Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
INTRODUCTION
This MD&A provides additional information on our businesses, current developments, financial condition, cash flows, and results of operations. It should be read in conjunction with our consolidated financial statements and notes thereto included herein (the “Financial Statements”) and with our consolidated financial statements and notes included in our 2020 Annual Report. This MD&A is organized as follows:
•Overview. This section provides a general description of our business, which we believe is important in understanding the results of our operations, financial condition, and potential future trends.
•Strategy. This section provides a description of our strategy and a discussion of recent developments, significant investments, acquisitions, and divestitures.
•Results of operations. This section provides an analysis of our results of operations presented on a business segment basis for the three months ended May 31, 2020 (“First Quarter 2021”), and May 31, 2019 (“First Quarter 2020”). In addition, a brief description of significant transactions and other items that affect the comparability of the results is provided.
•Financial liquidity and capital resources. This section provides an analysis of our cash flows, outstanding debt, and a discussion of the amount of financial capacity available to fund our ongoing operations and future commitments, as well as a discussion of other financing arrangements.
OVERVIEW
We are an international beverage alcohol company with a broad portfolio of consumer-preferred high-end imported beer brands, and higher-end wine and spirits brands. Many of our products are recognized as leaders in their respective categories. We are one of the leading U.S. growth drivers at retail among beverage alcohol suppliers. In the U.S. market, we are the third-largest beer company and a leading higher-end wine and spirits company.
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. Our Canopy Equity Method Investment makes up the Canopy segment.
In the Beer segment, our portfolio consists of high-end imported beer, craft beer, and alternative beverage alcohol brands. 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, our portfolio includes higher-margin, higher-growth wine brands complemented by certain higher-end spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of executive management, corporate development, corporate finance, corporate growth and strategy, human resources, internal audit, investor relations, legal, public relations, and information technology, as well as our investments made through our corporate venture capital function. All costs included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are therefore not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in our CODM’s evaluation of the operating income (loss) performance of the other reportable segments. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management, and the structure of our internal financial reporting.
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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STRATEGY
Our overall strategy is to drive industry-leading growth, build unrivaled shareholder value, and shape the future of our industry by building brands that people love. We believe sharing a toast, unwinding after a day, celebrating milestones, and helping people connect, is Worth Reaching For. We position our portfolio to benefit from the consumer-led trend towards premiumization, which we believe will continue to result in faster growth rates in the higher-end of the beer, wine, and spirits categories. We focus on developing our expertise in consumer insights and category management, as well as our strong distributor network, which provides an effective route-to-market. Additionally, we leverage our scale across the total beverage alcohol market and our level of diversification hedges our portfolio risk. In addition to growing our existing business, we focus on targeted acquisitions of, and investments in, businesses that are higher-margin, higher-growth, consumer-led, have a low integration risk, and/or fill a gap in our portfolio. We also strive to identify, meet, and stay ahead of evolving consumer trends and market dynamics. See “Investments, Acquisitions, and Divestitures – Canopy Investments” below.
We strive to strengthen our portfolio of higher-end beer, wine, and spirits brands and differentiate ourselves through:
•leveraging our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio;
•strengthening relationships with wholesalers and retailers by providing consumer and beverage alcohol insights;
•investing in brand building and innovation activities;
•positioning ourselves for success with consumer-led products that identify, meet, and stay ahead of evolving consumer trends and market dynamics;
•realizing operating efficiencies through expanding and enhancing production capabilities and maximizing asset utilization; and
•developing employees to enhance performance in the marketplace.
Our business strategy for the Beer segment focuses on leading the high-end segment of U.S. beer and includes continued focus on growing our beer portfolio in the U.S. through expanding distribution for key brands, as well as new product development and innovation within the existing portfolio of brands, and continued expansion, construction, and optimization activities for our Mexico beer operations. Additionally, in an effort to more fully compete in growing sectors of the high-end segment of the U.S. beer market, we have leveraged our innovation capabilities to introduce new brands that align with consumer trends. We continue to refine our options to optimize the value of our Beer segment and drive increased focus on our high-performing import portfolio and new product introductions. See “Investments, Acquisitions, and Divestitures - Ballast Point Divestiture” below.
In connection with our business strategy for the Beer segment, we have more than tripled the production capacity of our brewery located in Nava, Coahuila, Mexico (“the Nava Brewery”) since its June 2013 acquisition. Additionally, we are continuing to invest to expand our brewery operations in Obregon, Sonora, Mexico (the “Obregon Brewery”), where expansion is expected to be completed by the end of Fiscal 2021, although further COVID-19 containment measures may alter that timeline. At this time, we have paused all Mexicali Brewery construction activities, following a negative result from a public consultation held in Mexico, see “Capital expenditures” below. Expansion, construction, and optimization efforts in Mexico continue to align with our anticipated future growth expectations.
Our business strategy for the Wine and Spirits segment is to build an industry-leading portfolio of higher-end wine and spirits brands. We are investing to meet the evolving needs of consumers; building brands through consumer insights, sensory expertise, and innovation; and refreshing existing brands, as we continue to focus on moving our branded wine and spirits portfolio towards a higher-margin, higher-growth portfolio of brands. We dedicate a large share of our sales and marketing resources to well-known wine and spirits brands sold in the U.S., which comprise the U.S. Power Brands (“Power Brands”), as they represent a majority of our U.S. wine and spirits
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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revenue and profitability, and generally hold strong positions in their respective price categories. These brands and/or portfolio of brands include:
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Wine Brands
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Wine Portfolio
of Brands
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Spirits Brands
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● 7 Moons
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● Drylands
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● SIMI
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● Charles Smith
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● Casa Noble
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● Auros
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● Kim Crawford
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● Spoken Barrel
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● Prisoner
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● High West
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● Champagne Palmer & Co
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● Meiomi
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● Robert Mondavi
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● Mi CAMPO
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● Cooper & Thief
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● Mount Veeder
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● Schrader
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● Nelson’s Green Brier
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● Crafters Union
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● Nobilo (1)
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● SVEDKA
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● Cuvée Sauvage
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● Ruffino
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● The Real McCoy
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(1)See “Business Transformation - Wine and Spirits Transactions” below.
We focus our innovation and investment dollars on those brands within our portfolio which position us to benefit from the consumer-led trend towards premiumization. Additionally, in connection with the Wine and Spirits Transactions and Other Wine and Spirits Transactions, we expect to optimize the value of our wine and spirits portfolio by driving increased focus on our higher-end Power Brands to accelerate growth and improve overall operating margins. In markets where it is feasible, we entered into contractual arrangements to consolidate our U.S. distribution network in order to obtain dedicated distributor selling resources which focus on our U.S. wine and spirits portfolio to drive organic growth. This consolidated U.S. distribution network currently represents about 65% of our branded wine and spirits volume in the U.S. Throughout the terms of these contracts, we generally expect shipments on an annual basis to these distributors to essentially equal the distributors’ shipments to retailers.
Marketing, sales, and distribution of our products are managed on a geographic basis in order to fully leverage leading market positions. In addition, market dynamics and consumer trends vary across each of our markets. Within our primary market in the U.S., we offer a range of beverage alcohol products across the imported beer, craft beer, alternative beverage alcohol, branded wine, and spirits categories, with generally separate distribution networks utilized for (i) our beer portfolio and (ii) our wine and spirits portfolio. The environment for our products is competitive in each of our markets.
We complemented our total beverage alcohol strategy in an adjacent category by making investments in Canopy, a world-leading, diversified cannabis company. These investments are consistent with our long-term strategy to identify, meet, and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property, and retailing.
We remain committed to our long-term financial model of: growing sales, expanding margins, and increasing cash flow in order to achieve earnings per share growth, maintain our targeted leverage ratio, and deliver returns to shareholders through the payment of quarterly cash dividends and periodic share repurchases.
Recent Developments
COVID-19
We have an existing Crisis Management Committee that has been closely monitoring the impact of the virus that causes COVID-19, on our Company and our workforce since January 2020. In March 2020, the World Health Organization (“WHO”) recognized COVID-19 as a pandemic. COVID-19 has severely restricted the level of economic activity around the world. In response to COVID-19, the governments of many countries, states, cities, and other geographic regions took preventative or protective actions, such as imposing restrictions on travel and business operations and advising or requiring individuals to limit or forgo their time outside of their homes. Temporary closures of businesses were ordered, and numerous other businesses temporarily closed voluntarily. Further, individuals' ability to travel was curtailed through mandated travel restrictions and may be further limited
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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through additional voluntary or mandated closures of travel-related businesses. In the key markets where we sell our products, the beverage alcohol industry has been classified as an essential business.
We have implemented various measures to reduce the spread of the virus including working from home, restricting visitors to our production locations, splitting our production workforces, reducing the on-site production workforce levels, screening workers before they enter facilities, implementing social distancing, and encouraging employees to adhere to prevention measures recommended by the Center for Disease Control (“CDC”) and the WHO. These prevention measures have been effective as evidenced by the minimal number of COVID-19 cases within our workforce. Since our non-production workforce is able to work remotely using various technology tools, we are able to maintain our operations and internal controls over financial reporting and disclosures.
COVID-19 containment measures have affected us primarily in the reduction of (i) depletion volume on our products in the on-premise business due to bar and restaurant closures and (ii) shipment volume related to the reduced production activity at our major breweries in Mexico. The on-premise business has historically been about 10% to 15% of our depletion volume for beer, wine, and spirits. Various U.S. states are in the process of reopening their economies including bars and restaurants which we expect to begin increasing our on-premise depletion volumes. The decrease in the on-premise business was partially offset by an increase in off-premise, including eCommerce, which has increased since March 2020.
Currently, our breweries, wineries, and bottling facilities are operating at close to normal capacity. In June 2020, beer production at our major breweries in Mexico returned to normal levels. We expect the impacts from the COVID-19 related slowdown of beer production in Mexico will extend into the second quarter of fiscal 2021. We have recently begun reopening our hospitality, tasting rooms, retail, restaurants, and other non-essential public facilities. Our supply chains and distribution channels have not been materially impacted and we are working to rebuild our supply of products to meet forecasted demand. As a result of decreased production levels, we are closely monitoring distributor inventory to optimize stock levels. Product inventories are expected to return to more normal levels during the third quarter of fiscal 2021.
We have also been impacted by the containment actions imposed by the Mexican government, including a temporary halt on expansion activities at the Obregon Brewery. In June 2020, we resumed construction on a planned additional five million hectoliters expansion. Expansion is expected to be completed by the end of Fiscal 2021, although any further containment actions associated with COVID-19 may alter that timeline.
We are not able to estimate the long-term impact of COVID-19 on our business, financial condition, results of operations, and/or cash flow. We believe we have sufficient liquidity available from operating cash flow, cash on hand, and availability under our $2.0 billion revolving credit facility. We expect to have continued access to capital markets and to continue to return value to shareholders.
Empathy Wines
In June 2020, we acquired Empathy Wines, which primarily included the acquisition of goodwill, trademarks, and inventory, plus an earn-out over five years based on performance. This acquisition, which included a digitally-native wine brand, strengthens our position in the direct-to-consumer and eCommerce markets. The results of operations of Empathy Wines will be reported in the Wine and Spirits segment and will be included in our consolidated results of operations from the date of acquisition.
Paul Masson Transaction
In June 2020, we entered into the Paul Masson Transaction. The Paul Masson Transaction is subject to FTC review and clearance, and is expected to close in the second quarter of fiscal 2021. We expect to use the net cash proceeds from the Paul Masson Transaction primarily to reduce outstanding borrowings.
Concentrate Business Transaction
In June 2020, we entered into the Concentrate Business Transaction. The Concentrate Business Transaction is subject to FTC review and clearance, and is expected to close in the second quarter of fiscal 2021.
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 36
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Nobilo Wine Transaction
In June 2020, we entered into a definitive agreement to sell the New Zealand-based Nobilo Wine brand and certain related assets and liabilities, subject to certain purchase price adjustments. The definitive agreement was generally consistent with the terms described in “Business Transformation - Wine and Spirits Transactions” below.
New Acreage Agreement
In June 2020, Canopy announced the New Acreage Agreement. The New Acreage Agreement reduces (i) the ratio of Canopy shares required to be exchanged for Acreage shares upon U.S. Federal cannabis legalization and (ii) the number of Acreage shares subject to the fixed exchange ratio from 100% to 70%, calculated as a percentage of Acreage’s issued and outstanding shares. The amended agreement is subject to Acreage shareholder and regulatory approval. The issuance of Canopy shares in exchange for Acreage shares that would occur upon U.S. Federal cannabis legalization would decrease our ownership interest in Canopy and could have a significant effect on our share of Canopy’s reported earnings or losses.
Investments, acquisitions, and divestitures
Canopy segment
Canopy investments
In May 2020, we exercised the November 2017 Canopy Warrants at an exercise price of C$12.98 per warrant share for C$245.0 million, or $173.9 million, which increased our ownership interest in Canopy to 38.6%.
We recognized an unrealized net gain (loss) from the changes in fair value of our Canopy investments accounted for at fair value in income (loss) from unconsolidated investments as follows:
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Date of
Investment
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Investment
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First
Quarter
2021
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First
Quarter
2020
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(in millions)
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Nov 2017
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Warrants (1)
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$
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(61.8)
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$
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(134.1)
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June 2018
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Convertible debt securities
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(12.5)
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(32.6)
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Nov 2018
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Warrants
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(123.0)
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(660.8)
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$
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(197.3)
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$
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(827.5)
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(1)For additional information on the May 2020 Canopy Investment, refer to Note 8 of the Financial Statements.
We expect the value of the Canopy investments accounted for at fair value to be volatile in future periods. We evaluated the Canopy investments as of May 31, 2020, and determined that there was not an other-than-temporary-impairment. Additionally, since November 1, 2018, we recognize equity in earnings (losses) and related activities for our Canopy Equity Method Investment on a two-month lag. Accordingly, we recognized our share of Canopy’s fourth quarter fiscal 2020 earnings (losses) for the period January through March 2020, in our First Quarter 2021 results. We recognized our share of Canopy’s fourth quarter fiscal 2019 earnings (losses) from January through March 2019, in our First Quarter 2020 results. We expect Canopy’s earnings to be volatile in future periods.
As of May 31, 2020, the conversion of Canopy equity securities held by its employees and/or held by other third parties, excluding our New November 2018 Canopy Warrants, Canopy Debt Securities, and the Acreage Financial Instrument would not have a significant effect on our share of Canopy’s reported earnings or losses. Additionally, under an amended and restated investor rights agreement, we have the option to purchase additional common shares of Canopy at the then-current price of the underlying equity security to allow us to maintain our relative ownership interest. If we exercised all of our New November 2018 Canopy Warrants, expiring November 1, 2023, and November 1, 2026, it could have a significant effect on our share of Canopy’s reported earnings or losses and our ownership interest in Canopy would be expected to increase to greater than 50 percent. In connection with the Acreage Transaction, Canopy has the Acreage Financial Instrument, which would require the issuance of Canopy shares. If Canopy exercised the Acreage Financial Instrument it could have a
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 37
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significant effect on our share of Canopy’s reported earnings or losses and our ownership interest in Canopy would decrease and no longer be expected to be greater than 50 percent.
As previously noted, these investments are consistent with our long-term strategy to identify, meet, and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property, and retailing.
Beer segment
Ballast Point Divestiture
On March 2, 2020, we sold the Ballast Point craft beer business, including a number of its associated production facilities and brewpubs. Accordingly, our consolidated results of operations include the results of operations of our Ballast Point craft beer business through the date of divestiture. This divestiture is consistent with our strategic focus on our high-performing import portfolio and new product introductions.
Wine and Spirits segment
Other equity method investment
In April 2020, we invested in a wine business that is accounted for under the equity method. We will recognize our share of their equity in earnings (losses) in our consolidated financial statements in the Wine and Spirits segment.
Black Velvet Divestiture
On November 1, 2019, we sold the Black Velvet Canadian Whisky business and the brand’s associated production facility, along with a subset of Canadian whisky brands produced at that facility, and related inventory at a transaction value of $266.3 million. Accordingly, our consolidated results of operations include the results of operations of our Canadian whisky business through the date of divestiture. We received cash proceeds of $269.7 million, subject to estimated working capital adjustments. This divestiture is consistent with our strategic focus on higher-margin, higher-growth brands. We recognized a net gain of $73.5 million on the sale of the business primarily in the third quarter of fiscal 2020.
Nelson’s Green Brier acquisition
In May 2019, we increased our ownership interest in Nelson’s Green Brier to 75%, resulting in consolidation of the business and recognition of a 25% noncontrolling interest. This acquisition included a portfolio of award-winning, Tennessee-based craft bourbon and whiskey products. The fair value of the business combination was allocated primarily to goodwill, trademarks, inventory, and property, plant, and equipment. The results of operations of Nelson’s Green Brier are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Business transformation
Wine and Spirits Transactions
In April 2019, we entered into a definitive agreement with E. & J. Gallo Winery (“Gallo”) to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices, and facilities.
In December 2019, we agreed to revise and supersede the Original Wine and Spirits Transaction. The revisions to the transaction address competitive concerns raised by the FTC specifically related to the sparkling wine, brandy, dessert wine, and concentrate categories. As a result, the brands Cook’s California Champagne, J. Roget American Champagne, Paul Masson Grande Amber Brandy, and our concentrate business will be excluded from the Original Wine and Spirits Transaction. In May 2020, we further revised the Original Wine and Spirits Transaction to also exclude the Mission Bell Winery in Madera, California and certain related real estate, equipment, contracts, and employees, resulting in an adjusted transaction price of approximately $783 million, with the potential to earn an incremental $250 million of contingent consideration if certain brand performance provisions are met over a two-year period after closing. The Further Revised Wine and Spirits Transaction is
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 38
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expected to close in the second quarter of fiscal 2021 and is subject to FTC review and clearance. Additionally, in a separate, but related, transaction we agreed that upon execution and delivery of a definitive agreement for the Further Revised Wine and Spirits Transaction, we would enter into an agreement to sell the New Zealand-based Nobilo Wine brand and certain related assets for $130 million to Gallo. The Nobilo Wine Transaction is expected to close by the end of second quarter of fiscal 2021 and is subject to FTC review and clearance. Completion of the Nobilo Transaction is also conditioned on completion of the Further Revised Wine and Spirits Transaction. We expect to use the net cash proceeds from the Wine and Spirits Transactions primarily to reduce outstanding borrowings. The Wine and Spirits Transactions are consistent with our strategic focus on higher-margin, higher-growth brands.
We have communicated our intent to retain the brands Cook’s California Champagne and J. Roget American Champagne and the Mission Bell Winery contemplated to be sold in the Original Wine and Spirits Transaction. The FTC is currently reviewing our business plans to support these brands in the future. The Mission Bell Winery has the production capability to support the production of these retained brands.
Other Wine and Spirits Transactions
We plan to divest the Paul Masson Grande Amber Brandy brand and concentrate business excluded from the Original Wine and Spirits Transaction to companies with more aligned business strategies.
In connection with the Wine and Spirits Transactions and the Other Wine and Spirits Transactions, we have wine and spirits net assets of $946.2 million that met the held for sale criteria as of May 31, 2020.
Selected financial information included in our results of operations for the portion of the business that we expect will no longer be part of our consolidated results after the closing of the Wine and Spirits Transactions and Other Wine and Spirits Transactions is as follows:
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Net Sales
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Gross Profit
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Marketing (1)
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(in millions)
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First Quarter 2021
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Wine and Spirits segment results
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$
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187
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$
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78
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$
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1
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(1)Included in selling, general, and administrative expenses within our consolidated results of operations.
For additional information on these recent developments, investments, acquisitions, and divestitures, and business transformation updates refer to Notes 3, 5, and 8 of the Financial Statements.
RESULTS OF OPERATIONS
FINANCIAL HIGHLIGHTS
References to organic throughout the following discussion exclude the impact of divested brand activity in connection with the Ballast Point Divestiture (beer) and Black Velvet Divestiture (wine and spirits), as appropriate.
For First Quarter 2021 compared with First Quarter 2020:
•Our results of operations were negatively impacted by (i) equity in losses from Canopy’s results of operations and related activities and (ii) COVID-19 containment measures affecting on-premise sales and reduced production activity at our major breweries in Mexico, partially offset by a decrease in unrealized net loss from the changes in fair value of our investments in Canopy in First Quarter 2021 as compared with First Quarter 2020.
•Net sales decreased 6% due to (i) a decrease in Beer net sales driven predominantly by volume decline largely from COVID-19 containment measures and (ii) Wine and Spirits net sales led by branded volume decline largely from brands to be divested and on-premise and retail tasting room closures as
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 39
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a result of COVID-19 containment measures, partially offset by favorable impact from pricing within both the Beer and Wine and Spirits segments.
•Operating income (loss) decreased 2% largely due to the net sales volume decline and an impairment of long-lived assets held for sale primarily in connection with the Wine and Spirits Transactions and the Other Wine and Spirits Transactions, partially offset by favorable impact from pricing within the Beer and Wine and Spirits segments and decreased marketing spend within the Beer segment which largely resulted from COVID-19 containment measures.
•Net loss attributable to CBI and diluted net loss per common share attributable to CBI decreased largely from the decrease in loss from unconsolidated investments related to our investments in Canopy, partially offset by the First Quarter 2021 provision for income taxes as compared with the benefit from income taxes for First Quarter 2020.
COMPARABLE ADJUSTMENTS
Management excludes items that affect comparability 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 segment management compensation are evaluated based on core segment operating income (loss). As such, the performance measures for incentive compensation purposes for segment management do not include the impact of these Comparable Adjustments.
As more fully described herein and in the related Notes to the Financial Statements, the Comparable Adjustments that impacted comparability in our segment results for each period are as follows:
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First
Quarter
2021
|
|
First
Quarter
2020
|
(in millions)
|
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|
|
|
|
|
Cost of product sold
|
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|
|
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|
|
|
Net gain (loss) on undesignated commodity derivative contracts
|
|
|
|
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$
|
(26.8)
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$
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(15.9)
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Strategic business development costs
|
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(24.3)
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(44.5)
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COVID-19 incremental costs
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|
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(4.6)
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—
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Settlements of undesignated commodity derivative contracts
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10.4
|
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1.8
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Accelerated depreciation
|
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|
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—
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(3.5)
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Flow through of inventory step-up
|
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|
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—
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(0.4)
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Total cost of product sold
|
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(45.3)
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(62.5)
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Selling, general, and administrative expenses
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Net gain (loss) on foreign currency derivative contracts
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(8.0)
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—
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COVID-19 incremental costs
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(6.5)
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—
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Restructuring and other strategic business development costs
|
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(3.1)
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(23.6)
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Transaction, integration, and other acquisition-related costs
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(0.8)
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(2.3)
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Other gains (losses)
|
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7.4
|
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13.4
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Total selling, general, and administrative expenses
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(11.0)
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(12.5)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of assets held for sale
|
|
|
|
|
(25.0)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable Adjustments, Operating income (loss)
|
|
|
|
|
$
|
(81.3)
|
|
|
$
|
(75.0)
|
|
|
|
|
|
|
|
|
|
Income (loss) from unconsolidated investments
|
|
|
|
|
$
|
(543.2)
|
|
|
$
|
(879.1)
|
|
Cost of product sold
Undesignated commodity derivative contracts
Net gain (loss) on undesignated commodity derivative contracts represents a net gain (loss) from the changes in fair value of undesignated commodity derivative contracts. The net gain (loss) is reported outside of
|
|
|
|
|
|
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
|
#WORTHREACHINGFOR I 40
|
segment operating results until such time that the underlying exposure is recognized in the segment operating results. At settlement, the net gain (loss) from the changes in fair value of the undesignated commodity derivative contracts is reported in the appropriate operating segment, allowing the results of our operating segments to reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility.
Strategic business development costs
We recognized costs primarily in connection with losses on write-downs of excess inventory and contract terminations resulting from our ongoing efforts to optimize our portfolio, gain efficiencies, and reduce our cost structure within the Wine and Spirits segment.
COVID-19 incremental costs
We recognized costs for incremental wages and hazard payments to employees, costs associated with the unused beer keg reimbursement program with distributors, purchases of personal protective equipment, and more frequent and thorough cleaning and sanitization of our facilities.
Selling, general, and administrative expenses
Net gain (loss) on foreign currency derivative contracts
We recognized a net loss primarily in connection with the settlement of foreign currency forward contracts entered into to fix the U.S. dollar cost of the May 2020 Canopy Investment.
COVID-19 incremental costs
We recognized costs for payments to third-party general contractors to maintain their workforce for expansion activities at the Obregon Brewery and recognized costs for incremental wages and hazard payments to employees.
Restructuring and other strategic business development costs
We recognized costs primarily in connection with costs to optimize our portfolio, gain efficiencies, reduce our cost structure within the Wine and Spirits segment.
Transaction, integration, and other acquisition-related costs
We recognized transaction, integration, and other acquisition-related costs in connection with our acquisitions, divestitures, and investments.
Other gains (losses)
We recognized other gains (losses) primarily in connection with a gain recognized on the sale of a vineyard (First Quarter 2021) and a gain on the remeasurement of our previously held equity interest in Nelson’s Green Brier to the acquisition-date fair value (First Quarter 2020).
Impairment of assets held for sale
We recognized an impairment of long-lived assets held for sale in connection with the Wine and Spirits Transactions and the Other Wine and Spirits Transactions.
Income (loss) from unconsolidated investments
We recognized an unrealized gain (loss) primarily from (i) equity losses from Canopy related to costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand (First Quarter 2021), (ii) the changes in fair value of our securities measured at fair value, and (iii) equity in earnings (losses) from Canopy’s results of operations and related activities. For additional information, refer to Notes 5 and 8 of the Financial Statements.
|
|
|
|
|
|
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
|
#WORTHREACHINGFOR I 41
|
FIRST QUARTER 2021 COMPARED TO FIRST QUARTER 2020
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
2021
|
|
First
Quarter
2020
|
|
Dollar
Change
|
|
Percent
Change
|
(in millions)
|
|
|
|
|
|
|
|
Beer
|
$
|
1,384.1
|
|
|
$
|
1,477.4
|
|
|
$
|
(93.3)
|
|
|
(6
|
%)
|
Wine and Spirits:
|
|
|
|
|
|
|
|
Wine
|
499.6
|
|
|
535.0
|
|
|
(35.4)
|
|
|
(7
|
%)
|
Spirits
|
79.7
|
|
|
84.8
|
|
|
(5.1)
|
|
|
(6
|
%)
|
Total Wine and Spirits
|
579.3
|
|
|
619.8
|
|
|
(40.5)
|
|
|
(7
|
%)
|
Canopy
|
80.3
|
|
|
70.7
|
|
|
9.6
|
|
|
14
|
%
|
Consolidation and Eliminations
|
(80.3)
|
|
|
(70.7)
|
|
|
(9.6)
|
|
|
(14
|
%)
|
|
|
|
|
|
|
|
|
Consolidated net sales
|
$
|
1,963.4
|
|
|
$
|
2,097.2
|
|
|
$
|
(133.8)
|
|
|
(6
|
%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beer segment
|
First
Quarter
2021
|
|
First
Quarter
2020
|
|
Dollar
Change
|
|
Percent
Change
|
(in millions, branded product, 24-pack, 12-ounce case equivalents)
|
|
|
|
|
|
|
|
Net sales
|
$
|
1,384.1
|
|
|
$
|
1,477.4
|
|
|
$
|
(93.3)
|
|
|
(6
|
%)
|
|
|
|
|
|
|
|
|
Shipment volume
|
|
|
|
|
|
|
|
Total
|
76.2
|
|
|
82.1
|
|
|
|
|
(7.2
|
%)
|
Organic (1)
|
76.2
|
|
|
81.3
|
|
|
|
|
(6.3
|
%)
|
|
|
|
|
|
|
|
|
Depletion volume (1) (2)
|
|
|
|
|
|
|
5.6
|
%
|
(1)Includes an adjustment to remove volume associated with the Ballast Point Divestiture for the period March 2, 2019, through May 31, 2019.
(2)Depletions represent distributor shipments of our respective branded products to retail customers, based on third-party data.
|
|
|
|
|
|
|
The decrease in Beer net sales is primarily due to $89.3 million of volume decline within our Mexican beer portfolio, which was impacted by COVID-19 containment measures negatively affecting on-premise sales and production activity at our major breweries in Mexico, and $28.6 million from the Ballast Point Divestiture. The decline was partially offset by an $18.7 million favorable impact from pricing in select markets within our Mexican beer portfolio. The depletion volume trend outpaced the shipment volume trend for First Quarter Fiscal 2021, driven by reduced production activity in response to COVID-19 containment measures. We expect shipment volume will begin to align with depletion volume during the third quarter of fiscal 2021 as we replenish distribution channels and COVID-19 containment measures allow for return to on-premise.
|
|
|
|
|
|
|
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
|
#WORTHREACHINGFOR I 42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wine and Spirits segment
|
First
Quarter
2021
|
|
First
Quarter
2020
|
|
Dollar
Change
|
|
Percent
Change
|
(in millions, branded product, 9-liter case equivalents)
|
|
|
|
|
|
|
|
Net sales
|
$
|
579.3
|
|
|
$
|
619.8
|
|
|
$
|
(40.5)
|
|
|
(7
|
%)
|
|
|
|
|
|
|
|
|
Shipment volume
|
|
|
|
|
|
|
|
Total
|
10.8
|
|
|
12.4
|
|
|
|
|
(12.9
|
%)
|
Organic (3)
|
10.8
|
|
|
11.9
|
|
|
|
|
(9.2
|
%)
|
|
|
|
|
|
|
|
|
U.S. Domestic
|
9.9
|
|
|
11.3
|
|
|
|
|
(12.4
|
%)
|
Organic U.S. Domestic (3)
|
9.9
|
|
|
10.8
|
|
|
|
|
(8.3
|
%)
|
|
|
|
|
|
|
|
|
U.S. Domestic Power Brands
|
5.0
|
|
|
4.5
|
|
|
|
|
11.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depletion volume (2)
|
|
|
|
|
|
|
|
U.S. Domestic (3)
|
|
|
|
|
|
|
(1.1
|
%)
|
U.S. Domestic Power Brands
|
|
|
|
|
|
|
4.7
|
%
|
(3)Includes an adjustment to remove volume associated with the Black Velvet Divestiture for the period March 1, 2019, through May 31, 2019.
|
|
|
|
|
|
|
The decrease in Wine and Spirits net sales is primarily due to a $49.7 million decline in branded wine and spirits volume and $18.7 million from the Black Velvet Divestiture, partially offset by $20.8 million from favorable pricing and $13.6 million increase from favorable product mix shift. The Wine and Spirits First Quarter 2021 results have been negatively impacted by (i) on-premise and retail tasting room closures as a result of COVID-19 containment measures and (ii) transition activities with distributors who are repositioning for ownership of brands upon closing the Wine and Spirits Transactions, partially offset by an increase in off-premise, including eCommerce. During Fiscal 2021 as these transition activities with distributors continue to occur we do not expect shipment volume to be aligned with depletion volume.
|
|
|
|
|
|
|
|
Canopy segment
Our ownership interest in Canopy allows us to exercise significant influence, but not control, and, therefore, we account for our investment in Canopy under the equity method. Amounts included 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 the Canopy results are included and subsequently eliminated in order to reconcile to our consolidated financial statements. See “Income (Loss) from Unconsolidated Investments” below for a discussion of Canopy’s net sales, gross profit (loss), selling, general, and administrative expenses, and operating income (loss).
|
Gross profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
2021
|
|
First
Quarter
2020
|
|
Dollar
Change
|
|
Percent
Change
|
(in millions)
|
|
|
|
|
|
|
|
Beer
|
$
|
769.7
|
|
|
$
|
819.5
|
|
|
$
|
(49.8)
|
|
|
(6
|
%)
|
Wine and Spirits
|
263.9
|
|
|
271.7
|
|
|
(7.8)
|
|
|
(3
|
%)
|
Canopy
|
(57.3)
|
|
|
11.3
|
|
|
(68.6)
|
|
|
NM
|
|
Consolidation and Eliminations
|
57.3
|
|
|
(11.3)
|
|
|
68.6
|
|
|
NM
|
|
Comparable Adjustments
|
(45.3)
|
|
|
(62.5)
|
|
|
17.2
|
|
|
28
|
%
|
Consolidated gross profit
|
$
|
988.3
|
|
|
$
|
1,028.7
|
|
|
$
|
(40.4)
|
|
|
(4
|
%)
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
|
#WORTHREACHINGFOR I 43
|
|
|
|
|
|
|
|
The decrease in Beer is primarily due to $50.4 million of volume decline and $7.0 million of higher cost of product sold, partially offset by $18.7 million favorable impact from pricing. The higher cost of product sold is largely related to COVID-19 containment measures and increased focus on the production of our fastest moving products and packaging sizes to meet forecasted demand. This drove a $9.8 million increase in operational costs primarily consisting of higher material costs, including glass, pallets, and cartons, and unfavorable fixed cost absorption.
|
|
|
|
|
|
|
|
The decrease in Wine and Spirits is largely due to $19.7 million of decline in branded wine and spirits volume, a decrease of $8.5 million in gross profit due to the Black Velvet Divestiture, $5.1 million of decline driven by retail tasting room closures as a result of COVID-19 containment measures, and $3.8 million higher cost of product sold, partially offset by $20.8 million from favorable pricing and $8.5 million of favorable product mix shift.
|
Gross profit as a percent of net sales increased to 50.3% for First Quarter 2021 compared with 49.1% for First Quarter 2020. This was largely due to (i) a favorable change of approximately 90 basis points in Comparable Adjustments and (ii) a favorable impact from Beer pricing in select markets, which contributed approximately 50 basis points of rate growth.
Selling, general, and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
2021
|
|
First
Quarter
2020
|
|
Dollar
Change
|
|
Percent
Change
|
(in millions)
|
|
|
|
|
|
|
|
Beer
|
$
|
191.9
|
|
|
$
|
238.9
|
|
|
$
|
(47.0)
|
|
|
(20
|
%)
|
Wine and Spirits
|
99.9
|
|
|
110.9
|
|
|
(11.0)
|
|
|
(10
|
%)
|
Corporate Operations and Other
|
50.5
|
|
|
43.7
|
|
|
6.8
|
|
|
16
|
%
|
Canopy
|
675.9
|
|
|
181.3
|
|
|
494.6
|
|
|
NM
|
|
Consolidation and Eliminations
|
(675.9)
|
|
|
(181.3)
|
|
|
(494.6)
|
|
|
NM
|
|
Comparable Adjustments
|
11.0
|
|
|
12.5
|
|
|
(1.5)
|
|
|
(12
|
%)
|
Consolidated selling, general, and administrative expenses
|
$
|
353.3
|
|
|
$
|
406.0
|
|
|
$
|
(52.7)
|
|
|
(13
|
%)
|
|
|
|
|
|
|
|
The decrease in Beer is primarily due to a decrease of $41.2 million in marketing spend that largely resulted from COVID-19 containment measures. Our planned investment to support the growth of our Mexican beer portfolio through media and event sponsorships was suspended and/or canceled in First Quarter 2021. The favorable marketing spend as a percentage of net sales recognized in First Quarter 2021 is expected to return to targeted assumptions during the remainder of Fiscal 2021.
|
|
|
|
|
|
|
|
The decrease in Wine and Spirits is primarily due to a decrease of $9.6 million in general and administrative expenses. The decrease in general and administrative expenses is largely driven by certain cost saving initiatives including decreased compensation and benefits and decreased travel and entertainment expenses resulting from COVID-19 containment measures.
|
|
|
|
|
|
|
|
The increase in Corporate Operations and Other is largely due to approximately $5 million of unfavorable foreign currency losses and an increase of approximately $3 million in charitable contributions, primarily driven by COVID-19 support efforts.
|
Selling, general, and administrative expenses as a percent of net sales decreased to 18.0% for First Quarter 2021 as compared with 19.4% for First Quarter 2020. The decrease is driven largely by Beer selling, general, and administrative expenses, largely related to decreased marketing spend, which results in approximately 150 basis points of rate decline.
|
|
|
|
|
|
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
|
#WORTHREACHINGFOR I 44
|
Operating income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
2021
|
|
First
Quarter
2020
|
|
Dollar
Change
|
|
Percent
Change
|
(in millions)
|
|
|
|
|
|
|
|
Beer
|
$
|
577.8
|
|
|
$
|
580.6
|
|
|
$
|
(2.8)
|
|
|
—
|
%
|
Wine and Spirits
|
164.0
|
|
|
160.8
|
|
|
3.2
|
|
|
2
|
%
|
Corporate Operations and Other
|
(50.5)
|
|
|
(43.7)
|
|
|
(6.8)
|
|
|
(16
|
%)
|
Canopy
|
(733.2)
|
|
|
(170.0)
|
|
|
(563.2)
|
|
|
NM
|
|
Consolidation and Eliminations
|
733.2
|
|
|
170.0
|
|
|
563.2
|
|
|
NM
|
|
Comparable Adjustments
|
(81.3)
|
|
|
(75.0)
|
|
|
(6.3)
|
|
|
(8
|
%)
|
Consolidated operating income (loss)
|
$
|
610.0
|
|
|
$
|
622.7
|
|
|
$
|
(12.7)
|
|
|
(2
|
%)
|
|
|
|
|
|
|
|
The decrease in Beer is primarily attributable to the net sales decline and higher cost of product sold, partially offset by decreased marketing spend and favorable pricing impact.
|
|
|
|
|
|
|
|
The decrease in Wine and Spirits was driven by the decline in branded wine and spirits volume and the Black Velvet Divestiture, partially offset by favorable pricing and decreased compensation and benefits.
|
|
|
|
|
|
|
|
As previously discussed, the Corporate Operations and Other increase in operating loss is due largely to unfavorable foreign currency losses and an increase in charitable contributions.
|
Income (loss) from unconsolidated investments
General
Loss from unconsolidated investments decreased to $571.2 million for First Quarter 2021 from $930.6 million for First Quarter 2020, a decrease of $359.4 million. This decrease is driven largely by an unrealized net loss from the changes in fair value of our securities measured at fair value of $197.3 million for First Quarter 2021, as compared to $827.5 million for First Quarter 2020. The First Quarter 2021 decrease in loss from unconsolidated investments was partially offset by $377.6 million of equity in losses from Canopy’s results of operations, and related activities in First Quarter 2021, as compared to $106.0 million for First Quarter 2020. The First Quarter 2021 equity losses included $235.4 million of costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand.
|
|
|
|
|
|
|
Canopy segment
Canopy net sales increased to $80.3 million for First Quarter 2021 from $70.7 million for First Quarter 2020. This increase of $9.6 million, or 14% is primarily attributable to an increase in medical sales, largely resulting from their April 2019 acquisition of C3, Europe’s largest cannabinoid-based pharmaceuticals company, partially offset by a decline in Canadian recreational sales. Canopy gross profit (loss) decreased to $(57.3) million for First Quarter 2021 from $11.3 million or First Quarter 2020. This decrease of $68.6 million is primarily driven by inventory write-downs related to its organizational and strategic review of their business and detailed evaluation of inventory. Canopy selling, general, and administrative expenses increased $494.6 million primarily from their decision to close greenhouse facilities as well as other changes related to its organizational and strategic review of their business. The combination of these factors were the main contributors to the decrease in operating income (loss) of $563.2 million.
|
Interest expense
Interest expense decreased to $100.0 million for First Quarter 2021 from $114.6 million for First Quarter 2020. This decrease of $14.6 million or 13% is predominantly due to lower average borrowings of approximately $1.2 billion primarily attributable to the partial repayment of financing entered into in connection with the November 2018 Canopy Transaction.
|
|
|
|
|
|
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
|
#WORTHREACHINGFOR I 45
|
(Provision for) benefit from income taxes
Our effective tax rate for First Quarter 2021 was 153.1% of tax expense as compared with 43.9% of tax benefit for First Quarter 2020. In comparison to prior year, our taxes were negatively impacted primarily by:
•valuation allowances on the net unrealized loss from the changes in fair value of our investments in Canopy and Canopy equity in earnings (losses);
•valuation allowances on existing capital loss carryforwards; and to a lesser extent,
•the recognition of tax expense resulting from legislative and governmental initiatives under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) in the First Quarter 2021.
For additional information, refer to Note 10 of the Financial Statements.
Net income (loss) attributable to CBI
Net income (loss) attributable to CBI decreased to $(177.9) million for First Quarter 2021 from $(245.4) million for First Quarter 2020. This decrease in net loss of $67.5 million is largely attributable to the decrease in loss from unconsolidated investments, largely offset by the First Quarter 2021 provision for income taxes as compared with a benefit from income taxes for First Quarter 2020.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
General
Our ability to consistently generate cash flow from operating activities is one of our most significant financial strengths. Our strong cash flows enable us to invest in our people and our brands, make appropriate capital investments, provide a quarterly cash dividend program, and from time-to-time, repurchase shares of our common stock, and make strategic investments and acquisitions that we believe will enhance stockholder value. Our primary source of liquidity has been cash flow from operating activities. Our principal use of cash in our operating activities is for purchasing and carrying inventories and carrying seasonal accounts receivable. Historically, we have used cash flow from operating activities to repay our short-term borrowings and fund capital expenditures. Additionally, we have a commercial paper program which we use to fund our short-term borrowing requirements and to maintain our access to the capital markets. We will continue to use our short-term borrowings, including our commercial paper program, to support our working capital requirements and capital expenditures. COVID-19 has negatively impacted the global economy and financial markets which could interfere with our ability to access sources of liquidity at favorable rates and generate operating cash flows. We are taking advantage of opportunities to temporarily defer some payments including certain excise and payroll taxes under the CARES Act.
We have maintained adequate liquidity to meet working capital requirements, fund capital expenditures, and repay scheduled principal and interest payments on debt. Absent deterioration of market conditions, we believe that cash flows from operating activities and financing activities, primarily short-term borrowings, will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments, and anticipated capital expenditure requirements for both our short-term and long-term capital needs.
We plan to sell a portion of our wine and spirits business. We expect to use the net cash proceeds from closing these transactions primarily to reduce outstanding borrowings.
On May 1, 2020, we exercised the November 2017 Canopy Warrants at an exercise price of C$12.98 per warrant share for C$245.0 million, or $173.9 million. The May 2020 Canopy Transaction was funded with cash from operations.
|
|
|
|
|
|
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
|
#WORTHREACHINGFOR I 46
|
Cash flows
|
|
|
|
|
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First
Quarter
2021
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First
Quarter
2020
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Dollar
Change
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(in millions)
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Net cash provided by (used in):
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Operating activities
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$
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686.5
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$
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593.1
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$
|
93.4
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Investing activities
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(299.1)
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|
(213.5)
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|
(85.6)
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|
Financing activities
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(169.0)
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(374.4)
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|
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205.4
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|
Effect of exchange rate changes on cash and cash equivalents
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3.0
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(0.1)
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|
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3.1
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|
Net increase (decrease) in cash and cash equivalents
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$
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221.4
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$
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5.1
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$
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216.3
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Operating activities
The increase in net cash provided by operating activities for First Quarter 2021 is largely due to benefits from reduced inventory levels for the Beer segment and decreased accounts receivable related to net sales decline for the Beer and Wine and Spirits segments all largely resulting from COVID-19 containment measures. The increase in net cash provided by operating activities was partially offset by higher income tax payments in First Quarter 2021 primarily due to the receipt of a federal tax refund in First Quarter 2020.
Investing activities
Net cash used in investing activities for First Quarter 2021 increased primarily due to the $173.9 million exercise of the November 2017 Canopy Warrants in May 2020. The increase in net cash used in investing activities was partially offset by proceeds of $41.1 million from the March 2020 Ballast Point Divestiture and lower First Quarter 2021 business acquisition activity of $36.2 million.
Financing activities
The decrease in net cash provided by (used in) financing activities consists of:
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First
Quarter
2021
|
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First
Quarter
2020
|
|
Dollar
Change
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(in millions)
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|
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Net proceeds from (payments of) debt, current and long-term, and related activities
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$
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(21.9)
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|
$
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(227.9)
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$
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206.0
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Dividends paid
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(143.9)
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(143.0)
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(0.9)
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Net cash provided by stock-based compensation activities
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(3.2)
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(3.5)
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0.3
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Net cash provided by (used in) financing activities
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$
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(169.0)
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$
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(374.4)
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$
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205.4
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 47
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Debt
Total debt outstanding as of May 31, 2020, amounted to $12,174.0 million, a decrease of $10.6 million from February 29, 2020. This decrease consisted of:
Bank facilities
In March 2020, we entered into the 2020 Restatement Agreement that amended and restated the 2018 Credit Agreement. The 2020 Restatement Agreement resulted in (i) the removal of the subsidiary guarantees and termination of the guarantee agreement, (ii) the inclusion of the parent guaranty provisions in connection with the termination of the guarantee agreement, (iii) the removal of certain provisions pertaining to term loans since no term loans are outstanding, and (iv) the revision of the LIBOR successor rate provisions to permit the use of rates based on the SOFR administered by the Federal Reserve Bank of New York.
In March 2020, we entered into the Term Loan Restatement Agreement and the 2020 Term Loan Restatement Agreement, that amended and restated the Term Credit Agreement and the 2019 Term Credit Agreement, respectively. The Term Loan Restatement Agreement and the 2020 Term Loan Restatement Agreement each resulted in (i) the removal of the subsidiary guarantees and termination of the respective guarantee agreements and (ii) the revision of the LIBOR successor rate provisions in each to permit the use of rates based on SOFR.
In July 2020, we prepaid the remaining outstanding borrowings of $317.5 million on our Five-Year Term Facility and made an additional $25.0 million partial prepayment on the Three-Year Term Facility, both under our 2020 Term Credit Agreement.
Senior notes
In April 2020, we issued the April 2020 Senior Notes. Proceeds from this offering, net of discount and debt issuance costs, of $1,183.4 million were primarily used for the repayment of our 2.25% November 2017 Senior Notes and the repayment of a portion of the Three-Year Term Facility outstanding obligations under our 2020 Term Credit Agreement.
General
The majority of our outstanding borrowings as of May 31, 2020, consisted of fixed-rate senior unsecured notes, with maturities ranging from calendar 2021 to calendar 2050, and variable-rate senior unsecured term loan facilities under our Term Credit Agreement and 2019 Term Credit Agreement, with maturities ranging from calendar 2021 to calendar 2024.
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 48
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Additionally, we have a commercial paper program which provides for the issuance of up to an aggregate principal amount of $2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 2020 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility under our 2020 Credit Agreement.
We do not have purchase commitments from buyers for our commercial paper and, therefore, our ability to issue commercial paper is subject to market demand. If the commercial paper market is not available to us for any reason when outstanding commercial paper borrowings mature, we will utilize unused commitments under our revolving credit facility under our 2020 Credit Agreement to repay commercial paper borrowings. We do not expect that fluctuations in demand for commercial paper will affect our liquidity given our borrowing capacity available under our revolving credit facility under our 2020 Credit Agreement.
We had the following borrowing capacity available under our 2020 Credit Agreement:
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Remaining Borrowing Capacity
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May 31,
2020
|
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June 26,
2020
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(in millions)
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Revolving Credit Facility (1)
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$
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1,988.2
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$
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1,988.2
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(1)Net of outstanding revolving credit facility borrowings and outstanding letters of credit under our 2020 Credit Agreement and outstanding borrowings under our commercial paper program.
The financial institutions participating in our 2020 Credit Agreement have complied with prior funding requests and we believe such financial institutions will comply with any future funding requests. However, there can be no assurances that any particular financial institution will continue to do so.
We and our subsidiaries are subject to covenants that are contained in our 2020 Credit Agreement, including those restricting the incurrence of additional 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, both as defined in our 2020 Credit Agreement. As of May 31, 2020, under our 2020 Credit Agreement, the minimum interest coverage ratio was 2.5x and the maximum net leverage ratio was 4.5x.
The representations, warranties, covenants, and events of default set forth in our 2020 Term Credit Agreement and our March 2020 Term Credit Agreement are substantially similar to those set forth in our 2020 Credit Agreement.
Our indentures relating to our outstanding senior notes contain certain covenants, including, but not limited to: (i) a limitation on liens on certain assets, (ii) a limitation on certain sale and leaseback transactions, and (iii) restrictions on mergers, consolidations, and the transfer of all or substantially all of our assets to another person.
As of May 31, 2020, we were in compliance with our covenants under our 2020 Credit Agreement, our 2020 Term Credit Agreement, our March 2020 Term Credit Agreement, and our indentures, and have met all debt payment obligations.
For a complete discussion and presentation of all borrowings and available sources of borrowing, refer to Note 13 of our consolidated financial statements included in our 2020 Annual Report and Note 9 of the Financial Statements.
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 49
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Common stock dividends
On June 30, 2020, our Board of Directors declared a quarterly cash dividend of $0.75 per share of Class A Common Stock, $0.68 per share of Class B Convertible Common Stock, and $0.68 per share of Class 1 Common Stock payable on August 25, 2020, to stockholders of record of each class on August 11, 2020.
We currently expect to continue to pay a regular quarterly cash dividend to stockholders of our common stock in the future, but such payments are subject to approval of our Board of Directors and are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A “Risk Factors” of our 2020 Annual Report.
Share Repurchase Program
Our Board of Directors have authorized the repurchase of up to $3.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2018 Authorization. Shares repurchased under this authorization have become treasury shares. No shares were repurchased during First Quarter 2021.
As of May 31, 2020, total shares repurchased under this authorization are as follows:
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Class A Common Shares
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Repurchase Authorization
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Dollar Value of Shares Repurchased
|
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Number of Shares Repurchased
|
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(in millions, except share data)
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2018 Authorization
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$
|
3,000.0
|
|
|
$
|
1,045.9
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|
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4,897,605
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Share repurchases under the 2018 Authorization may be accomplished at management’s discretion from time to time based on market conditions, our cash and debt position, and other factors as determined by management. Shares may be repurchased through open market or privately negotiated transactions. We may fund future share repurchases with cash generated from operations and/or proceeds from borrowings. Any repurchased shares will become treasury shares.
We currently expect to continue to repurchase shares in the future, but such repurchases are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A “Risk Factors” of our 2020 Annual Report.
For additional information, refer to Note 18 of our consolidated financial statements included in our 2020 Annual Report and Note 11 of the Financial Statements.
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 50
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Capital expenditures
Management reviews the capital expenditure program periodically and modifies it as required to meet current business needs. We do not believe it is prudent at this time to provide capital expenditure guidance for Fiscal 2021 as we are not able to estimate the long-term impact of COVID-19, including the demand for our products and the impact on the timeframes for completion of our expansion, construction, and optimization projects in Mexico. To the extent possible, we plan to continue capital expenditures during Fiscal 2021 for the Beer segment associated primarily with our Obregon Brewery optimization and expansion.
In fiscal 2017, we began construction of the Mexicali Brewery. In March 2020, a public consultation on the construction of our Mexicali Brewery was held. We have initiated early stage discussions with government officials in Mexico regarding next steps for our brewery construction project and options elsewhere in the country following the negative result of the public consultation. These discussions have been positive and we will continue working with government officials to mutually agree upon a path forward. At this time, we have paused all construction activities at our Mexicali Brewery. As of May 31, 2020, we capitalized approximately $740 million of construction in progress related to the Mexicali Brewery. Future impairments may result based upon our plans for these assets for any capitalized amounts that are not deemed recoverable.
Guidance
Accounting guidance
Accounting guidance adopted for First Quarter 2021 did not have a material impact on our consolidated
financial statements.
Disclosure guidance
In May 2020, the Securities and Exchange Commission (“SEC”) issued a final rule that amends business acquisition and disposition financial disclosure requirements. Among other modifications, the amendments change certain criteria in the significance tests used to determine audited financial statements and related pro forma financial information requirements, the periods audited financial statements must cover, and the form and content of the pro forma financial information. We are required to comply with this rule for our annual and interim periods beginning March 1, 2021, however early compliance is permitted. We are currently assessing the impact of this rule on our SEC filings.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements, including without limitation:
•The statements regarding the current global COVID-19 pandemic.
•The statements under Part I - Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding:
◦our business strategy, future operations, future financial position, future net sales and expected volume trends, prospects, plans, and objectives of management;
◦information concerning expected or potential actions of third parties, including potential changes to international trade agreements, tariffs, taxes, and other governmental rules and regulations;
◦information concerning the future expected balance of supply and demand for our products;
◦timing and source of funds for operating activities and New November 2018 Canopy Warrant exercises, if any;
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 51
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◦the manner, timing, and duration of the share repurchase program and source of funds for share repurchases; and
◦the amount and timing of future dividends.
•The statements regarding our beer expansion, construction, and optimization activities, including anticipated costs and timeframes for completion, discussions with government officials in Mexico, and potential future impairment of non-recoverable brewery construction assets.
•The statements regarding:
◦the volatility of the fair value of our investments in Canopy measured at fair value;
◦our activities surrounding our investments in Canopy;
◦our targeted leverage ratio;
◦the New November 2018 Canopy Warrants; and
◦our future ownership level in Canopy and our future share of Canopy’s reported earnings and losses.
•The statements regarding the Wine and Spirits Transactions and the Other Wine and Spirits Transactions, including expected form and amount of consideration, amount and use of expected proceeds, estimated remaining costs, and any expected restructuring charge.
•The statements regarding Canopy’s transaction with Acreage.
When used in this Quarterly Report on Form 10-Q, the words “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. In addition to the risks and uncertainties of ordinary business operations and conditions in the general economy and markets in which we compete, our forward-looking statements contained in this Quarterly Report on Form 10-Q are also subject to the risk and uncertainty that:
•the duration and impact of the COVID-19 pandemic, including but not limited to the closure of non-essential businesses, which may include our manufacturing facilities, and other associated governmental containment actions, may vary from our current expectations;
•the actual balance of supply and demand for our products will vary from current expectations due to, among other reasons, actual raw material supply, actual shipments to distributors, and actual consumer demand;
•the actual demand, net sales, and volume trends for our products will vary from current expectations due to, among other reasons, actual shipments to distributors and actual consumer demand;
•the amount, timing, and source of funds for any share repurchases or Canopy warrant exercises, if any, may vary due to market conditions; our cash and debt position; the impact of the beer operations expansion activities; the impact of our investments in Canopy; any future exercise of the New November 2018 Canopy Warrants; the expected impacts of the Wine and Spirits Transactions and the Other Wine and Spirits Transactions; and other factors as determined by management from time to time;
•the amount and timing of future dividends may differ from our current expectations if our ability to use cash flow to fund dividends is affected by unanticipated increases in total net debt, we are unable to generate cash flow at anticipated levels, or we fail to generate expected earnings;
•the fair value of our investments in Canopy may vary due to market and economic conditions in Canopy’s markets and business locations;
•the accuracy of management’s projections relating to the Canopy investment may vary from management’s current expectations due to Canopy’s actual results of operations and market and economic conditions;
•the timeframe and actual costs associated with the beer operations expansion activities and amount of impairment, if any, for non-recoverable brewery construction assets in Mexico may vary from management’s current expectations due to market conditions, our cash and debt position, receipt of required regulatory approvals by the expected dates and on the expected terms, results of discussions
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 52
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with government officials in Mexico, actual amount of non-recoverable brewery construction assets, and other factors as determined by management;
•any consummation of the Wine and Spirits Transactions or the Other Wine and Spirits Transactions and any actual date of consummation of any of them may vary from our current expectations; the actual restructuring charge, if any, will vary based on management’s final plans; and the amount of additional loss, if any, on the future write-down of assets held for sale will vary based on the form of consideration, amount of consideration actually received, and future brand performance;
•any impact of U.S. federal laws on the transaction between Acreage and Canopy or upon the implementation of that transaction, or the impact of the Acreage Transaction upon our future ownership level in Canopy or our future share of Canopy’s reported earnings and losses, may vary from management’s current expectations; and
•our targeted leverage ratio may vary from management’s current expectations due to market conditions, our ability to generate cash flow at expected levels and our ability to generate expected earnings.
The Wine and Spirits Transactions are subject to the satisfaction of certain closing conditions. The Nobilo Transaction is also conditioned on completion of the Further Revised Wine and Spirits Transaction. For additional information about risks and uncertainties that could adversely affect our forward looking statements, please refer to Item 1A. “Risk Factors” of our 2020 Annual Report.
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Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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#WORTHREACHINGFOR I 53
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