Constellation Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter 2019, the three months ended May 31, 2018, compared with the three months ended May 31, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. The filing describes a beverage-alcohol company focused on high-end beer and premium wine and spirits.
Financial results
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $2,047.1 | $1,928.5 | +6% |
| Gross profit / margin | $1,048.6 / 51.2% | $988.3 / 51.2% | +6% profit |
| Operating income | $625.4 | $561.1 | +11% |
| Income from unconsolidated investments | $364.4 | $0.4 | +$364.0 |
| Net income attributable to CBI | $743.8 | $398.5 | +87% |
| Diluted EPS, Class A | $3.77 | $1.98 | +90% |
| Operating cash flow | $504.0 | $381.6 | +$122.4 |
| Capital expenditures | $168.2 | $217.1 | -$48.9 |
Beer net sales rose 11% to $1,375.1, led by Mexican beer volume growth; shipment volume increased 8.6% and depletions 8.9%. Wine and Spirits net sales fell 3% to $672.0, with lower shipment volumes and higher product costs. Operating income benefited from the prior-year comparison, which included an $86.8 impairment of craft-beer trademarks. Consolidated operating income growth also reflected planned marketing investment, higher costs and business investment.
Reported net income growth was substantially influenced by non-operating items: a $258.3 unrealized gain on Canopy Growth securities and warrants, and a $101.4 gain on the sale of the Accolade Wine investment. The filing states Canopy investment fair values may be volatile. Gross margin remained 51.2%; reported operating margin was approximately 30.6%, versus 29.1% a year earlier.
Cash, debt and liquidity
- Cash and cash equivalents were $210.0 at May 31, 2018, compared with $90.3 at February 28, 2018. Operating activities provided $504.0; investing used $53.5 and financing used $329.2. Investing cash flow included $110.2 of proceeds from the Accolade sale.
- Total debt was approximately $10.1 billion, down $79.7 from February 28, 2018. Balance-sheet current liabilities were $1,990.5 and current assets $3,604.8.
- Available borrowing capacity at May 31 included $1,111.1 under the revolving facility, $52.4 under the CBI receivables facility and $181.3 under the Crown receivables facility. The company reported compliance with debt covenants.
- Cash dividends paid were $140.5, versus $100.5 in the prior-year quarter. The board declared quarterly dividends of $0.74 per Class A share and $0.67 per Class B and Class 1 share, payable August 24, 2018, subject to the stated conditions.
Material changes, outlook and risks
- Beer growth was driven primarily by Mexican portfolio volume, with additional contribution from pricing. The quarter also benefited by $9.6 from temporary federal beer excise-tax relief; management said the benefit would not recur during the remainder of calendar 2018 because the applicable barrelage limit had been reached.
- Wine and Spirits performance weakened: segment operating income declined 17% to $167.8, reflecting higher input and transportation costs and lower shipments. Domestic Focus Brand shipments increased 1.3%, while total segment shipments fell 2.9%.
- Management said fiscal 2019 marketing spend was expected to increase overall and to be more heavily weighted to the first half. It reiterated a long-term financial model of sales growth, margin expansion, higher cash flow, EPS growth, targeted leverage and quarterly dividends. The filing provides no specific full-year numerical earnings or revenue guidance.
- The company continued expansion, construction and optimization of its Mexican beer operations, including the Mexicali brewery project. Actual timing and costs may vary.
- In June 2018, after quarter-end, the company acquired $153.0 of Canopy convertible debt securities. The company warns that Canopy investment fair values may be volatile.
- Accounting changes included adoption of revenue-recognition guidance, which had no material impact on net sales recognition but shifted the timing of certain sales-incentive expenses. Adoption of intra-entity tax-transfer guidance increased opening retained earnings and deferred tax assets by $2.2 billion, primarily related to intellectual property transfers. The company had not completed its accounting for all Tax Cuts and Jobs Act effects and said later adjustments could materially affect tax expense and the effective rate.
- Other risks discussed include demand and shipment variability, commodity and foreign-exchange movements, interest rates, commercial-paper market access, and execution and cost risks for expansion projects. Approximately 80% of relevant foreign-currency exposures and 70% of forecast commodity exposures for the remaining nine months of fiscal 2019 were hedged at May 31.
Most important facts for investors to verify
- How much of reported earnings growth is recurring operating performance versus the Canopy fair-value gain and Accolade sale gain.
- Whether Mexican beer volume and depletion growth continues, and how pricing, excise-tax relief expiration and higher operating costs affect margins.
- Whether Wine and Spirits shipment trends and input-cost pressures improve.
- Debt levels, borrowing capacity, covenant headroom, and funding needs for capital projects, dividends and share repurchases.
- Canopy investment valuation volatility, the June convertible-debt investment, and any resulting earnings swings.
- Potential future Tax Act adjustments and the impact of the newly recognized deferred tax asset.