CORRESP: A correspondence can be sent as a document with another submission type or can be sent as a separate submission.
Published on April 2, 2007
|
[LOGO]
|
Constellation
Brands, Inc.
|
|
|
Constellation
|
370
Woodcliff Drive, Suite 300
|
|
|
Fairport,
New York 14450
|
||
|
phone
585-218-3600
|
||
|
Fax
585-218-3601
|
April
2,
2007
United
States Securities and Exchange Commission
Division
of Corporation Finance
100
F
Street, N.E., Mail Stop 3561
Washington,
D.C. 20549
Attention:
William Choi, Accounting Branch Chief
Re: Securities
and Exchange
Commission Comment Letter dated February 28, 2007, with regard
to:
Constellation
Brands, Inc.
Form
10-K for the
Fiscal Year Ended February 28, 2006 (the "Filing")
Filed
May 2,
2006
File
No.
1-08495
Dear
Mr.
Choi:
The
responses of Constellation Brands, Inc. (the “Company”) to the comments of the
staff contained in your letter dated February 28, 2007, are set forth below.
For
the convenience of the staff, the Company has formatted this letter such that
the Company repeats, in the same numbered order contained in your letter, each
comment (sometimes grouping comments together) with the Company’s response
immediately following the numbered comment(s). The Company intends that its
responses to comments that request revised disclosure will be reflected
substantially as indicated below in its future filings only.
In
connection with responding to the staff’s comments, the Company acknowledges
that the Company is responsible for the adequacy and accuracy of the disclosure
in the Company’s Filing, staff comments or changes to disclosure in response to
staff comments do not foreclose the Commission from taking any action with
respect to the Company’s Filing, and the Company may not assert staff comments
as a defense in any proceeding initiated by the Commission or any person under
the federal securities laws of the United States.
FORM
10-K FOR THE FISCAL YEAR ENDED FEBRUARY 28, 2006
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Results
of Operations, page 30
|
1.
|
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.
|
|
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.
|
|
2.
|
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.
|
Company
Response: Please
refer to the below revised Item 7, Management’s Discussion and Analysis of
Financial Condition and Results of Operations, Fiscal
2006 Compared to Fiscal 2005,
which
addresses all items noted in Comments #1 and #2 above. Modifications to what
was
originally filed within the Company’s Form 10-K for the year ended February 28,
2006, are underlined.
Fiscal
2006 Compared to Fiscal 2005
Net
Sales
The
following table sets forth the net sales (in millions of dollars) by operating
segment of the Company for Fiscal 2006 and Fiscal 2005.
|
Fiscal
2006 Compared to Fiscal 2005
|
||||||||||
|
Net
Sales
|
||||||||||
|
2006
|
2005
|
%
Increase
(Decrease)
|
||||||||
|
Constellation
Wines:
|
||||||||||
|
Branded
wine
|
$
|
2,263.4
|
$
|
1,830.8
|
24
%
|
|
||||
|
Wholesale
and other
|
972.0
|
1,020.6
|
(5)%
|
|
||||||
|
Constellation
Wines net sales
|
$
|
3,235.4
|
$
|
2,851.4
|
13
%
|
|
||||
|
Constellation
Beers and Spirits:
|
|
|||||||||
|
Imported
beers
|
$
|
1,043.5
|
$
|
922.9
|
13
%
|
|
||||
|
Spirits
|
324.5
|
313.3
|
4
%
|
|
||||||
|
Constellation
Beers and Spirits net sales
|
$
|
1,368.0
|
$
|
1,236.2
|
11
%
|
|
||||
|
Corporate
Operations and Other
|
$
|
-
|
$
|
-
|
N/A
|
|||||
|
Consolidated
Net Sales
|
$
|
4,603.4
|
$
|
4,087.6
|
13
%
|
|
||||
Net
sales
for Fiscal 2006 increased to $4,603.4 million from $4,087.6 million for Fiscal
2005, an increase of $515.8 million, or 13%. This increase resulted primarily
from an increase in branded wine net sales of $440.1 million (on a constant
currency basis) and imported beer net sales of $120.5 million, partially offset
by an unfavorable foreign currency impact of $35.5 million.
2
Constellation
Wines
Net
sales
for Constellation Wines increased to $3,235.4 million for Fiscal 2006 from
$2,851.4 million in Fiscal 2005, an increase of $384.0 million, or 13%. Branded
wine net sales increased $432.6 million primarily from $337.5 million of net
sales of the acquired Robert Mondavi brands and $43.6 million of net sales
of
Ruffino brands, which the Company began distributing in the U.S. on February
1,
2005, as well as a $51.5 million increase in branded wine net sales (excluding
sales of Robert Mondavi and Ruffino brands). The $51.5 million increase is
due
primarily to growth in the Company’s branded wine net sales in the U.S.
of
$45.2 million resulting from a $28.2 million benefit from a shift in
the mix of sales towards higher priced products and $17.0 million
from
new
product introductions. Wholesale and other net sales decreased $48.5 million
($20.5 million on a constant currency basis) as constant
currency
growth
in the U.K. wholesale business of
$13.0 million
was more
than offset by a decrease in other net sales of
$33.5 million.
The
decrease in other net sales is primarily due to the Company’s Fiscal 2004
decision to exit the commodity concentrate business during Fiscal
2005.
Constellation
Beers and Spirits
Net
sales
for Constellation Beers and Spirits increased to $1,368.0 million for Fiscal
2006 from $1,236.2 million for Fiscal 2005, an increase of $131.8 million,
or
11%. This increase resulted from increases in imported beers net sales of $120.5
million and spirits net sales of $11.3 million. The growth in imported beers
net
sales is primarily due to volume growth in the Company’s Mexican beer portfolio
resulting
from increased retail consumer demand.
The
growth in spirits net sales is attributable primarily to an increase in the
Company’s contract production net sales.
Gross
Profit
The
Company’s gross profit increased to $1,324.6 million for Fiscal 2006 from
$1,140.6 million for Fiscal 2005, an increase of $184.0 million, or 16%. The
Constellation Wines segment’s gross profit increased $191.0 million primarily
due to the additional gross profit of $171.7 million from the Robert Mondavi
acquisition and additional gross profit of
$50.4 million
from
branded wine net sales in the U.S. primarily
due to a favorable mix of sales towards higher margin products and new
product introductions,
partially offset by reduced gross profit of $41.5 million from the
decrease in other net sales.
The
Constellation Beers and Spirits segment’s gross profit increased $21.0 million
primarily due to gross profit of $37.4 million on volume growth
in the Company’s Mexican beer portfolio, partially offset by higher Mexican
beer product
costs of
$9.5 million
and
transportation costs of
$4.0 million.
However, in connection with certain supply arrangements, the higher Mexican
beer
product costs were offset by a corresponding decrease in advertising expenses
resulting in no impact to operating income. In addition, unusual items, which
consist of certain costs that are excluded by management in their evaluation
of
the results of each operating segment, were higher by $28.1 million in Fiscal
2006 versus Fiscal 2005. This increase resulted primarily from accelerated
depreciation costs associated with the Fiscal 2006 Plan (as defined below)
of
$13.4 million and increased flow through of adverse grape cost associated with
the Robert Mondavi acquisition of $13.2 million. Gross profit as a percent
of
net sales increased to 28.8% for Fiscal 2006 from 27.9% for Fiscal 2005
primarily due to sales of higher-margin wine brands acquired in the Robert
Mondavi acquisition, partially offset by the higher unusual items and higher
Mexican beer product costs and transportation costs.
The
Company expects transportation costs to continue to impact the Company’s gross
margins. However, the Company is addressing this matter by continuing its
evaluation and implementation of price increases on a market by market
basis.
3
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased to $612.4 million for Fiscal
2006
from $555.7 million for Fiscal 2005, an increase of $56.7 million, or 10%.
The
Constellation Wines segment’s selling, general and administrative expenses
increased $67.2 million primarily due to increased selling expenses of
$31.6 million,
general
and administrative expenses of
$26.8 million,
and
advertising expenses of
$8.8 million
to
support the growth in the segment’s business, primarily due to the costs related
to the brands acquired in the Robert Mondavi acquisition. Included
in the increase in general and administrative expenses was an expense of $6.4
million
associated with the segment’s U.K. defined benefit pension plan related to a
reduction in the period over which unrecognized actuarial losses are amortized.
The Constellation Beers and Spirits segment’s selling, general and
administrative expenses increased $4.6 million as increased selling expenses
of
$4.9 million
and
general and administrative expenses of
$2.7 million
were
partially offset by lower advertising expenses of
$3.0 million.
The
Corporate Operations and Other segment’s selling, general and administrative
expenses increased $7.0 million primarily due to costs associated with
professional service fees incurred in connection with the Company’s tender offer
for Vincor that expired in December 2005 of
$1.5 million
and
increased general and administrative expenses of
$5.5 million
to
support the Company’s growth. Lastly, there was a decrease of $22.1 million of
unusual costs which consist of certain items that are excluded by management
in
their evaluation of the results of each operating segment. Fiscal 2006 included
costs associated primarily with professional service fees incurred for due
diligence in connection with the Company’s evaluation of a potential offer for
Allied Domecq of $3.4 million. Fiscal 2005 costs included $31.7 million of
financing costs recorded in Fiscal 2005 related to (i) the Company’s redemption
of its $200.0 million aggregate principal amount of 8 1/2% Senior Subordinated
Notes due March 2009 (the “Senior Subordinated Notes”) of
$10.3 millionand
(ii)
the Company’s new senior credit facility entered into in connection with the
Robert Mondavi acquisition of
$21.4 million,
partially offset by net gains of $6.1 million recorded in Fiscal 2005 on the
sales of non-strategic assets of
$3.1 million
and the
receipt of a payment associated with the termination of a previously announced
potential fine wine joint venture of
$3.0 million.
Selling, general and administrative expenses as a percent of net sales decreased
to 13.3% for Fiscal 2006 as compared to 13.6% for Fiscal 2005 primarily due
to
the decrease in unusual costs.
Acquisition-Related
Integration Costs
The
Company recorded $16.8 million of acquisition-related integration costs for
Fiscal 2006 in connection with the Company’s decision to restructure and
integrate the operations of Robert Mondavi (the “Robert Mondavi Plan”).
Acquisition-related integration costs included $5.3 million of employee-related
costs and $11.5 million of facilities and other one-time costs. The Company
recorded $9.4 million of acquisition-related integration costs for Fiscal 2005
in connection with the Robert Mondavi Plan. The Company does not expect
acquisition-related integration costs in connection with the Robert Mondavi
Plan
to be significant for Fiscal 2007.
4
Restructuring
and Related Charges
The
Company recorded $29.3 million of restructuring and related charges for Fiscal
2006 associated with the restructuring plans of the Constellation Wines segment.
Restructuring and related charges resulted from (i) the further realignment
of
business operations as previously announced in Fiscal 2004, a component of
the
Fiscal 2004 Plan (as defined below under the caption “Fiscal 2005 Compared to
Fiscal 2004 - Restructuring and Related Charges”), (ii) the Robert Mondavi Plan,
and (iii) costs associated with the worldwide wine reorganization announced
in
February 2006 (including certain personnel reductions in the U.K. during the
third quarter of fiscal 2006) and the Company’s program to consolidate certain
west coast production processes in the U.S. (collectively, the “Fiscal 2006
Plan”). Restructuring and related charges recorded in connection with the Fiscal
2004 Plan included $0.7 million of employee termination benefit costs and $1.3
million of facility consolidation and relocation costs. Restructuring and
related charges recorded in connection with the Robert Mondavi Plan included
$1.6 million of employee termination benefit costs, $0.7 million of contract
termination costs and $0.5 million of facility consolidation and relocation
costs. Restructuring and related charges recorded in connection with the Fiscal
2006 Plan included $24.3 million of employee termination benefit costs and
$0.2
million of facility consolidation and relocation costs. In addition, in
connection with the Fiscal 2006 Plan, the Company recorded (i) $13.4 million
of
accelerated depreciation charges in connection with the Company’s investment in
new assets and reconfiguration of certain existing assets under the plan and
(ii) $0.1 million of other related costs which were recorded in the cost of
product sold line and the selling, general and administrative expenses line,
respectively, within the Consolidated Statements of Income. The Company recorded
$7.6 million of restructuring and related charges for Fiscal 2005 associated
with the Fiscal 2004 Plan and the Robert Mondavi Plan.
For
Fiscal 2007, the Company expects to incur total restructuring and related
charges of $24.8 million associated primarily with the Fiscal 2006 Plan and
the
Robert Mondavi Plan. In addition, the Company expects to incur total accelerated
depreciation charges of $7.0 million associated with the Fiscal 2006 Plan.
Lastly, the Company expects to incur total other related costs of $8.3 million
associated with the Fiscal 2006 Plan.
Operating
Income
The
following table sets forth the operating income (loss) (in millions of dollars)
by operating segment of the Company for Fiscal 2006 and Fiscal
2005.
|
Fiscal
2006 Compared to Fiscal 2005
|
||||||||||
|
Operating
Income (Loss)
|
||||||||||
|
2006
|
2005
|
%
Increase
|
||||||||
|
Constellation
Wines
|
$
|
530.4
|
$
|
406.6
|
30%
|
|
||||
|
Constellation
Beers and Spirits
|
292.6
|
276.1
|
6%
|
|
||||||
|
Corporate
Operations and Other
|
(63.0
|
)
|
(56.0
|
)
|
13%
|
|
||||
|
Total
Reportable Segments
|
760.0
|
626.7
|
21%
|
|
||||||
|
Acquisition-Related
Integration Costs,
Restructuring
and Related Charges
and
Net Unusual Costs
|
(93.9
|
)
|
(58.8
|
)
|
60%
|
|
||||
|
Consolidated
Operating Income
|
$
|
666.1
|
$
|
567.9
|
17%
|
|
||||
5
As
a
result of the factors discussed above, consolidated operating income increased
to $666.1 million for Fiscal 2006 from $567.9 million for Fiscal 2005, an
increase of $98.2 million, or 17%. Acquisition-related integration costs,
restructuring and related charges and unusual costs of $93.9 million for Fiscal
2006 consist of certain costs that are excluded by management in their
evaluation of the results of each operating segment. These costs represent
restructuring and related charges of $29.3 million associated primarily with
the
Fiscal 2006 Plan and the Robert Mondavi Plan; the flow through of adverse grape
cost and acquisition-related integration costs associated with the Robert
Mondavi acquisition of $23.0 million and $16.8 million, respectively;
accelerated depreciation costs of $13.4 million associated with the Fiscal
2006
Plan; the flow through of inventory step-up associated with the Robert Mondavi
acquisition of $7.9 million; costs associated with professional service fees
incurred for due diligence in connection with the Company’s evaluation of a
potential offer for Allied Domecq of $3.4 million; and other costs associated
with the Fiscal 2006 Plan of $0.1 million. Acquisition-related integration
costs, restructuring and related charges and unusual costs of $58.8 million
for
Fiscal 2005 represent financing costs associated with the redemption of the
Company’s Senior Subordinated Notes and the Company’s new senior credit facility
entered into in connection with the Robert Mondavi acquisition of $31.7 million;
adverse grape cost and acquisition-related integration costs associated with
the
Company’s acquisition of Robert Mondavi of $9.8 million and $9.4 million,
respectively; restructuring and related charges of $7.6 million in the wine
segment associated with the Company’s realignment of its business operations and
the Robert Mondavi acquisition; and the flow through of inventory step-up
associated with the Hardy and Robert Mondavi acquisitions of $6.4 million;
partially offset by a net gain on the sale of non-strategic assets of $3.1
million and a gain related to the receipt of a payment associated with the
termination of a previously announced potential fine wine joint venture of
$3.0
million.
Equity
in Earnings of Equity Method Investees
The
Company’s equity in earnings of equity method investees decreased to $0.8
million in Fiscal 2006 from $1.8 million in Fiscal 2005, a decrease of $0.9
million due primarily to a $5.0 million loss from the Company’s investment in
Ruffino, partially offset by an increase in earnings of $4.1 million associated
primarily with the Company’s investment in Opus One as a result of the Robert
Mondavi acquisition. The $5.0 million loss from the Company’s investment in
Ruffino is due primarily to the write-down of certain pre-acquisition Ruffino
inventories.
Interest
Expense, Net
Interest
expense, net of interest income of $4.2 million and $2.3 million for Fiscal
2006
and Fiscal 2005, respectively, increased to $189.7 million for Fiscal 2006
from
$137.7 million for Fiscal 2005, an increase of $52.0 million, or 38%. The
increase resulted primarily from higher average borrowings in Fiscal 2006
primarily due to the Robert Mondavi acquisition and the investment in Ruffino
in
the fourth quarter of fiscal 2005.
Provision
for Income Taxes
The
Company’s effective tax rate was 31.8% for Fiscal 2006 and 36.0% for Fiscal
2005, a decrease of 4.2%. This decrease was primarily due to a non-cash
reduction in the Company’s provision for income taxes of $16.2 million, or 3.4%,
as a result of adjustments to income tax accruals in connection with the
completion of various income tax examinations plus the income tax benefit the
Company recorded under the repatriation provisions of the “American Jobs
Creation Act of 2004” in connection with distributions of certain foreign
earnings. The Company expects the effective tax rate for Fiscal 2007 to be
approximately 36.5%, which is slightly higher than historical levels, as an
increasing percentage of the Company’s earnings are coming from higher tax
jurisdictions.
6
Net
Income
As
a
result of the above factors, net income increased to $325.3
million
for Fiscal 2006 from $276.5 million for Fiscal 2005, an increase of
$48.8
million,
or 18%.
*********************
Financial
Liquidity and Capital Resources, page 39
|
3.
|
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.
|
Company
Response:
In
future filings, for each period presented, the Company will provide a more
informative discussion of cash flows from operating activities, including
changes in working capital components, explanations of the underlying reasons,
and implications of material changes between periods to provide investors with
an understanding of trends and variability in cash flows.
*********************
Contractual
Obligations and Commitments, page 43
|
4.
|
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.
|
Company
Response:
The
Company will revise its tabular disclosure of contractual obligations to include
estimated interest payments on its debt instruments. Footnotes will be added
to
the table to provide appropriate disclosures regarding the assumptions used
in
estimating the interest payments, as well as to clearly identify any debt
instruments for which estimated interest payments have been excluded. The
revised presentation will be substantially as follows:
Contractual
Obligations and Commitments
The
following table sets forth information about the Company’s long-term contractual
obligations outstanding at February 28, 2006. It brings together data for easy
reference from the consolidated balance sheet and from individual notes to
the
Company’s consolidated financial
statements. See Notes 8, 9, 11, 12, 13 and 14 to the Company’s consolidated
financial statements located
in
Item 8 of this Annual Report on Form 10-K for detailed discussion of items
noted
in the following table.
7
|
PAYMENTS
DUE BY PERIOD
|
||||||||||||||||
|
Total
|
Less
than
1
year
|
1-3
years
|
3-5
years
|
After
5
years
|
||||||||||||
|
(in
thousands)
|
||||||||||||||||
|
Contractual
obligations
|
||||||||||||||||
|
Notes
payable to banks
|
$
|
79,881
|
$
|
79,881
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Interest
payments on notes
payable
to banks(1)
|
4,883
|
4,883
|
-
|
-
|
-
|
|||||||||||
|
Long-term
debt (excluding
unamortized
discount)
|
2,730,188
|
214,066
|
378,234
|
856,085
|
1,281,803
|
|||||||||||
|
Interest
payments on long-
term
debt(2)
|
782,579
|
180,253
|
318,701
|
233,622
|
50,003
|
|||||||||||
|
Operating
leases
|
457,377
|
65,586
|
97,018
|
71,491
|
223,282
|
|||||||||||
|
Other
long-term liabilities
|
312,699
|
86,154
|
69,414
|
46,896
|
110,235
|
|||||||||||
|
Unconditional
purchase
obligations(3)
|
2,105,768
|
414,061
|
627,630
|
389,789
|
674,288
|
|||||||||||
|
Total
contractual
obligations
|
$
|
6,473,375
|
$
|
1,044,884
|
$
|
1,490,997
|
$
|
1,597,883
|
$
|
2,339,611
|
||||||
|
(1)
|
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.
|
|
(2)
|
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.
|
|
(3)
|
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.
|
*********************
Critical
Accounting Policies, page 44
|
5.
|
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.
|
8
Company
Response:
In
future filings, the Company will revise the discussion of its critical
accounting policies, where appropriate, to focus on the assumptions and
uncertainties that underlie the Company’s critical accounting estimates. We will
quantify, where material, and provide an analysis of the impact of critical
accounting estimates on the Company’s financial position and results of
operations, including the effects of changes in critical accounting estimates
between periods. In addition, we will include qualitative and quantitative
analyses of the sensitivity of reported results to changes in the Company’s
assumptions, judgments, and estimates, including the likelihood of obtaining
materially different results if different assumptions were
applied, including for goodwill and intangible assets with indefinite
lives, as appropriate. In future filings, the Company will consider including
a
discussion of its accounting policies and underlying estimates for restructuring
activities in the Company’s disclosure of critical accounting
estimates.
*********************
Notes
to Consolidated Financial Statements
Note 3.
Acquisitions, page 69
|
6.
|
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.
|
Company
Response:
The
following table presents as supplemental information for the staff the Company’s
significance tests calculated in accordance with Rule 210.1-02(w) of Regulation
S-X. As a result of the calculations, the Company determined that acquiree
and
pro forma financial statements were not necessary in connection with the
Company’s acquisition of The Robert Mondavi Corporation (“Robert Mondavi”) on
December 22, 2004, as noted below.
|
(in
millions)
|
Company
Data(1)
|
20%
Threshold(2)
|
Robert
Mondavi
Data(3)
|
Significant
|
|||||||||
|
Purchase
price for Robert Mondavi
|
$
|
1,111.7
|
$
|
1,042.7
|
No
|
||||||||
|
Total
assets
|
$
|
5,558.7
|
$
|
1,111.7
|
$
|
978.2
|
No
|
||||||
|
Income
before income taxes
|
$
|
344.4
|
$
|
68.9
|
$
|
40.4
|
No
|
||||||
|
(1)
|
Total
assets and income before income taxes are from the Company’s Form 10-K for
the fiscal year ended February 29,
2004.
|
|
(2)
|
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.
|
|
(3)
|
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.
|
*********************
9
Note
16. Earnings per Common Share, page 92
|
7.
|
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.
|
Company
Response:
The
Company notes the staff’s comment regarding the use of the two-class method of
computing earnings per share (“EPS”) since the Company has two classes of common
stock, Class A common stock and Class B common stock. The Company has reviewed
the requirements of paragraph 61 of SFAS No. 128, EITF Issue No. 03-6 and the
proposed FASB Staff Position FSP FAS 128-a. As a result of that review, the
Company has determined that on a prospective basis beginning with the Form
10-K
for the fiscal year ended February 28, 2007, the Company will present both
basic
EPS and diluted EPS for both Class A common stock and Class B common stock.
The
diluted EPS for the Class A common stock will be presented on the more dilutive
of the if-converted method or the two-class method of computing EPS.
Historically, the Company has presented the diluted EPS for Class A common
stock
on the more dilutive if-converted method. Also, the diluted EPS for Class B
common stock will be presented without assuming conversion into Class A common
stock.
The
Company has reviewed its historical calculations of both basic EPS and diluted
EPS presented in the Form 10-K for the fiscal year ended February 28, 2006,
in
accordance with the guidance in the proposed FASB Staff Position FSP FAS 128-a.
The Company noted no differences in the basic EPS for Class A common stock
and
Class B common stock presented and the Company has historically presented the
more dilutive if-converted method for its Class A common stock. The following
table shows the Company’s historical basic EPS and diluted EPS for both Class A
common stock and Class B common stock in accordance with the above
guidance.
|
For
the Years Ended
|
||||||||||
|
February
28,
2006
|
February
28,
2005
|
February
29,
2004
|
||||||||
|
Earnings
per common share - basic:
|
||||||||||
|
Class
A Common Stock
|
$
|
1.44
|
$
|
1.25
|
$
|
1.08
|
||||
|
Class
B Common Stock
|
$
|
1.31
|
$
|
1.14
|
$
|
0.98
|
||||
|
Earnings
per common share - diluted:
|
||||||||||
|
Class
A Common Stock
|
$
|
1.36
|
$
|
1.19
|
$
|
1.03
|
||||
|
Class
B Common Stock
|
$
|
1.25
|
$
|
1.09
|
$
|
0.95
|
||||
*********************
Note
20. Restructuring and Related Charges, page 94
|
8.
|
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.
|
|
9.
|
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.
|
10
Company
Response:
The
Company will revise its disclosure in future filings to further detail the
facts
and circumstances leading to the Company’s restructuring activities, as required
by paragraph 20 of SFAS 146. The Company will also disclose in future filings
the types of expenses included in the “Acquisition-Related Integration Costs”
line item and the “Restructuring and Related Charges” line item of the Company’s
statements of income.
The
Company defines acquisition-related integration costs as nonrecurring costs
incurred to integrate newly acquired businesses after a business combination
which are incremental to those of the Company prior to the business combination.
As such, acquisition-related integration costs include, but are not limited
to,
(i) employee-related costs such as salaries and stay bonuses paid to
employees of the acquired business that will be terminated after their
integration activities are completed, (ii) costs to relocate fixed assets and
inventories, and (iii) facility costs and other one-time costs such
as external services and consulting fees.
Restructuring
and related charges consist of various costs accounted for under, as
appropriate, either SFAS 112 or SFAS 146. Paragraph 8, footnote 7 of SFAS 146
states that “absent evidence to the contrary, an ongoing benefit arrangement is
presumed to exist if an entity has a past practice of providing similar
termination benefits.” Accordingly, as the Company has had several restructuring
programs which have provided employee termination benefits in the past, the
Company accounts for employee termination benefit costs under SFAS 112. The
Company includes employee severance, related payroll benefit costs such as
costs to provide continuing health insurance, and outplacement services as
employee termination benefit costs.
Contract
termination costs, and other associated costs including, but not limited to,
facility consolidation and relocation costs are accounted for under SFAS 146.
Per SFAS 146, contract termination costs are costs to terminate a contract
that
is not a capital lease, including costs to terminate the contract before the
end
of its term or costs that will continue to be incurred under the contract for
its remaining term without economic benefit to the entity. The Company includes
costs to terminate certain operating leases for buildings, computer and IT
equipment, and costs to terminate contracts, including distributor contracts
and
contracts for long-term purchase commitments, as contract
termination costs. Per SFAS 146, other associated costs include, but are not
limited to, costs to consolidate or close facilities and relocate employees.
The
Company includes employee relocation costs and equipment relocation costs as
other associated costs.
*********************
Note
22. Business Segment Information, page 102
|
10.
|
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.
|
11
Company
Response: As
supplemental information for the staff, the Company responds to this comment
as
follows. Prior to the Company’s acquisition of Robert Mondavi, Robert
Mondavi had entered into various long-term grape contracts which fixed the
purchase price for certain grape varietals. At the time of Robert Mondavi’s
purchase of certain of these grape varietals, the contracted pricing was higher
than the current market pricing. As a result, at the time of the Company’s
acquisition of Robert Mondavi, Robert Mondavi’s historical
inventory carrying value included these above-market grape contract
costs. This additional “layer” of cost included in Robert Mondavi’s historical
inventory carrying value is what the Company refers to as “adverse
grape costs”. In other words, the Company defines “adverse grape costs” as the
difference between the historical carrying value of the acquired inventories
and
what the historical carrying value would have been if Robert Mondavi had paid
market prices for their grape purchases. The Company estimates that the
historical market prices are indicative of the ongoing costs of the Robert
Mondavi business.
The
acquired inventories primarily consisted of wine from the annual grape harvests
of 2000 through 2004. The acquisition of Robert Mondavi occurred on December
22,
2004, which was after that calendar year’s grape harvest was completed. At the
acquisition date, the grapes from the 2004 harvest had already been crushed
and
their juice had already been fermented. Therefore, the inventories that the
Company acquired were classified as either bulk wine (work in process inventory)
or case goods (finished goods inventory). As such, the Company recorded the
acquired bulk wine and case goods inventories as stipulated by paragraphs
37(c.)(2) and 37(c.)(1), respectively, of SFAS 141. The inventory step-up that
resulted from valuing both the acquired work in process and the acquired
finished goods inventories in accordance with the provisions of SFAS 141 was
less than the step-up that would have been required had the historical inventory
carrying value not included the “adverse grape costs” component. In other words,
the adverse grape costs are included in Robert Mondavi’s historical work in
process and finished goods inventory carrying values, while the inventory
step-up represents the increase in inventory value from historical carrying
value to fair value, as defined in SFAS 141. Had the historical grape inventory
been originally purchased by Robert Mondavi at market prices, the historical
costs would have been lower, and the resulting inventory step-up would have
been
higher. Accordingly, the flow through of inventory step-up costs and “adverse
grape costs” are applicable to both the acquired work in process as well as the
acquired finished goods inventories.
For
segment reporting purposes, the Company excludes both the flow through of
adverse grape costs and the inventory step-up associated with the acquired
Robert Mondavi inventories, consistent with how the chief operating decision
maker and senior management evaluate the financial performance of the
Constellation Wines segment. The Company’s chief operating decision maker and
senior management measure the financial performance of the segment using a
normal level of segment profit that is intended to be comparable between
periods.
*********************
12
Note
25. Selected Quarterly Financial Information (Unaudited), page
107
|
11.
|
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:
|
| · |
The
manner in which you use these non-GAAP measures to conduct or evaluate
business;
|
| · |
The
economic substance behind your decision to use these
measures;
|
| · |
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;
|
| · |
The
substantive reasons why you believe these non-GAAP financial measures
provide useful information to
investors.
|
|
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.
|
Company
Response:
Pursuant
to Item 302 of Regulation S-K, the Company discloses the components of material
charges and/or credits to the results for each quarter presented in Note
25, Selected Quarterly Financial Information (Unaudited)
in
footnotes (1)
and
(3)
to the
table. The required GAAP disclosures are presented in the “first” table,
followed by footnotes (1),
(2)
and
(3)
to the
table. Footnotes (1)
and
(3)
are
designed to provide additional detail of the material charges and/or credits
included in the GAAP disclosures for each quarter presented as required by
Item
302 of Regulation S-K and not to present non-GAAP measures. Subtotals have
been
provided to assist the reader of the financial statements in understanding
the
total of material charges and/or credits included in the reported GAAP
disclosures. In future filings, in order to avoid any confusion that the Company
is presenting non-GAAP measures, the Company will no longer present the “Total
acquisition-related integration costs, restructuring and related charges and
unusual costs” line item in the tables included in footnotes (1)
and
(3).
*********************
Controls
and Procedures, page 109
|
12.
|
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).
|
13
Company
Response:
In
accordance with Exchange Act Rule 13a-15(e), the Company plans to state in
its
future filings that the Company’s disclosure controls and procedures are
effective to ensure that information required to be disclosed in the reports
that the Company files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including the Company’s principal
executive and principal financial officer, to allow timely decisions regarding
required disclosure.
*********************
Schedule
II - Valuation and Qualifying Accounts
|
13.
|
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.
|
*********************
If
you
have any questions or comments with respect to any of the foregoing matters,
please do not hesitate to contact me at (585) 218-3671, Tom Howe at (585)
218-3665, or Greg Belemjian at (585) 218-3658.
Sincerely,
CONSTELLATION
BRANDS, INC.
/s/
Thomas S. Summer
Thomas
S.
Summer
Executive
Vice President and Chief Financial Officer
Cc: Members
of the Audit Committee of the Board of Directors of Constellation Brands,
Inc.
KPMG
LLP
14