Constellation Brands(STZ) - 2025 Q2 - Quarterly Report

PART I PART I – FINANCIAL INFORMATION This section presents the unaudited consolidated financial statements and related notes for the period Item 1. Financial Statements This section presents the unaudited consolidated financial statements for the quarter ended August 31, 2024, highlighting a $2.25 billion goodwill impairment charge Consolidated Balance Sheets Total assets decreased to $23.1 billion by August 31, 2024, primarily due to a $2.25 billion goodwill reduction, impacting total liabilities and equity Consolidated Balance Sheet Summary | Account | Aug 31, 2024 (in millions) | Feb 29, 2024 (in millions) | | :--- | :--- | :--- | | Total Current Assets | $3,646.8 | $3,729.5 | | Property, plant, and equipment | $7,898.8 | $8,055.2 | | Goodwill | $5,715.4 | $7,980.3 | | Total Assets | $23,079.1 | $25,691.7 | | Total Current Liabilities | $2,913.8 | $3,141.7 | | Long-term debt, less current maturities | $10,683.6 | $10,681.1 | | Total Liabilities | $14,923.2 | $15,627.1 | | Total Stockholders' Equity | $8,155.9 | $10,064.6 | Consolidated Statements of Comprehensive Income (Loss) The company reported a significant operating loss of $1.23 billion and net loss of $1.18 billion for the quarter, primarily due to a $2.25 billion goodwill impairment Consolidated Statements of Comprehensive Income (Loss) - Three Months Ended | Metric | Three Months Ended Aug 31, 2024 (in millions) | Three Months Ended Aug 31, 2023 (in millions) | | :--- | :--- | :--- | | Net Sales | $2,918.9 | $2,836.8 | | Gross Profit | $1,511.8 | $1,449.9 | | Goodwill Impairment | ($2,250.0) | $0 | | Operating Income (Loss) | ($1,229.4) | $978.7 | | Net Income (Loss) Attributable to CBI | ($1,199.0) | $690.0 | | Diluted EPS Attributable to CBI | ($6.59) | $3.74 | Consolidated Statements of Comprehensive Income (Loss) - Six Months Ended | Metric | Six Months Ended Aug 31, 2024 (in millions) | Six Months Ended Aug 31, 2023 (in millions) | | :--- | :--- | :--- | | Net Sales | $5,580.7 | $5,351.7 | | Gross Profit | $2,915.6 | $2,707.7 | | Goodwill Impairment | ($2,250.0) | $0 | | Operating Income (Loss) | ($287.8) | $1,743.4 | | Net Income (Loss) Attributable to CBI | ($322.0) | $825.9 | | Diluted EPS Attributable to CBI | ($1.77) | $4.49 | Consolidated Statements of Cash Flows Operating cash flow increased to $1.87 billion for the six months ended August 31, 2024, while investing and financing activities used $857.6 million and $1.10 billion respectively Consolidated Statements of Cash Flows Summary | Cash Flow Activity | Six Months Ended Aug 31, 2024 (in millions) | Six Months Ended Aug 31, 2023 (in millions) | | :--- | :--- | :--- | | Net cash provided by operating activities | $1,872.3 | $1,622.0 | | Net cash used in investing activities | ($857.6) | ($600.9) | | Net cash used in financing activities | ($1,104.0) | ($1,072.4) | | Net (decrease) in cash and cash equivalents | ($87.8) | ($50.2) | Notes to Consolidated Financial Statements Detailed notes disclose a $2.25 billion goodwill impairment in Wine and Spirits, the Sea Smoke acquisition, and changes to the Canopy Growth investment - A goodwill impairment of $2,250.0 million was recorded for the Wine and Spirits reporting unit as of August 31, 2024. This was triggered by negative trends in the U.S. wholesale market, declines in the overall wine market, and underperformance of mainstream and premium wine brands[30] - In June 2024, the company acquired the Sea Smoke business, a California-based luxury wine brand, for $170.0 million. The acquisition included goodwill, inventory, and a trademark, and is reported within the Wine and Spirits segment[36] - In April 2024, the company converted its 17.1 million Canopy common shares into non-voting Exchangeable Shares and exchanged a C$81.2 million promissory note for an additional 9.1 million Exchangeable Shares, resulting in an $83.3 million net gain[42] Segment Net Sales and Operating Income | Segment | Net Sales (Six Months 2025, in millions) | Operating Income (Six Months 2025, in millions) | | :--- | :--- | :--- | | Beer | $4,803.0 | $2,000.7 | | Wine and Spirits | $777.7 | $130.2 | | Corporate and Other | N/A | ($117.1) | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses financial performance, highlighting strong Beer segment growth offset by Wine and Spirits challenges and a $2.25 billion goodwill impairment, while maintaining strong liquidity Overview and Strategy Constellation Brands, a leading producer of beer, wine, and spirits, focuses its strategy on brand building, premiumization, and operational efficiency, with Modelo Especial now the 1 U.S. beer brand - The company is the second-largest beer company in the U.S., with Modelo Especial becoming the 1 beer brand in the U.S. market in dollar sales in Fiscal 2024[77] - Key strategic pillars include building strong brands, being consumer-obsessed, deploying capital with discipline, delivering on ESG initiatives, and achieving operational efficiency[81] Results of Operations Q2 2025 saw consolidated net sales increase 3% to $2.9 billion, driven by Beer segment growth, but a $2.25 billion goodwill impairment led to a $1.2 billion operating loss - Beer segment net sales for Q2 2025 increased 6% to $2.53 billion, driven by 4.6% shipment volume growth and favorable pricing[108] - Wine and Spirits segment net sales for Q2 2025 decreased 12% to $388.7 million, driven by a 9.8% decline in shipment volume and unfavorable product mix, reflecting challenging market conditions and retailer inventory destocking[109][110] - Beer segment gross profit for Q2 2025 increased by $137.7 million (11%), benefiting from volume growth, pricing, and over $65 million in cost savings from efficiency initiatives[111] - The company expects its reported effective tax rate for Fiscal 2025 to be in the range of 8% to 10%[135] Liquidity and Capital Resources Strong operating cash flow of $1.87 billion for the first six months of Fiscal 2025 supported investing activities of $857.6 million and financing activities of $1.1 billion, reducing total debt - Net cash from operating activities increased to $1.87 billion for the first six months of Fiscal 2025, up from $1.62 billion in the prior year[140] - Key uses of cash in the first six months of Fiscal 2025 included $703.1 million in capital expenditures and $158.3 million for the purchase of businesses (Sea Smoke)[12][143] - The company repurchased 1,778,281 shares of Class A Stock for $449.2 million in the first six months of Fiscal 2025. As of August 31, 2024, $2.16 billion remained available for future share repurchases[58][59] - On October 1, 2024, the Board of Directors declared a quarterly cash dividend of $1.01 per share of Class A Stock[150] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company manages market risks from foreign currency, commodity prices, and interest rates using derivatives, with significant hedging coverage for Fiscal 2025 exposures Derivative Contract Summary | Risk Exposure | Aggregate Notional Value (Aug 31, 2024) | Net Asset (Liability) Fair Value (Aug 31, 2024) | | :--- | :--- | :--- | | Foreign currency contracts | $3,604.0 million | $53.3 million | | Commodity derivative contracts | $342.8 million | ($23.9) million | - A hypothetical 1% increase in prevailing interest rates would increase interest expense on variable rate debt by $2.6 million for the six months ended August 31, 2024[162] Item 4. Controls and Procedures The CEO and CFO concluded that disclosure controls and procedures were effective as of August 31, 2024, with no material changes to internal controls - Management has concluded that the company's disclosure controls and procedures are effective to ensure that information required to be disclosed is recorded, processed, summarized, and reported within the specified time periods[163] PART II PART II – OTHER INFORMATION This section provides other required information, including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings This section refers to the Risk Factors section for information regarding legal proceedings Item 1A. Risk Factors Risk factors remain largely unchanged from the 2024 Annual Report, with an update on the definitive resolution of the Cervecería Modelo lawsuit in the company's favor - A lawsuit from Cervecería Modelo concerning the use of the Corona brand on Corona Hard Seltzer and the Modelo brand on Modelo Ranch Water has been definitively resolved. A jury verdict in favor of Constellation Brands was affirmed on appeal, and the judgment is now final[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 1,002,947 shares for $248.49 per share during Q2 2024, with $2.16 billion remaining for future repurchases Share Repurchase Activity | Period | Total Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value Remaining for Purchase (in millions) | | :--- | :--- | :--- | :--- | | June 2024 | 169,415 | $249.94 | $2,371.4 | | July 2024 | 624,154 | $250.90 | $2,214.8 | | August 2024 | 209,378 | $240.15 | $2,164.5 | | Total Q2 | 1,002,947 | $248.49 | $2,164.5 | Item 5. Other Information The company reports that during the three months ended August 31, 2024, no directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and various corporate governance and debt-related documents incorporated by reference