Constellation Brands, Inc. — Form 10-Q Summary
Business context and reporting period
Quarter ended November 30, 2011, the company’s fiscal 2012 third quarter; comparisons are with the quarter and nine months ended November 30, 2010. Constellation operates wine and spirits businesses and holds a 50% interest in Crown Imports, a beer-import joint venture accounted for under the equity method. Comparisons are substantially affected by the January 2011 sale of 80.1% of its Australian and U.K. business (CWAE); that business contributed no sales in the current periods.
Key financial results
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $700.7 million, down 27% from $966.4 million | $2,026.2 million, down 23% from $2,616.7 million |
| Gross profit / margin | $282.9 million / 40.4%, versus $351.9 million / 36.4% | $816.9 million / 40.3%, versus $936.1 million / 35.8% |
| Operating income | $160.3 million, down 6% | $407.1 million, up 2% |
| Net income | $104.8 million, down 25% from $139.3 million | $342.0 million, up 22% from $279.7 million |
| Diluted EPS, Class A | $0.52, versus $0.65 | $1.62, versus $1.30 |
| Operating cash flow | Not separately presented | $640.8 million, versus $369.4 million |
At November 30, cash was $55.8 million; current assets were $2,178.5 million and current liabilities $1,178.2 million. Total debt, including bank notes, was $3,104.6 million, down $131.7 million from February 28, 2011. The company had $390.8 million of revolving availability at November 30 and reported $485.2 million at December 31. Nine-month capital expenditures were $54.1 million. Cash used in investing activities was $118.7 million and cash used in financing activities was $475.0 million.
Material changes and drivers
- Lower reported sales mainly reflect the CWAE divestiture: management estimated its impact at $208.0 million in the quarter and $558.4 million year to date. Current CWNA sales include shipments to Europe, Australia and Japan previously sold through CWAE.
- Current-quarter CWNA sales fell 4%, with lower U.S. base-branded wine volume and higher promotional spending. Year-to-date CWNA sales rose 2%, supported by transferred international sales and favorable U.S. product mix, partly offset by lower volume.
- Crown Imports’ third-quarter sales fell 12% and operating income fell 25%, primarily on lower Mexican beer volume and higher advertising. Nine-month sales rose 2%, but operating income fell 7% as advertising costs increased.
- Gross margin improved year over year largely because the divested, lower-margin CWAE business was no longer consolidated; higher U.S. product costs and promotional spending were offsets.
- Year-to-date net income benefited from a lower effective tax rate: 24.6% versus 37.0%, substantially reflecting a $60.2 million reduction in uncertain tax positions following tax examinations. The quarter’s rate was 37.4% versus 27.6%.
- Operating cash flow included seasonal working-capital movements related to the grape harvest. The company repurchased $281.3 million of shares and prepaid $400.0 million of term loans during the first quarter.
Outlook, commentary, risks and unusual items
- No specific revenue or earnings guidance is provided. Management describes a long-term focus on sales growth, margin expansion, cash generation and return on invested capital, including international growth of CWNA brands.
- Management expects U.S. wine supply and demand to remain generally balanced, while noting the 2011 grape harvest was smaller than 2010 and could tighten supply in some varietals over time. Distributor inventories are expected to remain stable as shipments broadly match retailer sales; actual distributor inventories and consumer demand remain risks.
- A fiscal 2012 restructuring initiative targets a 2%–3% global workforce reduction. Related costs and cash expenditures are expected to be completed by February 28, 2013. The company estimated fiscal 2012 restructuring charges of $11.7 million, plus $8.6 million of other SG&A costs and $0.3 million of accelerated depreciation.
- Ruffino became wholly owned on October 5, 2011, following a €50.3 million ($68.6 million) purchase of the remaining interest; the company also assumed $73.0 million of net debt. The transaction generated $9.1 million of reported gains, largely from revaluing the previously held interest and contingent obligation.
- Foreign-exchange and interest-rate exposures are managed with derivatives, not for trading. At November 30, foreign-currency derivative notional was $510.0 million; $500.0 million of floating-rate debt was hedged at an average LIBOR rate of 2.9% through September 2016, excluding borrowing margins. Derivatives carry counterparty and valuation risks.
- Potential future payments under divestiture indemnifications were estimated at up to $330.9 million, with $282.1 million subject to third-party recovery. Management said material payments were not expected and considered a significant adverse effect remote. A Clean Air Act matter was settled for a $95,000 penalty without admission or denial of the allegations.
- Project Fusion, a multi-year systems implementation, changed certain financial-reporting controls during the quarter. Management reported disclosure controls effective and said compensating controls were adequate; global implementation was expected to finish in fiscal 2013.
Important facts for investors to verify
- Assess underlying sales and margins excluding the divested CWAE business and the transferred international wine sales.
- Track U.S. branded-wine shipments, distributor inventories, promotional spending, grape supply and transportation costs.
- Evaluate Crown Imports volume, advertising expense and contribution to equity-method earnings.
- Separate recurring earnings from the tax-position release, Ruffino revaluation gains, divestiture-related items and restructuring costs.
- Monitor debt maturities, revolver availability, seasonal working-capital needs, share repurchases and the indemnification exposure.