EXHIBIT 99.1
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SELECTED BUSINESS AND FINANCIAL INFORMATION REFLECTING
THE COMPANY'S NEW BASIS OF SEGMENT REPORTING
Set forth below is a description of the Company's business, the Company's
properties and the Company's results of operations for the three fiscal years
ended February 28, 2003, which have been revised to reflect the Company's new
business segments and other business developments through the date of the
Company's Current Report on Form 8-K dated November 24, 2003 (the "Form 8-K"),
of which this Exhibit 99.1 forms a part.
BUSINESS
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INTRODUCTION
Unless the context otherwise requires, the term "Company" refers to
Constellation Brands, Inc. and its subsidiaries, and all references to "net
sales" refer to gross sales less promotions, returns and allowances, and excise
taxes to conform with the Company's method of classification. All references to
"Fiscal 2003", "Fiscal 2002" and "Fiscal 2001" shall refer to the Company's
fiscal year ended the last day of February of the indicated year. All
references to "Fiscal 2004" shall refer to the Company's fiscal year ending
February 29, 2004.
Market share and industry data disclosed below have been obtained from the
following industry and government publications: Adams Liquor Handbook; Adams
Wine Handbook; Adams Beer Handbook; Adams Media Handbook Advance; The U.S. Wine
Market: Impact Databank Review and Forecast; The U.S. Beer Market: Impact
Databank Review and Forecast; The U.S. Spirits Market: Impact Databank Review
and Forecast; International Wine and Spirit Record; Australian Wine and Brandy
Reports; NACM; AC Nielsen; IRI; and The Drink Pocketbook. The Company has not
independently verified this data. Unless otherwise noted, all references to
market share data are based on unit volume and unless otherwise noted, the most
recent complete industry data available are for calendar 2002.
The Company is a leading international producer and marketer of beverage
alcohol brands with a broad portfolio across the wine, spirits and imported beer
categories. The Company has the largest wine business in the world and is the
largest multi-category supplier of beverage alcohol in the United States; a
leading producer and exporter of wine from Australia and New Zealand; and both a
major producer and independent drinks wholesaler in the United Kingdom. The
Company's strong market positions increase its purchasing power and make the
Company a supplier of choice to its customers.
With its broad product portfolio, the Company believes it is distinctly
positioned to satisfy an array of consumer preferences across all beverage
alcohol categories and price points. Many of the Company's products are
recognized leaders in their respective categories. Leading brands in the
Company's portfolio include Corona Extra, Modelo Especial, Pacifico, St. Pauli
Girl, Franciscan Oakville Estate, Simi, Estancia, Ravenswood, Blackstone,
Banrock Station, Hardys, Nobilo, Houghton, Leasingham, Almaden, Inglenook, Arbor
Mist, Vendange, Alice White, Stowells, Black Velvet, Fleischmann's, Schenley,
Ten High and Blackthorn.
The Company is a Delaware corporation incorporated on December 4, 1972, as
the successor to a business founded in 1945. Since the Company's founding in
1945 as a producer and marketer of wine products, the Company has grown through
a combination of internal growth and acquisitions. The Company's internal
growth has been driven by leveraging the Company's existing portfolio of leading
brands, developing new products, new packaging and line extensions, and focusing
on the faster growing sectors of the beverage alcohol industry.
The Company has successfully integrated a number of major acquisitions that
have broadened its portfolio and increased its market share, net sales,
operating income and cash flow. Through these acquisitions, the Company has
become more competitive by: diversifying its portfolio; developing strong market
positions in the growing beverage alcohol product categories of varietal table
wine and imported beer; strengthening its relationships with wholesalers;
expanding its distribution and enhancing its production capabilities; and
acquiring additional management, operational, marketing, and research and
development expertise.
In April 2003, the Company completed the acquisition of BRL Hardy Limited,
now known as Hardy Wine Company Limited ("Hardy"), Australia's largest producer
of wine, which enhanced the Company's overall growth prospects and gave the
Company an immediate presence in the Australian domestic and export markets. As
a result of the acquisition of Hardy, the Company also acquired the remaining
50% ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the
Company established with Hardy in July 2001. The acquisition of Hardy along
with the remaining interest in PWP is referred to together as the "Hardy
Acquisition." Well known brands in Hardy's portfolio include Banrock Station,
Hardys Nottage Hill, Hardys Stamp, VR, Eileen Hardy, Sir James, Omni, Leasingham
and Houghton.
BUSINESS SEGMENTS
As a result of the Hardy Acquisition, the Company has changed the structure
of its internal organization to consist of two business divisions, Constellation
Wines and Constellation Beers and Spirits. Separate division chief executives
report directly to the Company's chief operating officer. As a result of such
changes, the Company reports its operating results in three segments:
Constellation Wines (branded wine, and U.K. wholesale and other), Constellation
Beers and Spirits (imported beer and distilled spirits) and Corporate Operations
and Other. The new business segments, described more fully below, reflect how
the Company's operations are now being managed, how the Company's operating
performance is now being evaluated by senior management and the availability and
structure of internal financial reporting.
Information regarding net sales, operating income and total assets of each
of the Company's business segments and information regarding geographic areas is
set forth in Note 21 to the Company's consolidated financial statements located
in Exhibit 99.2 to the Form 8-K.
CONSTELLATION WINES
Constellation Wines is the leading producer and marketer of wine in the
world. It sells a large number of wine brands across all categories - table
wine, dessert wine and sparkling wine - and across all price points - popular,
premium, super-premium and ultra-premium. The portfolio of super-premium and
ultra-premium wines is supported by vineyard holdings in California, Australia,
New Zealand and Chile. As the largest producer and marketer of wine in the
world, Constellation Wines has leading market positions in several countries.
It is the second largest producer and marketer of wine in the United States, the
largest producer and marketer of wine in Australia and the largest marketer of
wine in the United Kingdom. In addition, Constellation Wines exports its wine
products to the major wine consuming markets of the world.
In the United States, Constellation Wines sells 22 of the top 100 wine
brands and has one of the largest fine wine portfolios. In the United Kingdom,
it has seven of the top 20 selling table wine brands to the off-premise market,
three of the top 10 table wine brands in the on-premise market and the best
selling brand of fortified British wine. In Australia, it has wine brands
across all price points and varieties, including the most comprehensive range of
premium wine brands, and is the largest producer of cask wines.
Constellation Wines' leading wine brands include Franciscan Oakville
Estate, Simi, Estancia, Ravenswood, Blackstone, Banrock Station, Hardys, Nobilo,
Houghton, Leasingham, Almaden, Inglenook, Arbor Mist, Vendange, Alice White and
Stowells.
Constellation Wines is also the leading independent beverage wholesaler to
the on-premise trade in the United Kingdom and has more than 16,000 on-premise
accounts. The wholesaling business is wine led, but also involves the
distribution of branded distilled spirits, cider, beer, RTDs and soft drinks.
While these products are primarily produced by other major drinks companies,
they also include Constellation Wines' branded wine, cider and water products.
Constellation Wines is also the second largest producer and marketer of
cider in the United Kingdom, with leading cider brands Blackthorn and Gaymer's
Olde English, and produces and markets Strathmore, the leading bottled water
brand in the United Kingdom on-premise market.
In conjunction with its wine production, Constellation Wines produces and
sells bulk wine and other related products and services.
CONSTELLATION BEERS AND SPIRITS
Constellation Beers and Spirits imports and markets a diversified line of
beer and produces, bottles, imports and markets a diversified line of distilled
spirits. It is the largest marketer of imported beer in 25 primarily western
U.S. states, where it has exclusive rights to distribute the Mexican brands in
its portfolio. Constellation Beers and Spirits has exclusive rights to the
entire United States for its non-Mexican brands. It distributes six of the top
25 imported beer brands in the United States: Corona Extra, Modelo Especial,
Corona Light, Pacifico, St. Pauli Girl, and Negra Modelo. Corona Extra is the
best selling imported beer in the United States and the seventh best selling
beer overall in the United States. It also imports the Tsingtao beer brand from
China.
Constellation Beers and Spirits is the third largest producer and marketer
of distilled spirits in the United States and exports its distilled spirits to
other major distilled spirits consuming markets. Its principal distilled
spirits brands include Black Velvet, Skol, Fleischmann's, Mr. Boston, Canadian
LTD, Chi-Chi's prepared cocktails, Ten High, Montezuma, Barton, Monte Alban and
Inver House. Substantially all of this segment's distilled spirits unit volume
consists of products marketed in the value and mid-premium priced category.
Constellation Beers and Spirits also sells bulk distilled spirits and other
related products and services.
CORPORATE OPERATIONS AND OTHER
The Corporate Operations and Other segment includes traditional
corporate-related items.
MARKETING AND DISTRIBUTION
The Company employs full-time, in-house marketing, sales and customer
service organizations within its segments to maintain a high degree of focus on
each of its product categories. The organizations use a range of marketing
strategies and tactics to build brand equity and increase sales, including
market research, consumer and trade advertising, price promotions, point-of-sale
materials, event sponsorship and public relations. Where opportunities exist,
particularly with national accounts, the Company leverages its sales and
marketing skills across the organization.
In North America, the Company's products are primarily distributed by more
than 1,000 wholesale distributors as well as state and provincial alcoholic
beverage control agencies. In the Company's other markets, products are
primarily distributed either directly to retailers or through wholesalers and
importers. In Australia, distribution is dominated by a small number of
industry leaders. Its U.K. wholesaling business sells and distributes the
Company's branded products and those of other major drinks companies through a
network of depots located throughout the United Kingdom.
TRADEMARKS AND DISTRIBUTION AGREEMENTS
Trademarks are an important aspect of the Company's business. The Company
sells its products under a number of trademarks, most of which the Company owns,
or has the right to use. Throughout its segments, the Company also has various
licenses and distribution agreements, for the sale or the production and sale of
its products, as well as for the sale of products of third parties. These
licenses and distribution agreements have varying terms and durations.
Agreements include, among others, a long-term license agreement with Hiram
Walker & Sons, Inc., which expires in 2116, for the Ten High, Crystal Palace,
Northern Light, Lauder's and Imperial Spirits brands.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products.
These agreements have terms that vary and prohibit the Company from importing
other beer from other producers from the same country. The Company's agreement
to distribute Corona Extra and other Mexican beer brands exclusively throughout
25 primarily western U.S. states expires in December 2006 and, subject to
compliance with certain performance criteria, continued retention of certain
Company personnel and other terms under the agreement, will be automatically
renewed for additional terms of five years. Changes in control of the Company
or of its subsidiaries involved in importing the Mexican beer brands, changes in
the position of the Chief Executive Officer of Barton Beers, Ltd., including by
death or disability, or the termination of the President of Barton Incorporated,
may be a basis for the supplier, unless it consents to such changes, to
terminate the agreement. The supplier's consent to such changes may not be
unreasonably withheld. Prior to their expiration, all of the Company's imported
beer distribution agreements may be terminated if the Company fails to meet
certain performance criteria. The Company believes it is currently in
compliance with its material imported beer distribution agreements. From time
to time, the Company has failed, and may in the future fail, to satisfy certain
performance criteria in its distribution agreements. Although there can be no
assurance that the Company's material beer distribution agreements will be
renewed, given the Company's long-term relationships with its suppliers, the
Company expects that such agreements will be renewed prior to their expiration
and does not believe that these agreements will be terminated.
COMPETITION
The beverage alcohol industry is highly competitive. The Company competes
on the basis of quality, price, brand recognition and distribution strength.
The Company's beverage alcohol products compete with other alcoholic and
nonalcoholic beverages for consumer purchases, as well as shelf space in retail
stores, restaurant presence and wholesaler attention. The Company competes with
numerous multinational producers and distributors of beverage alcohol products,
some of which may have greater resources than the Company.
Constellation Wines' principal wine competitors include: E & J Gallo
Winery, The Wine Group, Beringer Blass, The Robert Mondavi Corporation and
Kendall-Jackson in the United States; Southcorp Wines, Orlando Wyndham and
Beringer Blass in Australia; and E & J Gallo Winery, Southcorp Wines, Western
Wines, Halewood Vintners and Pernod-Ricard in the United Kingdom. Its wholesale
business competes with major brewers who also have wholesale operations, in
particular, Scottish Courage, Coors, Interbrew and Carlsberg Tetley, and other
independent national and regional wholesalers. Constellation Wines' principal
cider competitor is Scottish & Newcastle.
Constellation Beers and Spirits' principal competitors include: Heineken
USA, Molson, Labatt USA and Guinness Import Company in the imported beer
category as well as domestic producers such as Anheuser Busch, Coors and
SAB-Miller; and Diageo, Brown-Forman Beverages, Jim Beam Brands and Heaven Hill
Distilleries in the distilled spirits category.
PRODUCTION
In the United States, the Company operates 18 wineries where wine is
produced from many varieties of grapes grown principally in the Napa, Sonoma,
Monterey and San Joaquin regions of California. In Australia, the Company
operates 10 wineries where wine is produced from many varieties of grapes grown
in most of the major viticultural regions of Australia. Grapes are crushed at
the Company's wineries and stored as wine until packaged for sale under the
Company's brand names or sold in bulk. Most of the Company's wine is bottled
and sold within 18 months after the grape crush. In the United States, the
Company's inventories of wine are usually at their highest levels in November
and December immediately after the crush of each year's grape harvest, and are
substantially reduced prior to the subsequent year's crush. Similarly, in
Australia, the Company's inventories of wine are usually at their highest levels
in April and May immediately after the crush of each year's grape harvest, and
are substantially reduced prior to the subsequent year's crush. The Company
also operates one winery in Chile and two wineries in New Zealand.
The bourbon whiskeys, domestic blended whiskeys and light whiskeys marketed
by the Company are primarily produced and aged by the Company at its distillery
in Bardstown, Kentucky. The Company's primary distilled spirits bottling
facility in the United States is in Owensboro, Kentucky. The majority of the
Company's Canadian whisky requirements are produced and aged at its Canadian
distilleries in Lethbridge, Alberta, and Valleyfield, Quebec. The Company's
requirements of Scotch whisky, tequila, mezcal and the neutral grain spirits it
uses in the production of gin, vodka and other spirits products, are primarily
purchased from various suppliers.
The Company operates three facilities in the United Kingdom that produce,
bottle and package wine, cider, and water. To produce Stowells, wine is imported
in bulk from various countries and packaged at the Company's facility at
Bristol. The Bristol facility also produces fortified British wine and wine
style drinks. All cider production takes place at the Company's facility at
Shepton Mallet. The Strathmore brand of bottled water is sourced and bottled in
Forfar, Scotland.
SOURCES AND AVAILABILITY OF PRODUCTION MATERIALS
The principal components in the production of the Company's branded
beverage alcohol products are agricultural products, such as grapes and grain,
and packaging materials (primarily glass).
Most of the Company's annual grape requirements are satisfied by purchases
from each year's harvest which normally begins in August and runs through
October in the United States and begins in February and runs through May in
Australia. The Company believes that it has adequate sources of grape supplies
to meet its sales expectations. However, in the event demand for certain wine
products exceeds expectations, the Company could experience shortages.
The Company purchases grapes from approximately 800 independent growers in
the United States and 1,450 growers in Australia. The Company enters into
written purchase agreements with a majority of these growers and pricing
generally varies year-to-year based on current market prices. In Australia,
approximately 800 of the 1,450 growers belong to a grape growers' cooperative.
The Company purchases the majority of its Australian grape requirements from
this cooperative under a long-term arrangement. In the United Kingdom, the
Company produces wine from materials purchased either on a contract basis or on
the open market.
The Company currently owns or leases approximately 14,500 acres of land and
vineyards, either fully bearing or under development, in California (U.S.), New
York (U.S.), Australia, Chile and New Zealand. This acreage supplies only a
small percentage of the Company's overall total wine needs. However, most of
this acreage is used to supply a large portion of the grapes used for the
production of the Company's super-premium and ultra-premium wines. The Company
continues to consider the purchase or lease of additional vineyards, and
additional land for vineyard plantings, to supplement its grape supply.
The distilled spirits manufactured by the Company require various
agricultural products, neutral grain spirits and bulk spirits. The Company
fulfills its requirements through purchases from various sources by contractual
arrangement and through purchases on the open market. The Company believes that
adequate supplies of the aforementioned products are available at the present
time.
In the United Kingdom, the Company sources apples for cider production
primarily through long-term supply arrangements with owners of apple orchards.
There are adequate supplies of apples at this particular time.
The Company utilizes glass and polyethylene terephthalate ("PET") bottles
and other materials such as caps, corks, capsules, labels and cardboard cartons
in the bottling and packaging of its products. Glass bottle costs are one of
the largest components of the Company's cost of product sold. In the United
States and Australia, the glass bottle industry is highly concentrated with only
a small number of producers. The Company has traditionally obtained, and
continues to obtain, its glass requirements from a limited number of producers.
Currently, substantially all of the Company's glass container requirements for
its United States operations are supplied by one producer and substantially all
of the Company's glass container requirements for its Australian operations are
supplied by another producer. The Company has not experienced difficulty in
satisfying its requirements with respect to any of the foregoing and considers
its sources of supply to be adequate. However, the inability of any of the
Company's glass bottle suppliers to satisfy the Company's requirements could
adversely affect the Company's operations.
GOVERNMENT REGULATION
The Company is subject to a range of regulations in the countries in which
it operates. Where it produces products, the Company is subject to
environmental laws and regulations and may be required to obtain permits and
licenses to operate its facilities. Where it markets and sells products, it may
be subject to laws and regulations on trademark and brand registration,
packaging and labeling, distribution methods and relationships, pricing and
price changes, sales promotions, advertising and public relations. The Company
is also subject to rules and regulations relating to changes in officers or
directors, ownership or control.
The Company believes it is in compliance in all material respects with all
applicable governmental laws and regulations in the countries in which it
operates. The Company also believes that the cost of administration and
compliance with, and liability under, such laws and regulations does not have,
and is not expected to have, a material adverse impact on its financial
condition, results of operations or cash flows.
SEASONALITY
The beverage alcohol industry is subject to seasonality in each major
category. As a result, in response to wholesaler and retailer demand which
precedes consumer purchases, the Company's wine and spirits sales are typically
highest during the third quarter of its fiscal year, primarily due to seasonal
holiday buying, and its imported beer sales are typically highest during the
first and second quarters of the Company's fiscal year, which correspond to the
Spring and Summer periods in the United States.
EMPLOYEES
As of the end of October 2003, the Company had approximately 6,870
full-time employees throughout the world. Approximately 3,130 full-time
employees were in the United States and approximately 3,740 full-time employees
were outside of the United States, in countries including Australia, the United
Kingdom, Canada and New Zealand. Additional workers may be employed by the
Company during the peak and grape crushing seasons. The Company considers its
employee relations generally to be good.
PROPERTIES
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Through its business segments, the Company operates wineries, distilling
plants, bottling plants, and cider and water producing facilities, most of which
include warehousing and distribution facilities on the premises. The Company
also operates separate distribution centers under the Constellation Wines
segment's wholesaling business. In addition to the Company's properties
described below, certain of the Company's businesses maintain office space for
sales and similar activities in a variety of geographic locations.
The Company believes that its facilities, taken as a whole, are in good
condition and working order and have adequate capacity to meet its needs for the
foreseeable future.
The following discussion details the properties associated with the
Company's three business segments.
CONSTELLATION WINES
Through the Constellation Wines segment, the Company maintains facilities
in the United States, Australia, New Zealand, the United Kingdom, Chile and the
Republic of Ireland. These facilities include wineries, bottling plants, cider
and water producing facilities, warehousing and distribution facilities,
distribution centers and office facilities. The segment maintains owned and/or
leased division offices in Canandaigua, New York; St. Helena, California;
Gonzales, California; Reynella, South Australia; Bristol, England and Esher,
England.
United States
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In the United States, the Company through its Constellation Wines segment
operates two wineries in New York, located in Canandaigua and Naples; 13
wineries in California, located in Fresno, Gonzales, Healdsburg, Kenwood,
Soledad, Rutherford, Ukiah, two in Lodi, two in Madera and two in Sonoma; two
wineries in Washington, located in Woodinville and Sunnyside; and one winery in
Caldwell, Idaho. All of these wineries are owned, except for the wineries in
Caldwell (Idaho) and Woodinville (Washington), which are leased. The
Constellation Wines segment considers its principal wineries in the United
States to be the Mission Bell winery in Madera (California), the Canandaigua
winery in Canandaigua (New York), the Ravenswood wineries in Sonoma
(California), the Franciscan Oakville Estates winery in Rutherford (California),
and the Blackstone winery in Gonzales (California). The Mission Bell winery
crushes grapes, produces, bottles and distributes wine, and produces specialty
concentrates and Mega Colors for sale. The Canandaigua winery crushes grapes and
produces, bottles and distributes wine. The other principal wineries crush
grapes, vinify, cellar and bottle wine. The segment plans to close its winery
located in Fresno (California) in Fiscal 2004.
Through the Constellation Wines segment, the Company owns or leases
approximately 5,400 acres of vineyards, either fully bearing or under
development, in California and New York to supply a portion of the grapes used
in the production of wine.
Australasia
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Through the Constellation Wines segment, the Company owns and operates ten
Australian wineries, five of which are in South Australia, two in Western
Australia and the other three in New South Wales, Australian Capital Territory
and Tasmania. Additionally, through this segment the Company also owns two
wineries in New Zealand. All of these Australasian wineries crush, vinify and
cellar wine, and four include bottling and/or packaging operations. Through the
Constellation Wines segment, the Company also owns a bottling facility in
Reynella, South Australia which bottles a significant portion of the wine
produced in Australia, produces all Australian sparkling wines and cellars
wines. The Company considers the segment's principal facilities in Australia to
be the Berri Estates winery located in South Australia, and the bottling
facility located in Reynella.
Through the Constellation Wines segment, the Company owns or has interests
in approximately 6,200 plantable acres of vineyards in South Australia, the
Australian Capital Territory, Western Australia, Victoria, and Tasmania, and
approximately 1,900 acres of vineyards, either fully bearing or under
development, in New Zealand.
United Kingdom and Ireland
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Through the Constellation Wines segment, in the United Kingdom the Company
owns and operates two facilities in England, located in Bristol and Shepton
Mallet and one facility in Scotland, located in Forfar. The Bristol facility is
considered a principal facility and produces, bottles and packages wine; the
Shepton Mallet facility produces, bottles and packages cider; and the Forfar
facility produces, bottles and packages water products. The Constellation Wines
segment also owns another facility in Taunton, England, which it plans to sell
since the operations have been consolidated into the Shepton Mallet facility.
Through this segment, the Company operates a National Distribution Centre,
located at a leased facility in Severnside, England, to distribute the Company's
products that are produced at the Bristol and Shepton Mallet facilities as well
as products imported from other wine suppliers. To support its wholesaling
business, the Company operates 11 distribution centers located throughout the
United Kingdom, 10 of which are leased. These 11 distribution centers are used
to distribute products produced by third parties, as well as by the Company.
The Company has been and will continue consolidating the operations of its
United Kingdom wholesaling distribution centers.
Additionally, through the Constellation Wines segment, the Company leases
warehouse and office facilities in Dublin and leases back office facilities in
Cork in support of the Company's business of marketing and distributing
alcoholic beverages in the Republic of Ireland.
Chile
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Through the Constellation Wines segment, the Company also operates, through
a majority owned subsidiary, a winery in the Casablanca Valley, Chile, that
crushes grapes and vinifies, cellars and bottles wine. Through this segment, the
Company also owns or leases approximately 1,000 acres of vineyards, either fully
bearing or under development, in Chile for the production of wine.
CONSTELLATION BEERS AND SPIRITS
Through the Constellation Beers and Spirits segment, the Company maintains
leased division offices in Chicago, Illinois. Through this segment, the Company
owns and operates four distilling plants, two in the United States and two in
Canada. The two distilling plants in the United States are located in Bardstown,
Kentucky and Albany, Georgia. The two distilling plants in Canada are located in
Valleyfield, Quebec and Lethbridge, Alberta. The Company considers this
segment's principal distilling plants to be the facilities located in Bardstown
(Kentucky), Valleyfield (Quebec) and Lethbridge (Alberta). The Bardstown
facility distills, bottles and warehouses distilled spirits products for the
Company and, on a contractual basis, for other industry members. The two
Canadian facilities distill, bottle and store Canadian whisky for the segment,
and distill and/or bottle and store Canadian whisky, vodka, rum, gin and
liqueurs for third parties.
In the United States, the Company through its Constellation Beers and
Spirits segment also operates three bottling plants, located in Atlanta,
Georgia; Owensboro, Kentucky and Carson, California. The facilities located in
Atlanta (Georgia) and Owensboro (Kentucky) are owned, while the facility in
Carson (California) is operated and leased through an arrangement involving an
ongoing management contract. The Company considers this segment's bottling plant
located in Owensboro to be one of the segment's principal facilities. The
Owensboro facility bottles and warehouses distilled spirits products for the
segment and is also utilized for contract bottling.
CORPORATE OPERATIONS AND OTHER
The Company's corporate headquarters are located in offices leased in
Fairport, New York.
RESULTS OF OPERATIONS
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FISCAL 2003 COMPARED TO FISCAL 2002
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2003 and Fiscal 2002.
Fiscal 2003 Compared to Fiscal 2002
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Net Sales
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2003 2002 % Increase
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Constellation Wines:
Branded wines $ 983,505 $ 963,514 2.1%
Wholesale and other 689,794 641,589 7.5%
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Constellation Wines net sales $ 1,673,299 $ 1,605,103 4.2%
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Constellation Beers and Spirits:
Imported beers $ 776,006 $ 726,953 6.7%
Spirits 282,307 274,702 2.8%
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Constellation Beers and Spirits net sales $ 1,058,313 $ 1,001,655 5.7%
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Corporate Operations and Other $ - $ - N/A
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Consolidated Net Sales $ 2,731,612 $ 2,606,758 4.8%
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Net sales for Fiscal 2003 increased to $2,731.6 million from $2,606.8
million for Fiscal 2002, an increase of $124.9 million, or 4.8%. This increase
resulted primarily from increased sales of imported beer and the impact of
foreign currency changes of $50.7 million in the Constellation Wines segment.
Also contributing to the sales growth were increased sales in U.K. wholesale (on
a local currency basis), fine wine and spirits, offset by lower bulk wine, grape
juice concentrate, popular and premium branded wine and U.K. cider sales (on a
local currency basis).
CONSTELLATION WINES
Net sales for the Constellation Wines segment for Fiscal 2003 increased to
$1,673.3 million from $1,605.1 million for Fiscal 2002, an increase of $68.2
million, or 4.2%. Branded wines sales increased $20.0 million due to increased
fine wine sales and a favorable foreign currency impact of $9.3 million
partially offset by lower popular and premium wine sales. The increase in fine
wine sales resulted from an additional four months of sales of the brands
acquired in the acquisition of Ravenswood Winery, Inc. ("Ravenswood"), completed
in July 2001, of $14.1 million, as well as an increase of $9.7 million due to
volume growth in the fine wine business partially offset by higher promotional
costs and a shift towards lower priced fine wine brands. Popular and premium
wine sales declined $13.9 million on lower volume offset slightly by higher
average selling prices. Volumes were negatively impacted as a result of
increased promotional spending in the industry, which the Company did not
participate in heavily. In this competitive pricing environment, the Company
continues to be selective in its promotional activities, focusing instead on
growth areas, long-term brand building initiatives and increased profitability.
Wholesale and other sales increased $48.2 million due to a favorable foreign
currency impact of $41.4 million and a $28.6 million local currency increase in
U.K. wholesale sales due to the addition of new accounts and increased average
delivery sizes, partially offset by lower bulk wine, grape juice concentrate and
cider sales.
CONSTELLATION BEERS AND SPIRITS
Net sales for the Constellation Beers and Spirits segment for Fiscal 2003
increased to $1,058.3 million from $1,001.7 million for Fiscal 2002, an increase
of $56.7 million, or 5.7%. This increase resulted primarily from a $49.1
million increase in imported beer sales. The growth in imported beer sales was
due to a price increase on the Company's Mexican beer portfolio, which took
effect in the first quarter of Fiscal 2003. Spirits sales increased $7.6
million due primarily to increased bulk whiskey sales, along with a slight
increase in branded sales.
GROSS PROFIT
The Company's gross profit increased to $760.7 million for Fiscal 2003 from
$695.2 million for Fiscal 2002, an increase of $65.6 million, or 9.4%. The
dollar increase in gross profit resulted from higher imported beer sales, the
additional four months of sales of the brands acquired in the acquisition of
Ravenswood (completed in July 2001), a favorable mix of sales towards higher
margin products, particularly popular and premium wine and tequila, lower
average wine and spirits costs, and a favorable foreign currency impact. These
increases were partially offset by higher average imported beer costs and lower
concentrate and bulk wine sales. As a result of the foregoing, gross profit as a
percent of net sales increased to 27.8% for Fiscal 2003 from 26.7% for Fiscal
2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $351.0 million
for Fiscal 2003 from $352.7 million for Fiscal 2002, a decrease of $1.7 million,
or (0.5)%. The Company adopted SFAS No. 142 on March 1, 2002, and, accordingly,
stopped amortizing goodwill and other indefinite lived intangible assets.
Therefore, the decrease of $1.7 million consists of a decrease of $27.3 million
of amortization expense from Fiscal 2002 offset by an increase of $25.6 million.
The increase resulted primarily from increased personnel costs to support the
Company's growth, higher selling costs to support the growth in the U.K.
wholesale business, and increased advertising costs on certain popular and
premium wine brands and imported beer brands. Selling, general and
administrative expenses as a percent of net sales decreased to 12.8% for Fiscal
2003 as compared to 13.5% for Fiscal 2002. This decrease was due to the reduced
amortization expense noted above partially offset by (i) the percent increase
in general and administrative expenses growing at a faster rate than the percent
increase in net sales across all segments, and (ii) the percent increase in the
U.K. wholesale and U.K. branded wine selling costs being greater than the
percent increase in the U.K. wholesale and U.K. branded wine net sales.
RESTRUCTURING CHARGES
The Company recorded a property, plant and equipment impairment charge of
$4.8 million in Fiscal 2003 in connection with the planned closure of two of its
production facilities within its Constellation Wines segment in Fiscal 2004.
The Company has begun the realignment of its business operations within this
segment to further improve productivity. This realignment is not expected to
have an impact on brand sales. No such charges were incurred in Fiscal 2002.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2003 and Fiscal 2002.
Fiscal 2003 Compared to Fiscal 2002
-------------------------------------
Operating Income (Loss)
-------------------------------------
2003 2002 %Increase
--------- --------- ---------
Constellation Wines $ 224,556 $ 191,227 17.4%
Constellation Beers and Spirits 217,963 178,805 21.9%
Corporate Operations and Other (32,797) (27,551) 19.0%
--------- ---------
Total Reportable Segments 409,722 342,481 19.6%
Restructuring and Unusual Costs (4,764) - N/A
--------- ---------
Consolidated Operating Income $ 404,958 $ 342,481 18.2%
========= =========
As a result of the above factors, operating income increased to $405.0
million for Fiscal 2003 from $342.5 million for Fiscal 2002, an increase of
$62.5 million, or 18.2%. Fiscal 2002 operating income for Constellation Wines
and Constellation Beers and Spirits included amortization expense of $19.1
million and $8.2 million, respectively.
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
In February 2003, the Company entered into a foreign currency collar
contract in connection with the Hardy Acquisition to lock in a range for the
cost of the acquisition in U.S. dollars. As of February 28, 2003, this
derivative instrument had a fair value of $23.1 million. Under SFAS No. 133, a
transaction that involves a business combination is not eligible for hedge
accounting treatment. As such, the derivative was recorded on the balance sheet
at its fair value with the change in the fair value recognized separately on the
Company's Consolidated Statements of Income.
In the first quarter of Fiscal 2004, the Company will record an additional
gain of $4.1 million related to the settlement of the foreign currency
derivative instruments entered into in conjunction with the Hardy Acquisition.
INTEREST EXPENSE, NET
Net interest expense decreased to $105.4 million for Fiscal 2003 from
$114.2 million for Fiscal 2002, a decrease of $8.8 million, or (7.7)%. The
decrease resulted from both decreases in the average borrowings for the year and
in the average interest rate for the year.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for Fiscal 2003 was 39.3% as compared to
40.0% for Fiscal 2002 as a result of the adoption of SFAS No. 142 on March 1,
2002.
NET INCOME
As a result of the above factors, net income increased to $203.3 million
for Fiscal 2003 from $136.4 million for Fiscal 2002, an increase of $66.9
million, or 49.0%.
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2002 and Fiscal 2001.
Fiscal 2002 Compared to Fiscal 2001
-------------------------------------
Net Sales
-------------------------------------
2002 2001 %Increase
----------- ----------- ---------
Constellation Wines:
Branded wines $ 963,514 $ 748,473 28.7%
Wholesale and other 641,589 580,781 10.5%
----------- -----------
Constellation Wines net sales $ 1,605,103 $ 1,329,254 20.8%
----------- -----------
Constellation Beers and Spirits:
Imported beers $ 726,953 $ 633,833 14.7%
Spirits 274,702 262,933 4.5%
----------- -----------
Constellation Beers and Spirits net sales $ 1,001,655 $ 896,766 11.7%
----------- -----------
Corporate Operations and Other $ - $ - N/A
----------- -----------
Consolidated Net Sales $ 2,606,758 $ 2,226,020 17.1%
=========== ===========
Net sales for Fiscal 2002 increased to $2,606.8 million from $2,226.0
million for Fiscal 2001, an increase of $380.7 million, or 17.1%.
CONSTELLATION WINES
Net sales for the Constellation Wines segment for Fiscal 2002 increased to
$1,605.1 million from $1,329.3 million for Fiscal 2001, an increase of $275.8
million, or 20.8%. Branded wines sales increased $215.0 million primarily from
$188.9 million of sales of the newly acquired brands from the acquisitions of
certain assets from Sebastiani Vineyards, Inc. and Tuolomne River Vintners
Group, and certain assets from Corus Brands, Inc. (collectively, the "March
Acquisitions"), both completed in March 2001, and from the acquisition of
Ravenswood, completed in July 2001. In addition, organic sales growth of $35.0
million in both U.S. and U.K. branded wine sales, partially offset by a negative
foreign currency impact of $4.6 million, also contributed to the increase in
branded wine sales. Wholesale and other sales increased $60.8 million due to a
$109.5 million increase in U.K. wholesale sales partially offset by declines in
cider sales, grape juice concentrate sales and a negative foreign currency
impact of $21.8 million.
CONSTELLATION BEERS AND SPIRITS
Net sales for the Constellation Beers and Spirits segment for Fiscal 2002
increased to $1,001.7 million from $896.8 million for Fiscal 2001, an increase
of $104.9 million, or 11.7%. This increase resulted primarily from a 14.7%
increase in imported beer sales, led by volume growth in the Mexican beer
portfolio. Spirits sales increased slightly primarily from an increase in bulk
whiskey sales, partially offset by slightly lower branded spirits sales as a
result of lower net selling prices from the implementation of a net pricing
strategy in the third quarter of Fiscal 2001, which also resulted in lower
promotion costs.
GROSS PROFIT
The Company's gross profit increased to $695.2 million for Fiscal 2002 from
$578.9 million for Fiscal 2001, an increase of $116.2 million, or 20.1%. The
dollar increase in gross profit resulted primarily from sales of the newly
acquired brands from the March Acquisitions and the acquisition of Ravenswood,
volume growth in the Constellation Beers and Spirits segment's Mexican beer
portfolio and volume growth in the Constellation Wines segment's portfolio.
These increases were partially offset by a decrease in the Constellation Beers
and Spirits segment's spirits sales and an adverse foreign currency impact. As
a percent of net sales, gross profit increased to 26.7% for Fiscal 2002 from
26.0% for Fiscal 2001, resulting primarily from sales of higher-margin wine
brands acquired in the March Acquisitions and the acquisition of Ravenswood.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $352.7 million
for Fiscal 2002 from $308.1 million for Fiscal 2001, an increase of $44.6
million, or 14.5%. The dollar increase in selling, general and administrative
expenses resulted primarily from an increase in advertising, selling, general
and administrative expenses associated with the brands acquired in the March
Acquisitions and the acquisition of Ravenswood. In addition, there were
increases in selling, general and administrative expenses associated with the
Constellation Beers and Spirits segment's Mexican beer portfolio volume growth
and the U.K. wholesale volume growth, and increased personnel costs to support
the Company's growth within the Corporate Operations and Other segment. Selling,
general and administrative expenses as a percent of net sales decreased slightly
to 13.5% for Fiscal 2002 as compared to 13.8% for Fiscal 2001 due to higher
sales growth from the March Acquisitions and the acquisition of Ravenswood than
the related selling, general and administrative expense growth.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2002 and Fiscal 2001.
Fiscal 2002 Compared to Fiscal 2001
---------------------------------------
Operating Income (Loss)
---------------------------------------
2002 2001 %Increase
---------- ---------- ---------
Constellation Wines $ 191,227 $ 123,779 54.5%
Constellation Beers and Spirits 178,805 167,680 6.6%
Corporate Operations and Other (27,551) (20,591) 33.8%
---------- ----------
Consolidated Operating Income $ 342,481 $ 270,868 26.4%
========== ==========
As a result of the above factors, operating income increased to $342.5
million for Fiscal 2002 from $270.9 million for Fiscal 2001, an increase of
$71.6 million, or 26.4%.
INTEREST EXPENSE, NET
Net interest expense increased to $114.2 million for Fiscal 2002 from
$108.6 million for Fiscal 2001, an increase of $5.6 million, or 5.1%. The
increase resulted primarily from an increase in the average borrowings primarily
due to the financing of the March Acquisitions and the acquisition of
Ravenswood, partially offset by a decrease in the average interest rate.
NET INCOME
As a result of the above factors, net income increased to $136.4 million
for Fiscal 2002 from $97.3 million for Fiscal 2001, an increase of $39.1
million, or 40.1%.