Constellation Brands, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2016 (the company’s first quarter of fiscal 2017); comparative period ended May 31, 2015. Unaudited results. The company operates Beer, Wine and Spirits, and Corporate Operations and Other segments.
Financial results
| Metric | Quarter ended May 31, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $1,871.8 million | $1,631.3 million | Up 15% |
| Gross profit | $881.3 million | $737.1 million | Up 20% |
| Gross margin | 47.1% | 45.2% | Up 1.9 percentage points |
| Operating income | $552.7 million | $427.3 million | Up 29% |
| Net income attributable to CBI | $318.3 million | $238.6 million | Up 33% |
| Diluted EPS, Class A | $1.55 | $1.18 | Up 31% |
| Operating cash flow | $345.9 million | $205.7 million | Up $140.2 million |
| Capital expenditures | $169.4 million | $129.7 million | Up $39.7 million |
SG&A was $328.6 million, up 6%; SG&A as a share of net sales declined to 17.6% from 19.0%. Interest expense increased 9% to $84.6 million. The effective tax rate was 31.9%, versus 31.5%.
Segment performance: Beer sales rose 19% to $1,151.0 million and operating income increased 22% to $409.3 million. Wine and Spirits sales rose 8% to $720.8 million and operating income increased 17% to $168.0 million. Corporate Operations and Other reported a $28.6 million operating loss, compared with a $26.5 million loss.
Cash, debt and liquidity
- Cash and cash equivalents were $167.3 million at May 31, 2016, up from $83.1 million at February 29, 2016. Net cash increased $84.2 million during the quarter.
- Investing cash outflow was $453.9 million, primarily reflecting the $284.9 million Prisoner acquisition and $169.4 million of property, plant and equipment purchases. Financing cash inflow was $191.9 million.
- Total debt, including notes payable, was $8,308.2 million, up $227.0 million from February 29, 2016. Long-term debt carrying amount, including its current portion, was $8,278.4 million; its estimated fair value was $8,154.8 million.
- Current assets were $3,218.5 million and current liabilities were $2,698.7 million. Current maturities of long-term debt were $1,587.8 million.
- Available borrowing capacity at May 31 included $1,133.0 million under the revolving credit facility, $300.0 million under the CBI receivables facility and $190.0 million under the Crown receivables facility. The company reported compliance with debt covenants and payment obligations.
Material changes and business developments
- Beer shipment volume increased 14.3% overall and 11.9% organically; Mexican beer demand, select-market pricing and $42.4 million of Ballast Point sales contributed to growth. Beer depletion volume increased 9.7%.
- Wine and Spirits shipment volume increased 4.5% overall and 2.5% organically. Acquired Meiomi and Prisoner brands contributed $40.2 million in sales; organic wine volume and product mix also helped. U.S. domestic Focus Brand depletion volume increased 12.7%.
- The company acquired The Prisoner Wine Company in April 2016 for $284.9 million. The acquisition included five super-luxury wine brands and was funded in part through the quarter’s acquisition-related investing outflow. Ballast Point and Meiomi had been acquired in earlier periods.
- In March 2016, the company restated its credit agreement, adding a $700 million European Term A-1 facility and increasing European revolving commitments. The $700 million term borrowing was used to refinance prior facility and securitization borrowings and for general corporate purposes.
- Gross-margin improvement reflected pricing, foreign-currency transactional benefits, volume, acquired brands and a more favorable year-over-year effect from comparable adjustments; higher Beer operating costs partly offset these benefits. Comparable adjustments increased operating income by $30.9 million year over year.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided in the filing text. Management said it expects operating and financing cash flows to fund working capital, debt service, dividends and planned capital spending, subject to market conditions and other risks.
- Capital plans include Nava Brewery expansion and construction of a new Mexicali Brewery. The Nava expansion to 20 million hectoliters was completed in June 2016; further capacity increases to 25 million by summer 2017 and 27.5 million by early 2018 were planned. Timing and costs may vary.
- The company was evaluating a possible IPO of part of its Canadian wine business, with a decision expected during calendar 2016. The filing does not state that an IPO would proceed.
- Key exposures include foreign exchange, commodity prices and interest rates. The company reported hedging approximately 65% of specified foreign-currency exposures and 69% of forecast commodity exposures for the remaining nine months of fiscal 2017. It expected $23.0 million of net-of-tax derivative losses to be reclassified to earnings within 12 months.
- The IRS proposed assessments for fiscal 2010 and 2011; the company disputed certain assessments and said it believed its position would be sustained. No clear amount of the disputed assessment is provided in the filing text.
- In an antitrust action related to the Modelo transaction, the Ninth Circuit affirmed dismissal and denied rehearing on June 1, 2016. Management characterized the action as baseless and said the company would continue to defend itself.
- Unusual/comparability items included commodity derivative gains and settlements, inventory step-up, acquisition-related costs, restructuring charges and costs related to evaluating the Canadian wine IPO. These affected period-to-period comparisons.
Investor verification priorities
- Confirm how much sales and profit growth is organic versus attributable to acquisitions, and whether shipment growth is supported by consumer depletion trends.
- Review leverage, near-term debt maturities, variable-rate exposure and covenant headroom alongside the planned brewery and glass-capacity investment program.
- Track integration and performance of Ballast Point, Meiomi and Prisoner, including purchase accounting and any subsequent impairment indicators.
- Monitor the Canadian wine IPO decision, related costs and any effect on segment reporting or capital allocation.
- Follow developments in the disputed IRS assessments, derivative exposures and any changes in litigation or other contingencies.