Constellation Brands, Inc. — Q3 FY2015 Form 10-Q
Reporting period: Three and nine months ended November 30, 2014; fiscal year ends February 28. Amounts are in U.S. dollars. The filing was signed January 8, 2015.
Business context
Constellation is a beverage alcohol company with Beer and Wine and Spirits divisions. The Beer segment includes the Mexican beer brands acquired through the 2013 Beer Business Acquisition, which materially affects year-over-year comparisons. The company reports Beer, Wine and Spirits, and Corporate Operations and Other segments.
Financial results
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $1,541.7 million, up 7% | $4,671.8 million, up 31% |
| Gross profit / margin | $638.9 million / 41.4% | $1,981.0 million / 42.4% |
| Operating income | $375.6 million, up 3% | $1,146.5 million, down 46% |
| Net income | $222.2 million, up 5% | $624.7 million, down 65% |
| Diluted Class A EPS | $1.10, versus $1.07 | $3.11, versus $9.07 |
| Operating cash flow | Not separately provided | $750.1 million, versus $629.1 million |
| Capital expenditures | Not separately provided | $541.3 million, versus $85.9 million |
For the nine months, operating cash flow less capital expenditures was approximately $208.8 million, before other investing activity. Cash and cash investments were $67.3 million at November 30. Total debt, including notes payable to banks, was $7,318.8 million, up $298.3 million from February 28. Current assets were $3,030.8 million and current liabilities $1,248.5 million.
Segment performance and comparisons
- Third quarter: Beer sales increased 16% to $768.1 million, with shipment volume up 14.2%; management cited consumer demand, selective pricing, and wholesaler inventories returning toward historic levels. Wine and Spirits sales declined 1% to $773.4 million: wine fell 4%, while spirits rose 27%.
- Nine months: Beer sales increased 13% to $2,527.6 million; Wine and Spirits sales were nearly flat at $2,147.5 million. Consolidated sales rose 31%, largely reflecting $941.1 million of acquired beer sales and the comparison with a prior period that included consolidation adjustments.
- Nine-month 2014 operating income and net income included a $1,642.0 million noncash gain from remeasuring the previously held Crown Imports stake. The prior period also included $300.9 million of goodwill and intangible impairment. These unusual items make reported year-over-year profit comparisons especially distorted; the filing’s pro forma nine-month 2013 comparison shows net sales of $4,193.9 million and net income of $239.5 million.
- Third-quarter gross margin fell from 42.2% to 41.4%, principally due to unusual costs and higher beer logistics costs. Nine-month gross margin increased from 40.3% to 42.4%.
Liquidity, debt, and capital spending
Cash from operations was $750.1 million. Working-capital uses included increases in inventory ($205.6 million), receivables ($80.8 million), and prepaid expenses and other current assets ($68.4 million). Investing cash outflow was $559.7 million, chiefly reflecting $541.3 million of capital expenditure. Financing cash outflow was $189.5 million, including $565.3 million of long-term debt principal payments and the $543.3 million final Beer Acquisition purchase-price payment, partly offset by $800.0 million of new senior notes.
At November 30, the company had no borrowings outstanding on its $850 million revolving credit facility and $835.9 million of availability after letters of credit. Its two receivables securitization facilities also had no outstanding borrowings and $385 million combined availability. Management stated that cash flows and financing capacity were expected to cover working capital, scheduled debt service, and anticipated capital spending, while noting that funding depends on market conditions and lender participation.
Outlook, risks, and unusual items
- Management reiterated a long-term objective of growing sales, expanding margins, increasing cash flow, growing EPS, and reducing borrowings. The filing provides no specific earnings or revenue guidance.
- FY2015 capital expenditure expectations were $725–$775 million, including $600–$650 million for Beer, primarily for brewery expansion. The company expected $2.0–$2.3 billion of brewery and glass-plant expansion spending from FY2014 through FY2018.
- The brewery was required to reach at least 20 million hectoliters of annual packaged-beer capacity by December 2016; an additional expansion to 25 million hectoliters was expected by the end of calendar 2017. In December 2014, after quarter-end, the company completed a glass-plant joint venture and acquired related warehouse, land, and rail assets for approximately $300 million.
- Q3 unusual costs included $21.5 million of unrealized losses on undesignated commodity swaps, $8.6 million amortization of a favorable interim supply agreement, and $2.6 million of product-recall costs. Nine-month recall charges were $11.8 million net of recoveries; reimbursement from the bottle supplier was not assured.
- Other risks include foreign-exchange, commodity-price and interest-rate exposure; execution and cost risks for major expansion projects; and a pending appeal in an antitrust lawsuit related to the Beer Business Acquisition, which management said it considered baseless. Potential payments under certain indemnifications were estimated at up to $292.4 million, with $278.8 million recoverable from third parties; management considered material payment unlikely.
Important facts for investors to verify
- Underlying Beer and Wine and Spirits trends, separating organic growth, acquisition effects, distributor inventory changes, and shipment timing.
- Cash conversion and working-capital needs, particularly elevated inventories and the planned step-up in capital spending.
- Debt repayment capacity, interest expense, refinancing needs, and the terms and continued availability of credit facilities.
- Progress, cost, and timing of brewery and glass-plant projects, including whether capacity additions align with demand.
- Final product-recall recoveries, resolution of the antitrust appeal, and any changes in contingent or indemnification exposures.