Constellation Brands, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended February 28, 2022, compared primarily with fiscal 2021. The filing also reports the quarter ended February 28, 2022. Amounts are U.S. dollars.
Business context
Constellation produces and markets beer, wine, and spirits, principally in the U.S., with production operations in the U.S., Mexico, New Zealand, and Italy. Its strategy emphasizes premium brands, beer capacity expansion, and higher-end wine and spirits; it also holds a significant, non-controlling investment in Canopy Growth.
Financial performance
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Net sales | $8.821 billion | $8.615 billion | +2% |
| Gross profit | $4.707 billion | $4.466 billion | +5% |
| Gross margin | 53.4% | 51.8% | +1.6 percentage points |
| Operating income | $2.332 billion | $2.791 billion | -16% |
| Net income (loss) attributable to CBI | $(40.4) million | $1.998 billion | Declined |
| Operating cash flow | $2.705 billion | $2.807 billion | -4% |
| Capital expenditures | $1.027 billion | $864.6 million | Increased |
Beer sales increased 11% to $6.752 billion, driven by shipment growth and pricing; Beer segment operating income rose 8% to $2.703 billion. Wine and Spirits sales fell 19% to $2.069 billion, mainly reflecting prior-year divestitures; organic sales increased $171.1 million. Wine and Spirits segment operating income declined 24% to $470.7 million.
Cash and cash equivalents were $199.4 million at year-end. Total debt outstanding was approximately $10.4 billion, including $323.0 million of short-term borrowings. Remaining revolving-credit capacity was $1.665 billion at February 28, 2022. The company reported compliance with debt covenants. Dividends paid were $573.0 million, and it repurchased $1.391 billion of stock during the year.
For the quarter ended February 28, 2022, net sales were $2.103 billion and net income attributable to CBI was $395.4 million, versus $1.953 billion and $382.9 million, respectively, in the prior-year quarter.
Material changes and unusual items
- Results included a $1.645 billion unrealized loss on Canopy securities measured at fair value, compared with an $802.0 million gain in FY2021. Canopy-related equity-method losses were $73.6 million, versus $679.0 million in FY2021.
- A $665.9 million impairment was recorded on Mexicali Brewery construction assets after the company determined certain assets could not be used or repurposed. Management is pursuing possible recovery, but no recovery is assured.
- Higher Beer operating costs included inflation in materials, utilities, compensation, and depreciation, as well as $78.2 million of hard-seltzer inventory obsolescence. Global freight and port constraints also raised costs and affected inventory availability.
- The effective tax rate was 99.7%, versus 20.1% in FY2021, principally reflecting valuation allowances related to Canopy fair-value losses and other tax factors. The rate was therefore unusually high relative to the company’s stated forward expectation.
Outlook, risks, and contingencies
- Management expects FY2023 capital expenditures of $1.3–$1.4 billion, including approximately $1.2 billion for Beer, largely Mexico Beer Projects. It expects $5.0–$5.5 billion of Beer-project spending over FY2023–FY2026, with most in the first three years, and Mexican capacity growth to approximately 64–69 million hectoliters by FY2026.
- Management expects a FY2023 reported effective tax rate of 19%–21%, excluding uncertain future Canopy fair-value and equity-method effects. It expects to return approximately $600 million to shareholders through dividends in FY2023.
- Management’s long-term financial model targets sales growth, margin expansion, and increased cash flow. It intends to address inflation through pricing and cost savings, but cautions it may not fully offset higher costs. Consumer discretionary spending, supply constraints, and transportation disruptions may affect results.
- Key exposures include water availability and climate events; reliance on a small number of Mexican breweries and glass suppliers; inflation and supply-chain disruption; and customer/distributor concentration. The Reyes Beer Division entities represented 21.0% of sales and Southern Glazer’s Wine and Spirits 14.4%.
- The company continues discussions with Mexican officials about the suspended Mexicali project and alternatives for future capacity. Canopy’s carrying value exceeded its estimated fair value by approximately $1.489 billion; management concluded no other-than-temporary impairment existed at year-end, but warned an impairment may occur if Canopy’s value does not recover.
- A lawsuit challenges use of Corona and Modelo trademarks on certain newer products; the company says it believes the suit is without merit. In April 2022, the Sands family proposed converting each Class B share into 1.35 Class A shares; a special committee was evaluating the proposal, which was not assured to proceed.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls were effective.
Most important facts for investors to verify
- Whether core Beer growth and pricing continue to offset cost inflation, hard-seltzer inventory charges, and supply constraints.
- Progress, capital spending, timing, and returns on Mexico brewery expansion, and any recovery from the Mexicali impairment.
- Canopy’s market value, operating performance, and impairment outlook, including the effect of its volatility on reported earnings.
- Wine and Spirits organic growth and margins after divestitures, including distribution transition and freight-cost effects.
- Liquidity and debt service capacity alongside planned capital expenditures, dividends, and share repurchases.
- Any material developments in the trademark litigation, Sands family share-class proposal, and contingent divestiture consideration.