Constellation Brands, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Leases

Leases

3 Months Ended

May 31, 2019

General

We primarily lease certain vineyards, office and production facilities, warehouses, production equipment, and vehicles. We assess service arrangements to determine if an asset is explicitly or

implicitly specified in the agreement and if we have the right to control the use of the identified asset. We have concluded that certain grape purchasing arrangements associated with the purchase of grape production yielded from a specified block of a vineyard and certain third-party logistics arrangements contain a lease.

The right-of-use asset is initially measured at cost, which is primarily comprised of the initial amount of the lease liability, plus initial direct costs and lease payments at or before the lease commencement date, less any lease incentives received, and is amortized on a straight-line basis over the remaining lease term. All right-of-use assets are reviewed periodically for impairment. The lease liability is initially measured at the present value of lease payments, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, our secured incremental borrowing rate. The incremental borrowing rates are determined using a portfolio approach based on publicly available information in connection with our unsecured borrowing rates adjusted for items including collateral, currency, and the timing in which lease payments are made. We elected to recognize expenses for leases with a term of 12 months or less on a straight-line basis over the lease term and not to recognize these short-term leases on the balance sheet.

Our leases have varying terms with remaining lease terms of up to approximately 30 years. Certain of our lease arrangements provide us with the option to extend or to terminate the lease early.

The right-of-use asset and lease liability are calculated including options to extend or to terminate the lease when we determine that it is reasonably certain that we will exercise those options. In making that determination, we consider various existing economic and market factors, business strategies as well as the nature, length, and terms of the agreement. Based on our evaluation using these factors, we concluded that the exercise of renewal options or early termination options would not be reasonably certain in determining the lease term at commencement for leases we currently have in place. Assumptions made at the commencement date are re-evaluated upon occurrence of certain events such as a lease modification.

Certain of our contractual arrangements may contain both lease and non-lease components. Non-lease components are distinct elements of a contract that are not related to securing the use of the leased asset, such as raw materials, common area maintenance and other management costs. We elected to measure the lease liability by combining the lease and non-lease components as a single lease component for all asset classes.

Certain of our leases include variable lease payments, including payments that depend on an index or rate, as well as variable payments for items such as raw materials, labor, property taxes, insurance, maintenance, and other operating expenses associated with leased assets. Certain grape purchasing arrangements include variable payments that will vary depending on certain factors, including weather, time of harvest, overall market conditions, and the agricultural practices and location of the vineyard. In addition, certain third-party logistics arrangements include variable payments that vary depending on throughput. Such variable lease payments are excluded from the calculation of the right-of-use asset and are recognized in the period in which the obligation is incurred.

Balance sheet location

A summary of lease right-of-use assets and liabilities are as follows:



	Balance Sheet Classification	May 31, 2019
(in millions)
Assets
Operating lease	Other assets	$	575.3
Finance lease	Property, plant, and equipment	30.3
Total right-of-use assets		$	605.6

Liabilities
Current:
Operating lease	Other accrued expenses and liabilities	$	75.6
Finance lease	Current maturities of long-term debt	11.8
Non-Current:
Operating lease	Deferred income taxes and other liabilities	527.0
Finance lease	Long-term debt, less current maturities	13.0
Total lease liabilities		$	627.4

Lease costs

The components of total lease cost are as follows:



	For the Three Months Ended May 31, 2019
(in millions)
Operating lease cost	$	23.4
Finance lease cost:
Amortization of right-of-use assets	2.8
Interest on lease liabilities	0.2
Short-term lease cost	3.2
Variable lease cost	42.6
Total lease cost	$	72.2

Lease maturities ⁽¹⁾

As of May 31, 2019, minimum payments due for lease liabilities for the remaining nine months of fiscal 2020 and for each of the five succeeding fiscal years and thereafter are as follows:



	Operating Leases			Finance Leases
(in millions)
2020	$	74.5		$	9.6
2021	93.7			9.4
2022	81.0			5.1
2023	69.4			1.6
2024	63.0			—
2025	53.2			—
Thereafter	310.5			—
Total lease payments	745.3			25.7
Less: Interest	(142.7		)	(0.9		)
Total lease liabilities	$	602.6		$	24.8

As of May 31, 2019, we have additional operating leases that have not yet commenced with aggregate minimum payments of approximately $5.7 million on an undiscounted basis.

As of February 28, 2019, future payments were expected to be as follows:



	Operating Leases
(in millions)
2020	$	59.0
2021	58.2
2022	51.1
2023	47.9
2024	41.2
Thereafter	302.1
Total lease payments	$	559.5

⁽¹⁾ For leases with terms in excess of 12 months at inception.



Supplemental information	For the Three Months Ended May 31, 2019
(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	22.5
Operating cash flows from finance leases	$	0.2
Financing cash flows from finance leases	$	3.6

Right-of-use assets obtained in exchange for new lease liabilities:
Operating leases	$	8.0
Finance leases	$	—

Weighted-average remaining lease term:
Operating leases	12.0 years
Finance leases	3.4 years

Weighted-average discount rate:
Operating leases	3.7		%
Finance leases	2.7		%