Business context and reporting period
Constellation Brands, Inc. is an international producer and marketer of beer, wine, and spirits, with major operations in the U.S. and Mexico. Its portfolio includes Corona, Modelo, Robert Mondavi, Kim Crawford, and SVEDKA. This Form 10-K reports fiscal 2020, the year ended February 29, 2020, compared mainly with fiscal 2019. It also discusses developments after year-end, including COVID-19.
Financial performance and liquidity
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Net sales | $8.344 billion | $8.116 billion |
| Gross profit / margin | $4.152 billion / 49.8% | $4.080 billion / 50.3% |
| Operating income | $2.155 billion | $2.412 billion |
| Net income (loss) attributable to CBI | $(11.8) million | $3.436 billion |
| Operating cash flow | $2.551 billion | $2.246 billion |
| Capital expenditures | $726.5 million | $886.3 million |
| Total debt outstanding | $12.185 billion | $13.617 billion |
Operating cash flow less capital expenditures was approximately $1.825 billion. Cash was $81.4 million, current assets $3.484 billion, and current liabilities $2.312 billion at year-end. Available revolving-credit capacity was $1.749 billion at February 29, 2020 ($1.988 billion at April 15, 2020). The company reported compliance with debt covenants. Dividends paid were $569.2 million; fiscal 2020 share repurchases were $50 million.
Beer drove growth: segment net sales rose 8% to $5.616 billion, with shipment volume up 6.1% and depletion volume up 7.5%. Wine and Spirits sales declined 6% to $2.728 billion, with branded shipment volume down 8.4% overall and U.S. Power Brand shipment volume down 1.7%. The reported net loss chiefly reflected a $2.126 billion unrealized loss on Canopy securities, $575.9 million of equity-method losses from Canopy, and $449.7 million of impairment charges on assets held for sale. A $547.4 million tax benefit related to Swiss tax reform partly offset these items; reported effective tax benefit rate was 102.3%.
Material changes versus prior period
- Consolidated net sales increased 3%, mainly on Mexican beer volume growth and pricing; Wine and Spirits declines partly offset the increase.
- Operating income fell 11%. Beer operating income grew 10%, while Wine and Spirits operating income fell 8%; held-for-sale impairments and restructuring/optimization costs also weighed on results.
- Canopy fair-value results reversed sharply: fiscal 2020 included a $2.126 billion unrealized loss, compared with a $1.971 billion unrealized gain in fiscal 2019. Interest expense rose 17% to $428.7 million, primarily because of higher average borrowings following the Canopy investment.
- Operating cash flow increased about $305 million. Debt declined about $1.432 billion from fiscal 2019 year-end.
- Fiscal fourth-quarter net sales were $1.903 billion and CBI-attributable net income was $398.4 million; the comparable prior-year quarter was $1.797 billion and $1.240 billion, respectively.
Outlook, commentary, and risks
Management’s long-term model is sales growth, margin expansion, cash-flow growth, targeted leverage, and shareholder returns. It forecast a fiscal 2021 effective tax rate of 17%–19%, but did not provide fiscal 2021 capital-expenditure guidance because COVID-19’s effects and brewery-project timelines were uncertain. Management said it could not yet estimate COVID-19’s long-term financial impact; its on-premise channel historically represented 10%–15% of depletion volume and was affected by bar and restaurant closures. It reported that major facilities remained open, distribution and supply chains had not been materially affected, and supply was adequate for forecast demand at the time of filing.
The revised Gallo wine-and-spirits sale was expected to yield about $843 million, with up to $250 million contingent consideration; a separate Nobilo sale was priced at $130 million. Both remained subject to approvals and closing conditions, and proceeds were intended primarily to reduce borrowings. Ballast Point was sold in March 2020. The Mexicali brewery project faced local opposition following a public consultation; approximately $700 million had been recorded as construction in progress, with additional committed costs. Canopy announced facility closures and operating reductions after year-end; Constellation expected to record its proportional share of Canopy’s estimated C$245 million–C$280 million pre-tax loss in fiscal 2021.
Key risks include COVID-19-related demand, operating, and supply disruptions; dependence on Mexican beer and a small number of breweries and glass suppliers; Canopy’s volatile valuation, losses, and cannabis-law uncertainty; completion, proceeds, and execution risks for divestitures; substantial debt and contractual commitments; and sensitivity to agricultural inputs, water availability, currency, and regulation. The company reported effective internal control over financial reporting; the audit opinion on the financial statements was unqualified.
Most important facts for investors to verify
- Whether COVID-19 materially changed consumer demand, channel mix, production, cash flow, or access to financing after the filing date.
- Canopy’s current valuation, operating outlook, potential impairment, and the accounting and cash consequences of any warrant exercise.
- Closing status, final proceeds, contingent consideration, and realized impairment or restructuring costs for the Gallo, Nobilo, and other divestitures.
- Mexicali project costs and path forward, and the timing and cost of the Obregon capacity expansion.
- Debt maturities, leverage and covenant headroom, and the company’s ability to fund capital spending and shareholder returns.