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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 31, 2021
or
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☐ | 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
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
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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:
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Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Class A Common Stock | STZ | New York Stock Exchange |
Class B Common Stock | STZ.B | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
There were 164,264,039 shares of Class A Common Stock, 23,221,678 shares of Class B Common Stock, and 614,353 shares of Class 1 Common Stock outstanding as of October 1, 2021.
TABLE OF CONTENTS
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DEFINED TERMS | |
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PART I - FINANCIAL INFORMATION | |
Item 1. Financial Statements | |
Consolidated Balance Sheets | |
Consolidated Statements of Comprehensive Income (Loss) | |
Consolidated Statements of Changes in Stockholders’ Equity | |
Consolidated Statements of Cash Flows | |
Notes to Consolidated Financial Statements | |
| 1. Basis of Presentation | |
| 2. Inventories | |
| 3. Acquisitions and Divestitures | |
| 4. Derivative Instruments | |
| 5. Fair Value of Financial Instruments | |
| 6. Goodwill | |
| 7. Intangible Assets | |
| 8. Equity Method Investments | |
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| 9. Borrowings | |
| 10. Income Taxes | |
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| 11. Stockholders' Equity | |
| 12. Net Income (Loss) Per Common Share Attributable to CBI | |
| 13. Comprehensive Income (Loss) Attributable to CBI | |
| 14. Business Segment Information | |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk | |
Item 4. Controls and Procedures | |
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PART II – OTHER INFORMATION | |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
Item 4. Mine Safety Disclosures | NA |
Item 6. Exhibits | |
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INDEX TO EXHIBITS | |
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SIGNATURES | |
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 Company’s 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. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
Defined Terms
Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. We use terms in this Quarterly Report on Form 10-Q and in our notes to the consolidated financial statements that are specific to us or are abbreviations that may not be commonly known or used.
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Term | | Meaning |
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$ | | U.S. dollars |
2.25% July 2021 Senior Notes | | $1,000.0 million principal amount of 2.25% senior notes issued in July 2021 |
2.65% November 2017 Senior Notes | | $700.0 million principal amount of 2.65% senior notes issued in November 2017 and redeemed in August 2021, prior to maturity |
2.70% May 2017 Senior Notes | | $500.0 million principal amount of 2.70% senior notes issued in May 2017 and redeemed in August 2021, prior to maturity |
2018 Authorization | | authority to repurchase up to $3.0 billion of our Class A Common Stock and Class B Convertible Common Stock, authorized in January 2018 by our Board of Directors |
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2019 Five-Year Term Facility | | a $491.3 million, five-year term loan facility under the June 2021 Term Credit Agreement, originally entered into in June 2019 |
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2020 Credit Agreement | | ninth amended and restated credit agreement, dated as of March 26, 2020, provides for an aggregate revolving credit facility of $2.0 billion |
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2020 U.S. wildfires | | significant wildfires that broke out in California, Oregon, and Washington states which affected the 2020 U.S. grape harvest |
2021 Annual Report | | our Annual Report on Form 10-K for the fiscal year ended February 28, 2021, unless otherwise specified |
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2021 Authorization | | authority to repurchase up to $2.0 billion of our Class A Common Stock and Class B Convertible Common Stock, authorized in January 2021 by our Board of Directors |
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ABA | | alternative beverage alcohol |
Acreage | | Acreage Holdings, Inc. |
Acreage Financial Instrument | | a call option for Canopy Growth Corporation to acquire 70% of the shares of Acreage Holdings, Inc., at a fixed exchange ratio and 30% at a floating exchange ratio |
Acreage Transaction | | Canopy Growth Corporation’s intention to acquire Acreage Holdings, Inc. upon U.S. federal cannabis legalization, subject to certain conditions |
Administrative Agent | | Bank of America, N.A., as administrative agent for the senior credit facility and term credit agreement |
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AOCI | | accumulated other comprehensive income (loss) |
ASR | | accelerated share repurchase agreement with a third-party financial institution |
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Ballast Point Divestiture | | sale of Ballast Point craft beer business, including a number of its associated production facilities and brewpubs |
C$ | | Canadian dollars |
Canopy | | we made an investment in Canopy Growth Corporation, an Ontario, Canada-based public company |
Canopy Debt Securities | | convertible debt securities issued by Canopy Growth Corporation |
Canopy Equity Method Investment | | November 2017 Canopy Investment, November 2018 Canopy Investment, and May 2020 Canopy Investment, collectively |
CARES Act | | Coronavirus Aid, Relief, and Economic Security Act |
CB International | | CB International Finance S.à r.l., a wholly-owned subsidiary of ours |
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CODM | | chief operating decision maker |
Comparable Adjustments | | certain items affecting comparability that have been excluded by management |
Concentrate Business Divestiture | | sale of certain brands used in our concentrates and high-color concentrate business, and certain related intellectual property, inventory, interests in certain contracts, and other assets |
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I i |
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Term | | Meaning |
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Copper & Kings | | Copper & Kings American Brandy Company, acquired by us |
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CSR | | corporate social responsibility |
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DTC | | direct-to-consumer |
Empathy Wines | | Empathy Wines business, including a digitally-native wine brand, acquired by us |
ERP | | enterprise resource planning system |
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Financial Statements | | our consolidated financial statements and notes thereto included herein |
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Fiscal 2021 | | the Company’s fiscal year ended February 28, 2021 |
Fiscal 2022 | | the Company’s fiscal year ending February 28, 2022 |
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June 2021 Term Credit Agreement | | March 2020 Term Credit Agreement, inclusive of amendment dated as of June 10, 2021 |
Lender | | Bank of America, N.A., as lender for the term credit agreement |
LIBOR | | London Interbank Offered Rate |
March 2020 Term Credit Agreement | | amended and restated term loan credit agreement, dated as of March 26, 2020, that provided for aggregate facilities of $491.3 million, consisting of the 2019 Five-Year Term Facility |
May 2020 Canopy Investment | | May 2020 exercise of the November 2017 Canopy Warrants at an exercise price of C$12.98 per warrant share |
MD&A | | Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 2. of this quarterly report on Form 10-Q |
Mexicali Brewery | | brewery originally planned to be located in Mexicali, Baja California, Mexico |
Mexico Beer Projects | | expansion activities at the Obregon Brewery and Nava Brewery |
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My Favorite Neighbor | | we made an investment in My Favorite Neighbor, LLC |
NA | | not applicable |
Nava Brewery | | brewery located in Nava, Coahuila, Mexico |
Net sales | | gross sales less promotions, returns and allowances, and excise taxes |
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NM | | not meaningful |
Nobilo Wine Divestiture | | sale of New Zealand-based Nobilo Wine brand and certain related assets |
Note(s) | | notes to the consolidated financial statements |
November 2017 Canopy Investment | | our initial investment for 18.9 million in common shares of Canopy Growth Corporation |
November 2017 Canopy Warrants | | warrants which gave us the option to purchase 18.9 million common shares of Canopy Growth Corporation, exercised May 1, 2020 |
November 2018 Canopy Investment | | our incremental investment for 104.5 million in common shares of Canopy Growth Corporation |
November 2018 Canopy Transaction | | November 2018 Canopy Investment and the purchase by us of the November 2018 Canopy Warrants, collectively |
November 2018 Canopy Warrants | | Tranche A Warrants, Tranche B Warrants, and Tranche C Warrants, collectively |
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Obregon Brewery | | brewery located in Obregon, Sonora, Mexico |
OCI | | other comprehensive income (loss) |
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Paul Masson Divestiture | | sale of Paul Masson Grande Amber Brandy brand, related inventory, and interests in certain contracts |
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SEC | | Securities and Exchange Commission |
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Second Quarter 2021 | | the Company’s three months ended August 31, 2020 |
Second Quarter 2022 | | the Company’s three months ended August 31, 2021 |
Six Months 2021 | | the Company’s six months ended August 31, 2020 |
Six Months 2022 | | the Company’s six months ended August 31, 2021 |
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Tranche A Warrants | | warrants which give us the option to purchase 88.5 million common shares of Canopy Growth Corporation expiring November 1, 2023 |
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I ii |
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Term | | Meaning |
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Tranche B Warrants | | warrants which give us the option to purchase 38.4 million common shares of Canopy Growth Corporation expiring November 1, 2026 |
Tranche C Warrants | | warrants which give us the option to purchase 12.8 million common shares of Canopy Growth Corporation expiring November 1, 2026 |
TSX | | Toronto Stock Exchange |
U.S. | | United States of America |
U.S. GAAP | | generally accepted accounting principles in the United States of America |
VWAP Exercise Price | | volume-weighted average of the closing market price of Canopy’s common shares on the Toronto Stock Exchange for the five trading days immediately preceding the exercise date |
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Wine and Spirits Divestiture | | sale of a portion of our wine and spirits business, including lower-margin, lower growth wine and spirits brands, related inventory, interests in certain contracts, wineries, vineyards, offices, and facilities |
Wine and Spirits Divestitures | | Wine and Spirits Divestiture and the Nobilo Wine Divestiture, collectively |
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I iii |
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)
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| August 31, 2021 | | February 28, 2021 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 103.4 | | | $ | 460.6 | |
Accounts receivable | 972.8 | | | 785.3 | |
Inventories | 1,339.0 | | | 1,291.1 | |
Prepaid expenses and other | 528.5 | | | 507.5 | |
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Total current assets | 2,943.7 | | | 3,044.5 | |
Property, plant, and equipment | 5,505.4 | | | 5,821.6 | |
Goodwill | 7,798.9 | | | 7,793.5 | |
Intangible assets | 2,729.7 | | | 2,732.1 | |
Equity method investments | 2,819.0 | | | 2,788.4 | |
Securities measured at fair value | 488.6 | | | 1,818.1 | |
Deferred income taxes | 2,448.0 | | | 2,492.5 | |
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Other assets | 607.0 | | | 614.1 | |
Total assets | $ | 25,340.3 | | | $ | 27,104.8 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Short-term borrowings | $ | 486.0 | | | $ | — | |
Current maturities of long-term debt | 5.8 | | | 29.2 | |
Accounts payable | 840.4 | | | 460.0 | |
Other accrued expenses and liabilities | 854.9 | | | 779.9 | |
Total current liabilities | 2,187.1 | | | 1,269.1 | |
Long-term debt, less current maturities | 10,081.7 | | | 10,413.1 | |
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Deferred income taxes and other liabilities | 1,546.9 | | | 1,493.5 | |
Total liabilities | 13,815.7 | | | 13,175.7 | |
Commitments and contingencies | | | |
CBI stockholders’ equity: | | | |
Class A Common Stock, $0.01 par value – Authorized, 322,000,000 shares; Issued, 187,247,721 shares and 187,204,280 shares, respectively | 1.9 | | | 1.9 | |
Class B Convertible Common Stock, $0.01 par value – Authorized, 30,000,000 shares; Issued, 28,227,478 shares and 28,270,288 shares, respectively | 0.3 | | | 0.3 | |
Additional paid-in capital | 1,648.3 | | | 1,604.2 | |
Retained earnings | 13,922.2 | | | 15,117.8 | |
Accumulated other comprehensive income (loss) | (290.4) | | | (335.5) | |
| 15,282.3 | | | 16,388.7 | |
Less: Treasury stock – | | | |
Class A Common Stock, at cost, 22,588,014 shares and 17,070,550 shares, respectively | (4,087.4) | | | (2,787.6) | |
Class B Convertible Common Stock, at cost, 5,005,800 shares | (2.2) | | | (2.2) | |
| (4,089.6) | | | (2,789.8) | |
Total CBI stockholders’ equity | 11,192.7 | | | 13,598.9 | |
Noncontrolling interests | 331.9 | | | 330.2 | |
Total stockholders’ equity | 11,524.6 | | | 13,929.1 | |
Total liabilities and stockholders’ equity | $ | 25,340.3 | | | $ | 27,104.8 | |
The accompanying notes are an integral part of these statements.
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I 1 |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
(unaudited)
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| For the Six Months Ended August 31, | | For the Three Months Ended August 31, |
| 2021 | | 2020 | | 2021 | | 2020 |
Sales | $ | 4,753.3 | | | $ | 4,591.4 | | | $ | 2,565.0 | | | $ | 2,459.7 | |
Excise taxes | (355.7) | | | (367.6) | | | (193.9) | | | (199.3) | |
Net sales | 4,397.6 | | | 4,223.8 | | | 2,371.1 | | | 2,260.4 | |
Cost of product sold | (2,048.6) | | | (2,019.7) | | | (1,141.4) | | | (1,044.6) | |
Gross profit | 2,349.0 | | | 2,204.1 | | | 1,229.7 | | | 1,215.8 | |
Selling, general, and administrative expenses | (868.8) | | | (752.4) | | | (490.5) | | | (399.1) | |
Impairment of brewery construction in progress | (665.9) | | | — | | | — | | | — | |
Impairment of assets held for sale | — | | | (3.0) | | | — | | | 22.0 | |
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Operating income (loss) | 814.3 | | | 1,448.7 | | | 739.2 | | | 838.7 | |
Income (loss) from unconsolidated investments | (1,370.0) | | | (651.9) | | | (470.8) | | | (80.7) | |
Interest expense | (182.5) | | | (200.2) | | | (95.8) | | | (100.2) | |
Loss on extinguishment of debt | (29.4) | | | (7.6) | | | (29.4) | | | (0.6) | |
Income (loss) before income taxes | (767.6) | | | 589.0 | | | 143.2 | | | 657.2 | |
(Provision for) benefit from income taxes | (117.8) | | | (239.8) | | | (131.3) | | | (135.4) | |
Net income (loss) | (885.4) | | | 349.2 | | | 11.9 | | | 521.8 | |
Net income (loss) attributable to noncontrolling interests | (21.2) | | | (15.0) | | | (10.4) | | | (9.7) | |
Net income (loss) attributable to CBI | $ | (906.6) | | | $ | 334.2 | | | $ | 1.5 | | | $ | 512.1 | |
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Comprehensive income (loss) | $ | (838.6) | | | $ | (231.7) | | | $ | (45.8) | | | $ | 733.2 | |
Comprehensive (income) loss attributable to noncontrolling interests | (22.9) | | | 16.7 | | | (6.5) | | | (14.2) | |
Comprehensive income (loss) attributable to CBI | $ | (861.5) | | | $ | (215.0) | | | $ | (52.3) | | | $ | 719.0 | |
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Net income (loss) per common share attributable to CBI: | | | | | | | |
Basic – Class A Common Stock | $ | (4.77) | | | $ | 1.74 | | | $ | 0.01 | | | $ | 2.68 | |
Basic – Class B Convertible Common Stock | $ | (4.34) | | | $ | 1.58 | | | $ | 0.01 | | | $ | 2.43 | |
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Diluted – Class A Common Stock | $ | (4.77) | | | $ | 1.71 | | | $ | 0.01 | | | $ | 2.62 | |
Diluted – Class B Convertible Common Stock | $ | (4.34) | | | $ | 1.58 | | | $ | 0.01 | | | $ | 2.42 | |
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Weighted average common shares outstanding: | | | | | | | |
Basic – Class A Common Stock | 169.025 | | | 169.841 | | | 167.447 | | | 170.078 | |
Basic – Class B Convertible Common Stock | 23.234 | | | 23.289 | | | 23.222 | | | 23.284 | |
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Diluted – Class A Common Stock | 169.025 | | | 194.962 | | | 192.530 | | | 195.142 | |
Diluted – Class B Convertible Common Stock | 23.234 | | | 23.289 | | | 23.222 | | | 23.284 | |
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Cash dividends declared per common share: | | | | | | | |
Class A Common Stock | $ | 1.52 | | | $ | 1.50 | | | $ | 0.76 | | | $ | 0.75 | |
Class B Convertible Common Stock | $ | 1.38 | | | $ | 1.36 | | | $ | 0.69 | | | $ | 0.68 | |
The accompanying notes are an integral part of these statements.
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I 2 |
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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, 2021 | $ | 1.9 | | | $ | 0.3 | | | $ | 1,604.2 | | | $ | 15,117.8 | | | $ | (335.5) | | | $ | (2,789.8) | | | $ | 330.2 | | | $ | 13,929.1 | |
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Comprehensive income (loss): | | | | | | | | | | | | | | | |
Net income (loss) | — | | | — | | | — | | | (908.1) | | | — | | | — | | | 10.8 | | | (897.3) | |
Other comprehensive income (loss), net of income tax effect | — | | | — | | | — | | | — | | | 98.9 | | | — | | | 5.6 | | | 104.5 | |
Comprehensive income (loss) | | | | | | | | | | | | | | | (792.8) | |
Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (400.8) | | | — | | | (400.8) | |
Dividends declared | — | | | — | | | — | | | (146.1) | | | — | | | — | | | — | | | (146.1) | |
Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (10.6) | | | (10.6) | |
Shares issued under equity compensation plans | — | | | — | | | (0.9) | | | — | | | — | | | 3.8 | | | — | | | 2.9 | |
Stock-based compensation | — | | | — | | | 15.9 | | | — | | | — | | | — | | | — | | | 15.9 | |
Balance at May 31, 2021 | 1.9 | | | 0.3 | | | 1,619.2 | | | 14,063.6 | | | (236.6) | | | (3,186.8) | | | 336.0 | | | 12,597.6 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | |
Net income (loss) | — | | | — | | | — | | | 1.5 | | | — | | | — | | | 10.4 | | | 11.9 | |
Other comprehensive income (loss), net of income tax effect | — | | | — | | | — | | | — | | | (53.8) | | | — | | | (3.9) | | | (57.7) | |
Comprehensive income (loss) | | | | | | | | | | | | | | | (45.8) | |
Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (904.2) | | | — | | | (904.2) | |
Dividends declared | — | | | — | | | — | | | (142.9) | | | — | | | — | | | — | | | (142.9) | |
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Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (10.6) | | | (10.6) | |
Shares issued under equity compensation plans | — | | | — | | | 8.9 | | | — | | | — | | | 1.4 | | | — | | | 10.3 | |
Stock-based compensation | — | | | — | | | 20.2 | | | — | | | — | | | — | | | — | | | 20.2 | |
Balance at August 31, 2021 | $ | 1.9 | | | $ | 0.3 | | | $ | 1,648.3 | | | $ | 13,922.2 | | | $ | (290.4) | | | $ | (4,089.6) | | | $ | 331.9 | | | $ | 11,524.6 | |
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Balance at February 29, 2020 | $ | 1.9 | | | $ | 0.3 | | | $ | 1,514.6 | | | $ | 13,695.3 | | | $ | (266.3) | | | $ | (2,814.0) | | | $ | 342.5 | | | $ | 12,474.3 | |
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Comprehensive income (loss): | | | | | | | | | | | | | | | |
Net income (loss) | — | | | — | | | — | | | (177.9) | | | — | | | — | | | 5.3 | | | (172.6) | |
Other comprehensive income (loss), net of income tax effect | — | | | — | | | — | | | — | | | (756.1) | | | — | | | (36.2) | | | (792.3) | |
Comprehensive income (loss) | | | | | | | | | | | | | | | (964.9) | |
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Dividends declared | — | | | — | | | — | | | (143.3) | | | — | | | — | | | — | | | (143.3) | |
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Shares issued under equity compensation plans | — | | | — | | | (6.0) | | | — | | | — | | | 2.8 | | | — | | | (3.2) | |
Stock-based compensation | — | | | — | | | 14.7 | | | — | | | — | | | — | | | — | | | 14.7 | |
Balance at May 31, 2020 | 1.9 | | | 0.3 | | | 1,523.3 | | | 13,374.1 | | | (1,022.4) | | | (2,811.2) | | | 311.6 | | | 11,377.6 | |
Comprehensive income (loss): | | | | | | | | | | | | | | | |
Net income (loss) | — | | | — | | | — | | | 512.1 | | | — | | | — | | | 9.7 | | | 521.8 | |
Other comprehensive income (loss), net of income tax effect | — | | | — | | | — | | | — | | | 206.9 | | | — | | | 4.5 | | | 211.4 | |
Comprehensive income (loss) | | | | | | | | | | | | | | | 733.2 | |
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Dividends declared | — | | | — | | | — | | | (144.0) | | | — | | | — | | | — | | | (144.0) | |
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Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (10.0) | | | (10.0) | |
Shares issued under equity compensation plans | — | | | — | | | 10.9 | | | — | | | — | | | 16.7 | | | — | | | 27.6 | |
Stock-based compensation | — | | | — | | | 19.4 | | | — | | | — | | | — | | | — | | | 19.4 | |
Balance at August 31, 2020 | $ | 1.9 | | | $ | 0.3 | | | $ | 1,553.6 | | | $ | 13,742.2 | | | $ | (815.5) | | | $ | (2,794.5) | | | $ | 315.8 | | | $ | 12,003.8 | |
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The accompanying notes are an integral part of these statements.
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I 3 |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
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| For the Six Months Ended August 31, |
| 2021 | | 2020 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | |
Net income (loss) | $ | (885.4) | | | $ | 349.2 | |
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | | | |
Unrealized net (gain) loss on securities measured at fair value | 1,335.1 | | | 244.9 | |
Deferred tax provision (benefit) | (19.2) | | | 196.1 | |
Depreciation | 162.3 | | | 142.7 | |
Stock-based compensation | 36.0 | | | 34.0 | |
Equity in (earnings) losses of equity method investees and related activities, net of distributed earnings | 35.3 | | | 408.1 | |
Noncash lease expense | 40.1 | | | 41.3 | |
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Amortization of debt issuance costs and loss on extinguishment of debt | 35.1 | | | 13.7 | |
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Impairment of brewery construction in progress | 665.9 | | | — | |
Impairment of assets held for sale | — | | | 3.0 | |
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Loss on inventory and related contracts associated with business optimization | — | | | 25.1 | |
Loss on settlement of treasury lock contracts | — | | | (29.3) | |
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Change in operating assets and liabilities, net of effects from purchase and sale of business: | | | |
Accounts receivable | (187.8) | | | (56.1) | |
Inventories | (49.3) | | | 73.0 | |
Prepaid expenses and other current assets | 10.1 | | | 51.3 | |
Accounts payable | 245.9 | | | 116.7 | |
Deferred revenue | 144.6 | | | 21.8 | |
Other accrued expenses and liabilities | (3.8) | | | (141.3) | |
Other | (39.0) | | | (49.3) | |
Total adjustments | 2,411.3 | | | 1,095.7 | |
Net cash provided by (used in) operating activities | 1,525.9 | | | 1,444.9 | |
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CASH FLOWS FROM INVESTING ACTIVITIES | | | |
Purchase of property, plant, and equipment | (353.4) | | | (277.8) | |
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Purchase of business, net of cash acquired | — | | | (19.9) | |
Investments in equity method investees and securities | (28.6) | | | (217.4) | |
Proceeds from sale of assets | 1.3 | | | 18.1 | |
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Proceeds from sale of business | 4.6 | | | 41.1 | |
Other investing activities | (1.0) | | | 0.6 | |
Net cash provided by (used in) investing activities | (377.1) | | | (455.3) | |
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I 4 |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
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| For the Six Months Ended August 31, |
| 2021 | | 2020 |
CASH FLOWS FROM FINANCING ACTIVITIES | | | |
Proceeds from issuance of long-term debt | 1,001.9 | | | 1,194.6 | |
Principal payments of long-term debt | (1,357.1) | | | (1,536.4) | |
Net proceeds from (repayments of) short-term borrowings | 486.0 | | | (238.9) | |
Dividends paid | (289.3) | | | (287.6) | |
Purchases of treasury stock | (1,305.0) | | | — | |
Proceeds from shares issued under equity compensation plans | 22.9 | | | 32.0 | |
Payments of minimum tax withholdings on stock-based payment awards | (9.8) | | | (7.6) | |
Payments of debt issuance, debt extinguishment, and other financing costs | (34.8) | | | (18.2) | |
Distributions to noncontrolling interests | (21.2) | | | (10.0) | |
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Net cash provided by (used in) financing activities | (1,506.4) | | | (872.1) | |
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Effect of exchange rate changes on cash and cash equivalents | 0.4 | | | 5.7 | |
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Net increase (decrease) in cash and cash equivalents | (357.2) | | | 123.2 | |
Cash and cash equivalents, beginning of period | 460.6 | | | 81.4 | |
Cash and cash equivalents, end of period | $ | 103.4 | | | $ | 204.6 | |
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Supplemental disclosures of noncash investing and financing activities | | | |
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Additions to property, plant, and equipment | $ | 196.5 | | | $ | 69.9 | |
The accompanying notes are an integral part of these statements.
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I 5 |
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
AUGUST 31, 2021
(unaudited)
1. BASIS OF PRESENTATION
We have prepared the Financial Statements, without audit, pursuant to the rules and regulations of the SEC 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 Financial Statements should be read in conjunction with the consolidated financial statements and related notes included in the 2021 Annual Report. Results of operations for interim periods are not necessarily indicative of annual results.
2. INVENTORIES
Inventories are stated at the lower of cost (primarily computed in accordance with the first-in, first-out method) or net realizable value. Elements of cost include materials, labor, and overhead and consist of the following:
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| August 31, 2021 | | February 28, 2021 |
(in millions) | | | |
Raw materials and supplies | $ | 166.0 | | | $ | 151.1 | |
In-process inventories | 703.5 | | | 735.9 | |
Finished case goods | 469.5 | | | 404.1 | |
| $ | 1,339.0 | | | $ | 1,291.1 | |
We assess the valuation of our inventories and reduce the carrying value of those inventories that are obsolete or in excess of our forecasted usage to their estimated net realizable value based on analyses and assumptions including, but not limited to, historical usage, future demand, and market requirements. We reduced the carrying value of certain inventories and recognized losses of $82.6 million and $8.6 million for the six months ended August 31, 2021, and August 31, 2020, respectively, and $66.6 million and $3.9 million for the three months ended August 31, 2021, and August 31, 2020, respectively. The increase in obsolescence was predominantly from excess inventory of hard seltzers within the Beer segment, resulting from a slowdown in the overall category. These losses were included in cost of product sold within our consolidated results of operations.
3. ACQUISITIONS AND DIVESTITURES
Acquisitions
Copper & Kings
In September 2020, we acquired the remaining ownership interest in Copper & Kings American Brandy Company. This acquisition included a collection of traditional and craft batch-distilled American brandies and other select spirits. The transaction primarily included the acquisition of inventory and property, plant, and equipment. The results of operations of Copper & Kings are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Empathy Wines
In June 2020, we acquired the Empathy Wines business, including the acquisition of a digitally-native wine brand which strengthens our position in the DTC and eCommerce markets. This transaction primarily included the acquisition of goodwill, trademarks, and inventory. In addition, the purchase price for Empathy Wines includes an earn-out over five years based on performance. The results of operations of Empathy Wines are reported in the
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I 6 |
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Divestitures
Paul Masson Divestiture
On January 12, 2021, we sold the Paul Masson Grande Amber Brandy brand, related inventory, and interests in certain contracts. The cash proceeds were used for general corporate purposes. Prior to the Paul Masson Divestiture, we recorded the results of operations of our Paul Masson Grande Amber Brandy business in the Wine and Spirits segment. The following table summarizes the net gain recognized in connection with this divestiture:
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(in millions) | |
Cash received from buyer | $ | 272.0 | |
Net assets sold | (206.4) | |
Contract termination | (4.0) | |
Direct costs to sell | (3.2) | |
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Gain on sale of business | $ | 58.4 | |
Wine and Spirits Divestitures
On January 5, 2021, we sold a portion of our wine and spirits business, including lower-margin, lower growth wine and spirits brands, related inventory, interests in certain contracts, wineries, vineyards, offices, and facilities. We have the potential to earn an incremental $250 million of contingent consideration if certain brand performance targets are met over a two-year period after closing. Also on January 5, 2021, in a separate, but related transaction with the same buyer, we sold the New Zealand-based Nobilo Wine brand and certain related assets. The cash proceeds were utilized to reduce outstanding debt and for other general corporate purposes.
Prior to the Wine and Spirits Divestitures, we recorded the results of operations for this portion of our business in the Wine and Spirits segment. The following table summarizes the net loss recognized in connection with these divestitures:
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(in millions) | |
Cash received from buyer | $ | 667.4 | |
Net assets sold | (669.1) | |
Transition services agreements | (13.0) | |
Direct costs to sell | (8.4) | |
AOCI reclassification adjustments, primarily foreign currency translation | (5.1) | |
Other | (5.2) | |
Loss on sale of business | $ | (33.4) | |
Concentrate Business Divestiture
On December 29, 2020, we sold certain brands used in our concentrates and high-color concentrate business, and certain related intellectual property, inventory, interests in certain contracts, and other assets. Prior to the Concentrate Business Divestiture, we recorded the results of operations of our concentrates and high-color concentrate business in the Wine and Spirits segment.
Ballast Point Divestiture
On March 2, 2020, we sold the Ballast Point craft beer business, including a number of its associated production facilities and brewpubs. Prior to the Ballast Point Divestiture, we recorded the results of operations of the Ballast Point craft beer business in the Beer segment. We received cash proceeds of $41.1 million, which were primarily utilized to reduce outstanding borrowings.
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I 7 |
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
4. DERIVATIVE INSTRUMENTS
Overview
Our risk management and derivative accounting policies are presented in Notes 1 and 6 of our consolidated financial statements included in our 2021 Annual Report and have not changed significantly for the six months and three months ended August 31, 2021.
We have an investment in certain equity securities and other rights which provide us with the option to purchase an additional ownership interest in the equity securities of Canopy (see Note 8). This investment is 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 this investment recognized in income (loss) from unconsolidated investments (see Note 5).
The aggregate notional value of outstanding derivative instruments is as follows:
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| August 31, 2021 | | February 28, 2021 |
(in millions) | | | |
Derivative instruments designated as hedging instruments | | | |
Foreign currency contracts | $ | 1,378.3 | | | $ | 1,558.0 | |
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Derivative instruments not designated as hedging instruments | | | |
Foreign currency contracts | $ | 549.6 | | | $ | 704.7 | |
Commodity derivative contracts | $ | 187.0 | | | $ | 221.6 | |
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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 August 31, 2021, the estimated fair value of derivative instruments in a net liability position due to counterparties was $0.1 million. If we were required to settle the net liability position under these derivative instruments on August 31, 2021, we would have had sufficient available liquidity on hand to satisfy this obligation.
Results of period derivative activity
The estimated fair value and location of our derivative instruments on our balance sheets are as follows (see Note 5):
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Assets | | Liabilities |
| August 31, 2021 | | February 28, 2021 | | | August 31, 2021 | | February 28, 2021 |
(in millions) | | | | | | | | |
Derivative instruments designated as hedging instruments |
Foreign currency contracts: |
Prepaid expenses and other | $ | 37.0 | | | $ | 32.0 | | | Other accrued expenses and liabilities | $ | 2.7 | | | $ | 3.5 | |
Other assets | $ | 31.3 | | | $ | 41.3 | | | Deferred income taxes and other liabilities | $ | 4.9 | | | $ | 2.7 | |
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Constellation Brands, Inc. Q2 FY 2022 Form 10-Q | #WORTHREACHINGFOR I 8 |
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FINANCIAL STATEMENTS | NOTES TO CONSOLIDATED FINANCIAL STATEMENTS | |
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Assets | | Liabilities |
| August 31, 2021 | | February 28, 2021 | | | August 31, 2021 | | February 28, 2021 |
(in millions) | | | | | | | | |
Derivative instruments not designated as hedging instruments |
Foreign currency contracts: |
Prepaid expenses and other | $ | 1.7 | | | $ | 3.3 | | | Other accrued expenses and liabilities | $ | 3.0 | | | $ | 3.5 | |
Commodity derivative contracts: |
Prepaid expenses and other | $ | 33.7 | | | $ | 13.4 | | | Other accrued expenses and liabilities | $ | 0.3 | | | $ | 3.9 | |
Other assets | |