For the transition period from _______________ to _______________

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.

 

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

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

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.

The BenRiach acquisition occurred duringWe suggest that you read these condensed financial statements together with the firstfinancial statements and footnotes included in our Annual Report on Form 10-K for the fiscal quarter of 2017 andyear ended April 30, 2018 (2018 Annual Report). Except for adopting the purchase price allocation was finalized as of June 1, 2017. There have been no material changes to the purchase price allocation.

Early adoption of any of theThere are no other new accounting pronouncements described above is permitted. However, except as noted above,standards to be adopted that we do not currently expectbelieve might have a significant impact on our consolidated financial statements.

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

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 quarter in which the related event or a change in judgment occurs. The effective tax rate of 28.5%17.4% for the ninethree months ended JanuaryJuly 31, 2018, is higherlower than the expected tax rate of 26.1%21.1% on ordinary income for the full fiscal year, primarily due to (a) the net impact of the Tax Cuts and Jobs Actcurrent year adjustment to the provisional repatriation U.S. tax charge that was made during fiscal 2018 (discussed below) and (b) true-ups related to

On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”)(Tax Act). The Tax Act significantly revisesrevised 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 will bewas phased in, resulting in a U.S. statutory federal rate of 30.4% for our fiscal year endingended April 30, 2018, and 21% for our current and subsequent fiscal years. DuringFor the quarter ended JanuaryJuly 31, 2018, the impact of the lower tax rate resulted in a tax benefit of approximately $20 million for the three and nine months then ended.$27 million. With the enactment of the Tax Act, we are evaluatingcontinue to evaluate our global working capital requirements and may change our current permanent reinvestment assertion in future periods.

There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposesimposed 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 requiredcaused 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 quarteryear ended January 31,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 quarter ended July 31, 2018, we recorded a provisional benefit of $6 million as an adjustment to the provisional repatriation charge.

The changes included in the Tax Act are broad and complex. The final transition impacts of the Tax Act may differ from the abovecurrent 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 the company has utilizedwe have used to calculate the transition impacts, including impacts from changes to current year earnings estimates and foreign currency exchange ratesrates. The SEC has issued rules that allow for a measurement period of foreign subsidiaries.

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).

We excluded common stock-based awards for approximately 2,789,0001,719,000 shares and 0100,000 shares from the calculation of diluted earnings per share for the three months ended January 31, 2017 and 2018, respectively. We excluded common stock-based awards for approximately 2,225,000 shares and 1,073,000 shares from the calculation of diluted earnings per share for the nine months ended JanuaryJuly 31, 2017 and 2018, respectively. We excluded those awards because they were not dilutive for those periods under the treasury stock method.

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 JanuaryJuly 31, 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 $12$10 million (subject to changes in foreign currency exchange rates). Both the fair value and carrying amount of the guaranty are insignificant.

As of JanuaryJuly 31, 2018, our actual exposure under the guaranty of the importer’s obligation is approximately $4 million. We also have accounts receivable from that importer of approximately $6 million.million at July 31, 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.

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 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.

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, 20172018 and $1,100$1,203 million at JanuaryJuly 31, 2018.

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.

We expect to reclassify $34$2 million of deferred net losses on cash flow hedges recorded in AOCI as of JanuaryJuly 31, 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 JanuaryJuly 31, 2018, the maximum term of our outstanding derivative contracts was 36 months.

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.

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

The following table summarizesshows the changes in goodwillcomponents of the net cost of pension and other intangible assets during the nine months ended January 31, 2018:postretirement benefits recognized for our U.S. benefit plans. Information about similar international plans is not presented due to immateriality.

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 20172018 Form 10-K. Note that the results of operations for the ninethree months ended JanuaryJuly 31, 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.