STZ

Business Context and Reporting Period

Constellation Brands, Inc. (NYSE: STZ) filed this Form 8-K on January 6, 2003, to report financial results for the third quarter and nine months ended November 30, 2002. The company is a leading producer and marketer of beverage alcohol brands, including imported beers (Corona, Modelo), spirits, and wines. The reported figures reflect a two-for-one stock split distributed in May 2002 and are presented on a "comparable" basis, excluding amortization of goodwill and indefinite-lived intangible assets in accordance with SFAS No. 142.

Key Financial Metrics

Nine Months Ended Nov 30, 2002: Net sales increased 4% to $2.08 billion. Net income rose 23% to $151.3 million, and diluted EPS increased 16% to $1.63. Operating income grew 19% to $319.6 million.

Liquidity and Debt: Cash and cash investments stood at $29.9 million as of November 30, 2002, compared to $9.0 million at the prior fiscal year-end. Total debt (current maturities plus long-term) was approximately $1.35 billion. Net interest expense for the nine months decreased to $80.5 million from $86.4 million in the prior year.

Material Changes vs. Prior Period

• Imported Beer and Spirits: Net sales grew 10% to $276.1 million, driven by a 12% increase in imported beer sales (volume gains and price increases on Mexican brands). Operating income for this segment rose 20%.
• Popular and Premium Wine: Net sales declined 3% to $213.3 million due to lower bulk wine and concentrate sales. Operating income decreased slightly by $1 million to $37.2 million, though margins remained stable at 17.5%.
• U.K. Brands and Wholesale: Net sales increased 7% to $211.4 million. Growth was driven by the wholesale business, offset by declines in branded cider sales. Operating income grew 12% to $21.6 million.
• Fine Wine: Net sales rose 3% to $42.4 million, with volume increases led by Ravenswood and Simi. Operating income increased 16% to $16.6 million.
• Joint Venture: Equity income from Pacific Wine Partners surged to $4.2 million for the quarter (from $1.2 million) and $10.1 million for the nine months, driven by strong demand for Banrock Station and Blackstone.

Guidance, Outlook, and Risks

Management Commentary: CEO Richard Sands highlighted the company's 19th consecutive quarter of double-digit earnings growth, attributing success to a balanced portfolio strategy and growth in imported beer and wine.

Revised Guidance: Management raised full-year fiscal 2003 diluted EPS guidance to a range of $2.03 to $2.05 (previously implied lower). For the fourth quarter ending February 28, 2003, diluted EPS is expected to be between $0.40 and $0.42.

Accounting Changes: The company adopted SFAS No. 142 (Goodwill) and EITF No. 01-09 (promotional expenditures reclassified as revenue reductions). Historical data has been reclassified for comparability.

Risks and Uncertainties: Forward-looking statements are subject to risks including raw material supply issues, increased competition, pricing pressures, foreign exchange rate fluctuations, and potential increases in excise taxes. A "Quiet Period" regarding financial commentary begins February 15, 2003.

Investor Verification Checklist

• Verify the impact of the two-for-one stock split on share counts and per-share metrics.
• Confirm the sustainability of the 12% growth in imported beer sales given the noted price increases.
• Monitor the decline in bulk wine and concentrate sales within the Popular and Premium Wine segment.
• Review the reclassification of promotional expenditures under EITF 01-09 to ensure accurate margin analysis.
• Assess the company's ability to meet the raised full-year EPS guidance of $2.03–$2.05 amidst a difficult economic environment.