Business context and reporting period
Constellation Brands, Inc. filed this unaudited Form 10-Q for the three months ended May 31, 2012, its fiscal first quarter of 2013. The company sells wine and spirits and holds a 50% equity-method interest in Crown Imports, the U.S. importer of Modelo beer brands. Crown Imports’ sales are not consolidated; Constellation records its share of earnings as equity income.
Financial performance and liquidity
| Metric | Three months ended May 31, 2012 | Prior-year comparable | Change |
|---|---|---|---|
| Sales before excise taxes | $725.3 million | $710.7 million | Up 2% |
| Net sales | $634.8 million | $635.3 million | Essentially flat |
| Gross profit / margin | $250.6 million / 39.5% | $251.0 million / 39.5% | Nearly unchanged |
| Operating income | $106.1 million | $101.7 million | Up 4% |
| Net income | $72.0 million | $74.5 million | Down 3% |
| Diluted EPS, Class A | $0.38 | $0.35 | Up |
| Operating cash flow | $96.4 million | $241.3 million | Down $144.9 million |
Operating margin on net sales was approximately 16.7%, compared with 16.0%. Cash and cash investments were $69.1 million at May 31, down from $85.8 million at February 29. Current assets were $1.97 billion and current liabilities $587.9 million. Total debt was $3.42 billion, up $291.5 million from fiscal year-end; cash less total debt was approximately $3.35 billion.
Material changes versus the prior period
- Flat consolidated net sales reflected lower branded wine volume and higher promotional spending, partly offset by favorable product mix and spirits volume growth.
- Operating income improved mainly because restructuring charges and unusual items fell to $3.5 million from $13.8 million. Excluding those items, total reportable segment operating income declined 5%.
- Net income fell despite higher operating income, primarily as net interest expense rose 14% to $50.7 million, reflecting higher average borrowings and the new senior notes.
- Operating cash flow decreased, with working-capital movements and a smaller cash-flow contribution from equity-method investees among the drivers. Financing included $1.4 billion of new long-term debt, $832.2 million of debt principal payments and $383.0 million of share repurchases.
- Other comprehensive loss was $18.6 million, largely reflecting $83.3 million of foreign-currency translation losses, despite positive net income.
Outlook, management commentary and risks
- Management reiterated a long-term focus on sales growth, margin expansion, cash generation and improved return on invested capital. The filing gives no specific consolidated earnings or revenue guidance.
- Management said cash flows and financing activities should provide adequate resources for working capital, debt service and planned capital expenditures, absent deterioration in market conditions. The company had $810.4 million available under its revolving facility at May 31.
- In June 2012, the company agreed to buy the remaining 50% of Crown Imports for approximately $1.85 billion, with a fully committed $1.875 billion bridge facility. It expected closing in the first quarter of calendar 2013, subject to conditions; permanent financing was expected to combine cash and additional debt. The transaction would materially affect future results, financial position and cash flows.
- Also in June, the company agreed to acquire the Mark West wine brand and related assets for approximately $160 million, with closing expected in July 2012.
- Management suspended further repurchases under the new $1.0 billion authorization and did not expect additional purchases in the remainder of fiscal 2013. Restructuring plans were expected to incur $8.9 million of other SG&A costs and $1.5 million of restructuring charges in fiscal 2013.
- Risks include acquisition completion and financing, the higher debt burden and ability to service it, market and interest-rate exposure, wine supply and demand, distributor inventory levels, and execution of restructuring and distributor-network changes. The company noted the 2011 grape harvest was smaller than 2010 and could tighten supply for some varietals over time.
- Disclosure controls were reported effective; management reported no material changes to internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the Crown Imports acquisition closed on expected terms and how its financing affected debt, interest costs and covenants.
- Whether wine and spirits volume, promotional spending and margins improved, and how Crown Imports’ growth translated into equity earnings.
- Whether operating cash flow recovered from the year-over-year decline and whether working-capital needs remain seasonal.
- Whether share repurchases remained suspended and how capital allocation balanced buybacks, acquisitions and debt reduction.
- Progress and final costs of the restructuring initiative, and the timing and financial contribution of the Mark West acquisition.