CONSTELLATION BRANDS, INC. - Quarter Report: 2022 November (Form 10-Q)
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 November 30, 2022
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

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 |
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 184,498,219 shares of Class A Common Stock and 52,685 shares of Class 1 Common Stock outstanding as of December 31, 2022.
TABLE OF CONTENTS
Page | ||||||||
DEFINED TERMS | ||||||||
PART I – FINANCIAL INFORMATION | ||||||||
Item 1. Financial Statements | ||||||||
Consolidated Balance Sheets | ||||||||
Consolidated Statements of Comprehensive Income (Loss) | ||||||||
Consolidated Statements of Changes in Stockholders’ Equity | ||||||||
Consolidated Statements of Cash Flows | ||||||||
Notes to Consolidated Financial Statements | ||||||||
1. Basis of Presentation | ||||||||
2. Inventories | ||||||||
3. Derivative Instruments | ||||||||
4. Fair Value of Financial Instruments | ||||||||
5. Goodwill | ||||||||
6. Intangible Assets | ||||||||
7. Equity Method Investments | ||||||||
8. Borrowings | ||||||||
9. Income Taxes | ||||||||
10. Stockholders' Equity | ||||||||
11. Net Income (Loss) Per Common Share Attributable to CBI | ||||||||
12. Comprehensive Income (Loss) Attributable to CBI | ||||||||
13. Business Segment Information | ||||||||
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||||||
Item 3. Quantitative and Qualitative Disclosures About Market Risk | ||||||||
Item 4. Controls and Procedures | ||||||||
PART II – OTHER INFORMATION | ||||||||
Item 1. Legal Proceedings | ||||||||
Item 1A. Risk Factors | ||||||||
Item 5. Other Information | ||||||||
Item 6. Exhibits | ||||||||
SIGNATURES |
This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s 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 MD&A.
Defined Terms
Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. We use terms in this Form 10-Q and in our Notes that are specific to us or are abbreviations that may not be commonly known or used.
Term | Meaning | ||||
$ | U.S. dollars | ||||
2.65% November 2017 Senior Notes | $700.0 million principal amount of 2.65% senior notes issued in November 2017 and redeemed in August 2021, prior to maturity | ||||
2.70% May 2017 Senior Notes | $500.0 million principal amount of 2.70% senior notes issued in May 2017 and redeemed in August 2021, prior to maturity | ||||
3.20% February 2018 Senior Notes | $600.0 million principal amount of 3.20% senior notes issued in February 2018, partially tendered in May 2022, and fully redeemed in June 2022, prior to maturity | ||||
4.25% May 2013 Senior Notes | $1,050.0 million principal amount of 4.25% senior notes issued in May 2013, partially tendered in May 2022, and fully redeemed in June 2022, prior to maturity | ||||
2018 Authorization | authority to repurchase up to $3.0 billion of our publicly traded common stock, authorized in January 2018 by our Board of Directors | ||||
2020 U.S. wildfires | significant wildfires that broke out in California, Oregon, and Washington states which affected the 2020 U.S. grape harvest | ||||
2021 Authorization | authority to repurchase up to $2.0 billion of our publicly traded common stock, authorized in January 2021 by our Board of Directors | ||||
2022 Annual Report | our Annual Report on Form 10-K for the fiscal year ended February 28, 2022 | ||||
2022 Credit Agreement | tenth amended and restated credit agreement, dated as of April 14, 2022, that provides for an aggregate revolving credit facility of $2.25 billion | ||||
2022 Restatement Agreement | restatement agreement, dated as of April 14, 2022, that amended and restated the ninth amended and restated agreement, dated as of March 26, 2020, which was our then-existing senior credit facility as of February 28, 2022 | ||||
2022 Wine Divestiture | sale of certain mainstream and premium wine brands and related inventory | ||||
3-tier | distribution channel where products are sold to a distributor (wholesaler) who then sells to a retailer; the retailer sells the products to a consumer | ||||
3-tier eCommerce | digital commerce experience for our consumers to purchase beverage alcohol from retailers | ||||
ABA | alternative beverage alcohol | ||||
Acreage | Acreage Holdings, Inc. | ||||
Acreage Financial Instrument | a call option for Canopy to acquire up to 100% of the shares of Acreage | ||||
Acreage Transaction | Canopy’s intention to acquire Acreage, subject to certain conditions | ||||
Administrative Agent | Bank of America, N.A., as administrative agent for the senior credit facility and term loan credit agreements | ||||
Amended and Restated By-Laws | our amended and restated by-laws which became effective at the Effective Time | ||||
Amended and Restated Charter | our amended and restated certificate of incorporation which effectuated the Reclassification at the Effective Time | ||||
AOCI | accumulated other comprehensive income (loss) | ||||
April 2022 Term Credit Agreement | June 2021 Term Credit Agreement, inclusive of amendment dated as of April 14, 2022 | ||||
ASR | accelerated share repurchase agreement with a third-party financial institution | ||||
August 2022 Term Credit Agreement | term loan credit agreement, dated as of August 9, 2022, that provided for a $1.0 billion unsecured delayed draw three-year term loan facility | ||||
Austin Cocktails | we made an initial investment in the Austin Cocktails business and subsequently acquired the remaining ownership interest | ||||
C$ | Canadian dollars |
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I i |
Term | Meaning | ||||
Canopy | we made an investment in Canopy Growth Corporation, an Ontario, Canada-based public company | ||||
Canopy Amendment | a proposed resolution authorizing amending Canopy’s share capital to create Exchangeable Shares and providing for the conversion of Canopy common shares into Exchangeable Shares on a one-for-one basis at any time and at the option of the holder of such shares | ||||
Canopy Debt Securities | debt securities issued by Canopy, as amended to remove Canopy's right to settle such debt securities on conversion into Canopy common shares | ||||
Canopy Equity Method Investment | November 2017 Canopy Investment, November 2018 Canopy Investment, May 2020 Canopy Investment, and July 2022 Canopy Investment, collectively | ||||
Canopy Strategic Transaction(s) | any potential acquisition, divestiture, investment, or other similar transaction made by Canopy, including but not limited to the Acreage Transaction and the Canopy Transaction | ||||
Canopy Transaction | proposed corporate transaction by Canopy, including the creation of Exchangeable Shares, designed to consolidate its U.S. cannabis assets into Canopy USA | ||||
Canopy USA | a new U.S. holding company formed by Canopy | ||||
CARES Act | Coronavirus Aid, Relief, and Economic Security Act | ||||
CB International | CB International Finance S.à r.l., a wholly-owned subsidiary of ours | ||||
Class 1 Stock | our Class 1 Convertible Common Stock, par value $0.01 per share | ||||
Class A Stock | our Class A Common Stock, par value $0.01 per share | ||||
Class B Stock | our Class B Convertible Common Stock, par value $0.01 per share, eliminated on November 10, 2022, pursuant to the Reclassification | ||||
CODM | chief operating decision maker | ||||
Comparable Adjustments | certain items affecting comparability that have been excluded by management | ||||
Consent Agreement | an agreement between Canopy and (i) Greenstar Canada Investment Limited Partnership and (ii) CBG Holdings LLC, our indirect, wholly-owned subsidiaries | ||||
Depletions | represent U.S. domestic distributor shipments of our respective branded products to retail customers, based on third-party data | ||||
Digital Business Acceleration | a phased initiative by the Company to create a cohesive digital strategy and build an advanced digital business in the coming years | ||||
DTC | direct-to-consumer inclusive of (i) a digital commerce experience for consumers to purchase directly from brand websites with inventory coming straight from the supplier and (ii) consumer purchases at hospitality locations (tasting rooms and tap rooms) from the supplier | ||||
Effective Time | the time that the Amended and Restated Charter was duly filed with the Secretary of State of the State of Delaware on November 10, 2022 | ||||
ERP | enterprise resource planning system | ||||
ESG | environmental, social, and governance | ||||
Exchangeable Shares | proposed new class of non-voting and non-participating exchangeable shares in Canopy which will be convertible into common shares of Canopy | ||||
Exchange Act | Securities Exchange Act of 1934, as amended | ||||
Financial Statements | our consolidated financial statements and notes thereto included herein | ||||
Fiscal 2022 | the Company’s fiscal year ended February 28, 2022 | ||||
Fiscal 2023 | the Company’s fiscal year ending February 28, 2023 | ||||
Fiscal 2024 | the Company’s fiscal year ending February 29, 2024 | ||||
Fiscal 2025 | the Company’s fiscal year ending February 28, 2025 | ||||
Fiscal 2026 | the Company’s fiscal year ending February 28, 2026 | ||||
Fiscal 2027 | the Company’s fiscal year ending February 28, 2027 | ||||
Fiscal 2028 | the Company’s fiscal year ending February 29, 2028 |
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I ii |
Term | Meaning | ||||
Five-Year Term Facility | a five-year term loan facility under the April 2022 Term Credit Agreement | ||||
Form 10-Q | this Quarterly Report on Form 10-Q for the quarterly period ended November 30, 2022, unless otherwise specified | ||||
GHG | greenhouse gas | ||||
GivingTuesday | a global generosity movement to encourage others to give back to their community, occurring each year on the Tuesday following Thanksgiving in the U.S. | ||||
July 2022 Canopy Investment | in July 2022, we received 29.2 million common shares of Canopy through the exchange of C$100.0 million principal amount of our Canopy Debt Securities | ||||
June 2021 Term Credit Agreement | amended and restated term loan credit agreement, dated as of March 26, 2020, that provided for aggregate facilities of $491.3 million, consisting of the Five-Year Term Facility, inclusive of amendment dated as of June 10, 2021 | ||||
Lender | Bank of America, N.A., as lender for the April 2022 Term Credit Agreement | ||||
LIBOR | London Interbank Offered Rate | ||||
Lingua Franca | Lingua Franca, LLC business, acquired by us | ||||
May 2020 Canopy Investment | in May 2020, we made an incremental investment for 18.9 million common shares of Canopy through the exercise of warrants obtained in November 2017 | ||||
May 2022 Senior Notes | $1,850.0 million aggregate principal amount of senior notes issued in May 2022 | ||||
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part I – Item 2. of this Form 10-Q | ||||
Mexicali Brewery | canceled brewery construction project located in Mexicali, Baja California, Mexico | ||||
Mexico Beer Projects | expansion, optimization, and/or construction activities at the Obregon Brewery, Nava Brewery, and Veracruz Brewery | ||||
M&T | Manufacturers and Traders Trust Company | ||||
My Favorite Neighbor | we made an initial investment in My Favorite Neighbor, LLC and subsequently acquired the remaining ownership interest | ||||
NA | not applicable | ||||
Nava | Nava, Coahuila, Mexico | ||||
Nava Brewery | brewery located in Nava | ||||
Net sales | gross sales less promotions, returns and allowances, and excise taxes | ||||
Nine Months 2022 | the Company’s nine months ended November 30, 2021 | ||||
Nine Months 2023 | the Company’s nine months ended November 30, 2022 | ||||
NM | not meaningful | ||||
Note(s) | notes to the consolidated financial statements | ||||
November 2017 Canopy Investment | in November 2017, we made an initial investment for 18.9 million common shares of Canopy | ||||
November 2018 Canopy Investment | in November 2018, we made an incremental investment for 104.5 million common shares of Canopy | ||||
November 2018 Canopy Warrants | Tranche A Warrants, Tranche B Warrants, and Tranche C Warrants, collectively | ||||
Obregon | Obregon, Sonora, Mexico | ||||
Obregon Brewery | brewery located in Obregon | ||||
OCI | other comprehensive income (loss) | ||||
October 2022 Credit Agreement Amendments | amendments dated as of October 18, 2022, to the 2022 Credit Agreement, the April 2022 Term Credit Agreement, and the August 2022 Term Credit Agreement | ||||
Pre-issuance hedge contracts | treasury lock and/or swap lock contracts designated as cash flow hedges entered into to hedge treasury rate volatility on future debt issuances | ||||
Reclassification | the reclassification, exchange, and conversion of the Company’s common stock to eliminate the Class B Stock pursuant to the terms and conditions of the Reclassification Agreement |
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I iii |
Term | Meaning | ||||
Reclassification Agreement | reclassification agreement in support of the Reclassification, dated June 30, 2022, among the Company and the Sands Family Stockholders | ||||
Registration Rights Agreement | Registration Rights Agreement, dated as of November 10, 2022, by and among the Company and the Sands Family Stockholders | ||||
Registration Statement on Form S-4 | our Registration Statement on Form S-4, including our proxy statement/prospectus, in connection with the Reclassification declared effective by the SEC on September 21, 2022 | ||||
RTD | ready-to-drink | ||||
SEC | Securities and Exchange Commission | ||||
Sands Family Stockholders | RES Master LLC, RES Business Holdings LP, SER Business Holdings LP, RHT 2015 Business Holdings LP, RSS Master LLC, RSS Business Holdings LP, SSR Business Holdings LP, RSS 2015 Business Holdings LP, RCT 2015 Business Holdings LP, RCT 2020 Investments LLC, NSDT 2009 STZ LLC, NSDT 2011 STZ LLC, RSS Business Management LLC, SSR Business Management LLC, LES Lauren Holdings LLC, MES Mackenzie Holdings LLC, Abigail Bennett, Zachary Stern, A&Z 2015 Business Holdings LP (subsequently liquidated), Marilyn Sands Master Trust, MAS Business Holdings LP, Sands Family Foundation, Richard Sands, Robert Sands, WildStar, Astra Legacy LLC, AJB Business Holdings LP, and ZMSS Business Holdings LP | ||||
Specified Time | such time as the domestic sale of marijuana could not reasonably be expected to violate the Controlled Substances Act, the Civil Asset Forfeiture Reform Act (as it relates to violation of the Controlled Substances Act), and all related applicable anti-money laundering laws | ||||
Securities Act | Securities Act of 1933, as amended | ||||
SOFR | secured overnight financing rate administered by the Federal Reserve Bank of New York | ||||
THC | tetrahydrocannabinol | ||||
Third Quarter 2022 | the Company’s three months ended November 30, 2021 | ||||
Third Quarter 2023 | the Company’s three months ended November 30, 2022 | ||||
Tranche A Warrants | warrants which give us the option to purchase 88.5 million common shares of Canopy expiring November 1, 2023 | ||||
Tranche B Warrants | warrants which give us the option to purchase 38.4 million common shares of Canopy expiring November 1, 2026 | ||||
Tranche C Warrants | warrants which give us the option to purchase 12.8 million common shares of Canopy expiring November 1, 2026 | ||||
TSX | Toronto Stock Exchange | ||||
U.S. | United States of America | ||||
U.S. GAAP | generally accepted accounting principles in the U.S. | ||||
Veracruz | Heroica Veracruz, Veracruz, Mexico | ||||
Veracruz Brewery | a new brewery being constructed in Veracruz | ||||
VWAP Exercise Price | 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 | ||||
WildStar | WildStar Partners LLC | ||||
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I iv |
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)
November 30, 2022 | February 28, 2022 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 185.0 | $ | 199.4 | |||||||
Accounts receivable | 921.0 | 899.0 | |||||||||
Inventories | 1,802.0 | 1,573.2 | |||||||||
Prepaid expenses and other | 617.9 | 658.1 | |||||||||
Total current assets | 3,525.9 | 3,329.7 | |||||||||
Property, plant, and equipment | 6,523.8 | 6,059.6 | |||||||||
Goodwill | 7,896.6 | 7,862.4 | |||||||||
Intangible assets | 2,741.5 | 2,755.2 | |||||||||
Equity method investments | 771.4 | 2,688.7 | |||||||||
Securities measured at fair value | 95.0 | 191.4 | |||||||||
Deferred income taxes | 2,241.7 | 2,351.5 | |||||||||
Other assets | 667.1 | 617.3 | |||||||||
Total assets | $ | 24,463.0 | $ | 25,855.8 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Short-term borrowings | $ | 875.6 | $ | 323.0 | |||||||
Current maturities of long-term debt | 9.6 | 605.3 | |||||||||
Accounts payable | 1,008.1 | 899.2 | |||||||||
Other accrued expenses and liabilities | 831.7 | 871.3 | |||||||||
Total current liabilities | 2,725.0 | 2,698.8 | |||||||||
Long-term debt, less current maturities | 11,287.1 | 9,488.2 | |||||||||
Deferred income taxes and other liabilities | 1,734.2 | 1,621.0 | |||||||||
Total liabilities | 15,746.3 | 13,808.0 | |||||||||
Commitments and contingencies | |||||||||||
CBI stockholders’ equity: | |||||||||||
Class A Stock, $0.01 par value – Authorized, 322,000,000 shares; Issued, 212,667,148 shares and 187,263,859 shares, respectively | 2.1 | 1.9 | |||||||||
Class B Stock, $0.01 par value – Authorized, 0 shares and 30,000,000 shares, respectively; Issued, 0 shares and 28,212,340 shares, respectively | — | 0.3 | |||||||||
Additional paid-in capital | 1,883.6 | 1,808.9 | |||||||||
Retained earnings | 12,267.8 | 14,505.4 | |||||||||
Accumulated other comprehensive income (loss) | (200.9) | (412.7) | |||||||||
13,952.6 | 15,903.8 | ||||||||||
Less: Treasury stock – | |||||||||||
Class A Stock, at cost, 28,175,566 shares and 22,824,607 shares, respectively | (5,563.1) | (4,169.7) | |||||||||
Class B Stock, at cost, 0 shares and 5,005,800 shares, respectively | — | (2.2) | |||||||||
(5,563.1) | (4,171.9) | ||||||||||
Total CBI stockholders’ equity | 8,389.5 | 11,731.9 | |||||||||
Noncontrolling interests | 327.2 | 315.9 | |||||||||
Total stockholders’ equity | 8,716.7 | 12,047.8 | |||||||||
Total liabilities and stockholders’ equity | $ | 24,463.0 | $ | 25,855.8 |
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 1 |
FINANCIAL STATEMENTS |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
(unaudited)
For the Nine Months Ended November 30, | For the Three Months Ended November 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Sales | $ | 8,029.6 | $ | 7,260.3 | $ | 2,624.6 | $ | 2,507.0 | |||||||||||||||
Excise taxes | (574.8) | (542.1) | (188.1) | (186.4) | |||||||||||||||||||
Net sales | 7,454.8 | 6,718.2 | 2,436.5 | 2,320.6 | |||||||||||||||||||
Cost of product sold | (3,647.0) | (3,143.5) | (1,209.6) | (1,094.9) | |||||||||||||||||||
Gross profit | 3,807.8 | 3,574.7 | 1,226.9 | 1,225.7 | |||||||||||||||||||
Selling, general, and administrative expenses | (1,431.6) | (1,254.6) | (480.2) | (385.8) | |||||||||||||||||||
Impairment of brewery construction in progress | — | (665.9) | — | — | |||||||||||||||||||
Operating income (loss) | 2,376.2 | 1,654.2 | 746.7 | 839.9 | |||||||||||||||||||
Income (loss) from unconsolidated investments | (1,944.2) | (1,541.8) | (37.2) | (171.8) | |||||||||||||||||||
Interest expense | (281.5) | (270.5) | (98.7) | (88.0) | |||||||||||||||||||
Loss on extinguishment of debt | (23.3) | (29.4) | — | — | |||||||||||||||||||
Income (loss) before income taxes | 127.2 | (187.5) | 610.8 | 580.1 | |||||||||||||||||||
(Provision for) benefit from income taxes | (388.9) | (217.1) | (131.1) | (99.3) | |||||||||||||||||||
Net income (loss) | (261.7) | (404.6) | 479.7 | 480.8 | |||||||||||||||||||
Net (income) loss attributable to noncontrolling interests | (32.3) | (31.2) | (12.0) | (10.0) | |||||||||||||||||||
Net income (loss) attributable to CBI | $ | (294.0) | $ | (435.8) | $ | 467.7 | $ | 470.8 | |||||||||||||||
Comprehensive income (loss) | $ | (32.8) | $ | (708.6) | $ | 643.1 | $ | 130.0 | |||||||||||||||
Comprehensive (income) loss attributable to noncontrolling interests | (49.4) | (14.8) | (20.9) | 8.1 | |||||||||||||||||||
Comprehensive income (loss) attributable to CBI | $ | (82.2) | $ | (723.4) | $ | 622.2 | $ | 138.1 | |||||||||||||||
Net income (loss) per common share attributable to CBI: | |||||||||||||||||||||||
Basic – Class A Stock | $ | (1.48) | $ | (2.31) | $ | 2.58 | $ | 2.53 | |||||||||||||||
Basic – Class B Stock | $ | (2.01) | $ | (2.10) | $ | 1.78 | $ | 2.30 | |||||||||||||||
Diluted – Class A Stock | $ | (1.48) | $ | (2.31) | $ | 2.52 | $ | 2.48 | |||||||||||||||
Diluted – Class B Stock | $ | (2.01) | $ | (2.10) | $ | 1.78 | $ | 2.29 | |||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||||
Basic – Class A Stock | 164.573 | 167.692 | 166.677 | 164.999 | |||||||||||||||||||
Basic – Class B Stock | 23.206 | 23.230 | 23.206 | 23.222 | |||||||||||||||||||
Diluted – Class A Stock | 164.573 | 167.692 | 185.291 | 189.939 | |||||||||||||||||||
Diluted – Class B Stock | 23.206 | 23.230 | 23.206 | 23.222 | |||||||||||||||||||
Cash dividends declared per common share: | |||||||||||||||||||||||
Class A Stock | $ | 2.40 | $ | 2.28 | $ | 0.80 | $ | 0.76 | |||||||||||||||
Class B Stock | $ | 2.16 | $ | 2.07 | $ | 0.72 | $ | 0.69 |
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 2 |
FINANCIAL STATEMENTS |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in millions) (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
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, 2022 | $ | 1.9 | $ | 0.3 | $ | 1,808.9 | $ | 14,505.4 | $ | (412.7) | $ | (4,171.9) | $ | 315.9 | $ | 12,047.8 | |||||||||||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | 389.5 | — | — | 9.8 | 399.3 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax effect | — | — | — | — | 246.4 | — | 12.6 | 259.0 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | 658.3 | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of shares | — | — | — | — | — | (1,007.6) | — | (1,007.6) | |||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (148.7) | — | — | — | (148.7) | |||||||||||||||||||||||||||||||||||||||
Noncontrolling interest distributions | — | — | — | — | — | — | (11.2) | (11.2) | |||||||||||||||||||||||||||||||||||||||
Shares issued under equity compensation plans | — | — | (0.6) | — | — | 3.8 | — | 3.2 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 16.7 | — | — | — | — | 16.7 | |||||||||||||||||||||||||||||||||||||||
Balance at May 31, 2022 | 1.9 | 0.3 | 1,825.0 | 14,746.2 | (166.3) | (5,175.7) | 327.1 | 11,558.5 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | (1,151.2) | — | — | 10.5 | (1,140.7) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax effect | — | — | — | — | (189.1) | — | (4.4) | (193.5) | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | (1,334.2) | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of shares | — | — | — | — | — | (392.9) | — | (392.9) | |||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (146.6) | — | — | — | (146.6) | |||||||||||||||||||||||||||||||||||||||
Noncontrolling interest distributions | — | — | — | — | — | — | (11.3) | (11.3) | |||||||||||||||||||||||||||||||||||||||
Shares issued under equity compensation plans | — | — | 14.5 | — | — | 2.0 | — | 16.5 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 20.9 | — | — | — | — | 20.9 | |||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2022 | 1.9 | 0.3 | 1,860.4 | 13,448.4 | (355.4) | (5,566.6) | 321.9 | 9,710.9 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | 467.7 | — | — | 12.0 | 479.7 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax effect | — | — | — | — | 154.5 | — | 8.9 | 163.4 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | 643.1 | ||||||||||||||||||||||||||||||||||||||||||||||
Reclassification payment | — | — | — | (1,500.0) | — | — | — | (1,500.0) | |||||||||||||||||||||||||||||||||||||||
Retirement of treasury shares | — | (0.1) | — | (2.2) | — | 2.3 | — | — | |||||||||||||||||||||||||||||||||||||||
Conversion of common shares | 0.2 | (0.2) | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (146.1) | — | — | — | (146.1) | |||||||||||||||||||||||||||||||||||||||
Noncontrolling interest distributions | — | — | — | — | — | — | (15.6) | (15.6) | |||||||||||||||||||||||||||||||||||||||
Shares issued under equity compensation plans | — | — | 4.9 | — | — | 1.2 | — | 6.1 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 18.3 | — | — | — | — | 18.3 | |||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2022 | $ | 2.1 | $ | — | $ | 1,883.6 | $ | 12,267.8 | $ | (200.9) | $ | (5,563.1) | $ | 327.2 | $ | 8,716.7 | |||||||||||||||||||||||||||||||
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 3 |
FINANCIAL STATEMENTS |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in millions) (unaudited) | |||||||||||||||||||||||||||||||||||||||||||||||
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, 2021 | $ | 1.9 | $ | 0.3 | $ | 1,604.2 | $ | 15,117.8 | $ | (335.5) | $ | (2,789.8) | $ | 330.2 | $ | 13,929.1 | |||||||||||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | (908.1) | — | — | 10.8 | (897.3) | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax effect | — | — | — | — | 98.9 | — | 5.6 | 104.5 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | (792.8) | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of shares | — | — | — | — | — | (400.8) | — | (400.8) | |||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (146.1) | — | — | — | (146.1) | |||||||||||||||||||||||||||||||||||||||
Noncontrolling interest distributions | — | — | — | — | — | — | (10.6) | (10.6) | |||||||||||||||||||||||||||||||||||||||
Shares issued under equity compensation plans | — | — | (0.9) | — | — | 3.8 | — | 2.9 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 15.9 | — | — | — | — | 15.9 | |||||||||||||||||||||||||||||||||||||||
Balance at May 31, 2021 | 1.9 | 0.3 | 1,619.2 | 14,063.6 | (236.6) | (3,186.8) | 336.0 | 12,597.6 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | 1.5 | — | — | 10.4 | 11.9 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax effect | — | — | — | — | (53.8) | — | (3.9) | (57.7) | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | (45.8) | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of shares | — | — | — | — | — | (904.2) | — | (904.2) | |||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (142.9) | — | — | — | (142.9) | |||||||||||||||||||||||||||||||||||||||
Noncontrolling interest distributions | — | — | — | — | — | — | (10.6) | (10.6) | |||||||||||||||||||||||||||||||||||||||
Shares issued under equity compensation plans | — | — | 8.9 | — | — | 1.4 | — | 10.3 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | 20.2 | — | — | — | — | 20.2 | |||||||||||||||||||||||||||||||||||||||
Balance at August 31, 2021 | 1.9 | 0.3 | 1,648.3 | 13,922.2 | (290.4) | (4,089.6) | 331.9 | 11,524.6 | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss): | |||||||||||||||||||||||||||||||||||||||||||||||
Net income (loss) | — | — | — | 470.8 | — | — | 10.0 | 480.8 | |||||||||||||||||||||||||||||||||||||||
Other comprehensive income (loss), net of income tax effect | — | — | — | — | (332.7) | — | (18.1) | (350.8) | |||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | 130.0 | ||||||||||||||||||||||||||||||||||||||||||||||
Repurchase of shares | — | — | — | — | — | (85.5) | — | (85.5) | |||||||||||||||||||||||||||||||||||||||
Dividends declared | — | — | — | (141.4) | — | — | — | (141.4) | |||||||||||||||||||||||||||||||||||||||
Noncontrolling interest distributions | — | — | — | — | — | — | (15.7) | (15.7) | |||||||||||||||||||||||||||||||||||||||
Shares issued under equity compensation plans | — | — | 135.8 | — | — | 0.9 | — | 136.7 | |||||||||||||||||||||||||||||||||||||||
Stock-based compensation | — | — | (2.3) | — | — | — | — | (2.3) | |||||||||||||||||||||||||||||||||||||||
Balance at November 30, 2021 | $ | 1.9 | $ | 0.3 | $ | 1,781.8 | $ | 14,251.6 | $ | (623.1) | $ | (4,174.2) | $ | 308.1 | $ | 11,546.4 |
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 4 |
FINANCIAL STATEMENTS |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
For the Nine Months Ended November 30, | |||||||||||
2022 | 2021 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
Net income (loss) | $ | (261.7) | $ | (404.6) | |||||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | |||||||||||
Unrealized net (gain) loss on securities measured at fair value | 39.1 | 1,534.8 | |||||||||
Deferred tax provision (benefit) | 218.4 | 58.5 | |||||||||
Depreciation | 278.4 | 248.6 | |||||||||
Stock-based compensation | 56.1 | 33.8 | |||||||||
Equity in (earnings) losses of equity method investees and related activities, net of distributed earnings | 845.4 | 6.0 | |||||||||
Noncash lease expense | 66.7 | 60.9 | |||||||||
Amortization of debt issuance costs and loss on extinguishment of debt | 31.1 | 37.5 | |||||||||
Impairment of Canopy Equity Method Investment | 1,060.3 | — | |||||||||
Impairment of brewery construction in progress | — | 665.9 | |||||||||
Gain (loss) on settlement of Pre-issuance hedge contracts | 20.7 | — | |||||||||
Change in operating assets and liabilities, net of effects from purchase and sale of business: | |||||||||||
Accounts receivable | (25.3) | (134.8) | |||||||||
Inventories | (259.3) | (218.4) | |||||||||
Prepaid expenses and other current assets | 204.7 | (114.7) | |||||||||
Accounts payable | 187.4 | 340.5 | |||||||||
Deferred revenue | (5.1) | 124.3 | |||||||||
Other accrued expenses and liabilities | (247.0) | 200.9 | |||||||||
Other | 70.7 | 4.9 | |||||||||
Total adjustments | 2,542.3 | 2,848.7 | |||||||||
Net cash provided by (used in) operating activities | 2,280.6 | 2,444.1 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
Purchase of property, plant, and equipment | (683.8) | (598.7) | |||||||||
Purchase of business, net of cash acquired | (37.1) | (53.5) | |||||||||
Investments in equity method investees and securities | (29.5) | (28.6) | |||||||||
Proceeds from sale of assets | 6.6 | 4.0 | |||||||||
Proceeds from sale of business | 96.7 | 4.6 | |||||||||
Other investing activities | 0.5 | (2.0) | |||||||||
Net cash provided by (used in) investing activities | (646.6) | (674.2) | |||||||||
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 5 |
FINANCIAL STATEMENTS |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
For the Nine Months Ended November 30, | |||||||||||
2022 | 2021 | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
Proceeds from issuance of long-term debt | 2,845.8 | 995.6 | |||||||||
Principal payments of long-term debt | (1,657.3) | (1,363.5) | |||||||||
Net proceeds from (repayments of) short-term borrowings | 552.6 | 243.0 | |||||||||
Dividends paid | (441.1) | (430.5) | |||||||||
Purchases of treasury stock | (1,400.5) | (1,390.5) | |||||||||
Proceeds from shares issued under equity compensation plans | 36.7 | 159.7 | |||||||||
Payments of minimum tax withholdings on stock-based payment awards | (10.5) | (9.8) | |||||||||
Payments of debt issuance, debt extinguishment, and other financing costs | (34.1) | (35.0) | |||||||||
Distributions to noncontrolling interests | (37.5) | (36.9) | |||||||||
Payment to holders of Class B Stock in connection with the Reclassification | (1,500.0) | — | |||||||||
Net cash provided by (used in) financing activities | (1,645.9) | (1,867.9) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (2.5) | (1.3) | |||||||||
Net increase (decrease) in cash and cash equivalents | (14.4) | (99.3) | |||||||||
Cash and cash equivalents, beginning of period | 199.4 | 460.6 | |||||||||
Cash and cash equivalents, end of period | $ | 185.0 | $ | 361.3 | |||||||
Supplemental disclosures of noncash investing and financing activities | |||||||||||
Additions to property, plant, and equipment | $ | 174.6 | $ | 223.1 |
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 6 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOVEMBER 30, 2022
(unaudited)
1. BASIS OF PRESENTATION
We have prepared the Financial Statements, without audit, pursuant to the rules and regulations of the SEC 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 Financial Statements should be read in conjunction with the consolidated financial statements and related notes included in the 2022 Annual Report. Results of operations for interim periods are not necessarily indicative of annual results.
2. 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:
November 30, 2022 | February 28, 2022 | ||||||||||
(in millions) | |||||||||||
Raw materials and supplies | $ | 227.8 | $ | 185.3 | |||||||
In-process inventories | 989.1 | 804.8 | |||||||||
Finished case goods | 585.1 | 583.1 | |||||||||
$ | 1,802.0 | $ | 1,573.2 |
We assess the valuation of our inventories and reduce the carrying value of those inventories that are obsolete or in excess of our forecasted usage to their estimated net realizable value based on analyses and assumptions including, but not limited to, historical usage, future demand, and market requirements. We evaluated the carrying value of certain inventories and recognized the following in cost of product sold within our consolidated results of operations:
For the Nine Months Ended November 30, | For the Three Months Ended November 30, | ||||||||||||||||||||||
2022 | 2021 (1) | 2022 | 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Loss on inventory write-down | $ | 15.7 | $ | 85.2 | $ | 4.5 | $ | 2.6 |
(1)We recognized a loss predominantly from excess inventory of hard seltzers, within the Beer segment, largely resulting from a slowdown in the overall category which occurred in early Fiscal 2022.
3. 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 2022 Annual Report and have not changed significantly for the nine months and three months ended November 30, 2022.
We have an investment 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 7). This investment is included in securities measured at fair value and is accounted for at fair value, with the net gain (loss) from the
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 7 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
changes in fair value of this investment recognized in income (loss) from unconsolidated investments (see Note 4). We will no longer have this investment if the Canopy Transaction is completed.
The aggregate notional value of outstanding derivative instruments is as follows:
November 30, 2022 | February 28, 2022 | ||||||||||
(in millions) | |||||||||||
Derivative instruments designated as hedging instruments | |||||||||||
Foreign currency contracts | $ | 1,952.5 | $ | 1,863.2 | |||||||
Pre-issuance hedge contracts | $ | — | $ | 100.0 | |||||||
Derivative instruments not designated as hedging instruments | |||||||||||
Foreign currency contracts | $ | 813.8 | $ | 497.6 | |||||||
Commodity derivative contracts | $ | 341.1 | $ | 291.1 | |||||||
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 November 30, 2022, the estimated fair value of derivative instruments in a net liability position due to counterparties was $3.6 million. If we were required to settle the net liability position under these derivative instruments on November 30, 2022, we would have had sufficient available liquidity on hand to satisfy this obligation.
Results of period derivative activity
The estimated fair value and location of our derivative instruments on our balance sheets are as follows (see Note 4):
Assets | Liabilities | |||||||||||||||||||||||||
November 30, 2022 | February 28, 2022 | November 30, 2022 | February 28, 2022 | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||
Derivative instruments designated as hedging instruments | ||||||||||||||||||||||||||
Foreign currency contracts: | ||||||||||||||||||||||||||
Prepaid expenses and other | $ | 80.2 | $ | 28.6 | Other accrued expenses and liabilities | $ | 10.9 | $ | 5.9 | |||||||||||||||||
Other assets | $ | 104.8 | $ | 25.1 | Deferred income taxes and other liabilities | $ | 4.8 | $ | 8.6 | |||||||||||||||||
Pre-issuance hedge contracts: | ||||||||||||||||||||||||||
Other assets | $ | — | $ | — | Deferred income taxes and other liabilities | $ | — | $ | 0.4 | |||||||||||||||||
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 8 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Assets | Liabilities | |||||||||||||||||||||||||
November 30, 2022 | February 28, 2022 | November 30, 2022 | February 28, 2022 | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||
Derivative instruments not designated as hedging instruments | ||||||||||||||||||||||||||
Foreign currency contracts: | ||||||||||||||||||||||||||
Prepaid expenses and other | $ | 6.3 | $ | 2.7 | Other accrued expenses and liabilities | $ | 3.5 | $ | 3.3 | |||||||||||||||||
Commodity derivative contracts: | ||||||||||||||||||||||||||
Prepaid expenses and other | $ | 45.3 | $ | 61.3 | Other accrued expenses and liabilities | $ | 9.0 | $ | 0.7 | |||||||||||||||||
Other assets | $ | 12.6 | $ | 29.7 | Deferred income taxes and other liabilities | $ | 3.9 | $ | 0.2 | |||||||||||||||||
The principal effect of our derivative instruments designated in cash flow hedging relationships on our results of operations, as well as 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 Nine Months Ended November 30, 2022 | ||||||||||||||||||||
Foreign currency contracts | $ | 146.6 | Sales | $ | (1.4) | |||||||||||||||
Cost of product sold | 34.0 | |||||||||||||||||||
Pre-issuance hedge contracts | 15.7 | Interest expense | (0.8) | |||||||||||||||||
$ | 162.3 | $ | 31.8 | |||||||||||||||||
For the Nine Months Ended November 30, 2021 | ||||||||||||||||||||
Foreign currency contracts | $ | (75.7) | Sales | $ | (0.8) | |||||||||||||||
Cost of product sold | 30.4 | |||||||||||||||||||
Pre-issuance hedge contracts | — | Interest expense | (1.8) | |||||||||||||||||
$ | (75.7) | $ | 27.8 | |||||||||||||||||
For the Three Months Ended November 30, 2022 | ||||||||||||||||||||
Foreign currency contracts | $ | 75.3 | Sales | $ | (0.2) | |||||||||||||||
Cost of product sold | 12.1 | |||||||||||||||||||
Pre-issuance hedge contracts | — | Interest expense | (0.2) | |||||||||||||||||
$ | 75.3 | $ | 11.7 | |||||||||||||||||
For the Three Months Ended November 30, 2021 | ||||||||||||||||||||
Foreign currency contracts | $ | (87.4) | Sales | $ | (0.4) | |||||||||||||||
Cost of product sold | 8.8 | |||||||||||||||||||
Pre-issuance hedge contracts | — | Interest expense | (0.3) | |||||||||||||||||
$ | (87.4) | $ | 8.1 |
We expect $60.9 million of net gains, net of income tax effect, to be reclassified from AOCI to our results of operations within the next 12 months.
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 9 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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 Nine Months Ended November 30, 2022 | ||||||||||||||||||||
Commodity derivative contracts | Cost of product sold | $ | 25.3 | |||||||||||||||||
Foreign currency contracts | Selling, general, and administrative expenses | (11.9) | ||||||||||||||||||
$ | 13.4 | |||||||||||||||||||
For the Nine Months Ended November 30, 2021 | ||||||||||||||||||||
Commodity derivative contracts | Cost of product sold | $ | 48.1 | |||||||||||||||||
Foreign currency contracts | Selling, general, and administrative expenses | (19.4) | ||||||||||||||||||
$ | 28.7 | |||||||||||||||||||
For the Three Months Ended November 30, 2022 | ||||||||||||||||||||
Commodity derivative contracts | Cost of product sold | $ | (7.8) | |||||||||||||||||
Foreign currency contracts | Selling, general, and administrative expenses | (9.3) | ||||||||||||||||||
$ | (17.1) | |||||||||||||||||||
For the Three Months Ended November 30, 2021 | ||||||||||||||||||||
Commodity derivative contracts | Cost of product sold | $ | — | |||||||||||||||||
Foreign currency contracts | Selling, general, and administrative expenses | (11.0) | ||||||||||||||||||
$ | (11.0) |
4. 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 or 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).
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 10 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Interest rate swap and Pre-issuance hedge 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).
Canopy investment
Equity securities, Warrants – The November 2018 Canopy Warrants consist of three tranches of warrants, including 88.5 million Tranche A Warrants expiring November 1, 2023, which are currently exercisable, 38.4 million Tranche B Warrants expiring November 1, 2026, and 12.8 million Tranche C Warrants expiring November 1, 2026. If the Canopy Transaction is completed we will no longer have the November 2018 Canopy Warrants. The inputs used to estimate the fair value of the November 2018 Canopy Warrants are as follows (1) (2):
November 30, 2022 | February 28, 2022 | ||||||||||||||||||||||
Tranche A Warrants (3) | Tranche B Warrants (4) | Tranche A Warrants (3) | Tranche B Warrants (4) | ||||||||||||||||||||
Exercise price (5) | C$ | 50.40 | C$ | 76.68 | C$ | 50.40 | C$ | 76.68 | |||||||||||||||
Valuation date stock price (6) | C$ | 4.86 | C$ | 4.86 | C$ | 9.04 | C$ | 9.04 | |||||||||||||||
Remaining contractual term (7) | 0.9 years | 3.9 years | 1.7 years | 4.7 years | |||||||||||||||||||
Expected volatility (8) | 100.0 | % | 100.0 | % | 75.0 | % | 75.0 | % | |||||||||||||||
Risk-free interest rate (9) | 4.4 | % | 3.4 | % | 1.4 | % | 1.7 | % | |||||||||||||||
Expected dividend yield (10) | 0.0 | % | 0.0 | % | 0.0 | % | 0.0 | % |
(1)The exercise price for the Tranche C Warrants is based on the VWAP Exercise Price. The Tranche C Warrants are not included in the table as there is no fair value assigned.
(2)In connection with the Acreage Transaction, we obtained other rights which include a share repurchase credit. If 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 between April 18, 2019, and two-years after the full exercise of the Tranche A Warrants, we will be credited an amount that will reduce the aggregate exercise price otherwise payable upon each exercise of the Tranche B Warrants and 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. The likelihood of receiving the share repurchase credit if we were to fully exercise the Tranche A Warrants is remote, therefore, no fair value has been assigned.
(3)The fair value is estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement).
(4)The fair value is estimated using Monte Carlo simulations (Level 2 fair value measurement).
(5)Based on the exercise price from the applicable underlying agreements.
(6)Based on the closing market price for Canopy common shares on the TSX as of the applicable date.
(7)Based on the expiration date of the warrants.
(8)Based on consideration of historical and/or implied volatility levels of the underlying equity security and limited consideration of historical peer group volatility levels.
(9)Based on the implied yield currently available on Canadian Treasury zero coupon issues with a remaining term equal to the expiration date of the applicable warrants.
(10)Based on historical dividend levels.
Debt securities – We have elected the fair value option to account for the Canopy Debt Securities. 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 settled prior to maturity by either party upon the occurrence of certain events. 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 market spreads using bond data as
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
of the valuation date. If the Canopy Transaction is completed we expect to negotiate an exchange of our Canopy Debt Securities. For additional information, refer to Note 7.
The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
November 30, 2022 | February 28, 2022 | ||||||||||
Settlement price (1) | C$ | 48.17 | C$ | 48.17 | |||||||
Valuation date stock price (2) | C$ | 4.86 | C$ | 9.04 | |||||||
Remaining term (3) | 0.6 years | 1.4 years | |||||||||
Expected volatility (4) | 100.0 | % | 75.0 | % | |||||||
Risk-free interest rate (5) | 4.4 | % | 1.4 | % | |||||||
Expected dividend yield (6) | 0.0 | % | 0.0 | % |
(1)Based on the rate which the Canopy Debt Securities may be settled. In June 2022, the Canopy Debt Securities were amended to remove Canopy’s right to settle the Canopy Debt Securities on conversion into Canopy common shares. As a result, the Canopy Debt Securities may only be settled in cash. Prior to the June 2022 amendment, the Canopy Debt Securities could be settled, at Canopy’s option, in cash, Canopy common shares, or a combination thereof.
(2)Based on the closing market price for Canopy common shares on the TSX as of the applicable date.
(3)Based on the contractual maturity date of the notes.
(4)Based on consideration of historical and/or implied volatility levels of the underlying equity security, adjusted for certain risks associated with debt securities, as appropriate.
(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 Canopy Debt Securities.
(6)Based on historical dividend levels.
Short-term borrowings
Our short-term borrowings consist of our commercial paper program and the revolving credit facility under our senior credit facility. The revolving credit facility is a variable interest rate bearing note with a fixed margin, adjustable based upon our debt rating (as defined in our senior credit facility). For these short-term borrowings, the carrying value approximates the fair value.
Long-term debt
The term loans under our term loan credit agreements are variable interest rate bearing notes with a fixed margin, adjustable based upon our debt rating. The carrying values approximate the fair value of the term loans. The fair value of the remaining fixed interest rate long-term debt 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, and accounts payable, approximate fair value as of November 30, 2022, and February 28, 2022, due to the relatively short maturity of these instruments. As of November 30, 2022, the carrying amount of long-term debt, including the current portion, was $11,296.7 million, compared with an estimated fair value of $10,503.2 million. As of February 28, 2022, the carrying amount of long-term debt, including the current portion, was $10,093.5 million, compared with an estimated fair value of $10,345.3 million.
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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) | |||||||||||||||||||||||
November 30, 2022 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Foreign currency contracts | $ | — | $ | 191.3 | $ | — | $ | 191.3 | |||||||||||||||
Commodity derivative contracts | $ | — | $ | 57.9 | $ | — | $ | 57.9 | |||||||||||||||
November 2018 Canopy Warrants (1) | $ | — | $ | 5.6 | $ | — | $ | 5.6 | |||||||||||||||
Canopy Debt Securities (1) | $ | — | $ | 69.1 | $ | — | $ | 69.1 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||
Foreign currency contracts | $ | — | $ | 19.2 | $ | — | $ | 19.2 | |||||||||||||||
Commodity derivative contracts | $ | — | $ | 12.9 | $ | — | $ | 12.9 | |||||||||||||||
February 28, 2022 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Foreign currency contracts | $ | — | $ | 56.4 | $ | — | $ | 56.4 | |||||||||||||||
Commodity derivative contracts | $ | — | $ | 91.0 | $ | — | $ | 91.0 | |||||||||||||||
November 2018 Canopy Warrants (1) | $ | — | $ | 36.3 | $ | — | $ | 36.3 | |||||||||||||||
Canopy Debt Securities (1) | $ | — | $ | 146.6 | $ | — | $ | 146.6 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||
Foreign currency contracts | $ | — | $ | 17.8 | $ | — | $ | 17.8 | |||||||||||||||
Commodity derivative contracts | $ | — | $ | 0.9 | $ | — | $ | 0.9 | |||||||||||||||
Pre-issuance hedge contracts | $ | — | $ | 0.4 | $ | — | $ | 0.4 |
(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 Nine Months Ended November 30, | For the Three Months Ended November 30, | ||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||
November 2018 Canopy Warrants | $ | (30.7) | $ | (1,496.4) | $ | (7.1) | $ | (189.4) | |||||||||||||||||||||
Canopy Debt Securities (i) | (8.4) | (38.4) | (0.3) | (10.3) | |||||||||||||||||||||||||
$ | (39.1) | $ | (1,534.8) | $ | (7.4) | $ | (199.7) | ||||||||||||||||||||||
(i) | In July 2022, we received 29.2 million common shares of Canopy through the exchange of C$100.0 million principal amount of our Canopy Debt Securities. We continue to hold Canopy Debt Securities of C$100.0 million principal amount. For additional information, refer to Note 7. |
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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 periods 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 Nine Months Ended November 30, 2022 | |||||||||||||||||||||||
Equity method investments | $ | 621.4 | $ | — | $ | — | $ | 1,060.3 | |||||||||||||||
For the Nine Months Ended November 30, 2021 | |||||||||||||||||||||||
Long-lived assets (1) | $ | — | $ | — | $ | 20.0 | $ | 665.9 | |||||||||||||||
(1)As of November 30, 2022, we determined the remaining Mexicali Brewery net assets have met held for sale criteria. The carrying value of assets held for sale are included in other assets within our consolidated balance sheet and we have concluded that no additional impairment existed.
Equity method investments
As of August 31, 2022, we evaluated the Canopy Equity Method Investment and determined there was an other-than-temporary impairment based on several contributing factors, including: (i) the period of time for which the fair value had been less than the carrying value and the uncertainty surrounding Canopy’s stock price recovering in the near-term, (ii) Canopy recording a significant impairment of goodwill related to its cannabis operations during its three months ended June 30, 2022, and (iii) the uncertainty of U.S. federal cannabis permissibility. As a result, the Canopy Equity Method Investment with a carrying value of $1,695.1 million was written down to its estimated fair value of $634.8 million, resulting in an impairment of $1,060.3 million. This loss from impairment was included in income (loss) from unconsolidated investments within our consolidated results for the nine months ended November 30, 2022. The estimated fair value was determined based on the closing price of the underlying equity security as of August 31, 2022. There may be a future impairment of our Canopy Equity Method Investment if our expectations about Canopy’s prospective results and cash flows decline, which could be influenced by a variety of factors including adverse market conditions or if Canopy records another significant impairment of goodwill or intangible or other long-lived assets, makes significant asset sales, or has changes in senior management.
Long-lived assets
In April 2021, our Board of Directors authorized management to sell or abandon the Mexicali Brewery. Subsequently, management determined that we will be unable to use or repurpose certain assets at the Mexicali Brewery. Accordingly, for the first quarter of Fiscal 2022, long-lived assets with a carrying value of $685.9 million were written down to their estimated fair value of $20.0 million, resulting in an impairment of $665.9 million. This impairment was included in impairment of brewery construction in progress within our consolidated results of operations for the nine months ended November 30, 2021. Our estimate of fair value was determined based on the expected salvage value of the assets. The Mexicali Brewery is a component of the Beer segment. In April 2022, we announced that, with the assistance of the Mexican government and state and local officials in Mexico, we acquired land in Veracruz for the construction of the Veracruz Brewery where there is ample water and we will have a skilled workforce to meet our long-term needs. The design and construction process for the Veracruz Brewery is underway. We continue to work with government officials in Mexico to pursue various forms of recovery for capitalized costs and additional expenses incurred in connection with the canceled Mexicali Brewery construction project, however, there can be no assurance of any recoveries. In the medium-term, under normal operating conditions, we have ample capacity at the Nava and Obregon breweries to meet consumer needs based on current growth forecasts and current and planned production capabilities. Expansion, optimization, and/or
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construction activities continue at our current brewery locations under our Mexico Beer Projects to align with our anticipated future growth expectations.
5. GOODWILL
The changes in the carrying amount of goodwill are as follows:
Beer | Wine and Spirits | Consolidated | |||||||||||||||
(in millions) | |||||||||||||||||
Balance, February 28, 2021 | $ | 5,125.6 | $ | 2,667.9 | $ | 7,793.5 | |||||||||||
Purchase accounting allocations (1) | — | 79.6 | 79.6 | ||||||||||||||
Foreign currency translation adjustments | (4.9) | (5.8) | (10.7) | ||||||||||||||
Balance, February 28, 2022 | 5,120.7 | 2,741.7 | 7,862.4 | ||||||||||||||
Purchase accounting allocations (2) | — | 26.3 | 26.3 | ||||||||||||||
2022 Wine Divestiture | — | (24.5) | (24.5) | ||||||||||||||
Foreign currency translation adjustments | 38.4 | (6.0) | 32.4 | ||||||||||||||
Balance, November 30, 2022 | $ | 5,159.1 | $ | 2,737.5 | $ | 7,896.6 |
(1)Preliminary purchase accounting allocations associated with the acquisition of My Favorite Neighbor and purchase accounting allocations associated with the acquisition of Empathy Wines.
(2)Preliminary purchase accounting allocations associated with the acquisitions of Austin Cocktails and Lingua Franca and purchase accounting allocations associated with the acquisition of My Favorite Neighbor.
Divestiture
2022 Wine Divestiture
On October 6, 2022, we sold certain of our mainstream and premium wine brands and related inventory. The net cash proceeds from the 2022 Wine Divestiture were utilized primarily to reduce outstanding borrowings. Prior to the 2022 Wine Divestiture, we recorded the results of operations of these brands in the Wine and Spirits segment. The following table summarizes the net gain recognized in connection with this divestiture for the nine months and three months ended November 30, 2022:
(in millions) | |||||||||||
Cash received from buyer | $ | 96.7 | |||||||||
Net assets sold | (68.1) | ||||||||||
Direct costs to sell (1) | (14.8) | ||||||||||
Gain on sale of business (2) | $ | 13.8 |
(1)Includes certain contract termination costs.
(2)Included in selling, general, and administrative expenses within our consolidated results of operations.
Acquisitions
Austin Cocktails
In April 2022, we acquired the remaining 73% ownership interest in Austin Cocktails, which included a portfolio of small batch, RTD cocktails. This transaction primarily included the acquisition of goodwill and a trademark. In addition, the purchase price for Austin Cocktails includes an earn-out over five years based on performance. The results of operations of Austin Cocktails are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Lingua Franca
In March 2022, we acquired the Lingua Franca business, including a collection of Oregon-based luxury wines, a vineyard, and a production facility. This transaction also includes the acquisition of a trademark and
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inventory. In addition, the purchase price for Lingua Franca includes an earn-out over seven years based on performance. The results of operations of Lingua Franca are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
My Favorite Neighbor
In November 2021, we acquired the remaining 65% ownership interest in My Favorite Neighbor, a super-luxury, DTC focused wine business as well as certain wholesale distributed brands. This transaction primarily included the acquisition of goodwill, trademarks, inventory, and property, plant, and equipment. In addition, the My Favorite Neighbor transaction includes an earn-out over 10 years based on performance, with a 50% minimum guarantee due at the end of the earn-out period. The results of operations of My Favorite Neighbor 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 $13.5 million for the nine months and three months ended November 30, 2021, related to the remeasurement of our previously held 35% equity interest in My Favorite Neighbor to the acquisition-date fair value. This gain is included in selling, general, and administrative expenses within our consolidated results of operations.
6. INTANGIBLE ASSETS
The major components of intangible assets are as follows:
November 30, 2022 | February 28, 2022 | ||||||||||||||||||||||
Gross Carrying Amount | Net Carrying Amount | Gross Carrying Amount | Net Carrying Amount | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Amortizable intangible assets | |||||||||||||||||||||||
Customer relationships | $ | 85.7 | $ | 18.1 | $ | 87.1 | $ | 21.7 | |||||||||||||||
Other | 20.8 | — | 20.9 | — | |||||||||||||||||||
Total | $ | 106.5 | 18.1 | $ | 108.0 | 21.7 | |||||||||||||||||
Nonamortizable intangible assets | |||||||||||||||||||||||
Trademarks | 2,723.4 | 2,733.5 | |||||||||||||||||||||
Total intangible assets | $ | 2,741.5 | $ | 2,755.2 |
We did not incur costs to renew or extend the term of acquired intangible assets for the nine months and three months ended November 30, 2022, and November 30, 2021. Net carrying amount represents the gross carrying value net of accumulated amortization.
7. EQUITY METHOD INVESTMENTS
Our equity method investments are as follows:
November 30, 2022 | February 28, 2022 | ||||||||||||||||||||||
Carrying Value | Ownership Percentage | Carrying Value | Ownership Percentage | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Canopy Equity Method Investment (1) (2) | $ | 543.0 | 35.7 | % | $ | 2,503.5 | 36.1 | % | |||||||||||||||
Other equity method investments | 228.4 | 20%-50% | 185.2 | 20%-50% | |||||||||||||||||||
$ | 771.4 | $ | 2,688.7 |
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(1)The fair value based on the closing price of the underlying equity security as of November 30, 2022, and February 28, 2022, was $621.4 million and $1,014.8 million, respectively. The balance at November 30, 2022, is net of a $1,060.3 million impairment of our Canopy Equity Method Investment (see “Canopy Equity Method Investment” below).
(2)Includes the following:
Common Shares | Purchase Price | |||||||||||||
(in millions) | ||||||||||||||
November 2017 Canopy Investment | 18.9 | $ | 130.1 | |||||||||||
November 2018 Canopy Investment | 104.5 | 2,740.3 | ||||||||||||
May 2020 Canopy Investment | 18.9 | 173.9 | ||||||||||||
July 2022 Canopy Investment (i) | 29.2 | 76.8 | ||||||||||||
171.5 | $ | 3,121.1 | ||||||||||||
(i) | In June 2022, certain holders of Canopy Debt Securities agreed to exchange C$262.6 million aggregate principal amount of their Canopy Debt Securities to Canopy at 99% of principal value for newly issued Canopy common shares. As part of this transaction, we exchanged C$100.0 million principal amount of our Canopy Debt Securities for Canopy common shares which we received in July 2022. This exchange did not significantly change our Canopy ownership percentage. |
Canopy Equity Method Investment
We complement our beverage alcohol strategy with our investment in Canopy, a leading provider of medicinal and recreational cannabis products. Equity in earnings (losses) from the Canopy Equity Method Investment and related activities is determined by recording the effect of basis differences. Amounts included in our consolidated results of operations for each period are as follows:
For the Nine Months Ended November 30, | For the Three Months Ended November 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Equity in earnings (losses) from Canopy and related activities (1) | $ | (876.5) | $ | (39.5) | $ | (60.8) | $ | (4.2) |
(1)Includes a $461.4 million goodwill impairment related to Canopy’s cannabis operations for the nine months ended November 30, 2022.
We evaluated the Canopy Equity Method Investment as of August 31, 2022, and determined there was an other-than-temporary impairment. Our conclusion was based on several contributing factors, including: (i) the period of time for which the fair value had been less than the carrying value and the uncertainty surrounding Canopy’s stock price recovering in the near-term, (ii) Canopy recording a significant impairment of goodwill related to its cannabis operations during its three months ended June 30, 2022, and (iii) the uncertainty of U.S. federal cannabis permissibility.
Canopy has various equity and convertible debt securities outstanding, including primarily equity awards granted to its employees, and options and warrants issued to various third parties, including our November 2018 Canopy Warrants, and the Acreage Financial Instrument (a call option for Canopy to acquire up to 100% of the shares of Acreage). As of November 30, 2022, the exercise and/or conversion of certain of these outstanding securities could have a significant effect on our share of Canopy’s reported earnings or losses and our ownership interest in Canopy.
The following table presents summarized financial information for Canopy prepared 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 earnings (losses) for the periods January through September 2022 and January through September 2021 in our nine months ended November 30, 2022, and November 30, 2021, results, respectively. We recognized our share of Canopy’s earnings (losses) for the periods July through September 2022 and July through September 2021 in our three months ended November 30, 2022, and November 30, 2021,
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results, respectively. The nine months ended November 30, 2022, includes (i) a goodwill impairment related to Canopy’s cannabis operations and (ii) substantial costs designed to drive efficiency and accelerate Canopy’s path to profitability. The amounts shown represent 100% of Canopy’s reported results of operations for the respective periods.
For the Nine Months Ended November 30, | For the Three Months Ended November 30, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Net sales | $ | 264.7 | $ | 332.4 | $ | 90.2 | $ | 104.3 | |||||||||||||||
Gross profit (loss) | $ | (123.9) | $ | (26.6) | $ | 2.9 | $ | (56.5) | |||||||||||||||
Net income (loss) | $ | (2,269.5) | $ | (182.6) | $ | (177.5) | $ | (12.9) | |||||||||||||||
Net income (loss) attributable to Canopy | $ | (2,255.2) | $ | (242.2) | $ | (169.8) | $ | (8.7) |
Plan to convert Canopy common stock ownership
In October 2022, we entered into a Consent Agreement with Canopy pursuant to which we have provided our consent, subject to certain conditions, to the Canopy Transaction. Canopy only holds non-voting and non-participating exchangeable shares of Canopy USA which are convertible into common shares of Canopy USA. Third-party investors will hold 100% of the common shares of Canopy USA.
In connection with the Canopy Transaction, Canopy has proposed to amend its share capital to (i) create Exchangeable Shares and (ii) restate the rights of Canopy common shares to provide for their conversion into Exchangeable Shares through the Canopy Amendment. Canopy has stated its intention to hold a special meeting of its shareholders to consider the Canopy Amendment. We have entered into a voting support agreement with Canopy to vote in favor of the Canopy Amendment.
If the Canopy Transaction is completed and the Canopy Amendment is authorized by Canopy’s shareholders and adopted by Canopy, we intend, subject to a final decision in our sole discretion, to exercise our right to convert our Canopy common shares into Exchangeable Shares. Additionally, if the Canopy Amendment is authorized by Canopy’s shareholders, we and Canopy intend to negotiate an exchange of up to C$100.0 million aggregate principal amount of our Canopy Debt Securities for Exchangeable Shares.
Assuming the completion of the Canopy Transaction and the transactions contemplated by the Consent Agreement and that we elect to convert our Canopy common shares into Exchangeable Shares:
•we intend to surrender our November 2018 Canopy Warrants to Canopy for cancellation;
•we will only have an interest in Exchangeable Shares, which are non-voting and non-participating securities, and our remaining Canopy Debt Securities;
•we intend to terminate all legacy agreements and commercial arrangements between ourselves and Canopy, including the investor rights agreement but excluding the Consent Agreement and certain termination agreements;
•we will have no further governance rights in relation to Canopy, including rights to nominate members to the board of directors of Canopy or approval rights related to certain transactions,
•all of our nominees will resign from the board of directors of Canopy; and
•as our investment in Canopy common shares makes up our Canopy Equity Method Investment, we expect to no longer:
◦apply the equity method to our investment in Canopy, which we expect will instead be accounted for at fair value with changes reported in income (loss) from unconsolidated investments within our consolidated results; and
◦have a stand-alone Canopy operating segment as Canopy’s financial results will no longer be provided to, or reviewed by, our CODM and will not be used to make strategic decisions, allocate resources, or assess performance.
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
If we do not convert our Canopy common shares into Exchangeable Shares:
•Canopy and its subsidiaries will not be permitted to exercise any rights to acquire shares and interests in entities carrying on cannabis-related business in the U.S.;
•Canopy USA will be required to exercise its repurchase rights to acquire the interests in Canopy USA held by its third-party investors; and
•we will continue to have all existing rights under our agreements with Canopy that predate the Consent Agreement, including governance rights in respect of Canopy (such as board nomination rights and approval rights in respect of certain transactions).
8. BORROWINGS
Borrowings consist of the following:
November 30, 2022 | February 28, 2022 | ||||||||||||||||||||||
Current | Long-term | Total | Total | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Short-term borrowings | |||||||||||||||||||||||
Commercial paper | $ | 875.6 | $ | 323.0 | |||||||||||||||||||
$ | 875.6 | $ | 323.0 | ||||||||||||||||||||
Long-term debt | |||||||||||||||||||||||
Term loan credit facilities | $ | — | $ | 1,298.2 | $ | 1,298.2 | $ | 300.0 | |||||||||||||||
Senior notes | — | 9,970.7 | 9,970.7 | 9,773.6 | |||||||||||||||||||
Other | 9.6 | 18.2 | 27.8 | 19.9 | |||||||||||||||||||
$ | 9.6 | $ | 11,287.1 | $ | 11,296.7 | $ | 10,093.5 |
Bank facilities
In October 2022, (i) the Company, CB International, the Administrative Agent, and certain other lenders agreed to amend the 2022 Credit Agreement, (ii) the Company, the Administrative Agent, and the Lender agreed to amend the April 2022 Term Credit Agreement, and (iii) the Company, the Administrative Agent, and certain other lenders agreed to amend the August 2022 Term Credit Agreement. The October 2022 Credit Agreement Amendments revise certain defined terms and covenants and will become effective upon (i) the amendment by Canopy of its Articles of Incorporation, (ii) the conversion of our Canopy common shares into Exchangeable Shares, and (iii) the resignation of our nominees from the board of directors of Canopy.
Senior credit facility
In April 2022, the Company, CB International, the Administrative Agent, and certain other lenders entered into the 2022 Restatement Agreement that amended and restated our then-existing senior credit facility (as amended and restated by the 2022 Restatement Agreement, the 2022 Credit Agreement). The principal changes effected by the 2022 Restatement Agreement were:
•The refinance and increase of the existing revolving credit facility from $2.0 billion to $2.25 billion and extension of its maturity to April 14, 2027;
•The refinement of certain negative covenants; and
•The replacement of LIBOR rates with rates based on term SOFR.
Term loan credit agreements
In April 2022, the Company, the Administrative Agent, and the Lender amended the June 2021 Term Credit Agreement (as amended, the April 2022 Term Credit Agreement). The principal changes effected by the amendment were the refinement of certain negative covenants and replacement of LIBOR rates with rates based on term SOFR.
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 19 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
In August 2022, the Company, the Administrative Agent, and certain other lenders entered into the August 2022 Term Credit Agreement. The August 2022 Term Credit Agreement provides for a $1.0 billion -year term loan facility and is not subject to amortization payments, with the balance due and payable three years after the November 10, 2022, funding date. We have the right to prepay the borrowing in whole or in part, without premium or penalty, ahead of its three-year maturity date (as defined in the August 2022 Term Credit Agreement). The proceeds from the August 2022 Term Credit Agreement were used to partially fund the aggregate cash payment to holders of Class B Stock in connection with the Reclassification and to pay related fees as well as fees related to closing the August 2022 Term Credit Agreement.
As of November 30, 2022, aggregate credit facilities under the 2022 Credit Agreement, the April 2022 Term Credit Agreement, and the August 2022 Term Credit Agreement consist of the following:
Amount | Maturity | ||||||||||
(in millions) | |||||||||||
2022 Credit Agreement | |||||||||||
Revolving credit facility (1) (2) | $ | 2,250.0 | Apr 14, 2027 | ||||||||
April 2022 Term Credit Agreement | |||||||||||
Five-Year Term Facility (1) (3) | $ | 491.3 | Jun 28, 2024 | ||||||||
August 2022 Term Credit Agreement | |||||||||||
Three-year term facility (1) (3) | $ | 1,000.0 | Nov 10, 2025 |
(1)Contractual interest rate varies based on our debt rating (as defined in the respective agreement) and is a function of SOFR plus a margin and a credit spread adjustment, or the base rate plus a margin, or, in certain circumstances where SOFR cannot be adequately ascertained or available, an alternative benchmark rate plus a margin.
(2)We and/or CB International are the borrower under the $2,250.0 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 term loan credit agreements.
As of November 30, 2022, information with respect to borrowings under the 2022 Credit Agreement, the April 2022 Term Credit Agreement, and the August 2022 Term Credit Agreement is as follows:
Outstanding borrowings | Interest rate | SOFR margin | Outstanding letters of credit | Remaining borrowing capacity (1) | |||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||
2022 Credit Agreement | |||||||||||||||||||||||||||||
Revolving credit facility | $ | — | — | % | — | % | $ | 12.0 | $ | 1,361.4 | |||||||||||||||||||
April 2022 Term Credit Agreement | |||||||||||||||||||||||||||||
Five-Year Term Facility | $ | 300.0 | 4.7 | % | 0.88 | % | |||||||||||||||||||||||
August 2022 Term Credit Agreement | |||||||||||||||||||||||||||||
Three-year term facility | $ | 1,000.0 | 5.0 | % | 1.13 | % |
(1)Net of outstanding revolving credit facility borrowings and outstanding letters of credit under the 2022 Credit Agreement and outstanding borrowings under our commercial paper program of $876.6 million (excluding unamortized discount) (see “Commercial paper program” below).
We and our subsidiaries are subject to covenants that are contained in the 2022 Credit Agreement, the April 2022 Term Credit Agreement, and the August 2022 Term Credit Agreement, including those restricting the incurrence of additional subsidiary indebtedness, additional liens, mergers and consolidations, transactions with affiliates, and sale and leaseback transactions, in each case subject to numerous conditions, exceptions, and
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 20 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
thresholds. The financial covenants are limited to a minimum interest coverage ratio and a maximum net leverage ratio.
Commercial paper program
We have a commercial paper program which provided for the issuance of up to an aggregate principal amount of $2.0 billion of commercial paper as of November 30, 2022. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 2022 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility. As of November 30, 2022, we had $875.6 million of outstanding borrowings, net of unamortized discount, under our commercial paper program with a weighted average annual interest rate of 4.6% and a weighted average remaining term of nine days.
In December 2022, we increased our commercial paper program by $250.0 million, thereby providing for the issuance of up to an aggregate principal amount of $2.25 billion of commercial paper.
Pre-issuance hedge contracts
In connection with the May 2022 Senior Notes, we entered into Pre-issuance hedge contracts, which were designated as cash flow hedges. As a result of these agreements, we hedged the treasury rate volatility on $300.0 million of future debt issuances. In May 2022, we terminated and settled all outstanding Pre-issuance hedge contracts, and recognized an unrealized gain, net of income tax effect, of $15.3 million in AOCI within our consolidated balance sheets. The gain on Pre-issuance hedge contracts is being amortized over 10 years to interest expense within our consolidated results of operations. See “Senior notes” below.
Senior notes
In May 2022, we issued $1,850.0 million aggregate principal amount of senior notes. Proceeds from this offering, net of discount and debt issuance costs, were $1,837.1 million. The May 2022 Senior Notes consist of:
Date of | Redemption | |||||||||||||||||||||||||||||||
Principal | Maturity | Interest Payments | Stated Redemption Date | Stated Basis Points | ||||||||||||||||||||||||||||
(in millions, except basis points) | ||||||||||||||||||||||||||||||||
3.60% Senior Notes (1) | $ | 550.0 | May 2024 | May/Nov | (2) | 15 | ||||||||||||||||||||||||||
4.35% Senior Notes (1) (3) | $ | 600.0 | May 2027 | May/Nov | Apr 2027 | 25 | ||||||||||||||||||||||||||
4.75% Senior Notes (1) (3) | $ | 700.0 | May 2032 | May/Nov | Feb 2032 | 30 |
(1)Senior unsecured obligations which rank equally in right of payment to all of our existing and future senior unsecured indebtedness.
(2)Redeemable, 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 and a make-whole payment based on the present value of the future payments at the applicable treasury rate plus the stated basis points.
(3)Redeemable, in whole or in part, at our option at any time prior to the stated redemption date as defined in the indenture, 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 the stated basis points as defined in the indenture. On or after the stated redemption date, redeemable, 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.
In February 2018, we issued $600.0 million aggregate principal amount of 3.20% senior notes due February 2023. In May 2013, we issued $1,050.0 million aggregate principal amount of 4.25% senior notes due May 2023. In May 2022, we used a portion of the proceeds from the May 2022 Senior Notes to complete a series of cash tender offers to purchase the 3.20% February 2018 Senior Notes and the 4.25% May 2013 Senior Notes validly tendered pursuant to the tender offers. We settled the tender offers with holders of approximately 67%
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 21 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
and 65% of the total outstanding principal amount of the 3.20% February 2018 Senior Notes and the 4.25% May 2013 Senior Notes, respectively. Total cash consideration paid for these purchases was $1,096.0 million and the total carrying amount of the notes was $1,080.7 million, resulting in a loss on extinguishment of debt of $15.3 million (including an immaterial amount of fees and other costs associated with the tender offers), which is included within our consolidated results for the nine months ended November 30, 2022. In addition, we paid any accrued interest on the tendered notes up to, but not including the date of settlement. In June 2022, we redeemed the remaining $198.2 million and $369.8 million outstanding principal balance of the 3.20% February 2018 Senior Notes and the 4.25% May 2013 Senior Notes, respectively. Total cash consideration paid was $575.5 million, which included the remaining principal amount of the notes of $568.0 million and a make-whole premium of $7.5 million which is included in loss on extinguishment of debt within our consolidated results for the nine months ended November 30, 2022.
Debt payments
As of November 30, 2022, the required principal repayments under long-term debt obligations (excluding unamortized debt issuance costs and unamortized discounts of $59.0 million and $22.1 million, respectively) for the remaining three months of Fiscal 2023 and for each of the five succeeding fiscal years and thereafter are as follows:
(in millions) | |||||
Fiscal 2023 | $ | 3.5 | |||
Fiscal 2024 | 9.1 | ||||
Fiscal 2025 | 1,256.1 | ||||
Fiscal 2026 | 1,904.3 | ||||
Fiscal 2027 | 603.4 | ||||
Fiscal 2028 | 1,801.3 | ||||
Thereafter | 5,800.1 | ||||
$ | 11,377.8 |
9. INCOME TAXES
Our effective tax rate for the nine months ended November 30, 2022, and November 30, 2021, was 305.7% and (115.8)%, respectively. Our effective tax rate for the three months ended November 30, 2022, and November 30, 2021, was 21.5% and 17.1%, respectively.
For the nine months ended November 30, 2022, our effective tax rate did not approximate the federal statutory rate of 21% primarily due to an increase in the valuation allowance related to our investment in Canopy, partially offset by a net income tax benefit recognized from the realization of tax losses related to a prior period divestiture.
For the three months ended November 30, 2022, our effective tax rate approximated the federal statutory rate of 21% as an increase in the valuation allowance related to our investment in Canopy was largely offset by a benefit of lower effective tax rates applicable to our foreign businesses.
For the nine months and three months ended November 30, 2021, our effective tax rate did not approximate the federal statutory rate of 21% primarily due to (i) an increase in the valuation allowance related to our investment in Canopy, (ii) a benefit of lower effective tax rates applicable to our foreign businesses, and (iii) recognition of a net income tax benefit from stock-based compensation award activity. For the nine months ended November 30, 2021, our effective rate was also impacted by the long-lived asset impairment of brewery construction in progress.
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 22 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
10. STOCKHOLDERS’ EQUITY
Common stock
Effective November 10, 2022, we have one class of common stock with a material number of shares outstanding: Class A Stock. Holders of Class A Stock are entitled to one vote per share. In addition, we have a class of common stock with an immaterial number of shares outstanding: Class 1 Stock. Shares of Class 1 Stock generally have no voting rights. Shares of Class 1 Stock are convertible into shares of Class A Stock on a one-to-one basis at any time at the option of the holder, provided that the holder immediately sells the Class A Stock acquired upon conversion. Because shares of Class 1 Stock are convertible into shares of Class A Stock, for each share of Class 1 Stock issued, we must reserve one share of Class A Stock for issuance upon the conversion of the share of Class 1 Stock. Holders of Class 1 Stock do not have any preference as to dividends, but may participate in any dividend if and when declared by the Board of Directors. If we pay a cash dividend on Class 1 Stock, each share of Class A Stock will receive an amount at least 10% greater than the amount of cash dividend per share paid on Class 1 Stock. In addition, the Board of Directors may declare and pay a dividend on Class A Stock without paying a dividend on Class 1 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, 2022 | 187,263,859 | 28,212,340 | 2,248,679 | 22,824,607 | 5,005,800 | ||||||||||||||||||||||||
Share repurchases | — | — | — | 4,065,508 | — | ||||||||||||||||||||||||
Conversion of shares | 655 | (655) | — | — | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | 35 | (108,228) | — | ||||||||||||||||||||||||
Vesting of restricted stock units (1) | — | — | — | (71,064) | — | ||||||||||||||||||||||||
Vesting of performance share units (1) | — | — | — | (16,326) | — | ||||||||||||||||||||||||
Balance at May 31, 2022 | 187,264,514 | 28,211,685 | 2,248,714 | 26,694,497 | 5,005,800 | ||||||||||||||||||||||||
Share repurchases | — | — | — | 1,652,445 | — | ||||||||||||||||||||||||
Conversion of shares | 2,196,749 | — | (2,196,749) | — | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | — | (75,482) | — | ||||||||||||||||||||||||
Employee stock purchases | — | — | — | (27,514) | — | ||||||||||||||||||||||||
Vesting of restricted stock units (1) | — | — | — | (4,851) | — | ||||||||||||||||||||||||
Balance at August 31, 2022 | 189,461,263 | 28,211,685 | 51,965 | 28,239,095 | 5,005,800 | ||||||||||||||||||||||||
Retirement of shares (2) | — | (5,005,800) | — | — | (5,005,800) | ||||||||||||||||||||||||
Conversion of shares (3) | 23,205,885 | (23,205,885) | — | — | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | 470 | (63,529) | — | ||||||||||||||||||||||||
Balance at November 30, 2022 | 212,667,148 | — | 52,435 | 28,175,566 | — | ||||||||||||||||||||||||
Balance at February 28, 2021 | 187,204,280 | 28,270,288 | 612,936 | 17,070,550 | 5,005,800 | ||||||||||||||||||||||||
Share repurchases | — | — | — | 1,696,722 | — | ||||||||||||||||||||||||
Conversion of shares | 43,441 | (42,810) | (631) | — | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | 781 | (116,058) | — | ||||||||||||||||||||||||
Vesting of restricted stock units (1) | — | — | — | (66,157) | — | ||||||||||||||||||||||||
Vesting of performance share units (1) | — | — | — | (7,934) | — | ||||||||||||||||||||||||
Balance at May 31, 2021 | 187,247,721 | 28,227,478 | 613,086 | 18,577,123 | 5,005,800 |
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 23 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||
Class A | Class B | Class 1 | Class A | Class B | |||||||||||||||||||||||||
Share repurchases | — | — | — | 4,079,651 | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | 1,267 | (34,736) | — | ||||||||||||||||||||||||
Employee stock purchases | — | — | — | (28,768) | — | ||||||||||||||||||||||||
Vesting of restricted stock units (1) | — | — | — | (5,256) | — | ||||||||||||||||||||||||
Balance at August 31, 2021 | 187,247,721 | 28,227,478 | 614,353 | 22,588,014 | 5,005,800 | ||||||||||||||||||||||||
Share repurchases | — | — | — | 402,642 | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | 1,603,397 | (43,534) | — | ||||||||||||||||||||||||
Balance at November 30, 2021 | 187,247,721 | 28,227,478 | 2,217,750 | 22,947,122 | 5,005,800 |
(1)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 Three Months Ended November 30, | For the Nine Months Ended November 30, | ||||||||||||||||||||
2022 | |||||||||||||||||||||||
Restricted Stock Units | 37,308 | 186 | — | 37,494 | |||||||||||||||||||
Performance Share Units | 4,919 | — | — | 4,919 | |||||||||||||||||||
2021 | |||||||||||||||||||||||
Restricted Stock Units | 36,048 | 165 | — | 36,213 | |||||||||||||||||||
Performance Share Units | 4,565 | — | — | 4,565 |
(2)Shares of our Class B Treasury Stock were retired to authorized and unissued shares of our Class B Stock prior to completing the Reclassification.
(3)Each share of Class B Stock issued and outstanding immediately prior to the Effective Time was reclassified, exchanged, and converted into one share of Class A Stock and the right to receive $64.64 in cash, without interest (see “Reclassification” below).
Stock repurchases
In January 2018, our Board of Directors authorized the repurchase of up to $3.0 billion of our publicly traded common stock, which was fully utilized during the three months ended May 31, 2022. Shares repurchased under the 2018 Authorization have become treasury shares.
Additionally, in January 2021, our Board of Directors authorized the repurchase of up to $2.0 billion of our publicly traded common stock. The Board of Directors did not specify a date upon which this authorization would expire. Shares repurchased under the 2021 Authorization become treasury shares.
For the nine months ended November 30, 2022, we repurchased 5,717,953 shares of Class A Stock pursuant to the 2018 Authorization and the 2021 Authorization at an aggregate cost of $1,400.5 million through a combination of open market transactions and an ASR that was announced in April 2022.
As of November 30, 2022, total shares repurchased under the 2018 Authorization and the 2021 Authorization 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 | $ | 3,000.0 | 13,331,156 | ||||||||||||
2021 Authorization | $ | 2,000.0 | $ | 836.9 | 3,463,417 |
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 24 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Reclassification
In November 2022, we completed the Reclassification at the Effective Time as contemplated by the Reclassification Agreement. Pursuant to the Reclassification, each share of Class B Stock issued and outstanding immediately prior to the Effective Time was reclassified, exchanged, and converted into one share of Class A Stock and the right to receive $64.64 in cash, without interest. The aggregate cash payment to holders of Class B Stock at the Effective Time was $1,500.0 million. We utilized our $1.0 billion delayed draw three-year term loan facility under the August 2022 Term Credit Agreement and borrowings under our commercial paper program to fund the aggregate cash payment to holders of Class B Stock. The issuance of Class A Stock in connection with the Reclassification was registered under the Securities Act pursuant to the Registration Statement on Form S-4.
Following the completion of the Reclassification, a number of corporate governance changes were implemented, consisting of the following:
•Robert and Richard Sands, who previously served as our Executive Chairman of the Board and Executive Vice Chairman of the Board, respectively, retired from their executive positions;
•Robert Sands became our Non-Executive Chairman of the Board and Richard Sands continues serving as a non-executive Board member;
•the Sands Family Stockholders initially have the right to nominate two members to our Board of Directors for the next five years so long as they own 10% or more of the issued and outstanding shares of Class A Stock and to nominate one member to our Board of Directors for the next five years and beyond so long as they own 5% or more of the issued and outstanding shares of Class A Stock;
•holders of Class A Stock are entitled to elect all directors to be elected at future Annual Meetings of Stockholders; and
•certain standstill and lock-up provisions for the Sands Family Stockholders; limitations on the Sands Family Stockholders’, directors’, and officers’ ability to pledge our common stock; a near-term rotation of the lead independent director position; and the transition to a majority vote standard for uncontested director elections.
11. NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CBI
For the nine months ended November 30, 2022, and November 30, 2021, net income (loss) per common share – diluted for Class A Stock and Class B Stock have been computed using the two-class method. For the three months ended November 30, 2022, and November 30, 2021, net income (loss) per common share – diluted for Class A 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 Stock as this method is more dilutive than the two-class method, until such conversion took place pursuant to the Reclassification. For the three months ended November 30, 2022, and November 30, 2021, net income (loss) per common share – diluted for Class B Stock has been computed using the two-class method and does not assume conversion of Class B Stock into shares of Class A Stock. The computation of basic and diluted net income (loss) per common share are as follows:
For the Nine Months Ended | |||||||||||||||||||||||
November 30, 2022 | November 30, 2021 | ||||||||||||||||||||||
Class A Stock | Class B Stock (1) | Class A Stock | Class B Stock | ||||||||||||||||||||
(in millions, except per share data) | |||||||||||||||||||||||
Net income (loss) attributable to CBI allocated – basic | $ | (247.3) | $ | (46.7) | $ | (386.9) | $ | (48.9) | |||||||||||||||
Conversion of Class B common shares into Class A common shares | — | — | — | — | |||||||||||||||||||
Effect of stock-based awards on allocated net income (loss) | — | — | — | — | |||||||||||||||||||
Net income (loss) attributable to CBI allocated – diluted | $ | (247.3) | $ | (46.7) | $ | (386.9) | $ | (48.9) | |||||||||||||||
Weighted average common shares outstanding – basic | 164.573 | 23.206 | 167.692 | 23.230 | |||||||||||||||||||
Conversion of Class B common shares into Class A common shares (2) | — | — | — | — | |||||||||||||||||||
Stock-based awards, primarily stock options (2) | — | — | — | — | |||||||||||||||||||
Weighted average common shares outstanding – diluted | 164.573 | 23.206 | 167.692 | 23.230 | |||||||||||||||||||
Net income (loss) per common share attributable to CBI – basic | $ | (1.48) | $ | (2.01) | $ | (2.31) | $ | (2.10) | |||||||||||||||
Net income (loss) per common share attributable to CBI – diluted | $ | (1.48) | $ | (2.01) | $ | (2.31) | $ | (2.10) | |||||||||||||||
For the Three Months Ended | |||||||||||||||||||||||
November 30, 2022 | November 30, 2021 | ||||||||||||||||||||||
Class A Stock | Class B Stock (1) | Class A Stock | Class B Stock | ||||||||||||||||||||
(in millions, except per share data) | |||||||||||||||||||||||
Net income (loss) attributable to CBI allocated – basic | $ | 426.3 | $ | 41.4 | $ | 417.4 | $ | 53.4 | |||||||||||||||
Conversion of Class B common shares into Class A common shares | 41.4 | — | 53.4 | — | |||||||||||||||||||
Effect of stock-based awards on allocated net income (loss) | — | (0.1) | — | (0.3) | |||||||||||||||||||
Net income (loss) attributable to CBI allocated – diluted | $ | 467.7 | $ | 41.3 | $ | 470.8 | $ | 53.1 | |||||||||||||||
Weighted average common shares outstanding – basic | 166.677 | 23.206 | 164.999 | 23.222 | |||||||||||||||||||
Conversion of Class B common shares into Class A common shares | 17.850 | — | 23.222 | — | |||||||||||||||||||
Stock-based awards, primarily stock options | 0.764 | — | 1.718 | — | |||||||||||||||||||
Weighted average common shares outstanding – diluted | 185.291 | 23.206 | 189.939 | 23.222 | |||||||||||||||||||
Net income (loss) per common share attributable to CBI – basic | $ | 2.58 | $ | 1.78 | $ | 2.53 | $ | 2.30 | |||||||||||||||
Net income (loss) per common share attributable to CBI – diluted | $ | 2.52 | $ | 1.78 | $ | 2.48 | $ | 2.29 |
(1) | Net income (loss) per common share attributable to CBI for Class B Stock was determined for the relevant periods through November 10, 2022, the date the Reclassification was completed. | |||||||||||||
(2) | We have excluded the following weighted average common shares outstanding from the calculation of diluted net income (loss) per common share, as the effect of including these would have been anti-dilutive, in millions: | |||||||||||||
For the Nine Months Ended November 30, | ||||||||||||||
2022 | 2021 | |||||||||||||
Class B Stock | 21.434 | 23.230 | ||||||||||||
Stock-based awards, primarily stock options | 0.786 | 1.807 |
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 25 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
12. COMPREHENSIVE INCOME (LOSS) ATTRIBUTABLE TO CBI
Comprehensive income (loss) consists of net income (loss), foreign currency translation adjustments, unrealized net gain (loss) on derivative instruments, pension/postretirement adjustments, and our share of OCI of equity method investments. The reconciliation of net income (loss) attributable to CBI to comprehensive income (loss) attributable to CBI is as follows:
Before Tax Amount | Tax (Expense) Benefit | Net of Tax Amount | |||||||||||||||
(in millions) | |||||||||||||||||
For the Nine Months Ended November 30, 2022 | |||||||||||||||||
Net income (loss) attributable to CBI | $ | (294.0) | |||||||||||||||
Other comprehensive income (loss) attributable to CBI: | |||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||
Net gain (loss) | $ | 85.8 | $ | — | 85.8 | ||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 85.8 | — | 85.8 | ||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||
Net derivative gain (loss) | 178.1 | (23.4) | 154.7 | ||||||||||||||
Amounts reclassified | (32.6) | 3.2 | (29.4) | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 145.5 | (20.2) | 125.3 | ||||||||||||||
Pension/postretirement adjustments: | |||||||||||||||||
Net actuarial gain (loss) | (0.4) | 0.1 | (0.3) | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (0.4) | 0.1 | (0.3) | ||||||||||||||
Share of OCI of equity method investments | |||||||||||||||||
Net gain (loss) | (2.4) | 3.4 | 1.0 | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (2.4) | 3.4 | 1.0 | ||||||||||||||
Other comprehensive income (loss) attributable to CBI | $ | 228.5 | $ | (16.7) | 211.8 | ||||||||||||
Comprehensive income (loss) attributable to CBI | $ | (82.2) | |||||||||||||||
For the Nine Months Ended November 30, 2021 | |||||||||||||||||
Net income (loss) attributable to CBI | $ | (435.8) | |||||||||||||||
Other comprehensive income (loss) attributable to CBI: | |||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||
Net gain (loss) | $ | (178.2) | $ | — | (178.2) | ||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (178.2) | — | (178.2) | ||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||
Net derivative gain (loss) | (74.5) | 3.2 | (71.3) | ||||||||||||||
Amounts reclassified | (28.2) | 2.5 | (25.7) | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (102.7) | 5.7 | (97.0) | ||||||||||||||
Pension/postretirement adjustments: | |||||||||||||||||
Net actuarial gain (loss) | 0.4 | (0.1) | 0.3 | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 0.4 | (0.1) | 0.3 |
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 26 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Before Tax Amount | Tax (Expense) Benefit | Net of Tax Amount | |||||||||||||||
(in millions) | |||||||||||||||||
Share of OCI of equity method investments | |||||||||||||||||
Net gain (loss) | (16.4) | 3.7 | (12.7) | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (16.4) | 3.7 | (12.7) | ||||||||||||||
Other comprehensive income (loss) attributable to CBI | $ | (296.9) | $ | 9.3 | (287.6) | ||||||||||||
Comprehensive income (loss) attributable to CBI | $ | (723.4) | |||||||||||||||
For the Three Months Ended November 30, 2022 | |||||||||||||||||
Net income (loss) attributable to CBI | $ | 467.7 | |||||||||||||||
Other comprehensive income (loss) attributable to CBI: | |||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||
Net gain (loss) | $ | 96.9 | $ | — | 96.9 | ||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 96.9 | — | 96.9 | ||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||
Net derivative gain (loss) | 82.4 | (10.3) | 72.1 | ||||||||||||||
Amounts reclassified | (12.3) | 1.3 | (11.0) | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 70.1 | (9.0) | 61.1 | ||||||||||||||
Pension/postretirement adjustments: | |||||||||||||||||
Net actuarial gain (loss) | (0.2) | — | (0.2) | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (0.2) | — | (0.2) | ||||||||||||||
Share of OCI of equity method investments | |||||||||||||||||
Net gain (loss) | (3.3) | — | (3.3) | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (3.3) | — | (3.3) | ||||||||||||||
Other comprehensive income (loss) attributable to CBI | $ | 163.5 | $ | (9.0) | 154.5 | ||||||||||||
Comprehensive income (loss) attributable to CBI | $ | 622.2 | |||||||||||||||
For the Three Months Ended November 30, 2021 | |||||||||||||||||
Net income (loss) attributable to CBI | $ | 470.8 | |||||||||||||||
Other comprehensive income (loss) attributable to CBI: | |||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||
Net gain (loss) | $ | (251.2) | $ | — | (251.2) | ||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (251.2) | — | (251.2) | ||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||
Net derivative gain (loss) | (93.8) | 11.7 | (82.1) | ||||||||||||||
Amounts reclassified | (8.1) | 0.8 | (7.3) | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (101.9) | 12.5 | (89.4) | ||||||||||||||
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 27 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Before Tax Amount | Tax (Expense) Benefit | Net of Tax Amount | |||||||||||||||
(in millions) | |||||||||||||||||
Pension/postretirement adjustments: | |||||||||||||||||
Net actuarial gain (loss) | 0.5 | (0.1) | 0.4 | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 0.5 | (0.1) | 0.4 | ||||||||||||||
Share of OCI of equity method investments | |||||||||||||||||
Net gain (loss) | 9.7 | (2.2) | 7.5 | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 9.7 | (2.2) | 7.5 | ||||||||||||||
Other comprehensive income (loss) attributable to CBI | $ | (342.9) | $ | 10.2 | (332.7) | ||||||||||||
Comprehensive income (loss) attributable to CBI | $ | 138.1 |
AOCI, net of income tax effect, includes the following components:
Foreign Currency Translation Adjustments | Unrealized Net Gain (Loss) on Derivative Instruments | Pension/ Postretirement Adjustments | Share of OCI of Equity Method Investments | AOCI | |||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||
Balance, February 28, 2022 | $ | (431.4) | $ | 17.5 | $ | (4.0) | $ | 5.2 | $ | (412.7) | |||||||||||||||||||
OCI: | |||||||||||||||||||||||||||||
OCI before reclassification adjustments | 85.8 | 154.7 | (0.3) | 1.0 | 241.2 | ||||||||||||||||||||||||
Amounts reclassified from AOCI | — | (29.4) | — | — | (29.4) | ||||||||||||||||||||||||
OCI | 85.8 | 125.3 | (0.3) | 1.0 | 211.8 | ||||||||||||||||||||||||
Balance, November 30, 2022 | $ | (345.6) | $ | 142.8 | $ | (4.3) | $ | 6.2 | $ | (200.9) |
13. BUSINESS SEGMENT INFORMATION
Our internal management financial reporting consists of three business divisions: (i) Beer, (ii) Wine and Spirits, and (iii) Canopy and we report our operating results in four segments: (i) Beer, (ii) Wine and Spirits, (iii) Corporate Operations and Other, and (iv) Canopy. The Canopy Equity Method Investment makes up the Canopy segment. If the Canopy Transaction is completed, including conversion of our Canopy common shares into Exchangeable Shares, our internal management financial reporting will consist of two business divisions: (i) Beer and (ii) Wine and Spirits and we will report our operating results in three segments: (i) Beer, (ii) Wine and Spirits, and (iii) Corporate Operations and Other.
In the Beer segment, our portfolio consists of high-end imported beer brands, craft beer, and ABAs. We have an exclusive perpetual brand license to import, market, and sell our Mexican beer portfolio in the U.S. In the Wine and Spirits segment, we sell a portfolio that includes higher-margin, higher-growth wine brands complemented by certain higher-end spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of executive management, corporate development, corporate finance, corporate growth and strategy, human resources, internal audit, investor relations, legal, public relations, and information technology, as well as our investments made through our corporate venture capital function. All costs included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are, therefore, not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in our CODM’s evaluation of the operating income (loss) performance of the other reportable segments. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management, and the structure of our internal financial reporting. Long-lived tangible assets and total asset information by segment is not provided to, or reviewed by, our CODM as it is not used to make strategic decisions, allocate resources, or assess performance.
Constellation Brands, Inc. Q3 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 28 |