You should read the following discussion and analysis along with our 2012 Form 10-K. Note that the results of operations for the three months ended July 31, 2012, do not necessarily indicate what our operating results for the full fiscal year will be. In this Item, "we," "us," and "our" refer to Brown-Forman Corporation.

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," "envision," "estimate," "expect," "expectation," "intend," "may," "plan," "potential," "project," "pursue," "see," "will," "will continue," and similar words identify 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 other factors include, but are not limited to:

· declining or depressed global or regional economic conditions, particularly in the Euro zone; political, financial, or credit or capital market instability; supplier, customer or consumer credit or other financial problems; bank failures or governmental debt defaults

· failure to develop or implement effective business, portfolio and brand strategies, including the increased U.S. penetration and international expansion of Jack Daniel's Tennessee Honey, innovation, marketing and promotional activity, and route-to-consumer

· unfavorable trade or consumer reaction to our new products, product line extensions, price changes, marketing, or changes in formulation, flavor or packaging

· 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, entry or expansion in our geographic markets

· declines in consumer confidence or spending, whether related to the economy (such as austerity measures, tax increases, high fuel costs, or higher unemployment), wars, natural or other disasters, weather, pandemics, security concerns, terrorist attacks or other factors

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

· governmental or other restrictions on our ability to produce, import, sell, price, or market our products, including advertising and promotion in either traditional or new media; regulatory compliance costs

· business disruption, decline or costs related to organizational changes, reductions in workforce or other cost-cutting measures

· lower returns or discount rates related to pension assets, interest rate fluctuations, inflation or deflation

· fluctuations in the U.S. dollar against foreign currencies, especially the euro, British pound, Australian dollar, Polish zloty or Mexican peso

· changes in consumer behavior or preferences and our ability to anticipate and respond to them, including societal attitudes or cultural trends that result in reduced consumption of our products; reduction of bar, restaurant, hotel or other on-premise business or travel

· consumer shifts away from spirits or premium-priced spirits products; shifts to discount store purchases or other price-sensitive consumer behavior

· distribution and other route-to-consumer decisions or changes that affect the timing of our sales, temporarily disrupt the marketing or sale of our products, or result in implementation-related or higher fixed costs

· effects of acquisitions, dispositions, joint ventures, business partnerships or investments, or their termination, including acquisition, integration or termination costs, disruption or other difficulties, or impairment in the recorded value of assets (e.g. receivables, inventory, fixed assets, goodwill, trademarks and other intangibles)

· lower profits, due to factors such as fewer or less profitable used barrel sales, lower production volumes, decreased demand or inability to meet consumer demand for products we sell, sales mix shift toward lower priced or lower margin SKUs, or cost increases in energy or raw materials, such as grain, agave, wood, glass, plastic, or closures

· natural disasters, climate change, agricultural uncertainties, environmental or other catastrophes, or other factors that affect the availability, price, or quality of agave, grain, glass, energy, closures, plastic, water, or wood, or that cause supply chain disruption or disruption at our production facilities or aging warehouses

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

· product counterfeiting, tampering, contamination, or recalls and resulting negative effects on our sales, brand equity, or corporate reputation

· significant costs or other adverse developments stemming from class action, intellectual property, governmental, or other major litigation; or governmental investigations of beverage alcohol industry business, trade, or marketing practices by us, our importers, distributors, or retailers

Results of Operations:
First Quarter Fiscal 2013 Compared to First Quarter Fiscal 2012

A summary of our operating performance (dollars expressed in millions, except
per share amounts) is presented below.
                                                Three Months Ended
                                                     July 31,
                                                2011         2012      Change
Net sales                                        $840.3       $878.1       4%
Excise taxes                                      202.5        212.3       5%
Cost of sales                                     217.5        201.7     (7%)
Gross profit                                      420.3        464.1      10%
Advertising expenses                               90.8         92.1       1%
Selling, general, and administrative expenses     139.0        148.5       7%
Amortization expense                                1.3           --
Other (income) expense, net                         3.3          1.8
Operating income                                  185.9        221.7      19%
Interest expense, net                               7.1          4.6
Income before income taxes                        178.8        217.1      21%
Income taxes                                       60.7         69.6
Net income                                        118.1        147.5      25%

Gross margin                                      50.0%        52.9%
Operating margin                                  22.1%        25.2%

Effective tax rate                                34.0%        32.1%

Earnings per share:
Basic                                             $0.54        $0.69      27%
Diluted                                            0.54         0.69      27%

On a reported basis, net sales for the three months ended July 31, 2012 were $878.1 million, up $37.8 million, or 4%, compared to the same prior year period. Solid underlying growth in the business, buy-ins in advance of price increases on several brands in several markets and higher estimated net trade inventory levels due in part to price increase buy-ins, fueled the growth in the quarter. These gains were partially offset by a stronger U.S. dollar and the absence of net sales associated with the Hopland-based wine business, which we sold in April 2011. (We had a transition services agreement with the buyer of Fetzer Vineyards that expired on December 31, 2011.)

                                                  Change vs.
                                                 Prior Period
· Underlying change  1   in net sales                10%
· Estimated net change in trade inventories  2        4%
· Sale of Hopland-based wine business  3             (4%)
· Foreign exchange  4                                (6%)
          Reported change in net sales                4%

The primary factors contributing to our underlying growth in net sales for the quarter were increased consumer demand and the buy-in in advance of price increases for several of our brands in several markets, but particularly Jack Daniel's in the U.S. We expect these buy-ins to reverse in the second quarter. The geographic expansion of Jack Daniel's Tennessee Honey, most significantly in Australia, and the introduction of additional sizes for this brand in the U.S. also contributed to the growth in underlying sales. The net sales performance for the rest of our portfolio showed significant acceleration in growth rates including for Finlandia, Appleton (an agency brand we represent in Mexico), the introduction of Southern Comfort Black Cherry, Herradura, Woodford Reserve, Maximus, Sonoma-Cutrer, Korbel, and el Jimador. Only a few brands in our portfolio experienced a decline in underlying net sales during the first quarter including the Southern Comfort parent brand. On a geographic basis, several markets including the U.S., Australia, Poland, Mexico, Turkey, Russia, and France contributed to the underlying growth in net sales for the quarter which more than offset declines registered in certain markets including China and Japan. Of the 10% underlying change in net sales, about 1% was due to price/mix while the remaining change reflects higher volumes.

1 Underlying change represents the percentage increase or decrease in reported financial results in accordance with generally accepted accounting principles (GAAP) in the United States, exclusive of other items impacting period-over-period results. We believe presenting the underlying change helps provide transparency to our comparable business performance.

2 Refers to the estimated financial impact of changes in wholesale trade inventories for our brands. We compute this effect by using our estimated depletion trends and separately identifying trade inventory changes in the variance analysis for our key measures. Based on the estimated depletions and the fluctuations in trade inventory levels, we then adjust the percentage variances from prior to current periods for our key measures. We believe it is important to separately identify the impact of this item in order for management and investors to understand the results of our business that can arise from varying levels of wholesale inventories.

3 Refers to the April 2011 sale of our Hopland, California-based wine business to Vina Concha y Toro S.A. and remained agency brands for us through December 31, 2011. This agency relationship resulted in full fiscal year 2012 reported sales of $79 million and $0.03 of earnings per diluted share. Included in this sale were the Fetzer winery, bottling facility, and vineyards, as well as the Fetzer brand and other Hopland, California-based wines, including Bonterra, Little Black Dress, Jekel, Five Rivers, Bel Arbor, Coldwater Creek, and Sanctuary.

4 Refers to net gains and losses incurred by the company relating to sales and purchases in currencies other than the U.S. dollar. We use the measure to understand the growth of the business on a constant dollar basis, as fluctuations in exchange rates can distort the underlying growth of our business (both positively and negatively). To neutralize the effect of foreign exchange fluctuations, we have translated current year results at prior year rates. We believe it is important to separately identify the impact that foreign exchange has on each major line item of our consolidated statement of operations.

The following discussion highlights net sales and depletion 5 results in the first quarter for several brands compared to the same prior period:

· Jack Daniel's Family of Brands depletions and reported net sales grew high single digits for the first quarter while net sales on a constant currency 6 basis grew double digits for the same period. This growth was driven by a combination of broad based geographic growth and buy-ins in advance of price increases, most notably for Jack Daniel's Tennessee Whiskey. Innovation also continued to fuel the growth with the geographic expansion of Jack Daniel's Tennessee Honey into select new markets outside the U.S. Gentleman Jack and Jack Daniel's Single Barrel benefitted from strong growth outside the U.S. and buy-in in advance of price increases in the U.S.

· Jack Daniel's ready-to-drink (RTD) brands net sales on a reported basis declined modestly in the quarter driven by the difficult comparisons to the same period a year ago where there was pipeline fill associated with the launch of a line extension in Japan. Excluding Japan, the brands grew in the mid-single digit range on a reported basis. On a constant currency basis, net sales grew modestly and volumetric gains continued in several markets but most notably Mexico and the U.K.

· Finlandia net sales grew low single-digits on a reported basis, while depletions and net sales on a constant currency basis improved in the high single digits and double digits, respectively. The brand's growth was driven largely by volume gains in Poland and Russia where it continues to grow market share per Nielsen data.

· Southern Comfort Family of Brands global net sales declined in the mid-single digits during the quarter on a reported basis and slightly on a constant currency basis driven by depletion declines for the parent brand internationally. However, overall depletion trends improved for the brand in the U.S., the brand's largest market, on the heels of a stronger and more consistent media presence, more effective promotional efforts with the trade, and continued flavor innovation. The positive momentum in the U.S. was offset by a slow start in some key international markets, notably the U.K. and Germany.

· Our super-premium brands, which include Herradura, Woodford Reserve, Tuaca, Sonoma- Cutrer and Chambord, collectively grew depletions and net sales on a reported and constant currency basis at double digits.

Cost of sales for the three months ended July 31, 2012 was $201.7 million, a decrease of $15.8 million, or 7%, compared to the same period a year ago. Cost of sales was helped ($8.3 million) by a stronger U.S. dollar. Additionally, the absence of cost of sales associated with the Hopland-based wine business resulted in a reduction in cost of sales compared to the prior year. Volumetric gains along with a shift in portfolio mix were the main contributors of the cost of sales increase for the period. While not a notable factor in the first quarter, we expect higher input costs, including grain and glass, and an increase in transportation costs to contribute to higher costs of sales over balance of the year in the low single digits. The following table highlights the major changes in costs for the first quarter:

                                       Change vs.
                                      Prior Period
· Volumetric growth                        5%
· Portfolio mix                            3%
· Foreign exchange                        (4%)
· Sale of Hopland-based wine business    (11%)
  Reported change in cost of sales        (7%)

Gross profit for the three months ended July 31, 2012 was $464.1 million, an increase of $43.8 million compared to the first quarter of last year. Gross profit was helped by underlying growth in revenue and an increase in estimated net trade inventory levels and was hurt by a stronger U.S. dollar and the absence of gross profit associated with the Hopland-based wine business. The same factors that drove the increase in underlying net sales for the quarter also contributed to the underlying growth in gross profit for the same period. The absence of the lower margin Hopland-based wine business, which improved the overall margin 1.4% points, and favorable brand/market mix were the primary factors driving the 2.9% point quarter over quarter improvement in gross margin to 52.9%.

The following table shows the major factors influencing the change in gross profit for the quarter:

                                             Change vs.
                                            Prior Period
· Underlying change in gross profit             13%
· Estimated net change in trade inventories      5%
· Sale of Hopland-based wine business           (1%)
· Foreign exchange                              (7%)
      Reported change in gross profit           10%

Advertising expenses increased $1.3 million, or 1%, for the three month period on a reported basis. A stronger U.S. dollar decreased advertising expense by over $5 million, or 6%, while the absence of spending behind the Hopland-based wine business reduced this quarter's spending by 2%. Excluding these factors, advertising expense rose 9%. We continue to strive to optimize our mix of total brand investment by reallocating resources among brands, geographies, and channels to reach consumers around the world effectively and efficiently. We expect to remain flexible in directing brand spending and resources to activities that support the business in the current environment while positioning our company for long-term growth.

Selling, general and administrative expenses increased $9.5 million, or 7%, for the quarter. Inflation on salary and benefit expenses, higher pension expense driven primarily by a reduction in the assumed discount rate, the full year effect of investments made in our organization, capabilities in emerging markets last year such as China, the establishment of our own route-to-consumer distribution in Turkey, and timing of various spending contributed to the year over year increase in selling, general, and administrative expenses.

Operating income of $221.7 million increased $35.8 million, or 19%, for the three months ended July 31, 2012 compared to the same period last year. Operating income benefited from the underlying growth in our business and an increase in estimated trade inventory levels, both of which were affected by buy-ins in advance of price increases. Operating income was hurt by a stronger U.S. dollar and the absence of profits associated with the Hopland-based wine business, which was sold in April 2011.

                                             Change vs.
                                            Prior Period
· Underlying change in operating income         17%
· Estimated net change in trade inventories     12%
· Sale of Hopland-based wine business           (1%)
· Foreign exchange                              (9%)
    Reported change in operating income         19%

Net interest expense decreased by $2.5 million compared to a year ago due principally to the maturing of $250 million 5.2% 5-yr bonds which were repaid with cash on April 1, 2012.

The effective tax rate in the quarter was 32.1% compared to 34.0% reported in the first quarter of fiscal 2012. The decrease in our effective tax rate was driven by a reduction in tax expense related to discrete items arising during the period.

Reported diluted earnings per share of $0.69 for the quarter increased 27% from the $0.54 earned in the same prior year period. This improvement resulted from the same factors that contributed to the increase in operating income as well as a reduction in net interest expense and a lower effective tax rate as discussed above.

5 Depletions are shipments direct to retail or from distributors to wholesale and retail customers, and are commonly regarded in the industry as an approximate measure of consumer demand.

6 Constant currency represents reported net sales with the cost/benefit of currency movements removed. Management uses the measure to understand the growth of the business on a constant dollar basis, as fluctuations in exchange rates can distort the underlying growth of the business both positively and negatively.

Full-Year Outlook

Our fiscal 2013 full-year outlook, adjusted for the three-for-two stock split executed on August 10, 2012, remains unchanged from the earnings guidance provided in early June 2012 of $2.40 to $2.67 per diluted share. We remain cautious given the many uncertainties that we believe will influence our overall financial performance for the year, including the ongoing volatile macroeconomic conditions, particularly in Europe, and the resulting effect on consumer spending particularly, the effect that our recent price increases may have on the trade and the consumer buyer preferences, the continued success of recent innovation activities including the expansion of Jack Daniel's Tennessee Honey in select markets internationally, changes in distributor and retail inventory levels, and volatility in foreign exchange and commodity prices. We continue to anticipate underlying net sales and operating income growth in the high-single digits.

Liquidity and Financial Condition

Cash and cash equivalents increased $23.2 million during the three months ended July 31, 2012, compared to a decline of $14.6 million during the same period last year. Cash provided by operations was $87.6 million, up from $64.0 million for the same period last year, reflecting significantly higher earnings (excluding non-cash items) offset partially by a larger seasonal increase in working capital. Cash used for investing activities increased from last year by $3.8 million, primarily reflecting this year's $11.2 million increase in capital expenditures due primarily to investments to expand production capacity at Jack Daniel's Distillery and Sonoma-Cutrer offset partially by last year's first quarter $7.0 million acquisition of the Maximus brand name. Cash used for financing activities was $16.5 million less than last year, largely reflecting last year's acquisition of $18.4 million in treasury stock as part of a share repurchase program that expired in November 2011. The impact on cash and cash equivalents as a result of exchange rate changes was a decline of $2.3 million for the three months ended July 31, 2012, compared to a decline of $3.8 million for the same period last year.

We have access to several liquidity sources to supplement our cash flow from operations. Our commercial paper program, supported by our $800.0 million bank credit facility, continues to fund our short-term credit needs. We could also satisfy our liquidity needs by drawing on the bank credit facility (currently unused), which expires in November 2016. Under extreme market conditions, one or more participating banks may not be able to fully fund this credit facility. In addition to our cash flow from operations, we believe that the markets for investment-grade bonds and private placements are very accessible and provide a source of long-term financing that could provide for any additional liquidity needs.

We have high credit standards when initiating transactions with counterparties and closely monitor our counterparty risks with respect to our cash balances and derivative contracts (that is, foreign currency, commodity, and interest rate hedges). If a counterparty's credit quality were to deteriorate below our credit standards, we would either liquidate exposures or require the counterparty to post appropriate collateral.

We believe our current liquidity position is strong and sufficient to meet all of our financial commitments for the foreseeable future. Our $800.0 million bank credit facility's quantitative covenant requires our ratio of consolidated EBITDA (as defined in the agreement) to consolidated interest expense to be at least 3 to 1. At July 31, 2012, with a ratio of 32 to 1, we were within the covenant's parameters.

As of July 31, 2012, we had total cash and cash equivalents of $361.5 million. Of this amount, $257.4 million was held by foreign subsidiaries whose earnings we expect to reinvest indefinitely outside of the United States. We do not expect to need the cash generated by those foreign subsidiaries to fund our domestic operations. However, in the unforeseen event that we repatriate cash from those foreign subsidiaries, we would be required to provide for and pay U.S. taxes on permanently repatriated funds.

On July 26, 2012, our Board of Directors approved a regular quarterly cash dividend of $0.233 per share on Class A and Class B Common Stock. The dividend will be paid on October 1, 2012 to stockholders of record as of September 7, 2012.