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

Introduction

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is intended to help the reader better understand Brown-Forman, our operations, our financial results, and our current business environment. Please read this MD&A in conjunction with our Consolidated Financial Statements and the accompanying Notes contained in “Item 8. Financial Statements and Supplementary Data” (the Consolidated Financial Statements). All share and per share amounts have been adjusted for a 5-for-4 stock split in February 2018 (see Note 10 to the Consolidated Financial Statements for additional information).

Our MD&A is organized as follows:

Table of Contents
	Page
Presentation basis. This MD&A reflects the basis of presentation described in Note 1 “Accounting Policies” to the Consolidated Financial Statements. In addition, we define statistical and non-GAAP financial measures that we believe help readers understand our results of operations and the trends affecting our business.	26
Significant developments. We discuss developments during the most recent three fiscal years. Please read this section in conjunction with “Item 1. Business,” which provides a general description of our business and strategy.	29
Executive summary. We discuss (a) fiscal 2018 highlights and (b) our outlook for fiscal 2019, including the trends, developments, and uncertainties that we expect to affect our business.	30
Results of operations. We discuss (a) fiscal 2018 results for our largest markets, (b) fiscal 2018 results for our largest brands, and (c) the causes of year-over-year changes in our income statement line items, including transactions and other items that affect the comparability of our results, for fiscal years 2017 and 2018.	32
Liquidity and capital resources. We discuss (a) the causes of year-over-year changes in cash flows from operating activities, investing activities, and financing activities; (b) recent and expected future capital expenditures; (c) dividends and share repurchases; and (d) our liquidity position, including capital resources available to us.	42
Off-balance sheet arrangements and long-term obligations.	44
Critical accounting policies and estimates. We discuss the critical accounting policies and estimates that require significant management judgment.	45

Presentation Basis

Non-GAAP Financial Measures

We use some financial measures in this report that are not measures of financial performance under U.S. generally accepted accounting principles (GAAP). These non-GAAP measures, defined below, should be viewed as supplements to (not substitutes for) our results of operations and other measures reported under GAAP. Other companies may not define or calculate these non-GAAP measures in the same way.

“Underlying change” in income statement measures. We present changes in certain income statement measures, or line items, that are adjusted to an “underlying” basis. We use “underlying change” for the following income statement measures: (a) underlying net sales; (b) underlying cost of sales; (c) underlying gross profit; (d) underlying advertising expenses; (e) underlying selling, general, and administrative (SG&A) expenses; (f) underlying other expense (income); (g) underlying operating expenses;1 and (h) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) acquisitions and divestitures, (b) foreign exchange, (c) estimated net changes in distributor inventories, and (d) the establishment of our charitable foundation. We explain these adjustments below.

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“Acquisitions and divestitures.” This adjustment removes (a) any non-recurring effects related to our acquisitions and divestitures (e.g., transaction gains or losses, transaction costs, and integration costs), and (b) the effects of operating activity related to acquired and divested brands for periods not comparable year over year (non-comparable periods). By excluding non-comparable periods, we therefore include the effects of acquired and divested brands only to the extent that results are comparable year over year.

1Operating expenses include advertising expense, SG&A expense, and other expense (income), net.

In fiscal 2016, we sold our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. and entered into a related transition services agreement (TSA). During fiscal 2017, we completed our obligations under the TSA. This adjustment removes the net sales, cost of sales, and operating expenses recognized in fiscal 2017 pursuant to the TSA related to contract bottling services and distribution services in certain markets.

On June 1, 2016, we acquired The BenRiach Distillery Company Limited (BenRiach). This adjustment removes (a) transaction and integration costs related to the acquisition and (b) operating activity for the acquired business for the non-comparable period. With respect to comparisons of fiscal 2017 to fiscal 2016, the non-comparable period comprised all months; with respect to comparisons of fiscal 2018 to fiscal 2017, the non-comparable period is the month of May.

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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 and remove foreign exchange gains and losses from current- and prior-year periods.

•	“Estimated net change in distributor inventories.” This adjustment refers to the estimated net effect of changes in distributor inventories on changes in our income statement line items. For each period compared, we use volume information from our distributors to estimate the effect of distributor inventory changes on our income statement line items.

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“Foundation.” In the fourth quarter of fiscal 2018, we established the Brown-Forman Foundation (the Foundation) with an initial $70 million contribution to support the company’s charitable giving program in the communities where our employees live and work. This adjustment removes the initial $70 million contribution to the Foundation from our underlying SG&A expenses and underlying operating income to present our underlying results on a comparable basis.

We use the non-GAAP measures “underlying change”: (a) to understand our performance from period to period on a consistent basis; (b) to compare our performance to that of our competitors; (c) in connection with management incentive compensation calculations; (d) in our planning and forecasting processes; and (e) in communications concerning our financial performance with the board of directors, stockholders, and investment analysts. We reconcile the “underlying changes in income statement measures” to their nearest GAAP measures in the tables below under “Results of Operations - Year-Over-Year Comparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

Definitions

Aggregations.

From time to time, to explain our results of operations or to highlight trends and uncertainties affecting our business, we aggregate markets according to stage of economic development as defined by the International Monetary Fund (IMF) and we aggregate brands by spirits category. Below, we define the aggregations used in this report.

Geographic Aggregations.

•	“Developed” markets are “advanced economies” as defined by the IMF. Our largest developed markets are the United States, the United Kingdom, and Australia. Developed international markets are developed markets excluding the United States.

•	“Emerging” markets are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico and Poland.

In “Results of Operations - Fiscal 2018 Market Highlights,” we provide supplemental information for our largest markets ranked by percentage of total fiscal 2018 net sales. In addition to markets listed by country name, we include the following aggregations:

•	“Rest of Europe” includes all markets in Europe and the Commonwealth of Independent States other than those specifically listed.

•	“Remaining geographies” represents all markets (approximately 110) other than those specifically listed or included in “Rest of Europe,” with the largest being Brazil, South Africa, and China.

•	“Travel Retail” represents our sales to global duty-free customers, travel retail customers, and the U.S. military.

•	“Other non-branded” includes used barrel, bulk whiskey and wine, and contract bottling sales.

Brand Aggregations.

•	“Premium bourbon” products include Woodford Reserve, Old Forester, and Coopers’ Craft.

•	“American whiskey” products include the Jack Daniel’s family of brands, premium bourbons, and Early Times.

•	“Tequila” products include el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.

In “Results of Operations - Fiscal 2018 Brand Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal 2018 net sales. In addition to brands listed by name, we include the following aggregations:

•	“Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s RTD and RTP products (JD RTDs/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Single Barrel Collection, Jack Daniel’s Tennessee Rye Whiskey (JDTR), Jack Daniel’s Sinatra Select, and Jack Daniel’s No. 27 Gold Tennessee Whiskey.

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“Jack Daniel’s RTDs/RTP” products include all RTD line extensions of Jack Daniel’s, such as Jack Daniel’s & Cola, Jack Daniel’s & Diet Cola, Jack & Ginger, Jack Daniel’s Country Cocktails, Gentleman Jack & Cola, Jack Daniel’s Double Jack, Jack Daniel’s American Serve, Jack Daniel’s Tennessee Honey RTD, Jack Daniel’s Cider (JD Cider), Jack Daniel’s Lynchburg Lemonade (JD Lynchburg Lemonade), and the seasonal Jack Daniel’s Winter Jack RTP.

Other Metrics.

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“Depletions.” We generally record revenues when we ship our products to our customers. Depending on our route-to-consumer (RTC), we ship products to either (a) retail or wholesale customers in owned distribution markets or (b) our distributor customers in other markets. “Depletions” is a term commonly used in the beverage alcohol industry to describe volume. Depending on the context, “depletions” means either (a) our shipments directly to retail or wholesale customers for owned distribution markets or (b) shipments from our distributor customers to retailers and wholesalers in other markets. We believe that depletions measure volume in a way that more closely reflects consumer demand than our shipments to distributor customers do. In this document, unless otherwise specified, we refer to “depletions” when discussing volume.

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

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“Consumer takeaway.” When discussing trends in the market, we refer to “consumer takeaway,” a term commonly used in the beverage alcohol industry. “Consumer takeaway” refers to the purchase of product by the consumer from a retail outlet as measured by volume or retail sales value. This information is provided by third parties, such as Nielsen and the National Alcohol Beverage Control Association (NABCA). Our estimates of market share or changes in market share are derived from consumer takeaway data using the retail sales value metric.

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

We reconcile each of these measures to their nearest GAAP measures in the tables below under “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Executive Summary.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

Significant Developments

Below we discuss the significant developments in our business during fiscal 2016, fiscal 2017, and fiscal 2018. These developments relate to (a) innovation, (b) acquisitions and divestitures, and (c) capital deployment.

Innovation

•	Jack Daniel’s family of brands. Innovation within the Jack Daniel’s family of brands has driven growth over the last three years:

◦	We introduced our second Jack Daniel’s flavored whiskey product, JDTF, starting with the United States in late fiscal 2015. In fiscal 2016, we completed the U.S. launch and continued the global rollout of JDTF. In fiscal 2017, we expanded JDTF to markets including France, Germany, and Travel Retail. In fiscal 2018, we expanded JDTF to Brazil and Chile.

◦	In fiscal 2018, we introduced several new Jack Daniel’s RTD products, including Jack Daniel’s Southern Peach Country Cocktails in the United States, Jack Daniel’s Cider in the United Kingdom, and Jack Daniel’s Lynchburg Lemonade in Germany. These introductions all contributed to our Jack Daniel’s RTD growth in those markets.

◦	In fiscal 2018, we introduced JDTR, the first full-strength whiskey from the Jack Daniel’s family of brands in over two decades, in the United States and certain international markets. With this successful launch, our total Rye whiskey portfolio, including Woodford Reserve Rye Whiskey and Jack Daniel’s Single Barrel Rye, surpassed 100,000 nine-liter cases in fiscal 2018.

•	Other American whiskeys. We continue to capitalize on consumers’ interest in super- and ultra-premium whiskey with our range of brands, including Woodford Reserve and Old Forester.

◦	In fiscal 2017, we unveiled new packaging for Woodford Reserve Double Oaked, the most successful line extension from Woodford Reserve to date (first introduced in 2012). The Double Oaked variant of Woodford Reserve continued to contribute meaningfully to the brand’s growth and reached nearly 50,000 nine-liter cases in fiscal 2018.

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From fiscal 2015 to fiscal 2017, we introduced three Old Forester craft expressions in our Old Forester Whiskey Row Series. In fiscal 2018, we added Old Forester Statesman, which won a double gold medal at the 2018 San Francisco World Spirits Competition. In addition, we launched new packaging for our core Old Forester bourbons in February 2017. Our founding brand grew net sales by more than 35% per year from fiscal 2015 through fiscal 2018.

◦	Also in fiscal 2017, we introduced our first entirely new bourbon in 20 years, Coopers’ Craft, a super-premium brand now in limited distribution in the United States.

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Tequila brands. We experienced another record year for our tequila brands in fiscal 2018, as Herradura, el Jimador, and New Mix contributed significantly to our overall net sales growth. In fiscal 2015, we released Herradura Ultra to participate in the fast-growing market for ultra-premium “cristalino” tequilas in Mexico, and it has been a significant driver of our tequila growth during the last four fiscal years, surpassing 70,000 nine-liter cases in fiscal 2018.

Acquisitions and Divestitures

•	In June 2015, we purchased all of the shares of Slane Castle Irish Whiskey Limited. In April 2017, we unveiled the first product from our Slane Irish Whiskey brand in Travel Retail in Ireland, and we introduced the brand selectively in the United States, the United Kingdom, and Australia in the summer of 2017. In fiscal 2019, we plan to expand Slane nationally in the United States.

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In March 2016, we sold our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. for $543 million in cash, which resulted in a gain of $485 million in the fourth quarter of fiscal 2016. We substantially completed all activities related to this transition of ownership in fiscal 2017. See ‘‘Executive Summary’’ below and Note 15 to the Consolidated Financial Statements for additional information about the financial impact of the sale of Southern Comfort and Tuaca.

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On June 1, 2016, we acquired The BenRiach Distillery Company Limited (BenRiach) for aggregate consideration of $407 million, consisting of a purchase price of $341 million and $66 million in assumed debt and transaction-related obligations that we have since paid. The acquisition, which brought three single malt Scotch whisky brands into our portfolio, included brand trademarks, inventories, three homeplaces, three malt distilleries, a bottling plant, and BenRiach’s headquarters in Edinburgh, Scotland. We believe that these super-premium brands will provide us an opportunity to participate in the growing single malt Scotch category and strengthen our portfolio’s long-term growth prospects in the United States, the United

Kingdom, Taiwan, Germany, and Travel Retail. See Note 16 to the Consolidated Financial Statements for additional information.

Capital Deployment

•	Beyond the acquisition and divestiture activities described above, we have focused our capital deployment initiatives on (a) enabling the expected future growth of our existing businesses through investments in our production capacity, barrel whiskey inventory, and brand-building efforts; and (b) returning cash to our shareholders.

•	Investments. From fiscal 2016 through fiscal 2018, our capital expenditures totaled approximately $350 million and focused on enabling the growth of our premium whiskey brands:

◦	Jack Daniel’s. We continued to expand our shipping warehouse facility and built an additional warehouse.

◦	Woodford Reserve. We expanded our bottling facility and built four new warehouses.

◦	Old Forester. We continued construction of the Old Forester Distillery and visitors’ center on Main Street in Louisville, Kentucky, which we expect to open in June 2018.

◦	Slane Irish Whiskey. We opened a consumer experience on the historic Slane Castle Estate in the fall of 2017. We also continued building a new distillery, which we expect to open in the summer of 2018.

•	Debt and equity transactions. From fiscal 2016 through fiscal 2018, we returned $3.0 billion to our shareholders through $0.8 billion in regular quarterly dividends, $0.5 billion in special dividends, and $1.7 billion in share repurchases. We financed our dividends and repurchases with cash on hand and proceeds from the issuance of long-term debt totaling $1.8 billion (net).

Executive Summary

Fiscal 2018 Highlights

•	We delivered net sales of $3.2 billion, an increase of 8% compared to fiscal 2017. Excluding (a) the positive effect of foreign exchange driven by the strengthening of the euro, Polish zloty, and Mexican peso and (b) an estimated net increase in distributor inventories in the United States, we grew underlying net sales 6%.

◦	From a brand perspective, our underlying net sales growth was driven by the Jack Daniel’s family of brands, our premium bourbon brands, and our tequila brands.

◦	From a geographic perspective, the United States and emerging markets led the growth in underlying net sales, while developed international markets also accelerated underlying net sales growth compared to fiscal 2017.

•	We delivered operating income of $1.0 billion, an increase of 5% compared to fiscal 2017. Excluding the impact of (a) the $70 million contribution to establish the Foundation, (b) the positive effect of foreign exchange, and (c) an estimated net increase in distributor inventories, underlying operating income grew 8%.

•	We delivered diluted earnings per share of $1.48, an increase of 8% compared to fiscal 2017 due to an increase in reported operating income and a reduction in our effective tax rate.

•	Our return on average invested capital increased to 20.0% in fiscal 2018, compared to 19.8% in fiscal 2017.

Summary of Operating Performance Fiscal 2016 - 2018
													Reported Change						Underlying Change1
Fiscal year ended April 30	2016				2017				2018				2016 vs. 2017			2017 vs. 2018			2016 vs. 2017			2017 vs. 2018
Net sales	$	3,089			$	2,994			$	3,248			(3	%)		8	%		3	%		6	%
Cost of sales	945				973				1,046				3	%		7	%		4	%		8	%
Gross profit	2,144				2,021				2,202				(6	%)		9	%		3	%		6	%
Advertising	417				383				414				(8	%)		8	%		2	%		6	%
SG&A	688				667				765				(3	%)		15	%		(2	%)		3	%
Operating income	$	1,533			$	989			$	1,039			(35	%)		5	%		7	%		8	%
Total operating expenses2	$	1,096			$	1,032			$	1,163			(6	%)		13	%		(1	%)		4	%
As a percentage of net sales3
Gross profit	69.4		%		67.5		%		67.8		%		(1.9	pp)		0.3	pp
Operating expenses2	35.5		%		34.5		%		35.8		%		(1.0	pp)		1.3	pp
Operating income	49.6		%		33.0		%		32.0		%		(16.6	pp)		(1.0	pp)
Interest expense, net	$	44			$	56			$	62			29	%		9	%
Effective tax rate	28.3		%		28.3		%		26.6		%		—			(1.7	pp)
Diluted earnings per share	$	2.09			$	1.37			$	1.48			(34	%)		8	%
Return on average invested capital4	34.1		%		19.8		%		20.0		%		(14.3	pp)		0.2	pp

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

2Operating expenses include advertising expense, SG&A expense, and other expense (income), net.

3Year-over-year changes in percentages are reported in percentage points (pp).

4See “Non-GAAP Financial Measures” above for details on our use of “return on average invested capital,” including how we calculate this measure and why we think this information is useful to readers.

Fiscal 2019 Outlook

We are optimistic about our prospects for growth of net sales, operating income, and diluted earnings per share in fiscal 2019. Below we discuss our current expectations for fiscal 2019, including trends, developments, and uncertainties that we expect may affect our business. When we provide guidance for underlying change for the following income statement measures we do not provide guidance for the corresponding GAAP change because the GAAP measure will include items that are difficult to quantify or predict with reasonable certainty, including the estimated net change in distributor inventories and foreign exchange, each of which could have a significant impact to our GAAP income statement measures.

Outlook for key measures:

•	Underlying net sales. We expect the underlying net sales growth rate trend from fiscal 2018 to continue. We anticipate the Jack Daniel’s family of brands, our portfolio of premium bourbons, and our tequila brands to again drive our growth. We expect that volume will be the most significant driver of underlying net sales growth in fiscal 2019.

•	Underlying expenses. We expect total underlying expenses to grow more slowly than net sales. In addition, we expect: (a) for underlying cost of sales, input costs should increase in the mid-single digits, (b) underlying advertising expenses should grow at a rate similar to our net sales growth rate, and (c) underlying SG&A expenses to be approximately unchanged compared to fiscal 2018.

Additional considerations related to our fiscal 2019 outlook:

•	Revenue from Contracts with Customers. In fiscal 2019, we will implement ASU 2014-09, which replaces existing revenue recognition guidance. We have concluded that adoption will not have a material impact on our financial statements. However,

under the new standard, we will estimate and recognize the cost of certain customer incentives earlier than we have historically. Although we expect this change in timing to shift the recognition of these costs among fiscal quarters, we do not expect the full-year impact to be significant. Additionally, some payments to customers previously classified as advertising or SG&A expenses will be classified as reductions of net sales under the new standard. We anticipate the impact of this change in classification to be insignificant. See Note 1 to the Consolidated Financial Statements for additional information.

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Productivity and efficiency initiative. In June 2017, we announced a three-year (fiscal 2018 – fiscal 2020) cost-saving and productivity initiative to deliver sustainable cost savings and accelerate our net sales growth rate. We expect to invest a portion of the cost savings generated by the initiative in incremental advertising and promotional activities. Our fiscal 2019 outlook reflects this initiative’s expected effects.

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Foreign exchange. In fiscal 2018, our reported results were helped by foreign exchange due to the weakening of the U.S. dollar. We cannot predict the movement of foreign exchange rates with reasonable certainty; however, considering spot rates as of April 30, 2018, we expect a modest negative effect to our fiscal 2019 results. See “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” for details about foreign exchange and our business.

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Tax Act. In December 2017, the U.S. government enacted the Tax Cuts and Jobs Act (Tax Act), which significantly revises the U.S. corporate income tax by lowering the U.S. corporate income tax rate. During fiscal 2018, we recorded a provisional net charge of $43 million related to the transitional impacts of the Tax Act. Our fiscal 2019 effective tax rate will not include these transitional impacts of the Tax Act and will include a full year of the lower U.S. corporate income tax rate. See Note 12 to the Consolidated Financial Statements for additional information.

•	Foundation. In fiscal 2018, we established the Brown-Forman Foundation with an initial contribution of $70 million, which we do not expect to repeat in fiscal 2019. The expense recorded to establish the Foundation was removed from our underlying change in fiscal 2018 SG&A and operating income measures. See “Non-GAAP Financial Measures” above for details.

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Tariffs. In response to the U.S. tariffs on steel and aluminum, the European Union and several other countries including Canada, China, Russia, and Turkey have threatened retaliatory tariffs. In addition, Mexico has imposed retaliatory tariffs on U.S. goods, including American whiskey. We have a significant U.S. manufacturing base and export our American whiskeys around the world. As the extent of any potential tariffs from key U.S. trading partners is uncertain, their potential impact on our business is unknown. We continue to monitor this situation and consider measures to mitigate risk.

Results of Operations

Fiscal 2018 Market Highlights

The following table shows net sales results for our ten largest markets, summarized by geographic area, for fiscal 2018 compared to fiscal 2017. We discuss the most significant changes in net sales for each market.

Top 10 Markets - Percentage of Fiscal 2018 Total Net Sales and Fiscal 2018 Net Sales Growth by Geographic Area
					Net Sales % Change vs. 2017
Markets1		% of Fiscal 2018 Net Sales			Reported		Acquisitions and Divestitures		Foreign Exchange		Estimated Net Chg in Distributor Inventories			Underlying2
United States		47	%		7	%	—	%	—	%	(2	%)		5	%
Europe		27	%		12	%	—	%	(4	%)	—	%		8	%
United Kingdom		6	%		4	%	—	%	(1	%)	—	%		3	%
Germany		5	%		14	%	—	%	(4	%)	—	%		10	%
France		4	%		11	%	—	%	(5	%)	—	%		6	%
Poland		3	%		15	%	—	%	(7	%)	—	%		7	%
Russia		1	%		52	%	—	%	(3	%)	(30	%)		19	%
Rest of Europe		8	%		12	%	—	%	(5	%)	2	%		9	%
Australia		5	%		8	%	1	%	(1	%)	—	%		8	%
Other geographies		14	%		10	%	—	%	(2	%)	1	%		9	%
Mexico		5	%		15	%	—	%	(3	%)	—	%		12	%
Brazil		1	%		34	%	—	%	3	%	(8	%)		28	%
Canada		1	%		2	%	—	%	(1	%)	2	%		3	%
Remaining geographies		7	%		3	%	—	%	(1	%)	3	%		5	%
Travel Retail		4	%		13	%	—	%	—	%	(5	%)		8	%
Other non-branded		3	%		(2	%)	11	%	(1	%)	—	%		9	%
Total		100	%		8	%	—	%	(1	%)	(1	%)		6	%
Note: Totals may differ due to rounding

1See “Definitions” above for definitions of market aggregations presented here.

2See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure and why we believe this information is useful to readers.

The United States, our most important market, accounted for 47% of our reported net sales in fiscal 2018, down from 48% in fiscal 2017. In fiscal 2018, reported net sales in the United States grew 7%, while underlying net sales increased 5%, after adjusting for an estimated net increase in distributor inventories. Underlying net sales gains were fueled by (a) the Jack Daniel’s family of brands, led by JDTW, JDTH, and the launch of JDTR; (b) our premium bourbon brands, led by Woodford Reserve and Old Forester; and (c) the growth of our tequila brands. This growth was partially offset by declines of Korbel Champagne and Canadian Mist.

Europe accounted for 27% of our reported net sales in fiscal 2018, up from 26% in fiscal 2017. For fiscal 2018, reported net sales in Europe increased 12%, while underlying net sales grew 8%, after adjusting for the positive effect of foreign exchange driven by the weakening of the dollar against the euro, Polish zloty, British pound, and Turkish lira. Underlying net sales growth was driven by gains in Germany, Russia, France, Poland, Turkey, the United Kingdom, and Spain.

•	In the United Kingdom, underlying net sales growth was driven by the launch of JD Cider and higher volumes of JDTW.

•	In Germany, underlying net sales growth was driven by higher volumes, higher prices, and favorable mix of JD RTDs and JDTW. JD RTDs benefited from the launch of JD Lynchburg Lemonade RTD in fiscal 2018.

•	In France, underlying net sales growth was primarily driven by higher volumes of JDTW and JDTH, as the Jack Daniel’s family of brands continued to gain market share in the world’s fourth largest whiskey market.1

•	In Poland, higher volumes of JDTW fueled underlying net sales growth driven by strong consumer takeaway trends.

•	In Russia, underlying net sales growth was driven by higher pricing on Finlandia, partially offset by declines of JDTW. The higher price of Finlandia is partly attributed to import duties resulting from a change in our RTC in fiscal 2017.

•	Underlying net sales growth in the rest of Europe was led by increases in Turkey, Spain, and Ukraine. Growth in Spain has accelerated in fiscal 2018 following our strategic investment in a new distribution operation.

Australia accounted for 5% of our reported net sales in both fiscal 2018 and fiscal 2017. In fiscal 2018, reported net sales grew 8%, while underlying net sales also increased 8% after adjusting for the positive effect of foreign exchange and the offsetting loss of net sales related to our TSA for Southern Comfort and Tuaca. Underlying net sales growth was led by higher prices of our core JD RTD brands, Jack Daniel’s & Cola and Jack Daniel’s Double Jack, along with volumetric growth of JDTW.

Net sales for our other geographies constituted 14% of our reported net sales in both fiscal 2018 and fiscal 2017. Reported net sales increased 10% in fiscal 2018 and underlying net sales were up 9% after adjusting reported results for the positive effect of foreign exchange driven by the weakening of the dollar against the Mexican peso and an estimated net decrease in distributor inventories. Underlying net sales growth was led by Mexico, Brazil, and China, partially offset by declines in Japan.

Travel Retail accounted for 4% of our reported net sales in fiscal 2018 and fiscal 2017. Reported net sales increased 13% in fiscal 2018 and underlying net sales increased 8% after adjusting for an estimated net increase in distributor inventories. Underlying net sales growth in fiscal 2018 was driven by increased travel, stabilization of foreign exchange, and increased promotional activity resulting in higher volumes of JDTW, Woodford Reserve, and Gentleman Jack.

Other non-branded accounted for 3% of our reported net sales in both fiscal 2018 and fiscal 2017. Reported net sales decreased 2%, while underlying net sales grew 9% after removing the net effect of acquired and divested businesses (primarily contract bottling sales related to our TSA agreement) and the positive effect of foreign exchange. The increase in underlying net sales was driven by higher volumes of used barrel sales and an increase in bulk whiskey sales, partially offset by declines in contract bottling sales.

1IWSR, 2017 data.

Fiscal 2018 Brand Highlights

The following table highlights the worldwide results of our largest brands for fiscal 2018 compared to fiscal 2017. We discuss results of the brands most affecting our performance below the table.

Major Brands Worldwide Results for Fiscal 2018
	Depletions								Net Sales % Change vs. 2017
Brand family / brand1	Nine-Liter Cases (Millions)	% Change vs. 2017			Drinks-Equivalent (Millions)1	% Change vs. 2017			Reported		Foreign Exchange		Estimated Net Chg in Distributor Inventories			Underlying2
Jack Daniel’s Family	24.9	7	%		17.1	6	%		8	%	(1	%)	(1	%)		6	%
Jack Daniel’s Tennessee Whiskey	13.0	5	%		13.0	5	%		6	%	(1	%)	—	%		4	%
Jack Daniel’s Tennessee Honey	1.7	8	%		1.7	8	%		10	%	(2	%)	1	%		9	%
Jack Daniel’s RTDs/RTP	8.7	9	%		0.9	9	%		15	%	(1	%)	—	%		14	%
Gentleman Jack	0.6	7	%		0.6	7	%		9	%	—	%	(1	%)		7	%
Jack Daniel’s Tennessee Fire	0.6	14	%		0.6	14	%		20	%	(1	%)	(4	%)		15	%
Other Jack Daniel’s whiskey brands	0.3	27	%		0.3	27	%		26	%	(2	%)	(12	%)		13	%
Woodford Reserve	0.7	23	%		0.7	23	%		26	%	—	%	(4	%)		22	%
Finlandia	3.0	2	%		3.0	2	%		10	%	(2	%)	(3	%)		5	%
el Jimador	1.3	8	%		1.3	8	%		14	%	(1	%)	(4	%)		9	%
Herradura	0.5	15	%		0.5	15	%		17	%	(1	%)	3	%		19	%
Note: Totals may differ due to rounding

1See “Definitions” above for definitions of brand aggregations and volume measures presented here.

2See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how we calculate this measure and why we believe this information is useful to readers.

In fiscal 2018, the Jack Daniel’s family of brands grew volumes 6% globally to 17.1 million drinks-equivalent nine-liter cases. Reported net sales for the family grew 8%, while underlying net sales increased 6% after adjusting for the positive effect of foreign exchange primarily due to the weakening of the dollar against the euro, Polish zloty, Turkish lira, British pound, and Mexican peso and an estimated net increase in distributor inventories in the United States. Jack Daniel’s family of brands was the most significant contributor to our total underlying net sales growth in fiscal 2018. Here are details about the underlying performance of the Jack Daniel’s family of brands:

•

Jack Daniel’s Tennessee Whiskey generates a significant percentage of our total net sales, and is our top priority. JDTW is the largest brand in the world priced over $25 per 750 ml per bottle1 and the world’s fourth-largest premium spirits brand measured by both volume and retail value.2 During calendar 2017, JDTW grew volume for the 26th consecutive year2 and, among the top five premium spirits brands on the list, Jack Daniel’s Tennessee Whiskey was the only one to grow volume in each of the past five years1 – an achievement that underscores our belief in the brand’s sustainable appeal and long-term growth potential. JDTW grew volumes 5% globally in fiscal 2018, a significant increase from its 1% growth rate in fiscal 2017. JDTW reported net sales grew 6%, while underlying net sales increased 4% led by the United States, Brazil, Poland, Turkey, France, Travel Retail, Germany, and Australia.

•

Since its introduction in late fiscal 2011, Jack Daniel’s Tennessee Honey has contributed significantly to our net sales growth. JDTH is now the 15th largest brand in the world priced over $25 per 750ml bottle.1 In fiscal 2018, JDTH grew volumes by 8%, on top of the 6% growth rate last fiscal year. The brand grew reported net sales 10% and underlying net sales 9%, driven by higher volumes in the United States and France.

1IWSR, 2017 data.
2Based on industry statistics published by Impact Databank, a well-known U.S. trade publication, in March 2018.

•	The Jack Daniel’s RTDs/RTP brands grew volume 9%, reported net sales 15%, and underlying net sales 14% in fiscal 2018. JD RTDs’ underlying net sales growth was driven by higher prices in Australia and consumer-led volumetric gains and product innovation in Germany, the United States, and the United Kingdom.

•	Gentleman Jack grew volumes 7% in fiscal 2018 and surpassed 600 thousand nine-liter cases entering its 30th year of production. The brand grew reported net sales 9% and underlying net sales 7%, driven by volumetric growth in the United States and Travel Retail, as increased media propelled stronger sales in fiscal 2018 compared to fiscal 2017.

•	Jack Daniel’s Tennessee Fire grew volumes 14%, reported net sales 20%, and underlying net sales 15% in fiscal 2018. Underlying net sales growth was led by the United States, along with expansion into Brazil and Chile. JDTF has grown volumes each year since its introduction in late fiscal 2015.

•	Our Other Jack Daniel’s whiskey brands reported net sales grew 26% and underlying net sales increased 13%, fueled by the launch of JDTR in the fall of 2017.

Woodford Reserve grew volumes 23% in fiscal 2018 (after growing 18% in fiscal 2017 and 26% in fiscal 2016) and was once again selected as an Impact’s “Hot Brand.”1 In addition, reported net sales increased 26% and underlying net sales grew 22% in fiscal 2018. The United States is by far the brand’s most important market and was responsible for most of its growth during fiscal 2018. However, the brand continued its momentum outside the United States, growing volumes 21%, driven by Travel Retail. We believe Woodford Reserve is the leading super-premium American whiskey globally, and is poised for continued growth as interest in bourbon continues to increase around the world. During fiscal 2018, Woodford Reserve became the official sponsor of the Kentucky Derby. We plan to continue devoting substantial resources to Woodford Reserve to support its growth potential, including sustained advertising and capital investments.

Finlandia grew volumes 2% in fiscal 2018, while reported net sales increased 10%, and underlying net sales grew 5% after adjusting for the positive effect of foreign exchange and an estimated net increase in distributor inventories in Russia. The increase in underlying net sales was driven predominantly by higher prices in Russia, which was partly attributed to import duties resulting from a change in our route-to-consumer.

el Jimador grew volumes 8% in fiscal 2018, while reported net sales increased 14%, and underlying net sales were up 9% after adjusting for the positive effect of foreign exchange due to the weakening of the dollar against the Mexican peso and an estimated net increase in distributor inventories in the United States. Underlying net sales growth was driven by higher volumes in the United States, where el Jimador remained on the Impact’s “Hot Brands” list1 in calendar 2017.

Herradura grew volumes 15% in fiscal 2018, while reported net sales increased 17%, and underlying net sales were up 19% after adjusting for the positive effect of foreign exchange due to the weakening of the dollar against the Mexican peso and an estimated net decrease in distributor inventories in the United States. This growth was driven primarily by increased volumes and higher prices in the brand’s largest markets, the United States and Mexico. Mexico also benefited from consumer-led volumetric growth of Herradura Ultra, our “cristalino” tequila expression released in fiscal 2015. We remain focused on developing Herradura in the United States (where we continue to see considerable potential for growth), strengthening our position in Mexico, and continuing to build our presence in higher-value tequila markets throughout the world.

1Impact Databank published the Impact’s “Hot Brands - Spirits” list in March 2018.

Year-Over-Year Comparisons

Net Sales
Percentage change versus the prior fiscal year ended April 30			2018					2017
Change in reported net sales			8	%				(3	%)
Acquisitions and divestitures			—	%				3	%
Foreign exchange			(1	%)				2	%
Estimated net change in distributor inventories			(1	%)				1	%
Change in underlying net sales			6	%				3	%
Change in underlying net sales attributed to:
Volume	5	%				2	%
Net price/mix	2	%				2	%
Note: Totals may differ due to rounding

Fiscal 2018 compared to Fiscal 2017

Net sales of $3,248 million increased 8%, or $254 million, in fiscal 2018 compared to fiscal 2017. After adjusting reported results for the positive effect of foreign exchange and an estimated net increase in distributor inventories, underlying net sales grew 6%. The positive effect of foreign exchange was driven primarily by the dollar’s weakening against the euro, Polish zloty, and Mexican peso. Of the 6% change in underlying net sales, 5% was attributable to volume growth and nearly 2% was attributable to the positive impact of price/mix. Volume growth was led by the Jack Daniel's family of brands, tequilas, and premium bourbons. Improved price/mix was driven by (a) an increase in the share of sales of higher margin brands, most notably the Jack Daniel’s family of brands and Woodford Reserve, and (b) higher average pricing on JD RTDs and tequilas.

The primary factors contributing to underlying net sales growth were:

•	our American whiskey portfolio in the United States, led by Woodford Reserve, JDTW, JDTH, JDTF, Old Forester, Gentleman Jack, and the launch of JDTR;

•	JDTW in the majority of international markets, most notably Brazil, Poland, Turkey, France, Travel Retail, Germany, and Australia;

•	JD RTDs, led by volumetric gains and product innovation in Australia, Germany, the United States, and the United Kingdom;

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

•	Finlandia in Russia;

•	used barrel volume growth; and

•	Woodford Reserve outside of the United States, driven by Travel Retail.

The primary factors partially offsetting underlying net sales growth were declines of:

•	Korbel Champagne volumes in the United States;

•	contract bottling sales; and

•	Canadian Mist volumes in the United States.

Fiscal 2017 compared to Fiscal 2016

Net sales of $2,994 million decreased 3%, or $95 million, in fiscal 2017 compared to fiscal 2016. After adjusting reported results for (a) the net effect of acquisitions and divestitures, (b) the negative effect of foreign exchange, and (c) the estimated net decrease in distributor inventories, underlying net sales grew 3%. The negative effect of foreign exchange was driven primarily by the dollar’s strengthening against the Mexican peso, euro, and British pound. The change in underlying net sales was driven almost equally by the positive impact of price/mix and volume growth. Volume growth was led by the Jack Daniel's family of brands and the tequilas, partially offset by declines in Canadian Mist. Improved price/mix was driven by (a) higher average pricing on JDTW and the tequilas, and (b) a shift in sales out of lower-priced brands (most notably, Canadian Mist) to higher priced brands (most notably, Jack Daniel's family of brands and Woodford Reserve); these gains were partially offset by declines in used barrel sales.

The primary factors contributing to underlying net sales growth were:

•	our American whiskey portfolio in the United States, led by JDTW, Woodford Reserve, Old Forester, and Gentleman Jack;

•	JDTW in several international markets, most notably Poland, France, the United Kingdom, Japan, Mexico, and Travel Retail;

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

•	JD RTDs, partially due to new product introductions, led by Mexico, Germany, the United Kingdom, and Australia;

•	Sonoma-Cutrer and Korbel Champagne in the United States;

•	JDTF driven by launches in Germany, France, and Travel Retail; and

•	Woodford Reserve outside of the United States, driven by distribution expansion in Travel Retail.

The primary factors partially offsetting underlying net sales growth were declines of:

•	used barrel sales, reflecting lower prices due to increased supply of used barrels and somewhat weaker demand from blended Scotch industry buyers;

•	JDTW in Belgium, Southeast Asia, sub-Saharan Africa, China, and Turkey;

•	Canadian Mist volumes in the United States; and

•	lower-margin agency brands that we no longer distribute.

Cost of Sales
Percentage change versus the prior fiscal year ended April 30			2018					2017
Change in reported cost of sales			7	%				3	%
Acquisitions and divestitures			1	%				—	%
Foreign exchange			—	%				—	%
Estimated net change in distributor inventories			(1	%)				1	%
Change in underlying cost of sales			8	%				4	%
Change in underlying cost of sales attributed to:
Volume	5	%				2	%
Cost/mix	3	%				3	%
Note: Totals may differ due to rounding

Fiscal 2018 compared to Fiscal 2017

Cost of sales of $1,046 million increased $73 million, or 7%, in fiscal 2018 compared to fiscal 2017. Underlying cost of sales grew 8% after adjusting reported costs for (a) the net effect of our Scotch acquisition and the absence of sales related to our TSA for Southern Comfort and Tuaca and (b) an estimated net increase in distributor inventories. The increase in underlying costs of sales was driven by higher volumes and an increase in input costs, including wood and agave. Looking ahead to fiscal 2019, we currently expect that input costs will increase in the mid-single digits.

Fiscal 2017 compared to Fiscal 2016

Cost of sales of $973 million increased $28 million, or 3%, in fiscal 2017 compared to fiscal 2016. Underlying cost of sales grew 4% after adjusting reported costs for the estimated net change in distributor inventories. The increase in underlying costs of sales was driven by higher volumes and an increase in input costs, including wood and grain.

Gross Profit
Percentage change versus the prior fiscal year ended April 30	2018			2017
Change in reported gross profit	9	%		(6	%)
Acquisitions and divestitures	—	%		4	%
Foreign exchange	(2	%)		3	%
Estimated net change in distributor inventories	(1	%)		1	%
Change in underlying gross profit	6	%		3	%
Note: Totals may differ due to rounding

Gross Margin
Fiscal year ended April 30	2018			2017
Prior year gross margin	67.5	%		69.4	%
Price/mix	0.3	%		0.1	%
Cost	(0.7	%)		(0.4	%)
Acquisitions and divestitures	0.3	%		(0.9	%)
Foreign exchange	0.4	%		(0.7	%)
Change in gross margin	0.3	%		(1.9	%)
Current year gross margin	67.8	%		67.5	%
Note: Totals may differ due to rounding

Fiscal 2018 compared to Fiscal 2017

Gross profit of $2,202 million increased $181 million, or 9%, in fiscal 2018 compared to fiscal 2017. Gross profit on an underlying basis improved 6% after adjusting reported gross profit for the positive effect of foreign exchange and an estimated net increase in distributor inventories. The increase in underlying gross profit resulted from the same factors that contributed to the increase in underlying net sales, partially offset by the same factors that drove higher underlying cost of sales.

Gross margin increased to 67.8% in fiscal 2018, up 0.3 percentage points from 67.5% in fiscal 2017. The increase in gross margin was primarily due to (a) favorable price/mix, (b) the positive effect of foreign exchange, and (c) the net effect of acquisitions and divestitures, partially offset by an increase in underlying cost of sales.

Fiscal 2017 compared to Fiscal 2016

Gross profit of $2,021 million decreased $123 million, or 6%, in fiscal 2017 compared to fiscal 2016. Gross profit on an underlying basis improved 3% after adjusting reported gross profit for (a) the net effect of acquisitions and divestitures, (b) the negative effect of foreign exchange, and (c) the estimated net change in distributor inventories. The increase in underlying gross profit resulted from the same factors that contributed to the increase in underlying net sales, partially offset by the same factors that drove higher underlying cost of sales.

Gross margin decreased to 67.5% in fiscal 2017, down 1.9 percentage points from 69.4% in fiscal 2016. The decrease in gross margin was primarily due to (a) the net effect of acquisitions and divestitures, (b) the negative effect of foreign exchange, and (c) an increase in underlying cost of sales.

Operating Expenses
Percentage change versus the prior year period ended April 30
2018	Reported		Acquisitions & Divestitures		Foundation		Foreign Exchange			Underlying
Advertising	8	%	—	%	—	%	(3	%)		6	%
SG&A	15	%	—	%	(11	%)	(2	%)		3	%
Total operating expenses1	13	%	—	%	(7	%)	(2	%)		4	%
2017
Advertising	(8	%)	8	%	—	%	2	%		2	%
SG&A	(3	%)	—	%	—	%	1	%		(2	%)
Total operating expenses1	(6	%)	3	%	—	%	2	%		(1	%)
Note: Totals may differ due to rounding
1Operating expenses include advertising expense, SG&A expense, and other expense (income), net.

Fiscal 2018 compared to Fiscal 2017

Operating expenses totaled $1,163 million and increased $131 million, or 13%, in fiscal 2018 compared to fiscal 2017. Underlying operating expenses grew 4% after adjusting for the establishment of the Foundation and the negative effect of foreign exchange.

•

Advertising expenses of $414 million increased $31 million, or 8%, in fiscal 2018 compared to fiscal 2017. Underlying advertising expenses increased 6% after adjusting reported results for the negative effect of foreign exchange. The increase in underlying advertising expense was driven by higher spending on (a) our American whiskey portfolio in the United States, including JDTW, Woodford Reserve, Gentleman Jack, and the launch of JDTR; (b) the continued rollout of Slane Irish Whiskey in the United States; and (c) the expansion of our single-malt Scotch brands.

•

SG&A expenses of $765 million increased $98 million, or 15%, in fiscal 2018 compared to fiscal 2017, while underlying SG&A increased 3% after adjusting reported results for the effect of our $70 million contribution to establish the Foundation and the negative effect of foreign exchange. The increase in underlying SG&A was driven by higher incentive compensation expenses and strategic investments, including our new Spain distribution operation, partially offset by lower pension expense and continued tight management of discretionary spending.

Operating expenses as a percentage of net sales increased 1.3 percentage points to 35.8% in fiscal 2018, from 34.5% in fiscal 2017. Our operating expenses as a percentage of net sales increased driven by our $70 million contribution to establish the Foundation.

Fiscal 2017 compared to Fiscal 2016

Operating expenses totaled $1,032 million and decreased $64 million, or 6%, in fiscal 2017 compared to fiscal 2016. Underlying operating expenses declined 1% after adjusting for the net effect of acquisitions and divestitures and the positive effect of foreign exchange.

•

Advertising expenses of $383 million decreased $34 million, or 8%, in fiscal 2017 compared to fiscal 2016. Underlying advertising expenses increased 2% after adjusting reported results for the net effect of acquisitions and divestitures and the positive effect of foreign exchange. The increase in underlying advertising expense was driven by higher spending on (a) JDTW, due in part to the 150th anniversary of Jack Daniel’s Distillery, (b) JD RTDs, partially due to new innovations, and (c) the launch of JDTF outside the United States. These increases were partially offset by lower spending for JDTF in the United States following the national introduction in late fiscal 2015 and for Finlandia Vodka.

•	SG&A expenses of $667 million decreased $21 million, or 3%, in fiscal 2017 compared to fiscal 2016, while underlying SG&A dropped 2% after adjusting reported results for the positive effect of foreign exchange. The most significant contributors to the year-over-year decrease in underlying SG&A were lower compensation-related expenses and tight management of discretionary spending.

Operating expenses as a percentage of net sales decreased 1.0 percentage point to 34.5% in fiscal 2017, from 35.5% in fiscal 2016. Our operating expenses as a percentage of net sales decreased driven by lower SG&A spend.

Operating Income
Percentage change versus the prior fiscal year ended April 30	2018			2017
Change in reported operating income	5	%		(35	%)
Acquisitions and divestitures	—	%		35	%
Foundation	7	%		—	%
Foreign exchange	(2	%)		4	%
Estimated net change in distributor inventories	(2	%)		3	%
Change in underlying operating income	8	%		7	%
Note: Totals may differ due to rounding

Fiscal 2018 compared to Fiscal 2017

Operating income was $1,039 million in fiscal 2018, an increase of $50 million, or 5%, compared to fiscal 2017. Underlying operating income growth was 8% after adjusting for (a) the establishment of the Foundation, (b) the positive effect of foreign exchange, and (c) an estimated net increase in distributor inventories, driven primarily by the United States. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by meaningful operating expense leverage, as underlying SG&A spend grew 3% compared to underlying net sales growth of 6%.

Operating margin declined 1.0 percentage point to 32.0% in fiscal 2018 from 33.0% in fiscal 2017. The decrease in our operating margin was primarily due to the 2.2 percentage point effect of the establishment of the Foundation, partially offset by operating expense leverage.

Fiscal 2017 compared to Fiscal 2016

Operating income was $989 million in fiscal 2017, a decrease of $544 million, or 35%, compared to fiscal 2016. Underlying operating income growth was 7% after adjusting for (a) the net effect of acquisitions and divestitures, (b) the negative effect of foreign exchange, and (c) the estimated net decrease in distributor inventories, driven primarily by the United States and Russia. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, enhanced by meaningful operating expense leverage, as SG&A spend declined and underlying advertising expenses grew 2% compared to underlying net sales growth of 3%.

Operating margin declined 16.6 percentage points to 33.0% in fiscal 2017 from 49.6% in fiscal 2016. The decrease in our operating margin was primarily due to the net 16.6 percentage point effect of acquisitions and divestitures and the negative effect of foreign exchange, partially offset by a reduction in SG&A spend.

Fiscal 2018 compared to Fiscal 2017

Interest expense (net) increased $6 million, or 9%, in fiscal 2018 compared to fiscal 2017, due to a higher average long-term debt balance and a higher interest rate on our short-term borrowings.

Our effective tax rate for fiscal 2018 was 26.6% compared to 28.3% in fiscal 2017. The decrease in our effective tax rate was driven by an increase in the beneficial impact of foreign earnings at lower rates and an increase in excess tax benefits related to stock-based compensation, partially offset by the net impact of the Tax Act. See Note 12 to the Consolidated Financial Statements for additional information.

Diluted earnings per share were $1.48 in fiscal 2018, up 8% from $1.37 in fiscal 2017. This increase resulted from (a) an increase in reported operating income (net of a $0.10 decrease from the establishment of the Foundation) and (b) the benefit of a lower effective tax rate.

Fiscal 2017 compared to Fiscal 2016

Interest expense (net) increased $12 million, or 29%, in fiscal 2017 compared to fiscal 2016, primarily due to our July 2016 issuance of €300 million 1.20% and £300 million 2.60% senior unsecured notes due on July 7, 2026, and July 7, 2028, respectively.

Our effective tax rates for fiscal 2017 and fiscal 2016 were 28.3%. An increase in the tax benefit related to discrete items and the beneficial impact of the excess tax benefits from stock-based awards decreased our effective tax rate. These were offset by (a) the absence of the beneficial impact of the sale of the Southern Comfort and Tuaca business, (b) a decrease in the beneficial impact of foreign earnings at lower tax rates, and (c) an increase in foreign exchange gains in non-U.S. entities that were currently subject to U.S. tax.

Diluted earnings per share were $1.37 in fiscal 2017, down 34% from $2.09 in fiscal 2016. This decrease resulted from the same factors that contributed to the decrease in reported operating income, including (a) the absence of the $0.70 gain from the sale of Southern Comfort and Tuaca in fiscal 2016, (b) the absence of net income contribution from those brands, and (c) higher interest expense in fiscal 2017, partially offset by a reduction in shares outstanding due to share repurchases.

Liquidity and Capital Resources

Our ability to generate cash from operations consistently is one of our most significant financial strengths. Our strong cash flows enable us to invest in our people, invest in our brands, invest in our assets, pay 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 for the foreseeable future.

Cash Flow Summary

(Dollars in millions)		2016				2017				2018
Operating activities		$	524			$	639			$	632
Investing activities:
Proceeds from sale of business		543				—				—
Acquisition of business		—				(307		)		—
Additions to property, plant, and equipment		(108		)		(112		)		(127		)
Other		(2		)		(3		)		(1		)
		433				(422		)		(128		)
Financing activities:
Net change in short-term borrowings		80				(122		)		(3		)
Net proceeds from long-term debt		240				717				345
Acquisition of treasury stock		(1,107		)		(561		)		(1		)
Dividends paid		(266		)		(274		)		(773		)
Other		(7		)		(45		)		(34		)
		(1,060		)		(285		)		(466		)
Foreign exchange effect on cash and cash equivalents		(4		)		(13		)		19
Net increase (decrease) in cash and cash equivalents		$	(107	)		$	(81	)		$	57

Fiscal 2018 compared to Fiscal 2017

Cash and cash equivalents increased $57 million in fiscal 2018, compared to a decrease of $81 million in fiscal 2017. Cash provided by operations was down $7 million from fiscal 2017, as a $124 million increase in discretionary contributions to our pension plans was largely offset by higher earnings (net of a $70 million contribution to establish the Foundation) and a $66 million decline in income tax payments. The decline in income tax payments reflects the impact of the contributions to the pension plans and charitable foundation and the lower federal tax rates resulting from the enactment of the Tax Act.

Cash used for investing activities was $128 million during fiscal 2018, compared to $422 million for the prior year. The $294 million decrease largely reflects $307 million in cash paid to acquire BenRiach in June 2016, partially offset by a $15 million increase in capital spending during the current year. The increase in capital spending is largely attributable to the construction of new distilleries and homeplaces for both Slane Irish Whiskey and Old Forester and to the modernization and automation of our Brown-Forman Cooperage operation.

Cash used for financing activities was $466 million during fiscal 2018, compared to $285 million for fiscal 2017. The $181 million increase largely reflects a special cash dividend payment of $481 million in April 2018, the repayment of $250 million of notes that matured in January 2018, and a $122 million decrease in proceeds from long-term debt, partially offset by a $560 million decline in share repurchases and a $119 million decrease in net repayments of short-term borrowings.

The impact on cash and cash equivalents as a result of exchange rate changes was an increase of $19 million for fiscal 2018, compared to a decline of $13 million in the prior fiscal year.

Fiscal 2017 compared to Fiscal 2016

Cash and cash equivalents declined $81 million during fiscal 2017, compared to a decline of $107 million during fiscal 2016. Cash provided by operations during fiscal 2017 was $639 million, compared to $524 million in fiscal 2016. The $115 million increase in fiscal 2017 largely reflected the absence of a $125 million payment made during fiscal 2016 for estimated income taxes incurred on the sale of the Southern Comfort and Tuaca business. Cash used for investing activities was $422 million during fiscal 2017, an increase of $855 million over the $433 million in cash provided by investing activities during fiscal 2016. The

increase of $855 million primarily reflected the impact of the sale of the Southern Comfort and Tuaca business (for which we received cash of $543 million) in fiscal 2016 and the acquisition of BenRiach (for which we paid cash of $307 million) in fiscal 2017.

Cash used for financing activities was $285 million during fiscal 2017, compared to $1,060 million during fiscal 2016. The $775 million decrease in cash used for financing activities largely reflected a $546 million decrease in share repurchases and a $477 million increase in proceeds from long-term debt net of repayments, partially offset by a $202 million decline in net proceeds from short-term borrowings and the payment of $30 million in November 2016 to settle an obligation related to our acquisition of BenRiach. The impact on cash and cash equivalents as a result of exchange rate changes was a decline of $13 million for fiscal 2017, compared to a decline of $4 million in fiscal 2016.

Capital Expenditures

Over the past several fiscal years, we accelerated our capital spending in order to build the production platform for our current and future growth. Capital expenditures in three fiscal years from 2016 through 2018 were, on average, 32% higher than the average of the five fiscal years prior to 2016.

We have invested capital to expand production capacity, to undertake new business initiatives, and to save costs.

•	Significant capacity expansion projects included (a) the expansion of our shipping warehouse facility and an additional warehouse for Jack Daniel's, (b) an expanded bottling facility and four new warehouses for Woodford Reserve, and (c) a new wood mill.

•	The integrated distillery and homeplaces projects for Old Forester and Slane Irish Whiskey were the major new business initiatives. The Slane Irish Whiskey consumer experience opened in the fall of 2017, and the distillery is expected to open in the summer of 2018. The Old Forester distillery is expected to open in June 2018.

•	The most significant cost-saving initiative was the ongoing automation project at our Brown-Forman Cooperage facility.

In fiscal 2019, we expect capital expenditures to be approximately $130 million. We expect capital expenditures in fiscal 2020 and fiscal 2021 to remain elevated as we complete several key, multi-year projects.

Share Repurchase Programs

We have repurchased approximately 57.7 million shares of our common stock under three separate repurchase programs 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		49,600			1,666,081			$	27.22			$	27.62			$	47
May 1, 2014 – April 30, 2015		130,210			12,618,378			$	36.09			$	36.14			$	461
May 1, 2015 – April 30, 2016		42,082			28,403,893			$	38.17			$	38.79			$	1,104
May 1, 2016 – April 30, 2017		30,312			14,756,628			$	38.77			$	37.75			$	558
		252,204			57,444,980											$	2,170

The following table summarizes information about those share repurchases by program.

										Average Price Per Share, Including								Total Spent on Stock Repurchase
Dates				Shares Purchased						Brokerage Commissions								Program
Starting		Ending		Class A			Class B			Class A				Class B				(Millions)
October 2013		September 2014		94,926			7,177,797			$	31.53			$	34.43			$	250
October 2014		March 2016		126,966			32,598,022			$	36.72			$	38.21			$	1,250
April 2016		March 2017		30,312			17,669,161			$	38.77			$	37.84			$	670
				252,204			57,444,980											$	2,170

Liquidity

We continue to manage liquidity conservatively to meet current obligations, fund capital expenditures, sustain and grow our regular dividends, and return cash to our shareholders from time to time through share repurchases and special dividends while reserving adequate debt capacity for unforeseen events and acquisition opportunities.

In addition to our cash and cash equivalent balances, we have access to several liquidity sources to supplement our cash flow from operations. One of those sources is our $800 million commercial paper program that we regularly use to fund our short-term credit needs and to maintain our access to the capital markets. During fiscal 2017, our commercial paper borrowings averaged $576 million, with an average maturity of 31 days and an average interest rate of 0.69%. During fiscal 2018, our commercial paper borrowings averaged $485 million, with an average maturity of 31 days and an average interest rate of 1.39%. Commercial paper outstanding was $208 million at April 30, 2017, and $215 million at April 30, 2018.

On November 10, 2017, we entered an amended and restated five-year credit agreement with various U.S. and international banks. The credit agreement provides an $800 million unsecured revolving credit commitment that expires on November 10, 2022. This agreement amended and restated our previous credit agreement dated November 18, 2011. The new agreement does not contain any financial covenants.

The $800 million revolving credit facility is currently undrawn and supports our commercial paper program. 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 believe the debt capital markets for bonds and private placements are accessible sources of long-term financing that could meet any additional liquidity needs. We believe our current liquidity position is sufficient to meet all of our future financial commitments.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, 2018, approximately 88% of our cash and cash equivalents were held by our foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. With the enactment of the Tax Act, we are evaluating our global working capital requirements and may change our current permanent reinvestment assertion in future periods.

As announced on January 23, 2018, our Board of Directors approved a number of capital deployment actions aimed at benefiting shareholders, employees, and the community. As further described below, these actions included a stock split and a special dividend. Additionally, U.S. tax reform afforded us an opportunity to tax-efficiently fund our pension plan and charitable giving programs that would have otherwise been funded in future years. We funded these actions with incremental debt (see Note 5 to the Consolidated Financial Statements for additional information).

The stock split was effected in the form of a dividend on both Class A and Class B common stock, paid in shares of Class B common stock. For every four shares of either Class A or Class B common stock held, shareholders of record as of the close of business on February 7, 2018, received one share of Class B common stock, with any fractional shares paid in cash. The additional shares and cash for fractional shares were distributed to stockholders on February 28, 2018. See Note 10 to the Consolidated Financial Statements for additional information.

In addition, the Board declared a special cash dividend of $1.00 per share on our Class A and Class B common stock. Stockholders of record on April 2, 2018, received the special cash dividend on April 23, 2018. The total amount of this special dividend was $481 million.

The Board also approved additional funding of $120 million for our U.S. pension plans, further strengthening an important employee retirement benefit. Further, with the goal of helping to fund our ongoing philanthropic endeavors in the communities where our employees live and work, we created and funded the Foundation with a contribution of $70 million in April 2018. The Foundation is expected to reduce ongoing expenses related to our annual giving programs.

As announced on May 24, 2018, our Board of Directors declared a regular quarterly cash dividend of $0.158 per share on our Class A and Class B common stock. Stockholders of record on June 6, 2018, will receive the dividend on July 3, 2018.

Off-Balance Sheet Arrangements

As of April 30, 2018, 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 8 to the Consolidated Financial Statements). The following table summarizes the amounts of those obligations as of April 30, 2018, and the years when they are expected to be paid.1 We expect to meet these obligations with internally generated funds.

(Dollars in millions)		Total				2019				2020-2021				2022-2023				After 2023
Long-term debt		$	2,377			$	—			$	—			$	250			$	2,127
Interest on long-term debt		1,327				75				150				148				954
Tax Act repatriation tax2		91				7				15				15				54
Grape purchases		33				12				15				5				1
Operating leases		45				18				21				5				1
Postretirement benefits3		8				8				n/a				n/a				n/a
Agave purchases4		28				n/a				n/a				n/a				n/a
Total		$	3,909			$	120			$	201			$	423			$	3,137

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

2	Reflects our current estimates of amounts and timing of repatriation tax resulting from the Tax Act (discussed in Note 12 to the Consolidated Financial Statements).

3	As of April 30, 2018, we have unfunded pension and other postretirement benefit obligations of $173 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 $8 million of expected contributions in fiscal 2019.

4

As discussed in Note 4 to the Consolidated Financial Statements, we have obligations to purchase agave, a plant whose sap forms the raw material for tequila. As of April 30, 2018, based on current market prices, obligations under these contracts totaled $28 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.

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 either the “relief from royalty” or “excess earnings” method. We also consider market values for similar assets when available. Considerable management judgment is necessary to estimate fair value, including making assumptions about future cash flows, discount rates, and royalty rates.

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

During fiscal 2018, we recorded a $2 million impairment charge related to the write-off of the carrying amount of an immaterial discontinued brand name. Based on our assumptions, we believe neither our goodwill nor other intangibles are impaired. Further, we estimate the fair values to substantially exceed the carrying values of our goodwill and all 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 costs are determined at the beginning of the year (“measurement date”). Because obligations are measured on a discounted basis, the discount rate is a significant assumption. It is based on interest rates for high-quality, long-term corporate debt at each measurement date. The expected return on pension plan assets reflects expected capital market returns for each asset class that are based on historical returns, adjusted for the expected effects of diversification and active management (net of fees) of the assets. The other assumptions also reflect our historical experience and management’s best judgment regarding future expectations.

Beginning in fiscal 2018, we changed the method used to estimate the service cost and interest cost components of net periodic benefit cost for our U.S. pension and other postretirement benefit plans. The new estimation approach discounts the individual expected cash flows underlying the service cost and interest cost using the applicable spot rates derived from the yield curve used to discount the cash flows used to measure the benefit obligation at the beginning of the period. Previously, we estimated these service and interest cost components using a single weighted-average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We believe the new approach provides a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot yield curve rates. We accounted for this change in estimate prospectively, beginning May 1, 2017. The new approach does not affect the measurement of our plan obligations, but generally results in lower service cost and interest cost in periods when the yield curve is upward-sloping. For fiscal 2018, the new estimation approach reduced total service and interest cost by approximately $7 million when compared to the cost computed using the prior approach.

The following table compares the assumed discount rates and expected return on assets used in determining net periodic benefit cost for fiscal 2018 to those to be used in determining that cost for fiscal 2019.

	Pension Benefits						Medical and Life Insurance Benefits
	2018			2019			2018			2019
Discount rate for service cost	4.29	%		4.30	%		4.39	%		3.90	%
Discount rate for interest cost	3.40	%		3.93	%		3.35	%		4.34	%
Expected return on plan assets	6.75	%		6.50	%		n/a			n/a

The changes in discount rates reflect changes in the yield curve since the prior measurement date. The decrease in expected return on assets reflects lower capital market return expectations for our current asset allocation.

Using these assumptions, we estimate our pension and other postretirement benefit cost for fiscal 2019 will be approximately $32 million, compared to $34 million for fiscal 2018. Decreasing/increasing the assumed discount rates by 50 basis points would increase/decrease the fiscal 2019 cost by approximately $7 million. Decreasing/increasing the assumed return on plan assets by 50 basis points would increase/decrease the fiscal 2019 cost by approximately $4 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 may have established a tax liability. Although predicting the final outcome or the timing of resolution of any particular tax matter can be difficult, we believe our liabilities reflect the likely outcome of known tax contingencies. Unfavorable settlement of any particular issue could require use of our cash. Conversely, a favorable resolution could result in reduced cash tax payments, the reversal of previously established liabilities, or some combination of these results, which could reduce our effective tax rate.

On December 22, 2017, the U.S. government enacted the Tax Act, which significantly changes U.S. corporate income taxes. Due to the complexity involved in applying the provisions of the Tax Act, we have made reasonable estimates of the effects and recorded provisional amounts in our financial statements as of and for the year ended April 30, 2018. As we complete our analysis

of the Tax Act and incorporate additional guidance that may be issued by the U.S. Treasury Department, the IRS, and other standard-setting bodies, we may adjust the recorded provisional amounts in subsequent reporting periods. Those adjustments may materially impact our provision for income taxes and effective tax rate in the period in which the adjustments are made. See Note 12 to the Consolidated Financial Statements for additional information about the Tax Act.

New Accounting Pronouncements

See Note 1 to the Consolidated Financial Statements for information about accounting pronouncements that we have recently adopted and about new accounting pronouncements that we will adopt in future periods.