Constellation Brands, Inc. — Form 10-Q Summary
Business context and reporting period
For the fiscal third quarter and nine months ended November 30, 2010, Constellation reported results from wine and spirits operations, plus its equity-method investment in Crown Imports, which imports Modelo and other beer brands into the U.S. The company reorganized its reportable segments effective May 1, 2010; prior-year segment results were restated. Amounts below are in U.S. dollars unless noted.
Financial performance
| Metric | Three months ended Nov. 30 | Nine months ended Nov. 30 |
|---|---|---|
| Net sales | $966.4 million, down 2% from $987.7 million | $2,616.7 million, down 1% from $2,656.1 million |
| Gross profit | $351.9 million, versus $344.1 million; gross margin 36.4%, versus 34.8% | $936.1 million, versus $922.4 million; gross margin 35.8%, versus 34.7% |
| Operating income | $170.1 million, up 25% from $136.1 million | $399.6 million, up 11% from $360.9 million |
| Net income | $139.3 million, versus $44.1 million | $279.7 million, versus $150.3 million |
| Diluted EPS, Class A | $0.65, versus $0.20 | $1.30, versus $0.68 |
| Interest expense, net | $49.1 million, down from $65.5 million | $147.9 million, down from $202.0 million |
For the nine months, cash provided by operations was $369.0 million, compared with $188.7 million; investing activities used $25.1 million and financing activities used $373.0 million. Capital expenditures were $70.1 million. Cash and cash investments at November 30 were $16.0 million, versus $43.5 million at February 28.
Total debt was $3,726.6 million at November 30, down $108.9 million from February 28. Current liabilities were $1,515.3 million and current assets were $2,844.8 million. The company reported $542.4 million available under its revolver at November 30 and $700.9 million available at December 31.
Material changes versus the prior comparable period
- Reported sales declined primarily because of the U.K. cider divestiture; nine-month sales were also affected by the value spirits divestiture. Favorable U.S. branded wine mix and foreign-currency translation partly offset these effects.
- U.S. and North American wine and spirits segment sales rose 1% in the quarter and 2% for the nine months. Australia and Europe segment sales fell 12% and 11%, respectively. Crown Imports’ sales rose 22% in the quarter and 4% for the nine months; its reported segment results are eliminated in consolidation, with Constellation’s share reflected in equity earnings.
- Reported profit growth benefited materially from lower restructuring and unusual charges: $6.2 million versus $55.7 million for the quarter, and $30.4 million versus $124.8 million for the nine months. Prior-year items included a Ruffino impairment and a loss related to a shareholder put option. Segment operating income before these excluded items declined 8% in the quarter and 11% for the nine months.
- Lower interest expense reflected lower average interest rates and borrowings. The effective tax rate was 27.6% versus 58.1% for the quarter and 37.0% versus 54.4% for the nine months. Current-period nine-month taxes included a $30.1 million U.K. deferred-tax valuation allowance.
Outlook, commentary, risks and unusual items
- Management described a long-term financial objective of sales growth, margin expansion, increased cash flow, lower borrowings, EPS growth and improved returns on invested capital. It said U.S. wine supply was expected to remain generally balanced with demand.
- Management attributed U.S. branded wine performance partly to distributor contracts requiring specified purchases during fiscal 2011. It expected distributor inventory levels to stabilize after fiscal 2011; shipments thereafter were expected to broadly match distributors’ retail sales through the contracts’ 2015 expiration.
- Management cited competitive U.K. and Australian markets, retailer concentration, private-label competition, U.K. duty increases, foreign-exchange volatility and challenging economic conditions as pressures on pricing and margins. The company also noted higher U.S. grape costs and promotional spending.
- On December 23, 2010, after the reporting date, the company signed an agreement to sell its Australian and U.K. business for approximately AUD$290 million, subject to adjustments. It expected cash proceeds of approximately AUD$230 million, would retain about a 20% interest, and planned to use net proceeds to reduce borrowings. Closing was expected by the end of January 2011; the filing cautions that the sale may not close on the expected timetable or at all.
- A 50.1% Ruffino shareholder notified the company in December 2010 that it was exercising a put option. The company estimated settlement could be as much as €55 million (about $71 million), but reported no liability at November 30 because it concluded loss was not probable while arbitration proceedings were pending; the ultimate amount was not estimable.
- The company recorded a $6.9 million impairment on U.S. wine trademarks after deciding to discontinue certain brands. It expected $23.1 million of restructuring charges in fiscal 2011, alongside other restructuring and integration costs; estimates may vary.
- Interest-rate and foreign-currency movements remain risks. The company reported that a hypothetical 1% rise in rates could increase annual cash interest requirements on variable-rate debt by approximately $36.1 million, based on November 30 exposures. It used derivatives for hedging, not trading.
Important facts for investors to verify
- Whether the Australian and U.K. business sale closes as planned, final cash proceeds and adjustments, and use of proceeds to reduce debt.
- The outcome, timing and possible cash cost of the disputed Ruffino put option and arbitration.
- Underlying segment trends after separating discontinued-business effects, unusual items and distributor purchase commitments from reported results.
- Whether cash generation, working-capital seasonality and revolver availability remain sufficient to meet debt maturities and operating needs.
- Progress on restructuring, U.S. distributor consolidation and Project Fusion, including costs, benefits and any further impairments.