CONSTELLATION BRANDS, INC. [[Image Removed: stz-20211130_g2.jpg]] Introduction This MD&A provides additional information on our businesses, current developments, financial condition, cash flows, and results of operations. It should be read in conjunction with our Financial Statements and with our consolidated financial statements and notes included in our 2021 Annual Report. This MD&A is organized as follows: Overview. This section provides a general description of our business, which we believe is important in understanding the results of our operations, financial condition, and potential future trends. Strategy. This section provides a description of our strategy and a discussion of recent developments, COVID-19 and global supply chain related impacts, and significant investments, acquisitions, and divestitures. Results of operations. This section provides an analysis of our results of operations presented on a business segment basis for the three months endedNovember 30, 2021 , andNovember 30, 2020 , and the nine months endedNovember 30, 2021 , andNovember 30, 2020 . In addition, a brief description of significant transactions and other items that affect the comparability of the results is provided. Liquidity and capital resources. This section provides an analysis of our cash flows, outstanding debt, and a discussion of the amount of financial capacity available to fund our ongoing operations and future commitments, as well as a discussion of other financing arrangements.
Overview
We are an international producer and marketer of beer, wine, and spirits with operations in theU.S. ,Mexico ,New Zealand , andItaly with powerful, consumer-connected, high-quality brands like Corona Extra, Modelo Especial,Robert Mondavi ,Kim Crawford , Meiomi, and SVEDKA Vodka. In theU.S. , we are one of the top growth contributors at retail among beverage alcohol suppliers. We are the third-largest beer company and a leader in the high-end of theU.S. beer market and a higher-end wine and spirits company with many of our products as leaders in their respective categories. Our strong market positions make us a supplier of choice to many of our consumers and our customers, who include wholesale distributors, retailers, and on-premise locations. We conduct our business through entities we wholly own as well as through a variety of joint ventures and other entities.
Our internal management financial reporting consists of three business
divisions: (i) Beer, (ii)
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(iii) Corporate Operations and Other, and (iv) Canopy. Our
In the Beer segment, our portfolio consists of high-end imported beer brands, craft beer, and ABAs. We have an exclusive perpetual brand license to import, market, and sell our Mexican beer portfolio in theU.S. In theWine and Spirits segment, we sell a portfolio that includes higher-margin, higher-growth wine brands complemented by certain higher-end spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of executive management, corporate development, corporate finance, corporate growth and strategy, human resources, internal audit, investor relations, legal, public relations, and information technology, as well as our investments made through our corporate venture capital function. All costs included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are, therefore, not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in our CODM's evaluation of the operating income (loss) performance of the other reportable segments. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management, and the structure of our internal financial reporting. Strategy Business strategy Our overall strategy is to drive growth and shape the future of our industry by building brands that people love and delivering unrivaled value to our stockholders. We endeavor to position our portfolio to benefit from the consumer-led premiumization trend, which we believe will continue to drive faster growth rates in the higher-end of the beer, wine, and spirits categories. To capitalize on consumer-led premiumization trends, become more competitive, and grow our business, we have employed a strategy dedicated to a combination of organic growth and acquisitions, with a focus on the higher-margin, higher-growth categories of the beverage alcohol industry. Key elements of our strategy include: •leverage our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio; •strengthen relationships with wholesalers and retailers by providing consumer and beverage alcohol insights; •invest in brand building and innovation activities; •position ourselves for success with consumer-led products that identify, meet, and stay ahead of evolving consumer trends and market dynamics; •realize operating efficiencies by expanding and enhancing production capabilities and maximizing asset utilization; and •develop employees to enhance performance in the marketplace. Our business strategy for the Beer segment focuses on leading the high-end segment of theU.S. beer market. This includes continued focus on growing our beer portfolio in theU.S. through expanding distribution for key brands, as well as innovation and continued expansion, optimization, and construction activities for ourMexico beer operations. Additionally, in an effort to more fully compete in growing sectors of the high-end segment of theU.S. beer market, we have leveraged our innovation capabilities to introduce new line extensions and package formats that align with consumer trends. Expansion and optimization efforts continue at our current brewery locations under our Mexico Beer Projects to align with our anticipated future growth expectations. However, at this time, we have suspended allMexicali Brewery construction activities, following a negative result from a public consultation held inMexico . We continue to work with government officials inMexico to explore options to add further capacity at other locations inMexico , including the construction of theSoutheast Mexico Brewery where there is ample water and a skilled workforce to meet our long-term needs (see "Liquidity and Capital Resources - Capital expenditures" below for further discussion).
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Our strategy for the Wine and Spirits segment is to build an industry-leading
portfolio of higher-end wine and spirits brands. We are investing to meet the
evolving needs of consumers, including offering DTC and other eCommerce
platforms; building brands through consumer insights, sensory expertise, and
innovation; and refreshing existing brands, as we continue to focus on moving
our branded wine and spirits portfolio towards a higher-margin, higher-growth
portfolio of brands. We focus our innovation and investment dollars on brands
within our portfolio which position us to benefit from the consumer-led trend
towards premiumization. Additionally, in connection with the recent
divestitures, we expect to optimize the value of our wine and spirits portfolio
by driving increased focus on our higher-end brands to accelerate growth and
improve overall operating margins. In markets where it is feasible, we entered
into a contractual arrangement to consolidate our U.S. distribution in order to
obtain dedicated distributor selling resources which focus on our U.S. wine and
spirits portfolio to drive organic growth. This U.S. distributor currently
represents about 70% of our branded wine and spirits volume in the U.S.
Marketing, sales, and distribution of our products are managed on a geographic
basis allowing us to leverage leading market positions. In addition, market
dynamics and consumer trends vary across each of our markets. Within our primary
market in the U.S. , we offer a range of beverage alcohol products across the
imported beer, craft beer, ABA, branded wine, and spirits categories, with
generally separate distribution networks utilized for (i) our beer portfolio and
(ii) our wine and spirits portfolio. The environment for our products is
competitive in each of our markets.
We complement our strategy with our investment in Canopy, by expanding our
portfolio into adjacent categories. Canopy is a leading cannabis company with
operations in countries across the world. This investment is consistent with our
long-term strategy to identify, address, and stay ahead of evolving consumer
trends and market dynamics. We expanded our strategic relationship with Canopy
to help position it as a global leader in cannabis production, branding,
intellectual property, and retailing.
We remain committed to our long-term financial model of: growing sales,
expanding margins, and increasing cash flow in order to achieve earnings per
share growth, maintain our targeted leverage ratio, and deliver returns to
stockholders through the payment of dividends and periodic share repurchases.
Our results of operations and financial condition have been affected by
inflation and changing prices. We intend to pass along rising costs through
increased selling prices, subject to normal competitive conditions. In addition,
we continue to identify on-going cost savings initiatives, including our
commodity hedge program. However, there can be no assurances that we will be
able to fully mitigate rising costs through increased selling prices and/or cost
savings initiatives.
CSR strategy
Our CSR strategy is designed to align with our business goals and stakeholder
interests, reflect our company values, and more directly address pressing
societal needs. Specifically, we dedicate our resources towards four focus
areas:
Model water stewardship for our industry - We have made water conservation and
stewardship the focus of our sustainability initiatives. We are committed to
increasing our site water efficiency, maintaining source availability and
quality, using our relationships to advance conservation efforts, and reporting
transparently.
Be a champion for the professional development and advancement of women - We are
committed to providing resources to support the advancement of women within our
company, our communities, and our industry.
Serve as a catalyst for economic development and prosperity for disadvantaged
communities - We are committed to addressing the needs of disadvantaged
communities, with a focus on Latinx/Hispanic and Black/
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Be a culture carrier of responsible consumption - We are committed to empowering
adults to make responsible choices in their alcohol (substance) consumption by
supporting fact-based education, engagement programs, and policies. We are
evolving our approach to responsible consumption by embracing a contemporary
mindset that aligns with consumer betterment trends.
During Third Quarter 2022 we took the following steps to advance our CSR strategy:
•revised ourCorporate Governance and Responsibility Committee andHuman Resources Committee charters to specifically address oversight of (i) environmental, sustainability, and social responsibility programs and goals and (ii) employee DE&I matters, respectively; •renewed our commitment and increased our level of support inDress for Success Worldwide , an organization whose mission is to empower women to achieve economic independence; •initiated an additional short-term investment, consisting of a certificate of deposit, in a minority-owned financial institution; •continued to drive change and enhance diverse representation among ourU.S. salaried population; •supported more than 225 employee-designated charitable organizations on GivingTuesday with a special match, in addition to our charitable matching program, providing approximately$150,000 in total donations; and •announced the launch of a new initiative between Modelo, UFC, the world's premier mixed martial arts organization, and the nonprofit Rebuilding Together to revitalize training gyms across the country. This initiative is consistent with Rebuilding Together's mission to repair homes, revitalize communities, and rebuild lives. Recent Developments Agreement with Coca-Cola InDecember 2021 , we entered into a brand authorization agreement with Coca-Cola in theU.S. to extend its FRESCA® brand into beverage alcohol for the launch of ready-to-drink cocktails. Other acquisition InDecember 2021 , we acquired a previously leased wine and spirits distribution facility located inLodi, California .
COVID-19 and Global Supply Chain Related Issues
COVID-19 containment measures affected us predominantly in the first half of Fiscal 2021 primarily in the reduction of (i) depletion volume on our products in the on-premise business due to bar and restaurant closures and (ii) shipment volume related to the reduced production activity at our major breweries inMexico which we were able to rectify in the second half of Fiscal 2021. The on-premise business has historically been about 10% to 15% of our depletion volume for beer, wine, and spirits. Our on-premise depletion volumes for Fiscal 2022 have been, and may continue to be, impacted by regional COVID-19 case volumes, vaccine immunization rates, and new COVID-19 variants. Currently, our breweries, wineries, and bottling facilities are open and operational. As reflected in the discussion below, we have seen consumers shift more of their total shopping spend to online channels since the COVID-19 outbreak, which has led to increased eCommerce sales, including DTC, for our business. Fiscal 2022 has been, and may continue to be, impacted by challenges with both global supply chain logistics and transportation which are contributing to lower product inventory levels and higher cost of product sold. For example, wine produced inNew Zealand andItaly and subsequently shipped to theU.S. for distribution has been affected by the lack of availability and increased costs of ocean freight shipping containers and port delays causing increased storage charges. In addition, we have experienced a brown glass purchasing shortage, which has impacted the near term growth prospects for certain of our imported beer brands.
In response to COVID-19, we have ensured our ongoing liquidity and financial flexibility through cash preservation initiatives, capital management adjustments, and cost control measures. We have used opportunities
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to defer some payments including certain payroll taxes under the CARES Act
afforded to us earlier in the pandemic. We are not able to estimate the
long-term impact of COVID-19 on our business, financial condition, results of
operations, and/or cash flow. We believe we have sufficient liquidity available
from operating cash flow, cash on hand, and availability under our $2.0 billion
revolving credit facility. We expect to have continued access to capital markets
and to be able to continue to return value to stockholders through dividends and
periodic share repurchases.
Investments, acquisitions, and divestitures
Beer segment Ballast Point Divestiture InMarch 2020 , we sold theBallast Point craft beer business, including a number of its associated production facilities and brewpubs. This divestiture is consistent with our strategic focus on our high-performing import portfolio.Wine and Spirits segment My Favorite Neighbor acquisition InNovember 2021 , we acquired the remaining 65% ownership interest in My Favorite Neighbor, which primarily included the acquisition of goodwill, trademarks, inventory, and property, plant, and equipment. The results of operations of My Favorite Neighbor are reported in theWine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. InApril 2020 , we made an initial investment in My Favorite Neighbor that was accounted for under the equity method. We recognized our share of their equity in earnings (losses) in our consolidated financial statements in theWine and Spirits segment up to the date we acquired the remaining ownership interest. The My Favorite Neighbor investment and subsequent acquisition supported our strategic focus on consumer-led premiumization trends and meeting the evolving needs of our consumers. Paul Masson Divestiture InJanuary 2021 , we sold the Paul Masson Grande Amber Brandy brand, related inventory, and interests in certain contracts. We recognized a net gain of$58.4 million on the sale of business primarily in the fourth quarter of Fiscal 2021. This divestiture is consistent with our increased focus on consumer-led premiumization trends. Wine and Spirits Divestitures InJanuary 2021 , we sold a portion of our wine and spirits business, including lower-margin, lower-growth wine and spirits brands, related inventory, interests in certain contracts, wineries, vineyards, offices, and facilities. We have the potential to earn an incremental$250 million of contingent consideration if certain brand performance targets are met over a two-year period after closing. Also inJanuary 2021 , we sold theNew Zealand -based Nobilo Wine brand and certain related assets. We recognized a net loss of$33.5 million on the Wine and Spirits Divestitures primarily in the fourth quarter of Fiscal 2021. These divestitures are consistent with our increased focus on consumer-led premiumization trends. Concentrate Business Divestiture InDecember 2020 , we sold certain brands used in our concentrates and high-color concentrate business, and certain related intellectual property, inventory, interests in certain contracts, and other assets. This divestiture is consistent with our focus on consumer-led premiumization trends.
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The following presents selected financial information included in our historical
consolidated financial statements that are no longer part of our consolidated
results of operations following the Paul Masson Divestiture, the Wine and
Spirits Divestitures, and the Concentrate Business Divestiture:
Third Nine
Quarter Months
2021 2021
(in millions)
Net sales $ 210.3 $ 578.5
Gross profit $ 80.9 $ 229.5
Marketing (1) $ 7.1 $ 12.4 (1)Included in selling, general, and administrative expenses within our consolidated results of operations.
Copper & Kings acquisition InSeptember 2020 , we acquired the remaining ownership interest in Copper & Kings which primarily included the acquisition of inventory and property, plant, and equipment. This acquisition included a collection of traditional and craft batch-distilled American brandies and other select spirits. The results of operations of Copper & Kings are reported in theWine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. The Copper & Kings acquisition supported our strategic focus on building an industry-leading portfolio of higher-end spirits brands. Empathy Wines acquisition InJune 2020 , we acquired Empathy Wines, which primarily included the acquisition of goodwill, trademarks, and inventory. This acquisition, which included a digitally-native wine brand, strengthened our position in the DTC and other eCommerce markets. The results of operations of Empathy Wines are reported in theWine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. The Empathy Wines acquisition supported our strategic focus on consumer-led premiumization trends and meeting the evolving needs of our consumers. Canopy segment Canopy investment InMay 2020 , we exercised theNovember 2017 Canopy Warrants at an exercise price ofC$12.98 per warrant share forC$245.0 million , or$173.9 million . This investment expanded our strategic relationship with Canopy.
For additional information on these recent developments, investments, acquisitions, and divestitures, refer to Notes 3, 5, 6, and 8.
Results of Operations Financial Highlights
References to organic throughout the following discussion exclude the impact of recent divestitures, as appropriate.
For Third Quarter 2022 compared with Third Quarter 2021
•Our results of operations were negatively impacted by (i) an unrealized net loss from the changes in fair value of our investment in Canopy as compared with the unrealized net gain in Third Quarter 2021 and (ii) a decrease inWine and Spirits net sales due largely to the recent divestitures, partially offset by improvements within the Beer segment.
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•Net sales decreased 5% due to a decrease in Wine and Spirits net sales largely
resulting from the recent divestitures, partially offset by an increase in Beer
net sales driven primarily by shipment volume growth and favorable impact from
pricing.
•Operating income increased 7% largely due to (i) favorable Comparable
Adjustments for Third Quarter 2022 as compared with Third Quarter 2021,
(ii) favorable marketing spend for both the Beer and Wine and Spirits segments,
driven by timing, (iii) favorable compensation and benefits for the Beer, Wine
and Spirits , and Corporate Operations and Other segments, and (iv) improvements
within the Beer segment, partially offset by the decrease in Wine and Spirits
net sales.
•Net income attributable to CBI and diluted net income per common share attributable to CBI decreased largely due to the items discussed above.
For Nine Months 2022 compared with Nine Months 2021
•Our results of operations were negatively impacted by (i) an unrealized net loss from the changes in fair value of our investment in Canopy as compared with the unrealized net gain in Nine Months 2021, (ii) an impairment of long-lived assets for Nine Months 2022 in connection with certain assets at theMexicali Brewery , (iii) a decrease inWine and Spirits net sales due largely to the recent divestitures, and (iv) an increase in operational costs within the Beer segment, partially offset by a decrease in equity in losses from Canopy's results, as well as an increase in Beer net sales.
•Net sales increased 1% as an increase in Beer net sales, driven primarily by
shipment volume growth and favorable impact from pricing, was offset by the
decrease in
•Operating income decreased 26% largely due to (i) the impairment of long-lived assets in connection with certain assets at theMexicali Brewery , (ii) the decrease inWine and Spirits net sales, (iii) an increase in marketing spend for the Beer segment, driven by a planned increase to support the growth of our brands, and (iv) an increase in cost of product sold, driven by obsolescence and material costs within the Beer segment, partially offset by the increase in Beer net sales.
•Net income (loss) attributable to CBI and diluted net income (loss) per common share attributable to CBI decreased significantly largely due to the items discussed above, partially offset by lower provision for income taxes.
Comparable Adjustments
Management excludes items that affect comparability from its evaluation of the results of each operating segment as these Comparable Adjustments are not reflective of core operations of the segments. Segment operating performance and the incentive compensation of segment management are evaluated based on core segment operating income (loss) which do not include the impact of these Comparable Adjustments.
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As more fully described herein and in the related Notes, the Comparable
Adjustments that impacted comparability in our segment results for each period
are as follows:
Third Third Nine Nine
Quarter Quarter Months Months
2022 2021 2022 2021
(in millions)
Cost of product sold
Settlements of undesignated commodity
derivative contracts $ (12.5) $ 6.6 $ (24.8) $ 30.2
Loss on inventory write-down (1.0) (26.5) (1.0) (26.5)
Flow through of inventory step-up (0.1) - - (0.1)
Net flow through of reserved inventory 11.6 - 11.6 -
COVID-19 incremental costs - (0.8) - (6.3)
Strategic business development costs - (0.7) (2.6) (25.8)
Net gain (loss) on undesignated commodity
derivative contracts - 9.1 48.1 (0.3)
Total cost of product sold (2.0) (12.3) 31.3 (28.8)
Selling, general, and administrative expenses
Restructuring and other strategic business
development costs 0.2 (12.7) 0.1 (21.6)
Transaction, integration, and other
acquisition-related costs (0.8) (1.5) (0.8) (5.4)
COVID-19 incremental costs - (0.2) - (4.8)
Net gain (loss) on foreign currency derivative
contracts - - - (8.0)
Other gains (losses) 18.7 (4.6) 12.6 (0.1)
Total selling, general, and administrative
expenses 18.1 (19.0) 11.9 (39.9)
Impairment of brewery construction in progress - - (665.9) -
Impairment of assets held for sale - (21.0) - (24.0)
Comparable Adjustments, Operating income (loss)
Income (loss) from unconsolidated investments
Cost of product sold Undesignated commodity derivative contracts Net gain (loss) on undesignated commodity derivative contracts represents a net gain (loss) from the changes in fair value of undesignated commodity derivative contracts. The net gain (loss) is reported outside of segment operating results until such time that the underlying exposure is recognized in the segment operating results. At settlement, the net gain (loss) from the changes in fair value of the undesignated commodity derivative contracts is reported in the appropriate operating segment, allowing the results of our operating segments to reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility. Loss on inventory write-down We recognized a loss on the write-down of certain grapes as a result of smoke damage sustained during the 2020 U.S. wildfires (Third Quarter 2021, Nine Months 2021). For additional information on the 2020 U.S. wildfires, refer to Note 2.
Net flow through of reserved inventory We sold reserved inventory previously written down in the fourth quarter of Fiscal 2021 following the 2020 U.S. wildfires.
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COVID-19 incremental costs
We recognized costs for incremental wages and hazard payments to employees,
purchases of personal protective equipment, more frequent and thorough cleaning
and sanitization of our facilities, and costs associated with the unused beer
keg reimbursement program with distributors.
Strategic business development costs
We recognized costs primarily in connection with losses on write-downs of excess
inventory and contract terminations resulting from our ongoing efforts to
optimize our portfolio, gain efficiencies, and reduce our cost structure within
the Wine and Spirits segment.
Selling, general, and administrative expenses
Restructuring and other strategic business development costs
We recognized costs primarily related to our strategy to optimize our portfolio,
gain efficiencies, and reduce our cost structure within the Wine and Spirits
segment (Third Quarter 2021, Nine Months 2021).
Transaction, integration, and other acquisition-related costs We recognized transaction, integration, and other acquisition-related costs in connection with our investments, acquisitions, and divestitures.
COVID-19 incremental costs We recognized costs for payments to third-party general contractors to maintain their workforce for expansion activities at theObregon Brewery and recognized costs for incremental wages and hazard payments to employees. Net gain (loss) on foreign currency derivative contracts We recognized a net loss primarily in connection with the settlement of foreign currency forward contracts entered into to fix theU.S. dollar cost of theMay 2020 Canopy Investment . Other gains (losses) We recognized other gains (losses) primarily in connection with (i) transition services agreements activity related to the Wine and Spirits Divestitures (Third Quarter 2022, Nine Months 2022), (ii) a gain recognized on the remeasurement of our previously held equity interest in My Favorite Neighbor to the acquisition-date fair value (Third Quarter 2022, Nine Months 2022), (iii) a property tax settlement (Third Quarter 2022, Nine Months 2022), and (iv) a gain recognized on the sale of a vineyard (Nine Months 2021).
Impairment of brewery construction in progress
We recognized an impairment of long-lived assets in connection with certain
assets at the
Impairment of assets held for sale We recognized impairments of long-lived assets held for sale in connection with the Wine and Spirits Divestitures and the Concentrate Business Divestiture. For additional information, refer to Note 5. Income (loss) from unconsolidated investments We recognized an unrealized gain (loss) primarily from (i) the changes in fair value of our securities measured at fair value and (ii) equity in earnings (losses) from Canopy's results, including equity in losses from Canopy largely related to costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand. For additional information, refer to Notes 5 and 8.
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Business segments
Third Quarter 2022 compared to Third Quarter 2021
Net sales
Third Third
Quarter Quarter Dollar Percent
2022 2021 Change Change
(in millions)
Beer $ 1,752.6 $ 1,677.9 $ 74.7 4 %
Wine and Spirits:
Wine 506.2 666.7 (160.5) (24 %)
Spirits 61.8 93.5 (31.7) (34 %)
Total Wine and Spirits 568.0 760.2 (192.2) (25 %)
Canopy 104.3 101.5 2.8 3 %
Consolidation and eliminations (104.3) (101.5) (2.8) (3 %)
Consolidated net sales $ 2,320.6 $ 2,438.1 $ (117.5) (5 %)
Beer segment Third Third
[[Image Removed: stz-20211130_g3.jpg]] Quarter Quarter Dollar Percent
2022 2021 Change Change
(in millions, branded product, 24-pack, 12-ounce case equivalents)
Net sales $ 1,752.6 $ 1,677.9 $ 74.7 4 %
Shipments 95.2 92.3 3.1 %
Depletions 8.4 %
The increase in Beer net sales is largely due to (i) $53.0 million of shipment
volume growth within our Mexican beer portfolio, which benefited from continued
consumer demand and (ii) $38.8 million of favorable impact from pricing in
select markets within our Mexican beer portfolio, partially offset by
$17.5 million of unfavorable product mix primarily from a shift in package types
and an increase of on-premise keg sales. Third Quarter 2022 cases shipped
exceeded cases depleted as we focused on replenishing product inventories which
are expected to return to more normal levels by the end of Fiscal 2022.
Wine and Spirits segment Third Third
[[Image Removed: stz-20211130_g4.jpg]] Quarter Quarter Dollar Percent
2022 2021 Change Change
(in millions, branded product, 9-liter case equivalents)
Net sales $ 568.0 $ 760.2 $ (192.2) (25 %)
Shipments
Total 8.1 13.2 (38.6 %)
Organic (1) 8.1 7.9 2.5 %
U.S. Domestic 7.0 12.2 (42.6 %)
Organic U.S. Domestic (1) 7.0 6.9 1.4 %
Depletions (1) (6.8 %)
(1)Includes an adjustment to remove volume associated with the Wine and Spirits
Divestitures and Paul Masson Divestiture for the period
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The decrease in Wine and Spirits net sales is due to $210.3 million from the
recent divestitures, partially offset by a $18.1 million increase in organic net
sales. The increase in organic net sales is driven by (i) $16.6 million increase
primarily from non-branded and bulk wine net sales, (ii) $12.8 million of
favorable impact from pricing, and (iii) $3.8 million increase in branded wine
and spirits shipment volume attributable to our continued focus on growing our
brands, partially offset by $14.7 million from unfavorable product mix shift
driven by timing. The increase in organic net sales was negatively impacted by
global supply chain logistics and route to market changes.
Canopy segment
Our ownership interest in Canopy allows us to exercise significant influence, but
not control, and, therefore, we account for our investment in Canopy under the
equity method. Amounts included for the Canopy segment represent 100% of Canopy's
reported results on a two-month lag. Accordingly, we recognize our share of Canopy's
earnings (losses) for the periods
(i) July through
Quarter 2022 results, (ii) July
through
[[Image Removed: stz-20211130_g5.jpg]] results, (iii) January through
(iv) January through September 2020, in our Nine Months 2021 results. Although we
own less than 100% of the outstanding shares of Canopy, 100% of its results are
included and subsequently eliminated in order to reconcile to our consolidated
financial statements. See "Income (loss) from unconsolidated investments" below for
a discussion of Canopy's net sales, gross profit (loss), selling, general, and
administrative expenses, and operating income (loss). This discussion is based on
information Canopy has publicly disclosed.
Gross profit
Third Third
Quarter Quarter Dollar Percent
2022 2021 Change Change
(in millions)
Beer $ 958.1 $ 952.7 $ 5.4 1 %
Wine and Spirits 269.6 327.8 (58.2) (18 %)
Canopy (56.5) 19.6 (76.1) NM
Consolidation and eliminations 56.5 (19.6) 76.1 NM
Comparable Adjustments (2.0) (12.3) 10.3 84 %
Consolidated gross profit $ 1,225.7 $ 1,268.2 $ (42.5) (3 %)
The increase in Beer is primarily
due to
and $30.2 million of shipment
volume growth, partially offset by
cost of product sold. The higher cost of product sold is largely due to
(i) $37.8 million of higher material costs, including pallets, aluminum, steel, and
[[Image Removed: stz-20211130_g3.jpg]] cartons, (ii)
compensation and benefits to support the growth of our Mexican beer portfolio, and
(iii) $11.6 million of higher
depreciation, partially offset by
favorable fixed cost absorption related to increased production levels as compared to
Third Quarter 2021.
Constellation Brands, Inc. Q3 FY 2022 Form 10-Q #WORTHREACHINGFOR I 40
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The decrease in Wine and Spirits gross profit is due to a decrease of
from the recent divestitures,
partially offset by a
gross profit. The increase in organic gross profit is attributable to
(i) $15.4 million of favorable
cost of product sold, (ii)
impact from pricing, and (iii)
bulk wine net sales, partially
offset by
[[Image Removed: stz-20211130_g4.jpg]] shift driven by timing. The decrease in cost of product sold was largely attributable
to (i) $15.5 million of net favorable fixed cost absorption and (ii) lower grape raw
materials and other cost saving
initiatives, partially offset by
increased transportation costs resulting from global supply chain logistics, including
inflation, and route to market changes. The net favorable fixed cost absorption in
Third Quarter 2022 primarily
resulted from
wildfires, partially offset by decreased production levels at certain facilities due
to a late frost in New Zealand which reduced the grape harvest.
Gross profit as a percent of net sales increased to 52.8% for Third Quarter 2022 compared with 52.0% for Third Quarter 2021. This increase was largely due to approximately (i) 120 basis points of favorable impact from the recent lower-margin wine and spirits divestitures, (ii) 70 basis points of favorable impact from Beer pricing in select markets, (iii) 60 basis points of rate growth from cost of product sold within theWine and Spirits segment, (iv) 40 basis points of favorable change in Comparable Adjustments, and (v) 35 basis points primarily related to favorable product mix shift within the Beer segment, partially offset by approximately 240 basis points of rate decline from higher cost of product sold within the Beer segment.
Selling, general, and administrative expenses
Third Third
Quarter Quarter Dollar Percent
2022 2021 Change Change
(in millions)
Beer $ 234.5 $ 238.2 $ (3.7) (2 %)
Wine and Spirits 125.1 145.5 (20.4) (14 %)
Corporate Operations and Other 44.3 61.4 (17.1) (28 %)
Canopy 114.5 233.0 (118.5) (51 %)
Consolidation and eliminations (114.5) (233.0) 118.5 51 %
Comparable Adjustments (18.1) 19.0 (37.1) NM
Consolidated selling, general, and
administrative expenses $ 385.8 $ 464.1 $ (78.3) (17 %)
The decrease in Beer is primarily
due to
partially offset by $11.5 million of increased general and administrative expenses.
The favorable marketing spend was driven by timing as many of our planned
investments to support the growth of our Mexican beer portfolio through media and
event sponsorships were suspended or canceled in the first half of Fiscal 2021 which
[[Image Removed: stz-20211130_g3.jpg]] shifted our normal spend to the second half of Fiscal 2021. The increase in general
and administrative expenses was driven primarily by unfavorable foreign currency
transaction losses and increased travel as compared to Third Quarter 2021 resulting
from COVID-19 containment measures, partially offset by lower compensation and
benefits primarily related to favorable stock-based compensation as compared to
Third Quarter 2021.
The decrease in Wine and Spirits is primarily due to
marketing spend and $9.2 million of decreased general and administrative expenses.
The favorable marketing spend was driven by timing as many of our planned
investments to support the growth of our brands through media and event sponsorships
[[Image Removed: stz-20211130_g4.jpg]] were suspended or canceled in the first half of Fiscal 2021 which shifted our normal
spend to the second half of Fiscal 2021. The decrease in general and administrative
expenses was driven by a decrease in outside services and lower compensation and
benefits primarily related to favorable stock-based compensation as compared to
Third Quarter 2021.
Constellation Brands, Inc. Q3 FY 2022 Form 10-Q #WORTHREACHINGFOR I 41
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The decrease in Corporate Operations and Other is largely due to an approximately
[[Image Removed: stz-20211130_g6.jpg]]
stock-based compensation as compared to Third Quarter 2021.
Selling, general, and administrative expenses as a percent of net sales decreased to 16.6% for Third Quarter 2022 as compared with 19.0% for Third Quarter 2021. The decrease is driven largely by (i) decreases in Beer, Corporate Operations and Other, andWine and Spirits segments selling, general, and administrative expenses, which resulted in approximately 240 basis points of rate decline, and (ii) a favorable change of approximately 175 basis points in Comparable Adjustments, partially offset by approximately 170 basis points of rate growth in connection with the recent wine and spirits divestitures. Operating income (loss) Third Third Quarter Quarter Dollar Percent 2022 2021 Change Change (in millions) Beer$ 723.6 $ 714.5 $ 9.1 1 % Wine and Spirits 144.5 182.3 (37.8) (21 %) Corporate Operations and Other (44.3) (61.4) 17.1 28 % Canopy (171.0) (213.4) 42.4 20 % Consolidation and eliminations 171.0 213.4 (42.4) (20 %) Comparable Adjustments 16.1 (52.3) 68.4
NM
Consolidated operating income (loss)
7 %
The increase in Beer is primarilyattributable to the favorable pricing impact,
[[Image Removed: stz-20211130_g3.jpg]] strong shipment volume growth within our Mexican beer portfolio, and favorable
marketing spend, largely offset by the higher operational costs and increased
general and administrative expenses, as described above.
The decrease in Wine and Spirits is largely attributable to the recent divestitures
[[Image Removed: stz-20211130_g4.jpg]] and unfavorable product mix shift, partially offset by the increase in organic net
sales, net favorable fixed cost absorption, lower marketing spend, and reduced
general and administrative expenses, as described above.
As previously discussed, the Corporate Operations and Other decrease in operating
[[Image Removed: stz-20211130_g6.jpg]] loss is largely due to the favorable stock-based compensation as compared to Third
Quarter 2021.
Income (loss) from unconsolidated investments
General
Third Third
Quarter Quarter Dollar Percent
2022 2021 Change Change
(in millions)
Unrealized net gain (loss) on securities
measured at fair value $ (199.7) $ 769.6 $ (969.3) (126 %)
Equity in earnings (losses) from Canopy
and related activities (4.2) (12.4) 8.2 66 %
Equity in earnings (losses) from other
equity method investees 32.1 25.2 6.9 27 %
$ (171.8) $ 782.4 $ (954.2) (122 %)
Constellation Brands, Inc. Q3 FY 2022 Form 10-Q #WORTHREACHINGFOR I 42
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Canopy segment
Canopy net sales increased to
million for Third Quarter 2021.
This increase of
attributable to an increase in global cannabis revenue, largely driven by higher
U.S. CBD sales. The increase in
global cannabis revenue was partially offset by a
decrease in other consumer product revenue resulting from supply chain challenges
and shipping restrictions of
vaporizers sold by
gross profit (loss) decreased to $19.6 million for Third Quarter
2021. This decrease of
[[Image Removed: stz-20211130_g5.jpg]] driven by inventory write-downs related to excess Canadian cannabis, price
compression in the Canadian recreational channel, and higher shipping and
warehousing costs in North America, partially offset by payroll subsidies received
from the Canadian government in Third Quarter 2022 pursuant to a COVID-19 relief
program. Canopy selling, general,
and administrative expenses decreased
million primarily from a reduction in (i) expected credit losses on financial assets
and related charges and (ii) asset impairment and restructuring costs, partially
offset by an increase in sales and marketing expenses. The combination of these
factors were the main contributors to the decrease in operating loss of
$42.4 million . Interest expense Interest expense decreased to$88.0 million for Third Quarter 2022 from$95.7 million for Third Quarter 2021. This decrease of$7.7 million , or 8%, is predominantly due to lower average borrowings of approximately$1.2 billion primarily attributable to the partial repayment of financing entered into in connection with theNovember 2018 Canopy Transaction. Loss on extinguishment of debt Loss on extinguishment of debt consists of the write-off of debt issuance costs in connection with the early redemption of our Senior Floating Rate Notes (Third Quarter 2021). (Provision for) benefit from income taxes Our effective tax rate for Third Quarter 2022 was 17.1% as compared with 12.0% for Third Quarter 2021. In comparison to prior year, our taxes were impacted primarily by: •valuation allowances on the unrealized net loss from the changes in fair value of our investment in Canopy and Canopy equity in earnings (losses); and •a net income tax benefit from stock-based compensation award activity for Third Quarter 2022 from changes in option exercise activity.
For additional information, refer to Note 11.
Net income (loss) attributable to CBI Net income attributable to CBI decreased to$470.8 million for Third Quarter 2022 from$1,280.9 million for Third Quarter 2021. This decrease in net income of$810.1 million is largely attributable to (i) the unrealized net loss from the changes in fair value of our investment in Canopy in Third Quarter 2022 as compared with an unrealized net gain in Third Quarter 2021 and (ii) the decrease inWine and Spirits net sales largely due to the recent divestitures, partially offset by improvements within the Beer segment.
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Nine Months 2022 compared to Nine Months 2021
Net sales
Nine Nine
Months Months Dollar Percent
2022 2021 Change Change
(in millions)
Beer $ 5,185.9 $ 4,697.9 $ 488.0 10 %
Wine and Spirits:
Wine 1,351.1 1,711.2 (360.1) (21 %)
Spirits 181.2 252.8 (71.6) (28 %)
Total Wine and Spirits 1,532.3 1,964.0 (431.7) (22 %)
Canopy 332.4 261.5 70.9 27 %
Consolidation and eliminations (332.4) (261.5) (70.9) (27 %)
Consolidated net sales $ 6,718.2 $ 6,661.9 $ 56.3 1 %
Beer segment Nine Nine
[[Image Removed: stz-20211130_g3.jpg]] Months Months Dollar Percent
2022 2021 Change Change
(in millions, branded product, 24-pack, 12-ounce case equivalents)
Net sales $ 5,185.9 $ 4,697.9 $ 488.0 10 %
Shipments 281.0 258.9 8.5 %
Depletions 8.7 %
The increase in Beer net sales is largely due to (i) $398.0 million of shipment
volume growth within our Mexican beer portfolio, which benefited from continued
consumer demand and a return to on-premise, including bars and restaurants, and
(ii) $120.4 million of favorable impact from pricing in select markets within
our Mexican beer portfolio, partially offset by $35.6 million of unfavorable
product mix primarily from a shift in package types and an increase of
on-premise keg sales.
Wine and Spirits segment Nine Nine
[[Image Removed: stz-20211130_g4.jpg]] Months Months Dollar Percent
2022 2021 Change Change
(in millions, branded product, 9-liter case equivalents)
Net sales $ 1,532.3 $ 1,964.0 $ (431.7) (22 %)
Shipments
Total 22.2 35.6 (37.6 %)
Organic (1) 22.2 21.2 4.7 %
U.S. Domestic 19.3 32.8 (41.2 %)
Organic U.S. Domestic (1) 19.3 18.6 3.8 %
Depletions (1) (5.5 %)
(1)Includes an adjustment to remove volume associated with the Wine and Spirits
Divestitures and Paul Masson Divestiture for the period March 1, 2020 , through
November 30, 2020 .
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The decrease in Wine and Spirits net sales is due to $578.5 million from the
recent divestitures, partially offset by a $146.8 million increase in organic
net sales. The increase in organic net sales is driven by (i) $42.7 million
increase from favorable product mix shift, (ii) $42.5 million increase in
branded wine and spirits shipment volume attributable to our continued focus on
growing our brands and an overlap of lower shipment volumes in Nine Months 2021
mainly from on-premise and retail tasting room closures as a result of COVID-19
containment measures, (iii) $36.8 million increase primarily from bulk wine and
non-branded net sales, and (iv) $19.0 million of favorable impact from pricing.
The increase in organic net sales was negatively impacted by global supply chain
logistics and route to market changes. For Nine Months 2022, the organic U.S.
shipment volume was ahead of the U.S. depletion volume largely driven by a
challenging overlap due to consumer pantry loading behavior in the first half of
Fiscal 2021 and timing related to transition activities with distributors that
occurred at the end of Fiscal 2021. We expect U.S. shipment volume to outpace
depletion volume for Fiscal 2022.
Gross profit
Nine Nine
Months Months Dollar Percent
2022 2021 Change Change
(in millions)
Beer $ 2,835.8 $ 2,632.9 $ 202.9 8 %
Wine and Spirits 707.6 868.2 (160.6) (18 %)
Canopy (26.6) (33.0) 6.4 19 %
Consolidation and eliminations 26.6 33.0 (6.4) (19 %)
Comparable Adjustments 31.3 (28.8) 60.1 NM
Consolidated gross profit $ 3,574.7 $ 3,472.3 $ 102.4 3 %
The increase in Beer is primarily
due to
$120.4 million of favorable
impact from pricing, partially offset by
higher cost of product sold. The higher cost of product sold is largely due to higher
operational costs including (i) a
excess inventory of hard seltzers resulting from a slowdown in the overall category,
[[Image Removed: stz-20211130_g3.jpg]] (ii)
and maintenance, (iii) $40.1 million of higher material costs, including aluminum,
pallets, steel, and cartons, and
(iv)
offset by (i) $46.4 million of favorable fixed cost absorption primarily as a result of
COVID-19 containment measures for Nine Months 2021 and increased production levels for
Nine Months 2022 and (ii) $14.1 million of foreign currency transactional benefits.
The decrease in Wine and Spirits gross profit is due to a decrease of
from the recent divestitures,
partially offset by a
gross profit. The increase in
organic gross profit is attributable to (i)
of growth in branded wine and spirits shipment volume, driven by our continued focus on
growing our brands as well as the return of our on-premise business, including bars,
restaurants, and tasting rooms following a relaxation of COVID-19 containment measures,
(ii) $19.0 million of favorable
pricing, (iii)
product mix shift, (iv) $9.0 million primarily related to favorable bulk wine and
[[Image Removed: stz-20211130_g4.jpg]] non-branded net sales, and (v)
cost of product sold was largely
attributable to (i) approximately
grape raw materials and other
cost saving initiatives and (ii)
favorable fixed cost absorption,
offset by
costs resulting from global supply chain logistics, including inflation, and route to
market changes. The net favorable fixed cost absorption in Nine Months 2022 primarily
resulted from the impact of the 2020 U.S. wildfires, partially offset by decreased
production levels at certain
facilities as a result of a late frost in
reduced the grape harvest.
Gross profit as a percent of net sales increased to 53.2% for Nine Months 2022 compared with 52.1% for Nine Months 2021. This increase was largely due to approximately (i) 110 basis points of favorable impact from
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the recent lower-margin wine and spirits divestitures, (ii) 85 basis points of
favorable change in Comparable Adjustments, (iii) 80 basis points of favorable
impact from Beer pricing in select markets, (iv) 20 basis points of rate growth
from volume within the Beer segment, and (v) 20 basis points primarily related
to favorable product mix shift within the Beer segment, partially offset by
approximately 190 basis points of rate decline from cost of product sold within
the Beer segment, driven by the increase in obsolescence.
Selling, general, and administrative expenses
Nine Nine
Months Months Dollar Percent
2022 2021 Change Change
(in millions)
Beer $ 746.1 $ 644.9 $ 101.2 16 %
Wine and Spirits 358.7 360.4 (1.7) 0 %
Corporate Operations and Other 161.7 171.3 (9.6) (6 %)
Canopy 481.4 1,038.0 (556.6) (54 %)
Consolidation and eliminations (481.4) (1,038.0) 556.6 54 %
Comparable Adjustments (11.9) 39.9 (51.8) NM
Consolidated selling, general, and
administrative expenses $ 1,254.6 $ 1,216.5 $ 38.1 3 %
The increase in Beer is primarily
due to
$42.2 million of increased
general and administrative expenses. The higher marketing
spend was driven by our planned investments to support the growth of our Mexican
[[Image Removed: stz-20211130_g3.jpg]] beer portfolio through media and event sponsorships. The increase in general and
administrative expenses was primarily driven by increased legal expense, increased
depreciation and other costs related to the implementation of a new ERP, unfavorable
foreign currency transaction losses, and higher compensation and benefits.
The decrease in Wine and Spirits is primarily due to a
[[Image Removed: stz-20211130_g4.jpg]] selling expenses, partially offset by
higher marketing spend was driven by timing and planned investments to support the
growth of our brands.
The decrease in Corporate Operations and Other is largely due to an approximate
$15 million decrease in
compensation and benefits, primarily related to favorable
stock-based compensation as
compared to Nine Months 2021, and
[[Image Removed: stz-20211130_g6.jpg]] favorable foreign currency impact as compared to Nine Months 2021, partially offset
by a $6 million increase in consulting services, primarily related to the
implementation of a new ERP, and an increase in travel as compared to reduced travel
in Nine Months 2021 resulting from COVID-19 containment measures.
Selling, general, and administrative expenses as a percent of net sales increased to 18.7% for Nine Months 2022 as compared with 18.3% for Nine Months 2021. The increase is driven largely by approximately 100 basis points of rate growth in connection with the recent wine and spirits divestitures, partially offset by the favorable change in Comparable Adjustments, contributing approximately 50 basis points of rate decline.
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Operating income (loss)
Nine Nine
Months Months Dollar Percent
2022 2021 Change Change
(in millions)
Beer $ 2,089.7 $ 1,988.0 $ 101.7 5 %
Wine and Spirits 348.9 507.8 (158.9) (31 %)
Corporate Operations and Other (161.7) (171.3) 9.6 6 %
Canopy (508.0) (1,071.0) 563.0 53 %
Consolidation and eliminations 508.0 1,071.0 (563.0) (53 %)
Comparable Adjustments (622.7) (92.7) (530.0) NM
Consolidated operating income (loss) $ 1,654.2 $ 2,231.8 $ (577.6) (26 %)
The increase in Beer is largelyattributable to the strong shipment volume growth
[[Image Removed: stz-20211130_g3.jpg]] within our Mexican beer portfolio and favorable pricing impact, partially offset by
higher operational costs, marketing spend, and general and administrative expenses,
as discussed above.
The decrease in Wine and Spirits is largely attributable to the recent divestitures,
[[Image Removed: stz-20211130_g4.jpg]] partially offset by the increase in organic net sales, led by branded wine and
spirits shipment volume growth, favorable pricing impact, bulk wine net sales, and
favorable product mix shift.
As previously discussed, the Corporate Operations and Other decrease in operating
[[Image Removed: stz-20211130_g6.jpg]] loss is largely due to the favorable stock-based compensation and favorable
foreign currency impact, partially offset by the increase in consulting services
and travel expense as compared to Nine Months 2021 .
Income (loss) from unconsolidated investments
General
Nine Nine
Months Months Dollar Percent
2022 2021 Change Change
(in millions)
Unrealized net gain (loss) on securities
measured at fair value $ (1,534.8) $ 524.7 $ (2,059.5) NM
Equity in earnings (losses) from Canopy
and related activities (1) (39.5) (421.0) 381.5 91 %
Equity in earnings (losses) from other
equity method investees 32.5 26.8 5.7 21 %
$ (1,541.8) $ 130.5 $ (1,672.3) NM
(1)Includes $70.7 million and $251.5 million of costs designed to improve their
organizational focus, streamline operations, and align production capability
with projected demand for Nine Months 2022 and Nine Months 2021, respectively.
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Canopy segment
Canopy net sales increased to
for Nine Months 2021. This
increase of
attributable to an increase in Canadian recreational sales and other consumer product
sales. The Canadian recreational sales for Nine Months 2022 benefited from (i) opening
of retail stores across Canada , (ii) the removal of COVID-19 containment measures
which adversely impacted Canopy's results in Nine Months 2021, and (iii) growth in
flower sales. The increase in other consumer product sales largely resulted from
expanded U.S. distribution for (i) sales of sports nutrition beverages and mixes sold
by BioSteel and (ii) vaporizers
sold by
by supply chain challenges and shipping restrictions. Canopy gross profit (loss)
improved to $(26.6) million for
Nine Months 2022 from
2021. This decrease in loss of [[Image Removed: stz-20211130_g5.jpg]] write-downs for Nine Months 2021 related to its organizational and strategic review of
their business, (ii) payroll subsidies received from the Canadian government in Nine
Months 2022 pursuant to a COVID-19 relief program, and (iii) increased net sales for
Nine Months 2022. The improvements in Canopy's gross profit (loss) were partially
offset by (i) inventory write-downs for Nine Months 2022 related to excess Canadian
cannabis, (ii) price compression in the Canadian recreational channel, and
(iii) higher shipping and
warehousing costs in
and administrative expenses
decreased
(i) asset impairment and restructuring charges related to their decision to close
greenhouse facilities as well as other changes related to its organizational and
strategic review of their business, (ii) expected credit losses on financial assets
and related charges, and (iii) stock-based compensation expense, partially offset by
an increase in sales and marketing expenses. The combination of these factors were the
main contributors to the $563.0 million decrease in operating loss.
Interest expense Interest expense decreased to$270.5 million for Nine Months 2022 from$295.9 million for Nine Months 2021. This decrease of$25.4 million , or 9%, is predominantly due to lower average borrowings of approximately$1.4 billion primarily attributable to the partial repayment of financing entered into in connection with theNovember 2018 Canopy Transaction. Loss on extinguishment of debt Loss on extinguishment of debt primarily consists of a make-whole payment in connection with the early redemption of our (i) 2.70%May 2017 Senior Notes and 2.65%November 2017 Senior Notes (Nine Months 2022) and (ii) 2.25%November 2017 senior notes (Nine Months 2021). (Provision for) benefit from income taxes Our effective tax rate for Nine Months 2022 was (115.8)% as compared with 20.2% for Nine Months 2021. In comparison to prior year, our taxes were impacted primarily by: •valuation allowances on a portion of the unrealized net loss from the changes in fair value of our investment in Canopy and Canopy equity in earnings (losses); •the effective tax rates applicable to our foreign businesses, including the impact of the long-lived asset impairment of brewery construction in progress; and •a net income tax benefit from stock-based compensation award activity for Nine Months 2022 from changes in option exercise activity.
For additional information, refer to Note 11.
We expect our reported effective tax rate for Fiscal 2022 to be in the range of 87% to 89%. This range includes the impacts of the long-lived asset impairment of brewery construction in progress, net income tax benefits from stock-based compensation award activity, and the unrealized net losses from our Canopy investment for Nine Months 2022. For additional information, refer to Note 5. Since estimates are not currently available, this range does not reflect any future changes in the fair value of our Canopy investment measured at fair value and any future equity in earnings (losses) and related activities from theCanopy Equity Method Investment .
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Net income (loss) attributable to CBI
Net income (loss) attributable to CBI decreased to $(435.8) million for Nine
Months 2022 from $1,615.1 million for Nine Months 2021. This decrease of
$2,050.9 million is largely attributable to (i) the unrealized net loss from the
changes in fair value of our investment in Canopy as compared with an unrealized
net gain in Nine Months 2021, (ii) the impairment of long-lived assets for Nine
Months 2022 in connection with certain assets at the Mexicali Brewery , (iii) the
decrease in Wine and Spirits net sales due largely to the recent divestitures,
and (iv) higher operational costs within the Beer segment, partially offset by
strong shipment volume growth within the Beer segment and the decrease in the
provision for income taxes.
Liquidity and Capital Resources
General
Our primary source of liquidity has been cash flow from operating activities. Our ability to consistently generate robust cash flow from our operations is one of our most significant financial strengths; it enables us to invest in our people and our brands, make capital investments and strategic acquisitions, provide a cash dividend program, and from time to time, repurchase shares of our common stock. Our largest use of cash in our operations is for purchasing and carrying inventories and carrying seasonal accounts receivable. Historically, we have used this cash flow to repay our short-term borrowings and fund capital expenditures. Additionally, our commercial paper program is used to fund our short-term borrowing requirements and to maintain our access to the capital markets. We use our short-term borrowings, including our commercial paper program, to support our working capital requirements and capital expenditures. We seek to maintain adequate liquidity to meet working capital requirements, fund capital expenditures, and repay scheduled principal and interest payments on debt. Absent deterioration of market conditions, we believe that cash flows from operating activities and financing activities will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments, periodic share repurchases, and anticipated capital expenditure requirements for both our short-term and long-term capital needs. As ofNovember 30, 2021 , the exercise of all Canopy warrants held by us would have required a cash outflow of approximately$5.9 billion based on the terms of theNovember 2018 Canopy Warrants. Cash flows Nine Nine Months Months Dollar Percent 2022 2021 Change Change (in millions) Net cash provided by (used in): Operating activities$ 2,444.1 $ 2,363.6 $ 80.5 3 % Investing activities (674.2) (643.2) (31.0) (5) % Financing activities (1,867.9) (1,654.7) (213.2) (13) % Effect of exchange rate changes on cash and cash equivalents (1.3) 5.8 (7.1) (122) % Net increase (decrease) in cash and cash equivalents$ (99.3) $ 71.5 $ (170.8) NM Constellation Brands, Inc. Q3 FY 2022 Form 10-Q #WORTHREACHINGFOR I 49
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Operating activities
The increase in net cash provided by (used in) operating activities consists of:
Nine Nine
Months Months Dollar Percent
2022 2021 Change Change
(in millions)
Net income (loss) $ (404.6) $ 1,641.2 $ (2,045.8) (125) %
Unrealized net (gain) loss on securities
measured at fair value 1,534.8 (524.7) 2,059.5 NM
Equity in (earnings) losses of equity
method investees and related activities,
net of distributed earnings 6.0 403.0 (397.0) (99) %
Impairment of brewery construction in
progress 665.9 - 665.9 NM
Other non-cash adjustments 439.3 659.4 (220.1) (33) %
Change in operating assets and liabilities,
net of effects from purchase and sale of
business 202.7 184.7 18.0 10 %
Net cash provided by (used in) operating
activities $ 2,444.1 $ 2,363.6 $ 80.5 3 %
The net change in operating assets and liabilities was largely driven by
benefits from (i) accounts payable primarily attributable to the timing of
payments for both the Beer and Wine and Spirits segments, (ii) other accrued
expenses and liabilities primarily from the timing of stock option exercise
activity, and (iii) an exclusivity payment in connection with distribution
arrangements for our U.S. wine and spirits brand portfolio. These benefits were
partially offset by higher inventory levels for the Beer and Wine and Spirits
segments largely resulting from COVID-19 related containment measures and the
2020 U.S. wildfires in Nine Months 2021. Additionally, the increase in net cash
provided by operating activities was partially offset by higher income tax
payments in Nine Months 2022 as compared to Nine Months 2021.
Investing activities
Net cash used in investing activities increased primarily due to (i) $131.0
million of higher capital expenditures, (ii) $38.3 million of lower proceeds
from sale of business, and (iii) $38.3 million of higher purchases of businesses
for Nine Months 2022 as compared with Nine Months 2021. The increase was
partially offset by the $173.9 million exercise of the November 2017 Canopy
Warrants in May 2020 .
Financing activities
The increase in net cash provided by (used in) financing activities consists of:
Nine Nine
Months Months Dollar Percent
2022 2021 Change Change
(in millions)
Net proceeds from (payments of) debt,
current and long-term, and related
activities $ (159.9) $ (1,236.5) $ 1,076.6 87 %
Dividends paid (430.5) (431.2) 0.7 0 %
Purchases of treasury stock (1,390.5) - (1,390.5) NM
Net cash provided by stock-based
compensation activities 149.9 35.5 114.4 NM
Distributions to noncontrolling interests (36.9) (22.5) (14.4) (64) %
Net cash provided by (used in) financing
activities $ (1,867.9) $ (1,654.7) $ (213.2) (13) %
Constellation Brands, Inc. Q3 FY 2022 Form 10-Q #WORTHREACHINGFOR I 50
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Debt
Total debt outstanding as of
[[Image Removed: stz-20211130_g7.jpg]]
Debt repayment Debt issuance
Bank facilities
In
Senior Notes InJuly 2021 , we issued the 2.25%July 2021 Senior Notes. Proceeds from this offering, net of discount and debt issuance costs, of$987.2 million were used towards the repayment of our 2.70%May 2017 Senior Notes and 2.65%November 2017 Senior Notes.
General
The majority of our outstanding borrowings as ofNovember 30, 2021 , consisted of fixed-rate senior unsecured notes, with maturities ranging from calendar 2023 to calendar 2050, and a variable-rate senior unsecured term loan facility under ourJune 2021 Term Credit Agreement, originally entered into inJune 2019 , with a calendar 2024 maturity date. Additionally, we have a commercial paper program which provides for the issuance of up to an aggregate principal amount of$2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 2020 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility. We do not have purchase commitments from buyers for our commercial paper and, therefore, our ability to issue commercial paper is subject to market demand. If the commercial paper market is not available to us for any reason when commercial paper borrowings mature, we intend to utilize unused commitments under our revolving credit facility under our 2020 Credit Agreement to repay commercial paper borrowings. We do not expect that fluctuations in demand for commercial paper will affect our liquidity given our borrowing capacity available under our revolving credit facility under our 2020 Credit Agreement.
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We had the following remaining borrowing capacity available under our 2020 Credit Agreement:
November 30, December 31,
2021 2021
(in millions)
Revolving credit facility (1) $ 1,744.8 $ 1,813.8 (1)Net of outstanding revolving credit facility borrowings and outstanding letters of credit under our 2020 Credit Agreement and outstanding borrowings under our commercial paper program.
The financial institutions participating in our 2020 Credit Agreement have complied with prior funding requests and we believe they will comply with any future funding requests. However, there can be no assurances that any particular financial institution will continue to do so. We and our subsidiaries are subject to covenants that are contained in our 2020 Credit Agreement, including those restricting the incurrence of additional indebtedness, additional liens, mergers and consolidations, transactions with affiliates, and sale and leaseback transactions, in each case subject to numerous conditions, exceptions, and thresholds. The financial covenants are limited to a minimum interest coverage ratio and a maximum net leverage ratio, both as defined in our 2020 Credit Agreement. As ofNovember 30, 2021 , under our 2020 Credit Agreement, the minimum interest coverage ratio was 2.5x and the maximum net leverage ratio was 4.0x. The representations, warranties, covenants, and events of default set forth in ourJune 2021 Term Credit Agreement are substantially similar to those set forth in our 2020 Credit Agreement.
Our indentures relating to our outstanding senior notes contain certain covenants, including, but not limited to: (i) a limitation on liens on certain assets, (ii) a limitation on certain sale and leaseback transactions, and (iii) restrictions on mergers, consolidations, and the transfer of all or substantially all of our assets to another person.
As ofNovember 30, 2021 , we were in compliance with our covenants under our 2020 Credit Agreement, ourJune 2021 Term Credit Agreement, and our indentures, and have met all debt payment obligations.
For a complete discussion and presentation of all borrowings and available sources of borrowing, refer to Note 12 of our consolidated financial statements included in our 2021 Annual Report and Note 10.
Common stock dividends
OnJanuary 5, 2022 , our Board of Directors declared a quarterly cash dividend of$0.76 per share of Class A Common Stock,$0.69 per share of ClassB Convertible Common Stock, and$0.69 per share of Class 1 Common Stock payable onFebruary 23, 2022 , to stockholders of record of each class as of the close of business onFebruary 9, 2022 .
We currently expect to continue to pay a regular quarterly cash dividend to stockholders of our common stock in the future, but such payments are subject to approval of our Board of Directors and are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A "Risk Factors" of our 2021 Annual Report.
Share Repurchase Program
Our Board of Directors authorized the repurchase of up to$3.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2018 Authorization and an additional repurchase of up to$2.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2021 Authorization. No shares have been repurchased under the 2021 Authorization.
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During Nine Months 2022, we repurchased 6,179,015 shares of Class A Common Stock
pursuant to the 2018 Authorization at an aggregate cost of $1,390.5 million , or
an average cost of $225.04 per share, through a combination of open market
transactions and an ASR that was announced in June 2021 . The shares repurchased
pursuant to the ASR, at an average purchase price paid of $223.17 per share,
include (i) 1,731,752 shares of Class A Common Stock received in July 2021 and
(ii) 508,645 shares of Class A Common Stock received in August 2021 in
connection with the early termination of the calculation period for the ASR by
the counterparty to the ASR transaction. We primarily used cash on hand to pay
the purchase price for the repurchased shares.
As of
Class A Common Shares
Repurchase Dollar Value of Number of Shares
Authorization Shares Repurchased Repurchased
(in millions, except share data)
2018 Authorization$ 3,000.0 $ 2,436.4 11,076,620 2021 Authorization$ 2,000.0 $ - -
Share repurchases under the 2018 Authorization and 2021 Authorization may be accomplished at management's discretion from time to time based on market conditions, our cash and debt position, and other factors as determined by management. Shares may be repurchased through open market or privately negotiated transactions. We may fund future share repurchases with cash generated from operations and/or proceeds from borrowings. Any repurchased shares become treasury shares, including shares repurchased under the 2018 Authorization.
We currently expect to continue to repurchase shares in the future, but such repurchases are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A "Risk Factors" of our 2021 Annual Report.
For additional information, refer to Note 17 of our consolidated financial statements included in our 2021 Annual Report and Note 12.
Capital expenditures
Management reviews the capital expenditure program periodically and modifies it
as required to meet current and projected future business needs. We have
recently updated our
For Nine Months 2022 we have spent$598.7 million for capital expenditures, including approximately$500 million for the Beer segment. We continue to plan to spend from$1.0 billion to$1.1 billion for capital expenditures in Fiscal 2022, including approximately$900 million for the Beer segment associated primarily with the Mexico Beer Projects. The remaining Fiscal 2022 capital expenditures consist of improvements to existing operating facilities and replacements of existing equipment and/or buildings. Total capital expenditures for the Beer segment are now expected to be$5.0 billion to$5.5 billion over Fiscal 2023 to Fiscal 2026, with the majority of spend expected to occur in the first three years of that timeframe. This updated capital investment includes the previously disclosed capital expenditure expectations of$700 million to$900 million annually over the next three fiscal years. This investment will support an additional 25 million to 30 million hectoliters of total capacity and includes construction of theSoutheast Mexico Brewery where there is ample water and a skilled workforce to meet our long-term needs, as well as continued expansion and optimization at our current brewery locations inNava andObregon .
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Accounting guidance
Accounting guidance adopted for Nine Months 2022 did not have a material impact on our 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 our control, which 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 fact included in this Quarterly Report on Form 10-Q are forward-looking statements, including without limitation: •The statements regarding the future reclassification of net losses from AOCI. •The statements regarding the current global COVID-19 pandemic. •The statements regarding the potential impact to supply, production levels, and costs due to wildfires, severe weather events, global supply chain logistics, and transportation. •The statements under Part I - Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding: •our business strategy, future operations, new products, future financial position, future net sales and expected volume and inventory trends, future marketing spend, future effective tax rates and anticipated tax liabilities, prospects, plans, and objectives of management; •information concerning expected or potential actions of third parties, including potential changes to international trade agreements, tariffs, taxes, other governmental rules and regulations, anticipated inflationary pressures and our responses thereto, and expected purchase accounting allocations; •information concerning the future expected balance of supply and demand for and inventory levels of our products; •timing and source of funds for operating activities andNovember 2018 Canopy Warrant exercises, if any; •the manner, timing, and duration of the share repurchase program and source of funds for share repurchases; and •the amount and timing of future dividends. •The statements regarding our beer expansion, optimization, and construction activities, including anticipated scope, capacity, costs, capital expenditures, and timeframes for completion, discussions with government officials inMexico , and potential future impairment of non-recoverable brewery construction assets and other costs. •The statements regarding: •the volatility of the fair value of our investment in Canopy measured at fair value; •our activities surrounding our investment in Canopy; •our targeted leverage ratio; •theNovember 2018 Canopy Warrants; and •our future ownership level in Canopy and our future share of Canopy's reported earnings and losses. •The statements regarding the Wine and Spirits Divestitures, including potential amount of contingent consideration, and the optimization of our wine and spirits portfolio. •The statements regarding Canopy's expectations and the transaction with Acreage. 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. We undertake no obligation to update or revise any forward-looking statements, whether as a
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result of new information, future events, or otherwise. Although we believe that
the expectations reflected in the forward-looking statements are reasonable, we
can give no assurance that such expectations will prove to be correct. In
addition to the risks and uncertainties of ordinary business operations and
conditions in the general economy and markets in which we compete, our
forward-looking statements contained in this Quarterly Report on Form 10-Q are
also subject to the risk and uncertainty that:
•the duration and impact of the COVID-19 pandemic, including but not limited to
the impact and severity of new variants, vaccine efficacy and immunization
rates, the closure of non-essential businesses, which may include our
manufacturing facilities, and other associated governmental containment actions,
quarantines, or curfews, may vary from our current expectations, and the
increase in cyber-security attacks that have occurred while non-production
employees work remotely;
•raw material and water supply, production, or shipment difficulties could
adversely affect our ability to supply our customers;
•the actual impact to supply, production levels, and costs due to wildfires,
severe weather events, global supply chain logistics, and transportation
challenges may vary from our current expectations due to, among other reasons,
the actual severity and geographical reach of wildfires and severe weather
events and actual supply chain and transportation performance;
•the actual balance of supply and demand for our products and percentage of our
portfolio distributed through any particular distributor may vary from current
expectations due to, among other reasons, actual raw material and water supply,
actual shipments to distributors, and actual consumer demand;
•the actual demand, net sales, and volume trends for our products may vary from
current expectations due to, among other reasons, actual shipments to
distributors and actual consumer demand;
•the amount, timing, and source of funds for any share repurchases or Canopy
warrant exercises, if any, may vary due to market conditions; our cash and debt
position; the impact of the beer operations expansion, optimization, and
construction activities; the impact of our investment in Canopy; any future
exercise of the November 2018 Canopy Warrants; the expected impacts of the Wine
and Spirits Divestitures; and other factors as determined by management from
time to time;
•the amount and timing of future dividends are subject to the determination and
discretion of our Board of Directors and may differ from our current
expectations if our ability to use cash flow to fund dividends is affected by
unanticipated increases in total net debt, we are unable to generate cash flow
at anticipated levels, or we fail to generate expected earnings;
•the fair value of our investment in Canopy may vary due to market and economic
conditions in Canopy's markets and business locations;
•the accuracy of management's projections relating to the Canopy investment may
vary from management's current expectations due to Canopy's actual results and
market and economic conditions;
•the timeframe and actual costs associated with the beer operations expansion,
optimization, and construction activities and amount of impairment or other
costs and expenses from non-recoverable brewery construction assets in Mexico
may vary from management's current expectations due to market conditions, our
cash and debt position, receipt of required regulatory approvals by the expected
dates and on the expected terms, results of discussions with government
officials in Mexico , actual amount of non-recoverable brewery construction
assets and other costs and expenses, and other factors as determined by
management;
•the amount of contingent consideration, if any, received in the Wine and
Spirits Divestitures will depend on actual future brand performance;
•the ability to respond to anticipated inflationary pressures and pass along
rising costs through increased selling prices may vary from management's current
expectations;
•purchase accounting with respect to any transaction, or the assumptions used
regarding the assets purchased and liabilities assumed to determine their fair
value, may vary from management's current expectations;
•any impact of U.S. federal laws on Canopy Strategic Transactions or upon the
implementation of such Canopy Strategic Transactions, or the impact of any
Canopy Strategic Transaction upon our future ownership level in Canopy or our
future share of Canopy's reported earnings and losses, may vary from
management's current expectations; and
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•our targeted leverage ratio may vary from management's current expectations due
to market conditions, our ability to generate cash flow at expected levels and
our ability to generate expected earnings.
For additional information about risks and uncertainties that could adversely
affect our forward looking statements, please refer to Item 1A. "Risk Factors"
of our 2021 Annual Report.
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