Constellation Brands, Inc. — Q3 FY2022 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2021; comparisons are with the corresponding 2020 periods. Amounts are U.S. dollars unless stated otherwise. The company produces and markets beer, wine, and spirits and reports Beer, Wine and Spirits, Corporate Operations and Other, and Canopy segments.
Financial results
| Metric | Three months ended Nov. 30, 2021 | Three months ended Nov. 30, 2020 | Nine months ended Nov. 30, 2021 | Nine months ended Nov. 30, 2020 |
|---|---|---|---|---|
| Net sales | $2,320.6 million | $2,438.1 million | $6,718.2 million | $6,661.9 million |
| Gross profit | $1,225.7 million | $1,268.2 million | $3,574.7 million | $3,472.3 million |
| Gross margin | 52.8% | 52.0% | 53.2% | 52.1% |
| Operating income | $839.9 million | $783.1 million | $1,654.2 million | $2,231.8 million |
| Net income (loss) attributable to CBI | $470.8 million | $1,280.9 million | $(435.8) million | $1,615.1 million |
| Diluted EPS, Class A | $2.48 | $6.55 | $(2.31) | $8.28 |
| Cash from operating activities | Not stated for the quarter | Not stated for the quarter | $2,444.1 million | $2,363.6 million |
- Quarterly changes: Net sales declined 5%, primarily as divested Wine and Spirits businesses reduced sales, partly offset by Beer growth. Operating income increased 7%; management cited Beer performance, lower marketing and compensation costs, and favorable comparable adjustments. Attributable net income fell substantially, chiefly because Canopy-related fair-value results shifted from a large gain to a loss.
- Nine-month changes: Net sales rose 1%, as Beer growth was largely offset by divestitures. Operating income fell 26%, including a $665.9 million Mexicali Brewery impairment. The company reported a net loss, mainly reflecting a $1,534.8 million unrealized loss on Canopy securities, the brewery impairment, and lower Wine and Spirits sales after divestitures.
- Segment trends: Quarterly Beer sales increased 4%; nine-month Beer sales increased 10%, supported by shipment growth and pricing. Wine and Spirits sales declined 25% for the quarter and 22% for nine months, primarily due to divestitures; organic sales increased in both comparisons. Nine-month Beer costs rose, including an $85.2 million inventory write-down predominantly tied to excess hard-seltzer inventory.
Cash, debt, and liquidity
- Operating cash flow was $2,444.1 million for the nine months, versus $2,363.6 million a year earlier. Capital expenditures were $598.7 million; investing cash use was $674.2 million.
- Cash and equivalents were $361.3 million at November 30, 2021, down from $460.6 million at February 28, 2021. Current assets were $3,376.6 million and current liabilities $2,248.6 million.
- Total debt was $10,332.5 million, including $243.0 million of commercial paper; long-term debt, including current maturities, was $10,089.5 million. Available revolving capacity was $1,744.8 million. The company reported compliance with its debt covenants.
- The company issued $1.0 billion of 2.25% senior notes due 2031 and used the proceeds, together with cash, to redeem $1.2 billion of 2017 notes early; the make-whole payment was $26.6 million. Nine-month financing included $1,390.5 million of share repurchases and $430.5 million of dividends paid.
Outlook, commentary, and risks
- Management expected Fiscal 2022 capital expenditures of $1.0–$1.1 billion, including approximately $900 million for Beer. Beer-segment capital spending was projected at $5.0–$5.5 billion for Fiscal 2023–2026, intended to add 25–30 million hectoliters of capacity, including a Southeast Mexico brewery and work at existing Mexican breweries.
- Management forecast a Fiscal 2022 reported effective tax rate of 87%–89%. This unusually high range includes the Mexicali impairment, stock-based compensation tax benefits, and Canopy-related losses; it excludes any future Canopy fair-value or equity-method changes that could not then be estimated.
- The Mexicali construction project remained suspended after a negative public consultation. The company wrote down affected assets to estimated salvage value and said recovery of costs was uncertain. It was exploring other Mexican capacity options and said existing Nava and Obregon capacity could meet medium-term needs under normal conditions.
- Management cited inflation, higher material and transportation costs, global shipping delays, port congestion, and brown-glass shortages. It aimed to pass rising costs through pricing and pursue savings, but gave no assurance these would fully offset cost increases. COVID-19 impacts, consumer demand, supply conditions, and Canopy’s valuation and results remain uncertain.
- The company said Beer shipments had exceeded depletions in the quarter as it replenished inventories, which it expected to return to more normal levels by Fiscal 2022 year-end. It also expected U.S. Wine and Spirits shipments to outpace depletions for Fiscal 2022.
- Subsequent developments disclosed included a December 2021 FRESCA alcoholic ready-to-drink authorization agreement with Coca-Cola and acquisition of a wine and spirits distribution facility in Lodi, California. The company also acquired the remaining 65% of My Favorite Neighbor in November 2021.
Key facts investors should verify
- How much of the reported earnings volatility is noncash Canopy fair-value movement, and what assumptions underpin the investment’s carrying value and impairment assessment?
- Whether Beer demand, shipment-versus-depletion trends, hard-seltzer inventory levels, and supply-chain constraints develop as management expects.
- Execution, cost, timing, and potential further impairment or recoveries related to Mexico brewery capacity plans and the suspended Mexicali project.
- Whether pricing and cost-saving actions offset inflation, transportation, packaging, and other input-cost pressures.
- Progress against the capital-spending plan, leverage and liquidity needs, and the assumptions behind the Fiscal 2022 tax-rate outlook.
- Whether Wine and Spirits organic growth and any contingent consideration from prior divestitures offset the continuing impact of the sold businesses.