Business context and reporting period
Constellation Brands, Inc. filed this unaudited Form 10-Q for the quarter ended August 31, 2015. The company refers to this as the second quarter of fiscal 2016; year-to-date figures cover the six months ended August 31, 2015. It operates Beer, Wine and Spirits, and Corporate Operations and Other segments.
Financial performance and liquidity
- Quarter: Net sales were $1.733 billion, up 8% year over year. Operating income was $479.4 million, up 27%; net income attributable to CBI was $302.4 million, up 54%. Diluted EPS was $1.49 for Class A and $1.38 for Class B, versus $0.98 and $0.90, respectively.
- Six months: Net sales were $3.365 billion, up 7%; operating income was $906.7 million, up 18%; net income attributable to CBI was $541.0 million, up 34%. Diluted EPS was $2.67 for Class A and $2.47 for Class B.
- Margins: Gross margin was 44.7% for the quarter versus 41.9% a year earlier, and 45.0% year to date versus 42.9%. SG&A was 17.1% of quarterly net sales and 18.0% year to date.
- Cash flow: Six-month operating cash flow was $803.1 million, versus $668.1 million. Investing used $609.0 million, including $317.9 million for Meiomi and $294.8 million for capital expenditures. Financing provided $29.3 million. Cash rose to $329.7 million from $110.1 million at fiscal year-end.
- Debt and liquidity: Total debt was $7.424 billion, up $75.6 million from February 28, 2015; cash-adjusted net debt was approximately $7.094 billion. The company reported $1.135 billion of unused revolving capacity and $430 million of unused receivables-facility capacity at August 31. Current liabilities were $1.212 billion. The company said it was in compliance with debt covenants.
- Dividends: Six-month dividends paid were $119.8 million. The board declared a subsequent quarterly dividend of $0.31 per Class A share and $0.28 per Class B share, payable November 24, 2015.
Material changes versus the prior comparable period
- Beer drove growth: quarterly Beer sales rose 14% and segment operating income rose 31%; year-to-date sales rose 13% and segment operating income rose 24%. Management attributed gains mainly to demand and volume growth in the Mexican beer portfolio, with pricing benefits in select markets.
- Wine and Spirits sales were essentially flat in the quarter and up 0.4% year to date. Spirits grew, while wine sales and foreign currency translation weighed on results. U.S. Focus Brand depletion volumes increased.
- Interest expense declined 9% for the quarter and 10% year to date, primarily due to lower average interest rates. Effective tax rates fell to 24.2% for the quarter and 27.6% year to date, from 32.2% and 32.4%, respectively.
- Comprehensive income attributable to CBI declined to $117.0 million for the quarter from $167.2 million, and to $301.7 million year to date from $421.3 million, largely reflecting foreign-currency translation and hedge losses.
Outlook, commentary, risks and unusual items
- Management reiterated its long-term objectives of sales growth, margin expansion, increased cash flow, EPS growth, debt reduction and quarterly dividends. It said liquidity should be adequate for operations, debt service, dividends, capital spending and planned expansions, subject to market conditions. The filing provides no specific full-year earnings or revenue guidance.
- Management expects the Mexican brewery expansion from 10 million to 20 million hectoliters to be completed by December 31, 2016, with a goal of June 2016; a further expansion to 25 million hectoliters is planned by December 31, 2017. The company continues to assess capacity needs beyond that level.
- Meiomi was acquired in August 2015 for $317.9 million in cash and is included in Wine and Spirits results from the acquisition date. Preliminary purchase accounting added $239.8 million to goodwill.
- Quarterly and year-to-date growth benefited from a roughly $37 million prior-year sales comparison effect related to the Corona Extra product recall; management warned that this shift would affect third-quarter fiscal 2016 sales growth. Other comparability items included commodity-derivative losses, acquisition costs, amortization of a favorable supply agreement, and restructuring charges ($14.3 million year to date).
- A $31.9 million tax benefit was recorded in the quarter following reductions in uncertain tax positions after certain IRS matters were effectively settled. The company disputes other proposed IRS assessments for fiscal 2010 and 2011 and believes its position will be sustained.
- Key exposures include consumer demand, foreign exchange, commodity prices, interest rates, leverage and covenant restrictions, and costs and timing of brewery and glass-plant expansions. Management reported hedging about 79% of relevant foreign-currency exposures and 76% of forecast commodity exposures for the remaining six months of fiscal 2016. It also disclosed that $33.2 million of net-of-tax hedge losses may be reclassified to earnings within 12 months.
- On September 28, 2015, after quarter-end, the receivables facilities were extended and their maximum capacities increased. Management cautioned that future dividends and share repurchases remain subject to board approval, financial condition and other factors.
Most important facts for investors to verify
- How much Beer’s growth reflects underlying demand and pricing versus the approximately $37 million recall-related comparison effect, and whether depletion trends support ongoing shipments.
- Whether margin improvement and cash generation persist as marketing investment, restructuring and acquisition-related costs evolve.
- The funding needs, returns and execution schedule for Meiomi and the brewery and glass-plant expansion programs, given total debt of $7.424 billion.
- Debt covenant headroom, refinancing requirements, and actual availability under revolving and receivables facilities.
- The resolution and potential financial impact of remaining IRS disputes, as well as foreign-exchange, commodity and interest-rate exposures.