Constellation Brands, Inc. — Form 10-Q Summary
Business context and reporting period. Constellation Brands is an international beverage alcohol company focused on high-end imported and craft beer and premium wine and spirits. This filing covers the three months ended May 31, 2017, the company’s fiscal first quarter of fiscal 2018; comparisons are with the three months ended May 31, 2016. The company reports Beer, Wine and Spirits, and Corporate Operations and Other segments.
Financial performance
| Metric | Three months ended May 31, 2017 | Prior-year period |
|---|---|---|
| Net sales | $1,935.5 million | $1,871.8 million |
| Gross profit / gross margin | $995.3 million / 51.4% | $881.3 million / 47.1% |
| Operating income | $568.1 million | $552.7 million |
| Net income attributable to CBI | $402.8 million | $318.3 million |
| Diluted EPS, Class A | $2.00 | $1.55 |
| Operating cash flow | $381.6 million | $345.9 million |
| Capital expenditures | $217.1 million | $169.4 million |
- Net sales rose 3%; operating income rose 3%, while net income attributable to CBI increased 27% and diluted Class A EPS increased 29%.
- Beer sales increased 8% to $1,242.3 million; shipment volume rose 7% and depletion volume rose 11.6%. Beer segment operating income was $500.6 million, up 22%.
- Wine and Spirits sales declined 4% to $693.2 million. Wine sales fell 6%, partly offset by spirits growth of 14%. Segment operating income increased 22% to $205.6 million.
- Gross margin expanded 4.3 percentage points, driven mainly by lower Mexican beer costs, pricing, product mix, and portfolio changes. SG&A increased 30% to $427.2 million, including an $86.8 million trademark impairment.
- Cash and equivalents were $199.1 million at May 31. Current assets were $3,360.5 million and current liabilities $2,182.4 million. Total debt, including notes payable, was $9,211.5 million, down $26.6 million from February 28, 2017.
- Net cash used in investing was $221.3 million, primarily reflecting capital spending. Financing used $141.6 million, including substantial debt repayments, partly offset by new debt issuance and increased short-term borrowings.
Material changes and unusual items
- The company recorded an $86.8 million impairment on Ballast Point craft beer trademarks, reducing their carrying value from $222.8 million to $136.0 million. Management cited weaker sales and depletion trends, disruption to a distribution transition, disappointing innovation sales, slower craft-beer industry growth, and increased competition.
- Comparable adjustments were a net negative $107.4 million, versus a positive $4.0 million a year earlier. They included the trademark impairment, $3.2 million of Canadian divestiture-related costs, acquisition-related costs, commodity-derivative effects, and a $6.7 million write-off of debt issuance costs. These items weigh on comparability of reported operating results.
- The May 2017 issuance of $1.5 billion in senior notes (2.70%, 3.50%, and 4.50%, due 2022, 2027, and 2047) helped fund repayment of $700 million of older notes and term-loan obligations. The company also repaid its U.S. Term A loan facility, using revolver borrowings for part of the repayment.
- The Canadian wine business was divested in December 2016. Its absence reduced current-period Wine and Spirits sales by $89.6 million versus the prior comparable period; acquired brands and organic growth partly offset the effect.
- The effective tax rate fell to 15.5% from 31.9%, aided by foreign tax-rate effects, the company’s indefinite-reinvestment assertion for certain foreign earnings, and newly adopted share-based compensation tax accounting. The adoption contributed $32.5 million of excess tax benefits to the tax provision and reduced diluted EPS by $0.02 under the revised share-count calculation.
Outlook, commentary, and risks
- No specific full-year earnings or revenue guidance is provided in the filing. Management expects Beer shipment growth to be generally aligned with depletion growth for fiscal 2018; Wine and Spirits shipments are also expected to align with depletions over the year after first-quarter timing effects.
- Management expects Mexican beer cost benefits to lessen as depreciation and brewery compensation rise with expansion. It also expects Wine and Spirits pricing benefits to moderate as promotional spending increases.
- The company says operating and financing cash flows, including short-term borrowing capacity, should adequately support working capital, scheduled debt service, dividends, and planned capital expenditures, absent deterioration in market conditions. It was in compliance with debt covenants at May 31, 2017.
- Available borrowing capacity at May 31 included $627.5 million under the revolving credit facility, $101.8 million under the CBI receivables facility, and $4.0 million under the Crown facility. The filing also describes significant brewery and glass-plant expansion activity, but does not provide a single consolidated estimate of future spending here.
- Key risks include beer and wine demand differing from expectations, craft-beer competition and portfolio performance, execution and cost of brewery expansion, foreign-exchange and commodity-price movements, interest rates, and access to financing. Management hedged about 71% of identified foreign-currency exposures and 64% of forecast commodity exposures for the remaining nine months of fiscal 2018.
- The board declared a quarterly dividend of $0.52 per Class A share and $0.47 per Class B and Class 1 share, payable August 23, 2017, subject to the stated conditions. The company had repurchased $453.1 million of shares under its $1.0 billion authorization as of May 31.
Most important facts for investors to verify
- Whether Beer depletion growth, shipment growth, and Mexican brewery capacity additions remain aligned as the fiscal year progresses.
- Whether Ballast Point sales and depletion trends stabilize, and whether trademark valuation assumptions lead to further impairment.
- How much reported earnings growth reflects underlying operations versus the lower tax rate, acquisitions, divestiture effects, and comparable adjustments.
- Debt, revolver and receivables-facility usage, covenant headroom, and planned capital spending as expansion projects proceed.
- Whether Wine and Spirits organic growth offsets the Canadian divestiture and the anticipated increase in promotional spending.