Business context and reporting period
Constellation Brands, Inc. filed this unaudited Form 10-Q for the fiscal quarter ended November 30, 2017 (fiscal Q3 2018), with comparisons to the quarter and nine months ended November 30, 2016. The company sells imported and craft beer, wine, and spirits. Its reportable segments are Beer, Wine and Spirits, and Corporate Operations and Other. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Fiscal Q3 2018 | Fiscal Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $1,799.1 million | $1,810.5 million | $5,819.1 million | $5,703.5 million |
| Gross profit | $907.5 million | $891.4 million | $2,968.1 million | $2,741.7 million |
| Gross margin | 50.4% | 49.2% | 51.0% | 48.1% |
| Operating income | $486.8 million | $534.0 million | $1,768.8 million | $1,697.6 million |
| Net income attributable to CBI | $491.1 million | $405.9 million | $1,393.4 million | $1,083.1 million |
| Diluted EPS, Class A | $2.44 | $1.98 | $6.93 | $5.27 |
| Operating cash flow | Not reported separately | Not reported separately | $1,468.4 million | $1,415.7 million |
- For the nine months, net sales rose 2%, operating income rose 4%, and CBI-attributable net income rose 29%. Beer drove growth; Wine and Spirits sales were lower, principally following the Canadian wine business divestiture.
- In Q3, net sales declined 1% and operating income declined 9%, while CBI-attributable net income increased 21%. The net income increase primarily reflected a $216.9 million Canopy investment-related gain and stronger Beer results, partly offset by one-time charges and a higher tax rate.
- Q3 Beer net sales increased 8% and segment operating income increased 17%; Mexican beer volume growth and pricing contributed. Wine and Spirits net sales decreased 10%, including $98.9 million of sales from the divested Canadian business in the comparison, while segment operating income declined 14%.
- Cash and cash equivalents were $154.5 million at November 30, 2017, versus $177.4 million at February 28, 2017. Nine-month investing cash outflow was $1,038.3 million, including $705.6 million of property, plant and equipment purchases and $191.3 million invested in Canopy. Financing cash outflow was $458.1 million.
- Total debt was $9,350.2 million, up $112.1 million from February 28, 2017. Short-term borrowings were $1,212.8 million and long-term debt, including current maturities, was $8,137.4 million. The company reported $679.3 million of remaining revolver capacity and $34.3 million across its two receivables facilities at quarter-end.
Material changes, outlook and notable items
- Beer’s nine-month net sales increased 10%, supported by Mexican beer volume growth and pricing. Wine and Spirits sales decreased 9%, chiefly due to the Canadian divestiture; organic sales increased, with favorable mix and pricing partly offset by lower volume. Management expected wine and spirits pricing benefits to moderate as promotional spending increased.
- Gross margin improved year over year, principally due to lower Beer product costs, Beer pricing, and portfolio mix and divestiture effects. Management expected some Beer cost benefits to lessen for the rest of fiscal 2018 as depreciation and brewery compensation increased and seasonal production volumes declined.
- Unusual items included an $86.8 million impairment of Ballast Point craft beer trademarks, following weaker sales and depletion trends, slower craft-beer industry growth, and increased competition; a $59.0 million loss from early termination of a beer-glass supply contract; and a $10.3 million Q3 write-off of debt issuance costs. The Canopy Growth investment and warrants generated a $216.9 million Q3 fair-value gain; management cautioned that their value may remain volatile.
- The company acquired Funky Buddha and Schrader Cellars for a combined $130.9 million during the second quarter and acquired a 9.9% stake and warrants in Canopy Growth for $191.3 million in November. It continued brewery expansion and construction projects in Mexico.
- Management expected a fiscal 2018 effective tax rate of approximately 20%, excluding the Tax Cuts and Jobs Act. Based on preliminary analysis, it expected the Act’s corporate-rate reduction to lower net deferred tax liabilities by $300–$400 million, with the benefit to be recorded in fiscal Q4 2018.
- The board declared a quarterly dividend of $0.52 per Class A share and $0.47 per Class B and Class 1 share, payable February 23, 2018. A new $3.0 billion share repurchase authorization was approved in January 2018; no shares had yet been repurchased under it. The company had repurchased $692.3 million under its prior $1.0 billion authorization as of November 30, 2017.
- Management stated that operating and financing cash flows were expected to fund working capital, scheduled debt service, dividends, and anticipated capital expenditures, assuming no deterioration in market conditions. It reported compliance with debt covenants. Forward-looking outcomes remain subject to consumer demand, financing and market conditions, currency and commodity prices, and execution and cost risks for brewery projects.
Important facts for investors to verify
- How much reported earnings growth depended on the non-cash Canopy fair-value gain, and how Canopy’s valuation changes in later periods.
- Whether Mexican beer volume growth and lower product costs persist as expansion spending, depreciation, and seasonal production affect margins.
- Whether Wine and Spirits organic volume, promotional spending, and pricing trends improve, apart from the effects of the Canadian divestiture and acquisitions.
- The final tax impact of the Tax Cuts and Jobs Act and the realization and timing of the estimated $300–$400 million deferred-tax benefit.
- Debt, borrowing capacity, capital expenditure needs, and the pace of dividends and share repurchases alongside ongoing brewery investments.