United States

Securities and Exchange Commission

Washington, D.C. 20549

FORM 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended October 31, ~~2017~~2018



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _______________

Commission File No. 001-00123

Brown-Forman Corporation

(Exact name of Registrant as specified in its Charter)



Delaware	61-0143150
(State or other jurisdiction of	(IRS Employer
incorporation or organization)	Identification No.)

850 Dixie Highway
Louisville, Kentucky	40210
(Address of principal executive offices)	(Zip Code)

(502) 585-1100

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	þ		Accelerated filer	¨
Non-accelerated filer	¨	~~(Do not check if a smaller reporting company)~~	Smaller reporting company	¨
			Emerging growth company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 30, ~~2017~~2018



Class A Common Stock ($.15 par value, voting)	~~169,061,063~~169,010,917
Class B Common Stock ($.15 par value, nonvoting)	~~215,276,608~~307,948,847



BROWN-FORMAN CORPORATION
Index to Quarterly Report Form 10-Q

		Page
PART I - FINANCIAL INFORMATION		3

Item 1.	Financial Statements (Unaudited)	3

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	1823

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	3240

Item 4.	Controls and Procedures	3240

PART II - OTHER INFORMATION		3341

Item 1.	Legal Proceedings	3341

Item 1A.	Risk Factors	3341

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	3341

Item 3.	Defaults Upon Senior Securities	3341

Item 4.	Mine Safety Disclosures	3341

Item 5.	Other Information	3341

Item 6.	Exhibits	3342

SIGNATURES		3443

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited)

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Dollars in millions, except per share amounts)


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	October 31,						October 31,						October 31,						October 31,
	2016			2017			2016			2017			2017			2018			2017			2018
Sales	$	1,055		$	1,166		$	1,911		$	2,095		$	1,166		$	1,161		$	2,095		$	2,148
Excise taxes	225			252			420			458			252			251			458			472
Net sales	830			914			1,491			1,637			914			910			1,637			1,676
Cost of sales	278			304			486			534			304			320			534			563
Gross profit	552			610			1,005			1,103			610			590			1,103			1,113
Advertising expenses	107			111			190			200			109			102			196			200
Selling, general, and administrative expenses	163			163			326			324			162			161			323			329
Other expense (income), net	(9		)	(10		)	(15		)	(11		)	(10		)	(5		)	(11		)	(12		)
Operating income	291			346			504			590			349			332			595			596
Non-operating postretirement expense													3			2			5			4
Interest income	1			1			1			2			(1		)	(2		)	(2		)	(4		)
Interest expense	16			16			28			32			16			22			32			44
Income before income taxes	276			331			477			560			331			310			560			552
Income taxes	79			92			135			143			92			61			143			103
Net income	$	197		$	239		$	342		$	417		$	239		$	249		$	417		$	449
Earnings per share:
Basic	$	0.51		$	0.62		$	0.87		$	1.08		$	0.50		$	0.52		$	0.87		$	0.93
Diluted	$	0.50		$	0.62		$	0.87		$	1.08		$	0.49		$	0.52		$	0.86		$	0.93
Cash dividends per common share:
Declared	$	—		$	—		$	0.3400		$	0.3650
Paid	$	0.1700		$	0.1825		$	0.3400		$	0.3650

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in millions)


	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	October 31,						October 31,						October 31,						October 31,
	2016			2017			2016			2017			2017			2018			2017			2018
Net income	$	197		$	239		$	342		$	417		$	239		$	249		$	417		$	449
Other comprehensive income (loss), net of tax:
Currency translation adjustments	(18		)	(25		)	(85		)	9			(25		)	(27		)	9			(39		)
Cash flow hedge adjustments	9			7			21			(16		)	7			22			(16		)	45
Postretirement benefits adjustments	4			3			7			6			3			4			6			7
Net other comprehensive income (loss)	(5		)	(15		)	(57		)	(1		)	(15		)	(1		)	(1		)	13
Comprehensive income	$	192		$	224		$	285		$	416		$	224		248			$	416		$	462

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in millions)


	April 30, 2017			October 31, 2017			April 30, 2018			October 31, 2018
Assets
Cash and cash equivalents	$	182		$	212		$	239		$	193
Accounts receivable, less allowance for doubtful accounts of $7 at April 30 and October 31	557			753			639			768
Inventories:
Barreled whiskey	873			895			947			937
Finished goods	186			242			225			303
Work in process	119			117			117			145
Raw materials and supplies	92			105			90			92
Total inventories	1,270			1,359			1,379			1,477
Other current assets	342			337			298			305
Total current assets	2,351			2,661			2,555			2,743
Property, plant and equipment, net	713			740			780			785
Goodwill	753			756			763			750
Other intangible assets	641			659			670			648
Deferred tax assets	16			15			16			16
Other assets	151			147			192			207
Total assets	$	4,625		$	4,978		$	4,976		$	5,149
Liabilities
Accounts payable and accrued expenses	$	501		$	556		$	581		$	620
Accrued income taxes	9			11			25			17
Short-term borrowings	211			235			215			258
Current portion of long-term debt	249			250
Total current liabilities	970			1,052			821			895
Long-term debt	1,689			1,719			2,341			2,288
Deferred tax liabilities	152			139			85			113
Accrued pension and other postretirement benefits	314			287			191			193
Other liabilities	130			134			222			163
Total liabilities	3,255			3,331			3,660			3,652
Commitments and contingencies
Stockholders’ Equity
Common stock:
Class A, voting, $0.15 par value (170,000,000 shares authorized; 170,000,000 shares issued at April 30 and October 31)	25			25
Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 284,627,000 shares and 217,627,000 shares issued at April 30 and October 31, respectively)	43			33
Class A, voting, $0.15 par value (170,000,000 shares authorized; 170,000,000 shares issued)							25			25
Class B, nonvoting, $0.15 par value (400,000,000 shares authorized; 314,532,000 shares issued)							47			47
Additional paid-in capital	65			49			4			4
Retained earnings	4,470			2,063			1,730			2,016
Accumulated other comprehensive income (loss), net of tax	(390		)	(391		)	(378		)	(365		)
Treasury stock, at cost (70,540,000 and 3,311,000 shares at April 30 and October 31, respectively)	(2,843		)	(132		)
Treasury stock, at cost (3,531,000 and 5,932,000 shares at April 30 and October 31, respectively)							(112		)	(230		)
Total stockholders’ equity	1,370			1,647			1,316			1,497
Total liabilities and stockholders’ equity	$	4,625		$	4,978		$	4,976		$	5,149

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in millions)


	Six Months Ended						Six Months Ended
	October 31,						October 31,
	2016			2017			2017			2018
Cash flows from operating activities:
Net income	$	342		$	417		$	417		$	449
Adjustments to reconcile net income to net cash provided by operations:
Depreciation and amortization	28			31			31			36
Stock-based compensation expense	7			9			9			9
Deferred income taxes	(7		)	(10		)	(10		)	4
Changes in assets and liabilities, excluding the effects of acquisition of business	(201		)	(233		)
Changes in assets and liabilities							(229		)	(226		)
Cash provided by operating activities	169			214			218			272
Cash flows from investing activities:
Acquisition of business, net of cash acquired	(307		)	—
Additions to property, plant, and equipment	(36		)	(64		)	(64		)	(53		)
Payments for corporate-owned life insurance							(4		)	(2		)
Computer software expenditures	(1		)	(1		)	(1		)	(2		)
Cash used for investing activities	(344		)	(65		)	(69		)	(57		)
Cash flows from financing activities:
Net change in short-term borrowings	6			21			21			42
Proceeds from long-term debt	717			—
Debt issuance costs	(5		)	—
Net payments related to exercise of stock-based awards	(5		)	(7		)	(7		)	(5		)
Acquisition of treasury stock	(442		)	(1		)	(1		)	(128		)
Dividends paid	(134		)	(140		)	(140		)	(152		)
Cash provided by (used for) financing activities	137			(127		)
Cash used for financing activities							(127		)	(243		)
Effect of exchange rate changes on cash and cash equivalents	(14		)	8			8			(18		)
Net increase (decrease) in cash and cash equivalents	(52		)	30			30			(46		)
Cash and cash equivalents, beginning of period	263			182			182			239
Cash and cash equivalents, end of period	$	211		$	212		$	212		$	193

See notes to the condensed consolidated financial statements.

BROWN-FORMAN CORPORATION AND SUBSIDIARIES

NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

In these notes, “we,” “us,” “our,” “Brown-Forman,” and ~~“our”~~the “Company” refer to Brown-Forman ~~Corporation.~~Corporation and its consolidated subsidiaries, collectively.

1. Condensed Consolidated Financial Statements

We prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim financial information. In accordance with those rules and regulations, we condensed or omitted certain information and disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP). We suggest that you read these condensed financial statements together with the financial statements and footnotes included in our annual report on Form 10-K for the fiscal year ended April 30, 2017 (2017 Form 10-K). We prepared the accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2017 Form 10-K.

In our opinion, the accompanying financial statements include all adjustments, consisting only of normal recurring adjustments (unless otherwise indicated), necessary for a fair statement of our financial results for the periods covered by this report. The results for interim periods are not necessarily indicative of future or annual results.

~~The BenRiach acquisition occurred during~~We suggest that you read these condensed financial statements together with the ~~first~~financial statements and footnotes included in our Annual Report on Form 10-K for the fiscal ~~quarter of 2017 and~~year ended April 30, 2018 (2018 Form 10-K). Except for adopting the ~~purchase price allocation was finalized as of June 1, 2017. There have been no material changes to~~new accounting standards discussed below, we prepared the ~~purchase price allocation.~~accompanying financial statements on a basis that is substantially consistent with the accounting principles applied in our 2018 Form 10-K.

~~New~~Recently adopted accounting ~~pronouncements to be adopted.~~standards. InAs of May ~~2014,~~1, 2018, we adopted the following Accounting Standards Updates (ASUs) issued by the Financial Accounting Standards Board (FASB) ~~issued a new revenue recognition standard that,~~:

ASU 2014-09: Revenue from Contracts with Customers. This update, codified along with various amendments ~~issued in 2015 and 2016, will replace substantially all existing~~as Accounting Standards Codification Topic 606 (ASC 606), replaces previous revenue recognition ~~guidance in U.S. GAAP.~~guidance. The core principle of ~~the standard~~ASC 606 requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. ~~The new standard~~ASC 606 also requires ~~significantly~~ more financial statement disclosures than ~~existing~~were required by previous revenue ~~standards do.~~

~~The~~recognition standards. We applied this new ~~standard can be adopted using either of two transition options: a full retrospective transition method or~~guidance on a modified retrospective method. Under the full retrospective method, the guidance would be applied to each prior reporting period presented. Under the modified retrospective method, the cumulative effect of initially applying the new guidance would be recorded as anbasis through a cumulative-effect adjustment ~~to the opening balance of~~that reduced retained earnings ~~for the annual reporting period that includes the date~~as of ~~initial application.~~

~~We are continuing to assess the potential impact~~May 1, 2018, by $25 million (net of ~~the new guidance on our financial statements. Based on our assessment to date, we currently expect our accounting~~tax). See Note 2 for ~~certain customer incentives to be the area most likely affected by the new recognition requirements. We also expect to disclose~~ additional information about our revenues ~~under~~and the ~~new standard. As we progress in our assessment, we are also identifying~~impact of adopting ASC 606.

ASU 2016-15: Classification of Certain Cash Receipts and preparing to make any changes to our accounting policies and practices, systems, processes, and controls that may be required to implement the new standard. We currently expect to choose the modified retrospective method in transitioning to the new standard, which we will adopt effective May 1, 2018.

~~We are also currently evaluating the potential impact on our financial statements of the additional new accounting pronouncements described below:~~

In February 2016, the FASB issued a new standard on accounting for leases. Under the new standard, a lessee should recognize on its balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. The standard permits an entity to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. The standard, which also requires additional quantitative and qualitative disclosures about leasing arrangements, will become effective for us beginning fiscal 2020. It is to be applied using a modified retrospective transition approach for leases existing at the beginning of the earliest comparative period presented in the adoption-period financial statements.

~~In August 2016, the FASB issued~~Cash Payments. This new guidance onaddresses eight specific issues related to the classification of certain cash receipts and cash payments on the statement of cash flows. The impact of adopting the new guidance was limited to a change in our classification of cash payments for premiums on corporate-owned life insurance policies, which ~~addresses eight specific~~we previously reflected in operating activities. Under the new guidance, we classify those payments as investing activities. We retrospectively adjusted prior period cash flow ~~classification issues, is intended~~statements to ~~reduce diversity in practice. It will become effective~~conform to the new classification. As a result, we reclassified payments of $4 million from operating activities to investing activities for ~~us beginning fiscal 2019 and is to be applied retrospectively.~~the six months ended October 31, 2017.

~~In October 2016, the FASB issued~~

ASU 2016-16: Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory. This revised guidance ~~that~~ requires the recognition of the income tax consequences (expense or benefit) of an intercompany transfer of assets other than inventory when the transfer occurs. It maintains

the existing requirement to defer the recognition of the income tax consequences of an intercompany transfer of inventory until the inventory is sold to an outside party. ~~The~~We applied the guidance ~~will become effective for us beginning fiscal 2019 and is to be applied~~ on a modified retrospective basis through a cumulative-effect adjustment ~~directly to~~that increased retained earnings as of May 1, 2018, by $20 million.

ASU 2017-04: Simplifying the ~~beginning of the period of adoption.~~

~~In January 2017, the FASB issued~~Test for Goodwill Impairment. This updated guidance ~~that~~ eliminates the second step of the ~~existing~~previous two-step quantitative test of goodwill for impairment. Under the new guidance, the quantitative test ~~will consist~~consists of a single step in which the carrying amount of the reporting unit ~~will be~~is compared to its fair value. An impairment charge would be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the amount of the impairment would be limited to the total amount of goodwill allocated to the reporting unit. The guidance does not affect the existing option to perform the qualitative assessment for a reporting unit to determine whether the quantitative impairment test is necessary. ~~Although~~The prospective adoption ~~is not required until fiscal 2021, we currently expect to adopt~~of the new standard ~~prospectively, beginning in fiscal 2019.~~had no impact on our consolidated financial statements.

~~In March 2017,~~

ASU 2017-07: Improving the ~~FASB issued~~Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This new guidance ~~for~~addresses the presentation of the net periodic cost (NPC) associated with pension and other

postretirement benefit plans. The guidance requires the service cost component of the NPC to be reported in the income statement in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of the NPC are to be presented separately from the service cost and outside of income from operations. In addition, the guidance allows only the service cost component of NPC to be eligible for capitalization when applicable. ~~The~~We applied the guidance ~~will become effective for us beginning fiscal 2019. It is to be applied~~ retrospectively for the presentation in the income statement and prospectively ~~on and after the effective date,~~ for the capitalization of service cost. The retrospective application increased previously-reported operating income by $3 million and $5 million for the three and six months ended October 31, 2017, respectively. As the retrospective application merely reclassified amounts from operating income to non-operating expense, there was no effect on previously-reported net income or earnings per share.

~~In August 2017,~~

New accounting standards to be adopted. The FASB has issued the ~~FASB issued updated~~ASUs described below that we are not required to adopt until May 1, 2019 (although early adoption is permitted). We are currently evaluating their potential impact on our consolidated financial statements.

ASU 2016-02: Leases. This update, codified along with various amendments as Accounting Standards Codification Topic 842 (ASC 842), replaces existing lease accounting guidance. Under ASC 842, a lessee should recognize on its balance sheet a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term. ASC 842 permits an entity to make an accounting policy election not to recognize lease assets and liabilities for leases with a term of 12 months or less. It also requires additional quantitative and qualitative disclosures about leasing arrangements.

We are continuing to assess the potential impact on our financial statements of adopting ASC 842. As we progress in our assessment, we are identifying and preparing to make any changes to our accounting policies and practices, systems, processes, and controls that may be required to implement the new standard. Although we are unable to quantify the impact of adoption at this time, the amount of lease liabilities and right-of-use assets to be recognized on our balance sheet could be material. We do not currently expect adoption to have a material impact on our results of operations, stockholders’ equity, or cash flows.

We will adopt ASC 842 as of May 1, 2019, using a modified retrospective transition approach for leases existing at that date. For the transition, we expect to elect to use the package of practical expedients to not reassess (a) whether existing contracts are or contain leases, (b) the classification of existing leases, and (c) initial direct costs for existing leases.

ASU 2017-12: Targeted Improvements to Accounting for Hedging Activities. This new guidance onis intended to better align hedge ~~accounting.~~accounting with an entity’s risk management activities and improve disclosures about hedges. The guidance expands hedge accounting for financial and nonfinancial risk components, eliminates the requirement to separately measure and report hedge ineffectiveness, simplifies the way assessments of hedge effectiveness may be performed, and amends some presentation and disclosure requirements for hedges. ~~The guidance will become effective for us beginning fiscal 2020.~~ It is to be applied using a modified retrospective transition approach for cash flow and net investment hedges existing at the date of adoption. The amended presentation and disclosure guidance is required only prospectively. ~~Although we~~We have not yet determined our plans for adoption, ~~we are considering the possibility of adopting~~but currently do not expect to adopt this new guidance before the required adoption date.

~~Early~~ASU 2018-02: Reclassification of Certain Effects from Accumulated Other Comprehensive Income. This new guidance would allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted by the U.S. government in December 2017. It is to be applied either in the period of adoption ~~of any~~or retrospectively to each period in which the effect of the ~~new accounting pronouncements described above~~change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is ~~permitted. However, except as noted above, we~~recognized. We have not yet determined our plans for adoption, but currently do not ~~currently~~ expect to adopt this new guidance before the required adoption date.

There are no other new accounting standards to be adopted that we currently believe might have a significant impact on our consolidated financial statements.

Reclassifications. We have reclassified some previously reported expense amounts related to certain marketing research and promotional agency costs to conform to the current year classification. These immaterial reclassifications between advertising expenses and selling, general, and administrative expenses had no impact on net income.

2. Net Sales

Effective May 1, 2018, we updated our policy for recognizing revenue (“net sales”) to reflect the adoption of ASC 606. We describe the updated policy below. Also, we show how the adoption impacted our financial statements and we present disaggregated net sales information in accordance with the new ~~pronouncements before their effective dates.~~standard.

Revenue recognition policy. Our net sales predominantly reflect global sales of beverage alcohol consumer products. We sell these products under contracts with different types of customers, depending on the market. The customer is most often a distributor, wholesaler, or retailer.

Each contract typically includes a single performance obligation to transfer control of the products to the customer. Depending on the contract, control is transferred when the products are either shipped or delivered to the customer, at which point we recognize the transaction price for those products as net sales. The transaction price recognized at that point reflects our estimate of the consideration to be received in exchange for the products. The actual amount may ultimately differ due to the effect of various customer incentives and trade promotion activities. In making our estimates, we consider our historical experience and current expectations, as applicable. Adjustments recognized during the three and six months ended October 31, 2018, for changes in estimated transaction prices of products sold in prior periods were not material.

Net sales exclude taxes we collect from customers that are imposed by various governments on our sales, and are reduced by payments to customers unless made in exchange for distinct goods or services with fair values approximating the payments.

Net sales include any amounts we bill customers for shipping and handling activities related to the products. We recognize the cost of those activities in cost of sales during the same period in which we recognize the related net sales.

Sales returns, which are permitted only in limited situations, are not material.

Customer payment terms generally range from 30 to 90 days. There are no significant amounts of contract assets or liabilities.

2. Impact of adoption.~~Inventories~~ We adopted ASC 606 using the modified retrospective method. As a result, we recorded an adjustment that decreased retained earnings as of May 1, 2018, by $25 million (net of tax). The adjustment reflects the cumulative effect on that date of applying our updated revenue recognition policy, under which we recognize the cost of certain customer incentives earlier than we did before adopting ASC 606. Although we do not expect this change in timing to have a significant impact on a full-year basis, we do anticipate some change in the pattern of recognition among fiscal quarters. Additionally, some payments to customers that we classified as expenses before adopting the new standard are classified as reductions of net sales under our new policy.

~~Inventories are valued at~~The following table shows how the ~~lower~~adoption of ~~cost or market. Some of~~ASC 606 impacted our consolidated ~~inventories are valued using the last-in, first-out (LIFO) method, which we use~~statement of operations for the ~~majority~~three months ended October 31, 2018:



	Three Months Ended October 31, 2018
	Under Prior			As Reported Under			Effect of
(Dollars in millions, except per share amounts)	Guidance			ASC 606			Adoption
Sales	$	1,169		$	1,161		$	(8	)
Excise taxes	251			251			—
Net sales	918			910			(8		)
Cost of sales	320			320			—
Gross profit	598			590			(8		)
Advertising expenses	107			102			(5		)
Selling, general, and administrative expenses	162			161			(1		)
Other expense (income), net	(5		)	(5		)	—
Operating income	334			332			(2		)
Non-operating postretirement expense	2			2			—
Interest income	(2		)	(2		)	—
Interest expense	22			22			—
Income before income taxes	312			310			(2		)
Income taxes	61			61			—
Net income	$	251		$	249		$	(2	)
Earnings per share:
Basic	$	0.52		$	0.52		$	—
Diluted	$	0.52		$	0.52		$	—

The following table shows how the adoption of ASC 606 impacted our ~~U.S. inventories. If~~consolidated statement of operations for the ~~LIFO method had not been used, inventories at current cost would have been~~ six months ended October 31, 2018:



	Six Months Ended October 31, 2018
	Under Prior			As Reported Under			Effect of
(Dollars in millions, except per share amounts)	Guidance			ASC 606			Adoption
Sales	$	2,166		$	2,148		$	(18	)
Excise taxes	472			472			—
Net sales	1,694			1,676			(18		)
Cost of sales	563			563			—
Gross profit	1,131			1,113			(18		)
Advertising expenses	208			200			(8		)
Selling, general, and administrative expenses	331			329			(2		)
Other expense (income), net	(12		)	(12		)	—
Operating income	604			596			(8		)
Non-operating postretirement expense	4			4			—
Interest income	(4		)	(4		)	—
Interest expense	44			44			—
Income before income taxes	560			552			(8		)
Income taxes	105			103			(2		)
Net income	$	455		$	449		$	(6	)
Earnings per share:
Basic	$	0.94		$	0.93		$	(0.01	)
Diluted	$	0.94		$	0.93		$	(0.01	)

~~$272 million~~ ~~higher than reported~~The following table shows how the adoption of ASC 606 impacted our consolidated balance sheet as of ~~April 30, 2017, and $285 million higher than reported as of~~ October 31, ~~2017~~2018:



	As of October 31, 2018
	Under Prior		As Reported Under		Effect of
(Dollars in millions)	Guidance		ASC 606		Adoption
Assets
Other current assets	$	306	$	305	$	(1	)
Deferred tax assets	15		16		1
Total assets	5,149		5,149		—

Liabilities
Accounts payable and accrued expenses	$	580	$	620	$	40
Deferred tax liabilities	122		113		(9		)
Total liabilities	3,621		3,652		31

Stockholders’ Equity
Retained earnings	$	2,047	$	2,016	$	(31	)
Total stockholders’ equity	1,528		1,497		(31		)

Disaggregated revenues.

The following table shows our net sales by geography:



	Three Months Ended				Six Months Ended
	October 31,				October 31,
(Dollars in millions)	2017		2018		2017		2018
United States	$	438	$	447	$	793	$	804
Developed International¹	248		234		441		449
Emerging²	159		164		282		295
Travel Retail³	44		38		74		76
Non-branded and bulk⁴	25		27		47		52
Total	$	914	$	910	$	1,637	$	1,676

¹~~. Changes~~Represents net sales of branded products to “advanced economies” as defined by the International Monetary Fund (IMF), excluding the United States. Our largest developed international markets are the United Kingdom, Australia, and Germany.

²Represents net sales of branded products to “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico and Poland.

³Represents net sales of branded products to global duty-free customers, travel retail customers, and the U.S. military regardless of customer location.

⁴Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

The following table shows our net sales by product category:



	Three Months Ended				Six Months Ended
	October 31,				October 31,
(Dollars in millions)	2017		2018		2017		2018
Whiskey¹	$	713	$	706	$	1,270	$	1,308
Tequila²	64		70		122		132
Vodka³	35		34		66		60
Wine⁴	63		62		105		102
Rest of portfolio	14		11		27		22
Non-branded and bulk⁵	25		27		47		52
Total	$	914	$	910	$	1,637	$	1,676

¹Includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink, and ready-to-pour products. The brands included in this category are the ~~LIFO valuation reserve for interim periods are based on a proportionate allocation~~Jack Daniel's family of ~~the estimated change for the entire fiscal year.~~brands, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers' Craft.

²Includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.

³Includes Finlandia.

⁴Includes Korbel Champagne and Sonoma-Cutrer wines.

⁵Includes net sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

3. Income Taxes

Our consolidated interim effective tax rate is based upon our expected annual operating income, statutory tax rates, and income tax laws in the various jurisdictions in which we operate. Significant or unusual items, including adjustments to accruals for tax uncertainties, are recognized in the fiscal quarter in which the related event or a change in judgment occurs. The effective tax rate of ~~25.5%~~18.6% for the six months ended October 31, ~~2017,~~2018, is lower than the expected tax rate of ~~28.4%~~21.4% on ordinary income for the full fiscal year, primarily due to (a) ~~a reduction in~~the impact of discrete items, including true-ups to prior year tax returns, (b) the impact of the current year net adjustment to the provisional repatriation U.S. tax ~~recorded in the first quarter of~~charge that was made during fiscal 2018 ~~for certain prior years on foreign exchange gains in non-U.S. entities due to a change in method of accounting for U.S. tax purposes,~~(discussed below), and ~~(b)~~(c) the excess tax benefits related to stock-based compensation. Our expected tax rate includes current fiscal year additions for existing tax contingency items.

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (Tax Act). The Tax Act significantly revised the future ongoing U.S. corporate income tax by, among other things, lowering U.S. corporate income tax rates and implementing a territorial tax system. As we have an April 30 fiscal year-end, the lower corporate income tax rate was phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year ended April 30, 2018, and 21% for our current and subsequent fiscal years. For the six months ended October 31, 2018, the impact of reducing the U.S. statutory federal rate from 35% (the pre-Tax Act rate) to 21% resulted in a tax benefit of approximately $60 million.

There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposed a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. In addition, the reduction of the U.S. corporate tax rate caused us to adjust our U.S. deferred tax assets and liabilities to the lower federal base rate of 21%. These transitional impacts resulted in a provisional net charge of $43 million for the year ended April 30, 2018, comprised of a provisional repatriation U.S. tax charge of $91 million and a provisional net deferred tax benefit of $48 million. In the six months ended October 31, 2018, we recorded a benefit of $4 million as an adjustment to the provisional repatriation tax.

Historically, we have asserted that the undistributed earnings of our foreign subsidiaries are reinvested indefinitely outside the United States. Therefore, no income taxes have been provided for any outside basis differences inherent in these subsidiaries other than those subject to the one-time repatriation tax. As of October 31, 2018, we changed our indefinite reinvestment assertion with respect to current year earnings and prior year undistributed earnings for one of those foreign subsidiaries (but not for its other outside basis differences). We intend to repatriate approximately $120 million of cash to the United States from this subsidiary during the fiscal quarter ending January 31, 2019. No incremental taxes are due on this distribution of cash beyond the repatriation tax recorded in fiscal year 2018. We have not changed the indefinite reinvestment assertion for

undistributed earnings or other outside basis differences for any of the other foreign subsidiaries. We will continue to evaluate our future cash deployment and may change our indefinite reinvestment assertion in future periods.

The Tax Act also established new tax laws that impact our financial statements beginning in the current fiscal year. These new laws include, but are not limited to (a) Global Intangible Low-Tax Income (GILTI), a new provision for tax on low-tax foreign earnings; (b) Base Erosion Anti-abuse Tax (BEAT), a new minimum tax; (c) Foreign-Derived Intangible Income (FDII), a new provision for deductions related to foreign-derived intangibles; (d) repeal of the domestic production activity deduction; and (e) limitations on certain executive compensation. For the six months ended October 31, 2018, the net impact of these provisions was approximately $7 million of additional tax.

As noted, certain income earned by foreign subsidiaries must be included in U.S. taxable income under the GILTI provisions. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to recognize these taxes as a current period expense when incurred.

The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the current estimates, due to, among other things, changes in interpretations of the Tax Act, any legislative action to address questions that arise because of the Tax Act, any changes in accounting standards for income taxes or related interpretations in response to the Tax Act, or any updates or changes to estimates we have used to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign currency exchange rates. The SEC has issued rules that allow for a measurement period of up to one year after the enactment date of the Tax Act to finalize the recording of the related tax impacts. As of October 31, 2018, the amounts recorded for the Tax Act remain provisional for the one-time repatriation tax and the adjustment to our U.S. deferred tax assets and liabilities. We will finalize and record any additional adjustments within the allowed measurement period.

4. Earnings Per Share

We calculate basic earnings per share by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share further includes the dilutive effect of stock-based compensation awards. We calculate that dilutive effect using the “treasury stock method” (as defined by GAAP).

The following table presents information concerning basic and diluted earnings per share:


	Three Months Ended				Six Months Ended				Three Months Ended				Six Months Ended
	October 31,				October 31,				October 31,				October 31,
(Dollars in millions, except per share amounts)	2016		2017		2016		2017		2017		2018		2017		2018
Net income available to common stockholders	$	197	$	239	$	342	$	417	$	239	$	249	$	417	$	449

Share data (in thousands):
Basic average common shares outstanding	389,050		384,120		390,994		384,076		480,150		480,436		480,095		480,647
Dilutive effect of stock-based awards	2,798		2,507		2,895		2,428		3,134		3,155		3,035		3,316
Diluted average common shares outstanding	391,848		386,627		393,889		386,504		483,284		483,591		483,130		483,963

Basic earnings per share	$	0.51	$	0.62	$	0.87	$	1.08	$	0.50	$	0.52	$	0.87	$	0.93
Diluted earnings per share	$	0.50	$	0.62	$	0.87	$	1.08	$	0.49	$	0.52	$	0.86	$	0.93

We excluded common stock-based awards for approximately ~~1,937,000~~1,501,000 shares and ~~1,201,000~~347,000 shares from the calculation of diluted earnings per share for the three months ended October 31, ~~2016~~2017 and ~~2017,~~2018, respectively. We excluded common stock-based awards for approximately ~~1,555,000~~1,610,000 shares and ~~1,288,000~~595,000 shares from the calculation of diluted earnings per share for the six months ended October 31, ~~2016~~2017 and ~~2017,~~2018, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.

5.Inventories

Inventories are valued at the lower of cost or market. Some of our consolidated inventories are valued using the last-in, first-out (LIFO) method, which we use for the majority of our U.S. inventories. If the LIFO method had not been used, inventories at current cost would have been $290 million higher than reported as of April 30, 2018, and $298 million higher than reported as

of October 31, 2018. Changes in the LIFO valuation reserve for interim periods are based on a proportionate allocation of the estimated change for the entire fiscal year.

6. Goodwill and Other Intangible Assets

The following table shows the changes in goodwill (which includes no accumulated impairment losses) and other intangible assets during the six months ended October 31, 2018:



(Dollars in millions)	Goodwill			Other Intangible Assets
Balance at April 30, 2018	$	763		$	670
Foreign currency translation adjustment	(13		)	(22		)
Balance at October 31, 2018	$	750		$	648

Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.

7. Commitments and Contingencies

We operate in a litigious environment, and we are sued in the normal course of business. Sometimes plaintiffs seek substantial damages. Significant judgment is required in predicting the outcome of these suits and claims, many of which take years to adjudicate. We accrue estimated costs for a contingency when we believe that a loss is probable and we can make a reasonable estimate of the loss, and then adjust the accrual as appropriate to reflect changes in facts and circumstances. We do not believe it is reasonably possible that these existing loss contingencies, individually or in the aggregate, would have a material adverse effect on our financial position, results of operations, or liquidity. No material accrued loss contingencies are recorded as of October 31, ~~2017.~~2018.

We have guaranteed the repayment by a third-party importer of its obligation under a bank credit facility that it uses in connection with its importation of our products in Russia. If the importer were to default on that obligation, which we believe is unlikely, our maximum possible exposure under the existing terms of the guaranty would be approximately ~~$11~~$10 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant.

As of October 31, ~~2017,~~2018, our actual exposure under the guaranty of the importer’s obligation is approximately $9$7 million. We also have accounts receivable from that importer of approximately ~~$10~~$11 million at October 31, ~~2017,~~2018, which we expect to collect in full.

Based on the financial support we provide to the importer, we believe it meets the definition of a variable interest entity. However, because we do not control this entity, it is not included in our consolidated financial statements.

6.8. Debt

Our long-term debt (net of unamortized discount and issuance costs) consists of:


(Principal and carrying amounts in millions)	April 30, 2017		October 31, 2017		April 30, 2018		October 31, 2018
1.00% senior notes, $250 principal amount, due January 15, 2018	$	249	$	250
2.25% senior notes, $250 principal amount, due January 15, 2023	248		248		$	248	$	248
3.50% senior notes, $300 principal amount, due April 15, 2025					296		296
1.20% senior notes, €300 principal amount, due July 7, 2026	324		346		361		338
2.60% senior notes, £300 principal amount, due July 7, 2028	383		391		408		377
4.00% senior notes, $300 principal amount, due April 15, 2038					293		293
3.75% senior notes, $250 principal amount, due January 15, 2043	248		248		248		248
4.50% senior notes, $500 principal amount, due July 15, 2045	486		486		487		488
	1,938		1,969		$	2,341	$	2,288
Less current portion	249		250
	$	1,689	$	1,719

As of April 30, ~~2017,~~2018, our short-term borrowings consisted of ~~$211 million included $208~~$215 million of commercial paper, with an average interest rate of ~~1.04%~~2.04%, and aan average remaining maturity of 2223 days. As of October 31, ~~2017,~~2018, our short-term borrowings of ~~$235~~$258 million included ~~$230~~$257 million of commercial paper, with an average interest rate of ~~1.28%~~2.37%, and aan average remaining maturity of 2021 days.

7. ~~Pension and Other Postretirement Benefits~~

The following table shows the components of the pension and other postretirement benefit cost recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.

Three Months Ended Six Months Ended
October 31, October 31,
(Dollars in millions) 2016 2017 2016 2017
Pension Benefits:

Service cost $ 6
$ 6
$ 13
$ 12
Interest cost 9
7
18
15
Expected return on plan assets (10 ) (10 ) (21 ) (21 )
Amortization of net actuarial loss 6
6
13
11
Net cost $ 11
$ 9
$ 23
$ 17

Other Postretirement Benefits:

Service cost $ —
$ —
$ 1
$ —
Interest cost 1
1
1
1
Amortization of prior service cost (credit) (1 ) (1 ) (1 ) (1 )
Net cost $ —
$ —
$ 1
$ —

8.9. Fair Value Measurements

The following table summarizes the assets and liabilities measured or disclosed at fair value on a recurring basis:


	April 30, 2017				October 31, 2017				April 30, 2018				October 31, 2018
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
(Dollars in millions)	Amount		Value		Amount		Value		Amount		Value		Amount		Value
Assets:
Assets
Cash and cash equivalents	$	182	$	182	$	212	$	212	$	239	$	239	$	193	$	193
Currency derivatives	25		25		3		3		1		1		31		31
Liabilities:
Liabilities
Currency derivatives	10		10		21		21		39		39		6		6
Short-term borrowings	211		211		235		235		215		215		258		258
Current portion of long-term debt	249		249		250		249
Long-term debt	1,689		1,752		1,719		1,791		2,341		2,386		2,288		2,294

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. We categorize the fair values of assets and liabilities into three levels based upon the assumptions (inputs) used to determine those values. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 – Observable inputs other than those included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in inactive markets; or other inputs that are observable or can be derived from or corroborated by observable market data.

Level 3 – Unobservable inputs ~~that are~~ supported by little or no market activity.

We determine the fair values of our currency derivatives (forward contracts) using standard valuation models. The significant inputs used in these models, which are readily available in public markets or can be derived from observable market transactions, include the applicable spot rates, forward rates, and discount rates. The discount rates are based on the historical U.S. Treasury rates. These fair value measurements are categorized as Level 2 within the valuation hierarchy.

We determine the fair value of long-term debt primarily based on the prices at which similar debt has recently traded in the market and also considering the overall market conditions on the date of valuation. These fair value measurements are categorized as Level 2 within the valuation hierarchy.

The fair ~~value~~values of cash, cash equivalents, and short-term borrowings approximate the carrying amounts due to the short maturities of these instruments.

We measure some assets and liabilities at fair value on a nonrecurring basis. That is, we do not measure them at fair value on an ongoing basis, but we do adjust them to fair value in some circumstances (for example, when we determine that an asset is impaired). No material nonrecurring fair value measurements were required during the periods presented in these financial statements.

9.10. Derivative Financial Instruments and Hedging Activities

Our multinational business exposes us to global market risks, including the effect of fluctuations in currency exchange rates, commodity prices, and interest rates. We use derivatives to help manage financial exposures that occur in the normal course of business. We formally document the purpose of each derivative contract, which includes linking the contract to the financial exposure it is designed to mitigate. We do not hold or issue derivatives for trading or speculative purposes.

We use currency derivative contracts to limit our exposure to the currency exchange risk that we cannot mitigate internally by using netting strategies. We designate most of these contracts as cash flow hedges of forecasted transactions (expected to occur within three years). We record all changes in the fair value of cash flow hedges (except any ineffective portion) in accumulated other comprehensive income (AOCI) until the underlying hedged transaction occurs, at which time we reclassify that amount into earnings. We assess the effectiveness of these hedges based on changes in forward exchange rates. The ineffective portion

of the changes in fair value of our hedges (recognized immediately in earnings) during the periods presented in this report was not material.

We had outstanding currency derivatives, related primarily to our euro, British pound, and Australian dollar exposures, with notional amounts totaling ~~$1,188~~$1,098 million at April 30, ~~2017~~2018 and ~~$1,149~~$1,255 million at October 31, ~~2017.~~2018.

~~During fiscal 2017, we designated some currency derivative forward contracts and~~We also use foreign currency-denominated ~~long-term~~ debt to help manage our currency exchange risk. As of October 31, 2018, $615 million of our foreign currency-denominated debt instruments were designated as ~~after-tax~~net investment hedges. These net investment hedges ~~of our~~are intended to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries. ~~During fiscal 2018, we have continued to designate some foreign currency-denominated debt for that purpose.~~ Any change in value of the designated portion of the hedging instruments is recorded in AOCI, offsetting the foreign currency translation adjustment of the related net investments that is also recorded in AOCI. As of October 31, 2017, $607 million of our foreign currency-denominated debt was designated as a net investment hedge. Our net investment hedges are intended to mitigate foreign exchange exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against changes in foreign exchange rates. There was no ineffectiveness related to our net investment ~~hedges.~~hedges in any of the periods presented.

We do not designate some of our currency derivatives and foreign currency-denominated debt as hedges because we use them to at least partially offset the immediate earnings impact of changes in foreign exchange rates on existing assets or liabilities. We immediately recognize the change in fair value of these instruments in earnings.

We use forward purchase contracts with suppliers to protect against corn price volatility. We expect to physically take delivery of the corn underlying each contract and use it for production over a reasonable period of time. Accordingly, we account for these contracts as normal purchases rather than as derivative instruments.

The following tables present the pre-tax impact that changes in the fair value of our derivative instruments and non-derivative hedging instruments had on AOCI and earnings:


		Three Months Ended							Three Months Ended
		October 31,							October 31,
(Dollars in millions)	Classification	2016			2017			Classification	2017			2018
Derivative Instruments
Currency derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI	n/a	$	23		$	7		n/a	$	7		$	30
Net gain (loss) reclassified from AOCI into earnings	Sales	9			(5		)	Sales	(5		)	—
Currency derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings	Sales	2			1			Sales	1			3
Net gain (loss) recognized in earnings	Other income	(3		)	(4		)	Other income	(4		)	(4		)
Non-Derivative Hedging Instruments
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI	n/a	34			1			n/a	1			19
Foreign currency-denominated debt not designated as hedging instrument:
Net gain (loss) recognized in earnings	Other income	3			1			Other income	1			3

		Six Months Ended							Six Months Ended
		October 31,							October 31,
(Dollars in millions)	Classification	2016			2017			Classification	2017			2018
Derivative Instruments
Currency derivatives designated as cash flow hedges:
Net gain (loss) recognized in AOCI	n/a	$	52		$	(29	)	n/a	$	(29	)	$	57
Net gain (loss) reclassified from AOCI into earnings	Sales	19			(3		)	Sales	(3		)	(2		)
Currency derivatives designated as net investment hedge:
Net gain (loss) recognized in AOCI	n/a	8			—
Currency derivatives not designated as hedging instruments:
Net gain (loss) recognized in earnings	Sales	3			(2		)	Sales	(2		)	6
Net gain (loss) recognized in earnings	Other income	(8		)	5			Other income	5			(1		)
Non-Derivative Hedging Instruments
Foreign currency-denominated debt designated as net investment hedge:
Net gain (loss) recognized in AOCI	n/a	24			(15		)	n/a	(15		)	47
Foreign currency-denominated debt not designated as hedging instrument:
Net gain (loss) recognized in earnings	Other income	2			(15		)	Other income	(15		)	8

We expect to reclassify $5$13 million of deferred net ~~losses~~gains on cash flow hedges recorded in AOCI as of October 31, ~~2017,~~2018, to earnings during the next 12 months. This reclassification would offset the anticipated earnings impact of the underlying hedged exposures. The actual amounts that we ultimately reclassify to earnings will depend on the exchange rates in effect when the underlying hedged transactions occur. As of October 31, ~~2017,~~2018, the maximum term of our outstanding derivative contracts was 36 months.

The following table presents the fair values of our derivative instruments:


(Dollars in millions)	Classification	Fair value of derivatives in a gain position		Fair value of derivatives in a loss position			Classification	Fair value of derivatives in a gain position		Fair value of derivatives in a loss position
April 30, 2017:
April 30, 2018
Designated as cash flow hedges:
Currency derivatives	Other current assets	$	21	$	(2	)	Other current assets	$	2	$	(2	)
Currency derivatives	Other assets	9		(4		)	Other assets	1		—
Currency derivatives	Accrued expenses	2		(8		)	Accrued expenses	4		(23		)
Currency derivatives	Other liabilities	1		(4		)	Other liabilities	2		(18		)
Not designated as hedges:
Currency derivatives	Other current assets	2		(1		)	Accrued expenses	1		(5		)
Currency derivatives	Accrued expenses	—		(1		)
October 31, 2017:
October 31, 2018
Designated as cash flow hedges:
Currency derivatives	Other current assets	5		(3		)	Other current assets	18		(3		)
Currency derivatives	Other assets	1		—			Other assets	18		(2		)
Currency derivatives	Accrued expenses	6		(15		)	Accrued expenses	1		(3		)
Currency derivatives	Other liabilities	4		(15		)	Other liabilities	—		—
Not designated as hedges:
Currency derivatives	Accrued expenses	—		(1		)	Accrued expenses	—		(4		)

The fair values reflected in the above table are presented on a gross basis. However, as discussed further below, the fair values of those instruments ~~that are~~ subject to net settlement agreements are presented on a net basis in our balance ~~sheets on a net basis.~~sheets.

In our statement of cash flows, we classify cash flows related to cash flow hedges in the same category as the cash flows from the hedged items.

Credit risk. We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association (ISDA) agreements that allow for net settlement of the derivative contracts. Also, we have established counterparty credit guidelines that are regularly monitored, and we monetize contracts when we believe it is warranted. Because of these safeguards, we believe we have no derivative positions that warrant credit valuation adjustments.

Some of our derivative instruments require us to maintain a specific level of creditworthiness, which we have maintained. If our creditworthiness were to fall below that level, then the counterparties to our derivative instruments could request immediate payment or collateralization for derivative instruments in net liability positions. The aggregate fair value of all derivatives with creditworthiness requirements that were in a net liability position was $9$38 million at April 30, ~~2017~~2018 and ~~$21~~$6 million at October 31, ~~2017~~2018.

Offsetting. As noted above, our derivative contracts are governed by ISDA agreements that allow for net settlement of derivative contracts with the same counterparty. It is our policy to present the fair values of current derivatives (i.e., those with a remaining term of 12 months or less) with the same counterparty on a net basis in the balance sheet. Similarly, we present the fair values of noncurrent derivatives with the same counterparty on a net basis. Current derivatives are not netted with noncurrent derivatives in the balance sheet.

The following table summarizes the gross and net amounts of our derivative contracts:


(Dollars in millions)	Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in Balance Sheet			Net Amounts Presented in Balance Sheet			Gross Amounts Not Offset in Balance Sheet			Net Amounts			Gross Amounts of Recognized Assets (Liabilities)			Gross Amounts Offset in Balance Sheet			Net Amounts Presented in Balance Sheet			Gross Amounts Not Offset in Balance Sheet			Net Amounts
April 30, 2017:
April 30, 2018
Derivative assets	$	35		$	(10	)	$	25		$	(1	)	$	24		$	10		$	(9	)	$	1		$	(1	)	$	—
Derivative liabilities	(20		)	10			(10		)	1			(9		)	(48		)	9			(39		)	1			(38		)
October 31, 2017:
October 31, 2018
Derivative assets	16			(13		)	3			—			3			37			(6		)	31			—			31
Derivative liabilities	(34		)	13			(21		)	—			(21		)	(12		)	6			(6		)	—			(6		)

No cash collateral was received or pledged related to our derivative contracts as of April 30, ~~2017~~2018 or October 31, ~~2017~~2018.

~~10.~~11. ~~Goodwill~~Pension and Other ~~Intangible Assets~~Postretirement Benefits

The following table shows the components of the net cost of pension and other postretirement benefits recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.



	Three Months Ended						Six Months Ended
	October 31,						October 31,
(Dollars in millions)	2017			2018			2017			2018
Pension Benefits:
Service cost	$	6		$	6		$	12		$	12
Interest cost	7			9			15			17
Expected return on plan assets	(10		)	(12		)	(21		)	(24		)
Amortization of:
Prior service cost (credit)	—			—			—			1
Net actuarial loss	6			5			11			10
Net cost	$	9		$	8		$	17		$	16

Other Postretirement Benefits:
Interest cost	$	1		$	1		$	1		$	1
Amortization of prior service cost (credit)	(1		)	(1		)	(1		)	(1		)
Net cost	$	—		$	—		$	—		$	—

12. Stockholders’ Equity

The following table ~~summarizes~~shows the changes in ~~goodwill and other intangible assets~~stockholders’ equity by quarter during the six months ended October 31, 2017:


(Dollars in millions)	Goodwill		Other Intangible Assets		Class A Common Stock		Class B Common Stock			Additional Paid-in Capital			Retained Earnings			AOCI			Treasury Stock			Total
Balance at April 30, 2017	$	753	$	641	$	25	$	43		$	65		$	4,470		$	(390	)	$	(2,843	)	$	1,370
Foreign currency translation adjustment	3		18
Retirement of treasury stock							(10		)	(8		)	(2,684		)				2,702			—
Net income													178									178
Net other comprehensive income (loss)																14						14
Cash dividends													(140		)							(140		)
Acquisition of treasury stock																			(1		)	(1		)
Stock-based compensation expense										4												4
Stock issued under compensation plans																			9			9
Loss on issuance of treasury stock issued under compensation plans										(14		)										(14		)
Balance at July 31, 2017					25		33			47			1,824			(376		)	(133		)	1,420
Net income													239									239
Net other comprehensive income (loss)																(15		)				(15		)
Stock-based compensation expense										5												5
Stock issued under compensation plans																			1			1
Loss on issuance of treasury stock issued under compensation plans										(3		)										(3		)
Balance at October 31, 2017	$	756	$	659	$	25	$	33		$	49		$	2,063		$	(391	)	$	(132	)	$	1,647

~~Our other intangible assets consist of trademarks and brand names, all with indefinite useful lives.~~

~~11.~~ ~~Stockholders’ Equity~~

The following table ~~summarizes~~shows the changes in stockholders’ equity by quarter during the six months ended October 31, ~~2017:~~2018:

(Dollars in millions)
Class A Common Stock

Class B Common Stock

Additional Paid-in Capital

Retained Earnings
AOCI
Treasury Stock
Total
Balance at April 30, 2017 $ 25
$ 43
$ 65
$ 4,470
$ (390 ) $ (2,843 ) $ 1,370
Retirement of treasury stock (10 ) (8 ) (2,684 ) 2,702
—
Net income 417
417
Net other comprehensive income (loss) (1 ) (1 )
Cash dividends (140 ) (140 )
Acquisition of treasury stock (1 ) (1 )
Stock-based compensation expense 9
9
Stock issued under compensation plans 10
10
Loss on issuance of treasury stock issued under compensation plans (17 )
(17 )
Balance at October 31, 2017 $ 25
$ 33
$ 49
$ 2,063
$ (391 ) $ (132 ) $ 1,647

~~Retirement of Treasury Stock.~~ On May 24, 2017, we retired 67,000,000 shares of Class B common stock previously held as treasury shares. This retirement reduced the number of issued shares of Class B common stock by that same amount.



(Dollars in millions)	Class A Common Stock		Class B Common Stock		Additional Paid-in Capital			Retained Earnings			AOCI			Treasury Stock			Total
Balance at April 30, 2018	$	25	$	47	$	4		$	1,730		$	(378	)	$	(112	)	$	1,316
Cumulative effect of changes in accounting standards (Note 1)								(5		)							(5		)
Net income								200									200
Net other comprehensive income (loss)											14						14
Cash dividends								(152		)							(152		)
Acquisition of treasury stock														(6		)	(6		)
Stock-based compensation expense					5												5
Stock issued under compensation plans														9			9
Loss on issuance of treasury stock issued under compensation plans					(7		)	(6		)							(13		)
Balance at July 31, 2018	25		47		2			1,767			(364		)	(109		)	1,368
Net income								249									249
Net other comprehensive income (loss)											(1		)				(1		)
Acquisition of treasury stock														(122		)	(122		)
Stock-based compensation expense					4												4
Stock issued under compensation plans														1			1
Loss on issuance of treasury stock issued under compensation plans					(2		)										(2		)
Balance at October 31, 2018	$	25	$	47	$	4		$	2,016		$	(365	)	$	(230	)	$	1,497

Dividends. The following table ~~summarizes~~shows the cash dividends declared per share on our Class A and Class B common stock during the six months ended October 31, ~~2017:~~2018:



Declaration Date	Record Date	Payable Date	Amount per Share
May 24, ~~2017~~2018	June ~~5, 2017~~6, 2018	July 3, ~~2017~~2018	$~~0.1825~~0.158
July ~~27, 2017~~26, 2018	September ~~7, 2017~~6, 2018	October ~~2, 2017~~1, 2018	$~~0.1825~~0.158

As announced on November ~~16, 2017,~~15, 2018, our Board of Directors increased the quarterly cash dividend on our Class A and Class B common stock from ~~$0.1825~~$0.158 per share to ~~$0.1975~~$0.166 per share. Stockholders of record on December ~~7, 2017,~~6, 2018 will receive the quarterly cash dividend on January 2, ~~2018.~~2019.

Accumulated ~~Other Comprehensive Income.~~other comprehensive income. The following table ~~summarizes~~shows the ~~changes~~change in each component of AOCI, net of tax, during the six months ended October 31, ~~2017:~~2018:


(Dollars in millions)	Currency Translation Adjustments			Cash Flow Hedge Adjustments			Postretirement Benefits Adjustments			Total AOCI			Currency Translation Adjustments			Cash Flow Hedge Adjustments			Postretirement Benefits Adjustments			Total AOCI
Balance at April 30, 2017	$	(204	)	$	11		$	(197	)	$	(390	)
Balance at April 30, 2018													$	(180	)	$	(17	)	$	(181	)	$	(378	)
Net other comprehensive income (loss)	9			(16		)	6			(1		)	(39		)	45			7			13
Balance at October 31, 2017	$	(195	)	$	(5	)	$	(191	)	$	(391	)
Balance at October 31, 2018													$	(219	)	$	28		$	(174	)	$	(365	)

~~12.~~13. Other Comprehensive Income

The following ~~tables present~~table shows the components of net other comprehensive income (loss):


	Three Months Ended									Three Months Ended									Three Months Ended									Three Months Ended
	October 31, 2016									October 31, 2017									October 31, 2017									October 31, 2018
(Dollars in millions)	Pre-Tax			Tax			Net			Pre-Tax			Tax			Net			Pre-Tax			Tax			Net			Pre-Tax			Tax			Net
Currency translation adjustments:
Net gain (loss) on currency translation	$	(4	)	$	(14	)	$	(18	)	$	(25	)	$	—		$	(25	)	$	(25	)	$	—		$	(25	)	$	(23	)	$	(4	)	$	(27	)
Reclassification to earnings	—			—			—			—			—			—			—			—			—			—			—			—
Other comprehensive income (loss), net	(4		)	(14		)	(18		)	(25		)	—			(25		)	(25		)	—			(25		)	(23		)	(4		)	(27		)
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments	23			(9		)	14			7			(3		)	4			7			(3		)	4			30			(8		)	22
Reclassification to earnings¹	(9		)	4			(5		)	5			(2		)	3			5			(2		)	3			—			—			—
Other comprehensive income (loss), net	14			(5		)	9			12			(5		)	7			12			(5		)	7			30			(8		)	22
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost	—			—			—			(1		)	—			(1		)	(1		)	—			(1		)	—			—			—
Reclassification to earnings²	7			(3		)	4			6			(2		)	4			6			(2		)	4			5			(1		)	4
Other comprehensive income (loss), net	7			(3		)	4			5			(2		)	3			5			(2		)	3			5			(1		)	4

Total other comprehensive income (loss), net	$	17		$	(22	)	$	(5	)	$	(8	)	$	(7	)	$	(15	)	$	(8	)	$	(7	)	$	(15	)	$	12		$	(13	)	$	(1	)


	Six Months Ended									Six Months Ended									Six Months Ended									Six Months Ended
	October 31, 2016									October 31, 2017									October 31, 2017									October 31, 2018
(Dollars in millions)	Pre-Tax			Tax			Net			Pre-Tax			Tax			Net			Pre-Tax			Tax			Net			Pre-Tax			Tax			Net
Currency translation adjustments:
Net gain (loss) on currency translation	(72		)	(13		)	(85		)	3			6			9			$	3		$	6		$	9		$	(28	)	$	(11	)	$	(39	)
Reclassification to earnings	—			—			—			—			—			—			—			—			—			—			—			—
Other comprehensive income (loss), net	(72		)	(13		)	(85		)	3			6			9			3			6			9			(28		)	(11		)	(39		)
Cash flow hedge adjustments:
Net gain (loss) on hedging instruments	52			(20		)	32			(29		)	11			(18		)	(29		)	11			(18		)	57			(14		)	43
Reclassification to earnings¹	(19		)	8			(11		)	3			(1		)	2			3			(1		)	2			2			—			2
Other comprehensive income (loss), net	33			(12		)	21			(26		)	10			(16		)	(26		)	10			(16		)	59			(14		)	45
Postretirement benefits adjustments:
Net actuarial gain (loss) and prior service cost	—			—			—			—			—			—			—			—			—			—			—			—
Reclassification to earnings²	12			(5		)	7			10			(4		)	6			10			(4		)	6			9			(2		)	7
Other comprehensive income (loss), net	12			(5		)	7			10			(4		)	6			10			(4		)	6			9			(2		)	7

Total other comprehensive income (loss), net	$	(27	)	$	(30	)	$	(57	)	$	(13	)	$	12		$	(1	)	$	(13	)	$	12		$	(1	)	$	40		$	(27	)	$	13

¹Pre-tax amount is classified as sales in the accompanying condensed consolidated statements of operations.

²Pre-tax amount is ~~a component~~classified as non-operating postretirement expense in the accompanying condensed consolidated statements of ~~pension and other postretirement benefit expense (as shown in Note 7, except for amounts related to non-U.S. benefit plans, about which no information is presented in Note 7 due to immateriality).~~operations.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with both our unaudited condensed consolidated financial statements and related notes included in Part I, Item 1 of this Quarterly Report and our ~~2017~~2018 Form 10-K. Note that the results of operations for the six months ended October 31, ~~2017~~2018 do not necessarily indicate what our operating results for the full fiscal year will be. In this Item, “we,” “us,” “our,” “Brown-Forman,” and ~~“our”~~the “Company” refer to Brown-Forman ~~Corporation.~~Corporation and its consolidated subsidiaries, collectively.

Presentation Basis

Non-GAAP Financial Measures

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

“Underlying change” in income statement ~~measures.~~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), net, (g) underlying operating expenses¹, and (h) underlying operating income. To calculate these measures, we adjust, as applicable, for (a) ~~acquisitions and divestitures,~~a new accounting standard, (b) foreign exchange, and (c) estimated net ~~changes~~change in distributor inventories. We explain these adjustments below.

“~~Acquisitions and divestitures.~~New accounting standard.” Under ASC 606 (Revenue from Contracts with Customers), we recognize the cost of certain customer incentives earlier than we did before adopting ASC 606. Although we do not expect this change in timing to have a significant impact on a full-year basis, we do anticipate some change in the pattern of recognition among fiscal quarters. Additionally, some payments to customers that we classified as expenses before adopting the new standard are classified as reductions of net sales under our new policy. See Note 2 to the accompanying financial statements for additional information. This adjustment ~~removes (a) any non-recurring effects related~~allows us 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 that are not comparablelook at underlying change on a ~~year-over-year basis (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 ~~on a year-over-year~~ basis.

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 and operating expenses recognized in fiscal 2017 pursuant to the TSA related to (a) contract bottling services and (b) 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 acquisition for the non-comparable period. For both fiscal 2017 and 2018, the non-comparable period is the month of May.

“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~~current-year results at prior-year ~~rates.~~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~~change in distributor inventories on changes in our income statement line items. For each period compared, we use ~~depletion~~volume information ~~provided by~~from our distributors to estimate the effect of distributor inventory changes on our income statement line items. We believe that this adjustment reduces the effect of varying levels of distributor inventories on changes in our income statement measures and allows us to understand better our underlying results and trends.

We use the non-GAAP measures “underlying change” for the following reasons: (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~~to determine management incentive compensation calculations; (d) ~~in our planning~~to plan and ~~forecasting processes;~~forecast; and (e) ~~in communications concerning~~to communicate our financial performance ~~with~~to the board of directors, stockholders, and investment analysts. We provide reconciliations of the “underlying ~~changes~~change” in income statement ~~measures”~~measures to their nearest GAAP measures in the tables below under “Results of Operations - Year-Over-Year Period Comparisons.” We have consistently applied the adjustments within our reconciliations in arriving at each non-GAAP measure.

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

Definitions

~~Geographic Aggregations.~~Aggregations.

From time to time, ~~in order~~ 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.~~Fund (IMF), and we aggregate brands by spirits category. Below, we define aggregations used in this report.

~~“Developed”~~ markets are “advanced economies” as defined by the International Monetary Fund, with the largest for Brown-Forman being 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 International Monetary Fund, with the largest for Brown-Forman being Mexico and Poland.~~

Geographic Aggregations.

In “Results of Operations - Fiscal ~~2018~~2019 Year-to-Date ~~Highlights”,~~Highlights,” we provide supplemental information for our largest markets ranked by percentage of total fiscal ~~2017 Net Sales.~~2018 net sales. In addition to markets that are listed by country name, we include the following aggregations:

“~~Rest~~Developed International” markets are “advanced economies” as defined by the IMF, excluding the United States. Our largest developed international markets are the United Kingdom, Australia, and Germany. This aggregation represents our sales of ~~Europe”~~ ~~includes all markets in the continent of Europe and the Commonwealth of Independent States other than those specifically listed.~~branded products to these markets.

“~~Remaining geographies”~~Emerging” ~~All other~~ markets ~~(approximately 110), other than those specifically listed or included in “Rest~~are “emerging and developing economies” as defined by the IMF. Our largest emerging markets are Mexico and Poland. This aggregation represents our sales of ~~Europe”, with the largest being Brazil, South Africa, and China.~~branded products to these markets.

“Travel Retail” represents our sales of branded products to global ~~duty free~~duty-free customers, travel retail customers, and the U.S. ~~military.~~military regardless of customer location.

“~~Other non-branded”~~Non-branded and bulk” includes our sales of used ~~barrel,~~barrels, bulk whiskey and wine, and contract bottling ~~sales.~~regardless of customer location.

Brand Aggregations.

~~From time to time, in order to explain our results of operations or to highlight trends and uncertainties affecting our business, we aggregate brands by spirits category.~~

~~“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~~2019 Year-to-Date ~~Highlights”,~~Highlights,” we provide supplemental information for our largest brands ranked by percentage of total fiscal ~~2017 Net Sales.~~2018 net sales. In addition to brands that are listed by name, we include the following aggregations:

“Whiskey” includes all whiskey spirits and whiskey-based flavored liqueurs, ready-to-drink (RTD), and ready-to-pour products (RTP). The brands included in this category are the Jack Daniel's family of brands, Woodford Reserve, Canadian Mist, GlenDronach, BenRiach, Glenglassaugh, Old Forester, Early Times, Slane Irish Whiskey, and Coopers’ Craft.

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

“Jack Daniel’s family of brands” includes Jack Daniel’s Tennessee Whiskey (JDTW), Jack Daniel’s ~~Tennessee Honey (JDTH), Jack Daniel’s~~ RTD and RTP products (JD ~~RTDs/~~RTD/RTP), Jack Daniel’s Tennessee Honey (JDTH), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Single Barrel Collection (JDSB), Jack Daniel’s Tennessee Rye Whiskey (JDTR), Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and Jack Daniel’s ~~1907 Tennessee Whiskey.~~Bottled-in-Bond.

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


▪	“Premium bourbons” includes Woodford Reserve, Old Forester, and Coopers’ Craft.

“Tequila” includes el Jimador, Herradura, New Mix, Pepe Lopez, and Antiguo.

“Vodka” includes Finlandia.

“Wine” includes Korbel Champagne and Sonoma-Cutrer wines.

“Non-branded and bulk” includes our sales of used barrels, bulk whiskey and wine, and contract bottling regardless of customer location.

Other ~~Metrics.~~Metrics.

“Depletions.” ~~When discussing volume, unless otherwise specified,~~We generally record revenues when we ~~refer~~ship our products to ~~“depletions,”~~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.~~industry to describe volume. Depending on the context, “depletions” means either (a) our shipments directly to ~~retailers~~retail or ~~wholesalers,~~wholesale customers for owned distribution markets 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.~~wholesalers in other markets. We believe that ~~our~~ 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.

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

Reclassifications

As discussed in Note 1 to the accompanying financial statements, we retrospectively adjusted our prior year income statements in connection with the adoption of ASU 2017-07 and reclassified some previously reported expense amounts related to certain marketing research and promotional agency costs. The impact of these reclassifications, which had no effect on ~~a nine-liter equivalent unit basis (nine-liter cases) unless otherwise specified. At times, we use a “drinks-equivalent” measure~~net income, was not material.

The following tables reconcile the previously reported income statement amounts to the currently reported amounts for ~~volume when comparing single-serve ready-to-drink (RTD) or ready-~~the three and six months ended October 31, 2017.



	Three Months Ended October 31, 2017
	Previously			Adoption of						Currently
(Dollars in millions)	Reported			ASU 2017-07			Reclassifications			Reported
Net sales	$	914		$	—		$	—		$	914
Cost of sales	304			—			—			304
Gross profit	610			—			—			610
Advertising expenses	111			—			(2		)	109
Selling, general, and administrative expenses	163			(3		)	2			162
Other expense (income), net	(10		)	—			—			(10		)
Operating income	346			3			—			349
Non-operating postretirement expense	—			3			—			3
Interest income	(1		)	—			—			(1		)
Interest expense	16			—			—			16
Income before income taxes	331			—			—			331
Income taxes	92			—			—			92
Net income	$	239		$	—		$	—		$	239

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.



	Six Months Ended October 31, 2017
	Previously			Adoption of						Currently
(Dollars in millions)	Reported			ASU 2017-07			Reclassifications			Reported
Net sales	$	1,637		$	—		$	—		$	1,637
Cost of sales	534			—			—			534
Gross profit	1,103			—			—			1,103
Advertising expenses	200			—			(4		)	196
Selling, general, and administrative expenses	324			(5		)	4			323
Other expense (income), net	(11		)	—			—			(11		)
Operating income	590			5			—			595
Non-operating postretirement expense	—			5			—			5
Interest income	(2		)	—			—			(2		)
Interest expense	32			—			—			32
Income before income taxes	560			—			—			560
Income taxes	143			—			—			143
Net income	$	417		$	—		$	—		$	417

Important Information on Forward-Looking Statements:

This report contains statements, estimates, and projections that are “forward-looking statements” as defined under U.S. federal securities laws. Words such as “aim,” “anticipate,” “aspire,” “believe,” “can,” “continue,” “could,” “envision,” “estimate,” “expect,” “expectation,” “intend,” “may,” “might,” “plan,” “potential,” “project,” “pursue,” “see,” “seek,” “should,” “will,” “would,” and similar words ~~identify~~indicate forward-looking statements, which speak only as of the date we make them. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. By their nature, forward-looking statements involve risks, uncertainties, and other factors (many beyond our control) that could cause our actual results to differ materially from our historical experience or from our current expectations or projections. These risks and uncertainties include, but are not limited to, those described in Part I, Item 1A. Risk Factors of our ~~2017~~2018 Form 10-K and those described from time to time in our future reports filed with the Securities and Exchange Commission, including:

Unfavorable global or regional economic conditions and related low consumer confidence, high unemployment, weak credit or capital markets, budget deficits, burdensome government debt, austerity measures, higher interest rates, higher taxes, political instability, higher inflation, deflation, lower returns on pension assets, or lower discount rates for pension obligations

Risks associated with being a U.S.-based company with global operations, including commercial, political, and financial risks; local labor policies and conditions; protectionist trade policies, or economic or trade ~~sanctions;~~sanctions, including potential retaliatory tariffs on American spirits and the effectiveness of our actions to mitigate the potential negative impact on our sales and distributors; compliance with local trade practices and other regulations, including anti-corruption laws; terrorism; and health pandemics

Fluctuations in foreign currency exchange rates, particularly a stronger U.S. dollar

Changes in laws, regulations, or policies – especially those that affect the production, importation, marketing, labeling, pricing, distribution, sale, or consumption of our beverage alcohol products

Tax rate changes (including excise, sales, VAT, tariffs, duties, corporate, individual income, dividends, or capital gains) or changes in related reserves, changes in tax rules ~~(for example, LIFO, foreign income deferral, U.S. manufacturing, and other deductions)~~ or accounting standards, and the unpredictability and suddenness with which they can occur

The impact of the recently enacted U.S. tax reform legislation, including as a result of future regulations and guidance interpreting the statute

Dependence upon the continued growth of the Jack Daniel’s family of brands

Changes in consumer preferences, consumption, or purchase patterns – particularly away from larger producers in favor of ~~smaller~~small distilleries or local producers, or away from brown spirits, our premium products, or spirits generally, and our ability to anticipate or react to them; legalization of marijuana use on a more widespread basis; shifts in consumer purchase practices from traditional to e-commerce retailers; bar, restaurant, travel, or other on-premise declines; shifts in demographic or health and wellness trends; or unfavorable consumer reaction to new products, line extensions, package changes, product reformulations, or other product innovation

Decline in the social acceptability of beverage alcohol ~~products~~ in significant markets

Production facility, aging warehouse, or supply chain disruption

Imprecision in supply/demand forecasting

Higher costs, lower quality, or unavailability of energy, water, raw materials, product ingredients, labor, or finished goods

Route-to-consumer changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in higher ~~implementation-related or~~ fixed costs

Inventory fluctuations in our products by distributors, wholesalers, or retailers

Competitors’ and retailers’ consolidation or other competitive activities, such as pricing actions (including price reductions, promotions, discounting, couponing, or free goods), marketing, category expansion, product introductions, or entry or expansion in our geographic markets or distribution networks

Risks associated with acquisitions, dispositions, business partnerships or investments – such as acquisition integration, termination difficulties or costs, or impairment in recorded value

Inadequate protection of our intellectual property rights

Product recalls or other product liability ~~claims;~~claims, product counterfeiting, tampering, contamination, or ~~product~~ quality issues

Significant legal disputes and ~~proceedings;~~proceedings, or government investigations ~~(particularly of industry or company business, trade or marketing practices)~~

Failure or breach of key information technology systems

Negative publicity related to our company, brands, marketing, personnel, operations, business performance, or prospects

Failure to attract or retain key executive or employee talent

Our status as a family “controlled company” under New York Stock Exchange rules, and our dual class share structure

Overview

~~Fiscal~~Tariffs

An important development on our fiscal 2019 results has been the impact of tariffs. In the overview and outlook below, we discuss (a) certain facts about tariffs as they relate to our business, (b) the effect of this development on our results for the three and six months ended October 31, 2018, ~~Year-to-Date Highlights~~and (c) the expected effect of tariffs in the remainder of fiscal 2019.

~~Key highlights~~In response to the new U.S. tariffs on certain foreign goods, the European Union, Mexico, Canada, Turkey, and China imposed retaliatory tariffs on a number of U.S. goods, including American whiskey. The effective dates of the retaliatory tariffs and the import duty rates before and after the retaliation are summarized below.

Summary of Retaliatory Tariffs

		Rate
Geographic Area	Effective Date	Before		After
European Union	June 22, 2018	—	%	25	%
Mexico	June 5, 2018	—	%	25	%
Canada	July 1, 2018	—	%	10	%
Turkey	June 21, 2018	—	%	140	%
China	July 6, 2018	5	%	30	%

Our fiscal 2019 results were affected by tariffs through the two costs discussed below, which will continue to impact our ~~operating~~ results ~~for~~as long as tariffs are in place.

Lower pricing to certain customers. Certain customers paid the incremental costs of tariffs in the six months ended October 31, ~~2017 include:~~2018. We compensated these customers for these incremental costs through additional discounts and lower prices. These discounts and lower prices reduced our net sales.

Incremental costs of tariffs included in our cost of sales. In certain markets where we own the inventory, we paid the incremental cost of tariffs in the six months ended October 31, 2018, which increased our cost of sales.

The combined effect of these tariff-related costs, whether arising as a reduction of net sales or as an increase in cost of sales, is hereafter referred to as “incremental costs associated with tariffs.”

Our results for the three months ended October 31, 2018 were also affected by the timing related impact of tariffs as discussed below.

Timing of sales related to customer inventory movements.In the first quarter of fiscal 2019, our net sales in major European Union countries were higher than normal as many retail and wholesale customers increased purchases to build inventory ahead of anticipated price increases related to tariffs (hereafter referred to as “first quarter tariff-related buy-ins”). In the second quarter of fiscal 2019, our net sales in major European Union countries were lower than normal as most of these retail and wholesale customers reduced purchases to return their inventory to normal levels (hereafter referred to as “second quarter tariff-related inventory reductions”).

We discuss the estimated effect of the tariffs on our results and outlook where relevant below.

Fiscal 2019 Year-to-Date Highlights

We delivered net sales of ~~$1.6~~$1.7 billion, an increase of ~~10%~~2% compared to the same period last year. Excluding (a) the ~~net effect of our Scotch acquisition and the loss of net sales related to our TSA for Southern Comfort and Tuaca, (b) the positive~~negative effect of foreign exchange driven by the weakening of the Turkish lira, the British pound, the Australian dollar, and ~~(c) an estimated net increase in distributor inventories,~~the Mexican peso, and (b) the adoption of the revenue recognition accounting standard, we grew underlying net sales 7%5%. We estimate that lower pricing to certain customers related to tariffs reduced our underlying net sales growth by approximately one percentage point.


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


◦	From a geographic perspective, emerging markets led underlying net sales growth. Developed international markets and the United States both contributed meaningfully. Travel Retail accelerated the rate of underlying net sales growth compared to the same period last year partially due to timing of customer orders in the current year.

We delivered operating income of ~~$590~~$596 million, ~~an increase of 17%~~which was flat compared to the same period last year. Excluding (a) the ~~net effect of our Scotch acquisition and the loss of net sales related to our TSA for Southern Comfort and Tuaca, (b) the~~ negative effect of foreign exchange and ~~(c) an estimated net increase in distributor inventories,~~(b) the adoption of the revenue recognition accounting standard, we grew

underlying operating income ~~14%~~4%. We estimate that incremental costs associated with tariffs reduced our underlying operating income growth by approximately two percentage points.

We delivered diluted earnings per share of ~~$1.08,~~$0.93, an increase of ~~24%~~8% compared to the same period last year due to ~~an increase in reported operating income,~~the the benefit of a lower effective tax rate from the Tax Cuts and ~~a reduction in shares outstanding.~~

~~Our underlying operating results were driven~~Jobs Act (Tax Act), partially offset by the Jack Daniel's family of brands, our premium bourbon brands, and our tequila brands. Our used barrels sales also increased compared to the same period last year. From a geographic perspective, the United States and emerging markets led the growth, developed international markets contributed meaningfully, and Travel Retail growth accelerated. In addition, our underlying operating results benefitedhigher interest expense, which resulted from a ~~decline~~new bond issuance in ~~underlying SG&A spend, as well as underlying advertising expense growth of 5% compared to underlying net sales growth of 7%.~~

While foreign exchange had a positive effect on net sales, our operating income was negatively affected, driven by the reduction of foreign exchange gains in other expense (income) compared to the same period last year. An estimated net increase in distributor inventories, primarily in the United States, positively affected our reported results.March 2018.

Summary of Operating Performance
	Three months ended October 31,										Six months ended October 31,										Three Months Ended October 31,										Six months ended October 31,
(Dollars in millions)	2016			2017			Reported Change		Underlying Change¹		2016			2017			Reported Change		Underlying Change¹		2017			2018			Reported Change		Underlying Change¹		2017			2018			Reported Change		Underlying Change¹
Net sales	$	830		$	914		10	%	8	%	$	1,491		$	1,637		10	%	7	%	$	914		$	910		—	%	3	%	$	1,637		$	1,676		2	%	5	%
Cost of sales	278			304			9	%	9	%	486			534			10	%	8	%	304			320			5	%	7	%	534			563			6	%	7	%
Gross profit	552			610			11	%	8	%	1,005			1,103			10	%	7	%	610			590			(3	%)	1	%	1,103			1,113			1	%	5	%
Advertising	107			111			4	%	3	%	190			200			5	%	5	%	109			102			(7	%)	—	%	196			200			2	%	7	%
SG&A	163			163			—	%	(1	%)	326			324			(1	%)	(1	%)	162			161			(1	%)	1	%	323			329			2	%	3	%
Other expense (income), net	(9		)	(10		)	3	%	(4	%)	(15		)	(11		)	(28	%)	(2	%)
Operating income	$	291		$	346		19	%	16	%	$	504		$	590		17	%	14	%	349			332			(5	%)	—	%	595			596			—	%	4	%

As a percentage of net sales²
Total operating expenses²																					$	261		$	258		(1	%)	2	%	$	508		$	517		2	%	5	%

As a percentage of net sales³
Gross profit	66.5		%	66.8		%	0.3	pp			67.4		%	67.4		%	—				66.8		%	64.8		%	(2.0	)pp			67.4		%	66.4		%	(1.0	)pp
Operating expenses³	31.4		%	28.9		%	(2.5	)pp			33.6		%	31.4		%	(2.2	)pp
Operating income	35.1		%	37.9		%	2.8	pp			33.8		%	36.0		%	2.2	pp			38.2		%	36.5		%	(1.7	)pp			36.3		%	35.6		%	(0.7	)pp
Interest expense, net	$	15		15			3	%			$	27		30			10	%			$	15		$	20		32	%			$	30		$	40		34	%
Effective tax rate	28.6		%	27.9		%	(0.7	)pp			28.4		%	25.5		%	(2.9	)pp			27.9		%	19.5		%	(8.4	)pp			25.5		%	18.6		%	(6.9	)pp
Diluted earnings per share	$	0.50		$	0.62		23	%			$	0.87		$	1.08		24	%			$	0.49		$	0.52		4	%			$	0.86		$	0.93		8	%
Note: Totals may differ due to rounding	Note: Totals may differ due to rounding																				Note: Totals may differ due to rounding

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

²See “Non-GAAP Financial Measures” above for definitions of operating expenses presented here.

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

³~~Operating expenses include advertising expense, SG&A expense, and other expense (income), net.~~

Fiscal ~~2018~~2019 Outlook

Below we discuss our outlook for the remainder of fiscal ~~2018,~~2019, reflecting the trends, developments, and uncertainties that we expect to affect our business. ~~Overall, we expect slower growth rates for both net sales and operating income in the remainder of fiscal 2018 compared to growth rates experienced in the six months ended October 31, 2017.~~ This ~~updated~~ outlook ~~revises~~is unchanged from our first quarter 10-Q, which revised certain aspects of the ~~2018~~2019 outlook included in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of our ~~2017~~2018 Form 10-K. 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.

Tariffs. In response to the U.S. tariffs on certain foreign goods, the European Union, Mexico, Canada, Turkey, and China imposed retaliatory tariffs on a number of U.S. goods, including American whiskey. Our American whiskeys are made in the United States and exported around the world. Our results in the six months ended October 31, 2018 were hurt by lower pricing to certain customers related to tariffs and incremental costs of tariffs included in our cost of sales. Our full year outlook, which is discussed below, has been adjusted to reflect the anticipated negative effect of tariffs, net of mitigation plans, over the remainder of our fiscal year. The effect of tariffs will largely result in higher cost of sales.

Net ~~sales.~~sales. We expect underlying net sales growth ~~to be slower~~ in the remainder of fiscal ~~2018~~2019 to be slightly higher than the ~~10%~~ growth in the six months ended October 31, ~~2017.~~2018. We ~~believe~~continue to expect the fiscal 2019 underlying net sales growth rate to be similar to our fiscal 2018 growth rate.

Cost of sales. We expect underlying total cost of sales to grow at a significantly higher rate than net sales over the remainder of fiscal 2019, reflecting incremental costs associated with tariffs as well as input cost increases in ~~emerging markets will be slower~~the mid-

single digits. Combined, these costs are expected to reduce gross margin over the remainder of the fiscal year compared to the six months ended October 31, 2018.

Operating expenses. We expect the rate of change in total underlying operating expenses to decline over the remainder of the fiscal year compared to the growth rate experienced in the six months ended October 31, ~~2017. Our reported net sales benefited from an estimated net increase~~2018.

Operating income. We expect underlying operating income over the remainder of fiscal 2019 to grow in ~~distributor inventories during~~line with growth rates experienced in the six months ended October 31, ~~2017,~~2018.

Foreign exchange. For the six months ended October 31, 2018, net sales and operating income were negatively affected by foreign exchange. Considering the spot rates as of October 31, 2018, we ~~do not~~ expect that ~~benefit~~negative trend to continue infor the remainder of the fiscal year.

~~Cost of sales.~~New accounting standard ~~We expect total cost of sales to grow at a higher rate than~~. Our reported net sales inand operating income were negatively affected by timing differences related to the ~~remainder of fiscal 2018. We expect underlying cost of sales growth from cost/mix to grow at a higher rate in the remainder~~implementation of the ~~year compared to 2% cost/mix growth for~~revenue recognition accounting standard during the six months ended October 31, ~~2017.~~

~~Operating expenses.~~2018. We expect ~~total operating expenses~~that negative trend to ~~grow at a higher rate in~~moderate over the remainder of the fiscal year compared to the growth rate experienced in the six months ended October 31, 2017. For the remainder of fiscal 2018, we expect (a) advertising expenses to grow at a higher rate than net sales growth, and (b) underlying SG&A to grow compared to the decline for the six months ended October 31, 2017.

~~Foreign exchange.~~ For the six months ended October 31, 2017, operating income was adversely affected by foreign exchange. For the remainder of fiscal 2018, we expect that foreign exchange will positively affect our results.year.

Effective tax ~~rate.~~rate Absent any changes due to the enactment of proposed U.S. tax reform legislation, we expect our effective tax rate to increase in the remainder of fiscal 2018 compared to the 25.5% effective tax rate for the six months ended October 31, 2017.. We expect our full year effective tax rate to be ~~approximately 27.5%~~between 19.5% and 20.5% based on the tax rate of ~~28.4%~~21.4% on ordinary income for the full fiscal year adjusted for known discrete items.

Results of Operations – Fiscal ~~2018~~2019 Year-to-Date Highlights

Market Highlights

The following table provides supplemental information for our largest markets for the six months ended October 31, ~~2017,~~2018, compared to the same period last year. We discuss results for the markets most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the six months ended October 31, ~~2017,~~2018, compared to the same period last year.

Top 10 Markets¹- Fiscal 2018 Net Sales Growth by Geographic Area
Top 10 Markets¹- Fiscal 2019 Net Sales Growth by Geographic Area											Top 10 Markets¹- Fiscal 2019 Net Sales Growth by Geographic Area

	Percentage change versus prior year period										Percentage change versus prior year period
Six months ended October 31, 2017	Net Sales
Geographic area	Reported		Acquisitions & Divestitures		Foreign Exchange		Net Chg in Est. Distributor Inventories		Underlying²
Six months ended October 31, 2018											Net Sales
Geographic area²											Reported		New Accounting Standard		Foreign Exchange		Est. Net Chg in Distributor Inventories		Underlying³
United States	9	%	—	%	—	%	(3	%)	6	%	1	%	1	%	—	%	—	%	3	%
Europe	16	%	—	%	(4	%)	(2	%)	10	%
Developed International											2	%	1	%	3	%	(1	%)	5	%
United Kingdom	15	%	—	%	(8	%)	—	%	7	%	(5	%)	—	%	9	%	—	%	4	%
Australia											1	%	—	%	6	%	—	%	7	%
Germany	13	%	(1	%)	(2	%)	—	%	11	%	14	%	—	%	2	%	—	%	16	%
France	8	%	—	%	(2	%)	—	%	6	%	2	%	—	%	1	%	1	%	4	%
Canada											(10	%)	2	%	3	%	2	%	(4	%)
Rest of Developed International											2	%	3	%	(1	%)	(3	%)	—	%
Emerging											5	%	2	%	7	%	(3	%)	10	%
Mexico											2	%	3	%	6	%	—	%	12	%
Poland	24	%	—	%	(12	%)	—	%	12	%	4	%	—	%	(2	%)	—	%	2	%
Russia	NM		—	%	(18	%)	NM		43	%	18	%	—	%	(5	%)	(16	%)	(2	%)
Rest of Europe	6	%	—	%	(1	%)	3	%	8	%
Australia	7	%	2	%	—	%	—	%	10	%
Other geographies	5	%	—	%	—	%	1	%	6	%
Mexico	9	%	—	%	(1	%)	1	%	9	%
Japan	(18	%)	—	%	3	%	1	%	(15	%)
Canada	(3	%)	—	%	2	%	1	%	—	%
Remaining geographies³	11	%	(1	%)	—	%	1	%	11	%
Travel Retail³	18	%	—	%	2	%	(9	%)	11	%
Other non-branded³	(6	%)	21	%	—	%	—	%	14	%
Brazil											7	%	2	%	18	%	10	%	36	%
Rest of Emerging											4	%	2	%	11	%	(6	%)	10	%
Travel Retail											3	%	—	%	(1	%)	11	%	14	%
Non-branded and bulk											11	%	—	%	(1	%)	—	%	10	%
Total	10	%	1	%	(1	%)	(2	%)	7	%	2	%	1	%	2	%	—	%	5	%
Note: Totals may differ due to rounding

¹“Top 10 markets” are ranked based on percentage of total fiscal ~~2017 Net Sales.~~2018 net sales. See ~~2017~~2018 Form 10-K “Results of Operations - Fiscal ~~2017~~2018 Market Highlights” and “Note ~~15.~~14. Supplemental Information.”

²See “Definitions” above for definitions of market aggregations presented here.

³See “Non-GAAP Financial Measures” above for details on our use of “underlying change” in net sales, including how this measure is calculated and the reasons why we ~~think~~believe this information is useful to readers.

³~~See “Definitions” above for definitions of market aggregations presented here.~~

United States. Reported net sales ~~grew 9%~~increased 1%, while underlying net sales increased 6%3% after adjusting for the adoption of the revenue recognition accounting standard. Underlying net sales gains were driven by the growth of Woodford Reserve, el Jimador, JD RTDs, Gentleman Jack, Herradura, and Old Forester. These gains were partially offset by declines of JDTW, which was largely related to (a) timing of promotional activity compared to the same period last year, (b) an inventory adjustment from a change in route-to-market in one state, and (c) comparisons against strong growth in the six months ended October 31, 2017. Declines of Canadian Mist also partially offset these gains.

Developed International. Reported net sales increased 2%, while underlying net sales grew 5% after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the British pound, Australian dollar, and euro, and (c) an estimated net increase in distributor inventories. Underlying net sales ~~gains were driven primarily by the~~ growth ~~of (a) the Jack Daniel’s family of brands, (b) our premium bourbons,~~was led by ~~Woodford Reserve~~Germany, Australia, Spain, and ~~Old Forester, and (c) our tequila brands, led by Herradura and el Jimador.~~

~~Europe.~~ Reported net sales increased 16%, while underlying net sales increased 10% after adjusting for the positive effect of foreign exchange driven by the broad weakening of the dollar compared to the same period last year and an estimated net increase in distributor inventories in Russia. Underlying net sales gains were led by Russia, Germany, the United ~~Kingdom, Poland, Turkey, and France.~~Kingdom.


◦	In the United Kingdom, underlying net sales growth was driven by higher volumes of JDTW and ~~JD RTDs, the latter of which was fueled~~JDTH, partially offset by ~~the launch~~declines of JD Cider.


◦	In Australia, underlying net sales growth was driven by higher pricing and volume growth of JD RTDs, partially offset by volume declines of JDTW due to slowing consumer takeaway trends following an August 2018 price increase associated with higher excise taxes.


◦	In Germany, underlying net sales growth was driven by ~~solid~~volumetric growth of JDTW and JD ~~RTDs, including the launch of JD Lynchburg Lemonade, and volumetric growth and favorable price/mix of JDTW.~~RTDs.


◦	In France, underlying net sales growth was led by higher volumes of JDTH and the launch of JDTR, partially offset by unfavorable price/mix and volume declines of JDTW.


◦	In Canada, the underlying net sales decline was driven by lower volumes of the Jack Daniel’s family of brands due to a change in distributor.

◦

Underlying net sales in the Rest of Developed International were flat as growth in Spain and Czechia were offset in the rest of developed Europe. In Spain, JDTW grew volumes along with favorable price/mix, where our new owned-distribution organization has led to an acceleration in performance over the past 12 months. In Czechia, growth was led by increased volumes of JDTW and ~~JDTH, as both experienced~~JDTH.

Emerging. Reported net sales increased 5%, while underlying net sales grew 10% after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the Turkish lira and Mexican peso, and (c) an estimated net increase in distributor inventories. Underlying net sales growth was led by Mexico, Brazil, Commonwealth of Independent States (CIS), and China.


◦	In Mexico, underlying net sales growth was led by volume growth and favorable price/mix of Herradura along with volume growth and higher ~~consumer demand compared to the total whiskey category.~~prices of New Mix. The growth in Herradura benefited from consumer-led volumetric growth of Herradura Ultra, our “cristalino” tequila expression.


◦	In Poland, underlying net sales growth was ~~fueled~~driven by ~~volume gains~~increased volumes of JDTW, ~~which has experienced strong consumer takeaway trends.~~mostly offset by unfavorable product and channel mix of Finlandia.


◦	In Russia, the underlying net sales decline was driven by Finlandia and Early Times, which was mostly due to the change to a new distributor in late fiscal 2018 and related buying patterns. Volume growth of JDTW partially offset the decline for these brands.


◦	In Brazil, underlying net sales growth was ~~driven~~fueled by higher ~~price~~volumes and ~~volumetric growth~~pricing of ~~Finlandia. The higher prices are partly attributed~~JDTW, which was partially due to ~~import duties resulting from a change in our route-to-consumer.~~timing of buying patterns compared to the same period last year.


◦	The increase in underlying net sales in the Rest of ~~Europe~~Emerging was led by ~~improved trends for JDTW in Turkey, where our results in the same period last year were negatively affected by geopolitical~~CIS, China, sub-Saharan Africa, and ~~economic instability.~~Turkey. All of these geographic areas benefited from higher volumes of JDTW.

~~Australia.~~Travel Retail. Reported net sales increased 7%3%, while underlying net sales increased ~~10%~~14% after adjusting for the ~~loss~~positive effect of ~~net sales related to our TSA for Southern Comfort~~foreign exchange and ~~Tuaca. Underlying net sales growth was driven by the Jack Daniel’s family of brands, led by favorable price/mix and higher volumes of JD RTDs and volumetric growth of JDTW.~~

~~Other geographies.~~ ~~Reported net sales for our other markets collectively increased 5%, while underlying net sales increased 6% after adjusting for~~ an estimated net decrease in distributor inventories. Underlying net sales growth was led by ~~Mexico as well as~~(a) higher volumes of JDTW and Woodford Reserve due to the ~~return to growth~~timing of ~~Southeast Asia, China, and Brazil, all of which declined~~customer orders in the ~~same period last year. These gains were partially offset by declines in Japan, where volumes~~current year, strong consumer demand, and increased ~~considerably in~~travel and (b) the ~~same period last year due to buy-ins ahead~~launch of ~~a price increase last September.~~Jack Daniel’s Bottled-in-Bond and JDTR.

~~Travel Retail.~~Non-branded and bulk. Reported net sales increased ~~18%~~11%, while underlying net sales increased ~~11%~~10% after adjusting for the ~~negative~~positive effect of foreign ~~exchange and an estimated net increase in distributor inventories.~~exchange. Underlying ~~net sales growth was led by higher volumes of JDTW, Woodford Reserve, Gentleman Jack, and Herradura, the last of which also benefited from favorable price/mix.~~

~~Other non-branded.~~ Reported net sales decreased 6%, while underlying net sales increased 14% after adjusting for the net effect of our Scotch acquisition and the loss of net sales related to our TSA for Southern Comfort and Tuaca. The underlying net sales growth was driven by increased bulk whiskey and wine sales along with higher ~~volumes~~pricing of used ~~barrel sales, which benefited from an easy comparison to a weak prior-year period, as well as timing of shipments in the current year.~~barrels.

Brand Highlights

The following table ~~highlights the worldwide results of~~provides supplemental information for our largest brands for the six months ended October 31, ~~2017,~~2018, compared to the same period last year. We discuss results of the brands most affecting our performance below the table. Unless otherwise indicated, all related commentary is for the six months ended October 31, ~~2017,~~2018, compared to the same period last year.

Major Brands Worldwide Results
Percentage change versus prior year period
Six months ended October 31, 2017 Volumes Net Sales
Brand family / brand
9L Depletions²
Reported Foreign Exchange Net Chg in Est. Distributor Inventories
Underlying¹
Jack Daniel’s Family 9 % 10 % (1 %) (2 %) 7 %
Jack Daniel’s Tennessee Whiskey 7 % 9 % (1 %) (2 %) 6 %
Jack Daniel’s Tennessee Honey 9 % 10 % (2 %) — % 8 %
Jack Daniel’s RTDs/RTP²
11 % 14 % 1 % — % 15 %
Gentleman Jack 9 % 11 % — % (2 %) 9 %
Jack Daniel’s Tennessee Fire 15 % 22 % (1 %) (7 %) 14 %
Other Jack Daniel’s whiskey brands²
19 % 36 % (1 %) (22 %) 13 %
Woodford Reserve 20 % 23 % — % (2 %) 21 %
Finlandia 5 % 18 % (3 %) (7 %) 8 %
el Jimador 8 % 15 % (1 %) (4 %) 10 %
Herradura 13 % 15 % — % 5 % 19 %
Note: Totals may differ due to rounding

Major Brands Worldwide Results

	Percentage change versus prior year period
Six months ended October 31, 2018	Volumes		Net Sales
Product category / brand family / brand¹	9L Depletions¹		Reported		New Accounting Standard		Foreign Exchange		Est. Net Chg in Distributor Inventories		Underlying²
Whiskey	5	%	3	%	1	%	2	%	—	%	6	%
Jack Daniel's family of brands	5	%	2	%	1	%	2	%	—	%	5	%
JDTW	3	%	—	%	1	%	2	%	(1	%)	3	%
Jack Daniel's RTD/RTP	7	%	6	%	—	%	5	%	—	%	12	%
JD Tennessee Honey	8	%	11	%	1	%	2	%	(6	%)	8	%
Gentleman Jack	10	%	5	%	1	%	2	%	2	%	10	%
JD Tennessee Fire	8	%	7	%	1	%	1	%	(3	%)	7	%
Other Jack Daniel's whiskey brands	35	%	—	%	1	%	1	%	18	%	20	%
Woodford Reserve	24	%	24	%	1	%	1	%	(1	%)	25	%
Tequila	6	%	7	%	3	%	4	%	(1	%)	12	%
el Jimador	6	%	8	%	3	%	2	%	(3	%)	11	%
Herradura	12	%	11	%	3	%	3	%	(2	%)	15	%
Vodka (Finlandia)	(2	%)	(9	%)	1	%	4	%	(3	%)	(8	%)
Wine	(1	%)	(3	%)	2	%	—	%	1	%	—	%
Rest of Portfolio	(8	%)	(17	%)	—	%	7	%	1	%	(8	%)
Non-branded and bulk	NM		11	%	—	%	(1	%)	—	%	10	%
Note: Totals may differ due to rounding

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

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

²~~See “Definitions” above for definitions of brand aggregations and volume measures presented here.~~

~~Jack Daniel’s family of~~Whiskey brands grew reported net sales ~~10% (underlying 7%)~~3%, ~~and was the most significant contributor to our overall~~while underlying net sales ~~growth. Reported net sales were helped by an estimated net increase in distributor inventories~~grew 6% after adjusting for (a) the adoption of the revenue recognition accounting standard and (b) the negative effect of foreign exchange ~~due to~~reflecting the ~~weakening~~strengthening of the dollar against the Turkish lira, British pound, ~~Polish zloty,~~Australian dollar, and ~~the~~ euro. ~~The following are details about the underlying performance of~~Growth was led by the Jack Daniel’s family of ~~brands:~~brands and Woodford Reserve.


◦	Jack Daniel’s family of brands underlying net sales growth was led by JDTW in markets outside of the United States along with broad-based geographic growth of JD RTDs and JDTH.

▪

JDTW grew underlying net sales in the majority of its markets including Brazil, Germany, Spain, Travel Retail, Poland, the United Kingdom, and Turkey, partially offset by volume declines in the United States, which was largely related to (a) timing of promotional activity compared to the ~~United Kingdom, Poland, Turkey, Southeast Asia,~~same period last year, (b) an inventory adjustment from a change in route-to-market in one state, and ~~Travel Retail.~~(c) comparisons against strong growth in the six months ended October 31, 2017.


◦	~~JDTH~~ ~~grew underlying net sales in the United States, its largest market, Latin America, Russia, and France.~~


◦▪	The increase in underlying net sales growth for Jack Daniel’s ~~RTDs/~~RTD/RTP was driven by higher prices in Australia along with continued consumer momentum in Germany and the United ~~States, with all markets benefiting from new RTD line extensions.~~States.


◦▪	~~Gentleman Jack~~JDTH grew underlying net sales led by ~~volumetric growth~~volume gains in France, Brazil, the United ~~States, its largest market,~~Kingdom, and Travel Retail.


◦▪	Gentleman Jack grew underlying net sales with volume growth in the United States along with broad-based international growth led by the United Kingdom and Poland.


▪	Growth of underlying net sales of JDTF was driven by higher volumes in the United ~~States and the launch of the brand in Brazil and Chile.~~States.

◦▪

~~The launch of Jack Daniel’s Tennessee Rye in September of this year in the United States was the primary driver of underlying~~Underlying net sales growth for Other Jack Daniel’s whiskey brands. was led by JDTR, which launched in select European markets and Travel Retail in fiscal 2019, the growth of Jack Daniel’s Single Barrel in the United States and Germany, and the launch of Jack Daniel’s Bottled-in-Bond in Travel Retail.


◦	Woodford Reserve led the growth of our premium bourbons. Underlying net sales growth was driven by the United States, where strong consumer takeaway trends led to volumetric gains. Higher volumes in Travel Retail also contributed to the brand’s growth.

~~Woodford Reserve~~Tequila ~~led the growth of our premium bourbons as~~brands grew reported net sales ~~increased 23% (underlying 21%). This growth was driven by the United States, where the brand continued to grow volumetrically with strong consumer takeaway trends. Reported~~7%, while underlying net sales ~~were helped by~~grew 12% after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the Mexican peso, and (c) an estimated net increase in distributor ~~inventories in Travel Retail.~~inventories.


◦	el Jimador grew underlying net sales driven by higher volumes and prices in the United States and Mexico, as takeaway trends remain strong in Mexico.


◦	Herradura grew underlying net sales driven by volumetric growth and favorable mix in Mexico and higher volumes and prices in the United States. Consumer-led volumetric growth of Herradura Ultra drove the growth in Mexico.

Reported net sales for Finlandia ~~grew 18%~~declined 9%, while underlying net sales ~~increased~~decreased 8% ~~led by higher price~~after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange reflecting the strengthening of the dollar against the Russian ruble and ~~volumetric growth in Russia. The higher prices in Russia are partly attributed to import duties resulting from a change in our route-to-consumer. Reported net sales were helped by~~Turkish lira, and (c) an estimated net increase in distributor ~~inventories~~inventories. Unfavorable product and channel mix in Poland and lower volumes in Russia and ~~foreign exchange.~~the United States drove the decrease in underlying net sales.

Wine brands reported net sales declined 3%, while underlying net sales were flat after adjusting for the adoption of the revenue recognition accounting standard and an estimated net decrease in distributor inventories. Volume declines of Korbel Champagne were offset by growth of Sonoma-Cutrer in the United States.

Rest of portfolio reported net sales declined 17%, while underlying net sales decreased 8% after adjusting for the negative effect of foreign exchange and an estimated net decrease in distributor inventories. The decline was due to discontinued agency brands in Turkey.

Non-branded and bulk. Reported net sales ~~for~~ ~~el Jimador~~increased ~~15%~~11%, while underlying net sales increased 10% after adjusting for the positive effect of foreign exchange. Underlying net sales growth was driven by ~~volume gains in the United States supported by strong takeaway trends. Reported net~~increased bulk whiskey and wine sales ~~were helped by an estimated net increase in distributor inventories in the United States and foreign exchange.~~

~~Herradura~~ ~~grew reported net sales 15%, while underlying net sales increased 19% driven by~~along with higher ~~volumes and favorable price/mix in the brand’s largest markets, the United States and Mexico, the latter~~pricing of ~~which benefited from volumetric growth of Herradura Ultra. Reported net sales were hurt by an estimated net decrease in distributor inventories in the United States.~~used barrels.

Year-over-Year Period Comparisons

Net Sales
Percentage change versus the prior year period ended October 31	3 Months		6 Months		3 Months		6 Months
Change in reported net sales	10	%	10	%	—	%	2	%
Acquisitions and divestitures	1	%	1	%
New accounting standard					1	%	1	%
Foreign exchange	(1	%)	(1	%)	2	%	2	%
Estimated net change in distributor inventories	(2	%)	(2	%)	—	%	—	%
Change in underlying net sales	8	%	7	%	3	%	5	%

Change in underlying net sales attributed to:
Volume	7	%	6	%	2	%	3	%
Net price/mix	2	%	2	%	1	%	2	%
Note: Totals may differ due to rounding

For the three months ended October 31, ~~2017,~~ 2018, net sales were ~~$914~~$910 million, ~~an increase~~a decrease of ~~$84~~$4 million, or ~~10%,~~flat, compared to the same period last year. After adjusting reported results for (a) the ~~net effect~~adoption of ~~our Scotch acquisition~~the revenue recognition accounting standard and ~~the loss of net sales related to our TSA for Southern Comfort and Tuaca,~~ (b) the ~~positive~~negative effect of foreign exchange reflecting the strengthening of the dollar against the Turkish lira, British pound, and ~~(c) an estimated net increase in distributor inventories,~~Australian dollar, underlying net sales grew 8%3%. The change in underlying net sales was driven by 7%2% volume growth and 2%1% of net price/mix. Volume growth was led by our tequila brands, Woodford Reserve, and JD RTDs. Net price/mix was driven by (a) favorable portfolio mix of fast growing higher-priced brands, most notably the Jack Daniel’s family of brands and Woodford Reserve, and (b) higher average pricing on tequilas and JD RTDs, partially offset by lower average pricing to certain customers on JDTW related to tariffs in certain European markets. We estimate that the second quarter tariff-related inventory reductions and lower pricing to certain customers related to tariffs reduced our underlying net sales growth by approximately two percentage points for the three months ended October 31, 2018.

The primary factors contributing to the growth in underlying net sales for the three months ended October 31, ~~2017~~2018 were:

growth of several American whiskey brands in the United States led by Woodford Reserve, JDTW, Gentleman Jack, and Old Forester;

higher volume of JD RTDs led by Australia, Germany, and the United States;

growth of our tequila brands, led by (a) volumetric growth and favorable price/mix of Herradura and el Jimador in Mexico and the United States and (b) higher volumes and prices of New Mix in Mexico;

volumetric growth of JDTW in several international markets, most notably, ~~the United Kingdom, Germany, Southeast Asia, Turkey, Travel Retail, France, China, Poland,~~Brazil, Russia, Spain, and ~~Australia;~~sub-Saharan Africa;

broad-based international growth of ~~our American whiskey portfolio in the United States,~~JDTH led by ~~the Jack Daniel’s family, Woodford Reserve,~~France, Brazil, Russia, and ~~Old Forester;~~Travel Retail;

~~volumetric growth~~increased bulk whiskey and wine contract sales;

expansion of JDTR to France and Travel Retail;

higher volume and favorable price/mix of ~~Herradura~~Sonoma-Cutrer in the United ~~States and Mexico and volume gains of el Jimador in the United~~ States;

~~higher price and volume growth of Finlandia in Russia;~~

~~higher volume of JD RTDs led by Germany and the United Kingdom, both of which benefited from new RTD line extensions, and China;~~

~~increased volumes of JDTH in several international markets, most notably the United Kingdom and France;~~

~~higher volume of used barrel sales, which is partially due to the timing of orders;~~ and

~~growth~~the launch of ~~Korbel Champagne~~Jack Daniel’s Bottled-in-Bond in ~~the United States.~~Travel Retail.

These gains in underlying net sales were partially offset byby:

volume declines of JDTW in the United Kingdom, Germany, and France, as many European markets were down due to second quarter tariff-related inventory reductions, and volume declines in ~~Japan, where JDTW and Early Times volumes increased considerably~~Australia following an August 2018 price increase associated with higher excise taxes;

declines of JDTR in the ~~same period last year~~United States as the brand cycled its September 2017 launch;

declines of Finlandia in Poland and Russia, the former of which is partially due to ~~buy-ins ahead~~unfavorable product and channel mix;

declines in our contract bottling operations;

declines of ~~a price increase last September.~~Canadian Mist in the United States; and

declines of JD Cider in the United Kingdom.

For the six months ended October 31, ~~2017,~~ 2018, net sales were ~~$1,637 million,~~$1.7 billion, an increase of ~~$146~~$39 million, or ~~10%~~2%, compared to the same period last year. ~~After~~Underlying net sales grew 5% after adjusting reported results for (a) the ~~net effect~~adoption of ~~our Scotch acquisition~~the revenue recognition accounting standard and ~~the loss of net sales related to our TSA for Southern Comfort and Tuaca,~~ (b) the ~~positive~~negative effect of foreign exchange reflecting the strengthening of the dollar

against the Turkish lira, British pound, Australian dollar, and ~~(c) an estimated net increase in distributor inventories, underlying net sales grew 7%.~~Mexican peso. The change in underlying net sales was driven by 6%3% volume growth and 2% of net price/mix. Volume growth was led by the Jack Daniel's family of brands, tequilas, and premium bourbons, ~~and Finlandia,~~ partially offset by declines in ~~Early Times. Price/~~Canadian Mist. Net price/mix was driven by (a) ~~an increase in share~~favorable portfolio mix of ~~sales from higher priced~~fast growing higher-priced brands, most notably, the Jack ~~Daniel's~~Daniel’s family of brands and Woodford Reserve, and (b) higher average pricing on tequilas ~~partially offset by~~and JD RTDs. We estimate that lower pricing to certain customers related to tariffs reduced our underlying net sales growth by approximately one percentage point for the six months ended October 31, 2018. See “Results of Operations - Fiscal 2019 Year-to-Date Highlights” above for further details on ~~JDTW.~~

~~The primary~~the factors contributing to the growth in underlying net sales for the six months ended October 31, ~~2017 were:~~

~~volumetric growth of JDTW in several international markets, most notably, the United Kingdom, Poland, Turkey, Southeast Asia, Travel Retail, Germany, Brazil, France, and Australia;~~

~~growth of our American whiskey portfolio in the United States, led by the Jack Daniel’s family, Woodford Reserve, and Old Forester;~~

our tequila brands, led by (a) higher volumes of Herradura in the United States and Mexico, and (b) volume gains of el Jimador in the United States, and (c) higher prices and volume gains of New Mix in Mexico;

~~higher volume of JD RTDs, led by Australia as well as Germany and the United Kingdom, which both benefited from new RTD line extensions;~~

~~higher price and volume growth of Finlandia in Russia;~~

~~higher volume of used barrel sales, which is partially due to the timing of orders; and~~

~~growth of Korbel Champagne in the United States.~~

~~These gains in underlying net sales were partially~~ ~~offset~~ ~~by declines in Japan, where Early Times and JDTW volumes increased considerably in the same period last year due to buy-ins ahead of a price increase last September.~~2018.

Cost of Sales
Percentage change versus the prior year period ended October 31	3 Months		6 Months		3 Months		6 Months
Change in reported cost of sales	9	%	10	%	5	%	6	%
Acquisitions and divestitures	2	%	3	%
New accounting standard					—	%	—	%
Foreign exchange	(2	%)	(3	%)	2	%	2	%
Estimated net change in distributor inventories	—	%	(1	%)	—	%	—	%
Change in underlying cost of sales	9	%	8	%	7	%	7	%

Change in underlying cost of sales attributed to:
Volume	7	%	6	%	2	%	3	%
Cost/mix	2	%	2	%	5	%	4	%
Note: Totals may differ due to rounding

Cost of sales for the three months ended October 31, ~~2017~~2018 increased ~~$26~~$16 million, or 9%5%, to $304 million when compared to the same period last year. Underlying cost of sales also increased 9% after adjusting reported costs for (a) the net effect of our Scotch acquisition and the loss of net sales related to our TSA for Southern Comfort and Tuaca and (b) the negative effect of foreign exchange. Cost of sales for the six months ended October 31, 2017 increased $48 million, or 10%, to $534$320 million when compared to the same period last year. Underlying cost of sales increased 8%7% after adjusting reported costs for ~~(a)~~ the ~~net effect of our Scotch acquisition and the loss of net sales related to our TSA for Southern Comfort and Tuaca, (b) the negative~~positive effect of foreign ~~exchange, and (c) an estimated net increase in distributor inventories.~~exchange.

Cost of sales for the six months ended October 31, 2018 increased $29 million, or 6%, to $563 million when compared to the same period last year. Underlying cost of sales increased 7% after adjusting reported costs for the positive effect of foreign exchange. The increase in underlying cost of sales for ~~both~~ the three and six months ended October 31, ~~2017~~2018 was driven by higher volumes, ~~incremental value-added packaging,~~higher input costs including wood and ~~higher wood costs, partially offset by~~agave, a shift in product mix to ~~lower-cost brands.~~higher-cost brands, and incremental costs associated with tariffs. Looking ahead to the remainder of fiscal ~~2018,~~2019, we expect ~~that cost/mix will~~(a) input costs to increase in the ~~low~~mid-single digits largely due to ~~mid-single digits.~~higher cost of wood and agave, and (b) incremental costs associated with tariffs to increase significantly relative to the six months ended October 31, 2018.

Gross Profit

Percentage change versus the prior year period ended October 31	3 Months		6 Months
Change in reported gross profit	(3	%)	1	%
New accounting standard	1	%	2	%
Foreign exchange	2	%	2	%
Estimated net change in distributor inventories	—	%	—	%
Change in underlying gross profit	1	%	5	%
Note: Totals may differ due to rounding

Gross Profit
Percentage change versus the prior year period ended October 31 3 Months 6 Months
Change in reported gross profit 11 % 10 %
Acquisitions and divestitures — % — %
Foreign exchange — % — %
Estimated net change in distributor inventories (2 %) (3 %)
Change in underlying gross profit 8 % 7 %
Note: Totals may differ due to rounding

Gross Margin

For the period ended October 31	3 months		6 Months
Prior year gross margin	66.8	%	67.4	%
Price/mix	(0.1	%)	0.1	%
Cost	(1.4	%)	(0.7	%)
New accounting standard	(0.3	%)	(0.4	%)
Foreign exchange	(0.2	%)	—	%
Change in gross margin	(2.0	%)	(1.0	%)
Current year gross margin	64.8	%	66.4	%
Note: Totals may differ due to rounding

Gross Margin
For the period ended October 31 3 months 6 Months
Prior year gross margin 66.5 % 67.4 %
Price/mix 1.2 % 0.7 %
Cost (1.0 %) (0.6 %)
Acquisitions and divestitures 0.4 % 0.5 %
Foreign exchange (0.3 %) (0.6 %)
Change in gross margin 0.3 % — %
Current year gross margin 66.8 % 67.4 %
Note: Totals may differ due to rounding

Gross profit of ~~$610~~$590 million ~~increased $58~~decreased $20 million, or ~~11%~~3%, for the three months ended October 31, ~~2017.~~2018 compared to the same period last year. Underlying gross profit grew 8%1% after adjusting reported results for ~~an estimated net increase in distributor inventories.~~the adoption of the revenue recognition accounting standard and the negative effect of foreign exchange. The increase in underlying gross profit resulted from the same factors that contributed to the increase in underlying net sales and the increase in underlying cost of sales.

For the three months ended October 31, ~~2017,~~2018, gross margin ~~increased~~decreased approximately ~~30 basis~~2.0 percentage points to ~~66.8%,~~64.8% from ~~66.5%~~66.8% in the same period last year driven by ~~favorable price/mix and the net effect of our Scotch acquisition and the loss of net sales related to our TSA for Southern Comfort and Tuaca, partially offset by~~(a) an increase in ~~underlying cost~~input costs, (b) incremental costs associated with tariffs, (c) the adoption of ~~sales~~the revenue recognition accounting standard, and (d) the negative effect of foreign exchange.

Gross profit of ~~$1,103 million~~$1.1 billion increased ~~$98~~$10 million, or ~~10%~~1%, for the six months ended October 31, ~~2017.~~2018 compared to the same period last year. Underlying gross profit grew 7%5% after adjusting reported results for ~~an estimated net increase in distributor inventories.~~the adoption of the revenue recognition accounting standard and the negative effect of foreign exchange. The increase in underlying gross profit resulted from the same factors that contributed to the increase in underlying net sales and the increase in underlying cost of sales.

~~Gross margin remained unchanged at 67.4% for~~For the six months ended October 31, ~~2017 compared~~2018, gross margin decreased approximately 1.0 percentage point to 66.4% from 67.4% in the same period last year ~~as favorable price/mix and the net effect of our Scotch acquisition and the loss of net sales related to our TSA for Southern Comfort and Tuaca were offset~~driven by ~~the negative effect of foreign exchange and~~(a) an increase in ~~underlying cost~~input costs, (b) the adoption of ~~sales.~~

the revenue recognition accounting standard, and (c) incremental costs associated with tariffs.

Operating Expenses
	Percentage change versus the prior year period ended October 31
Percentage change versus the prior year period ended October 31									Percentage change versus the prior year period ended October 31
3 Months	Reported		Acquisitions & Divestitures		Foreign Exchange		Underlying		Reported		New Accounting Standard		Foreign Exchange		Underlying
Advertising	4	%	—	%	(1	%)	3	%	(7	%)	4	%	3	%	—	%
SG&A	—	%	—	%	(1	%)	(1	%)	(1	%)	1	%	2	%	1	%
Other expense (income), net	3	%	—	%	(7	%)	(4	%)
Total	1	%	—	%	(1	%)	1	%
Total operating expenses¹									(1	%)	2	%	1	%	2	%

6 Months
Advertising	5	%	—	%	(1	%)	5	%	2	%	4	%	1	%	7	%
SG&A	(1	%)	—	%	(1	%)	(1	%)	2	%	—	%	1	%	3	%
Other expense (income), net	(28	%)	(7	%)	33	%	(2	%)
Total	3	%	—	%	(2	%)	1	%
Total operating expenses¹									2	%	2	%	2	%	5	%
Note: Totals may differ due to rounding
¹Operating expenses include advertising expense, SG&A expense, and other expense (income), net.									¹Operating expenses include advertising expense, SG&A expense, and other expense (income), net.

Operating expenses totaled ~~$264~~$258 million, ~~and increased~~down $3 million, or 1%, for the three months ended October 31, ~~2017~~compared to the same period last year. Underlying operating expenses also grew 1% after adjusting for the negative effect of foreign exchange driven by the decline of foreign exchange gains in other expense (income) compared to the same period last year.

~~Reported~~ ~~advertising expenses~~ ~~grew 4%, while underlying advertising expenses grew 3% after adjusting for the negative effect of foreign exchange.~~

~~Reported~~ ~~SG&A expenses~~ ~~were flat, while underlying SG&A dropped 1% after adjusting for the negative effect of foreign exchange.~~

For the three months ended October 31, 2017, operating expenses as a percentage of net sales declined 250 basis points to 28.9%, from 31.4% in the same period last year. The decline in operating expenses as a percentage of net sales was driven by operating expense leverage as SG&A spend declined and underlying advertising expenses grew 3% compared to underlying net sales growth of 8%.

~~Operating expenses~~ ~~totaled $513 million and increased $12 million, or 3%, for the six months ended October 31, 2017~~2018 compared to the same period last year. Underlying operating expenses grew 2% after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard and the positive effect of foreign exchange.

Reported advertising expenses declined 7% for the three months ended October 31, 2018, while underlying advertising expenses were flat after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard and the positive effect of foreign exchange. Underlying advertising expenses were driven by continued investment in our American whiskey portfolio, including JDTW and Woodford Reserve, as well as investment in Korbel Champagne. These increases were offset by timing of spending on our tequila brands and JD RTDs.

Reported SG&A expenses declined 1% for the three months ended October 31, 2018, while underlying SG&A grew 1% after adjusting for reclassifications related to the ~~negative~~adoption of the revenue recognition accounting standard and the positive effect of foreign ~~exchange~~exchange. The increase in underlying SG&A was driven by higher personnel costs, partially offset by lower incentive compensation-related expenses.

Operating expenses totaled $517 million, up $9 million, or 2%, for the ~~reduction of foreign exchange gains in other expense (income)~~six months ended October 31, 2018 compared to the same period last year. Underlying operating expenses grew 5% after adjusting for reclassifications related to the adoption of the revenue recognition accounting standard and the positive effect of foreign exchange.

Reported ~~and underlying~~ advertising expenses grew 5%2% for the six months ended October 31, ~~2017. The increase in~~2018, while underlying advertising expenses grew 7% after adjusting for reclassifications related to the ~~three~~adoption of the revenue recognition accounting standard and ~~six months ended October 31, 2017 was driven by continued~~the positive effect of foreign exchange. Underlying advertising expense increased as we invested in our American whiskey brands, including the first year of our Woodford Reserve Kentucky Derby sponsorship, investment in ~~(a)~~ the Jack ~~Daniel's~~Daniel’s family ~~(b) our premium bourbon~~of brands, ~~most notably Woodford Reserve~~ and the new Old Forester homeplace and ~~(c) our tequila brands, most notably Herradura.~~

distillery.

Reported ~~and underlying~~ SG&A expenses ~~dropped 1%~~ increased 2% for the six months ended October 31, ~~2017.~~2018, while underlying SG&A expenses grew 3% after adjusting for the positive effect of foreign exchange. The ~~decrease~~increase in underlying SG&A expenses ~~for the three and six months ended October 31, 2017~~ was driven by ~~lower pension expense and continued tight management of discretionary spending,~~higher personnel costs, partially offset by ~~personnel costs driven in part by investments in our new Spain distribution operation.~~

For the six months ended October 31, 2017, operating expenses as a percentage of net sales declined 220 basis points to 31.4%, from 33.6% in the same period last year. Our operating expenses as a percentage of net sales declined as combined operating expenses grew at a slower rate than underlying net sales driven by the decline in SG&A spend.lower incentive compensation-related expenses.

Operating Income
Percentage change versus the prior year period ended October 31	3 Months		6 Months		3 Months		6 Months
Change in reported operating income	19	%	17	%	(5	%)	—	%
Acquisitions and divestitures	—	%	(1	%)
New accounting standard					1	%	1	%
Foreign exchange	1	%	3	%	3	%	3	%
Estimated net change in distributor inventories	(3	%)	(5	%)	1	%	—	%
Change in underlying operating income	16	%	14	%	—	%	4	%
Note: Totals may differ due to rounding

Operating income of ~~$346~~$332 million ~~increased $55~~decreased $17 million, or ~~19%~~5%, for the three months ended October 31, ~~2017~~2018 compared to the same period last year. Underlying operating income ~~grew 16%~~was flat after adjusting for (a) the adoption of the revenue recognition accounting standard, (b) the negative effect of foreign exchange, and (c) an estimated net ~~increase~~decrease in distributor inventories. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, while an increase in total underlying operating expenses partially offset these gains. We estimate that (a) second quarter tariff-related inventory reductions and (b) incremental costs associated with tariffs lowered our underlying operating income growth by approximately six percentage points for the three months ended October 31, 2018.

For the three months ended October 31, ~~2017,~~2018, operating margin ~~increased 280 basis~~decreased 1.7 percentage points to ~~37.9%~~36.5%, from ~~35.1%~~38.2% in the same period last year. The ~~increase~~decrease in our operating margin was driven by ~~operating expense leverage as SG&A spend declined~~the decrease in underlying gross margin, partially due to the incremental costs associated with tariffs, and ~~underlying advertising expenses grew 3% compared to underlying net sales growth~~the negative effect of ~~8%.~~foreign exchange.

Operating income of ~~$590~~$596 million increased ~~$86~~$1 million, or ~~17%,~~flat, for the six months ended October 31, ~~2017~~2018 compared to the same period last year. Underlying operating income grew ~~14%~~4% after adjusting for ~~(a)~~ the ~~net effect~~adoption of ~~our Scotch acquisition~~the revenue recognition accounting standard and ~~the loss of net sales related to our TSA for Southern Comfort and Tuaca, (b)~~ the negative effect of foreign ~~exchange, and (c) an estimated net increase in distributor inventories.~~exchange. The same factors that contributed to the growth in underlying gross profit also contributed to the growth in underlying operating income, while an increase in total underlying operating expenses partially offset these gains. We estimate that the incremental costs associated with tariffs lowered our underlying operating income growth by approximately two percentage points.

Operating margin ~~increased 220 basis~~decreased 0.7 percentage points to ~~36.0%~~35.6% for the six months ended October 31, ~~2017~~2018 from ~~33.8%~~36.3% in the same period last year. The ~~increase~~decrease in our operating margin was ~~driven~~due mainly to the decrease in underlying gross margin, largely reflecting the incremental costs associated with tariffs, partially offset by ~~operating expense leverage as SG&A spend declined and underlying advertising expenses grew 5% compared to underlying net sales~~slower growth of ~~7%. The negative effect of foreign exchange partially offset these positive factors.~~SG&A expenses.

The effective tax rate in the three months ended October 31, ~~2017~~2018 was ~~27.9%~~19.5% compared to ~~28.6%~~27.9% for the same period last year. The decrease in our effective tax rate was primarily driven by ~~a reduction in~~the net impact of the Tax Act (including the current ~~year~~quarter increase to the provisional repatriation U.S. tax ~~on foreign exchange gains~~charge recorded in ~~non-U.S.~~fiscal 2018).

entities due to a change in method of accounting for U.S. tax purposes in the first quarter and an increase in the U.S. tax benefits related to domestic manufacturing activities, partially offset by accruals for certain prior year international tax uncertainties.

The effective tax rate in the six months ended October 31, ~~2017~~2018 was ~~25.5%~~18.6% compared to ~~28.4%~~25.5% for the same period last year.The decrease in our effective tax rate was primarily driven by athe net impact of the Tax Act (including the current year reduction into the provisional repatriation U.S. tax charge recorded in fiscal 2018), partially offset by the absence of the amortization of the deferred tax benefit that was reclassified to retained earnings as a result of the adoption of ASU 2016-16. See Note 1 to the accompanying financial statements for current and certain prior years on foreign exchange gains in non-U.S. entities due to a change in method of accounting for U.S. tax purposes in the first quarter. We expect our full year effective tax rate to be approximately 27.5% based on the tax rate of 28.4% on ordinary income for the full fiscal year adjusted for known discrete items.additional information.

Diluted earnings per share of ~~$0.62~~$0.52 in the three months ended October 31, ~~2017~~2018 increased ~~23%~~4% from the ~~$0.50~~$0.49 reported for the same period last year. Diluted earnings per share of ~~$1.08~~$0.93 in the six months ended October 31, ~~2017~~2018 increased ~~24%~~8% from the ~~$0.87~~$0.86 reported for the same period last year. The increase in diluted earnings per share for the ~~three-~~three and ~~six-month periods~~six months ended October 31, 2018 resulted from ~~an increase in reported operating income,~~ the benefit of a lower effective tax rate ~~and~~from the Tax Act, partially offset by higher interest expense, which resulted from a ~~reduction~~new bond issuance in ~~shares outstanding.~~March 2018.

Liquidity and Financial Condition

Cash flows. Cash and cash equivalents ~~increased $30~~decreased $46 million during the six months ended October 31, ~~2017,~~2018, compared to ~~a decrease~~an increase of ~~$52~~$30 million during the same period last year. Cash provided by operations ~~of $214~~was $272 million ~~was up $45~~during the six months ended October 31, 2018, compared to $218 million ~~from~~for the same period last ~~year, reflecting higher earnings~~year. The $54 million increase primarily reflects a $47 million reduction in U.S. federal income tax payments, due largely to the effect of the Tax Act. The increase also reflects a $30 million reduction in discretionary contributions to our qualified pension plans (which became fully funded as a result of a contribution made during the fourth quarter of last fiscal year), partially offset ~~partially~~ by a higher seasonal increase in working capital.

Cash used for investing activities was ~~$65~~$57 million during the six months ended October 31, ~~2017,~~2018, compared to ~~$344~~$69 million for the same ~~prior-year period.~~period last year. The ~~$279~~$12 million decrease reflects the absence this year of $307 million in cash paid to acquire BenRiach in June 2016, partially offset by a $28 million increase in capital spending during the current period. The increase in capital spending isdecline was largely attributable to ~~construction~~the timing of ~~new distilleries and homeplaces for both Slane Irish Whiskey and Old Forester.~~capital projects.

Cash used for financing activities was ~~$127~~$243 million during the six months ended October 31, ~~2017,~~2018, compared to ~~$137~~$127 million ~~in cash provided by financing activities during~~for the same ~~prior-year period.~~period last year. The ~~$264~~$116 million ~~change~~increase largely reflects a ~~$717~~$127 million ~~decrease in proceeds from long-term debt, partially offset by a $441 million decline~~increase in share repurchases and a ~~$15~~$12 million increase in dividend payments, partially offset by a $21 million increase in net proceeds from short-term borrowings.

The impact on cash and cash equivalents as a result of exchange rate changes was ~~an increase~~a decrease of $8$18 million for the six months ended October 31, ~~2017,~~2018, compared to ~~a decline~~an increase of ~~$14~~$8 million for the same period last year.

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

In addition to our cash and cash equivalent balances, we have access to several liquidity sources to supplement our cash flow from operations. One of those sources is our $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.~~needs. During the three months ended October 31, ~~2017,~~2018, our commercial paper borrowings averaged ~~$502~~$479 million, with an average maturity of 3031 days and an average interest rate of ~~1.29%~~2.20%. During the six months ended October 31, ~~2017,~~2018, our commercial paper borrowings averaged ~~$494~~$471 million, with an average maturity of 2931 days and an average interest rate of ~~1.22%~~2.14%. Commercial paper outstanding was ~~$208~~$215 million at April 30, ~~2017,~~2018, and ~~$230~~$257 million at October 31, ~~2017.~~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~~Our commercial paper program is supported by available commitments under our currently undrawn $800 million ~~unsecured revolving~~bank credit ~~commitment~~facility 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 covenant.~~

~~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. ~~The~~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 ~~strong and~~ sufficient to meet all of our future financial ~~commitments.We~~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 October 31, ~~2017, we had total~~2018, approximately $160 million of our cash and cash equivalents ~~of $212 million. Of this amount, $183 million was~~were held by our foreign subsidiaries whose earnings we ~~expect~~had expected to reinvest indefinitely outside of the United States. As discussed in Note 3 to the accompanying financial statements, we intend to repatriate approximately $120 million of that cash to the United States from one of those foreign subsidiaries during the fiscal quarter ending January 31, 2019. No incremental taxes will be due on this distribution of cash beyond the repatriation tax recorded in fiscal 2018. We ~~do not expect~~continue to ~~need the~~evaluate our future cash ~~generated~~deployment and may decide to repatriate additional cash held by those foreign ~~subsidiaries to fund our domestic operations.~~subsidiaries. However, ~~if we were to repatriate cash from those foreign subsidiaries, we would be required~~future repatriations may require us to provide for and pay ~~U.S. taxes on permanently repatriated earnings.~~

~~As of October 31, 2017, our outstanding debt includes $250 million of 1.00% notes that mature on January 15, 2018. We currently plan to repay these notes with cash.~~additional taxes.

Share repurchases. As announced on July 13, 2018, our Board of Directors authorized the repurchase of up to $200 million of our outstanding shares of Class A and Class B common stock from July 13, 2018, through July 12, 2019, subject to market and other conditions. As of October 31, 2018, we had repurchased a total of 2,580,635 shares under this program for approximately $122 million. We completed this program with $78 million of additional repurchases during November 2018.

The results of this share repurchase program are summarized in the following table.



	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, 2018 – July 31, 2018	—	—	$	—	$	—	$	—
August 1, 2018 – October 31, 2018	28,460	2,552,175	$	47.40	$	47.17	$	122
November 1, 2018 - November 30, 2018	14,953	1,634,428	$	47.65	$	47.50	$	78
	43,413	4,186,603	$	47.49	$	47.30	$	200

Item 3. Quantitative and Qualitative Disclosures about Market Risk

We are exposed to market risks arising from adverse changes in (a) foreign exchange rates, (b) commodity prices affecting the cost of our raw materials and energy, and (c) interest rates. We try to manage risk through a variety of strategies, including production initiatives and hedging strategies. Our foreign currency hedging contracts are subject to ~~changes in~~foreign exchange ~~rates,~~rate changes, our commodity forward purchase contracts are subject to ~~changes in~~ commodity ~~prices,~~price changes, and some of our debt obligations are subject to ~~changes in~~ interest ~~rates.~~rate changes. Established procedures and internal processes govern the management of these market risks. Since April 30, ~~2017,~~2018, there have been no material changes to the disclosure on this matter made in our ~~2017~~2018 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) (our principal executive and principal financial officers), has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, our CEO and CFO concluded that our disclosure controls and ~~procedures~~procedures: (a) are effective to ensure that information required to be disclosed by the company in the reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms; and (b) include controls and procedures designed to ensure that information required to be disclosed by the company in such reports is accumulated and communicated to the company’s management, including the CEO and the CFO, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There has been no change in our internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

We operate in a litigious environment and we are sued in the normal course of business. We do not anticipate that any ~~currently~~ pending ~~suits~~legal proceedings will have, individually or in the aggregate, a material adverse effect on our financial position, results of operations, or liquidity.

Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report, you should carefully consider the risks and uncertainties discussed in Part I, Item 1A. Risk Factors in our ~~2017~~2018 Form 10-K, which could materially adversely affect our business, financial condition, or future results. There have been no material changes to the risk factors disclosed in our ~~2017~~2018 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None.~~The following table provides information about shares of our common stock that we acquired during the quarter ended October 31, 2018:



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased under the Plans or Programs
August 1, 2018 – August 31, 2018	—	$	—	—	$	200,000,000
September 1, 2018 – September 30, 2018	18,107	$	48.52	18,107	$	199,100,000
October 1, 2018 – October 31, 2018	2,563,948	$	47.16	2,562,528	$	78,300,000
Total	2,582,055	$	47.17	2,580,635

As announced on July 13, 2018, our Board of Directors has authorized the repurchase of up to $200 million of our outstanding shares of Class A and Class B common stock from July 13, 2018, through July 12, 2019, subject to market and other conditions. Of the 2,582,055 total shares presented in the above table, 2,580,635 were acquired as part of this repurchase program. The remaining 1,420 shares presented in the above table were acquired from an employee to satisfy income tax withholding triggered by the vesting of restricted shares.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

The following documents are filed with this Report:



31.1		CEO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
31.2		CFO Certification pursuant to Section 302 of Sarbanes-Oxley Act of 2002.
32		CEO and CFO Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (not considered to be filed).
101		The following materials from Brown-Forman Corporation's Quarterly Report on Form 10-Q for the quarter ended October 31, ~~2017,~~2018, formatted in XBRL (eXtensible Business Reporting Language): (a) Condensed Consolidated Statements of Operations, (b) Condensed Consolidated Statements of Comprehensive Income, (c) Condensed Consolidated Balance Sheets, (d) Condensed Consolidated Statements of Cash Flows, and (e) Notes to the Condensed Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		BROWN-FORMAN CORPORATION
		(Registrant)

Date:	December 6, ~~2017~~2018	By:	/s/ Jane C. Morreau
			Jane C. Morreau
			Executive Vice President and Chief Financial Officer
			(On behalf of the Registrant and as Principal Financial Officer)

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