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CONSTELLATION BRANDS, INC. - Quarter Report: 2019 August (Form 10-Q)

Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number: 001-08495
image_color.jpg
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
16-0716709
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)

207 High Point Drive, Building 100, Victor, New York 14564
(Address of principal executive offices) (Zip code)
(585) 678-7100
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Class A Common Stock
STZ
New York Stock Exchange
Class B Common Stock
STZ.B
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes    No  

There were 167,498,276 shares of Class A Common Stock, 23,314,407 shares of Class B Common Stock, and 823,377 shares of Class 1 Common Stock outstanding as of September 30, 2019.


Table of Contents

TABLE OF CONTENTS

 
 























This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Companys control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. For further information regarding such forward-looking statements, risks and uncertainties, please see “Information Regarding Forward-Looking Statements” under Part I – Item 2 “Managements Discussion and Analysis of Financial Condition and Results of Operations.”

Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. Unless otherwise defined herein, refer to the Notes to Consolidated Financial Statements under Item 1 of this Quarterly Report on Form 10-Q for the definition of capitalized terms used herein. All references to “Fiscal 2019” refer to our fiscal year ended February 28, 2019. All references to “Fiscal 2020” refer to our fiscal year ending February 29, 2020. All references to “$” are to U.S. dollars, all references to “C$” are to Canadian dollars, all references to MXN$ are to Mexican pesos, and all references to “A$” are to Australian dollars.



FINANCIAL STATEMENTS

PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
 
August 31,
2019
 
February 28,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
81.3

 
$
93.6

Accounts receivable
953.7

 
846.9

Inventories
1,311.4

 
2,130.4

Prepaid expenses and other
525.1

 
613.1

Assets held for sale - current
666.0

 

Total current assets
3,537.5

 
3,684.0

Property, plant, and equipment
5,141.6

 
5,267.3

Goodwill
7,696.7

 
8,088.8

Intangible assets
2,787.0

 
3,198.1

Equity method investments
3,003.8

 
3,465.6

Securities measured at fair value
1,572.2

 
3,234.7

Deferred income taxes
2,146.8

 
2,183.3

Assets held for sale
1,019.1

 

Other assets
650.4

 
109.7

Total assets
$
27,555.1

 
$
29,231.5

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
150.9

 
$
791.5

Current maturities of long-term debt
636.1

 
1,065.2

Accounts payable
608.6

 
616.7

Other accrued expenses and liabilities
800.3

 
690.4

Total current liabilities
2,195.9

 
3,163.8

Long-term debt, less current maturities
12,159.8

 
11,759.8

Deferred income taxes and other liabilities
1,508.4

 
1,470.7

Total liabilities
15,864.1

 
16,394.3

Commitments and contingencies

 

CBI stockholders’ equity:
 
 
 
Class A Common Stock, $.01 par value – Authorized, 322,000,000 shares; Issued, 185,880,112 shares and 185,740,178 shares, respectively
1.9

 
1.9

Class B Convertible Common Stock, $.01 par value – Authorized, 30,000,000 shares; Issued, 28,321,821 shares and 28,322,419 shares, respectively
0.3

 
0.3

Additional paid-in capital
1,452.1

 
1,410.8

Retained earnings
13,221.4

 
14,276.2

Accumulated other comprehensive income (loss)
(476.6
)
 
(353.9
)
 
14,199.1

 
15,335.3

Less: Treasury stock –
 
 
 
Class A Common Stock, at cost, 18,604,964 shares and 18,927,966 shares, respectively
(2,819.4
)
 
(2,782.1
)
Class B Convertible Common Stock, at cost, 5,005,800 shares
(2.2
)
 
(2.2
)
 
(2,821.6
)
 
(2,784.3
)
Total CBI stockholders’ equity
11,377.5

 
12,551.0

Noncontrolling interests
313.5

 
286.2

Total stockholders’ equity
11,691.0

 
12,837.2

Total liabilities and stockholders’ equity
$
27,555.1

 
$
29,231.5

The accompanying notes are an integral part of these statements.

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
1


FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
(unaudited)
 
For the Six Months Ended August 31,
 
For the Three Months Ended August 31,
 
2019
 
2018
 
2019
 
2018
Sales
$
4,855.9

 
$
4,755.7

 
$
2,573.4

 
$
2,525.7

Excise taxes
(414.7
)
 
(409.5
)
 
(229.4
)
 
(226.6
)
Net sales
4,441.2

 
4,346.2

 
2,344.0

 
2,299.1

Cost of product sold
(2,226.6
)
 
(2,129.4
)
 
(1,158.1
)
 
(1,130.9
)
Gross profit
2,214.6

 
2,216.8

 
1,185.9

 
1,168.2

Selling, general, and administrative expenses
(872.4
)
 
(826.4
)
 
(466.4
)
 
(403.2
)
Operating income (loss)
1,342.2

 
1,390.4

 
719.5

 
765.0

Income (loss) from unconsolidated investments
(2,255.3
)
 
1,052.8

 
(1,324.7
)
 
688.4

Interest expense
(226.2
)
 
(175.8
)
 
(111.6
)
 
(88.0
)
Loss on extinguishment of debt
(2.4
)
 

 
(2.4
)
 

Income (loss) before income taxes
(1,141.7
)
 
2,267.4

 
(719.2
)
 
1,365.4

(Provision for) benefit from income taxes
387.6

 
(369.8
)
 
202.2

 
(214.1
)
Net income (loss)
(754.1
)
 
1,897.6

 
(517.0
)
 
1,151.3

Net income (loss) attributable to noncontrolling interests
(16.5
)
 
(4.3
)
 
(8.2
)
 
(1.8
)
Net income (loss) attributable to CBI
$
(770.6
)
 
$
1,893.3

 
$
(525.2
)
 
$
1,149.5

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
(886.2
)
 
$
1,793.5

 
$
(646.4
)
 
$
1,232.6

Comprehensive (income) loss attributable to noncontrolling interests
(7.1
)
 
(1.9
)
 
0.1

 
(9.1
)
Comprehensive income (loss) attributable to CBI
$
(893.3
)
 
$
1,791.6

 
$
(646.3
)
 
$
1,223.5

 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to CBI:
 
 
 
 
 
 
 
Basic – Class A Common Stock
$
(4.08
)
 
$
10.03

 
$
(2.77
)
 
$
6.11

Basic – Class B Convertible Common Stock
$
(3.71
)
 
$
9.11

 
$
(2.52
)
 
$
5.55

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
$
(4.08
)
 
$
9.64

 
$
(2.77
)
 
$
5.87

Diluted – Class B Convertible Common Stock
$
(3.71
)
 
$
8.89

 
$
(2.52
)
 
$
5.41

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic – Class A Common Stock
168.215

 
167.617

 
168.310

 
167.172

Basic – Class B Convertible Common Stock
23.316

 
23.325

 
23.316

 
23.323

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
168.215

 
196.468

 
168.310

 
195.907

Diluted – Class B Convertible Common Stock
23.316

 
23.325

 
23.316

 
23.323

 
 
 
 
 
 
 
 
Cash dividends declared per common share:
 
 
 
 
 
 
 
Class A Common Stock
$
1.50

 
$
1.48

 
$
0.75

 
$
0.74

Class B Convertible Common Stock
$
1.36

 
$
1.34

 
$
0.68

 
$
0.67


The accompanying notes are an integral part of these statements.

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
2


FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Non-controlling
Interests
 
Total
 
Class A
 
Class B
 
Balance at February 28, 2019
$
1.9

 
$
0.3

 
$
1,410.8

 
$
14,276.2

 
$
(353.9
)
 
$
(2,784.3
)
 
$
286.2

 
$
12,837.2

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
(245.4
)
 

 

 
8.3

 
(237.1
)
Other comprehensive income (loss), net of income tax effect

 

 

 

 
(1.6
)
 

 
(1.1
)
 
(2.7
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(239.8
)
Dividends declared

 

 

 
(141.9
)
 

 

 

 
(141.9
)
Initial recognition of non-controlling interest

 

 

 

 

 

 
20.2

 
20.2

Shares issued under equity compensation plans

 

 
(9.3
)
 

 

 
6.3

 

 
(3.0
)
Stock-based compensation

 

 
15.5

 

 

 

 

 
15.5

Balance at May 31, 2019
$
1.9

 
$
0.3

 
$
1,417.0

 
$
13,888.9

 
$
(355.5
)
 
$
(2,778.0
)
 
$
313.6

 
$
12,488.2

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
(525.2
)
 

 

 
8.2

 
(517.0
)
Other comprehensive income (loss), net of income tax effect

 

 

 

 
(121.1
)
 

 
(8.3
)
 
(129.4
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(646.4
)
Repurchase of shares

 

 

 

 

 
(50.0
)
 

 
(50.0
)
Dividends declared

 

 

 
(142.3
)
 

 

 

 
(142.3
)
Shares issued under equity compensation plans

 

 
17.4

 

 

 
6.4

 

 
23.8

Stock-based compensation

 

 
17.7

 

 

 

 

 
17.7

Balance at August 31, 2019
$
1.9

 
$
0.3

 
$
1,452.1

 
$
13,221.4

 
$
(476.6
)
 
$
(2,821.6
)
 
$
313.5

 
$
11,691.0

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at February 28, 2018
$
2.6

 
$
0.3

 
$
2,825.3

 
$
9,157.2

 
$
(202.9
)
 
$
(3,807.4
)
 
$
16.6

 
$
7,991.7

Cumulative effect of change in accounting principle

 

 

 
2,242.0

 

 

 

 
2,242.0

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
743.8

 

 

 
2.5

 
746.3

Other comprehensive income (loss), net of income tax effect

 

 

 

 
(175.7
)
 

 
(9.7
)
 
(185.4
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
560.9

Repurchase of shares

 

 

 

 

 
(100.0
)
 

 
(100.0
)
Dividends declared

 

 

 
(140.6
)
 

 

 

 
(140.6
)
Shares issued under equity compensation plans

 

 
(7.7
)
 

 

 
2.3

 

 
(5.4
)
Stock-based compensation

 

 
17.2

 

 

 

 

 
17.2

Balance at May 31, 2018
$
2.6

 
$
0.3

 
$
2,834.8

 
$
12,002.4

 
$
(378.6
)
 
$
(3,905.1
)
 
$
9.4

 
$
10,565.8

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
1,149.5

 

 

 
1.8

 
1,151.3

Other comprehensive income (loss), net of income tax effect

 

 

 

 
74.0

 

 
7.3

 
81.3

Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1,232.6

Repurchase of shares

 

 

 

 

 
(404.3
)
 

 
(404.3
)
Dividends declared

 

 

 
(139.0
)
 

 

 

 
(139.0
)
Conversion of long-term debt to noncontrolling equity interest

 

 

 

 

 

 
248.4

 
248.4

Shares issued under equity compensation plans

 

 
12.3

 

 

 
1.2

 

 
13.5

Stock-based compensation

 

 
18.2

 

 

 

 

 
18.2

Balance at August 31, 2018
$
2.6

 
$
0.3

 
$
2,865.3

 
$
13,012.9

 
$
(304.6
)
 
$
(4,308.2
)
 
$
266.9

 
$
11,535.2


The accompanying notes are an integral part of these statements.

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
3


FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Six Months Ended August 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(754.1
)
 
$
1,897.6

 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Unrealized net (gain) loss on securities measured at fair value
1,666.6

 
(950.4
)
Equity in (earnings) losses of equity method investees and related activities, net of distributed (earnings) losses
580.3

 
2.1

Depreciation
169.1

 
168.8

Loss on inventory and related contracts
61.0

 

(Gain) loss on sale of business and assets held for sale
36.0

 
(6.2
)
Stock-based compensation
33.6

 
35.9

Impairment and amortization of intangible assets
13.9

 
3.0

Amortization of debt issuance costs and loss on extinguishment of debt
9.7

 
8.9

Net (gain) loss on sale of unconsolidated investment
0.1

 
(99.8
)
Deferred tax provision (benefit)
(452.7
)
 
202.3

Change in operating assets and liabilities, net of effects from purchases of businesses:
 
 
 
Accounts receivable
(106.2
)
 
(173.8
)
Inventories
92.7

 
123.8

Prepaid expenses and other current assets
32.2

 
(49.0
)
Accounts payable
3.9

 
111.0

Deferred revenue
34.0

 
35.6

Other accrued expenses and liabilities
(61.0
)
 
15.6

Other
60.3

 
13.1

Total adjustments
2,173.5

 
(559.1
)
Net cash provided by (used in) operating activities
1,419.4

 
1,338.5

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of property, plant, and equipment
(355.2
)
 
(370.6
)
Purchases of businesses, net of cash acquired
(36.2
)
 
(20.2
)
Investments in equity method investees and securities
(33.0
)
 
(152.1
)
Proceeds from sale of unconsolidated investment

 
110.2

Proceeds from sales of assets

 
44.7

Other investing activities
(1.3
)
 
(0.8
)
Net cash provided by (used in) investing activities
(425.7
)
 
(388.8
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments of long-term debt
(1,331.5
)
 
(23.5
)
Net proceeds from (repayments of) short-term borrowings
(640.5
)
 
(32.4
)
Dividends paid
(285.0
)
 
(279.1
)
Purchases of treasury stock
(50.0
)
 
(504.3
)
Payments of minimum tax withholdings on stock-based payment awards
(14.2
)
 
(13.5
)
Payments of debt issuance costs
(8.0
)
 
(13.6
)
Proceeds from issuance of long-term debt
1,291.3

 
12.0

Proceeds from shares issued under equity compensation plans
32.9

 
21.5

Net cash provided by (used in) financing activities
(1,005.0
)
 
(832.9
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1.0
)
 
(1.0
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
(12.3
)
 
115.8

Cash and cash equivalents, beginning of period
93.6

 
90.3

Cash and cash equivalents, end of period
$
81.3

 
$
206.1

 
 
 
 

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
4


FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Six Months Ended August 31,
 
2019
 
2018
Supplemental disclosures of noncash investing and financing activities
 
 
 
Additions to property, plant, and equipment
$
74.4

 
$
147.2

Conversion of long-term debt to noncontrolling equity interest
$

 
$
248.4


The accompanying notes are an integral part of these statements.

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
5


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
AUGUST 31, 2019
(unaudited)

1.    BASIS OF PRESENTATION

Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. We have prepared the consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in our opinion, all adjustments necessary to present fairly our financial information. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019 (the “2019 Annual Report”), and include the recently adopted accounting guidance described in Note 2 and Note 14 herein. Results of operations for interim periods are not necessarily indicative of annual results.

2.    ACCOUNTING GUIDANCE

Recently adopted accounting guidance
In February 2016, the FASB issued guidance for the accounting for leases. Under this guidance, a lessee recognizes assets and liabilities on its balance sheet for most leases. Lease expense continues to be consistent with previous guidance. Additionally, this guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leasing arrangements.

We adopted the guidance on March 1, 2019, using the modified retrospective approach, accordingly, prior period balances and disclosures have not been restated. We elected the package of transition practical expedients for expired or existing contracts, which retains prior conclusions reached on lease identification, classification, and initial direct costs incurred.

We finalized the implementation of changes to our accounting policies, systems and controls, including a new leasing software to capture the required data for accounting and disclosure. The adoption of this guidance resulted in the recognition of operating lease right-of-use assets of $585.4 million and operating lease liabilities of $619.7 million as of March 1, 2019, and did not have a material impact on our results of operations or liquidity.

For additional information on leases, refer to Note 14.

3.    INVENTORIES

Inventories are stated at the lower of cost (primarily computed in accordance with the first-in, first-out method) or net realizable value. Elements of cost include materials, labor, and overhead and consist of the following:
 
August 31,
2019 (1)
 
February 28,
2019
(in millions)
 
 
 
Raw materials and supplies
$
147.0

 
$
182.6

In-process inventories
792.2

 
1,480.5

Finished case goods
372.2

 
467.3

 
$
1,311.4

 
$
2,130.4


(1) 
The inventory balance at August 31, 2019, excludes amounts reclassified to assets held for sale (see Note 4).

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
6


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Related party transactions and arrangements
We have an equally-owned glass production plant joint venture with Owens-Illinois. We have entered into various contractual arrangements with affiliates of Owens-Illinois primarily for the purchase of glass bottles used largely in our imported and craft beer portfolios. Amounts purchased under these arrangements were $126.4 million and $123.7 million for the six months ended August 31, 2019, and August 31, 2018, respectively, and $37.9 million and $54.7 million for the three months ended August 31, 2019, and August 31, 2018, respectively.

4.    WINE AND SPIRITS TRANSFORMATION

Wine and Spirits Transaction
In April 2019, we entered into a definitive agreement to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices, and facilities, for approximately $1.7 billion, subject to certain adjustments (the “Wine and Spirits Transaction”). The Wine and Spirits Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approval, and is expected to close by the end of Fiscal 2020. We expect to use the net cash proceeds from the Wine and Spirits Transaction primarily to reduce outstanding borrowings.

Subsequent event
We now believe it is likely that a portion of the Wine and Spirits Transaction purchase price may be revised to take the form of contingent consideration, receivable based on future brand performance. We record contingent consideration when it is determined to be realizable. Therefore, we now expect to recognize an additional loss of approximately $300 million on the write-down of assets held for sale during the three months ended November 30, 2019.

Black Velvet Transaction
In August 2019, we entered into a definitive agreement to sell Black Velvet Canadian Whisky and the brand’s associated production facility, along with a subset of Canadian whisky brands produced at that facility, for approximately $266 million, subject to certain adjustments (the “Black Velvet Transaction”). We expect to recognize a gain of approximately $70 million to $80 million upon closing. The Black Velvet Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approvals, and is expected to close in the fourth quarter of calendar 2019. We expect to use the net cash proceeds from the Black Velvet Transaction primarily to reduce outstanding borrowings.

Assets Held for Sale
In connection with the Wine and Spirits Transaction and Black Velvet Transaction, certain Wine and Spirits segment net assets have met the held for sale criteria as of August 31, 2019. For the six months and three months ended August 31, 2019, a long-lived asset impairment of $27.0 million was recognized. For additional information refer to Note 6.


Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
7


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The carrying value of assets held for sale consists of the following:
 
August 31, 2019
 
Wine and Spirits Transaction
 
Black
Velvet Transaction
 
Total
(in millions)
 
 
 
 
 
Assets
 
 
 
 
 
Inventories
$
593.7

 
$
63.3

 
$
657.0

Prepaid expenses and other
9.0

 

 
9.0

Assets held for sale - current
602.7

 
63.3

 
666.0

 
 
 
 
 
 
Property, plant, and equipment
175.8

 
18.2

 
194.0

Goodwill
353.2

 
62.6

 
415.8

Intangible assets
347.2

 
59.8

 
407.0

Equity method investments
1.1

 

 
1.1

Other assets
0.3

 
0.9

 
1.2

Assets held for sale
877.6

 
141.5

 
1,019.1

 
 
 
 
 
 
Liabilities
 
 
 
 
 
Accounts payable
4.7

 

 
4.7

Other accrued expenses and liabilities
31.1

 
1.6

 
32.7

Deferred income taxes and other liabilities
0.1

 
2.1

 
2.2

Liabilities held for sale (1)
35.9

 
3.7

 
39.6

Net assets held for sale
$
1,444.4

 
$
201.1

 
$
1,645.5


(1) 
Liabilities held for sale are included in the Consolidated Balance Sheet as of August 31, 2019, within the respective liability line items noted above.
Wine and Spirits Optimization
We recognized charges in connection with our ongoing efforts to gain efficiencies and reduce our cost structure within the Wine and Spirits segment as follows:
 
Results of Operations Location
 
For the Six Months Ended
August 31, 2019
 
For the Three Months Ended
August 31, 2019
(in millions)
 
 
 
 
 
Loss on inventory write-downs
Cost of product sold
 
$
40.9

 
$
13.7

Contract termination costs
Cost of product sold
 
20.1

 
4.3

Employee termination costs
Selling, general, and administrative expenses
 
12.1

 
0.2

Impairment of long-lived assets
Selling, general, and administrative expenses
 
27.0

 
27.0

Other costs
Selling, general, and administrative expenses
 
6.3

 

 
 
 
$
106.4

 
$
45.2





Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
8


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.    DERIVATIVE INSTRUMENTS

Overview
Our risk management and derivative accounting policies are presented in Notes 1 and 6 of our consolidated financial statements included in our 2019 Annual Report and have not changed significantly for the six months and three months ended August 31, 2019.

We have investments in certain equity securities and other rights which provide us with the option to purchase an additional ownership interest in the equity securities of Canopy (see Note 9). These investments are included in securities measured at fair value and are accounted for at fair value, with the net gain (loss) from the changes in fair value of these investments recognized in income (loss) from unconsolidated investments (see Note 6).

The aggregate notional value of outstanding derivative instruments is as follows:
 
August 31,
2019
 
February 28,
2019
(in millions)
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
Foreign currency contracts
$
1,959.9

 
$
1,579.3

Interest rate swap contracts
$
375.0

 
$

 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
Foreign currency contracts
$
781.2

 
$
460.3

Commodity derivative contracts
$
265.1

 
$
284.7



Credit risk
We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the derivative contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association agreements which allow for net settlement of the derivative contracts. We have also established counterparty credit guidelines that are regularly monitored. Because of these safeguards, we believe the risk of loss from counterparty default to be immaterial.

In addition, our derivative instruments are not subject to credit rating contingencies or collateral requirements. As of August 31, 2019, the estimated fair value of derivative instruments in a net liability position due to counterparties was $53.4 million. If we were required to settle the net liability position under these derivative instruments on August 31, 2019, we would have had sufficient available liquidity on hand to satisfy this obligation.


Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
9


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Results of period derivative activity
The estimated fair value and location of our derivative instruments on our balance sheets are as follows (see Note 6):
Assets
 
Liabilities
 
August 31,
2019
 
February 28,
2019
 
 
August 31,
2019
 
February 28,
2019
(in millions)
 
 
 
 
 
 
 
 
Derivative instruments designated as hedging instruments
Foreign currency contracts:
Prepaid expenses and other
$
9.6

 
$
14.1

 
Other accrued expenses and liabilities
$
24.0

 
$
8.8

Other assets
$
11.6

 
$
22.1

 
Deferred income taxes and other liabilities
$
18.6

 
$
6.3

Interest rate swap contracts:
Prepaid expenses and other
$
0.1

 
$

 
Other accrued expenses and liabilities
$
0.8

 
$

 
 
 
 
 
 
 
 
 
Derivative instruments not designated as hedging instruments
Foreign currency contracts:
Prepaid expenses and other
$
4.5

 
$
2.0

 
Other accrued expenses and liabilities
$
11.0

 
$
0.6

Commodity derivative contracts:
Prepaid expenses and other
$
1.2

 
$
6.1

 
Other accrued expenses and liabilities
$
15.6

 
$
6.1

Other assets
$
0.3

 
$
2.6

 
Deferred income taxes and other liabilities
$
10.7

 
$
5.5


The principal effect of our derivative instruments designated in cash flow hedging relationships on our results of operations, as well as Other Comprehensive Income (Loss) (“OCI”), net of income tax effect, is as follows:
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
Net
Gain (Loss)
Recognized
in OCI
 
Location of Net Gain (Loss)
Reclassified from
AOCI to Income (Loss)
 
Net
Gain (Loss)
Reclassified
from AOCI
to Income (Loss)
(in millions)
 
 
 
 
 
 
For the Six Months Ended August 31, 2019
 
 
 
 
 
 
Foreign currency contracts
 
$
(35.6
)
 
Sales
 
$

 
 
 
 
Cost of product sold
 
7.8

Interest rate swap contracts
 
(0.6
)
 
Interest expense
 

 
 
$
(36.2
)
 
 
 
$
7.8

 
 
 
 
 
 
 
For the Six Months Ended August 31, 2018
 
 
 
 
 
 
Foreign currency contracts
 
$
(7.0
)
 
Sales
 
$
0.1

 
 
 
 
Cost of product sold
 
4.7

 
 
$
(7.0
)
 
 
 
$
4.8

 
 
 
 
 
 
 

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
10


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
Net
Gain (Loss)
Recognized
in OCI
 
Location of Net Gain (Loss)
Reclassified from
AOCI to Income (Loss)
 
Net
Gain (Loss)
Reclassified
from AOCI
to Income (Loss)
(in millions)
 
 
 
 
 
 
For the Three Months Ended August 31, 2019
 
 
 
 
 
 
Foreign currency contracts
 
$
(33.2
)
 
Sales
 
$

 
 
 
 
Cost of product sold
 
4.2

Interest rate swap contracts
 
(0.6
)
 
Interest expense
 

 
 
$
(33.8
)
 
 
 
$
4.2

 
 
 
 
 
 
 
For the Three Months Ended August 31, 2018
 
 
 
 
 
 
Foreign currency contracts
 
$
37.9

 
Sales
 
$

 
 
 
 
Cost of product sold
 
0.6

 
 
$
37.9

 
 
 
$
0.6


We expect $6.8 million of net losses, net of income tax effect, to be reclassified from accumulated other comprehensive income (loss) (“AOCI”) to our results of operations within the next 12 months.

The effect of our undesignated derivative instruments on our results of operations is as follows:
Derivative Instruments Not
Designated as Hedging Instruments
 
 
 
Location of Net Gain (Loss)
Recognized in Income (Loss)
 
Net
Gain (Loss)
Recognized
in Income (Loss)
(in millions)
 
 
 
 
 
 
For the Six Months Ended August 31, 2019
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
(26.8
)
Foreign currency contracts
 
 
 
Selling, general, and administrative expenses
 
(8.9
)
 
 
 
 
 
 
$
(35.7
)
 
 
 
 
 
 
 
For the Six Months Ended August 31, 2018
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
9.6

Foreign currency contracts
 
 
 
Selling, general, and administrative expenses
 
(28.1
)
Interest rate swap contracts
 
 
 
Interest expense
 
2.7

 
 
 
 
 
 
$
(15.8
)
 
 
 
 
 
 
 
For the Three Months Ended August 31, 2019
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
(10.9
)
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
(5.1
)
 
 
 
 
 
 
$
(16.0
)
 
 
 
 
 
 
 
For the Three Months Ended August 31, 2018
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
(5.8
)
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
(26.2
)
Interest rate swap contracts
 
 
 
Interest expense
 
2.7

 
 
 
 
 
 
$
(29.3
)



Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
11


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.    FAIR VALUE OF FINANCIAL INSTRUMENTS

Authoritative guidance establishes a framework for measuring fair value, including a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy includes three levels:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities;
Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as volatility, interest rates, and yield curves that are observable for the asset and liability, either directly or indirectly; and
Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

Fair value methodology
The following methods and assumptions are used to estimate the fair value for each class of our financial instruments:

Foreign currency and commodity derivative contracts
The fair value is estimated using market-based inputs, obtained from independent pricing services, entered into valuation models. These valuation models require various inputs, including contractual terms, market foreign exchange prices, market commodity prices, interest-rate yield curves, and currency volatilities, as applicable (Level 2 fair value measurement).

Interest rate swap contracts
The fair value is estimated based on quoted market prices from respective counterparties. Quotes are corroborated by using discounted cash flow calculations based upon forward interest-rate yield curves, which are obtained from independent pricing services (Level 2 fair value measurement).

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
12


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Canopy investments
Equity securities, Warrants The terms of the November 2018 Canopy Warrants were modified in June 2019 and now consist of three tranches of warrants: New Tranche A Warrants, New Tranche B Warrants, and New Tranche C Warrants. The exercise price for the New Tranche C Warrants is based on the volume-weighted average of the closing market price of Canopy’s common shares on the TSX for the five trading days immediately preceding the exercise date (“VWAP Exercise Price”), accordingly, no fair value is assigned. For additional information on the November 2018 Canopy Warrants and the related modification, refer to Note 9.

The inputs used to estimate the fair value of the Canopy warrants (all as defined in Note 9) are as follows:
 
August 31, 2019 (1)
 
February 28, 2019
 
New
Tranche A
Warrants (2)
 
New
Tranche B
Warrants (3)
 
November
2017 Canopy
Warrants (2)
 
November
2018 Canopy
Warrants
 (2)
 
November
2017 Canopy
Warrants (2)
Exercise price (4)
C$
50.40

 
C$
76.68

 
C$
12.98

 
C$
50.40

 
C$
12.98

Valuation date stock price (5)
C$
31.46

 
C$
31.46

 
C$
31.46

 
C$
62.38

 
C$
62.38

Expected life (6)
4.2 years

 
7.2 years

 
0.7 years

 
2.7 years

 
1.2 years

Expected volatility (7)
65.0
%
 
65.0
%
 
69.6
%
 
79.3
%
 
87.8
%
Risk-free interest rate (8)
1.2
%
 
1.2
%
 
1.6
%
 
1.8
%
 
1.8
%
Expected dividend yield (9)
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
(1) 
New Tranche C Warrants are not included in the table as there is no fair value assigned.
(2) 
The fair value is estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement).
(3) 
The fair value is estimated using Monte Carlo simulations (Level 2 fair value measurement).
(4) 
Based on the exercise price from the applicable underlying agreements.
(5) 
Based on the closing market price for Canopy common stock on the Toronto Stock Exchange (“TSX”) as of the applicable date.
(6) 
Based on the expiration date of the warrants.
(7) 
Based on consideration of historical and/or implied volatility levels of the underlying equity security and limited consideration of historical peer group volatility levels.
(8) 
Based on the implied yield currently available on Canadian Treasury zero coupon issues with a remaining term equal to the expected life.
(9) 
Based on historical dividend levels.
Debt securities, ConvertibleIn June 2018, we acquired convertible debt securities issued by Canopy for C$200.0 million, or $150.5 million (the “Canopy Debt Securities”). We have elected the fair value option to account for the Canopy Debt Securities, which at that time, provided the greatest level of consistency with the accounting treatment for the November 2017 Canopy Warrants. Interest income on the Canopy Debt Securities is calculated using the effective interest method and is recognized separately from the changes in fair value in interest expense. The Canopy Debt Securities have a contractual maturity of five years from the date of issuance but may be converted prior to maturity by either party upon the occurrence of certain events. At settlement, the Canopy Debt Securities can be settled at the option of the issuer, in cash, equity shares of the issuer, or a combination thereof. The fair value is estimated using a binomial lattice option-pricing model (Level 2 fair value measurement), which includes an estimate of the credit spread based on the implied spread as of the issuance date of the notes.

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
13


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
 
August 31,
2019
 
February 28,
2019
Conversion price (1)
C$
48.17

 
C$
48.17

Valuation date stock price (2)
C$
31.46

 
C$
62.38

Remaining term (3)
3.9 years

 
4.4 years

Expected volatility (4)
49.0
%
 
45.9
%
Risk-free interest rate (5)
1.3
%
 
1.8
%
Expected dividend yield (6)
0.0
%
 
0.0
%
(1) 
Based on the rate which the Canopy Debt Securities may be converted into equity shares, or the equivalent amount of cash, at the option of the issuer.
(2) 
Based on the closing market price for Canopy common stock on the TSX as of the applicable date.
(3) 
Based on the contractual maturity date of the notes.
(4) 
Based on historical volatility levels of the underlying equity security reduced to account for certain risks not incorporated into the option-pricing model.
(5) 
Based on the implied yield currently available on Canadian Treasury zero coupon issues with a term equal to the remaining contractual term of the debt securities.
(6) 
Based on historical dividend levels.
Short-term borrowings
The revolving credit facility under our senior credit facility is a variable interest rate bearing note which includes a fixed margin which is adjustable based upon our debt rating (as defined in our senior credit facility). Its fair value is estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions (Level 2 fair value measurement). The remaining instruments, including our commercial paper, are variable interest rate bearing notes for which the carrying value approximates the fair value.

Long-term debt
The term loans under our Term Credit Agreement and 2019 Term Credit Agreement (both as defined in Note 11) are variable interest rate bearing notes which include a fixed margin which is adjustable based upon our debt rating. The senior floating rate notes are variable interest rate bearing notes which include a fixed margin. The fair value of the term loans and the senior floating rate notes are estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions (Level 2 fair value measurement). The fair value of the remaining long-term debt, which is primarily fixed interest rate, is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings, approximate fair value as of August 31, 2019, and February 28, 2019, due to the relatively short maturity of these instruments. As of August 31, 2019, the carrying amount of long-term debt, including the current portion, was $12,795.9 million, compared with an estimated fair value of $13,677.2 million. As of February 28, 2019, the carrying amount of long-term debt, including the current portion, was $12,825.0 million, compared with an estimated fair value of $12,768.5 million.


Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
14


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recurring basis measurements
The following table presents our financial assets and liabilities measured at estimated fair value on a recurring basis:
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
(in millions)
 
 
 
 
 
 
 
August 31, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
25.7

 
$

 
$
25.7

Commodity derivative contracts
$

 
$
1.5

 
$

 
$
1.5

Interest rate swap contracts
$

 
$
0.1

 
$

 
$
0.1

Equity securities (1)
$

 
$
1,438.0

 
$

 
$
1,438.0

Canopy Debt Securities (1)
$

 
$
134.2

 
$

 
$
134.2

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
53.6

 
$

 
$
53.6

Commodity derivative contracts
$

 
$
26.3

 
$

 
$
26.3

Interest rate swap contracts
$

 
$
0.8

 
$

 
$
0.8

 
 
 
 
 
 
 
 
February 28, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
38.2

 
$

 
$
38.2

Commodity derivative contracts
$

 
$
8.7

 
$

 
$
8.7

Equity securities (1)
$

 
$
3,023.2

 
$

 
$
3,023.2

Canopy Debt Securities (1)
$

 
$
211.5

 
$

 
$
211.5

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
15.7

 
$

 
$
15.7

Commodity derivative contracts
$

 
$
11.6

 
$

 
$
11.6


(1) 
Unrealized net gain (loss) from the changes in fair value of our securities measured at fair value recognized in income (loss) from unconsolidated investments are as follows:
 
 
For the Six Months Ended
 
For the Three Months Ended
 
 
August 31, 2019
 
August 31, 2018
 
August 31, 2019
 
August 31, 2018
 
(in millions)
 
 
 
 
 
 
 
 
November 2017 Canopy Investment (i)
$

 
$
461.0

 
$

 
$
328.1

 
November 2017 Canopy Warrants
(450.8
)
 
435.9

 
(316.7
)
 
310.5

 
November 2018 Canopy Warrants (ii)
(1,134.4
)
 

 
(473.6
)
 

 
Canopy Debt Securities
(81.4
)
 
53.5

 
(48.8
)
 
53.5

 
 
$
(1,666.6
)
 
$
950.4

 
$
(839.1
)
 
$
692.1

 
(i) 
Accounted for at fair value from the date of investment in November 2017 through October 31, 2018. Accounted for under the equity method from November 1, 2018. For additional information on the November 2017 Canopy Investment, refer to Note 9.
 
(ii) 
The terms of the November 2018 Canopy Warrants were modified in June 2019. For additional information on the November 2018 Canopy Warrants and the related modification, refer to Note 9. The amounts are net of a $1,176.0 million unrealized gain resulting from the June 2019 Warrant Modification for the six months and three months ended August 31, 2019.


Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
15


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Nonrecurring basis measurements
The following table presents our assets and liabilities measured at estimated fair value on a nonrecurring basis for which an impairment assessment was performed for the period presented:
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Losses
(in millions)
 
 
 
 
 
 
 
For the Six Months Ended August 31, 2019
 
 
 
 
 
 
 
Long-lived assets held for sale
$

 
$

 
$
1,444.4

 
$
27.0

Trademarks
$

 
$

 
$
17.0

 
$
11.0

Total
$

 
$

 
$
1,461.4

 
$
38.0



Long-lived assets held for sale
For the six months and three months ended August 31, 2019, in connection with the Wine and Spirits Transaction (as defined in Note 4), long-lived assets held for sale with a carrying value of $1,471.4 million were written down to their estimated fair value of $1,444.4 million, less cost to sell, resulting in a loss of $27.0 million. These losses are included in selling, general, and administrative expenses. These assets consisted primarily of goodwill, intangible assets, and certain winery and vineyard assets which had satisfied the conditions necessary to be classified as held for sale. As such, these assets were written down to a value based on our estimate of fair value less cost to sell. Our estimate of fair value was determined based on the expected proceeds from the Wine and Spirits Transaction as of August 31, 2019.

Trademarks
For the six months and three months ended August 31, 2019, certain continuing negative trends within our Beer segment’s Ballast Point craft beer portfolio, including increased rate of revenue decline and increased competition, indicated that it was more likely than not that the fair value of our indefinite-lived intangible asset associated with the Ballast Point craft beer trademark might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. As a result of this assessment, the Ballast Point craft beer trademark asset with a carrying value of $28.0 million was written down to its estimated fair value of $17.0 million, resulting in an impairment of $11.0 million. This impairment is included in selling, general, and administrative expenses.

7.    GOODWILL

The changes in the carrying amount of goodwill are as follows:
 
Beer
 
Wine and Spirits
 
Consolidated
(in millions)
 
 
 
 
 
Balance, February 28, 2018
$
5,157.6

 
$
2,925.5

 
$
8,083.1

Purchase accounting allocations (1)
22.3

 
2.7

 
25.0

Foreign currency translation adjustments
(12.0
)
 
(7.3
)
 
(19.3
)
Balance, February 28, 2019
5,167.9

 
2,920.9

 
8,088.8

Purchase accounting allocations (2)

 
58.8

 
58.8

Foreign currency translation adjustments
(26.0
)
 
(9.1
)
 
(35.1
)
Reclassified to assets held for sale (3)

 
(415.8
)
 
(415.8
)
Balance, August 31, 2019
$
5,141.9

 
$
2,554.8

 
$
7,696.7



Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
16


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) 
Purchase accounting allocations associated primarily with the acquisition of Four Corners (Beer). See defined acquisition term below.
(2) 
Preliminary purchase accounting allocations associated primarily with the acquisition of Nelson’s Green Brier (Wine and Spirits). See defined acquisition term below.
(3) 
In connection with the Wine and Spirits Transaction and the Black Velvet Transaction, goodwill associated with the businesses being sold were reclassified to assets held for sale based on the relative fair values of the portion of the business being sold and the remaining wine and spirits portfolio. The relative fair values were determined using the income approach based on assumptions, including projected revenue growth rates, terminal growth rate, and discount rate and other projected financial information.

Acquisitions
Nelson’s Green Brier
In May 2019, we increased our ownership interest in Nelson’s Green Brier Distillery, LLC (“Nelson’s Green Brier”) to 75%, resulting in consolidation of the business and recognition of a noncontrolling interest. This acquisition included a portfolio of award-winning, Tennessee-based craft bourbon and whiskey products. The preliminary fair value of the business combination was allocated primarily to goodwill, trademarks, inventory, and property, plant, and equipment. The results of operations of Nelson’s Green Brier are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.

We recognized a gain of $11.8 million for the six months ended August 31, 2019, related to the remeasurement of our previously held 20% equity interest in Nelson’s Green Brier to the acquisition-date fair value. This gain is included in selling, general, and administrative expenses within our consolidated results of operations.

Four Corners
In July 2018, we acquired Four Corners Brewing Company LLC, which included a portfolio of high-quality, dynamic, and bicultural, Texas-based craft beers (“Four Corners”). The purchase price was primarily allocated to goodwill, property, plant, and equipment, and trademarks, plus an earn-out over five years based on the performance of the brands. The results of operations of Four Corners are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.

8.    INTANGIBLE ASSETS

The major components of intangible assets are as follows:
 
August 31, 2019
 
February 28, 2019
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
(in millions)
 
 
 
 
 
 
 
Amortizable intangible assets
 
 
 
 
 
 
 
Customer relationships
$
89.9

 
$
36.4

 
$
89.9

 
$
39.1

Other
20.4

 
0.6

 
20.5

 
0.9

Total
$
110.3

 
37.0

 
$
110.4

 
40.0

 
 
 
 
 
 
 
 
Nonamortizable intangible assets
 
 
 
 
 
 
 
Trademarks (1)
 
 
2,750.0

 
 
 
3,158.1

Total intangible assets
 
 
$
2,787.0

 
 
 
$
3,198.1


(1) 
The intangible assets balance at August 31, 2019, excludes trademarks reclassified to assets held for sale (see Note 4).

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
17


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


We did not incur costs to renew or extend the term of acquired intangible assets for the six months and three months ended August 31, 2019, and August 31, 2018. Net carrying amount represents the gross carrying value net of accumulated amortization.

9.    EQUITY METHOD INVESTMENTS

Our equity method investments are as follows:
 
August 31, 2019
 
February 28, 2019
 
Carrying Value
 
Ownership Percentage
 
Carrying Value
 
Ownership Percentage
(in millions)
 
 
 
 
 
 
 
Canopy Equity Method Investment
$
2,846.0

 
35.6
%
 
$
3,332.1

 
36.0
%
Other equity method investments
157.8

 
20%-50%

 
133.5

 
20%-50%

 
$
3,003.8

 
 
 
$
3,465.6

 
 


In November 2017, we acquired 18.9 million common shares, which represented a 9.9% ownership interest in Ontario, Canada-based Canopy Growth Corporation (the “November 2017 Canopy Investment”), a public company and leading provider of medicinal and recreational cannabis products (“Canopy”), plus warrants which give us the option to purchase an additional 18.9 million common shares of Canopy (the “November 2017 Canopy Warrants”) for C$245.0 million, or $191.3 million. The November 2017 Canopy Warrants were issued with an exercise price of C$12.98 per warrant share and are exercisable as of August 31, 2019. These warrants expire in May 2020.

The November 2017 Canopy Investment was accounted for at fair value from the date of investment through October 31, 2018. From November 1, 2018, the November 2017 Canopy Investment has been accounted for under the equity method (see “Canopy Equity Method Investment” below). The November 2017 Canopy Warrants have been accounted for at fair value from the date of investment.

On November 1, 2018, we increased our ownership interest in Canopy by acquiring an additional 104.5 million common shares (the “November 2018 Canopy Investment”) (see Canopy Equity Method Investment below), plus warrants which give us the option to purchase an additional 139.7 million common shares of Canopy (the “November 2018 Canopy Warrants”, and together with the November 2018 Canopy Investment, the “November 2018 Canopy Transaction”) for C$5,078.7 million, or $3,869.9 million.

On November 1, 2018, our ownership interest in Canopy increased to 36.6% which allows us to exercise significant influence, but not control, over Canopy. Therefore, we account for the November 2017 Canopy Investment and the November 2018 Canopy Investment, each of which represents an investment in common shares of Canopy, collectively, under the equity method (the “Canopy Equity Method Investment”). We recognize equity in earnings (losses) and related activities for this investment on a two-month lag. Accordingly, we recognized equity in earnings (losses) and related activities of $(590.4) million for the period January 1, 2019, through June 30, 2019, in our consolidated financial statements for the six months ended August 31, 2019, and $(484.4) million for the period April 1, 2019, through June 30, 2019, in our consolidated financial statements for the three months ended August 31, 2019. Equity in earnings (losses) from the Canopy Equity Method Investment and related activities include, among other items, our share of the additional loss resulting from the June 2019 Warrant Modification (as defined below) of $(409.0) million (the “June 2019 Warrant Modification Loss”), the amortization of the fair value adjustments associated with the definite-lived intangible assets over their estimated useful lives, the flow through of inventory step-up, and unrealized gains (losses) associated with changes in our Canopy ownership percentage resulting from periodic equity issuances made by Canopy.

The November 2018 Canopy Warrants originally consisted of 88.5 million warrants (the “Tranche A Warrants”) and 51.2 million warrants (the “Tranche B Warrants”). The Tranche A Warrants were

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
18


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

immediately exercisable at an exercise price of C$50.40 per warrant share. The Tranche B Warrants were exercisable upon the exercise, in full, of the Tranche A Warrants and at an exercise price based on the volume-weighted average of the closing market price of Canopy’s common shares on the TSX for the five trading days immediately preceding the exercise date. The November 2018 Canopy Warrants originally expired in November 2021 and have been accounted for at fair value from the date of investment.

In June 2019, the Canopy shareholders approved the modification of the terms of the November 2018 Canopy Warrants and certain other rights (the “June 2019 Warrant Modification”), and the other required approvals necessary for the modifications to be effective were granted. These changes are the result of Canopy’s intention to acquire Acreage Holdings, Inc. (“Acreage”) upon U.S. Federal cannabis legalization, subject to certain conditions (the “Acreage Transaction”). As a result of the modifications, we continue to have the option to purchase an additional 139.7 million common shares of Canopy upon exercise of the warrants originally received in November 2018; however, this option now consists of three tranches of warrants, including 88.5 million warrants (the “New Tranche A Warrants”), 38.4 million warrants (the “New Tranche B Warrants”), and 12.8 million warrants (the “New Tranche C Warrants”, and collectively with the New Tranche A Warrants and the New Tranche B Warrants, the “New November 2018 Canopy Warrants”). The New Tranche A Warrants have an exercise price of C$50.40 per warrant share and are currently exercisable, but now expire November 1, 2023. The New Tranche B Warrants now have an exercise price of C$76.68 per warrant share and the New Tranche C Warrants have a VWAP Exercise Price. The New Tranche B Warrants and the New Tranche C Warrants now have an expiration date of November 1, 2026.

The other rights obtained in June 2019 in connection with the Acreage Transaction include a share repurchase credit and the ability to purchase Canopy common shares on the open market or in private agreement transactions. If for any reason Canopy has not purchased the lesser of 27,378,866 Canopy common shares or C$1,583.0 million worth of Canopy common shares for cancellation by the end of the two-year period beginning upon full exercise of the New Tranche A Warrants, we will be credited an amount that will reduce the aggregate exercise price otherwise payable upon each exercise of the New Tranche B Warrants and New Tranche C Warrants. The credit will be an amount equal to the difference between C$1,583.0 million and the actual price paid by Canopy in purchasing its common shares for cancellation. If we choose to purchase Canopy common shares on the open market or in private agreement with existing holders, the number of New Tranche B Warrants or New Tranche C Warrants shall be decreased by one for each Canopy common share acquired, up to an aggregate maximum reduction of 20 million warrants. The likelihood of receiving the share repurchase credit if we were to fully exercise the New Tranche A Warrants is remote, therefore, no fair value has been assigned.

The inputs used to estimate the fair value of the New November 2018 Canopy Warrants as of the June 27, 2019 modification date, are as follows:
 
New Tranche A Warrants (1)
 
New Tranche B Warrants (1)
Exercise price
C$
50.40

 
C$
76.68

Valuation date stock price
C$
53.36

 
C$
53.36

Expected life
4.3 years

 
7.3 years

Expected volatility
66.7
%
 
66.7
%
Risk-free interest rate
1.4
%
 
1.4
%
Expected dividend yield
0.0
%
 
0.0
%

(1) 
Refer to Note 6 for input descriptions.
Accordingly, we have recognized a $1,176.0 million unrealized gain from unconsolidated investments in the second quarter of fiscal 2020 from the June 2019 Warrant Modification. Approximately $322.5 million of the unrealized gain was associated with the New Tranche A Warrants and $853.5 million was associated with the New Tranche B Warrants. No value was associated with the New Tranche C Warrants

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
19


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

as they have a VWAP Exercise Price. As the expiration dates of the New Tranche A Warrants and New Tranche B Warrants were extended, we now utilize a blend of Canopy’s historical volatility, implied volatility, and limited consideration of historical peer group volatility in our valuations to supplement the limited trading history.

Canopy has various convertible equity securities outstanding, including primarily equity awards granted to its employees, and options and warrants issued to various third parties, including our November 2017 Canopy Warrants and New November 2018 Canopy Warrants. As of August 31, 2019, the conversion of Canopy equity securities held by its employees and/or held by other third parties would not have a significant effect on our share of Canopy’s reported earnings or losses. Additionally, under an amended and restated investor rights agreement, we have the option to purchase additional common shares of Canopy at the then-current price of the underlying equity security to allow us to maintain our relative ownership interest. If Canopy exercises its right to acquire the shares of Acreage and we were to exercise all of our outstanding November 2017 Canopy Warrants and the New November 2018 Canopy Warrants, our ownership interest in Canopy would not be expected to be greater than 50 percent. As of August 31, 2019, the exercise of all Canopy warrants held by us would have required a cash outflow of approximately $6.1 billion based on the terms of the November 2017 Canopy Warrants and the New November 2018 Canopy Warrants. Additionally, as of August 31, 2019, the fair value of the Canopy Equity Method Investment was $2,916.0 million based on the closing price of the underlying equity security as of that date.

The following table presents summarized financial information for Canopy presented in accordance with U.S. GAAP. We recognize our equity in earnings (losses) for Canopy on a two-month lag. Accordingly, we recognized our share of Canopy’s fourth quarter fiscal 2019 and first quarter fiscal 2020 earnings (losses) for the period January through June 2019 in our six months ended August 31, 2019. We recognized our share of Canopy’s first quarter fiscal 2020 earnings (losses) for the period April through June 2019, in our three months ended August 31, 2019 results. The amounts shown represent 100% of Canopy’s results of operations for the respective periods. However, they exclude the impact the June 2019 Warrant Modification Loss because it was recorded within equity.
 
For the Six Months Ended August 31,
 
For the Three Months Ended August 31,
 
2019
 
2018
 
2019
 
2018
(in millions)
 
 
 
 
 
 
 
Net sales
$
138.4

 
NA
 
$
67.7

 
NA
Gross profit
$
21.1

 
NA
 
$
9.8

 
NA
Net gain (loss)
$
(418.6
)
 
NA
 
$
(149.7
)
 
NA
Net gain (loss) attributable to Canopy
$
(430.4
)
 
NA
 
$
(146.3
)
 
NA
 
 
 
 
 
 
 
 
NA = Not Applicable
 
 
 
 
 
 
 


10.    OTHER ASSETS

The major components of other assets are as follows:
 
August 31,
2019
 
February 28,
2019
(in millions)
 
 
 
Operating lease right-of-use asset
$
552.8

 
$

Other
97.6

 
109.7

 
$
650.4

 
$
109.7




Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
20


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.    BORROWINGS

Borrowings consist of the following:
 
August 31, 2019
 
February 28,
2019
 
Current
 
Long-term
 
Total
 
Total
(in millions)
 
 
 
 
 
 
 
Short-term borrowings
 
 
 
 
 
 
 
Senior credit facility, Revolving credit loan
$

 
 
 


 
$
59.0

Commercial paper
150.9

 
 
 


 
732.5

 
$
150.9

 


 


 
$
791.5

 
 
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
 
 
Senior credit facility, Term loan
$

 
$

 
$

 
$
492.8

Term loan credit facilities
24.6

 
1,528.3

 
1,552.9

 
1,486.4

Senior notes
599.6

 
10,618.2

 
11,217.8

 
10,816.9

Other
11.9

 
13.3

 
25.2

 
28.9

 
$
636.1

 
$
12,159.8

 
$
12,795.9

 
$
12,825.0



Senior credit facility
The Company, CB International Finance S.à r.l., a wholly-owned subsidiary of ours (“CB International”), certain of the Company’s subsidiaries as guarantors, Bank of America, N.A., as administrative agent (the “Administrative Agent”), and certain other lenders are parties to a credit agreement, as amended and restated (the “2018 Credit Agreement”). The 2018 Credit Agreement provides for aggregate credit facilities of $2.0 billion.

Term Credit Agreement
The Company, the Administrative Agent, and certain other lenders are parties to a term loan credit agreement (the “Term Credit Agreement”). The Term Credit Agreement provides for aggregate credit facilities of $1.5 billion, consisting of a $500.0 million three-year term loan facility (the “Three-Year Term Facility”) and a $1.0 billion five-year term loan facility (the “Five-Year Term Facility”).

2019 Term Credit Agreement
In June 2019, the Company and Bank of America, N.A., as Administrative Agent and lender (the “Lender”) entered into a term loan credit agreement (the “2019 Term Credit Agreement”). The 2019 Term Credit Agreement provides for the creation of a $491.3 million five-year term loan facility (the “2019 Five-Year Term Facility”). The 2019 Five-Year Term Facility will be repaid in quarterly payments of principal equal to 1.25% of the original aggregate principal amount of the 2019 Five-Year Term Facility, with the balance due and payable at maturity. The proceeds from borrowings under the 2019 Term Credit Agreement were used to repay in full the U.S. Term A-1 Facility under the 2018 Credit Agreement.

The obligations under the 2019 Term Credit Agreement are guaranteed by certain subsidiaries of the Company. The guarantors under the 2019 Term Credit Agreement are the same subsidiary guarantors as under the 2018 Credit Agreement and the Term Credit Agreement. We and our subsidiaries are subject to covenants that are contained in the 2019 Term Credit Agreement, including those restricting the incurrence of additional indebtedness (including guarantees of indebtedness), additional liens, mergers and consolidations, transactions with affiliates, and sale and leaseback transactions, in each case subject to numerous conditions, exceptions and thresholds. The financial covenants are limited to a minimum interest coverage ratio and a maximum net leverage ratio.


Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
21


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

As of August 31, 2019, aggregate credit facilities under the 2018 Credit Agreement, the Term Credit Agreement, and the 2019 Term Credit Agreement consist of the following:
 
Amount
 
Maturity
(in millions)
 
 
 
2018 Credit Agreement
 
 
 
Revolving Credit Facility (1) (2)
$
2,000.0

 
Sept 14, 2023
 
 
 
 
Term Credit Agreement

 
 
Three-Year Term Facility (1) (3)
$
500.0

 
Nov 1, 2021
Five-Year Term Facility (1) (3)
$
1,000.0

 
Nov 1, 2023
 
$
1,500.0

 
 
2019 Term Credit Agreement
 
 
 
2019 Five-Year Term Facility (1) (3)
$
491.3

 
Jun 28, 2024
(1) 
Contractual interest rate varies based on our debt rating (as defined in the respective agreement) and is a function of LIBOR plus a margin, or the base rate plus a margin, or, in certain circumstances where LIBOR cannot be adequately ascertained or available, an alternative benchmark rate plus a margin.
(2) 
We and/or CB International are the borrower under the $2,000.0 million Revolving Credit Facility. Includes a sub-facility for letters of credit of up to $200.0 million.
(3) 
We are the borrower under the Three-Year Term Facility, the Five-Year Term Facility, and the 2019 Five-Year Term Facility.

As of August 31, 2019, information with respect to borrowings under the 2018 Credit Agreement, the Term Credit Agreement, and the 2019 Term Credit Agreement is as follows:
 
2018 Credit Agreement
 
Term Credit
Agreement
 
2019 Term Credit Agreement
 
Revolving
Credit
Facility
 
Three-Year
Term
Facility (1)
 
Five-Year
Term
Facility (1) (2)
 
2019 Five-Year Term Facility (1)
(in millions)
 
 
 
 
 
 
 
Outstanding borrowings
$

 
$
499.6

 
$
562.0

 
$
491.3

Interest rate
%
 
3.4
%
 
3.5
%
 
3.1
%
LIBOR margin
1.13
%
 
1.13
%
 
1.25
%
 
0.88
%
Outstanding letters of credit
$
12.2

 
 
 
 
 
 
Remaining borrowing capacity (3)
$
1,836.8

 
 
 
 
 
 

(1) 
Outstanding term loan facilities borrowings are net of unamortized debt issuance costs.
(2) 
Outstanding borrowings reflect a $400.0 million partial repayment of the Five-Year Term Facility under our Term Credit Agreement.
(3) 
Net of outstanding revolving credit facility borrowings and outstanding letters of credit under the 2018 Credit Agreement and outstanding borrowings under our commercial paper program of $151.0 million (excluding unamortized discount) (see “Commercial paper program”).

Commercial paper program
We have a commercial paper program which provides for the issuance of up to an aggregate principal amount of $2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 2018 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility under our 2018 Credit Agreement. As of August 31, 2019, we had $150.9 million of

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
22


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

outstanding borrowings, net of unamortized discount, under our commercial paper program with a weighted average annual interest rate of 2.4% and a weighted average remaining term of 9 days.

Interest rate swap contracts
In June 2019, we entered into interest rate swap agreements, which are designated as cash flow hedges for $375.0 million of our floating LIBOR rate debt. As a result of these hedges, we have fixed our interest rates on $375.0 million of our floating LIBOR rate debt at an average rate of 1.9% (exclusive of borrowing margins) from July 1, 2019, through July 1, 2020.

Senior Notes
In July 2019, we issued $800.0 million aggregate principal amount of 3.15% Senior Notes due August 2029 (the “July 2019 Senior Notes”). Proceeds from this offering, net of discount and debt issuance costs, were $793.0 million. Interest on the July 2019 Senior Notes is payable semiannually on February 1 and August 1 of each year, beginning February 1, 2020. The July 2019 Senior Notes are redeemable, in whole or in part, at our option at any time prior to May 1, 2029, at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment based on the present value of the future payments at the applicable Treasury Rate plus 20 basis points. On or after May 1, 2029, we may redeem the July 2019 Senior Notes, in whole or in part, at our option at any time at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest. The July 2019 Senior Notes are senior unsecured obligations which rank equally in right of payment to all of our existing and future senior unsecured indebtedness. Certain of our U.S. subsidiaries guarantee the July 2019 Senior Notes on a senior unsecured basis.

In November 2014, we issued $400.0 million aggregate principal amount of 3.875% Senior Notes due November 2019 (the “3.875% November 2014 Senior Notes”). On August 28, 2019, we repaid the 3.875% November 2014 Senior Notes with proceeds from the July 2019 Senior Notes.

Debt payments
As of August 31, 2019, the required principal repayments under long-term debt obligations (excluding unamortized debt issuance costs and unamortized discounts of $68.4 million and $14.7 million, respectively) for the remaining six months of fiscal 2020 and for each of the five succeeding fiscal years and thereafter are as follows:
(in millions)
 
2020
$
618.4

2021
734.6

2022
1,680.6

2023
1,827.2

2024
1,637.5

2025
780.7

Thereafter
5,600.0

 
$
12,879.0




Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
23


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.    INCOME TAXES

Our effective tax rate for the six months ended August 31, 2019 was 33.9% of tax benefit as compared with 16.3% of tax expense for the six months ended August 31, 2018. Our effective tax rate for the three months ended August 31, 2019 was 28.1% of tax benefit as compared with 15.7% of tax expense for the three months ended August 31, 2018.

For the six months and three months ended August 31, 2019, our effective tax rate was higher than the federal statutory rate of 21% primarily due to the net unrealized loss from the changes in fair value of our investments in Canopy, which have resulted in an overall net loss for the six months and three months ended August 31, 2019. Our effective tax rate benefited from the following:

a higher effective rate of tax benefit from our foreign businesses including the tax benefits recorded on the net unrealized loss from the changes in fair value of our investments in Canopy and the tax benefits recorded on the Canopy equity in earnings (losses) and related activities;
the recognition of a net income tax benefit from stock-based compensation award activity; and
for the six months ended August 31, 2019, our effective tax rate also benefited from the reversal of valuation allowances for capital loss carryforwards in connection with the Wine and Spirits Transaction.

For the six months and three months ended August 31, 2018, our effective tax rate was lower than the federal statutory rate of 21% primarily due to:

lower effective tax rates applicable to our foreign businesses;
the recognition of a net income tax benefit from stock-based compensation award activity; and
for the six months ended August 31, 2018, our effective tax rate also benefited from the reversal of valuation allowances in connection with the sale of our Accolade Wine Investment (see Note 19).

Subsequent Event
As a result of certain foreign tax reform that was enacted in September 2019, we are estimating a one-time benefit to our deferred tax assets of approximately $500 million to $550 million to be recognized during the three months ended November 30, 2019.

13.    DEFERRED INCOME TAXES AND OTHER LIABILITIES

The major components of deferred income taxes and other liabilities are as follows:
 
August 31,
2019
 
February 28,
2019
(in millions)
 
 
 
Deferred income taxes
$
561.3

 
$
1,029.7

Operating lease liability

511.9

 

Unrecognized tax benefit liabilities
249.8

 
239.0

Long-term income tax payable
95.4

 
95.4

Other
90.0

 
106.6

 
$
1,508.4

 
$
1,470.7




Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
24


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

14.    LEASES

General
We primarily lease certain vineyards, office and production facilities, warehouses, production equipment, and vehicles. We assess service arrangements to determine if an asset is explicitly or implicitly specified in the agreement and if we have the right to control the use of the identified asset. We have concluded that certain grape purchasing arrangements associated with the purchase of grape production yielded from a specified block of a vineyard and certain third-party logistics arrangements contain a lease.

The right-of-use asset is initially measured at cost, which is primarily comprised of the initial amount of the lease liability, plus initial direct costs and lease payments at or before the lease commencement date, less any lease incentives received, and is amortized on a straight-line basis over the remaining lease term. All right-of-use assets are reviewed periodically for impairment. The lease liability is initially measured at the present value of lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate. The incremental borrowing rates are determined using a portfolio approach based on publicly available information in connection with our unsecured borrowing rates adjusted for items including collateral, currency, and the timing in which lease payments are made. We elected to recognize expenses for leases with a term of 12 months or less on a straight-line basis over the lease term and not to recognize these short-term leases on the balance sheet.

Our leases have varying terms with remaining lease terms of up to approximately 30 years. Certain of our lease arrangements provide us with the option to extend or to terminate the lease early.

The right-of-use asset and lease liability are calculated including options to extend or to terminate the lease when we determine that it is reasonably certain that we will exercise those options. In making that determination, we consider various existing economic and market factors, business strategies as well as the nature, length, and terms of the agreement. Based on our evaluation using these factors, we concluded that the exercise of renewal options or early termination options would not be reasonably certain in determining the lease term at commencement for leases we currently have in place. Assumptions made at the commencement date are re-evaluated upon occurrence of certain events such as a lease modification.

Certain of our contractual arrangements may contain both lease and non-lease components. Non-lease components are distinct elements of a contract that are not related to securing the use of the leased asset, such as raw materials, common area maintenance and other management costs. We elected to measure the lease liability by combining the lease and non-lease components as a single lease component for all asset classes.

Certain of our leases include variable lease payments, including payments that depend on an index or rate, as well as variable payments for items such as raw materials, labor, property taxes, insurance, maintenance, and other operating expenses associated with leased assets. Certain grape purchasing arrangements include variable payments that will vary depending on certain factors, including weather, time of harvest, overall market conditions, and the agricultural practices and location of the vineyard. In addition, certain third-party logistics arrangements include variable payments that vary depending on throughput. Such variable lease payments are excluded from the calculation of the right-of-use asset and are recognized in the period in which the obligation is incurred.


Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
25


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Balance sheet location
A summary of lease right-of-use assets and liabilities are as follows:
 
Balance Sheet Classification
 
August 31,
2019
(in millions)
 
 
 
Assets
 
 
 
Operating lease
Other assets
 
$
552.8

Finance lease
Property, plant, and equipment
 
26.4

Total right-of-use assets
 
 
$
579.2

 
 
 
 
Liabilities
 
 
 
Current:
 
 
 
Operating lease
Other accrued expenses and liabilities
 
$
76.7

Finance lease
Current maturities of long-term debt
 
11.9

Non-Current:
 
 
 
Operating lease
Deferred income taxes and other liabilities
 
511.9

Finance lease
Long-term debt, less current maturities
 
13.3

Total lease liabilities
 
 
$
613.8


Lease costs
The components of total lease cost are as follows:


 
For the Six Months Ended August 31, 2019
 
For the Three Months Ended August 31, 2019
(in millions)
 
 
 
 
Operating lease cost
 
$
46.5

 
$
23.1

Finance lease cost:
 
 
 
 
Amortization of right-of-use assets
 
5.6

 
2.8

Interest on lease liabilities
 
0.3

 
0.1

Short-term lease cost
 
4.2

 
1.9

Variable lease cost
 
95.4

 
51.5

Total lease cost
 
$
152.0

 
$
79.4



Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
26


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Lease maturities (1) 
As of August 31, 2019, minimum payments due for lease liabilities for the remaining six months of fiscal 2020 and for each of the five succeeding fiscal years and thereafter are as follows:
 
Operating Leases
 
Finance Leases
(in millions)
 
 
 
2020
$
51.8

 
$
6.4

2021
94.3

 
10.4

2022
81.6

 
6.2

2023
69.9

 
2.6

2024
63.5

 
0.5

2025
53.6

 

Thereafter
310.9

 

Total lease payments
725.6

 
26.1

Less: Interest
(137.0
)
 
(0.9
)
Total lease liabilities
$
588.6

 
$
25.2



As of February 28, 2019, future payments were expected to be as follows:
 
Operating Leases
(in millions)
 
2020
$
59.0

2021
58.2

2022
51.1

2023
47.9

2024
41.2

Thereafter
302.1

Total lease payments
$
559.5

(1) For leases with terms in excess of 12 months at inception.
Supplemental information
 
For the Six Months Ended August 31, 2019
(in millions)
 
 
Cash paid for amounts included in the measurement of lease liabilities:
 
 
Operating cash flows from operating leases
 
$
46.6

Operating cash flows from finance leases
 
$
0.3

Financing cash flows from finance leases
 
$
7.3

 
 
 
Right-of-use assets obtained in exchange for new lease liabilities:
 
 
Operating leases
 
$
17.3

Finance leases
 
$
4.0

 
 
 
Weighted-average remaining lease term:
 
 
Operating leases
 
11.9 years

Finance leases
 
3.4 years

 
 
 
Weighted-average discount rate:
 
 
Operating leases
 
3.7
%
Finance leases
 
2.7
%


Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
27


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


15.    STOCKHOLDERS’ EQUITY

Common stock
The number of shares of common stock issued and treasury stock, and associated share activity, are as follows:
 
Common Stock
 
Treasury Stock
 
Class A
 
Class B
 
Class 1
 
Class A
 
Class B
Balance at February 28, 2019
185,740,178

 
28,322,419

 
1,149,624

 
18,927,966

 
5,005,800

Conversion of shares
133,667

 
(55
)
 
(133,612
)
 

 

Exercise of stock options (1)

 

 
2,107

 
(173,725
)
 

Vesting of restricted stock units (2)

 

 

 
(88,683
)
 

Vesting of performance share units (2)

 

 

 
(29,015
)
 

Cancellation of restricted shares

 

 

 
444

 

Balance at May 31, 2019
185,873,845

 
28,322,364

 
1,018,119

 
18,636,987

 
5,005,800

Share repurchases

 

 

 
265,593

 

Conversion of shares
6,267

 
(543
)
 
(5,724
)
 

 

Exercise of stock options (1)

 

 

 
(258,628
)
 

Employee stock purchases

 

 

 
(36,840
)
 

Vesting of restricted stock units (2)

 

 

 
(2,148
)
 

Balance at August 31, 2019
185,880,112

 
28,321,821

 
1,012,395

 
18,604,964

 
5,005,800

 
 
 
 
 
 
 
 
 
 
Balance at February 28, 2018
258,718,356

 
28,335,387

 
1,970

 
90,743,239

 
5,005,800

Share repurchases

 

 

 
450,508

 

Conversion of shares
5,144

 
(5,144
)
 

 

 

Exercise of stock options
216,946

 

 
5,118

 

 

Vesting of restricted stock units (2)

 

 

 
(20,392
)
 

Vesting of performance share units (2)

 

 

 
(62,352
)
 

Balance at May 31, 2018
258,940,446

 
28,330,243

 
7,088

 
91,111,003

 
5,005,800

Share repurchases

 

 

 
1,901,637

 

Conversion of shares
2,500

 
(2,500
)
 

 

 

Exercise of stock options
137,219

 

 
2,325

 

 

Employee stock purchases

 

 

 
(34,203
)
 

Grant of restricted stock awards

 

 

 
(3,552
)
 

Vesting of restricted stock units (2)

 

 

 
(3,074
)
 

Balance at August 31, 2018
259,080,165

 
28,327,743

 
9,413

 
92,971,811

 
5,005,800

(1) 
Includes use of Class A Treasury Stock associated with stock option exercises beginning March 1, 2019.
(2) 
Net of the following shares withheld to satisfy tax withholding requirements:
 
For the Three Months Ended
May 31,
 
For the Three Months Ended
August 31,
 
For the Six
Months Ended
August 31,
2019
 
 
 
 
 
Restricted Stock Units
48,562

 
1,176

 
49,738

Performance Share Units
17,439

 

 
17,439

 
 
 
 
 
 
2018
 
 
 
 
 
Restricted Stock Units
12,743

 
2,211

 
14,954

Performance Share Units
44,016

 

 
44,016



Stock repurchases
In January 2018, our Board of Directors authorized the repurchase of up to $3.0 billion of our Class A Common Stock and Class B Convertible Common Stock (the “2018 Authorization”). The Board of

Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
28


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Directors did not specify a date upon which this authorization would expire. Shares repurchased under the 2018 Authorization have become treasury shares.

For the six months ended August 31, 2019, we repurchased 265,593 shares of Class A Common Stock pursuant to the 2018 Authorization at an aggregate cost of $50.0 million through open market transactions.

As of August 31, 2019, total shares repurchased under the 2018 Authorizations are as follows:
 
 
 
Class A Common Shares
 
Repurchase
Authorization
 
Dollar Value
of Shares
Repurchased
 
Number of
Shares
Repurchased
(in millions, except share data)
 
 
 
 
 
2018 Authorization
$
3,000.0

 
$
1,045.9

 
4,897,605


16.    NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CBI

For the six months and three months ended August 31, 2018, net income (loss) per common share – diluted for Class A Common Stock has been computed using the if-converted method and assumes the exercise of stock options using the treasury stock method and the conversion of Class B Convertible Common Stock as this method is more dilutive than the two-class method. For the six months and three months ended August 31, 2018, net income (loss) per common share – diluted for Class B Convertible Common Stock has been computed using the two-class method and does not assume conversion of Class B Convertible Common Stock into shares of Class A Common Stock.

We have excluded 23,316,505 and 23,316,411 of Class B Convertible Common Stock and 3,367,943 and 3,304,955 of shares issuable under the assumed exercise of stock options using the treasury stock method from the calculation of diluted net income (loss) per share for the six months and three months ended August 31, 2019, respectively, as the effect of including these would have been anti-dilutive.

The computation of basic and diluted net income (loss) per common share is as follows:
 
For the Six Months Ended
 
August 31, 2019
 
August 31, 2018
 
Common Stock
 
Common Stock
 
Class A
 
Class B
 
Class A
 
Class B
(in millions, except per share data)
 
 
 
 
 
 
 
Net income (loss) attributable to CBI allocated – basic
$
(684.1
)
 
$
(86.5
)
 
$
1,680.7

 
$
212.6

Conversion of Class B common shares into Class A common shares

 

 
212.6

 

Effect of stock-based awards on allocated net income (loss)

 

 

 
(5.2
)
Net income (loss) attributable to CBI allocated – diluted
$
(684.1
)
 
$
(86.5
)
 
$
1,893.3

 
$
207.4

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
168.215

 
23.316

 
167.617

 
23.325

Conversion of Class B common shares into Class A common shares

 

 
23.325

 

Stock-based awards, primarily stock options

 

 
5.526

 

Weighted average common shares outstanding – diluted
168.215

 
23.316

 
196.468

 
23.325

 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to CBI – basic
$
(4.08
)
 
$
(3.71
)
 
$
10.03

 
$
9.11

Net income (loss) per common share attributable to CBI – diluted
$
(4.08
)
 
$
(3.71
)
 
$
9.64

 
$
8.89

 
 
 
 
 
 
 
 


Constellation Brands, Inc. Q2 FY 2020 Form 10-Q
29


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 
For the Three Months Ended
 
August 31, 2019
 
August 31, 2018
 
Common Stock
 
Common Stock
 
Class A
 
Class B
 
Class A
 
Class B
(in millions, except per share data)
 
 
 
 
 
 
 
Net income (loss) attributable to CBI allocated – basic
$
(466.4
)
 
$
(58.8
)
 
$
1,020.0

 
$
129.5

Conversion of Class B common shares into Class A common shares

 

 
129.5

 

Effect of stock-based awards on allocated net income (loss)

 

 

 
(3.2
)
Net income (loss) attributable to CBI allocated – diluted
$
(466.4
)
 
$
(58.8
)
 
$
1,149.5

 
$
126.3

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
168.310

 
23.316

 
167.172

 
23.323

Conversion of Class B common shares into Class A common shares

 

 
23.323

 

Stock-based awards, primarily stock options

 

 
5.412

 

Weighted average common shares outstanding – diluted
168.310

 
23.316

 
195.907

 
23.323

 
 
 
 
 
 
 
 
Net income (loss) per common share attributable to CBI – basic
$
(2.77
)
 
$
(2.52
)
 
$
6.11

 
$
5.55

Net income (loss) per common share attr