Constellation Brands, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended February 28, 2021. This is an annual filing, not a standalone 2020 fourth-quarter report. All amounts are U.S. dollars unless stated otherwise.
Business context
Constellation produces and markets beer, wine, and spirits, primarily in the U.S., with operations in Mexico, New Zealand, and Italy. Its reportable segments are Beer, Wine and Spirits, Corporate Operations and Other, and Canopy. Canopy is accounted for under the equity method; its full segment results are eliminated in consolidation.
Financial performance and liquidity
| Metric | FY2021 | FY2020 |
|---|---|---|
| Net sales | $8.615 billion | $8.344 billion |
| Gross profit / gross margin | $4.466 billion / 51.8% | $4.152 billion / 49.8% |
| Operating income | $2.791 billion | $2.155 billion |
| Net income (loss) attributable to CBI | $1.998 billion | $(11.8) million |
| Diluted EPS, Class A | $10.23 | $(0.07) |
| Cash from operating activities | $2.807 billion | $2.551 billion |
| Capital expenditures | $864.6 million | $726.5 million |
| Cash and cash equivalents at year-end | $460.6 million | $81.4 million |
| Total debt at year-end | $10.442 billion | $12.185 billion |
Cash flow from operations less capital expenditures was approximately $1.942 billion. The company reported $1.988 billion of remaining capacity under its $2.0 billion revolving credit facility and no short-term borrowings at year-end. Current assets were $3.045 billion and current liabilities were $1.269 billion. Interest expense was $385.7 million, down from $428.7 million.
Changes versus FY2020
- Consolidated net sales rose 3%. Beer sales increased 8% to $6.075 billion, supported by Mexican beer volume growth and pricing. Wine and Spirits sales fell 7% to $2.540 billion, reflecting divestitures and lower branded volume; favorable mix and pricing partly offset the decline.
- Operating income increased 30%, with stronger Beer results and substantially lower held-for-sale impairment charges than in FY2020.
- Net income swung from a small loss to a profit, principally because of an $802.0 million unrealized gain on Canopy securities in FY2021 versus a $2.126 billion unrealized loss in FY2020. Canopy-related equity losses were $679.0 million in FY2021.
- Beer shipment volume increased 7.3%; organic shipment volume increased 8.1%. Wine and Spirits organic shipment volume declined 4.9%.
- Operating cash flow increased $255.4 million. Debt decreased by approximately $1.742 billion, according to the MD&A.
Outlook, commentary, risks, and unusual items
- Management’s stated long-term priorities are sales growth, margin expansion, higher cash flow, earnings-per-share growth, maintaining a targeted leverage ratio, and shareholder returns. The filing does not provide specific consolidated sales or EPS guidance for FY2022.
- FY2022 capital expenditures were projected at $1.0–$1.1 billion, including approximately $900 million for Beer. Beer-project spending was expected to be approximately $700–$900 million annually in FY2023–FY2025, with planned Mexican capacity rising to about 54 million hectoliters by FY2025.
- After year-end, the board authorized selling or abandoning the suspended Mexicali Brewery. Management expected a first-quarter FY2022 impairment of approximately $650–$680 million; recovery of capitalized costs and other expenses was uncertain. Management said Nava and Obregon had adequate medium-term capacity under normal conditions.
- The 2020 U.S. wildfires affected grape supply and quality. The company recorded a $78.6 million inventory and grape write-down, partly offset by an $8.2 million insurance recovery; additional recovery was not assured.
- COVID-19 reduced on-premise activity and earlier constrained Mexican brewery production. Management said off-premise demand more than offset the on-premise decline, facilities were operating, and distributor inventories had returned to normal by year-end. The longer-term effects remained uncertain.
- Other key risks include dependence on Mexican beer brands and a small number of production facilities and glass suppliers; water, weather, agricultural and packaging supply risks; debt and interest-rate exposure; Canopy’s volatile valuation and cannabis regulatory uncertainty; and a lawsuit challenging use of the Corona name on Corona Hard Seltzer. The company said it believed the trademark lawsuit was without merit.
- Wine and Spirits divestitures generated proceeds, including $538.4 million net from the main divestiture and $129.0 million from Nobilo; up to $250 million of additional contingent consideration depended on brand performance targets. Paul Masson sale proceeds were $267.4 million. Proceeds were used for debt repayment and general corporate purposes.
- Reported FY2021 profit was materially affected by the Canopy fair-value gain, while FY2020 comparability was affected by a large Canopy-related loss and $449.7 million of held-for-sale impairments. FY2021 also included a $58.9 million Paul Masson sale gain and a $35.7 million loss on Wine and Spirits divestitures.
Important facts for investors to verify
- Underlying earnings and margins excluding Canopy fair-value movements, Canopy equity losses, divestiture gains or losses, impairment charges, and other comparable adjustments.
- Whether Beer volume growth and pricing can offset cost pressures, and whether Wine and Spirits performance stabilizes after divestitures and distributor transitions.
- The final Mexicali asset impairment, any recovery proceeds, and the timing, cost, and capacity implications of alternative Mexican brewery expansion plans.
- FY2022 capital spending, debt repayment, leverage, and liquidity against the stated investment and shareholder-return plans.
- Wildfire-related grape availability, quality, production effects, and any additional insurance recoveries; also the outcome of the Corona Hard Seltzer trademark litigation.
- Canopy’s operating performance and share-price volatility, including the potential effects of outstanding warrants and evolving cannabis laws.