Constellation Brands, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended November 30, 2015. The company calls the three-month period its third quarter of fiscal 2016. Unless noted otherwise, amounts are in U.S. dollars; financial statement amounts are in millions.
Business context
Constellation is a beverage alcohol company operating through Beer, Wine and Spirits, and Corporate Operations and Other. Its Beer segment imports and markets its Mexican beer portfolio in the U.S.; Wine and Spirits includes wine brands across price categories and premium spirits. Management identified Mexican beer demand as the principal growth driver.
Financial performance
| Metric | Three months ended Nov. 30, 2015 | Year-over-year change | Nine months ended Nov. 30, 2015 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $1,640.5 | +6% | $5,005.2 | +7% |
| Gross profit | $733.5 | +15% | $2,246.2 | +13% |
| Operating income | $447.3 | +19% | $1,354.0 | +18% |
| Net income attributable to CBI | $270.5 | +22% | $811.5 | +30% |
| Diluted EPS, Class A | $1.33 | +21% | $3.99 | +28% |
| Interest expense | $75.6 | Down from $86.0 | $230.4 | Down from $257.4 |
Gross margin was 44.7% for the quarter versus 41.4% a year earlier, and 44.9% for the nine months versus 42.4%. SG&A was $286.2 million for the quarter and $892.2 million for the nine months; SG&A as a share of net sales was 17.4% and 17.8%, respectively.
Segment trends: Quarterly Beer sales rose 8% to $831.3 million and segment operating income increased 20% to $291.6 million. Nine-month Beer sales rose 11% to $2,816.6 million and segment operating income increased 23% to $984.0 million. Wine and Spirits quarterly sales increased 5% to $809.2 million and operating income rose 12% to $222.7 million. For the nine months, Wine and Spirits sales increased 2% to $2,188.6 million and operating income increased 6% to $542.8 million. Meiomi contributed acquired-brand sales; foreign currency was a partial offset in Wine and Spirits.
Cash flow, balance sheet and liquidity
- Nine-month operating cash flow was $1,091.6 million, versus $750.1 million. Investing cash outflow was $827.7 million, including $513.8 million of capital expenditures and $317.9 million for the Meiomi acquisition. Financing cash flow was positive $122.2 million, compared with an outflow of $189.5 million a year earlier.
- Cash and cash equivalents were $491.3 million at November 30, 2015, compared with $110.1 million at February 28, 2015. Current assets were $3,460.9 million and current liabilities $1,920.8 million.
- Total debt, including bank notes, was $7,403.0 million, up $55.0 million from February 28, 2015. The balance sheet classified $856.9 million of long-term debt as current maturities. The company reported $1,134.1 million of unused revolving-credit capacity and unused seasonal receivables-facility capacity of $305.0 million (CBI) and $135.0 million (Crown) at November 30.
- The company reported compliance with its debt covenants and all debt payment obligations. Its stated maximum net debt coverage ratio was 5.5x and minimum interest coverage ratio 2.5x. A $500 million portion of floating-rate debt was fixed at an average 2.8% rate, excluding borrowing margins, through September 1, 2016.
Material changes, outlook and notable items
- Growth reflected strong Mexican beer demand, higher shipment volumes, selected beer price increases, lower product costs, and Meiomi sales. Management attributed the increase in operating income to these factors; lower average interest rates and a lower effective tax rate also contributed to nine-month earnings growth.
- In August 2015, the company acquired Meiomi. In December 2015, after quarter-end, it acquired Ballast Point for approximately $1.0 billion. The company issued $400 million of 4.75% senior notes due 2025 on December 4, 2015, and said the proceeds funded part of the Ballast Point purchase; the balance came from receivables-facility borrowings and cash.
- Management expected fiscal 2016 capital expenditures of $875 million to $925 million, including approximately $800 million for Beer-related projects. It estimated approximately $4.5 billion of capital spending from fiscal 2014 through fiscal 2021 for Nava Brewery, glass plant and Mexicali Brewery projects. These are forward-looking estimates, not guarantees.
- The company planned Nava Brewery capacity expansion to 27.5 million hectoliters by early 2018 and announced construction of a new Mexicali Brewery, initially designed for 10 million hectoliters with the ability to scale to 20 million. It expected the first 5 million hectoliters of Mexicali capacity by year-end 2019 and completion of the initial capacity within four to five years. The interim beer supply agreement with AB InBev was extended through June 2017.
- The board declared a quarterly dividend payable in February 2016 of $0.31 per Class A share and $0.28 per Class B and Class 1 share, subject to the stated record-date terms. The company reported $703.3 million remaining under its share repurchase authorization.
- Unusual and comparability items included $31.9 million of tax benefit in the second quarter from reducing uncertain-tax-position liabilities after certain IRS items were effectively settled. The company disputed other proposed IRS assessments for fiscal 2010 and 2011 and said it believed its position would be sustained. Nine-month comparable adjustments included $15.0 million of restructuring charges, acquisition-related costs, derivative mark-to-market losses and inventory step-up costs.
- Management cited risks including variation in consumer demand and shipments, foreign-exchange and commodity-price exposure, interest-rate movements, and the cost, timing, permits and execution of major brewery and glass-plant projects. The filing states that forward-looking statements are subject to risks and actual results may differ. Approximately 79% of specified foreign-currency exposures and 77% of forecast commodity exposures for the remaining fiscal quarter were hedged at November 30.
Most important facts for investors to verify
- Whether Mexican beer volume growth, pricing and demand remain strong, and how much of reported growth reflects shipments versus consumer depletions.
- Whether gross-margin improvement persists after derivative effects, acquisition-related inventory step-up and other comparable adjustments.
- Ballast Point’s purchase economics, financing impact and subsequent contribution to results; this acquisition closed after the reporting date.
- Actual capital spending, construction milestones and capacity ramp-up for Nava, Mexicali and the glass plant, including the extent of any schedule or cost changes.
- Debt maturity and refinancing needs, covenant headroom, and the impact of acquisition funding on leverage and liquidity.
- The outcome of the disputed IRS assessments and the sustainability of the effective tax rate and employee-equity tax benefits.