The following information should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions, which could cause actual results to differ materially from management's expectations. Please see the "Disclosure Regarding Forward-Looking Statements" section in Part I, Item 1 of this report and the "Risk Factors" section in Part I, Item 1A of this report.

We are a leading premium spirits company that makes and sells branded distilled spirits products in major markets worldwide. Our principal products include bourbon whiskey, tequila, Scotch whisky, Canadian whisky, vodka, cognac, rum, cordials, and ready-to-drink pre-mixed cocktails. Our diverse portfolio includes several of the world's top premium spirits brands. As further described in the notes to the consolidated financial statements included in this Form 10-K, discontinued operations include the former Fortune Brands Golf and Home & Security segments, both of which were disposed of in 2011.

Our portfolio consists of brands we identify as Power Brands, Rising Stars, Local Jewels, and Value Creators. The Power Brands are our core brand equities, with global reach in premium categories and large annual sales volume. Rising Stars are smaller premium brands in priority markets that we believe have excellent growth profiles and receive substantial brand investment to drive expansion. Brands identified as Local Jewels act as Power Brands in local markets. Value Creators include a variety of brands providing scale and profit across multiple categories. Power Brands, Rising Stars, and combined Local Jewels/Value Creators (including non-branded sales) represent approximately 60%, 15%, and 25%, respectively, of our net sales. Our Power Brands and Rising Stars, which are the focus of our brand investment, are listed below.

Power Brands:     Jim Beam Bourbon, Maker's Mark Bourbon, Sauza Tequila,
                  Courvoisier Cognac, Canadian Club Whisky, Teacher's Scotch, and
                  Pinnacle Vodka

Rising Stars:     Laphroaig Scotch, Knob Creek Bourbon, Basil Hayden's Bourbon,
                  Kilbeggan Irish Whiskey, Cruzan Rum, Hornitos Tequila, Skinnygirl
                  Cocktails, and Sourz Liqueurs

The principal markets for our spirits products are the United States, Australia, Germany, Spain, the United Kingdom, and Canada, and we continue to invest in emerging markets such as India, Brazil, Mexico, Russia, Central Europe, Asia, and other geographies. We operate our business on the basis of geographical regions, consisting of North America, Europe/Middle East/Africa ("EMEA"), and Asia-Pacific/South America ("APSA").

EXECUTIVE SUMMARY

Operational and Financial Highlights for 2012

Operational and financial highlights for the year ended December 31, 2012 include the following:

• Our diluted earnings per share from continuing operations were $2.48 in 2012 compared with $0.85 per share in 2011. The year-over-year improvement in earnings per share is largely attributable to significant nonrecurring costs incurred in 2011 due to the Separation Transactions (as noted below). In addition, our results in 2012 benefited from our operating strategy (Create Famous Brands, Building Winning Markets, and Fueling Our Growth) as well as from acquisitions completed in 2012. Our results included an 11% increase in advertising and marketing expenditures as well as higher investment in aging spirits inventory, production capacity, and innovation capability to support future profitable growth;

• Our net sales increased 7% (6% on a comparable basis), exceeding the growth of our global market, which we estimate grew approximately 3% in value in 2012. The comparable net sales growth was driven by our Power Brands and Rising Stars, benefiting from strong demand for bourbon and growth in core markets, including the United States, Australia, and Germany, as well as in emerging markets;

• Strategies to Create Famous Brands, which resulted in record new product innovations (such as Red Stag Honey Tea, Red Stag Spiced, Jim Beam Devil's Cut, Jim Beam Honey, and Skinnygirl Wine, Vodka, and Piña Colada Ready-to-Serve), higher pricing in select categories, and favorable price/mix, contributed to net sales growth and faster operating income growth;

• Strategies to Build Winning Markets resulted in enhanced distribution capability in many countries, such as Australia, China, and Mexico, which also contributed to net sales growth and faster operating income growth;

• Strategies to Fuel Our Growth, such as the consolidation of our U.S. bottling facilities into our expanded center of excellence in Frankfort, Kentucky and our "Design to Value" program that focuses on brand attributes consumers value, led to substantial cost savings that largely offset the impact of higher raw material related costs and contributed to increased gross margin;

• We completed the acquisition of the Pinnacle Vodka brand and related assets (the "Pinnacle assets") to create shareholder value by driving cost and revenue synergies while enhancing our participation in the premium vodka category. We also entered the Irish whiskey category with the acquisition of Cooley Distillery ("Cooley");

• We issued long-term debt with an aggregate principal amount of $600 million to fund our acquisition of the Pinnacle assets; and

• In January 2012, we increased our quarterly dividend 8% to 20.5 cents per share of common stock (and we subsequently increased our quarterly dividend 10% to 22.5 cents per share of common stock in January 2013, beginning with the March 1, 2013 dividend payment).

Certain items had a significant impact on our financial results in 2012, 2011, and 2010. These include the impact of the Separation Transactions completed in 2011, changes in foreign currency exchange rates, acquisition related items, restructuring and other related charges and income tax related matters.

In 2012, our financial results include the following:

• Acquisition /integration charges of $22 million ($17 million net of tax, or $0.11 per share) related to the acquisition and integration of the Pinnacle assets and Cooley. The 2012 acquisition related adjustments impacting SG&A expense consist of: transaction-related expenses of $5 million, contract termination expenses of $10 million and integration related expenses of $2 million. In addition, acquisition related adjustments include amounts charged to costs of goods sold ($1 million) and restructuring charges ($3 million) that primarily relate to accelerated depreciation and employee retention. Income tax expense includes the tax benefit related to these charges, partially offset by tax on earnings distributed within certain of Beam's foreign tax jurisdictions incurred in connection with funding a portion of the capital requirement for Cooley ($5 million);

• Other SG&A charges of $4 million associated with our internal review with respect to our India operation;

• Business separation costs of $14 million ($9 million net of tax, or $0.05 per share) primarily related to a $15 million pension settlement charge associated with a required $29 million lump sum distribution of benefits paid to former Fortune Brands, Inc. executives in July 2012 in connection with the Separation Transactions completed in 2011;

• Asset impairment charges of $16 million ($11 million net of tax, or $0.07 per share) related to the Larios tradename (Spain);

• Other income benefited from a nontaxable indemnification payment of $18 million (or $0.11 per share) received from Pernod Ricard S.A. ("Pernod Ricard") for resolution of certain tax matters for years prior to our ownership of the businesses and a nontaxable distribution from our former Maxxium investment of $2 million ($0.01 per share);

• Income tax expense benefits of approximately $33 million (or $0.20 per share) that primarily included a $22 million net foreign tax credit related to the repatriation of current year earnings, a $17 million net benefit arising from the resolution of certain foreign and U.S. federal and state tax audit matters, and $6 million of expense primarily related to our annual reconciliation of the 2011 income tax filing to the 2011 provision for income taxes; and

• As compared with 2011, foreign exchange translation rates and hedge results had an unfavorable $32 million impact on net sales and a favorable $9 million impact on operating income.

In 2011, our financial results included the following:

• Business separation costs of $84 million ($68 million net of tax, or $0.43 per share) incurred in connection with the Separation Transactions, principally transaction and professional advisory fees, severance and other employee related costs;

• Corporate and other general and administrative overhead costs related to the former Fortune Brands, Inc. management structure through the Spin-Off (October 3, 2011) of $61 million ($38 million net of tax, or $0.24 per share);

• Acquisition related contingent consideration of $28 million ($17 million net of tax, or $0.11 per share) recorded based on the actual and forecasted performance of the Skinnygirl business, which we acquired in 2011;

• Higher net sales of $46 million and operating income of $24 million ($17 million net of tax, or $0.10 per share) related to the one-time sale of product recorded in connection with our transition to a new long-term distribution agreement in Australia;

• A favorable impact of foreign exchange compared to 2010 of $64 million on net sales and $16 million on operating income ($11 million net of tax, or $0.07 per share);

• Asset impairment charges of $31 million ($22 million net of tax, or $0.14 per share) related to the DYC and Larios tradenames (Spain);

• Other income benefited from a nontaxable distribution from our Maxxium investment of $10 million ($0.06 per share) and nontaxable income tax indemnification payments of $27 million ($0.17 per share) from Pernod Ricard related to foreign tax jurisdictions for periods prior to our ownership of the businesses;

• Loss on early extinguishment of debt of $149 million ($96 million net of tax, or $0.61 per share); and

• Income tax expense was impacted by the tax effects of the significant items described above and the impact of tax assessments associated with the resolution of routine foreign and US income tax audit examinations, including an unfavorable $26 million related to Mexican tax audits and a favorable $19 million related to Germany tax audits.

In 2010, our financial results include the following:

• Business separation costs of $2 million (or $0.01 per share) incurred in connection with the Separation Transactions principally for transaction and professional advisory fees;

• Corporate and other general and administrative overhead costs related to the former Fortune Brands, Inc. management structure of $86 million ($55 million net of tax, or $0.36 per share);

• Restructuring and other related charges of $26 million ($17 million net of tax, or $0.11 per share) primarily related to a facility consolidation and other supply chain and distribution cost reduction initiatives in North America as well as other organizational streamlining initiatives;

• Loss on the sale of certain non-strategic brands in Germany and the Cockburn's port brand of $16 million ($19 million net of tax, or $0.12 per share);

• Other income benefited from nontaxable income tax indemnification payments of $37 million related to foreign tax jurisdictions for periods prior to our acquisitions of the business; and

• Income tax expense was impacted by the tax effects of the significant items described above and a favorable $46 million related to tax assessments associated with the resolution of routine foreign and U.S. income tax audit examinations.

Business Outlook

We believe that the long-term demographic trends are favorable for the continued profitable growth of western premium spirits globally. While we estimate our global spirits market will again grow value by approximately 3% in 2013, supported by continued growth in the U.S. and emerging markets, the potential for slower growth in Western Europe and emerging economies could adversely impact trading conditions. In addition, in 2013 we expect another year of higher raw material-related costs (mostly offset by cost savings), limited opportunities to increase pricing, and year-over-year declines in our India operation through the third quarter as we reposition the business there (India comprised 2% of

total 2012 net sales, and less than 2% of total 2012 operating income; see Note 18, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for more information). We believe that the continued management and investment focus on the best growth and return opportunities in our brand portfolio and geographic markets, including innovation, advertising and more effective routes to market, position us well for growth in 2013 and over the long term. In 2013, we also expect to benefit from the carry-over benefit of 2012 price increases, above-market growth of the bourbon category globally, our efficiency and effectiveness agenda, and from the full-year benefit of 2012 acquisitions, including cost synergies and enhanced distribution.

Please see "Forward-Looking Statements" for a discussion of certain factors that may cause our actual results to vary materially from those expected as of the date of the filing of this report.

RESULTS OF OPERATIONS

Presentation Basis and Non-GAAP Measures

Volume is measured on a nine liter equivalent unit basis. We divide ready-to-drink cases by 10 to obtain a nine liter case equivalent.

Price/mix is the number of percentage points by which the comparable net sales changes exceeds the change attributable to volume. The difference arises because of changes in the composition of sales between higher and lower priced brands or from price changes.

Comparable net sales growth rate is a non-GAAP measure that we use to evaluate our sales growth on a year-over-year basis exclusive of certain items that are not indicative of the underlying sales performance of our business. To calculate comparable net sales, our GAAP net sales growth rates are adjusted for the impact of foreign exchange, acquisitions/divestures, and the impact of transitioning in 2011 to a new manufacturing and distribution model in Australia.

In calculating comparable net sales, the acquisition/divesture impact is determined by comparing our actual reported revenue in the current period, including revenue attributable to acquired companies, with adjusted revenue from the prior-year period. In arriving at adjusted prior-year revenue, we include the revenue of acquired companies and remove the revenue of divested companies for the prior-year periods comparable to the current-year periods for which the companies are included in our actual reported revenue. The foreign exchange impact is calculated by translating current year results at prior year exchange rates and excluding hedge impacts.

Approximately 45 percent of our business was outside the U.S during 2012. As a result, changes in foreign exchange rates can have a significant impact on our reported results of operations when translated and presented in U.S. dollars. Our discussion of results of operations by segment includes the use of "constant currency" net sales and operating income, non-GAAP measures which exclude the impact of foreign exchange translation. Management believes these measures are useful for evaluating performance, as fluctuations in exchange rates can impact the underlying year-over-year growth rates of the segments.

Comparable net sales and constant currency net sales and operating income (by segment) are measures that may not be comparable to similar measures used by other companies. These measures should not be considered in isolation or as a substitute for any measure derived in accordance with GAAP.

Consolidated Results for 2012 Compared to 2011

Net sales

The following table presents a reconciliation of GAAP net sales growth to
comparable net sales growth for 2012 as compared to 2011:



                                                       Consolidated
                                                     Net Sales Growth
          Net sales growth (GAAP)                                    7 %
          Foreign exchange rates (a)                                 1 %
          Acquisitions/divestitures (a)                             (4 )%
          Australia distribution one-time sale(a)                    2 %

          Comparable net sales growth (Non-GAAP)                     6 %

(a) See "Presentation Basis and Non-GAAP Measures" above for a description of these adjustments.

GAAP net sales increased $155 million, or 7%, from $2,311 million in 2011 to $2,466 million in 2012. The 7% increase in GAAP net sales in the 2012 period was primarily due to the benefit of sales from the Pinnacle assets and Cooley (4%), which were acquired in 2012, partially offset by the impact of the 2011 one-time sale of inventory related to transitioning to our new long-term distribution agreement in Australia in 2011 (2%) and an adverse impact from foreign exchange rate fluctuations (1%), which is discussed in segments results of operations below. The increase in comparable net sales was primarily due to the impact of higher volumes (3%), favorable mix (2%), and favorable price (1%) in 2012 as compared to 2011. Higher volumes were primarily due to strong growth for Jim Beam, reflecting higher sales for Jim Beam White as well as the brand's premium innovations such as Red Stag, Jim Beam Honey, and Devil's Cut, in addition to comparable sales growth for our Pinnacle Vodka, Maker's Mark, Courvoisier, and Skinnygirl brands. Favorable mix was due to the impact of innovations and premiumization on our product portfolio. The price benefit in 2012 was due to targeted price increases for certain brands and markets such as Jim Beam and Maker's Mark in the U.S. as well as Courvoisier in Asia and Travel Retail. The comparable net sales increase of 6% was driven by net sales growth in all three of our segments as described below.

Cost of goods sold

The $40 million, or 4%, increase in cost of goods sold in 2012 was largely due to the impact of acquisitions (approximately $55 million) and increased organic sales as described above, partially offset by a year-over-year benefit from foreign currency ($30 million) and the transition to our new long-term manufacturing and distribution agreement in Australia, including the prior year impact of a one-time sale of inventory ($23 million). The impact of higher raw material-related costs and inflation (approximately $35 million) was largely offset by savings from our organizational streamlining and cost sourcing/saving initiatives. For 2013, we expect our net increases in raw material-related costs to be likely in the range of $35 million, impacted by bottling and selling bourbon that was barreled at a time when corn prices were higher four to five years ago. Gross profit percentage margin increased approximately 100 basis points in 2012 compared to 2011 largely due to the absence of the low margin one-time sale in 2011 related to our Australia distribution change described above, as well as reflecting the benefit of price/mix and accretive innovations.

Advertising and marketing expense

The $40 million increase in advertising and marketing expense in 2012 was primarily due to the expansion of successful innovations and equity building programs related to our Power Brands and Rising Stars. Advertising and marketing expense as a percentage of net sales increased from 15.5% to 16.2% in 2012.

Selling, general and administrative expense

Selling, general and administrative expense decreased $17 million in 2012, primarily due to lower Beam standalone-company costs as compared to the former Fortune Brands, Inc. corporate cost structure ($36 million), the absence of $28 million of acquisition-related charges that were incurred in the prior-year period in connection with contingent consideration related to the Skinnygirl acquisition, and a favorable foreign currency impact ($5 million). These benefits in 2012 were partially offset by inflation and increased selling costs to drive higher sales, acquisition and integration-related costs of $17 million (contract termination expenses of $10 million, transaction-related expenses of $5 million, and integration related expenses of $2 million) in connection with the acquisition of the Pinnacle assets and Cooley as well as approximately $4 million of charges associated with our internal investigation with respect to our India operations. Refer to Note 21, Segment Information, to our financial statements included in this report for more information on estimating standalone corporate cost structure.

The following table summarizes information related to certain of our operating expenses as a percentage of net sales:

                                                                                               Favorable (Unfavorable)
                                               2012                     2011                           change
                                                      % of                    % of
                                                      net                     net                                    basis
($ in millions)                            $         sales          $        sales          $            %           points
Cost of goods sold                       1,027.5       41.7 %      987.8       42.7 %      (39.7 )       (4.0 )%         100
Advertising and marketing expense          398.7       16.2 %      358.7       15.5 %      (40.0 )      (11.2 )%         (70 )
Selling, general, and administrative
expense                                    412.9       16.7 %      430.0       18.6 %       17.1          4.0 %          190

Business separation costs

We recorded $14 million and $84 million of business separation costs in the years ended December 31, 2012 and 2011, respectively. Business separation costs in 2012 primarily consist of a $15 million pension settlement charge associated with a required $29 million lump sum distribution of benefits paid to former Fortune Brands executives in July 2012, partially offset by a decrease in accrued liabilities for estimated costs to complete the Separation Transactions. Business separation costs in 2011 consisted of $44 million of financial, legal, and other advisory fees related to the Separation Transactions, as well as $40 million of employee-related costs primarily related to termination benefits.

Restructuring charges

In 2012, restructuring charges of $4 million primarily related to the relocation of certain U.S. finance and human resource shared services from our Deerfield headquarters to Kentucky and the ongoing integration of the Pinnacle assets, which includes our plans to move Pinnacle bottling operations from Maine to our existing facilities in Kentucky in early 2014. In 2011, restructuring charges of $8 million primarily related to distribution and supply-chain initiatives, facility consolidations, and organizational streamlining initiatives. The Company employed lean techniques throughout the organization to meet its goal of achieving 1-2% annual improvement before inflation in our total cost of goods sold and selling, general and administrative expenses.

We expect that future cash charges related to the integration of the Pinnacle assets to be approximately $5 million. Actual costs may vary from these estimates depending on the timing and extent of the initiatives we implement and other factors.

Asset impairment charges

In 2012, we recorded an impairment charge of $16 million to reduce the Larios tradename to an estimated fair value of $55 million. The impairment was primarily due to lower projected future revenue for this brand as compared to the projected revenues estimated during the impairment test conducted during the fourth quarter of 2011. Factors that contributed to lower revenue projections included a comparison of actual results for 2012 against our 2012 outlook, continued economic challenges in the Spanish market, and the current competitive outlook within the spirits category in which the tradename competes, among other factors.

In 2011, we recorded a non-cash impairment charge of $31 million to reduce the DYC and Larios tradenames to their estimated fair value in December 2011. The asset impairments were due to the combined effect of the economic downturn on sales in key geographic markets (principally Spain), as well as the effect of substantially higher interest rates.

Refer to "Critical Accounting Policies and Estimates - Intangible Assets" below, Note 12, Goodwill and Other Intangible Assets, and Note 15, Fair Value Measurements, of the Notes to the Consolidated Financial Statements in Part II, Item 8 of this report for more information.

Operating income

Operating income increased $180 million, or 46%, from $396 million in 2011 to $576 million in 2012. The increase in operating income was primarily due to lower business separation, acquisition, and restructuring and other charges/gains (collectively, approximately $93 million), lower Beam corporate cost structure as compared to the Fortune Brands, Inc. cost structure ($36 million), lower intangible asset impairment charges ($15 million) and increased gross profit ($115 million) from higher sales, which were driven by volume, mix, and price as described above. The increase in operating income in 2012 was also due to a $9 million favorable impact from changes in foreign currency rates and related hedge impacts. These benefits were partially offset by increases in advertising and marketing and selling, general and administrative expenses (excluding the Fortune Brands cost structure impact and other charges/gains noted above) and the absence of $24 million of gross profit from the one-time sale of inventory related to our Australia distribution change in 2011.

Interest expense

Interest expense decreased $8 million, or 7%, from $117 million in 2011 to $109 million in 2012 due to lower average borrowings, principally due to debt reduction of approximately $2.3 billion during 2011 related to the Separation Transactions as well as additional debt reductions from scheduled debt payments . . .