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Effective beginning May 1, 2016, we changed our presentation of excise taxes from the gross method (included in sales and costs) to the net method (excluded from sales). As a result, the amounts presented as “net sales” in our financial statements now exclude excise taxes. We believe the change in presentation to the net method is preferable because it is more representative of the internal financial information reviewed by management in assessing our performance and more consistent with the presentation used by our major competitors in their external financial statements. Prior period financial statements have been recast to conform to the new presentation.

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We adopted new guidance related to certain aspects of the accounting for stock-based compensation, including the income tax consequences. Under the new guidance, we recognize all tax benefits related to stock-based compensation as an income tax benefit in our statement of operations, and include all income tax cash flows within operating activities in our statement of cash flows. Under the previous accounting guidance, we recognized some of those tax benefits (excess tax benefits) as additional paid-in capital and classified that amount as a financing activity in our statement of cash flows. We adopted these provisions of the new guidance on a prospective basis as of May 1, 2016. As a result, our net income and operating cash flows for the six months ended October 31, 2016, include excess tax benefits of $3 million. Prior period financial statements have not been adjusted.

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•	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.

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

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

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“Acquisitions and divestitures.” On January 14, 2016, we reached an agreement to sell our Southern Comfort and Tuaca brands and related assets to Sazerac Company, Inc. The transaction closed March 1, 2016, for $543 million in cash, which resulted in a gain of $485 million in the fourth quarter of fiscal 2016. On June 1, 2016, we acquired The BenRiach Distillery Company Limited (BenRiach) for aggregate consideration of $407 million, consisting of a purchase price of $341 million and $66 million in assumed debt and transaction-related obligations that we have since paid. The acquisition, which brought three single malt Scotch whisky brands into our whiskey portfolio, included brand trademarks, inventories, three malt distilleries, a bottling plant, and BenRiach’s headquarters in Edinburgh, Scotland. See Note 14 to the accompanying financial statements for additional information. This adjustment removes

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•	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; 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, 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

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

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Changes in consumer preferences, consumption, or purchase patterns – particularly away from larger producers in favor of smaller distilleries or local producers, or away from brown spirits, our premium products, or spirits generally, and our ability to anticipate or react to them; bar, restaurant, travel, or other on-premise declines; shifts in demographic 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’ 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, or termination difficulties or costs, or impairment in recorded value

•	Inadequate protection of our intellectual property rights

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

•	Significant legal disputes and proceedings; 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

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United States. Reported net sales declined 1%, while underlying net sales increased 5% after adjusting for the absence of revenues following the sale of Southern Comfort and Tuaca. Underlying net sales gains were driven primarily by (a) the growth of our American whiskey portfolio, led by JDTW, Woodford Reserve, and Jack Daniel’s Tennessee Honey (JDTH); (b) our tequila brands, led by Herradura and el Jimador; and (c) Korbel Champagne. This growth was partially offset by declines in Canadian Mist.

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Europe. Reported net sales decreased 13%, while underlying net sales were flat after adjusting for (a) the absence of revenues following the sale of Southern Comfort and Tuaca, (b) the negative effect of foreign exchange driven by the strengthening of the dollar against the British pound and euro, and (c) an estimated net decrease in distributor inventories in Russia. Underlying net sales gains in France, Poland, and the United Kingdom were offset by declines in Turkey and Russia, which both suffered from geopolitical instability and weak economic conditions.

◦	In the United Kingdom, underlying net sales growth was driven by higher volumes of JD RTDs and Chambord, favorable price/mix of JDTW, and the expansion of JDTF.

◦	In Germany, underlying net sales growth was driven by higher volumes of JD RTDs and JDTH, and the introduction of JDTF, partially offset by volume declines of JDTW.

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◦	In Poland and France, underlying net sales growth was driven by higher volumes of JDTW. France also benefited from the expansion of JDTF.

◦	In Turkey, which has suffered from political and economic instability, the decline in underlying net sales was driven by lower volumes of JDTW.

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In Russia, underlying net sales declines were driven primarily by lower volumes of Finlandia following price increases intended to partially offset the devaluation of the ruble. We believe that the declines in the market are driven by weak economic conditions, consumer trends favoring local products, and the reduction in the purchasing power of consumers for premium brands given the significant currency devaluation.

◦	The decline in underlying net sales in the rest of Europe was driven by lower volumes of JDTW in Belgium, where prior year volumes were high due to buy-in ahead of an excise tax increase.

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Australia. Reported net sales increased 1%, and underlying net sales also increased 1% after adjusting for (a) the negative effect of the absence of revenues following the sale of Southern Comfort and Tuaca and (b) the positive effect of foreign exchange. Underlying net sales growth was driven by volumetric gains of JDTW and Gentleman Jack, and the expansion of JDTF after introduction in late fiscal 2016. These gains were partially offset by declines in JD RTDs due to price/mix.

•	Other geographies. Reported net sales for our other markets were flat, while underlying net sales collectively increased 3%. Underlying net sales growth was led by Mexico and Japan, which benefited from buy-ins ahead of price increases. These gains were partially offset by declines in Brazil, China, and Southeast Asia.

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Travel Retail. Reported net sales decreased 3%, while underlying net sales increased 4% after adjusting reported results for (a) the absence of revenues following the sale of Southern Comfort and Tuaca, (b) the negative effect of foreign exchange, and (c) an estimated net decrease in distributor inventories. Following declines in the same period last year, underlying net sales growth was led by higher volumes of JDTW, distribution expansion of Woodford Reserve, and the expansion of JDTF into Europe and Asia.

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Other. Reported net sales increased 13%, while underlying net sales declined 27% after removing the net effect of acquired and divested businesses (primarily bulk whiskey and contract bottling sales). The reduction in underlying net sales was due primarily to declines in used barrel sales reflecting lower prices and volumes as a result of weaker demand from blended Scotch industry buyers and pricing pressures due to increased supply of used barrels in the market.

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Jack Daniel’s family of brands reported net sales declined 1%, while underlying net sales grew 2%, and was the most significant contributor to our overall underlying net sales growth. Reported net sales were hurt by foreign exchange due to the strengthening of the dollar against the British pound and euro. The following are details about the underlying performance of the Jack Daniel’s family of brands:

◦	JDTW grew underlying net sales in the United States, Japan, Poland, France, Mexico, Travel Retail, the United Kingdom, and Australia. These increases were partially offset by declines in China, Belgium, Turkey, Germany, Southeast Asia, sub-Saharan Africa, and certain markets in Latin America.

◦	JDTH grew underlying net sales in the United States, its largest market; Germany; and Mexico. These gains were partially offset by declines in Brazil and France.

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Among our Other Jack Daniel’s whiskey brands, the most significant contributor to underlying net sales growth was JDTF, which was led by the expansion in France, Travel Retail, Germany, Australia, and the United Kingdom. The year-to-date growth of JDTF from its international expansion was partially offset by declines for the brand in the United States, where prior year volumes were high due to the national introduction in late fiscal 2015. Gentleman Jack also contributed significantly to underlying net sales growth, driven by growth in the United States.

◦	The increase in underlying net sales growth for Jack Daniel’s RTDs/RTP was driven by consumer-led volumetric gains, distribution expansion, and product innovation in Mexico, Germany, and the United Kingdom.

•	Reported net sales for New Mix RTDs in Mexico increased 3% and underlying net sales grew 18% driven by volume gains and higher pricing.

•	Reported net sales for Finlandia declined 17% and underlying net sales decreased 4% driven predominately by lower volumes in Russia and the United States. In Poland, the brand’s largest market, underlying net sales increased 2%, recovering from declines in the first quarter of this year.

•	Reported and underlying net sales for Canadian Mist decreased 14% primarily driven by volume declines in the United States.

•	Reported net sales for el Jimador grew 3% and underlying net sales increased 9% driven by volume gains in the United States.

•	Woodford Reserve led the growth of our super- and ultra-premium American whiskeys with reported net sales increasing 12% and underlying net sales growing 19%. This growth was driven by the United States, where the brand continued to grow volumetrically with strong consumer takeaway trends. Outside the United States, growth was improved by distribution expansion in Travel Retail.

•	Reported net sales of Herradura grew 12% and underlying net sales increased 16% driven primarily by increased volumes in the brand’s largest markets, Mexico and the United States.

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

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

•	growth of JDTW in several international markets, most notably, Japan, Poland, France, Travel Retail, and Mexico;

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

•	growth of JDTF driven by (a) expansion in France and Germany and (b) the return to growth of JDTF in the United States after cycling prior year distribution gains in the first quarter;

•	volume growth of JD RTDs, led by Mexico and Germany;

•	higher volumes of JDTH in the United States; and

•	distribution expansion of Woodford Reserve in Travel Retail.

•	declines of JDTW in certain markets, including Germany, Southeast Asia, Belgium, China, Russia, and the United Kingdom, which was partially timing related;

•	declines in used barrel sales reflecting lower prices and volumes as a result of weaker demand from blended Scotch industry buyers and pricing pressures due to increased supply of used barrels in the market;

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

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

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

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

•	volume growth of JD RTDs, led by Mexico, Germany, and the United Kingdom;

•	growth of JDTF led by France, Travel Retail, Germany, Australia, and the United Kingdom;

•	growth of JDTH led by the United States;

•	distribution expansion of Woodford Reserve in Travel Retail; and

•	launch of Coopers’ Craft Bourbon in the United States.

•	declines of JDTW in China, Belgium, Turkey, Germany, Southeast Asia, sub-Saharan Africa, and certain markets in Latin America;

•	declines in used barrel sales reflecting lower prices and volumes as a result of weaker demand from blended Scotch industry buyers and pricing pressures due to increased supply of used barrels in the market;

•	volume declines of Canadian Mist in the United States;

•	lower volumes of Finlandia in Russia; and

•	declines of JDTF in the United States, where prior year volumes were high due to the national introduction in late fiscal 2015.

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