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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 new guidance on the classification of certain cash receipts and cash payments on the statement of cash flows. The new guidance, which addresses eight specific cash flow classification issues, is intended to reduce diversity in practice. It will become effective for us beginning fiscal 2019 and is to be applied retrospectively.

•	In October 2016, the FASB issued 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

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In January 2017, the FASB issued updated guidance that eliminates the second step of the existing two-step quantitative test of goodwill for impairment. Under the new guidance, the quantitative test will consist of a single step in which the carrying amount of the reporting unit will be 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 adoption is not required until fiscal 2021, we currently expect to adopt the new standard, prospectively, beginning in fiscal 2019.

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In March 2017, the FASB issued new guidance for 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 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.

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In August 2017, the FASB issued updated guidance on hedge accounting. 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 have not yet determined our plans for adoption, we are considering the possibility of adopting this new guidance before the required adoption date.

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

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

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

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•	“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.

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

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

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

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

•	“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.

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“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/RTP), Gentleman Jack, Jack Daniel’s Tennessee Fire (JDTF), Jack Daniel’s Single Barrel Collection, Jack Daniel’s Tennessee Rye Whiskey, Jack Daniel’s Sinatra Select, Jack Daniel’s No. 27 Gold Tennessee Whiskey, and Jack Daniel’s 1907 Tennessee Whiskey.

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“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.

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

•	“Drinks-equivalent.” Volume is discussed on a nine-liter equivalent unit basis (nine-liter cases) unless otherwise specified. At times, we use a “drinks-equivalent” measure for volume when comparing single-serve ready-to-drink (RTD) or ready-

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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, termination difficulties or costs, or impairment in recorded value

•	Inadequate protection of our intellectual property rights

•	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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•	We delivered net sales of $1.6 billion, an increase of 10% 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 effect of foreign exchange, and (c) an estimated net increase in distributor inventories, we grew underlying net sales 7%.

•	We delivered operating income of $590 million, an increase of 17% 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, we grew underlying operating income 14%.

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

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Net sales. We expect net sales growth to be slower in the remainder of fiscal 2018 than the 10% growth in the six months ended October 31, 2017. We believe net sales growth in emerging markets will be slower in 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 in distributor inventories during the six months ended October 31, 2017, and we do not expect that benefit to continue in the remainder of the fiscal year.

•	Cost of sales. We expect total cost of sales to grow at a higher rate than net sales in the remainder of fiscal 2018. We expect underlying cost of sales growth from cost/mix to grow at a higher rate in the remainder of the year compared to 2% cost/mix growth for the six months ended October 31, 2017.

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Operating expenses. We expect total operating expenses to grow at a higher rate in 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.

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Effective tax 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% based on the tax rate of 28.4% on ordinary income for the full fiscal year adjusted for known discrete items.

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•	United States. Reported net sales grew 9%, while underlying net sales increased 6% after adjusting for 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, led by Woodford Reserve 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.

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

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

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◦	In France, underlying net sales growth was led by JDTW and JDTH, as both experienced higher consumer demand compared to the total whiskey category.

◦	In Poland, underlying net sales growth was fueled by volume gains of JDTW, which has experienced strong consumer takeaway trends.

◦	In Russia, underlying net sales growth was driven by higher price and volumetric growth of Finlandia. The higher prices are partly attributed to import duties resulting from a change in our route-to-consumer.

◦	The increase in underlying net sales in the Rest of Europe was led by improved trends for JDTW in Turkey, where our results in the same period last year were negatively affected by geopolitical and economic instability.

•	Australia. Reported net sales increased 7%, while underlying net sales increased 10% after adjusting for the loss of net sales related to our TSA for Southern Comfort 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.

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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 the return to growth of Southeast Asia, China, and Brazil, all of which declined in the same period last year. These gains were partially offset by declines in Japan, where volumes increased considerably in the same period last year due to buy-ins ahead of a price increase last September.

•	Travel Retail. Reported net sales increased 18%, while underlying net sales increased 11% after adjusting for the negative effect of foreign exchange and an estimated net increase in distributor inventories. 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.

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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 higher volumes 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.

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Jack Daniel’s family of brands grew reported net sales 10% (underlying 7%), and was the most significant contributor to our overall underlying net sales growth. Reported net sales were helped by an estimated net increase in distributor inventories and foreign exchange due to the weakening of the dollar against the British pound, Polish zloty, and the euro. The following are details about the underlying performance of the Jack Daniel’s family of brands:

◦	JDTW grew underlying net sales in the majority of its markets including the United States, the United Kingdom, Poland, Turkey, Southeast Asia, and Travel Retail.

◦	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/RTP was driven by Australia, Germany, and the United States, with all markets benefiting from new RTD line extensions.

◦	Gentleman Jack grew underlying net sales led by volumetric growth in the United States, its largest market, and Travel Retail.

◦	Growth of JDTF was driven by higher volumes in the United States and the launch of the brand in Brazil and Chile.

◦	The launch of Jack Daniel’s Tennessee Rye in September of this year in the United States was the primary driver of underlying net sales growth for Other Jack Daniel’s whiskey brands.

•	Woodford Reserve led the growth of our premium bourbons as 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 net sales were helped by an estimated net increase in distributor inventories in Travel Retail.

•	Reported net sales for Finlandia grew 18%, while underlying net sales increased 8% led by higher price 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 an estimated net increase in distributor inventories in Russia and foreign exchange.

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•	Reported net sales for el Jimador increased 15%, while underlying net sales increased 10% driven by volume gains in the United States supported by strong takeaway trends. Reported net 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 higher volumes and favorable price/mix in the brand’s largest markets, the United States and Mexico, the latter 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.

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

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

•	volumetric growth and favorable price/mix of Herradura 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 of Korbel Champagne in the United States.

•	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;

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•	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.

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

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

•	Reported and underlying advertising expenses grew 5% for the six months ended October 31, 2017. The increase in underlying advertising expenses for the three and six months ended October 31, 2017 was driven by continued investment in (a) the Jack Daniel's family, (b) our premium bourbon brands, most notably Woodford Reserve and Old Forester, and (c) our tequila brands, most notably Herradura.

•	Reported and underlying SG&A expenses dropped 1% for the six months ended October 31, 2017. The decrease 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, partially offset by personnel costs driven in part by investments in our new Spain distribution operation.

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