Constellation Brands(US:STZ)2024-07-03 17:15PART I – FINANCIAL INFORMATION Financial Statements This section presents the unaudited consolidated financial statements for Constellation Brands, Inc. for the quarterly period ended May 31, 2024 Consolidated Balance Sheets The Consolidated Balance Sheet as of May 31, 2024, shows total assets of $26.06 billion, an increase from $25.69 billion at February 29, 2024 Consolidated Balance Sheet Highlights (in millions) | Account | May 31, 2024 | February 29, 2024 | | :--- | :--- | :--- | | Total Assets | $26,060.1 | $25,691.7 | | Total Current Assets | $3,828.4 | $3,729.5 | | Property, plant, and equipment | $8,298.0 | $8,055.2 | | Goodwill | $7,985.4 | $7,980.3 | | Total Liabilities | $15,488.2 | $15,627.1 | | Total Current Liabilities | $3,122.2 | $3,141.7 | | Long-term debt, less current maturities | $10,682.9 | $10,681.1 | | Total Stockholders' Equity | $10,571.9 | $10,064.6 | Consolidated Statements of Comprehensive Income (Loss) For the three months ended May 31, 2024, net income attributable to CBI significantly increased to $877.0 million from $135.9 million, driven by higher net sales and a gain from unconsolidated investments Q1 FY2025 vs Q1 FY2024 Performance (in millions, except per share data) | Metric | Q1 2025 (ended May 31, 2024) | Q1 2024 (ended May 31, 2023) | | :--- | :--- | :--- | | Net sales | $2,661.8 | $2,514.9 | | Gross profit | $1,403.8 | $1,257.8 | | Operating income (loss) | $941.6 | $764.7 | | Income (loss) from unconsolidated investments | $82.0 | $(415.4) | | Net income (loss) attributable to CBI | $877.0 | $135.9 | | Diluted EPS attributable to CBI | $4.78 | $0.74 | Consolidated Statements of Cash Flows Net cash provided by operating activities slightly increased to $690.5 million, while cash used in investing and financing activities rose due to higher capital expenditures and treasury stock purchases Cash Flow Summary (in millions) | Activity | For the Three Months Ended May 31, 2024 | For the Three Months Ended May 31, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $690.5 | $665.4 | | Net cash used in investing activities | $(377.4) | $(291.9) | | Net cash used in financing activities | $(393.0) | $(314.7) | | Net (decrease) increase in cash | $(78.6) | $59.0 | - The increase in cash used for investing activities was primarily due to higher purchases of property, plant, and equipment, which rose to $375.3 million from $277.0 million year-over-year24 - Financing activities reflected a significant increase in treasury stock purchases, amounting to $200.0 million compared to $35.0 million in the prior-year quarter26 Notes to Consolidated Financial Statements This section details accounting policies and financial data, including derivative instruments, fair value measurements, and the conversion of the Canopy investment into Exchangeable Shares - In April 2024, the company converted its 17.1 million Canopy common shares into Exchangeable Shares and exchanged a C$81.2 million promissory note for 9.1 million Exchangeable Shares, resulting in a net gain of $83.3 million55 - The effective tax rate for Q1 2025 was 3.0%, significantly lower than 39.6% in Q1 2024, primarily due to a net income tax benefit from resolving tax examinations and a decreased valuation allowance related to the Canopy investment6566 - The company repurchased 775,334 shares of Class A Stock for $200.0 million during the quarter under its 2021 authorization72 Segment Net Sales (in millions) | Segment | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Beer | $2,272.8 | $2,098.6 | | Wine and Spirits | $389.0 | $416.3 | | Consolidated | $2,661.8 | $2,514.9 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A provides management's perspective on financial condition and operations, highlighting strong Beer segment growth and the impact of Canopy-related activities on net income Overview and Strategy Constellation Brands, a leading producer of beer, wine, and spirits, focuses on building strong brands, consumer-led decisions, disciplined capital deployment, and operational efficiency - The company is the second-largest beer company in the U.S., with Modelo Especial becoming the 1 beer brand in the U.S. in dollar sales in Fiscal 202494 - Key strategic pillars include building strong brands, being consumer-obsessed, deploying capital with discipline, delivering on ESG initiatives, and achieving operational efficiency100 - The Beer segment strategy focuses on growing its high-end imported brands, while the Wine and Spirits strategy is centered on higher-margin brands and creating operating efficiencies99101 Recent Developments Key recent activities include the acquisition of Sea Smoke luxury wine, the sale of Mexicali Brewery assets, and the conversion of Canopy investment into Exchangeable Shares - In June 2024, the company acquired the Sea Smoke luxury wine business to align with consumer-led premiumization trends109 - The company converted its Canopy common shares into 26.3 million Exchangeable Shares in April 2024, resulting in an $83.3 million net gain and ceasing to apply the equity method for this investment113 - In Q1 2024 (prior year), the company recognized a $123.5 million impairment on its Canopy Equity Method Investment115 Results of Operations Consolidated net sales increased by 6% driven by the Beer segment, while operating income grew 23% and net income surged due to favorable Canopy-related activities and lower taxes Segment Operating Income (in millions) | Segment | Q1 2025 | Q1 2024 | % Change | | :--- | :--- | :--- | :--- | | Beer | $923.0 | $797.8 | 16% | | Wine and Spirits | $59.7 | $79.3 | (25%) | | Corporate Operations and Other | $(58.7) | $(49.9) | (18%) | | Consolidated Operating Income | $941.6 | $764.7 | 23% | - Beer net sales increased by 8% due to a 7.6% rise in shipment volume and favorable pricing, reflecting continued strong consumer demand128 - Wine and Spirits net sales decreased by 7%, driven by a 5.1% decline in shipment volume and unfavorable product mix, particularly in U.S. wholesale129130 - Income from unconsolidated investments was a gain of $82.0 million, compared to a loss of $415.4 million in the prior year, primarily due to the $83.3 million net gain on the Canopy conversion and the absence of prior-year impairment and equity losses142 Liquidity and Capital Resources The company's liquidity is primarily from operating cash flow, used for capital expenditures and share repurchases, maintaining compliance with debt covenants and a revolving credit facility Cash Flow Summary (in millions) | Activity | Q1 2025 | Q1 2024 | | :--- | :--- | :--- | | Net cash from operating activities | $690.5 | $665.4 | | Net cash used in investing activities | $(377.4) | $(291.9) | | Net cash used in financing activities | $(393.0) | $(314.7) | - As of May 31, 2024, the company was in compliance with all debt covenants, including a minimum interest coverage ratio of 2.5x and a maximum net leverage ratio of 4.0x162163 - The Board of Directors has authorized share repurchases, with $2.37 billion remaining available for future repurchases as of July 3, 202473167 Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from foreign currency, commodity prices, and interest rates using derivatives, with significant portions of exposures hedged for Fiscal 2025 - The company hedges foreign currency risk, with primary exposures to the Mexican peso, Canadian dollar, New Zealand dollar, and euro, and 83% of forecasted transactional exposures for the rest of Fiscal 2025 were hedged181 - Commodity price risk for items like aluminum, corn, and natural gas is managed through derivatives, with 80% of forecasted exposures for the rest of Fiscal 2025 hedged182 Market Risk Sensitivity Analysis (in millions) | Risk Exposure | Aggregate Notional Value (May 31, 2024) | Fair Value (May 31, 2024) | Impact of 10% Adverse Change | | :--- | :--- | :--- | :--- | | Foreign currency contracts | $2,912.6 | $284.9 | $(181.6) | | Commodity derivative contracts | $351.5 | $(6.7) | $29.3 | Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective, with no material changes to internal control over financial reporting identified during the quarter - Management has concluded that the company's disclosure controls and procedures are effective to ensure timely and accurate reporting as required by the SEC188 - No changes occurred during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting189 PART II – OTHER INFORMATION Unregistered Sales of Equity Securities and Use of Proceeds This section details the repurchase of 775,334 shares of equity securities during Q1 FY2025 at an average price of $257.91 per share, with $2.41 billion remaining for future repurchases Issuer Purchases of Equity Securities (Q1 2025) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | March 2024 | — | $— | | April 2024 | 509,183 | $259.21 | | May 2024 | 266,151 | $255.42 | | Total | 775,334 | $257.91 | - Share repurchases were made under the $2.0 billion 2021 Authorization, with a separate $2.0 billion 2023 Authorization having no shares repurchased against it yet196 Other Information No directors or officers adopted or terminated Rule 10b5-1 or non-Rule 10b5-1 trading arrangements during the three months ended May 31, 2024 - There were no adoptions or terminations of Rule 10b5-1 trading arrangements by directors or officers during the quarter194 Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate documents, debt agreements, and CEO/CFO certifications - The exhibits include CEO and CFO certifications pursuant to Rule 13a-14(a) and 18 U.S.C. Section 1350, as well as XBRL data files201