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

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

Volume and Depletions

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

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

Non-GAAP Financial Measures

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

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

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“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.

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

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“Sale of Southern Comfort and Tuaca.” On January 14, 2016, we reached an agreement to sell our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. The transaction closed March 1, 2016, for $543 million in cash (subject to a post-closing inventory adjustment), which resulted in a one-time gain of $485 million in the fourth quarter of fiscal 2016. This adjustment removes (a) the gain on sale, (b) those transaction-related costs not included in the gain on sale, and (c) operating activity for the non-comparable period, March and April in fiscal 2015 and 2016. We believe that these adjustments allow us to understand better our underlying results on a comparable basis.

Management uses “underlying” measures of performance to assist it in comparing and measuring our performance from period to period on a consistent basis, and in comparing our performance to that of our competitors. We also use underlying measures in connection with management incentive compensation calculations. Management also uses underlying measures in its planning and forecasting and in communications with the board of directors, stockholders, analysts, and investors concerning our financial performance. We have provided reconciliations of the non-GAAP measures adjusted to an “underlying” basis to their

nearest GAAP measures in the tables below under “Results of Operations – Year-Over-Year Comparisons” and have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

We also use the following additional non-GAAP financial measures in “Item 6. Selected Financial Data” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary”:

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“Return on average invested capital.” This measure refers to the sum of net income and after-tax interest expense, divided by average invested capital. Average invested capital equals assets less liabilities, excluding interest-bearing debt, and is calculated using the average of the most recent 13 month-end balances. After-tax interest expense equals interest expense multiplied by one minus our effective tax rate. We consider return on average invested capital to be a meaningful indicator of how effectively and efficiently we use capital invested in our business.

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“Adjusted” measures for (a) operating income, (b) operating margin, (c) effective tax rate, (d) diluted earnings per share, and (e) return on average invested capital. We provide these adjusted measures to identify the effect of the sale of Southern Comfort and Tuaca on reported income from operations and other key measures derived therefrom; this effect is expected not be part of our sustainable results or trends. These measures remove the effects of (a) the gain on sale, (b) those transaction-related costs not included in the gain on sale, and (c) operating activity related to the brands for the period subsequent to their divestiture (March and April in fiscal 2016). Tax effects on items (c), (d), and (e) are calculated consistent with the nature of the underlying transaction.

Our MD&A includes the following sections:

		Page
EXECUTIVE SUMMARY		24
RESULTS OF OPERATIONS		30
LIQUIDITY AND CAPITAL RESOURCES		40
LONG-TERM OBLIGATIONS		42
CRITICAL ACCOUNTING POLICIES AND ESTIMATES		43

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:

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We have further developed the Jack Daniel’s family of brands through innovations designed to create new demand for products from the world’s foremost maker of American whiskey. These efforts resulted in the successful launch of Jack Daniel’s Tennessee Honey (JDTH), Jack Daniel’s Tennessee Fire (JDTF), and a series of ultra-premium-priced line extensions including Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and several additions to the Jack Daniel’s Single Barrel Collection. At the same time, we have invested steadily in our core Jack Daniel’s Tennessee Whiskey (JDTW) brand to support its growth around the world.

We are partway through a multiyear production capacity expansion project for Jack Daniel's. In fiscal 2014, we completed construction of the Jack Daniel Cooperage in Decatur, Alabama. We announced a major expansion of our distilling capacity in August 2013, and we completed construction of a new distillery on our property in Lynchburg, Tennessee during the first quarter of fiscal 2016. The next stage of our expansion in Lynchburg will add bottling capacity and finished product warehousing, to be completed in the next few years.

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The continued growth of the Jack Daniel’s family of brands is the most important measure of our progress toward becoming a global leader in whiskey. Woodford Reserve’s growth has also helped us move forward on this ambition, as this super-premium brand grew volume at a compound annual rate of approximately 25% from fiscal 2011 to fiscal 2016 – more than doubling its annual volume to approximately 500,000 nine-liter cases by the end of fiscal 2016. In June 2013, we announced a more than $35 million expansion at our Woodford Reserve Distillery to support our expected growth. During fiscal 2014, we completed a renovation of our visitors’ center at the Woodford Reserve Distillery, as visitors have increased over 20% since fiscal 2014 to almost 125,000 visitors in fiscal 2016. During fiscal 2016, we completed the construction of two new warehouses, and we entered into the second phase of a bottling expansion. In fiscal 2017, we expect to complete two new warehouses.

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Brown-Forman was founded in 1870 with Old Forester, the world’s first bottled bourbon brand. Old Forester is attracting a new generation of fans, as it has grown net sales by approximately 20% annually since fiscal 2011, including growth of nearly 50% in fiscal 2016. We plan to leverage the current momentum of Old Forester and the favorable trends in American whiskey to reestablish Old Forester as an iconic bourbon brand. To support our ambition, we announced the construction of the Old Forester Distillery and visitors’ center in fiscal 2014, and in May 2015 purchased two historic buildings on Main Street in Louisville for its location. We began construction of the Old Forester Distillery in February 2016, and we expect to open late in 2017. We anticipate investing approximately $50 million in this project.

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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.

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In addition to our successful efforts to develop and introduce new products and line extensions for the Jack Daniel’s family of brands, we have pursued growth through innovation in the rest of our portfolio. Notable introductions have included Woodford Reserve Double Oaked (fiscal 2012) and Herradura Ultra (fiscal 2015). In April 2016, we announced plans to release our first new bourbon trademark in 20 years, Coopers’ Craft, in the summer of 2016 (fiscal 2017).

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In June 2015 (fiscal 2016), we purchased all of the shares of Slane Castle Irish Whiskey Limited and announced plans to invest approximately $40 million to build a new distillery, construct warehouses, and develop a consumer experience on the historic Slane Castle Estate (in County Meath, about 30 miles north of Dublin). We plan to open the Slane Castle Whiskey Distillery and to introduce new Irish whiskeys in the spring of 2017, using high-quality whiskey purchased from other Irish distilleries and finished to Slane’s specifications while the whiskey made at the new Slane Distillery matures.

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In June 2016 (fiscal 2017), we purchased The BenRiach Distillery Company Limited and, with it, three single malt Scotch whisky brands and distilleries – The GlenDronach, BenRiach, and Glenglassaugh. This purchase included other trademarks, a bottling plant, and The BenRiach Distillery Company Limited’s headquarters in Edinburgh, Scotland. We believe that these super-premium brands will provide us an immediate opportunity to participate in the growing single malt Scotch category and strengthen our portfolio’s long-term growth prospects in markets such as the United States, the United Kingdom, Taiwan, Germany, and in travel retail. We plan to build three new warehouses in fiscal 2017 to support the growth of these brands.

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Our focus on the importance of the barrel in crafting whiskeys of the highest quality is perhaps unique in the industry. We believe we are the largest maker of new whiskey barrels in the world and, within the global spirits industry, only we own manufacturing facilities for new whiskey barrels. Our control over this critical input to the whiskey-making process gives us a competitive advantage – one that applies both to Jack Daniel’s and to our other aged spirits, including bourbons and tequilas today and – over time – Irish and Scotch whiskeys. For example, our barrel-making expertise enables us to introduce unique characteristics into our products, as we did with our successful recent innovation, Woodford Reserve Double Oaked. In addition, newly-introduced Coopers’ Craft bourbon was created to celebrate our more than 70 years of expertise raising barrels at the Brown-Forman Cooperage. While we expect it to benefit from a generally favorable craft spirits trend, we also believe that linking its identity to our distinctive barrel-making expertise will benefit Coopers’. As we progress toward becoming a global leader in whiskey, we will continue to take advantage of this source of differentiation for our existing portfolio and across the range of new opportunities.

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Over the past several decades, we have pursued international growth both in larger, developed markets and in the emerging world. In recent years, our most visible progress has been the evolution of our RTC strategy in several key markets. We set up new distribution companies in three of our current top ten countries (Germany, France, and Turkey) and also in Brazil, a market that we believe is among our most promising long-term growth opportunities. In fiscal 2017, we plan to establish a new distribution company in Spain, which we expect to begin operating in fiscal 2018. We have added substantially to our employee base outside the United States, mostly in markets where we evolved our RTC strategy.

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Our capital deployment initiatives have been focused on (1) enabling the expected future growth of our existing businesses through investments in our production capacity, innovation, and brand-building efforts for our existing portfolio; and (2) returning cash to our shareholders. From fiscal 2010 through 2016, we returned over $4.6 billion to our shareholders through $1.5 billion in regular quarterly dividends, $1.0 billion in two special dividends, and $2.1 billion in share repurchases.

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

Fiscal 2016 Financial Highlights

Summary of Operating Performance Fiscal 2014 - 2016
													Reported Change						Underlying Change1
Fiscal year ended April 30	2014				2015				2016				2015 vs. 2014			2016 vs. 2015			2015 vs. 2014			2016 vs. 2015
Net sales	$	3,946			$	4,096			$	4,011			4	%		(2	)%		6	%		5	%
Excise taxes	955				962				922				1	%		(4	)%		5	%		6	%
Cost of sales	913				951				945				4	%		(1	)%		7	%		3	%
Gross profit	2,078				2,183				2,144				5	%		(2	)%		7	%		5	%
Advertising	436				437				417				—	%		(4	)%		4	%		2	%
SG&A	686				697				688				2	%		(1	)%		4	%		2	%
Operating income	$	971			$	1,027			$	1,533			6	%		49	%		9	%		8	%
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	%
Effective tax rate	30.5		%		31.7		%		28.3		%		1.2pp			(3.4)pp
Diluted earnings per share	$	3.06			$	3.21			$	5.22			5	%		63	%
Return on average invested capital2	21.6		%		22.0		%		34.1		%		0.4pp			12.1pp

1See “Non-GAAP Financial Measures” above for details on our use of “underlying changes,” including how we calculate these measures and why we think this information is useful to readers.

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

On March 1, 2016, we sold our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. for $543 million in cash (subject to a post-closing inventory adjustment). The following table shows the impact of the sale of Southern Comfort and Tuaca on our operating results.

Sale of Southern Comfort and Tuaca
Fiscal year ended April 30, 2016	Reported				Sale of Southern Comfort and Tuaca1				Adjusted
Operating income	$	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 related to the brands for the period subsequent to their divestiture (March and April in fiscal 2016).

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

In fiscal 2016, we delivered net sales of $4.0 billion, a decrease of 2% compared to fiscal 2015, but an increase of 5% on an underlying basis; operating income of $1.5 billion, an increase of 49% compared to fiscal 2015, or 8% on an underlying basis;

and, diluted earnings per share of $5.22, or $3.46 after removing the $1.76 impact of the sale of Southern Comfort and Tuaca. We improved our operating margin in fiscal 2016, as we added 1.1 percentage points from our continuing business and 12.0 percentage points attributed to the sale of Southern Comfort and Tuaca. Our operating results were driven largely by the gain on the sale of our Southern Comfort and Tuaca businesses, as well as the continued growth of our American whiskey portfolio, led by the Jack Daniel’s family of brands. From a geographic perspective, the United States and our developed international markets led the growth, while emerging markets grew more slowly compared to fiscal 2015, and our business in the travel retail channel declined. Foreign exchange negatively affected our reported operating results as the U.S. dollar strengthened compared to most foreign currencies.

In fiscal 2016, our return on average invested capital improved to 34.1% driven by the sale of Southern Comfort and Tuaca. Excluding the effect of the sale of Southern Comfort and Tuaca, adjusted return on average invested capital increased to 23.0%, despite capital spending of $108 million and increased working capital related to our maturing whiskey inventory. Also during fiscal 2016, we returned $1.4 billion in cash to our shareholders through dividend payments of $266 million and share repurchases of $1.1 billion while maintaining investment-grade credit ratings.

Outlook

Looking ahead to fiscal 2017, we are optimistic about our prospects for net sales and operating income growth, and we expect to make further progress toward our strategic ambitions. We describe below the trends, developments, and uncertainties that we expect to affect our business.

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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 and 2014, and to a lesser extent in fiscal 2015 and 2016, our operating results have benefited from price increases for several of our brands, including, most importantly, JDTW. Looking ahead, we anticipate volume will be the more significant driver of growth compared to the last few years. We have not raised prices generally in international markets in response to the strengthened U.S. dollar, but we have recently increased prices in higher-inflation economies including Russia, Turkey, Brazil, and certain other markets. In many emerging markets, and for many of our travel retail customers around the world, we price our products in dollars. As foreign currencies generally weakened in fiscal 2015 and 2016, we believe that lower purchasing power in dollar terms of emerging-market consumers has dampened demand for our products; we do not expect improvement in fiscal 2017. In fiscal 2017, we expect lower prices for our used barrels as a result of weaker demand from blended Scotch industry buyers.

1 The IWSR, 2015 data.

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Uncertain increase in costs of sales. We expect that freight, logistics, and raw materials costs will generally increase in the low single digits during fiscal 2017. Our cost of sales are somewhat sensitive to variation in prices of certain commodities, including prices of corn, natural gas, oil, and wood used in our barrels, among others. In addition, we have been investing in our production capacity over the last four years at more than twice the rate of historical capital expenditure investment, which will also contribute to rising costs as we depreciate these investments.

Wood barrels are an essential input to our whiskeys. We believe that manufacturing our own barrels ensures both high quality and consistent, timely availability for our whiskey distilleries. In addition to our cooperages, where we assemble finished barrels, we manufacture wood staves and headings at four mills. Higher demand and lower supply in the market for wood inputs (American white oak logs and barrel components, such as wood staves and headings), have resulted in higher prices from time to time. While many factors drive demand, among these is the recent, sustained rise in the popularity of American whiskey. While American white oak is not in short supply, we believe that market forces have led to higher prices of wood inputs, which we expect will lead to higher costs for our barreled whiskey.

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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.

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Emerging-market uncertainty. During fiscal 2016, we grew underlying net sales in emerging markets, led by the Jack Daniel’s family of brands. While our competition reported a general slowdown or declines in emerging markets, we grew, but our rate of growth slowed. In fiscal 2016, we experienced challenges in Russia and Southeast Asia, and looking ahead to fiscal 2017, we are cautious about our growth outlook in emerging markets given the geopolitical uncertainty in Brazil, Turkey, and Russia. These three countries have contributed to our growth from emerging markets in recent years. Looking beyond the current challenges, we believe that emerging markets will be important to our sustained, long-term growth potential, and we remain committed to developing our business there.

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Foreign currency headwinds anticipated to continue. The more we expand our business globally, the more exchange rate fluctuations relative to the U.S. dollar influence our financial results. We sell more in local currencies than we purchase – for example, Jack Daniel’s Tennessee Whiskey can be distilled only in Tennessee. Accordingly, we have a net negative exposure to a strengthening U.S. dollar relative to other currencies. Additionally, the U.S. dollar is the functional currency for most of our consolidated operations. Our reported results were significantly affected in fiscal 2016 by negative foreign exchange due to the strength of the U.S. dollar, and we anticipate our fiscal 2017 results will be negatively affected as well. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for more information about foreign exchange and our business.

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

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

RESULTS OF OPERATIONS – FISCAL 2016 MARKET HIGHLIGHTS

The following table shows net sales results for our ten largest markets, summarized by geographic area, for fiscal 2016, compared to fiscal 2015. We discuss the most significant changes in net sales for each geography.

Top 10 Markets - Percentage of Fiscal 2016 Total Net Sales and Fiscal 2016 Net Sales Growth by Geographic Area
					Net Sales1 % Change vs. 2015
Markets		% of Fiscal 2016 Net Sales			Reported		Sale of Southern Comfort and Tuaca		Foreign Exchange		Net Chg in Est. Distributor Inventories			Underlylng
United States		46	%		3	%	1	%	—	%	1	%		6	%
Europe		31	%		(2	)%	—	%	10	%	(3	)%		6	%
United Kingdom		10	%		5	%	1	%	3	%	—	%		9	%
Germany		5	%		(1	)%	—	%	7	%	—	%		7	%
Poland		3	%		(12	)%	—	%	13	%	—	%		1	%
France		3	%		6	%	—	%	8	%	—	%		13	%
Turkey		2	%		(2	)%	—	%	19	%	—	%		17	%
Russia		1	%		(26	)%	—	%	43	%	(33	)%		(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	%		—	%
Total		100	%		(2	)%	1	%	6	%	—	%		5	%
Note: Totals may differ due to rounding

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

The United States, our largest and most important market, accounted for 46% of our reported net sales in fiscal 2016 and 43% of net sales in fiscal 2015. In fiscal 2016, reported net sales in the United States grew 3%, while underlying net sales increased 6%, after adjusting for (a) the negative effect of the absence of normal revenues in March and April following the sale of Southern Comfort and Tuaca and (b) the negative year-over-year effect of distributors’ inventory buy-ins related to the launch of JDTF at the end of fiscal 2015. The growth in underlying net sales was driven by the Jack Daniel’s family of brands, including higher volumes for JDTF, following its launch in the fourth quarter of fiscal 2015, and for JDTW. Volume gains for Woodford Reserve also contributed to the underlying net sales growth, while lower volumes from Southern Comfort (before we sold the brand) and Canadian Mist partially offset these gains. Overall, we believe our brands grew market share in fiscal 2016 in both the on-premise and off-premise channels.

Europe accounted for 31% of our net sales in both fiscal 2016 and fiscal 2015. For fiscal 2016, reported net sales in Europe were down 2%, while underlying net sales were up 6%, after adjusting for the negative effect of foreign exchange and the positive effect of a net increase in distributor inventories in Russia. The growth in underlying net sales was driven by gains in the United Kingdom, France, Germany, and Turkey, partially offset by declines in Russia.

•	In the United Kingdom, underlying net sales growth was driven by the Jack Daniel’s family of brands, led by volume growth for JDTW reflecting strong consumer demand, volume growth for JD RTDs, and the test market introduction of JDTF.

•	In Germany, underlying net sales growth was primarily driven by higher volumes of JDTW. Volume growth of JDTH and JD RTDs also contributed.

•	In Poland, volume gains for JDTW led underlying net sales growth, partially offset by a decline in volume of a lower-margin brand that we discontinued in fiscal 2016.

•	In France, underlying net sales growth was primarily driven by higher volumes for JDTW and JDTH, as the Jack Daniel’s family of brands continued to gain market share in the world’s third largest whiskey market.

•	In Turkey, price increases, higher volumes, and a beneficial channel mix for JDTW drove underlying net sales growth.

•	In Russia, volume declines for both Finlandia and JDTW were responsible for the decrease in underlying net sales. We believe that our results in this market were driven by factors common to all premium spirits companies – namely, challenging economic conditions and consumer trends toward less expensive, local products.

Australia accounted for 9% of our net sales in fiscal 2016, down from 11% in fiscal 2015. In fiscal 2016, reported net sales were down 12%, but underlying net sales were up 2% after adjusting for the negative effect of a weaker Australian dollar. Underlying net sales growth was driven by the Jack Daniel’s family of brands, led by volume gains for JD RTDs and JDTW, as well as the introduction of JDTF late in the fiscal year.

Net sales for our other markets constituted 14% of our total net sales in fiscal 2016, down from 15% in fiscal 2015. Reported net sales were down 10% in fiscal 2016, but underlying net sales were up 3% after adjusting reported results for the negative effect of a stronger U.S. dollar and the negative impact of a net decrease in distributor inventories. The increase in underlying net sales was led by Mexico, Brazil, and sub-Saharan Africa. Decreased volume in travel retail and Southeast Asia partially offset the overall growth in this grouping.

RESULTS OF OPERATIONS – FISCAL 2016 BRAND HIGHLIGHTS

The following table highlights the worldwide results of our largest brands for fiscal 2016, compared to the results for fiscal 2015. We discuss results of the brands most affecting our performance below the table.

Major Brands Worldwide Results for Fiscal 20161
	Depletion Volume										Net Sales % Change vs. 2015
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

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

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

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

In fiscal 2016, the Jack Daniel’s family of brands grew volumes 5% globally to nearly 16 million drinks-equivalent nine-liter cases across all expressions of the brand. Underlying net sales for the family of brands increased 6% (reported declined 1%) and was the most significant contributor to our total underlying net sales growth. In fiscal 2016, JDTW led the family of brand’s overall global growth, followed by (a) JDTF, which we introduced in the United States nationwide in the fourth quarter of fiscal 2015 and rolled out in select international markets in fiscal 2016; and (b) JDTH, which declined slightly in the United States but grew in most other markets.

Jack Daniel’s Tennessee Whiskey generates a significant percentage of our total net sales, and it is our top priority. As the world’s fourth-largest premium spirits brand measured by both volume and retail value,1 JDTW is one of the most valuable spirits brands in the world. During calendar 2015, JDTW grew volume for a 24th consecutive year and outpaced the average volume growth rate of the top 25 premium spirits brands1 – an achievement that underscores our belief in the brand’s long-term appeal and sustainable growth potential. JDTW grew volumes 3% globally in fiscal 2016, down from its 4% growth rate in fiscal 2015. JDTW underlying net sales grew 4% (reported declined 1%) led by the United States, the United Kingdom, Turkey, Germany, and France. These increases were partially offset by declines in travel retail and a slowdown in growth in emerging markets, driven by declines in Southeast Asia and Russia.

Since its introduction in late fiscal 2011, Jack Daniel’s Tennessee Honey has contributed significantly to our net sales growth. We estimate that JDTH is now the 13th largest brand in the world priced over $25 per 750ml bottle.2 In fiscal 2016, JDTH grew volumes by 8%, down from its 29% growth rate last year. A slowing growth rate was expected, considering that we essentially completed the international rollout of JDTH in fiscal 2015. JDTH grew underlying net sales 9% (reported were flat) driven by higher volumes in Brazil and France, and, to a lesser extent, growth in the United Kingdom, Germany, and Czech Republic. These gains were partially offset by declines in the United States, where takeaway trends weakened due to increased competition.

Among our Other Jack Daniel’s whiskey brands, the most significant contributor to underlying net sales growth was JDTF, launched nationally in the United States at the end of fiscal 2015 and rolled out to select international markets in fiscal 2016, including the United Kingdom (test market), Czech Republic, and Australia (introduced late in fiscal 2016). JDTF was designated as an Impact “Hot Brand”3 in its first calendar year. JDTF contributed over 20% of the underlying net sales growth delivered by the Jack Daniel’s family of brands in fiscal 2016.

The Jack Daniel’s RTDs/RTPs brands grew volume 4% and underlying net sales 4% (reported declined 7%) in fiscal 2016. JD RTDs underlying net sales growth was driven by volume gains in the United Kingdom, Australia, Mexico, and Germany. These gains were partially offset by declines for Jack Daniel’s Winter Jack.

In fiscal 2016, New Mix volumes increased 14%, while underlying net sales growth of 23% (reported increased 2%) was helped by a price increase. Growth was helped by low trade inventories at the beginning of fiscal 2016, as well as by higher takeaway trends relative to fiscal 2015, new size offerings, and distribution expansion within Mexico.

In fiscal 2016, Finlandia volumes declined 12%, while underlying net sales were down 5% (reported declined 16%). The decline in underlying net sales was driven predominantly by lower volumes in travel retail and Russia. In Poland, the brand’s largest market, Finlandia grew modestly compared to last year, but continued to suffer from generally weak consumer demand for premium vodkas in this competitive marketplace. In addition, Finlandia RTDs were discontinued in Mexico.

Canadian Mist volumes declined 11% while underlying net sales also decreased 11% (reported declined 10%) in fiscal 2016. The net sales declines were driven by lower volumes in the United States. In fiscal 2017, we plan to introduce new packaging and related marketing programs in an effort to stabilize the brand.

el Jimador volumes declined 4% in fiscal 2016, but underlying net sales were up 5% (reported declined 5%). Underlying net sales growth was driven by higher volumes in the United States, partially offset by volume declines in Mexico. We expected short-term volume declines in Mexico, as we decided to begin raising prices strategically in fiscal 2015. el Jimador continued to grow market share in the United States, its largest market, and returned to Impact’s “Hot Brands” list3 in calendar 2015. In the rest of the world, el Jimador grew volumes more than 15% to surpass 200,000 nine-liter cases.

Woodford Reserve grew volumes 26% in fiscal 2016 (after growing 30% in fiscal 2015 and 24% in fiscal 2014) and was named to Impact’s “Hot Brands” list3. In addition, underlying net sales grew 28% (reported increased 29%) in fiscal 2016. The United States is by far the brand’s most important market and was responsible for most of its growth during fiscal 2016. Woodford Reserve continued its momentum outside the United States as well, growing volumes 33%, driven by the United Kingdom. During fiscal 2016, we increased our advertising investment in Woodford Reserve both in the United States and internationally. Woodford Reserve led a fast-growing competitive set of super-premium American whiskeys, and we believe it is poised for continued growth as interest in bourbon increases around the world. We plan to devote substantial resources to Woodford Reserve to support its growth potential, including sustained advertising investment focused on consumer communications and capital spending for two new warehouses in fiscal 2017.

1Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in March 2016.
2The IWSR, 2015 data.
3Impact Databank published the Impact’s “Hot Brands - Spirits” list in March 2016.

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 COMPARISONS

NET SALES
Percentage change versus the prior fiscal year ended April 30			2016					2015
Change in reported net sales			(2	)%				4	%
Sale of Southern Comfort and Tuaca			1	%				—	%
Foreign exchange			6	%				3	%
Estimated net change in distributor inventories			—	%				(1	)%
Change in underlying net sales			5	%				6	%
Change in underlying net sales attributed to:
Volume	1	%				4	%
Net price/mix	4	%				3	%
Note: Totals may differ due to rounding

Fiscal 2016 compared to Fiscal 2015

Net sales of $4,011 million decreased 2%, or $85 million, in fiscal 2016 compared to fiscal 2015. Underlying net sales growth was 5%, after adjusting reported results for the negative effects of foreign exchange and the sale of Southern Comfort and Tuaca. The negative effect of foreign exchange was driven primarily by the dollar’s broad strengthening against most currencies. The change in underlying net sales was driven by the 4% positive impact of price/mix and 1% volume growth. Improved price/mix was driven by a shift in sales out of lower-priced brands, most notably Finlandia and Canadian Mist, to higher-priced brands, led by the Jack Daniel’s family of brands and Woodford Reserve.

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

•	broad-based, consumer-oriented growth of JDTW volumes, led by the United States, the United Kingdom, Germany, France, Mexico, and Poland, and beneficial channel mix in Turkey;

•	launch of JDTF in the United States, the United Kingdom (test market), Czech Republic, and Australia (introduced late in fiscal 2016);

•	growth of our tequila brands led by (1) higher volumes of New Mix in Mexico, (2) higher prices and volumes of Herradura in Mexico and the United States, and (3) higher volumes of el Jimador in the United States;

•	volume growth of Woodford Reserve in the United States;

•	broad-based volume growth of JDTH outside the United States, led by Brazil and France; and

•	higher volumes of JD RTDs in the United Kingdom and Australia.

The primary factors partially offsetting growth in underlying net sales were:

•	broad-based declines of Finlandia in Europe, most notably in Russia;

•	volume declines for lower-margin brands that we discontinued in fiscal 2016 and for lower-margin agency brands that we no longer distribute;

•	declines in Southern Comfort in the United States before we sold it;

•	volume declines of el Jimador in Mexico; and

•	volume declines of JDTW in Russia.

Fiscal 2015 compared to Fiscal 2014

Net sales of $4,096 million increased 4%, or $150 million, in fiscal 2015 compared to fiscal 2014. Underlying net sales growth was 6%, after adjusting reported results for the negative effect of foreign exchange and the estimated net increase in distributor inventories. The negative effect of foreign exchange, after taking into consideration our hedging activities, was driven primarily by weaker European currencies. The estimated net increase in distributor inventories resulted from distributor buy-ins related to the nationwide rollout of Jack Daniel’s Tennessee Fire in the United States and the year-over-year effect of our January 2014 RTC change in France. In fiscal 2014, our former distributor in France fully depleted inventories of our brands during November and December – during which time there were essentially no shipments – before we began selling directly to customers in France in January 2014. Going forward, we will not adjust France’s underlying results for changes in distributor inventories because fiscal 2015 fully reflected owned distribution. The change in underlying net sales was driven by the 4% positive impact

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 for the year.

Gross margin improved to 53.4% in fiscal 2016, up 10 basis points from 53.3% in fiscal 2015. The increase in gross margin was primarily due to a favorable mix shift.

Fiscal 2015 compared to Fiscal 2014

Gross profit of $2,183 million increased $105 million, or 5%, in fiscal 2015 compared to fiscal 2014. Gross profit on an underlying basis improved 7% after adjusting reported gross profit for the negative effects of foreign exchange and the estimated net increase in distributor inventories. The increase resulted from the same factors that contributed to the increase in underlying net sales for the year and was enhanced by the smaller combined increase in underlying excise taxes and cost of sales for the year.

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

ADVERTISING EXPENSES
Percentage change versus the prior fiscal year ended April 30	2016			2015
Change in reported advertising	(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 the positive effects of foreign exchange and the sale of Southern Comfort and Tuaca. The increase in underlying advertising expenses was driven primarily by investments in the United States for Woodford Reserve, JDTW, and JDTF, as well as higher spending outside the United States on the Jack Daniel’s family of brands. These increases were partially offset by lower spending for Southern Comfort globally and Finlandia Vodka in many markets.

Fiscal 2015 compared to Fiscal 2014

Advertising expenses of $437 million increased $1 million in fiscal 2015 compared to fiscal 2014, essentially unchanged on a reported basis. Underlying advertising expenses increased 4% after adjusting reported results for the benefit of foreign exchange. The increase in underlying advertising expenses was driven primarily by (a) investments in United States related to the nationwide launch of JDTF, (b) higher spending on JDTW in the United States, and (c) higher spending outside the United States on the Jack Daniel’s family of brands. These increases were partially offset by lower spending for Southern Comfort and Finlandia in many markets.

SELLING, GENERAL, AND ADMINISTRATIVE (SG&A) EXPENSES
Percentage change versus the prior fiscal year ended April 30	2016			2015
Change in reported SG&A	(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

Fiscal 2016 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 2015

Operating income was $1,533 million in fiscal 2016, an increase of $506 million, or 49% compared to fiscal 2015. Underlying operating income growth was 8% after adjusting for (a) the positive effect of the sale of Southern Comfort and Tuaca; (b) the negative effect of foreign exchange related to the broad strengthening of the dollar; and (c) the estimated net decrease in distributor inventories, driven primarily by the absence of the pipeline fill in the United States associated with the nationwide rollout of JDTF in the fourth quarter of fiscal 2015. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by a slower rate of growth in operating expenses.

Operating margin grew 13.1 percentage points to 38.2% in fiscal 2016 from 25.1% in fiscal 2015. The same factors that drove the increase in our gross margin benefited our operating margin, additionally enhanced by a slower rate of growth in operating expenses compared to the gross profit growth rate. The sale of Southern Comfort and Tuaca increased our operating margin 12.0 percentage points.

Fiscal 2015 compared to Fiscal 2014

Operating income was $1,027 million in fiscal 2015, an increase of $56 million, or 6%, compared to fiscal 2014. Underlying operating income growth was 9% after adjusting for (a) the estimated net increase in U.S. distributor inventories in anticipation of the nationwide rollout of JDTF, (b) the year-over-year effect of our January 2014 RTC change in France, and (c) the negative effect of foreign exchange, mostly related to weaker European currencies. Included in the negative effect of foreign exchange was $30 million in other expense (income), net, in fiscal 2015 related to the revaluation of foreign-currency-denominated net assets. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by a slower rate of growth in operating expenses.

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

Fiscal 2016 compared to Fiscal 2015

Interest expense (net) increased by $19 million, or 70%, in fiscal 2016 compared to fiscal 2015, primarily due to our June 2015 issuance of $500 million 4.50% senior unsecured notes due on July 15, 2045 and the increase in our commercial paper borrowing.

Our effective tax rate for fiscal 2016 was 28.3% compared to 31.7% in fiscal 2015. The decrease in our effective tax rate was driven primarily by an increase in the beneficial impact of foreign earnings and the impact of the sale of the Southern Comfort and Tuaca business.

Diluted earnings per share were $5.22 in fiscal 2016, up 63% from $3.21 for fiscal 2015. This increase resulted from (a) the same factors that contributed to the increase in operating income, including $1.76 from the sale of Southern Comfort and Tuaca, (b) the reduction in the shares outstanding resulting from share repurchases, and (c) the decrease in the effective tax rate.

Fiscal 2015 compared to Fiscal 2014

Our effective tax rate for fiscal 2015 was 31.7% compared to 30.5% in fiscal 2014. The effective tax rates include the amortization ($15 million in fiscal 2015 and $5 million in fiscal 2014) of a deferred tax benefit that resulted from the release of certain deferred tax liabilities in connection with an intercompany transfer of assets on January 31, 2014. The increase in our effective tax rate was driven primarily by the reduction in the beneficial impact of foreign earnings, partially offset by the increase in the amortization of this deferred tax benefit.

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

LIQUIDITY AND CAPITAL RESOURCES

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

CASH FLOW SUMMARY

(Dollars in millions)		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 commercial paper program that we regularly use to fund our short-term credit needs and to maintain our access to the capital markets. During fiscal 2015, our commercial paper borrowings averaged $191 million, with an average maturity of 14 days and an average interest rate of 0.17%. During fiscal 2016, our commercial paper borrowings averaged $331 million, with an average maturity of 29 days and an average interest rate of 0.42%. Commercial paper outstanding was $183 million at April 30, 2015, and $269 million at April 30, 2016.

Our commercial paper program is supported with available commitments under our currently undrawn $800 million bank credit facility that matures on November 20, 2018, and undrawn $400 million 364-day credit facility that matures on May 5, 2017. Further, we believe that the markets for investment-grade bonds and private placements are accessible sources of long-term financing that could meet any additional liquidity needs. Although unlikely, under extreme market conditions, one or more participating banks may not be able to fully fund its commitments under our credit facility.

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

As of April 30, 2016, we had total cash and cash equivalents of $263 million. Of this amount, $220 million was held by foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. We do not expect to need the cash generated by those foreign subsidiaries to fund our domestic operations. In the unforeseen event that we were to repatriate cash from those foreign subsidiaries, we would be required to provide for and pay U.S. taxes on permanently repatriated earnings. See Note 11 to our Consolidated Financial Statements for further information about the taxes that would have been provided on the undistributed earnings of these foreign subsidiaries if not considered indefinitely reinvested.

As announced on May 26, 2016, our Board of Directors declared a regular quarterly cash dividend of $0.34 per share on our Class A and Class B common stock. Stockholders of record on June 6, 2016, will receive the dividend on July 1, 2016.

On June 1, 2016, we acquired 90% of the voting equity interests in The BenRiach Distillery Company Limited for approximately $307 million in cash. The acquisition included our assumption of the company’s debts and transaction-related obligations totaling approximately $66 million, which we have since paid. We financed the transaction with a combination of cash on hand and short-term commercial paper borrowing. The transaction includes a put and call option agreement for the remaining 10% equity shares. Under that agreement, we may choose (or be required) to purchase the remaining 10% for approximately 24 million British pounds (approximately $34 million at the exchange rate on June 1, 2016) during the one-year period ending November 14, 2017.

We believe our current liquidity position is strong and sufficient to meet all of our future financial commitments. A quantitative covenant of our $800 million bank credit facility requires the ratio of consolidated EBITDA (as defined in the agreement) to consolidated interest expense to be at least 3 to 1. At April 30, 2016, with a ratio of 24 to 1, we were well within the covenant’s parameters. The $400 million 364-day credit facility has no quantitative covenant requirement.

OFF-BALANCE SHEET ARRANGEMENTS

As of April 30, 2016, we were not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material effect on our financial condition, results of operations, or liquidity.

LONG-TERM OBLIGATIONS

We have long-term obligations related to contracts, leases, borrowing arrangements, and employee benefit plans that we enter into in the normal course of business (see Notes 4, 5, and 9 to our Consolidated Financial Statements). The following table summarizes the amounts of those obligations as of April 30, 2016, and the years when they must be paid:

LONG-TERM OBLIGATIONS1

(Dollars in millions)		Total				2017				2018-2019				2020-2021				After 2021
Long-term debt		$	1,250			$	—			$	250			$	—			$	1,000
Interest on long-term debt		950				40				77				75				758
Grape purchase obligations		20				10				7				2				1
Operating leases		46				18				18				7				3
Postretirement benefit obligations2		33				33				n/a				n/a				n/a
Agave purchase obligations3		2				n/a				n/a				n/a				n/a
Total		$	2,301			$	101			$	352			$	84			$	1,762

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

2	As of April 30, 2016, we have unfunded pension and other postretirement benefit obligations of $360 million. Because we cannot determine the specific periods in which those obligations will be funded, the table above reflects no amounts related to those obligations other than the $33 million of expected contributions (including $26 million of expected discretionary contributions) in fiscal 2017.

3

As discussed in Note 4 to our Consolidated Financial Statements, we have obligations to purchase agave, a plant whose sap forms the raw material for tequila. As of April 30, 2016, based on current market prices, obligations under these contracts totaled $2 million. Because we cannot determine the specific periods in which those obligations will be paid, the above table reflects only the total related to those obligations.

We expect to meet these obligations with internally generated funds or issuance of debt.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

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

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

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

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

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

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

We review our assumptions on each annual measurement date. As of April 30, 2016, we have decreased the weighted-average discount rate for pension obligations from 4.09% to 4.02%, and for other postretirement benefit obligations from 4.09% to 3.96%. Our expected return on plan assets of 7.0% has not changed. Using these assumptions, we estimate our pension and postretirement benefit expense for fiscal 2017 will be approximately $47 million, compared to $51 million for fiscal 2016. A decrease/increase of 25 basis points in the assumed discount rate would increase/decrease the fiscal 2017 expense by approximately $3 million. A decrease/increase of 25 basis points in the assumed return on plan assets would increase/decrease the fiscal 2017 expense by approximately $2 million.

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

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