Constellation Brands, Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results for the three months ended May 31, 2011, the first quarter of fiscal 2012, compared with the three months ended May 31, 2010. Constellation sells wine and spirits and holds a 50% interest in Crown Imports, its imported-beer joint venture. The January 2011 sale of 80.1% of its Australian and U.K. business materially affects year-over-year comparability; the company retained a 19.9% interest.
Key financial results
| Metric | Quarter ended May 31, 2011 | Prior-year quarter |
|---|---|---|
| Sales | $710.7 million | $976.2 million |
| Net sales, after excise taxes | $635.3 million | $787.5 million |
| Gross profit; gross margin | $251.0 million; 39.5% | $270.0 million; 34.3% |
| Operating income | $101.7 million | $96.3 million |
| Equity in earnings of investees | $62.2 million | $54.5 million |
| Net interest expense | $44.3 million | $48.5 million |
| Net income | $74.5 million | $49.1 million |
| Diluted EPS, Class A / Class B | $0.35 / $0.32 | $0.22 / $0.21 |
| Operating cash flow | $241.3 million | $60.1 million |
| Capital expenditures | $21.0 million | $25.6 million |
Cash and cash investments were $13.4 million at May 31, 2011, versus $9.2 million at February 28. Total debt was $2,992.4 million, down $243.9 million from February 28; reported long-term debt, including current maturities, was $2,739.7 million, with $252.7 million of bank notes payable. The company reported $604.5 million available to draw under its revolving facilities at May 31, and $557.7 million at June 30. Stockholders’ equity was $2,715.1 million; total assets were $7,075.4 million.
Material changes versus the prior comparable period
- Net sales fell 19%, primarily because the divested Australian and U.K. business contributed $170.1 million to the prior-year comparison. This was partly offset by $24.8 million growth in U.S. base branded wine net sales.
- CWNA net sales increased 8% to $635.3 million, benefiting from product mix and $27.5 million of wine sales to Europe, Australia and Japan previously made through CWAE; U.S. base branded wine volume was lower.
- Crown Imports sales rose 9% to $677.5 million and operating income rose 10% to $119.8 million. The filing attributes growth to volume, lower promotional spending and favorable mix; higher advertising spend partly offset the benefit.
- Gross profit declined 7% in dollars, but gross margin expanded to 39.5%, partly reflecting the absence of the divested business and favorable CWNA mix. Higher U.S. product costs, including imported-product and transportation costs, were a partial offset.
- Operating income increased 6%, despite restructuring and unusual items of $13.8 million versus $6.9 million. Net income rose 52%, also benefiting from higher equity-method earnings, lower interest expense and a lower tax rate. The prior-year effective tax rate included a $28.1 million U.K. deferred-tax valuation allowance.
- Operating cash flow increased to $241.3 million, supported by working-capital movements and a tax refund; it included a $67.5 million inventory decrease and a $71.8 million increase in other accrued liabilities, partly offset by a $42.4 million increase in receivables.
Outlook, commentary, risks and unusual items
- Management said cash flows and financing activities should adequately support working capital, scheduled debt service and planned capital expenditures, absent deterioration in market conditions. Seasonal grape purchases can increase short-term borrowing needs.
- The company’s stated long-term objectives are sales growth, margin expansion, higher cash flow, reduced borrowings, EPS growth and improved return on invested capital. It expects U.S. wine supply to remain generally balanced with demand. No specific sales or EPS guidance is provided in the filing.
- A new restructuring initiative, committed to in May 2011 and announced in June, targets a 2%–3% reduction in the global workforce following the divestiture. The company expects completion of related costs and cash expenditures by February 28, 2013. First-quarter restructuring charges were $11.1 million, primarily employee termination costs. The filing’s Fiscal 2012 cost estimate lists $12.4 million of restructuring charges, $12.4 million of other SG&A costs and $0.3 million of accelerated depreciation.
- The company authorized up to $500 million of share repurchases in April 2011, expected over multiple years depending on market conditions and its cash and debt position. No shares had been repurchased under this authorization as of July 8, 2011.
- The potential Ruffino shareholder put remains under discussion; the company recorded a $2.2 million first-quarter foreign-currency loss. It states a loss of up to $57 million could arise if it does not prevail in a related claim, but considers a loss not probable and recorded no liability for that separate contingency.
- Divestiture-related indemnifications had a recorded liability of $25.4 million. Potential payments could reach $330.9 million, of which $282.1 million could be recovered from third parties; management does not expect material payments and considers a significant adverse effect remote.
- Market risks include foreign exchange and interest rates. The company reported $504.7 million of foreign-currency derivative notional, with approximately 80.2% of total currency exposures hedged, and $500 million of floating-rate debt hedged at a 2.9% average LIBOR rate through September 2016, excluding borrowing margins.
Important facts for investors to verify
- How much of the decline in consolidated net sales reflects the CWAE divestiture versus underlying volume and pricing trends, particularly in U.S. branded wine.
- Whether Crown Imports’ volume and earnings growth persist after the prior-year brewery-strike comparison and the Victoria brand launch effect.
- The sustainability of operating cash flow, including the effects of seasonal working capital, tax refunds and accrued liabilities.
- Debt repayment progress, available revolving credit and the company’s capacity to balance debt reduction with the $500 million repurchase authorization.
- Actual restructuring costs and workforce reductions versus management’s estimates, and developments in the Ruffino and divestiture indemnification matters.