Constellation Brands, Inc. — Q2 FY 2022 Form 10-Q
Reporting period: Three and six months ended August 31, 2021. Unaudited results; amounts in U.S. dollars unless noted. The company produces and markets beer, wine, and spirits and reports Beer, Wine and Spirits, Corporate Operations and Other, and Canopy segments.
Financial performance
| Metric | Q2 FY 2022 | Six months FY 2022 |
|---|---|---|
| Net sales | $2,371.1 million, up 5% year over year | $4,397.6 million, up 4% |
| Gross profit / margin | $1,229.7 million / 51.9%, versus $1,215.8 million / 53.8% | $2,349.0 million / 53.4%, versus $2,204.1 million / 52.2% |
| Operating income | $739.2 million, down 12% | $814.3 million, down 44% |
| Net income (loss) attributable to CBI | $1.5 million, versus $512.1 million | $(906.6) million, versus $334.2 million |
| Diluted EPS, Class A | $0.01, versus $2.62 | $(4.77), versus $1.71 |
| Operating cash flow | Not separately reported for the quarter in the supplied filing text | $1,525.9 million, versus $1,444.9 million |
Q2 Beer net sales rose 14%, primarily on Mexican beer volume growth and pricing. Wine and Spirits net sales fell 18%, reflecting divestitures, partly offset by organic growth. For the six months, Beer sales rose 14%; Wine and Spirits sales declined 20%, largely due to divestitures.
Cash, debt, and liquidity
- Cash and cash equivalents were $103.4 million at August 31, down from $460.6 million at February 28, 2021.
- Total debt, including $486.0 million of commercial paper, was $10,573.5 million. Long-term debt including current maturities was $10,087.5 million.
- Available capacity under the revolving credit facility was $1,501.8 million at August 31. Management said cash flow and borrowing capacity should be adequate for operating needs, debt service, dividends, buybacks, and planned capital spending.
- Six-month investing cash outflow was $377.1 million, including $353.4 million of property, plant, and equipment purchases. Financing cash outflow was $1,506.4 million, including $1,305.0 million of share repurchases and $289.3 million of dividends paid.
- The company issued $1.0 billion of 2.25% senior notes due 2031 and used proceeds and cash to redeem $1.2 billion of 2017 notes early, including a $26.6 million make-whole payment. It reported compliance with debt covenants.
Material changes and unusual items
- A $665.9 million impairment was recorded in the first quarter for Mexicali Brewery construction assets after the company concluded certain assets could not be used or repurposed. Construction remains suspended; recovery of costs is uncertain.
- Canopy-related fair-value losses on warrants and convertible debt were $1,335.1 million for the six months, materially weighing on reported earnings. The Canopy equity-method investment’s market value was $2,448.1 million, below its $2,580.2 million carrying value; the company did not conclude that the decline was other-than-temporary, but said future impairment is possible.
- Beer inventory obsolescence losses were $82.6 million for the six months, predominantly from excess hard seltzer inventory following a category slowdown.
- Q2 operating income was pressured by increased Beer marketing and administrative expenses, hard seltzer obsolescence, and lower Wine and Spirits sales after divestitures. Six-month operating income also reflected the Mexicali impairment.
- Recent Wine and Spirits divestitures reduced sales, while management said organic sales and volume improved. The company may receive up to $250 million of contingent consideration if specified brand targets are met over two years.
Outlook, commentary, and risks
- Management forecast a Fiscal 2022 reported effective tax rate of 82%–84%; this includes the Mexicali impairment and Canopy unrealized losses and excludes future changes in Canopy fair value and equity-method results.
- Management expected Beer product inventories to return to normal by fiscal year-end. It expected Wine and Spirits U.S. shipments and depletions to be generally aligned in the second half of FY 2022.
- The company’s strategy emphasizes premium beer, higher-margin wine and spirits, brand investment, and production capacity. Mexicali expansion plans remain uncertain; management is exploring alternative capacity options in Mexico.
- Key uncertainties include COVID-19 and variants, severe weather and wildfire effects, supply-chain and transportation constraints, consumer demand and inventory levels, Canopy’s market value and operating performance, and the outcome of discussions with Mexican government officials. Management cautioned that rising costs may not be fully passed through to customers.
- The company declared a quarterly dividend of $0.76 per Class A share and $0.69 per Class B and Class 1 share, payable November 19, 2021, subject to board approval and other factors. It expected to continue dividends and periodic repurchases, but neither is assured.
Most important facts for investors to verify
- Whether Beer growth and inventory availability continue, and whether hard seltzer obsolescence declines.
- Whether Wine and Spirits organic growth offsets divestiture-related revenue reductions and supply-chain costs.
- How Canopy’s share price and operating results affect fair-value losses, equity-method earnings, and potential impairment.
- Whether Mexicali assets yield any recoveries and what alternative Mexico capacity plans will cost.
- Cash generation, leverage, available revolver capacity, and the sustainability of buybacks and dividends given the company’s debt and liquidity position.