CONSTELLATION BRANDS, INC. - Quarter Report: 2022 August (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 August 31, 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 | ||||||
Class B Common Stock | STZ.B | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☒ | Accelerated filer | ☐ | ||||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | ||||||||
Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
There were 161,224,498 shares of Class A Common Stock, 23,205,885 shares of Class B Common Stock, and 51,965 shares of Class 1 Common Stock outstanding as of September 30, 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 1A. Risk Factors | ||||||||
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | ||||||||
Item 6. Exhibits | ||||||||
INDEX TO 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 Part I – Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
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 Class A Stock and Class B 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 Class A Stock and Class B 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 70% of the shares of Acreage at a fixed exchange ratio and 30% at a floating exchange ratio | ||||
Acreage Transaction | Canopy’s intention to acquire Acreage upon U.S. federal cannabis permissibility, 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 Charter | form of our amended and restated certificate of incorporation, attached to the Registration Statement on Form S-4, which will effectuate the Reclassification and be in effect at and following 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 provides for a $1.0 billion unsecured delayed draw three-year term loan facility | ||||
Austin Cocktails | we made an initial investment in the Austin Cocktails business and subsequently acquired the remaining ownership interest |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I i |
Term | Meaning | ||||
C$ | Canadian dollars | ||||
Canopy | we made an investment in Canopy Growth Corporation, an Ontario, Canada-based public company | ||||
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 | ||||
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 | ||||
CODM | chief operating decision maker | ||||
Comparable Adjustments | certain items affecting comparability that have been excluded by management | ||||
DEI | diversity, equity, and inclusion | ||||
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 has been duly filed with the Secretary of State of the State of Delaware (or such later time as we and WildStar Partners LLC will agree and set forth in the Amended and Restated Charter) | ||||
ERP | enterprise resource planning system | ||||
ESG | environmental, social, and governance | ||||
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 | ||||
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 August 31, 2022, unless otherwise specified | ||||
GHG | greenhouse gas | ||||
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 |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I ii |
Term | Meaning | ||||
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 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 | ||||
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 | ||||
NYSE | New York Stock Exchange | ||||
Obregon | Obregon, Sonora, Mexico | ||||
Obregon Brewery | brewery located in Obregon | ||||
OCI | other comprehensive income (loss) | ||||
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 plan to reclassify the Company’s common stock to eliminate the existing Class B Stock pursuant to the terms and conditions of the Reclassification Agreement | ||||
Reclassification Agreement | reclassification agreement in support of the Reclassification, dated June 30, 2022, among the Company and the Sands Family Stockholders | ||||
Reclassification Proposal | proposal to approve and adopt the Amended and Restated Charter, which will effectuate the Reclassification | ||||
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, as may be amended or supplemented from time to time | ||||
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, Marilyn Sands Master Trust, MAS Business Holdings LP, Sands Family Foundation, Richard Sands, Robert Sands, WildStar Partners LLC, and Astra Legacy LLC |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I iii |
Term | Meaning | ||||
Second Quarter 2022 | the Company’s three months ended August 31, 2021 | ||||
Second Quarter 2023 | the Company’s three months ended August 31, 2022 | ||||
Securities Act | Securities Act of 1933, as amended | ||||
Six Months 2022 | the Company’s six months ended August 31, 2021 | ||||
Six Months 2023 | the Company’s six months ended August 31, 2022 | ||||
SOFR | secured overnight financing rate administered by the Federal Reserve Bank of New York | ||||
THC | tetrahydrocannabinol | ||||
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 to be 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 | ||||
Constellation Brands, Inc. Q2 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)
August 31, 2022 | February 28, 2022 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 165.1 | $ | 199.4 | |||||||
Accounts receivable | 978.9 | 899.0 | |||||||||
Inventories | 1,651.0 | 1,573.2 | |||||||||
Prepaid expenses and other | 735.2 | 658.1 | |||||||||
Total current assets | 3,530.2 | 3,329.7 | |||||||||
Property, plant, and equipment | 6,234.0 | 6,059.6 | |||||||||
Goodwill | 7,898.6 | 7,862.4 | |||||||||
Intangible assets | 2,763.6 | 2,755.2 | |||||||||
Equity method investments | 833.4 | 2,688.7 | |||||||||
Securities measured at fair value | 91.8 | 191.4 | |||||||||
Deferred income taxes | 2,292.3 | 2,351.5 | |||||||||
Other assets | 637.0 | 617.3 | |||||||||
Total assets | $ | 24,280.9 | $ | 25,855.8 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Short-term borrowings | $ | 663.9 | $ | 323.0 | |||||||
Current maturities of long-term debt | 7.6 | 605.3 | |||||||||
Accounts payable | 959.1 | 899.2 | |||||||||
Other accrued expenses and liabilities | 881.3 | 871.3 | |||||||||
Total current liabilities | 2,511.9 | 2,698.8 | |||||||||
Long-term debt, less current maturities | 10,278.7 | 9,488.2 | |||||||||
Deferred income taxes and other liabilities | 1,779.4 | 1,621.0 | |||||||||
Total liabilities | 14,570.0 | 13,808.0 | |||||||||
Commitments and contingencies | |||||||||||
CBI stockholders’ equity: | |||||||||||
Class A Stock, $0.01 par value – Authorized, 322,000,000 shares; Issued, 189,461,263 shares and 187,263,859 shares, respectively | 1.9 | 1.9 | |||||||||
Class B Stock, $0.01 par value – Authorized, 30,000,000 shares; Issued, 28,211,685 shares and 28,212,340 shares, respectively | 0.3 | 0.3 | |||||||||
Additional paid-in capital | 1,860.4 | 1,808.9 | |||||||||
Retained earnings | 13,448.4 | 14,505.4 | |||||||||
Accumulated other comprehensive income (loss) | (355.4) | (412.7) | |||||||||
14,955.6 | 15,903.8 | ||||||||||
Less: Treasury stock – | |||||||||||
Class A Stock, at cost, 28,239,095 shares and 22,824,607 shares, respectively | (5,564.4) | (4,169.7) | |||||||||
Class B Stock, at cost, 5,005,800 shares | (2.2) | (2.2) | |||||||||
(5,566.6) | (4,171.9) | ||||||||||
Total CBI stockholders’ equity | 9,389.0 | 11,731.9 | |||||||||
Noncontrolling interests | 321.9 | 315.9 | |||||||||
Total stockholders’ equity | 9,710.9 | 12,047.8 | |||||||||
Total liabilities and stockholders’ equity | $ | 24,280.9 | $ | 25,855.8 |
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q2 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 Six Months Ended August 31, | For the Three Months Ended August 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
Sales | $ | 5,405.0 | $ | 4,753.3 | $ | 2,864.3 | $ | 2,565.0 | |||||||||||||||
Excise taxes | (386.7) | (355.7) | (209.2) | (193.9) | |||||||||||||||||||
Net sales | 5,018.3 | 4,397.6 | 2,655.1 | 2,371.1 | |||||||||||||||||||
Cost of product sold | (2,437.4) | (2,048.6) | (1,329.2) | (1,141.4) | |||||||||||||||||||
Gross profit | 2,580.9 | 2,349.0 | 1,325.9 | 1,229.7 | |||||||||||||||||||
Selling, general, and administrative expenses | (951.4) | (868.8) | (512.8) | (490.5) | |||||||||||||||||||
Impairment of brewery construction in progress | — | (665.9) | — | — | |||||||||||||||||||
Operating income (loss) | 1,629.5 | 814.3 | 813.1 | 739.2 | |||||||||||||||||||
Income (loss) from unconsolidated investments | (1,907.0) | (1,370.0) | (1,719.1) | (470.8) | |||||||||||||||||||
Interest expense | (182.8) | (182.5) | (94.3) | (95.8) | |||||||||||||||||||
Loss on extinguishment of debt | (23.3) | (29.4) | (8.0) | (29.4) | |||||||||||||||||||
Income (loss) before income taxes | (483.6) | (767.6) | (1,008.3) | 143.2 | |||||||||||||||||||
(Provision for) benefit from income taxes | (257.8) | (117.8) | (132.4) | (131.3) | |||||||||||||||||||
Net income (loss) | (741.4) | (885.4) | (1,140.7) | 11.9 | |||||||||||||||||||
Net (income) loss attributable to noncontrolling interests | (20.3) | (21.2) | (10.5) | (10.4) | |||||||||||||||||||
Net income (loss) attributable to CBI | $ | (761.7) | $ | (906.6) | $ | (1,151.2) | $ | 1.5 | |||||||||||||||
Comprehensive income (loss) | $ | (675.9) | $ | (838.6) | $ | (1,334.2) | $ | (45.8) | |||||||||||||||
Comprehensive (income) loss attributable to noncontrolling interests | (28.5) | (22.9) | (6.1) | (6.5) | |||||||||||||||||||
Comprehensive income (loss) attributable to CBI | $ | (704.4) | $ | (861.5) | $ | (1,340.3) | $ | (52.3) | |||||||||||||||
Net income (loss) per common share attributable to CBI: | |||||||||||||||||||||||
Basic – Class A Stock | $ | (4.13) | $ | (4.77) | $ | (6.30) | $ | 0.01 | |||||||||||||||
Basic – Class B Stock | $ | (3.77) | $ | (4.34) | $ | (5.73) | $ | 0.01 | |||||||||||||||
Diluted – Class A Stock | $ | (4.13) | $ | (4.77) | $ | (6.30) | $ | 0.01 | |||||||||||||||
Diluted – Class B Stock | $ | (3.77) | $ | (4.34) | $ | (5.73) | $ | 0.01 | |||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||||||
Basic – Class A Stock | 163.532 | 169.025 | 161.730 | 167.447 | |||||||||||||||||||
Basic – Class B Stock | 23.206 | 23.234 | 23.206 | 23.222 | |||||||||||||||||||
Diluted – Class A Stock | 163.532 | 169.025 | 161.730 | 192.530 | |||||||||||||||||||
Diluted – Class B Stock | 23.206 | 23.234 | 23.206 | 23.222 | |||||||||||||||||||
Cash dividends declared per common share: | |||||||||||||||||||||||
Class A Stock | $ | 1.60 | $ | 1.52 | $ | 0.80 | $ | 0.76 | |||||||||||||||
Class B Stock | $ | 1.44 | $ | 1.38 | $ | 0.72 | $ | 0.69 |
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q2 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 | |||||||||||||||||||||||||||||||
Constellation Brands, Inc. Q2 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 | |||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q2 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 Six Months Ended August 31, | |||||||||||
2022 | 2021 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||||||
Net income (loss) | $ | (741.4) | $ | (885.4) | |||||||
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 | 31.7 | 1,335.1 | |||||||||
Deferred tax provision (benefit) | 208.6 | (19.2) | |||||||||
Depreciation | 183.5 | 162.3 | |||||||||
Stock-based compensation | 37.8 | 36.0 | |||||||||
Equity in (earnings) losses of equity method investees and related activities, net of distributed earnings | 815.6 | 35.3 | |||||||||
Noncash lease expense | 44.4 | 40.1 | |||||||||
Amortization of debt issuance costs and loss on extinguishment of debt | 28.2 | 35.1 | |||||||||
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 | (84.8) | (187.8) | |||||||||
Inventories | (86.3) | (49.3) | |||||||||
Prepaid expenses and other current assets | 165.6 | 10.1 | |||||||||
Accounts payable | 188.9 | 245.9 | |||||||||
Deferred revenue | 9.5 | 144.6 | |||||||||
Other accrued expenses and liabilities | (287.7) | (3.8) | |||||||||
Other | 59.7 | (39.0) | |||||||||
Total adjustments | 2,395.7 | 2,411.3 | |||||||||
Net cash provided by (used in) operating activities | 1,654.3 | 1,525.9 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||||
Purchase of property, plant, and equipment | (435.0) | (353.4) | |||||||||
Purchase of business, net of cash acquired | (37.2) | — | |||||||||
Investments in equity method investees and securities | (21.0) | (28.6) | |||||||||
Proceeds from sale of assets | 6.6 | 1.3 | |||||||||
Proceeds from sale of business | — | 4.6 | |||||||||
Other investing activities | 0.6 | (1.0) | |||||||||
Net cash provided by (used in) investing activities | (486.0) | (377.1) | |||||||||
Constellation Brands, Inc. Q2 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 Six Months Ended August 31, | |||||||||||
2022 | 2021 | ||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||||
Proceeds from issuance of long-term debt | 1,846.8 | 1,001.9 | |||||||||
Principal payments of long-term debt | (1,654.7) | (1,357.1) | |||||||||
Net proceeds from (repayments of) short-term borrowings | 340.9 | 486.0 | |||||||||
Dividends paid | (295.3) | (289.3) | |||||||||
Purchases of treasury stock | (1,400.5) | (1,305.0) | |||||||||
Proceeds from shares issued under equity compensation plans | 30.5 | 22.9 | |||||||||
Payments of minimum tax withholdings on stock-based payment awards | (10.5) | (9.8) | |||||||||
Payments of debt issuance, debt extinguishment, and other financing costs | (33.3) | (34.8) | |||||||||
Distributions to noncontrolling interests | (22.5) | (21.2) | |||||||||
Net cash provided by (used in) financing activities | (1,198.6) | (1,506.4) | |||||||||
Effect of exchange rate changes on cash and cash equivalents | (4.0) | 0.4 | |||||||||
Net increase (decrease) in cash and cash equivalents | (34.3) | (357.2) | |||||||||
Cash and cash equivalents, beginning of period | 199.4 | 460.6 | |||||||||
Cash and cash equivalents, end of period | $ | 165.1 | $ | 103.4 | |||||||
Supplemental disclosures of noncash investing and financing activities | |||||||||||
Additions to property, plant, and equipment | $ | 69.1 | $ | 196.5 |
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 6 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
AUGUST 31, 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:
August 31, 2022 | February 28, 2022 | ||||||||||
(in millions) | |||||||||||
Raw materials and supplies | $ | 225.0 | $ | 185.3 | |||||||
In-process inventories | 851.6 | 804.8 | |||||||||
Finished case goods | 574.4 | 583.1 | |||||||||
$ | 1,651.0 | $ | 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 Six Months Ended August 31, | For the Three Months Ended August 31, | ||||||||||||||||||||||
2022 | 2021 (1) | 2022 | 2021 (1) | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Loss on inventory write-down | $ | 11.2 | $ | 82.6 | $ | 5.1 | $ | 66.6 |
(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 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 six months and three months ended August 31, 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
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 7 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
included in securities measured at fair value and is accounted for at fair value, with the net gain (loss) from the changes in fair value of this investment recognized in income (loss) from unconsolidated investments (see Note 4).
The aggregate notional value of outstanding derivative instruments is as follows:
August 31, 2022 | February 28, 2022 | ||||||||||
(in millions) | |||||||||||
Derivative instruments designated as hedging instruments | |||||||||||
Foreign currency contracts | $ | 2,013.3 | $ | 1,863.2 | |||||||
Pre-issuance hedge contracts | $ | — | $ | 100.0 | |||||||
Derivative instruments not designated as hedging instruments | |||||||||||
Foreign currency contracts | $ | 720.5 | $ | 497.6 | |||||||
Commodity derivative contracts | $ | 328.9 | $ | 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 August 31, 2022, the estimated fair value of derivative instruments in a net liability position due to counterparties was $17.9 million. If we were required to settle the net liability position under these derivative instruments on August 31, 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 | |||||||||||||||||||||||||
August 31, 2022 | February 28, 2022 | August 31, 2022 | February 28, 2022 | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||
Derivative instruments designated as hedging instruments | ||||||||||||||||||||||||||
Foreign currency contracts: | ||||||||||||||||||||||||||
Prepaid expenses and other | $ | 55.5 | $ | 28.6 | Other accrued expenses and liabilities | $ | 15.6 | $ | 5.9 | |||||||||||||||||
Other assets | $ | 66.6 | $ | 25.1 | Deferred income taxes and other liabilities | $ | 10.4 | $ | 8.6 | |||||||||||||||||
Pre-issuance hedge contracts: | ||||||||||||||||||||||||||
Other assets | $ | — | $ | — | Deferred income taxes and other liabilities | $ | — | $ | 0.4 | |||||||||||||||||
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 8 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Assets | Liabilities | |||||||||||||||||||||||||
August 31, 2022 | February 28, 2022 | August 31, 2022 | February 28, 2022 | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||
Derivative instruments not designated as hedging instruments | ||||||||||||||||||||||||||
Foreign currency contracts: | ||||||||||||||||||||||||||
Prepaid expenses and other | $ | 3.3 | $ | 2.7 | Other accrued expenses and liabilities | $ | 3.8 | $ | 3.3 | |||||||||||||||||
Commodity derivative contracts: | ||||||||||||||||||||||||||
Prepaid expenses and other | $ | 67.6 | $ | 61.3 | Other accrued expenses and liabilities | $ | 13.4 | $ | 0.7 | |||||||||||||||||
Other assets | $ | 18.8 | $ | 29.7 | Deferred income taxes and other liabilities | $ | 6.5 | $ | 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 Six Months Ended August 31, 2022 | ||||||||||||||||||||
Foreign currency contracts | $ | 71.3 | Sales | $ | (1.2) | |||||||||||||||
Cost of product sold | 21.9 | |||||||||||||||||||
Pre-issuance hedge contracts | 15.7 | Interest expense | (0.6) | |||||||||||||||||
$ | 87.0 | $ | 20.1 | |||||||||||||||||
For the Six Months Ended August 31, 2021 | ||||||||||||||||||||
Foreign currency contracts | $ | 11.7 | Sales | $ | (0.4) | |||||||||||||||
Cost of product sold | 21.6 | |||||||||||||||||||
Pre-issuance hedge contracts | — | Interest expense | (1.5) | |||||||||||||||||
$ | 11.7 | $ | 19.7 | |||||||||||||||||
For the Three Months Ended August 31, 2022 | ||||||||||||||||||||
Foreign currency contracts | $ | (8.2) | Sales | $ | (0.6) | |||||||||||||||
Cost of product sold | 10.8 | |||||||||||||||||||
Pre-issuance hedge contracts | — | Interest expense | (0.1) | |||||||||||||||||
$ | (8.2) | $ | 10.1 | |||||||||||||||||
For the Three Months Ended August 31, 2021 | ||||||||||||||||||||
Foreign currency contracts | $ | (7.6) | Sales | $ | (0.2) | |||||||||||||||
Cost of product sold | 12.6 | |||||||||||||||||||
Pre-issuance hedge contracts | — | Interest expense | (0.9) | |||||||||||||||||
$ | (7.6) | $ | 11.5 |
We expect $35.3 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. Q2 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 Six Months Ended August 31, 2022 | ||||||||||||||||||||
Commodity derivative contracts | Cost of product sold | $ | 33.1 | |||||||||||||||||
Foreign currency contracts | Selling, general, and administrative expenses | (2.6) | ||||||||||||||||||
$ | 30.5 | |||||||||||||||||||
For the Six Months Ended August 31, 2021 | ||||||||||||||||||||
Commodity derivative contracts | Cost of product sold | $ | 48.1 | |||||||||||||||||
Foreign currency contracts | Selling, general, and administrative expenses | (8.4) | ||||||||||||||||||
$ | 39.7 | |||||||||||||||||||
For the Three Months Ended August 31, 2022 | ||||||||||||||||||||
Commodity derivative contracts | Cost of product sold | $ | (15.4) | |||||||||||||||||
Foreign currency contracts | Selling, general, and administrative expenses | (8.8) | ||||||||||||||||||
$ | (24.2) | |||||||||||||||||||
For the Three Months Ended August 31, 2021 | ||||||||||||||||||||
Commodity derivative contracts | Cost of product sold | $ | 24.0 | |||||||||||||||||
Foreign currency contracts | Selling, general, and administrative expenses | (6.2) | ||||||||||||||||||
$ | 17.8 |
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 and liability, either directly or indirectly; and
•Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.
Fair value methodology
The following methods and assumptions are used to estimate the fair value for each class of our financial instruments:
Foreign currency and commodity derivative contracts
The fair value is estimated using market-based inputs, obtained from independent pricing services, entered into valuation models. These valuation models require various inputs, including contractual terms, market foreign exchange prices, market commodity prices, interest-rate yield curves, and currency volatilities, as applicable (Level 2 fair value measurement).
Constellation Brands, Inc. Q2 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. The inputs used to estimate the fair value of the November 2018 Canopy Warrants are as follows (1) (2):
August 31, 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) | 1.2 years | 4.2 years | 1.7 years | 4.7 years | |||||||||||||||||||
Expected volatility (8) | 100.0 | % | 100.0 | % | 75.0 | % | 75.0 | % | |||||||||||||||
Risk-free interest rate (9) | 3.8 | % | 3.3 | % | 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 of the valuation date. For additional information on the Canopy Debt Securities refer to Note 7.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 11 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
August 31, 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) | 0.9 years | 1.4 years | |||||||||
Expected volatility (4) | 100.0 | % | 75.0 | % | |||||||
Risk-free interest rate (5) | 3.7 | % | 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 August 31, 2022, and February 28, 2022, due to the relatively short maturity of these instruments. As of August 31, 2022, the carrying amount of long-term debt, including the current portion, was $10,286.3 million, compared with an estimated fair value of $9,609.1 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.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 12 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Recurring basis measurements
The following table presents our financial assets and liabilities measured at estimated fair value on a recurring basis:
Fair Value Measurements Using | |||||||||||||||||||||||
Quoted Prices in Active Markets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Total | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
August 31, 2022 | |||||||||||||||||||||||
Assets: | |||||||||||||||||||||||
Foreign currency contracts | $ | — | $ | 125.4 | $ | — | $ | 125.4 | |||||||||||||||
Commodity derivative contracts | $ | — | $ | 86.4 | $ | — | $ | 86.4 | |||||||||||||||
November 2018 Canopy Warrants (1) | $ | — | $ | 12.8 | $ | — | $ | 12.8 | |||||||||||||||
Canopy Debt Securities (1) | $ | — | $ | 67.5 | $ | — | $ | 67.5 | |||||||||||||||
Liabilities: | |||||||||||||||||||||||
Foreign currency contracts | $ | — | $ | 29.8 | $ | — | $ | 29.8 | |||||||||||||||
Commodity derivative contracts | $ | — | $ | 19.9 | $ | — | $ | 19.9 | |||||||||||||||
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 Six Months Ended August 31, | For the Three Months Ended August 31, | ||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||
November 2018 Canopy Warrants | $ | (23.6) | $ | (1,307.0) | $ | (4.9) | $ | (570.8) | |||||||||||||||||||||
Canopy Debt Securities (i) | (8.1) | (28.1) | (4.4) | (19.2) | |||||||||||||||||||||||||
$ | (31.7) | $ | (1,335.1) | $ | (9.3) | $ | (590.0) | ||||||||||||||||||||||
(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. As of August 31, 2022, we continued to hold Canopy Debt Securities of C$100.0 million principal amount. For additional information, refer to Note 7. |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 13 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Nonrecurring basis measurements
The following table presents our assets and liabilities measured at estimated fair value on a nonrecurring basis for which an impairment assessment was performed for the 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 Six Months Ended August 31, 2022 | |||||||||||||||||||||||
Equity method investments | $ | 634.8 | $ | — | $ | — | $ | 1,060.3 | |||||||||||||||
For the Six Months Ended August 31, 2021 | |||||||||||||||||||||||
Long-lived assets | $ | — | $ | — | $ | 20.0 | $ | 665.9 | |||||||||||||||
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 six months and three months ended August 31, 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 six months ended August 31, 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 development process for the Veracruz Brewery is underway. We continue to work with government officials in Mexico to (i) determine next steps for our canceled Mexicali Brewery construction project and (ii) pursue various forms of recovery for capitalized costs and additional expenses incurred in establishing the brewery, 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 construction activities continue at our current brewery locations under our Mexico Beer Projects to align with our anticipated future growth expectations.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 14 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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) | — | 26.1 | 26.1 | ||||||||||||||
Foreign currency translation adjustments | 18.4 | (8.3) | 10.1 | ||||||||||||||
Balance, August 31, 2022 | $ | 5,139.1 | $ | 2,759.5 | $ | 7,898.6 |
(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.
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 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.
Subsequent event
2022 Wine Divestiture
On October 6, 2022, we sold certain of our mainstream and premium wine brands and related inventory. We expect to use the net cash proceeds from the 2022 Wine Divestiture primarily to reduce outstanding borrowings and for general corporate purposes, including working capital, funding capital expenditures, and other business opportunities.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 15 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
6. INTANGIBLE ASSETS
The major components of intangible assets are as follows:
August 31, 2022 | February 28, 2022 | ||||||||||||||||||||||
Gross Carrying Amount | Net Carrying Amount | Gross Carrying Amount | Net Carrying Amount | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Amortizable intangible assets | |||||||||||||||||||||||
Customer relationships | $ | 87.1 | $ | 19.8 | $ | 87.1 | $ | 21.7 | |||||||||||||||
Other | 20.7 | — | 20.9 | — | |||||||||||||||||||
Total | $ | 107.8 | 19.8 | $ | 108.0 | 21.7 | |||||||||||||||||
Nonamortizable intangible assets | |||||||||||||||||||||||
Trademarks | 2,743.8 | 2,733.5 | |||||||||||||||||||||
Total intangible assets | $ | 2,763.6 | $ | 2,755.2 |
We did not incur costs to renew or extend the term of acquired intangible assets for the six months and three months ended August 31, 2022, and August 31, 2021. Net carrying amount represents the gross carrying value net of accumulated amortization.
7. EQUITY METHOD INVESTMENTS
Our equity method investments are as follows:
August 31, 2022 | February 28, 2022 | ||||||||||||||||||||||
Carrying Value | Ownership Percentage | Carrying Value | Ownership Percentage | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Canopy Equity Method Investment (1) (2) | $ | 634.8 | 34.1 | % | $ | 2,503.5 | 36.1 | % | |||||||||||||||
Other equity method investments | 198.6 | 20%-50% | 185.2 | 20%-50% | |||||||||||||||||||
$ | 833.4 | $ | 2,688.7 |
(1)The fair value based on the closing price of the underlying equity security as of August 31, 2022, and February 28, 2022, was $634.8 million and $1,014.8 million, respectively. The balance at August 31, 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. |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 16 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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 Six Months Ended August 31, | For the Three Months Ended August 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Equity in earnings (losses) from Canopy and related activities (1) | $ | (815.7) | $ | (35.3) | $ | (650.7) | $ | 120.5 |
(1)Includes a $460.8 million goodwill impairment related to Canopy’s cannabis operations for the six months and three months ended August 31, 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 70% of the shares of Acreage at a fixed exchange ratio and 30% at a floating exchange ratio). As of August 31, 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 June 2022 and January through June 2021 in our six months ended August 31, 2022, and August 31, 2021, results, respectively. We recognized our share of Canopy’s earnings (losses) for the periods April through June 2022 and April through June 2021 in our three months ended August 31, 2022, and August 31, 2021, results, respectively. The six months and three months ended August 31, 2022, includes a goodwill impairment related to Canopy’s cannabis operations. The six months ended August 31, 2022, also includes 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 Six Months Ended August 31, | For the Three Months Ended August 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Net sales | $ | 174.5 | $ | 228.1 | $ | 86.3 | $ | 110.8 | |||||||||||||||
Gross profit (loss) | $ | (126.8) | $ | 29.9 | $ | (1.1) | $ | 22.2 | |||||||||||||||
Net income (loss) | $ | (2,092.0) | $ | (169.7) | $ | (1,635.2) | $ | 317.4 | |||||||||||||||
Net income (loss) attributable to Canopy | $ | (2,085.4) | $ | (233.5) | $ | (1,631.7) | $ | 319.4 |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 17 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
8. BORROWINGS
Borrowings consist of the following:
August 31, 2022 | February 28, 2022 | ||||||||||||||||||||||
Current | Long-term | Total | Total | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Short-term borrowings | |||||||||||||||||||||||
Commercial paper | $ | 663.9 | $ | 323.0 | |||||||||||||||||||
$ | 663.9 | $ | 323.0 | ||||||||||||||||||||
Long-term debt | |||||||||||||||||||||||
Term loan credit facilities | $ | — | $ | 300.0 | $ | 300.0 | $ | 300.0 | |||||||||||||||
Senior notes | — | 9,968.2 | 9,968.2 | 9,773.6 | |||||||||||||||||||
Other | 7.6 | 10.5 | 18.1 | 19.9 | |||||||||||||||||||
$ | 7.6 | $ | 10,278.7 | $ | 10,286.3 | $ | 10,093.5 |
Bank facilities
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.
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 delayed single draw -year term loan facility and is not subject to amortization payments, with the balance due and payable on the earliest of (i) three years after the funding date (as defined in the August 2022 Term Credit Agreement) and (ii) December 31, 2025. The proceeds, if drawn, from the August 2022 Term Credit Agreement will be 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.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 18 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
As of August 31, 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 | (4) |
(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.
(4)The August 2022 Term Credit Agreement will mature on the earliest of (i) three years after the funding date (as defined in the August 2022 Term Credit Agreement) and (ii) December 31, 2025.
As of August 31, 2022, information with respect to borrowings under the 2022 Credit Agreement and the April 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 | $ | 1,573.5 | |||||||||||||||||||
April 2022 Term Credit Agreement | |||||||||||||||||||||||||||||
Five-Year Term Facility | $ | 300.0 | 3.3 | % | 0.88 | % | |||||||||||||||||||||||
(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 $664.5 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 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 provides for the issuance of up to an aggregate principal amount of $2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 2022 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility. As of August 31,
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 19 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
2022, we had $663.9 million of outstanding borrowings, net of unamortized discount, under our commercial paper program with a weighted average annual interest rate of 3.0% and a weighted average remaining term of 12 days.
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 $1,837.4 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% 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 six months ended August 31, 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 six months and three months ended August 31, 2022.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 20 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Debt payments
As of August 31, 2022, the required principal repayments under long-term debt obligations (excluding unamortized debt issuance costs and unamortized discounts of $61.0 million and $20.8 million, respectively) for the remaining six months of Fiscal 2023 and for each of the five succeeding fiscal years and thereafter are as follows:
(in millions) | |||||
Fiscal 2023 | $ | 4.4 | |||
Fiscal 2024 | 6.6 | ||||
Fiscal 2025 | 1,254.0 | ||||
Fiscal 2026 | 902.1 | ||||
Fiscal 2027 | 600.9 | ||||
Fiscal 2028 | 1,800.0 | ||||
Thereafter | 5,800.1 | ||||
$ | 10,368.1 |
9. INCOME TAXES
Our effective tax rate for the six months ended August 31, 2022, and August 31, 2021, was (53.3)% and (15.3)%, respectively. Our effective tax rate for the three months ended August 31, 2022, and August 31, 2021, was (13.1)% and 91.7%, respectively.
For the six months and three months ended August 31, 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 six months ended August 31, 2021, our effective tax rate was lower than the federal statutory rate of 21% primarily due to (i) an increase in the valuation allowance related to our investment in Canopy and (ii) the impact of the long-lived asset impairment of brewery construction in progress.
For the three months ended August 31, 2021, our effective tax rate was higher than the federal statutory rate of 21% primarily due to an increase in the valuation allowance related to our investment in Canopy, partially offset by the benefit of lower effective tax rates applicable to our foreign businesses.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 21 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
10. STOCKHOLDERS’ EQUITY
Common stock
The number of shares of common stock issued and treasury stock, and associated share activity, are as follows:
Common Stock | Treasury Stock | ||||||||||||||||||||||||||||
Class A | Class B | Class 1 | Class A | Class B (1) | |||||||||||||||||||||||||
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 (2) | — | — | — | (71,064) | — | ||||||||||||||||||||||||
Vesting of performance share units (2) | — | — | — | (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 (2) | — | — | — | (4,851) | — | ||||||||||||||||||||||||
Balance at August 31, 2022 | 189,461,263 | 28,211,685 | 51,965 | 28,239,095 | 5,005,800 | ||||||||||||||||||||||||
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 (2) | — | — | — | (66,157) | — | ||||||||||||||||||||||||
Vesting of performance share units (2) | — | — | — | (7,934) | — | ||||||||||||||||||||||||
Balance at May 31, 2021 | 187,247,721 | 28,227,478 | 613,086 | 18,577,123 | 5,005,800 | ||||||||||||||||||||||||
Share repurchases | — | — | — | 4,079,651 | — | ||||||||||||||||||||||||
Exercise of stock options | — | — | 1,267 | (34,736) | — | ||||||||||||||||||||||||
Employee stock purchases | — | — | — | (28,768) | — | ||||||||||||||||||||||||
Vesting of restricted stock units (2) | — | — | — | (5,256) | — | ||||||||||||||||||||||||
Balance at August 31, 2021 | 187,247,721 | 28,227,478 | 614,353 | 22,588,014 | 5,005,800 | ||||||||||||||||||||||||
(1) In October 2022, our Board of Directors retired 5,005,800 shares of our Class B Treasury Stock which became authorized and unissued shares of our Class B Stock.
(2) Net of the following shares withheld to satisfy tax withholding requirements:
For the Three Months Ended May 31, | For the Three Months Ended August 31, | For the Six Months Ended August 31, | |||||||||||||||
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 |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 22 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Stock repurchases
In January 2018, our Board of Directors authorized the repurchase of up to $3.0 billion of our Class A Stock and Class B 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 Class A Stock and Class B Stock. The Board of Directors did not specify a date upon which this authorization would expire. Shares repurchased under this authorization become treasury shares.
For the six months ended August 31, 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 August 31, 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 |
Reclassification Agreement
On June 30, 2022, we announced the Reclassification. To effectuate the Reclassification, we will file the Amended and Restated Charter with the Secretary of State of the State of Delaware. If the Reclassification is completed, at the Effective Time, each share of Class B Stock issued and outstanding immediately prior to the Effective Time will be reclassified and converted into one validly issued, fully paid, and non-assessable share of Class A Stock and the right to receive $64.64 in cash, without interest, subject to any adjustment as provided in the Reclassification Agreement and the Amended and Restated Charter.
The closing of the Reclassification is subject to customary conditions, including, among others:
•the adoption and approval of the Reclassification Proposal by the affirmative vote of the holders of (i) not less than 50.3% of the issued and outstanding shares of Class A Stock not held by the Sands Family Stockholders, executive officers of the Company, or directors that hold Class B Stock, (ii) a majority of the voting power of the issued and outstanding shares of Class A Stock and Class B Stock entitled to vote thereon, voting together as a single class, and (iii) a majority of the issued and outstanding shares of Class B Stock;
•the absence of any SEC stop order suspending effectiveness of the Registration Statement on Form S-4;
•the absence of any governmental order or law preventing, prohibiting, or enjoining the Reclassification or the Amended and Restated Charter from becoming effective;
•the approval by the NYSE, subject to official notice of issuance, of the listing of the shares of Class A Stock into which the Class B Stock will be reclassified; and
•the accuracy of the representations and warranties of each party (subject to a materiality standard) and compliance in all material respects by each party with its obligations under the Reclassification Agreement.
The Reclassification Agreement contains customary representations, warranties, and covenants of each of the parties thereto for a transaction of this type.
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 23 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
11. NET INCOME (LOSS) PER COMMON SHARE ATTRIBUTABLE TO CBI
For the six months and three months ended August 31, 2022, and for the six months ended August 31, 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 August 31, 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. For the three months ended August 31, 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 Six Months Ended | |||||||||||||||||||||||
August 31, 2022 | August 31, 2021 | ||||||||||||||||||||||
Class A Stock | Class B Stock | Class A Stock | Class B Stock | ||||||||||||||||||||
(in millions, except per share data) | |||||||||||||||||||||||
Net income (loss) attributable to CBI allocated – basic | $ | (674.2) | $ | (87.5) | $ | (805.8) | $ | (100.8) | |||||||||||||||
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 | $ | (674.2) | $ | (87.5) | $ | (805.8) | $ | (100.8) | |||||||||||||||
Weighted average common shares outstanding – basic | 163.532 | 23.206 | 169.025 | 23.234 | |||||||||||||||||||
Conversion of Class B common shares into Class A common shares (1) | — | — | — | — | |||||||||||||||||||
Stock-based awards, primarily stock options (1) | — | — | — | — | |||||||||||||||||||
Weighted average common shares outstanding – diluted | 163.532 | 23.206 | 169.025 | 23.234 | |||||||||||||||||||
Net income (loss) per common share attributable to CBI – basic | $ | (4.13) | $ | (3.77) | $ | (4.77) | $ | (4.34) | |||||||||||||||
Net income (loss) per common share attributable to CBI – diluted | $ | (4.13) | $ | (3.77) | $ | (4.77) | $ | (4.34) | |||||||||||||||
For the Three Months Ended | |||||||||||||||||||||||
August 31, 2022 | August 31, 2021 | ||||||||||||||||||||||
Class A Stock | Class B Stock | Class A Stock | Class B Stock | ||||||||||||||||||||
(in millions, except per share data) | |||||||||||||||||||||||
Net income (loss) attributable to CBI allocated – basic | $ | (1,018.2) | $ | (133.0) | $ | 1.3 | $ | 0.2 | |||||||||||||||
Conversion of Class B common shares into Class A common shares | — | — | 0.2 | — | |||||||||||||||||||
Effect of stock-based awards on allocated net income (loss) | — | — | — | — | |||||||||||||||||||
Net income (loss) attributable to CBI allocated – diluted | $ | (1,018.2) | $ | (133.0) | $ | 1.5 | $ | 0.2 | |||||||||||||||
Weighted average common shares outstanding – basic | 161.730 | 23.206 | 167.447 | 23.222 | |||||||||||||||||||
Conversion of Class B common shares into Class A common shares (1) | — | — | 23.222 | — | |||||||||||||||||||
Stock-based awards, primarily stock options (1) | — | — | 1.861 | — | |||||||||||||||||||
Weighted average common shares outstanding – diluted | 161.730 | 23.206 | 192.530 | 23.222 | |||||||||||||||||||
Net income (loss) per common share attributable to CBI – basic | $ | (6.30) | $ | (5.73) | $ | 0.01 | $ | 0.01 | |||||||||||||||
Net income (loss) per common share attributable to CBI – diluted | $ | (6.30) | $ | (5.73) | $ | 0.01 | $ | 0.01 |
(1) | 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: | ||||||||||||||||||||||||||||
For the Six Months Ended August 31, | For the Three Months Ended August 31, | ||||||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||||||||
(in millions) | |||||||||||||||||||||||||||||
Class B Stock | 23.206 | 23.234 | 23.206 | — | |||||||||||||||||||||||||
Stock-based awards, primarily stock options | 0.802 | 1.936 | 0.801 | — | |||||||||||||||||||||||||
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 Six Months Ended August 31, 2022 | |||||||||||||||||
Net income (loss) attributable to CBI | $ | (761.7) | |||||||||||||||
Other comprehensive income (loss) attributable to CBI: | |||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||
Net gain (loss) | $ | (11.1) | $ | — | (11.1) | ||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (11.1) | — | (11.1) | ||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||
Net derivative gain (loss) | 95.7 | (13.1) | 82.6 | ||||||||||||||
Amounts reclassified | (20.3) | 1.9 | (18.4) | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 75.4 | (11.2) | 64.2 | ||||||||||||||
Pension/postretirement adjustments: | |||||||||||||||||
Net actuarial gain (loss) | (0.2) | 0.1 | (0.1) | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (0.2) | 0.1 | (0.1) | ||||||||||||||
Share of OCI of equity method investments | |||||||||||||||||
Net gain (loss) | 0.9 | 3.4 | 4.3 | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 0.9 | 3.4 | 4.3 | ||||||||||||||
Other comprehensive income (loss) attributable to CBI | $ | 65.0 | $ | (7.7) | 57.3 | ||||||||||||
Comprehensive income (loss) attributable to CBI | $ | (704.4) | |||||||||||||||
For the Six Months Ended August 31, 2021 | |||||||||||||||||
Net income (loss) attributable to CBI | $ | (906.6) | |||||||||||||||
Other comprehensive income (loss) attributable to CBI: | |||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||
Net gain (loss) | $ | 73.0 | $ | — | 73.0 | ||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 73.0 | — | 73.0 |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 24 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Before Tax Amount | Tax (Expense) Benefit | Net of Tax Amount | |||||||||||||||
(in millions) | |||||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||
Net derivative gain (loss) | 19.3 | (8.5) | 10.8 | ||||||||||||||
Amounts reclassified | (20.1) | 1.7 | (18.4) | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (0.8) | (6.8) | (7.6) | ||||||||||||||
Pension/postretirement adjustments: | |||||||||||||||||
Net actuarial gain (loss) | (0.1) | — | (0.1) | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (0.1) | — | (0.1) | ||||||||||||||
Share of OCI of equity method investments | |||||||||||||||||
Net gain (loss) | (26.1) | 5.9 | (20.2) | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (26.1) | 5.9 | (20.2) | ||||||||||||||
Other comprehensive income (loss) attributable to CBI | $ | 46.0 | $ | (0.9) | 45.1 | ||||||||||||
Comprehensive income (loss) attributable to CBI | $ | (861.5) | |||||||||||||||
For the Three Months Ended August 31, 2022 | |||||||||||||||||
Net income (loss) attributable to CBI | $ | (1,151.2) | |||||||||||||||
Other comprehensive income (loss) attributable to CBI: | |||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||
Net gain (loss) | $ | (181.4) | $ | — | (181.4) | ||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (181.4) | — | (181.4) | ||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||
Net derivative gain (loss) | (9.8) | 1.7 | (8.1) | ||||||||||||||
Amounts reclassified | (10.3) | 1.0 | (9.3) | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (20.1) | 2.7 | (17.4) | ||||||||||||||
Pension/postretirement adjustments: | |||||||||||||||||
Net actuarial gain (loss) | 0.1 | 0.1 | 0.2 | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 0.1 | 0.1 | 0.2 | ||||||||||||||
Share of OCI of equity method investments | |||||||||||||||||
Net gain (loss) | 9.9 | (0.4) | 9.5 | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 9.9 | (0.4) | 9.5 | ||||||||||||||
Other comprehensive income (loss) attributable to CBI | $ | (191.5) | $ | 2.4 | (189.1) | ||||||||||||
Comprehensive income (loss) attributable to CBI | $ | (1,340.3) | |||||||||||||||
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 25 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
Before Tax Amount | Tax (Expense) Benefit | Net of Tax Amount | |||||||||||||||
(in millions) | |||||||||||||||||
For the Three Months Ended August 31, 2021 | |||||||||||||||||
Net income (loss) attributable to CBI | $ | 1.5 | |||||||||||||||
Other comprehensive income (loss) attributable to CBI: | |||||||||||||||||
Foreign currency translation adjustments: | |||||||||||||||||
Net gain (loss) | $ | (30.0) | $ | — | (30.0) | ||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (30.0) | — | (30.0) | ||||||||||||||
Unrealized gain (loss) on cash flow hedges: | |||||||||||||||||
Net derivative gain (loss) | (8.2) | 1.3 | (6.9) | ||||||||||||||
Amounts reclassified | (12.3) | 1.5 | (10.8) | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (20.5) | 2.8 | (17.7) | ||||||||||||||
Pension/postretirement adjustments: | |||||||||||||||||
Net actuarial gain (loss) | 0.1 | — | 0.1 | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | 0.1 | — | 0.1 | ||||||||||||||
Share of OCI of equity method investments | |||||||||||||||||
Net gain (loss) | (8.0) | 1.8 | (6.2) | ||||||||||||||
Amounts reclassified | — | — | — | ||||||||||||||
Net gain (loss) recognized in other comprehensive income (loss) | (8.0) | 1.8 | (6.2) | ||||||||||||||
Other comprehensive income (loss) attributable to CBI | $ | (58.4) | $ | 4.6 | (53.8) | ||||||||||||
Comprehensive income (loss) attributable to CBI | $ | (52.3) |
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 | (11.1) | 82.6 | (0.1) | 4.3 | 75.7 | ||||||||||||||||||||||||
Amounts reclassified from AOCI | — | (18.4) | — | — | (18.4) | ||||||||||||||||||||||||
OCI | (11.1) | 64.2 | (0.1) | 4.3 | 57.3 | ||||||||||||||||||||||||
Balance, August 31, 2022 | $ | (442.5) | $ | 81.7 | $ | (4.1) | $ | 9.5 | $ | (355.4) |
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.
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
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 26 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
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.
In addition, management excludes Comparable Adjustments from its evaluation of the results of each operating segment as these Comparable Adjustments are not reflective of core operations of the segments. Segment operating performance and the incentive compensation of segment management are evaluated based on core segment operating income (loss) which does not include the impact of these Comparable Adjustments.
We evaluate segment operating performance based on operating income (loss) of the respective business units. Comparable Adjustments that impacted comparability in our segment operating income (loss) for each period are as follows:
For the Six Months Ended August 31, | For the Three Months Ended August 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Cost of product sold | |||||||||||||||||||||||
Settlements of undesignated commodity derivative contracts | $ | (54.6) | $ | (12.3) | $ | (31.3) | $ | (8.9) | |||||||||||||||
Flow through of inventory step-up | (1.9) | 0.1 | (0.9) | 0.1 | |||||||||||||||||||
Net gain (loss) on undesignated commodity derivative contracts | 33.1 | 48.1 | (15.4) | 24.0 | |||||||||||||||||||
Net flow through of reserved inventory | 1.2 | — | 1.2 | — | |||||||||||||||||||
Recovery of inventory write-down | 0.2 | — | — | — | |||||||||||||||||||
Strategic business development costs | — | (2.6) | — | — | |||||||||||||||||||
Total cost of product sold | (22.0) | 33.3 | (46.4) | 15.2 | |||||||||||||||||||
Selling, general, and administrative expenses | |||||||||||||||||||||||
Costs associated with the Reclassification | (21.3) | — | (20.6) | — | |||||||||||||||||||
Transition services agreements activity | (7.9) | (7.2) | (4.5) | (4.9) | |||||||||||||||||||
Restructuring and other strategic business development costs | (2.6) | (0.1) | (1.2) | 0.8 | |||||||||||||||||||
Transaction, integration, and other acquisition-related costs | (0.7) | — | (0.5) | — | |||||||||||||||||||
Other gains (losses) (1) | 8.8 | 1.1 | 3.6 | (2.2) | |||||||||||||||||||
Total selling, general, and administrative expenses | (23.7) | (6.2) | (23.2) | (6.3) | |||||||||||||||||||
Impairment of brewery construction in progress | — | (665.9) | — | — | |||||||||||||||||||
Comparable Adjustments, Operating income (loss) | $ | (45.7) | $ | (638.8) | $ | (69.6) | $ | 8.9 |
Constellation Brands, Inc. Q2 FY 2023 Form 10-Q | #WORTHREACHINGFOR I 27 |
FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
(1) | Primarily includes the following: | |||||||||||||||||||||||||
For the Six Months Ended August 31, | For the Three Months Ended August 31, | |||||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
(in millions) | ||||||||||||||||||||||||||
Gain from remeasurement of previously held equity method investment | $ | 5.2 | $ | — | $ | — | $ | — | ||||||||||||||||||
Decrease in estimated fair value of a contingent liability associated with a prior period acquisition | $ | 4.4 | $ | — | $ | 4.4 | $ | — |
The accounting policies of the segments are the same as those described for the Company in Note 1 of our consolidated financial statements included in our 2022 Annual Report. Amounts included below for the Canopy segment represent 100% of Canopy’s reported results on a two-month lag, prepared in accordance with U.S. GAAP, and converted from Canadian dollars to U.S. dollars. Although we own less than 100% of the outstanding shares of Canopy, 100% of its results are included in the information below and subsequently eliminated in order to reconcile to our consolidated financial statements. Segment information is as follows:
For the Six Months Ended August 31, | For the Three Months Ended August 31, | ||||||||||||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||||||||||||
(in millions) | |||||||||||||||||||||||
Beer | |||||||||||||||||||||||
Net sales | $ | 4,037.5 | $ | 3,433.3 | $ | 2,139.3 | $ | 1,861.3 | |||||||||||||||
Segment operating income (loss) | $ | 1,628.4 | $ | 1,366.1 | $ | 865.6 | $ | 693.0 | |||||||||||||||
Capital expenditures | $ | 357.8 | $ | 295.8 | $ | 196.0 | $ | 210.0 | |||||||||||||||
Depreciation and amortization | $ | 135.2 | $ | 118.5 | $ | 67.0 | $ | 64.5 | |||||||||||||||
Wine and Spirits | |||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||
Wine | $ | 846.1 | $ | 844.9 | $ | 442.0 | $ | 447.2 | |||||||||||||||
Spirits | 134.7 | 119.4 | 73.8 | 62.6 | |||||||||||||||||||
Net sales | $ | 980.8 | $ | 964.3 | $ | 515.8 | $ | 509.8 | |||||||||||||||
Segment operating income (loss) | $ | 190.4 | $ | 204.4 | $ | 99.4 | $ | 100.2 | |||||||||||||||
Income (loss) from unconsolidated investments | $ | 4.9 | $ | 0.2 | $ | 3.4 | $ | (1.1) | |||||||||||||||
Equity method investments | $ | 100.5 | $ | 126.7 | $ | 100.5 | $ | 126.7 | |||||||||||||||
Capital expenditures | $ | 51.6 | $ | 54.0 | $ | 21.8 | $ | 28.3 | |||||||||||||||
Depreciation and amortization | $ | 43.3 | $ | 39.6 | $ | 21.0 | $ | 19.7 | |||||||||||||||
Corporate Operations and Other | |||||||||||||||||||||||
Segment operating income (loss) | $ | (143.6) | $ | (117.4) | $ | (82.3) | $ | (62.9) | |||||||||||||||
Income (loss) from unconsolidated investments | $ | (4.3) | $ | (0.8) | $ | (2.3) | $ | (0.2) | |||||||||||||||
Equity method investments | $ | 98.1 | $ | 112.1 | $ | 98.1 | $ | 112.1 | |||||||||||||||
Capital expenditures | $ | 25.6 | $ | 3.6 | $ | 20.6 | $ | 1.2 | |||||||||||||||
Depreciation and amortization | $ | 6.9 | $ | 6.5 | $ | 3.7 | $ | 3.2 | |||||||||||||||