Constellation Brands, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2017 (fiscal 2018); comparable periods ended August 31, 2016. Unaudited results. Amounts are in millions of dollars except per-share data.
Business context
Constellation is an international beverage alcohol company reporting Beer, Wine and Spirits, and Corporate Operations and Other segments. Its strategy emphasizes premium brands, organic growth, targeted acquisitions, and investment in Mexican beer production capacity.
Financial performance
| Metric | Three months ended Aug. 31, 2017 | Change year over year | Six months ended Aug. 31, 2017 | Change year over year |
|---|---|---|---|---|
| Net sales | $2,084.5 | Up 3% | $4,020.0 | Up 3% |
| Gross profit | $1,065.3 | Up 10% | $2,060.6 | Up 11% |
| Gross margin | 51.1% | Up from 47.9% | 51.3% | Up from 47.5% |
| Operating income | $713.9 | Up 17% | $1,282.0 | Up 10% |
| Net income attributable to CBI | $499.5 | Up 39% | $902.3 | Up 33% |
| Diluted EPS, Class A | $2.48 | Up from $1.75 | $4.48 | Up from $3.30 |
| Operating cash flow | Not provided for quarter alone | — | $1,102.9 | Up from $1,044.9 |
Beer was the principal growth driver. Second-quarter Beer sales rose 13% to $1,378.9, with shipment volume up 11.7% and depletions up 8.1%; Mexican beer volume, pricing, and lower product costs supported results. Wine and Spirits sales fell 12% to $705.6, primarily reflecting the Canadian wine divestiture; organic sales also declined modestly in the quarter. For the six months, Beer sales increased 10%, while Wine and Spirits sales declined 8%, including the divested business.
Second-quarter interest expense was $81.3, down 14% year over year; six-month interest expense was $163.7, down 8%. Effective tax rates were 20.4% for the quarter and 18.3% for the six months, versus 31.7% and 31.8% in the comparable periods. Management attributed the lower rates mainly to foreign earnings tax treatment and tax effects of share-based compensation. Approximate net margins, calculated from reported net income attributable to CBI and net sales, were 24.0% for the quarter and 22.4% for the six months.
Cash, debt, and liquidity
- Cash and equivalents were $125.6 at August 31, down from $177.4 at fiscal year-end. Six-month operating cash flow of $1,102.9 was offset by $640.6 of investing outflows and $520.3 of financing outflows.
- Capital expenditures were $505.1 for the six months, versus $368.6 a year earlier. Business acquisitions used $131.8.
- Total debt outstanding, including notes payable, was $8,947.4, down $290.7 from February 28. The balance sheet reports $8,133.4 of long-term debt including current maturities, plus $814.0 of bank notes payable. Current assets were $3,373.4 and current liabilities $2,090.0.
- Available borrowing capacity at August 31 included $1,028.3 under the revolving credit facility and $137.2 combined under receivables securitization facilities. The revolving facility was increased to $1.5 billion and extended to July 2022. September amendments extended the receivables facilities and changed their capacities.
- The company reported compliance with debt covenants at August 31. It said operating cash flow and financing sources should adequately fund working capital, debt service, dividends, and planned capital expenditures, assuming market conditions do not deteriorate.
Material changes, outlook, and risks
- Ballast Point impairment: A first-quarter review identified weaker sales and depletion trends, distribution-transition disruption, weaker innovation results, and increased craft-beer competition. The company recorded an $86.8 impairment of the craft-beer trademark, included in six-month SG&A. Valuation depended on projected revenues, royalty and growth rates, and discount rates; management disclosed that reasonably adverse assumption changes could increase the charge.
- Portfolio transactions: The Canadian wine business was sold in December 2016. The company acquired Funky Buddha and Schrader Cellars during the quarter for a combined $130.8 purchase price; the acquisitions support its craft-beer and fine-wine portfolios. Other recent acquisitions included Obregon Brewery, High West, Charles Smith, and Prisoner.
- Operations and investment: Management expects Mexican beer cost benefits to moderate as depreciation and brewery compensation rise and seasonal production declines. It also expects wine and spirits pricing benefits to moderate as promotional spending increases. U.S. wine and spirits shipments are expected to generally align with depletions for fiscal 2018.
- Expansion and capital allocation: Mexicali brewery construction, Nava capacity expansion, Obregon optimization, and glass-plant expansion are ongoing. The filing does not provide a specific earnings forecast. Management stated a long-term aim of sales growth, margin expansion, higher cash flow, debt reduction, and dividends.
- Other risks and unusual items: The company is exposed to foreign-exchange, commodity-price, and interest-rate risk and uses derivatives for hedging, not speculation. Forward-looking results also depend on consumer demand, financing access, construction costs and timing, permits, and market conditions. The filing notes commitments and contingencies but the supplied text does not provide a clear quantified contingency amount.
- Shareholder returns: The board declared quarterly dividends payable in November 2017 of $0.52 per Class A share and $0.47 per Class B and Class 1 share. Under a $1.0 billion repurchase authorization, $467.4 had been used by August 31.
Most important facts for investors to verify
- Whether Mexican beer shipment and depletion growth remains aligned, and whether volume, pricing, and cost advantages persist as brewery investment and seasonal costs increase.
- Whether the Ballast Point trademark assumptions and craft-beer recovery prospects support the recorded carrying value after the $86.8 impairment.
- How much of Wine and Spirits’ reported sales decline reflects the Canadian divestiture versus ongoing organic volume, pricing, and mix trends.
- Debt repayment and refinancing needs, available facility capacity, covenant headroom, and the cash demands of capital spending, acquisitions, dividends, and repurchases.
- Execution, cost, timing, and permitting risks for Mexican brewery and related capacity projects, along with the effect of foreign exchange and commodity prices.