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Table of Contents

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2019
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number: 001-08495
image_color.jpg
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
16-0716709
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
207 High Point Drive, Building 100, Victor, New York
14564
 
(Address of principal executive offices)
(Zip Code)
 
 
 
 
(585) 678-7100
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
Not Applicable
 
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Class A Common Stock
STZ
New York Stock Exchange
Class B Common Stock
STZ.B
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  ý  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  ý  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ¨    No  ý

There were 167,239,478 shares of Class A Common Stock, 23,316,564 shares of Class B Common Stock, and 1,018,119 shares of Class 1 Common Stock outstanding as of June 24, 2019.


Table of Contents

TABLE OF CONTENTS

 
 























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

Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. Unless otherwise defined herein, refer to the Notes to Consolidated Financial Statements under Item 1 of this Quarterly Report on Form 10-Q for the definition of capitalized terms used herein. All references to “Fiscal 2019” refer to our fiscal year ended February 28, 2019. All references to “Fiscal 2020” refer to our fiscal year ending February 29, 2020. All references to “$” are to U.S. dollars, all references to “C$” are to Canadian dollars, and all references to “A$” are to Australian dollars.



FINANCIAL STATEMENTS

PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
 
May 31,
2019
 
February 28,
2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
98.7

 
$
93.6

Accounts receivable
788.3

 
846.9

Inventories
1,494.1

 
2,130.4

Prepaid expenses and other
530.9

 
613.1

Assets held for sale - current
668.9

 

Total current assets
3,580.9

 
3,684.0

Property, plant, and equipment
5,118.0

 
5,267.3

Goodwill
7,756.0

 
8,088.8

Intangible assets
2,847.5

 
3,198.1

Equity method investments
3,430.4

 
3,465.6

Securities measured at fair value
2,409.5

 
3,234.7

Deferred income taxes
2,203.1

 
2,183.3

Assets held for sale
925.7

 

Other assets
680.0

 
109.7

Total assets
$
28,951.1

 
$
29,231.5

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
586.4

 
$
791.5

Current maturities of long-term debt
1,065.4

 
1,065.2

Accounts payable
579.1

 
616.7

Other accrued expenses and liabilities
708.4

 
690.4

Total current liabilities
2,939.3

 
3,163.8

Long-term debt, less current maturities
11,745.8

 
11,759.8

Deferred income taxes and other liabilities
1,777.8

 
1,470.7

Total liabilities
16,462.9

 
16,394.3

Commitments and contingencies

 

CBI stockholders’ equity:
 
 
 
Class A Common Stock, $.01 par value – Authorized, 322,000,000 shares; Issued, 185,873,845 shares and 185,740,178 shares, respectively
1.9

 
1.9

Class B Convertible Common Stock, $.01 par value – Authorized, 30,000,000 shares; Issued, 28,322,364 shares and 28,322,419 shares, respectively
0.3

 
0.3

Additional paid-in capital
1,417.0

 
1,410.8

Retained earnings
13,888.9

 
14,276.2

Accumulated other comprehensive income (loss)
(355.5
)
 
(353.9
)
 
14,952.6

 
15,335.3

Less: Treasury stock –
 
 
 
Class A Common Stock, at cost, 18,636,987 shares and 18,927,966 shares, respectively
(2,775.8
)
 
(2,782.1
)
Class B Convertible Common Stock, at cost, 5,005,800 shares
(2.2
)
 
(2.2
)
 
(2,778.0
)
 
(2,784.3
)
Total CBI stockholders’ equity
12,174.6

 
12,551.0

Noncontrolling interests
313.6

 
286.2

Total stockholders’ equity
12,488.2

 
12,837.2

Total liabilities and stockholders’ equity
$
28,951.1

 
$
29,231.5

The accompanying notes are an integral part of these statements.

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
1


FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
(unaudited)
 
For the Three Months Ended May 31,
 
2019
 
2018
Sales
$
2,282.5

 
$
2,230.0

Excise taxes
(185.3
)
 
(182.9
)
Net sales
2,097.2

 
2,047.1

Cost of product sold
(1,068.5
)
 
(998.5
)
Gross profit
1,028.7

 
1,048.6

Selling, general, and administrative expenses
(406.0
)
 
(423.2
)
Operating income (loss)
622.7

 
625.4

Income (loss) from unconsolidated investments
(930.6
)
 
364.4

Interest expense
(114.6
)
 
(87.8
)
Income (loss) before income taxes
(422.5
)
 
902.0

(Provision for) benefit from income taxes
185.4

 
(155.7
)
Net income (loss)
(237.1
)
 
746.3

Net income (loss) attributable to noncontrolling interests
(8.3
)
 
(2.5
)
Net income (loss) attributable to CBI
$
(245.4
)
 
$
743.8

 
 
 
 
Comprehensive income (loss)
$
(239.8
)
 
$
560.9

Comprehensive (income) loss attributable to noncontrolling interests
(7.2
)
 
7.2

Comprehensive income (loss) attributable to CBI
$
(247.0
)
 
$
568.1

 
 
 
 
Net income (loss) per common share attributable to CBI:
 
 
 
Basic – Class A Common Stock
$
(1.30
)
 
$
3.93

Basic – Class B Convertible Common Stock
$
(1.19
)
 
$
3.57

 
 
 
 
Diluted – Class A Common Stock
$
(1.30
)
 
$
3.77

Diluted – Class B Convertible Common Stock
$
(1.19
)
 
$
3.48

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic – Class A Common Stock
168.118

 
168.063

Basic – Class B Convertible Common Stock
23.317

 
23.326

 
 
 
 
Diluted – Class A Common Stock
168.118

 
197.060

Diluted – Class B Convertible Common Stock
23.317

 
23.326

 
 
 
 
Cash dividends declared per common share:
 
 
 
Class A Common Stock
$
0.75

 
$
0.74

Class B Convertible Common Stock
$
0.68

 
$
0.67


The accompanying notes are an integral part of these statements.

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
2


FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in millions)
(unaudited)
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Treasury
Stock
 
Non-controlling
Interests
 
Total
 
Class A
 
Class B
 
Balance at February 28, 2019
$
1.9

 
$
0.3

 
$
1,410.8

 
$
14,276.2

 
$
(353.9
)
 
$
(2,784.3
)
 
$
286.2

 
$
12,837.2

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
(245.4
)
 

 

 
8.3

 
(237.1
)
Other comprehensive income (loss), net of income tax effect

 

 

 

 
(1.6
)
 

 
(1.1
)
 
(2.7
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(239.8
)
Dividends declared

 

 

 
(141.9
)
 

 

 

 
(141.9
)
Initial recognition of non-controlling interest

 

 

 

 

 

 
20.2

 
20.2

Shares issued under equity compensation plans

 

 
(9.3
)
 

 

 
6.3

 

 
(3.0
)
Stock-based compensation

 

 
15.5

 

 

 

 

 
15.5

Balance at May 31, 2019
$
1.9

 
$
0.3

 
$
1,417.0

 
$
13,888.9

 
$
(355.5
)
 
$
(2,778.0
)
 
$
313.6

 
$
12,488.2

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at February 28, 2018
$
2.6

 
$
0.3

 
$
2,825.3

 
$
9,157.2

 
$
(202.9
)
 
$
(3,807.4
)
 
$
16.6

 
$
7,991.7

Cumulative effect of change in accounting principle

 

 

 
2,242.0

 

 

 

 
2,242.0

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)

 

 

 
743.8

 

 

 
2.5

 
746.3

Other comprehensive income (loss), net of income tax effect

 

 

 

 
(175.7
)
 

 
(9.7
)
 
(185.4
)
Comprehensive income (loss)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
560.9

Repurchase of shares

 

 

 

 

 
(100.0
)
 

 
(100.0
)
Dividends declared

 

 

 
(140.6
)
 

 

 

 
(140.6
)
Shares issued under equity compensation plans

 

 
(7.7
)
 

 

 
2.3

 

 
(5.4
)
Stock-based compensation

 

 
17.2

 

 

 

 

 
17.2

Balance at May 31, 2018
$
2.6

 
$
0.3

 
$
2,834.8

 
$
12,002.4

 
$
(378.6
)
 
$
(3,905.1
)
 
$
9.4

 
$
10,565.8


The accompanying notes are an integral part of these statements.

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
3


FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Three Months Ended May 31,
 
2019
 
2018
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(237.1
)
 
$
746.3

 
 
 
 
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Unrealized net (gain) loss on securities measured at fair value
827.5

 
(258.3
)
Equity in (earnings) losses of equity method investees, net of distributed (earnings) losses
91.1

 
(4.7
)
Depreciation
86.6

 
84.2

Stock-based compensation
15.5

 
17.3

Net (gain) loss on sale of unconsolidated investment
0.1

 
(101.4
)
Deferred tax provision (benefit)
(245.4
)
 
116.2

Change in operating assets and liabilities, net of effects from purchase of business:
 
 
 
Accounts receivable
58.6

 
(49.3
)
Inventories
(20.9
)
 
10.6

Prepaid expenses and other current assets
(8.7
)
 
(54.1
)
Accounts payable
(22.3
)
 
14.9

Deferred revenue
53.1

 
47.3

Other accrued expenses and liabilities
(62.3
)
 
(77.7
)
Other
57.3

 
12.7

Total adjustments
830.2

 
(242.3
)
Net cash provided by (used in) operating activities
593.1

 
504.0

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
 
Purchases of property, plant, and equipment
(155.7
)
 
(168.2
)
Purchase of business, net of cash acquired
(36.2
)
 
(0.8
)
Investments in equity method investees
(20.0
)
 
(1.5
)
Proceeds from (payments related to) sale of unconsolidated investment

 
110.2

Other investing activities
(1.6
)
 
6.8

Net cash provided by (used in) investing activities
(213.5
)
 
(53.5
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Net proceeds from (repayments of) short-term borrowings
(205.0
)
 
(77.5
)
Dividends paid
(143.0
)
 
(140.5
)
Principal payments of long-term debt
(22.9
)
 
(5.9
)
Payments of minimum tax withholdings on stock-based payment awards
(13.9
)
 
(12.9
)
Proceeds from shares issued under equity compensation plans
10.4

 
7.6

Purchases of treasury stock

 
(100.0
)
Net cash provided by (used in) financing activities
(374.4
)
 
(329.2
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(0.1
)
 
(1.6
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
5.1

 
119.7

Cash and cash equivalents, beginning of period
93.6

 
90.3

Cash and cash equivalents, end of period
$
98.7

 
$
210.0

 
 
 
 
Supplemental disclosures of noncash investing and financing activities
 
 
 
Additions to property, plant, and equipment
$
35.6

 
$
138.5

The accompanying notes are an integral part of these statements.

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
4


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
MAY 31, 2019
(unaudited)

1.    BASIS OF PRESENTATION

Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. We have prepared the consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in our opinion, all adjustments necessary to present fairly our financial information. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019 (the “2019 Annual Report”), and include the recently adopted accounting guidance described in Note 2 and Note 15 herein. Results of operations for interim periods are not necessarily indicative of annual results.

2.    ACCOUNTING GUIDANCE

Recently adopted accounting guidance
In February 2016, the FASB issued guidance for the accounting for leases. Under this guidance, a lessee recognizes assets and liabilities on its balance sheet for most leases. Lease expense continues to be consistent with previous guidance. Additionally, this guidance requires enhanced disclosures regarding the amount, timing, and uncertainty of cash flows arising from leasing arrangements.

We adopted the guidance on March 1, 2019, using the modified retrospective approach, accordingly, prior period balances and disclosures have not been restated. We elected the package of transition practical expedients for expired or existing contracts, which retains prior conclusions regarding lease identification, classification, and initial direct costs incurred.

We finalized the implementation of changes to our accounting policies, systems and controls, including a new leasing software to capture the required data for accounting and disclosure. The adoption of this guidance resulted in the recognition of operating lease right-of-use assets of $592.5 million and operating lease liabilities of $619.9 million as of March 1, 2019, and did not have a material impact on our results of operations or liquidity.

For additional information on leases, refer to Note 15.

3.    INVENTORIES

Inventories are stated at the lower of cost (primarily computed in accordance with the first-in, first-out method) or net realizable value. Elements of cost include materials, labor, and overhead and consist of the following:
 
May 31,
2019 (1)
 
February 28,
2019
(in millions)
 
 
 
Raw materials and supplies
$
172.8

 
$
182.6

In-process inventories
884.7

 
1,480.5

Finished case goods
436.6

 
467.3

 
$
1,494.1

 
$
2,130.4


(1) 
The inventory balance at May 31, 2019, excludes amounts reclassified to assets held for sale (see Note 4).

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
5


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Related party transactions and arrangements
We have an equally-owned glass production plant joint venture with Owens-Illinois. We have entered into various contractual arrangements with affiliates of Owens-Illinois primarily for the purchase of glass bottles used largely in our imported and craft beer portfolios. Amounts purchased under these arrangements were $88.5 million and $69.0 million for the three months ended May 31, 2019, and May 31, 2018, respectively.

4.    WINE AND SPIRITS TRANSFORMATION

Wine and Spirits Transaction
In April 2019, we entered into a definitive agreement to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices, and facilities (the “Wine and Spirits Transaction”). The Wine and Spirits Transaction is subject to the satisfaction of certain closing conditions, including receipt of required regulatory approval, and is expected to close in the second half of calendar 2019. We expect to use the net cash proceeds from the Wine and Spirits Transaction primarily to reduce outstanding borrowings.

In connection with the Wine and Spirits Transaction, certain Wine and Spirits segment net assets have met the held for sale criteria as of May 31, 2019. We have concluded that no impairment existed as of May 31, 2019. The carrying value of assets held for sale consists of the following:
 
May 31,
2019
(in millions)
 
Assets
 
Inventories
$
658.8

Prepaid expenses and other
10.1

Assets held for sale - current
668.9

 
 
Property, plant, and equipment
179.7

Goodwill
397.3

Intangible assets
347.2

Other assets
1.5

Assets held for sale
925.7

 
 
Liabilities
 
Accounts payable
7.8

Other accrued expenses and liabilities
26.3

Deferred income taxes and other liabilities
0.1

Liabilities held for sale (1)
34.2

Net assets held for sale
$
1,560.4


(1) 
Liabilities held for sale are included in the Consolidated Balance Sheet as of May 31, 2019, within the respective liability line items noted above.

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
6


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Wine and Spirits Optimization
We recognized charges in connection with our ongoing efforts to gain efficiencies and reduce our cost structure within the Wine and Spirits segment as follows:
 
Results of Operations Location
 
For the Three Months Ended
May 31, 2019
(in millions)
 
 
 
Loss on inventory write-downs
Cost of product sold
 
$
27.2

Contract termination costs
Cost of product sold
 
15.8

Employee termination costs
Selling, general, and administrative expenses
 
11.9

Other costs
Selling, general, and administrative expenses
 
6.3

 
 
 
$
61.2



5.    DERIVATIVE INSTRUMENTS

Overview
Our risk management and derivative accounting policies are presented in Notes 1 and 6 of our consolidated financial statements included in our 2019 Annual Report and have not changed significantly for the three months ended May 31, 2019.

We have investments in certain equity securities which provide us with the option to purchase an additional ownership interest in the equity securities of Canopy (see Note 9). These investments are included in securities measured at fair value and are accounted for at fair value, with the net gain (loss) from the changes in fair value of these investments recognized in income (loss) from unconsolidated investments (see Note 6).

The aggregate notional value of outstanding derivative instruments is as follows:
 
May 31,
2019
 
February 28,
2019
(in millions)
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
Foreign currency contracts
$
1,510.1

 
$
1,579.3

 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
Foreign currency contracts
$
645.4

 
$
460.3

Commodity derivative contracts
$
271.3

 
$
284.7



Credit risk
We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the derivative contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association agreements which allow for net settlement of the derivative contracts. We have also established counterparty credit guidelines that are regularly monitored. Because of these safeguards, we believe the risk of loss from counterparty default to be immaterial.

In addition, our derivative instruments are not subject to credit rating contingencies or collateral requirements. As of May 31, 2019, the estimated fair value of derivative instruments in a net liability position due to counterparties was $17.2 million. If we were required to settle the net liability position under these derivative instruments on May 31, 2019, we would have had sufficient available liquidity on hand to satisfy this obligation.

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
7


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Results of period derivative activity
The estimated fair value and location of our derivative instruments on our balance sheets are as follows (see Note 6):
Assets
 
Liabilities
 
May 31,
2019
 
February 28,
2019
 
 
May 31,
2019
 
February 28,
2019
(in millions)
 
 
 
 
 
 
 
 
Derivative instruments designated as hedging instruments
Foreign currency contracts:
Prepaid expenses and other
$
17.0

 
$
14.1

 
Other accrued expenses and liabilities
$
11.0

 
$
8.8

Other assets
$
18.3

 
$
22.1

 
Deferred income taxes and other liabilities
$
9.3

 
$
6.3

 
 
 
 
 
 
 
 
 
Derivative instruments not designated as hedging instruments
Foreign currency contracts:
Prepaid expenses and other
$
1.2

 
$
2.0

 
Other accrued expenses and liabilities
$
2.3

 
$
0.6

Commodity derivative contracts:
Prepaid expenses and other
$
3.0

 
$
6.1

 
Other accrued expenses and liabilities
$
11.8

 
$
6.1

Other assets
$
1.0

 
$
2.6

 
Deferred income taxes and other liabilities
$
9.5

 
$
5.5


The principal effect of our derivative instruments designated in cash flow hedging relationships on our results of operations, as well as Other Comprehensive Income (Loss) (“OCI”), net of income tax effect, is as follows:
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
Net
Gain (Loss)
Recognized
in OCI
 
Location of Net Gain (Loss)
Reclassified from
AOCI to Income (Loss)
 
Net
Gain (Loss)
Reclassified
from AOCI
to Income (Loss)
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2019
 
 
 
 
 
 
Foreign currency contracts
 
$
(2.4
)
 
Sales
 
$

 
 
 
 
Cost of product sold
 
3.6

 
 
$
(2.4
)
 
 
 
$
3.6

 
 
 
 
 
 
 
For the Three Months Ended May 31, 2018
 
 
 
 
 
 
Foreign currency contracts
 
$
(44.9
)
 
Sales
 
$
0.1

 
 
 
 
Cost of product sold
 
4.1

 
 
$
(44.9
)
 
 
 
$
4.2


We expect $12.3 million of net gains, net of income tax effect, to be reclassified from accumulated other comprehensive income (loss) (“AOCI”) to our results of operations within the next 12 months.


Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
8


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The effect of our undesignated derivative instruments on our results of operations is as follows:
Derivative Instruments Not
Designated as Hedging Instruments
 
 
 
Location of Net Gain (Loss)
Recognized in Income (Loss)
 
Net
Gain (Loss)
Recognized
in Income (Loss)
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2019
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
(15.9
)
Foreign currency contracts
 
 
 
Selling, general, and administrative expenses
 
(3.8
)
 
 
 
 
 
 
$
(19.7
)
 
 
 
 
 
 
 
For the Three Months Ended May 31, 2018
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
15.4

Foreign currency contracts
 
 
 
Selling, general, and administrative expenses
 
(1.9
)
 
 
 
 
 
 
$
13.5



6.    FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

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

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
9


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


Canopy investments
Equity securitiesThe fair value of the November 2017 Canopy Warrants and the November 2018 Canopy Warrants (both as defined in Note 9) is estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement). Refer to Note 9, for information on a modification of the November 2018 Canopy Warrants that occurred in June 2019. The inputs used to estimate the fair value of the warrants are as follows:
 
May 31, 2019
 
February 28, 2019
 
November
2018 Canopy
Warrants
 
November
2017 Canopy
Warrants
 
November
2018 Canopy
Warrants
 
November
2017 Canopy
Warrants
Issue date exercise price (1)
C$
50.40

 
C$
12.98

 
C$
50.40

 
C$
12.98

Valuation date stock price (1)
C$
54.48

 
C$
54.48

 
C$
62.38

 
C$
62.38

Expected life (2)
2.4 years

 
0.9 years

 
2.7 years

 
1.2 years

Expected volatility (3)
72.7
%
 
76.2
%
 
79.3
%
 
87.8
%
Risk-free interest rate (4)
1.4
%
 
1.6
%
 
1.8
%
 
1.8
%
Expected dividend yield (5)
0.0
%
 
0.0
%
 
0.0
%
 
0.0
%
(1) 
Based on the closing market price for Canopy common stock on the Toronto Stock Exchange (“TSX”) as of the applicable date.
(2) 
Based on the expiration date of the warrants.
(3) 
Based on historical volatility levels of the underlying equity security.
(4) 
Based on the implied yield currently available on Canadian Treasury zero coupon issues with a remaining term equal to the expected life.
(5) 
Based on historical dividend levels.
Debt securities, ConvertibleIn June 2018, we acquired convertible debt securities issued by Canopy for C$200.0 million, or $150.5 million (the “Canopy Debt Securities”). We have elected the fair value option to account for the Canopy Debt Securities, which at that time, provided the greatest level of consistency with the accounting treatment for the November 2017 Canopy Warrants. Interest income on the Canopy Debt Securities is calculated using the effective interest method and is recognized separately from the changes in fair value in interest expense. The Canopy Debt Securities have a contractual maturity of five years from the date of issuance but may be converted prior to maturity by either party upon the occurrence of certain events. At settlement, the Canopy Debt Securities can be settled at the option of the issuer, in cash, equity shares of the issuer, or a combination thereof. The fair value is estimated using a binomial lattice option-pricing model (Level 2 fair value measurement), which includes an estimate of the credit spread based on the implied spread as of the issuance date of the notes. The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
 
May 31,
2019
 
February 28,
2019
Conversion price (1)
C$
48.17

 
C$
48.17

Valuation date stock price (2)
C$
54.48

 
C$
62.38

Remaining term (3)
4.1 years

 
4.4 years

Expected volatility (4)
47.6
%
 
45.9
%
Risk-free interest rate (5)
1.4
%
 
1.8
%
Expected dividend yield (6)
0.0
%
 
0.0
%
(1) 
Based on the rate which the Canopy Debt Securities may be converted into equity shares, or the equivalent amount of cash, at the option of the issuer.
(2) 
Based on the closing market price for Canopy common stock on the TSX as of the applicable date.

Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
10


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(3) 
Based on the contractual maturity date of the notes.
(4) 
Based on historical volatility levels of the underlying equity security reduced to account for certain risks not incorporated into the option-pricing model.
(5) 
Based on the implied yield currently available on Canadian Treasury zero coupon issues with a term equal to the remaining contractual term of the debt securities.
(6) 
Based on historical dividend levels.
Short-term borrowings
The revolving credit facility under our senior credit facility is a variable interest rate bearing note which includes a fixed margin which is adjustable based upon our debt rating (as defined in our senior credit facility). Its fair value is estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions (Level 2 fair value measurement). The remaining instruments, including our commercial paper, are variable interest rate bearing notes for which the carrying value approximates the fair value.

Long-term debt
The term loans under our 2018 Credit Agreement and our Term Credit Agreement (both as defined in Note 12) are variable interest rate bearing notes which include a fixed margin which is adjustable based upon our debt rating. The senior floating rate notes are variable interest rate bearing notes which include a fixed margin. The fair value of the term loans and the senior floating rate notes are estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions (Level 2 fair value measurement). The fair value of the remaining long-term debt, which is primarily fixed interest rate, is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term borrowings, approximate fair value as of May 31, 2019, and February 28, 2019, due to the relatively short maturity of these instruments. As of May 31, 2019, the carrying amount of long-term debt, including the current portion, was $12,811.2 million, compared with an estimated fair value of $13,199.1 million. As of February 28, 2019, the carrying amount of long-term debt, including the current portion, was $12,825.0 million, compared with an estimated fair value of $12,768.5 million.


Constellation Brands, Inc. Q1 FY 2020 Form 10-Q
11


FINANCIAL STATEMENTS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Recurring basis measurements
The following table presents our financial assets and liabilities measured at estimated fair value on a recurring basis:
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
(in millions)
 
 
 
 
 
 
 
May 31, 2019
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
36.5

 
$

 
$
36.5

Commodity derivative contracts
$

 
$
4.0

 
$

 
$