Business context and reporting period
Constellation Brands, Inc. filed this Form 10-Q for the three months ended May 31, 2014, its fiscal first quarter of fiscal 2015. The company sells beer, wine and spirits. Results include the beer businesses acquired in June 2013, including Crown Imports and the Mexican brewery; the acquisition materially changes comparability with the prior-year quarter.
Key financial metrics
| Metric | Quarter ended May 31, 2014 | Prior-year quarter |
|---|---|---|
| Net sales | $1,526.0 million | $673.4 million |
| Gross profit / margin | $670.1 million / 43.9% | $256.1 million / 38.0% |
| Operating income / margin | $392.2 million / 25.7% | $70.5 million / 10.5% |
| Net income | $206.7 million | $52.9 million |
| Diluted EPS, Class A | $1.03 | $0.27 |
| Operating cash flow | $232.3 million | $3.3 million |
| Capital expenditures | $131.4 million | $22.0 million |
| Cash and cash investments, May 31 | $378.0 million | — |
| Total debt, May 31 | $7,195.2 million | — |
Operating cash flow less capital expenditures was $100.9 million. The company reported current assets of $3,137.2 million and current liabilities of $2,254.7 million at May 31. Total debt comprises $235.2 million of bank notes and $6,960.0 million of long-term debt, including current maturities.
Material changes versus the prior comparable period
- Reported net sales rose 127%, primarily because the acquired beer operations were consolidated. In the prior-year quarter, Crown Imports was accounted for under the equity method and its sales were eliminated in consolidation; reported year-over-year growth therefore is not a like-for-like measure.
- As an additional, unaudited comparison, pro forma net sales assuming the acquisition occurred March 1, 2013 were $1,526.0 million versus $1,239.0 million; pro forma net income was $206.7 million versus $139.8 million.
- Beer segment sales were $867.7 million, up 14%; shipment volume rose 10.5% and depletion volume rose 7.9%. Management cited continued Mexican beer demand and selective pricing.
- Wine and Spirits sales declined 2% to $658.3 million. Wine shipments fell 3.8%, partly reflecting an exclusive distributor’s planned inventory reduction; a contractual payment partially offset the sales impact. Spirits sales declined 6%.
- Interest expense increased 58% to $86.4 million, primarily due to acquisition financing. Equity-method earnings fell to $0.5 million from $66.6 million as Crown Imports became consolidated.
- Operating cash flow improved from $3.3 million to $232.3 million. Capital spending rose substantially, primarily for the Mexican brewery expansion.
Outlook, management commentary, risks and unusual items
- Management reiterated its long-term financial model of sales growth, margin expansion, increased cash flow, EPS growth and debt reduction. The filing gives no specific near-term earnings or revenue guidance.
- The company must expand brewery capacity from 10 million to at least 20 million hectoliters of packaged beer annually by December 31, 2016. Management continued assessing commodity sourcing and possible longer-term capacity needs beyond that expansion.
- After quarter-end, the company paid $558.0 million of acquisition-related final consideration, funded with $150.0 million of revolving-credit borrowings, $100.0 million from receivables facilities and $308.0 million of cash. At June 30, revolving-credit availability was $685.9 million.
- Unusual items reduced operating income by $12.4 million in the quarter, including $7.6 million of amortization of a favorable interim supply agreement, $4.5 million of acquisition-related costs and $0.3 million of other costs.
- Potential indemnification payments were estimated at up to $292.7 million, of which $278.9 million was recoverable from third parties; the recorded liability was $11.5 million. Management considered material payments unlikely.
- Market risks include currency, commodity-price and interest-rate movements. The company reported hedging approximately 68.0% of relevant currency exposures and 65.1% of forecast commodity exposures for the remainder of fiscal 2015. It does not use derivatives for speculative purposes.
- An antitrust-related appeal remained pending; management described the claim as without merit and said it would continue to defend the company. Management reported disclosure controls were effective and said integration of acquired-business financial controls was expected to be completed in fiscal 2015.
Most important facts for investors to verify
- Assess operating trends using the pro forma comparison as well as reported results, given the acquisition’s substantial effect on year-over-year comparisons.
- Track Mexican beer volume, distributor depletions, pricing and the impact of the brewery expansion on capital spending and cash generation.
- Monitor debt repayment, cash flow, liquidity and the financing impact of the post-quarter $558.0 million payment.
- Evaluate the sustainability of Wine and Spirits performance, including the distributor inventory reduction and related contractual payment.
- Review future disclosures on brewery expansion timing and cost, acquisition integration, indemnification exposure and the pending litigation appeal.