Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities.Securities
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(2) PART II | Includes impairmentITEM 7. MD&A | Table of intangible assets of $108.0 million, $86.8 million and $46.0 million for the years ended February 28, 2019, February 28, 2018, and February 28, 2017, respectively (refer to Note 7 of the Notes to the Financial Statements for additional discussion).Contents |
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(3)
| Includes a net gain in connection with the sale of our Accolade Wine Investment of $99.8 million for the year ended February 28, 2019 (refer to Note 2 of the Notes to the Financial Statements for additional discussion). |
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(4)
| Includes unrealized net gain from the changes in fair value of the Canopy securities measured at fair value of $1,971.2 million and $464.3 million for the years ended February 28, 2019, and February 28, 2018, respectively (refer to Note 7 of the Notes to the Financial Statements for additional discussion). |
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(5)
| Consists of a make-whole payment of $73.6 million in connection with the early redemption of our April 2012 senior notes and the write-off of debt issuance costs of $23.4 million in connection with prior-to-maturity repayments of various debt obligations for the year ended February 28, 2018 (refer to Note 12 of the Notes to the Financial Statements for additional discussion). |
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(6)
| Includes a provisional net income tax benefit of $351.2 million for the year ended February 28, 2018, associated with the December 2017 enactment of the TCJ Act (refer to Note 13 of the Notes to the Financial Statements for additional discussion). |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.Operations
Introduction
We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources” located in our Form 10-K for the fiscal year ended February 29, 2020, filed on April 21, 2020, for reference to discussion of the fiscal year ended February 28, 2019, the earliest of the three fiscal years presented. This MD&A, which should be read in conjunction with our Financial Statements, provides additional information on our businesses, current developments, financial condition, cash flows and results of operations. It is organized as follows:
Overview. This section provides a general description of our business, which we believe is important in understanding the results of our operations, financial condition, and potential future trends.
Strategy.Strategy. This section provides a description of our strategy and a discussion of recent developments, significant investments, acquisitions, and divestitures.
Results of operations. This section provides an analysis of our results of operations presented on a business segment basis. In addition, a brief description of significant transactions and other items that affect the comparability of the results is provided.
Financial liquidityLiquidity and capital resources. This section provides an analysis of our cash flows, and our outstanding debt, liquidity position, and commitments. Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund our ongoing operations and future commitments, as well as a discussion of other financing arrangements.
Critical accounting estimatespolicies and policies.estimates. This section identifies those accounting policies that are considered important to our results of operations and financial condition, require significant judgment and involve significant management estimates. Our significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 1 of the Notes to the Financial Statements.
1.
Effective March 1, 2018, we adopted the FASB amended guidance regarding the recognition of revenue from contracts with customers using the retrospective application method. Accordingly, unless otherwise noted, we have restated net sales, gross profit, operating income, provision for income taxes and net income attributable to CBI for the years ended February 28, 2018, and February 28, 2017. For additional information, refer to Note 1 of the Notes to the Financial Statements.
Overview
We are an international beverage alcohol company with a broad portfolio of consumer-preferred, high-end imported and craft beer brands, and higher-end wine and spirits brands. We are the third-largest producer and marketer of beer for the U.S. market and aleading, higher-end wine company in the U.S. market. We are the largest multi-category supplier (beer, wine and spirits) of beverage alcohol in the U.S., and a leading supplier of wine from New Zealand and Italy to North America.
Our internal management financial reporting consists of twothree business divisions: (i) Beer and (ii) Wine and Spirits, and we report our operating results in three segments: (i) Beer, (ii) Wine and Spirits, and (iii) Canopy and we report our operating results in four segments: (i) Beer, (ii) Wine and Spirits, (iii) Corporate Operations and Other. Other, and (iv) Canopy. Our Canopy Equity Method Investment makes up the Canopy segment.
In the Beer segment, our portfolio consists of high-end imported andbeer, craft beer, and ABA brands. We have an exclusive perpetual brand license to import, market, and sell in the U.S. our Mexican beer portfolio.portfolio in the U.S. In the Wine and Spirits segment, our portfolio includes higher-margin, higher-growth wine brands complemented by certain higher-end spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of executive management, corporate development, corporate finance, corporate growth and strategy, human resources, internal audit, investor relations, legal, public relations, and information technology, as well as our investments in Canopy and those made through our corporate venture capital function.function. All costs included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are, therefore, not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in our chief operating decision maker’sCODM’s evaluation of the operating income (loss) performance of the other reportable segments.The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management, and the structure of our internal financial reporting.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 30 |
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PART II | ITEM 7. MD&A | Table of Contents |
Strategy
Our overall strategy is to drive industry-leading growth and shareholder value by building brands that people love when celebrating big moments or enjoying quiet ones. We position our portfolio to benefit from the consumer-led trend towards premiumization, which we believe will continue to result in faster growth rates in the higher-end of the beer, wine and spirits categories. We focus on developing our expertise in consumer insights and category management as well as our strong distributor network, which provides an effective route-to-market. Additionally, we leverage our scale across the total beverage alcohol market and our level of diversification hedges our portfolio risk. In addition to growing our existing business, we focus on targeted acquisitions of, and investments in, businesses that are higher-margin, higher-growth, consumer-led, have a low integration risk and/or fill a gap in our portfolio. We also strive to identify, meet and stay ahead of evolving consumer trends and market dynamics (see “Recent Developments” and “Investments, Acquisitions and Divestitures – Canopy Investments” below).
We strive to strengthen our portfolio of higher-end beer, wine and spirits brands and differentiate ourselves through:
leveraging our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio and to provide for cross promotional opportunities;
strengthening relationships with wholesalers and retailers by providing consumer and beverage alcohol insights;
investing in brand building and innovation activities;
positioning ourselves for success with consumer-led products that identify, meet and stay ahead of evolving consumer trends and market dynamics;
realizing operating efficiencies through expanding and enhancing production capabilities and maximizing asset utilization; and
developing employees to enhance performance in the marketplace.
Our business strategy for the Beer segment focuses on leading the high-end segment of the U.S. beer market andmarket. This includes continued focus on growing our beer portfolio in the U.S. through expanding distribution for key
brands, as well as new product developmentNPD and innovation within the existing portfolio of brands, and continued expansion construction and optimizationconstruction activities for our Mexico beer operations. Additionally, in an effort to more fully compete in growing sectors of the high-end segment of the U.S. beer market, we’ve made several acquisitions of high-quality, regional craft beer brands andwe have leveraged our innovation capabilities to introduce new brands that align with consumer trends.
In connection with our business strategy for the Beer segment, weWe havemore than tripled the production capacity of ourthe Nava Brewery since its June 2013 acquisition. In addition, constructionearly Fiscal 2022, we completed part of the Mexicali Brewery is progressing and we are continuing to invest to expand thea planned expansion of our Obregon Brewery, which was acquired in December 2016.Brewery. Expansion construction and optimization efforts continue under our previously-announced Mexico Beer Expansion Projects (as defined below in “Capital Expenditures”) to align with our anticipated future growth expectations (seeexpectations. However, at this time, we have suspended all Mexicali Brewery construction activities, following a negative result from a public consultation held in Mexico. See “Capital Expenditures” below).expenditures” below.
Our business strategy for the Wine and Spirits segment is to build an industry-leading portfolio of higher-end wine and spirits brands. We are investing to meet the evolving needs of consumers;consumers, including launching direct-to-consumer and eCommerce platforms; building brands through consumer insights, sensory expertise, and innovation; and refreshing existing brands, as we continue to focus on moving our branded wine and spirits portfolio towards a higher-margin, higher-growth portfolio of brands. We dedicate a large share of our sales and marketing resources to our U.S. Focus Brands as they represent a majority of our U.S. wine and spirits revenue and profitability, and generally hold strong positions in their respective price categories. We focus our innovation and investment dollars on those brands within our portfolio which position us to benefit from the consumer-led trend towards premiumization. Additionally, in connection with the Wine and Spirits Transaction,recent divestitures, we expect to optimize the value of our wine and spirits portfolio by driving increased focus on our higher-end priority brands to accelerate growth and improve overall operating margins. In markets where it is feasible, we entered into contractual arrangements to consolidate our U.S. distribution network in order to obtain dedicated distributor selling resources which focus on our U.S. wine and spirits portfolio to drive organic growth. This consolidated U.S. distribution network currently represents about 70%of our branded wine and spirits volume in the U.S. Effective April 1, 2021, we have modified our U.S. wine and spirits distribution network to a single distributor which we expect to continue to represent approximately 70% of that volume. Throughout the terms of these contracts, we generally expect shipments on an annual basis to these distributors to essentially equal the distributors’ shipments to retailers.
Marketing, sales, and distribution of our products are managed on a geographic basis in orderallowing us to fully leverage leading market positions. In addition, market dynamics and consumer trends vary across each of our markets. Within our primary market in the U.S., we offer a range of beverage alcohol products across the imported beer, craft beer, ABA, branded wine, and spirits categories, with generally separate distribution networks utilized for (i)our beer portfolio and (ii)our wine and spirits portfolio. The environment for our products is competitive in each of our markets.
WithinWe complement our Corporate Operations and Other segment, we complementedstrategy with our total beverage alcohol strategy in an adjacent category by making investmentsinvestment in Canopy, by expanding our portfolio into adjacent categories. Canopy is a world-leading, diversifiedleading cannabis company. These investments arecompany with operations in countries across the world. This investment is consistent with our long-term strategy to identify, meetaddress, and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion ofdynamics. We expanded our strategic relationship with Canopy to help position Canopyit as a global leader in cannabis production, branding, intellectual property, and retailing.
We remain committed to our long-term financial model ofof: growing sales, expanding margins, and increasing cash flow in order to achieve earnings per share growth, maintain our targeted leverage ratio, and pay quarterly cash dividends.deliver returns to shareholders through the payment of dividends and periodic share repurchases. Our results of operations and financial condition have not been significantly affected by inflation and changing prices. In the event of future rising costs, we intend to pass along such rising costs through increased selling prices, subject to normal competitive conditions. There can be no assurances, however, that we will be able to pass along rising costs through increased selling prices. In addition, we continue to identify on-going cost savings initiatives.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 31 |
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PART II | ITEM 7. MD&A | Table of Contents |
Recent DevelopmentsDevelopment
Mexicali Brewery
In April 2021, our Board of Directors authorized management to sell or abandon the Mexicali Brewery. Subsequently, management determined that we will be unable to use or repurpose certain assets at the Mexicali Brewery. Accordingly, in the first quarter of fiscal 2022, we expect to recognize a long-lived asset impairment of approximately $650 million to $680 million which will be included within our consolidated results of operations. The fair value will be determined based on the expected salvage value of the abandoned assets as of April 2021. We are continuing to work with government officials in Mexico to (i) determine next steps for our suspended Mexicali Brewery construction project and (ii) pursue various forms of recovery for capitalized costs and additional expenses incurred in establishing the brewery, however, there can be no assurance of any recoveries. In the medium-term, under normal operating conditions, we have ample capacity at the Nava and Obregon breweries to meet consumer needs based on current growth forecasts and current and planned production capabilities. To align with our anticipated future growth expectations we are also working with the Mexican government to explore options to add further capacity at another location in Southeastern Mexico where there is ample water and a skilled workforce to meet our long-term needs.
COVID-19
In the key markets where we sell our products, the beverage alcohol industry has been classified as an essential business. COVID-19 containment measures affected us earlier in the fiscal year primarily in the reduction of (i) depletion volume on our products in the on-premise business due to bar and restaurant closures and (ii) shipment volume related to the reduced production activity at our major breweries in Mexico. The on-premise business has historically been about 10% to 15% of our depletion volume for beer, wine, and spirits. The Fiscal 2021 decrease in the on-premise business has been more than offset by an increase in off-premise. We expect our on-premise depletion volumes to return to more normal levels as Federal Drug Administration approved COVID-19 vaccines are administered across the U.S. and states begin the process of fully reopening their economies, including bars and restaurants.
Currently, our breweries, wineries, and bottling facilities are open and operational. However, certain facilities may experience occasional temporary closures due to applicable local conditions. In June 2020, beer production at our major breweries in Mexico returned to normal levels following a slow down earlier in the fiscal year.Our supply chains and distribution channels were not materially impacted and we worked throughout the fiscal year to rebuild our supply of products to meet forecasted demand. Distributor product inventories returned to normal levels at the end of Fiscal 2021.
In response to COVID-19, we have ensured our ongoing liquidity and financial flexibility through cash preservation initiatives, capital expense reductions, and cost control measures. We are not able to estimate the long-term impact of COVID-19 on our business, financial condition, results of operations, and/or cash flow. We believe we have sufficient liquidity available from operating cash flow, cash on hand, and availability under our $2.0 billion revolving credit facility. We expect to have continued access to capital markets and to be able to continue to return value to shareholders through dividends and periodic share repurchases.
Investments, acquisitions, and divestitures
Beer segment
Ballast Point Divestiture
In March 2020, we sold the Ballast Point craft beer business, including a number of its associated production facilities and brewpubs. Accordingly, our consolidated results of operations include the results of operations of our Ballast Point craft beer business through the date of divestiture.
Wine and Spirits Transactionsegment
Paul Masson Divestiture
In April 2019,January 2021, we entered intosold the Paul Masson Grande Amber Brandy brand, related inventory, and interests in certain contracts. We received cash proceeds of $267.4 million, subject to certain post-closing adjustments. The
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PART II | ITEM 7. MD&A | Table of Contents |
net cash proceeds were used for general corporate purposes. For the year ended February 28, 2021, we recognized a definitive agreement to sellnet gain of $58.9 million on the sale of the business.
Wine and Spirits Divestitures
In January 2021, we sold a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, related inventory, interests in certain contracts, wineries, vineyards, offices, and facilities, for approximately $1.7 billion,facilities. We received net cash proceeds of $538.4 million, subject to certain post-closing adjustments. TheIn addition, 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.
In January 2021, we also sold the New Zealand-based Nobilo Wine brand and Spirits Transaction iscertain related assets. We received cash proceeds of $129.0 million, subject to the satisfaction of certain closing conditions, including receipt of required regulatory approval. We expect to use the netpost-closing adjustments.
The cash proceeds from this transaction primarily to reduce outstanding borrowings. We are in the process of
developing a plan to eliminate any remaining costs in the Wine and Spirits segment fromDivestitures were utilized to repay the brands3.75% May 2013 Senior Notes and for other general corporate purposes. For the year ended February 28, 2021, we are selling and expect to incurrecognized a restructuring charge for the first quarternet loss of fiscal 2020. We expect$35.7 million on the Wine and Spirits Transaction to close around the endDivestitures.
Concentrate Business Divestiture
In December 2020, we sold certain brands used in our concentrates and high-color concentrate business, and certain intellectual property, inventory, goodwill, interests in certain contracts, and assets of the first quarter of fiscal 2020. our concentrates and high-color concentrate business.
The Wine and Spirits Transaction is consistent with our strategic focus on higher-margin, higher-growth brands.
We are selling approximately $1.3 billion in tangible and intangible assets, excluding goodwill, in connection with the Wine and Spirits Transaction. Selectedfollowing presents selected financial information included in our historical consolidated financial statements that are no longer part of our consolidated results of operations for Fiscal 2019 forfollowing the portionPaul Masson Divestiture, Wine and Spirits Divestitures, and Concentrate Business Divestiture:
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| Fiscal 2021 | | Fiscal 2020 |
(in millions) | | | |
Net sales | $ | 642.3 | | | $ | 868.2 | |
Gross profit | $ | 252.9 | | | $ | 330.5 | |
Marketing (1) | $ | 14.5 | | | $ | 17.8 | |
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(1)Included in selling, general, and administrative expenses within our consolidated results of the wine and spirits business we expect to sell is as follows:operations.
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| Net Sales | | Gross Profit | | Marketing |
(in millions) | | | | | |
Wine and Spirits segment results | $ | 1,106.7 |
| | $ | 419.5 |
| | $ | 30.5 |
|
Canopy Warrants Modification
Copper & Kings acquisition
In April 2019, we agreed to modify the terms of the November 2018 Canopy Warrants and certain other rights. Modification of the November 2018 Canopy Warrants is subject to, among other things, approval by Canopy’s shareholders. These changes are a result of Canopy’s intention to acquire Acreage Holdings, Inc. upon U.S. Federal cannabis legalization, subject to certain conditions. We expect the New November 2018 Canopy Warrants to be accounted for at fair value. If Canopy shareholder approval is received, we expect the modifications to the November 2018 Canopy Warrants will result in a fair value adjustment related to the warrants. Additionally, we expect the fair value of the New November 2018 Canopy Warrants to be volatile in future periods. For additional information regarding the Canopy warrants modification, see Note 10 of the Notes to the Financial Statements.
Investments, Acquisitions and Divestitures
Corporate Operations and Other Segment
Canopy Investments
Our investments in Canopy, and the method of accounting for these investments, consist of the following:
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| | | | | | | | |
Date of Investment | | Investment Acquired | | Purchase Price | | Method of Accounting |
(in millions) | | | | | | |
Nov 2017 | | Common shares | | $ | 130.1 |
| | Fair value / equity method (1) |
Nov 2017 | | Warrants | | 61.2 |
| | Fair value |
| | | | $ | 191.3 |
| | |
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June 2018 | | Convertible debt securities | | $ | 150.5 |
| | Fair value |
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Nov 2018 | | Common shares | | $ | 2,740.3 |
| | Equity method |
Nov 2018 | | Warrants | | 1,146.8 |
| | Fair value |
| | | | $ | 3,887.1 |
| (2) |
We recognized an unrealized net gain from the changes in fair value of these investments accounted for at fair value in income from unconsolidated investments, as follows:
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Date of Investment | | Investment | | Fiscal 2019 | | Fiscal 2018 |
(in millions) | | | | | | |
Nov 2017 | | Common shares (1) | | $ | 292.5 |
| | $ | 272.3 |
|
Nov 2017 | | Warrants | | 465.5 |
| | 192.0 |
|
June 2018 | | Convertible debt securities | | 55.5 |
| | — |
|
Nov 2018 | | Warrants | | 1,157.7 |
| | — |
|
| | | | $ | 1,971.2 |
| | $ | 464.3 |
|
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(1)
| Accounted for at fair value from the date of investment in November 2017 through October 31, 2018. Accounted for under the equity method from November 1, 2018 (refer to Note 10 of the Financial Statements). |
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(2)
| Includes $17.2 million of direct acquisition costs capitalized under the equity method cost accumulation model. Excludes $7.3 million of direct acquisition costs associated with the investment in warrants which are expensed as incurred in selling, general and administrative expenses. See “Financial Liquidity and Capital Resources – General” for a discussion of financing for this transaction.
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We expect the fair value of the Canopy investments accounted for at fair value to be volatile in future periods. Equity in earnings (losses) for our Canopy Equity Method Investment are reported in the Corporate Operations and Other segment and are expected to be volatile in future periods. Additionally, since November1, 2018 we recognize equity in earnings (losses) for our Canopy Equity Method Investment on a two-month lag. Accordingly, we recognized our share of Canopy’s losses from November and December 2018, which was included in Canopy’s third quarter fiscal 2019 results, in our fourth quarter fiscal 2019 results.
As of February 28, 2019, the conversion of Canopy equity securities held by its employees and/or held by other third parties would not have a significant effect on our share of Canopy’s reported earnings or losses. Additionally, under an amended and restated investor rights agreement, we have the option to purchase additional common shares of Canopy at the then-current price of the underlying equity security to allow us to maintain our relative ownership interest.
As previously noted, these investments are consistent with our long-term strategy to identify, meet and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property and retailing.
Beer Segment
Four Corners Acquisition
In July 2018,September 2020, we acquired Four Corners,the remaining ownership interest in Copper & Kings which primarily included the acquisition of operations, goodwill,inventories, and property, plant, and equipment, and trademarks. This acquisition included a portfolio of high-quality, dynamic and bicultural, Texas-based craft beers which further strengthened our position in the high-end segment of the U.S. beer market. The results of operations of Four Corners are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.
Funky Buddha Acquisition
In August 2017, we acquired Funky Buddha, which primarily included the acquisition of operations, goodwill and trademarks. This acquisition included a portfolio of high-quality, Florida-based craft beers which further strengthened our position in the high-end segment of the U.S. beer market. The results of operations of Funky Buddha are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.
Obregon Brewery Acquisition
In December 2016, we acquired the Obregon Brewery, which primarily included the acquisition of operations, goodwill, property, plant and equipment and inventories. This acquisition provided us with immediate functioning brewery capacity to support our fast-growing, high-end Mexican beer portfolio and flexibility for future innovation initiatives. It also enabled us to become fully independent from an interim supply agreement with Modelo, which was terminated at the time of this acquisition. The results of operations of the Obregon Brewery are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.
Wine and Spirits Segment
Schrader Cellars Acquisition
In June 2017, we acquired Schrader Cellars, which primarily included the acquisition of goodwill, inventories, trademarks and certain grape supply contracts.equipment. This acquisition included a collection of highly-rated, limited-production fine wines which aligned with our strategic focus on higher-end winetraditional and spirits brandscraft batch-distilled American brandies and strengthened our position in the fine wine category.other select spirits. The results of operations of Schrader CellarsCopper & Kings are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Canadian Divestiture
Empathy Wines acquisition
In December 2016, we sold our Canadian wine business, which included Canadian wine brands such as Jackson-Triggs and Inniskillin, wineries, vineyards, offices, facilities and Wine Rack retail stores, at a transaction value of C$1.03 billion, or $775.1 million. Accordingly, our consolidated results of operations include the results of operations of our Canadian wine business through the date of divestiture. We received cash proceeds of $570.3 million, net of outstanding debt and direct costs to sell. We will continue to export certain of our brands into the Canadian market, which remains our largest export market. This transaction is consistent with our strategic focus on higher-margin, higher-growth brands. We recognized a net gain on the sale of the business in the fourth quarter of fiscal 2017 of $262.4 million.
Selected financial information included in our historical financial statements for Fiscal 2017 that are no longer part of our results after the Canadian Divestiture is as follows:
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| | | | | | | | | | | | | | | | | | | | | | | |
| Net Sales | | Gross Profit | | Depreciation and Amortization | | Operating Income | | Income Before Income Taxes | | Cash Flows From Operating Activities |
(in millions) | | | | | | | | | | | |
Consolidated results (1) | $ | 311.2 |
| | $ | 131.2 |
| | $ | 9.1 |
| | $ | 49.8 |
| | $ | 46.6 |
| | $ | 47.2 |
|
| | | | | | | | | | | |
Wine and Spirits segment results (1) | $ | 311.2 |
| | $ | 131.2 |
| | $ | 9.1 |
| | $ | 50.1 |
| | | | |
| |
(1)
| Amounts have not been adjusted to reflect the adoption of the amended guidance for revenue recognition as the impact is not deemed material. Additionally, the Wine and Spirits segment results do not include the impact of comparable adjustments (see “Comparable Adjustments” below). |
Charles Smith Acquisition
In October 2016,June 2020, we acquired Charles Smith,Empathy Wines, which primarily included the acquisition of goodwill, trademarks, inventories and certain grape supply contracts.inventory. This acquisition, which included a collection of five superdigitally-native wine brand, strengthened our position in the direct-to-consumer and ultra-premium, high-quality Washington State wine brands with strong consumer affinity and demand.eCommerce markets. The results of operations of Charles SmithEmpathy Wines are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
High West Acquisition
Booker Vineyard investment
In October 2016,April 2020, we acquired High West, which primarily includedinvested in Booker Vineyard, a super-luxury, direct-to-consumer focused wine business that is accounted for under the acquisitionequity method. We recognize our share of their equity in earnings (losses) in our consolidated financial statements in the Wine and Spirits segment.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 33 |
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PART II | ITEM 7. MD&A | Table of Contents |
Black Velvet Divestiture
In November 2019, we sold the Black Velvet Canadian Whisky business and the brand’s associated production facility, along with a subset of Canadian whisky brands produced at that facility, and related inventory. Accordingly, our consolidated results of operations goodwill, trademarks, inventoriesinclude the results of operations of our Canadian whisky business through the date of divestiture. We received cash proceeds of $266.7 million, net of post-closing adjustments. We recognized a net gain of $70.5 million on the sale of the business, primarily for the year ended February 29, 2020.
Nelson’s Green Brier acquisition
In May 2019, we increased our ownership interest in Tennessee-based Nelson’s Green Brier to 75%, resulting in consolidation of the business and property, plant and equipment.recognition of a 25% noncontrolling interest. This acquisition included a portfolio of distinctive, award-winning, fast-growingcraft bourbon and higher-end craft whiskeyswhiskey products. The fair value of the business combination was allocated primarily to goodwill, trademarks, inventory, and other select spirits.property, plant, and equipment. The results of operations of High WestNelson’s Green Brier are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Prisoner AcquisitionCanopy segment
Canopy investment
In April 2016,May 2020, we acquired Prisoner, which primarily includedexercised the acquisitionNovember 2017 Canopy Warrants at an exercise price of goodwill, inventories, trademarks and certain grape supply contracts. This acquisition, which included a portfolio of five higher-margin, fast-growing, super-luxury wine brands, aligned with our strategic focus on higher-end wine and spirits brands and strengthened our position in the super-luxury wine category. The results of operations of Prisoner are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.C$12.98 per warrant share for C$245.0 million, or $173.9 million.
For additional information on the recent development, and these investments, acquisitions, and divestitures, refer to Notes 2, 7, 10, and 10 of the Notes to the Financial Statements.23.
Results of Operations
Financial Highlights
References to organic throughout the following discussion exclude the impact of acquired brand activity in connection with our more significant acquisitions, consisting of Prisoner, High West and Charles Smith (wine and spirits), and divested brand activity in connection with the Canadian Divestiture (wine and spirits),recent divestitures, as appropriate.
Financial Highlights forFor Fiscal 2019:2021 compared with Fiscal 2020:
•Our results of operations benefited primarily from continued improvements within the Beer segment, an unrealized net gain of $802.0 million from the changes in fair value of our investmentsinvestment in Canopy andin Fiscal 2021 a net gain onnd improvements within the sale of the Accolade Wine Investment.Beer segment.
•Net sales increased 7% primarily3% due to (i) an increase in Beer net sales driven predominantly by volume growth, and a(ii) favorable impactimpacts from pricing within our Mexican beer portfolio.
Operating income increased 6% largely due to the net sales volume growth and favorable impact from pricingproduct mix shift within our Mexican beer portfolio. Operating income growth was tempered by planned increases in marketing spend and higher cost of product sold across both the Beer and the Wine and Spirits segments.
segments, partially offset by (i) recent divestitures within both the Beer and the Wine and Spirits segments and (ii) Wine and Spirits net sales led by branded volume decline largely from brands divested in January 2021.
•Operating income increased 30% largely due to charges recognized for Fiscal 2020 in connection with our business transformation strategy within the Wine and Spirits segment, including an impairment of long-lived assets held for sale primarily in connection with the Wine and Spirits Divestitures and an increase in Beer net sales in Fiscal 2021 driven by volume growth, partially offset by recent divestitures.
•Net income attributable to CBI and diluted net income per common share attributable to CBI increased significantly primarilylargely due to (i) the factors discussed above.increase in unrealized net gain from the changes in fair value of our investment in Canopy in Fiscal 2021 as compared with the unrealized net loss in Fiscal 2020, (ii) an impairment of long-lived assets held for sale in Fiscal 2020, and (iii) volume growth within the Beer segment, partially offset by Fiscal 2021 provision for income taxes as compared with the benefit from income taxes for Fiscal 2020.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 34 |
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PART II | ITEM 7. MD&A | Table of Contents |
Comparable Adjustments
Management excludes items that affect comparability from its evaluation of the results of each operating segment as these Comparable Adjustments are not reflective of core operations of the segments. Segment operating performance and the incentive compensation of segment management compensation are evaluated based on core segment operating income (loss). As such, the performance measures for incentive compensation purposes for segment management which do not include the impact of these Comparable Adjustments.
As more fully described herein and in the related Notes, to the Financial Statements, the Comparable Adjustments that impacted comparability in our segment results for each period are as follows:
| | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | |
(in millions) | | | | | |
Cost of product sold | | | | | |
Recovery of (loss on) inventory write-down | $ | (70.4) | | | $ | 8.6 | | | |
Strategic business development costs | (29.8) | | | (124.5) | | | |
COVID-19 incremental costs | (7.6) | | | — | | | |
Flow through of inventory step-up | (0.4) | | | (1.5) | | | |
Accelerated depreciation | (0.1) | | | (7.6) | | | |
Settlements of undesignated commodity derivative contracts | 31.6 | | | 11.7 | | | |
Net gain (loss) on undesignated commodity derivative contracts | 25.1 | | | (49.0) | | | |
| | | | | |
Total cost of product sold | (51.6) | | | (162.3) | | | |
| | | | | |
Selling, general, and administrative expenses | | | | | |
Restructuring and other strategic business development costs | (23.9) | | | (25.3) | | | |
Net gain (loss) on foreign currency derivative contracts | (8.0) | | | (1.8) | | | |
Transaction, integration, and other acquisition-related costs | (7.6) | | | (9.2) | | | |
Impairment of intangible assets | (6.0) | | | (11.0) | | | |
COVID-19 incremental costs | (4.8) | | | — | | | |
| | | | | |
Other gains (losses) | 14.7 | | | 7.3 | | | |
Total selling, general, and administrative expenses | (35.6) | | | (40.0) | | | |
| | | | | |
| | | | | |
Impairment of assets held for sale | (24.0) | | | (449.7) | | | |
Gain (loss) on sale of business | 14.2 | | | 74.1 | | | |
Comparable Adjustments, Operating income (loss) | $ | (97.0) | | | $ | (577.9) | | | |
| | | | | |
Income (loss) from unconsolidated investments | $ | 265.2 | | | $ | (2,480.1) | | | |
|
| | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
(in millions) | | | | | |
Cost of product sold | | | | | |
Accelerated depreciation | $ | (8.9 | ) | | $ | — |
| | $ | — |
|
Settlements of undesignated commodity derivative contracts | (8.6 | ) | | 2.3 |
| | 23.4 |
|
Flow through of inventory step-up | (4.9 | ) | | (18.7 | ) | | (20.1 | ) |
Loss on inventory write-down | (3.3 | ) | | (19.1 | ) | | — |
|
Net gain on undesignated commodity derivative contracts | 1.8 |
| | 7.4 |
| | 16.3 |
|
Other losses | (6.0 | ) | | — |
| | (2.2 | ) |
Total cost of product sold | (29.9 | ) |
| (28.1 | ) |
| 17.4 |
|
| | | | | |
Selling, general and administrative expenses | | | | | |
Impairment of intangible assets | (108.0 | ) | | (86.8 | ) | | (37.6 | ) |
Net loss on foreign currency derivative contracts associated with acquisition of investment | (32.6 | ) | | — |
| | — |
|
Restructuring and other strategic business development costs | (17.1 | ) | | (14.0 | ) | | (0.9 | ) |
Deferred compensation | (16.3 | ) | | — |
| | — |
|
Transaction, integration and other acquisition-related costs | (10.2 | ) | | (8.1 | ) | | (14.2 | ) |
Loss on contract termination | — |
| | (59.0 | ) | | — |
|
Costs associated with the Canadian Divestiture and related activities | — |
| | (3.2 | ) | | (20.4 | ) |
Other gains (losses) | 10.1 |
| | 10.5 |
| | (2.6 | ) |
Total selling, general and administrative expenses | (174.1 | ) |
| (160.6 | ) |
| (75.7 | ) |
| | | | | |
Gain on sale of business | — |
| | — |
| | 262.4 |
|
Comparable Adjustments, Operating income (loss) | $ | (204.0 | ) | | $ | (188.7 | ) | | $ | 204.1 |
|
| | | | | |
Income (loss) from unconsolidated investments | $ | 2,084.9 |
| | $ | 452.6 |
| | $ | (1.7 | ) |
Cost of Product Soldproduct sold
Recovery of (loss on) inventory write-down
We recognized a loss on the write-down of bulk wine inventory and certain grapes as a result of smoke damage sustained during the 2020 U.S. wildfires, partially offset by a related probable recovery from our insurance carriers (Fiscal 2021), and a reimbursement from our insurance carriers for losses recognized on the write-down of certain bulk wine inventory as a result of smoke damage sustained during the fall 2017 California wildfires (Fiscal 2020). For additional information on the 2020 U.S. wildfires, refer to Note 16.
Strategic business development costs
We recognized costs primarily in connection with losses on write-downs of excess inventory and contract terminations resulting from our ongoing efforts to optimize our portfolio, gain efficiencies, and reduce our cost structure within the Wine and Spirits segment.
COVID-19 incremental costs
We recognized costs for incremental wages and hazard payments to employees, purchases of personal protective equipment, more frequent and thorough cleaning and sanitization of our facilities, and costs associated with the unused beer keg reimbursement program with distributors.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 35 |
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PART II | ITEM 7. MD&A | Table of Contents |
Inventory step-up
In connection with acquisitions, the allocation of purchase price in excess of book value for certain inventories on hand at the date of acquisition is referred to as inventory step-up. Inventory step-up represents an assumed manufacturing profit attributable to the acquired business prior to acquisition.
Accelerated Depreciation
depreciation
We recognized accelerated depreciation for certain assets primarily in connection with our currentthe multi-year implementation of a new global ERP system which is intended to replace our existingthen-existing operating and financial systems.
Undesignated Commodity Derivative Contracts
commodity derivative contracts
Net gain (loss) on undesignated commodity derivative contracts represents a net gain (loss) from the changes in fair value of undesignated commodity derivative contracts. The net gain (loss) is reported outside of segment operating results until such time that the underlying exposure is recognized in the segment operating results. At settlement, the net gain (loss) from the changes in fair value of the undesignated commodity derivative contracts is reported in the appropriate operating segment, allowing the results of our operating segments to reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility.
Inventory Step-UpSelling, general, and administrative expenses
In connection with acquisitions, the allocation of purchase price in excess of book value for certain inventories on hand at the date of acquisition is referred to as inventory step-up. Inventory step-up represents an assumed manufacturing profit attributable to the acquiredRestructuring and other strategic business prior to acquisition.
Loss on Inventory Write-Down
development costs
We recognized a loss oncosts primarily in connection with costs to optimize our portfolio, gain efficiencies, and reduce our cost structure within the write-down of certain bulk wine inventory as a result of smoke damage sustained during the Fall 2017 California wildfires (Fiscal 2019 and Fiscal 2018).
Selling, General and Administrative Expenses
Impairment of Intangible Assets
We recognized trademark impairment losses related to our Beer segment’s Ballast Point craft beer trademark asset (Fiscal 2019 and Fiscal 2018) and certain of our Wine and Spirits trademark assets associated with our decision to discontinue certain small-scale, low-margin U.S. brands (Fiscal 2017). See “Costs Associated with the Canadian Divestiture and Related Activities” below for information about an additional impairment of intangible assets recognized in connection with the Canadian Divestiture. For additional information, refer to Note 7 of the Notes to the Financial Statements.segment.
Net Lossgain (loss) on Foreign Currency Derivative Contracts Associated with Acquisition of Investment
foreign currency derivative contracts
We recognized a net loss primarily in connection with the settlement of foreign currency optionforward contracts entered into to fix the U.S. dollar cost of the November 2018May 2020 Canopy Transaction.Investment.
Restructuring and Other Strategic Business Development Costs
We recognized costs primarily in connection with the development of a program specifically intended to identify opportunities for further streamlining of processes and improving capabilities, linking strategy with execution, prioritizing resources and enabling a new enterprise resource planning system (Fiscal 2019 and Fiscal 2018).
Deferred Compensation
We recognized an adjustment related to prior periods to correct for previously unrecognized deferred compensation costs associated with certain employment agreements.
Transaction, Integrationintegration, and Other Acquisition-Related Costs
other acquisition-related costs
We recognized transaction, integration, and other acquisition-related costs in connection with our investments, acquisitions, and investments.divestitures.
Loss on Contract Termination
Impairment of intangible assets
We recognized a loss in connection with the early termination of a beer glass supply contract with Owens-Illinois, a related-party entity with which we have an equally-owned joint venture which owns and operates a glass production plant located adjacenttrademark impairment losses related to our Nava Brewery.Beer segment’s Four Corners craft beer trademark asset (Fiscal 2021) and Ballast Point craft beer trademark asset (Fiscal 2020). For additional information, refer to Note 7.
Costs Associated with the Canadian Divestiture and Related Activities
COVID-19 incremental costs
We recognized costs in connection withfor payments to third-party general contractors to maintain their workforce for expansion activities at the evaluation of the merits of executing an initial public offeringObregon Brewery and recognized costs for a portion of our Canadian wine business (Fiscal 2017)incremental wages and net costs incurred in connection with the sale of the Canadian wine business (Fiscal 2018 and Fiscal 2017). In addition, in connection with the Canadian Divestiture, we recognized a trademark impairment loss for trademarks associated with certain U.S. brands within our Wine and Spirits portfolio sold exclusively through the Canadian wine business, for which future sales of these brands were expectedhazard payments to be minimal subsequent to the Canadian Divestiture (Fiscal 2017).employees.
Other Gains (Losses)
gains (losses)
We recognized other gains (losses) primarily in connection with (i) a gain recognized on the sale of certain non-core assetsa vineyard (Fiscal 2019) and2021), (ii) a gain on the reductionremeasurement of our previously held equity interest in Nelson’s Green Brier to the acquisition-date fair value (Fiscal 2020), (iii) an increase in estimated fair value of a contingent liability associated with a prior period acquisition (Fiscal 2018)2020), and (iv) recognition of previously deferred gain upon release of a related guarantee (Fiscal 2020).
Impairment of assets held for sale
We recognized impairments of long-lived assets held for sale in connection with the (i) Wine and Spirits Divestitures (Fiscal 2021, Fiscal 2020), (ii) the Concentrate Business Divestiture (Fiscal 2021, Fiscal 2020), and (iii) the Ballast Point Divestiture (Fiscal 2020). For additional information, refer to Note 7.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 36 |
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PART II | ITEM 7. MD&A | Table of Contents |
Gain (loss) on Salesale of Business
business
We recognized a net gain (loss) primarily on salethe completion of the Canadian wine business.Paul Masson Divestiture, the Wine and Spirits Divestitures (Fiscal 2021), and the Black Velvet Divestiture (Fiscal 2020).
Income (Loss)(loss) from Unconsolidated Investments
unconsolidated investments
We recognized an unrealized net gain (loss) primarily from (i) the changes in fair value of our securities measured at fair value, (ii) equity in earnings (losses) from Canopy’s results of operations, (iii) equity losses from Canopy related to costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand (Fiscal 2019 and Fiscal 2018)2021), and a net gain(iv) the increase in connection withfair value resulting from the saleJune 2019 modification of our Accolade Wine Investmentthe terms of the November 2018 Canopy Warrants (Fiscal 2019)2020). For additional information, refer to Notes 2, 7 and 10 of the Notes to the Financial Statements.10.
Fiscal 2019 Compared to Fiscal 2018Business segments
Net Salessales
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 6,074.6 | | | $ | 5,615.9 | | | $ | 458.7 | | | 8 | % |
Wine and Spirits: | | | | | | | |
Wine | 2,208.4 | | | 2,367.5 | | | (159.1) | | | (7 | %) |
Spirits | 331.9 | | | 360.1 | | | (28.2) | | | (8 | %) |
Total Wine and Spirits | 2,540.3 | | | 2,727.6 | | | (187.3) | | | (7 | %) |
Canopy | 378.6 | | | 290.2 | | | 88.4 | | | 30 | % |
Consolidation and Eliminations | (378.6) | | | (290.2) | | | (88.4) | | | (30 | %) |
Consolidated net sales | $ | 8,614.9 | | | $ | 8,343.5 | | | $ | 271.4 | | | 3 | % |
|
| | | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 5,202.1 |
| | $ | 4,660.4 |
| | $ | 541.7 |
| | 12 | % |
Wine and Spirits: | | | | | | | |
Wine | 2,532.5 |
| | 2,556.3 |
| | (23.8 | ) | | (1 | %) |
Spirits | 381.4 |
| | 363.6 |
| | 17.8 |
| | 5 | % |
Total Wine and Spirits | 2,913.9 |
| | 2,919.9 |
| | (6.0 | ) | | — | % |
Consolidated net sales | $ | 8,116.0 |
| | $ | 7,580.3 |
| | $ | 535.7 |
| | 7 | % |
Beer Segment | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Beer segment | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change | | Percent Change |
(in millions, branded product, 24-pack, 12-ounce case equivalents) | | | | | | |
Net sales | $ | 6,074.6 | | | $ | 5,615.9 | | | $ | 458.7 | | | 8 | % |
| | | | | | | | |
Shipment volume | | | | | | | |
Total | 334.6 | | | 311.9 | | | | | 7.3 | % |
Organic (1) | 334.6 | | | 309.4 | | | | | 8.1 | % |
| | | | | | | | |
Depletion volume (1) (2) | | | | | | | 7.1 | % |
(1)Includes an adjustment to remove volume associated with the Ballast Point Divestiture for the period March 2, 2019, through February 29, 2020. |
| | | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Dollar Change | | Percent Change |
(in millions, branded product, 24-pack, 12-ounce case equivalents) | | | | | | |
Net sales | $ | 5,202.1 |
| | $ | 4,660.4 |
| | $ | 541.7 |
| | 12 | % |
| | | | | | | |
Shipment volume | 294.1 |
| | 268.0 |
| | | | 9.7 | % |
| | | | | | | |
Depletion volume (1) | | | | | | | 8.8 | % |
(2)Depletions represent distributor shipments of our respective branded products to retail customers, based on third-party data. | |
| Depletions represent distributor shipments of our respective branded products to retail customers, based on third-party data. |
The increase in Beer net sales is primarilylargely due to (i) $446.5$451.6 million of volume growth within our Mexican beer portfolio, which benefited from continued consumer demand, increased marketing spend and new product introductions, and (ii) a $102.8line extensions, $69.7 million favorable impact from pricing in select markets within our Mexican beer portfolio. Shipmentportfolio, and $35.0 million increase from favorable product mix shift, partially offset by $92.0 million from the Ballast Point Divestiture. Favorable product mix shift primarily resulted from increased sales of Corona Hard Seltzer and a reduction in on-premise keg sales. Inventory in our distribution channels returned to normal levels by the end of Fiscal 2021 following reduced production levels at our major breweries in Mexico earlier in the year.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 37 |
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PART II | ITEM 7. MD&A | Table of Contents |
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| Wine and Spirits segment | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change | | Percent Change |
(in millions, branded product, 9-liter case equivalents) | | | | | | |
Net sales | $ | 2,540.3 | | | $ | 2,727.6 | | | $ | (187.3) | | | (7 | %) |
| | | | | | | |
Shipment volume | | | | | | | |
Total | 45.0 | | | 53.6 | | | | | (16.0 | %) |
Organic (3) (4) (5) | 45.0 | | | 47.3 | | | | | (4.9 | %) |
| | | | | | | |
U.S. Domestic | 41.5 | | | 49.5 | | | | | (16.2 | %) |
Organic U.S. Domestic (3) (4) (5) | 41.5 | | | 43.4 | | | | | (4.4 | %) |
| | | | | | | |
| | | | | | | |
U.S. Domestic depletion volume (2) (3) (4) (5) | | | | | | | (2.8 | %) |
(3)Includes an adjustment to remove volume growth outpaced depletionassociated with the Black Velvet Divestiture for the period March 1, 2019, through October 31, 2019.
(4)Includes an adjustment to remove volume growth primarily due to timing. We expect this shipment timing benefit to reverse during Fiscal 2020.
associated with the Wine and Spirits SegmentDivestitures for the period January 5, 2020, through February 29, 2020.
(5)Includes an adjustment to remove volume associated with the Paul Masson Divestiture for the period January 12, 2020, through February 29, 2020. |
| | | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Dollar Change | | Percent Change |
(in millions, branded product, 9-liter case equivalents) | | | | | | | |
Net sales | $ | 2,913.9 |
| | $ | 2,919.9 |
| | $ | (6.0 | ) | | — | % |
| | | | | | | |
Shipment volume | | | | | | | |
Total | 58.5 |
| | 59.0 |
| | | | (0.8 | %) |
U.S. Domestic | 54.4 |
| | 54.7 |
| | | | (0.5 | %) |
U.S. Domestic Focus Brands | 33.9 |
| | 33.1 |
| | | | 2.4 | % |
| | | | | | | |
Depletion volume (1) | | | | | | | |
U.S. Domestic | | | | | | | (2.6 | %) |
U.S. Domestic Focus Brands | | | | | | | 0.6 | % |
The decrease in Wine and Spirits net sales remained relatively flat as $21.4is primarily due to $230.9 million of lowerfrom recent divestitures and $96.4 million decline in branded wine and spirits volume, and $16.2driven by the brands divested in January 2021, partially offset by $102.5 million of unfavorablefavorable product mix shift were largely offsetand $51.1 million from favorable pricing. The Wine and Spirits Fiscal 2021 results have been negatively impacted by a $35.5 million favorable impact from pricing. As noted in the table above, the decline in the U.S. shipment volume was not(i) recent divestitures, (ii) on-premise and retail tasting room closures as unfavorable as the decline in U.S. depletion volume. As U.S. shipment volume should generally be aligned with U.S. depletion volume, we expect this timing difference to reverse primarily in the first quarter of fiscal 2020. As a result first quarter of fiscal 2020 net sales are expected to decrease 10% as comparedCOVID-19 containment measures, and (iii) transition activities with the first quarterdistributors repositioning for ownership of fiscal 2019.
Gross Profit
|
| | | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 2,830.7 |
| | $ | 2,531.2 |
| | $ | 299.5 |
| | 12 | % |
Wine and Spirits | 1,279.5 |
| | 1,309.4 |
| | (29.9 | ) | | (2 | %) |
Comparable Adjustments | (29.9 | ) | | (28.1 | ) | | (1.8 | ) | | (6 | %) |
Consolidated gross profit | $ | 4,080.3 |
| | $ | 3,812.5 |
| | $ | 267.8 |
| | 7 | % |
The increase in Beer is primarily due to $247.2 million of volume growth and the $102.8 million favorable impact from pricing,brands, partially offset by $46.3 million of higher cost of product sold foran increase in off-premise and a continued focus on NPD and growing our Mexican beer business. The higher cost of product sold is predominantly due to $57.8 million of increased transportation costs, partially offset by $17.2 million of foreign currency transactional benefits within our Mexican beer portfolio. The Beer segment also recognized higher operational costs for Fiscal 2019, largely attributable to higher depreciation, brewery maintenance and compensation and benefits; however, these costs were offset by brewery sourcing benefits.brands.
The decrease in Wine and Spirits is largely due to $37.4 million of higher cost of product sold and an unfavorable product mix shift of $26.3 million, partially offset by the $35.5 million favorable impact from pricing. The higher cost of product sold is largely attributable to higher raw material costs, including grape, bulk wine and imported vodka costs, as well as increased transportation costs. | | | | | |
| Canopy segment Our ownership interest in Canopy allows us to exercise significant influence, but not control, and, therefore, we account for our investment in Canopy under the equity method. Amounts included for the Canopy segment represent 100% of Canopy’s reported results on a two-month lag. Accordingly, we recognized our share of Canopy’s earnings (losses) from January through December 2020, in our Fiscal 2021 results and January through December 2019, in our Fiscal 2020 results. Although we own less than 100% of the outstanding shares of Canopy, 100% of the Canopy results are included and subsequently eliminated to reconcile to our consolidated financial statements. See “Income (loss) from unconsolidated investments” below for a discussion of Canopy’s net sales, gross profit (loss), selling, general, and administrative expenses, and operating income (loss). |
Gross profit
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 3,402.4 | | | $ | 3,125.2 | | | $ | 277.2 | | | 9 | % |
Wine and Spirits | 1,115.2 | | | 1,189.0 | | | (73.8) | | | (6 | %) |
Canopy | (14.1) | | | 45.4 | | | (59.5) | | | NM |
Consolidation and Eliminations | 14.1 | | | (45.4) | | | 59.5 | | | NM |
Comparable Adjustments | (51.6) | | | (162.3) | | | 110.7 | | | 68 | % |
Consolidated gross profit | $ | 4,466.0 | | | $ | 4,151.9 | | | $ | 314.1 | | | 8 | % |
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 38 |
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PART II | ITEM 7. MD&A | Table of Contents |
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| The increase in Beer is primarily due to $259.3 million of volume growth and the $69.7 million favorable impact from pricing, partially offset by $19.9 million of higher cost of product sold, $18.5 million decrease in gross profit due to the Ballast Point Divestiture, and $9.4 million of unfavorable product mix shift. The higher cost of product sold is largely due to $39.6 million increased operational costs and $3.8 million increased logistics costs, partially offset by $23.5 million of foreign currency transactional benefits. The increase in operational costs primarily consisted of (i) $32.3 million of higher material costs, largely attributable to glass, and (ii) $15.7 million of inflation and increased brewery compensation and benefits, partially offset by $20.4 million of favorable fixed cost absorption related to increased production in Fiscal 2021. The increase in logistics costs primarily consisted of $14.5 million increased transportation costs, partially offset by $11.8 million of decreased obsolescence driven by lower inventory levels as we replenished our distribution channels. Unfavorable product mix shift primarily resulted from increased sales of Corona Hard Seltzer, partially offset by a reduction in on-premise keg sales. |
| | | | | |
| The decrease in Wine and Spirits is largely due to a decrease of $90.0 million in gross profit due to the recent divestitures, $66.5 million higher cost of product sold, and $33.1 million of decline in branded wine and spirits volume, driven by the brands divested in January 2021, partially offset by $71.5 million of favorable product mix shift and the $51.1 million from favorable pricing. Higher cost of product sold was largely attributable to unfavorable fixed cost absorption including $28.6 million from decreased production levels at certain facilities in the second half of fiscal 2021 as a result of the 2020 U.S. wildfires, certain spirits packaging size obsolescence, increased winery compensation and benefits, as well as increased packaging costs, including glass and labels, partially offset by lower grape raw material costs. |
Gross profit as a percent of net sales remained flatincreased to 51.8% for Fiscal 20192021 compared towith 49.8% for Fiscal 2018 at 50.3%.2020. This was largely due to the higher cost(i) a favorable change of product sold withinapproximately 130 basis points in Comparable Adjustments, (ii) favorable impacts from both the Beer and Wine and Spirits segments, which resulted in approximately 25 basis points and 20 basis points of rate decline, respectively, partially offset by the favorable impact from Beer pricing in select markets, which contributed approximately 40 basis points and 30 basis points of rate growth.growth, respectively, and (iii) 30 basis points of favorable impact from the recent divestitures, partially offset by approximately 80 basis points of rate decline from higher cost of product sold within the Wine and Spirits segment and an unfavorable product mix shift for the Beer segment contributing approximately 30 basis points of rate decline.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 787.8 |
| | $ | 691.0 |
| | $ | 96.8 |
| | 14 | % |
Wine and Spirits | 508.3 |
| | 515.3 |
| | (7.0 | ) | | (1 | %) |
Corporate Operations and Other | 197.9 |
| | 165.8 |
| | 32.1 |
| | 19 | % |
Comparable Adjustments | 174.1 |
| | 160.6 |
| | 13.5 |
| | 8 | % |
Consolidated selling, general and administrative expenses | $ | 1,668.1 |
| | $ | 1,532.7 |
| | $ | 135.4 |
| | 9 | % |
The increase in Beer is primarily due to an increase of $63.6 million in marketing spend and $33.7 million in general, and administrative expenses. The increase in marketing spend is due largely to planned investment to support the growth of our Mexican beer portfolio, including support of the new product introductions. The increase in general and administrative expenses is largely driven by unfavorable foreign currency transaction losses and higher expenses supporting the growth of the business, including compensation and benefits associated primarily with increased headcount and information technology costs.
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 908.1 | | | $ | 877.3 | | | $ | 30.8 | | | 4 | % |
Wine and Spirits | 492.8 | | | 480.6 | | | 12.2 | | | 3 | % |
Corporate Operations and Other | 228.6 | | | 223.9 | | | 4.7 | | | 2 | % |
Canopy | 1,481.9 | | | 731.2 | | | 750.7 | | | NM |
Consolidation and Eliminations | (1,481.9) | | | (731.2) | | | (750.7) | | | NM |
Comparable Adjustments | 35.6 | | | 40.0 | | | (4.4) | | | (11 | %) |
Consolidated selling, general, and administrative expenses | $ | 1,665.1 | | | $ | 1,621.8 | | | $ | 43.3 | | | 3 | % |
The decrease in Wine and Spirits is primarily due to a decrease of $18.2 million in general and administrative expenses, partially offset by an increase of $12.0 million in marketing spend. The decrease in general and administrative expenses is largely driven by certain cost savings initiatives. The increase in marketing spend is primarily attributable to planned investment supporting the portfolio. | | | | | |
| The increase in Beer is primarily due to an increase of $26.9 million in marketing spend that was largely driven by increased advertising resulting from planned investments to support the growth of our Mexican beer portfolio predominantly in the fourth quarter of Fiscal 2021. |
| | | | | |
| The increase in Wine and Spirits is primarily due to an increase of $8.6 million in marketing spend that was largely driven by an increased focus on eCommerce and digital marketing placement for our higher-end, higher-margin brandsand a $5.9 million increase in general and administrative expenses. The increase in general and administrative expenses is driven by increased compensation and benefits, partially offset bya favorable impact from reduced travel driven by COVID-19 containment measures and certain cost saving initiatives. |
The increase in Corporate Operations and Other is due to higher general and administrative expenses driven predominantly by an increase of approximately $28 million in compensation and benefits largely attributable to supporting our growth initiatives. | | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 39 |
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PART II | ITEM 7. MD&A | Table of Contents |
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| The increase in Corporate Operations and Other is largely due to approximately a $15 million increase in compensation and benefits, $6 million of unfavorable foreign currency losses, and an increase of $2 million in charitable contributions, primarily driven by COVID-19 support efforts, partially offset by decreased insurance related costs of $17 million and $6 million of favorable impact from reduced travel driven by COVID-19 containment measures. |
Selling, general, and administrative expenses as a percent of net sales increaseddecreased to 20.6%19.3% for Fiscal 20192021 as compared with 20.2%19.4% for Fiscal 2018.2020. The decrease is driven largely by approximately 490 basis points of rate decline as the increase is primarily attributable toin Beer net sales exceeded the increase in selling, general, and administrative expenses, and approximately 40 basis points in Comparable Adjustments rate decline, largely offset by approximately 470 basis points of rate growth from the recent Wine and Spirits divestitures and an increase in Corporate Operations and Other general and administrative expenses, which resulted in approximately 3045 basis points of rate growth.
Operating income (loss)
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 2,494.3 | | | $ | 2,247.9 | | | $ | 246.4 | | | 11 | % |
Wine and Spirits | 622.4 | | | 708.4 | | | (86.0) | | | (12 | %) |
Corporate Operations and Other | (228.6) | | | (223.9) | | | (4.7) | | | (2 | %) |
Canopy | (1,496.0) | | | (685.8) | | | (810.2) | | | NM |
Consolidation and Eliminations | 1,496.0 | | | 685.8 | | | 810.2 | | | NM |
Comparable Adjustments | (97.0) | | | (577.9) | | | 480.9 | | | 83 | % |
Consolidated operating income (loss) | $ | 2,791.1 | | | $ | 2,154.5 | | | $ | 636.6 | | | 30 | % |
| | | | | |
| The increase in Beer is primarily attributable to the strong volume growth within our Mexican beer portfolio and favorable pricing impact, partially offset by the increased marketing spend and higher cost of product sold. |
| | | | | |
| The decrease in Wine and Spirits was driven largely by the recent divestitures, the higher cost of product sold, and the decline in branded wine and spirits volume, partially offset by favorable impacts from product mix shift and pricing. |
| | | | | |
| As previously discussed, the Corporate Operations and Other increase in operating loss is due largely to the increase in compensation and benefits, unfavorable foreign currency losses, and increased charitable contributions, partially offset by decreased insurance related costs and the favorable impact from reduced travel. |
Income (loss) from unconsolidated investments
General
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Unrealized net gain (loss) on securities measured at fair value (1) | $ | 802.0 | | | $ | (2,126.4) | | | $ | 2,928.4 | | | 138 | % |
Equity in earnings (losses) from Canopy and related activities (2) | (679.0) | | | (575.9) | | | (103.1) | | | (18) | % |
Equity in earnings (losses) from other equity method investees | 27.3 | | | 33.3 | | | (6.0) | | | (18 | %) |
Net gain (loss) on sale of unconsolidated investment | — | | | 0.4 | | | (0.4) | | | NM |
| $ | 150.3 | | | $ | (2,668.6) | | | $ | 2,818.9 | | | 106 | % |
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 40 |
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| | | | | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 2,042.9 |
| | $ | 1,840.2 |
| | $ | 202.7 |
| | 11 | % |
Wine and Spirits | 771.2 |
| | 794.1 |
| | (22.9 | ) | | (3 | %) |
Corporate Operations and Other | (197.9 | ) | | (165.8 | ) | | (32.1 | ) | | (19 | %) |
Comparable Adjustments | (204.0 | ) | | (188.7 | ) | | (15.3 | ) | | (8 | %) |
Consolidated operating income | $ | 2,412.2 |
| | $ | 2,279.8 |
| | $ | 132.4 |
| | 6 | % |
| | | | | | | | |
PART II | ITEM 7. MD&A | Table of Contents |
The increase in Beer is primarily attributable to the strong net sales growth, partially offset by the planned increase in marketing spend and the higher cost of product sold. The decrease in Wine and Spirits was driven by the higher cost of product sold and unfavorable product mix shift, partially offset by pricing. As previously discussed, Corporate Operations and Other reduction in operating income is due largely to the higher costs supporting our growth initiatives.
Income from Unconsolidated Investments
Income from unconsolidated investments increased to $2,101.6 million for (1)Fiscal 2019 from $487.2 million for Fiscal 2018, an increase of $1,614.4 million. This increase is driven largely by2020 includes an unrealized net gainloss from the changes in fair value of our securities measured at fair value of $1,971.2$3,302.4 million, partially offset by an $1,176.0 million unrealized gain resulting from the June 2019 Warrant Modification.
(2)Fiscal 2021 includes $359.6 million of costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand and Fiscal 2020 includes our share of Canopy’s additional loss resulting from the June 2019 Warrant Modification of $409.0 million.
| | | | | |
| Canopy segment Canopy net sales increased to $378.6 million for Fiscal 2021 from $290.2 million for Fiscal 2020. This increase of $88.4 million, or 30% is primarily attributable to an increase in other product offering sales and international medical sales, as well as additional Canadian recreational sales. The increase in other sales resulted from (i) the expansion of their U.S. distribution network for vaporizers sold by Storz & Bickel GmbH & Co. KG, (ii) beauty, skincare, wellness, and sleep product sales from their May 2019 acquisition of This Works Products Limited, and (iii) sales of sports nutrition beverages, mixes, protein, gum, and mints from their October 2019 acquisition of BioSteel. The increase in international medical sales largely resulted from Canopy’s April 2019 acquisition of C3. Canadian recreational sales benefited from the introductions of retail stores across Canada and cannabis-infused beverages. Canopy gross profit (loss) decreased to $(14.1) million for Fiscal 2021 from $45.4 million for Fiscal 2020. This decrease of $59.5 million is primarily driven by inventory write-downs related to its organizational and strategic review of their business and detailed evaluation of inventory. Canopy selling, general, and administrative expenses increased $750.7 million primarily from (i) their decision to close greenhouse facilities as well as other changes related to its organizational and strategic review of their business and (ii) expected credit losses on financial assets and related charges, partially offset by a reduction in stock-based compensation expense. The combination of these factors were the main contributors to the increase in operating loss of $810.2 million. |
Interest expense
Interest expense decreased to $385.7 million for Fiscal 2019 as compared with an unrealized net gain of $464.32021 from $428.7 million recognized for Fiscal 2018. Fiscal 2019 also benefited from a net gain2020. This decrease of $43.0 million, or 10% is predominantly due to lower average borrowings of approximately $1.2 billion primarily attributable to the partial repayment of financing entered into in connection with the sale of our Accolade Wine Investment of $99.8 million.
Interest Expense
Interest expense increased to $367.1 million for Fiscal 2019 from $332.0 million for Fiscal 2018, an increase of $35.1 million, or 11%. This increase is predominately due to higher average borrowings of approximately $2.0 billion. The higher average borrowings are primarily attributable to the significant purchases of treasury stock for Fiscal 2018 and the November 2018 Canopy Transaction.
Loss on Extinguishment of Debt
Loss on extinguishment of debt for Fiscal 2018 consists of a make-whole payment of $73.6 million in connection with the early redemption of our April 2012 senior notes and the write-off of debt issuance costs of $23.4 million in connection with the May and November 2017 repayments of outstanding obligations under the European Term A loan facility and the U.S. Term A loan facility under our applicable senior credit facility, the July 2017 amendment and restatement of the 2016 Credit Agreement and the early redemption of our April 2012 senior notes.
(Provision for Income Taxes
for) benefit from income taxes
Our effective tax rate for Fiscal 20192021 was 16.5%20.1% of tax expense as compared with 1.0%102.3% of tax benefit for Fiscal 2018 driven2020. In comparison to prior year, our taxes were negatively impacted primarily by by:
•the recognition of a $351.2$547.4 million income tax benefit for Fiscal 2018 associated with the enactment of the TCJ Act, which was signed into law on December 22, 2017. For Fiscal 2018, we recognized a provisional net income tax benefit comprised primarily of benefitsresulting from (i) the remeasurement of our deferred tax assets and liabilities tofor Fiscal 2020 in connection with the new, September 2019 enactment of tax reform in Switzerland,
•lower federal statutory rate and (ii)net income tax benefits recorded for Fiscal 2021 as compared with Fiscal 2020 on the reversal of deferred tax liabilities previously provided for unremitted earnings of foreign subsidiaries which were not considered to be indefinitely reinvested; partially offset by the recording of the mandatory one-time transition tax on unremitted earningschanges in fair value of our foreign subsidiaries. We completed our analysis of the income tax implications of the TCJ Act for the third quarter of fiscal 2019investment in Canopy and recognized an additionalCanopy equity in earnings (losses); and
•a lower net income tax benefit of $37.6 million resulting from a decreasestock-based compensation award activity for Fiscal 2021 from changes in the mandatory one-time transition tax on unremitted earnings of our foreign subsidiaries.option exercise activity.
For additional information, refer to Note 13 of the Notes to the Financial Statements.13.
We expect our reported effective tax rate for the next fiscal year to be in the range of 16%21% to 18%23%. This range includes anthe estimated impact for (i) benefits related to the recognition of the income tax effectexpected long-lived asset impairment of stock-based compensation awardsbrewery construction in the income statement when the awards vest or are settled, (ii) lower effective tax rates applicableprogress. For additional information, refer to our foreign businesses and (iii) closing of the Wine and Spirits Transaction in accordance with the expected timeline.Note 23. Since estimates are not currently available, this range does not assume (i)reflect any future changes in the fair value of our Canopy investmentsinvestment measured at fair value (ii)and any gain (loss) recognized in connection with the Wine and Spirits Transaction and (iii) anyfuture equity in earnings (losses) and related activities from the Canopy Equity Method Investment.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 41 |
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PART II | ITEM 7. MD&A | Table of Contents |
Net Income Attributableincome (loss) attributable to CBI
Net income (loss) attributable to CBI increased to $3,435.9$1,998.0 million for Fiscal 20192021 from $2,303.4$(11.8) million for Fiscal 2018, an2020. This increase of $1,132.5 million. This increase$2,009.8 million is largely attributable to the increase in income from unconsolidated investments discussed above. Solid operating performance from Beer contributed an additional $202.7 million of operating income. These increases were partially offset by the higher provision for income taxes discussed above.
Fiscal 2018 Compared to Fiscal 2017
Net Sales
|
| | | | | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 4,660.4 |
| | $ | 4,227.3 |
| | $ | 433.1 |
| | 10 | % |
Wine and Spirits: | | | | | | |
|
|
Wine | 2,556.3 |
| | 2,732.7 |
| | (176.4 | ) | | (6 | %) |
Spirits | 363.6 |
| | 361.1 |
| | 2.5 |
| | 1 | % |
Total Wine and Spirits | 2,919.9 |
| | 3,093.8 |
| | (173.9 | ) | | (6 | %) |
Consolidated net sales | $ | 7,580.3 |
| | $ | 7,321.1 |
| | $ | 259.2 |
| | 4 | % |
Beer Segment
|
| | | | | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 | | Dollar Change | | Percent Change |
(in millions, branded product, 24-pack, 12-ounce case equivalents) | | | | | | |
Net sales | $ | 4,660.4 |
| | $ | 4,227.3 |
| | $ | 433.1 |
| | 10 | % |
| | | | | | | |
Shipment volume | 268.0 |
| | 246.4 |
| | | | 8.8 | % |
| | | | | | | |
Depletion volume (1) | | | | | | | 9.8 | % |
| |
(1)
| Depletions represent distributor shipments of our respective branded products to retail customers, based on third-party data, including acquired brands from the date of acquisition and for the comparable prior year period. |
The increase in Beer net sales is primarily due to (i) the volume growth within our Mexican beer portfolio of $371.4 million, which benefited from continued consumer demand and increased marketing spend, and (ii) a favorable impact from pricing in select markets within our Mexican beer portfolio of $78.1 million.
Wine and Spirits Segment
|
| | | | | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 | | Dollar Change | | Percent Change |
(in millions, branded product, 9-liter case equivalents) | | | | | | | |
Net sales | $ | 2,919.9 |
| | $ | 3,093.8 |
| | $ | (173.9 | ) | | (6 | %) |
| | | | | | | |
Shipment volume | | | | | | | |
Total | 59.0 |
| | 69.2 |
| | | | (14.7 | %) |
Organic | 58.6 |
| | 59.3 |
| | | | (1.2 | %) |
| | | | | | | |
U.S. Domestic | 54.7 |
| | 55.0 |
| | | | (0.5 | %) |
Organic U.S. Domestic | 54.4 |
| | 55.0 |
| | | | (1.1 | %) |
| | | | | | | |
U.S. Domestic Focus Brands | 33.6 |
| | 31.8 |
| | | | 5.7 | % |
Organic U.S. Domestic Focus Brands | 33.4 |
| | 31.8 |
| | | | 5.0 | % |
| | | | | | | |
Depletion volume (1) | | | | | | | |
U.S. Domestic | | | | | | | 0.9 | % |
U.S. Domestic Focus Brands | | | | | | | 6.6 | % |
The decrease in Wine and Spirits net sales is due to the Canadian Divestiture of $311.2 million, partially offset by net sales from acquired brands of $50.4 million and organic net sales growth of $86.9 million. The organic growth is due largely to favorable product mix shift of $129.5 million, partially offset by lower branded wine and spirits volume of $39.9 million driven predominantly by brands within our wine and spirits portfolio other than our Focus Brands.
Gross Profit
|
| | | | | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 2,531.2 |
| | $ | 2,149.3 |
| | $ | 381.9 |
| | 18 | % |
Wine and Spirits | 1,309.4 |
| | 1,352.3 |
| | (42.9 | ) | | (3 | %) |
Comparable Adjustments | (28.1 | ) | | 17.4 |
| | (45.5 | ) | | NM |
|
Consolidated gross profit | $ | 3,812.5 |
| | $ | 3,519.0 |
| | $ | 293.5 |
| | 8 | % |
| | | | | | | |
NM = Not meaningful | | | | | | | |
The increase in Beer is primarily due to (i) the volume growth and the favorable impact from pricing in select markets within our Mexican beer portfolio of $190.2 million and $78.1 million, respectively, and (ii) lower cost of product sold for our Mexican beer business of $140.5 million. The lower cost of product sold is primarily due to operational and foreign currency transactional benefits within our Mexican beer portfolio of $89.6 million and $30.3 million, respectively.
The decrease in Wine and Spirits is due to the Canadian Divestiture of $131.2 million, partially offset by organic gross profit growth of $62.2 million and gross profit from the acquired brands of $26.1 million. The organic growth is due largely to favorable product mix shift of $93.2 million, partially offset by higher branded wine and spirits cost of product sold of $25.9 million.
Gross profit as a percent of net sales increased to 50.3% for Fiscal 2018 compared with 48.1% for Fiscal 2017 primarily due to (i) ��lower cost of product sold for the Beer segment, (ii) the favorable impact from Beer pricing in select markets and (iii) the favorable Wine and Spirits product mix shift, which contributed approximately 185 basis points, 55 basis points and 40 basis points of rate growth, respectively; partially offset by an unfavorable change in Comparable Adjustments, which resulted in approximately 60 basis points of rate decline.
Selling, General and Administrative Expenses
|
| | | | | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 691.0 |
| | $ | 616.9 |
| | $ | 74.1 |
| | 12 | % |
Wine and Spirits | 515.3 |
| | 559.9 |
| | (44.6 | ) | | (8 | %) |
Corporate Operations and Other | 165.8 |
| | 139.9 |
| | 25.9 |
| | 19 | % |
Comparable Adjustments | 160.6 |
| | 75.7 |
| | 84.9 |
| | NM |
|
Consolidated selling, general and administrative expenses | $ | 1,532.7 |
| | $ | 1,392.4 |
| | $ | 140.3 |
| | 10 | % |
The increase in Beer is primarily due to increases in marketing spend of $46.1 million and general and administrative expenses of $27.9 million. The increase in marketing spend is due largely to planned investment to support the growth of our Mexican beer portfolio. The increase in general and administrative expenses is predominantly driven by higher expenses supporting the growth of the business. The decrease in Wine and Spirits is primarily driven by the Canadian Divestiture of $81.1 million, partially offset by an increase in marketing spend primarily due to planned investment to support our organic growth and acquired businesses of $32.4 million. The increase in Corporate Operations and Other is due to higher general and administrative expenses primarily attributable to increases in consulting of $12.8 million and compensation and benefits of $11.0 million, both largely attributable to supporting the growth of the business.
Selling, general and administrative expenses as a percent of net sales increased to 20.2% for Fiscal 2018 as compared with 19.0% for Fiscal 2017. The increase is primarily attributable to the unfavorable change in Comparable Adjustments and the growth in Corporate Operations and Other general and administrative expenses, which resulted in approximately 135 basis points of rate growth, partially offset by a benefit of approximately 25
basis points from the divestiture of the Canadian wine business, which had a higher rate of selling, general and administrative expenses as a percent of net sales as compared with the rest of the Wine and Spirits business.
Operating Income
|
| | | | | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 1,840.2 |
| | $ | 1,532.4 |
| | $ | 307.8 |
| | 20 | % |
Wine and Spirits | 794.1 |
| | 792.4 |
| | 1.7 |
| | — | % |
Corporate Operations and Other | (165.8 | ) | | (139.9 | ) | | (25.9 | ) | | (19 | %) |
Comparable Adjustments | (188.7 | ) | | 204.1 |
| | (392.8 | ) | | NM |
|
Consolidated operating income | $ | 2,279.8 |
| | $ | 2,389.0 |
| | $ | (109.2 | ) | | (5 | %) |
Operating income growth in our Beer segment was driven predominantly by the factors discussed above. Wine and Spirits remained relatively flat as the loss of operating income in connection with the divestiture of the Canadian wine business was offset by the growth factors discussed above.
Income from Unconsolidated Investments
Income from unconsolidated investments increased to $487.2 million for Fiscal 2018 from $27.3 million for Fiscal 2017, an increase of $459.9 million. This increase is driven largely by an unrealized net gain from the changes in fair value of our securities measured at fair value of $464.3 million.
Interest Expense
Interest expense remained relatively flat forinvestment in Canopy in Fiscal 2018 as compared to Fiscal 2017 as a lower average interest rate of approximately 30 basis points was offset by higher average borrowings of approximately $645 million. The lower average interest rate is predominantly due to the issuance of the lower rate December 2016 Senior Notes, May 2017 Senior Notes and November 2017 Senior Notes and the repayment of the higher rate August 2006 senior notes and January 2008 senior notes. The higher average borrowings are primarily attributable to the purchases of businesses and treasury stock, net of proceeds from the Canadian Divestiture, during Fiscal 2017.
Provision for Income Taxes
Our effective tax rate for Fiscal 2018 was 1.0%2021 as compared with 26.4%an unrealized net loss in Fiscal 2020, (ii) an impairment of long-lived assets held for sale for Fiscal 2017 driven primarily by2020, (iii) and strong volume growth within the recognition of a $351.2 million income tax benefit for Fiscal 2018 associated with the enactment of the TCJ Act, which was signed into law on December 22, 2017. For Fiscal 2018, we recognized a provisional net income tax benefit comprised primarily of benefits from (i) the remeasurement of our deferred tax assets and liabilities to the new, lower federal statutory rate and (ii) the reversal of deferred tax liabilities previously provided for unremitted earnings of foreign subsidiaries which were not considered to be indefinitely reinvested;Beer segment, partially offset by the recording of the mandatory one-time transition tax on unremitted earnings of our foreign subsidiaries.
Our effective tax rateFiscal 2021 provision for Fiscal 2018income taxes as compared with Fiscal 2017 was also favorably impacted by:
lower effective tax rates applicable to our foreign businesses;
the recognition of thea benefit from income tax effect of stock-based compensation awards in the income statement when the awards vest or are settled in connection with our March 1, 2017, adoption of FASB amended share-based compensation guidance; and
the new, lower federal statutory rate of 32.7% associated with the TCJ Act, as compared to the federal statutory rate of 35% in effecttaxes for Fiscal 2017.2020.
Net Income Attributable to CBI
Net income attributable to CBI increased to $2,303.4 million for Fiscal 2018 from $1,528.6 million for Fiscal 2017, an increase of $774.8 million. This increase was driven largely by the factors discussed above, including the net unrealized gain from the changes in fair value of our securities measured at fair value of $464.3 million, the net income tax benefit of $351.2 million resulting from the TCJ Act and the strong operating performance for the Beer segment of $307.8 million.
Financial Liquidity and Capital Resources
General
Our ability to consistently generate cash flow from operating activities is one of our most significant financial strengths. Our strong cash flows enable us to invest in our people and our brands, make appropriate capital investments, provide a quarterly cash dividend program, and from time-to-time, repurchase shares of our common stock and make strategic investments and acquisitions that we believe will enhance shareholder value. Our primary source of liquidity has been cash flow from operating activities. Our principalability to consistently generate robust cash flow from our operations is one of our most significant financial strengths, it enables us to invest in our people and brands, make capital investments and strategic acquisitions, provide a cash dividend program, and from time-to-time, repurchase shares of our common stock. Our largest use of cash in our operating activitiesoperations is for purchasing and carrying inventories and carrying seasonal accounts receivable. Historically, we have used this cash flow from operating activities to repay our short-term borrowings and fund capital expenditures. Additionally, we have aour commercial paper program which we useis used to fund our short-term borrowing requirements and to maintain our access to the capital markets. We will continue to use our short-term borrowings, including our commercial paper program, to support our working capital requirements and capital expenditures. COVID-19 has negatively impacted the global economy and financial markets. A prolonged impact could interfere with our ability to access sources of liquidity or at favorable rates and to generate sufficient operating cash flows. We also have used opportunities to defer some payments including certain payroll taxes under the CARES Act afforded to us during the pandemic.
We have maintainedseek to maintain adequate liquidity to meet working capital requirements, fund capital expenditures, and repay scheduled principal and interest payments on debt. Absent deterioration of market conditions, we believe that cash flows from operating activities and financing activities, primarily short-term borrowings, will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments, periodic share repurchases, and anticipated capital expenditure requirements for both our short-term and long-term capital needs.
In November 2018,On May 1, 2020, we completedexercised the November 20182017 Canopy TransactionWarrants for an aggregate amount of C$5,078.7245.0 million, or $3,869.9 million. In addition, we incurred $24.5$173.9 million of direct acquisition costs. The aggregatewith cash paid at closing was financed with (i) the net proceeds from the issuance of $2,150.0 million aggregate principal amount of October 2018 Senior Notes, (ii) $1,500.0 million in term loans under the Term Credit Agreement and (iii) the remainder from proceeds of borrowings under our commercial paper program. Based on our ability to consistently generate strong cash flow from operating activities, we expect to be able to return to our targeted leverage ratio within 24 months following the close of this transaction, while continuing to make appropriate investments in our business that we believe will enhance shareholder value.operations.
In April 2019, we entered into an agreement to sell a portion of our wine and spirits business for approximately $1.7 billion, subject to closing adjustments. We expect to use the net cash proceeds from this transaction primarily to reduce outstanding borrowings.
Cash Flowsflows
| | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change | | |
(in millions) | | | | | | | |
Net cash provided by (used in): | | | | | | | |
Operating activities | $ | 2,806.5 | | | $ | 2,551.1 | | | $ | 255.4 | | | |
Investing activities | (87.9) | | | (531.0) | | | 443.1 | | | |
Financing activities | (2,346.6) | | | (2,031.4) | | | (315.2) | | | |
Effect of exchange rate changes on cash and cash equivalents | 7.2 | | | (0.9) | | | 8.1 | | | |
Net increase (decrease) in cash and cash equivalents | $ | 379.2 | | | $ | (12.2) | | | $ | 391.4 | | | |
|
| | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
(in millions) | | | | | |
Net cash provided by (used in): | | | | | |
Operating activities | $ | 2,246.3 |
| | $ | 1,931.4 |
| | $ | 1,696.0 |
|
Investing activities | (4,831.8 | ) | | (1,423.1 | ) | | (1,461.8 | ) |
Financing activities | 2,593.3 |
| | (601.2 | ) | | (134.8 | ) |
Effect of exchange rate changes on cash and cash equivalents | (4.5 | ) | | 5.8 |
| | (5.1 | ) |
Net increase (decrease) in cash and cash equivalents | $ | 3.3 |
| | $ | (87.1 | ) | | $ | 94.3 |
|
Operating Activities
Fiscal 2019 Compared to Fiscal 2018
activities
The increase in net cash provided by operating activities for Fiscal 20192021 is largely due to strong cash flow from the Beer segment driven primarily by the segment’s solid operating results, including a benefit from decreased inventory levels due to strong shipments in the fourth quarter of fiscal 2019. Additionally, net cash provided by operating activities for Fiscal 2019 benefited from lower income tax payments predominantly due to (i) the receipt of a federal tax refund for Fiscal 2019 and (ii) lower federal tax payments resulting from the reduction in the U.S. corporate income tax rate associatedcombined with the enactment of the TCJ Act.
Fiscal 2018 Compared to Fiscal 2017
The increase in net cash provided by operating activities for Fiscal 2018 is primarily due to strong cash flow from the Beer segment driven largely by the segment’s strong operating results, partially offset by (i) the timing of collections for recoverable value-added taxes and (ii) an increase in cash outflow from accounts payable primarily attributable to the timing of payments.taxes. Net cash provided by operating activities also benefited from our March 1, 2017, adoptionreduced inventories for the Wine and Spirits segment as a result of the FASB amended share-based compensation guidance, which resulted in the classification of excess tax benefits (resulting from an increase in the fair value of an award from grant date to the vesting or settlement date) as an operating activity in the statement of cash flows instead of as a financing activity where they were previously presented prior to March 1, 2017.
Investing Activities
Fiscal 2019 Compared to Fiscal 2018
2020 U.S. wildfires. The increase in net
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 42 |
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PART II | ITEM 7. MD&A | Table of Contents |
cash provided by operating activities was partially offset by higher income tax payments in Fiscal 2021 primarily due to a change in estimated taxable income and the receipt of a federal tax refund in Fiscal 2020.
Investing activities
Net cash used in investing activities for Fiscal 2019 is2021 decreased primarily due to the November 2018 Canopy Transaction. The increase in net cash used in investing activities was partially offset by (i) lower capital expenditures of $171.3 million, (ii)higher proceeds from the May 2018 sale of our Accolade Wine Investmentbusiness of $110.2$729.8 million and (iii) the lower level of business acquisition activity of $104.5 million.
Fiscal 2018 Compared to Fiscal 2017
The decrease in net cash used in investing activities for Fiscal 2018 is primarily due to the lower level of net business acquisition and divestiture activity of $380.6 million.2021 as compared with Fiscal 2020. The decrease in net cash used in investing activities was partially offset by the May 2020 exercise of the November 2017 Canopy Investment of $191.3Warrants for $173.9 million and higher Fiscal 2021 capital expenditures of $150.2$138.1 million.
Business investments, acquisitions, and divestitures consist primarily of the following:
| | | | | | | | | | | | | | | | | | | | |
| | Investments | | Acquisitions | | Divestitures |
Fiscal 2021 | | | | | | |
| | ● May 2020 Canopy Investment | | ● Copper & Kings | | ● Paul Masson Grande Amber Brandy |
| | ● Booker Vineyard | | ● Empathy Wines | | ● Wine and Spirits Divestiture |
| | | | | | ● Nobilo Wine |
| | | | | | ● Concentrates and high-color concentrates |
| | | | | | ● Ballast Point |
Fiscal 2020 | | | | | | |
| | | | |
Fiscal 2019 | | Fiscal 2018 | | Fiscal 2017 |
● Four Corners (July 2018) Nelson’s Green Brier | | ●Schrader Cellars (June 2017) | | ● Prisoner (April 2016)
|
| | ● Funky Buddha (August 2017)
| | ● High West (October 2016)
|
| | | | ● Charles Smith (October 2016)
|
| | | | ● Obregon Brewery (December 2016) Black Velvet Canadian Whisky
|
For additional information on these investments, acquisitions, and divestitures, refer to Notes 2, 7, and 10.
Financing Activities
Fiscal 2019 Compared to Fiscal 2018
activities
The increase in net cash provided by (used in) financing activities consists of:
| | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Dollar Change |
(in millions) | | | | | |
Net proceeds from (payments of) debt, current and long-term, and related activities | $ | (1,787.8) | | | $ | (1,464.8) | | | $ | (323.0) | |
Dividends paid | (575.0) | | | (569.2) | | | (5.8) | |
Purchases of treasury stock | — | | | (50.0) | | | 50.0 | |
Net cash provided by stock-based compensation activities | 51.2 | | | 63.9 | | | (12.7) | |
Distributions to noncontrolling interests | (35.0) | | | — | | | (35.0) | |
Payment of contingent consideration | — | | | (11.3) | | | 11.3 | |
Net cash provided by (used in) financing activities | $ | (2,346.6) | | | $ | (2,031.4) | | | $ | (315.2) | |
|
| | | | | | | | | | | |
| Fiscal 2019 | | Fiscal 2018 | | Dollar Change |
(in millions) | | | | | |
Net proceeds from debt, current and long-term, and related activities | $ | 3,605.7 |
| | $ | 819.7 |
| | $ | 2,786.0 |
|
Dividends paid | (557.7 | ) | | (400.1 | ) | | (157.6 | ) |
Purchases of treasury stock | (504.3 | ) | | (1,038.5 | ) | | 534.2 |
|
Net cash provided by stock-based compensation activities | 49.6 |
| | 17.7 |
| | 31.9 |
|
Net cash provided by (used in) financing activities | $ | 2,593.3 |
| | $ | (601.2 | ) | | $ | 3,194.5 |
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 43 |
Fiscal 2018 Compared to Fiscal 2017
The increase in net cash used in financing activities consists of:
|
| | | | | | | | | | | |
| Fiscal 2018 | | Fiscal 2017 | | Dollar Change |
(in millions) | | | | | |
Net proceeds from debt, current and long-term, and related activities | $ | 819.7 |
| | $ | 1,176.8 |
| | $ | (357.1 | ) |
Dividends paid | (400.1 | ) | | (315.1 | ) | | (85.0 | ) |
Purchases of treasury stock | (1,038.5 | ) | | (1,122.7 | ) | | 84.2 |
|
Net cash provided by stock-based compensation activities | 17.7 |
| | 126.2 |
| | (108.5 | ) |
Net cash used in financing activities | $ | (601.2 | ) | | $ | (134.8 | ) | | $ | (466.4 | ) |
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PART II | ITEM 7. MD&A | Table of Contents |
Debt
Total debt outstanding as of February 28, 2019,2021, amounted to $13,616.5$10,442.3 million, an increasea decrease of $3,429.8$1,742.3 million from February 28, 2018.29, 2020. This increase was predominately due to the financing of the November 2018 Canopy Transaction, including the issuance of the October 2018 Senior Notes and borrowings under the Term Credit Agreement, partially offset by the conversion of $248.2 million from long-term debt to noncontrolling equity interests associated with the noncash settlement of a prior contractual agreement with our glass production plant joint venture partner.decrease consisted of:
Senior Credit Facility | | | | | | | | | | | | | | | | | |
| | Debt repayment | | Debt issuance | |
Bank facilities
In August 2018,March 2020, we entered into the August 2018 Restatement Agreement that amended and restated our 2017 Credit Agreement, primarily for technical amendments. In September 2018, we entered into the 20182020 Restatement Agreement that amended and restated the August 2018 Credit Agreement. Among other things,This resulted in (i) the 2018 Restatement Agreement increased our revolving credit facility by $500.0 million to $2.0 billionremoval of the subsidiary guarantees and extended its maturity to September 14, 2023. Additionally,termination of the 2018 Restatement Agreement modified certain financial covenants and added various representations and warranties, covenants and an eventguarantee agreement, (ii) the inclusion of defaultthe parent guaranty provisions in connection with the then-pending additional investmenttermination of the guarantee agreement, (iii) the removal of certain provisions pertaining to term loans since no term loans are outstanding, and (iv) the revision of the LIBOR successor rate provisions to permit the use of rates based on the SOFR administered by the Federal Reserve Bank of New York.
In March 2020, we entered into the Term Loan Restatement Agreement and the 2020 Term Loan Restatement Agreement, that amended and restated the Term Credit Agreement and the 2019 Term Credit Agreement, respectively. These new agreements each resulted in Canopy.(i) the removal of the subsidiary guarantees and termination of the respective guarantee agreements and (ii) the revision of the LIBOR successor rate provisions in each to permit the use of rates based on SOFR. We prepaid the remaining outstanding Three-Year Term Facility and Five-Year Term Facility borrowings under our 2020 Term Credit Agreement in Fiscal 2021.
Senior notes
In April 2020, we issued the April 2020 Senior Notes. Proceeds from this offering, net of discount and debt issuance costs, of $1,183.3 million were primarily used for the repayment of our 2.25% November 2017 Senior Notes and a portion of the Three-Year Term Facility outstanding obligations under our 2020 Term Credit Agreement.
In November 2020, we repaid the Senior Floating Rate Notes with cash on hand. In February 2021, we repaid the 3.75% May 2013 Senior Notes utilizing cash proceeds from the Wine and Spirits Divestitures.
General
The majority of our outstanding borrowings as of February 28, 2019,2021, consisted of fixed-rate senior unsecured notes, with maturities ranging from calendar 20192022 to calendar 2048,2050, and a variable-rate senior unsecured
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 44 |
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unsecured term loan facilitiesfacility under our 2018 Credit Agreement andMarch 2020 Term Credit Agreement, originally entered into in June 2019, with maturities ranging froma calendar 2021 to calendar 2024.2024 maturity date as follows:
Additionally, we have a commercial paper program which provides for the issuance of up to an aggregate principal amount of $2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 20182020 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility under our 20182020 Credit Agreement.
We do not have purchase commitments from buyers for our commercial paper and, therefore, our ability to issue commercial paper is subject to market demand. If the commercial paper market is not available to us for any reason when outstanding commercial paper borrowings mature, we will utilize unused commitments under our revolving credit facility under our 20182020 Credit Agreement to repay commercial paper borrowings. We do not expect that fluctuations in demand for commercial paper will affect our liquidity given our borrowing capacity available under our revolving credit facility under our 20182020 Credit Agreement.
We had the following borrowing capacity available under our 20182020 Credit Agreement:
| | | | | | | | | | | |
| Remaining Borrowing Capacity |
| February 28, 2021 | | April 14, 2021 |
(in millions) | | | |
Revolving credit facility (1) | $ | 1,988.3 | | | $ | 1,988.4 | |
|
| | | | | | | |
| Remaining Borrowing Capacity |
| February 28, 2019 | | April 17, 2019 |
(in millions) | | | |
Revolving Credit Facility (1) | $ | 1,196.7 |
| | $ | 1,176.8 |
|
(1) Net of outstanding revolving credit facility borrowings and outstanding letters of credit under our 2020 Credit Agreement and outstanding borrowings under our commercial paper program. | |
(1)
| Net of outstanding revolving credit facility borrowings and outstanding letters of credit under our 2018 Credit Agreement and outstanding borrowings under our commercial paper program. |
The financial institutions participating in our 20182020 Credit Agreement have complied with prior funding requests and we believe such financial institutionsthey will comply with any future funding requests. However, there can be no assurances that any particular financial institution will continue to do so.
We and our subsidiaries are subject to covenants that are contained in the 2018our 2020 Credit Agreement, including those restricting the incurrence of additional indebtedness, (including guarantees of indebtedness) by subsidiaries that are not guarantors, additional liens, mergers and consolidations, transactions with affiliates, and sale and leaseback transactions, in each case subject to numerous conditions, exceptions, and thresholds. The financial covenants are limited to a minimum interest coverage ratio and a
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PART II | ITEM 7. MD&A | Table of Contents |
maximum net leverage ratio, both as defined in the 2018our 2020 Credit Agreement. As of February 28, 2019,2021, under the 2018our 2020 Credit Agreement, the minimum interest coverage ratio was 2.5x and the maximum net leverage ratio was 5.25x.4.5x.
The obligations under the Term Credit Agreement are guaranteed by certain of our U.S. subsidiaries. In addition, the representations, warranties, covenants, and events of default set forth in theour March 2020 Term Credit Agreement are substantially similar to those set forth in the 2018our 2020 Credit Agreement.
Our indentures relating to our outstanding senior notes contain certain covenants, including, but not limited to: (i) a limitation on liens on certain assets, (ii) a limitation on certain sale and leaseback transactions, and (iii) restrictions on mergers, consolidations, and the transfer of all or substantially all of our assets to another person.
As of February 28, 2019,2021, we were in compliance with all of our covenants under the 2018our 2020 Credit Agreement, theour March 2020 Term Credit Agreement, and our indentures, and have met all debt payment obligations.
For a completefurther discussion and presentation of allour borrowings and available sources of borrowing, refer to Note 12 of the Notes to the Financial Statements.12.
Common Stock Dividendsstock dividends
On April 3, 2019,7, 2021, our Board of Directors declared a quarterly cash dividend of $0.75$0.76 per share of Class A Common Stock, $0.68$0.69 per share of Class B Convertible Common Stock, and $0.68$0.69 per share of Class 1 Common Stock payable on May 24, 2019,18, 2021, to stockholders of record of each class on May 10, 2019.4, 2021. We expect to return approximately $567$580 million to stockholders in Fiscal 20202022 through cash dividends.
We currently expect to continue to pay a regular quarterly cash dividend to stockholders of our common stock in the future, but such payments are subject to approval of our Board of Directors and are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A “Risk Factors” of this Annual Report on Form 10-K.
Share Repurchase Program
Our Board of Directors havehas authorized the repurchase of up to $3.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2018 Authorization and the repurchase of up to $2.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2021 Authorization. Shares repurchased under this authorizationthe 2018 Authorization have become treasury shares. No shares were repurchased during the fourth quarter of fiscal 2021.
As of February 28, 2019,2021, total shares repurchased under this authorizationthe 2018 Authorization and the 2021 Authorization are as follows:
| | | | | | | | | | | | | | | | | | | |
| | | Class A Common Shares | | |
| Repurchase Authorization | | Dollar Value of Shares Repurchased | | Number of Shares Repurchased | | |
(in millions, except share data) | | | | | | | |
2018 Authorization | $ | 3,000.0 | | | $ | 1,045.9 | | | 4,897,605 | | |
2021 Authorization | $ | 2,000.0 | | | $ | — | | | — | | |
|
| | | | | | | | | |
| | | Class A Common Shares |
| Repurchase Authorization | | Dollar Value of Shares Repurchased | | Number of Shares Repurchased |
(in millions, except share data) | | | | | |
2018 Authorization | $ | 3,000.0 |
| | $ | 995.9 |
| | 4,632,012 |
Share repurchases under the 2018 Authorization and 2021 Authorization may be accomplished at management’s discretion from time to time based on market conditions, our cash and debt position, and other factors as determined by management. Shares may be repurchased through open market or privately negotiated transactions. We may fund future share repurchases with cash generated from operations and/or proceeds from borrowings. Any repurchased shares will become treasury shares.
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PART II | ITEM 7. MD&A | Table of Contents |
We currently expect to continue to repurchase shares in the future, but such repurchases are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A “Risk Factors” of this Form 10-K.
For additional information, refer to Note 1617.
Capital Resources
We have maintained adequate liquidity to meet working capital requirements, fund capital expenditures, and repay scheduled principal and interest payments on debt. Absent deterioration of market conditions, we believe that cash flows from operating activities and financing activities, primarily short-term borrowings, will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments, periodic share repurchases, and anticipated capital expenditure requirements for both our short-term and long-term capital needs. As of February 28, 2021, our $460.6 million cash and cash equivalent balance reflects the Notes to the Financial Statements.recent sale of a portion of our wine and spirits business.
Contractual Obligations and Commitments
The following table sets forth information about our contractualoutstanding obligations outstanding at February 28, 2019. It brings together data for easy reference from our balance sheet and Notes to the Financial Statements.2021. For a detailed discussion of the items noted in the following table, refer to Notes 11, 12, 13, 14, 15, and 1516.
| | | | | | | | | | | | | | | | | |
| Short-term payments | | Long-term payments | | Total |
(in millions) | | | | | |
Contractual obligations: | | | | | |
| | | | | |
Long-term debt (excluding unamortized debt issuance costs and unamortized discounts) | $ | 29.2 | | | $ | 10,490.7 | | | $ | 10,519.9 | |
Interest payments on long-term debt (1) | $ | 386.7 | | | $ | 3,707.6 | | | $ | 4,094.3 | |
Operating leases | $ | 84.6 | | | $ | 574.7 | | | $ | 659.3 | |
Other long-term liabilities (2) | $ | 49.0 | | | $ | 207.7 | | | $ | 256.7 | |
Purchase obligations | | | | | |
Raw materials and supplies | $ | 994.0 | | | $ | 3,069.8 | | | $ | 4,063.8 | |
Contract services | $ | 189.1 | | | $ | 627.4 | | | $ | 816.5 | |
| | | | | |
Capital expenditures (3) | $ | 140.0 | | | $ | 103.7 | | | $ | 243.7 | |
In-process inventories | $ | 30.9 | | | $ | 44.4 | | | $ | 75.3 | |
Other purchase obligations | $ | 8.4 | | | $ | 18.0 | | | $ | 26.4 | |
Other: | | | | | |
Return value to shareholders (4) | $ | 580.0 | | | $ | 3,225.8 | | | $ | 3,805.8 | |
Investments in businesses (5) | $ | 2.0 | | | $ | 165.3 | | | $ | 167.3 | |
(1)Interest payments on long-term debt do not include interest related to finance lease obligations as amounts are not material.
(2)Other long-term liabilities do not include payments for unrecognized tax benefit liabilities of $204.7 million due to the uncertainty of the Notestiming of future cash flows associated with these unrecognized tax benefit liabilities. In addition, other long-term liabilities do not include expected payments for interest and penalties associated with unrecognized tax benefit liabilities as amounts are not material. For a detailed discussion of these items, refer to Note 13.
(3)Contracts to purchase equipment and services primarily related to the Financial Statements.Obregon Brewery expansion. For further information about these purchase obligations, refer to “Capital Expenditures” below.
(4)Publicly announced intent to return $5 billion in value to shareholders through dividends and share repurchases to be made from Fiscal 2020 through Fiscal 2023. We have returned $1,194.2 million through Fiscal 2021.
(5)Publicly announced intent to invest (i) $100 million in female-founded or led companies through our Focus on Female Founders program over a ten-year period concluding in fiscal 2029 and (ii) $100 million to support African American/Black and minority-owned startups in the beverage alcohol space and related categories over a ten-year period concluding in fiscal 2031. We have invested $32.7 million through Fiscal 2021 in female-founded or led companies.
|
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| PAYMENTS DUE BY PERIOD |
| Total | | Less than 1 year | | 1-3 years | | 3-5 years | | After 5 years |
(in millions) | | | | | | | | | |
Short-term borrowings | $ | 791.5 |
| | $ | 791.5 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Long-term debt (excluding unamortized debt issuance costs and unamortized discounts) | 12,910.1 |
| | 1,067.4 |
| | 2,474.6 |
| | 3,699.3 |
| | 5,668.8 |
|
Interest payments on long-term debt (1) | 4,197.0 |
| | 477.8 |
| | 853.4 |
| | 635.7 |
| | 2,230.1 |
|
Operating leases | 559.5 |
| | 59.0 |
| | 109.3 |
| | 89.1 |
| | 302.1 |
|
Other long-term liabilities (2) | 284.2 |
| | 58.1 |
| | 68.1 |
| | 69.8 |
| | 88.2 |
|
Purchase obligations (3) | 7,194.2 |
| | 1,568.7 |
| | 2,591.6 |
| | 1,568.9 |
| | 1,465.0 |
|
Total contractual obligations | $ | 25,936.5 |
| | $ | 4,022.5 |
| | $ | 6,097.0 |
| | $ | 6,062.8 |
| | $ | 9,754.2 |
|
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(1) Constellation Brands, Inc. FY 2021 Form 10-K | Interest rates on long-term debt obligations range from 2.0% to 5.3% as of February 28, 2019. Interest payments on long-term debt do not include interest related to capital lease obligations, which represent approximately 0.2% of our total long-term debt, as amounts are not material.#WORTHREACHINGFOR I 47 |
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(2) PART II | Includes $36.3 million associated with expected payments for unrecognized tax benefit liabilities asITEM 7. MD&A | Table of February 28, 2019, $0.3 million of which is expected to be paid in the less than one year period. The payments are reflected in the period in which we believe they will ultimately be settled based on our experience in these matters. Other long-term liabilities do not include payments for unrecognized tax benefit liabilities of $188.0 million due to the uncertainty of the timing of future cash flows associated with these unrecognized tax benefit liabilities. In addition, other long-term liabilities do not include expected payments for interest and penalties associated with unrecognized tax benefit liabilities as amounts are not material. For a detailed discussion of these items, refer to Note 13 of the Notes to the Financial Statements.Contents |
| |
(3)
| Consists primarily of $5,955.1 million for contracts to purchase certain raw materials and supplies over the next sixteen fiscal years and $649.8 million for contracts to purchase equipment and services over the next three fiscal years. For a detailed discussion of our purchase obligations, refer to Note 15 of the Notes to the Financial Statements. |
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that either have, or are reasonably likely to have, a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Capital Expendituresexpenditures
During Fiscal 2019,2021, we incurred $886.3$864.6 million for capital expenditures, including $720.0$693.9 million for the Beer segment primarily for (i) our Nava Brewerythe Mexico Beer Projects.
We plan to spend from $1.0 billion to $1.1 billion for capital expenditures in Fiscal 2022, including approximately $900 million for the Beer segment associated primarily with the Mexico Beer Projects. The remaining planned Fiscal 2022 capital expenditures consist of improvements to existing operating facilities and glass production plant expansions, (ii) our Obregon Brewery optimization and expansion and (iii) our Mexicali Brewery construction (collectively,replacements of existing equipment and/or buildings. The Mexico Beer Projects are expected to be completed by Fiscal 2025. Accordingly, we expect to spend approximately $700 million to $900 million annually in Fiscal 2023 through Fiscal 2025 for the “Mexico Beer Expansion Projects”).segment. Management reviews the capital expenditure program periodically and modifies it as required to meet current business needs. We plan to spend from $800.0 million to $900.0 million
In fiscal 2017, we began construction of the Mexicali Brewery. In March 2020, a public consultation was held on the construction of our Mexicali Brewery. Following the negative result of the public consultation, we are in discussions with government officials in Mexico regarding next steps for capital expenditures for Fiscal 2020, including approximately $750.0 million forour brewery construction project and options elsewhere in the Beer segment associated primarily with the Mexico Beer Expansion Projects. The remaining Fiscal 2020 capital expenditures consist of improvements of existing operating facilities and replacements of existing equipment and/or buildings. The Mexico Beer Expansion Projects are expected to be completed over the next four fiscal years.
Effects of Inflation and Changing Prices
Our results of operations and financial condition have not been significantly affected by inflation and changing prices.country. We intend to pass along rising costs through increased selling prices, subjectcontinue working with government officials to normal competitive conditions. There can be no assurances, however, thatmutually agree upon a path forward. At this time, we will be able to pass along rising costs through increased selling prices. In addition, we continue to identify on-going cost savings initiatives.have suspended all Mexicali Brewery construction activities. See Note 23 for further discussion.
Critical Accounting Estimatesaccounting policies and Policiesestimates
Our significant accounting policies are more fully described in Note 1 of the Notes to the Financial Statements. However, certain of our accounting1. Certain policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by management;management to determine appropriate assumptions to be used in certain estimates; as a result, they are subject to an inherent degree of uncertainty. In applying those policies, management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimatesEstimates are based on our historical experience, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. On an ongoing basis, weWe review our estimates to ensure that they appropriately reflect changes in our business.business on an ongoing basis. Our critical accounting estimates include:
•Fair value of financial instruments. Management’s estimate of fair value requires significant judgment and is subject to a high degree of variability based upon market conditions and the availability of specific information. The fair values of our financial instruments that require the application of significant judgment by management are as follows:
Canopy investment
Equity securities, Warrants – estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement) and Monte Carlo simulations (Level 2 fair value measurement). These valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. Management applies significant judgment in its determination of expected volatility. We consider both historical and implied volatility levels of the underlying equity security and apply limited consideration of historical peer group volatility levels.
Debt securities, Convertible – estimated using a binomial lattice option-pricing model (Level 2 fair value measurement), which includes an estimate of the credit spread based on market spreads using bond data as of the valuation date. This valuation model uses various market-based inputs,
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PART II | ITEM 7. MD&A | Table of Contents |
including stock price, remaining term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable.
•Goodwill and other intangible assets. We account for goodwillGoodwill and other intangible assets by classifying intangible assetsare classified into three categories: (i) goodwill, (ii) intangible assets with definite lives subject to
amortization, (ii)and (iii) intangible assets with indefinite lives not subject to amortization and (iii) goodwill. For intangible assets with definite lives, impairment testing is required if conditions exist that indicate the carrying value may not be recoverable. For intangible assets with indefinite lives and for goodwill, impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired. We perform annual impairment tests and re-evaluate the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date of January 1 or when circumstances arise that indicate a possible impairment or change in useful life might exist. The guidance for goodwill impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the estimated fair value of a reporting unit is less than its carrying amount or to proceed directly to performing a quantitative impairment test. Under the quantitative assessment, the estimated fair value of each reporting unit is compared to its carrying value, including goodwill. The estimate of fair value of the reporting unit is generally calculated based on an income approach using the discounted cash flow method supplemented by the market approach. If the estimated fair value of the reporting unit is less than the carrying value of the reporting unit, a goodwill impairment will be recognized. The amount of impairment charge for goodwill is equal to the excess of the carrying value of the goodwill over the implied fair value of the goodwill. Our reporting units with goodwill include the Beer segment and the Wine and Spirits segment.amortization. In estimating the fair value of the reporting units, management must make assumptions and projections regarding items such items as future cash flows, future revenues, future earnings, and other factors. The assumptions used in the estimate of fair valuereflect management’s estimates and are based on historical trends, and the projections and assumptions, including expectations of future economic and competitive conditions that are used in current strategic operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions andplans, however, are therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, we may be required to recognize an impairment loss for these assets. The recognition of any resulting impairment loss could have a material adverse impact on our financial statements.
We perform annual impairment tests and re-evaluate the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date of January 1 or when circumstances arise that indicate a possible impairment or change in useful life might exist.
Goodwill – Our reporting units with goodwill include the Beer segment and the Wine and Spirits segment. In the fourth quarter of fiscal 2019,2021, we performed our annual goodwill impairment analysis using the qualitativequantitative assessment. Our decision to utilize the qualitative assessment was based primarily on the significant amount of excess fair value over the carrying amount of goodwill for our reporting units noted in the prior year assessment. As part of the qualitative assessment, we first identified the key drivers of fair value used in the prior year valuations for each of the reporting units noting that the most significant assumptions used in the discounted cash flow calculations were: (i) the discount rate, (ii) the expected long-term growth rate and (iii) the annual cash flow projections. We then evaluated whether those drivers had subsequently been affected by events and circumstances that could have positive, negative or neutral impacts on the valuation inputs. No indication of impairment was noted for eitherany of our reporting units; therefore, no quantitative assessmentunits, as the estimated fair value of each of our reporting units with goodwill exceeded their carrying value. Based on this analysis, the reporting unit with the lowest amount of estimated fair value in excess of its carrying value was performed.the Wine and Spirits reporting unit with approximately 108% excess fair value. For Fiscal 20182020 and Fiscal 2017,2019, as a result of our annual goodwill impairment analyses, we concluded that there were no indications of impairment for either of our reporting units.
We performed sensitivity analyses on our qualitative assessment for each reporting unit, by updatingThe most significant assumptions used in the reporting unit’s carrying value for all assets and liabilities, as well as prior year’sdiscounted cash flow calculation to determine the estimated fair value using actual reporting unit operating results for Fiscal 2019, with any forecast versus actual variances carried through estimated future periods. These analyses further supported our qualitative conclusion of no indication of impairment for either of our reporting units.units in connection with the impairment testing are: (i) the discount rate, (ii) the expected long-term growth rate, and (iii) the annual cash flow projections.As of January 1, 2021, if we used a discount rate that was 50 basis points higher or used an expected long-term growth rate that was 50 basis points lower or used annual cash flow projections that were 100 basis points lower in our impairment testing of goodwill, then the changes individually would not have resulted in the carrying value of the respective reporting unit’s net assets, including its goodwill, exceeding its estimated fair value. Therefore, we did not have any indication of potential impairment.
Our other
Other intangible assets – consist primarily of customer relationships and trademarks obtained through business acquisitions. Customer relationships are amortized over their estimated useful lives. The trademarks that were determined to have indefinite useful lives are not amortized. The guidance for indefinite lived intangible asset impairment testing allows an entity to assess qualitative factors to determine whether the existence of events or circumstances indicates that it is more likely than not that the indefinite lived intangible asset is impaired or to proceed directly to performing the quantitative impairment test. UnderUsing the quantitative assessment, our trademarks are evaluated for impairment by comparing the carrying value of the trademarks to their estimated fair value. The estimated fair value of trademarks is calculated based on an income approach using the relief from royalty method. The
estimate of fair value is then compared to the carrying value of each trademark. If the estimated fair value is less than the carrying value of the trademark, then an impairment charge is recognized to reduce the carrying value of the trademark to its estimated fair value. In estimating the fair value of the trademarks, management must make assumptions and projections regarding future cash flows based upon future revenues and other factors. The assumptions used in the estimate of fair value are consistent with historical trends and the projections and assumptions that are used in current strategic operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, we may be required to recognize an impairment loss for these assets. The recognition of any resulting impairment loss could have a material adverse impact on our financial statements.
In the fourth quarter of fiscal 2019, we performed2021, the Beer segment’s Four Corners craft beer business recognized a $6.0 million impairment loss in connection with its trademark asset. Certain negative trends within our annual indefinite lived intangible asset impairment analysis utilizing the qualitative assessment for our importFour Corners craft beer total wineportfolio, including slower growth rates and total spirits trademark assetsincreased competition, resulted in updated long-term financial forecasts indicating lower revenue and the quantitative assessmentcash flow generation for the Ballast Point and Funky Buddha trademark assets. Our decision to utilize the qualitative assessment for the import beer, total wine and total spirits trademark assetsrelated portfolio. This change in financial forecasts indicated it was based primarily on the significant amount of excess fair value over the carrying amount for the trademark assets noted in the prior year assessment. No indication of impairment was noted for any of the trademark assets tested under the qualitative assessment. As the aforementioned more likely than not criteria was not met, nothe fair value of our indefinite-lived intangible asset associated with the Four Corners craft beer trademark might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. During the second quarter of fiscal 2020, certain continuing negative trends within our Beer segment’s Ballast Point craft beer portfolio, including
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 49 |
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PART II | ITEM 7. MD&A | Table of Contents |
increased rate of revenue decline and increased competition, indicated that it was performed. Additionally, undermore likely than not the fair value of our indefinite-lived intangible asset associated with the Ballast Point craft beer trademarks might be below its carrying value. Accordingly, we performed a quantitative assessment no indicationfor impairment. As a result of this assessment, the Ballast Point craft beer trademark asset recognized an impairment was noted for the Funky Buddha trademark asset.
loss of $11.0 million. For the fourth quarter of fiscal 2019, the Beer segment’s Ballast Point business recognized a trademark impairment loss of $108.0 million in connection with certain continuing negative trends within its craft beer portfolio and a change in strategy for this portfolio focused on improving profitability by rationalizing the number of product offerings while targeting distribution growth in select strategic markets. In the first quarter of fiscal 2018, the Beer segment’s Ballast Point business recognized a trademark impairment loss of $86.8 million in connection with certain negative trends within its craft beer portfolio. In the fourth quarter of fiscal 2017, the Wine and Spirits’ U.S. business recognized a trademark impairment loss of $37.6 million in connection with our decision to discontinue certain small-scale, low-margin U.S. brands. Additionally, in the fourth quarter of fiscal 2017, the Wine and Spirits’ U.S. business recognized a trademark impairment loss of $8.4 million in connection with certain U.S. brands sold exclusively through the Canadian wine business, for which we expect future sales of these brands to be minimal subsequent to the Canadian Divestiture (referRefer to Note 7 of the Notes to the Financial Statements for further discussion).discussion.
The most significant assumptions used in the relief from royalty method to determine the estimated fair value of intangible assets with indefinite lives in connection with impairment testing are: (i) the estimated royalty rate, (ii) the discount rate, (iii) the expected long-term growth rate, and (iv) the annual revenue projections. As of January 1, 2019,2021, if we used a royalty rate that was 50 basis points lower or used a discount rate that was 50 basis points higher or used an expected long-term growth rate that was 50 basis points lower or used annual revenue projections that were 100 basis points lower in our impairment testing of the Funky Buddha trademark,intangible assets with indefinite lives, then each change individually would not have resulted in itsany unit of accounting’s carrying value exceeding its estimated fair value.
Divestitures – When some, but not all of a reporting unit is disposed of, some of the goodwill of the reporting unit should be allocated to the portion of the reporting unit being disposed of, if that portion constitutes a business. The allocation of goodwill is based on the relative fair values of the portion of the reporting unit being disposed of and the portion of the reporting unit remaining. This approach requires a determination of the fair value of both the business being disposed and the businesses retained within the reporting unit.
For Fiscal 2021, our estimate of fair value for the Paul Masson Divestiture, the Wine and Spirits Divestitures, the Concentrate Business Divestiture, and the Ballast Point Divestiture was determined based on the expected proceeds from the transactions. The components sold were a part of the Wine and Spirits or Beer segment and were included in those reporting units through the date of divestiture. Goodwill was allocated to the assets held for sale based on the relative fair value of the businesses being sold compared to the relative fair value of the reporting unit. Goodwill not allocated to assets associated with the respective divestitures remained in the wine and spirits or beer reporting unit.
•Accounting for income taxes. We estimate our deferred tax assets and liabilities, income taxes payable, provision for income taxes, and unrecognized tax benefit liabilities based upon various factors including, but not limited to, historical pretax operating income, future estimates of pretax operating income, differences between book and tax treatment of various items of income and expense, interpretation of tax laws, and tax planning strategies. We are subject to income taxes in Canada, Luxembourg, Mexico, Switzerland, the U.S., and other jurisdictions. We are regularly audited by federal, state, and foreign tax authorities, but a number of years may elapse before an uncertain tax position for which we have unrecognized tax benefit liabilities, is audited and finally resolved.
We believe that all tax positions are fully supported. However, weWe recognize tax assets and liabilities in accordance with the FASB guidance for income tax accounting. Accordingly, we recognize a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination. We measure and recognize the tax benefit from such a positionexamination based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. In addition, changes in existing tax laws or rates could significantly change our current estimate of our unrecognized tax benefit liabilities. These differences will be reflected as increases or
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 50 |
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PART II | ITEM 7. MD&A | Table of Contents |
decreases to income tax expense in the period in which they are determined. Changes in current estimates, if significant, could have a material adverse impact on our financial statements.
We recognize our deferred tax assets and liabilities based upon the expected future tax outcome of amounts recognized in our results of operations. If necessary, we recognize a valuation allowance on deferred tax assets when it is more likely than not that they will not be realized. We evaluate our ability to realize the tax benefits associated with deferred tax assets by assessing the adequacy of future expected taxable income, historical, and projected operating results, and the availability of prudent and feasible tax planning strategies. The realization of deferred tax assets is evaluated by jurisdiction and the realizability of these assets can vary based on the character of the tax attribute and the carryforward periods specific to each jurisdiction. We believe it is more likely than not that the results of future operations will generate sufficient taxable income to realize our existing deferred tax assets, net of valuation allowances. Changes in the realizability of our deferred tax assets will be reflected in our effective tax rate in the period in which they are determined.
Change in Accounting Guidance
Accounting guidance adopted for Fiscal 20192021 did not have a material impact on our consolidated financial statements. For additional information on recently adopted accounting guidance and accounting guidance not yet adopted, refer to Note 1 in the Notes to the Financial Statements.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 51 |
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PART II | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES | Table of Contents |
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.Risk
As a result of our global operating, investment, acquisition, and financing activities, we are exposed to market risk associated with changes in foreign currency exchange rates, commodity prices, interest rates, and equity prices. To manage the volatility relating to these risks, we periodically purchase and/or sell derivative instruments including foreign currency forward and option contracts, commodity swap contracts, and interest rate swap contracts, and treasury lock contracts. We use derivative instruments to reduce earnings and cash flow volatility resulting from shifts in market rates, as well as to hedge economic exposures. We do not enter into derivative instruments for trading or speculative purposes.
Foreign Currencycurrency and Commodity Price Riskcommodity price risk
Foreign currency derivative instruments are or may be used to hedge existing foreign currency denominated assets and liabilities, forecasted foreign currency denominated sales/purchases to/from third parties as well as intercompany sales/purchases, intercompany principal and interest payments, and in connection with investments, acquisitions, divestitures or investmentsdivestitures outside the U.S. As of February 28, 2019,2021, we had exposures to foreign currency risk primarily related to the Mexican peso, euro, New Zealand dollar, and Canadian dollar. Approximately 80%100% of our balance sheet exposures and 82% of our forecasted transactional exposures for the year ending February 29, 2020,28, 2022, were hedged as of February 28, 2019.2021.
Commodity derivative instruments are or may be used to hedge forecasted commodity purchases from third parties as either economic hedges or accounting hedges. As of February 28, 2019,2021, exposures to commodity price risk which we are currently hedging include aluminum, corn, diesel fuel, natural gas, and wheat prices. Approximately 75%67% of our forecasted transactional exposures for the year ending February 29, 2020,28, 2022, were hedged as of February 28, 2019.2021.
We have performed a sensitivity analysis to estimate our exposure to market risk of foreign exchange rates and commodity prices reflecting the impact of a hypothetical 10% adverse change in the applicable market. The volatility of the applicable rates and prices is dependent on many factors which cannot be forecasted with reliable accuracy. LossesGains or gainslosses from the revaluation or settlement of the related underlying positions would substantially offset such gains or losses on the derivative instruments. The aggregate notional value, estimated fair value, and sensitivity analysis for our open foreign currency and commodity derivative instruments are summarized as follows:
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| Aggregate Notional Value | | Fair Value, Net Asset (Liability) | | Increase (Decrease) in Fair Value – Hypothetical 10% Adverse Change |
| February 28, 2021 | | February 29, 2020 | | February 28, 2021 | | February 29, 2020 | | February 28, 2021 | | February 29, 2020 |
(in millions) | | | | | | | | | | | |
Foreign currency contracts | $ | 2,262.7 | | | $ | 3,011.2 | | | $ | 66.9 | | | $ | 61.9 | | | $ | (129.7) | | | $ | (193.3) | |
Commodity derivative contracts | $ | 221.6 | | | $ | 282.8 | | | $ | 15.9 | | | $ | (40.3) | | | $ | (22.5) | | | $ | 21.7 | |
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| Aggregate Notional Value | | Fair Value, Net Asset (Liability) | | Increase (Decrease) in Fair Value – Hypothetical 10% Adverse Change |
| February 28, 2019 | | February 28, 2018 | | February 28, 2019 | | February 28, 2018 | | February 28, 2019 | | February 28, 2018 |
(in millions) | | | | | | | | | | | |
Foreign currency contracts | $ | 2,039.6 |
| | $ | 1,906.0 |
| | $ | 22.5 |
| | $ | 20.4 |
| | $ | (166.5 | ) | | $ | (107.1 | ) |
Commodity derivative contracts | $ | 284.7 |
| | $ | 177.5 |
| | $ | (2.9 | ) | | $ | 3.5 |
| | $ | 24.4 |
| | $ | (15.0 | ) |
Interest Rate Risk
rate risk
The estimated fair value of our fixed interest rate debt is subject to interest rate risk, credit risk, and foreign currency risk. In addition, we also have variable interest rate debt outstanding (primarily LIBOR-based), certain of which includes a fixed margin subject to the same risks identified for our fixed interest rate debt.
As of February 29, 2020, we had $375.0 million of outstanding cash flow designated interest rate swap agreements which fixed LIBOR interest rates (to minimize interest rate volatility) on our floating LIBOR rate debt. There were no cash flow designated interest rate swap contracts outstanding as of February 28, 2021. As of February 28, 2019,2021, and February 28, 2018, we had29, 2020, there were no undesignated interest rate swap contracts outstanding.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 52 |
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PART II | ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES | Table of Contents |
As of February 29, 2020, we had $300.0 million of outstanding cash flow designated treasury lock agreements which fixed 10-year Treasury interest rates (to minimize interest rate volatility) on our future debtissuances. There were no cash flow designated treasury lock contracts outstanding as of February 28, 2021. As of February 28, 2021, and February 29, 2020, there were no undesignated treasury lock contracts outstanding.
We have performed a sensitivity analysis to estimate our exposure to market risk of interest rates reflecting the impact of a hypothetical 1% increase in the prevailing interest rates. The volatility of the applicable rates is dependent on many factors which cannot be forecasted with reliable accuracy. The aggregate notional value, estimated fair value, and sensitivity analysis for our outstanding fixedfixed-rate debt, including current maturities and open interest rate derivative instruments, are summarized as follows:
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| Aggregate Notional Value | | Fair Value Net Asset (Liability) | | Increase (Decrease) in Fair Value – Hypothetical 1% Rate Increase |
| February 28, 2021 | | February 29, 2020 | | February 28, 2021 | | February 29, 2020 | | February 28, 2021 | | February 29, 2020 |
(in millions) | | | | | | | | | | | |
Fixed interest rate debt | $ | 10,065.5 | | | $ | 10,075.3 | | | $ | (11,126.5) | | | $ | (10,942.8) | | | $ | (805.3) | | | $ | (708.4) | |
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Interest rate swap contracts | $ | — | | | $ | 375.0 | | | $ | — | | | $ | (0.8) | | | $ | — | | | $ | (0.3) | |
Treasury lock contracts | $ | — | | | $ | 300.0 | | | $ | — | | | $ | (7.6) | | | $ | — | | | $ | (9.7) | |
A 1% hypothetical change in the prevailing interest rates would have increased interest expense on our variable interest rate debt including current maturities, are summarized as follows:by $12.4 million and $26.7 million for the for the years ending February 28, 2021, and February 29, 2020, respectively.
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| Aggregate Notional Value | | Fair Value | | Decrease in Fair Value – Hypothetical 1% Rate Increase |
| February 28, 2019 | | February 28, 2018 | | February 28, 2019 | | February 28, 2018 | | February 28, 2019 | | February 28, 2018 |
(in millions) | | | | | | | | | | | |
Fixed interest rate debt | $ | 10,278.9 |
| | $ | 8,787.5 |
| | $ | 10,098.5 |
| | $ | 8,682.9 |
| | $ | (591.0 | ) | | $ | (524.3 | ) |
Variable interest rate debt | $ | 3,422.7 |
| | $ | 1,476.1 |
| | $ | 3,461.9 |
| | $ | 1,460.7 |
| | $ | (88.0 | ) | | $ | (29.6 | ) |
Equity Price Risk
price risk
The estimated fair value of our investmentsinvestment in the Canopy warrants and the Canopy convertible debt securities are subject to equity price risk, interest rate risk, credit risk, and foreign currency risk. These investments areThis investment is recognized at fair value utilizing various option-pricing models and havehas the potential to fluctuate from, among other items, changes in the quoted market price of the underlying equity security. We manage our equity price risk exposure by closely monitoring the financial condition, performance, and outlook of Canopy Growth Corporation.Canopy.
As of February 28, 2019,2021, the fair value of our investmentsinvestment in the Canopy warrants and the Canopy convertible debt securities was $3,234.7$1,816.0 million, with an unrealized net gain (loss) on these investmentsthis investment of $1,678.7$802.0 million recognized in our results of operations for the year ended February 28, 2019.2021. We have performed a sensitivity analysis to estimate our exposure to market risk of the equity price reflecting the impact of a hypothetical 10% adverse change in the quoted market price of the underlying equity security. As of February 28, 2019,2021, such a hypothetical 10% adverse change would have resulted in a decrease in fair value of $438.3$282.7 million.
For additional discussion on our market risk, refer to Notes 6 and 7 of the Notes to the Financial Statements.7.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 53 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Item 8. Financial Statements and Supplementary Data.Data
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 20192021
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Management’s Annual Report on Internal Control Over Financial Reporting | |
Reports of Independent Registered Public Accounting Firm – KPMG LLP | |
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. | Description of Business, Basis of Presentation, and Summary of Significant Accounting Policies | |
| 2. | Acquisitions, Divestitures, and Business Transformation | |
| 3. | Inventories | |
| 4. | Prepaid Expenses and Other | |
| 5. | Property, Plant, and Equipment | |
| 6. | Derivative Instruments | |
| 7. | Fair Value of Financial Instruments | |
| 8. | Goodwill | |
| 9. | Intangible Assets | |
| 10. | Equity Method Investments | |
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| 11. | Other Accrued Expenses and Liabilities | |
| 12. | Borrowings | |
| 13. | Income Taxes | |
| 14. | Deferred Income Taxes and Other Liabilities | |
| 15. | Leases | |
| 16. | Commitments and Contingencies | |
| 17. | Stockholders' Equity | |
| 18. | Stock-Based Employee Compensation | |
| 19. | Net Income (Loss) Per Common Share Attributable to CBI | |
| 20. | Accumulated Other Comprehensive Income (Loss) | |
| 21. | Significant Customers and Concentration of Credit Risk | |
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| 22. | Business Segment Information | |
| 23. | Subsequent Event | |
| 24. | Selected Quarterly Financial Information (unaudited) | |
The following information is presented in this Annual Report on Form 10-K: | | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 54 |
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PART II | |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Page |
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Management’s Annual Report on Internal Control Over Financial Reporting
Management of Constellation Brands, Inc. and subsidiaries (the “Company”) is responsible for establishing and maintaining an adequate system of internal control over financial reporting. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. Further, because of changes in conditions, effectiveness of internal controls over financial reporting may vary over time.
Management conducted an evaluation of the effectiveness of the system of internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on that evaluation, management concluded that the Company’s internal control over financial reporting was effective as of February 28, 2019.2021.
The effectiveness of the Company’s internal control over financial reporting has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report which is included herein.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 55 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Constellation Brands, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Constellation Brands, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of February 28, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of February 28, 20192021 and 2018,February 29, 2020, the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 28, 2019,2021, and the related notes (collectively, the consolidated financial statements), and our report dated April 23, 201920, 2021 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 56 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ KPMG LLP
Rochester, New York
April 23, 201920, 2021
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 57 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Constellation Brands, Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Constellation Brands, Inc. and subsidiaries (the Company) as of February 28, 20192021 and 2018,February 29, 2020, the related consolidated statements of comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 28, 2019,2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 20192021 and 2018,February 29, 2020, and the results of its operations and its cash flows for each of the fiscal years in the three-year period ended February 28, 2019,2021, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of February 28, 2019,2021, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated April 23, 201920, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Fair value measurement of the Canopy warrants
As discussed in Notes 1 and 7 to the consolidated financial statements, the Company established policies for measuring the fair value of financial instruments, including the November 2018 Canopy Warrants. As of February 28, 2021, the recorded balance of the Company’s investment in the November 2018 Canopy Warrants was $1,639.7 million. The Company uses option pricing models to estimate the fair value of the November 2018 Canopy Warrants using various market-based inputs.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 58 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
We identified the evaluation of the fair value measurement of the November 2018 Canopy Warrants as a critical audit matter. Specifically, a high degree of subjective auditor judgment, including the involvement of valuation professionals with specialized skills and knowledge, was required in evaluating the determination of the expected volatility inputs used in the option pricing models for the November 2018 Canopy Warrants. Historical, implied, and peer group volatility levels provide a range of possible expected volatility inputs and the fair value estimates for the November 2018 Canopy Warrants were sensitive to the expected volatility inputs.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the fair value measurement of the November 2018 Canopy Warrants. This included controls related to the evaluation of observable market information used in the determination of the expected volatility inputs. We involved valuation professionals with specialized skills and knowledge, who assisted in evaluating the expected volatility inputs by comparing them against a volatility range that was independently developed in consideration of historical, implied, and peer group volatility information and in developing an estimate of the November 2018 Canopy Warrants’ fair value using the independently-developed volatility range and comparing it to the value determined by the Company.
Unrecognized tax benefits
As discussed in Notes 1 and 13 to the consolidated financial statements, the Company recognizes a tax benefit from an uncertain tax position when it is more likely than not that the position will be sustained upon examination. The Company has recorded unrecognized tax benefits of $236.1 million as of February 28, 2021.
We identified the evaluation of certain of the Company’s unrecognized tax benefits as a critical audit matter. Specifically, complex auditor judgment, including the involvement of tax and valuation professionals with specialized skills and knowledge, was required in evaluating the Company’s interpretation of tax law and its estimate of the ultimate resolution of its tax positions.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the Company’s process to evaluate uncertain tax positions. This included controls related to the interpretation of tax law, its application in the liability estimation process, and the review of activity that could result in changes to the Company’s unrecognized tax benefits. We involved tax professionals with specialized skills and knowledge, who assisted in evaluating the Company’s interpretation of tax law and tax authority rulings and in performing an independent assessment of certain of the Company’s tax positions and the amount of unrecognized tax benefit, if any, and comparing the results to the Company’s assessment. We also involved valuation professionals with specialized skills and knowledge, who assisted in assessing certain transfer pricing studies for compliance with applicable laws and regulations.
/s/ KPMG LLP
We have served as the Company’s auditor since 2002.
Rochester, New York
April 23, 201920, 2021
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 59 |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in millions, except share and per share data) |
| | | | | | | |
| February 28, 2019 | | February 28, 2018 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 93.6 |
| | $ | 90.3 |
|
Accounts receivable | 846.9 |
| | 776.2 |
|
Inventories | 2,130.4 |
| | 2,084.0 |
|
Prepaid expenses and other | 613.1 |
| | 523.5 |
|
Total current assets | 3,684.0 |
| | 3,474.0 |
|
Property, plant and equipment | 5,267.3 |
| | 4,789.7 |
|
Goodwill | 8,088.8 |
| | 8,083.1 |
|
Intangible assets | 3,198.1 |
| | 3,304.8 |
|
Equity method investments | 3,465.6 |
| | 121.5 |
|
Securities measured at fair value | 3,234.7 |
| | 672.2 |
|
Deferred income taxes | 2,183.3 |
| | — |
|
Other assets | 109.7 |
| | 93.4 |
|
Total assets | $ | 29,231.5 |
| | $ | 20,538.7 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Short-term borrowings | $ | 791.5 |
| | $ | 746.8 |
|
Current maturities of long-term debt | 1,065.2 |
| | 22.3 |
|
Accounts payable | 616.7 |
| | 592.2 |
|
Other accrued expenses and liabilities | 690.4 |
| | 678.3 |
|
Total current liabilities | 3,163.8 |
| | 2,039.6 |
|
Long-term debt, less current maturities | 11,759.8 |
| | 9,417.6 |
|
Deferred income taxes and other liabilities | 1,470.7 |
| | 1,089.8 |
|
Total liabilities | 16,394.3 |
| | 12,547.0 |
|
Commitments and contingencies (Note 15) |
|
| |
|
|
CBI stockholders’ equity: | | | |
Preferred Stock, $.01 par value – Authorized, 1,000,000 shares; Issued, none | — |
| | — |
|
Class A Common Stock, $.01 par value – Authorized, 322,000,000 shares; Issued, 185,740,178 shares and 258,718,356 shares, respectively | 1.9 |
| | 2.6 |
|
Class B Convertible Common Stock, $.01 par value – Authorized, 30,000,000 shares; Issued, 28,322,419 shares and 28,335,387 shares, respectively | 0.3 |
| | 0.3 |
|
Class 1 Common Stock, $.01 par value – Authorized, 25,000,000 shares; Issued, 1,149,624 shares and 1,970 shares, respectively | — |
| | — |
|
Additional paid-in capital | 1,410.8 |
| | 2,825.3 |
|
Retained earnings | 14,276.2 |
| | 9,157.2 |
|
Accumulated other comprehensive loss | (353.9 | ) | | (202.9 | ) |
| 15,335.3 |
| | 11,782.5 |
|
Less: Treasury stock – | | | |
Class A Common Stock, at cost, 18,927,966 shares and 90,743,239 shares, respectively | (2,782.1 | ) | | (3,805.2 | ) |
Class B Convertible Common Stock, at cost, 5,005,800 shares | (2.2 | ) | | (2.2 | ) |
| (2,784.3 | ) | | (3,807.4 | ) |
Total CBI stockholders’ equity | 12,551.0 |
| | 7,975.1 |
|
Noncontrolling interests | 286.2 |
| | 16.6 |
|
Total stockholders’ equity | 12,837.2 |
| | 7,991.7 |
|
Total liabilities and stockholders’ equity | $ | 29,231.5 |
| | $ | 20,538.7 |
|
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 460.6 | | | $ | 81.4 | |
Accounts receivable | 785.3 | | | 864.8 | |
Inventories | 1,291.1 | | | 1,373.6 | |
Prepaid expenses and other | 507.5 | | | 535.8 | |
Assets held for sale - current | 0 | | | 628.5 | |
Total current assets | 3,044.5 | | | 3,484.1 | |
Property, plant, and equipment | 5,821.6 | | | 5,333.0 | |
Goodwill | 7,793.5 | | | 7,757.1 | |
Intangible assets | 2,732.1 | | | 2,718.9 | |
Equity method investments | 2,788.4 | | | 3,093.9 | |
Securities measured at fair value | 1,818.1 | | | 1,117.1 | |
Deferred income taxes | 2,492.5 | | | 2,656.3 | |
Assets held for sale | 0 | | | 552.1 | |
Other assets | 614.1 | | | 610.7 | |
Total assets | $ | 27,104.8 | | | $ | 27,323.2 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Short-term borrowings | $ | 0 | | | $ | 238.9 | |
Current maturities of long-term debt | 29.2 | | | 734.9 | |
Accounts payable | 460.0 | | | 557.6 | |
Other accrued expenses and liabilities | 779.9 | | | 780.4 | |
Total current liabilities | 1,269.1 | | | 2,311.8 | |
Long-term debt, less current maturities | 10,413.1 | | | 11,210.8 | |
| | | |
Deferred income taxes and other liabilities | 1,493.5 | | | 1,326.3 | |
Total liabilities | 13,175.7 | | | 14,848.9 | |
Commitments and contingencies (Note 17) | 0 | | 0 |
CBI stockholders’ equity: | | | |
Preferred Stock, $0.01 par value – Authorized, 1,000,000 shares; Issued, NaN | 0 | | | 0 | |
Class A Common Stock, $0.01 par value – Authorized, 322,000,000 shares; Issued, 187,204,280 shares and 186,090,745 shares, respectively | 1.9 | | | 1.9 | |
Class B Convertible Common Stock, $0.01 par value – Authorized, 30,000,000 shares; Issued, 28,270,288 shares and 28,300,206 shares, respectively | 0.3 | | | 0.3 | |
Class 1 Common Stock, $0.01 par value – Authorized, 25,000,000 shares; Issued, 612,936 shares and 1,692,227 shares, respectively | 0 | | | 0 | |
Additional paid-in capital | 1,604.2 | | | 1,514.6 | |
Retained earnings | 15,117.8 | | | 13,695.3 | |
Accumulated other comprehensive income (loss) | (335.5) | | | (266.3) | |
| 16,388.7 | | | 14,945.8 | |
Less: Treasury stock – | | | |
Class A Common Stock, at cost, 17,070,550 shares and 18,256,826 shares, respectively | (2,787.6) | | | (2,811.8) | |
Class B Convertible Common Stock, at cost, 5,005,800 shares | (2.2) | | | (2.2) | |
| (2,789.8) | | | (2,814.0) | |
Total CBI stockholders’ equity | 13,598.9 | | | 12,131.8 | |
Noncontrolling interests | 330.2 | | | 342.5 | |
Total stockholders’ equity | 13,929.1 | | | 12,474.3 | |
Total liabilities and stockholders’ equity | $ | 27,104.8 | | | $ | 27,323.2 | |
The accompanying notes are an integral part of these statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (in millions, except per share data) |
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
Sales | $ | 8,884.3 |
| | $ | 8,322.1 |
| | $ | 8,051.2 |
|
Excise taxes | (768.3 | ) | | (741.8 | ) | | (730.1 | ) |
Net sales | 8,116.0 |
| | 7,580.3 |
| | 7,321.1 |
|
Cost of product sold | (4,035.7 | ) | | (3,767.8 | ) | | (3,802.1 | ) |
Gross profit | 4,080.3 |
| | 3,812.5 |
| | 3,519.0 |
|
Selling, general and administrative expenses | (1,668.1 | ) | | (1,532.7 | ) | | (1,392.4 | ) |
Gain on sale of business | — |
| | — |
| | 262.4 |
|
Operating income | 2,412.2 |
| | 2,279.8 |
| | 2,389.0 |
|
Income from unconsolidated investments | 2,101.6 |
| | 487.2 |
| | 27.3 |
|
Interest expense | (367.1 | ) | | (332.0 | ) | | (333.3 | ) |
Loss on extinguishment of debt | (1.7 | ) | | (97.0 | ) | | — |
|
Income before income taxes | 4,145.0 |
| | 2,338.0 |
| | 2,083.0 |
|
Provision for income taxes | (685.9 | ) | | (22.7 | ) | | (550.3 | ) |
Net income | 3,459.1 |
| | 2,315.3 |
| | 1,532.7 |
|
Net income attributable to noncontrolling interests | (23.2 | ) | | (11.9 | ) | | (4.1 | ) |
Net income attributable to CBI | $ | 3,435.9 |
| | $ | 2,303.4 |
| | $ | 1,528.6 |
|
| | | | | |
Net income per common share attributable to CBI: | | | | | |
Basic – Class A Common Stock | $ | 18.24 |
| | $ | 11.96 |
| | $ | 7.76 |
|
Basic – Class B Convertible Common Stock | $ | 16.57 |
| | $ | 10.86 |
| | $ | 7.04 |
|
| | | | | |
Diluted – Class A Common Stock | $ | 17.57 |
| | $ | 11.47 |
| | $ | 7.49 |
|
Diluted – Class B Convertible Common Stock | $ | 16.21 |
| | $ | 10.59 |
| | $ | 6.90 |
|
| | | | | |
Weighted average common shares outstanding: | | | | | |
Basic – Class A Common Stock | 167.249 |
| | 171.457 |
| | 175.934 |
|
Basic – Class B Convertible Common Stock | 23.321 |
| | 23.336 |
| | 23.353 |
|
| | | | | |
Diluted – Class A Common Stock | 195.532 |
| | 200.745 |
| | 204.099 |
|
Diluted – Class B Convertible Common Stock | 23.321 |
| | 23.336 |
| | 23.353 |
|
| | | | | |
Cash dividends declared per common share: | | | | | |
Class A Common Stock | $ | 2.96 |
| | $ | 2.08 |
| | $ | 1.60 |
|
Class B Convertible Common Stock | $ | 2.68 |
| | $ | 1.88 |
| | $ | 1.44 |
|
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 60 |
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| | | | | | | | | | | |
Comprehensive income: | | | | | |
Net income | $ | 3,459.1 |
| | $ | 2,315.3 |
| | $ | 1,532.7 |
|
Other comprehensive income (loss), net of income tax effect: | | | | | |
Foreign currency translation adjustments | (196.8 | ) | | 153.8 |
| | 22.1 |
|
Unrealized gain on cash flow hedges | 11.4 |
| | 55.5 |
| | 7.8 |
|
Unrealized gain (loss) on available-for-sale debt securities | 2.5 |
| | (0.2 | ) | | 0.5 |
|
Pension/postretirement adjustments | 0.5 |
| | (1.1 | ) | | 11.6 |
|
Share of other comprehensive income of equity method investments | 29.6 |
| | — |
| | — |
|
Other comprehensive income (loss), net of income tax effect | (152.8 | ) | | 208.0 |
| | 42.0 |
|
Comprehensive income | 3,306.3 |
| | 2,523.3 |
| | 1,574.7 |
|
Comprehensive (income) loss attributable to noncontrolling interests | (21.4 | ) | | (23.0 | ) | | 6.6 |
|
Comprehensive income attributable to CBI | $ | 3,284.9 |
| | $ | 2,500.3 |
| | $ | 1,581.3 |
|
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions, except per share data)
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
Sales | $ | 9,355.7 | | | $ | 9,113.0 | | | $ | 8,884.3 | |
Excise taxes | (740.8) | | | (769.5) | | | (768.3) | |
Net sales | 8,614.9 | | | 8,343.5 | | | 8,116.0 | |
Cost of product sold | (4,148.9) | | | (4,191.6) | | | (4,035.7) | |
Gross profit | 4,466.0 | | | 4,151.9 | | | 4,080.3 | |
Selling, general, and administrative expenses | (1,665.1) | | | (1,621.8) | | | (1,668.1) | |
| | | | | |
Impairment of assets held for sale | (24.0) | | | (449.7) | | | 0 | |
Gain (loss) on sale of business | 14.2 | | | 74.1 | | | 0 | |
Operating income (loss) | 2,791.1 | | | 2,154.5 | | | 2,412.2 | |
Income (loss) from unconsolidated investments | 150.3 | | | (2,668.6) | | | 2,101.6 | |
Interest expense | (385.7) | | | (428.7) | | | (367.1) | |
Loss on extinguishment of debt | (12.8) | | | (2.4) | | | (1.7) | |
Income (loss) before income taxes | 2,542.9 | | | (945.2) | | | 4,145.0 | |
(Provision for) benefit from income taxes | (511.1) | | | 966.6 | | | (685.9) | |
Net income (loss) | 2,031.8 | | | 21.4 | | | 3,459.1 | |
Net income (loss) attributable to noncontrolling interests | (33.8) | | | (33.2) | | | (23.2) | |
Net income (loss) attributable to CBI | $ | 1,998.0 | | | $ | (11.8) | | | $ | 3,435.9 | |
| | | | | |
Net income (loss) per common share attributable to CBI: | | | | | |
Basic – Class A Common Stock | $ | 10.44 | | | $ | (0.07) | | | $ | 18.24 | |
Basic – Class B Convertible Common Stock | $ | 9.48 | | | $ | (0.07) | | | $ | 16.57 | |
| | | | | |
Diluted – Class A Common Stock | $ | 10.23 | | | $ | (0.07) | | | $ | 17.57 | |
Diluted – Class B Convertible Common Stock | $ | 9.42 | | | $ | (0.07) | | | $ | 16.21 | |
| | | | | |
Weighted average common shares outstanding: | | | | | |
Basic – Class A Common Stock | 170.239 | | | 168.329 | | | 167.249 | |
Basic – Class B Convertible Common Stock | 23.280 | | | 23.313 | | | 23.321 | |
| | | | | |
Diluted – Class A Common Stock | 195.308 | | | 168.329 | | | 195.532 | |
Diluted – Class B Convertible Common Stock | 23.280 | | | 23.313 | | | 23.321 | |
| | | | | |
Cash dividends declared per common share: | | | | | |
Class A Common Stock | $ | 3.00 | | | $ | 3.00 | | | $ | 2.96 | |
Class B Convertible Common Stock | $ | 2.72 | | | $ | 2.72 | | | $ | 2.68 | |
| | | | | | | | | | | | | | | | | |
Comprehensive income (loss): | | | | | |
Net income (loss) | $ | 2,031.8 | | | $ | 21.4 | | | $ | 3,459.1 | |
Other comprehensive income (loss), net of income tax effect: | | | | | |
Foreign currency translation adjustments | (56.0) | | | 60.8 | | | (196.8) | |
Unrealized gain (loss) on cash flow hedges | (20.9) | | | 40.4 | | | 11.4 | |
Unrealized gain (loss) on available-for-sale debt securities | 0 | | | 0 | | | 2.5 | |
Pension/postretirement adjustments | (1.6) | | | (0.6) | | | 0.5 | |
Share of other comprehensive income (loss) of equity method investments | (1.8) | | | (10.1) | | | 29.6 | |
Other comprehensive income (loss), net of income tax effect | (80.3) | | | 90.5 | | | (152.8) | |
Comprehensive income (loss) | 1,951.5 | | | 111.9 | | | 3,306.3 | |
Comprehensive (income) loss attributable to noncontrolling interests | (22.7) | | | (36.1) | | | (21.4) | |
Comprehensive income (loss) attributable to CBI | $ | 1,928.8 | | | $ | 75.8 | | | $ | 3,284.9 | |
The accompanying notes are an integral part of these statements.
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 61 |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (in millions) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 29, 2016 | $ | 2.6 |
| | $ | 0.3 |
| | $ | 2,589.0 |
| | $ | 6,090.5 |
| | $ | (452.5 | ) | | $ | (1,670.3 | ) | | $ | 132.2 |
| | $ | 6,691.8 |
|
Cumulative effect of change in accounting principle | — |
| | — |
| | — |
| | (49.0 | ) | | — |
| | — |
| | — |
| | (49.0 | ) |
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | 1,528.6 |
| | — |
| | — |
| | 4.1 |
| | 1,532.7 |
|
Other comprehensive income (loss), net of income tax effect | — |
| | — |
| | — |
| | — |
| | 52.7 |
| | — |
| | (10.7 | ) | | 42.0 |
|
Comprehensive income | | | | | | | | | | | | | | | 1,574.7 |
|
Repurchase of shares | — |
| | — |
| | — |
| | — |
| | — |
| | (1,122.7 | ) | | — |
| | (1,122.7 | ) |
Dividends declared | — |
| | — |
| | — |
| | (315.6 | ) | | — |
| | — |
| | — |
| | (315.6 | ) |
Conversion of noncontrolling equity interests to long-term debt | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (132.0 | ) | | (132.0 | ) |
Shares issued under equity compensation plans | — |
| | — |
| | (20.1 | ) | | — |
| | — |
| | 15.3 |
| | — |
| | (4.8 | ) |
Stock-based compensation | — |
| | — |
| | 55.5 |
| | — |
| | — |
| | — |
| | — |
| | 55.5 |
|
Tax benefit on stock-based compensation | — |
| | — |
| | 131.4 |
| | — |
| | — |
| | — |
| | — |
| | 131.4 |
|
Balance at February 28, 2017 | 2.6 |
| | 0.3 |
| | 2,755.8 |
| | 7,254.5 |
| | (399.8 | ) | | (2,777.7 | ) | | (6.4 | ) | | 6,829.3 |
|
Comprehensive income: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | 2,303.4 |
| | — |
| | — |
| | 11.9 |
| | 2,315.3 |
|
Other comprehensive income, net of income tax effect | — |
| | — |
| | — |
| | — |
| | 196.9 |
| | — |
| | 11.1 |
| | 208.0 |
|
Comprehensive income | | | | | | | | | | | | | | | 2,523.3 |
|
Repurchase of shares | — |
| | — |
| | — |
| | — |
| | — |
| | (1,038.5 | ) | | — |
| | (1,038.5 | ) |
Dividends declared | — |
| | — |
| | — |
| | (400.7 | ) | | — |
| | — |
| | — |
| | (400.7 | ) |
Shares issued under equity compensation plans | — |
| | — |
| | 8.3 |
| | — |
| | — |
| | 8.8 |
| | — |
| | 17.1 |
|
Stock-based compensation | — |
| | — |
| | 61.2 |
| | — |
| | — |
| | — |
| | — |
| | 61.2 |
|
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: | | | | | | | | | | | | | | | |
Net income | — |
| | — |
| | — |
| | 3,435.9 |
| | — |
| | — |
| | 23.2 |
| | 3,459.1 |
|
Other comprehensive loss, net of income tax effect | — |
| | — |
| | — |
| | — |
| | (151.0 | ) | | — |
| | (1.8 | ) | | (152.8 | ) |
Comprehensive income | | | | | | | | | | | | | | | 3,306.3 |
|
Retirement of treasury shares | (0.7 | ) | | — |
| | (1,522.3 | ) | | — |
| | — |
| | 1,523.0 |
| | — |
| | — |
|
Repurchase of shares | — |
| | — |
| | — |
| | — |
| | — |
| | (504.3 | ) | | — |
| | (504.3 | ) |
Dividends declared | — |
| | — |
| | — |
| | (558.9 | ) | | — |
| | — |
| | — |
| | (558.9 | ) |
Conversion of long-term debt to noncontrolling equity interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 248.2 |
| | 248.2 |
|
Shares issued under equity compensation plans | — |
| | — |
| | 45.2 |
| | — |
| | — |
| | 4.4 |
| | — |
| | 49.6 |
|
Stock-based compensation | — |
| | — |
| | 62.6 |
| | — |
| | — |
| | — |
| | — |
| | 62.6 |
|
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 |
|
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in millions)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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, 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) | — | | | — | | | — | | | 3,435.9 | | | — | | | — | | | 23.2 | | | 3,459.1 | |
Other comprehensive income (loss), net of income tax effect | — | | | — | | | — | | | — | | | (151.0) | | | — | | | (1.8) | | | (152.8) | |
Comprehensive income (loss) | | | | | | | | | | | | | | | 3,306.3 | |
Retirement of treasury shares | (0.7) | | | — | | | (1,522.3) | | | — | | | — | | | 1,523.0 | | | — | | | 0 | |
Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (504.3) | | | — | | | (504.3) | |
Dividends declared | — | | | — | | | — | | | (558.9) | | | — | | | — | | | — | | | (558.9) | |
| | | | | | | | | | | | | | | |
Conversion of long-term debt to noncontrolling equity interest | — | | | — | | | — | | | — | | | — | | | — | | | 248.2 | | | 248.2 | |
Shares issued under equity compensation plans | 0 | | | 0 | | | 45.2 | | | — | | | — | | | 4.4 | | | — | | | 49.6 | |
Stock-based compensation | — | | | — | | | 62.6 | | | — | | | — | | | — | | | — | | | 62.6 | |
| | | | | | | | | | | | | | | |
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) | — | | | — | | | — | | | (11.8) | | | — | | | — | | | 33.2 | | | 21.4 | |
Other comprehensive income (loss), net of income tax effect | — | | | — | | | — | | | — | | | 87.6 | | | — | | | 2.9 | | | 90.5 | |
Comprehensive income (loss) | | | | | | | | | | | | | | | 111.9 | |
| | | | | | | | | | | | | | | |
Repurchase of shares | — | | | — | | | — | | | — | | | — | | | (50.0) | | | — | | | (50.0) | |
Dividends declared | — | | | — | | | — | | | (569.1) | | | — | | | — | | | — | | | (569.1) | |
| | | | | | | | | | | | | | | |
Initial recognition of non-controlling interest | — | | | — | | | — | | | — | | | — | | | — | | | 20.2 | | | 20.2 | |
| | | | | | | | | | | | | | | |
Shares issued under equity compensation plans | 0 | | | 0 | | | 43.8 | | | — | | | — | | | 20.3 | | | — | | | 64.1 | |
Stock-based compensation | — | | | — | | | 60.0 | | | — | | | — | | | — | | | — | | | 60.0 | |
| | | | | | | | | | | | | | | |
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 | |
| | | | | | | | | | | | | | | |
Comprehensive income (loss): | | | | | | | | | | | | | | | |
Net income (loss) | — | | | — | | | — | | | 1,998.0 | | | — | | | — | | | 33.8 | | | 2,031.8 | |
Other comprehensive income (loss), net of income tax effect | — | | | — | | | — | | | — | | | (69.2) | | | — | | | (11.1) | | | (80.3) | |
Comprehensive income (loss) | | | | | | | | | | | | | | | 1,951.5 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Dividends declared | — | | | — | | | — | | | (575.5) | | | — | | | — | | | — | | | (575.5) | |
Noncontrolling interest distributions | — | | | — | | | — | | | — | | | — | | | — | | | (35.0) | | | (35.0) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Shares issued under equity compensation plans | 0 | | | 0 | | | 27.0 | | | — | | | — | | | 24.2 | | | — | | | 51.2 | |
Stock-based compensation | — | | | — | | | 62.6 | | | — | | | — | | | — | | | — | | | 62.6 | |
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 | |
The accompanying notes are an integral part of these statements.
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 62 |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) |
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
Cash flows from operating activities: | | | | | |
Net income | $ | 3,459.1 |
| | $ | 2,315.3 |
| | $ | 1,532.7 |
|
| | | | | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Unrealized net gain on securities measured at fair value | (1,971.2 | ) | | (464.3 | ) | | — |
|
Net gain on sale of unconsolidated investment | (99.8 | ) | | — |
| | — |
|
Net income tax benefit related to the Tax Cuts and Jobs Act | (37.6 | ) | | (351.2 | ) | | — |
|
Deferred tax provision | 426.9 |
| | 113.8 |
| | 124.8 |
|
Depreciation | 333.1 |
| | 293.8 |
| | 237.5 |
|
Impairment and amortization of intangible assets | 114.0 |
| | 92.7 |
| | 56.4 |
|
Stock-based compensation | 64.1 |
| | 60.9 |
| | 56.1 |
|
Amortization of debt issuance costs and loss on extinguishment of debt | 29.4 |
| | 108.7 |
| | 12.7 |
|
Gain on sale of business | — |
| | — |
| | (262.4 | ) |
Loss on contract termination | — |
| | 59.0 |
| | — |
|
Change in operating assets and liabilities, net of effects from purchases of businesses: | | | | | |
Accounts receivable | (71.9 | ) | | (34.1 | ) | | (49.4 | ) |
Inventories | (61.9 | ) | | (123.8 | ) | | (151.0 | ) |
Prepaid expenses and other current assets | (103.0 | ) | | (111.5 | ) | | (71.6 | ) |
Accounts payable | 21.4 |
| | 12.8 |
| | 115.9 |
|
Other accrued expenses and liabilities | (22.1 | ) | | (66.8 | ) | | 132.6 |
|
Other | 165.8 |
| | 26.1 |
| | (38.3 | ) |
Total adjustments | (1,212.8 | ) | | (383.9 | ) | | 163.3 |
|
Net cash provided by operating activities | 2,246.3 |
| | 1,931.4 |
| | 1,696.0 |
|
| | | | | |
Cash flows from investing activities: | | | | | |
Investments in equity method investees and securities | (4,081.5 | ) | | (210.9 | ) | | (17.1 | ) |
Purchases of property, plant and equipment | (886.3 | ) | | (1,057.6 | ) | | (907.4 | ) |
Purchases of businesses, net of cash acquired | (45.6 | ) | | (150.1 | ) | | (1,111.0 | ) |
Proceeds from sale of unconsolidated investment | 110.2 |
| | — |
| | — |
|
Proceeds from sales of assets | 72.3 |
| | 5.9 |
| | 2.1 |
|
Proceeds from (payments related to) sale of business | — |
| | (5.0 | ) | | 575.3 |
|
Other investing activities | (0.9 | ) | | (5.4 | ) | | (3.7 | ) |
Net cash used in investing activities | (4,831.8 | ) | | (1,423.1 | ) | | (1,461.8 | ) |
| | | | | |
Cash flows from financing activities: | | | | | |
Proceeds from issuance of long-term debt | 3,657.6 |
| | 7,933.4 |
| | 1,965.6 |
|
Proceeds from shares issued under equity compensation plans | 63.2 |
| | 49.4 |
| | 59.7 |
|
Net proceeds from short-term borrowings | 45.5 |
| | 137.2 |
| | 197.1 |
|
Dividends paid | (557.7 | ) | | (400.1 | ) | | (315.1 | ) |
Purchases of treasury stock | (504.3 | ) | | (1,038.5 | ) | | (1,122.7 | ) |
Principal payments of long-term debt | (62.8 | ) | | (7,128.7 | ) | | (971.8 | ) |
Payments of debt issuance, debt extinguishment and other financing costs | (34.6 | ) | | (122.2 | ) | | (14.1 | ) |
Payments of minimum tax withholdings on stock-based payment awards | (13.6 | ) | | (31.7 | ) | | (64.9 | ) |
Excess tax benefits from stock-based payment awards | — |
| | — |
| | 131.4 |
|
Net cash provided by (used in) financing activities | 2,593.3 |
| | (601.2 | ) | | (134.8 | ) |
| | | | | |
Effect of exchange rate changes on cash and cash equivalents | (4.5 | ) | | 5.8 |
| | (5.1 | ) |
| | | | | |
Net increase (decrease) in cash and cash equivalents | 3.3 |
| | (87.1 | ) | | 94.3 |
|
Cash and cash equivalents, beginning of year | 90.3 |
| | 177.4 |
| | 83.1 |
|
Cash and cash equivalents, end of year | $ | 93.6 |
| | $ | 90.3 |
| | $ | 177.4 |
|
| | | | | |
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
| | | | | | | | | | | | | | | | | |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | |
Net income (loss) | $ | 2,031.8 | | | $ | 21.4 | | | $ | 3,459.1 | |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | |
Unrealized net (gain) loss on securities measured at fair value | (802.0) | | | 2,126.4 | | | (1,971.2) | |
Deferred tax provision (benefit) | 336.4 | | | (1,153.7) | | | 426.9 | |
Depreciation | 293.8 | | | 326.5 | | | 333.1 | |
Stock-based compensation | 63.0 | | | 60.4 | | | 64.1 | |
Equity in (earnings) losses of equity method investees and related activities, net of distributed earnings | 673.4 | | | 560.8 | | | 13.5 | |
Noncash lease expense | 83.3 | | | 88.3 | | | 0 | |
Impairment and amortization of intangible assets | 11.3 | | | 16.7 | | | 114.0 | |
Amortization of debt issuance costs and loss on extinguishment of debt | 24.3 | | | 16.1 | | | 29.4 | |
Net (gain) loss on sale of unconsolidated investment | 0 | | | (0.4) | | | (99.8) | |
| | | | | |
Impairment of assets held for sale | 24.0 | | | 449.7 | | | 0 | |
(Gain) loss on sale of business | (14.2) | | | (74.1) | | | 0 | |
Loss on inventory and related contracts associated with business optimization | 25.8 | | | 123.0 | | | 0 | |
Loss on settlement of treasury lock contracts | (29.3) | | | 0 | | | 0 | |
Net income tax benefit related to the Tax Cuts and Jobs Act | 0 | | | 0 | | | (37.6) | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Change in operating assets and liabilities, net of effects from purchase and sale of business: | | | | | |
Accounts receivable | 59.6 | | | (22.0) | | | (71.9) | |
Inventories | 193.7 | | | (29.5) | | | (61.9) | |
Prepaid expenses and other current assets | 65.7 | | | 8.1 | | | (103.0) | |
Accounts payable | (95.7) | | | 16.8 | | | 21.4 | |
Other accrued expenses and liabilities | (75.0) | | | (58.5) | | | (22.1) | |
Other | (63.4) | | | 75.1 | | | 152.3 | |
Total adjustments | 774.7 | | | 2,529.7 | | | (1,212.8) | |
Net cash provided by (used in) operating activities | 2,806.5 | | | 2,551.1 | | | 2,246.3 | |
| | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | |
Purchase of property, plant, and equipment | (864.6) | | | (726.5) | | | (886.3) | |
Purchase of business, net of cash acquired | (19.9) | | | (36.2) | | | (45.6) | |
Investments in equity method investees and securities | (222.4) | | | (48.2) | | | (4,081.5) | |
Proceeds from sale of assets | 18.9 | | | 8.3 | | | 72.3 | |
Proceeds from sale of unconsolidated investment | 0 | | | 1.5 | | | 110.2 | |
Proceeds from sale of business | 999.5 | | | 269.7 | | | 0 | |
Other investing activities | 0.6 | | | 0.4 | | | (0.9) | |
Net cash provided by (used in) investing activities | (87.9) | | | (531.0) | | | (4,831.8) | |
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 63 |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) |
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
Supplemental disclosures of cash flow information: | | | | | |
Cash paid during the year: | | | | | |
Interest, net of interest capitalized | $ | 324.8 |
| | $ | 322.2 |
| | $ | 300.4 |
|
Income taxes, net of refunds received | $ | 186.2 |
| | $ | 238.6 |
| | $ | 219.6 |
|
| | | | | |
Noncash investing and financing activities: | | | | | |
Additions to property, plant and equipment | $ | 141.7 |
| | $ | 170.0 |
| | $ | 190.3 |
|
Conversion of long-term debt to noncontrolling equity interest | $ | 248.2 |
| | $ | — |
| | $ | — |
|
Conversion of noncontrolling equity interest to long-term debt | $ | — |
| | $ | — |
| | $ | 132.0 |
|
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
| | | | | | | | | | | | | | | | | |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
| | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | |
Proceeds from issuance of long-term debt | 1,194.7 | | | 1,291.3 | | | 3,657.6 | |
Principal payments of long-term debt | (2,721.3) | | | (2,195.3) | | | (62.8) | |
Net proceeds from (repayments of) short-term borrowings | (238.9) | | | (552.6) | | | 45.5 | |
Dividends paid | (575.0) | | | (569.2) | | | (557.7) | |
Purchase of treasury stock | 0 | | | (50.0) | | | (504.3) | |
Proceeds from shares issued under equity compensation plans | 58.9 | | | 78.2 | | | 63.2 | |
Payments of minimum tax withholdings on stock-based payment awards | (7.7) | | | (14.3) | | | (13.6) | |
Payments of debt issuance, debt extinguishment, and other financing costs | (22.3) | | | (8.2) | | | (34.6) | |
| | | | | |
Distributions to noncontrolling interests | (35.0) | | | 0 | | | 0 | |
Payment of contingent consideration | 0 | | | (11.3) | | | 0 | |
Net cash provided by (used in) financing activities | (2,346.6) | | | (2,031.4) | | | 2,593.3 | |
| | | | | |
Effect of exchange rate changes on cash and cash equivalents | 7.2 | | | (0.9) | | | (4.5) | |
| | | | | |
Net increase (decrease) in cash and cash equivalents | 379.2 | | | (12.2) | | | 3.3 | |
Cash and cash equivalents, beginning of year | 81.4 | | | 93.6 | | | 90.3 | |
Cash and cash equivalents, end of year | $ | 460.6 | | | $ | 81.4 | | | $ | 93.6 | |
| | | | | |
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | |
Cash paid during the year | | | | | |
Interest, net of interest capitalized | $ | 418.5 | | | $ | 448.9 | | | $ | 324.8 | |
Income taxes, net of refunds received | $ | 189.7 | | | $ | 85.3 | | | $ | 186.2 | |
| | | | | |
Noncash investing and financing activities | | | | | |
Additions to property, plant, and equipment | $ | 101.1 | | | $ | 70.4 | | | $ | 141.7 | |
Conversion of long-term debt to noncontrolling equity interest | $ | 0 | | | $ | 0 | | | $ | 248.2 | |
| | | | | |
The accompanying notes are an integral part of these statements.
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 64 |
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 20192021
| |
1. | DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of business –
Constellation Brands, Inc. and its subsidiaries operate primarily in the beverage alcohol industry. Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. We are an international beverage alcohol company with a broadpowerful portfolio of consumer-preferred,consumer-connected, high-end imported and craft beer brands, and higher-end wine and spirits brands.
Basis of presentation –
Principles of consolidation:consolidation
Our consolidated financial statements include our accounts and our majority-owned and controlled domestic and foreign subsidiaries. In addition, we have an equally-owned joint venture with Owens-Illinois. The joint venture owns and operates a state-of-the-art glass production plant which provides bottles exclusively for our brewery located inthe Nava Coahuila, Mexico (the “Nava Brewery”).Brewery. We have determined that we are the primary beneficiary of this variable interest entity and accordingly, the results of operations of the joint venture are reported in the Beer segment and are included in our consolidated results of operations. All intercompany accounts and transactions are eliminated in consolidation.
Equity method investments:investments
If we are not required to consolidate our investment in another entity, we use the equity method when we (i) can exercise significant influence over the other entity and (ii) hold common stock and/or in-substance common stock of the other entity. Under the equity method, investments are carried at cost, plus or minus our equity in the increases and decreases in the investee’s net assets after the date of acquisition. We monitor our equity method investments for factors indicating other-than-temporary impairment. Dividends received from the investee reduce the carrying amount of the investment.
Management’s use of estimates:estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Summary of significant accounting policies –
Revenue recognition:recognition
Effective March 1, 2018, we adopted the FASB amended guidance regarding the recognition of revenue from contracts with customers using the retrospective application method (see “Recently adopted accounting guidance – Revenue recognition” below for impacts of adoption). Our revenue (referred to in our financial statements as “sales”) consists primarily of the sale of beer, wine, and spirits domestically in the U.S. Sales of products are for cash or otherwise agreed-upon credit terms. Our payment terms vary by location and customer, however, the time period between when revenue is recognized and when payment is due is not significant. Our customers consist primarily of wholesale distributors. Our revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and our obligation has been fulfilled, which is when the related goods are shipped or delivered to the customer, depending upon the method of distribution, and shipping terms. We have elected to treat shipping as a fulfillment activity. Revenue is measured as the amount of consideration we expect to receive in exchange for the sale of our product. Our sales terms do not allow for a right of return except for matters related to any manufacturing defects on our part. Amounts billed to customers for shipping and handling are included in sales.
As noted, the majority of our revenues are generated from the domestic sale of beer, wine, and spirits to wholesale distributors in the U.S. Our other revenue generating activities include the export of certain of our products to select international markets, as well as the sale of our products through state alcohol beverage control
agencies and on-premise, retail locations in certain markets. We have evaluated these other revenue generating activities under the disaggregation disclosure criteria outlined within the amended guidance and concluded that
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 65 |
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
these other revenue generating activities are immaterial for separate disclosure. See Note 22 for disclosure of net sales by product type.
Sales reflect reductions attributable to consideration given to customers in various customer incentive programs, including pricing discounts on single transactions, volume discounts, promotional and advertising allowances, coupons, and rebates. This variable consideration is recognized as a reduction of the transaction price based upon expected amounts at the time revenue for the corresponding product sale is recognized. For example, customer promotional discount programs are entered into with certain distributors for certain periods of time. The amount ultimately reimbursed to distributors is determined based upon agreed-upon promotional discounts which are applied to distributors’ sales to retailers. Other common forms of variable consideration include volume rebates for meeting established sales targets, and coupons and mail-in rebates offered to the end consumer. The determination of the reduction of the transaction price for variable consideration requires that we make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recognized. We estimate this variable consideration by taking into account factors such as the nature of the promotional activity, historical information, and current trends, availability of actual results and expectations of customer and consumer behavior.
Excise taxes remitted to tax authorities are government-imposed excise taxes on our beverage alcohol products. Excise taxes are shown on a separate line item as a reduction of sales and are recognized in our results of operations when the related product sale is recognized. Excise taxes are recognized as a current liability in other accrued expenses and liabilities, with the liability subsequently reduced when the taxes are remitted to the tax authority.
Cost of product sold:sold
The types of costs included in cost of product sold are raw materials, packaging materials, manufacturing costs, plant administrative support and overheads, and freight and warehouse costs (including distribution network costs). Distribution network costs include inbound freight charges and outbound shipping and handling costs, purchasing and receiving costs, inspection costs, warehousing and internal transfer costs.
Selling, general, and administrative expenses:expenses
The types of costs included in selling, general, and administrative expenses consist predominately of advertising and non-manufacturing administrative and overhead costs. Distribution network costs are included in cost of product sold. We expense advertising costs as incurred, shown, or distributed. Advertising expense for the years ended February 28, 2019,2021, February 28, 2018,29, 2020, and February 28, 2017,2019, was $805.0 million, $769.5 million, and $700.8 million, $615.7 million and $552.8 million, respectively.
Foreign currency translation:translation
The functional currency of our foreign subsidiaries is generally the respective local currency. The translation from the applicable foreign currencies to U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet date and for revenue and expense accounts using a weighted average exchange rate for the period. The resulting translation adjustments are recognized as a component of Accumulated Other Comprehensive Income (Loss) (“AOCI”).AOCI. Gains or losses resulting from foreign currency denominated transactions are included in selling, general, and administrative expenses.
Cash and cash equivalents:equivalents
Cash equivalents consist of highly liquid investments with an original maturity when purchased of three months or less and are stated at cost, which approximates fair value.
FairInventories
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.
Bulk wine inventories are included as in-process inventories within current assets, in accordance with the general practices of the wine industry, although a portion of such inventories may be aged for periods greater than one year. A substantial portion of barreled whiskey and brandy will not be sold within one year because of the
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 66 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
duration of the aging process. All barreled whiskey and brandy are classified as in-process inventories and are included in current assets, in accordance with industry practice. Warehousing, insurance, value added taxes, and other carrying charges applicable to barreled whiskey and brandy held for aging are included in inventory costs.
We assess the valuation of our inventories and reduce the carrying value of financial instruments: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.
Property, plant, and equipment
Property, plant, and equipment is stated at cost. Major additions and improvements are recognized as an increase to the property accounts, while maintenance and repairs are expensed as incurred. The cost of properties sold or otherwise disposed of and the related accumulated depreciation are eliminated from the balance sheet accounts at the time of disposal and resulting gains and losses are included as a component of operating income.
Interest incurred relating to expansion, construction, and optimization of facilities is capitalized to construction in progress. We calculatecease the capitalization of interest when construction activities are substantially completed and the facility and related assets are available for their intended use. At this point, construction in progress is transferred to the appropriate asset class.
Depreciation
Depreciation is computed primarily using the straight-line method over the following estimated fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available, we use standard pricing models for various types of financial instruments (such as forwards, options, swaps and convertible debt) which take into account the present value of estimated future cash flows (see Note 7).useful lives:
| | | | | |
| Years |
Land improvements | 15 to 32 |
Vineyards | 16 to 26 |
Buildings and improvements | 10 to 50 |
Machinery and equipment | 3 to 35 |
Motor vehicles | 3 to 8 |
Derivative instruments:instruments
We enter into derivative instruments to manage our exposure to fluctuations in foreign currency exchange rates, commodity prices, and interest rates. We enter into derivatives for risk management purposes only, including derivatives designated in hedge accounting relationships as well as those derivatives utilized as economic hedges. We do not enter into derivatives for trading or speculative purposes. We recognize all derivatives as either assets or liabilities and measure those instruments at estimated fair value (see NoteNotes 6 and Note 7). We present our derivative positions gross on our balance sheets.
Effective March 1, 2018, we adopted FASB guidance which amends, among other items, the requirement to separately measure and report hedge ineffectiveness for outstanding cash flow hedges. Accordingly, the entireThe change in the fair value of outstanding cash flow hedges is deferred in stockholders’ equity as a component of AOCI prospectively from the date of adoption. For the years ended February 28, 2018, and February 28, 2017, changes in fair values of outstanding cash flow hedges deferred in stockholders’ equity as a component of AOCI consisted only of amounts deemed effective, with ineffectiveness associated for these derivative instruments recognized immediately in our results of operations for the applicable period.AOCI. For all periods presented herein, gains or losses deferred in stockholders’ equity as a component of AOCI are recognized in our results of operations in the same period in which the hedged items are recognized and on the same financial statement line item as the hedged items.
Changes in fair values for derivative instruments not designated in a hedge accounting relationship are recognized directly in our results of operations each period and on the same financial statement line item as the hedged item. For purposes of measuring segment operating performance, the net gain (loss) from the changes in fair value of our undesignated commodity derivative contracts, prior to settlement, is reported outside of segment operating results until such time that the underlying exposure is recognized in the segment operating results. Upon settlement, the net gain (loss) from the changes in fair value of the undesignated commodity derivative contracts is reported in the appropriate operating segment, allowing our operating segment results to reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 67 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Cash flows from the settlement of derivatives, including both economic hedges and those designated in hedge accounting relationships, appear on our statements of cash flows in the same categories as the cash flows of the hedged items.
Inventories:
Inventories are stated at the lowerFair value 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.
Bulk wine inventories are included as in-process inventories within current assets, in accordance with the general practices of the wine industry, although a portion of such inventories may be aged for periods greater than one year. A substantial portion of barreled whiskey and brandy will not be sold within one year because of the duration of the aging process. All barreled whiskey and brandy are classified as in-process inventories and are included in current assets, in accordance with industry practice. Warehousing, insurance, value added taxes and other carrying charges applicable to barreled whiskey and brandy held for aging are included in inventory costs.
financial instruments
We assesscalculate the valuation of our inventories and reduce the carryingestimated fair value of those inventories thatfinancial instruments using quoted market prices whenever available. When quoted market prices are obsolete or in excessnot available, we use standard pricing models for various types of our forecasted usage to theirfinancial instruments (such as forwards, options, swaps, and convertible debt) which take into account the present value of estimated net realizable value based on analyses and assumptions including, but not limited to, historical usage, future demand and market requirements.cash flows (see Note 7).
Property, plant and equipment:
Property, plant and equipment is stated at cost. Major additions and improvements are recognized as an increase to the property accounts, while maintenance and repairs are expensed as incurred. The cost of properties sold or otherwise disposed of and the related accumulated depreciation are eliminated from the balance sheet accounts at the time of disposal and resulting gains and losses are included as a component of operating income.
Depreciation:
Depreciation is computed primarily using the straight-line method over the following estimated useful lives:
|
| |
| Years |
Land improvements | 15 to 32 |
Vineyards | 16 to 26 |
Buildings and improvements | 10 to 50 |
Machinery and equipment | 3 to 35 |
Motor vehicles | 3 to 8 |
Goodwill and other intangible assets:assets
Goodwill is allocated to the reporting unit in which the business that created the goodwill resides. A reporting unit is an operating segment, or a business unit one level below that operating segment, for which discrete financial information is prepared and regularly reviewed by segment management. We review our goodwill and indefinite livedindefinite-lived intangible assets annually for impairment, or sooner, if events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We use January 1 as our annual impairment test measurement date. Indefinite livedIndefinite-lived intangible assets consist principally of trademarks. Intangible assets determined to have a finite life, primarily customer relationships, are amortized over their estimated useful lives and are subject to review for impairment when events or circumstances indicate that the carrying amount of an asset may not be recoverable. Note 9 provides a summary of intangible assets segregated between amortizable and nonamortizable amounts.
Indemnification liabilities:
We have indemnified respective parties against certain liabilities that may arise in connection with certain acquisitions and divestitures. Indemnification liabilities are recognized when probable and estimable and included in deferred income taxes and other liabilities (see Note 15).
Income taxes:taxes
We use the asset and liability method of accounting for income taxes. This method accounts for deferred income taxes by applying statutory rates in effect at the balance sheet date to the difference between the financial reporting and tax bases of assets and liabilities. Certain income earned by foreign subsidiaries, GILTI, is subject to U.S. tax. We treat the tax effect of GILTI as a current period tax expense when incurred. We provide fordeferred income taxes, that may be payable if undistributedconsisting primarily of foreign withholding and state taxes, on all applicable unremitted earnings of our foreign subsidiaries were to be remitted to the U.S., except for those earnings that we consider to be indefinitely reinvested (see Note 13).subsidiaries. Interest and penalties are recognized as a component of provision for(provision for) benefit from income taxes.
NetWe recognize a tax benefit from an uncertain tax position when it is more likely than not the position will be sustained upon examination. We measure and recognize the tax benefit from such a position based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. In addition, changes in existing tax laws or rates could significantly change our current estimate of our unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income per common share attributable to CBI:
Wetax expense in the period in which they are determined. Changes in current estimates, if significant, could have twoclasses of common stock with a material number of shares outstanding: Class A Common Stock and Class B Convertible Common Stock (see Note 16). In addition, we have another class of common stock with an immaterial number of shares outstanding: Class 1 Common Stock (see Note 16). If we pay a cash dividendadverse impact on Class B Convertible Common Stock, each share of Class A Common Stock will receive an amount at least ten percent greater than the amount of the cash dividend per share paid on Class B Convertible Common Stock. Class B Convertible Common Stock shares are convertible into shares of Class A Common Stock on a one-to-one basis at any time at the option of the holder.our financial statements.
Leases
We use the two-class method for the computationrecognize right-of-use assets and presentation of net income per common share attributable to CBI (hereafter referred to as “net income per common share”) (see Note 18). The two-class method is an earnings allocation formula that calculates basic and diluted net income per common share for each class of common stock separately basedlease liabilities on dividends declared and participation rights in undistributed earnings as if all such earnings had been distributed during the period. Under the two-class method, Class A Common Stock is assumed to receive a ten percent greater participation in undistributed earnings than Class B Convertible Common Stock,our balance sheet in accordance with the respective minimum dividend rightsFASB guidance for accounting for leases. 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 each classthe identified asset.
The right-of-use asset and lease liability are initially measured at the present value of stock.
Net income per common share – basic excludes the effect of common stock equivalents and is computedfuture lease payments, discounted using the two-class method. Net income per common share – dilutedinterest 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. We elected to recognize expenses for Class A Common Stock reflectsleases with a term of 12 months or less on a straight-line basis over the potential dilutionlease term and not to recognize these short-term leases on the balance sheet.
The right-of-use asset and lease liability are calculated including options to extend or to terminate the lease when we determine that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Net income per common share – diluted for Class A Common Stockit is computed usingreasonably certain that we will exercise those options. In making that
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 68 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
determination, we consider various existing economic and market factors, business strategies as well as the
more dilutive nature, length, and terms of the if-converted or two-class method. Net income per common share – diluted for Class A Common Stock is computedagreement. Based on our evaluation using the if-converted method and assumesthese factors, we concluded that the exercise of stockrenewal options usingor early termination options would not be reasonably certain in determining the treasury stock methodlease 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. 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 based on actual tonnage and price of grapes. 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 the conversion of Class B Convertible Common Stock as this methodlease liability and are recognized in the period in which the obligation is more dilutive than the two-class method. Netincurred.
Indemnification liabilities
We have indemnified respective parties against certain liabilities that may arise in connection with certain acquisitions and divestitures. Indemnification liabilities are recognized when probable and estimable and included in deferred income per common share – diluted for Class B Convertible Common Stock is computed using the two-class methodtaxes and does not assume conversion of Class B Convertible Common Stock into shares of Class A Common Stock.other liabilities (see Note 16).
Stock-based employee compensation:compensation
We have two2 stock-based employee compensation plans (see Note 17)18). We apply grant date fair-value-based measurement methods in accounting for our stock-based payment arrangements and recognize all costs resulting from stock-based payment transactions, net of expected forfeitures, ratably over the requisite service period. Stock-based awards are subject to specific vesting conditions, generally time vesting, or upon retirement, disability, or death of the employee (as defined by the plan), if earlier. For awards granted to retirement-eligible employees, we recognize compensation expense ratably over the period from the date of grant to the date of retirement-eligibility.
Recently adopted accounting guidance –Net income (loss) per common share attributable to CBI
Revenue recognition:
We have 2 classes of common stock with a material number of shares outstanding: Class A Common Stock and Class B Convertible Common Stock (see Note 17). In May 2014, the FASB issued guidance regarding the recognitionaddition, we have another class of revenue from contractscommon stock with customers. Under this guidance, an entityimmaterial number of shares outstanding: Class 1 Common Stock (see Note 17). If we pay a cash dividend on Class B Convertible Common Stock, each share of Class A Common Stock will recognize revenue to depict the transfer of goods or services to customers inreceive an amount at least 10 percent greater than the amount of the cash dividend per share paid on Class B Convertible Common Stock. Class B Convertible Common Stock shares are convertible into shares of Class A Common Stock on a one-to-one basis at any time at the option of the holder.
We use the two-class method for the computation and presentation of net income (loss) per common share attributable to CBI (hereafter referred to as “net income (loss) per common share”) (see Note 19). The two-class method is an earnings allocation formula that calculates basic and diluted net income (loss) per common share for each class of common stock separately based on dividends declared and participation rights in undistributed earnings as if all such earnings had been distributed during the period. Under the two-class method, Class A Common Stock is assumed to receive a 10 percent greater participation in undistributed earnings (losses) than Class B Convertible Common Stock, in accordance with the respective minimum dividend rights of each class of stock.
Net income (loss) per common share – basic excludes the effect of common stock equivalents and is computed using the two-class method. Net income (loss) per common share – diluted for Class A Common Stock reflects the considerationpotential dilution that could result if securities or other contracts to which the entity expects to be entitled in exchangeissue common stock were exercised or converted into common stock. Net income (loss) per common share – diluted for those goods or services. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.
We adopted this guidance on March 1, 2018,Class A Common Stock is computed using the retrospective application method to allow for comparable reporting in all periods throughout the year ending February 28, 2019. Based on our analysis, we concluded that the adoptionmore dilutive of the amended guidance did not have a material impact on our net sales recognition. However, the broad definition of variable consideration under this guidance requires us to estimate and recognize certain variable payments resulting from various sales incentives earlier than we have historically recognized them. This change in the timing of when we recognize sales incentives resulted in a shift in net sales recognition primarily between our fiscal quarters. Under the retrospective application method, we recognized the cumulative effect of adopting this guidance in the first quarter of fiscal 2019 with a reduction to our March 1, 2016, opening retained earnings of $49.0 million, net ofif-converted or two-class method. Net income tax effect, with an offsetting increase to current accrued promotion expense and the recognition of a deferred tax asset to align the timing of when we recognize sales incentive expense and when we recognize revenue.(loss) per common
The effects of the retrospective application method on our consolidated financial statements for the periods presented in this report are as follows: | | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 69 |
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| | | | | | | | | | | |
| As Previously Reported | | Revenue Recognition Adjustments | | As Adjusted |
(in millions) | | | | | |
Consolidated Balance Sheet at February 28, 2018 | | | | | |
Other accrued expenses and liabilities | $ | 583.4 |
| | $ | 94.9 |
| | $ | 678.3 |
|
Total current liabilities | $ | 1,944.7 |
| | $ | 94.9 |
| | $ | 2,039.6 |
|
Deferred income taxes and other liabilities (including deferred income taxes – as previously reported, $718.3 million; as adjusted, $694.4 million) | $ | 1,113.7 |
| | $ | (23.9 | ) | | $ | 1,089.8 |
|
Total liabilities | $ | 12,476.0 |
| | $ | 71.0 |
| | $ | 12,547.0 |
|
Retained earnings | $ | 9,228.2 |
| | $ | (71.0 | ) | | $ | 9,157.2 |
|
Total stockholders’ equity | $ | 8,062.7 |
| | $ | (71.0 | ) | | $ | 7,991.7 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
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| | | | | | | | | | | | | | | | | | | | | | | |
| For the Year Ended February 28, 2018 | | For the Year Ended February 28, 2017 |
| As Previously Reported | | Revenue Recognition Adjustments | | As Adjusted | | As Previously Reported | | Revenue Recognition Adjustments | | As Adjusted |
(in millions, except per share data) | | | | | | | | | | | |
Consolidated Statements of Comprehensive Income | | | | | | | | | | |
Sales | $ | 8,326.8 |
| | $ | (4.7 | ) | | $ | 8,322.1 |
| | $ | 8,061.6 |
| | $ | (10.4 | ) | | $ | 8,051.2 |
|
Net sales | $ | 7,585.0 |
| | $ | (4.7 | ) | | $ | 7,580.3 |
| | $ | 7,331.5 |
| | $ | (10.4 | ) | | $ | 7,321.1 |
|
Gross profit | $ | 3,817.2 |
| | $ | (4.7 | ) | | $ | 3,812.5 |
| | $ | 3,529.4 |
| | $ | (10.4 | ) | | $ | 3,519.0 |
|
Operating income | $ | 2,284.5 |
| | $ | (4.7 | ) | | $ | 2,279.8 |
| | $ | 2,399.4 |
| | $ | (10.4 | ) | | $ | 2,389.0 |
|
Income before income taxes | $ | 2,342.7 |
| | $ | (4.7 | ) | | $ | 2,338.0 |
| | $ | 2,093.4 |
| | $ | (10.4 | ) | | $ | 2,083.0 |
|
Provision for income taxes | $ | (11.9 | ) | | $ | (10.8 | ) | | $ | (22.7 | ) | | $ | (554.2 | ) | | $ | 3.9 |
| | $ | (550.3 | ) |
Net income | $ | 2,330.8 |
| | $ | (15.5 | ) | | $ | 2,315.3 |
| | $ | 1,539.2 |
| | $ | (6.5 | ) | | $ | 1,532.7 |
|
Net income attributable to CBI | $ | 2,318.9 |
| | $ | (15.5 | ) | | $ | 2,303.4 |
| | $ | 1,535.1 |
| | $ | (6.5 | ) | | $ | 1,528.6 |
|
Comprehensive income attributable to CBI | $ | 2,515.8 |
| | $ | (15.5 | ) | | $ | 2,500.3 |
| | $ | 1,587.8 |
| | $ | (6.5 | ) | | $ | 1,581.3 |
|
| | | | | | | | | | | |
Net income per common share attributable to CBI: | | | | | | | | | | | |
Basic – Class A Common Stock | $ | 12.04 |
| | $ | (0.08 | ) | | $ | 11.96 |
| | $ | 7.79 |
| | $ | (0.03 | ) | | $ | 7.76 |
|
Basic – Class B Convertible Common Stock | $ | 10.93 |
| | $ | (0.07 | ) | | $ | 10.86 |
| | $ | 7.07 |
| | $ | (0.03 | ) | | $ | 7.04 |
|
| | | | | | | | | | | |
Diluted – Class A Common Stock | $ | 11.55 |
| | $ | (0.08 | ) | | $ | 11.47 |
| | $ | 7.52 |
| | $ | (0.03 | ) | | $ | 7.49 |
|
Diluted – Class B Convertible Common Stock | $ | 10.66 |
| | $ | (0.07 | ) | | $ | 10.59 |
| | $ | 6.93 |
| | $ | (0.03 | ) | | $ | 6.90 |
|
The adoption ofshare – diluted for Class A Common Stock is computed using the revenue recognition guidance had no impact to cash flows from operating, financing or investing activities in our consolidated statements of cash flowsif-converted method for the years ended February 28, 2018,2021 and February 28, 2017.
Income taxes:
In October 2016,2019, and assumes the FASB issued guidance that simplifies the accounting for the income tax consequencesexercise of intra-entity transfers of assets other than inventory. Under this guidance, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Prior guidance prohibited the recognition in earnings of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party or recovered through use.
We adopted this guidance on March 1, 2018,stock options using the modified retrospective basis, which requires a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. Based on our assessment of intra-entity asset transfers that are in scopetreasury stock method and the related deferred income taxes, we recognizedconversion of Class B Convertible Common Stock as this method is more dilutive than the cumulative effect of adopting this guidance in the first quarter of fiscal 2019 with a net increase to our March 1, 2018, opening retained earnings and deferred tax assets of approximately $2.2 billion, primarily in connection with the intra-entity transfer of certain intellectual property related to our imported beer business fortwo-class method. For the year ended February 28, 2018. In connection with a change in forecast within that business29, 2020, net income (loss) per common share - diluted for the fourth quarter of fiscal 2019, we recognized a tax benefit of $50.1 million from the reversal of a valuation allowance established in connection with the adoption of this guidance on March 1, 2018.
Accounting guidance not yet adopted–
Leases:
In February 2016, the FASB issued guidance for the accounting for leases. Under this guidance, a lessee will recognize assets and liabilities on its balance sheet for most leases, but will recognize expense similar to current lease accounting guidance. Additionally, this guidance requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leasing arrangements.
We adopted this guidance on March 1, 2019,Class A Common Stock is computed using the modified retrospective approach. We will applytwo-class method. Net income (loss) per common share – diluted for Class B Convertible Common Stock is computed using the transitiontwo-class method whichand does not require adjustments to comparative periods or require modified disclosures for those comparative periods for Fiscal 2020. The guidance provides a numberassume conversion of optional practical expedients inClass B Convertible Common Stock into shares of Class A Common Stock.
transition. We have elected all of the available transition practical expedients, other than the use-of-hindsight. We are finalizing the implementation of changes to our accounting policies, systems and controls, including the implementation of new leasing software capable of producing the required data for accounting and disclosure purposes. The adoption of this guidance did not have a material impact on our results of operations or liquidity. We expect to recognize new right-of-use assets and lease liabilities associated with our operating leases of approximately $600.0 million to $650.0 million in the first quarter of fiscal 2020.
The guidance also provides practical expedients for an entity’s ongoing accounting. We have elected the short-term lease recognition exemption which allows us to not recognize right-of-use assets and lease liabilities for all leases with an initial term of 12 months or less. We have also elected the practical expedient to not separate lease and non-lease components for all of our leases.
2. ACQUISITIONS, DIVESTITURES, AND DIVESTITURES:BUSINESS TRANSFORMATION
Acquisitions –
Obregon Brewery:Copper & Kings
In December 2016,September 2020, we acquired the remaining ownership interest in Copper & Kings American Brandy Company. This acquisition included a brewery operation business in Obregon, Sonora, Mexico from Grupo Modelo, S. de R.L. de C.V., formerly known as Grupo Modelo, S.A.B. de C.V., (“Modelo”), a subsidiarycollection of Anheuser-Busch InBev SA/NV for cash paid of $569.7 million, net of cash acquired(the “Obregon Brewery”).traditional and craft batch-distilled American brandies and other select spirits. The transaction primarily included the acquisition of operations; goodwill;inventory and property, plant, and equipment; and inventories. This acquisition provided us with immediate functioning brewery capacity to support our fast-growing, high-end Mexican beer portfolio and flexibility for future innovation initiatives. It also enabled us to become fully independent from an interim supply agreement with Modelo, which was terminated at the time of this acquisition.equipment. The results of operations of the Obregon Brewery are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.
Charles Smith:
In October 2016, we acquired the Charles Smith Wines, LLC business, a collection of five super and ultra-premium wine brands, for $120.8 million (“Charles Smith”). This transaction primarily included the acquisition of goodwill, trademarks, inventories and certain grape supply contracts, plus an earn-out over three years based on the performance of the brands. The results of operations of Charles SmithCopper & Kings are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
High West:Empathy Wines
In October 2016,June 2020, we acquired allthe Empathy Wines business, including the acquisition of a digitally-native wine brand which strengthens our position in the issueddirect-to-consumer and outstanding common and preferred membership interests of High West Holdings, LLC for $136.6 million, net of cash acquired (“High West”).eCommerce markets. This transaction primarily included the acquisition of operations, goodwill, trademarks, inventories and property, plant and equipment. This acquisition included a portfolio of craft whiskeys and other select spirits.inventory. In addition, the purchase price for Empathy Wines includes an earn-out over five years based on performance. The results of operations of High WestEmpathy Wines are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Prisoner:Nelson’s Green Brier
In April 2016,May 2019, we acquired The Prisoner Wine Companyincreased our ownership interest in Tennessee-based Nelson’s Green Brier to 75%, resulting in consolidation of the business includingand recognition of a 25% noncontrolling interest. This acquisition included a portfolio of five super-luxury wine brands, for $284.9 million (“Prisoner”). This transactioncraft bourbon and whiskey products. The fair value of the business combination was allocated primarily included the acquisition ofto goodwill, inventories, trademarks, inventory, and certain grape supply contracts.property, plant, and equipment. The results of operations of PrisonerNelson’s Green Brier are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
We recognized a gain of $11.8 million for the year ended February 29, 2020, related to the remeasurement of our previously held 20% equity interest in Nelson’s Green Brier to the acquisition-date fair value. This gain is included in selling, general, and administrative expenses within our consolidated results of operations.
Other Acquisitions:acquisitions
During the year ended February 28, 2019, we completed the acquisitions of other businesses, including the Four Corners Brewing Company LLC business, which included a portfolio of high-quality, dynamic, and bicultural, Texas-based craft beers, (“Four Corners”), and a business in Italy, which provided additional processing and sourcing capabilities for our Italian wine portfolio. The purchase price for the Four Corners acquisition was primarily allocated to goodwill, property, plant, and equipment, and trademarks, plus an earn-out over five years based on the performance of the brands. The purchase price for the acquired business in Italy was primarily
allocated to a production facility, vineyards, and inventory. The results of operations of these acquired businesses are reported in the respective segment and have been included in our consolidated results of operations from their respective date of acquisition.
DuringDivestitures
Paul Masson Divestiture
On January 12, 2021, we sold the Paul Masson Grande Amber Brandy brand, related inventory, and interests in certain contracts. We received cash proceeds of $267.4 million, subject to certain post-closing adjustments. The net cash proceeds were used for general corporate purposes. Prior to the Paul Masson
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Divestiture, we recorded the results of operations of our Paul Masson Grande Amber Brandy business in the Wine and Spirits segment. In connection with the Paul Masson Divestiture, we entered into a transition services agreement with Sazerac Company whereby our retained Mission Bell facility will provide certain bulk wine processing services at market rates for a period of up to three years. The following table summarizes the net gain recognized in connection with this divestiture for the year ended February 28, 2018,2021:
| | | | | |
(in millions) | |
Cash received from buyer | $ | 267.4 | |
Net assets sold | (201.3) | |
Contract termination | (4.0) | |
Direct costs to sell | (3.2) | |
| |
Gain on sale of business | $ | 58.9 | |
Wine and Spirits Divestitures
On January 5, 2021, we completedsold 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 received net cash proceeds of $538.4 million, from the acquisitions of other businesses, including the Funky Buddha Brewery LLC business, which included a portfolio of high-quality, Florida-based craft beers (“Funky Buddha”),Wine and the Schrader Cellars, LLC business, which included a collection of highly-rated, limited-production fine wines (“Schrader Cellars”). The total combined purchase price for these acquisitions was $149.8 million. The purchase price for each acquisition was primarily allocatedSpirits Divestiture, subject to goodwill and trademarks.certain post-closing adjustments. In addition, we have the purchase price for Funky Buddha includespotential to earn an earn-outincremental $250 million of contingent consideration if certain brand performance targets are met over five years baseda two-year period after closing.
On January 5, 2021, in a separate, but related transaction with the same buyer, Gallo, we also sold the New Zealand-based Nobilo Wine brand and certain related assets. We received cash proceeds of $129.0 million, from the Nobilo Wine Divestiture, subject to certain post-closing adjustments.
In connection with the Wine and Spirits Divestitures, we entered into certain transition services agreements with Gallo whereby we provide certain cellar, package, and storage services primarily at Mission Bell. We recorded a $13.0 million liability related to the unfavorable transition services agreements, which was included in the net loss on sale of business and is being amortized over the performanceexpected term of the brands. contracts to selling, general, and administrative expenses both within our consolidated results of operations.
The cash proceeds from the Wine and Spirits Divestitures were utilized to repay the 3.75% May 2013 Senior Notes (as defined in Note 12) 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 for the year ended February 28, 2021:
| | | | | |
(in millions) | |
Cash received from buyer | $ | 667.4 | |
Net assets sold | (671.7) | |
Transition services agreements | (13.0) | |
Direct costs to sell | (8.1) | |
AOCI reclassification adjustments, primarily foreign currency translation | (5.1) | |
Other | (5.2) | |
Loss on sale of business | $ | (35.7) | |
Concentrate Business Divestiture
On December 29, 2020, we sold certain brands used in our concentrates and high-color concentrate business, and certain intellectual property, inventory, goodwill, interests in certain contracts, and assets of our concentrates and high-color concentrate business. Prior to the Concentrate Business Divestiture, we recorded the results of operations of these acquired businesses are reportedour concentrates and high-color concentrate business in the respective segmentWine and have been included in our consolidatedSpirits 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 from their respective dateof
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
the Ballast Point craft beer business in the Beer segment. We received cash proceeds of acquisition.$41.1 million, which were primarily utilized to reduce outstanding borrowings.
Divestitures –Black Velvet Divestiture
On November 1, 2019, we sold the Black Velvet Canadian Whisky business and the brand’s associated production facility, along with a subset of Canadian whisky brands produced at that facility, and related inventory. We received cash proceeds of $266.7 million, net of post-closing adjustments which were utilized to partially repay the 2.00% November 2017 Senior Notes (as defined in Note 12). In total, we recognized a $70.5 million net gain associated with the Black Velvet Divestiture, with $(3.6) million and $74.1 million recognized for the years ended February 28, 2021, and February 29, 2020, respectively. Prior to the Black Velvet Divestiture, we recorded the results of operations of our Black Velvet Canadian Whisky business in the Wine and Spirits segment. The following table summarizes the net gain recognized in connection with this divestiture:
| | | | | |
(in millions) | |
Cash received from buyer | $ | 266.7 | |
Net assets sold | (213.3) | |
AOCI reclassification adjustments, primarily foreign currency translation | 20.9 | |
Direct costs to sell | (3.8) | |
| |
Gain on sale of business | $ | 70.5 | |
Sale of Accolade Wine Investment:Investment
In May 2018, we completed the sale of our remaining interest in our previously-owned Australian and European business (the “Accolade Wine Investment”) for A$149.1 million, or $113.6 million, subject to closing adjustments.Investment. We received cash proceeds, net of direct costs to sell, of $110.2 million and a note receivable of $3.4$111.7 million. This interest consisted of an investment accounted for under the cost method and AFS debt securities. For the year ended February 28, 2019, weWe recognized a net gaingains of $0.4 million and $99.8 million in connection with this transaction. Thistransaction for the years ended February 29, 2020, and February 28,2019, respectively. These net gain isgains are included in income (loss) from unconsolidated investments.
Canadian Divestiture:Business transformation
In December 2016, we soldWe have committed to a business transformation strategy which aligns our portfolio with consumer-led premiumization trends and growing segments of the Wine and Spirits Canadian wine business, which included Canadian wine brands suchand Beer markets. For the years ended February 28, 2021, and February 29, 2020, long-lived asset impairments of $24.0 million and $449.7 million were recognized, respectively. For additional information refer to Note 7.
Assets held for sale
Primarily in contemplation of the Paul Masson Divestiture, the Wine and Spirits Divestitures, the Concentrate Business Divestiture, and the Ballast Point Divestiture noted above, certain net assets met the held for sale criteria as Jackson-Triggs and Inniskillin, wineries, vineyards, offices, facilities and Wine Rack retail stores, at a transactionof February 29, 2020. The carrying value of C$1.03 billion, or $775.1 million (the “Canadian Divestiture”). assets held for sale consisted of the following:
| | | | | | | | | | | | | | | | | |
| February 29, 2020 |
| Beer | | Wine and Spirits | | Consolidated |
(in millions) | | | | | |
Assets | | | | | |
Accounts receivable | $ | 2.4 | | | $ | 0 | | | $ | 2.4 | |
Inventories | 13.7 | | | 576.9 | | | 590.6 | |
Prepaid expenses and other | 2.8 | | | 32.7 | | | 35.5 | |
Assets held for sale - current | 18.9 | | | 609.6 | | | 628.5 | |
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| February 29, 2020 |
| Beer | | Wine and Spirits | | Consolidated |
(in millions) | | | | | |
Property, plant, and equipment | 55.9 | | | 172.6 | | | 228.5 | |
Goodwill | 4.7 | | | 304.3 | | | 309.0 | |
Intangible assets | 28.2 | | | 384.0 | | | 412.2 | |
Equity method investments | 0 | | | 1.0 | | | 1.0 | |
Other assets | 24.8 | | | 26.3 | | | 51.1 | |
Less: Reserve for assets held for sale | (42.7) | | | (407.0) | | | (449.7) | |
Assets held for sale | 70.9 | | | 481.2 | | | 552.1 | |
| | | | | |
Liabilities | | | | | |
Accounts payable | 0.2 | | | 0.6 | | | 0.8 | |
Other accrued expenses and liabilities | 11.0 | | | 17.8 | | | 28.8 | |
Deferred income taxes and other liabilities | 33.3 | | | 0 | | | 33.3 | |
Liabilities held for sale (1) | 44.5 | | | 18.4 | | | 62.9 | |
Net assets held for sale | $ | 45.3 | | | $ | 1,072.4 | | | $ | 1,117.7 | |
(1)Liabilities held for sale are included in the Consolidated Balance Sheet as of February 29, 2020, within the respective liability line items noted above.
Wine and spirits optimization
We received cash proceeds of $570.3 million, net of outstanding debtrecognized restructuring and directother strategic business development costs to sell of $194.9 million and $9.9 million, respectively. The following table summarizes the net gain recognized in connection with this divestiture:
|
| | | |
(in millions) | |
Cash received from buyer | $ | 580.2 |
|
Net assets sold | (175.3 | ) |
AOCI reclassification adjustments, primarily foreign currency translation | (122.5 | ) |
Direct costs to sell | (9.9 | ) |
Other | (10.1 | ) |
Gain on sale of business | $ | 262.4 |
|
Additionally, our business transformation strategy which aligns our portfolio with consumer-led premiumization trends within the Wine and Spirits U.S. business recognized an impairment of $8.4 million for the fourth quarter of fiscal 2017 for trademarks associated with certain U.S. brands sold exclusively through the Canadian wine business for which we expected future sales of these brands to be minimal subsequent to the Canadian Divestiture. We have also recognized $15.2 million of other costs associated with the Canadian Divestiture, with $12.0 million recognized for the year ended February 28, 2017, primarily in connection with the evaluation of the merits of executing an initial public offering for a portion of our then-owned Canadian wine business, and $3.2 million recognized for the first quarter of fiscal 2018 in connection with the sale of the Canadian wine business. These amounts are included in selling, general and administrative expenses. In total, we have recognized $238.8 million of net gains associated with the Canadian Divestiture, with $242.0 million of net gains recognized for the year ended February 28, 2017, and $3.2 million of net losses recognized for the year ended February 28, 2018,segment as follows:
| | | | | | | | | | | | | | | | |
| | For the Years Ended |
| Results of Operations Location | February 28, 2021 | | February 29, 2020 | | |
(in millions) | | | | | | |
Contract termination costs | Cost of product sold | $ | 20.9 | | | $ | 20.1 | | | |
Loss on inventory write-downs | Cost of product sold | 4.7 | | | 102.9 | | | |
Employee termination costs | Selling, general, and administrative expenses | 4.1 | | | 12.5 | | | |
Other costs | Selling, general, and administrative expenses | 9.7 | | | 8.4 | | | |
Impairment of long-lived assets | Impairment of assets held for sale | 24.0 | | | 407.0 | | | |
| | $ | 63.4 | | | $ | 550.9 | | | |
|
| | | |
(in millions) | |
Gain on sale of business | $ | 262.4 |
|
Impairment of trademarks | (8.4 | ) |
Other net costs | (15.2 | ) |
Net gain associated with the Canadian Divestiture and related activities | $ | 238.8 |
|
3. INVENTORIES:INVENTORIES
The components of inventories are as follows:
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 (1) |
(in millions) | | | |
Raw materials and supplies | $ | 151.1 | | | $ | 171.7 | |
In-process inventories | 735.9 | | | 814.7 | |
Finished case goods | 404.1 | | | 387.2 | |
| $ | 1,291.1 | | | $ | 1,373.6 | |
(1)The inventories balance at February 29, 2020, excludes amounts reclassified to assets held for sale.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 73 |
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| | | | | | | |
| February 28, 2019 | | February 28, 2018 |
(in millions) | | | |
Raw materials and supplies | $ | 182.6 |
| | $ | 160.8 |
|
In-process inventories | 1,480.5 |
| | 1,382.8 |
|
Finished case goods | 467.3 |
| | 540.4 |
|
| $ | 2,130.4 |
| | $ | 2,084.0 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
4. PREPAID EXPENSES AND OTHER:OTHER
The major components of prepaid expenses and other are as follows:
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 (1) |
(in millions) | | | |
Value added taxes receivable | $ | 257.8 | | | $ | 315.2 | |
Derivative assets | 48.7 | | | 57.3 | |
Income taxes receivable | 45.4 | | | 35.2 | |
Prepaid excise and sales taxes | 40.9 | | | 38.8 | |
Other | 114.7 | | | 89.3 | |
| $ | 507.5 | | | $ | 535.8 | |
|
| | | | | | | |
| February 28, 2019 | | February 28, 2018 |
(in millions) | | | |
Value added taxes receivable | $ | 315.8 |
| | $ | 209.9 |
|
Income taxes receivable | 105.2 |
| | 121.0 |
|
Prepaid excise and sales taxes | 48.1 |
| | 59.2 |
|
Other | 144.0 |
| | 133.4 |
|
| $ | 613.1 |
| | $ | 523.5 |
|
(1)The prepaid expenses and other balance at February 29, 2020, excludes amounts reclassified to assets held for sale.
5. PROPERTY, PLANT, AND EQUIPMENT:EQUIPMENT
The major components of property, plant, and equipment are as follows:
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 (1) |
(in millions) | | | |
Land and land improvements | $ | 434.0 | | | $ | 440.2 | |
Vineyards | 226.0 | | | 215.8 | |
Buildings and improvements | 983.4 | | | 975.1 | |
Machinery and equipment | 3,696.9 | | | 3,627.9 | |
Motor vehicles | 131.3 | | | 109.5 | |
Construction in progress (2) | 2,084.2 | | | 1,422.7 | |
| 7,555.8 | | | 6,791.2 | |
Less – Accumulated depreciation | (1,734.2) | | | (1,458.2) | |
| $ | 5,821.6 | | | $ | 5,333.0 | |
(1)The property, plant, and equipment balance at February 29, 2020, excludes amounts reclassified to assets held for sale.
(2)Interest costs incurred during the expansion, construction, and optimization of facilities are capitalized to construction in progress. We capitalized interest costs of $31.5 million, $37.2 million, and $23.1 million for the years ended February 28, 2021, February 29, 2020, and February 28, 2019, respectively, primarily due to the Mexico Beer Projects.
Mexicali Brewery
In fiscal 2017, we began construction of the Mexicali Brewery. In March 2020, a public consultation was held on the construction of the Mexicali Brewery. Following the negative result of the public consultation, we are in discussions with government officials in Mexico regarding next steps for our brewery construction project and options elsewhere in the country. We intend to continue working with government officials to mutually agree upon a path forward. As of February 28, 2021, we have suspended all Mexicali Brewery construction activities and have approximately $710 million of capitalized fixed assets remaining at the location. In addition to the capitalized costs, we have incurred other expenses in establishing the Mexicali Brewery. See Note 23 for further discussion.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 74 |
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| | | | | | | |
| February 28, 2019 | | February 28, 2018 |
(in millions) | | | |
Land and land improvements | $ | 456.7 |
| | $ | 438.0 |
|
Vineyards | 221.3 |
| | 238.3 |
|
Buildings and improvements | 1,067.3 |
| | 883.0 |
|
Machinery and equipment | 3,931.1 |
| | 3,548.3 |
|
Motor vehicles | 81.8 |
| | 93.6 |
|
Construction in progress | 1,214.3 |
| | 1,072.5 |
|
| 6,972.5 |
| | 6,273.7 |
|
Less – Accumulated depreciation | (1,705.2 | ) | | (1,484.0 | ) |
| $ | 5,267.3 |
| | $ | 4,789.7 |
|
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
6. DERIVATIVE INSTRUMENTS:INSTRUMENTS
Overview –
We are exposed to market risk from changes in foreign currency exchange rates, commodity prices, interest rates, and equity prices that could affect our results of operations and financial condition. The impact on our results and financial position and the amounts reported in our financial statements will vary based upon the currency, commodity, interest rate, and equity market movements during the period, the effectiveness and level of derivative instruments outstanding, and whether they are designated and qualify for hedge accounting.
The estimated fair values of our derivative instruments change with fluctuations in currency rates, commodity prices, interest rates, and/or equity prices and are expected to offset changes in the values of the
underlying exposures. Our derivative instruments are held solely to manage our exposures to the aforementioned market risks as part of our normal business operations. We follow strict policies to manage these risks and do not enter into derivative instruments for trading or speculative purposes.
We have investmentsan 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 that issuerCanopy (see Note 10). These investments areThis 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 these investmentsthis investment recognized in income (loss) from unconsolidated investments (see Note 7).
The aggregate notional value of outstanding derivative instruments is as follows:
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
(in millions) | | | |
Derivative instruments designated as hedging instruments | | | |
Foreign currency contracts | $ | 1,558.0 | | | $ | 1,831.0 | |
Interest rate swap contracts | $ | 0 | | | $ | 375.0 | |
Treasury lock contracts | $ | 0 | | | $ | 300.0 | |
| | | |
Derivative instruments not designated as hedging instruments | | | |
Foreign currency contracts | $ | 704.7 | | | $ | 1,180.2 | |
Commodity derivative contracts | $ | 221.6 | | | $ | 282.8 | |
|
| | | | | | | |
| February 28, 2019 | | February 28, 2018 |
(in millions) | | | |
Derivative instruments designated as hedging instruments | | | |
Foreign currency contracts | $ | 1,579.3 |
| | $ | 1,465.4 |
|
| | | |
Derivative instruments not designated as hedging instruments | | | |
Foreign currency contracts | $ | 460.3 |
| | $ | 440.6 |
|
Commodity derivative contracts | $ | 284.7 |
| | $ | 177.5 |
|
Cash flow hedges –
Our derivative instruments designated in hedge accounting relationships are designated as cash flow hedges. We are exposed to foreign denominated cash flow fluctuations primarily in connection with third party and intercompany sales and purchases. We primarily use foreign currency forward contracts to hedge certain of these risks. In addition, we utilize interest rate swap and treasury lock contracts periodically to manage our exposure to changes in interest rates. Derivatives managing our cash flow exposures generally mature within three years or less, with a maximum maturity of five years.
To qualify for hedge accounting treatment, the details of the hedging relationship must be formally documented at inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risk that is being hedged, the derivative instrument, how effectiveness is being assessed, and how ineffectiveness will be measured. The derivative must be highly effective in offsetting changes in the cash flows of the risk being hedged. Throughout the term of the designated cash flow hedge relationship on at least a quarterly basis, a retrospective evaluation and prospective assessment of hedge effectiveness is performed based on quantitative and qualitative measures. All components of our derivative instruments’ gains or losses are included in the assessment of hedge effectiveness.
When we determine that a derivative instrument which qualified for hedge accounting treatment has ceased to be highly effective as a hedge, we discontinue hedge accounting prospectively. In the event the relationship is no longer effective, we recognize the change in the fair value of the hedging derivative instrument from the date the hedging derivative instrument became no longer effective immediately in our results of
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
operations. We also discontinue hedge accounting prospectively when (i) a derivative expires or is sold, terminated, or exercised; (ii) it is no longer probable that the forecasted transaction will occur; or (iii) we determine that designating the derivative as a hedging instrument is no longer appropriate. When we discontinue hedge accounting prospectively, but the original forecasted transaction continues to be probable of occurring, the existing gain or loss of the derivative instrument remains in AOCI and is reclassified into earnings (losses) when the forecasted transaction occurs. When it becomes probable that the forecasted transaction will not occur, any remaining gain or loss in AOCI is recognized immediately in our results of operations.
We expect $11.8$26.3 million of net gains, net of income tax effect, to be reclassified from AOCI to our results of operations within the next 12 months.
Undesignated hedges –
Certain of our derivative instruments do not qualify for hedge accounting treatment; for others, we choose not to maintain the required documentation to apply hedge accounting treatment. These undesignated instruments are primarily used to economically hedge our exposure to fluctuations in the value of foreign currency denominated receivables and payables; foreign currency investments, primarily consisting of loans to subsidiaries and foreign-denominated investments, and cash flows related primarily to the repatriation of those loans or investments; and commodity prices, including aluminum, corn, diesel fuel, natural gas, and wheat prices. We primarily use foreign currency forward and option contracts, generally less than 12 months in duration, and commodity swap contracts, generally less than 36 months in duration, with a maximum maturity of five years, to hedge some of these risks. In addition, from time to time, we utilize interest rate swap contracts, generally less than six months in duration, to economically hedge our exposure to changes in interest rates associated with the financing of significant investments and acquisitions. Our derivative policy permits the use of undesignated derivatives as approved by senior management.
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 February 28, 2019,2021, the estimated fair value of derivative instruments in a net liability position due to counterparties was $3.4$0.1 million. If we were required to settle the net liability position under these derivative instruments on February 28, 2019,2021, we would have had sufficient available liquidity on hand to satisfy this obligation.
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Results of period derivative activity –
The estimated fair value and location of our derivative instruments on our balance sheets are as follows (see Note 7):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets | | Liabilities |
| February 28, 2021 | | February 29, 2020 | | | February 28, 2021 | | February 29, 2020 |
(in millions) | | | | | | | | |
Derivative instruments designated as hedging instruments |
Foreign currency contracts: |
Prepaid expenses and other | $ | 32.0 | | | $ | 47.8 | | | Other accrued expenses and liabilities | $ | 3.5 | | | $ | 13.0 | |
Other assets | $ | 41.3 | | | $ | 39.5 | | | Deferred income taxes and other liabilities | $ | 2.7 | | | $ | 7.1 | |
Interest rate swap contracts: |
Prepaid expenses and other | $ | 0 | | | $ | 0 | | | Other accrued expenses and liabilities | $ | 0 | | | $ | 0.8 | |
Treasury lock contracts: |
Prepaid expenses and other | $ | 0 | | | $ | 0 | | | Other accrued expenses and liabilities | $ | 0 | | | $ | 7.6 | |
| | | | | | | | |
Derivative instruments not designated as hedging instruments |
Foreign currency contracts: |
Prepaid expenses and other | $ | 3.3 | | | $ | 9.0 | | | Other accrued expenses and liabilities | $ | 3.5 | | | $ | 14.3 | |
| | | | | | | | |
Commodity derivative contracts: |
Prepaid expenses and other | $ | 13.4 | | | $ | 0.5 | | | Other accrued expenses and liabilities | $ | 3.9 | | | $ | 25.4 | |
Other assets | $ | 7.8 | | | $ | 0.1 | | | Deferred income taxes and other liabilities | $ | 1.4 | | | $ | 15.5 | |
|
| | | | | | | | | | | | | | | | |
Assets | | Liabilities |
| February 28, 2019 | | February 28, 2018 | | | February 28, 2019 | | February 28, 2018 |
(in millions) | | | | | | | | |
Derivative instruments designated as hedging instruments |
Foreign currency contracts: |
Prepaid expenses and other | $ | 14.1 |
| | $ | 21.2 |
| | Other accrued expenses and liabilities | $ | 8.8 |
| | $ | 7.8 |
|
Other assets | $ | 22.1 |
| | $ | 17.0 |
| | Deferred income taxes and other liabilities | $ | 6.3 |
| | $ | 9.9 |
|
| | | | | | | | |
Derivative instruments not designated as hedging instruments |
Foreign currency contracts: |
Prepaid expenses and other | $ | 2.0 |
| | $ | 2.1 |
| | Other accrued expenses and liabilities | $ | 0.6 |
| | $ | 2.2 |
|
Commodity derivative contracts: |
Prepaid expenses and other | $ | 6.1 |
| | $ | 6.3 |
| | Other accrued expenses and liabilities | $ | 6.1 |
| | $ | 3.0 |
|
Other assets | $ | 2.6 |
| | $ | 2.8 |
| | Deferred income taxes and other liabilities | $ | 5.5 |
| | $ | 2.6 |
|
The principal effect of our derivative instruments designated in cash flow hedging relationships on our results of operations, as well as Other Comprehensive Income (“OCI”),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 Year Ended February 28, 2021 | | | | | | |
Foreign currency contracts | | $ | (31.1) | | | Sales | | $ | 1.4 | |
| | | | Cost of product sold | | (25.4) | |
Interest rate swap contracts | | (0.6) | | | Interest expense | | (1.1) | |
Treasury lock contracts | | (16.1) | | | Interest expense | | (1.8) | |
| | $ | (47.8) | | | | | $ | (26.9) | |
| | | | | | |
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 77 |
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| | | | | | | | | | |
Derivative Instruments in Designated Cash Flow Hedging Relationships | | Net Gain (Loss) Recognized in OCI | | Location of Net Gain (Loss) Reclassified from AOCI to Income | | Net Gain (Loss) Reclassified from AOCI to Income |
(in millions) | | | | | | |
For the Year Ended February 28, 2019 | | | | | | |
Foreign currency contracts | | $ | 15.9 |
| | Sales | | $ | 0.4 |
|
| | | | Cost of product sold | | 4.1 |
|
| | $ | 15.9 |
| | | | $ | 4.5 |
|
| | | | | | |
For the Year Ended February 28, 2018 | | | | | | |
Foreign currency contracts | | $ | 61.4 |
| | Sales | | $ | (1.4 | ) |
| | | | Cost of product sold | | 1.3 |
|
Interest rate swap contracts | | (1.5 | ) | | Interest expense | | 2.2 |
|
| | $ | 59.9 |
| | | | $ | 2.1 |
|
| | | | | | |
For the Year Ended February 28, 2017 | | | | | | |
Foreign currency contracts | | $ | (26.1 | ) | | Sales | | $ | 1.1 |
|
| | | | Cost of product sold | | (28.3 | ) |
Interest rate swap contracts | | 2.8 |
| | Interest expense | | (4.0 | ) |
| | $ | (23.3 | ) | | | | $ | (31.2 | ) |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
| | | | | | | | | | | | | | | | | | | | |
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 Year Ended February 29, 2020 | | | | | | |
Foreign currency contracts | | $ | 66.8 | | | Sales | | $ | 0 | |
| | | | Cost of product sold | | 20.2 | |
| | | | | | |
Interest rate swap contracts | | (0.5) | | | Interest expense | | 0 | |
Treasury lock contracts | | (5.7) | | | Interest expense | | 0 | |
| | $ | 60.6 | | | | | $ | 20.2 | |
| | | | | | |
For the Year Ended February 28, 2019 | | | | | | |
Foreign currency contracts | | $ | 15.9 | | | Sales | | $ | 0.4 | |
| | | | Cost of product sold | | 4.1 | |
| | | | | | |
| | | | | | |
| | $ | 15.9 | | | | | $ | 4.5 | |
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 Year Ended February 28, 2021 | | | | | | |
Commodity derivative contracts | | | | Cost of product sold | | $ | 25.1 | |
Foreign currency contracts | | | | Selling, general, and administrative expenses | | (17.4) | |
| | | | | | |
| | | | | | $ | 7.7 | |
| | | | | | |
For the Year Ended February 29, 2020 | | | | | | |
Commodity derivative contracts | | | | Cost of product sold | | $ | (49.0) | |
Foreign currency contracts | | | | Selling, general, and administrative expenses | | (7.8) | |
| | | | | | |
| | | | | | $ | (56.8) | |
| | | | | | |
For the Year Ended February 28, 2019 | | | | | | |
Commodity derivative contracts | | | | Cost of product sold | | $ | 1.8 | |
Foreign currency contracts | | | | Selling, general, and administrative expenses | | (60.8) | |
Interest rate swap contracts | | | | Interest expense | | 35.0 | |
| | | | | | $ | (24.0) | |
|
| | | | | | | | |
Derivative Instruments not Designated as Hedging Instruments | | | | Location of Net Gain (Loss) Recognized in Income | | Net Gain (Loss) Recognized in Income |
(in millions) | | | | | | |
For the Year Ended February 28, 2019 | | | | | | |
Commodity derivative contracts | | | | Cost of product sold | | $ | 1.8 |
|
Foreign currency contracts | | | | Selling, general and administrative expenses | | (60.8 | ) |
Interest rate swap contracts | | | | Interest expense | | 35.0 |
|
| | | | | | $ | (24.0 | ) |
| | | | | | |
For the Year Ended February 28, 2018 | | | | | | |
Commodity derivative contracts | | | | Cost of product sold | | $ | 7.5 |
|
Foreign currency contracts | | | | Selling, general and administrative expenses | | 6.0 |
|
| | | | | | $ | 13.5 |
|
| | | | | | |
For the Year Ended February 28, 2017 | | | | | | |
Commodity derivative contracts | | | | Cost of product sold | | $ | 16.3 |
|
Foreign currency contracts | | | | Selling, general and administrative expenses | | (26.1 | ) |
| | | | | | $ | (9.8 | ) |
7. FAIR VALUE OF FINANCIAL INSTRUMENTS: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 volatility, interest rates and yield curves that are observable for the asset and liability, either directly or indirectly; and
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 78 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
•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: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).
Interest rate swap and treasury lock contracts
The fair value is estimated based on quoted market prices from respective counterparties. Quotes are corroborated by using discounted cash flow calculations based upon forward interest-rate yield curves, which are obtained from independent pricing services (Level 2 fair value measurement).
Canopy investments:investment
Equity securities, Common stockWarrants – The inputs used to estimate the fair value of the Canopy warrants are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| February 28, 2021 (1)(2) | | February 29, 2020 (2) |
| Tranche A Warrants (3) | | Tranche B Warrants (4) | | Tranche A Warrants (3) | | Tranche B Warrants (4) | | November 2017 Canopy Warrants (3) |
Exercise price (5) | C$ | 50.40 | | | C$ | 76.68 | | | C$ | 50.40 | | | C$ | 76.68 | | | C$ | 12.98 | |
Valuation date stock price (6) | C$ | 41.90 | | | C$ | 41.90 | | | C$ | 25.17 | | | C$ | 25.17 | | | C$ | 25.17 | |
Remaining contractual term (7) | 2.7 years | | 5.7 years | | 3.7 years | | 6.7 years | | 0.2 years |
Expected volatility (8) | 70.0 | % | | 70.0 | % | | 70.0 | % | | 70.0 | % | | 105.3 | % |
Risk-free interest rate (9) | 0.5 | % | | 1.1 | % | | 1.1 | % | | 1.1 | % | | 1.5 | % |
Expected dividend yield (10) | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
(1)The November 2017 Canopy Investment (as definedWarrants were exercised on May 1, 2020 and as such are not included in Note 10) is calculated through the datetable as of the November 2018 Canopy Transaction (as defined in Note 10) by using the closing market price of the underlying equity security (Level 1 fair value measurement). As of the date of the November 2018 Canopy Transaction, the November 2017 Canopy Investment, collectively with the November 2018 Canopy Investment (as defined in Note 10), is accounted for under the equity method (see Note 10).
Equity securities, Warrants – The fair value ofFebruary 28, 2021. For additional information on the November 2017 Canopy Warrants and the November 2018 Canopyrelated exercise, refer to Note 10.
(2)The exercise price for the Tranche C Warrants (bothis based on the VWAP Exercise Price and are not included in the table as defined in Note 10)there is no fair value assigned.
(3)The fair value is estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement).
(4)The inputs used to estimate the fair value is estimated using Monte Carlo simulations (Level 2 fair value measurement).
(5)Based on the exercise price from the applicable underlying agreements.
(6)Based on the closing market price for Canopy common stock on the TSX as of the warrants are as follows:applicable date.
(7)Based on the following expiration dates: |
| | | | | | | | | | | |
| February 28, 2019 | | February 28, 2018 |
| November 2018 Canopy Warrants | | November 2017 Canopy Warrants | | November 2017 Canopy Warrants |
Issue date exercise price (1) | C$ | 50.40 |
| | C$ | 12.98 |
| | C$ | 12.98 |
|
Valuation date stock price (1) | C$ | 62.38 |
| | C$ | 62.38 |
| | C$ | 27.35 |
|
Expected life (2) | 2.7 years |
| | 1.2 years |
| | 2.2 years |
|
Expected volatility (3) | 79.3 | % | | 87.8 | % | | 70.9 | % |
Risk-free interest rate (4) | 1.8 | % | | 1.8 | % | | 1.8 | % |
Expected dividend yield (5) | 0.0 | % | | 0.0 | % | | 0.0 | % |
| | | | | | | | |
(1) November 2017 Canopy Warrants | Based on the closing market price for Canopy common stock on the Toronto Stock Exchange (“TSX”) as of the applicable date. | May 1, 2020 |
Tranche A Warrants | | November 1, 2023 |
Tranche B Warrants | | November 1, 2026 |
| | |
(8)Based on consideration of historical and/or implied volatility levels of the underlying equity security and limited consideration of historical peer group volatility levels.
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(2) Constellation Brands, Inc. FY 2021 Form 10-K | Based on the expiration date of the warrants.#WORTHREACHINGFOR I 79 |
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(3) PART II | Based on historical volatility levelsITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of the underlying equity security.Contents |
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(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. |
(9)Based on the implied yield currently available on Canadian Treasury zero coupon issues with a remaining term equal to the expiration date of the applicable warrants.
(10)Based on historical dividend levels.
Debt securities, Convertible – In 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.C$200.0 million, or $150.5 million. Interest income on the Canopy Debt Securities is calculated using the effective interest method and is recognized separately from the changes in fair value in interest expense. The Canopy Debt Securities have a contractual maturity of five years from the date of issuance but may be converted prior to maturity by either party upon the occurrence of certain events. At settlement, the Canopy Debt Securities can be settled at the option of the issuer, in cash, equity shares of the issuer, or a combination thereof. The fair value is estimated using a binomial lattice option-pricing model (Level 2 fair value measurement), which includes an estimate of the credit spread based on the implied spreadmarket spreads using bond data as of the issuance date of the notes. As of February 28, 2019, thevaluation date.
The inputs used to estimate the fair value of the Canopy Debt Securities are as follows:
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
Conversion price (1) | C$ | 48.17 | | | C$ | 48.17 | |
Valuation date stock price (2) | C$ | 41.90 | | | C$ | 25.17 | |
Remaining term (3) | 2.4 years | | 3.4 years |
Expected volatility (4) | 57.6 | % | | 58.2 | % |
Risk-free interest rate (5) | 0.4 | % | | 1.1 | % |
Expected dividend yield (6) | 0.0 | % | | 0.0 | % |
|
| | | | | | | |
Conversion price (1) | C$ | 48.17 |
| | Expected volatility (2) | 45.9 | % |
Valuation date stock price (3) | C$ | 62.38 |
| | Risk-free interest rate (4) | 1.8 | % |
Remaining term (5) | 4.4 years |
| | Expected dividend yield (6) | 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 historical volatility levels of the underlying equity security reduced to account for certain risks not incorporated into the option-pricing model. |
| |
(3)
| Based on the closing market price for Canopy common stock on the TSX as of the applicable date. |
| |
(4)
| 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. |
| |
(5)
| Based on the contractual maturity date of the notes. |
| |
(6)
| Based on historical dividend levels. |
(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.
(3)Based on the contractual maturity date of the notes.
(4)Based on historical volatility levels of the underlying equity security, reduced for certain risks associated with debt securities.
(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 Canopy Debt securities, Available-for-sale (“AFS”): The fair value is estimated by discounting cash flows using market-based inputs (Level 3 fair value measurement).Securities.
(6)Based on historical dividend levels.
Short-term borrowings:borrowings
The revolving credit facility under our senior credit facility is a variable interest rate bearing note which includeswith 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:debt
The term loansloan under our 2018 Credit Agreement and ourMarch 2020 Term Credit Agreement (both as defined in Note 12) areis a variable interest rate bearing notes which includenote with a fixed margin, which is adjustable based upon our debt rating. The Senior Floating Rate Notes (as defined in Note 12) are variable interest rate bearing notes which include a fixed margin. Thecarrying value approximates 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).loan. The fair value of the remaining long-term debt, which is primarily fixed interest rate long-term debt 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 February 28, 2019,2021, and February 28, 2018,29, 2020, due to the relatively short maturity of these instruments. As of February 28, 2019,2021, the carrying amount of long-term debt, including the current portion, was $12,825.0$10,442.3 million, compared with an
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
estimated fair value of $12,768.5$11,580.9 million. As of February 28, 2018,29, 2020, the carrying amount of long-term debt, including the current portion, was $9,439.9$11,945.7 million, compared with an estimated fair value of $9,398.4$12,935.9 million.
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) | | | | | | | |
February 28, 2021 | | | | | | | |
Assets: | | | | | | | |
Foreign currency contracts | $ | 0 | | | $ | 76.6 | | | $ | 0 | | | $ | 76.6 | |
Commodity derivative contracts | $ | 0 | | | $ | 21.2 | | | $ | 0 | | | $ | 21.2 | |
Equity securities (1) | $ | 0 | | | $ | 1,639.7 | | | $ | 0 | | | $ | 1,639.7 | |
Canopy Debt Securities (1) | $ | 0 | | | $ | 176.3 | | | $ | 0 | | | $ | 176.3 | |
| | | | | | | |
| | | | | | | |
Liabilities: | | | | | | | |
Foreign currency contracts | $ | 0 | | | $ | 9.7 | | | $ | 0 | | | $ | 9.7 | |
Commodity derivative contracts | $ | 0 | | | $ | 5.3 | | | $ | 0 | | | $ | 5.3 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
February 29, 2020 | | | | | | | |
Assets: | | | | | | | |
Foreign currency contracts | $ | 0 | | | $ | 96.3 | | | $ | 0 | | | $ | 96.3 | |
Commodity derivative contracts | $ | 0 | | | $ | 0.6 | | | $ | 0 | | | $ | 0.6 | |
Equity securities (1) | $ | 0 | | | $ | 991.5 | | | $ | 0 | | | $ | 991.5 | |
Canopy Debt Securities (1) | $ | 0 | | | $ | 125.6 | | | $ | 0 | | | $ | 125.6 | |
Liabilities: | | | | | | | |
Foreign currency contracts | $ | 0 | | | $ | 34.4 | | | $ | 0 | | | $ | 34.4 | |
Commodity derivative contracts | $ | 0 | | | $ | 40.9 | | | $ | 0 | | | $ | 40.9 | |
Interest rate swap contracts | $ | 0 | | | $ | 0.8 | | | $ | 0 | | | $ | 0.8 | |
Treasury lock contracts | $ | 0 | | | $ | 7.6 | | | $ | 0 | | | $ | 7.6 | |
| | | | | | | | | | | | | | | | | |
(1) | Unrealized net gain (loss) from the changes in fair value of our securities measured at fair value recognized in income (loss) from unconsolidated investments, are as follows: |
| | | February 28, 2021 | | February 29, 2020 |
| (in millions) | | | |
| | | | |
| November 2017 Canopy Warrants (i) | (61.8) | | | (543.7) | |
| November 2018 Canopy Warrants (ii) | 823.3 | | | (1,488.1) | |
| Canopy Debt Securities | 40.5 | | | (94.6) | |
| | $ | 802.0 | | | $ | (2,126.4) | |
| | |
| (i) | The November 2017 Canopy Warrants were exercised in May 2020. For additional information on the November 2017 Canopy Warrants and the related exercise, refer to Note 10. |
| (ii) | The terms of the November 2018 Canopy Warrants were modified in June 2019. For additional information on the November 2018 Canopy Warrants and the related modification, refer to Note 10. For the year ended February 29, 2020, amounts are net of a $1,176.0 million unrealized gain resulting from the June 2019 Warrant Modification. |
|
| | | | | | | | | | | | | | | |
| 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) | | | | | | | |
February 28, 2019 | | | | | | | |
Assets: | | | | | | | |
Foreign currency contracts | $ | — |
| | $ | 38.2 |
| | $ | — |
| | $ | 38.2 |
|
Commodity derivative contracts | $ | — |
| | $ | 8.7 |
| | $ | — |
| | $ | 8.7 |
|
Equity securities (1) (2) | $ | — |
| | $ | 3,023.2 |
| | $ | — |
| | $ | 3,023.2 |
|
Canopy Debt Securities (2) | $ | — |
| | $ | 211.5 |
| | $ | — |
| | $ | 211.5 |
|
Liabilities: | | | | | | | |
Foreign currency contracts | $ | — |
| | $ | 15.7 |
| | $ | — |
| | $ | 15.7 |
|
Commodity derivative contracts | $ | — |
| | $ | 11.6 |
| | $ | — |
| | $ | 11.6 |
|
| | | | | | | |
February 28, 2018 | | | | | | | |
Assets: | | | | | | | |
Foreign currency contracts | $ | — |
| | $ | 40.3 |
| | $ | — |
| | $ | 40.3 |
|
Commodity derivative contracts | $ | — |
| | $ | 9.1 |
| | $ | — |
| | $ | 9.1 |
|
Equity securities (1) (2) | $ | 402.4 |
| | $ | 253.2 |
| | $ | — |
| | $ | 655.6 |
|
Debt securities, AFS | $ | — |
| | $ | — |
| | $ | 16.6 |
| | $ | 16.6 |
|
Liabilities: | | | | | | | |
Foreign currency contracts | $ | — |
| | $ | 19.9 |
| | $ | — |
| | $ | 19.9 |
|
Commodity derivative contracts | $ | — |
| | $ | 5.6 |
| | $ | — |
| | $ | 5.6 |
|
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 81 |
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| | | | | | | | |
(1) | Equity securities consist of: | February 28, 2019 | | February 28, 2018 |
| (in millions) | | | |
| November 2017 Canopy Investment (i) | $ | — |
| | $ | 402.4 |
|
| November 2017 Canopy Warrants | 718.7 |
| | 253.2 |
|
| November 2018 Canopy Warrants | 2,304.5 |
| | — |
|
| | $ | 3,023.2 |
| | $ | 655.6 |
|
|
| | | | | | | | | |
(2) | Unrealized net gain from the changes in fair value of our securities measured at fair value recognized in income from unconsolidated investments, are as follows: |
| | | February 28, 2019 | | February 28, 2018 |
| (in millions) | | | |
| November 2017 Canopy Investment (i) | $ | 292.5 |
| | $ | 272.3 |
|
| November 2017 Canopy Warrants | 465.5 |
| | 192.0 |
|
| November 2018 Canopy Warrants | 1,157.7 |
| | — |
|
| Canopy Debt Securities | 55.5 |
| | — |
|
| | $ | 1,971.2 |
| | $ | 464.3 |
|
| (i) |
Accounted for at fair value from the date of investment in November 2017 through October 31, 2018. Accounted for under the equity method from November 1, 2018. |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Nonrecurring basis measurements –
The following table presents our assets and liabilities measured at estimated fair value on a nonrecurring basis for which an impairment assessment was performed for the periods presented. Impairmentpresented:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using | | |
| Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Losses |
(in millions) | | | | | | | |
For the Year Ended February 28, 2021 | | | | | | | |
| | | | | | | |
Long-lived assets held for sale | $ | 0 | | | $ | 0 | | | $ | 0 | | | $ | 24.0 | |
Trademarks | 0 | | | 0 | | | 4.0 | | | 6.0 | |
| $ | 0 | | | $ | 0 | | | $ | 4.0 | | | $ | 30.0 | |
| | | | | | | |
For the Year Ended February 29, 2020 | | | | | | | |
Long-lived assets held for sale | $ | 0 | | | $ | 0 | | | $ | 949.3 | | | $ | 449.7 | |
Trademarks (1) | 0 | | | 0 | | | 0 | | | 11.0 | |
| $ | 0 | | | $ | 0 | | | $ | 949.3 | | | $ | 460.7 | |
| | | | | | | |
For the Year Ended February 28, 2019 | | | | | | | |
Trademarks | $ | 0 | | | $ | 0 | | | $ | 28.0 | | | $ | 108.0 | |
(1) The balance at February 29, 2020, has been reclassified to assets held for sale (see “Trademarks” below for further discussion).
Long-lived assets held for sale
For the year ended February 28, 2021, primarily in connection with the Wine and Spirits Divestitures and the Concentrate Business Divestiture, long-lived assets held for sale with a carrying value of $736.4 million were written down to their estimated fair value of $712.4 million, less costs to sell, resulting in a total loss of $24.0 million. This loss was included in impairment of assets held for sale within our consolidated results of operations. These assets consisted primarily of goodwill, intangible assets, and certain winery and vineyard assets which had satisfied the conditions necessary to be classified as held for sale. Our estimated fair value was determined as of November 30, 2020, primarily based on the expected proceeds from the Wine and Spirits Divestitures and the Concentrate Business Divestiture, excluding the contingent consideration, which we will recognize when it is determined to be realizable.
For the year ended February 29, 2020, in connection with the Wine and Spirits Divestitures and the Concentrate Business Divestiture, long-lived assets held for sale with a carrying value of $1,291.2 million were written down to their estimated fair value of $908.2 million, less costs to sell, resulting in a total loss of $407.0 million. This loss was included in impairment of assets held for sale within our consolidated results of operations. These assets consisted primarily of goodwill, intangible assets, and certain winery and vineyard assets which had satisfied the conditions necessary to be classified as held for sale. Our estimate of fair value was determined as of February 29, 2020, based on the expected proceeds from the Wine and Spirits Divestitures and the Concentrate Business Divestiture, excluding the contingent consideration.
For the year ended February 29, 2020, in connection with the Ballast Point Divestiture, long-lived assets held for sale with a carrying value of $81.3 million were written down to their estimated fair value of $41.1 million, less costs to sell. As a result, a loss of $42.7 million, inclusive of costs to sell and other losses arewas included in impairment of assets held for sale for the year ended February 29, 2020. These assets consisted primarily of intangible assets and certain production and warehouse assets which had satisfied the conditions necessary to be classified as held for sale. Our estimate of fair value was determined based on the expected proceeds from the Ballast Point Divestiture as of February 29, 2020. Ballast Point was a component of the Beer segment and was
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 82 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
included in our beer reporting unit through the date of divestiture. Accordingly, goodwill was allocated to the Ballast Point assets held for sale based on the relative fair value of the business being sold compared to the relative fair value of the reporting unit. Goodwill not allocated to assets associated with the Ballast Point Divestiture remained in the beer reporting unit.
Trademarks
For the year ended February 28, 2021, certain negative trends within our Beer segment’s Four Corners craft beer portfolio, including slower growth rates and increased competition, resulted in updated long-term financial forecasts. The updated forecasts indicated it was more likely than not the fair value of our indefinite-lived intangible asset associated with the Four Corners trademark might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. As a result of this assessment, the Four Corners trademark asset with a carrying value of $10.0 million was written down to its estimated fair value of $4.0 million, resulting in an impairment of $6.0 million. This impairment was included in selling, general, and administrative expenses within our consolidated results of operations for the periods presented:year ended February 28, 2021.
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements Using | | |
| Quoted Prices in Active Markets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Losses |
(in millions) | | | | | | | |
For the Year Ended February 28, 2019 | | | | | | | |
Trademarks | $ | — |
| | $ | — |
| | $ | 28.0 |
| | $ | 108.0 |
|
| | | | | | | |
For the Year Ended February 28, 2018 | | | | | | | |
Trademarks | $ | — |
| | $ | — |
| | $ | 136.0 |
| | $ | 86.8 |
|
| | | | | | | |
For the Year Ended February 28, 2017 | | | | | | | |
Trademarks | $ | — |
| | $ | — |
| | $ | — |
| | $ | 46.0 |
|
For the year ended February 29, 2020, certain continuing negative trends within our Beer segment’s Ballast Point craft beer portfolio, including increased rate of revenue decline and increased competition, indicated that it was more likely than not the fair value of our indefinite-lived intangible asset associated with the Ballast Point craft beer trademark might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. As a result of this assessment, the Ballast Point craft beer trademark asset with a carrying value of $28.0 million was written down to its estimated fair value of $17.0 million, resulting in an impairment of $11.0 million.This impairment was included in selling, general, and administrative expenses within our consolidated results of operations for the year ended February 29, 2020.
Trademarks:
For the fourth quarter of fiscalyear ended February 28, 2019, in connection with certain continuing negative trends within our Beer segment’s Ballast Point craft beer portfolio, including slower growth rates and increased competition, we implemented a change in strategy for our Ballast Point craft beer portfolio. This change in strategy, when combined with the continuing negative trends, indicated that it was more likely than not that the fair value of our indefinite livedindefinite-lived intangible asset associated with the craft beer trademarkstrademark might be below its carrying value. The change in strategy for our Ballast Point craft beer portfolio focuses on improving profitability by rationalizing the number of product offerings while targeting distribution growth in select strategic markets. This change in strategy resulted in updated long-term financial forecasts with lower revenues, and cash flows for the related portfolio. Accordingly, we performed a quantitative assessment for impairment of the Ballast Point craft beer trademark asset. As a result of this assessment, the Ballast Point craft beer trademark asset with a carrying value of $136.0 million was written down to its estimated fair value of $28.0 million, resulting in an impairment of $108.0 million.
For the first quarter of fiscal 2018, we identified certain negative trends within our Beer segment’s Ballast Point craft beer portfolio which, when combined with the then-recent negative craft beer industry trends, including slower growth rates and increased competition, indicated that it was more likely than not that the fair value of our indefinite lived intangible asset associated with the craft beer trademarks might be below its carrying value. These negative trends were the result of (i) a disruption in our distribution network transition plan, (ii) an unexpected decrease in sales from product innovations and (iii) a significant shift in market conditions for our craft beer portfolio, all of which resulted in a decline in net sales and depletion trends, which represent distributor shipments of our branded products to retail customers, for the first quarter of fiscal 2018 as compared to the first quarter of fiscal 2017, following consecutive quarters of significant net sales and depletion volume growth for our craft beer portfolio. Additionally, net sales for the first quarter of fiscal 2018 were below our forecasted net sales for the first quarter of fiscal 2018. Accordingly, we performed a quantitative assessment for impairment of the craft beer trademark asset. As a result of this assessment, the craft beer trademark asset with a carrying value of $222.8 million was written down to its estimated fair value of $136.0 million, resulting in an impairment of $86.8 million.
For the fourth quarter of fiscal 2017, in connection with our continued focus on the consumer-led trend towards premiumization of our branded wine and spirits portfolio, a decision was made to discontinue certain small-scale, lower-margin U.S. brands within our Wine and Spirits’ portfolio. As a result, trademark assets with a carrying value of $37.6 million were written down to their estimated fair value, resulting in an impairment of $37.6 million.
In addition, in connection with the Canadian Divestiture in the fourth quarter of fiscal 2017, trademark assets with a carrying value of $8.4 million were written down to their estimated fair value, resulting in an impairment of $8.4 million. These trademarks were associated with certain U.S. brands within our Wine and
Spirits’ portfolio sold exclusively through the Canadian wine business, for which we expected future sales of these brands to be minimal subsequent to the Canadian Divestiture.
When performing a quantitative assessment for impairment of a trademark asset, we measure the amount of impairment by calculating the amount by which the carrying value of the trademark asset exceeds its estimated fair value. The estimated fair value is determined based on an income approach using the relief from royalty method, which assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of the trademark asset. The cash flow projections we use to estimate the fair value of our trademark assets involve several assumptions, including (i) projected revenue growth rates, (ii) estimated royalty rates, (iii) after-tax royalty savings expected from ownership of the trademarks, and (iv) discount rates used to derive the estimated fair value of the trademark assets.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 83 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
8. GOODWILL:GOODWILL
The changes in the carrying amount of goodwill are as follows:
| | | | | | | | | | | | | | | | | | | |
| Beer | | Wine and Spirits | | | | Consolidated |
(in millions) | | | | | | | |
Balance, February 28, 2019 | $ | 5,167.9 | | | $ | 2,920.9 | | | | | $ | 8,088.8 | |
Purchase accounting allocations (1) | 0 | | | 58.8 | | | | | 58.8 | |
Black Velvet Divestiture | 0 | | | (72.2) | | | | | (72.2) | |
Foreign currency translation adjustments | 0.2 | | | (9.5) | | | | | (9.3) | |
Reclassified (to) from assets held for sale (2) | (4.7) | | | (304.3) | | | | | (309.0) | |
Balance, February 29, 2020 | 5,163.4 | | | 2,593.7 | | | | | 7,757.1 | |
Purchase accounting allocations (3) | 0 | | | 14.3 | | | | | 14.3 | |
Foreign currency translation adjustments | (38.7) | | | 15.9 | | | | | (22.8) | |
Reclassified (to) from assets held for sale (2) | 0.9 | | | 44.0 | | | | | 44.9 | |
Balance, February 28, 2021 | $ | 5,125.6 | | | $ | 2,667.9 | | | | | $ | 7,793.5 | |
|
| | | | | | | | | | | |
| Beer | | Wine and Spirits | | Consolidated |
(in millions) | | | | | |
Balance, February 28, 2017 | $ | 5,053.0 |
| | $ | 2,867.5 |
| | $ | 7,920.5 |
|
Purchase accounting allocations (1) | 63.9 |
| | 56.2 |
| | 120.1 |
|
Foreign currency translation adjustments | 40.7 |
| | 1.8 |
| | 42.5 |
|
Balance, February 28, 2018 | 5,157.6 |
| | 2,925.5 |
| | 8,083.1 |
|
Purchase accounting allocations (2) | 22.3 |
| | 2.7 |
| | 25.0 |
|
Foreign currency translation adjustments | (12.0 | ) | | (7.3 | ) | | (19.3 | ) |
Balance, February 28, 2019 | $ | 5,167.9 |
| | $ | 2,920.9 |
| | $ | 8,088.8 |
|
| |
(1)
| Purchase accounting allocations associated primarily with the acquisitions of the Obregon Brewery ($13.8 million) and Funky Buddha (Beer), and Schrader Cellars (Wine and Spirits). |
| |
(2)
| Preliminary purchase accounting allocations associated primarily with the acquisition of Four Corners (Beer). |
(1)Purchase accounting allocations associated primarily with the acquisition of Nelson’s Green Brier.
(2)Primarily in connection with the Wine and Spirits Divestitures, goodwill associated with the businesses being sold was reclassified (to) from assets held for sale based on the relative fair values of the portion of the business being sold and the remaining wine and spirits and beer portfolios. The relative fair values were determined using the income approach based on assumptions, including projected revenue growth rates, terminal growth rate, and discount rate and other projected financial information. (3)Preliminary purchase accounting allocations associated primarily with the acquisition of Empathy Wines.
9. INTANGIBLE ASSETS:ASSETS
The major components of intangible assets are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
| Gross Carrying Amount | | Net Carrying Amount | | Gross Carrying Amount | | Net Carrying Amount |
(in millions) | | | | | | | |
Amortizable intangible assets | | | | | | | |
Customer relationships | $ | 87.2 | | | $ | 26.3 | | | $ | 87.4 | | | $ | 31.8 | |
Other | 21.1 | | | 0.2 | | | 20.2 | | | 0.3 | |
Total | $ | 108.3 | | | 26.5 | | | $ | 107.6 | | | 32.1 | |
| | | | | | | |
Nonamortizable intangible assets | | | | | | | |
Trademarks | | | 2,705.6 | | | | | 2,686.8 | |
Total intangible assets | | | $ | 2,732.1 | | | | | $ | 2,718.9 | |
|
| | | | | | | | | | | | | | | |
| February 28, 2019 | | February 28, 2018 |
| Gross Carrying Amount | | Net Carrying Amount | | Gross Carrying Amount | | Net Carrying Amount |
(in millions) | | | | | | | |
Amortizable intangible assets | | | | | | | |
Customer relationships | $ | 89.9 |
| | $ | 39.1 |
| | $ | 89.8 |
| | $ | 44.2 |
|
Other | 20.5 |
| | 0.9 |
| | 20.3 |
| | 1.4 |
|
Total | $ | 110.4 |
| | 40.0 |
| | $ | 110.1 |
| | 45.6 |
|
| | | | | | | |
Nonamortizable intangible assets | | | | | | | |
Trademarks | | | 3,158.1 |
| | | | 3,259.2 |
|
Total intangible assets | | | $ | 3,198.1 |
| | | | $ | 3,304.8 |
|
The intangible assets balance at February 29, 2020, excludes intangible assets reclassified to assets held for sale, which consist primarily of trademarks. We did not incur costs to renew or extend the term of acquired intangible assets for the years ended February 28, 2019,2021, February 29, 2020, and February 28, 2018.2019. Net carrying amount represents the gross carrying value net of accumulated amortization. Amortization expense for intangible assets was $6.0$5.3 million,, $5.9 $5.7 million, and $10.4$6.0 million for the years ended February 28, 2021, February 29, 2020, and February 28, 2019,, February 28, 2018, and February 28, 2017, respectively.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 84 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Estimated amortization expense for each of the five succeeding fiscal years and thereafter is as follows:
| | | | | |
(in millions) | |
2022 | $ | 5.1 | |
2023 | $ | 3.2 | |
2024 | $ | 1.4 | |
2025 | $ | 1.4 | |
2026 | $ | 1.4 | |
Thereafter | $ | 14.0 | |
|
| | | |
(in millions) | |
2020 | $ | 5.8 |
|
2021 | $ | 5.4 |
|
2022 | $ | 5.1 |
|
2023 | $ | 3.3 |
|
2024 | $ | 1.6 |
|
Thereafter | $ | 18.8 |
|
10. EQUITY METHOD INVESTMENTS:INVESTMENTS
Our equity method investments are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
| Carrying Value | | Ownership Percentage | | Carrying Value | | Ownership Percentage |
(in millions) | | | | | | | |
Canopy Equity Method Investment | $ | 2,578.8 | | | 38.1 | % | | $ | 2,911.7 | | | 35.3 | % |
Other equity method investments (1) | 209.6 | | | 20%-50% | | 182.2 | | | 20%-50% |
| $ | 2,788.4 | | | | | $ | 3,093.9 | | | |
|
| | | | | | | | | | | | | |
| February 28, 2019 | | February 28, 2018 |
| Carrying Value | | Ownership Percentage | | Carrying Value | | Ownership Percentage |
(in millions) | | | | | | | |
Canopy Equity Method Investment | $ | 3,332.1 |
| | 36.0 | % | | $ | — |
| | — | % |
Other equity method investments | 133.5 |
| | 20%-50% |
| | 121.5 |
| | 20%-50% |
|
| $ | 3,465.6 |
| | | | $ | 121.5 |
| | |
(1)The other equity method investments balance at February 29, 2020, excludes investments reclassified to assets held for sale.
Canopy Equity Method Investment
In November 2017, we acquired 18.9 million common shares, which represented a 9.9% ownership interest in Canopy, an Ontario, Canada-based Canopy Growth Corporation (the “November 2017 Canopy Investment”), a public company and leading provider of medicinal and recreational cannabis products, (“Canopy”), plus warrants which givegave us the option to purchase an additional 18.9 million common shares of Canopy (the “November 2017 Canopy Warrants”) for C$245.0 million, or $191.3 million. The November 2017 Canopy Warrants were issued with an exercise price of C$12.98 per warrant share and are exercisable as of February 28, 2019. These warrants expire in May 2020.
Canopy. The November 2017 Canopy Investment was accounted for at fair value from the date of investment through October 31, 2018. From November 1, 2018, the November 2017 Canopy Investment has been accounted for under the equity method (see “Canopy Equity Method Investment” below).method. The November 2017 Canopy Warrants have beenwere accounted for at fair value from the date of investment.investment through April 30, 2020. See “May 2020 Canopy Investment” and “Canopy Equity Method Investment” below.
OnIn November 1, 2018, we increased our ownership interest in Canopy by acquiring an additional 104.5 million common shares (the “November 2018 Canopy Investment”) (see Canopy“Canopy Equity Method InvestmentInvestment” below), plus warrants which give us the option to purchase an additional 139.7 million common shares of Canopy (the “November 2018 Canopy Warrants��, and together with the November 2018 Canopy Investment, the “November 2018 Canopy Transaction”) for C$5,078.7 million, or $3,869.9 million. The allocation of the consideration paid as of the date of closing was determined using a relative fair value approach based upon a market value of C$5,060.9 million for the acquired common shares and a fair value of C$2,131.3 million for the acquired warrants using a Black-Scholes option-pricing model. The inputs used to estimate the fair value of the November 2018 Canopy Warrants as of November 1, 2018, are as follows: |
| | | | | | | |
Issue date exercise price | C$ | 50.40 |
| | Expected volatility | 75.9 | % |
Valuation date stock price | C$ | 48.43 |
| | Risk-free interest rate | 2.4 | % |
Expected life | 3.0 years |
| | Expected dividend yield | 0.0 | % |
Accordingly, C$3,573.7 million, or $2,723.1 million, was allocated to the November 2018 Canopy Investment, and C$1,505.0 million, or $1,146.8 million, was allocated to the November 2018 Canopy Warrants. In addition, we incurred $24.5 million of direct acquisition costs which were allocated to the acquired securities utilizing this relative fair value approach. This resulted in $17.2 million of direct acquisition costs being allocated to the November 2018 Canopy Investment and included in the value of the Canopy Equity Method Investment under the cost-accumulation model, and $7.3 million being allocated to the November 2018 Canopy Warrants and expensed to selling, general and administrative expenses.
The November 2018 Canopy Warrants consist of 88.5 million warrants (the “Tranche A Warrants”) and 51.2 million warrants (the “Tranche B Warrants”). The Tranche A Warrants are immediately exercisable at an exercise price of C$50.40 per warrant share. The Tranche B Warrants are exercisable upon the exercise, in full, of the Tranche A Warrants and at an exercise price based on the volume-weighted average of the closing market price of Canopy’s common shares on the TSX for the five trading days immediately preceding the exercise date. The November 2018 Canopy Warrants expire in November 2021 and are accounted for at fair value from the date of investment.
On November 1, 2018, our ownership interest in Canopy increased to 36.6% and, as this allowswhich allowed us to exercise significant influence, but not control, over Canopy.
In May 2020, we exercised the November 2017 Canopy Warrants at an exercise price of C$12.98 per warrant share for C$245.0 million, or $173.9 million. The May 2020 Canopy Investment increased our ownership interest in Canopy to 38.6% upon exercise. We entered into foreign currency forward contracts to fix the U.S. dollar cost of the May 2020 Canopy Investment. For the year ended February 28, 2021, we recognized net losses on the foreign currency forward contracts of $7.5 million, in selling, general, and administrative expenses within our consolidated results of operations. The payment at maturity of the derivative instruments is reported as cash flows from investing activities in investments in equity method investees and securities for the year ended February 28, 2021.
We account for the November 2017 Canopy Investment, and the November 2018 Canopy Investment, and the May 2020 Canopy Investment, each of which represents an investment in common shares of Canopy, collectively, under the equity method (the “Canopy Equity Method Investment”). As of November 1, 2018, the Canopy Equity Method Investment balance consisted of the amount allocated to the November 2018 Canopy Investment of $2,740.3 million, plus the fair value of the November 2017 Canopy Investment at that date of $694.9 million. We recognize equity in earnings (losses) for this investment on a two-month lag. Accordingly, we recognized $2.6 million of equity in losses from Canopy’s results of operations for the period November 1, 2018, through December 31, 2018, and related activities, in our consolidated financial statements for the year ended February 28, 2019. As of February 28, 2019, the carrying amount of the Canopy Equity Method Investment is greater than our equity in the book value of net assets of Canopy by $1.4 billion. This difference primarily represents our basis in identifiable intangible assets and goodwill associated with the November 2018 investment.method. Equity in earnings (losses) from the Canopy Equity Method Investment and related activities (see table below) include, among other items, restructuring and other strategic business development
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 85 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
costs, the amortization of the fair value adjustments associated with the definite-lived intangible assets over their estimated useful lives, the flow through of inventory step up andstep-up, unrealized gains (losses) associated with changes in our Canopy ownership percentage resulting from periodic equity issuances made by Canopy.Canopy, and our share of Canopy’s additional loss resulting from the June 2019 Warrant Modification of $409.0 million.
Amounts included in our consolidated results of operations for each period are as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
(in millions) | | | | | |
Equity in earnings (losses) from Canopy and related activities | $ | (679.0) | | | $ | (575.9) | | | $ | (2.6) | |
In June 2019, the Canopy shareholders approved the modification of the terms of the warrants originally obtained in November 2018 and certain other rights, and the other required approvals necessary for the modifications to be effective were granted. The November 2018 Canopy Warrants now consist of three tranches of warrants, including 88.5 million Tranche A Warrants expiring November 1, 2023 which are currently exercisable, 38.4 million Tranche B Warrants expiring November 1, 2026, and 12.8 million Tranche C Warrants expiring November 1, 2026. These changes are the result of Canopy’s intention to acquire Acreage upon U.S. federal cannabis legalization, subject to certain conditions. In connection with the Acreage Transaction, Canopy had a call option to acquire 100% of the shares of Acreage.
The other rights obtained in June 2019 in connection with the Acreage Transaction include a share repurchase credit and the ability to purchase Canopy common shares on the open market or in private agreement transactions. If Canopy has not purchased the lesser of 27,378,866 Canopy common shares, or C$1,583.0 million worth of Canopy common shares for cancellation between April 18, 2019 and two-years after the full exercise of the Tranche A Warrants, we will be credited an amount that will reduce the aggregate exercise price otherwise payable upon each exercise of the Tranche B Warrants and Tranche C Warrants. The credit will be an amount equal to the difference between C$1,583.0 million and the actual price paid by Canopy in purchasing its common shares for cancellation. If we choose to purchase Canopy common shares on the open market or in private agreement with existing holders, the number of Tranche B Warrants or Tranche C Warrants shall be decreased by one for each Canopy common share acquired, up to an aggregate maximum reduction of 20 million warrants. The likelihood of receiving the share repurchase credit if we were to fully exercise the Tranche A Warrants is remote, therefore, no fair value has been assigned.
The inputs used to estimate the fair value of the November 2018 Canopy Warrants as of the June 27, 2019 modification date, were as follows:
| | | | | | | | | | | |
| Tranche A Warrants (1) | | Tranche B Warrants (1) |
Exercise price | $ | 50.40 | | | $ | 76.68 | |
Valuation date stock price | $ | 53.36 | | | $ | 53.36 | |
Remaining contractual term | 4.3 years | | 7.3 years |
Expected volatility | 66.7 | % | | 66.7 | % |
Risk-free interest rate | 1.4 | % | | 1.4 | % |
Expected dividend yield | 0.0 | % | | 0.0 | % |
(1)Refer to Note 7 for input descriptions.
Accordingly, we recognized a $1,176.0 million unrealized gain from unconsolidated investments within our consolidated results of operations for the second quarter of fiscal 2020 from the June 2019 Warrant Modification. Approximately $322.5 million of the unrealized gain was associated with the Tranche A Warrants and $853.5 million was associated with the Tranche B Warrants. No value was associated with the Tranche C Warrants as they have a VWAP Exercise Price.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 86 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
In September 2020, the Acreage shareholders approved the modification of the Acreage Transaction and related Acreage Financial Instrument, and the other required regulatory approvals necessary for the modification to be effective were granted. The New Acreage Agreement reduces (i) the ratio of Canopy shares required to be exchanged for Acreage shares upon U.S. federal cannabis legalization and (ii) the number of Acreage shares subject to the fixed exchange ratio from 100% to 70%, calculated as a percentage of Acreage’s issued and outstanding shares. The remaining 30% of Acreage shares will be subject to a floating exchange ratio and Canopy, at its sole discretion, will have the option to acquire these shares with Canopy shares, cash, or a combination thereof.
In February 2021, Canopy sold its ownership interest in RIV Capital in exchange for (i) exchangeable shares, warrants, and debt in TerrAscend Corp., (ii) shares in Les Serres Vert Cannabis Inc., and (iii) the termination of a royalty agreement with The Tweed Tree Lot Inc. As additional consideration for the assets being transferred and termination of the royalty agreement, Canopy made a cash payment of C$115 million and issued 3,647,902 Canopy shares. The RIV Capital Divestiture has a minor dilutive impact on our ownership interest in Canopy which we will reflect in our first quarter of fiscal 2022 results.
Canopy has various equity and convertible equitydebt securities outstanding, including primarily equity awards granted to its employees, and options and warrants issued to various third parties, including our November 20172018 Canopy Warrants, Canopy Debt Securities, and November 2018 Canopy Warrants.the New Acreage Financial Instrument. As of February 28, 2019,2021, the conversion of Canopy equity securities held by its employees and/or held by other third parties, excluding our November 2018 Canopy Warrants, Canopy Debt Securities, and the New Acreage Financial Instrument, would not have a significant effect on our share of Canopy’s reported earnings or losses. Additionally, under an amended and restated investor rights agreement, we have the option to purchase additional common shares of Canopy at the then-current price of the underlying equity security to allow us to maintain our relative ownership interest. The exerciseIf we exercised all of our November 2017 Canopy Warrants as of February 28, 2019, also would not have a significant effect on our share of Canopy’s reported earnings or losses. However, as of February 28, 2019, the exercise of all of the November 2017 Canopy Warrants and the November 2018 Canopy Warrants, held by us would result in an increase in our ownership interest in Canopy to greater than 50% and the consolidation of Canopy’s results of operations in our consolidated results of operations with the recognition of an associated noncontrolling ownership interest, as appropriate. Thisit could have a significant effect on our share of Canopy’s reported earnings or losses. losses and our ownership interest in Canopy would be expected to increase to greater than 50%. If Canopy exercised the New Acreage Financial Instrument, which would require the issuance of Canopy shares, it could have a significant effect on our share of Canopy’s reported earnings or losses and our ownership interest in Canopy would decrease and no longer be expected to be greater than 50%.
As of February 28, 2019,2021, the exercise of all Canopy warrants held by us would have required a cash outflow of approximately $5.9$6.3 billion based on the terms of the November 2017 Canopy Warrants and the November 2018 Canopy Warrants. Additionally, as of February 28, 2019,2021, the fair value of our equity method investment inthe Canopy Equity Method Investment was $5,842.9$4,679.3 million based on the closing price of the underlying equity security as of that date.
The following table presentstables present summarized financial information for Canopy presentedprepared in accordance with U.S. GAAP. The amounts shown represent 100% of Canopy’s financial position as of December 31, 2018, and results of operations from the date of our investment on November 1, 2018, through December 31, 2018. We recognize our equity in earnings (losses) for Canopy on a two-month lag. Accordingly, we recognized our share of
Canopy’s losses fromearnings (losses) for the periods (i) January through December 2020 in our year ended February 28, 2021 results, (ii) January through December 2019 in our year ended February 29, 2020, results, and (iii) November and December 2018, which was included in Canopy’s third quarter fiscal 2019 results, in our fourth quarter fiscalyear ended February 28, 2019 results. The amounts shown represent 100% of Canopy’s financial position and results of operations, for the respective periods, however, the results of operations for the year ended February 29, 2020, exclude the impact of the June 2019 Warrant Modification Loss because it was recorded by Canopy within equity. The year ended February 28, 2021, includes costs designed to improve Canopy’s organizational focus, streamline operations, and align production capability with projected demand.
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
(in millions) | | | |
Current assets | $ | 1,706.6 | | | $ | 2,232.9 | |
Noncurrent assets | $ | 3,251.5 | | | $ | 3,751.6 | |
Current liabilities | $ | 273.7 | | | $ | 322.0 | |
Noncurrent liabilities | $ | 1,308.8 | | | $ | 867.9 | |
Noncontrolling interests | $ | 179.0 | | | $ | 210.5 | |
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 87 |
|
| | | | | | | | |
| February 28, 2019 | | | For the Year Ended February 28, 2019 |
(in millions) | | | | |
Current assets | $ | 3,800.7 |
| | Net sales | $ | 48.6 |
|
Noncurrent assets | $ | 2,466.0 |
| | Gross profit | $ | 11.2 |
|
Current liabilities | $ | 216.8 |
| | Net loss | $ | (39.6 | ) |
Noncurrent liabilities | $ | 668.2 |
| | Net loss attributable to Canopy | $ | (27.8 | ) |
Noncontrolling interests | $ | 143.3 |
| | | |
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 (1) |
(in millions) | | | | | |
Net sales | $ | 378.6 | | | $ | 290.2 | | | $ | 48.6 | |
Gross profit (loss) | $ | (14.1) | | | $ | 45.4 | | | $ | 11.2 | |
Net income (loss) | $ | (1,775.3) | | | $ | (327.0) | | | $ | (39.6) | |
Net income (loss) attributable to Canopy | $ | (1,750.0) | | | $ | (312.6) | | | $ | (27.8) | |
Subsequent event –(1)For the period November 1, 2018, through December 31, 2018.
Other equity method investment
Booker Vineyard
In April 2019,2020, we agreed to modifyinvested in My Favorite Neighbor, LLC, also known as Booker Vineyard, a super-luxury, direct-to-consumer focused wine business which we account for under the termsequity method. We recognize our share of their equity in earnings (losses) in our consolidated financial statements in the November 2018 Canopy WarrantsWine and certain other rights. Modification of the November 2018 Canopy Warrants is subject to, among other things, approval by Canopy’s shareholders. These changes are the result of Canopy’s intention to acquire Acreage Holdings, Inc. (“Acreage”) upon U.S. Federal cannabis legalization, subject to certain conditions. As a result of the proposed modifications, and following all necessary Canopy shareholder approvals, we will continue to have the option to purchase an additional 139.7 million common shares of Canopy upon exercise of the warrants originally received in November 2018; however, this option will consist of three tranches of warrants, including 88.5 million warrants (the “New Tranche A Warrants”), 38.4 million warrants (the “New Tranche B Warrants”) and 12.8 million warrants (the “New Tranche C Warrants”, and collectively with the New Tranche A Warrants and the New Tranche B Warrants, the “New November 2018 Canopy Warrants”). The New Tranche A Warrants will continue to have an exercise price of C$50.40 per warrant share and remain currently exercisable, but would expire November 1, 2023. The New Tranche B Warrants would have an exercise price of C$76.68 per warrant share and the New Tranche C Warrants would have an exercise price based on the volume-weighted average of the closing market price of Canopy’s common shares on the TSX for the five trading days immediately preceding the exercise date. The New Tranche B Warrants and the New Tranche C Warrants would have an expiration date of November 1, 2026. If Canopy exercises its proposed right to acquire the shares of Acreage and we were to exercise all of our outstanding November 2017 Canopy Warrants and the New November 2018 Canopy Warrants, our ownership interest in Canopy would no longer be expected to be greater than 50 percent.Spirits segment.
11. OTHER ACCRUED EXPENSES AND LIABILITIES:LIABILITIES
The major components of other accrued expenses and liabilities are as follows:
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
(in millions) | | | |
Salaries, commissions, and payroll benefits and withholdings | $ | 232.1 | | | $ | 182.2 | |
Promotions and advertising | 159.9 | | | 191.7 | |
Accrued interest | 93.4 | | | 94.3 | |
Operating lease liability | 68.8 | | | 76.6 | |
Income taxes payable | 24.7 | | | 24.9 | |
Derivative liabilities | 10.9 | | | 61.1 | |
| | | |
| | | |
Other | 190.1 | | | 149.6 | |
| $ | 779.9 | | | $ | 780.4 | |
|
| | | | | | | |
| February 28, 2019 | | February 28, 2018 |
(in millions) | | | |
Promotions and advertising | $ | 181.2 |
| | $ | 209.0 |
|
Salaries, commissions, and payroll benefits and withholdings | 163.1 |
| | 149.0 |
|
Accrued interest | 107.3 |
| | 86.7 |
|
Income taxes payable | 24.5 |
| | 48.5 |
|
Accrued excise taxes | 21.0 |
| | 28.7 |
|
Other | 193.3 |
| | 156.4 |
|
| $ | 690.4 |
| | $ | 678.3 |
|
12. BORROWINGS:BORROWINGS
Borrowings consist of the following:
| | | | | | | | | | | | | | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
| Current | | Long-term | | Total | | Total |
(in millions) | | | | | | | |
Short-term borrowings | | | | | | | |
| | | | | | | |
Commercial paper | $ | 0 | | | | | | | $ | 238.9 | |
| | | | | | | |
| $ | 0 | | | | | | | $ | 238.9 | |
| | | | | | | |
Long-term debt | | | | | | | |
| | | | | | | |
Term loan credit facilities | $ | 24.6 | | | $ | 429.8 | | | $ | 454.4 | | | $ | 1,295.7 | |
Senior notes | 0 | | | 9,972.4 | | | 9,972.4 | | | 10,624.7 | |
Other | 4.6 | | | 10.9 | | | 15.5 | | | 25.3 | |
| $ | 29.2 | | | $ | 10,413.1 | | | $ | 10,442.3 | | | $ | 11,945.7 | |
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 88 |
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| | | | | | | | | | | | | | | |
| February 28, 2019 | | February 28, 2018 |
| Current | | Long-term | | Total | | Total |
(in millions) | | | | | | | |
Short-term borrowings | | | | | | | |
Senior credit facility, Revolving credit loan | $ | 59.0 |
| | | | | | $ | 79.0 |
|
Commercial paper | 732.5 |
| | | | | | 266.9 |
|
Other | — |
| | | | | | 400.9 |
|
| $ | 791.5 |
| | | | | | $ | 746.8 |
|
| | | | | | | |
Long-term debt | | | | | | | |
Senior credit facility, Term loan | $ | 5.0 |
| | $ | 487.8 |
| | $ | 492.8 |
| | $ | 497.7 |
|
Term loan credit facilities | 50.0 |
| | 1,436.4 |
| | 1,486.4 |
| | — |
|
Senior notes | 997.8 |
| | 9,819.1 |
| | 10,816.9 |
| | 8,674.2 |
|
Other | 12.4 |
| | 16.5 |
| | 28.9 |
| | 268.0 |
|
| $ | 1,065.2 |
| | $ | 11,759.8 |
| | $ | 12,825.0 |
| | $ | 9,439.9 |
|
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Bank facilities –
Senior credit facility:
In March 2016, the Company, CIH International S.à r.l., a wholly-owned subsidiary of ours (“CIH”), CIH Holdings S.à r.l., a wholly-owned subsidiary of ours (“CIHH”), Bank of America, N.A., as administrative agent (the “Administrative Agent”), and certain other lenders entered into a Restatement Agreement (the “March 2016 Restatement Agreement”) that amended and restated our then-existing senior credit facility (as amended and restated by the March 2016 Restatement Agreement, the “March 2016 Credit Agreement”). The principal changes effected by the March 2016 Restatement Agreement were:
The creation of a new $700.0 million European Term A-1 loan facility maturing on March 10, 2021;
An increase of the European revolving commitment under the revolving credit facility by $425.0 million to $1.0 billion;
The addition of CIHH as a new borrower under the new European Term A-1 loan facility and the European revolving commitment; and
The entry into a cross-guarantee agreement by CIH and CIHH whereby each guarantees the other’s obligations under the March 2016 Credit Agreement.
In October 2016, the Company, CIH, CIHH, CB International Finance S.à r.l., a wholly-owned subsidiary of ours (“CB International” and together with CIH and CIHH, the “2016 European Borrowers”), the Administrative Agent, and certain other lenders entered into a Restatement Agreement (the “2016 Restatement Agreement”) that amended and restated the March 2016 Credit Agreement (as amended and restated by the 2016 Restatement Agreement, the “2016 Credit Agreement”). The principal changes effected by the 2016 Restatement Agreement were:
The creation of a new $400.0 million European Term A-2 loan facility with CIH as the borrower, maturing on March 10, 2021;
An adjustment of the Incremental Facilities (as defined below) from a fixed amount to a flexible amount;
The addition of CB International as a new borrower under the European revolving commitment; and
The entry into an amended and restated cross-guarantee agreement by the 2016 European Borrowers whereby each guarantees the others’ obligations under the 2016 Credit Agreement.
In May 2017, we repaid the outstanding obligations under the U.S. Term A loan facility under the 2016 Credit Agreement primarily with a portion of the proceeds from the May 2017 senior notes and revolver borrowings under the 2016 Credit Agreement.
In July 2017, the Company, CIH, CB International (together with CIH, the “European Borrowers”), CIHH, the Administrative Agent, and certain other lenders entered into a Restatement Agreement (the “2017 Restatement Agreement”) that amended and restated the 2016 Credit Agreement (as amended and restated by the 2017 Restatement Agreement, the “2017 Credit Agreement”). The principal changes effected by the 2017 Restatement Agreement were:
The refinance and increase of the existing U.S. Term A-1 loan facility by $261.1 million to $500.0 million and extension of its maturity to July 14, 2024;
The creation of a new $2.0 billion European Term A loan facility into which the then-existing European Term A loan facility, European Term A-1 loan facility and European Term A-2 loan facility were combined;
The increase of the revolving credit facility by $350.0 million to $1.5 billion and extension of its maturity to July 14, 2022; and
The removal of CIHH as a borrower under the 2017 Restatement Agreement.
In addition, the Company and certain of our U.S. subsidiaries executed an amended and restated guarantee agreement which, among other things, released certain of our U.S. subsidiaries as guarantors of borrowings under the 2017 Credit Agreement. Furthermore, the European Borrowers executed an amended and restated cross-guarantee agreement which, among other things, removed CIHH as a party to the amended and restated cross-guarantee agreement.
In November 2017, we repaid the outstanding obligations under the European Term A loan facility under the 2017 Credit Agreement primarily with proceeds from the November 2017 senior notes.
In August 2018, the Company, CIH, CB International, certain of the Company’s subsidiaries as guarantors, the Administrative Agent, and certain other lenders entered into athe August 2018 Restatement Agreement (the “August 2018 Restatement Agreement”) that amended and restated the 2017 Credit Agreementour then-existing senior credit facility (as amended and restated by the August 2018 Restatement Agreement, the “AugustAugust 2018 Credit Agreement”)Agreement). The principal changes effected by the August 2018 Restatement Agreement were:
The•the removal of CIH as a borrower under the August 2018 Credit Agreement;
The•the termination of a cross-guarantee agreement by the European Borrowers;CIH and CB International; and
The•the addition of a mechanism to provide for the replacement of LIBOR with an alternative benchmark rate in certain circumstances where LIBOR cannot be adequately ascertained or available.
In September 2018, the Company, CB International, certain of the Company’s subsidiaries as guarantors, the Administrative Agent, and certain other lenders entered into athe 2018 Restatement Agreement (the “2018 Restatement Agreement”) that amended and restated the August 2018 Credit Agreement (as amended and restated by the 2018 Restatement Agreement, the “20182018 Credit Agreement”)Agreement). The primary change effected by the 2018 Restatement Agreement was the increase of the revolving credit facility from $1.5 billion to $2.0 billion and extension of its maturity to September 14, 2023. The 2018 Restatement Agreement also modified certain financial covenants in connection with the November 2018 Canopy Transaction and added various representations and warranties, covenants, and an event of default related to the November 2018 Canopy Transaction.
In June 2019, we repaid the outstanding obligations under the U.S. Term A-1 loan facility under the 2018 Credit Agreement with proceeds from the 2019 Term Credit Agreement:Agreement.
In March 2020, the Company, CB International, certain of the Company’s subsidiaries as guarantors, the Administrative Agent, and certain other lenders entered into the 2020 Restatement Agreement that amended and restated the 2018 Credit Agreement (as amended and restated by the 2020 Restatement Agreement, the 2020 Credit Agreement). The 2020 Credit Agreement provides for an aggregate revolving credit facility of $2.0 billion. The principal changes effected by the 2020 Restatement Agreement were:
•the removal of the subsidiary guarantees and termination of the guarantee agreement;
•the inclusion of the parent guaranty provisions in connection with the termination of the guarantee agreement;
•the removal of certain provisions pertaining to term loans since no term loans are outstanding; and
•the revision of the LIBOR successor rate provisions to permit the use of rates based on the SOFR administered by the Federal Reserve Bank of New York.
Upon removal of all subsidiary guarantors from our 2020 Credit Agreement, the subsidiary guarantors were automatically released from the indentures relating to our outstanding senior notes.
2020 Term Credit Agreement
In September 2018, the Company, the Administrative Agent, and certain other lenders entered into a term loan credit agreement (the “Termthe Term Credit Agreement”).Agreement. The Term Credit Agreement providesprovided for aggregate credit facilities of $1.5 billion, consisting of athe $500.0 millionthree-year term loan facility (the “Three-Year Term Facility”) and a $1.0 billionfive-year term loan facility (the “Five-Yearfacility.
In March 2020, the Company, certain of the Company’s subsidiaries as guarantors, the Administrative Agent, and certain other lenders entered into the Term Facility”)Loan Restatement Agreement that amended and restated the Term Credit Agreement (as amended and restated by the Term Loan Restatement Agreement, the 2020 Term Credit Agreement). The principal changes effected by the Term Loan Restatement Agreement were:
The•the removal of the subsidiary guarantees and termination of the respective guarantee agreements; and
•the revision of the LIBOR successor rate provisions to permit the use of rates based on SOFR.
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 89 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
In August 2020, we prepaid the outstanding Three-Year Term Facility is not subject to amortization payments, withborrowings and in July 2020, we prepaid the balance dueoutstanding Five-Year Term Facility borrowings, both under our 2020 Term Credit Agreement.
March 2020 Term Credit Agreement
In June 2019, the Company and payable at maturity.the Administrative Agent and Lender entered into the 2019 Term Credit Agreement. The 2019 Term Credit Agreement provides for the creation of a $491.3 million five-year term loan facility. The 2019 Five-Year Term Facility will be repaid in quarterly payments of principal equal to 1.25% of the original aggregate principal amount of the 2019 Five-Year Term Facility, with the balance due and payable at maturity.
General:
The obligations underIn March 2020, the 2018 Credit AgreementCompany, certain of the Company’s subsidiaries as guarantors, and the Lender entered into the 2020 Term Loan Restatement Agreement that amended and restated the 2019 Term Credit Agreement are guaranteed(as amended and restated by certainthe 2020 Term Loan Restatement Agreement, the March 2020 Term Credit Agreement). The principal changes effected by the 2020 Term Loan Restatement Agreement were:
•the removal of our U.S. subsidiaries. the subsidiary guarantees and termination of the respective guarantee agreements; and
•the revision of the LIBOR successor rate provisions to permit the use of rates based on SOFR.
General
We and our subsidiaries are subject to covenants that are contained in the 20182020 Credit Agreement and the March 2020 Term Credit Agreement, including those restricting the incurrence of additional indebtedness, (including guarantees of indebtedness) by subsidiaries that are not guarantors, additional liens, mergers and consolidations, transactions with affiliates, and sale and leaseback transactions, in each case subject to numerous conditions, exceptions, and thresholds. The financial covenants are limited to a minimum interest coverage ratio and a maximum net leverage ratio.
Our senior credit facility permits us to elect, subject to the willingness of existing or new lenders to fund such increase or term loans and other customary conditions, to increase the revolving credit commitments or add one or more tranches of additional term loans (the “Incremental Facilities”).loans. The Incremental Facilities may be an unlimited amount so long as our leverage ratio, as defined and computed pursuant to our senior credit facility, is no greater than 4.00 to 1.00 subject to certain limitations for the period defined pursuant to our senior credit facility.
As of February 28, 2019,2021, aggregate credit facilities under the 20182020 Credit Agreement and the March 2020 Term Credit Agreement consist of the following:
|
| | | | | | | | | | | | |
| Amount | | Maturity | | | Amount | | Maturity |
(in millions) | | | | | | | | |
2018 Credit Agreement | | | | | Term Credit Agreement | | | |
Revolving Credit Facility (1) (2) | $ | 2,000.0 |
| | Sept 14, 2023 | | Three-Year Term Facility (1) (3) | $ | 500.0 |
| | Nov 1, 2021 |
U.S. Term A-1 Facility (1) (3) | 500.0 |
| | July 14, 2024 | | Five-Year Term Facility (1) (3) | 1,000.0 |
| | Nov 1, 2023 |
| $ | 2,500.0 |
| | | | | $ | 1,500.0 |
| | |
| | | | | | | | | | | |
| Amount | | Maturity |
(in millions) | | | |
2020 Credit Agreement | | | |
Revolving credit facility(1) (2) | Contractual interest rate varies based on our debt rating (as defined in the respective agreement) and is a function of LIBOR plus a margin, or the base rate plus a margin, or, in certain circumstances where LIBOR cannot be adequately ascertained or available, an alternative benchmark rate plus a margin.$ | 2,000.0 | | | Sept 14, 2023 |
| | | |
| | | |
| | | |
| | | |
| | | |
March 2020 Term Credit Agreement | | | |
(2)2019 Five-Year Term Facility (1) (3)
| We and/or CB International are the borrower under the $2,000.0 million Revolving Credit Facility. Includes a sub-facility for letters of credit of up to $200.0 million.$ | 491.3 | | | Jun 28, 2024 |
(1)Contractual interest rate varies based on our debt rating (as defined in the respective agreement) and is a function of LIBOR plus a margin, or the base rate plus a margin, or, in certain circumstances where LIBOR cannot be adequately ascertained or available, an alternative benchmark rate plus a margin.
(2)We and/or CB International are the borrower under the $2,000.0 million revolving credit facility. Includes a sub-facility for letters of credit of up to $200.0 million.
(3)We are the borrower under the 2019 Five-Year Term Facility.
| | | | | |
(3) Constellation Brands, Inc. FY 2021 Form 10-K | We are the borrower under the U.S. Term A-1 loan facility, the Three-Year Term Facility and the Five-Year Term Facility.#WORTHREACHINGFOR I 90 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
As of February 28, 2019,2021, information with respect to borrowings under the 20182020 Credit Agreement and the March 2020 Term Credit Agreement is as follows:
| | | | | | | | | | | | | | | |
| 2020 Credit Agreement | | | | March 2020 Term Credit Agreement |
| Revolving credit facility | | | | | | 2019 Five-Year Term Facility (1) |
(in millions) | | | | | | | |
Outstanding borrowings | $ | 0 | | | | | | | $ | 454.4 | |
Interest rate | 0 | % | | | | | | 1.0 | % |
LIBOR margin | 0 | % | | | | | | 0.88 | % |
Outstanding letters of credit | $ | 11.7 | | | | | | | |
Remaining borrowing capacity (2) | $ | 1,988.3 | | | | | | | |
|
| | | | | | | | | | | | | | | |
| 2018 Credit Agreement | | Term Credit Agreement |
| Revolving Credit Facility | | U.S. Term A Facility (1) | | Three-Year Term Facility (1) | | Five-Year Term Facility (1) |
(in millions) | | | | | | | |
Outstanding borrowings | $ | 59.0 |
| | $ | 492.8 |
| | $ | 499.5 |
| | $ | 986.9 |
|
Interest rate | 3.6 | % | | 4.0 | % | | 3.6 | % | | 3.8 | % |
LIBOR margin | 1.13 | % | | 1.50 | % | | 1.13 | % | | 1.25 | % |
Outstanding letters of credit | $ | 10.8 |
| | | | | | |
Remaining borrowing capacity (2) | $ | 1,196.7 |
| | | | | | |
(1)Outstanding term loan facility borrowings are net of unamortized debt issuance costs. | |
(2)Net of outstanding revolving credit facility borrowings, outstanding letters of credit under the 2020 Credit Agreement, and outstanding borrowings under our commercial paper program (excluding unamortized discount) (see “Commercial paper program”).
(1)
| Outstanding term loan facility borrowings are net of unamortized debt issuance costs. |
| |
(2)
| Net of outstanding revolving credit facility borrowings and outstanding letters of credit under the 2018 Credit Agreement and outstanding borrowings under our commercial paper program of $733.5 million (excluding unamortized discount) (see “Commercial paper program”). |
Commercial paper program –
In October 2017, we implementedWe have a commercial paper program which provided for the issuance of up to an aggregate principal amount of $1.0 billion of commercial paper. In October 2018, our Board of Directors
authorized a $1.0 billion increase to our commercial paper program, thereby providingprovides for the issuance of up to an aggregate principal amount of $2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 20182020 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility under our 20182020 Credit Agreement. As of February 28, 2019,2021, we had $732.5 million of0 outstanding borrowings net of unamortized discount, under our commercial paper programprogram. Information with a weighted average annual interest rate of 3.0% and a weighted average remaining term of 18 days. Asrespect to our outstanding commercial paper borrowings as of February 28, 2018, we had $266.9 millionof outstanding29, 2020, is as follows:
| | | | | | | | | |
(in millions) | | | |
Outstanding borrowings(1) | | | $ | 238.9 | |
Weighted average annual interest rate | | | 1.9 | % |
Weighted average remaining term | | | 8 days |
(1)Outstanding commercial paper borrowings are net of unamortized discount, under our commercial paper program with a weighted average annualdiscount.
Interest rate swap contracts
In June 2019, we entered into interest rate swap agreements, which were designated as cash flow hedges for $375.0 million of 2.1%our floating LIBOR rate debt. As a result of these hedges, we fixed our interest rates on $375.0 million of our floating LIBOR rate debt at an average rate of 1.9% (exclusive of borrowing margins) from July 1, 2019, through July 1, 2020.
Treasury lock contracts
In February and March 2020, we entered into treasury lock agreements, which were designated as cash flow hedges. As a weightedresult of these hedges, we fixed our 10-year treasury rates on $500.0 million of future debt issuances at an average remaining termrate of 1.2% (exclusive of borrowing margins). In April 2020, prior to the issuance of the 2.875% Senior Notes and 3.75% Senior Notes, we settled all outstanding treasury lock contracts, and recognized an unrealized loss, net of income tax effect, of $21.8 million in accumulated other comprehensive income (loss) within our consolidated balance sheets. This loss is being amortized over 10 days.years to interest expense within our consolidated results of operations. See “Senior notes” below.
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 91 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Senior notes –
Our outstanding senior notes are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Date of | | Outstanding Balance (1) |
| Principal | | Issuance | | Maturity | | Interest Payments | | February 28, 2021 | | February 29, 2020 |
(in millions) | | | | | | | | | | | |
3.75% Senior Notes (2) (3) | $ | 500.0 | | | May 2013 | | May 2021 | | May/Nov | | $ | 0 | | | $ | 499.2 | |
4.25% Senior Notes (2) (4) | $ | 1,050.0 | | | May 2013 | | May 2023 | | May/Nov | | 1,047.5 | | | 1,046.4 | |
| | | | | | | | | | | |
4.75% Senior Notes (2) (4) | $ | 400.0 | | | Nov 2014 | | Nov 2024 | | May/Nov | | 397.6 | | | 397.0 | |
4.75% Senior Notes (2) (4) | $ | 400.0 | | | Dec 2015 | | Dec 2025 | | Jun/Dec | | 396.9 | | | 396.3 | |
3.70% Senior Notes (2) (5) | $ | 600.0 | | | Dec 2016 | | Dec 2026 | | Jun/Dec | | 596.5 | | | 595.9 | |
2.70% Senior Notes (2) (5) | $ | 500.0 | | | May 2017 | | May 2022 | | May/Nov | | 498.8 | | | 497.8 | |
3.50% Senior Notes (2) (5) | $ | 500.0 | | | May 2017 | | May 2027 | | May/Nov | | 496.5 | | | 496.1 | |
4.50% Senior Notes (2) (5) | $ | 500.0 | | | May 2017 | | May 2047 | | May/Nov | | 493.1 | | | 493.0 | |
| | | | | | | | | | | |
2.25% Senior Notes (2) (6) | $ | 700.0 | | | Nov 2017 | | Nov 2020 | | May/Nov | | 0 | | | 698.7 | |
2.65% Senior Notes (2) (5) | $ | 700.0 | | | Nov 2017 | | Nov 2022 | | May/Nov | | 697.1 | | | 695.5 | |
3.20% Senior Notes (2) (5) | $ | 600.0 | | | Feb 2018 | | Feb 2023 | | Feb/Aug | | 598.0 | | | 597.0 | |
3.60% Senior Notes (2) (5) | $ | 700.0 | | | Feb 2018 | | Feb 2028 | | Feb/Aug | | 695.0 | | | 694.3 | |
4.10% Senior Notes (2) (5) | $ | 600.0 | | | Feb 2018 | | Feb 2048 | | Feb/Aug | | 592.3 | | | 592.1 | |
Senior Floating Rate Notes (2) (7) | $ | 650.0 | | | Oct 2018 | | Nov 2021 | | Quarterly | | 0 | | | 647.9 | |
4.40% Senior Notes (2) (5) | $ | 500.0 | | | Oct 2018 | | Nov 2025 | | May/Nov | | 496.6 | | | 496.0 | |
4.65% Senior Notes (2) (5) | $ | 500.0 | | | Oct 2018 | | Nov 2028 | | May/Nov | | 495.6 | | | 495.2 | |
5.25% Senior Notes (2) (5) | $ | 500.0 | | | Oct 2018 | | Nov 2048 | | May/Nov | | 493.1 | | | 493.0 | |
3.15% Senior Notes (2) (5) | $ | 800.0 | | | Jul 2019 | | Aug 2029 | | Feb/Aug | | 793.9 | | | 793.3 | |
2.875% Senior Notes (2) (5) | $ | 600.0 | | | Apr 2020 | | May 2030 | | May/Nov | | 594.3 | | | 0 | |
3.75% Senior Notes (2) (5) | $ | 600.0 | | | Apr 2020 | | May 2050 | | May/Nov | | 589.6 | | | 0 | |
| | | | | | | | | $ | 9,972.4 | | | $ | 10,624.7 | |
|
| | | | | | | | | | | | | | | | | |
| | | Date of | | Outstanding Balance (1) |
| Principal | | Issuance | | Maturity | | Interest Payments | | February 28, 2019 | | February 28, 2018 |
(in millions) | | | | | | | | | | | |
3.75% Senior Notes (2) (3) | $ | 500.0 |
| | May 2013 | | May 2021 | | May/Nov | | $ | 498.6 |
| | $ | 498.0 |
|
4.25% Senior Notes (2) (3) | $ | 1,050.0 |
| | May 2013 | | May 2023 | | May/Nov | | 1,045.4 |
| | 1,044.4 |
|
3.875% Senior Notes (2) (3) | $ | 400.0 |
| | Nov 2014 | | Nov 2019 | | May/Nov | | 399.1 |
| | 397.9 |
|
4.75% Senior Notes (2) (3) | $ | 400.0 |
| | Nov 2014 | | Nov 2024 | | May/Nov | | 396.4 |
| | 395.9 |
|
4.75% Senior Notes (2) (3) | $ | 400.0 |
| | Dec 2015 | | Dec 2025 | | Jun/Dec | | 395.8 |
| | 395.3 |
|
3.70% Senior Notes (2) (4) | $ | 600.0 |
| | Dec 2016 | | Dec 2026 | | Jun/Dec | | 595.4 |
| | 594.9 |
|
2.70% Senior Notes (2) (4) | $ | 500.0 |
| | May 2017 | | May 2022 | | May/Nov | | 496.8 |
| | 495.9 |
|
3.50% Senior Notes (2) (4) | $ | 500.0 |
| | May 2017 | | May 2027 | | May/Nov | | 495.6 |
| | 495.1 |
|
4.50% Senior Notes (2) (4) | $ | 500.0 |
| | May 2017 | | May 2047 | | May/Nov | | 492.9 |
| | 492.7 |
|
2.00% Senior Notes (2) (5) | $ | 600.0 |
| | Nov 2017 | | Nov 2019 | | May/Nov | | 598.6 |
| | 596.8 |
|
2.25% Senior Notes (2) (5) | $ | 700.0 |
| | Nov 2017 | | Nov 2020 | | May/Nov | | 696.8 |
| | 695.0 |
|
2.65% Senior Notes (2) (4) | $ | 700.0 |
| | Nov 2017 | | Nov 2022 | | May/Nov | | 693.9 |
| | 692.3 |
|
3.20% Senior Notes (2) (4) | $ | 600.0 |
| | Feb 2018 | | Feb 2023 | | Feb/Aug | | 596.0 |
| | 595.0 |
|
3.60% Senior Notes (2) (4) | $ | 700.0 |
| | Feb 2018 | | Feb 2028 | | Feb/Aug | | 693.8 |
| | 693.2 |
|
4.10% Senior Notes (2) (4) | $ | 600.0 |
| | Feb 2018 | | Feb 2048 | | Feb/Aug | | 592.0 |
| | 591.8 |
|
Senior Floating Rate Notes (2) (6) | $ | 650.0 |
| | Oct 2018 | | Nov 2021 | | Quarterly | | 646.8 |
| | — |
|
4.40% Senior Notes (2) (4) | $ | 500.0 |
| | Oct 2018 | | Nov 2025 | | May/Nov | | 495.4 |
| | — |
|
4.65% Senior Notes (2) (4) | $ | 500.0 |
| | Oct 2018 | | Nov 2028 | | May/Nov | | 494.7 |
| | — |
|
5.25% Senior Notes (2) (4) | $ | 500.0 |
| | Oct 2018 | | Nov 2048 | | May/Nov | | 492.9 |
| | — |
|
| | | | | | | | | $ | 10,816.9 |
| | $ | 8,674.2 |
|
(1)Amounts are net of unamortized debt issuance costs and unamortized discounts, where applicable.(2)Senior unsecured obligations which rank equally in right of payment to all of our existing and future senior unsecured indebtedness.
(3)Redeemed prior to maturity in February 2021 at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment of $3.8 million. The make-whole payment is included in loss on extinguishment of debt within our consolidated results of operations.
(4)Redeemable, in whole or in part, at our option at any time at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment based on the present value of the future payments at the adjusted Treasury Rate plus 50 basis points.
(5)Redeemable, in whole or in part, at our option at any time prior to the stated redemption date as defined in the indenture, at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment based on the present value of the future payments at the adjusted Treasury Rate plus the stated basis points as defined in the indenture. On or after the stated redemption date, redeemable, in whole or in part, at our option at any time at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest.
| |
(1)
| Amounts are net of unamortized debt issuance costs and unamortized discounts, where applicable. |
| |
(2)
| Senior unsecured obligations which rank equally in right of payment to all of our existing and future senior unsecured indebtedness. Guaranteed by certain of our U.S. subsidiaries on a senior unsecured basis. |
| |
(3)
| Redeemable, in whole or in part, at our option at any time at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment based on the present value of the future payments at the adjusted Treasury Rate plus 50 basis points. |
| |
(4)
| Redeemable, in whole or in part, at our option at any time prior to the stated redemption date as defined in the indenture, at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment based on the present value of the future payments at the adjusted Treasury Rate plus the stated basis points as defined in the indenture. On or after the stated redemption date, redeemable, in whole or in part, at our option at any time at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest. |
|
| | | | |
| Redemption |
| Stated Redemption
Date
| | Stated Basis
Points
|
3.70% Senior Notes due December 2026 | Sept 2026 | | 25 |
|
2.70% Senior Notes due May 2022 | Apr 2022 | | 15 |
|
| | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 92 |
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
| | | | | | | | | | | |
3.50% Senior Notes due May 2027 | Feb 2027 | | 20 |
|
4.50% Senior Notes due May 2047 | Nov 2046 | | 25 |
|
2.65% Senior Notes due November 2022 | Oct 2022 | | 15 |
|
3.20% Senior Notes due February 2023 | Jan 2023 | | 13 |
|
3.60% Senior Notes due February 2028 | Nov 2027 | | 15 |
|
4.10% Senior Notes due February 2048 | Aug 2047 | | 20 |
|
4.40% Senior Notes due November 2025 | Sept 2025 | | 20 |
|
4.65% Senior Notes due November 2028 | Aug 2028 | | 25 |
|
5.25% Senior Notes due November 2048 | May 2048 | | 30 |
3.15% Senior Notes due August 2029 | May 2029 | | 20 |
2.875% Senior Notes due May 2030 | Feb 2030 | | 35 |
3.75% Senior Notes due May 2050 | Nov 2049 | | 40 |
| |
(5)
| Redeemable,(6)Redeemed prior to maturity in May 2020 at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment of $6.2 million. The make-whole payment is included in whole or in part, at our option at any time prior to maturity, at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment based on the present value of the future payments at the adjusted Treasury Rate plus 10 basis points. |
| |
(6)
| Interest will accrue for each quarterly interest period at a rate equal to three-month LIBOR plus 0.70% per year as determined on the applicable interest determination date as defined in the indenture. Interest is payable quarterly in February, May, August and November. The notes are not redeemable prior to October 30, 2019. On or after this date, the notes are redeemable, in whole or in part, at our option at any time prior to maturity, at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest. |
For the year ended February 28, 2018, we recognized a loss on extinguishment of debt within our consolidated results of $97.0 million. Thisoperations.
(7)Redeemed prior to maturity in November 2020 at a redemption price equal to 100% of the outstanding principal amount, consisted of a make-whole payment of $73.6 million in connection with the early redemption of our April 2012 senior notesplus accrued and the write-off of debt issuance costs of $23.4 million primarily in connection with the prior-to-maturity repayments of term loan facilities under our applicable senior credit facility in May and November 2017.unpaid interest.
Indentures –
Our indentures relating to our outstanding senior notes contain certain covenants, including, but not limited to: (i) a limitation on liens on certain assets, (ii) a limitation on certain sale and leaseback transactions, and (iii) restrictions on mergers, consolidations, and the transfer of all or substantially all of our assets to another person.
Subsidiary credit facilities –
General:General
We have additional credit arrangements totaling $45.1$61.2 million and $503.5$71.8 million as of February 28, 2019,2021, and February 28, 2018,29, 2020, respectively. As of February 28, 2019,2021, and February 28, 2018,29, 2020, amounts outstanding under these arrangements were $28.9$15.5 million and $277.0$25.3 million, respectively, the majority of which is classified as long-term as of the respective date. These arrangements primarily support the financing needs of our domestic and foreign subsidiary operations (see “Other long-term debt” for additional information). Interest rates and other terms of these borrowings vary from country to country, depending on local market conditions.
Other long-term debt:debt
During the year ended February 28, 2019, we recorded a conversion of $248.2 million from long-term debt to noncontrolling equity interests associated with the noncash settlement of a prior contractual agreement with our glass production plant joint venture partner, Owens-Illinois. During the year ended February 28, 2017, we had recorded a noncash conversion of $132.0 million from noncontrolling equity interests to long-term debt associated with the same contractual agreement.
Debt payments
As of February 28, 2018, outstanding borrowings under this contractual agreement were $230.5 million and were included in our consolidated balance sheet in accordance with our consolidation of this variable interest entity.
Debt payments –
As of February 28, 2019,2021, the required principal repayments under long-term debt obligations (excluding unamortized debt issuance costs and unamortized discounts of $69.6$60.6 million and $15.5$17.0 million, respectively) for each of the five succeeding fiscal years and thereafter are as follows:
| | | | | |
(in millions) | |
2022 | $ | 29.2 | |
2023 | 1,829.2 | |
2024 | 1,078.7 | |
2025 | 782.8 | |
2026 | 900.0 | |
Thereafter | 5,900.0 | |
| $ | 10,519.9 | |
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 93 |
|
| | | |
(in millions) | |
2020 | $ | 1,067.4 |
|
2021 | 764.3 |
|
2022 | 1,710.3 |
|
2023 | 1,856.8 |
|
2024 | 1,842.5 |
|
Thereafter | 5,668.8 |
|
| $ | 12,910.1 |
|
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Accounts receivable securitization facilities –
As of February 28, 2018, we had two outstanding 364-day revolving trade accounts receivable securitization facilities with aggregate borrowings outstanding of $391.9 million at a weighted average interest rate of 2.4%. Both facilities reached full maturation in accordance with the respective terms for each facility during the year ended February 28, 2019, and were not renewed.
13. INCOME TAXES:TAXES
Income (loss) before income taxes was generated as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
(in millions) | | | | | |
Domestic | $ | 495.2 | | | $ | (2,230.1) | | | $ | 1,615.9 | |
Foreign | 2,047.7 | | | 1,284.9 | | | 2,529.1 | |
| $ | 2,542.9 | | | $ | (945.2) | | | $ | 4,145.0 | |
|
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
(in millions) | | | | | |
Domestic | $ | 1,615.9 |
| | $ | 591.5 |
| | $ | 777.6 |
|
Foreign | 2,529.1 |
| | 1,746.5 |
| | 1,305.4 |
|
| $ | 4,145.0 |
| | $ | 2,338.0 |
| | $ | 2,083.0 |
|
The income tax provision (benefit) consisted of the following:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
(in millions) | | | | | |
Current | | | | | |
Federal | $ | 74.0 | | | $ | 66.5 | | | $ | 4.1 | |
State | 19.1 | | | 12.1 | | | 15.7 | |
Foreign | 81.6 | | | 108.5 | | | 239.2 | |
Total current | 174.7 | | | 187.1 | | | 259.0 | |
| | | | | |
Deferred | | | | | |
Federal | 152.8 | | | (459.9) | | | 223.9 | |
State | 28.3 | | | (118.3) | | | 75.0 | |
Foreign | 155.3 | | | (575.5) | | | 128.0 | |
Total deferred | 336.4 | | | (1,153.7) | | | 426.9 | |
Income tax provision (benefit) | $ | 511.1 | | | $ | (966.6) | | | $ | 685.9 | |
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 94 |
|
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
(in millions) | | | | | |
Current | | | | | |
Federal | $ | 4.1 |
| | $ | 261.1 |
| | $ | 270.8 |
|
State | 15.7 |
| | 20.4 |
| | 28.5 |
|
Foreign | 239.2 |
| | 158.4 |
| | 126.2 |
|
Total current | 259.0 |
| | 439.9 |
| | 425.5 |
|
| | | | | |
Deferred | | | | | |
Federal | 223.9 |
| | (475.9 | ) | | 109.9 |
|
State | 75.0 |
| | 0.4 |
| | 7.1 |
|
Foreign | 128.0 |
| | 58.3 |
| | 7.8 |
|
Total deferred | 426.9 |
| | (417.2 | ) | | 124.8 |
|
Income tax provision | $ | 685.9 |
| | $ | 22.7 |
| | $ | 550.3 |
|
On December 22, 2017, the Tax Cuts and Jobs Act (the “TCJ Act”) was signed into law. The TCJ Act significantly changes U.S. corporate income taxes by, among other items, lowering the federal statutory rate from 35% to 21%, eliminating certain deductions, changing how foreign earnings are subject to U.S. tax and imposing a
mandatory one-time transition tax on accumulated earnings of foreign subsidiaries. In December 2017, the SEC issued guidance related to the income tax accounting implications of the TCJ Act. This guidance provides a measurement period, which extends no longer than one year from the enactment date of the TCJ Act, during which a company may complete its accounting for the income tax implications of the TCJ Act. In accordance with this guidance, we recognized a provisional net income tax benefit of $351.2 million for the year ended February 28, 2018. This amount is comprised primarily of (i) a benefit of $311.2 million from the remeasurement of our deferred tax assets and liabilities to the new, lower federal statutory rate and (ii) a benefit of $220.0 million from the reversal of deferred tax liabilities previously provided for unremitted earnings of foreign subsidiaries which were not considered to be indefinitely reinvested; partially offset by the recording of the mandatory one-time transition tax of $180.0 million on unremitted earnings of our foreign subsidiaries.
For the third quarter of fiscal 2019, we completed our analysis of the income tax implications of the TCJ Act. We recognized an additional income tax benefit of $37.6 million resulting from a decrease in the mandatory one-time transition tax on unremitted earnings of our foreign businesses.
The TCJ Act also creates a new requirement that certain income earned by foreign subsidiaries (“GILTI”), must be included in U.S. gross income. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to treat the tax effect of GILTI as a current period tax expense when incurred.
Prior to the third quarter of fiscal 2017, we had historically provided deferred income taxes for the repatriation to the U.S. of earnings from our foreign subsidiaries. During the third quarter of fiscal 2017, in connection with the agreement to divest the Canadian wine business and the ongoing Beer capacity expansion activities in Mexico, including the agreement to acquire the Obregon Brewery, we changed our assertion regarding our ability and intent to indefinitely reinvest unremitted earnings of certain foreign subsidiaries. Approximately $420 million of our earnings for the year ended February 28, 2017, and all future earnings for these foreign subsidiaries were expected to be indefinitely reinvested. Therefore, no deferred income taxes had been provided on these applicable unremitted earnings. Although we expect to continue to reinvest these foreign earnings, as the TCJ Act reduces the tax impact of repatriation, beginning in the fourth quarter of fiscal 2018, we have provided deferred income taxes, consisting primarily of foreign withholding and state taxes, on all applicable unremitted earnings of our foreign subsidiaries.
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
A reconciliation of the total tax provision (benefit) to the amount computed by applying the statutory U.S. Federalfederal income tax rate to income before provision for (benefit from) income taxes is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
| Amount | | % of Pretax Income (Loss) | | Amount | | % of Pretax Income (Loss) | | Amount | | % of Pretax Income (Loss) |
(in millions, except % of pretax income (loss) data) | | | | | | | | | | |
Income tax provision (benefit) at statutory rate | $ | 534.0 | | | 21.0 | % | | $ | (198.5) | | | 21.0 | % | | $ | 870.5 | | | 21.0 | % |
State and local income taxes, net of federal income tax benefit (1) | 39.0 | | | 1.5 | % | | (82.3) | | | 8.7 | % | | 81.3 | | | 2.0 | % |
| | | | | | | | | | | |
Net income tax provision (benefit) from legislative changes (2) | 10.9 | | | 0.4 | % | | (547.4) | | | 57.9 | % | | (37.6) | | | (0.9 | %) |
Earnings taxed at other than U.S. statutory rate (3) | (84.4) | | | (3.2 | %) | | (46.5) | | | 5.0 | % | | (81.0) | | | (1.9 | %) |
| | | | | | | | | | | |
Excess tax benefits from stock-based compensation awards (4) | (29.4) | | | (1.2 | %) | | (56.2) | | | 5.9 | % | | (82.9) | | | (2.0 | %) |
Net income tax provision (benefit) recognized for adjustment to valuation allowance | 27.1 | | | 1.1 | % | | (32.8) | | | 3.5 | % | | (74.1) | | | (1.8 | %) |
Miscellaneous items, net | 13.9 | | | 0.5 | % | | (2.9) | | | 0.3 | % | | 9.7 | | | 0.1 | % |
Income tax provision (benefit) at effective rate | $ | 511.1 | | | 20.1 | % | | $ | (966.6) | | | 102.3 | % | | $ | 685.9 | | | 16.5 | % |
|
| | | | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
| Amount | | % of Pretax Income | | Amount | | % of Pretax Income | | Amount | | % of Pretax Income |
(in millions, except % of pretax income data) | | | | | | | | | | | |
Income tax provision at statutory rate | $ | 870.5 |
| | 21.0 | % | | $ | 765.4 |
| | 32.7 | % | | $ | 729.1 |
| | 35.0 | % |
State and local income taxes, net of federal income tax benefit (1) | 81.3 |
| | 2.0 | % | | 18.0 |
| | 0.8 | % | | 23.1 |
| | 1.1 | % |
Net income tax benefit from TCJ Act | (37.6 | ) | | (0.9 | %) | | (351.2 | ) | | (15.0 | %) | | — |
| | — | % |
Earnings of subsidiaries taxed at other than U.S. statutory rate (2) | (149.0 | ) | | (3.6 | %) | | (319.1 | ) | | (13.7 | %) | | (160.4 | ) | | (7.7 | %) |
Excess tax benefits from stock-based compensation awards (3) | (82.9 | ) | | (2.0 | %) | | (68.6 | ) | | (2.9 | %) | | — |
| | — | % |
Canadian Divestiture | — |
| | — | % | | — |
| | — | % | | (25.5 | ) | | (1.2 | %) |
Miscellaneous items, net | 3.6 |
| | — | % | | (21.8 | ) | | (0.9 | %) | | (16.0 | ) | | (0.8 | %) |
Income tax provision at effective rate | $ | 685.9 |
| | 16.5 | % | | $ | 22.7 |
| | 1.0 | % | | $ | 550.3 |
| | 26.4 | % |
(1)Includes differences resulting from adjustments to the current and deferred state effective tax rates. | |
(1)(2)The year ended February 28, 2021, represents a net income tax (provision) benefit resulting from initiatives under the CARES Act. The year ended February 29, 2020, represents the recognition of a net income tax benefit resulting from the remeasurement of our deferred tax assets in connection with the September 2019 enactment of tax reform in Switzerland. The year ended February 28, 2019, represents the recognition of a net income tax benefit related to the TCJ Act. (3)Consists of the following (i) difference between the U.S. statutory rate and local jurisdiction tax rates, (ii) the provision for incremental U.S. taxes on earnings of certain foreign subsidiaries offset by foreign tax credits, (iii) the non-U.S. portion of tax provision (benefit) recorded on the net unrealized gain (loss) from the changes in fair value of our investment in Canopy, and (iv) the non-U.S. portion of tax benefits recorded on the Canopy equity in earnings (losses) and related activities. (4)Represents the recognition of the income tax effect of stock-based compensation awards in the income statement when the awards vest or are settled.
| Includes differences resulting from adjustments to the current and deferred state effective tax rates. |
| |
(2)
| Consists of the difference between the U.S. statutory rate and local jurisdiction tax rates, as well as the provision for incremental U.S. taxes on unremitted earnings of certain foreign subsidiaries offset by foreign tax credits and other foreign adjustments. |
| |
(3)
| Represents the recognition of the income tax effect of stock-based compensation awards in the income statement when the awards vest or are settled as a result of our March 1, 2017, adoption of FASB amended share-based compensation guidance (see Note 17). |
Deferred tax assets and liabilities reflect the future income tax effects of temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates that apply to taxable income.
| | | | | |
Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 95 |
| | | | | | | | |
PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Significant components of deferred tax assets (liabilities) consist of the following:
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
(in millions) | | | |
Deferred tax assets | | | |
Intangible assets | $ | 1,852.0 | | | $ | 2,045.8 | |
Loss carryforwards | 233.1 | | | 225.9 | |
Stock-based compensation | 30.1 | | | 75.6 | |
Lease liabilities | 83.1 | | | 89.2 | |
Inventory | 26.6 | | | 32.4 | |
| | | |
| | | |
| | | |
| | | |
Investments in unconsolidated investees | 36.7 | | | 106.1 | |
Other accruals | 33.7 | | | 35.0 | |
Gross deferred tax assets | 2,295.3 | | | 2,610.0 | |
Valuation allowances | (78.6) | | | (54.1) | |
Deferred tax assets, net | 2,216.7 | | | 2,555.9 | |
| | | |
Deferred tax liabilities | | | |
| | | |
Property, plant, and equipment | (200.3) | | | (175.5) | |
| | | |
Provision for unremitted earnings | (23.0) | | | (27.5) | |
| | | |
| | | |
| | | |
Right-of-use assets | (70.6) | | | (80.5) | |
Total deferred tax liabilities | (293.9) | | | (283.5) | |
Deferred tax assets (liabilities), net | $ | 1,922.8 | | | $ | 2,272.4 | |
|
| | | | | | | |
| February 28, 2019 | | February 28, 2018 |
(in millions) | | | |
Deferred tax assets | | | |
Intangible assets | $ | 1,616.7 |
| | $ | — |
|
Loss carryforwards | 147.8 |
| | 106.0 |
|
Stock-based compensation | 33.4 |
| | 29.1 |
|
Inventory | 20.3 |
| | 18.3 |
|
Other accruals | 93.4 |
| | 81.1 |
|
Gross deferred tax assets | 1,911.6 |
| | 234.5 |
|
Valuation allowances | (86.9 | ) | | (112.1 | ) |
Deferred tax assets, net | 1,824.7 |
| | 122.4 |
|
| | | |
Deferred tax liabilities | | | |
Intangible assets | — |
| | (499.8 | ) |
Property, plant and equipment | (191.5 | ) | | (197.8 | ) |
Investments in unconsolidated investees | (448.9 | ) | | (78.2 | ) |
Provision for unremitted earnings | (22.8 | ) | | (21.2 | ) |
Derivative instruments | (7.9 | ) | | (19.8 | ) |
Total deferred tax liabilities | (671.1 | ) | | (816.8 | ) |
Deferred tax assets (liabilities), net | $ | 1,153.6 |
| | $ | (694.4 | ) |
In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some or all of the deferred tax assets will not be realized. In making this assessment, we consider the projected reversal of deferred tax liabilities and projected future taxable income.income as well as tax planning strategies. Based upon this assessment, we believe it is more likely than not that we will realize the benefits of these deductible differences, net of any valuation allowances.
As of February 28, 2019,2021, operating loss carryforwards, which are primarily state and foreign, totaling $833.3 million$1.6 billion are being carried forward in a number of jurisdictions where we are permitted to use tax operating losses from prior periods to reduce future taxable income. Of these operating loss carryforwards, $745.5 million$1.2 billion will expire inby fiscal 2020 through2027, $344.1 million will expire between fiscal 20392028 and $87.8fiscal 2041, and $92.5 million of operating losses in certain jurisdictions may be carried forward indefinitely. Additionally, as of February 28, 2019,2021, federal capital losses totaling $222.3$168.1 million are being carried forward and will expire in fiscal 2022.
We have recognized valuation allowances for operating loss carryforwards, capital loss carryforwards, and other deferred tax assets when we believe it is more likely than not that these items will not be realized. The decreaseincrease in our valuation allowances as of February 28, 2019,2021, primarily relatesrelate to the reversaladjustments in expected utilization of valuation allowancescapital loss carryforwards in connection with the sale of our Accolade Wine Investment inand Spirits Divestiture and the first quarter of fiscal 2019.Paul Masson Divestiture.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 96 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
The liability for income taxes associated with uncertain tax positions, excluding interest and penalties, and a reconciliation of the beginning and ending unrecognized tax benefit liabilities is as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
(in millions) | | | | | |
Balance as of March 1 | $ | 249.4 | | | $ | 224.3 | | | $ | 89.3 | |
Increases as a result of tax positions taken during a prior period | 3.1 | | | 11.4 | | | 56.4 | |
Decreases as a result of tax positions taken during a prior period | (15.4) | | | (14.8) | | | (1.4) | |
Increases as a result of tax positions taken during the current period | 15.2 | | | 29.0 | | | 88.8 | |
Decreases related to settlements with tax authorities | (10.2) | | | (0.1) | | | (0.8) | |
Decreases related to lapse of applicable statute of limitations | (6.0) | | | (0.4) | | | (8.0) | |
Balance as of last day of February | $ | 236.1 | | | $ | 249.4 | | | $ | 224.3 | |
|
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
(in millions) | | | | | |
Balance as of March 1 | $ | 89.3 |
| | $ | 39.5 |
| | $ | 30.4 |
|
Increases as a result of tax positions taken during a prior period | 56.4 |
| | 7.5 |
| | — |
|
Decreases as a result of tax positions taken during a prior period | (1.4 | ) | | (0.1 | ) | | (11.5 | ) |
Increases as a result of tax positions taken during the current period | 88.8 |
| | 43.8 |
| | 21.3 |
|
Decreases related to settlements with tax authorities | (0.8 | ) | | (0.4 | ) | | — |
|
Decreases related to lapse of applicable statute of limitations | (8.0 | ) | | (1.0 | ) | | (0.7 | ) |
Balance as of last day of February | $ | 224.3 |
| | $ | 89.3 |
| | $ | 39.5 |
|
As of February 28, 2019,2021, and February 28, 2018,29, 2020, we had $239.0$268.9 million and $93.7$276.2 million,, respectively, of non-current unrecognized tax benefit liabilities, including interest and penalties, recognized on our balance sheets. These liabilities are recorded as non-current as payment of cash is not anticipated within one year of the balance sheet date.
As of February 28, 2019,2021, and February 28, 2018,29, 2020, we had $224.3$236.1 million and $89.3$249.4 million,, respectively, of unrecognized tax benefit liabilities that, if recognized, would decrease the effective tax rate.rate in the year of resolution.
We file U.S. Federalfederal income tax returns and various state, local, and foreign income tax returns. Major tax jurisdictions where we are subject to examination by tax authorities include Canada, Luxembourg, Mexico, Switzerland, and the U.S. Various U.S. Federal,federal, state and foreign income tax examinations are currently in progress. It is reasonably possible that the liability associated with our unrecognized tax benefit liabilities will increase or decrease within the next twelve months as a result of these examinations or the expiration of statutes of limitation. As of February 28, 2019,2021, we estimate that unrecognized tax benefit liabilities could change by a range of $1$1 million to $13 million.$8 million. With few exceptions, we are no longer subject to U.S. Federal,federal, state, local, or foreign income tax examinations for fiscal years prior to February 29, 2012.28, 2014.
We provide for additional tax expense based on probable outcomes of ongoing tax examinations and assessments in various jurisdictions. While it is often difficult to predict the outcome or the timing of resolution of any tax matter, we believe the reserves reflect the probable outcome of known tax contingencies. Unfavorable settlement of any particular issue would require the use of cash. Favorable resolution would be recognized as a reduction to the effective tax rate in the year of resolution.
14.14. DEFERRED INCOME TAXES AND OTHER LIABILITIES:LIABILITIES
The major components of deferred income taxes and other liabilities are as follows:
| | | | | | | | | | | |
| February 28, 2021 | | February 29, 2020 |
(in millions) | | | |
Deferred income taxes | $ | 569.7 | | | $ | 384.0 | |
Operating lease liability | 471.1 | | | 483.6 | |
Unrecognized tax benefit liabilities | 268.9 | | | 276.2 | |
Long-term income tax payable | 86.1 | | | 96.2 | |
Other | 97.7 | | | 86.3 | |
| $ | 1,493.5 | | | $ | 1,326.3 | |
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 97 |
|
| | | | | | | |
| February 28, 2019 | | February 28, 2018 |
(in millions) | | | |
Deferred income taxes | $ | 1,029.7 |
| | $ | 694.4 |
|
Unrecognized tax benefit liabilities | 239.0 |
| | 93.7 |
|
Long-term income tax payable | 95.4 |
| | 165.6 |
|
Other | 106.6 |
| | 136.1 |
|
| $ | 1,470.7 |
| | $ | 1,089.8 |
|
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
15. COMMITMENTS AND CONTINGENCIES:LEASES
Operating leases –General
We primarily lease certain vineyards, office and production facilities, warehouses, production equipment, and vehicles. 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.
Balance sheet location
A summary of lease right-of-use assets and liabilities are as follows:
| | | | | | | | | | | | | | |
| Balance Sheet Classification | February 28, 2021 | | February 29, 2020 |
(in millions) | | | | |
Assets | | | | |
Operating lease | Other assets | $ | 477.9 | | | $ | 481.4 | |
Finance lease | Property, plant, and equipment | 17.0 | | | 26.6 | |
Total right-of-use assets | | $ | 494.9 | | | $ | 508.0 | |
| | | | |
Liabilities | | | | |
Current: | | | | |
Operating lease | Other accrued expenses and liabilities | $ | 68.8 | | | $ | 76.6 | |
Finance lease | Current maturities of long-term debt | 4.6 | | | 11.7 | |
Non-current: | | | | |
Operating lease | Deferred income taxes and other liabilities | 471.1 | | | 483.6 | |
Finance lease | Long-term debt, less current maturities | 10.9 | | | 13.6 | |
Total lease liabilities | | $ | 555.4 | | | $ | 585.5 | |
Lease cost
The minimumcomponents of total lease payments for our operating leases are recognized on a straight-line basis over the minimum lease term. Step rent provisions, escalation clauses, capital improvement funding and other lease concessions, when present in our leases, are taken into account in computing the minimum lease payments.
Future payments under noncancelable operating leases having initial or remaining terms of one year or morecost are as followsfollows:
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 |
(in millions) | | | |
Operating lease cost | $ | 93.4 | | | $ | 98.9 | |
Finance lease cost: | | | |
Amortization of right-of-use assets | 11.0 | | | 12.2 | |
Interest on lease liabilities | 0.5 | | | 0.7 | |
Short-term lease cost | 9.2 | | | 8.6 | |
Variable lease cost (1) | 216.5 | | | 403.3 | |
Total lease cost | $ | 330.6 | | | $ | 523.7 | |
(1)The decrease for the year ended February 28, 2021, was primarily due to (i) transfers of grape purchasing agreements largely in connection with our Wine and Spirits Divestitures and (ii) reduced grape supply availability due to the 2020 U.S. wildfires (see Note 16).
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 98 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
Lease maturities(1)
As of February 28, 2021, minimum payments due for lease liabilities for each of the five succeeding fiscal years and thereafter:thereafter are as follows:
| | | | | | | | | | | | | |
| Operating Leases | | Finance Leases | | |
(in millions) | | | | | |
2022 | $ | 84.6 | | | $ | 4.8 | | | |
2023 | 73.3 | | | 4.7 | | | |
2024 | 66.7 | | | 4.2 | | | |
2025 | 54.6 | | | 2.1 | | | |
2026 | 44.1 | | | 0 | | | |
Thereafter | 336.0 | | | 0 | | | |
Total lease payments | 659.3 | | | 15.8 | | | |
Less: Interest | (119.4) | | | (0.3) | | | |
Total lease liabilities | $ | 539.9 | | | $ | 15.5 | | | |
(1)For leases with terms in excess of 12 months at inception.
Supplemental information
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 |
(in millions) | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows from operating leases | $ | 93.9 | | | $ | 100.7 | |
Operating cash flows from finance leases | $ | 0.5 | | | $ | 0.7 | |
Financing cash flows from finance leases | $ | 10.5 | | | $ | 13.8 | |
| | | |
| | | |
| | | |
Right-of-use assets obtained in exchange for new lease liabilities: | | | |
Operating leases | $ | 66.3 | | | $ | 34.3 | |
Finance leases | $ | 11.6 | | | $ | 10.7 | |
| | | |
| February 28, 2021 | | February 29, 2020 |
Weighted-average remaining lease term: (1) | | | |
Operating leases | 12.8 years | | 11.7 years |
Finance leases | 2.9 years | | 3.2 years |
| | | |
Weighted-average discount rate: | | | |
Operating leases | 3.2 | % | | 3.5 | % |
Finance leases | 1.2 | % | | 2.6 | % |
(1)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.
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 99 |
|
| | | |
(in millions) | |
2020 | $ | 59.0 |
|
2021 | 58.2 |
|
2022 | 51.1 |
|
2023 | 47.9 |
|
2024 | 41.2 |
|
Thereafter | 302.1 |
|
| $ | 559.5 |
|
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
16. COMMITMENTS AND CONTINGENCIES
Rental expense was $63.5 million, $59.1 million and $59.2 million for the years ended February 28, 2019, February 28, 2018, and February 28, 2017, respectively.
Purchase commitments and contingencies –
We have entered into various long-term contracts in the normal course of business for the purchase of (i) certain inventory components, (ii) transportation, marketing, and warehousing services, (iii) IT contracts, (iv) certain energy requirements, and (v) property, plant, and equipment and related contractor and manufacturing services, (iii) processing and warehousing services, (iv) transportation services and (v) certain energy requirements.services. As of February 28, 2019,2021, the estimated aggregate minimum purchase obligationscommitments under these contracts are as follows:
|
| | | | | | | |
| Type | | Length of Commitment | | Amount |
(in millions) | | | | | |
Raw materials and supplies (1) | Packaging, grapes, hops, malts and other raw materials | | through May 2034 | | $ | 5,955.1 |
|
In-process inventories | Bulk wine and spirits | | through February 2027 | | 100.4 |
|
Capital expenditures (2) | Property, plant and equipment, and contractor and manufacturing services | | through February 2022 | | 649.8 |
|
Other | Processing and warehousing services, transportation services, energy contracts | | through December 2030 | | 488.9 |
|
| | | | | $ | 7,194.2 |
|
| | | | | | | | | | | |
| Type | Length of Commitment | Amount |
(in millions) | | | |
Raw materials and supplies (1) | Certain grape purchasing arrangements include the purchase of grape production yielded from specified blocks of a vineyard. The actual tonnagePackaging, grapes, malts, corn, and price of grapes that we purchase will vary each year depending on certain factors, including weather, time of harvest, overall market conditions and the agricultural practices and location of the vineyard. Amounts included herein for the estimated aggregate minimum grape purchase obligations consist of estimates for the purchase of the grapes and the implicit leases of the land. Upon adoption of the new lease guidance on March 1, 2019, certain grape purchasing arrangements classified as leases will result in the recognition of right-of-use assets and lease liabilities on our balance sheet. However, certain other grape purchasing arrangements classified as leases will not result in the recognition of right-of-use assets and lease liabilities on our balance sheet due to their variable nature.hops | through December 2037 | $ | 4,063.8 | |
| | | |
Contract services | Transportation, marketing, and warehousing services, and IT and energy contracts | through December 2030 | 816.5 | |
Capital expenditures (2) | Consists of purchase commitments entered into primarily in connection with the construction of a new, state-of-the-art brewery located in Mexicali, Baja California, Mexico (the “Mexicali Brewery”),Property, plant, and the expansion project for the Obregon Brewery.equipment and contractor and manufacturing services | through January 2024 | 243.7 | |
In-process inventories | Bulk wine and spirits | through April 2025 | 75.3 | |
Other | Finished wine case goods | through May 2029 | 26.4 | |
| | | $ | 5,225.7 | |
(1)Certain grape purchasing arrangements include the purchase of grape production yielded from specified blocks of a vineyard. The actual tonnage and price of grapes that we purchase will vary each year depending on certain factors, including weather, time of harvest, overall market conditions, and the agricultural practices and location of the vineyard. Amounts included herein for the estimated aggregate minimum grape purchase commitments consist of estimates for the purchase of the grapes and the implicit leases of the land. Certain grape purchasing arrangements classified as leases have not resulted in the recognition of right-of-use assets and lease liabilities on our balance sheet due to their variable nature.
(2)Consists of purchase commitments entered into primarily in connection with the expansion project for the Obregon Brewery.
Additionally, 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 for the years ended February 28, 2019,2021, February 28, 2018,29, 2020, and February 28, 2017,2019, were $154.7 million, $166.6 million, and $238.8 million, $316.6 million and $292.3 million, respectively.
Indemnification liabilities –
In connection with prior divestitures, we have indemnified respective parties against certain liabilities that may arise subsequent to the divestiture. As of February 28, 2019,2021, and February 28, 2018,29, 2020, these liabilities consist primarily of indemnifications related to certain lease contracts and income tax matters. During the year ended February 28, 2019, in connection with the sale of the Accolade Wine Investment, we were released from certain guarantees and we recognized a gain of $3.7 million as part of the net gain on the sale of this business. This net gain is included in income (loss) from unconsolidated investments.investments within our consolidated results of operations. As of February 28, 2019,2021, and February 28, 2018,29, 2020, the carrying amount of our indemnification liabilities was $9.2$17.0 million and $12.8$9.1 million, respectively, and is included in deferred income taxes and other liabilities. We do not expect to be required to make material payments under the indemnifications and we believe that the likelihood is remote that the indemnifications could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Legal matters –
In the ordinary course of our business, we are subject to litigation from timelawsuits, arbitration, claims, and other legal proceedings in connection with our business. Some of the legal actions include claims for substantial or unspecified compensatory and/or punitive damages and/or injunctive relief. A substantial adverse judgment or other unfavorable resolution of these matters could have a material adverse effect on our financial condition, results of operations, or cash flows. Management believes that we have adequate legal defenses with respect to time. Although
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 100 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
the amountlegal proceedings to which it is a defendant or respondent and that the outcome of these pending proceedings is not likely to have a material adverse effect on our financial condition, results of operations, or cash flows. However, we are unable to predict the outcome of these matters.
Regulatory matters
We are in discussions with various governmental agencies concerning matters raised during regulatory examinations or otherwise subject to such agencies’ inquiry. These matters could result in censures, fines, or other sanctions. Management believes the outcome of any liability with respect to such litigation cannot be determined, in the opinion of management, such liabilitypending regulatory matters will not have a material adverse effect on our financial condition, results of operations, or cash flows. However, we are unable to predict the outcome of these matters.
Other –2020 U.S. wildfires
In August 2020, significant wildfires broke out in California, Oregon, and Washington states which affected the U.S. grape harvest. None of our facilities were damaged. At this time, we continue to expect no material impact to our ability to meet customer demand. Most of our annual grape requirements are satisfied by supply contracts from independent growers which, in many cases, allow for us to reject grapes that do not meet required quality specifications, including from smoke damage. We continue to assess when to use our rights under law and our supply contracts to reject grapes that are damaged from wildfires. For the year ended February 28, 2021, we recognized a $78.6 million loss in connection with the write-down of certain bulk wine inventory and certaingrapes as a result of smoke damage sustained during the Fall 2017 California wildfires, we2020 U.S. wildfires. This loss was included in cost of product sold within our consolidated results of operations. We have recognized totalinsurance coverage that partially covers losses of $20.6 million, with $1.5 million recognized for the first quarter of fiscal 2019 and $19.1 million recognized forgrapes in our own vineyards. In the fourth quarter of 2018.fiscal 2021 we determined a loss recovery from our insurance carriers was realizable and recognized $8.2 million in cost of product sold within our consolidated results of operations. While we are pursuingcontinuing to pursue reimbursement, from our insurance carriers, there can be no assurance there will be any potentialadditional recoveries. We test the grapes acquired under our supply contracts for smoke damage and other issues prior to accepting them. Additionally, for the year ended February 28, 2021, we recognized $28.6 million in unfavorable fixed cost absorption from decreased production levels at certain facilities as period costs in cost of product sold within our consolidated results of operations in the Wine and Spirits segment rather than capitalized in inventories.
16.17. STOCKHOLDERS’ EQUITY:EQUITY
Common stock –
We have two2 classes of common stock with a material number of shares outstanding: Class A Common Stock and Class B Convertible Common Stock. Class B Convertible Common Stock shares are convertible into shares of Class A Common Stock on a one-to-one basis at any time at the option of the holder. Holders of Class B Convertible Common Stock are entitled to ten votes per share. Holders of Class A Common Stock are entitled to one vote per share and a cash dividend premium. If we pay a cash dividend on Class B Convertible Common Stock, each share of Class A Common Stock will receive an amount at least ten10 percent greater than the amount of the cash dividend per share paid on Class B Convertible Common Stock. In addition, the Board of Directors may declare and pay a dividend on Class A Common Stock without paying any dividend on Class B Convertible Common Stock. However, our senior credit facility limits the cash dividends that we can pay on our common stock to a fixed amount per quarter but the fixed amount may be exceeded subject to various conditions set forth in the senior credit facility.
In addition, we have a class of common stock with an immaterial number of shares outstanding: Class 1 Common Stock. Shares of Class 1 Common Stock generally have no voting rights. Class 1 Common Stock shares are convertible into shares of Class A Common Stock on a one-to-one basis at any time at the option of the holder, provided that the holder immediately sells the Class A Common Stock acquired upon conversion. Because shares of Class 1 Common Stock are convertible into shares of Class A Common Stock, for each share of Class 1 Common Stock issued, we must reserve one share of Class A Common Stock for issuance upon the conversion of the share of Class 1 Common Stock. Holders of Class 1 Common Stock do not have any preference as to dividends, but may participate in any dividend if and when declared by the Board of Directors. If we pay a cash dividend on Class 1 Common Stock, each share of Class A Common Stock will receive an amount at least ten10 percent greater than the amount of cash dividend per share paid on Class 1 Common Stock. In addition, the Board of Directors may declare
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 101 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
and pay a dividend on Class A Common Stock without paying a dividend on Class 1 Common Stock. The cash dividends declared and paid on Class B Convertible Common Stock and Class 1 Common Stock must always be the same.
The number of shares of common stock issued and treasury stock, and associated share activity, are as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock |
| Class A | | Class B | | Class 1 | | Class A | | Class B |
Balance at February 28, 2018 | 258,718,356 | | | 28,335,387 | | | 1,970 | | | 90,743,239 | | | 5,005,800 | |
Retirement of treasury shares (1) | (74,000,000) | | | — | | | — | | | (74,000,000) | | | — | |
Share repurchases | — | | | — | | | — | | | 2,352,145 | | | — | |
Conversion of shares | 12,968 | | | (12,968) | | | 0 | | | — | | | — | |
Exercise of stock options | 1,008,854 | | | — | | | 1,147,654 | | | — | | | — | |
Employee stock purchases | — | | | — | | | — | | | (76,844) | | | — | |
Grant of restricted stock awards | — | | | — | | | — | | | (3,914) | | | — | |
Vesting of restricted stock units (2) | — | | | — | | | — | | | (24,308) | | | — | |
Vesting of performance share units (2) | — | | | — | | | — | | | (62,352) | | | — | |
| | | | | | | | | |
Balance at February 28, 2019 | 185,740,178 | | | 28,322,419 | | | 1,149,624 | | | 18,927,966 | | | 5,005,800 | |
| | | | | | | | | |
Share repurchases | — | | | — | | | — | | | 265,593 | | | — | |
Conversion of shares | 350,567 | | | (22,213) | | | (328,354) | | | — | | | — | |
Exercise of stock options (3) | — | | | — | | | 870,957 | | | (747,527) | | | — | |
Employee stock purchases | — | | | — | | | — | | | (69,324) | | | — | |
| | | | | | | | | |
Vesting of restricted stock units (2) | — | | | — | | | — | | | (91,311) | | | — | |
Vesting of performance share units (2) | — | | | — | | | — | | | (29,015) | | | — | |
Cancellation of restricted shares | — | | | — | | | — | | | 444 | | | — | |
Balance at February 29, 2020 | 186,090,745 | | | 28,300,206 | | | 1,692,227 | | | 18,256,826 | | | 5,005,800 | |
| | | | | | | | | |
| | | | | | | | | |
Conversion of shares | 1,113,535 | | | (29,918) | | | (1,083,617) | | | — | | | — | |
Exercise of stock options (3) | — | | | — | | | 4,326 | | | (1,020,853) | | | — | |
Employee stock purchases | — | | | — | | | — | | | (67,801) | | | — | |
| | | | | | | | | |
Vesting of restricted stock units (2) | — | | | — | | | — | | | (80,287) | | | — | |
Vesting of performance share units (2) | — | | | — | | | — | | | (17,335) | | | — | |
| | | | | | | | | |
Balance at February 28, 2021 | 187,204,280 | | | 28,270,288 | | | 612,936 | | | 17,070,550 | | | 5,005,800 | |
|
| | | | | | | | | | | | | | |
| Common Stock | | Treasury Stock |
| Class A | | Class B | | Class 1 | | Class A | | Class B |
Balance at February 29, 2016 | 255,558,026 |
| | 28,358,529 |
| | 2,000 |
| | 79,454,011 |
| | 5,005,800 |
|
Share repurchases | — |
| | — |
| | — |
| | 7,407,051 |
| | — |
|
Conversion of shares | 2 |
| | (2 | ) | | — |
| | — |
| | — |
|
Exercise of stock options | 1,948,156 |
| | — |
| | 80 |
| | — |
| | — |
|
Employee stock purchases | — |
| | — |
| | — |
| | (77,671 | ) | | — |
|
Grant of restricted stock awards | — |
| | — |
| | — |
| | (4,088 | ) | | — |
|
Vesting of restricted stock units (1) | — |
| | — |
| | — |
| | (325,773 | ) | | — |
|
Vesting of performance share units (2) | — |
| | — |
| | — |
| | (190,559 | ) | | — |
|
Balance at February 28, 2017 | 257,506,184 |
| | 28,358,527 |
| | 2,080 |
| | 86,262,971 |
| | 5,005,800 |
|
Share repurchases | — |
| | — |
| | — |
| | 4,810,061 |
| | — |
|
Conversion of shares | 29,640 |
| | (23,140 | ) | | (6,500 | ) | | — |
| | — |
|
Exercise of stock options | 1,182,532 |
| | — |
| | 6,390 |
| | — |
| | — |
|
Employee stock purchases | — |
| | — |
| | — |
| | (75,023 | ) | | — |
|
Grant of restricted stock awards | — |
| | — |
| | — |
| | (3,848 | ) | | — |
|
Vesting of restricted stock units (1) | — |
| | — |
| | — |
| | (181,994 | ) | | — |
|
Vesting of performance share units (2) | — |
| | — |
| | — |
| | (68,928 | ) | | — |
|
Balance at February 28, 2018 | 258,718,356 |
| | 28,335,387 |
| | 1,970 |
| | 90,743,239 |
| | 5,005,800 |
|
Retirement of treasury shares (3) | (74,000,000 | ) | | — |
| | — |
| | (74,000,000 | ) | | — |
|
Share repurchases | — |
| | — |
| | — |
| | 2,352,145 |
| | — |
|
Conversion of shares | 12,968 |
| | (12,968 | ) | | — |
| | — |
| | — |
|
Exercise of stock options | 1,008,854 |
| | — |
| | 1,147,654 |
| | — |
| | — |
|
Employee stock purchases | — |
| | — |
| | — |
| | (76,844 | ) | | — |
|
Grant of restricted stock awards | — |
| | — |
| | — |
| | (3,914 | ) | | — |
|
Vesting of restricted stock units (1) | — |
| | — |
| | — |
| | (24,308 | ) | | — |
|
Vesting of performance share units (2) | — |
| | — |
| | — |
| | (62,352 | ) | | — |
|
Balance at February 28, 2019 | 185,740,178 |
| | 28,322,419 |
| | 1,149,624 |
| | 18,927,966 |
| | 5,005,800 |
|
(1)Shares of our Class A Treasury Stock were retired to authorized and unissued shares of our Class A Common Stock. | |
(1)(2)Net of the following shares withheld to satisfy tax withholding requirements: | | | | | | | | | | | | | | | | | | | For the Years Ended | | February 28, 2021 | | February 29, 2020 | | February 28, 2019 | Restricted Stock Units | 37,933 | | 49,900 | | 15,409 | Performance Share Units | 9,433 | | 17,439 | | 44,016 |
(3)Includes use of Class A Treasury Stock associated with stock option exercises beginning March 1, 2019.
| Net of 15,409 shares, 117,188 shares and 241,870 shares withheld for the years ended February 28, 2019, February 28, 2018, and February 28, 2017, respectively, to satisfy tax withholding requirements. |
| |
(2)
| Net of 44,016 shares, 55,584 shares and 168,811 shares withheld for the years ended February 28, 2019, February 28, 2018, and February 28, 2017, respectively, to satisfy tax withholding requirements. |
| |
(3)
| Shares of our Class A Treasury Stock were retired to authorized and unissued shares of our Class A Common Stock. |
Stock repurchases –
From time to time,In January 2018, our Board of Directors has authorized the repurchase of up to $3.0 billion of our Class A Common Stock and Class B Convertible Common Stock. In January 2021, our Board of Directors authorized the repurchase of up to $2.0 billion of our Class A Common Stock and Class B Convertible Common Stock. Shares may
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 102 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
be repurchased through open market or privately negotiated transactions. Shares repurchased under suchthese authorizations havewill become treasury shares.
A summary of share repurchase activity is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Class A Common Shares Repurchased |
| Repurchase Authorization | | For the Year Ended February 28, 2021 | | For the Year Ended February 29, 2020 | | For the Year Ended February 28, 2019 |
| Date | | Amount Authorized | | Dollar Value | | Number of Shares | | Dollar Value | | Number of Shares | | Dollar Value | | Number of Shares |
(in millions, except share data) |
2018 Authorization (1) | Jan 2018 | | $3,000.0 | | $ | 0 | | | 0 | | | $ | 50.0 | | | 265,593 | | | $ | 504.3 | | | 2,352,145 | |
2021 Authorization (2) | Jan 2021 | | $2,000.0 | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | | | 0 | |
| | | | | $ | 0 | | | 0 | | | $ | 50.0 | | | 265,593 | | | $ | 504.3 | | | 2,352,145 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Class A Common Shares Repurchased |
| Repurchase Authorization | | For the Year Ended February 28, 2019 | | For the Year Ended February 28, 2018 | | For the Year Ended February 28, 2017 |
| Date | | Amount Authorized | | Dollar Value | | Number of Shares | | Dollar Value | | Number of Shares | | Dollar Value | | Number of Shares |
(in millions, except share data) |
2013 Authorization (1) | Apr 2012 | | $1,000.0 | | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | 669.6 |
| | 4,400,504 |
|
2017 Authorization (2) | Nov 2016 | | $1,000.0 | | — |
| | — |
| | 546.9 |
| | 2,530,194 |
| | 453.1 |
| | 3,006,547 |
|
2018 Authorization (3) | Jan 2018 | | $3,000.0 | | 504.3 |
| | 2,352,145 |
| | 491.6 |
| | 2,279,867 |
| | — |
| | — |
|
| | | | | $ | 504.3 |
| | 2,352,145 |
| | $ | 1,038.5 |
| | 4,810,061 |
| | $ | 1,122.7 |
| | 7,407,051 |
|
(1)As of February 28, 2021, $1,954.1 million remains available for future share repurchase under the 2018 Authorization. The Board of Directors did not specify a date upon which the 2018 Authorization would expire.
(2)As of February 28, 2021, 0 shares have been repurchased under the 2021 Authorization. The Board of Directors did not specify a date upon which the 2021 Authorization would expire.
| |
| The 2013 Authorization was fully utilized during the year ended February 28, 2017. |
| |
(2)
| The 2017 Authorization was fully utilized during the year ended February 28, 2018. |
| |
(3)
| As of February 28, 2019, $2,004.1 million remains available for future share repurchase under the 2018 Authorization. The Board of Directors did not specify a date upon which this authorization would expire. |
Common stock dividends –
In April 2019,2021, our Board of Directors declared a quarterly cash dividend of $0.75$0.76 per share of Class A Common Stock, $0.68$0.69 per share of Class B Convertible Common Stock, and $0.68$0.69 per share of Class 1 Common Stock payable in the first quarter of fiscal 2020.2022.
17.18. STOCK-BASED EMPLOYEE COMPENSATION:COMPENSATION
Effective March 1, 2017, we adopted the FASB amended guidance for, among other items, the accounting for income taxes related to share-based compensation and the related classification in the statement of cash flows. This guidance requires the recognition of excess tax benefits and deficiencies (resulting from an increase or decrease in the fair value of an award from grant date to the vesting or settlement date) in the provision for income taxes as a discrete item in the quarterly period in which they occur. Through February 28, 2017, these amounts were recognized in additional paid-in capital at the time of vesting or settlement. Additionally, effective March 1, 2017, excess tax benefits are classified as an operating activity in the statement of cash flows instead of as a financing activity where they were previously presented. We adopted this guidance on a prospective basis and, accordingly, prior periods have not been adjusted. The adoption of this amended guidance also impacted our calculation of diluted earnings per share under the treasury stock method, as excess tax benefits and deficiencies resulting from share-based compensation are no longer included in the assumed proceeds calculation.
We have two2 stock-based employee compensation plans (as further discussed below). Total compensation cost recognized for our stock-based awards and income tax benefits related thereto are as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
(in millions) | | | | | |
Total compensation cost recognized in our results of operations | $ | 63.0 | | | $ | 60.4 | | | $ | 64.1 | |
Income tax benefit related thereto recognized in our results of operations | $ | 9.2 | | | $ | 9.5 | | | $ | 11.6 | |
|
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
(in millions) | | | | | |
Total compensation cost recognized in our results of operations | $ | 64.1 |
| | $ | 60.9 |
| | $ | 56.1 |
|
Income tax benefit related thereto recognized in our results of operations | $ | 11.6 |
| | $ | 13.5 |
| | $ | 18.5 |
|
Long-term stock incentive plan –Long-Term Stock Incentive Plan
Under our Long-Term Stock Incentive Plan, nonqualified stock options, restricted stock, restricted stock units, performance share units, and other stock-based awards may be granted to our employees, officers, and directors. The aggregate number of shares of our Class A Common Stock and Class 1 Common Stock available for awards under our Long-Term Stock Incentive Plan is 108,000,000 shares.
The exercise price, vesting period, and term of nonqualified stock options granted are established by the committee administering the plan (the “Committee”). The exercise price of any nonqualified stock option may not be less than the fair market value of our Class A Common Stock on the date of grant. Nonqualified stock options generally vest and become exercisable over a four-yearfour-year period from the date of grant and expire as established by the Committee, but not later than ten years after the grant date.
Grants of restricted stock, restricted stock units, performance share units, and other stock-based awards may contain such vesting periods, terms, conditions, and other requirements as the Committee may establish. Restricted stock and restricted stock unit awards are based on service and generally vest over one to four years from the date of grant. Performance share unit awards are based on service and the satisfaction of certain performance conditions, and vest over a required employee service period, generally from one to three years from
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Constellation Brands, Inc. FY 2021 Form 10-K | #WORTHREACHINGFOR I 103 |
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PART II | ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA | Table of Contents |
the date of grant, which closely matches the performance period. The performance conditions include the achievement of specified financial or operational performance metrics, or market conditions which require the achievement of specified levels of shareholder return relative to other companies as defined in the applicable performance share unit agreement. The
actual number of shares to be awarded upon vesting of a performance share unit award will range between 0% and 200% of the target award, based upon the measure of performance as certified by the Committee.
A summary of stock option activity under our Long-Term Stock Incentive Plan is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
| Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
Outstanding as of March 1 | 4,525,418 | | | $ | 108.87 | | | 5,691,219 | | | $ | 81.87 | | | 7,444,701 | | | $ | 56.33 | |
Granted | 973,286 | | | $ | 154.62 | | | 639,957 | | | $ | 206.76 | | | 540,640 | | | $ | 227.91 | |
Exercised | (1,025,179) | | | $ | 47.42 | | | (1,618,484) | | | $ | 41.77 | | | (2,156,508) | | | $ | 23.55 | |
Forfeited | (56,897) | | | $ | 185.59 | | | (175,917) | | | $ | 201.44 | | | (133,250) | | | $ | 187.84 | |
Expired | (16,821) | | | $ | 221.16 | | | (11,357) | | | $ | 224.07 | | | (4,364) | | | $ | 175.86 | |
Outstanding as of last day of February | 4,399,807 | | | $ | 131.89 | | | 4,525,418 | | | $ | 108.87 | | | 5,691,219 | | | $ | 81.87 | |
Exercisable | 2,754,888 | | | $ | 104.94 | | | 3,330,164 | | | $ | 75.61 | | | 4,456,486 | | | $ | 53.18 | |
|
| | | | | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
| Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price | | Number of Options | | Weighted Average Exercise Price |
Outstanding as of March 1 | 7,444,701 |
| | $ | 56.33 |
| | 8,070,255 |
| | $ | 44.31 |
| | 9,541,393 |
| | $ | 34.03 |
|
Granted | 540,640 |
| | $ | 227.91 |
| | 624,121 |
| | $ | 172.70 |
| | 648,147 |
| | $ | 157.01 |
|
Exercised | (2,156,508 | ) | | $ | 23.55 |
| | (1,188,922 | ) | | $ | 31.86 |
| | (1,948,236 | ) | | $ | 25.79 |
|
Forfeited | (133,250 | ) | | $ | 187.84 |
| | (59,725 | ) | | $ | 136.08 |
| | (170,711 | ) | | $ | 109.23 |
|
Expired | (4,364 | ) | | $ | 175.86 |
| | (1,028 | ) | | $ | 36.13 |
| | (338 | ) | | $ | 31.92 |
|
Outstanding as of last day of February | 5,691,219 |
| | $ | 81.87 |
| | 7,444,701 |
| | $ | 56.33 |
| | 8,070,255 |
| | $ | 44.31 |
|
Exercisable | 4,456,486 |
| | $ | 53.18 |
| | 5,983,286 |
| | $ | 34.12 |
| | 6,456,382 |
| | $ | 26.66 |
|
As of February 28, 2019,2021, the aggregate intrinsic value of our options outstanding and exercisable was $527.2$367.5 million and $517.9$303.6 million, respectively. In addition, the weighted average remaining contractual life for our options outstanding and exercisable was 4.55.6 years and 3.53.8 years, respectively.
The fair value of stock options vested, and the intrinsic value of and tax benefit realized from the exercise of stock options, are as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
(in millions) | | | | | |
Fair value of stock options vested | $ | 21.1 | | | $ | 21.1 | | | $ | 22.8 | |
Intrinsic value of stock options exercised | $ | 142.1 | | | $ | 255.0 | | | $ | 348.5 | |
Tax benefit realized from stock options exercised | $ | 33.9 | | | $ | 60.4 | | | $ | 82.6 | |
|
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
(in millions) | | | | | |
Fair value of stock options vested | $ | 22.8 |
| | $ | 20.3 |
| | $ | 20.3 |
|
Intrinsic value of stock options exercised | $ | 348.5 |
| | $ | 189.9 |
| | $ | 260.4 |
|
Tax benefit realized from stock options exercised | $ | 82.6 |
| | $ | 59.8 |
| | $ | 106.0 |
|
The weighted average grant-date fair value of stock options granted and the weighted average inputs used to estimate the fair value on the date of grant using the Black-Scholes option-pricing model are as follows:
| | | | | | | | | | | | | | | | | |
| For the Years Ended |
| February 28, 2021 | | February 29, 2020 | | February 28, 2019 |
Grant-date fair value | $ | 31.26 | | | $ | 44.90 | | | $ | 53.06 | |
Expected life (1) | 6.3 years | | 6.0 years | | 5.9 years |
Expected volatility (2) | 26.6 | % | | 22.1 | % | | 22.3 | % |
Risk-free interest rate (3) | 0.5 | % | | 2.5 | % | | 2.9 | % |
Expected dividend yield (4) | 1.9 | % | | 1.5 | % | | 1.3 | % |
(1)Based on historical experience of employees’ exercise behavior for similar type awards.
(2)Based primarily on historical volatility levels of our Class A Common Stock.
|
| | | | | | | | | | | |
| For the Years Ended |
| February 28, 2019 | | February 28, 2018 | | February 28, 2017 |
Grant-date fair value | $ | 53.06 |
| | $ | 42.88 |
| | $ | 40.09 |
|
Expected life (1) | 5.9 years |
| | 5.9 years |
| | 5.9 years |
|
Expected volatility (2) | 22.3 | % | | 26.0 | % | | 27.1 | % |
Risk-free interest rate (3) | 2.9 | % | | 2.0 | % | | 1.6 | % |
Expected dividend yield (4) | 1.3 | % | | 1.2 | % | | 1.0 | % |
| | | | | |
(1) Constellation Brands, Inc. FY 2021 Form 10-K | Based on historical experience of employees’ exercise behavior for similar type awards.#WORTHREACHINGFOR I 104 |
The fair value of shares vested for our restricted Class A Common Stock awards is as follows:
The weighted average grant-date fair value of performance share units granted with a market condition and the weighted average inputs used to estimate the fair value on the date of grant using the Monte Carlo Simulation model are as follows:
Other comprehensive income (loss) attributable to CBI includes the following components:
Net sales for the above customer are primarily reported within the Wine and Spirits segment. Our arrangements with certain of our customers may, generally, be terminated by either party with prior notice. The majority of our accounts receivable balance is generated from sales to independent distributors with whom we have a predetermined collection date arranged through electronic funds transfer. We perform ongoing credit evaluations of our customers’ financial position, and management is of the opinion that any risk of significant loss is reduced due to the diversity of our customers and geographic sales area.
We evaluate segment operating performance based on operating income (loss) of the respective business units. Comparable Adjustments that impacted comparability in our segment operating income (loss) for each period are as follows: