Constellation Brands, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 29, 2016 (Fiscal 2016). The filing is an annual report, not a standalone quarterly filing; it also reports fourth-quarter results.
Business context
Constellation is a global beverage alcohol company operating in Beer and Wine and Spirits. Its portfolio includes Mexican beer brands such as Corona and Modelo, Ballast Point craft beer, and premium wine and spirits. Beer contributed 55.3% of segment net sales; Wine and Spirits contributed 44.7%.
Financial performance and liquidity
| Metric | Fiscal 2016 | Fiscal 2015 |
|---|---|---|
| Net sales | $6,548.4 million | $6,028.0 million |
| Gross profit | $2,942.3 million | $2,578.6 million |
| Gross margin | 44.9% | 42.8% |
| Operating income | $1,765.1 million | $1,500.2 million |
| Net income attributable to CBI | $1,054.9 million | $839.3 million |
| Diluted EPS, Class A | $5.18 | $4.17 |
| Cash provided by operating activities | $1,413.7 million | $1,081.0 million |
- Net sales rose 9%, operating income 18%, and attributable net income 26%. Management attributed growth chiefly to Mexican beer demand, lower product costs, pricing, and the Meiomi and Ballast Point acquisitions; higher marketing spending partly offset operating gains.
- Beer net sales increased 14% and shipment volume 11.3%; Wine and Spirits net sales increased 3%. U.S. domestic Focus Brand shipment volume grew 8.6%.
- Net cash used in investing was $2,207.4 million, including $1,316.4 million for business acquisitions and $891.3 million in capital expenditures. Cash and cash equivalents were $83.1 million at year-end.
- Total debt was $8,081.2 million, up $784.7 million year over year. Long-term debt, including current maturities, was $7,672.9 million. The company reported compliance with debt covenants. At February 29, available borrowing capacity under the listed revolving and receivables facilities totaled approximately $1,198 million.
- Current assets were $2,977.6 million and current liabilities $2,272.3 million. The company said operating cash flow and financing facilities should provide adequate resources for working capital, debt service, dividends, and planned capital spending.
Material changes and unusual items
- Acquired Meiomi in August 2015 for $316.2 million and Ballast Point in December 2015 for $998.5 million, net of cash acquired. Ballast Point contributed $27.2 million in net sales after acquisition; Meiomi contributed $73.8 million.
- In April 2016, after year-end, the company agreed to acquire The Prisoner Wine Company portfolio for approximately $285 million, subject to closing conditions.
- Launched quarterly dividends during Fiscal 2016. Declared dividends were $1.24 per Class A share and $1.12 per Class B share; management expected to return approximately $320 million through dividends in Fiscal 2017.
- Fiscal 2016 included $100.5 million of comparable-adjustment reductions to operating income, including commodity derivative effects, interim supply agreement amortization, inventory step-up, restructuring, and acquisition-related costs. Fiscal 2014 results were unusually affected by a $1,642.0 million acquisition remeasurement gain and $300.9 million of impairment charges.
- Fourth-quarter Fiscal 2016 net sales were $1,543.2 million, gross profit $696.1 million, and attributable net income $243.4 million; corresponding Fiscal 2015 fourth-quarter amounts were $1,356.2 million, $597.6 million, and $214.6 million.
Outlook, commentary, and risks
- Management’s stated long-term financial model is sales growth, margin expansion, increased cash flow, EPS growth, debt reduction, and quarterly dividends. Fiscal 2017 expected tax rate: 28%–31%.
- Fiscal 2017 capital expenditures were projected at $1.25–$1.35 billion, primarily for the Mexico Beer Expansion Projects. Total project spending was estimated at approximately $4.5 billion through Fiscal 2021.
- Nava Brewery expansion was planned to reach 20 million hectoliters by June 2016, with further phases targeting 27.5 million by early 2018. The new Mexicali Brewery was planned for initial 5-million-hectoliter capacity by year-end 2019 and 10 million by year-end 2020. The interim beer supply agreement was extended through June 2017.
- Key risks include reliance on Mexican beer growth and concentrated brewery supply, delays or cost overruns in major construction, high debt and interest obligations, and exposure to currency, commodity, water, weather, agricultural-input, glass-supply, regulatory, and customer-concentration risks.
- The company was evaluating a potential IPO of part of its Canadian wine business, with a decision expected during calendar 2016. This was not a committed transaction.
- Management considered pending litigation and regulatory matters unlikely to have a material adverse effect but noted outcomes could not be predicted. The Ninth Circuit affirmed dismissal of the private antitrust action on April 4, 2016; a rehearing petition deadline was extended to May 4, 2016.
Important facts for investors to verify
- Whether brewery expansion milestones, interim supply arrangements, and glass-plant capacity support projected Mexican beer demand.
- Debt maturities, borrowing availability, covenant headroom, and funding needs for planned capital expenditures, acquisitions, and shareholder returns.
- How much reported growth reflects organic volume and pricing versus acquired brands, and whether distributor depletions track shipments.
- Completion and final cost of the Prisoner acquisition, and any decision or terms for a Canadian wine business IPO.
- Exposure to tax examinations, foreign exchange, commodity prices, water and crop conditions, and major-customer concentration.