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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 May 31, 2020
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
STZ-20200531_G1.JPG
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware 16-0716709
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
207 High Point Drive, Building 100, Victor, New York 14564
(Address of principal executive offices) (Zip code)
(585) 678-7100
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Trading Symbol(s) Name of Each Exchange on Which Registered
Class A Common Stock STZ New York Stock Exchange
Class B Common Stock STZ.B New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ☒  Yes    ☐  No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ☒  Yes    ☐  No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  ☐  No  ☒
There were 168,020,436 shares of Class A Common Stock, 23,285,074 shares of Class B Common Stock, and 1,684,628 shares of Class 1 Common Stock outstanding as of June 26, 2020.


TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
1
Consolidated Statements of Comprehensive Income (Loss)
2
Consolidated Statements of Changes in Stockholders’ Equity
3
Consolidated Statements of Cash Flows
4
Notes to Consolidated Financial Statements
1. Basis of Presentation
6
2. Inventories
6
3. Acquisitions, Divestitures, and Business Transformation
6
4. Derivative Instruments
5. Fair Value of Financial Instruments
6. Goodwill
7. Intangible Assets
8. Equity Method Investments
9. Borrowings
10. Income Taxes
11. Stockholders' Equity
12. Net Income (Loss) Per Common Share Attributable to CBI
13. Comprehensive Income (Loss) Attributable to CBI
14. 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 4. Mine Safety Disclosures NA
Item 6. Exhibits
INDEX TO EXHIBITS
SIGNATURES
NA = Not Applicable



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

Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. Unless otherwise defined herein, refer to the Notes to Consolidated Financial Statements under Item 1. of this Quarterly Report on Form 10-Q for the definition of capitalized terms used herein. All references to “Fiscal 2020” refer to our fiscal year ended February 29, 2020. All references to “Fiscal 2021” refer to our fiscal year ending February 28, 2021. All references to “$” are to U.S. dollars and all references to “C$” are to Canadian dollars.



FINANCIAL STATEMENTS
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
May 31,
2020
February 29,
2020
ASSETS
Current assets:
Cash and cash equivalents $ 302.8    $ 81.4   
Accounts receivable 700.5    864.8   
Inventories 1,332.6    1,373.6   
Prepaid expenses and other 470.1    535.8   
Assets held for sale - current 590.2    628.5   
Total current assets 3,396.2    3,484.1   
Property, plant, and equipment 5,098.2    5,333.0   
Goodwill 7,684.9    7,757.1   
Intangible assets 2,735.4    2,718.9   
Equity method investments 2,885.7    3,093.9   
Securities measured at fair value 809.5    1,117.1   
Deferred income taxes 2,599.5    2,656.3   
Assets held for sale 376.4    552.1   
Other assets 564.0    610.7   
Total assets $ 26,149.8    $ 27,323.2   
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Short-term borrowings $ —    $ 238.9   
Current maturities of long-term debt 534.7    734.9   
Accounts payable 505.5    557.6   
Other accrued expenses and liabilities 712.2    780.4   
Total current liabilities 1,752.4    2,311.8   
Long-term debt, less current maturities 11,639.3    11,210.8   
Deferred income taxes and other liabilities 1,380.5    1,326.3   
Total liabilities 14,772.2    14,848.9   
Commitments and contingencies
CBI stockholders’ equity:
Class A Common Stock, $0.01 par value – Authorized, 322,000,000 shares; Issued, 186,093,277 shares and 186,090,745 shares, respectively
1.9    1.9   
Class B Convertible Common Stock, $0.01 par value – Authorized, 30,000,000 shares; Issued, 28,297,674 shares and 28,300,206 shares, respectively
0.3    0.3   
Additional paid-in capital 1,523.3    1,514.6   
Retained earnings 13,374.1    13,695.3   
Accumulated other comprehensive income (loss) (1,022.4)   (266.3)  
13,877.2    14,945.8   
Less: Treasury stock –
Class A Common Stock, at cost, 18,118,879 shares and 18,256,826 shares, respectively
(2,809.0)   (2,811.8)  
Class B Convertible Common Stock, at cost, 5,005,800 shares
(2.2)   (2.2)  
(2,811.2)   (2,814.0)  
Total CBI stockholders’ equity 11,066.0    12,131.8   
Noncontrolling interests 311.6    342.5   
Total stockholders’ equity 11,377.6    12,474.3   
Total liabilities and stockholders’ equity $ 26,149.8    $ 27,323.2   
The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
(unaudited)
For the Three Months
Ended May 31,
2020 2019
Sales $ 2,131.7    $ 2,282.5   
Excise taxes (168.3)   (185.3)  
Net sales 1,963.4    2,097.2   
Cost of product sold (975.1)   (1,068.5)  
Gross profit 988.3    1,028.7   
Selling, general, and administrative expenses (353.3)   (406.0)  
Impairment of assets held for sale (25.0)   —   
Operating income (loss) 610.0    622.7   
Income (loss) from unconsolidated investments (571.2)   (930.6)  
Interest expense (100.0)   (114.6)  
Loss on extinguishment of debt (7.0)   —   
Income (loss) before income taxes (68.2)   (422.5)  
(Provision for) benefit from income taxes (104.4)   185.4   
Net income (loss) (172.6)   (237.1)  
Net income (loss) attributable to noncontrolling interests (5.3)   (8.3)  
Net income (loss) attributable to CBI $ (177.9)   $ (245.4)  
Comprehensive income (loss) $ (964.9)   $ (239.8)  
Comprehensive (income) loss attributable to noncontrolling interests 30.9    (7.2)  
Comprehensive income (loss) attributable to CBI $ (934.0)   $ (247.0)  
Net income (loss) per common share attributable to CBI:
Basic and Diluted – Class A Common Stock $ (0.94)   $ (1.30)  
Basic and Diluted – Class B Convertible Common Stock $ (0.86)   $ (1.19)  
Weighted average common shares outstanding:
Basic and Diluted – Class A Common Stock 169.604    168.118   
Basic and Diluted – Class B Convertible Common Stock 23.293    23.317   
Cash dividends declared per common share:
Class A Common Stock $ 0.75    $ 0.75   
Class B Convertible Common Stock $ 0.68    $ 0.68   

The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
Common Stock Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Non-controlling
Interests
Total
Class A Class B
Balance at February 29, 2020 $ 1.9    $ 0.3    $ 1,514.6    $ 13,695.3    $ (266.3)   $ (2,814.0)   $ 342.5    $ 12,474.3   
Comprehensive income (loss):
Net income (loss) —    —    —    (177.9)   —    —    5.3    (172.6)  
Other comprehensive income (loss), net of income tax effect —    —    —    —    (756.1)   —    (36.2)   (792.3)  
Comprehensive income (loss) (964.9)  
Dividends declared —    —    —    (143.3)   —    —    —    (143.3)  
Shares issued under equity compensation plans —    —    (6.0)   —    —    2.8    —    (3.2)  
Stock-based compensation —    —    14.7    —    —    —    —    14.7   
Balance at May 31, 2020 $ 1.9    $ 0.3    $ 1,523.3    $ 13,374.1    $ (1,022.4)   $ (2,811.2)   $ 311.6    $ 11,377.6   
Balance at February 28, 2019 $ 1.9    $ 0.3    $ 1,410.8    $ 14,276.2    $ (353.9)   $ (2,784.3)   $ 286.2    $ 12,837.2   
Comprehensive income (loss):
Net income (loss) —    —    —    (245.4)   —    —    8.3    (237.1)  
Other comprehensive income (loss), net of income tax effect —    —    —    —    (1.6)   —    (1.1)   (2.7)  
Comprehensive income (loss) (239.8)  
Dividends declared —    —    —    (141.9)   —    —    —    (141.9)  
Initial recognition of non-controlling interest —    —    —    —    —    —    20.2    20.2   
Shares issued under equity compensation plans —    —    (9.3)   —    —    6.3    —    (3.0)  
Stock-based compensation —    —    15.5    —    —    —    —    15.5   
Balance at May 31, 2019 $ 1.9    $ 0.3    $ 1,417.0    $ 13,888.9    $ (355.5)   $ (2,778.0)   $ 313.6    $ 12,488.2   

The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
For the Three Months
Ended May 31,
2020 2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (172.6)   $ (237.1)  
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Unrealized net (gain) loss on securities measured at fair value 197.3    827.5   
Deferred tax provision (benefit) 98.9    (245.4)  
Depreciation 71.0    86.6   
Stock-based compensation 14.6    15.5   
Equity in (earnings) losses of equity method investees and related activities, net of distributed earnings 373.9    91.1   
Noncash lease expense 20.9    22.8   
Impairment of assets held for sale 25.0    —   
Loss on inventory and related contracts 24.3    44.5   
Loss on settlement of treasury lock contracts (29.3)   —   
Change in operating assets and liabilities, net of effects from purchases of businesses:
Accounts receivable 167.0    58.6   
Inventories 48.6    (50.3)  
Prepaid expenses and other current assets 40.5    (8.7)  
Accounts payable (28.4)   (22.3)  
Deferred revenue 34.4    53.1   
Other accrued expenses and liabilities (155.5)   (77.4)  
Other (44.1)   34.6   
Total adjustments 859.1    830.2   
Net cash provided by (used in) operating activities 686.5    593.1   
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant, and equipment (144.2)   (155.7)  
Purchases of businesses, net of cash acquired —    (36.2)  
Investments in equity method investees and securities (213.4)   (20.0)  
Proceeds from sales of assets 17.7    0.3   
Proceeds from sale of business 41.1    —   
Other investing activities (0.3)   (1.9)  
Net cash provided by (used in) investing activities (299.1)   (213.5)  
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
For the Three Months
Ended May 31,
2020 2019
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long-term debt 1,194.6    —   
Principal payments of long-term debt (959.5)   (22.9)  
Net proceeds from (repayments of) short-term borrowings (238.9)   (205.0)  
Dividends paid (143.9)   (143.0)  
Proceeds from shares issued under equity compensation plans 4.4    10.4   
Payments of minimum tax withholdings on stock-based payment awards (7.6)   (13.9)  
Payments of debt issuance, debt extinguishment, and other financing costs (18.1)   —   
Net cash provided by (used in) financing activities (169.0)   (374.4)  
Effect of exchange rate changes on cash and cash equivalents 3.0    (0.1)  
Net increase (decrease) in cash and cash equivalents 221.4    5.1   
Cash and cash equivalents, beginning of period 81.4    93.6   
Cash and cash equivalents, end of period $ 302.8    $ 98.7   
Supplemental disclosures of noncash investing and financing activities
Additions to property, plant, and equipment $ 64.5    $ 35.6   

The accompanying notes are an integral part of these statements.
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
MAY 31, 2020
(unaudited)

1. BASIS OF PRESENTATION

Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. We have prepared the consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in our opinion, all adjustments necessary to present fairly our financial information. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020 (the “2020 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:
May 31,
2020
February 29,
2020
(in millions)
Raw materials and supplies $ 161.5    $ 171.7   
In-process inventories 775.0    814.7   
Finished case goods 396.1    387.2   
$ 1,332.6    $ 1,373.6   

The inventories balance at May 31, 2020, and February 29, 2020, exclude amounts reclassified to assets held for sale (see Note 3).

Related party transactions and arrangements
We have an equally-owned glass production plant joint venture with Owens-Illinois. We have entered into various contractual arrangements with affiliates of Owens-Illinois primarily for the purchase of glass bottles used largely in our imported beer portfolio. Amounts purchased under these arrangements were $9.1 million and $88.5 million for the three months ended May 31, 2020, and May 31, 2019, respectively. The decrease in amounts purchased for the three months ended May 31, 2020, was largely driven by reduced production activity at our Mexican breweries in response to COVID-19 containment measures.

3. ACQUISITIONS, DIVESTITURES, AND BUSINESS TRANSFORMATION

Acquisitions
Nelson’s Green Brier
In May 2019, we increased our ownership interest in Nelson’s Green Brier Distillery, LLC (“Nelson’s Green Brier”) to 75%, resulting in consolidation of the business and recognition of a 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.

We recognized a gain of $11.8 million for the three months ended May 31, 2019, related to the remeasurement of our previously held 20% equity interest in Nelson’s Green Brier to the acquisition-date fair
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
value. This gain is included in selling, general, and administrative expenses within our consolidated results of operations.

Divestitures
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 (the “Ballast Point Divestiture”). We received cash proceeds of $41.1 million which were primarily utilized to reduce outstanding borrowings.

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 (the “Black Velvet Divestiture”). We received cash proceeds of $269.7 million, subject to estimated working capital adjustments. The cash proceeds were utilized to partially repay the 2.00% November 2017 senior notes. In total, we have recognized a $73.5 million net gain associated with the Black Velvet Divestiture, with a $74.1 million net gain recognized for the year ended February 29, 2020, and a $0.6 million net loss recognized for three months ended May 31, 2020. The following table summarizes the net gain recognized in connection with this divestiture:

(in millions)
Cash received from buyer $ 269.7   
Net assets sold (213.3)  
AOCI reclassification adjustments, primarily foreign currency translation 20.9   
Direct costs to sell (3.8)  
Gain on sale of business $ 73.5   

Business transformation and other updates
We have committed to a business transformation strategy which aligns our portfolio with consumer-led premiumization trends and growing segments of the Wine and Spirits and Beer markets.

Original Wine and Spirits Transaction
In April 2019, we entered into a definitive agreement to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices, and facilities (the “Original Wine and Spirits Transaction”).

Wine and Spirits Transactions
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 U.S. Federal Trade Commission (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”). The Further Revised Wine and Spirits Transaction is 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 and liabilities for $130 million (the “Nobilo Wine Transaction”). 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 Further Revised Wine and Spirits Transaction and
Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the Nobilo Wine Transaction (collectively, the “Wine and Spirits Transactions”) primarily to reduce outstanding borrowings.

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 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 (the “Other Wine and Spirits Transactions”). See “Subsequent Events - Paul Masson Transaction and Concentrate Business Transaction” below.

Assets held for sale
Primarily in contemplation of the Wine and Spirits segment transactions noted above, certain net assets met the held for sale criteria as of May 31, 2020, and February 29, 2020. For the three months ended May 31, 2020, long-lived asset impairments of $25.0 million were recognized. No long-lived asset impairment was recognized for the three months ended May 31, 2019. For additional information refer to Note 5.

The carrying value of assets held for sale consist of the following:
May 31,
2020
February 29, 2020
Wine and Spirits
Beer (1)
Wine and Spirits Consolidated
(in millions)
Assets
Accounts receivable $ —    $ 2.4    $ —    $ 2.4   
Inventories 570.2    13.7    576.9    590.6   
Prepaid expenses and other 20.0    2.8    32.7    35.5   
Assets held for sale - current 590.2    18.9    609.6    628.5   
Property, plant, and equipment 115.9    55.9    172.6    228.5   
Goodwill 290.6    4.7    304.3    309.0   
Intangible assets 375.2    28.2    384.0    412.2   
Equity method investments 0.4    —    1.0    1.0   
Other assets 26.3    24.8    26.3    51.1   
Less: Reserve for assets held for sale (432.0)   (42.7)   (407.0)   (449.7)  
Assets held for sale 376.4    70.9    481.2    552.1   
Liabilities
Accounts payable 6.9    0.2    0.6    0.8   
Other accrued expenses and liabilities 13.5    11.0    17.8    28.8   
Deferred income taxes and other liabilities —    33.3    —    33.3   
Liabilities held for sale (2)
20.4    44.5    18.4    62.9   
Net assets held for sale $ 946.2    $ 45.3    $ 1,072.4    $ 1,117.7   
(1)In March 2020, we completed the Ballast Point Divestiture.
(2)Liabilities held for sale are included in the Consolidated Balance Sheets at May 31, 2020, and February 29, 2020, within the respective liability line items noted above.

Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Wine and spirits optimization
We recognized charges in connection with our business transformation strategy which aligns our portfolio with consumer-led premiumization trends within the Wine and Spirits segment as follows:
For the Three Months
Ended May 31,
Results of Operations Location 2020 2019
(in millions)
Loss on inventory write-downs Cost of product sold $ 4.1    $ 27.2   
Contract termination costs Cost of product sold 16.9    15.8   
Employee termination costs Selling, general, and administrative expenses (1.3)   11.9   
Other costs Selling, general, and administrative expenses —    6.3   
Impairment of long-lived assets Impairment of assets held for sale 25.0    —   
$ 44.7    $ 61.2   

Mexicali Brewery
In fiscal 2017, we began construction of a new, state-of-the-art brewery located in Mexicali, Baja California, Mexico (the “Mexicali Brewery”). In March 2020, a public consultation was held on the construction of the Mexicali Brewery. 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 Mexicali Brewery construction activities. In the medium-term, we have ample capacity, based on current growth forecasts and production capabilities, under normal operating conditions, at the Nava and Obregon breweries, to meet consumer needs. As of May 31, 2020, we capitalized approximately $740 million of construction in progress and are committed to an estimated additional $200 million of expenditures. We are evaluating a variety of alternatives for the Mexicali Brewery and related assets. No conclusion to abandon the property or to sell the assets has been reached, therefore, as of May 31, 2020, no impairment has been recognized. Future impairments may result based upon our plans for these assets for any capitalized amounts that are not deemed recoverable.

Subsequent events
Empathy Wines
In June 2020, we acquired the Empathy Wines business, including the acquisition of a digitally-native wine brand (“Empathy Wines”) which strengthens our position in the direct-to-consumer and eCommerce markets. This transaction primarily included the acquisition of goodwill, trademarks, and inventory, plus an earn-out over five years based on performance. 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 a definitive agreement to sell the Paul Masson Grande Amber Brandy brand, related inventory and interests in certain contracts with an estimated aggregate purchase price of approximately $255 million, subject to certain purchase price and closing adjustments (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 a definitive agreement to sell certain brands used in our concentrates and high-color concentrate business, and certain intellectual property, inventory, goodwill, interests in certain contracts, assets, and liabilities of our concentrates and high-color concentrate business ( 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.

Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 above.

4. 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 2020 Annual Report and have not changed significantly for the three months ended May 31, 2020.

We have investments in certain equity securities and other rights which provide us with the option to purchase an additional ownership interest in the equity securities of Canopy (see Note 8). These investments are included in securities measured at fair value and are accounted for at fair value, with the net gain (loss) from the changes in fair value of these investments recognized in income (loss) from unconsolidated investments (see Note 5).

The aggregate notional value of outstanding derivative instruments is as follows:
May 31,
2020
February 29,
2020
(in millions)
Derivative instruments designated as hedging instruments
Foreign currency contracts $ 1,668.4    $ 1,831.0   
Interest rate swap contracts $ 375.0    $ 375.0   
Treasury lock contracts $ —    $ 300.0   
Derivative instruments not designated as hedging instruments
Foreign currency contracts $ 323.0    $ 1,180.2   
Commodity derivative contracts $ 268.3    $ 282.8   

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 May 31, 2020, the estimated fair value of derivative instruments in a net liability position due to counterparties was $158.8 million. If we were required to settle the net liability position under these derivative instruments on May 31, 2020, we would have had sufficient available liquidity on hand to satisfy this obligation.

Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Results of period derivative activity
The estimated fair value and location of our derivative instruments on our balance sheets are as follows (see Note 5):
Assets Liabilities
May 31,
2020
February 29,
2020
May 31,
2020
February 29,
2020
(in millions)
Derivative instruments designated as hedging instruments
Foreign currency contracts:
Prepaid expenses and other $ 1.2    $ 47.8    Other accrued expenses and liabilities $ 50.8    $ 13.0   
Other assets $ 5.4    $ 39.5    Deferred income taxes and other liabilities $ 58.1    $ 7.1   
Interest rate swap contracts:
Prepaid expenses and other $ —    $ —    Other accrued expenses and liabilities $ 0.6    $ 0.8   
Treasury lock contracts:
Prepaid expenses and other $ —    $ —    Other accrued expenses and liabilities $ —    $ 7.6   
Derivative instruments not designated as hedging instruments
Foreign currency contracts:
Prepaid expenses and other $ 4.6    $ 9.0    Other accrued expenses and liabilities $ 4.3    $ 14.3   
Commodity derivative contracts:
Prepaid expenses and other $ 0.9    $ 0.5    Other accrued expenses and liabilities $ 35.8    $ 25.4   
Other assets $ 0.7    $ 0.1    Deferred income taxes and other liabilities $ 22.0    $ 15.5   

The principal effect of our derivative instruments designated in cash flow hedging relationships on our results of operations, as well as Other Comprehensive Income (Loss) (“OCI”), net of income tax effect, is as follows:
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
Net
Gain (Loss)
Recognized
in OCI
Location of Net Gain (Loss)
Reclassified from
AOCI to Income (Loss)
Net
Gain (Loss)
Reclassified
from AOCI
to Income (Loss)
(in millions)
For the Three Months Ended May 31, 2020
Foreign currency contracts $ (193.4)   Sales $ 0.4   
Cost of product sold (8.5)  
Interest rate swap contracts (0.3)   Interest expense (0.4)  
Treasury lock contracts (16.1)   Interest expense —   
$ (209.8)   $ (8.5)  
For the Three Months Ended May 31, 2019
Foreign currency contracts $ (2.4)   Sales $ —   
Cost of product sold 3.6   
$ (2.4)   $ 3.6   

We expect $44.1 million of net losses, net of income tax effect, to be reclassified from accumulated other comprehensive income (loss) (“AOCI”) to our results of operations within the next 12 months.

Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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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 Three Months Ended May 31, 2020   
Commodity derivative contracts Cost of product sold $ (26.8)  
Foreign currency contracts Selling, general, and administrative expenses (25.9)  
$ (52.7)  
For the Three Months Ended May 31, 2019   
Commodity derivative contracts Cost of product sold $ (15.9)  
Foreign currency contracts Selling, general, and administrative expenses (3.8)  
$ (19.7)  

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

Interest rate swap and treasury lock 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 investments
Equity securities, Warrants The November 2017 Canopy Warrants were exercised on May 1, 2020. For additional information on the November 2017 Canopy Warrants and the related exercise, refer to Note 8.

Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The inputs used to estimate the fair value of the Canopy warrants (all as defined in Note 8) are as follows:
May 31, 2020 (1) (2)
February 29, 2020 (2)
New
Tranche A
Warrants (3)
New
Tranche B
Warrants (4)
New
Tranche A
Warrants (3)
New
Tranche B
Warrants (4)
November
2017 Canopy
Warrants (3)
Exercise price (5)
C$ 50.40    C$ 76.68    C$ 50.40    C$ 76.68    C$ 12.98   
Valuation date stock price (6)
C$ 24.21    C$ 24.21    C$ 25.17    C$ 25.17    C$ 25.17   
Remaining contractual term (7)
3.4 years 6.4 years 3.7 years 6.7 years 0.2 years
Expected volatility (8)
70.0  % 70.0  % 70.0  % 70.0  % 105.3  %
Risk-free interest rate (9)
0.3  % 0.4  % 1.1  % 1.1  % 1.5  %
Expected dividend yield (10)
0.0  % 0.0  % 0.0  % 0.0  % 0.0  %
(1)The November 2017 Canopy Warrants were exercised on May 1, 2020 and as such are not included in the table as of May 31, 2020.
(2)The exercise price for the New Tranche C Warrants is based on the volume-weighted average of the closing market price of Canopy’s common shares on the Toronto Stock Exchange (“TSX”) for the five trading days immediately preceding the exercise date (“VWAP Exercise Price”) and are not included in the table as there is no fair value 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 stock 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, Convertible We have elected the fair value option to account for convertible debt securities issued by Canopy for C$200.0 million, or $150.5 million (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 converted prior to maturity by either party upon the occurrence of certain events. At settlement, the Canopy Debt Securities can be settled at the option of the issuer, in cash, equity shares of the issuer, or a combination thereof. The fair value is estimated using a binomial lattice option-pricing model (Level 2 fair value measurement), which includes an estimate of the credit spread based on the implied spread as of the issuance date of the notes.

Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
May 31,
2020
February 29,
2020
Conversion price (1)
C$ 48.17    C$ 48.17   
Valuation date stock price (2)
C$ 24.21    C$ 25.17   
Remaining term (3)
3.1 years 3.4 years
Expected volatility (4)
60.3  % 58.2  %
Risk-free interest rate (5)
0.3  % 1.1  %
Expected dividend yield (6)
0.0  % 0.0  %
(1)Based on the rate which the Canopy Debt Securities may be converted into equity shares, or the equivalent amount of cash, at the option of the issuer.
(2)Based on the closing market price for Canopy common stock on the TSX as of the applicable date.
(3)Based on the contractual maturity date of the notes.
(4)Based on historical volatility levels of the underlying equity security reduced to account for certain risks not incorporated into the option-pricing model.
(5)Based on the implied yield currently available on Canadian Treasury zero coupon issues with a term equal to the remaining contractual term of the debt securities.
(6)Based on historical dividend levels.

Short-term borrowings
The revolving credit facility under our senior credit facility is a variable interest rate bearing note which includes a fixed margin which is adjustable based upon our debt rating (as defined in our senior credit facility). Its fair value is estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions (Level 2 fair value measurement). The remaining instruments, including our commercial paper, are variable interest rate bearing notes for which the carrying value approximates the fair value.

Long-term debt
The term loans under our 2020 Term Credit Agreement and March 2020 Term Credit Agreement (both as defined in Note 9) are variable interest rate bearing notes which include a fixed margin which is adjustable based upon our debt rating. The senior floating rate notes are variable interest rate bearing notes which include a fixed margin. The carrying value approximates the fair value of the term loans. The fair value of the remaining long-term debt, which is primarily fixed interest rate, is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings, approximate fair value as of May 31, 2020, and February 29, 2020, due to the relatively short maturity of these instruments. As of May 31, 2020, the carrying amount of long-term debt, including the current portion, was $12,174.0 million, compared with an estimated fair value of $13,130.0 million. As of February 29, 2020, the carrying amount of long-term debt, including the current portion, was $11,945.7 million, compared with an estimated fair value of $12,935.9 million.

Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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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)
May 31, 2020
Assets:
Foreign currency contracts $ —    $ 11.2    $ —    $ 11.2   
Commodity derivative contracts $ —    $ 1.6    $ —    $ 1.6   
Equity securities (1)
$ —    $ 693.4    $ —    $ 693.4   
Canopy Debt Securities (1)
$ —    $ 116.1    $ —    $ 116.1   
Liabilities:
Foreign currency contracts $ —    $ 113.2    $ —    $ 113.2   
Commodity derivative contracts $ —    $ 57.8    $ —    $ 57.8   
Interest rate swap contracts $ —    $ 0.6    $ —    $ 0.6   
February 29, 2020
Assets:
Foreign currency contracts $ —    $ 96.3    $ —    $ 96.3   
Commodity derivative contracts $ —    $ 0.6    $ —    $ 0.6   
Equity securities (1)
$ —    $ 991.5    $ —    $ 991.5   
Canopy Debt Securities (1)
$ —    $ 125.6    $ —    $ 125.6   
Liabilities:
Foreign currency contracts $ —    $ 34.4    $ —    $ 34.4   
Commodity derivative contracts $ —    $ 40.9    $ —    $ 40.9   
Interest rate swap contracts $ —    $ 0.8    $ —    $ 0.8   
Treasury lock contracts $ —    $ 7.6    $ —    $ 7.6   
(1)
Unrealized net gain (loss) from the changes in fair value of our securities measured at fair value recognized in income (loss) from unconsolidated investments, are as follows:
For the Three Months
Ended May 31,
2020 2019
(in millions)
November 2017 Canopy Warrants (i)
$ (61.8)   $ (134.1)  
November 2018 Canopy Warrants (ii)
(123.0)   (660.8)  
Canopy Debt Securities (12.5)   (32.6)  
$ (197.3)   $ (827.5)  
(i)
The November 2017 Canopy Warrants were exercised in May 2020. For additional information on the November 2017 Canopy Warrants and the related exercise, refer to Note 8.
(ii)
The terms of the November 2018 Canopy Warrants were modified in June 2019. For additional information on the November 2018 Canopy Warrants and the related modification, refer to Note 8.

Constellation Brands, Inc. Q1 FY 2021 Form 10-Q
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FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nonrecurring basis measurements
The following table presents our assets and liabilities measured at estimated fair value on a nonrecurring basis for which an impairment assessment was performed for the period presented:
Fair Value Measurements Using Total Losses
Quoted
Prices in
Active
Markets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
For the Three Months Ended May 31, 2020
(in millions)
Long-lived assets held for sale $ —    $ —    $ 784.0    $ 25.0   

Long-lived assets held for sale
During the three months ended May 31, 2020, in connection with the Wine and Spirits Transactions and the Other Wine and Spirits Transactions, $809.0 million of the Wine and Spirits segment total long-lived assets held for sale were written down to their estimated fair value of $784.0 million, less costs to sell, resulting in a loss of $25.0 million. This loss was included in impairment of assets held for sale within our consolidated results of operations. These assets consisted primarily of goodwill, intangible assets, and certain winery and vineyard assets which had satisfied the conditions necessary to be classified as held for sale. Our current estimate of fair value was determined based on the expected proceeds from the Wine and Spirits Transactions and Other Wine and Spirits Transactions as of May 31, 2020, excluding the contingent consideration, which we will recognize when it is determined to be realizable.

6. GOODWILL

The changes in the carrying amount of goodwill are as follows:
Beer Wine and Spirits Consolidated
(in millions)
Balance, February 28, 2019 $ 5,167.9    $ 2,920.9    $ 8,088.8   
Purchase accounting allocations (1)
—    58.8    58.8   
Black Velvet Divestiture —