| 18) | BUSINESS SEGMENT INFORMATION: |
Through January 1, 2007, the Company reported its operating results in three segments: Constellation Wines (branded wines, and U.K. wholesale and other), Constellation Beers and Spirits (imported beers and distilled spirits) and Corporate Operations and Other. As a result of the Company’s investment in Crown Imports, the Company has changed its internal management financial reporting to consist of three business divisions, Constellation Wines, Constellation Spirits and Crown Imports. Prior to the investment in Crown Imports, the Company’s internal management financial reporting included the Constellation Beers business division. Consequently, the Company reports its operating results in five segments: Constellation Wines (branded wine, and wholesale and other), Constellation Spirits (distilled spirits), Constellation Beers (imported beer), Corporate Operations and Other and Crown Imports (imported beer). Segment results for Constellation Beers are for the period prior to January 2, 2007, and segment results for Crown Imports are for the period on and after January 2, 2007. Amounts included in the Corporate Operations and Other segment consist of general corporate administration and finance expenses. These amounts include costs of executive management, corporate development, corporate finance, human resources, internal audit, investor relations, legal, public relations, global information technology and global strategic sourcing. Any costs incurred at the corporate office that are applicable to the segments are allocated to the appropriate segment. The amounts 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 the chief operating decision maker’s evaluation of the operating income performance of the other operating segments.
The new business segments reflect how the Company’s operations are managed, how operating performance within the Company is evaluated by senior management and the structure of its internal financial reporting. The financial information for the six months and three months ended August 31, 2006, has been restated to conform to the new segment presentation.
In addition, the Company excludes acquisition-related integration costs, restructuring and related charges and unusual items that affect comparability from its definition of operating income for segment purposes as these items are not reflective of normal continuing operations of the segments. The Company excludes these items as segment operating performance and segment management compensation is evaluated based upon a normalized segment operating income. As such, the performance measures for incentive compensation purposes for segment management do not include the impact of these items.
For the six months ended August 31, 2007, acquisition-related integration costs, restructuring and related charges and unusual costs consist of the loss on the contribution of the U.K. wholesale business of $6.6 million, the flow through of inventory step-up associated primarily with the Company’s acquisition of Vincor of $5.2 million, accelerated depreciation associated with the Fiscal 2007 Wine Plan and Fiscal 2006 Plan of $4.2 million, acquisition-related integration costs of $3.6 million associated primarily with the Vincor Plan, other related costs, restructuring and related charges and inventory write-offs associated with the Fiscal 2006 Plan, Fiscal 2007 Wine Plan and the Vincor Plan of $1.4 million, $0.8 million and $0.1 million, respectively, and the flow through of adverse grape cost of $0.1 million associated with the acquisition of Robert Mondavi. For the six months ended August 31, 2006, acquisition-related integration costs, restructuring and related charges and unusual costs consist of restructuring and related charges of $24.0 million associated primarily with the Fiscal 2007 Wine Plan and Fiscal 2006 Plan; loss on the sale of the branded bottled water business of $14.2 million; financing costs of $11.8 million related to the Company’s new senior credit facility entered into in connection with the acquisition of Vincor; acquisition-related integration costs of $8.1 million associated with the Vincor Plan and Robert Mondavi Plan; the flow through of inventory step-up of $6.5 million associated with the Company’s acquisitions of Vincor and Robert Mondavi; foreign currency losses of $5.4 million on foreign denominated intercompany loan balances associated with the acquisition of Vincor; other related costs of $3.1 million associated with the Fiscal 2006 Plan and Fiscal 2007 Wine Plan; the flow through of adverse grape cost (as described below) of $2.4 million associated with the acquisition of Robert Mondavi; and accelerated depreciation of $2.4 million associated with the Fiscal 2006 Plan and Fiscal 2007 Wine Plan. Adverse grape cost represents the amount of historical inventory cost on Robert Mondavi’s balance sheet that exceeds the Company’s estimated ongoing grape cost and is primarily due to the purchase of grapes by Robert Mondavi prior to the acquisition date at above-market prices as required under the terms of their then existing grape purchase contracts.
For the three months ended August 31, 2007, acquisition-related integration costs, restructuring and related charges and unusual costs consist of the flow through of inventory step-up associated primarily with the Company’s acquisition of Vincor of $2.3 million, accelerated depreciation associated with the Fiscal 2007 Wine Plan and Fiscal 2006 Plan of $2.1 million, acquisition-related integration costs of $1.6 million associated primarily with the Vincor Plan, other related costs and restructuring and related charges associated with the Fiscal 2007 Wine Plan, Fiscal 2006 Plan and the Vincor Plan of $0.9 million and $0.4 million, respectively, the additional loss on the contribution of the U.K. wholesale business of $0.5 million, and the flow through of adverse grape cost of $0.1 million associated with the acquisition of Robert Mondavi. For the three months ended August 31, 2006, acquisition-related integration costs, restructuring and related charges and unusual costs consist of restructuring and related charges of $21.7 million associated primarily with the Fiscal 2007 Wine Plan; financing costs of $11.8 million related to the Company’s new senior credit facility entered into in connection with the acquisition of Vincor; acquisition-related integration costs of $7.4 million associated primarily with the Vincor Plan; the flow through of inventory step-up of $5.9 million associated with the Company’s acquisitions of Vincor and Robert Mondavi; foreign currency losses of $5.4 million on foreign denominated intercompany loan balances associated with the acquisition of Vincor; other related charges of $1.6 million associated primarily with the Fiscal 2006 Plan; accelerated depreciation of $1.3 million associated with the Fiscal 2006 Plan and the Fiscal 2007 Wine Plan; the flow through of adverse grape cost of $0.9 million associated with the acquisition of Robert Mondavi; and additional loss on the sale of the Company’s branded bottled water business of $0.1 million.
The Company evaluates performance based on operating income of the respective business units. The accounting policies of the segments are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007, and include the recently adopted accounting pronouncements described in Note 2 herein. Transactions between segments consist mainly of sales of products and are accounted for at cost plus an applicable margin.
Segment information is as follows:
| | | For the Six Months Ended August 31, | | | For the Three Months Ended August 31, | |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
(in millions) | | | | | | | | | | | | |
Constellation Wines: | | | | | | | | | | | | |
| Net sales: | | | | | | | | | | | | |
Branded wine | | $ | 1,358.8 | | | $ | 1,233.7 | | | $ | 738.9 | | | $ | 716.5 | |
Wholesale and other | | | 233.3 | | | | 523.1 | | | | 48.9 | | | | 275.8 | |
| Net sales | | $ | 1,592.1 | | | $ | 1,756.8 | | | $ | 787.8 | | | $ | 992.3 | |
| Segment operating income | | $ | 211.1 | | | $ | 260.0 | | | $ | 124.9 | | | $ | 163.8 | |
| Equity in earnings of equity method investees | | $ | 3.7 | | | $ | 0.3 | | | $ | 1.3 | | | $ | 0.2 | |
| Long-lived tangible assets | | $ | 1,586.3 | | | $ | 1,571.8 | | | $ | 1,586.3 | | | $ | 1,571.8 | |
| Investment in equity method investees | | $ | 241.3 | | | $ | 161.4 | | | $ | 241.3 | | | $ | 161.4 | |
| Total assets | | $ | 8,381.2 | | | $ | 8,464.4 | | | $ | 8,381.2 | | | $ | 8,464.4 | |
| Capital expenditures | | $ | 40.1 | | | $ | 80.0 | | | $ | 25.2 | | | $ | 36.5 | |
| Depreciation and amortization | | $ | 65.6 | | | $ | 53.1 | | | $ | 32.4 | | | $ | 29.0 | |
| | | | | | | | | | | | | | | | | |
Constellation Spirits: | | | | | | | | | | | | | | | | |
| Net sales | | $ | 201.7 | | | $ | 166.9 | | | $ | 104.8 | | | $ | 83.6 | |
| Segment operating income | | $ | 36.7 | | | $ | 35.4 | | | $ | 20.9 | | | $ | 17.7 | |
| Long-lived tangible assets | | $ | 100.7 | | | $ | 95.1 | | | $ | 100.7 | | | $ | 95.1 | |
| Total assets | | $ | 1,098.4 | | | $ | 667.2 | | | $ | 1,098.4 | | | $ | 667.2 | |
| Capital expenditures | | $ | 5.4 | | | $ | 4.4 | | | $ | 2.9 | | | $ | 3.0 | |
| Depreciation and amortization | | $ | 6.7 | | | $ | 4.8 | | | $ | 3.5 | | | $ | 2.4 | |
| | | | | | | | | | | | | | | | | |
Constellation Beers: | | | | | | | | | | | | | | | | |
| Net sales | | $ | - | | | $ | 649.7 | | | $ | - | | | $ | 341.6 | |
| Segment operating income | | $ | - | | | $ | 139.0 | | | $ | - | | | $ | 73.9 | |
| Long-lived tangible assets | | $ | - | | | $ | 0.9 | | | $ | - | | | $ | 0.9 | |
| Total assets | | $ | - | | | $ | 230.0 | | | $ | - | | | $ | 230.0 | |
| Capital expenditures | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Depreciation and amortization | | $ | - | | | $ | 1.0 | | | $ | - | | | $ | 0.6 | |
| | | | | | | | | | | | | | | | | |
Corporate Operations and Other: | | | | | | | | | | | | | | | | |
| Net sales | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| Segment operating loss | | $ | (40.4 | ) | | $ | (32.2 | ) | | $ | (20.7 | ) | | $ | (18.0 | ) |
| Long-lived tangible assets | | $ | 41.6 | | | $ | 30.3 | | | $ | 41.6 | | | $ | 30.3 | |
| Total assets | | $ | 91.9 | | | $ | 87.1 | | | $ | 91.9 | | | $ | 87.1 | |
| Capital expenditures | | $ | 1.5 | | | $ | 18.7 | | | $ | 1.2 | | | $ | 18.5 | |
| Depreciation and amortization | | $ | 4.7 | | | $ | 3.3 | | | $ | 2.4 | | | $ | 1.5 | |
| | | | | | | | | | | | | | | | | |
Crown Imports: | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,380.8 | | | $ | - | | | $ | 722.7 | | | $ | - | |
| Segment operating income | | $ | 303.6 | | | $ | - | | | $ | 157.3 | | | $ | - | |
| Long-lived tangible assets | | $ | 3.9 | | | $ | - | | | $ | 3.9 | | | $ | - | |
| Total assets | | $ | 362.5 | | | $ | - | | | $ | 362.5 | | | $ | - | |
| Capital expenditures | | $ | 1.9 | | | $ | - | | | $ | 0.8 | | | $ | - | |
| Depreciation and amortization | | $ | 0.3 | | | $ | - | | | $ | 0.2 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
Acquisition-Related Integration Costs, Restructuring and Related Charges and Unusual Costs: | | | | | | | | | | | | | | | | |
| Operating loss | | $ | (22.0 | ) | | $ | (77.9 | ) | | $ | (7.9 | ) | | $ | (56.1 | ) |
| | For the Six Months Ended August 31, | | | For the Three Months Ended August 31, | |
| | | 2007 | | | 2006 | | | 2007 | | | 2006 | |
(in millions) | | | | | | | | | | | | |
Consolidation and Eliminations: | | | | | | | | | | | | | | | | |
| Net sales | | $ | (1,380.8 | ) | | $ | - | | | $ | (722.7 | ) | | $ | - | |
| Operating income | | $ | (303.6 | ) | | $ | - | | | $ | (157.3 | ) | | $ | - | |
| Equity in earnings of Crown Imports | | $ | 152.2 | | | $ | - | | | $ | 78.8 | | | $ | - | |
| Long-lived tangible assets | | $ | (3.9 | ) | | $ | - | | | $ | (3.9 | ) | | $ | - | |
| Investment in equity method investees | | $ | 159.6 | | | $ | - | | | $ | 159.6 | | | $ | - | |
| Total assets | | $ | (202.9 | ) | | $ | - | | | $ | (202.9 | ) | | $ | - | |
| Capital expenditures | | $ | (1.9 | ) | | $ | - | | | $ | (0.8 | ) | | $ | - | |
| Depreciation and amortization | | $ | (0.3 | ) | | $ | - | | | $ | (0.2 | ) | | $ | - | |
| | | | | | | | | | | | | | | | | |
Consolidated: | | | | | | | | | | | | | | | | |
| Net sales | | $ | 1,793.8 | | | $ | 2,573.4 | | | $ | 892.6 | | | $ | 1,417.5 | |
| Operating income | | $ | 185.4 | | | $ | 324.3 | | | $ | 117.2 | | | $ | 181.3 | |
| Equity in earnings of equity method investees | | $ | 155.9 | | | $ | 0.3 | | | $ | 80.1 | | | $ | 0.2 | |
| Long-lived tangible assets | | $ | 1,728.6 | | | $ | 1,698.1 | | | $ | 1,728.6 | | | $ | 1,698.1 | |
| Investment in equity method investees | | $ | 400.9 | | | $ | 161.4 | | | $ | 400.9 | | | $ | 161.4 | |
| Total assets | | $ | 9,731.1 | | | $ | 9,448.7 | | | $ | 9,731.1 | | | $ | 9,448.7 | |
| Capital expenditures | | $ | 47.0 | | | $ | 103.1 | | | $ | 29.3 | | | $ | 58.0 | |
| Depreciation and amortization | | $ | 77.0 | | | $ | 62.2 | | | $ | 38.3 | | | $ | 33.5 | |
19) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED:
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. The Company is required to adopt SFAS No. 157 for fiscal years and interim periods beginning March 1, 2008. The Company is currently assessing the financial impact of SFAS No. 157 on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The Company has adopted this provision of SFAS No. 158 and has provided the required disclosures as of February 28, 2007. SFAS No. 158 also requires companies to measure the funded status of a plan as of the date of the company’s fiscal year-end (with limited exceptions), which provision the Company is required to adopt as of February 28, 2009. The Company does not expect the adoption of the remaining provision of SFAS No. 158 to have a material impact on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS No. 159 allows companies to choose to measure eligible items at fair value at specified election dates. The Company will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (i) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (ii) is irrevocable (unless a new election date occurs); and (iii) is applied only to entire instruments and not to portions of instruments. The Company is required to adopt SFAS No. 159 for fiscal years beginning after February 28, 2009. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its consolidated financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
The Company is a leading international producer and marketer of beverage alcohol brands with a broad portfolio across the wine, spirits and imported beer categories. The Company continues to supply imported beer in the United States (“U.S.”) through its investment in Crown Imports (as defined in “Equity Method Investments in Fiscal 2008 and Fiscal 2007” below). The Company has the largest wine business in the world and is the largest multi-category (wine, spirits and imported beer) supplier of beverage alcohol in the U.S.; a leading producer and exporter of wine from Australia and New Zealand; the largest producer and marketer of wine in Canada; and both a major supplier of beverage alcohol and, through its investment in Matthew Clark (see “Equity Method Investments in Fiscal 2008 and Fiscal 2007” below), a major independent drinks wholesaler in the United Kingdom (“U.K.”).
Through January 1, 2007, the Company reported its operating results in three segments: Constellation Wines (branded wines, and U.K. wholesale and other), Constellation Beers and Spirits (imported beers and distilled spirits) and Corporate Operations and Other. As a result of the Company’s investment in Crown Imports, the Company has changed its internal management financial reporting to consist of three business divisions, Constellation Wines, Constellation Spirits and Crown Imports. Prior to the investment in Crown Imports, the Company’s internal management financial reporting included the Constellation Beers business division. Consequently, the Company reports its operating results in five segments: Constellation Wines (branded wine, and wholesale and other), Constellation Spirits (distilled spirits), Constellation Beers (imported beer), Corporate Operations and Other and Crown Imports (imported beer). Segment results for Constellation Beers are for the period prior to January 2, 2007, and segment results for Crown Imports are for the period on and after January 2, 2007. Amounts included in the Corporate Operations and Other segment consist of general corporate administration and finance expenses. These amounts include costs of executive management, corporate development, corporate finance, human resources, internal audit, investor relations, legal, public relations, global information technology and global strategic sourcing. Any costs incurred at the corporate office that are applicable to the segments are allocated to the appropriate segment. The amounts 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 the chief operating decision maker’s evaluation of the operating income performance of the other operating segments.
The new business segments reflect how the Company’s operations are managed, how operating performance within the Company is evaluated by senior management and the structure of its internal financial reporting. The financial information for Second Quarter 2007 and Six Months 2007 (as defined below) has been restated to conform to the new segment presentation.
In addition, the Company excludes acquisition-related integration costs, restructuring and related charges and unusual items that affect comparability from its definition of operating income for segment purposes as these items are not reflective of normal continuing operations of the segments. The Company excludes these items as segment operating performance and segment management compensation is evaluated based upon a normalized segment operating income. As such, the performance measures for incentive compensation purposes for segment management do not include the impact of these items.
The Company’s business strategy is to remain focused across the beverage alcohol industry by offering a broad range of products in each of the Company’s three major categories: wine, spirits and, through Crown Imports, imported beer. The Company intends to keep its portfolio positioned for superior top-line growth while maximizing the profitability of its brands. In addition, the Company seeks to increase its relative importance to key customers in major markets by increasing its share of their overall purchasing, which is increasingly important in a consolidating industry. The Company’s strategy of breadth across categories and geographies is designed to deliver long-term profitable growth. This strategy allows the Company more investment choices, provides flexibility to address changing market conditions and creates stronger routes-to-market.
Marketing, sales and distribution of the Company’s products, particularly the Constellation Wines segment’s products, are managed on a geographic basis in order to fully leverage leading market positions within each core market. Market dynamics and consumer trends vary significantly across the Company’s five core markets (U.S., Canada, U.K., Australia and New Zealand) within the Company’s three geographic regions (North America, Europe and Australia/New Zealand). Within North America, the Company offers a wide range of beverage alcohol products across the branded wine and spirits and, through Crown Imports, imported beer categories in the U.S. and is the largest producer and marketer of branded wines in Canada. In Europe, the Company leverages its position as the largest wine supplier in the U.K. In addition, the Company leverages its investment in Matthew Clark as a strategic route-to-market for its imported wine portfolio and as a key supplier of a full range of beverage alcohol products primarily to the on-premise business. Within Australia/New Zealand, where consumer trends favor domestic wine products, the Company leverages its position as one of the largest producers and marketers of wine in Australia and New Zealand.
The Company remains committed to its long-term financial model of growing sales (both organically and through acquisitions), expanding margins and increasing cash flow to achieve superior earnings per share growth and improve return on invested capital.
The environment for the Company’s products is competitive in each of the Company’s core markets, due, in part, to industry and retail consolidation. In particular, the U.K. and Australian markets have grown increasingly competitive, as further described below. Competition in the U.S. beer and spirits markets is normally intense, with domestic and imported beer producers increasing brand spending in an effort to gain market share.
The U.K. wine market is primarily an import market, with Australian wines comprising nearly one-quarter of all wine sales in the U.K. off-premise business. The Australian wine market is primarily a domestic market. The Company has leading share positions in the Australian wine category in both the U.K. and Australian markets.
These markets have become increasingly competitive making it difficult for the Company to recover certain cost increases, in particular, the duty increases in the U.K. which have been imposed annually for the past several years. In the U.K., significant consolidation at the retail level has resulted in a limited number of large retailers controlling a significant portion of the off-premise wine business. A recent surplus of Australian wine has made very low cost bulk wine available to retailers which has allowed certain of these large retailers to quickly create and build private label brands in the Australian wine category. In Australia, the domestic market remains competitive due to the surplus of Australian bulk wine, resulting in pricing pressures on the Company’s products, in particular on the box wine category.
Prior years of record Australian grape harvests have contributed to the surplus of Australian bulk wine. The calendar 2007 Australian grape harvest was significantly lower than the calendar 2006 Australian grape harvest as a result of an ongoing drought and late spring frosts in several regions. Severe drought conditions continue to affect key wine producing regions of Australia. The effects of the ongoing drought conditions are expected by many industry projections to impact the size of the calendar 2008 Australian grape harvest. As a result of the significant reduction in the calendar 2007 Australian grape harvest, the Company has begun to see a reduction in the current surplus and an increase in pricing for Australian bulk wine. A significant reduction in the calendar 2008 Australian grape harvest may also have a substantial impact on the current surplus and may result in higher pricing for Australian bulk wine. In the U.S., while the Company expects the calendar 2007 U.S. grape harvest to yield lower levels than the calendar 2006 U.S. grape harvest, the Company expects that the overall supply should remain generally in balance with demand.
For the three months ended August 31, 2007 (“Second Quarter 2008”), the Company’s net sales decreased 37% over the three months ended August 31, 2006 (“Second Quarter 2007”), primarily due to (i) the formation of Crown Imports on January 2, 2007, and Matthew Clark on April 17, 2007, and the accounting for these investments under the equity method of accounting, and (ii) the Company’s Constellation Wines segment’s program to reduce distributor wine inventory levels in the U.S. during the first half of fiscal 2008 (as discussed below), partially offset by a favorable foreign currency impact and growth in Canadian net sales. Operating income decreased 35% over the comparable prior year period resulting primarily from (i) the decreased imported beer and U.K. wholesale sales discussed above, and (ii) the decreased Constellation Wines segment’s net sales discussed above without a corresponding decrease in promotional, advertising, selling and general and administrative spend within the Constellation Wines segment. Net income increased 5% over the comparable prior year period primarily due to an increase in equity in earnings of equity method investees in connection primarily with Crown Imports and a decrease in the provision for income taxes, partially offset by the factors discussed above combined with increased interest expense.
For the six months ended August 31, 2007 (“Six Months 2008”), the Company’s net sales decreased 30% over the six months ended August 31, 2006 (“Six Months 2007”), primarily due to (i) the accounting for the Crown Imports and Matthew Clark investments under the equity method of accounting, and (ii) the Company’s Constellation Wines segment’s program to reduce distributor wine inventory levels in the U.S., partially offset by net sales of products acquired in the acquisition of Vincor and Svedka Acquisition (see “Acquisitions in Fiscal 2008 and 2007” below) and a favorable foreign currency impact. Operating income decreased 43% over the comparable prior year period resulting primarily from the decreased imported beer and U.K. wholesale sales discussed above and the decreased Constellation Wines segment’s net sales discussed above without a corresponding decrease in promotional, advertising, selling and general and administrative spend within the Constellation Wines segment, partially offset by the incremental benefit from the acquisition of Vincor and the Svedka Acquisition and lower unusual items, which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment. Net income decreased 34% over the comparable prior year period primarily due to the factors discussed above combined with increased interest expense, partially offset by an increase in equity in earnings of equity method investees in connection primarily with Crown Imports.
The Company’s Constellation Wines segment implemented a program to reduce distributor wine inventory levels in the U.S. during the first half of the year ending February 29, 2008 (“Fiscal 2008”), in response to the consolidation of distributors over the past few years and supply chain technology improvements. As distributors are looking to operate with lower levels of inventory while maintaining appropriate service levels to retailers, the Company has worked closely with its distributors on supply-chain efficiencies, thereby lowering costs for both the Company and its distributors, and ultimately making the Company’s brands more competitive in the marketplace. The Company substantially completed its reduction of distributor inventory levels during the second quarter of fiscal 2008. This initiative will have a significant impact on the Company’s Fiscal 2008 financial performance, including a reduction of net sales of approximately $110 million and a reduction in diluted earnings per share of approximately $0.15 per share.
The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for Second Quarter 2008 compared to Second Quarter 2007 and Six Months 2008 compared to Six Months 2007 and (ii) financial liquidity and capital resources for Six Months 2008. This discussion and analysis also identifies certain acquisition-related integration costs, restructuring and related charges and unusual items expected to affect consolidated results of operations of the Company for Fiscal 2008. This discussion and analysis should be read in conjunction with the Company’s consolidated financial statements and notes thereto included herein and in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007 (“Fiscal 2007”). References to base branded wine net sales and base branded wine gross profit exclude the impact of branded wine acquired in the acquisition of Vincor. References to base branded spirits net sales and base branded spirits gross profit exclude the impact of branded spirits acquired in the Svedka Acquisition.
Acquisitions in Fiscal 2008 and Fiscal 2007
Acquisition of Svedka
On March 19, 2007, the Company acquired the SVEDKA Vodka brand (“Svedka”) in connection with the acquisition of Spirits Marque One LLC and related business (the “Svedka Acquisition”). Svedka is a premium Swedish vodka and is the fastest growing major imported premium vodka in the U.S. Svedka is the fifth largest imported vodka in the U.S. The acquisition of Svedka supports the Company’s strategy of expanding the Company’s premium spirits business. The acquisition provides a foundation from which the Company looks to leverage its existing and future premium spirits portfolio for growth. In addition, Svedka complements the Company’s existing portfolio of super-premium and value vodka brands by adding a premium vodka brand that has experienced rapid growth.
Total consideration paid in cash for the Svedka Acquisition was $385.8 million. In addition, the Company expects to incur direct acquisition costs of approximately $1.3 million. The purchase price was financed with revolver borrowings under the Company’s 2006 Credit Agreement (as defined below).
The results of operations of the Svedka business are reported in the Constellation Spirits segment and have been included in the consolidated results of operations of the Company from the date of acquisition. The Svedka Acquisition will have a significant impact on the Company’s interest expense associated with the additional revolver borrowings.
Acquisition of Vincor
On June 5, 2006, the Company acquired all of the issued and outstanding common shares of Vincor International Inc. (“Vincor”), Canada’s premier wine company. Vincor is Canada’s largest producer and marketer of wine. At the time of the acquisition, Vincor was the world’s eighth largest producer and distributor of wine and related products by revenue and was also one of the largest wine importers, marketers and distributors in the U.K. Through this transaction, the Company acquired various additional winery and vineyard interests used in the production of premium, super-premium and fine wines from Canada, California, Washington State, Western Australia and New Zealand. In addition, as a result of the acquisition, the Company sources, markets and sells premium wines from South Africa. Well-known premium brands acquired in the acquisition of Vincor include Inniskillin, Jackson-Triggs, Sawmill Creek, Sumac Ridge, R.H. Phillips, Toasted Head, Hogue, Kim Crawford and Kumala.
The acquisition of Vincor supports the Company’s strategy of strengthening the breadth of its portfolio across price segments and geographic regions to capitalize on the overall growth in the wine industry. In addition to complementing the Company’s current operations in the U.S., U.K., Australia and New Zealand, the acquisition of Vincor increases the Company’s global presence by adding Canada as another core market and provides the Company with the ability to capitalize on broader geographic distribution in strategic international markets. In addition, the acquisition of Vincor makes the Company the largest wine company in Canada and strengthens the Company’s position as the largest wine company in the world and the largest premium wine company in the U.S.
Total consideration paid in cash to the Vincor shareholders was $1,115.8 million. In addition, the Company incurred direct acquisition costs of $9.4 million. At closing, the Company also assumed outstanding indebtedness of Vincor, net of cash acquired, of $320.2 million, resulting in a total transaction value of $1,445.4 million. The purchase price was financed with borrowings under the Company’s June 2006 Credit Agreement (as defined below). The results of operations of the Vincor business are reported in the Constellation Wines segment and are included in the consolidated results of operations of the Company from the date of acquisition.
Equity Method Investments in Fiscal 2008 and Fiscal 2007
Investment in Matthew Clark
On April 17, 2007, the Company and Punch Taverns plc (“Punch”) commenced operations of a joint venture for the U.K. wholesale business (“Matthew Clark”). The U.K. wholesale business was formerly owned entirely by the Company. Under the terms of the arrangement, the Company and Punch, directly or indirectly, each have a 50% voting and economic interest in Matthew Clark. The joint venture will reinforce Matthew Clark’s position as the U.K.’s largest independent premier drinks wholesaler serving the on-premise drinks industry. The Company received $185.6 million of cash proceeds from the formation of the joint venture.
Upon formation of the joint venture, the Company discontinued consolidation of the U.K. wholesale business and accounts for the investment in Matthew Clark under the equity method. Accordingly, the results of operations of Matthew Clark are included in the equity in earnings of equity method investees line in the Company’s Consolidated Statements of Income from the date of investment.
Investment in Crown Imports
On July 17, 2006, Barton Beers, Ltd. (“Barton”), an indirect wholly-owned subsidiary of the Company, entered into an Agreement to Establish Joint Venture (the “Joint Venture Agreement”) with Diblo, S.A. de C.V. (“Diblo”), an entity owned 76.75% by Grupo Modelo, S.A.B. de C.V. (“Modelo”) and 23.25% by Anheuser-Busch Companies, Inc., pursuant to which Modelo’s Mexican beer portfolio (the “Modelo Brands”) will be exclusively imported, marketed and sold in the 50 states of the U.S., the District of Columbia and Guam. In addition, the owners of the Tsingtao and St. Pauli Girl brands transferred exclusive importing, marketing and selling rights with respect to these brands in the U.S. to the joint venture. On January 2, 2007, the parties completed the closing (the “Closing”) of the transactions contemplated in the Joint Venture Agreement, as amended at Closing.
Pursuant to the Joint Venture Agreement, Barton established Crown Imports LLC, a wholly-owned subsidiary formed as a Delaware limited liability company. On January 2, 2007, pursuant to a Barton Contribution Agreement, dated July 17, 2006, among Barton, Diblo and Crown Imports LLC, Barton transferred to Crown Imports LLC substantially all of its assets relating to importing, marketing and selling beer under the Corona Extra, Corona Light, Coronita, Modelo Especial, Negra Modelo, Pacifico, St. Pauli Girl and Tsingtao brands and the liabilities associated therewith (the “Barton Contributed Net Assets”). At the Closing, GModelo Corporation, a Delaware corporation (the “Diblo Subsidiary”), a subsidiary of Diblo joined Barton as a member of Crown Imports LLC, and, in exchange for a 50% membership interest in Crown Imports LLC, contributed cash in an amount equal to the Barton Contributed Net Assets, subject to specified adjustments. This imported beers joint venture is referred to hereinafter as “Crown Imports”.
Also on January 2, 2007, Crown Imports and Extrade II S.A. de C.V. (“Extrade II”), an affiliate of Modelo, entered into an Importer Agreement, pursuant to which Extrade II granted to Crown Imports the exclusive right to import, market and sell the Modelo Brands in the territories mentioned above, and Crown Imports and Marcas Modelo, S.A. de C.V. (“Marcas Modelo”), entered into a Sub-license Agreement, pursuant to which Marcas Modelo granted Crown Imports an exclusive sub-license to use certain trademarks related to the Modelo Brands within this territory.
As a result of these transactions, Barton and Diblo each have, directly or indirectly, equal interests in Crown Imports and each of Barton and Diblo have appointed an equal number of directors to the Board of Directors of Crown Imports.
The importer agreement that previously gave Barton the exclusive right to import, market and sell the Modelo Brands primarily west of the Mississippi River was superseded by the transactions contemplated by the Joint Venture Agreement, as amended. The contribution by Diblo Subsidiary in exchange for a 50% membership interest in Crown does not constitute the acquisition of a business by the Company.
The joint venture and the related importation arrangements provide that, subject to the terms and conditions of those agreements, the joint venture and the related importation arrangements will continue for an initial term of 10 years, and renew in 10-year periods unless Diblo Subsidiary gives notice prior to the end of year seven of any term. Upon consummation of the transactions, the Company discontinued consolidation of the imported beer business and accounts for the investment in Crown Imports under the equity method. Accordingly, the results of operations of Crown Imports are included in the equity in earnings of equity method investees line in the Company’s Consolidated Statements of Income from the date of investment.
Results of Operations
Second Quarter 2008 Compared to Second Quarter 2007
Net Sales
The following table sets forth the net sales (in millions of dollars) by operating segment of the Company for Second Quarter 2008 and Second Quarter 2007.
| | | Second Quarter 2008 Compared to Second Quarter 2007 | |
| | | Net Sales | |
| | | 2008 | | | 2007 | | | % Increase / (Decrease) | |
| Constellation Wines: | | | | | | | | | |
Branded wine | | $ | 738.9 | | | $ | 716.5 | | | | 3% | |
Wholesale and other | | | 48.9 | | | | 275.8 | | | | (82)% | |
| Constellation Wines net sales | | | 787.8 | | | | 992.3 | | | | (21)% | |
| Constellation Spirits net sales | | | 104.8 | | | | 83.6 | | | | 25% | |
| Constellation Beers net sales | | | - | | | | 341.6 | | | | (100)% | |
| Crown Imports net sales | | | 722.7 | | | | - | | | N/A | |
| Consolidations and eliminations | | | (722.7 | ) | | | - | | | N/A | |
| Consolidated Net Sales | | $ | 892.6 | | | $ | 1,417.5 | | | | (37)% | |
Net sales for Second Quarter 2008 decreased to $892.6 million from $1,417.5 million for Second Quarter 2007, a decrease of $524.9 million, or (37%). This decrease resulted primarily from a decrease in net sales of $341.6 million and $215.4 million for the Crown Imports and Matthew Clark investments, respectively, which are accounted for under the equity method of accounting, and the Company’s program to reduce distributor wine inventory levels in the U.S., partially offset by a favorable foreign currency impact of $31.4 million, growth in Canadian branded wine net sales of $12.1 million and net sales of branded spirits acquired in the Svedka Acquisition of $11.8 million.
Constellation Wines
Net sales for Constellation Wines decreased to $787.8 million for Second Quarter 2008 from $992.3 million for Second Quarter 2007, a decrease of $204.5 million, or (21%). Branded wine net sales increased $22.4 million primarily due to a favorable foreign currency impact of $28.0 million, a benefit of $14.5 million due to U.K. branded wine net sales previously sold through the Company’s U.K. wholesale business, and an increase in Canadian branded wine net sales of $12.1 million, partially offset by the lower U.S. base branded wine net sales resulting primarily from the Company’s program to reduce distributor wine inventory levels in the U.S. The increase in Canadian branded wine net sales is due to the expansion of the Company’s products into the Canadian market. Wholesale and other net sales decreased $226.9 million primarily due to a decrease of $229.9 million resulting from the accounting for the Matthew Clark investment under the equity method of accounting.
Constellation Spirits
Net sales for Constellation Spirits increased to $104.8 million for Second Quarter 2008 from $83.6 million for Second Quarter 2007, an increase of $21.2 million, or 25%. This increase resulted primarily from $11.8 million of net sales of branded spirits acquired in the Svedka Acquisition and an increase in base branded spirits net sales of $7.5 million due primarily to higher average selling prices and volume gains.
Constellation Beers
Net sales for Constellation Beers decreased $341.6 million, or (100%), from Second Quarter 2007 as the Crown Imports investment is accounted for under the equity method of accounting.
Gross Profit
The Company’s gross profit decreased to $309.7 million for Second Quarter 2008 from $414.8 million for Second Quarter 2007, a decrease of $105.1 million, or (25%). The Constellation Wines segment’s gross profit decreased $24.1 million primarily due to (i) a decrease of $22.2 million resulting from the formation of Matthew Clark on April 17, 2007, and the accounting for this investment under the equity method of accounting and (ii) lower U.S. branded wine gross profit of $20.1 million resulting from the lower U.S. branded wine net sales primarily as a result of the Company’s program to reduce distributor inventory levels, partially offset by a favorable foreign currency impact of $9.6 million. The Constellation Spirits segment’s gross profit increased $9.5 million primarily due to increased gross profit of $5.3 million due to the Svedka Acquisition and increased base branded spirits gross profit of $4.2 million resulting from the higher average selling prices and volume gains. The Constellation Beers segment’s gross profit was down $94.1 million due to the formation of Crown Imports on January 2, 2007, and the accounting for this investment under the equity method of accounting. In addition, unusual items, which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment, were lower by $3.6 million in Second Quarter 2008 versus Second Quarter 2007. This decrease resulted primarily from decreased flow through of inventory step-up associated primarily with the acquisition of Vincor. Gross profit as a percent of net sales increased to 34.7% for Second Quarter 2008 from 29.3% for Second Quarter 2007 primarily due to the benefit of reporting the lower margin U.K. wholesale and imported beer businesses under the equity method of accounting, partially offset by lower margins in the U.S. branded wine business primarily due to the distributor inventory reduction program.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $190.5 million for Second Quarter 2008 from $204.4 million for Second Quarter 2007, a decrease of $13.9 million, or (7%). This decrease is due primarily to a $20.2 million decrease in selling, general and administrative expenses within the Constellation Beers segment as the Crown Imports investment is accounted for under the equity method of accounting, and a reduction in unusual costs which consist of certain items that are excluded by management in their evaluation of the results of each operating segment of $17.5 million, partially offset by an increase of $14.8 million in the Constellation Wines segment, an increase of $6.3 million in the Constellation Spirits segment, and an increase of $2.7 million in Corporate Operations and Other. The decrease in unusual costs was primarily due to financing costs of $11.8 million related to the Company’s new senior credit facility entered into in connection with the acquisition of Vincor and foreign currency losses of $5.4 million on foreign denominated intercompany loan balances associated with the acquisition of Vincor, both recorded in Second Quarter 2007. The increase in the Constellation Wines segment’s selling, general and administrative expenses is primarily due to increased advertising expenses of $7.4 million resulting primarily from higher planned brand marketing support in the U.S. and U.K. wine markets, and increased general and administrative expenses of $6.6 million primarily to support the Company’s efforts to improve performance in the U.K. The increase in the Constellation Spirits segment’s selling, general and administrative expenses is primarily due to an increase in selling expenses of $2.6 million and advertising expenses of $2.2 million, resulting primarily from the Svedka Acquisition. The increase in the Corporate Operations and Other segment’s selling, general and administrative expenses is primarily due to the recognition of additional stock-based compensation expense in Second Quarter 2008 of $1.4 million and increased general and administrative expenses to support the Company’s growth.
Selling, general and administrative expenses as a percent of net sales increased to 21.3% for Second Quarter 2008 as compared to 14.4% for Second Quarter 2007 primarily due to (i) the reporting of the imported beer and U.K. wholesale joint ventures under the equity method of accounting and (ii) the lower net sales associated with the reduction in the distributor wine inventory levels without a corresponding decrease in selling, general and administrative expenses within the U.S. branded wine business, partially offset by lower unusual costs.
Acquisition-Related Integration Costs
Acquisition-related integration costs decreased to $1.6 million for Second Quarter 2008 from $7.4 million for Second Quarter 2007. Acquisition-related integration costs for Second Quarter 2008 consisted of costs recorded primarily in connection with the Company’s plan to restructure and integrate the operations of Vincor (the “Vincor Plan”). These costs included $0.3 million of employee-related costs and $1.3 million of facilities and other one-time costs. Acquisition-related integration costs for Second Quarter 2007 consisted of costs recorded primarily in connection with the Vincor Plan.
For Fiscal 2008, the Company expects to incur total acquisition-related integration costs of $9.0 million primarily in connection with the Vincor Plan.
Restructuring and Related Charges
The Company recorded $0.4 million of restructuring and related charges for Second Quarter 2008 associated primarily with the Company’s worldwide wine reorganizations announced during Fiscal 2006 and the Company’s program to consolidate certain west coast production processes in the U.S. (collectively, the “Fiscal 2006 Plan”) and the Vincor Plan. Restructuring and related charges included $0.1 million of employee termination benefits, $0.2 million of contract termination costs and $0.1 million of facility consolidation/relocation costs. In addition, in connection with the Company’s plan to invest in new distribution and bottling facilities in the U.K. and to streamline certain Australian wine operations (collectively, the “Fiscal 2007 Wine Plan”), the Fiscal 2006 Plan and the Vincor Plan, the Company recorded $2.1 million of accelerated depreciation costs and $0.9 million of other related costs which were recorded in the cost of product sold line and selling, general and administrative expenses line, respectively, within the Company’s Consolidated Statements of Income. The Company recorded $21.7 million of restructuring and related charges for Second Quarter 2007 associated primarily with the Fiscal 2007 Wine Plan, the Vincor Plan and the Fiscal 2006 Plan.
For Fiscal 2008, the Company expects to incur total restructuring and related charges of $3.5 million associated with the Fiscal 2006 Plan, the Vincor Plan and costs associated with consolidation of certain spirits production processes in the U.S. In addition, with respect to the Fiscal 2007 Wine Plan, the Fiscal 2006 Plan and the Vincor Plan, the Company expects to incur total accelerated depreciation costs, other charges and inventory write-downs for Fiscal 2008 of $7.1 million, $2.2 million and $0.3 million, respectively.
Operating Income
The following table sets forth the operating income (loss) (in millions of dollars) by operating segment of the Company for Second Quarter 2008 and Second Quarter 2007.
| | | Second Quarter 2008 Compared to Second Quarter 2007 | |
| | Operating Income (Loss) | |
| | | 2008 | | | 2007 | | | % Increase (Decrease) | |
| Constellation Wines | | $ | 124.9 | | | $ | 163.8 | | | | (24)% | |
| Constellation Spirits | | | 20.9 | | | | 17.7 | | | | 18% | |
| Constellation Beers | | | - | | | | 73.9 | | | | (100)% | |
| Corporate Operations and Other | | | (20.7 | ) | | | (18.0 | ) | | | 15% | |
| Crown Imports | | | 157.3 | | | | - | | | N/A | |
| Consolidations and eliminations | | | (157.3 | ) | | | - | | | N/A | |
Total Reportable Segments | | | 125.1 | | | | 237.4 | | | | (47)% | |
Acquisition-Related Integration Costs, Restructuring and Related Charges and Unusual Costs | | | (7.9 | ) | | | (56.1 | ) | | | (86)% | |
| Consolidated Operating Income | | $ | 117.2 | | | $ | 181.3 | | | | (35)% | |
As a result of the factors discussed above, consolidated operating income decreased to $117.2 million for Second Quarter 2008 from $181.3 million for Second Quarter 2007, a decrease of $64.1 million, or (35%). Acquisition-related integration costs, restructuring and related charges and unusual costs of $7.9 million for Second Quarter 2008 consist of certain costs that are excluded by management in their evaluation of the results of each operating segment. These costs represent the flow through of inventory step-up associated primarily with the Company’s acquisition of Vincor of $2.3 million, accelerated depreciation associated with the Fiscal 2007 Wine Plan and Fiscal 2006 Plan of $2.1 million, acquisition-related integration costs of $1.6 million associated primarily with the Vincor Plan, other related costs and restructuring and related charges associated with the Fiscal 2007 Wine Plan, Fiscal 2006 Plan and the Vincor Plan of $0.9 million and $0.4 million, respectively, the additional loss on the contribution of the U.K. wholesale business of $0.5 million, and the flow through of adverse grape cost of $0.1 million associated with the acquisition of The Robert Mondavi Corporation (“Robert Mondavi”). Acquisition-related integration costs, restructuring and related charges and unusual costs of $56.1 million for Second Quarter 2007 consist of restructuring and related charges of $21.7 million associated primarily with the Fiscal 2007 Wine Plan; financing costs of $11.8 million related to the Company’s new senior credit facility entered into in connection with the acquisition of Vincor; acquisition-related integration costs of $7.4 million associated primarily with the Vincor Plan; the flow through of inventory step-up of $5.9 million associated with the Company’s acquisitions of Vincor and Robert Mondavi; foreign currency losses of $5.4 million on foreign denominated intercompany loan balances associated with the acquisition of Vincor; other related charges of $1.6 million associated primarily with the Fiscal 2006 Plan; accelerated depreciation of $1.3 million associated with the Fiscal 2006 Plan and the Fiscal 2007 Wine Plan; the flow through of adverse grape cost of $0.9 million associated with the acquisition of Robert Mondavi; and additional loss on the sale of the Company's branded bottled water business of $0.1 million.
Equity in Earnings of Equity Method Investees
The Company’s equity in earnings of equity method investees increased to $80.1 million in Second Quarter 2008 from $0.2 million in Second Quarter 2007. This increase is primarily due to the January 2, 2007, consummation of the Crown Imports beer joint venture and the reporting of the results of operations of that joint venture since that date under the equity method of accounting of $78.8 million.
Gain on Change in Fair Value of Derivative Instrument
In April 2006, the Company entered into a foreign currency forward contract in connection with the acquisition of Vincor to fix the U.S. dollar cost of the acquisition and the payment of certain outstanding indebtedness. For Second Quarter 2007, the Company recorded a gain of $2.6 million in connection with this derivative instrument. Under SFAS No. 133, a transaction that involves a business combination is not eligible for hedge accounting treatment. As such, the gain was recognized separately on the Company’s Consolidated Statements of Income.
Interest Expense, Net
Interest expense, net of interest income of $1.0 million and $1.6 million, for Second Quarter 2008 and Second Quarter 2007, respectively, increased to $86.7 million for Second Quarter 2008 from $72.5 million for Second Quarter 2007, an increase of $14.2 million, or 20%. The increase resulted primarily from higher average borrowings in Second Quarter 2008 as a result of the funding of the Svedka Acquisition and the $500.0 million of share repurchases (see discussion below).
Provision for Income Taxes
The Company’s effective tax rate decreased to 34.8% for Second Quarter 2008 from 38.7% for Second Quarter 2007, a decrease of 3.9 percentage points. The decrease in the Company’s effective tax rate for Second Quarter 2008 is primarily due to reductions in deferred income tax liabilities as a result of legislative changes in various state and foreign jurisdictions and the tax effects of foreign earnings, partially offset by increases to existing tax contingencies and related interest.
Net Income
As a result of the above factors, net income increased to $72.1 million for Second Quarter 2008 from $68.4 million for Second Quarter 2007, an increase of $3.7 million, or 5%.
Six Months 2008 Compared to Six Months 2007
Net Sales
The following table sets forth the net sales (in millions of dollars) by operating segment of the Company for Six Months 2008 and Six Months 2007.
| | | Six Months 2008 Compared to Six Months 2007 | |
| | | Net Sales | |
| | | 2008 | | | 2007 | | | % Increase / (Decrease) | |
| Constellation Wines: | | | | | | | | | |
Branded wine | | $ | 1,358.8 | | | $ | 1,233.7 | | | | 10% | |
Wholesale and other | | | 233.3 | | | | 523.1 | | | | (55)% | |
| Constellation Wines net sales | | | 1,592.1 | | | | 1,756.8 | | | | (9)% | |
| Constellation Spirits net sales | | | 201.7 | | | | 166.9 | | | | 21% | |
| Constellation Beers net sales | | | - | | | | 649.7 | | | | (100)% | |
| Crown Imports net sales | | | 1,380.8 | | | | - | | | N/A | |
| Consolidations and eliminations | | | (1,380.8 | ) | | | - | | | N/A | |
| Consolidated Net Sales | | $ | 1,793.8 | | | $ | 2,573.4 | | | | (30)% | |
Net sales for Six Months 2008 decreased to $1,793.8 million from $2,573.4 million for Six Months 2007, a decrease of $779.6 million, or (30%). This decrease resulted primarily from a decrease in net sales of $649.7 million and $313.3 million for the Crown Imports and Matthew Clark investments, respectively, which are accounted for under the equity method of accounting, and the Company’s program to reduce distributor wine inventory levels in the U.S., partially offset by net sales of products acquired in the acquisition of Vincor and Svedka Acquisition of $133.7 million and $23.4 million, respectively, and a favorable foreign currency impact of $64.2 million.
Constellation Wines
Net sales for Constellation Wines decreased to $1,592.1 million for Six Months 2008 from $1,756.8 million in Six Months 2007, a decrease of $164.7 million, or (9%). Branded wine net sales increased $125.1 million primarily due to $126.3 million of net sales of branded wine acquired in the acquisition of Vincor, a favorable foreign currency impact of $45.5 million and a benefit of $21.6 million due to U.K. branded wine net sales previously sold through the Company’s U.K. wholesale business, partially offset by the lower U.S. base branded wine net sales resulting primarily from the Company’s program to reduce distributor wine inventory levels in the U.S. Wholesale and other net sales decreased $289.8 million primarily due to a decrease of $334.9 million resulting from the accounting for the Matthew Clark investment under the equity method of accounting, partially offset by a favorable foreign currency impact of $18.7 million.
Constellation Spirits
Net sales for Constellation Spirits increased to $201.7 million for Six Months 2008 from $166.9 million for Six Months 2007, an increase of $34.8 million, or 21%. This increase resulted primarily from $23.4 million of net sales of branded spirits acquired in the Svedka Acquisition and an increase in base branded spirits net sales of $8.9 million due primarily to higher average selling prices.
Constellation Beers
Net sales for Constellation Beers decreased $649.7 million, or (100%), from Six Months 2007 as the Crown Imports investment is accounted for under the equity method of accounting.
Gross Profit
The Company’s gross profit decreased to $577.9 million for Six Months 2008 from $733.4 million for Six Months 2007, a decrease of $155.5 million, or (21%). The Constellation Wines segment’s gross profit increased $8.4 million primarily due to increased gross profit of $53.2 million due to the acquisition of Vincor, partially offset by lower U.S. base branded wine gross profit of $42.0 million resulting from the lower U.S. branded wine net sales primarily as a result of the Company’s program to reduce distributor inventory levels. The Constellation Spirits segment’s gross profit increased $13.8 million primarily due to increased gross profit of $11.4 million due to the Svedka Acquisition. The Constellation Beers segment’s gross profit was down $179.4 million due to the formation of Crown Imports on January 2, 2007, and the accounting for this investment under the equity method of accounting. In addition, unusual items, which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment, were lower by $1.7 million in Six Months 2008 versus Six Months 2007. This decrease resulted primarily from decreased flow through of inventory step-up of $1.3 million associated primarily with the acquisition of Vincor. Gross profit as a percent of net sales increased to 32.2% for Six Months 2008 from 28.5% for Six Months 2007 primarily due to the benefit of reporting the lower margin U.K. wholesale and imported beer businesses under the equity method of accounting combined with the sales of higher-margin wine and spirits brands acquired in the acquisition of Vincor and Svedka Acquisition, respectively, partially offset by lower margins in the U.S. branded wine business primarily due to the distributor inventory reduction program.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $388.1 million for Six Months 2008 from $377.0 million for Six Months 2007, an increase of $11.1 million, or 3%. This increase is due to an increase of $57.3 million in the Constellation Wines segment, an increase of $12.5 million in the Constellation Spirits segment, and an increase of $8.2 million in Corporate Operations and Other, partially offset by a $40.4 million decrease in selling, general and administrative expenses within the Constellation Beers segment as the Crown Imports investment is accounted for under the equity method of accounting, and a reduction in unusual costs which consist of certain items that are excluded by management in their evaluation of the results of each operating segment of $26.5 million. The increase in the Constellation Wines segment’s selling, general and administrative expenses is due to increased general and administrative expenses of $21.5 million, advertising expenses of $20.3 million and selling expenses of $15.5 million resulting primarily from the acquisition of Vincor and the recognition of an additional $3.9 million of stock-based compensation expense. The increase in the Constellation Spirits segment’s selling, general and administrative expenses is primarily due to increases in selling expenses of $5.2 million and advertising expenses of $5.1 million resulting primarily from the Svedka Acquisition. The Corporate Operations and Other segment’s selling, general and administrative expenses increased primarily due to the recognition of additional stock-based compensation expense in Six Months 2008 of $3.8 million and increased general and administrative expenses to support the Company’s growth. The decrease in unusual costs was primarily due to the recognition in Six Months 2007 of (i) a $14.2 million loss on the sale of the Company’s branded bottled water business, (ii) financing costs of $11.8 million related to the Company’s new senior credit facility entered into in connection with the acquisition of Vincor; and (iii) foreign currency losses of $5.4 million on foreign denominated intercompany loan balances associated with the acquisition of Vincor, partially offset by the recognition of a $6.6 million loss in Six Months 2008 in connection with the contribution of the Company’s U.K. wholesale business to the Matthew Clark joint venture.
Selling, general and administrative expenses as a percent of net sales increased to 21.6% for Six Months 2008 as compared to 14.6% for Six Months 2007 primarily due to (i) the reporting of the imported beer and U.K. wholesale joint ventures under the equity method of accounting, (ii) the lower net sales associated with the reduction in the distributor wine inventory levels without a corresponding decrease in selling, general and administrative expenses within the U.S. branded wine business and (iii) increased stock-based compensation expense, partially offset by lower unusual costs.
Acquisition-Related Integration Costs
Acquisition-related integration costs decreased to $3.6 million for Six Months 2008 from $8.1 million for Six Months 2007. Acquisition-related integration costs for Six Months 2008 consisted of costs recorded primarily in connection with the Vincor Plan. These costs included $0.7 million of employee-related costs and $2.9 million of facilities and other one-time costs. Acquisition-related integration costs for Six Months 2007 consisted of costs recorded in connection with the Vincor Plan and the Company’s plan to restructure and integrate the operations of The Robert Mondavi Corporation (the “Robert Mondavi Plan”) of $7.5 million and $0.6 million, respectively.
For Fiscal 2008, the Company expects to incur total acquisition-related integration costs of $9.0 million primarily in connection with the Vincor Plan.
Restructuring and Related Charges
The Company recorded $0.8 million of restructuring and related charges for Six Months 2008 associated primarily with the Fiscal 2006 Plan. Restructuring and related charges included $0.1 million of employee termination benefit costs, $0.4 million of contract termination costs and $0.3 million of facility consolidation/relocation costs. In addition, in connection with the Company’s Fiscal 2007 Wine Plan, the Fiscal 2006 Plan and the Vincor Plan, the Company recorded (i) $4.2 million of accelerated depreciation costs and $0.1 million of inventory write-downs and (ii) $1.4 million of other related costs which were recorded in the cost of product sold line and selling, general and administrative expenses line, respectively, within the Company’s Consolidated Statements of Income. The Company recorded $24.0 million of restructuring and related charges for Six Months 2007 associated primarily with the Fiscal 2007 Wine Plan and Fiscal 2006 Plan.
For Fiscal 2008, the Company expects to incur total restructuring and related charges of $3.5 million associated with the Fiscal 2006 Plan, the Vincor Plan and costs associated with consolidation of certain spirits production processes in the U.S. In addition, with respect to the Fiscal 2007 Wine Plan, the Fiscal 2006 Plan and the Vincor Plan, the Company expects to incur total accelerated depreciation costs, other charges and inventory write-downs for Fiscal 2008 of $7.1 million, $2.2 million and $0.3 million, respectively.
Operating Income
The following table sets forth the operating income (loss) (in millions of dollars) by operating segment of the Company for Six Months 2008 and Six Months 2007.
| | | Six Months 2008 Compared to Six Months 2007 | |
| | | Operating Income (Loss) | |
| | | 2008 | | | 2007 | | | % Increase (Decrease) | |
| Constellation Wines | | $ | 211.1 | | | $ | 260.0 | | | | (19)% | |
| Constellation Spirits | | | 36.7 | | | | 35.4 | | | | 4% | |
| Constellation Beers | | | - | | | | 139.0 | | | | (100)% | |
| Corporate Operations and Other | | | (40.4 | ) | | | (32.2 | ) | | | 25% | |
| Crown Imports | | | 303.6 | | | | - | | | N/A | |
| Consolidations and eliminations | | | (303.6 | ) | | | - | | | N/A | |
Total Reportable Segments | | | 207.4 | | | | 402.2 | | | | (48)% | |
Acquisition-Related Integration Costs, Restructuring and Related Charges and Unusual Costs | | | (22.0 | ) | | | (77.9 | ) | | | (72)% | |
| Consolidated Operating Income | | $ | 185.4 | | | $ | 324.3 | | | | (43)% | |
As a result of the factors discussed above, consolidated operating income decreased to $185.4 million for Six Months 2008 from $324.3 million for Six Months 2007, a decrease of $138.9 million, or (43%). Acquisition-related integration costs, restructuring and related charges and unusual costs of $22.0 million for Six Months 2008 consist of certain costs that are excluded by management in their evaluation of the results of each operating segment. These costs represent the loss on the contribution of the U.K. wholesale business of $6.6 million, the flow through of inventory step-up associated primarily with the Company’s acquisition of Vincor of $5.2 million, accelerated depreciation associated with the Fiscal 2007 Wine Plan and Fiscal 2006 Plan of $4.2 million, acquisition-related integration costs of $3.6 million associated primarily with the Vincor Plan, other related costs, restructuring and related charges and inventory write-offs associated with the Fiscal 2006 Plan, Fiscal 2007 Wine Plan and the Vincor Plan of $1.4 million, $0.8 million and $0.1 million, respectively, and the flow through of adverse grape cost of $0.1 million associated with the acquisition of Robert Mondavi. Acquisition-related integration costs, restructuring and related charges and unusual costs of $77.9 million for Six Months 2007 represent restructuring and related charges of $24.0 million associated primarily with the Fiscal 2007 Wine Plan and Fiscal 2006 Plan; loss on sale of the branded bottled water business of $14.2 million; financing costs of $11.8 million related to the Company’s new senior credit facility entered into in connection with the acquisition of Vincor; acquisition-related integration costs of $8.1 million associated with the Vincor Plan and Robert Mondavi Plan; the flow through of inventory step-up of $6.5 million associated with the Company’s acquisitions of Vincor and Robert Mondavi; foreign currency losses of $5.4 million on foreign denominated intercompany loan balances associated with the acquisition of Vincor; other related costs of $3.1 million associated with the Fiscal 2006 Plan and Fiscal 2007 Wine Plan; the flow through of adverse grape cost of $2.4 million associated with the acquisition of Robert Mondavi; and accelerated depreciation of $2.4 million associated with the Fiscal 2006 Plan and Fiscal 2007 Wine Plan.
Equity in Earnings of Equity Method Investees
The Company’s equity in earnings of equity method investees increased to $155.9 million in Six Months 2008 from $0.3 million in Six Months 2007. This increase is primarily due to the January 2, 2007, consummation of the Crown Imports beer joint venture and the reporting of the results of operations of that joint venture since that date under the equity method of accounting of $152.2 million.
Gain on Change in Fair Value of Derivative Instrument
In April 2006, the Company entered into a foreign currency forward contract in connection with the acquisition of Vincor to fix the U.S. dollar cost of the acquisition and the payment of certain outstanding indebtedness. For Six Months 2007, the Company recorded a gain of $55.1 million in connection with this derivative instrument. Under SFAS No. 133, a transaction that involves a business combination is not eligible for hedge accounting treatment. As such, the gain was recognized separately on the Company’s Consolidated Statements of Income.
Interest Expense, Net
Interest expense, net of interest income of $1.4 million and $2.5 million, for Six Months 2008 and Six Months 2007, respectively, increased to $166.4 million for Six Months 2008 from $121.2 million for Six Months 2007, an increase of $45.2 million, or 37%. The increase resulted primarily from higher average borrowings in Six Months 2008 as a result of the funding of the acquisition of Vincor and the Svedka Acquisition, and the $500.0 million of share repurchases.
Provision for Income Taxes
The Company’s effective tax rate increased to 41.7% for Six Months 2008 from 40.5% for Six Months 2007, an increase of 1.2 percentage points. The increase in the Company’s effective tax rate for Six Months 2008 is primarily due to the recognition of a nondeductible pretax loss in connection with the Company’s contribution of its U.K. wholesale business to the Matthew Clark joint venture and increases to existing tax contingencies and related interest, partially offset by reductions in deferred income tax liabilities as a result of legislative changes in various state and foreign jurisdictions.
Net Income
As a result of the above factors, net income decreased to $101.9 million for Six Months 2008 from $153.9 million for Six Months 2007, a decrease of $52.0 million, or (34%).
Financial Liquidity and Capital Resources
General
The Company’s principal use of cash in its operating activities is for purchasing and carrying inventories and carrying seasonal accounts receivable. The Company’s primary source of liquidity has historically been cash flow from operations, except during annual grape harvests when the Company has relied on short-term borrowings. In the United States, the annual grape crush normally begins in August and runs through October. In Australia, the annual grape crush normally begins in February and runs through May. The Company generally begins taking delivery of grapes at the beginning of the crush season with payments for such grapes beginning to come due one month later. The Company’s short-term borrowings to support such purchases generally reach their highest levels one to two months after the crush season has ended. Historically, the Company has used cash flow from operating activities to repay its short-term borrowings and fund capital expenditures. The Company will continue to use its short-term borrowings to support its working capital requirements. The Company believes that cash provided by operating activities and its financing activities, primarily short-term borrowings, will provide adequate resources to satisfy its working capital, scheduled principal and interest payments on debt, and anticipated capital expenditure requirements for both its short-term and long-term capital needs.
Six Months 2008 Cash Flows
Operating Activities
Net cash provided by operating activities for Six Months 2008 was $177.7 million, which resulted primarily from $101.9 million of net income, plus $107.0 million of net non-cash items charged to the Consolidated Statement of Income, $45.4 million increase in accrued income taxes payable and $11.9 million increase in accrued interest, partially offset by $56.6 million from an increase in accounts receivable and $31.2 million of other items.
The net non-cash items consisted primarily of depreciation of property, plant and equipment and stock-based compensation expense. The increase in accrued income taxes payable is due to timing of payments and the increase in accrued interest is due to the issuance of the May 2007 Senior Notes (as defined below). The increase in accounts receivable is primarily due to seasonality as January and February are typically the Company’s lowest selling months. The other items consist primarily of $17.0 million of non-cash gains on foreign currency denominated intercompany balances, which are offset in the income statement by losses on derivative instruments designed to economically hedge such foreign currency risks, and $10.1 million of non-cash gains on derivative instruments designed to economically hedge foreign currency risks associated with the earnings of foreign subsidiaries.
Investing Activities
Net cash used in investing activities for Six Months 2008 was $245.8 million, which resulted primarily from the use of $385.4 million for the Svedka Acquisition, net of cash acquired, and $47.0 million of capital expenditures, partially offset by $185.6 million of net proceeds from the formation of the U.K. wholesale joint venture.
Financing Activities
Net cash provided by financing activities for Six Months 2008 was $67.7 million resulting primarily from proceeds from issuance of long-term debt of $716.1 million, partially offset by purchases of treasury stock of $500.0 million and principal payments of long-term debt of $163.1 million.
Share Repurchases
During February 2006, the Company’s Board of Directors replenished a June 1998 Board of Directors authorization to repurchase up to $100.0 million of the Company’s Class A Common Stock and Class B Common Stock. During the second and third quarters of fiscal 2007, the Company repurchased 3,894,978 shares of Class A Common Stock at an aggregate cost of $100.0 million, or at an average cost of $25.67 per share. The Company used revolver borrowings under the June 2006 Credit Agreement to pay the purchase price for these shares. During February 2007, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s Class A Common Stock and Class B Common Stock. During Six Months 2008, the Company repurchased 21,332,468 shares of Class A Common Stock pursuant to this authorization at an aggregate cost of $500.0 million, or an average cost of $23.44 per share, through a combination of open market transactions and an accelerated share repurchase (“ASR”) transaction that was announced in May 2007. The repurchased shares include 933,206 shares of Class A Common Stock that were received by the Company in July 2007 in connection with the early termination of the calculation period for the ASR transaction by the counterparty to the ASR transaction. The Company used revolver borrowings under the 2006 Credit Agreement to pay the purchase price for the repurchased shares. The repurchased shares have become treasury shares.
Debt
Total debt outstanding as of August 31, 2007, amounted to $4,749.0 million, an increase of $563.5 million from February 28, 2007. The ratio of total debt to total capitalization increased to 59.8% as of August 31, 2007, from 55.1% as of February 28, 2007.
Senior Credit Facility
2006 Credit Agreement
In connection with the acquisition of Vincor, on June 5, 2006, the Company and certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and administrative agent, and certain other agents, lenders, and financial institutions entered into a new credit agreement (the “June 2006 Credit Agreement”). On February 23, 2007, the June 2006 Credit Agreement was amended (the “February Amendment”). The June 2006 Credit Agreement together with the February Amendment is referred to as the “2006 Credit Agreement”. The 2006 Credit Agreement provides for aggregate credit facilities of $3.9 billion, consisting of a $1.2 billion tranche A term loan facility due in June 2011, a $1.8 billion tranche B term loan facility due in June 2013, and a $900 million revolving credit facility (including a sub-facility for letters of credit of up to $200 million) which terminates in June 2011. Proceeds of the June 2006 Credit Agreement were used to pay off the Company’s obligations under its prior senior credit facility, to fund the acquisition of Vincor and to repay certain indebtedness of Vincor. The Company uses its revolving credit facility under the 2006 Credit Agreement for general corporate purposes, including working capital, on an as needed basis.
As of August 31, 2007, the required principal repayments of the tranche A term loan and the tranche B term loan for the remaining six months of fiscal 2008 and for each of the five succeeding fiscal years are as follows:
| | | Tranche A Term Loan | | | Tranche B Term Loan | | | Total | |
(in millions) | | | | | | | | | |
| 2008 | | $ | - | | | $ | - | | | $ | - | |
| 2009 | | | 210.0 | | | | 2.0 | | | | 212.0 | |
| 2010 | | | 270.0 | | | | 4.0 | | | | 274.0 | |
| 2011 | | | 300.0 | | | | 4.0 | | | | 304.0 | |
| 2012 | | | 150.0 | | | | 4.0 | | | | 154.0 | |
| 2013 | | | - | | | | 1,426.0 | | | | 1,426.0 | |
| | | $ | 930.0 | | | $ | 1,440.0 | | | $ | 2,370.0 | |
The rate of interest on borrowings under the 2006 Credit Agreement is a function of LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate plus a margin. The margin is fixed with respect to the tranche B term loan facility and is adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit Agreement) with respect to the tranche A term loan facility and the revolving credit facility. As of August 31, 2007, the LIBOR margin for the revolving credit facility and the tranche A term loan facility is 1.25%, while the LIBOR margin on the tranche B term loan facility is 1.50%.
The February Amendment amended the June 2006 Credit Agreement to, among other things, (i) increase the revolving credit facility from $500.0 million to $900.0 million, which increased the aggregate credit facilities from $3.5 billion to $3.9 billion; (ii) increase the aggregate amount of cash payments the Company is permitted to make in respect or on account of its capital stock; (iii) remove certain limitations on the application of proceeds from the incurrence of senior unsecured indebtedness; (iv) increase the maximum permitted total “Debt Ratio” and decrease the required minimum “Interest Coverage Ratio”; and (v) eliminate the “Senior Debt Ratio” covenant and the “Fixed Charges Ratio” covenant.
The Company’s obligations are guaranteed by certain of its U.S. subsidiaries. These obligations are also secured by a pledge of (i) 100% of the ownership interests in certain of the Company’s U.S. subsidiaries and (ii) 65% of the voting capital stock of certain of the Company’s foreign subsidiaries.
The Company and its subsidiaries are also subject to covenants that are contained in the 2006 Credit Agreement, including those restricting the incurrence of additional indebtedness (including guarantees of indebtedness), additional liens, mergers and consolidations, disposition or acquisition of property, the payment of dividends, transactions with affiliates and the making of certain investments, in each case subject to numerous conditions, exceptions and thresholds. The financial covenants are limited to maximum total debt coverage ratios and minimum interest coverage ratios.
As of August 31, 2007, under the 2006 Credit Agreement, the Company had outstanding tranche A term loans of $930.0 million bearing an interest rate of 6.6%, tranche B term loans of $1.44 billion bearing an interest rate of 6.9%, revolving loans of $17.0 million bearing an interest rate of 5.8%, outstanding letters of credit of $33.9 million, and $849.1 million in revolving loans available to be drawn.
As of September 30, 2007, under the 2006 Credit Agreement, the Company had outstanding tranche A term loans of $930.0 million bearing an interest rate of 6.8%, tranche B term loans of $1.44 billion bearing an interest rate of 7.2%, revolving loans of $66.5 million bearing an interest rate of 6.0%, outstanding letters of credit of $33.9 million, and $799.6 million in revolving loans available to be drawn.
As of August 31, 2007, the Company had outstanding interest rate swap agreements which fixed LIBOR interest rates on $1.2 billion of the Company’s floating LIBOR rate debt at an average rate of 4.1% through fiscal 2010. For Six Months 2008 and Six Months 2007, the Company reclassified $3.5 million, net of tax effect of $2.3 million, and $2.3 million, net of tax effect of $1.5 million, respectively, from AOCI to the interest expense, net line in the Company’s Consolidated Statements of Income. For Second Quarter 2008 and Second Quarter 2007, the Company reclassified $1.7 million, net of tax effect of $1.1 million, and $1.5 million, net of tax effect of $1.0 million, respectively, from AOCI to the interest expense, net line in the Company’s Consolidated Statements of Income. This non-cash operating activity is included on the other, net line in the Company’s Consolidated Statements of Cash Flows.
Senior Notes
As of August 31, 2007, the Company had outstanding £1.0 million ($2.0 million) aggregate principal amount of 8 1/2% Series B Senior Notes due November 2009 (the “Sterling Series B Senior Notes”). In addition, as of August 31, 2007, the Company had outstanding £154.0 million ($310.4 million, net of $0.2 million unamortized discount) aggregate principal amount of 8 1/2% Series C Senior Notes due November 2009 (the “Sterling Series C Senior Notes”). The Sterling Series B Senior Notes and Sterling Series C Senior Notes are currently redeemable, in whole or in part, at the option of the Company.
In addition, as of August 31, 2007, the Company had outstanding $200.0 million aggregate principal amount of 8% Senior Notes due February 2008 (the “February 2001 Senior Notes”). The February 2001 Senior Notes are currently redeemable, in whole or in part, at the option of the Company.
Also, as of August 31, 2007, the Company had outstanding $693.6 million (net of $6.4 million unamortized discount) aggregate principal amount of 7 1/4% Senior Notes due September 2016 (the “August 2006 Senior Notes”). The August 2006 Senior Notes are redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to 100% of the outstanding principal amount and a make whole payment based on the present value of the future payments at the applicable Treasury Rate plus 50 basis points.
On May 14, 2007, the Company issued $700.0 million aggregate principal amount of 7 1/4% Senior Notes due May 2017 (the “May 2007 Senior Notes”). The net proceeds of the offering ($693.9 million) were used to reduce a corresponding amount of borrowings under the revolving portion of the Company’s 2006 Credit Agreement. Interest on the May 2007 Senior Notes is payable semiannually on May 15 and November 15 of each year, beginning November 15, 2007. The May 2007 Senior Notes are redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest to the redemption date, plus a make whole payment based on the present value of the future payments at the applicable Treasury Rate plus 50 basis points. The May 2007 Senior Notes are unsecured senior obligations and rank equally in right of payment to all existing and future unsecured senior indebtedness of the Company. Certain of the Company’s significant U.S. operating subsidiaries guarantee the May 2007 Senior Notes, on an unsecured senior basis. As of August 31, 2007, the Company had outstanding $700.0 million aggregate principal amount of May 2007 Senior Notes.
In connection with the issuance of the May 2007 Senior Notes, the Company entered into a registration rights agreement. Pursuant to the registration rights agreement, the Company agreed to, among other things, (i) file a registration statement with respect to an offer to exchange the May 2007 Senior Notes for new, registered notes of the Company with otherwise identical terms within 395 days after the issue date of the May 2007 Senior Notes; (ii) have the registration statement declared effective within 485 days after such issue date; and (iii) consummate the exchange offer within 525 days after such issue date. If any such event does not occur, then additional cash interest will accrue on the May 2007 Senior Notes at the rate of 0.25% per year for the first 90-day period immediately following the event of default, increasing by an additional 0.25% per year for each subsequent 90-day period up to a maximum of 1.00% per year until the event of default is cured or, in the absence of a completed exchange offer, the May 2007 Senior Notes either (i) are registered for resale as required under the registration rights agreement or (ii) become freely tradeable without registration. As of August 31, 2007, the Company has not recorded any liability for any such additional cash interest as the Company has determined that the likelihood of failing to meet the Company's obligations under the registration rights agreement is remote.
Senior Subordinated Notes
As of August 31, 2007, the Company had outstanding $250.0 million aggregate principal amount of 8 1/8% Senior Subordinated Notes due January 2012 (the “January 2002 Senior Subordinated Notes”). The January 2002 Senior Subordinated Notes are currently redeemable, in whole or in part, at the option of the Company.
Subsidiary Credit Facilities
The Company has additional credit arrangements totaling $434.9 million as of August 31, 2007. These arrangements primarily support the financing needs of the Company’s domestic and foreign subsidiary operations. Interest rates and other terms of these borrowings vary from country to country, depending on local market conditions. As of August 31, 2007, amounts outstanding under these arrangements were $206.0 million.
Accounting Pronouncements Not Yet Adopted
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing the asset or liability. The Company is required to adopt SFAS No. 157 for fiscal years and interim periods beginning March 1, 2008. The Company is currently assessing the financial impact of SFAS No. 157 on its consolidated financial statements.
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R).” SFAS No. 158 requires companies to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its balance sheet and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. The Company adopted this provision of SFAS No. 158 and provided the required disclosures as of February 28, 2007. SFAS No. 158 also requires companies to measure the funded status of a plan as of the date of the company’s fiscal year-end (with limited exceptions), which provision the Company is required to adopt as of February 28, 2009. The Company does not expect the adoption of the remaining provision of SFAS No. 158 to have a material impact on its consolidated financial statements.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.” SFAS No. 159 permits companies to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however, the amendment to Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities”, applies to all entities with available-for-sale and trading securities. The fair value option established by SFAS No. 159 allows companies to choose to measure eligible items at fair value at specified election dates. The Company will report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option: (i) may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for by the equity method; (ii) is irrevocable (unless a new election date occurs); and (iii) is applied only to entire instruments and not to portions of instruments. The Company is required to adopt SFAS No. 159 for fiscal years beginning after February 28, 2009. The Company does not expect the adoption of SFAS No. 159 to have a material impact on its consolidated financial statements.
Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Company’s control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including without limitation statements under Part I - Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding (i) the Company’s business strategy, future financial position, prospects, plans and objectives of management, (ii) the expected impact upon the Company’s net sales and diluted earnings per share resulting from the decision to reduce distributor inventory wine levels in the U.S., (iii) the Company’s expected restructuring and related charges, accelerated depreciation costs, acquisition-related integration costs, and other related charges, and (iv) information regarding expected actions of third parties are forward-looking statements. When used in this Quarterly Report on Form 10-Q, the words “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. The Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, it can give no assurance that such expectations will prove to be correct. In addition to the risks and uncertainties of ordinary business operations, the forward-looking statements of the Company contained in this Quarterly Report on Form 10-Q are also subject to the risk and uncertainty that (i) the impact upon net sales and diluted earnings per share resulting from the decision to reduce distributor wine inventory levels will vary from current expectations due to the actual levels of distributor wine inventory level reductions and (ii) the Company’s restructuring and related charges, accelerated depreciation costs, acquisition-related integration costs, and other related charges may exceed current expectations due to, among other reasons, variations in anticipated headcount reductions, contract terminations or greater than anticipated implementation costs. For additional information about risks and uncertainties that could adversely affect the Company’s forward-looking statements, please refer to Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2007.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company, as a result of its global operating, acquisition and financing activities, is exposed to market risk associated with changes in foreign currency exchange rates and interest rates. To manage the volatility relating to these risks, the Company periodically purchases and/or sells derivative instruments including foreign currency exchange contracts and interest rate swap agreements. The Company uses derivative instruments solely to reduce the financial impact of these risks and does not use derivative instruments for trading purposes.
Foreign currency forward contracts are or may be used to hedge existing foreign currency denominated assets and liabilities, forecasted foreign currency denominated sales both to third parties as well as intercompany sales, intercompany principal and interest payments, and in connection with acquisitions or joint venture investments outside the U.S. As of August 31, 2007, the Company had exposures to foreign currency risk primarily related to the Australian dollar, euro, New Zealand dollar, British pound sterling, Canadian dollar and Mexican peso.
As of August 31, 2007, and August 31, 2006, the Company had outstanding foreign exchange derivative instruments with a notional value of $2,295.6 million and $2,195.3 million, respectively. Approximately 76.3% of the Company’s total exposures were hedged as of August 31, 2007. Using a sensitivity analysis based on estimated fair value of open contracts using forward rates, if the contract base currency had been 10% weaker as of August 31, 2007, and August 31, 2006, the fair value of open foreign exchange contracts would have been decreased by $165.1 million and $140.2 million, respectively. Losses or gains from the revaluation or settlement of the related underlying positions would substantially offset such gains or losses on the derivative instruments.
The fair value of fixed rate debt is subject to interest rate risk, credit risk and foreign currency risk. The estimated fair value of the Company’s total fixed rate debt, including current maturities, was $2,223.1 million and $1,528.6 million as of August 31, 2007, and August 31, 2006, respectively. A hypothetical 1% increase from prevailing interest rates as of August 31, 2007, and August 31, 2006, would have resulted in a decrease in fair value of fixed interest rate long-term debt by $105.6 million and $70.8 million, respectively.
As of August 31, 2007, and August 31, 2006, the Company had outstanding interest rate swap agreements to minimize interest rate volatility. The swap agreements fix LIBOR interest rates on $1,200.0 million of the Company’s floating LIBOR rate debt at an average rate of 4.1% through fiscal 2010. A hypothetical 1% increase from prevailing interest rates as of August 31, 2007, and August 31, 2006, would have increased the fair value of the interest rate swaps by $28.3 million and $41.8 million, respectively.
In addition to the $2,223.1 million and $1,528.6 million estimated fair value of fixed rate debt outstanding as of August 31, 2007, and August 31, 2006, respectively, the Company also had variable rate debt outstanding (primarily LIBOR based) as of August 31, 2007, and August 31, 2006, of $2,519.8 million and $2,845.0 million, respectively. Using a sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates over a 12-month period, the approximate increase in cash required for interest as of August 31, 2007, and August 31, 2006, is $25.2 million and $28.5 million, respectively.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial Officer have concluded, based on their evaluation as of the end of the period covered by this report, that the Company’s “disclosure controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management, including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
In connection with the foregoing evaluation by the Company’s Chief Executive Officer and its Chief Financial Officer, no changes were identified in the Company’s “internal control over financial reporting” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) that occurred during the Company’s fiscal quarter ended August 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | | Total Number of Shares Purchased | | | Average Price Paid Per Share | | | Total Number of Shares Purchased as Part of a Publicly Announced Program | | | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(1) | |
| June 1 – 30, 2007 | | | - | | | $ | - | | | | - | | | $ | - | |
| July 1 – 31, 2007 | | | 933,206 | (2) | | | - | (2) | | | 933,206 | (2) | | | - | |
| August 1 – 31, 2007 | | | - | | | | - | | | | - | | | | - | |
Total | | | 933,206 | | | $ | - | | | | 933,206 | | | $ | - | |
(1) | As announced on March 1, 2007, during February 2007 the Company’s Board of Directors authorized the repurchase from time to time of up to $500.0 million of the Company’s Class A and Class B Common Stock (the “2007 Authorization”). The Board of Directors did not specify a date upon which this authorization would expire. The accelerated share repurchase transaction described in footnote (2) and the other purchases previously reported by the Company have utilized fully the 2007 Authorization. |
(2) | On July 26, 2007, the Company received 933,206 shares of Class A Common Stock pursuant to a Confirmation, dated May 6, 2007, between the Company and Citibank, N.A. (“Citibank”) with respect to an accelerated share repurchase of the Company’s Class A Common Stock (the “Confirmation”). Pursuant to the Confirmation, the Company paid Citibank a fixed purchase price of $421,079,174 on May 8, 2007, in exchange for 16,899,062 shares of Class A Common Stock. In connection with its acceleration of the end of the pricing period, Citibank delivered 933,206 additional shares of the Company’s Class A Common Stock to the Company on July 26, 2007, for no additional consideration based on the application of a formula set forth in the Confirmation. After giving effect to the additional shares delivered on July 26, 2007, the average purchase price for the total number of shares delivered pursuant to the Confirmation was $23.6133 per share. |
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Stockholders of Constellation Brands, Inc. held on July 26, 2007 (the “Annual Meeting”), the holders of the Company’s Class A Common Stock (the “Class A Stock”), voting as a separate class, elected the Company’s slate of director nominees designated to be elected by the holders of the Class A Stock, and the holders of the Company’s Class A Stock and Class B Common Stock (the “Class B Stock”), voting together as a single class with holders of Class A Stock having one (1) vote per share and holders of Class B Stock having ten (10) votes per share, elected the Company’s slate of director nominees designated to be elected by the holders of the Class A Stock and Class B Stock voting together as a single class.
In addition, at the Annual Meeting, the holders of Class A Stock and the holders of Class B Stock, voting together as a single class, voted upon a proposal to ratify the selection of KPMG LLP, Certified Public Accountants, as the Company’s independent public accountants for the fiscal year ending February 29, 2008, a proposal to amend the Company’s Certificate of Incorporation to increase the number of authorized shares of the Company’s Class A Common Stock from 300,000,000 shares to 315,000,000 shares, a proposal to approve the amendment and restatement of the Company’s Long-Term Stock Incentive Plan, and a proposal to approve the amendment and restatement of the Company’s Annual Management Incentive Plan.
Set forth below is the number of votes cast for, against or withheld, as well as the number of abstentions and broker nonvotes, as applicable, as to each of the foregoing matters.
| I. | The results of the voting for the election of Directors of the Company are as follows: |
| | | | | |
| | Directors Elected by the Holders of Class A Stock: |
| | | | | |
| | | Nominee | For | Withheld |
| | | Thomas C. McDermott | 149,944,926 | 15,832,211 |
| | | Paul L. Smith | 149,924,221 | 15,852,916 |
| | | | | |
| | Directors Elected by the Holders of Class A Stock and Class B Stock: |
| | | | | |
| | | Nominee | For | Withheld |
| | | Barry A. Fromberg | 399,843,846 | 2,979,611 |
| | | Jeananne K. Hauswald | 387,033,643 | 15,789,814 |
| | | James A. Locke III | 348,275,756 | 54,547,701 |
| | | Richard Sands | 398,725,240 | 4,098,217 |
| | | Robert Sands | 396,895,025 | 5,928,432 |
| | | Peter H. Soderberg | 384,797,655 | 18,025,802 |
| | | | | |
| II. | The selection of KPMG LLP was ratified with the following votes: |
| | | | | |
| | | For: | 401,176,368 | |
| | | Against: | 562,063 | |
| | | Abstain: | 1,084,944 | |
| | | Broker Nonvotes: | 82 | |
| | | | | |
| III. | The Amendment to the Company’s Certificate of Incorporation was approved with the following votes: |
| | | | | |
| | | For: | 396,281,716 | |
| | | Against: | 5,287,747 | |
| | | Abstain: | 1,253,105 | |
| | | Broker Nonvotes: | 889 | |
| | | | | |
| IV. | The amendment and restatement of the Company’s Long-Term Stock Incentive Plan was approved with the following votes: |
| | | | | |
| | | For: | 280,885,568 | |
| | | Against: | 89,457,946 | |
| | | Abstain: | 1,948,236 | |
| | | Broker Nonvotes: | 30,531,707 | |
| | | | | |
| V. | The amendment and restatement of the Company’s Annual Management Incentive Plan was approved with the following votes: |
| | | | | |
| | | For: | 364,022,751 | |
| | | Against: | 6,549,920 | |
| | | Abstain: | 1,712,486 | |
| | | Broker Nonvotes: | 30,538,300 | |
Item 6. Exhibits
Exhibits required to be filed by Item 601 of Regulation S-K.
For the exhibits that are filed herewith or incorporated herein by reference, see the Index to Exhibits located on page 60 of this report. The Index to Exhibits is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | CONSTELLATION BRANDS, INC. |
| | | |
| Dated: October 10, 2007 | By: | /s/ Thomas F. Howe |
| | | Thomas F. Howe, Senior Vice President, Controller |
| | | |
| Dated: October 10, 2007 | By: | /s/ Robert Ryder |
| | | Robert Ryder, Executive Vice President and Chief Financial Officer (principal financial officer and principal accounting officer) |
INDEX TO EXHIBITS |
Exhibit No. | |
2.1 | | Agreement and Plan of Merger, dated as of November 3, 2004, by and among Constellation Brands, Inc., a Delaware corporation, RMD Acquisition Corp., a California corporation and a wholly-owned subsidiary of Constellation Brands, Inc., and The Robert Mondavi Corporation, a California corporation (filed as Exhibit 2.6 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2004 and incorporated herein by reference). |
2.2 | | Support Agreement, dated as of November 3, 2004, by and among Constellation Brands, Inc., a Delaware corporation and certain shareholders of The Robert Mondavi Corporation (filed as Exhibit 2.7 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2004 and incorporated herein by reference). |
2.3 | | Arrangement Agreement dated April 2, 2006 by and among Constellation Brands, Inc., Constellation Canada Holdings Limited, and Vincor International Inc. (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated April 2, 2006 and incorporated herein by reference). |
2.4 | | Amending Agreement, dated as of April 21, 2006 by and among Constellation Brands, Inc., Constellation Canada Holdings Limited, and Vincor International Inc. (filed as Exhibit 2.4 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2006 and incorporated herein by reference). |
2.5 | | Agreement to Establish Joint Venture, dated July 17, 2006, between Barton Beers, Ltd. and Diblo, S.A. de C.V. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated July 17, 2006, filed July 18, 2006 and incorporated herein by reference). + |
2.6 | | Amendment No. 1, dated as of January 2, 2007 to the Agreement to Establish Joint Venture, dated July 17, 2006, between Barton Beers, Ltd. and Diblo, S.A. de C.V. (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated January 2, 2007, filed January 3, 2007 and incorporated herein by reference). + |
2.7 | | Barton Contribution Agreement, dated July 17, 2006, among Barton Beers, Ltd., Diblo, S.A. de C.V. and Company (a Delaware limited liability company to be formed) (filed as Exhibit 2.2 to the Company’s Current Report on Form 8-K dated July 17, 2006, filed July 18, 2006 and incorporated herein by reference).+ |
3.1 | | Restated Certificate of Incorporation of the Company (filed herewith). |
3.2 | | Amendment to Restated Certificate of Incorporation of the Company (filed herewith). |
3.3 | | By-Laws of the Company (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2002 and incorporated herein by reference). # |
4.1 | | Indenture, dated as of February 25, 1999, among the Company, as issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated February 25, 1999 and incorporated herein by reference). # |
4.2 | | Supplemental Indenture No. 3, dated as of August 6, 1999, by and among the Company, Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc., Franciscan Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak Corporation, Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 1999 and incorporated herein by reference). # |
4.3 | | Supplemental Indenture No. 4, with respect to 8 1/2% Senior Notes due 2009, dated as of May 15, 2000, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2000 and incorporated herein by reference). # |
4.4 | | Supplemental Indenture No. 5, dated as of September 14, 2000, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor Trustee to The Bank of New York), as Trustee (filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2000 and incorporated herein by reference). # |
4.5 | | Supplemental Indenture No. 6, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company (successor trustee to Harris Trust and Savings Bank and The Bank of New York, as applicable), as Trustee (filed as Exhibit 4.6 to the Company’s Registration Statement on Form S-3 (Pre-effective Amendment No. 1) (Registration No. 333-63480) and incorporated herein by reference). |
4.6 | | Supplemental Indenture No. 7, dated as of January 23, 2002, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated January 17, 2002 and incorporated herein by reference). # |
4.7 | | Supplemental Indenture No. 9, dated as of July 8, 2004, by and among the Company, BRL Hardy Investments (USA) Inc., BRL Hardy (USA) Inc., Pacific Wine Partners LLC, Nobilo Holdings, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.10 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2004 and incorporated herein by reference). |
4.8 | | Supplemental Indenture No. 10, dated as of September 13, 2004, by and among the Company, Constellation Trading, Inc., and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.11 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2004 and incorporated herein by reference). |
4.9 | | Supplemental Indenture No. 11, dated as of December 22, 2004, by and among the Company, The Robert Mondavi Corporation, R.M.E. Inc., Robert Mondavi Winery, Robert Mondavi Investments, Robert Mondavi Affiliates d/b/a Vichon Winery and Robert Mondavi Properties, Inc., and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.12 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2004 and incorporated herein by reference). |
4.10 | | Supplemental Indenture No. 12, dated as of August 11, 2006, by and among the Company, Constellation Leasing, LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.12 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2006 and incorporated herein by reference). |
4.11 | | Supplemental Indenture No. 13, dated as of November 30, 2006, by and among the Company, Vincor International Partnership, Vincor International II, LLC, Vincor Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.11 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2006 and incorporated herein by reference). |
4.12 | | Supplemental Indenture No. 15, dated as of May 4, 2007, by and among the Company, Barton SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.12 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2007 and incorporated herein by reference). |
4.13 | | Indenture, with respect to 8 1/2% Senior Notes due 2009, dated as of November 17, 1999, among the Company, as Issuer, certain principal subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.1 to the Company’s Registration Statement on Form S-4 (Registration No. 333-94369) and incorporated herein by reference). |
4.14 | | Supplemental Indenture No. 1, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company (successor to Harris Trust and Savings Bank), as Trustee (filed as Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2001 and incorporated herein by reference). # |
4.15 | | Supplemental Indenture No. 3, dated as of July 8, 2004, by and among the Company, BRL Hardy Investments (USA) Inc., BRL Hardy (USA) Inc., Pacific Wine Partners LLC, Nobilo Holdings, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.15 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2004 and incorporated herein by reference). |
4.16 | | Supplemental Indenture No. 4, dated as of September 13, 2004, by and among the Company, Constellation Trading, Inc., and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.16 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2004 and incorporated herein by reference). |
4.17 | | Supplemental Indenture No. 5, dated as of December 22, 2004, by and among the Company, The Robert Mondavi Corporation, R.M.E. Inc., Robert Mondavi Winery, Robert Mondavi Investments, Robert Mondavi Affiliates d/b/a Vichon Winery and Robert Mondavi Properties, Inc., and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.18 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2004 and incorporated herein by reference). |
4.18 | | Supplemental Indenture No. 6, dated as of August 11, 2006, by and among the Company, Constellation Leasing, LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.19 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2006 and incorporated herein by reference). |
4.19 | | Supplemental Indenture No. 7, dated as of November 30, 2006, by and among the Company, Vincor International Partnership, Vincor International II, LLC, Vincor Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.18 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2006 and incorporated herein by reference). |
4.20 | | Supplemental Indenture No. 9, dated as of May 4, 2007, by and among the Company, Barton SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2007 and incorporated herein by reference). |
4.21 | | Indenture, with respect to 8% Senior Notes due 2008, dated as of February 21, 2001, by and among the Company, as Issuer, certain principal subsidiaries, as Guarantors and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.1 to the Company’s Registration Statement filed on Form S-4 (Registration No. 333-60720) and incorporated herein by reference). |
4.22 | | Supplemental Indenture No. 1, dated as of August 21, 2001, among the Company, Ravenswood Winery, Inc. and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.7 to the Company’s Pre-effective Amendment No. 1 to its Registration Statement on Form S-3 (Registration No. 333-63480) and incorporated herein by reference). |
4.23 | | Supplemental Indenture No. 3, dated as of July 8, 2004, by and among the Company, BRL Hardy Investments (USA) Inc., BRL Hardy (USA) Inc., Pacific Wine Partners LLC, Nobilo Holdings, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2004 and incorporated herein by reference). |
4.24 | | Supplemental Indenture No. 4, dated as of September 13, 2004, by and among the Company, Constellation Trading, Inc., and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.21 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2004 and incorporated herein by reference). |
4.25 | | Supplemental Indenture No. 5, dated as of December 22, 2004, by and among the Company, The Robert Mondavi Corporation, R.M.E. Inc., Robert Mondavi Winery, Robert Mondavi Investments, Robert Mondavi Affiliates d/b/a Vichon Winery and Robert Mondavi Properties, Inc., and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.24 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2004 and incorporated herein by reference). |
4.26 | | Supplemental Indenture No. 6, dated as of August 11, 2006, by and among the Company, Constellation Leasing, LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.26 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2006 and incorporated herein by reference). |
4.27 | | Supplemental Indenture No. 7, dated as of November 30, 2006, by and among the Company, Vincor International Partnership, Vincor International II, LLC, Vincor Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.25 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2006 and incorporated herein by reference). |
4.28 | | Supplemental Indenture No. 9, dated as of May 4, 2007, by and among the Company, Barton SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.28 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2007 and incorporated herein by reference). |
4.29 | | Indenture, with respect to 7.25% Senior Notes due 2016, dated as of August 15, 2006, by and among the Company, as Issuer, certain subsidiaries, as Guarantors and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 15, 2006, filed August 18, 2006 and incorporated herein by reference). |
4.30 | | Supplemental Indenture No. 1, dated as of August 15, 2006, among the Company, as Issuer, certain subsidiaries, as Guarantors, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated August 15, 2006, filed August 18, 2006 and incorporated herein by reference). |
4.31 | | Supplemental Indenture No. 2, dated as of November 30, 2006, by and among the Company, Vincor International Partnership, Vincor International II, LLC, Vincor Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.28 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2006 and incorporated herein by reference). |
4.32 | | Supplemental Indenture No. 3, dated as of May 4, 2007, by and among the Company, Barton SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.32 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2007 and incorporated herein by reference). |
4.33 | | Indenture, with respect to 7 1/4% Senior Notes due May 2017, dated May 14, 2007, by and among the Company, as Issuer, certain subsidiaries, as Guarantors, and The Bank of New York Trust Company, N.A., as Trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 9, 2007, filed May 14, 2007 and incorporated herein by reference). |
4.34 | | Registration Rights Agreement, with respect to 7 1/4% Senior Notes due May 2017, dated May 14, 2007, among the Company, certain subsidiaries, as Guarantors, and Banc of America Securities LLC and Citigroup Global Markets Inc., as Initial Purchasers (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated May 9, 2007, filed May 14, 2007 and incorporated herein by reference). |
4.35 | | Credit Agreement, dated as of June 5, 2006, among Constellation, the Subsidiary Guarantors party thereto, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Citicorp North America, Inc., as Syndication Agent, J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Bookrunners, and The Bank of Nova Scotia and SunTrust Bank, as Co-Documentation Agents (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated June 5, 2006, filed June 9, 2006 and incorporated herein by reference). |
4.36 | | Amendment No. 1, dated as of February 23, 2007, to the Credit Agreement, dated as of June 5, 2006, among Constellation, the Subsidiary Guarantors referred to on the signature pages to such Amendment No. 1, and JPMorgan Chase Bank, N.A., in its capacity as Administrative Agent (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K, dated and filed February 23, 2007, and incorporated herein by reference). |
4.37 | | Guarantee Assumption Agreement, dated as of August 11, 2006, by Constellation Leasing, LLC, in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, pursuant to the Credit Agreement dated as of June 5, 2006 (as modified and supplemented and in effect from time to time) (filed as Exhibit 4.29 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2006 and incorporated herein by reference). |
4.38 | | Guarantee Assumption Agreement, dated as of November 30, 2006, by Vincor International Partnership, Vincor International II, LLC, Vincor Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., and Vincor Finance, LLC in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, pursuant to the Credit Agreement dated as of June 5, 2006 (as modified and supplemented and in effect from time to time) (filed as Exhibit 4.31 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2006 and incorporated herein by reference). |
4.39 | | Guarantee Assumption Agreement, dated as of May 4, 2007, by Barton SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, pursuant to the Credit Agreement dated as of June 5, 2006 (as modified and supplemented and in effect from time to time) (filed as Exhibit 4.39 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2007 and incorporated herein by reference). |
10.1 | | First Amendment to the Constellation Brands, Inc. 2005 Supplemental Executive Retirement Plan (filed as Exhibit 10.7 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2007 and incorporated herein by reference). * |
10.2 | | Constellation Brands, Inc. Long-Term Stock Incentive Plan, amended and restated as of July 26, 2007 (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated July 26, 2007, filed July 31, 2007 and incorporated herein by reference).* |
10.3 | | Form of Terms and Conditions Memorandum for Employees with respect to the Constellation Brands, Inc. Long-Term Stock Incentive Plan (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K dated July 26, 2007, filed July 31, 2007 and incorporated herein by reference).* |
10.4 | | Form of Terms and Conditions Memorandum for Directors with respect to the Constellation Brands, Inc. Long-Term Stock Incentive Plan (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K dated July 26, 2007, filed July 31, 2007 and incorporated herein by reference).* |
10.5 | | Constellation Brands, Inc. Annual Management Incentive Plan, amended and restated as of July 26, 2007 (filed as Exhibit 99.4 to the Company’s Current Report on Form 8-K dated July 26, 2007, filed July 31, 2007 and incorporated herein by reference).* |
10.6 | | Description of Compensation Arrangements for Non-Management Directors (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 2, 2007, filed October 4, 2007 and incorporated herein by reference).* |
31.1 | | Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). |
31.2 | | Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). |
32.1 | | Certification of Chief Executive Officer pursuant to Section 18 U.S.C. 1350 (filed herewith). |
32.2 | | Certification of Chief Financial Officer pursuant to Section 18 U.S.C. 1350 (filed herewith). |
* Designates management contract or compensatory plan or arrangement.
| # Company’s Commission File No. 001-08495. For filings prior to October 4, 1999, use Commission File No. 000-07570. |
| + This Exhibit has been filed separately with the Commission pursuant to an application for confidential treatment. The confidential portions of this Exhibit have been omitted and are marked by an asterisk. |
The Company agrees, upon request of the Securities and Exchange Commission, to furnish copies of each instrument that defines the rights of holders of long-term debt of the Company or its subsidiaries that is not filed herewith pursuant to Item 601(b)(4)(iii)(A) because the total amount of long-term debt authorized under such instrument does not exceed 10% of the total assets of the Company and its subsidiaries on a consolidated basis.
