Constellation Brands, Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2015 (the company’s first quarter of fiscal 2016). Comparative period: three months ended May 31, 2014. Amounts are in millions of dollars unless stated otherwise.
Business context and results
Constellation Brands is a beverage alcohol company operating through Beer, Wine and Spirits, and Corporate Operations and Other. The company’s Beer business includes its U.S. Mexican beer portfolio. Management said Beer continued to drive improvement, principally through consumer demand and volume growth.
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $1,631.3 | $1,526.0 | +7% |
| Gross profit | $737.1 | $670.1 | +10% |
| Gross margin | 45.2% | 43.9% | +1.3 percentage points |
| Operating income | $427.3 | $392.2 | +9% |
| Net income attributable to CBI | $238.6 | $206.7 | +15% |
| Diluted EPS, Class A | $1.18 | $1.03 | +15% |
| Operating cash flow | $205.7 | $232.3 | Down $26.6 |
| Capital expenditures | $129.7 | $131.4 | Down $1.7 |
Segments and material changes
- Beer: Net sales rose 11% to $965.8; shipment volume increased 10.2% and depletion volume 10.3%. Segment operating income increased 17% to $336.5. Growth reflected Mexican beer volume demand, pricing in select markets, and increased advertising investment.
- Wine and Spirits: Net sales rose 1% to $665.5; shipment volume increased 4.0%. Segment operating income was $144.2, up 1%. Volume and mix gains were partly offset by foreign-exchange effects and a prior-year distributor-related payment.
- Consolidated SG&A increased 11% to $309.8. Higher Beer advertising and $18.3 of comparable-adjustment charges contributed to the increase; comparable adjustments totaled $26.9 versus $12.4 a year earlier, including $13.0 of restructuring charges and $5.3 of acquisition-related costs.
- Interest expense declined $8.9 to $77.5, primarily due to lower average interest rates, partly offset by higher average borrowings. The effective tax rate was 31.5%, compared with 32.5%.
Cash flow, debt and liquidity
- Operating cash flow was $205.7, down from $232.3, primarily reflecting higher tax and interest payments, partly offset by stronger Beer cash generation. Investing activities used $131.3; financing activities used $53.4, versus $213.1 provided in the prior-year quarter. The company ended the period with $130.7 of cash.
- Total debt outstanding was $7,317.6 at May 31, 2015, down $30.4 from February 28, 2015. Balance-sheet debt, including current maturities but excluding notes payable to banks, was $7,216.7; notes payable to banks were $100.9. Long-term debt carrying value was below its estimated fair value of $7,559.7.
- Available capacity at May 31 included $834.7 under the revolving credit facility, $270.0 under the CBI receivables facility and $160.0 under the Crown receivables facility. The company reported compliance with its debt covenants and debt payments.
- Cash dividends paid were $59.8. The board subsequently declared quarterly dividends of $0.31 per Class A share and $0.28 per Class B and Class 1 share, payable August 25, 2015, subject to stated conditions.
Outlook, commentary and risks
- The filing provides no specific earnings or revenue forecast. Management reiterated its long-term aims of sales growth, margin expansion, increased cash flow, EPS growth, debt reduction and quarterly dividends.
- The company expected the Nava, Mexico brewery expansion from 10 million to 20 million hectoliters of capacity to be completed by December 2016, with a goal of June 2016, and planned a further expansion to 25 million hectoliters by December 2017. It was assessing additional capacity needs. Management said operating and financing cash flows should fund working capital, debt service, dividends and planned brewery and glass-plant investments, absent deterioration in market conditions.
- In June 2015, after quarter-end, the company signed an agreement to acquire the Meiomi wine brand for approximately $315 million, subject to customary closing conditions; closing was expected around early August.
- After May 31, the IRS issued a report proposing assessments for tax years 2010 and 2011. The company disputed certain assessments and said it intended to protest; it believed its position would be sustained.
- Market risks include foreign currency, commodities and interest rates. About 65% of specified foreign-currency exposures and 66% of forecast commodity exposures for the remaining nine months of fiscal 2016 were hedged. Derivatives can create fair-value volatility; management said counterparties were investment grade and estimated counterparty-default risk as immaterial.
- Forward-looking outcomes remain subject to consumer demand, financing and market conditions, the cost and timing of expansion projects, and regulatory approvals and closing conditions for Meiomi. The company also identified a new revenue-recognition standard scheduled for adoption beginning March 2017 and was assessing its impact.
Important facts for investors to verify
- Whether Beer volume and pricing trends continue to offset higher advertising and planned brewery investment.
- Whether operating cash flow rebounds after the year-over-year decline and supports capital spending, dividends and debt reduction.
- Debt maturities, covenant headroom and borrowing capacity, particularly as expansion spending and the Meiomi acquisition proceed.
- Closing, final cost and integration of the Meiomi acquisition, and the outcome of the IRS examination and proposed assessments.
- Actual timing and cost of brewery and glass-plant expansions, and any material effects from currency, commodity or interest-rate movements.