Constellation Brands, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended February 28, 2017 (filed April 27, 2017). This is an annual report, not a report for calendar-year 2016 Q4. The company produces and markets beer, wine and spirits; its largest business is U.S. high-end beer, led by Mexican brands.
Financial results
| Metric | FY2017 | FY2016 |
|---|---|---|
| Net sales | $7.332 billion | $6.548 billion |
| Gross profit / gross margin | $3.529 billion / 48.1% | $2.942 billion / 44.9% |
| Operating income | $2.399 billion | $1.765 billion |
| Net income attributable to CBI | $1.535 billion | $1.055 billion |
| Diluted EPS, Class A | $7.52 | $5.18 |
| Operating cash flow | $1.696 billion | $1.414 billion |
| Capital expenditures | $907 million | $891 million |
| Total debt at year-end | $9.238 billion | $8.081 billion |
- Net sales increased 12%. Beer sales rose 17% to $4.229 billion; Wine and Spirits sales rose 6% to $3.102 billion. Beer shipment volume increased 13% overall, including 11.1% organically.
- Gross margin improved 3.2 percentage points. SG&A increased 18% to $1.392 billion, or 19.0% of sales versus 18.0%.
- Operating income rose 36% and attributable net income rose 46%, but reported results include a $262.4 million gain on the Canadian wine business sale and a lower effective tax rate. The FY2017 effective tax rate was 26.5%, versus 29.3%.
- Operating cash flow increased 20%. Cash less capital expenditures was approximately $789 million. Year-end cash was $177 million; current assets were $3.230 billion and current liabilities $2.698 billion.
- Debt increased approximately $1.157 billion year over year. The company reported $1.004 billion of remaining capacity across its revolving credit and receivables facilities at February 28, 2017, and said it was in compliance with debt covenants.
Material changes and notable items
- Sold the lower-margin Canadian wine business in December 2016 for transaction value of C$1.03 billion ($775.2 million). Net cash proceeds were $575.3 million; the reported gain was $262.4 million. The business contributed $311.2 million in FY2017 sales through the sale date.
- Acquired the Obregon Brewery for $568.7 million net of cash acquired, ending the interim beer supply agreement with Modelo. FY2017 also included acquisitions of Prisoner, High West and Charles Smith.
- Beer growth reflected Mexican beer volume and pricing, along with Ballast Point sales. Wine and Spirits growth included acquired brands and organic volume, partly offset by the Canadian divestiture.
- Recorded $46.0 million of trademark impairment charges, including $37.6 million for discontinued low-margin brands and $8.4 million related to the divestiture. The Canadian sale and related activities generated a net gain of $242.0 million after specified impairment and other costs.
Outlook, risks and contingencies
- Management forecast FY2018 capital expenditures of $1.2–$1.3 billion, including $1.0–$1.1 billion for beer projects, and an effective tax rate of 21%–23%. It expected approximately $400 million of FY2018 dividends. The filing provides no specific sales or EPS guidance.
- Mexico Beer Expansion Projects—including Nava expansion, Obregon optimization, Mexicali brewery construction and glass-plant expansion—were estimated at approximately $3.9 billion through FY2021. Approximately $2.1 billion had been invested, including about $700 million in FY2017; most remaining spending was expected over the next three fiscal years.
- Management cited reliance on Mexican beer brands and a concentrated brewery supply base; project delays or cost overruns; water, agricultural input and glass supply risks; competition and changing consumer preferences; foreign-exchange and interest-rate exposure; and potential changes to trade rules, tariffs, taxes and alcohol regulation.
- Contractual obligations totaled $17.855 billion, including $6.443 billion of purchase obligations and $8.683 billion of long-term debt principal. The company said it had no material off-balance-sheet arrangements.
- Ordinary-course litigation and regulatory inquiries were disclosed. Management did not expect pending matters to have a material adverse effect, but said outcomes could not be predicted. KPMG gave an unqualified opinion on the financial statements; management and the auditor reported effective internal control over financial reporting.
Important facts for investors to verify
- How much of earnings growth persists after excluding the Canadian divestiture gain, tax effects, acquisition impacts and other comparability adjustments.
- Whether Mexican beer consumer demand, depletions and pricing sustain growth, and whether acquired brands meet expectations.
- Progress, costs, timing and capacity benefits of the Mexico expansion projects, including the company’s ability to manage brewery, glass and water supply risks.
- Debt reduction capacity and liquidity after planned capital spending, dividends, buybacks and contractual purchase commitments.
- Effects of tax examinations, potential trade or tariff changes, and other regulatory developments on cash taxes and results.