Constellation Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended August 31, 2012, compared with the corresponding 2011 periods. Amounts are in millions of dollars except per-share data. The company sells wine and spirits and holds a 50% equity-method interest in Crown Imports, a U.S. importer of Modelo beer brands.
Financial performance
| Metric | Three months ended August 31, 2012 | Prior year | Six months ended August 31, 2012 | Prior year |
|---|---|---|---|---|
| Net sales | $698.5 | $690.2 | $1,333.3 | $1,325.5 |
| Gross profit / margin | $285.1 / 40.8% | $283.0 / 41.0% | $535.7 / 40.2% | $534.0 / 40.3% |
| Operating income | $130.6 | $145.1 | $236.7 | $246.8 |
| Equity in earnings of investees | $70.5 | $64.0 | $131.1 | $126.2 |
| Interest expense, net | $54.6 | $42.5 | $105.3 | $86.8 |
| Net income | $124.6 | $162.7 | $196.6 | $237.2 |
| Diluted EPS, Class A | $0.67 | $0.76 | $1.05 | $1.11 |
- Quarterly net sales rose 1%; operating income fell 10% and net income fell 23%. For the six months, net sales rose 1%, while operating income declined 4% and net income declined 17%.
- Quarterly SG&A increased 12% to $154.3; for the six months it increased 8% to $298.3. Management cited higher promotional and marketing spending, portfolio investment, and Project Fusion-related depreciation. SG&A was 22.1% of quarterly net sales and 22.4% for the six months.
- Six-month sales growth reflected spirits volume and acquired Ruffino and Mark West wine sales, partly offset by promotions and unfavorable currency translation. Mark West contributed $13.4 of quarterly and $20.1 of six-month net sales after its July acquisition.
- Crown Imports’ standalone net sales grew 8% to $788.4 in the quarter and $1,512.5 for the six months; operating income rose 14% and 9%, respectively. These Crown sales are eliminated in consolidation; Constellation records its share of Crown earnings using the equity method.
Cash flow, balance sheet and debt
- Six-month operating cash flow was $368.5, down from $517.4. Investing used $184.0, including $159.7 for Mark West and $35.6 of capital expenditures. Financing used $89.9. Cash and cash investments ended at $178.5, versus $85.8 at February 29, 2012.
- At August 31, total debt was $3,987.7, up $858.2 from February 29. The balance sheet showed $3,972.5 of long-term debt including current maturities and $15.2 of bank notes. Total assets were $8,040.5 and stockholders’ equity was $2,618.1.
- Current assets were $2,177.9 and current liabilities $656.0. The $650.0 of restricted cash was held in escrow for the proposed Crown acquisition and is not unrestricted operating cash.
- The company reported $834.6 of revolver availability at August 31, plus $15.4 of letters of credit outstanding. It reported adequate liquidity for working capital, capital expenditures and scheduled debt payments, subject to market conditions and financing availability.
- During the period, Constellation issued $600.0 of 6% senior notes due 2022 and $650.0 of 4.625% senior notes due 2023. It also entered a $2,225.0 credit agreement; $800.0 of term loans were outstanding at August 31. Interest expense increased 21% for the six months, chiefly due to higher average borrowings and interest rates.
- Cash used for treasury-stock purchases was $383.0. The company repurchased 14.0 million Class A shares for $296.7 under its new $1.0 billion authorization during the six months; it made no repurchases under that authorization in the second quarter.
Outlook, developments and risks
- The company agreed to acquire the remaining 50% of Crown Imports for approximately $1.85 billion and expected closing in the first quarter of calendar 2013, subject to regulatory and other conditions, including specified transactions between AB InBev and Modelo. Management expects a material effect on future results, financial position and cash flows.
- Funding was expected to include the $650.0 million senior-note proceeds held in escrow, a $575.0 million delayed-draw term facility, revolver borrowings and available cash. A committed bridge facility was available if expected funding proved unavailable. If the acquisition is not completed by December 30, 2013, the August notes are subject to mandatory redemption.
- Management’s stated long-term aims were sales growth, margin expansion, increased cash flow, EPS growth and improved return on invested capital. It expected the 2012 U.S. grape harvest to be larger than the 2011 harvest, potentially easing supply tightness in some varietals. These are expectations, not assurances.
- Management expected $9.3 of additional restructuring-related SG&A costs and $1.3 of restructuring charges in fiscal 2013. It also identified $9.1 of acquisition-related transaction costs and a $4.0 gain on settlement of a receivable among six-month unusual items.
- Key exposures include foreign currency, diesel prices and interest rates; derivatives are used for hedging, not trading. The company reported potential indemnification payments of up to $303.5 related to its prior divestiture, with $282.1 recoverable from third parties, and a separate lease indemnity exposure of up to $39.2. Management said material payments were not expected and considered material adverse effects remote.
- The company cautioned that the acquisition, financing availability and terms, wine supply-demand balance, restructuring costs and future share repurchases could differ from expectations. Credit-facility covenants include interest-coverage and maximum net-debt-coverage requirements.
Important facts for investors to verify
- Whether Crown Imports closed, on what terms and with what final financing, debt burden and integration costs.
- Whether operating trends and margins improved after the effects of higher promotions, SG&A, interest expense and unusual items.
- How much unrestricted cash and revolver capacity remained after acquisition funding, and whether credit covenants remained comfortably satisfied.
- Whether operating cash flow recovered from the prior-year decline and supported debt service, investment and any further share repurchases.
- Whether indemnification exposures, restructuring costs, grape supply conditions and other disclosed risks changed materially.