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[LOGO]
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Constellation
Brands, Inc.
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Constellation
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370
Woodcliff Drive, Suite 300
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Fairport,
New York 14450
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phone
585-218-3600
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Fax
585-218-3601
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1.
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Where
you identify intermediate causes of changes in your operating results,
also describe the reasons underlying the intermediate causes. For
example,
you disclose on pages 30 and 31 that your fiscal 2006 net sales benefited
from volume growth in your branded wine product line and your Mexican
beer
portfolio.
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Please
explain in reasonable detail the applicable factors, such as movements
in
retail prices, new products, or promotional activity that caused
volume to
increase in these product lines. See SEC Release No.
33-8350.
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2.
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Where
you describe two or more business reasons that contributed to a material
change in a financial statement line item between periods, please
quantify, where possible, the extent to which each change contributed
to
the overall change in that line item. For example, with respect to
the
change in selling, general and administrative expenses of the
Constellation Wine segment from fiscal year 2005 to 2006, please
quantify
the extent to which the changes are attributable to the various
contributing factors, such as selling expenses, advertising expenses,
and
the U.K. defined benefit plan adjustment. See Item 303(a) of Regulation
S-K and SEC Release No.
33-8350.
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Fiscal
2006 Compared to Fiscal 2005
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Net
Sales
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2006
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2005
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%
Increase
(Decrease)
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Constellation
Wines:
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Branded
wine
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$
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2,263.4
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$
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1,830.8
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24
%
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Wholesale
and other
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972.0
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1,020.6
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(5)%
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Constellation
Wines net sales
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$
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3,235.4
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$
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2,851.4
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13
%
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Constellation
Beers and Spirits:
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Imported
beers
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$
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1,043.5
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$
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922.9
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13
%
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Spirits
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324.5
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313.3
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4
%
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Constellation
Beers and Spirits net sales
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$
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1,368.0
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$
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1,236.2
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11
%
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Corporate
Operations and Other
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$
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-
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$
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-
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N/A
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Consolidated
Net Sales
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$
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4,603.4
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$
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4,087.6
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13
%
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Fiscal
2006 Compared to Fiscal 2005
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Operating
Income (Loss)
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2006
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2005
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%
Increase
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Constellation
Wines
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$
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530.4
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$
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406.6
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30%
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Constellation
Beers and Spirits
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292.6
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276.1
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6%
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Corporate
Operations and Other
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(63.0
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)
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(56.0
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13%
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Total
Reportable Segments
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760.0
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626.7
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21%
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Acquisition-Related
Integration Costs,
Restructuring
and Related Charges
and
Net Unusual Costs
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(93.9
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)
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(58.8
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)
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60%
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Consolidated
Operating Income
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$
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666.1
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$
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567.9
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17%
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3.
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In
future filings please provide a more informative analysis and discussion
of cash flows from operating activities, including changes in working
capital components, for each period presented. In doing so, please
explain
the underlying reasons and implications of material changes between
periods to provide investors with an understanding of trends and
variability in cash flows. Please refer to Item 303(a) of Regulation
S-K
and SEC Release No. 33-8350.
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4.
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Please
revise your tabular disclosure of contractual obligations to include
estimated interest payments on your debt. Since the table is aimed
at
increasing transparency of cash flow, we believe these payments should
be
included in the table. A footnote to the table should provide appropriate
disclosure regarding how you estimated the interest payments. If
you
choose not to include these payments, a footnote to the table should
clearly identify the excluded item and provide any additional information
that is material to an understanding of your cash requirements. See
Item
303(a)(5) of Regulation S-K and footnote 46 to SEC Release No.
33-8350.
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PAYMENTS
DUE BY PERIOD
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Total
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Less
than
1
year
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1-3
years
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3-5
years
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After
5
years
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(in
thousands)
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Contractual
obligations
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Notes
payable to banks
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$
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79,881
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$
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79,881
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$
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-
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$
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-
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$
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-
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Interest
payments on notes
payable
to banks(1)
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4,883
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4,883
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-
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-
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-
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Long-term
debt (excluding
unamortized
discount)
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2,730,188
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214,066
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378,234
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856,085
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1,281,803
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Interest
payments on long-
term
debt(2)
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782,579
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180,253
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318,701
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233,622
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50,003
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Operating
leases
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457,377
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65,586
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97,018
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71,491
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223,282
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Other
long-term liabilities
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312,699
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86,154
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69,414
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46,896
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110,235
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Unconditional
purchase
obligations(3)
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2,105,768
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414,061
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627,630
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389,789
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674,288
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Total
contractual
obligations
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$
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6,473,375
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$
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1,044,884
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$
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1,490,997
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$
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1,597,883
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$
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2,339,611
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(1)
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Interest
payments on notes payable to banks include interest on both revolving
loans under the Company’s Senior Credit Facility and on foreign subsidiary
facilities. The weighted average interest rate on the revolving loans
under the Company’s Senior Credit Facility was 5.7% as of February 28,
2006. Interest rates on foreign subsidiary facilities range from
3.8% to
8.9% as of February 28, 2006.
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(2)
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Interest
rates on long-term debt obligations range from 6.3% to 8.6%. Interest
payments on long-term debt obligations include amounts associated
with the
Company’s outstanding interest rate swap agreements to fix LIBOR interest
rates on $1,200.0 million of the Company’s floating LIBOR rate debt.
Interest payments on long-term debt do not include interest related
to
capital lease obligations or certain foreign credit arrangements,
which
represent approximately 1.6% of the Company’s total long-term debt, as
amounts are not material.
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(3)
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Total
unconditional purchase obligations consist of $26.1 million
for contracts to purchase various spirits over the next seven
fiscal years, $1,920.9 million for contracts to purchase grapes over
the
next sixteen fiscal years, $82.5 million for contracts to purchase
bulk
wine over the next eight fiscal years and $76.3 million for processing
contracts over the next nine fiscal years. See Note 14 to the Company’s
consolidated financial statements located in Item 8 of this Annual
Report
on Form 10-K for a detailed discussion of these
items.
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5.
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In
future filings, please revise the discussion of your critical accounting
policies to focus on the assumptions and uncertainties that underlie
your
critical accounting estimates. Please also quantify, where material,
and
provide an analysis of the impact of critical accounting estimates
on your
financial position and results of operations for the periods presented,
including the effects of changes in critical accounting estimates
between
periods. In addition, please include a qualitative and quantitative
analysis of the sensitivity of reported results to changes in your
assumptions, judgments, and estimates, including the likelihood of
obtaining materially different results if different assumptions were
applied. For example, if reasonably likely changes in an assumption
used
in assessing your goodwill or indefinite-lived intangible assets
for
impairment would have a material effect on your financial condition
or
results of operations, the impact that could result given the range
of
reasonable outcomes should be disclosed and quantified. In this regard,
it
appears that including a discussion of your accounting policies and
underlying estimates for restructuring activities to your critical
accounting policies would be informative given your consecutive
restructuring activities in recent years. Please refer to SEC Release
No.
33-8350.
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6.
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We
note that you acquired The Robert Mondavi Corporation on December
22,
2004. Since it appears that the financial statements of the acquiree
were
not filed subject to Rule 3-05 of Regulation S-X in an Item 9.01
Form 8-K,
please provide us with your significance tests under Rule 210.1-02(w)
of
Regulation S-X supporting your determination that acquiree and pro
forma
financial statements were not
necessary.
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(in
millions)
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Company
Data(1)
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20%
Threshold(2)
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Robert
Mondavi
Data(3)
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Significant
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Purchase
price for Robert Mondavi
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$
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1,111.7
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$
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1,042.7
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No
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Total
assets
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$
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5,558.7
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$
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1,111.7
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$
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978.2
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No
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Income
before income taxes
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$
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344.4
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$
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68.9
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$
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40.4
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No
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(1)
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Total
assets and income before income taxes are from the Company’s Form 10-K for
the fiscal year ended February 29,
2004.
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(2)
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20%
threshold for purchase price is calculated on the Company’s total assets
as of February 29, 2004. 20% threshold for other line items is calculated
on the Company’s balance for the respective line
item.
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(3)
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Purchase
price represents cash paid to shareholders in connection with the
Robert
Mondavi acquisition, plus cash paid for direct acquisition costs.
Total
assets and income before income taxes are from Robert Mondavi’s Form 10-K
for the fiscal year ended June 30,
2004.
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7.
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We
note that you have two classes of common stock and that you present
basic
earnings per share (EPS) using the two-class method. As required
by
paragraph 61(d) of SFAS 128, please also present diluted EPS data
for each
class of common stock. We advise you that your diluted EPS for Class
A
common stock should be based on the more dilutive of the two-class
method
or the if-converted method. Furthermore, diluted EPS for Class B
common
stock should be presented without assuming conversion. Please provide
us
with your historical EPS calculations had you assumed application
of this
guidance to the historical annual periods
presented.
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For
the Years Ended
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February
28,
2006
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February
28,
2005
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February
29,
2004
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Earnings
per common share - basic:
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Class
A Common Stock
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$
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1.44
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$
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1.25
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$
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1.08
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Class
B Common Stock
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$
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1.31
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$
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1.14
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$
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0.98
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Earnings
per common share - diluted:
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Class
A Common Stock
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$
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1.36
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$
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1.19
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$
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1.03
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Class
B Common Stock
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$
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1.25
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$
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1.09
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$
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0.95
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8.
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As
required by paragraph 20 of SFAS 146, please revise your disclosure
in
future filings to further detail the facts and circumstances leading
to
your restructuring activities.
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9.
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Please
tell us and disclose the types of expenses that you include in the
“Acquisition-related Integration Costs” line item and the types of
expenses that you include in the “Restructuring and Related Charges” line
item of your statements of
income.
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10.
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You
disclose on page 103 that adverse grape costs represent the amount
of
historical inventory cost on Robert Mondavi’s balance sheet that exceeds
your estimated ongoing grape cost and is primarily due to the purchase
of
grapes by Robert Mondavi prior to the acquisition date at above-market
prices. You further disclose that you recognized a flow through of
inventory step-up associated primarily with the Robert Mondavi
acquisition. If, as we assume, you recorded the acquired grape inventory
at current replacement costs as stipulated by paragraph 37(c.)(3)
of SFAS
141, please explain to us why a “flow through” of adverse grape costs is
necessary. Please also tell us if the step-up of inventory included
your
grape inventory or only your finished goods and/or work in process
inventories.
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11.
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We
note that you disclose the components of and subtotals for
“acquisition-related integration costs, restructuring and related
charges,
and unusual costs.” As these non-GAAP measures are subject to the
prohibition, disclosure and reconciliation requirements in Item 10(e)
of
Regulation S-K, please tell us why you believe disclosure of these
measures are allowable. If you are able to justify presentation of
these
disclosures, you must meet the burden of demonstrating the usefulness
of
these non-GAAP measures. Therefore, please disclose the following
information in future filings:
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The
manner in which you use these non-GAAP measures to conduct or evaluate
business;
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The
economic substance behind your decision to use these
measures;
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The
material limitations associated with use of these non-GAAP financial
measures as compared to the use of the most directly comparable GAAP
financial measure, and;
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The
substantive reasons why you believe these non-GAAP financial measures
provide useful information to
investors.
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In
addition to the above guidance, please ensure that you provide
reconciliation, preferably in tabular form, which reconciles each
non-GAAP
measure to the most directly comparable GAAP measure. For further
guidance, see Item 10(e) of Regulation S-K and questions 8 and 9
of the
Staff’s Frequently Asked Questions Regarding the Use of Non-GAAP Financial
Measures available at www.sec.gov.
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12.
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You
state in the conclusion that your disclosure controls and procedures
are
effective to ensure that information required to be disclosed in
the
reports you file or submit under the Securities Exchange Act is recorded,
processed, summarized and reported within the time periods specified
in
the SEC’s rules and forms. In future filings, please also state that your
officers conclude, if true, that your disclosure controls and procedures
are also effective to ensure that information required to be disclosed
in
the reports that you file or submit under the Exchange Act is accumulated
and communicated to your management, including your principal executive
and principal financial officer, to allow timely decisions regarding
required disclosure. See Exchange Act Rule
13a-15(e).
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13.
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We
note that your filing excludes a Valuation and Qualifying Accounts
schedule that lists, by major classes, all valuation and qualifying
accounts and reserves not included in specific schedules. We further
note
that your financial statements include, at a minimum, valuation accounts
such as provision for sales returns and uncollectible accounts receivable.
Please either revise future filings to include this schedule or otherwise
tell us why you believe the schedule is not required. See Rules 5-04
and
12-09 of Regulation S-X.
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