Constellation Brands, Inc. — FY2015 Form 10-K
Reporting period: Fiscal year ended February 28, 2015. This is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless otherwise stated.
Business context and reporting period
Constellation is a beverage alcohol company operating in Beer and Wine and Spirits, with corporate operations reported separately. Its portfolio includes Mexican beer brands such as Corona and Modelo, wine brands, and spirits. The June 2013 acquisition of Modelo’s U.S. beer business substantially expanded the company’s beer operations; FY2015 includes a full year of those acquired operations.
Financial performance and liquidity
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $6,028.0 million | $4,867.7 million |
| Gross profit / gross margin | $2,578.6 million / 42.8% | $1,991.7 million / 40.9% |
| Operating income | $1,500.2 million | $2,437.7 million |
| Net income attributable to CBI | $839.3 million | $1,943.1 million |
| Diluted EPS, Class A | $4.17 | $9.83 |
| Operating cash flow | $1,081.0 million | $826.2 million |
| Capital expenditures | $719.4 million | $223.5 million |
| Cash and cash equivalents, year-end | $110.1 million | $63.9 million |
| Total debt outstanding | $7,348.0 million | $7,020.5 million |
- Net sales increased 24%, driven by $941.1 million in acquired beer sales and organic growth in the Mexican beer portfolio. Beer segment sales rose 12%; Wine and Spirits sales were essentially flat.
- Beer segment operating income increased to $1,017.8 million from $772.9 million; Wine and Spirits operating income increased to $674.3 million from $637.8 million.
- Operating cash flow less capital expenditures was approximately $361.6 million. Investing cash outflow was $1,015.9 million, principally reflecting capital spending and acquisitions.
- Year-end current assets were $2,910.8 million and current liabilities were $1,130.7 million. Available borrowing capacity at February 28, 2015 was $835.6 million under the revolving credit facility and $375.0 million under receivables facilities.
- Interest expense was $337.7 million, up from $323.2 million. The company reported compliance with its debt covenants, including a minimum interest coverage ratio of 2.5x and maximum net debt coverage ratio of 5.5x.
Material changes versus the prior comparable period
- FY2015 net income fell 57% and operating income fell 38%, despite higher sales and segment operating income. The comparison is substantially affected by FY2014’s $1,642.0 million non-taxable gain from remeasuring the pre-existing Crown Imports investment and $300.9 million in goodwill and intangible-asset impairment charges.
- FY2015 gross margin improved by 1.9 percentage points. Higher beer volumes, pricing in select markets, and favorable product mix contributed; acquisition-related supply-agreement amortization and commodity derivative losses were offsets.
- Operating cash flow rose $254.8 million, while capital expenditures increased to $719.4 million, including $587.3 million in the Beer segment, largely for the brewery expansion.
- Total debt increased $327.5 million year over year. The company issued $800 million of senior notes in November 2014, primarily to fund redemption of $500 million of notes due in December 2014.
Outlook, management commentary, risks, and contingencies
- Management’s stated long-term priorities are sales growth, margin expansion, increased cash flow, debt reduction, and dividends. The filing does not provide a clear numeric sales or earnings forecast.
- The company expects an effective tax rate of 30%–32% in each of the next two fiscal years. It plans FY2016 capital expenditures of $1.05–$1.15 billion, including $950 million–$1.05 billion for Beer-related projects.
- Brewery capacity is planned to rise from 10 million to 20 million hectoliters by the end of 2016, with a target of June 2016, and then to 25 million hectoliters by the end of 2017. Brewery expansion spending was estimated at $1.45–$1.65 billion; total brewery and glass-plant expansion spending through FY2018 was estimated at $1.9–$2.3 billion.
- The board approved a first quarterly dividend in April 2015; management expected approximately $240 million in FY2016 dividends. Future payments remain subject to board approval, financial conditions, and debt restrictions.
- In December 2014, the company formed an equally owned glass-plant joint venture with Owens-Illinois. The company consolidates the venture because it determined it is the primary beneficiary. Casa Noble tequila was acquired in September 2014.
- Key risks include reliance on Mexican beer growth and a single brewery, timely completion and cost control of brewery and glass expansions, water scarcity and California drought, agricultural and packaging supply and cost pressures, significant debt and covenant constraints, distributor/customer concentration, currency movements, and competition.
- A voluntary recall of select Corona Extra clear-glass bottle packages was announced in August 2014 after possible glass defects were identified. The bottle supplier agreed to reimburse recall costs; the company reported no net FY2015 cost from the recall.
- Private antitrust litigation relating to the beer acquisition was on appeal; management described the claim as baseless and said it would continue to defend the company. Management stated pending legal and regulatory matters were not expected to have a material adverse effect, while noting outcomes could not be predicted.
- KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end.
Important facts for investors to verify
- Assess sustainable earnings and margins separately from FY2014’s acquisition remeasurement gain and impairment charges; reconcile segment results to reported consolidated results.
- Track Mexican beer depletion trends, shipments, distributor inventory levels, and the contribution of pricing versus volume to growth.
- Monitor brewery and glass-plant construction milestones, total project costs, and the timing of reduced reliance on interim beer supply.
- Review debt maturities, interest expense, covenant headroom, and the funding capacity available for capital spending and dividends.
- Evaluate Wine and Spirits volume, distributor inventory changes, promotional spending, currency effects, and customer concentration.
- Follow the status and financial impact, if any, of the Corona recall, antitrust appeal, and other legal or regulatory matters.