Constellation Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter ended August 31, 2010 (fiscal second quarter of fiscal 2011); six-month results are compared with the six months ended August 31, 2009. Amounts are in U.S. dollars unless noted.
Business context and reporting period
Constellation is a global wine and beverage-alcohol company, with U.S. wine and spirits operations, international wine businesses, and an equity-method investment in Crown Imports, its Mexican beer joint venture. From May 1, 2010, it reported CWNA, CWAE, Corporate Operations and Other, and Crown Imports as its business segments; prior-year segment data was recast. Crown Imports’ sales are not consolidated in Constellation’s net sales.
Financial performance and position
| Metric | Three months ended Aug. 31, 2010 | Six months ended Aug. 31, 2010 | Comparable prior period |
|---|---|---|---|
| Net sales | $862.8 million | $1,650.3 million | $876.8 million; $1,668.4 million |
| Gross profit / margin | $314.2 million / 36.4% | $584.2 million / 35.4% | $309.6 million / 35.3%; $578.3 million / 34.7% |
| Operating income | $133.2 million | $229.5 million | $140.1 million; $224.8 million |
| Net income | $91.3 million | $140.4 million | $99.7 million; $106.2 million |
| Diluted EPS, Class A | $0.43 | $0.65 | $0.45; $0.48 |
| Interest expense, net | $50.3 million | $98.8 million | $68.1 million; $136.5 million |
- Quarterly net sales declined 2%, operating income declined 5%, and net income declined 8%. For six months, net sales fell 1%, while operating income rose 2% and net income rose 32%.
- Six-month operating cash flow was $305.7 million, versus $97.4 million a year earlier. The period included a $204.5 million increase in receivables and a $157.2 million cash benefit from lower inventories. Investing cash flow was negative $10.9 million; financing cash flow was negative $324.0 million, including the $300.0 million share repurchase. Cash declined to $13.9 million from $43.5 million at fiscal year-end.
- At August 31, total debt was $3,783.4 million, down $52.1 million from February 28; this includes $347.0 million of bank notes and $3,436.4 million of long-term debt, including current maturities. Current assets were $2,560.0 million and current liabilities $1,449.7 million. Revolver availability was $551.1 million at August 31 and $656.2 million at September 30.
- Segment trends were mixed: six-month CWNA sales rose 2%, CWAE sales fell 10%, and Crown Imports’ sales fell 3%. CWAE reported a $6.0 million six-month segment operating loss; Crown Imports’ operating income declined 11% to $240.1 million.
Material changes, outlook and risks
- Sales were pressured by the U.K. cider divestiture and, over six months, the prior-year value spirits divestiture. U.S. branded wine growth and favorable foreign exchange partly offset these effects. Lower average borrowing costs and borrowings reduced six-month interest expense by 28%.
- Quarterly Crown Imports results were affected by lower volume, promotions and weaker mix; a Mexican brewery strike and Hurricane Alex disrupted distribution. Higher Mexican beer costs also weighed on gross profit.
- Management’s strategy emphasizes premium brands in North America and tighter portfolio focus, cost reductions and improved cash generation in Australia and Europe. It cited challenging economic conditions, intense competition, U.K. retail concentration, private-label pressure, foreign-exchange volatility and a continuing Australian wine surplus. Management said liquidity was adequate and expected operating cash flow and financing activities to fund working capital, scheduled debt service and capital expenditures, subject to market conditions. No specific earnings or revenue guidance is provided.
- Management expected fiscal 2011 restructuring charges of $27.1 million, accelerated depreciation of $1.1 million, acquisition-related integration costs of $0.3 million, other costs of $4.8 million, and a $3.2 million gain on sale of nonstrategic assets. The Australian Initiative included a $5.8 million impairment charge and $23.0 million of Australian assets held for sale.
- The six-month effective tax rate was 44.2%, including a $30.1 million U.K. deferred-tax valuation allowance, partly offset by reductions in uncertain tax positions. The company has a contingent put option on the remaining 50.1% of Ruffino; estimated settlement could reach €55 million (about $70 million), but management said loss was not probable and recorded no liability.
- A $300.0 million accelerated share repurchase was funded with revolver borrowings. The final share count remained subject to a calculation period scheduled to end November 24, 2010, and could range from 13.8 million to 18.4 million shares, subject to transaction terms.
- Debt maturities merit attention: $300.0 million of Tranche A term loans was outstanding at August 31 and matures in June 2011. The company also disclosed sensitivity to foreign-exchange movements and variable interest rates; a hypothetical 1% rate increase was estimated to raise annual cash interest by approximately $39.2 million at August 31.
Most important facts for investors to verify
- Whether operating cash flow remains strong after seasonal working-capital movements, especially receivables and inventory.
- How the June 2011 Tranche A maturity will be refinanced or repaid, and whether revolving-credit availability remains sufficient.
- Whether U.S. wine growth and distributor-consolidation benefits can offset continuing CWAE and Crown Imports weakness.
- Actual restructuring costs and asset-sale proceeds versus management’s fiscal 2011 estimates, including the Australian assets held for sale.
- The final accelerated-repurchase share count and whether the remaining Ruffino put option is exercised or creates a recorded obligation.