptions to determine the net benefit expense and obligations, such as interest rates, return on plan assets, the rate of salary increases, expected service, and health care cost trend rates.

The assets, obligations, and assumptions used to measure pension and retiree medical expenses are determined at the beginning of the year (“measurement date”). Because obligations are measured on a discounted basis, the discount rate is a significant assumption. It is based on interest rates for high-quality, long-term corporate debt at each measurement date. The expected return on pension plan assets reflects expected capital market returns for each asset class, which are based on historical returns, adjusted for the expected effects of diversification and active management (net of fees) of the assets. The other assumptions also reflect our historical experience and management’s best judgment regarding future expectations.

We review our assumptions on each annual measurement date. As of April 30, 2015, we have decreased the weighted-average discount rate for pension obligations from 4.46% to 4.09%, and for other postretirement benefit obligations from 4.67% to 4.09%. We have also decreased the expected return on plan assets from 7.5% to 7.0% as a result of lower capital market return expectations for our current asset allocation. Using these assumptions, we estimate our pension and postretirement benefit expense for fiscal 2016 will be approximately $50 million, compared to $41 million for fiscal 2015. A decrease/increase of 25 basis points in the assumed discount rate would increase/decrease the fiscal 2016 expense by approximately $3 million. A decrease/increase of 25 basis points in the assumed return on plan assets would increase/decrease the fiscal 2016 expense by approximately $2 million.

Income taxes. Significant judgment is required in evaluating our tax positions. We establish liabilities when some positions are likely to be challenged and may not succeed, despite our belief that our tax return positions are fully supportable. We adjust these liabilities in light of changing circumstances, such as the progress of a tax audit. We believe current liabilities are appropriate for all known contingencies, but this situation could change.

Years can elapse before we can resolve a particular matter for which we have established a tax liability. Although predicting the final outcome or the timing of resolution of any particular tax matter can be difficult, we believe our liabilities reflect the likely outcome of known tax contingencies. Unfavorable settlement of any particular issue could require use of our cash; conversely, a favorable resolution could result in either reduced cash tax payments, or the reversal of previously established liabilities, or some combination of these, which could reduce our effective tax rate.