Constellation Brands, Inc. — Q1 FY2022 Form 10-Q
Reporting period: Three months ended May 31, 2021; comparison is the three months ended May 31, 2020. Amounts are in U.S. dollars. The company produces and markets beer, wine, and spirits and holds an equity-method investment in Canopy Growth.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $2,026.5 million | $1,963.4 million |
| Gross profit / margin | $1,119.3 million / 55.2% | $988.3 million / 50.3% |
| Operating income | $75.1 million | $610.0 million |
| Net loss attributable to CBI | $908.1 million | $177.9 million |
| Diluted loss per share, Class A / Class B | $4.74 / $4.31 | $0.94 / $0.86 |
| Operating cash flow | $716.0 million | $686.5 million |
- Beer net sales rose 14% to $1,572.0 million; shipment volume increased 11.3%. Beer segment operating income increased 16% to $673.1 million.
- Wine and Spirits net sales declined 22% to $454.5 million, largely reflecting divestitures. Organic net sales increased $62.0 million; segment operating income fell 36% to $104.2 million.
- Gross margin increased 4.9 percentage points, while operating income fell 88%, principally because of a $665.9 million Mexicali Brewery impairment.
- Canopy fair-value securities generated a $745.1 million unrealized loss in earnings. Losses from the Canopy equity-method investment and related activities were $155.8 million, down from $377.6 million.
- Cash and cash equivalents were $503.8 million at May 31, 2021. Net cash used in investing activities was $116.6 million; financing activities used $556.5 million, including $400.8 million of share repurchases and $146.7 million of dividends paid.
- Total debt was $10,444.2 million, including $529.4 million of current maturities. The company reported $1,987.8 million of remaining capacity on its $2.0 billion revolving facility and no commercial paper outstanding. It reported compliance with debt covenants.
Material changes and significant items
- Consolidated net sales grew 3%, with Beer growth partly offset by lower Wine and Spirits sales following divestitures. The divested businesses contributed $186.8 million of prior-year-quarter net sales.
- In April 2021, the board authorized management to sell or abandon the Mexicali Brewery; the company wrote down affected assets from $685.9 million to estimated salvage value of $20.0 million. Recovery of costs is uncertain. Management said existing Nava and Obregon capacity is sufficient for medium-term needs under its current assumptions.
- Canopy-related fair-value losses increased year over year, while Canopy’s operating loss improved. The fair-value investment is sensitive to Canopy’s share price and other valuation inputs.
- Cash flow from operations increased by $29.5 million year over year. Capital expenditures paid in cash were $113.9 million, compared with $144.2 million a year earlier.
- Post-quarter events: in June, the company prepaid $142.1 million of term borrowings and amended the term loan margin for June–December 2021. On June 30, it entered into a $500 million accelerated share repurchase agreement under its existing authorization.
Outlook, commentary, and risks
- Management expects on-premise demand to return to more normal levels in FY2022 as COVID-19 restrictions ease. It expects U.S. Wine and Spirits shipment growth to generally align with depletion growth for the fiscal year.
- Management forecast a reported FY2022 effective tax rate of 36%–38%; the estimate excludes future changes in Canopy fair value and future Canopy equity-method results.
- The filing does not provide a clear numerical full-year sales or earnings forecast. Management describes a long-term focus on sales growth, margin expansion, cash flow, targeted leverage, dividends, and periodic repurchases.
- Risks include COVID-19 effects, supply and logistics constraints, severe winter storm impacts, wildfire-related supply and production effects, ERP implementation and shipment delays, foreign exchange and commodity volatility, and the uncertain outcome of the Mexicali project and any recovery of related costs.
- The Wine and Spirits divestitures may generate up to $250 million of contingent consideration if specified brand targets are met over two years; receipt is not assured. The company also disclosed that exercising all Canopy warrants would require approximately $6.5 billion based on their terms.
Key facts for investors to verify
- How much of the quarter’s operating and net loss reflects the Mexicali impairment and volatile Canopy valuation, versus underlying operating performance.
- Whether Beer volume growth, pricing, and margins persist, and whether Wine and Spirits organic growth offsets the smaller post-divestiture business.
- Canopy’s market value, equity-method losses, and the potential cash requirements and dilution implications of its warrants.
- Debt maturities, leverage and covenant headroom, and the use of cash for dividends and repurchases alongside capital needs.
- Progress on ERP-related shipment issues, supply constraints, the Mexicali project, and realization of the divestiture contingent consideration.