Constellation Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 third quarter and nine months ended November 30, 2019. Dollar amounts are in millions unless stated otherwise. Comparisons are with the corresponding prior-year periods.
Business context and performance
Constellation sells premium beer, wine, and spirits and reports Beer, Wine and Spirits, Corporate Operations and Other, and Canopy segments. Management’s stated strategy is to emphasize higher-growth, higher-margin brands. Segment reporting changed in fiscal 2020 to include Canopy; Canopy’s results are recorded on a two-month lag and eliminated in consolidation.
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $1,999.4; up 1% | $6,440.6; up 2% |
| Gross profit | $987.5; up 2% | $3,202.1; approximately flat |
| Gross margin | 49.4%, versus 49.2% | 49.7%, versus 50.4% |
| Operating income | $267.2; down 52% | $1,609.4; down 17% |
| Net income (loss) attributable to CBI | $360.4, versus $303.1 | $(410.2), versus $2,196.4 |
| Diluted Class A EPS | $1.85, versus $1.56 | $(2.17), versus $11.21 |
| Operating cash flow | Not separately provided | $2,076.3, versus $1,973.9 |
Quarterly operating income included a $390.0 impairment of assets held for sale and a $76.0 gain on the Black Velvet sale. For the nine months, those items were $417.0 and $76.0, respectively. The reported results also reflect substantial Canopy investment volatility, so GAAP earnings and operating trends should be considered separately.
Segment trends and changes versus prior year
- Beer: Quarterly net sales rose 8% to $1,310.6; shipment volume increased 6.8% and depletion volume 7.3%. Nine-month sales rose 8% to $4,428.4. Growth came chiefly from Mexican beer volume and pricing. Management expected the remaining benefit from shipment timing to reverse in fiscal fourth quarter.
- Wine and Spirits: Quarterly sales fell 10% to $688.8; nine-month sales fell 9% to $2,012.2. Management cited lower branded volume, including distributor transitions ahead of planned divestitures, partly offset by favorable product mix. Nine-month U.S. Power Brand depletion volume increased 1.0%, while total domestic depletion volume declined 7.0%.
- Canopy and investment results: Nine-month loss from unconsolidated investments was $2,711.8, versus income of $918.2 a year earlier. It included $2,200.9 of unrealized losses on fair-value investments and $544.2 of equity-method losses from Canopy and related activities. The quarter’s $456.5 loss from unconsolidated investments included a $534.3 unrealized loss, partly offset by $46.2 of Canopy equity earnings.
Cash, debt, and liquidity
- Nine-month operating cash flow was $2,076.3. Investing activities used $335.9, while financing activities used $1,740.2; cash ended at $93.7, essentially unchanged from fiscal year-end.
- Total debt was $12,356.0 at November 30, down $1,260.5 from February 28. Balance-sheet short- and long-term borrowings totaled $12,356.0; long-term debt including current maturities had a carrying amount of $12,074.5. Interest expense rose 32% for the nine months to $329.3, principally due to higher average borrowings related to the Canopy transaction.
- Available revolving-credit borrowing capacity was $1,706.2 at November 30. The company reported compliance with debt covenants. Cash and cash equivalents were $93.7; the filing states management believed cash flows and financing capacity would be adequate for operating needs, scheduled debt service, dividends, and expected capital expenditures.
- Capital expenditures were $538.3 for the nine months, compared with $620.3 a year earlier. Dividends paid were $427.0. The board declared a subsequent quarterly dividend of $0.75 per Class A share and $0.68 per Class B and Class 1 share, payable February 25, 2020.
Outlook, transactions, and risks
- Management projected a fiscal 2020 reported effective tax rate of 97%–99%, reflecting Swiss tax reform’s deferred-tax remeasurement and Canopy-related tax effects. The quarter included a $547.4 tax benefit from Swiss tax reform; the unusually high tax benefit contributed to quarterly net income despite a pre-tax loss.
- In December 2019, the planned Gallo wine-and-spirits sale was revised to approximately $843 million, with up to $250 million of contingent consideration subject to brand performance. The Nobilo transaction is for $130 million. Closings are subject to regulatory approvals and other conditions; proceeds are expected to reduce borrowings. The company was also pursuing separate sales of excluded brands.
- The Ballast Point sale agreement was signed in December 2019 and was expected to close by fiscal year-end, subject to closing conditions. Proceeds were expected to reduce borrowings. The company recognized a $50.0 impairment related to Ballast Point assets held for sale and an $11.0 trademark impairment during the nine months.
- The Black Velvet Canadian Whisky business was sold November 1 for $269.7 cash proceeds, generating a $76.0 gain; proceeds were used partly to repay senior notes.
- Canopy fair-value changes are a significant earnings risk: the company states those values and Canopy’s earnings may remain volatile. Exercising all Canopy warrants would require approximately $6.0 billion in cash based on their terms; the 2017 warrants were due to expire May 1, 2020, and management said it would assess exercise near expiry.
- Other disclosed risks include foreign-exchange, commodity, interest-rate and equity-price movements; transaction approvals and potential further asset write-downs; shipment and consumer-demand variability; and the timing and cost of Mexican brewery expansion. Management reported effective disclosure controls. A new enterprise resource planning system was implemented in the Mexico business on December 1, with related control changes expected in the following quarter.
Important facts for investors to verify
- Whether the Gallo, Nobilo, and Ballast Point transactions close on expected terms and timing, and the eventual proceeds and use of proceeds.
- How Beer growth and the expected fourth-quarter shipment-timing reversal affect underlying demand and full-year results.
- Whether Wine and Spirits volume stabilizes after distributor transition activity and portfolio divestitures.
- Canopy investment valuations, equity-method results, warrant decisions, and related effects on reported earnings and leverage.
- The assumptions behind the 97%–99% fiscal 2020 tax-rate estimate and the sustainability of cash generation, debt reduction, and dividends.