CONSTELLATION BRANDS, INC.
10-Qs and 10-Ks
PROXIES
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
| ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
May 31, 2011
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________ to ____________________
Commission File Number 001-08495
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 16-0716709 | |
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
| 207 High Point Drive, Building 100, Victor, New York | 14564 | ||
| (Address of principal executive offices) | (Zip Code) | ||
(585) 678-7100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
x
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
x
No
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Large accelerated filer
x
|
Accelerated filer o | |
|
Non-accelerated filer
o
|
Smaller reporting company o | |
|
(Do not check if a smaller reporting company)
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes
o
No
x
The number of shares outstanding with respect to each of the classes of common stock of
Constellation Brands, Inc., as of June 30, 2011, is set forth below:
| Class | Number of Shares Outstanding | |
|
Class A Common Stock, par value $.01 per share
|
190,843,144 | |
|
Class B Common Stock, par value $.01 per share
|
23,595,558 | |
|
Class 1 Common Stock, par value $.01 per share
|
11,596 |
TABLE OF CONTENTS
Table of Contents
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are subject to a number of risks and uncertainties, many of which
are beyond the Company’s control, that could cause actual results to differ materially from those
set forth in, or implied by, such forward-looking statements. For further information regarding
such forward-looking statements, risks and uncertainties, please see “Information Regarding
Forward-Looking Statements” under Part I - Item 2 “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of this Quarterly Report on Form 10-Q.
Table of Contents
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
| May 31, | February 28, | |||||||
| 2011 | 2011 | |||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS:
|
||||||||
|
Cash and cash investments
|
$ | 13.4 | $ | 9.2 | ||||
|
Accounts receivable, net
|
459.3 | 417.4 | ||||||
|
Inventories
|
1,309.0 | 1,369.3 | ||||||
|
Prepaid expenses and other
|
174.4 | 287.1 | ||||||
|
|
||||||||
|
Total current assets
|
1,956.1 | 2,083.0 | ||||||
|
PROPERTY, PLANT AND EQUIPMENT, net
|
1,230.7 | 1,219.6 | ||||||
|
GOODWILL
|
2,632.6 | 2,619.8 | ||||||
|
INTANGIBLE ASSETS, net
|
896.4 | 886.3 | ||||||
|
OTHER ASSETS, net
|
359.6 | 358.9 | ||||||
|
|
||||||||
|
Total assets
|
$ | 7,075.4 | $ | 7,167.6 | ||||
|
|
||||||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
CURRENT LIABILITIES:
|
||||||||
|
Notes payable to banks
|
$ | 252.7 | $ | 83.7 | ||||
|
Current maturities of long-term debt
|
10.8 | 15.9 | ||||||
|
Accounts payable
|
104.8 | 129.2 | ||||||
|
Accrued excise taxes
|
23.3 | 14.2 | ||||||
|
Other accrued expenses and liabilities
|
391.8 | 419.9 | ||||||
|
|
||||||||
|
Total current liabilities
|
783.4 | 662.9 | ||||||
|
|
||||||||
|
LONG-TERM DEBT, less current maturities
|
2,728.9 | 3,136.7 | ||||||
|
|
||||||||
|
DEFERRED INCOME TAXES
|
590.8 | 583.1 | ||||||
|
|
||||||||
|
OTHER LIABILITIES
|
257.2 | 233.0 | ||||||
|
|
||||||||
|
COMMITMENTS AND CONTINGENCIES (NOTE 12)
|
||||||||
|
STOCKHOLDERS’ EQUITY:
|
||||||||
|
Class A Common Stock, $.01 par value-
Authorized, 322,000,000 shares;
Issued, 232,676,024 shares at May 31, 2011,
and 230,290,798 shares at February 28, 2011
|
2.3 | 2.3 | ||||||
|
Class B Convertible Common Stock, $.01 par value-
Authorized, 30,000,000 shares;
Issued, 28,605,058 shares at May 31, 2011,
and 28,617,758 shares at February 28, 2011
|
0.3 | 0.3 | ||||||
|
Additional paid-in capital
|
1,643.2 | 1,602.4 | ||||||
|
Retained earnings
|
1,736.8 | 1,662.3 | ||||||
|
Accumulated other comprehensive income
|
223.7 | 188.8 | ||||||
|
|
||||||||
|
|
3,606.3 | 3,456.1 | ||||||
|
|
||||||||
|
Less: Treasury stock -
|
||||||||
|
Class A Common Stock, 42,012,761 shares at
May 31, 2011, and 42,739,831 shares at
February 28, 2011, at cost
|
(889.0 | ) | (902.0 | ) | ||||
|
Class B Convertible Common Stock, 5,005,800 shares
at May 31, 2011, and February 28, 2011, at cost
|
(2.2 | ) | (2.2 | ) | ||||
|
|
||||||||
|
|
(891.2 | ) | (904.2 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
2,715.1 | 2,551.9 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 7,075.4 | $ | 7,167.6 | ||||
|
|
||||||||
The accompanying notes are an integral part of these statements.
2
Table of Contents
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
| For the Three Months Ended May 31, | ||||||||
| 2011 | 2010 | |||||||
|
SALES
|
$ | 710.7 | $ | 976.2 | ||||
|
Less - excise taxes
|
(75.4 | ) | (188.7 | ) | ||||
|
|
||||||||
|
Net sales
|
635.3 | 787.5 | ||||||
|
COST OF PRODUCT SOLD
|
(384.3 | ) | (517.5 | ) | ||||
|
|
||||||||
|
Gross profit
|
251.0 | 270.0 | ||||||
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
(138.2 | ) | (168.8 | ) | ||||
|
RESTRUCTURING CHARGES
|
(11.1 | ) | (4.9 | ) | ||||
|
|
||||||||
|
Operating income
|
101.7 | 96.3 | ||||||
|
EQUITY IN EARNINGS OF EQUITY METHOD INVESTEES
|
62.2 | 54.5 | ||||||
|
INTEREST EXPENSE, net
|
(44.3 | ) | (48.5 | ) | ||||
|
|
||||||||
|
Income before income taxes
|
119.6 | 102.3 | ||||||
|
PROVISION FOR INCOME TAXES
|
(45.1 | ) | (53.2 | ) | ||||
|
|
||||||||
|
NET INCOME
|
$ | 74.5 | $ | 49.1 | ||||
|
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||||||||
|
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||||||||
|
SHARE DATA:
|
||||||||
|
Earnings per common share:
|
||||||||
|
Basic - Class A Common Stock
|
$ | 0.36 | $ | 0.23 | ||||
|
|
||||||||
|
Basic - Class B Convertible Common Stock
|
$ | 0.32 | $ | 0.21 | ||||
|
|
||||||||
|
|
||||||||
|
Diluted - Class A Common Stock
|
$ | 0.35 | $ | 0.22 | ||||
|
|
||||||||
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Diluted - Class B Convertible Common Stock
|
$ | 0.32 | $ | 0.21 | ||||
|
|
||||||||
|
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||||||||
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Weighted average common shares outstanding:
|
||||||||
|
Basic - Class A Common Stock
|
187.046 | 192.713 | ||||||
|
Basic - Class B Convertible Common Stock
|
23.604 | 23.726 | ||||||
|
|
||||||||
|
Diluted - Class A Common Stock
|
214.914 | 218.856 | ||||||
|
Diluted - Class B Convertible Common Stock
|
23.604 | 23.726 | ||||||
The accompanying notes are an integral part of these statements.
3
Table of Contents
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| For the Three Months Ended May 31, | ||||||||
| 2011 | 2010 | |||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net income
|
$ | 74.5 | $ | 49.1 | ||||
|
|
||||||||
|
Adjustments to reconcile net income to net cash provided by operating
activities:
|
||||||||
|
Depreciation of property, plant and equipment
|
23.2 | 30.9 | ||||||
|
Stock-based compensation expense
|
13.7 | 11.0 | ||||||
|
Deferred tax provision
|
10.8 | 35.3 | ||||||
|
Amortization of intangible and other assets
|
3.7 | 3.7 | ||||||
|
Loss (gain) on disposal or impairment of long-lived assets, net
|
0.1 | (1.4 | ) | |||||
|
Equity in earnings of equity method investees, net of distributed earnings
|
(2.4 | ) | 23.1 | |||||
|
Gain on business sold, net
|
(1.4 | ) | - | |||||
|
Change in operating assets and liabilities:
|
||||||||
|
Accounts receivable, net
|
(42.4 | ) | (133.3 | ) | ||||
|
Inventories
|
67.5 | 61.0 | ||||||
|
Prepaid expenses and other current assets
|
11.4 | 7.0 | ||||||
|
Accounts payable
|
(21.8 | ) | (30.6 | ) | ||||
|
Accrued excise taxes
|
9.0 | 8.5 | ||||||
|
Other accrued expenses and liabilities
|
71.8 | (0.3 | ) | |||||
|
Other, net
|
23.6 | (3.9 | ) | |||||
|
|
||||||||
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Total adjustments
|
166.8 | 11.0 | ||||||
|
|
||||||||
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Net cash provided by operating activities
|
241.3 | 60.1 | ||||||
|
|
||||||||
|
|
||||||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchases of property, plant and equipment
|
(21.0 | ) | (25.6 | ) | ||||
|
Payments related to sale of business
|
(7.5 | ) | (1.6 | ) | ||||
|
Proceeds from note receivable
|
1.0 | 60.0 | ||||||
|
Proceeds from sales of assets
|
0.1 | 1.1 | ||||||
|
Investments in equity method investees
|
- | (29.6 | ) | |||||
|
Other investing activities
|
(6.4 | ) | 0.3 | |||||
|
|
||||||||
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Net cash (used in) provided by investing activities
|
(33.8 | ) | 4.6 | |||||
|
|
||||||||
|
|
||||||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Principal payments of long-term debt
|
(417.3 | ) | (1.3 | ) | ||||
|
Payment of minimum tax withholdings on stock-based payment awards
|
(2.2 | ) | (0.4 | ) | ||||
|
Net proceeds from notes payable
|
168.5 | 194.6 | ||||||
|
Proceeds from exercises of employee stock options
|
36.5 | 16.7 | ||||||
|
Proceeds from excess tax benefits from stock-based payment awards
|
9.9 | 4.6 | ||||||
|
Purchases of treasury stock
|
- | (300.0 | ) | |||||
|
Payment of financing costs of long-term debt
|
- | (0.2 | ) | |||||
|
|
||||||||
|
Net cash used in financing activities
|
(204.6 | ) | (86.0 | ) | ||||
|
|
||||||||
|
|
||||||||
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Effect of exchange rate changes on cash and cash investments
|
1.3 | (1.3 | ) | |||||
|
|
||||||||
|
|
||||||||
|
NET INCREASE (DECREASE) IN CASH AND CASH INVESTMENTS
|
4.2 | (22.6 | ) | |||||
|
CASH AND CASH INVESTMENTS, beginning of period
|
9.2 | 43.5 | ||||||
|
|
||||||||
|
CASH AND CASH INVESTMENTS, end of period
|
$ | 13.4 | $ | 20.9 | ||||
|
|
||||||||
|
|
||||||||
|
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
|
||||||||
|
Property, plant and equipment acquired under financing arrangements
|
$ | 4.1 | $ | 2.5 | ||||
|
|
||||||||
The accompanying notes are an integral part of these statements.
4
Table of Contents
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2011
(unaudited)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2011
(unaudited)
1. BASIS OF PRESENTATION:
The consolidated financial statements included herein have been prepared by Constellation
Brands, Inc. and its subsidiaries (the “Company”), without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form
10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the
financial information for the Company. All such adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial statements, prepared in
accordance with generally accepted accounting principles, have been condensed or omitted as
permitted by such rules and regulations. These consolidated financial statements and related notes
should be read in conjunction with the consolidated financial statements and related notes included
in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2011. Results
of operations for interim periods are not necessarily indicative of annual results.
2. RECENTLY ADOPTED ACCOUNTING GUIDANCE:
Fair value measurements and disclosures –
In January 2010, the Financial Accounting Standards Board (“FASB”) issued amended guidance for
fair value measurements and disclosures. This guidance requires an entity to (i) disclose
separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value
measurements and the reasons for the transfers, and (ii) present separately information about
purchases, sales, issuances and settlements on a gross basis in the reconciliation for fair value
measurements using significant unobservable inputs (Level 3). This guidance also clarifies
existing disclosures requiring an entity to provide fair value measurement disclosures for each
class of assets and liabilities and, for Level 2 or Level 3 fair value measurements, disclosures
about the valuation techniques and inputs used to measure fair value for both recurring and
nonrecurring fair value measurements. Effective March 1, 2010, the Company adopted the additional
disclosure requirements and clarifications of existing disclosures of this guidance, except for the
disclosures about purchases, sales, issuances and settlements in the reconciliation for fair value
measurements using significant unobservable inputs (Level 3). Effective March 1, 2011, the Company
adopted the additional disclosure requirement to present separately information about purchases,
sales, issuances and settlements on a gross basis in the reconciliation for fair value measurements
using significant unobservable inputs (Level 3). The adoption of the remaining provision of this
guidance on March 1, 2011, did not have a material impact on the Company’s consolidated financial
statements.
Intangibles – goodwill and other –
Effective March 1, 2011, the Company adopted amended guidance for when to perform Step 2 of
the goodwill impairment test for reporting units with zero or negative carrying amounts. The
amended guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or
negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of
the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In
determining whether it is more likely than not that a goodwill impairment exists, an entity should
consider whether there are any adverse qualitative factors indicating that an impairment may exist.
Any resulting goodwill impairment upon adoption should be recorded as a cumulative-effect
adjustment to beginning retained earnings in the period of adoption. The adoption of this amended
guidance on March 1, 2011, did not have a material impact on the Company’s consolidated financial
statements.
5
Table of Contents
3. INVENTORIES:
Inventories are stated at the lower of cost (computed in accordance with the first-in,
first-out method) or market. Elements of cost include materials, labor and overhead and consist of
the following:
| May 31, | February 28, | |||||||
| 2011 | 2011 | |||||||
|
(in millions)
|
||||||||
|
Raw materials and supplies
|
$ | 41.5 | $ | 38.2 | ||||
|
In-process inventories
|
953.0 | 1,012.1 | ||||||
|
Finished case goods
|
314.5 | 319.0 | ||||||
|
|
||||||||
|
|
$ | 1,309.0 | $ | 1,369.3 | ||||
|
|
||||||||
4. PREPAID EXPENSES AND OTHER:
The major components of prepaid expenses and other are as follows:
| May 31, | February 28, | |||||||
| 2011 | 2011 | |||||||
|
(in millions
)
|
||||||||
|
Income taxes receivable
|
$ | 85.6 | $ | 193.8 | ||||
|
Deferred tax assets
|
41.3 | 42.1 | ||||||
|
Other
|
47.5 | 51.2 | ||||||
|
|
||||||||
|
|
$ | 174.4 | $ | 287.1 | ||||
|
|
||||||||
5. DERIVATIVE INSTRUMENTS:
As a multinational company, the Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates that could affect the Company’s results of operations
and financial condition. The amount of volatility realized will vary based upon the effectiveness
and level of derivative instruments outstanding during a particular period of time, as well as the
currency and interest rate market movements during that same period.
The Company enters into derivative instruments, primarily interest rate swaps and foreign
currency forward and option contracts, to manage interest rate and foreign currency risks. In
accordance with the FASB guidance for derivatives and hedging, the Company recognizes all
derivatives as either assets or liabilities on the balance sheet and measures those instruments at
fair value (see Note 6). The fair values of the Company’s derivative instruments change with
fluctuations in interest rates and/or currency rates and are expected to offset changes in the
values of the underlying exposures. The Company’s derivative instruments are held solely to hedge
economic exposures. The Company follows strict policies to manage interest rate and foreign
currency risks, including prohibitions on derivative market-making or other speculative activities.
To qualify for hedge accounting treatment under the FASB guidance for derivatives and hedging,
the details of the hedging relationship must be formally documented at inception of the
arrangement, including the risk management objective, hedging strategy, hedged item, specific risk
that is being hedged, the derivative instrument, how effectiveness is being assessed and how
ineffectiveness will be measured. The derivative must be highly effective in offsetting either
changes in the fair value or cash flows, as appropriate, of the risk being hedged. Effectiveness
is evaluated on a retrospective and prospective basis based on quantitative measures.
6
Table of Contents
Certain of the Company’s derivative instruments do not qualify for hedge accounting treatment
under the FASB guidance for derivatives and hedging; for others, the Company chooses not to
maintain the required documentation to apply hedge accounting treatment. These undesignated
instruments are used to economically hedge the Company’s exposure to fluctuations in the value of
foreign currency denominated receivables and payables; foreign currency investments, primarily
consisting of loans to subsidiaries; and cash flows related primarily to repatriation of those
loans or investments. Foreign currency contracts, generally less than 12 months in duration, are
used to hedge some of these risks. The Company’s derivative policy permits the use of undesignated
derivatives when the derivative instrument is settled within the fiscal quarter or offsets a
recognized balance sheet exposure. In these circumstances, the mark to fair value is reported
currently through earnings in selling, general and administrative expenses on the Company’s
Consolidated Statements of Operations. As of May 31, 2011, and February 28, 2011, the Company had
undesignated foreign currency contracts outstanding with a notional value of $248.8 million and
$160.0 million, respectively. The Company had no undesignated interest rate swap agreements
outstanding as of May 31, 2011, and February 28, 2011.
Furthermore, when the Company determines that a derivative instrument which qualified for
hedge accounting treatment has ceased to be highly effective as a hedge, the Company discontinues
hedge accounting prospectively. The Company also discontinues hedge accounting prospectively when
(i) a derivative expires or is sold, terminated, or exercised; (ii) it is no longer probable that
the forecasted transaction will occur; or (iii) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
Cash flow hedges:
The Company is exposed to foreign denominated cash flow fluctuations in connection with third
party and intercompany sales and purchases and, historically, third party financing arrangements.
The Company primarily uses foreign currency forward and option contracts to hedge certain of these
risks. In addition, the Company utilizes interest rate swaps to manage its exposure to changes in
interest rates. Derivatives managing the Company’s cash flow exposures generally mature within
three years or less, with a maximum maturity of five years. Throughout the term of the designated
cash flow hedge relationship, but at least quarterly, a retrospective evaluation and prospective
assessment of hedge effectiveness is performed. All components of the Company’s derivative
instruments’ gains or losses are included in the assessment of hedge effectiveness. In the event
the relationship is no longer effective, the Company recognizes the change in the fair value of the
hedging derivative instrument from the date the hedging derivative instrument became no longer
effective immediately in the Company’s Consolidated Statements of Operations. In conjunction with
its effectiveness testing, the Company also evaluates ineffectiveness associated with the hedge
relationship. Resulting ineffectiveness, if any, is recognized immediately in the Company’s
Consolidated Statements of Operations in selling, general and administrative expenses.
The Company records the fair value of its foreign currency and interest rate swap contracts
qualifying for cash flow hedge accounting treatment in its consolidated balance sheet with the
effective portion of the related gain or loss on those contracts deferred in stockholders’ equity
(as a component of AOCI (as defined in Note 14)). These deferred gains or losses are recognized in
the Company’s Consolidated Statements of Operations in the same period in which the underlying
hedged items are recognized and on the same line item as the underlying hedged items. However, to
the extent that any derivative instrument is not considered to be highly effective in offsetting
the change in the value of the hedged item, the hedging relationship is terminated and the amount
related to the ineffective portion of this derivative instrument is immediately recognized in the
Company’s Consolidated Statements of Operations in selling, general and administrative expenses.
7
Table of Contents
As of May 31, 2011, and February 28, 2011, the Company had cash flow designated foreign
currency contracts outstanding with a notional value of $255.9 million and $166.4 million,
respectively. In addition, as of May 31, 2011, and February 28, 2011, the Company had cash flow
designated interest rate swap agreements outstanding with a notional value of $500.0 million (see
Note 10). The Company expects $5.4 million of net gains, net of income tax effect, to be
reclassified from AOCI to earnings within the next 12 months.
Fair value hedges:
Fair value hedges are hedges that offset the risk of changes in the fair values of recorded
assets and liabilities, and firm commitments. The Company records changes in fair value of
derivative instruments which are designated and deemed effective as fair value hedges, in earnings
offset by the corresponding changes in the fair value of the hedged items. The Company did not
designate any derivative instruments as fair value hedges for the three months ended May 31, 2011,
and May 31, 2010.
Net investment hedges:
Net investment hedges are hedges that use derivative instruments or non-derivative instruments
to hedge the foreign currency exposure of a net investment in a foreign operation. Historically,
the Company has managed currency exposures resulting from certain of its net investments in foreign
subsidiaries principally with debt denominated in the related foreign currency. Accordingly, gains
and losses on these instruments were recorded as foreign currency translation adjustments in AOCI.
The Company did not designate any derivative or non-derivative instruments as net investment hedges
for the three months ended May 31, 2011, and May 31, 2010.
Fair values of derivative instruments:
The fair value and location of the Company’s derivative instruments on its Consolidated
Balance Sheets are as follows:
| May 31, | February 28, | |||||||
| Balance Sheet Location | 2011 | 2011 | ||||||
| (in millions) | ||||||||
|
Derivative instruments designated as hedging instruments
|
||||||||
|
Foreign currency contracts
|
||||||||
|
Prepaid expenses and other
|
$ | 16.8 | $ | 11.0 | ||||
|
Other accrued expenses and liabilities
|
$ | 2.4 | $ | 3.4 | ||||
|
Other assets, net
|
$ | 3.7 | $ | 2.8 | ||||
|
Other liabilities
|
$ | 0.8 | $ | 0.9 | ||||
|
|
||||||||
|
Interest rate swap contracts
|
||||||||
|
Other accrued expenses and liabilities
|
$ | 9.2 | $ | 6.1 | ||||
|
Other assets, net
|
$ | - | $ | 1.7 | ||||
|
Other liabilities
|
$ | 11.0 | $ | - | ||||
|
|
||||||||
|
Derivative instruments not designated as hedging
instruments
|
||||||||
|
Foreign currency contracts
|
||||||||
|
Prepaid expenses and other
|
$ | 4.8 | $ | 3.2 | ||||
|
Other accrued expenses and liabilities
|
$ | 0.8 | $ | 1.0 | ||||
8
Table of Contents
The effect of the Company’s derivative instruments designated in cash flow hedging
relationships on its Consolidated Statements of Operations, as well as its Other Comprehensive
Income (“OCI”), net of income tax effect, is as follows:
| Net | Net Gain | |||||||||||
| Gain (Loss) | Reclassified | |||||||||||
| Recognized | from AOCI to | |||||||||||
| Derivative Instruments in | in OCI | Location of Net Gain | Income | |||||||||
| Designated Cash Flow | (Effective | Reclassified from AOCI to | (Effective | |||||||||
| Hedging Relationships | portion) | Income (Effective portion) | portion) | |||||||||
| (in millions) | ||||||||||||
|
For the Three Months Ended May 31, 2011
|
||||||||||||
|
Foreign currency contracts
|
$ | 3.7 |
Sales
|
$ | 1.0 | |||||||
|
Foreign currency contracts
|
3.9 |
Cost of product sold
|
- | |||||||||
|
Interest rate swap contracts
|
(9.6 | ) |
Interest expense, net
|
- | ||||||||
|
|
||||||||||||
|
Total
|
$ | (2.0 | ) |
Total
|
$ | 1.0 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
For the Three Months Ended May 31, 2010
|
||||||||||||
|
Foreign currency contracts
|
$ | (1.1 | ) |
Sales
|
$ | 3.6 | ||||||
|
Foreign currency contracts
|
(3.3 | ) |
Cost of product sold
|
2.2 | ||||||||
|
|
||||||||||||
|
Total
|
$ | (4.4 | ) |
Total
|
$ | 5.8 | ||||||
|
|
||||||||||||
| Net Gain | ||||||
| Recognized | ||||||
| Derivative Instruments in | Location of Net Gain | in Income | ||||
| Designated Cash Flow | Recognized in Income | (Ineffective | ||||
| Hedging Relationships | (Ineffective portion) | portion) | ||||
| (in millions) | ||||||
| For the Three Months Ended May 31, 2011 |
|
|||||
| Foreign currency contracts |
Selling, general and administrative expenses
|
$ | 0.6 | |||
|
|
||||||
|
|
||||||
| For the Three Months Ended May 31, 2010 |
|
|||||
| Foreign currency contracts |
Selling, general and administrative expenses
|
$ | 0.3 | |||
|
|
||||||
The effect of the Company’s undesignated derivative instruments on its Consolidated
Statements of Operations is as follows:
| Net | ||||||
| Gain (Loss) | ||||||
| Derivative Instruments not | Location of Net Gain (Loss) | Recognized | ||||
| Designated as Hedging Instruments | Recognized in Income | in Income | ||||
| (in millions) | ||||||
| For the Three Months Ended May 31, 2011 |
|
|||||
| Foreign currency contracts |
Selling, general and administrative expenses
|
$ | 3.1 | |||
|
|
||||||
|
|
||||||
| For the Three Months Ended May 31, 2010 |
|
|||||
| Foreign currency contracts |
Selling, general and administrative
expenses
|
$ | (4.3 | ) | ||
|
|
||||||
9
Table of Contents
Credit risk:
The Company enters into master agreements with its bank derivative trading counterparties that
allow netting of certain derivative positions in order to manage credit risk. The Company’s
derivative instruments are not subject to credit rating contingencies or collateral requirements.
As of May 31, 2011, the fair value of derivative instruments in a net liability position due to
counterparties was $20.6 million. If the Company were required to settle the net liability
position under these derivative instruments on May 31, 2011, the Company would have had sufficient
availability under its revolving credit facility to satisfy this obligation.
Counterparty credit risk:
Counterparty credit risk relates to losses the Company could incur if a counterparty defaults
on a derivative contract. The Company manages exposure to counterparty credit risk by requiring
specified minimum credit standards and diversification of counterparties. The Company enters into
master agreements with its bank derivative trading counterparties that allow netting of certain
derivative positions in order to manage counterparty credit risk. As of May 31, 2011, all of the
Company’s counterparty exposures are with financial institutions which have investment grade
ratings. The Company has procedures to monitor counterparty credit risk for both current and
future potential credit exposures. As of May 31, 2011, the fair value of derivative instruments in
a net receivable position due from counterparties was $21.8 million.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company calculates the fair value of financial instruments using quoted market prices
whenever available. When quoted market prices are not available, the Company uses standard pricing
models for various types of financial instruments (such as forwards, options, swaps, etc.) which
take into account the present value of estimated future cash flows.
The carrying amount and estimated fair value of the Company’s financial instruments are
summarized as follows:
| May 31, 2011 | February 28, 2011 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| (in millions) | ||||||||||||||||
|
Assets
:
|
||||||||||||||||
|
Cash and cash investments
|
$ | 13.4 | $ | 13.4 | $ | 9.2 | $ | 9.2 | ||||||||
|
Accounts receivable
|
$ | 459.3 | $ | 459.3 | $ | 417.4 | $ | 417.4 | ||||||||
|
Available-for-sale debt
securities
|
$ | 43.9 | $ | 43.9 | $ | 40.8 | $ | 40.8 | ||||||||
|
Foreign currency contracts
|
$ | 25.3 | $ | 25.3 | $ | 17.0 | $ | 17.0 | ||||||||
|
Interest rate swap contracts
|
$ | - | $ | - | $ | 1.7 | $ | 1.7 | ||||||||
|
Notes receivable
|
$ | 3.4 | $ | 3.4 | $ | 4.8 | $ | 4.8 | ||||||||
|
|
||||||||||||||||
|
Liabilities
:
|
||||||||||||||||
|
Notes payable to banks
|
$ | 252.7 | $ | 251.9 | $ | 83.7 | $ | 83.8 | ||||||||
|
Accounts payable
|
$ | 104.8 | $ | 104.8 | $ | 129.2 | $ | 129.2 | ||||||||
|
Long-term debt, including
current portion
|
$ | 2,739.7 | $ | 2,947.9 | $ | 3,152.6 | $ | 3,298.2 | ||||||||
|
Foreign currency contracts
|
$ | 4.0 | $ | 4.0 | $ | 5.3 | $ | 5.3 | ||||||||
|
Interest rate swap contracts
|
$ | 20.2 | $ | 20.2 | $ | 6.1 | $ | 6.1 | ||||||||
10
Table of Contents
The following methods and assumptions are used to estimate the fair value of each class
of financial instruments:
Cash and cash investments, accounts receivable and accounts payable:
The carrying amounts
approximate fair value due to the short maturity of these instruments.
Available-for-sale debt securities
: The fair value is estimated by discounting cash flows
using market-based inputs (see “Fair Value Measurements” below).
Foreign currency contracts:
The fair value is estimated using market-based inputs, obtained
from independent pricing services, into valuation models (see “Fair Value Measurements” below).
Interest rate swap contracts:
The fair value is estimated based on quoted market prices from
respective counterparties (see “Fair Value Measurements” below).
Notes receivable:
These instruments are fixed interest rate bearing notes. The fair value is
estimated by discounting cash flows using market-based inputs, including counterparty credit risk.
Notes payable to banks:
The revolving credit facility under the 2006 Credit Agreement (as
defined in Note 10) is a variable interest rate bearing note which includes a fixed margin which is
adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit Agreement). The fair
value of the revolving credit facility is estimated by discounting cash flows using LIBOR plus a
margin reflecting current market conditions obtained from participating member financial
institutions. The remaining instruments are variable interest rate bearing notes for which the
carrying value approximates the fair value.
Long-term debt:
The tranche B term loan facility under the 2006 Credit Agreement is a
variable interest rate bearing note which includes a fixed margin. The fair value of the tranche B
term loan facility is estimated by discounting cash flows using LIBOR plus a margin reflecting
current market conditions obtained from participating member financial institutions. The fair
value of the remaining long-term debt, which is all fixed rate, is estimated by discounting cash
flows using interest rates currently available for debt with similar terms and maturities.
Fair value measurements –
The FASB guidance on fair value measurements and disclosures defines fair value, establishes a
framework for measuring fair value under generally accepted accounting principles, and requires
disclosures about fair value measurements. This guidance emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and states that a fair value
measurement should be determined based on assumptions that market participants would use in pricing
an asset or liability. The fair value measurement guidance establishes a hierarchy for inputs used
in measuring fair value that maximizes the use of observable inputs and minimizes the use of
unobservable inputs by requiring that the most observable inputs be used when available. The
hierarchy is broken down into three levels: Level 1 inputs are quoted prices in active markets for
identical assets or liabilities; Level 2 inputs include data points that are observable such as
quoted prices for similar assets or liabilities in active markets, quoted prices for identical
assets or similar assets or liabilities in markets that are not active, and inputs (other than
quoted prices) such as interest rates and yield curves that are observable for the asset and
liability, either directly or indirectly; Level 3 inputs are unobservable data points for the asset
or liability, and include situations where there is little, if any, market activity for the asset
or liability.
11
Table of Contents
The following table presents the Company’s financial assets and liabilities measured at fair
value on a recurring basis.
| Quoted | Significant | |||||||||||||||
| Prices in | Other | Significant | ||||||||||||||
| Active | Observable | Unobservable | ||||||||||||||
| Markets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
May 31, 2011
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Available-for-sale debt securities
|
$ | - | $ | - | $ | 43.9 | $ | 43.9 | ||||||||
|
Foreign currency contracts
|
$ | - | $ | 25.3 | $ | - | $ | 25.3 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Foreign currency contracts
|
$ | - | $ | 4.0 | $ | - | $ | 4.0 | ||||||||
|
Interest rate swap contracts
|
$ | - | $ | 20.2 | $ | - | $ | 20.2 | ||||||||
|
|
||||||||||||||||
|
February 28, 2011
|
||||||||||||||||
|
Assets:
|
||||||||||||||||
|
Available-for-sale debt securities
|
$ | - | $ | - | $ | 40.8 | $ | 40.8 | ||||||||
|
Foreign currency contracts
|
$ | - | $ | 17.0 | $ | - | $ | 17.0 | ||||||||
|
Interest rate swap contracts
|
$ | - | $ | 1.7 | $ | - | $ | 1.7 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Foreign currency contracts
|
$ | - | $ | 5.3 | $ | - | $ | 5.3 | ||||||||
|
Interest rate swap contracts
|
$ | - | $ | 6.1 | $ | - | $ | 6.1 | ||||||||
The Company’s foreign currency contracts consist of foreign currency forward and option
contracts which are valued using market-based inputs, obtained from independent pricing services,
into valuation models. These valuation models require various inputs, including contractual terms,
market foreign exchange prices, interest-rate yield curves and currency volatilities. Interest
rate swap fair values are based on quotes from respective counterparties. Quotes are corroborated
by the Company using discounted cash flow calculations based upon forward interest-rate yield
curves, which are obtained from independent pricing services. Available-for-sale debt securities
are valued using market-based inputs into discounted cash flow models.
The following table represents a reconciliation of the changes in fair value of financial
instruments measured at fair value on a recurring basis using significant unobservable inputs
(Level 3).
| Available- | ||||
| For-Sale | ||||
| Debt | ||||
| Securities | ||||
| (in millions) | ||||
|
Balance at February 28, 2011
|
$ | 40.8 | ||
|
Total gains:
|
||||
|
Included in earnings
|
1.5 | |||
|
Included in other comprehensive income (foreign
currency translation adjustments)
|
1.6 | |||
|
|
||||
|
Total gains
|
43.9 | |||
|
Transfers in and/or out of Level 3
|
- | |||
|
|
||||
|
Balance at May 31, 2011
|
$ | 43.9 | ||
|
|
||||
12
Table of Contents
7. GOODWILL:
The changes in the carrying amount of goodwill are as follows:
| Constellation | Constellation | |||||||||||||||||||
| Wines | Wines | |||||||||||||||||||
| North | Australia and | Crown | Consolidations | |||||||||||||||||
| America | Europe | Imports | and | |||||||||||||||||
| (“CWNA”) | (“CWAE”) | LLC | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Balance, February 28, 2010
|
||||||||||||||||||||
|
Goodwill
|
$ | 2,570.6 | $ | 852.6 | $ | 13.0 | $ | (13.0 | ) | $ | 3,423.2 | |||||||||
|
Accumulated impairment losses
|
- | (852.6 | ) | - | - | (852.6 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
2,570.6 | - | 13.0 | (13.0 | ) | 2,570.6 | ||||||||||||||
|
Foreign currency translation
adjustments
|
49.2 | - | - | - | 49.2 | |||||||||||||||
|
Divestiture of business
|
||||||||||||||||||||
|
Goodwill
|
- | (852.6 | ) | - | - | (852.6 | ) | |||||||||||||
|
Accumulated impairment losses
|
- | 852.6 | - | - | 852.6 | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance, February 28, 2011
|
||||||||||||||||||||
|
Goodwill
|
2,619.8 | - | 13.0 | (13.0 | ) | 2,619.8 | ||||||||||||||
|
Accumulated impairment losses
|
- | - | - | - | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
2,619.8 | - | 13.0 | (13.0 | ) | 2,619.8 | ||||||||||||||
|
Foreign currency translation
adjustments
|
12.8 | - | - | - | 12.8 | |||||||||||||||
|
|
||||||||||||||||||||
|
Balance, May 31, 2011
|
||||||||||||||||||||
|
Goodwill
|
2,632.6 | - | 13.0 | (13.0 | ) | 2,632.6 | ||||||||||||||
|
Accumulated impairment losses
|
- | - | - | - | - | |||||||||||||||
|
|
||||||||||||||||||||
|
|
$ | 2,632.6 | $ | - | $ | 13.0 | $ | (13.0 | ) | $ | 2,632.6 | |||||||||
|
|
||||||||||||||||||||
Divestiture of the Australian and U.K. Business –
In January 2011, the Company sold 80.1% of its Australian and U.K. business (the “CWAE
Divestiture”) at a transaction value of $266.9 million, subject to post-closing adjustments. As of
May 31, 2011, the Company has received cash proceeds, net of cash divested of $15.8 million and
direct costs paid of $9.8 million, of $213.8 million, subject to post-closing adjustments. The
Company retained a 19.9% interest in its previously owned Australian and U.K. business, Accolade
Wines (“Accolade”) (see Note 9). The following table summarizes the net gain recognized and the
net cash proceeds received in connection with this divestiture.
| (in millions) | ||||
|
Net assets sold
|
$ | (734.1 | ) | |
|
Cash received from buyer, net of cash divested
|
223.6 | |||
|
Retained interest in Accolade
|
48.2 | |||
|
Estimated post-closing adjustments
|
(19.3 | ) | ||
|
Foreign currency reclassification
|
678.8 | |||
|
Indemnification liabilities (see Note 12)
|
(25.4 | ) | ||
|
Direct costs to sell, paid and accrued
|
(13.2 | ) | ||
|
Other
|
7.9 | |||
|
|
||||
|
Net gain on sale
|
166.5 | |||
|
Loss on settlement of pension
|
(109.9 | ) | ||
|
|
||||
|
Net gain
|
$ | 56.6 | ||
|
|
||||
13
Table of Contents
Of the $56.6 million net gain, $55.2 million was recognized for the fourth quarter of
fiscal 2011 and $1.4 million was recognized for the three months ended May 31, 2011. In addition,
the Company’s CWAE segment recorded an additional net gain of $28.5 million for the fourth quarter
of fiscal 2011, primarily associated with a net gain on derivative instruments of $20.8 million,
related to this divestiture. For the three months ended May 31, 2011, the Company recorded an
additional loss of $0.6 million related to this divestiture. Total net gains associated with this
divestiture of $84.5 million are included in selling, general and administrative expenses on the
Company’s Consolidated Statements of Operations, $83.7 million for the year ended February 28,
2011, and $0.8 million for the three months ended May 31, 2011.
8. INTANGIBLE ASSETS:
The major components of intangible assets are as follows:
| May 31, 2011 | February 28, 2011 | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Carrying | Carrying | Carrying | Carrying | |||||||||||||
| Amount | Amount | Amount | Amount | |||||||||||||
| (in millions) | ||||||||||||||||
|
Amortizable intangible assets:
|
||||||||||||||||
|
Customer relationships
|
$ | 83.4 | $ | 63.0 | $ | 83.2 | $ | 64.1 | ||||||||
|
Other
|
3.9 | 1.4 | 2.6 | - | ||||||||||||
|
|
||||||||||||||||
|
Total
|
$ | 87.3 | 64.4 | $ | 85.8 | 64.1 | ||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Nonamortizable intangible assets:
|
||||||||||||||||
|
Trademarks
|
826.3 | 816.5 | ||||||||||||||
|
Other
|
5.7 | 5.7 | ||||||||||||||
|
|
||||||||||||||||
|
Total
|
832.0 | 822.2 | ||||||||||||||
|
|
||||||||||||||||
|
Total intangible assets, net
|
$ | 896.4 | $ | 886.3 | ||||||||||||
|
|
||||||||||||||||
The Company did not incur costs to renew or extend the term of acquired intangible assets
during the three months ended May 31, 2011, and May 31, 2010. The difference between the gross
carrying amount and net carrying amount for each item presented is attributable to accumulated
amortization. Amortization expense for intangible assets was $1.2 million and $1.4 million for the
three months ended May 31, 2011, and May 31, 2010, respectively. Estimated amortization expense
for the remaining nine months of fiscal 2012 and for each of the five succeeding fiscal years and
thereafter is as follows:
| (in millions ) | ||||
|
2012
|
$ | 3.8 | ||
|
2013
|
$ | 5.1 | ||
|
2014
|
$ | 5.1 | ||
|
2015
|
$ | 4.8 | ||
|
2016
|
$ | 4.7 | ||
|
2017
|
$ | 4.7 | ||
|
Thereafter
|
$ | 36.2 |
14
Table of Contents
9. INVESTMENTS:
Investments in equity method investees –
Crown Imports:
Constellation Beers Ltd. (“Constellation Beers”) (previously known as Barton Beers, Ltd.), an
indirect wholly-owned subsidiary of the Company, and Diblo, S.A. de C.V. (“Diblo”), an entity owned
76.75% by Grupo Modelo, S.A.B. de C.V. (“Modelo”) and 23.25% by Anheuser-Busch Companies, Inc.,
each have, directly or indirectly, equal interests in a joint venture, Crown Imports LLC (“Crown
Imports”). Crown Imports has the exclusive right to import, market and sell Modelo’s Mexican beer
portfolio (the “Modelo Brands”) in the U.S. and Guam. In addition, Crown Imports also has the
exclusive rights to import, market and sell the Tsingtao and St. Pauli Girl brands in the U.S.
The Company accounts for its investment in Crown Imports under the equity method.
Accordingly, the results of operations of Crown Imports are included in equity in earnings of
equity method investees on the Company’s Consolidated Statements of Operations. As of May 31,
2011, and February 28, 2011, the Company’s investment in Crown Imports was $183.7 million and
$183.3 million, respectively. The carrying amount of the investment is greater than the Company’s
equity in the underlying assets of Crown Imports by $13.6 million due to the difference in the
carrying amounts of the indefinite-lived intangible assets contributed to Crown Imports by each
party. The Company received $59.4 million and $76.5 million of cash distributions from Crown
Imports for the three months ended May 31, 2011, and May 31, 2010, respectively, all of which
represent distributions of earnings.
Constellation Beers provides certain administrative services to Crown Imports. Amounts
related to the performance of these services for the three months ended May 31, 2011, and May 31,
2010, were not material. In addition, as of May 31, 2011, and February 28, 2011, amounts
receivable from Crown Imports were not material.
The following table presents summarized financial information for the Company’s Crown Imports
equity method investment. The amounts shown represent 100% of this equity method investments’
results of operations.
| Crown | ||||
| Imports | ||||
| (in millions) | ||||
|
For the Three Months Ended May 31, 2011
|
||||
|
Net sales
|
$ | 677.5 | ||
|
Gross profit
|
$ | 199.6 | ||
|
Income from continuing operations
|
$ | 119.6 | ||
|
Net income
|
$ | 119.6 | ||
|
|
||||
|
For the Three Months Ended May 31, 2010
|
||||
|
Net sales
|
$ | 621.5 | ||
|
Gross profit
|
$ | 176.2 | ||
|
Income from continuing operations
|
$ | 108.5 | ||
|
Net income
|
$ | 108.5 | ||
15
Table of Contents
Other:
In connection with the Company’s December 2004 investment in Ruffino S.r.l. (“Ruffino”), the
Company granted separate irrevocable and unconditional options to the two other shareholders of
Ruffino to put to the Company all of the ownership interests held by these shareholders for a price
as calculated in the joint venture agreement. Each option was exercisable during the period
starting from January 1, 2010, and ending on December 31, 2010. For the year ended February 28,
2010, in connection with the notification by the 9.9% shareholder of Ruffino to exercise its option
to put its entire equity interest in Ruffino to the Company for the specified minimum value of
€23.5 million, the Company recognized a loss of $34.3 million for the third quarter of fiscal 2010
on the contractual obligation created by this notification. In May 2010, the Company settled this
put option through a cash payment of €23.5 million ($29.6 million) to the 9.9% shareholder of
Ruffino, thereby increasing the Company’s equity interest in Ruffino from 40.0% to 49.9%. In
December 2010, the Company received notification from the 50.1% shareholder of Ruffino that it was
exercising its option to put its entire equity interest in Ruffino to the Company for €55.9
million. Prior to this notification, the Company had initiated arbitration proceedings against the
50.1% shareholder alleging various matters which should affect the validity of the put option.
However, subsequent to the initiation of the arbitration proceedings, the Company began discussions
with the 50.1% shareholder on a framework for settlement of all legal actions. The framework of
the settlement would include the Company’s purchase of the 50.1% shareholder’s entire equity
interest in Ruffino on revised terms to be agreed upon by both parties. As a result, the Company
recognized a loss for the fourth quarter of fiscal 2011 of €43.4 million ($60.0 million) on the
contingent obligation. During the three months ended May 31, 2011, the Company recognized a net
foreign currency loss of $2.2 million on the contractual obligation recorded in the fourth
quarter of fiscal 2011 in connection with the potential settlement created by the notification by
the 50.1% shareholder of Ruffino to exercise the option to put its entire equity interest in
Ruffino to the Company. This loss is included in selling, general and administrative expenses on
the Company’s Consolidated Statements of Operations. As of May 31, 2011, and February 28, 2011,
the Company’s investment in Ruffino was $9.3 million and $7.4 million, respectively.
Investment in Accolade –
In connection with the Company’s CWAE Divestiture, the Company retained a 19.9% interest in
Accolade, its previously owned Australian and U.K. business, which consists of equity securities
and available-for-sale debt securities. The investment in the equity securities is accounted for
under the cost method. Accordingly, the Company recognizes earnings only upon the receipt of a
dividend from Accolade. Dividends received in excess of net accumulated earnings since the date of
investment are considered a return of investment and are recorded as a reduction of the cost of the
investment. No dividends were received for the three months ended May 31, 2011. The
available-for-sale debt securities are measured at fair value on a recurring basis with unrealized
holding gains and losses, including foreign currency gains and losses, reported in AOCI until
realized. Interest income is recognized based on the interest rate implicit in the
available-for-sale debt securities’ fair value and is reported in interest expense, net, on the
Company’s Consolidated Statements of Operations. Interest income recognized in connection with the
available-for-sale debt securities was not material for the three months ended May 31, 2011. The
available-for-sale debt securities have a contractual maturity of twelve years from the date of
issuance and can be settled, at the option of the issuer, in cash, equity shares of the issuer, or
a combination thereof.
16
Table of Contents
10. BORROWINGS:
Borrowings consist of the following:
| February 28, | ||||||||||||||||
| May 31, 2011 | 2011 | |||||||||||||||
| Current | Long-term | Total | Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
Notes Payable to Banks
|
||||||||||||||||
|
Senior Credit Facility –
|
||||||||||||||||
|
Revolving Credit Loans
|
$ | 224.7 | $ | - | $ | 224.7 | $ | 74.9 | ||||||||
|
Other
|
28.0 | - | 28.0 | 8.8 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 252.7 | $ | - | $ | 252.7 | $ | 83.7 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Long-term Debt
|
||||||||||||||||
|
Senior Credit Facility –
Term Loans
|
$ | - | $ | 826.6 | $ | 826.6 | $ | 1,228.0 | ||||||||
|
Senior Notes
|
- | 1,893.9 | 1,893.9 | 1,893.6 | ||||||||||||
|
Other Long-term Debt
|
10.8 | 8.4 | 19.2 | 31.0 | ||||||||||||
|
|
||||||||||||||||
|
|
$ | 10.8 | $ | 2,728.9 | $ | 2,739.7 | $ | 3,152.6 | ||||||||
|
|
||||||||||||||||
Senior credit facility –
The Company and certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and
administrative agent, and certain other agents, lenders, and financial institutions are parties to
a credit agreement, as amended (the “2006 Credit Agreement”). The 2006 Credit Agreement provides
for aggregate credit facilities of $3,842.0 million, consisting of (i) a $1,200.0 million tranche
A term loan facility with an original final maturity in June 2011, fully repaid as of February 28,
2011, (ii) a $1,800.0 million tranche B term loan facility, of which
$1,500.0 million has a final maturity in June 2013 (the “2013 Tranche B Term Loans”) and $300.0
million has a final maturity in June 2015 (the “2015 Tranche B Term Loans”), and (iii) an $842.0
million revolving credit facility (including a sub-facility for letters of credit of up to $200.0
million), of which $192.0 million terminated in June 2011 (the “2011 Revolving Facility”) and
$650.0 million terminates in June 2013 (the “2013 Revolving Facility”). The Company uses its
revolving credit facility under the 2006 Credit Agreement for general corporate purposes.
As of May 31, 2011, following the prepayment of $400.0 million of the tranche B term loan
facility during the three months ended May 31, 2011, under the 2006 Credit Agreement, the Company
had outstanding 2013 Tranche B Term Loans of $624.7 million bearing an interest rate of 1.8%, 2015
Tranche B Term Loans of $201.9 million bearing an interest rate of 3.0%, 2011 Revolving Facility of
$41.0 million bearing an interest rate of 1.4%, 2013 Revolving Facility of $183.7 million bearing
an interest rate of 2.6%, outstanding letters of credit of $12.8 million, and $604.5 million in
revolving loans available to be drawn.
As of May 31, 2011, the required principal repayments of the tranche B term loan facility for
the remaining nine months of fiscal 2012 and for each of the four succeeding fiscal years are as
follows:
| Tranche B | ||||
| Term Loan | ||||
| Facility | ||||
| (in millions) | ||||
|
2012
|
$ | - | ||
|
2013
|
314.1 | |||
|
2014
|
314.1 | |||
|
2015
|
99.7 | |||
|
2016
|
98.7 | |||
|
|
||||
|
|
$ | 826.6 | ||
|
|
||||
17
Table of Contents
Through February 28, 2010, the Company had outstanding interest rate swap agreements
which were designated as cash flow hedges of $1,200.0 million of the Company’s floating LIBOR rate
debt. The designated cash flow hedges fixed the Company’s interest rates on $1,200.0 million of
the Company’s floating LIBOR rate debt through February 28, 2010. In addition, the Company had
offsetting undesignated interest rate swap agreements with an absolute notional amount of $2,400.0
million outstanding as of February 28, 2010. On March 1, 2010, the Company paid $11.9 million in
connection with the maturity of these outstanding interest rate swap agreements, which is reported
in other, net in cash flows from operating activities in the Company’s Consolidated Statements of
Cash Flows. In June 2010, the Company entered into a new five year delayed start interest rate
swap agreement effective September 1, 2011, which was designated as a cash flow hedge for $500.0
million of the Company’s floating LIBOR rate debt. Accordingly, the Company fixed its interest
rates on $500.0 million of the Company’s floating LIBOR rate debt at an average rate of 2.9%
(exclusive of borrowing margins) through September 1, 2016. The Company did not reclassify any
amount from AOCI to interest expense, net on its Consolidated Statements of Operations for the
three months ended May 31, 2011, and May 31, 2010.
11. INCOME TAXES:
The Company’s effective tax rate for the three months ended May 31, 2011, and May 31, 2010,
was 37.7% and 52.0%, respectively. The Company’s effective tax rate for the three months ended May
31, 2010, includes the recognition of a valuation allowance against deferred tax assets in the
United Kingdom of $28.1 million, partially offset by a decrease in uncertain tax positions in
connection with the completion of various income tax examinations.
12. COMMITMENTS AND CONTINGENCIES:
Indemnification liabilities –
In connection with the CWAE Divestiture, the Company indemnified respective parties against
certain liabilities that may arise related to certain contracts with certain investees of Accolade,
a certain facility in the U.K. and a certain income tax matter. As a result, the Company recorded
liabilities with a fair value of $26.1 million at January 31, 2011. During the three months ended
May 31, 2011, the Company was released from one of its guarantees related to a contract with a
certain investee of Accolade. In connection with this release, the Company recognized a gain of
$0.7 million, which is included in selling, general and administrative expenses on the Company’s
Consolidated Statements of Operations. As of May 31, 2011, and February 28, 2011, the carrying
amount of these indemnification liabilities was $25.4 million and $26.1 million, respectively. If
the indemnified party were to incur a liability, pursuant to the terms of the indemnification, the
Company would be required to reimburse the indemnified party. As of May 31, 2011, the Company
estimates that these indemnifications could require the Company to make potential future payments
of up to $330.9 million under these indemnifications with $282.1 million of this amount able to be
recovered by the Company from third parties under recourse provisions. The Company does not expect
to be required to make material payments under the indemnifications and the Company believes that
the likelihood is remote that the indemnifications could have a significant adverse effect on the
Company’s financial position, results of operations, cash flows or liquidity.
18
Table of Contents
Other contingency –
In February 2011, the Company terminated early a certain agreement with a certain equity
method investee. Based upon the terms of the certain agreement and the related joint venture
agreement, the Company concluded as of May 31, 2011, and February 28, 2011, that it is not probable
that there is a likelihood of loss under this contingency. Therefore, no liability has been
recorded by the Company related to this contingency. While the Company believes it should prevail
against any claim related to the early termination of this agreement, a loss of up to $57 million
could be incurred by the Company should it not prevail in any claim.
| 13. | EARNINGS PER COMMON SHARE: |
The Company has two classes of outstanding common stock: Class A Common Stock and Class B
Convertible Common Stock. Earnings per common share – basic excludes the effect of common stock
equivalents and is computed using the two-class computation method. Earnings per common share –
diluted for Class A Common Stock reflects the potential dilution that could result if securities or
other contracts to issue common stock were exercised or converted into common stock. Earnings per
common share – diluted for Class A Common Stock has been computed using the more dilutive of the
if-converted or two-class computation method. Using the if-converted method, earnings per common
share – diluted for Class A Common Stock assumes the exercise of stock options using the treasury
stock method and the conversion of Class B Convertible Common Stock. Using the two-class
computation method, earnings per common share – diluted for Class A Common Stock assumes the
exercise of stock options using the treasury stock method and no conversion of Class B Convertible
Common Stock. For the three months ended May 31, 2011, and May 31, 2010, earnings per common share
– diluted for Class A Common Stock has been calculated using the if-converted method. For the
three months ended May 31, 2011, and May 31, 2010, earnings per common share – diluted for Class B
Convertible Common Stock is presented without assuming conversion into Class A Common Stock and is
computed using the two-class computation method.
The computation of basic and diluted earnings per common share is as follows:
| For the Three Months | ||||||||
| Ended May 31, | ||||||||
| 2011 | 2010 | |||||||
| (in millions, except per share data) | ||||||||
|
Income available to common stockholders
|
$ | 74.5 | $ | 49.1 | ||||
|
|
||||||||
|
|
||||||||
|
Weighted average common shares outstanding – basic:
|
||||||||
|
Class A Common Stock
|
187.046 | 192.713 | ||||||
|
|
||||||||
|
Class B Convertible Common Stock
|
23.604 | 23.726 | ||||||
|
|
||||||||
|
|
||||||||
|
Weighted average common shares outstanding –
diluted:
|
||||||||
|
Class A Common Stock
|
187.046 | 192.713 | ||||||
|
Class B Convertible Common Stock
|
23.604 | 23.726 | ||||||
|
Stock-based awards, primarily stock options
|
4.264 | 2.417 | ||||||
|
|
||||||||
|
Weighted average common shares outstanding – diluted
|
214.914 | 218.856 | ||||||
|
|
||||||||
|
|
||||||||
|
Earnings per common share – basic:
|
||||||||
|
Class A Common Stock
|
$ | 0.36 | $ | 0.23 | ||||
|
|
||||||||
|
Class B Convertible Common Stock
|
$ | 0.32 | $ | 0.21 | ||||
|
|
||||||||
|
Earnings per common share – diluted:
|
||||||||
|
Class A Common Stock
|
$ | 0.35 | $ | 0.22 | ||||
|
|
||||||||
|
Class B Convertible Common Stock
|
$ | 0.32 | $ | 0.21 | ||||
|
|
||||||||
19
Table of Contents
For the three months ended May 31, 2011, and May 31, 2010, stock-based awards, primarily
stock options, which could result in the issuance of 8.7 million and 23.7 million shares,
respectively, of Class A Common Stock were outstanding, but were not included in the computation of
earnings per common share – diluted for Class A Common Stock because the effect of including such
awards would have been antidilutive.
| 14. | COMPREHENSIVE INCOME (LOSS): |
Comprehensive income (loss) consists of net income, foreign currency translation adjustments,
net unrealized (losses) gains on derivative instruments and pension/postretirement adjustments.
The reconciliation of net income to comprehensive income (loss) is as follows:
| Before Tax | Tax (Expense) | Net of Tax | ||||||||||
| Amount | Benefit | Amount | ||||||||||
| (in millions) | ||||||||||||
|
For the Three Months Ended May 31, 2011
|
||||||||||||
|
Net income
|
$ | 74.5 | ||||||||||
|
Other comprehensive income (loss):
|
||||||||||||
|
Foreign currency translation adjustments
|
$ | 39.3 | $ | (0.8 | ) | 38.5 | ||||||
|
Net unrealized loss on cash flow hedges:
|
||||||||||||
|
Net derivative losses
|
(5.4 | ) | 3.4 | (2.0 | ) | |||||||
|
Reclassification adjustments
|
(2.0 | ) | 0.4 | (1.6 | ) | |||||||
|
|
||||||||||||
|
Net loss recognized in other comprehensive income
|
(7.4 | ) | 3.8 | (3.6 | ) | |||||||
|
|
||||||||||||
|
Other comprehensive income
|
$ | 31.9 | $ | 3.0 | 34.9 | |||||||
|
|
||||||||||||
|
Total comprehensive income
|
$ | 109.4 | ||||||||||
|
|
||||||||||||
|
|
||||||||||||
|
For the Three Months Ended May 31, 2010
|
||||||||||||
|
Net income
|
$ | 49.1 | ||||||||||
|
Other comprehensive (loss) income:
|
||||||||||||
|
Foreign currency translation adjustments
|
$ | (51.1 | ) | $ | (4.1 | ) | (55.2 | ) | ||||
|
Net unrealized loss on cash flow hedges:
|
||||||||||||
|
Net derivative losses
|
(5.0 | ) | 0.6 | (4.4 | ) | |||||||
|
Reclassification adjustments
|
(8.0 | ) | 1.9 | (6.1 | ) | |||||||
|
|
||||||||||||
|
Net loss recognized in other comprehensive income
|
(13.0 | ) | 2.5 | (10.5 | ) | |||||||
|
Pension/postretirement adjustments:
|
||||||||||||
|
Net gains arising during the period
|
6.0 | (1.7 | ) | 4.3 | ||||||||
|
Reclassification adjustments
|
2.4 | (0.7 | ) | 1.7 | ||||||||
|
|
||||||||||||
|
Net gain recognized in other comprehensive income
|
8.4 | (2.4 | ) | 6.0 | ||||||||
|
|
||||||||||||
|
Other comprehensive loss
|
$ | (55.7 | ) | $ | (4.0 | ) | (59.7 | ) | ||||
|
|
||||||||||||
|
Total comprehensive loss
|
$ | (10.6 | ) | |||||||||
|
|
||||||||||||
Accumulated other comprehensive income (“AOCI”), net of income tax effect, includes the
following components:
| Net | ||||||||||||||||
| Foreign | Unrealized | Accumulated | ||||||||||||||
| Currency | Gains | Pension/ | Other | |||||||||||||
| Translation | (Losses) on | Postretirement | Comprehensive | |||||||||||||
| Adjustments | Derivatives | Adjustments | Income | |||||||||||||
| (in millions) | ||||||||||||||||
|
Balance, February 28, 2011
|
$ | 194.0 | $ | 4.2 | $ | (9.4 | ) | $ | 188.8 | |||||||
|
Current period change
|
38.5 | (3.6 | ) | - | 34.9 | |||||||||||
|
|
||||||||||||||||
|
Balance, May 31, 2011
|
$ | 232.5 | $ | 0.6 | $ | (9.4 | ) | $ | 223.7 | |||||||
|
|
||||||||||||||||
20
Table of Contents
| 15. | RESTRUCTURING CHARGES: |
Restructuring charges consist of employee termination benefit costs, contract termination
costs and other associated costs. Employee termination benefit costs are accounted for under the
FASB guidance for compensation – nonretirement postemployment benefits, as the Company has had
several restructuring programs which have provided employee termination benefits in the past. The
Company includes employee severance, related payroll benefit costs (such as costs to provide
continuing health insurance) and outplacement services as employee termination benefit costs.
Contract termination costs, and other associated costs including, but not limited to, facility
consolidation and relocation costs, are accounted for under the FASB guidance for exit or disposal
cost obligations. Contract termination costs are costs to terminate a contract that is not a
capital lease, including costs to terminate the contract before the end of its term or costs that
will continue to be incurred under the contract for its remaining term without economic benefit to
the Company. The Company includes costs to terminate certain operating leases for buildings,
computer and IT equipment, and costs to terminate contracts, including distributor contracts and
contracts for long-term purchase commitments, as contract termination costs. Other associated
costs include, but are not limited to, costs to consolidate or close facilities and relocate
employees. The Company includes employee relocation costs and equipment relocation costs as other
associated costs.
The Company’s significant restructuring plans with current activity are as follows:
Fiscal 2010 Global Initiative –
In April 2009, the Company announced its plan to simplify its business, increase efficiencies
and reduce its cost structure on a global basis (the “Global Initiative”). The Global Initiative
includes an approximate five percent reduction in the Company’s global workforce and the closing of
certain office, production and warehouse facilities. In addition, the Global Initiative includes
the termination of certain contracts, and a streamlining of the Company’s production footprint and
sales and administrative organizations. Lastly, the Global Initiative includes other non-material
restructuring activities primarily in connection with the consolidation of the Company’s remaining
spirits business into its North American wine business following the March 2009 divestiture of its
value spirits business. This initiative is part of the Company’s ongoing efforts to maximize asset
utilization, reduce costs and improve long-term return on invested capital throughout the Company’s
operations. The Company expects all costs associated with the Global Initiative to be recognized
in its Consolidated Statements of Operations by February 29, 2012, with the related cash
expenditures to be substantially completed by February 28, 2013.
Fiscal 2012 Initiative –
In May 2011, the Company committed to a plan (announced in June 2011) to streamline
operations, gain efficiencies and reduce its cost structure following the CWAE Divestiture (the
“Fiscal 2012 Initiative”). The Fiscal 2012 Initiative includes an approximate two to three percent
reduction in the Company’s global workforce. This initiative is part of the Company’s ongoing
efforts to maximize asset utilization, reduce costs and improve long-term return on invested
capital throughout the Company’s operations. The Company expects all costs and related cash
expenditures associated with the Fiscal 2012 Initiative to be completed by February 28, 2013.
21
Table of Contents
Details of each plan for which the Company expects to incur additional costs are presented
separately in the following table. Plans for which exit activities were completed prior to March
1, 2011, are reported below under “Other Plans.”
| Fiscal | ||||||||||||||||
| 2012 | Global | Other | ||||||||||||||
| Initiative | Initiative | Plans | Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
Restructuring liability, February 28, 2011
|
$ | - | $ | 7.6 | $ | 2.1 | $ | 9.7 | ||||||||
|
|
||||||||||||||||
|
Restructuring charges:
|
||||||||||||||||
|
Employee termination benefit costs
|
11.0 | 0.1 | - | 11.1 | ||||||||||||
|
Contract termination costs
|
- | - | - | - | ||||||||||||
|
Facility consolidation/relocation costs
|
- | - | - | - | ||||||||||||
|
|
||||||||||||||||
|
Restructuring charges, May 31, 2011
|
11.0 | 0.1 | - | 11.1 | ||||||||||||
|
|
||||||||||||||||
|
Cash expenditures
|
(0.9 | ) | (1.4 | ) | (0.3 | ) | (2.6 | ) | ||||||||
|
|
||||||||||||||||
|
Foreign currency translation adjustments
|
- | 0.6 | - | 0.6 | ||||||||||||
|
|
||||||||||||||||
|
Restructuring liability, May 31, 2011
|
$ | 10.1 | $ | 6.9 | $ | 1.8 | $ | 18.8 | ||||||||
|
|
||||||||||||||||
The following table presents a summary of restructuring charges and other costs incurred,
including a summary of amounts incurred by each of the Company’s reportable segments, in connection
with the Company’s restructuring plans noted above.
| Fiscal | ||||||||||||||||
| 2012 | Global | Other | ||||||||||||||
| Initiative | Initiative | Plans | Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
For the Three Months
Ended May 31, 2011
|
||||||||||||||||
|
Restructuring charges
|
$ | 11.0 | $ | 0.1 | $ | - | $ | 11.1 | ||||||||
|
Other costs:
|
||||||||||||||||
|
Accelerated depreciation/inventory
write-down/other costs (cost of
product sold)
|
- | 0.2 | - | 0.2 | ||||||||||||
|
Asset write-down/other
costs/acquisition-related integration
costs (selling, general and
administrative expenses)
|
1.0 | 0.1 | - | 1.1 | ||||||||||||
|
|
||||||||||||||||
|
Total other costs
|
1.0 | 0.3 | - | 1.3 | ||||||||||||
|
|
||||||||||||||||
|
Total costs
|
$ | 12.0 | $ | 0.4 | $ | - | $ | 12.4 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Costs by Reportable Segment:
|
||||||||||||||||
|
CWNA
|
||||||||||||||||
|
Restructuring charges
|
$ | 5.5 | $ | 0.1 | $ | - | $ | 5.6 | ||||||||
|
Other costs
|
0.1 | 0.3 | - | 0.4 | ||||||||||||
|
|
||||||||||||||||
|
Total CWNA
|
$ | 5.6 | $ | 0.4 | $ | - | $ | 6.0 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Corporate Operations and Other
|
||||||||||||||||
|
Restructuring charges
|
$ | 5.5 | $ | - | $ | - | $ | 5.5 | ||||||||
|
Other costs
|
0.9 | - | - | 0.9 | ||||||||||||
|
|
||||||||||||||||
|
Total Corporate Operations and Other
|
$ | 6.4 | $ | - | $ | - | $ | 6.4 | ||||||||
|
|
||||||||||||||||
22
Table of Contents
| Fiscal | ||||||||||||||||
| 2012 | Global | Other | ||||||||||||||
| Initiative | Initiative | Plans | Total | |||||||||||||
| (in millions) | ||||||||||||||||
|
For the Three Months
Ended May 31, 2010
|
||||||||||||||||
|
Restructuring charges
|
$ | - | $ | 4.8 | $ | 0.1 | $ | 4.9 | ||||||||
|
Other costs:
|
||||||||||||||||
|
Accelerated depreciation/inventory
write-down/other costs (cost of
product sold)
|
- | 1.0 | - | 1.0 | ||||||||||||
|
Asset write-down/other
costs/acquisition-related integration
costs (selling, general and
administrative expenses)
|
- | 0.9 | (0.9 | ) | - | |||||||||||
|
|
||||||||||||||||
|
Total other costs
|
- | 1.9 | (0.9 | ) | 1.0 | |||||||||||
|
|
||||||||||||||||
|
Total costs
|
$ | - | $ | 6.7 | $ | (0.8 | ) | $ | 5.9 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total Costs by Reportable Segment:
|
||||||||||||||||
|
CWNA
|
||||||||||||||||
|
Restructuring charges
|
$ | - | $ | 0.7 | $ | 0.1 | $ | 0.8 | ||||||||
|
Other costs
|
- | 1.7 | 0.1 | 1.8 | ||||||||||||
|
|
||||||||||||||||
|
Total CWNA
|
$ | - | $ | 2.4 | $ | 0.2 | $ | 2.6 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
CWAE
|
||||||||||||||||
|
Restructuring charges
|
$ | - | $ | 4.1 | $ | - | $ | 4.1 | ||||||||
|
Other costs
|
- | 0.2 | (1.0 | ) | (0.8 | ) | ||||||||||
|
|
||||||||||||||||
|
Total CWAE
|
$ | - | $ | 4.3 | $ | (1.0 | ) | $ | 3.3 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Corporate Operations and Other
|
||||||||||||||||
|
Restructuring charges
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Other costs
|
- | - | - | - | ||||||||||||
|
|
||||||||||||||||
|
Total Corporate Operations and Other
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
|
||||||||||||||||
A summary of restructuring charges and other costs incurred since inception for each of
the Company’s significant restructuring plans with current activity, as well as total expected
costs for such plans, are presented in the following table.
| Fiscal | ||||||||
| 2012 | Global | |||||||
| Initiative | Initiative | |||||||
| (in millions) | ||||||||
|
Costs incurred to date
|
||||||||
|
Restructuring charges:
|
||||||||
|
Employee termination benefit costs
|
$ | 11.0 | $ | 35.6 | ||||
|
Contract termination costs
|
- | 8.7 | ||||||
|
Facility consolidation/relocation costs
|
- | 2.6 | ||||||
|
Impairment charges on assets held for sale, net of
gains on sales of assets held for sale
|
- | - | ||||||
|
|
||||||||
|
Total restructuring charges
|
11.0 | 46.9 | ||||||
23
Table of Contents
| Fiscal | ||||||||
| 2012 | Global | |||||||
| Initiative | Initiative | |||||||
| (in millions) | ||||||||
|
Other costs:
|
||||||||
|
Accelerated depreciation/inventory
write-down/other costs (cost of product sold)
|
- | 13.7 | ||||||
|
Asset write-down/other costs/acquisition-related
integration costs (selling, general and
administrative expenses)
|
1.0 | 40.4 | ||||||
|
Asset impairment (impairment of goodwill and
intangible assets)
|
- | - | ||||||
|
|
||||||||
|
Total other costs
|
1.0 | 54.1 | ||||||
|
|
||||||||
|
Total costs incurred to date
|
$ | 12.0 | $ | 101.0 | ||||
|
|
||||||||
|
|
||||||||
|
Total Costs Incurred to Date by Reportable Segment:
|
||||||||
|
CWNA
|
||||||||
|
Restructuring charges
|
$ | 5.5 | $ | 23.1 | ||||
|
Other costs
|
0.1 | 42.9 | ||||||
|
|
||||||||
|
Total CWNA
|
$ | 5.6 | $ | 66.0 | ||||
|
|
||||||||
|
|
||||||||
|
CWAE
|
||||||||
|
Restructuring charges
|
$ | - | $ | 19.5 | ||||
|
Other costs
|
- | 6.2 | ||||||
|
|
||||||||
|
Total CWAE
|
$ | - | $ | 25.7 | ||||
|
|
||||||||
|
|
||||||||
|
Corporate Operations and Other
|
||||||||
|
Restructuring charges
|
$ | 5.5 | $ | 4.3 | ||||
|
Other costs
|
0.9 | 5.0 | ||||||
|
|
||||||||
|
Total Corporate Operations and Other
|
$ | 6.4 | $ | 9.3 | ||||
|
|
||||||||
|
|
||||||||
|
Total expected costs
|
||||||||
|
Restructuring charges:
|
||||||||
|
Employee termination benefit costs
|
$ | 12.6 | $ | 35.6 | ||||
|
Contract termination costs
|
- | 8.7 | ||||||
|
Facility consolidation/relocation costs
|
0.1 | 2.7 | ||||||
|
Impairment charges on assets held for sale, net of
gains on sales of assets held for sale
|
- | - | ||||||
|
|
||||||||
|
Total restructuring charges
|
12.7 | 47.0 | ||||||
|
Other costs:
|
||||||||
|
Accelerated depreciation/inventory
write-down/other costs (cost of product sold)
|
- | 13.8 | ||||||
|
Asset write-down/other costs/acquisition-related
integration costs (selling, general and
administrative expenses)
|
13.5 | 41.4 | ||||||
|
Asset impairment (impairment of goodwill and
intangible assets)
|
- | - | ||||||
|
|
||||||||
|
Total other costs
|
13.5 | 55.2 | ||||||
|
|
||||||||
|
Total expected costs
|
$ | 26.2 | $ | 102.2 | ||||
|
|
||||||||
|
|
||||||||
|
Total Expected Costs by Reportable Segment:
|
||||||||
|
CWNA
|
||||||||
|
Restructuring charges
|
$ | 6.1 | $ | 23.2 | ||||
|
Other costs
|
6.4 | 44.0 | ||||||
|
|
||||||||
|
Total CWNA
|
$ | 12.5 | $ | 67.2 | ||||
|
|
||||||||
24
Table of Contents
| Fiscal | ||||||||
| 2012 | Global | |||||||
| Initiative | Initiative | |||||||
| (in millions) | ||||||||
|
CWAE
|
||||||||
|
Restructuring charges
|
$ | - | $ | 19.5 | ||||
|
Other costs
|
- | 6.2 | ||||||
|
|
||||||||
|
Total CWAE
|
$ | - | $ | 25.7 | ||||
|
|
||||||||
|
|
||||||||
|
Corporate Operations and Other
|
||||||||
|
Restructuring charges
|
$ | 6.6 | $ | 4.3 | ||||
|
Other costs
|
7.1 | 5.0 | ||||||
|
|
||||||||
|
Total Corporate Operations and Other
|
$ | 13.7 | $ | 9.3 | ||||
|
|
||||||||
16. CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance sheets as of May 31,
2011, and February 28, 2011, the condensed consolidating statements of operations for the three
months ended May 31, 2011, and May 31, 2010, and the condensed consolidating statements of cash
flows for the three months ended May 31, 2011, and May 31, 2010, for the Company, the parent
company, the combined subsidiaries of the Company which guarantee the Company’s senior notes
(“Subsidiary Guarantors”) and the combined subsidiaries of the Company which are not Subsidiary
Guarantors (primarily foreign subsidiaries) (“Subsidiary Nonguarantors”). The Subsidiary
Guarantors are wholly-owned and the guarantees are full, unconditional, joint and several
obligations of each of the Subsidiary Guarantors. Separate financial statements for the Subsidiary
Guarantors of the Company are not presented because the Company has determined that such financial
statements would not be material to investors. The accounting policies of the parent company, the
Subsidiary Guarantors and the Subsidiary Nonguarantors are the same as those described for the
Company in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated
financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended
February 28, 2011, and include the recently adopted accounting guidance described in Note 2 herein.
There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the
Company in the form of cash dividends, loans or advances.
| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Condensed Consolidating Balance Sheet at May 31, 2011 | ||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash
investments
|
$ | 0.5 | $ | 1.0 | $ | 11.9 | $ | - | $ | 13.4 | ||||||||||
|
Accounts receivable, net
|
356.2 | 29.1 | 74.0 | - | 459.3 | |||||||||||||||
|
Inventories
|
128.8 | 880.2 | 306.4 | (6.4 | ) | 1,309.0 | ||||||||||||||
|
Prepaid expenses and
other
|
18.3 | 69.9 | 384.9 | (298.7 | ) | 174.4 | ||||||||||||||
|
Intercompany (payable)
receivable
|
(672.1 | ) | 578.4 | 93.7 | - | - | ||||||||||||||
|
|
||||||||||||||||||||
|
Total
current assets
|
(168.3 | ) | 1,558.6 | 870.9 | (305.1 | ) | 1,956.1 | |||||||||||||
|
Property, plant and
equipment, net
|
111.3 | 765.0 | 354.4 | - | 1,230.7 | |||||||||||||||
|
Investments in
subsidiaries
|
6,275.1 | 154.7 | - | (6,429.8 | ) | - | ||||||||||||||
|
Goodwill
|
- | 1,987.4 | 645.2 | - | 2,632.6 | |||||||||||||||
|
Intangible assets, net
|
- | 676.2 | 220.2 | - | 896.4 | |||||||||||||||
|
Other assets, net
|
29.4 | 253.7 | 79.2 | (2.7 | ) | 359.6 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 6,247.5 | $ | 5,395.6 | $ | 2,169.9 | $ | (6,737.6 | ) | $ | 7,075.4 | |||||||||
|
|
||||||||||||||||||||
25
Table of Contents
| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Notes payable to banks
|
$ | 224.7 | $ | - | $ | 28.0 | $ | - | $ | 252.7 | ||||||||||
|
Current maturities of
long-term debt
|
8.5 | 2.3 | - | - | 10.8 | |||||||||||||||
|
Accounts payable
|
7.1 | 74.8 | 22.9 | - | 104.8 | |||||||||||||||
|
Accrued excise taxes
|
15.9 | 3.1 | 4.3 | - | 23.3 | |||||||||||||||
|
Other accrued expenses
and liabilities
|
443.6 | 105.4 | 143.1 | (300.3 | ) | 391.8 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total
current liabilities
|
699.8 | 185.6 | 198.3 | (300.3 | ) | 783.4 | ||||||||||||||
|
Long-term debt, less
current maturities
|
2,722.0 | 6.9 | - | - | 2,728.9 | |||||||||||||||
|
Deferred income taxes
|
- | 505.5 | 88.0 | (2.7 | ) | 590.8 | ||||||||||||||
|
Other liabilities
|
110.6 | 58.2 | 88.4 | - | 257.2 | |||||||||||||||
|
Stockholders’ equity:
|
||||||||||||||||||||
|
Preferred stock
|
- | 9.0 | 1,130.7 | (1,139.7 | ) | - | ||||||||||||||
|
Class A and Class B
Convertible Common
Stock
|
2.6 | 100.7 | 24.0 | (124.7 | ) | 2.6 | ||||||||||||||
|
Additional paid-in
capital
|
1,643.2 | 1,394.6 | 1,620.5 | (3,015.1 | ) | 1,643.2 | ||||||||||||||
|
Retained earnings
(deficit)
|
1,736.8 | 3,104.0 | (1,236.0 | ) | (1,868.0 | ) | 1,736.8 | |||||||||||||
|
Accumulated other
comprehensive income
|
223.7 | 31.1 | 256.0 | (287.1 | ) | 223.7 | ||||||||||||||
|
Treasury stock
|
(891.2 | ) | - | - | - | (891.2 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Total
stockholders’ equity
|
2,715.1 | 4,639.4 | 1,795.2 | (6,434.6 | ) | 2,715.1 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities and
stockholders’ equity
|
$ | 6,247.5 | $ | 5,395.6 | $ | 2,169.9 | $ | (6,737.6 | ) | $ | 7,075.4 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
| Condensed Consolidating Balance Sheet at February 28, 2011 | ||||||||||||||||||||
|
Current assets:
|
||||||||||||||||||||
|
Cash and cash
investments
|
$ | 0.7 | $ | 0.9 | $ | 7.6 | $ | - | $ | 9.2 | ||||||||||
|
Accounts receivable, net
|
322.8 | 32.3 | 62.3 | - | 417.4 | |||||||||||||||
|
Inventories
|
127.5 | 965.3 | 284.3 | (7.8 | ) | 1,369.3 | ||||||||||||||
|
Prepaid expenses and
other
|
23.1 | 118.2 | 370.9 | (225.1 | ) | 287.1 | ||||||||||||||
|
Intercompany (payable)
receivable
|
(522.3 | ) | 389.7 | 132.6 | - | - | ||||||||||||||
|
|
||||||||||||||||||||
|
Total
current assets
|
(48.2 | ) | 1,506.4 | 857.7 | (232.9 | ) | 2,083.0 | |||||||||||||
|
Property, plant and
equipment, net
|
110.3 | 764.8 | 344.5 | - | 1,219.6 | |||||||||||||||
|
Investments in
subsidiaries
|
6,142.6 | 153.4 | - | (6,296.0 | ) | - | ||||||||||||||
|
Goodwill
|
- | 1,987.4 | 632.4 | - | 2,619.8 | |||||||||||||||
|
Intangible assets, net
|
- | 672.1 | 214.2 | - | 886.3 | |||||||||||||||
|
Other assets, net
|
36.3 | 256.9 | 72.9 | (7.2 | ) | 358.9 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total assets
|
$ | 6,241.0 | $ | 5,341.0 | $ | 2,121.7 | $ | (6,536.1 | ) | $ | 7,167.6 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Current liabilities:
|
||||||||||||||||||||
|
Notes payable to banks
|
$ | 74.9 | $ | - | $ | 8.8 | $ | - | $ | 83.7 | ||||||||||
|
Current maturities of
long-term debt
|
12.5 | 3.4 | - | - | 15.9 | |||||||||||||||
|
Accounts payable
|
9.7 | 97.1 | 22.4 | - | 129.2 | |||||||||||||||
|
Accrued excise taxes
|
10.2 | 1.8 | 2.2 | - | 14.2 | |||||||||||||||
|
Other accrued expenses
and liabilities
|
354.6 | 137.2 | 155.0 | (226.9 | ) | 419.9 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total
current liabilities
|
461.9 | 239.5 | 188.4 | (226.9 | ) | 662.9 | ||||||||||||||
|
Long-term debt, less
current maturities
|
3,117.3 | 19.4 | - | - | 3,136.7 | |||||||||||||||
|
Deferred income taxes
|
- | 509.0 | 81.3 | (7.2 | ) | 583.1 | ||||||||||||||
|
Other liabilities
|
109.9 | 37.0 | 86.1 | - | 233.0 | |||||||||||||||
26
Table of Contents
| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
|
Stockholders’ equity:
|
||||||||||||||||||||
|
Preferred stock
|
- | 9.0 | 1,130.7 | (1,139.7 | ) | - | ||||||||||||||
|
Class A and Class B
Convertible Common
Stock
|
2.6 | 100.7 | 24.0 | (124.7 | ) | 2.6 | ||||||||||||||
|
Additional paid-in
capital
|
1,602.4 | 1,394.6 | 1,620.5 | (3,015.1 | ) | 1,602.4 | ||||||||||||||
|
Retained earnings
(deficit)
|
1,662.3 | 2,991.6 | (1,221.1 | ) | (1,770.5 | ) | 1,662.3 | |||||||||||||
|
Accumulated other
comprehensive income
|
188.8 | 40.2 | 211.8 | (252.0 | ) | 188.8 | ||||||||||||||
|
Treasury stock
|
(904.2 | ) | - | - | - | (904.2 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Total
stockholders’ equity
|
2,551.9 | 4,536.1 | 1,765.9 | (6,302.0 | ) | 2,551.9 | ||||||||||||||
|
|
||||||||||||||||||||
|
Total liabilities and
stockholders’ equity
|
$ | 6,241.0 | $ | 5,341.0 | $ | 2,121.7 | $ | (6,536.1 | ) | $ | 7,167.6 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
| Condensed Consolidating Statement of Operations for the Three Months Ended May 31, 2011 | ||||||||||||||||||||
|
Sales
|
$ | 154.3 | $ | 448.4 | $ | 157.8 | $ | (49.8 | ) | $ | 710.7 | |||||||||
|
Less – excise taxes
|
(30.0 | ) | (30.4 | ) | (15.0 | ) | - | (75.4 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Net sales
|
124.3 | 418.0 | 142.8 | (49.8 | ) | 635.3 | ||||||||||||||
|
Cost of product sold
|
(62.9 | ) | (259.2 | ) | (87.4 | ) | 25.2 | (384.3 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
61.4 | 158.8 | 55.4 | (24.6 | ) | 251.0 | ||||||||||||||
|
Selling, general and
administrative expenses
|
(68.2 | ) | (61.0 | ) | (34.8 | ) | 25.8 | (138.2 | ) | |||||||||||
|
Restructuring charges
|
(5.5 | ) | (3.5 | ) | (2.1 | ) | - | (11.1 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Operating
(loss) income
|
(12.3 | ) | 94.3 | 18.5 | 1.2 | 101.7 | ||||||||||||||
|
Equity in earnings of
equity method investees
and subsidiaries
|
132.1 | 61.7 | 1.6 | (133.2 | ) | 62.2 | ||||||||||||||
|
Interest (expense)
income, net
|
(57.2 | ) | 11.4 | 1.5 | - | (44.3 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Income before
income taxes
|
62.6 | 167.4 | 21.6 | (132.0 | ) | 119.6 | ||||||||||||||
|
Benefit from (provision
for) income taxes
|
11.9 | (55.0 | ) | (2.0 | ) | - | (45.1 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 74.5 | $ | 112.4 | $ | 19.6 | $ | (132.0 | ) | $ | 74.5 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
| Condensed Consolidating Statement of Operations for the Three Months Ended May 31, 2010 | ||||||||||||||||||||
|
Sales
|
$ | 168.3 | $ | 431.9 | $ | 473.9 | $ | (97.9 | ) | $ | 976.2 | |||||||||
|
Less – excise taxes
|
(28.8 | ) | (24.2 | ) | (135.7 | ) | - | (188.7 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Net sales
|
139.5 | 407.7 | 338.2 | (97.9 | ) | 787.5 | ||||||||||||||
|
Cost of product sold
|
(67.5 | ) | (266.2 | ) | (257.5 | ) | 73.7 | (517.5 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Gross profit
|
72.0 | 141.5 | 80.7 | (24.2 | ) | 270.0 | ||||||||||||||
|
Selling, general and
administrative expenses
|
(73.4 | ) | (58.1 | ) | (62.0 | ) | 24.7 | (168.8 | ) | |||||||||||
|
Restructuring charges
|
- | (0.5 | ) | (4.4 | ) | - | (4.9 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Operating
(loss) income
|
(1.4 | ) | 82.9 | 14.3 | 0.5 | 96.3 | ||||||||||||||
|
Equity in earnings of
equity method investees
and subsidiaries
|
87.0 | 49.6 | 0.6 | (82.7 | ) | 54.5 | ||||||||||||||
|
Interest (expense)
income, net
|
(51.4 | ) | 2.1 | 0.8 | - | (48.5 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Income before
income taxes
|
34.2 | 134.6 | 15.7 | (82.2 | ) | 102.3 | ||||||||||||||
|
Benefit from (provision
for) income taxes
|
14.9 | (54.9 | ) | (13.1 | ) | (0.1 | ) | (53.2 | ) | |||||||||||
|
|
||||||||||||||||||||
|
Net income
|
$ | 49.1 | $ | 79.7 | $ | 2.6 | $ | (82.3 | ) | $ | 49.1 | |||||||||
|
|
||||||||||||||||||||
27
Table of Contents
| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Condensed Consolidating Statement of Cash Flows for the Three Months Ended May 31, 2011 | ||||||||||||||||||||
|
Net cash provided by
operating activities
|
$ | 21.8 | $ | 206.9 | $ | 12.6 | $ | - | $ | 241.3 | ||||||||||
|
|
||||||||||||||||||||
|
Cash flows from
investing activities:
|
||||||||||||||||||||
|
Purchases of property,
plant and equipment
|
(8.2 | ) | (10.2 | ) | (2.6 | ) | - | (21.0 | ) | |||||||||||
|
Payments related to
sale of business
|
(7.5 | ) | - | - | - | (7.5 | ) | |||||||||||||
|
Proceeds from note
receivable
|
1.0 | - | - | - | 1.0 | |||||||||||||||
|
Proceeds from sales of
assets
|
- | - | 0.1 | - | 0.1 | |||||||||||||||
|
Investment in equity
method investee
|
- | - | - | - | - | |||||||||||||||
|
Other investing
activities
|
- | (5.0 | ) | (1.4 | ) | - | (6.4 | ) | ||||||||||||
|
|
||||||||||||||||||||
|
Net cash used in
investing activities
|
(14.7 | ) | (15.2 | ) | (3.9 | ) | - | (33.8 | ) | |||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Cash flows from
financing activities:
|
||||||||||||||||||||
|
Intercompany
financings, net
|
200.1 | (176.2 | ) | (23.9 | ) | - | - | |||||||||||||
|
Principal payments of
long-term debt
|
(403.6 | ) | (13.7 | ) | - | - | (417.3 | ) | ||||||||||||
|
Payment of minimum tax
withholdings on
stock-based payment
awards
|
- | (1.7 | ) | (0.5 | ) | - | (2.2 | ) | ||||||||||||
|
Net proceeds from notes
payable
|
149.8 | - | 18.7 | - | 168.5 | |||||||||||||||
|
Proceeds from exercises
of employee stock
options
|
36.5 | - | - | - | 36.5 | |||||||||||||||
|
Proceeds from excess
tax benefits from
stock-based payment
awards
|
9.9 | - | - | - | 9.9 | |||||||||||||||
|
Purchases of treasury
stock
|
- | - | - | - | - | |||||||||||||||
|
Payment of financing
costs of long-term debt
|
- | - | - | - | - | |||||||||||||||
|
|
||||||||||||||||||||
|
Net cash used in
financing activities
|
(7.3 | ) | (191.6 | ) | (5.7 | ) | - | (204.6 | ) | |||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Effect of exchange rate
changes on cash and cash
investments
|
- | - | 1.3 | - | 1.3 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net (decrease) increase
in cash and cash
investments
|
(0.2 | ) | 0.1 | 4.3 | - | 4.2 | ||||||||||||||
|
Cash and cash
investments, beginning
of period
|
0.7 | 0.9 | 7.6 | - | 9.2 | |||||||||||||||
|
|
||||||||||||||||||||
|
Cash and cash
investments, end of
period
|
$ | 0.5 | $ | 1.0 | $ | 11.9 | $ | - | $ | 13.4 | ||||||||||
|
|
||||||||||||||||||||
28
Table of Contents
| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Condensed Consolidating Statement of Cash Flows for the Three Months Ended May 31, 2010 | ||||||||||||||||||||
|
Net cash (used in)
provided by operating
activities
|
$ | (100.3 | ) | $ | 147.8 | $ | 12.6 | $ | - | $ | 60.1 | |||||||||
|
|
||||||||||||||||||||
|
Cash flows from
investing activities:
|
||||||||||||||||||||
|
Purchases of property,
plant and equipment
|
(12.3 | ) | (9.4 | ) | (3.9 | ) | - | (25.6 | ) | |||||||||||
|
Payments related to
sale of business
|
- | - | (1.6 | ) | - | (1.6 | ) | |||||||||||||
|
Proceeds from note
receivable
|
60.0 | - | - | - | 60.0 | |||||||||||||||
|
Proceeds from sales of
assets
|
- | 0.3 | 0.8 | - | 1.1 | |||||||||||||||
|
Investment in equity
method investee
|
- | - | (29.6 | ) | - | (29.6 | ) | |||||||||||||
|
Other investing
activities
|
- | - | 0.3 | - | 0.3 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net cash provided by
(used in) investing
activities
|
47.7 | (9.1 | ) | (34.0 | ) | - | 4.6 | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Cash flows from
financing activities:
|
||||||||||||||||||||
|
Intercompany
financings, net
|
136.8 | (138.8 | ) | 2.0 | - | - | ||||||||||||||
|
Principal payments of
long-term debt
|
(0.9 | ) | (0.3 | ) | (0.1 | ) | - | (1.3 | ) | |||||||||||
|
Payment of minimum tax
withholdings on
stock-based payment
awards
|
- | - | (0.4 | ) | - | (0.4 | ) | |||||||||||||
|
Net proceeds from notes
payable
|
196.0 | - | (1.4 | ) | - | 194.6 | ||||||||||||||
|
Proceeds from exercises
of employee stock
options
|
16.7 | - | - | - | 16.7 | |||||||||||||||
|
Proceeds from excess
tax benefits from
stock-based payment
awards
|
4.6 | - | - | - | 4.6 | |||||||||||||||
|
Purchases of treasury
stock
|
(300.0 | ) | - | - | - | (300.0 | ) | |||||||||||||
|
Payment of financing
costs of long-term debt
|
(0.2 | ) | - | - | - | (0.2 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
Net cash provided by
(used in) financing
activities
|
53.0 | (139.1 | ) | 0.1 | - | (86.0 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Effect of exchange rate
changes on cash and cash
investments
|
- | - | (1.3 | ) | - | (1.3 | ) | |||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Net increase (decrease)
in cash and cash
investments
|
0.4 | (0.4 | ) | (22.6 | ) | - | (22.6 | ) | ||||||||||||
|
Cash and cash
investments, beginning
of period
|
0.3 | 3.3 | 39.9 | - | 43.5 | |||||||||||||||
|
|
||||||||||||||||||||
|
Cash and cash
investments, end of
period
|
$ | 0.7 | $ | 2.9 | $ | 17.3 | $ | - | $ | 20.9 | ||||||||||
|
|
||||||||||||||||||||
29
Table of Contents
17. BUSINESS SEGMENT INFORMATION:
In connection with the Company’s changes on June 1,
2011, within its internal management structure for its wine and spirits business, the Company
changed its internal management financial reporting to consist of two business divisions:
Constellation Wines North America and Crown Imports. Accordingly, beginning June 1, 2011, the
Company began reporting its operating results in three segments: Constellation Wines North America
(wine and spirits) (“CWNA”), Corporate Operations and Other, and Crown Imports (imported beer).
Prior to the change in its internal management structure, the Company’s internal management
financial reporting consisted of three business divisions: Constellation Wines North America,
Constellation Wines New Zealand and Crown Imports. Due to a number of factors, including the size
of the Constellation Wines New Zealand segment’s operations, the similarity of its economic
characteristics and long-term financial performance with that of the Constellation Wines North
America business, and the fact that the vast majority of the wine produced by the Constellation
Wines New Zealand operating segment is sold in the U.S. and Canada, the Company had aggregated the
results of this operating segment with its Constellation Wines North America operating segment to
form one reportable segment. Accordingly, the June 1, 2011, organizational changes had no impact on
the Company’s previously reported financial information. The business segments reflect how the
Company’s operations are managed, how operating performance within the Company is evaluated by
senior management and the structure of its internal financial reporting. Amounts included in the
Corporate Operations and Other segment consist of costs of executive management, corporate
development, corporate finance, human resources, internal audit, investor relations, legal, public
relations and global information technology. Any costs incurred at the corporate office that are
applicable to the segments are allocated to the appropriate segment. The amounts included in the
Corporate Operations and Other segment are general costs that are applicable to the consolidated
group and are therefore not allocated to the other reportable segments. All costs reported within
the Corporate Operations and Other segment are not included in the chief operating decision maker’s
evaluation of the operating income performance of the other reportable segments.
In addition,
the Company excludes restructuring charges and unusual items that affect comparability from its
definition of operating income for segment purposes as these items are not reflective of normal
continuing operations of the segments. The Company excludes these items as segment operating
performance and segment management compensation is evaluated based upon a normalized segment
operating income. As such, the performance measures for incentive compensation purposes for
segment management do not include the impact of these items.
For the three months ended May 31,
2011, and May 31, 2010, restructuring charges and unusual items included in operating income
consist of:
| For the Three Months | ||||||||
| Ended May 31, | ||||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
|
Cost of Product Sold
|
||||||||
|
Accelerated depreciation
|
$ | 0.2 | $ | 1.0 | ||||
|
Flow through of inventory step-up
|
- | 1.0 | ||||||
|
|
||||||||
|
Cost of Product Sold
|
0.2 | 2.0 | ||||||
30
Table of Contents
| For the Three Months | ||||||||
| Ended May 31, | ||||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
|
Selling, General and Administrative Expenses
|
||||||||
|
Net foreign currency loss on contractual obligation
from put option of Ruffino shareholder
|
2.2 | - | ||||||
|
Net gains on CWAE Divestiture and related activities
|
(0.8 | ) | - | |||||
|
Net gains on sale of nonstrategic assets
|
- | (1.0 | ) | |||||
|
Acquisition-related integration costs
|
- | 0.1 | ||||||
|
Other costs
|
1.1 | 0.9 | ||||||
|
|
||||||||
|
Selling, General and Administrative Expenses
|
2.5 | - | ||||||
|
|
||||||||
|
Restructuring Charges
|
11.1 | 4.9 | ||||||
|
|
||||||||
|
|
||||||||
|
Restructuring Charges and Unusual Items
|
$ | 13.8 | $ | 6.9 | ||||
|
|
||||||||
The Company evaluates performance based on operating income of the respective business
units. The accounting policies of the segments are the same as those described for the Company in
the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial
statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February
28, 2011, and include the recently adopted accounting guidance described in Note 2 herein.
Segment
information is as follows:
| For the Three Months | ||||||||
| Ended May 31, | ||||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
|
CWNA
:
|
||||||||
|
Net sales
|
$ | 635.3 | $ | 589.9 | ||||
|
Segment operating income
|
$ | 136.6 | $ | 132.5 | ||||
|
Equity in earnings of equity method investees
|
$ | 2.4 | $ | 0.1 | ||||
|
Long-lived tangible assets
|
$ | 1,106.1 | $ | 1,090.9 | ||||
|
Investment in equity method investees
|
$ | 82.0 | $ | 74.8 | ||||
|
Total assets
|
$ | 6,668.5 | $ | 6,453.8 | ||||
|
Capital expenditures
|
$ | 13.7 | $ | 13.8 | ||||
|
Depreciation and amortization
|
$ | 21.2 | $ | 22.8 | ||||
|
|
||||||||
|
CWAE
:
|
||||||||
|
Net sales
|
$ | - | $ | 197.6 | ||||
|
Segment operating (loss) income
|
$ | - | $ | (2.8 | ) | |||
|
Equity in earnings of equity method investees
|
$ | - | $ | 0.6 | ||||
|
Long-lived tangible assets
|
$ | - | $ | 343.2 | ||||
|
Investment in equity method investees
|
$ | - | $ | 34.2 | ||||
|
Total assets
|
$ | - | $ | 1,156.6 | ||||
|
Capital expenditures
|
$ | - | $ | 1.4 | ||||
|
Depreciation and amortization
|
$ | - | $ | 7.8 | ||||
|
|
||||||||
|
Corporate Operations and Other
:
|
||||||||
|
Net sales
|
$ | - | $ | - | ||||
|
Segment operating loss
|
$ | (21.1 | ) | $ | (26.5 | ) | ||
|
Long-lived tangible assets
|
$ | 124.6 | $ | 88.8 | ||||
|
Total assets
|
$ | 223.2 | $ | 140.8 | ||||
|
Capital expenditures
|
$ | 7.3 | $ | 10.4 | ||||
|
Depreciation and amortization
|
$ | 5.7 | $ | 4.0 | ||||
31
Table of Contents
| For the Three Months | ||||||||
| Ended May 31, | ||||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
|
Crown Imports
:
|
||||||||
|
Net sales
|
$ | 677.5 | $ | 621.5 | ||||
|
Segment operating income
|
$ | 119.8 | $ | 108.9 | ||||
|
Long-lived tangible assets
|
$ | 5.2 | $ | 4.7 | ||||
|
Total assets
|
$ | 466.7 | $ | 362.8 | ||||
|
Capital expenditures
|
$ | 0.9 | $ | 0.2 | ||||
|
Depreciation and amortization
|
$ | 0.5 | $ | 0.5 | ||||
|
|
||||||||
|
Restructuring Charges and Unusual Items
:
|
||||||||
|
Operating loss
|
$ | (13.8 | ) | $ | (6.9 | ) | ||
|
Equity in losses of equity method investees
|
$ | - | $ | (0.5 | ) | |||
|
|
||||||||
|
Consolidation and Eliminations
:
|
||||||||
|
Net sales
|
$ | (677.5 | ) | $ | (621.5 | ) | ||
|
Operating income
|
$ | (119.8 | ) | $ | (108.9 | ) | ||
|
Equity in earnings of Crown Imports
|
$ | 59.8 | $ | 54.3 | ||||
|
Long-lived tangible assets
|
$ | (5.2 | ) | $ | (4.7 | ) | ||
|
Investment in equity method investees
|
$ | 183.7 | $ | 144.9 | ||||
|
Total assets
|
$ | (283.0 | ) | $ | (217.9 | ) | ||
|
Capital expenditures
|
$ | (0.9 | ) | $ | (0.2 | ) | ||
|
Depreciation and amortization
|
$ | (0.5 | ) | $ | (0.5 | ) | ||
|
|
||||||||
|
Consolidated
:
|
||||||||
|
Net sales
|
$ | 635.3 | $ | 787.5 | ||||
|
Operating income
|
$ | 101.7 | $ | 96.3 | ||||
|
Equity in earnings of equity method investees
|
$ | 62.2 | $ | 54.5 | ||||
|
Long-lived tangible assets
|
$ | 1,230.7 | $ | 1,522.9 | ||||
|
Investment in equity method investees
|
$ | 265.7 | $ | 253.9 | ||||
|
Total assets
|
$ | 7,075.4 | $ | 7,896.1 | ||||
|
Capital expenditures
|
$ | 21.0 | $ | 25.6 | ||||
|
Depreciation and amortization
|
$ | 26.9 | $ | 34.6 | ||||
18. ACCOUNTING GUIDANCE NOT YET ADOPTED:
Fair value measurement –
In May 2011, the FASB
issued amended guidance to achieve common fair value measurement and disclosure requirements under
U.S. GAAP and International Financial Reporting Standards. This amended guidance provides
clarification about the application of existing fair value measurement and disclosure requirements,
and expands certain other disclosure requirements. The Company is required to adopt this amended
guidance for its annual and interim periods beginning March 1, 2012. The Company does not expect
the adoption of this amended guidance to have a material impact on the Company’s consolidated
financial statements.
Presentation of comprehensive income –
In June 2011, the FASB issued amended
guidance requiring an entity to present the total of comprehensive income, the components of net
income, and the components of other comprehensive income either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. This amended guidance
eliminates the option to present the components of other comprehensive income as part of the
statement of stockholders’ equity. In addition, this amended guidance requires retrospective
application. The Company is required to adopt this amended guidance for its annual and interim
periods beginning March 1, 2012. The Company does not expect the adoption of this amended guidance
to have a material impact on the Company’s consolidated financial statements.
32
Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company is the world’s leading premium wine company with a broad portfolio of
consumer-preferred premium wine brands complemented by premium spirits, imported beer and other
select beverage alcohol products. The Company continues to supply imported beer in the United
States (“U.S.”) through its investment in a joint venture with Grupo Modelo, S.A.B. de C.V. This
imported beers joint venture operates as Crown Imports LLC and is referred to hereinafter as “Crown
Imports.” The Company is the leading premium wine company in the U.S.; the leading producer and
marketer of wine in Canada; and a leading producer and exporter of wine from New Zealand. Prior to
January 31, 2011, the Company had leading market positions in both Australia and the United Kingdom
(“U.K.”) through its Australian and U.K. business. On January 31, 2011, the Company completed the
sale of 80.1% of its Australian and U.K. business (the “CWAE Divestiture”) as further discussed
below under “Divestiture in Fiscal 2011.”
In connection with the Company’s changes on June 1, 2011, within its internal management
structure for its wine and spirits business, the Company changed its internal management financial
reporting to consist of two business divisions: Constellation Wines North America and Crown
Imports. Accordingly, beginning June 1, 2011, the Company began reporting its operating results in
three segments: Constellation Wines North America (wine and spirits) (“CWNA”), Corporate
Operations and Other, and Crown Imports (imported beer). Prior to the change in its internal
management structure, the Company’s internal management financial reporting consisted of three
business divisions: Constellation Wines North America, Constellation Wines New Zealand and Crown
Imports. Due to a number of factors, including the size of the Constellation Wines New Zealand
segment’s operations, the similarity of its economic characteristics and long-term financial
performance with that of the Constellation Wines North America business, and the fact that the vast
majority of the wine produced by the Constellation Wines New Zealand operating segment is sold in
the U.S. and Canada, the Company had aggregated the results of this operating segment with its
Constellation Wines North America operating segment to form one reportable segment. Accordingly,
the June 1, 2011, organizational changes had no impact on the Company’s previously reported
financial information. The business segments reflect how the Company’s operations are managed, how
operating performance within the Company is evaluated by senior management and the structure of its
internal financial reporting. Amounts included in the Corporate Operations and Other segment
consist of costs of executive management, corporate development, corporate finance, human
resources, internal audit, investor relations, legal, public relations and global information
technology. Any costs incurred at the corporate office that are applicable to the segments are
allocated to the appropriate segment. The amounts included in the Corporate Operations and Other
segment are general costs that are applicable to the consolidated group and are therefore not
allocated to the other reportable segments. All costs reported within the Corporate Operations and
Other segment are not included in the chief operating decision maker’s evaluation of the operating
income performance of the other reportable segments.
In addition, the Company excludes restructuring charges and unusual items that affect
comparability from its definition of operating income for segment purposes as these items are not
reflective of normal continuing operations of the segments. The Company excludes these items as
segment operating performance and segment management compensation is evaluated based upon a
normalized segment operating income. As such, the performance measures for incentive compensation
purposes for segment management do not include the impact of these items.
33
Table of Contents
The Company’s business strategy in the CWNA segment is to remain focused on consumer-preferred
premium wine brands, complemented by premium spirits. In this segment, the Company intends to
continue to focus on growing premium product categories and expects to capitalize on its size and
scale in the marketplace to profitably grow the business. During the year ended February 28, 2010
(“Fiscal 2010”), the Company began implementation of a strategic project to consolidate its U.S.
distributor network in key markets and create a new go-to-market strategy designed to focus the
full power of its U.S. wine and spirits portfolio in order to improve alignment of dedicated,
selling resources which is expected to drive organic growth. In connection with this strategy, the
Company negotiated long-term contracts with five U.S. distributors who currently represent about
60% of the Company’s branded wine and spirits volume in the U.S. During the second half of fiscal
2010 and throughout Fiscal 2011 (as defined below), the Company’s net sales and operating income
for its U.S. branded wine and spirits business benefited from these contracts as the Company’s
shipments to distributors exceeded distributor shipments to retailers. Throughout Fiscal 2012 (as
defined below) and beyond, the Company expects distributor inventory levels related to the
Company’s branded wine and spirits products to remain stable as shipments on an annual basis to
these distributors should essentially equal the distributors’ shipments to retailers for the
remainder of the terms of these contracts, which extend through the end of fiscal 2015.
With regard to the overall supply of wine in the U.S., although the calendar 2010 grape
harvest came in lower than the calendar 2009 grape harvest, the Company continues to expect the
overall supply of wine to remain generally in balance with demand within the U.S.
The Company remains committed to its long-term financial model of growing sales, including
international expansion of its CWNA segment’s branded portfolio, expanding margins, increasing cash
flow and reducing borrowings to achieve earnings per share growth and improve return on invested
capital.
Sales and distribution of the Company’s products are managed on a geographic basis in order to
fully leverage leading market positions within each core market. Market dynamics and consumer
trends vary significantly across the Company’s three core markets (U.S., Canada and New Zealand)
within the Company’s two geographic regions (North America and New Zealand). Within North America,
the Company offers a range of beverage alcohol products across the branded wine and spirits and,
through Crown Imports, imported beer categories in the U.S. Within New Zealand, the Company
primarily offers branded wine. The environment for the Company’s products is competitive in each
of the Company’s core markets.
For the three months ended May 31, 2011 (“First Quarter 2012”), the Company’s net sales
decreased 19% over the three months ended May 31, 2010 (“First Quarter 2011”), primarily due to the
CWAE Divestiture. Operating income increased 6% over the comparable prior year period primarily
due to a decrease in Corporate Operations and Other general and administrative expenses in First
Quarter 2012 compared to First Quarter 2011. Net income increased 52% over the comparable prior
year period primarily due to the items discussed above combined with a reduction in the Company’s
provision for income taxes, increased equity in earnings of equity method investees and lower
interest expense.
34
Table of Contents
The following discussion and analysis summarizes the significant factors affecting (i)
consolidated results of operations of the Company for First Quarter 2012 compared to First Quarter
2011 and (ii) financial liquidity and capital resources for First Quarter 2012. This discussion
and analysis also identifies certain restructuring charges and unusual items expected to affect
consolidated results of operations of the Company for the year ending February 29, 2012 (“Fiscal
2012”). References to U.S. base branded wine exclude the impact of branded wine for the CWNA
segment previously sold through the Company’s CWAE segment. This discussion and analysis should be
read in conjunction with the Company’s consolidated financial statements and notes thereto included
herein and in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2011
(“Fiscal 2011”).
Divestiture in Fiscal 2011
Australian and U.K. Business
In January 2011, the Company sold 80.1% of its Australian and U.K. business (the “CWAE
Divestiture”) at a transaction value of $266.9 million, subject to post-closing adjustments. As of
May 31, 2011, the Company has received cash proceeds, net of cash divested of $15.8 million and
direct costs paid of $9.8 million, of $213.8 million, subject to post-closing adjustments. The
Company retained a 19.9% interest in its previously owned Australian and U.K. business, Accolade
Wines (“Accolade”). This transaction is consistent with the Company’s strategic focus on
premiumizing the Company’s portfolio and improving margins and return on invested capital. The
following table summarizes the net gain recognized and the net cash proceeds received in connection
with this divestiture.
|
(in millions)
|
||||
|
Net assets sold
|
$ | (734.1 | ) | |
|
Cash received from buyer, net of cash divested
|
223.6 | |||
|
Retained interest in Accolade
|
48.2 | |||
|
Estimated post-closing adjustments
|
(19.3 | ) | ||
|
Foreign currency reclassification
|
678.8 | |||
|
Indemnification liabilities
|
(25.4 | ) | ||
|
Direct costs to sell, paid and accrued
|
(13.2 | ) | ||
|
Other
|
7.9 | |||
|
|
||||
|
Net gain on sale
|
166.5 | |||
|
Loss on settlement of pension
|
(109.9 | ) | ||
|
|
||||
|
Net gain
|
$ | 56.6 | ||
|
|
||||
Of the $56.6 million net gain, $55.2 million was recognized for the fourth quarter of
fiscal 2011 and $1.4 million was recognized for First Quarter 2012. In addition, the Company’s
CWAE segment recorded an additional net gain of $28.5 million for the fourth quarter of fiscal
2011, primarily associated with a net gain on derivative instruments of $20.8 million, related to
this divestiture. For First Quarter 2012, the Company recorded an additional loss of $0.6 million
related to this divestiture. Total net gains associated with this divestiture of $84.5 million are
included in selling, general and administrative expenses on the Company’s Consolidated Statements
of Operations, $83.7 million for Fiscal 2011, and $0.8 million for First Quarter 2012.
35
Table of Contents
Equity Method Investment in Fiscal 2011
In connection with the Company’s December 2004 investment in Ruffino S.r.l. (“Ruffino”), the
Company granted separate irrevocable and unconditional options to the two other shareholders of
Ruffino to put to the Company all of the ownership interests held by these shareholders for a price
as calculated in the joint venture agreement. Each option was exercisable during the period
starting from January 1, 2010, and ending on December 31, 2010. For Fiscal 2010, in connection
with the notification by the 9.9% shareholder of Ruffino to exercise its option to put its entire
equity interest in Ruffino to the Company for the specified minimum value of €23.5 million, the
Company recognized a loss of $34.3 million for the third quarter of fiscal 2010 on the contractual
obligation created by this notification. This loss was included in selling, general and
administrative expenses on the Company’s Consolidated Statements of Operations. In May 2010, the
Company settled this put option through a cash payment of €23.5 million ($29.6 million) to the 9.9%
shareholder of Ruffino, thereby increasing the Company’s equity interest in Ruffino from 40.0% to
49.9%. In December 2010, the Company received notification from the 50.1% shareholder of Ruffino
that it was exercising its option to put its entire equity interest in Ruffino to the Company for
€55.9 million. Prior to this notification, the Company had initiated arbitration proceedings
against the 50.1% shareholder alleging various matters which should affect the validity of the put
option. However, subsequent to the initiation of the arbitration proceedings, the Company began
discussions with the 50.1% shareholder on a framework for settlement of all legal actions. The
framework of the settlement would include the Company’s purchase of the 50.1% shareholder’s entire
equity interest in Ruffino on revised terms to be agreed upon by both parties. As a result, the
Company recognized a loss for the fourth quarter of fiscal 2011 of €43.4 million ($60.0 million) on
the contingent obligation. During First Quarter 2012, the Company
recognized a net foreign currency
loss of $2.2 million on the contractual obligation recorded in the fourth quarter of fiscal 2011
in connection with the potential settlement created by the notification by the 50.1% shareholder of
Ruffino to exercise the option to put its entire equity interest in Ruffino to the Company. This
loss is included in selling, general and administrative expenses on the Company’s Consolidated
Statements of Operations. As of May 31, 2011, the Company’s investment in Ruffino was $9.3
million.
Results of Operations
First Quarter 2012 Compared to First Quarter 2011
Net Sales
The following table sets forth the net sales by reportable segment of the Company for First
Quarter 2012 and First Quarter 2011.
| First | First | |||||||||||
| Quarter | Quarter | % Increase | ||||||||||
| 2012 | 2011 | (Decrease) | ||||||||||
|
(
in millions)
|
||||||||||||
|
CWNA net sales
|
$ | 635.3 | $ | 589.9 | 8 | % | ||||||
|
CWAE net sales
|
- | 197.6 | (100 | )% | ||||||||
|
Crown Imports net sales
|
677.5 | 621.5 | 9 | % | ||||||||
|
Consolidations and eliminations
|
(677.5 | ) | (621.5 | ) | (9 | )% | ||||||
|
|
||||||||||||
|
Consolidated Net Sales
|
$ | 635.3 | $ | 787.5 | (19 | )% | ||||||
|
|
||||||||||||
Net sales for First Quarter 2012 decreased to $635.3 million from $787.5 million for
First Quarter 2011, a decrease of $152.2 million, or (19%). This decrease resulted primarily from
the CWAE Divestiture of $170.1 million, partially offset by an increase in U.S. base branded wine
net sales of $24.8 million.
36
Table of Contents
Constellation Wines North America
Net sales for CWNA increased to $635.3 million for First Quarter 2012 from $589.9 million for
First Quarter 2011, an increase of $45.4 million, or 8%. This increase is primarily due to
favorable product mix shift in the U.S. base branded wine portfolio combined with a benefit of
$27.5 million due to wine net sales to Europe, Australia and Japan which were previously sold
through the Company’s CWAE segment, partially offset by lower U.S. base branded wine volume.
Constellation Wines Australia and Europe
Net sales for CWAE decreased $197.6 million, or (100%), from First Quarter 2011 due to the
January 2011 CWAE Divestiture.
Crown Imports
As this segment is eliminated in consolidation, see “Equity in Earnings of Equity Method
Investees” below for a discussion of Crown Imports’ net sales, gross profit, selling, general and
administrative expenses, and operating income.
Gross Profit
The Company’s gross profit decreased to $251.0 million for First Quarter 2012 from $270.0
million for First Quarter 2011, a decrease of $19.0 million, or (7%). This decrease is primarily
due to a decrease in CWAE’s gross profit of $28.2 million, partially offset by an increase in
CWNA’s gross profit of $7.4 million. The decrease in CWAE’s gross profit is due to the January
2011 CWAE Divestiture. The increase in CWNA’s gross profit is primarily due to favorable product
mix shift in the U.S. base branded wine portfolio. In addition, unusual items, which consist of
certain amounts that are excluded by management in their evaluation of the results of each
operating segment, were lower by $1.8 million in First Quarter 2012 versus First Quarter 2011.
Gross profit as a percent of net sales increased to 39.5% for First Quarter 2012 from 34.3% for
First Quarter 2011 primarily due to the factors discussed above, partially offset by higher cost of
product sold in the U.S. (due largely to higher costs for imported products and transportation
costs in the Company’s U.S. wine and spirits portfolio).
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $138.2 million for First Quarter
2012 from $168.8 million for First Quarter 2011, a decrease of $30.6 million, or (18%). This
decrease is due to decreases in the CWAE segment of $31.0 million and the Corporate Operations and
Other segment of $5.4 million, partially offset by increases in the CWNA segment of $3.3 million
and unusual items, which consist of certain amounts that are excluded by management in their
evaluation of the results of each operating segment, of $2.5 million. The decrease in CWAE’s
selling, general and administrative expenses is due to the January 2011 CWAE Divestiture. The
decrease in Corporate Operations and Other’s selling, general and administrative expenses is due to
a decrease in general and administrative expenses primarily relating to lower expenses incurred in
connection with the Company’s initiative to implement a comprehensive multi-year program to
strengthen and enhance the Company’s global business capabilities and processes through the
creation of an integrated technology platform. The increase in CWNA’s selling, general and
administrative expenses is primarily due to an unfavorable year-over-year foreign currency
translation impact of $1.7 million and an increase in general and administrative expenses (on a
constant currency basis) of $1.2 million resulting primarily from higher compensation and benefits,
partially offset by lower consulting service fees. Selling, general and administrative expenses as
a percent of net sales increased to 21.8% for First Quarter 2012 as compared to 21.4% for First
Quarter 2011 primarily due to the CWAE Divestiture, partially offset by the decrease in Corporate
Operations and Other’s general and administrative expenses.
37
Table of Contents
Restructuring Charges
In May 2011, the Company committed to a plan (announced in June 2011) to streamline
operations, gain efficiencies and reduce its cost structure following the CWAE Divestiture (the
“Fiscal 2012 Initiative”). The Company recorded $11.1 million of restructuring charges for First
Quarter 2012 associated primarily with the Fiscal 2012 Initiative. Restructuring charges consisted
of $11.1 million of employee termination benefit costs. The Company recorded $4.9 million of
restructuring charges for First Quarter 2011 associated primarily with the Company’s plan
(announced in April 2009) to simplify its business, increase efficiencies and reduce its cost
structure on a global basis.
In addition, the Company incurred additional costs for First Quarter 2012 and First Quarter
2011 in connection with the Company’s restructuring and acquisition-related integration plans.
Total costs incurred in connection with these plans for First Quarter 2012 and First Quarter 2011
are as follows:
| First | First | |||||||
| Quarter | Quarter | |||||||
| 2012 | 2011 | |||||||
| (in millions) | ||||||||
|
Cost of Product Sold
|
||||||||
|
Accelerated depreciation
|
$ | 0.2 | $ | 1.0 | ||||
|
|
||||||||
|
Selling, General and Administrative Expenses
|
||||||||
|
Net gains on sale of nonstrategic assets
|
$ | - | $ | (1.0 | ) | |||
|
Acquisition-related integration costs
|
$ | - | $ | 0.1 | ||||
|
Other costs
|
$ | 1.1 | $ | 0.9 | ||||
|
|
||||||||
|
Restructuring Charges
|
$ | 11.1 | $ | 4.9 | ||||
The Company expects to incur the following costs in connection with its restructuring and
acquisition-related integration plans for Fiscal 2012.
| Expected | ||||
| Fiscal | ||||
| 2012 | ||||
| (in millions) | ||||
|
Cost of Product Sold
|
||||
|
Accelerated depreciation
|
$ | 0.3 | ||
|
|
||||
|
Selling, General and Administrative Expenses
|
||||
|
Other costs
|
$ | 12.4 | ||
|
|
||||
|
Restructuring Charges
|
$ | 12.4 | ||
38
Table of Contents
Operating Income
The following table sets forth the operating income (loss) by reportable segment of the
Company for First Quarter 2012 and First Quarter 2011.
| First | First | |||||||||||
| Quarter | Quarter | % Increase | ||||||||||
| 2012 | 2011 | (Decrease) | ||||||||||
| (in millions) | ||||||||||||
|
CWNA
|
$ | 136.6 | $ | 132.5 | 3 | % | ||||||
|
CWAE
|
- | (2.8 | ) | (100 | )% | |||||||
|
Corporate Operations and Other
|
(21.1 | ) | (26.5 | ) | 20 | % | ||||||
|
Crown Imports
|
119.8 | 108.9 | 10 | % | ||||||||
|
Consolidations and eliminations
|
(119.8 | ) | (108.9 | ) | (10 | )% | ||||||
|
|
||||||||||||
|
Total Reportable Segments
|
115.5 | 103.2 | 12 | % | ||||||||
|
Restructuring Charges and Unusual Items
|
(13.8 | ) | (6.9 | ) | NM | |||||||
|
|
||||||||||||
|
Consolidated Operating Income
|
$ | 101.7 | $ | 96.3 | 6 | % | ||||||
|
|
||||||||||||
NM = Not Meaningful
As a result of the factors discussed above, consolidated operating income increased to
$101.7 million for First Quarter 2012 from $96.3 million for First Quarter 2011, an increase of
$5.4 million, or 6%. Restructuring charges and unusual items of $13.8 million and $6.9 million for
First Quarter 2012 and First Quarter 2011, respectively, consist of certain amounts that are
excluded by management in their evaluation of the results of each operating segment. These amounts
include:
| First | First | |||||||
| Quarter | Quarter | |||||||
| 2012 | 2011 | |||||||
| (in millions) | ||||||||
|
Cost of Product Sold
|
||||||||
|
Accelerated depreciation
|
$ | 0.2 | $ | 1.0 | ||||
|
Flow through of inventory step-up
|
- | 1.0 | ||||||
|
|
||||||||
|
Cost of Product Sold
|
0.2 | 2.0 | ||||||
|
|
||||||||
|
Selling, General and Administrative Expenses
|
||||||||
|
Net foreign currency loss on contractual obligation
from put option of Ruffino shareholder
|
2.2 | - | ||||||
|
Net gains on CWAE Divestiture and related activities
|
(0.8 | ) | - | |||||
|
Net gains on sale of nonstrategic assets
|
- | (1.0 | ) | |||||
|
Acquisition-related integration costs
|
- | 0.1 | ||||||
|
Other costs
|
1.1 | 0.9 | ||||||
|
|
||||||||
|
Selling, General and Administrative Expenses
|
2.5 | - | ||||||
|
|
||||||||
|
Restructuring Charges
|
11.1 | 4.9 | ||||||
|
|
||||||||
|
|
||||||||
|
Restructuring Charges and Unusual Items
|
$ | 13.8 | $ | 6.9 | ||||
|
|
||||||||
Equity in Earnings of Equity Method Investees
The Company’s equity in earnings of equity method investees increased to $62.2 million in
First Quarter 2012 from $54.5 million in First Quarter 2011, an increase of $7.7 million, or 14%.
This increase is primarily due to higher equity in earnings of Crown Imports.
39
Table of Contents
Net sales for Crown Imports increased to $677.5 million for First Quarter 2012 from $621.5
million for First Quarter 2011, an increase of $56.0 million, or 9%. This increase resulted
primarily from volume growth combined with lower promotional spend and a favorable product mix
shift within the Crown Imports’ Mexican beer portfolio. First Quarter 2012 volume growth was
primarily due to the overlap of unfavorable volumes for First Quarter 2011 in connection with a
brewery strike in Mexico coupled with the continuing launch of the Victoria brand which began
during the Company’s fourth quarter of fiscal 2011. Crown Imports gross profit increased $23.4
million, or 13%, primarily due to these factors. Selling, general and administrative expenses
increased $12.5 million, or 19%, primarily due to a planned increase in advertising spend.
Operating income increased $10.9 million, or 10%, primarily due to these factors.
Interest Expense, Net
Interest expense, net of interest income of $1.7 million and $1.2 million, for First Quarter
2012 and First Quarter 2011, respectively, decreased to $44.3 million for First Quarter 2012 from
$48.5 million for First Quarter 2011, a decrease of $4.2 million, or (9%). The decrease resulted
from lower average borrowings for the Company for First Quarter 2012.
Provision for Income Taxes
The Company’s effective tax rate for First Quarter 2012 and First Quarter 2011 was 37.7% and
52.0%, respectively. The Company’s effective tax rate for First Quarter 2011 includes the
recognition of a valuation allowance against deferred tax assets in the United Kingdom of $28.1
million, partially offset by a decrease in uncertain tax positions in connection with the
completion of various income tax examinations.
Net Income
As a result of the above factors, net income increased to $74.5 million for First Quarter 2012
from $49.1 million for First Quarter 2011, an increase of $25.4 million, or 52%.
Financial Liquidity and Capital Resources
General
The Company’s principal use of cash in its operating activities is for purchasing and carrying
inventories and carrying seasonal accounts receivable. The Company’s primary source of liquidity
has historically been cash flow from operations, except during annual grape harvests when the
Company has relied on short-term borrowings. In the U.S. and Canada, the annual grape crush
normally begins in August and runs through October. In New Zealand, the annual grape crush
normally begins in February and runs through May. The Company generally begins taking delivery of
grapes at the beginning of the crush season with the majority of payments for such grapes coming
due within 90 days. The Company’s short-term borrowings to support such purchases generally reach
their highest levels one to two months after the crush season has ended. Historically, the Company
has used cash flow from operating activities to repay its short-term borrowings and fund capital
expenditures. The Company will continue to use its short-term borrowings to support its working
capital requirements.
40
Table of Contents
The Company has maintained adequate liquidity to meet current working capital requirements,
fund capital expenditures and repay scheduled principal and interest payments on debt. Absent
deterioration of market conditions, the Company believes that cash flows from operating activities
and its financing activities, primarily short-term borrowings, will provide adequate resources to
satisfy its working capital, scheduled principal and interest payments on debt, and anticipated
capital expenditure requirements for both its short-term and long-term capital needs.
As of June 30, 2011, the Company had $557.7 million in revolving loans available to be drawn
under its 2006 Credit Agreement (as defined below). The member financial institutions
participating in the Company’s 2006 Credit Agreement have complied with prior funding requests and
the Company believes the member financial institutions will comply with ongoing funding requests.
However, there can be no assurances that any particular financial institution will continue to do
so in the future.
First Quarter 2012 Cash Flows
Operating Activities
Net cash provided by operating activities for First Quarter 2012 was $241.3 million, which
resulted primarily from net income of $74.5 million, plus net noncash items charged to the
Consolidated Statements of Operations of $47.7 million and net cash provided by the net change in
the Company’s operating assets and liabilities of $95.5 million.
The net noncash items consisted primarily of depreciation expense, stock-based compensation
expense and deferred tax provision. The net cash provided by the net change in the Company’s
operating assets and liabilities resulted primarily from an increase in other accrued expenses and
liabilities of $71.8 million and a decrease in inventories of $67.5 million, partially offset by an
increase in accounts receivable, net, of $42.4 million. The increase in other accrued expenses and
liabilities is due largely to an increase in current income taxes payable due primarily to a refund
of $85.5 million received in First Quarter 2012 associated with the recognition of income tax
benefits in the fourth quarter of fiscal 2011 in connection with the January 2011 CWAE Divestiture.
The decrease in inventories and the increase in accounts receivable, net, were both due largely to
seasonality as January and February are typically the Company’s lowest selling months.
Investing Activities
Net cash used in investing activities for First Quarter 2012 was $33.8 million, which resulted
primarily from capital expenditures of $21.0 million and payments of direct costs associated with
the January 2011 CWAE Divestiture of $7.5 million.
Financing Activities
Net cash used in financing activities for First Quarter 2012 was $204.6 million resulting
primarily from principal payments of long-term debt of $417.3 million, partially offset by net
proceeds from notes payable of $168.5 million and proceeds from exercises of employee stock options
of $36.5 million.
41
Table of Contents
Share Repurchase
In April 2011, the Company’s Board of Directors authorized the repurchase of up to $500.0
million of the Company’s Class A Common Stock and Class B Convertible Common Stock. The Board of
Directors did not specify a date upon which this authorization would expire. Share repurchases
under this authorization are expected to be accomplished from time to time based on market
conditions, the Company’s cash and debt position, and other factors as determined by management.
Shares may be repurchased through open market or privately negotiated transactions, and management
currently expects that the repurchase under this authorization will be implemented over a
multi-year period. The Company may fund share repurchases with cash generated from operations or
proceeds of borrowings under its senior credit facility. Any repurchased shares will become
treasury shares. As of July 8, 2011, no shares have been repurchased pursuant to this
authorization.
Debt
Total debt outstanding as of May 31, 2011, amounted to $2,992.4 million, a decrease of $243.9
million from February 28, 2011.
Senior Credit Facility
2006 Credit Agreement
The Company and certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and
administrative agent, and certain other agents, lenders, and financial institutions are parties to
a credit agreement, as amended (the “2006 Credit Agreement”). The 2006 Credit Agreement provides
for aggregate credit facilities of $3,842.0 million, consisting of (i) a $1,200.0 million tranche
A term loan facility with an original final maturity in June 2011, fully repaid as of February 28,
2011, (ii) a $1,800.0 million tranche B term loan facility, of which
$1,500.0 million has a final maturity in June 2013 (the “2013 Tranche B Term Loans”) and $300.0
million has a final maturity in June 2015 (the “2015 Tranche B Term Loans”), and (iii) an $842.0
million revolving credit facility (including a sub-facility for letters of credit of up to $200.0
million), of which $192.0 million terminated in June 2011 (the “2011 Revolving Facility”) and
$650.0 million terminates in June 2013 (the “2013 Revolving Facility”). The Company uses its
revolving credit facility under the 2006 Credit Agreement for general corporate purposes.
As of May 31, 2011, following the prepayment of $400.0 million of the tranche B term loan
facility during First Quarter 2012, under the 2006 Credit Agreement, the Company had outstanding
2013 Tranche B Term Loans of $624.7 million bearing an interest rate of 1.8%, 2015 Tranche B Term
Loans of $201.9 million bearing an interest rate of 3.0%, 2011 Revolving Facility of $41.0 million
bearing an interest rate of 1.4%, 2013 Revolving Facility of $183.7 million bearing an interest
rate of 2.6%, outstanding letters of credit of $12.8 million, and $604.5 million in revolving loans
available to be drawn.
As of May 31, 2011, the required principal repayments of the tranche B term loan facility for
the remaining nine months of fiscal 2012 and for each of the four succeeding fiscal years are as
follows:
| Tranche B | ||||
| Term Loan | ||||
| Facility | ||||
|
(in millions)
|
||||
|
2012
|
$ | - | ||
|
2013
|
314.1 | |||
|
2014
|
314.1 | |||
|
2015
|
99.7 | |||
|
2016
|
98.7 | |||
|
|
||||
|
|
$ | 826.6 | ||
|
|
||||
42
Table of Contents
As of June 30, 2011, under the 2006 Credit Agreement, the Company had outstanding 2013
Tranche B Term Loans of $624.7 million bearing an interest rate of 1.8%, 2015 Tranche B Term Loans
of $201.9 million bearing an interest rate of 3.0%, 2013 Revolving Facility of $79.6 million
bearing an interest rate of 2.5%, outstanding letters of credit of $12.7 million, and $557.7
million in revolving loans available to be drawn.
Through February 28, 2010, the Company had outstanding interest rate swap agreements which
were designated as cash flow hedges of $1,200.0 million of the Company’s floating LIBOR rate debt.
The designated cash flow hedges fixed the Company’s interest rates on $1,200.0 million of the
Company’s floating LIBOR rate debt through February 28, 2010. In addition, the Company had
offsetting undesignated interest rate swap agreements with an absolute notional amount of $2,400.0
million outstanding as of February 28, 2010. On March 1, 2010, the Company paid $11.9 million in
connection with the maturity of these outstanding interest rate swap agreements, which is reported
in other, net in cash flows from operating activities in the Company’s Consolidated Statements of
Cash Flows. In June 2010, the Company entered into a new five year delayed start interest rate
swap agreement effective September 1, 2011, which was designated as a cash flow hedge for $500.0
million of the Company’s floating LIBOR rate debt. Accordingly, the Company fixed its interest
rates on $500.0 million of the Company’s floating LIBOR rate debt at an average rate of 2.9%
(exclusive of borrowing margins) through September 1, 2016. For First Quarter 2012 and First
Quarter 2011, the Company did not reclassify any amount from Accumulated Other Comprehensive Income
to interest expense, net on its Consolidated Statements of Operations.
Accounting Guidance Not Yet Adopted
Fair value measurement –
In May 2011, the FASB issued amended guidance to achieve common fair value measurement and
disclosure requirements under U.S. GAAP and International Financial Reporting Standards. This
amended guidance provides clarification about the application of existing fair value measurement
and disclosure requirements, and expands certain other disclosure requirements. The Company is
required to adopt this amended guidance for its annual and interim periods beginning March 1, 2012.
The Company does not expect the adoption of this amended guidance to have a material impact on the
Company’s consolidated financial statements.
Presentation of comprehensive income –
In June 2011, the FASB issued amended guidance requiring an entity to present the total of
comprehensive income, the components of net income, and the components of other comprehensive
income either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. This amended guidance eliminates the option to present the components of
other comprehensive income as part of the statement of stockholders’ equity. In addition, this
amended guidance requires retrospective application. The Company is required to adopt this amended
guidance for its annual and interim periods beginning March 1, 2012. The Company does not expect
the adoption of this amended guidance to have a material impact on the Company’s consolidated
financial statements.
43
Table of Contents
Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are subject to a number of risks and uncertainties, many of which
are beyond the Company’s control, 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, including without limitation the
statements under Part I - Item 2 “Management’s Discussion and Analysis of Financial Condition and
Results of Operation” regarding (i) the Company’s business strategy, future financial position,
prospects, plans and objectives of management, (ii) the Company’s expected restructuring charges,
accelerated depreciation and other costs, (iii) information concerning expected or potential
actions of third parties, (iv) information concerning the future expected balance of supply and
demand for wine, (v) the expected impact upon results of operations resulting from the Company’s
decision to consolidate its U.S. distributor network, and (vi) the duration of the share
repurchase implementation are forward-looking statements. When used in this Quarterly Report on
Form 10-Q, the words “anticipate,” “intend,” “expect,” and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements contain such
identifying words. All forward-looking statements speak only as of the date of this Quarterly
Report on Form 10-Q. The Company undertakes no obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise. Although the
Company believes that the expectations reflected in the forward-looking statements are reasonable,
it can give no assurance that such expectations will prove to be correct. In addition to the risks
and uncertainties of ordinary business operations and conditions in the general economy and markets
in which the Company competes, the forward-looking statements of the Company contained in this
Quarterly Report on Form 10-Q are also subject to the risk and uncertainty that (i) the impact
upon results of operations resulting from the decision to consolidate the Company’s U.S.
distributor network will vary from current expectations due to actual U.S. distributor transition
experience, (ii) the actual balance of supply and demand for wine products will vary from current
expectations due to, among other reasons, actual consumer demand, (iii) the Company’s
restructuring charges, accelerated depreciation and other costs may vary materially from current
expectations due to, among other reasons, variations in anticipated headcount reductions, contract
terminations or modifications, equipment relocation, proceeds from the sale of assets identified
for sale, product portfolio rationalizations, production footprint, and/or other costs of
implementation, and (iv) the amount and timing of any share repurchases may vary due to market
conditions, the Company’s cash and debt position, and other factors as determined by management
from time to time. For additional information about risks and uncertainties that could adversely
affect the Company’s forward-looking statements, please refer to Item 1A “Risk Factors” of the
Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2011.
44
Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The Company, as a result of its global operating, acquisition and financing activities, is
exposed to market risk associated with changes in foreign currency exchange rates and interest
rates. To manage the volatility relating to these risks, the Company periodically purchases and/or
sells derivative instruments including foreign currency forward and option contracts and interest
rate swap agreements. The Company uses derivative instruments solely to reduce the financial
impact of these risks and does not use derivative instruments for trading purposes.
Foreign currency derivative instruments are or may be used to hedge existing foreign currency
denominated assets and liabilities, forecasted foreign currency denominated sales/purchases to/from
third parties as well as intercompany sales/purchases, intercompany principal and interest
payments, and in connection with acquisitions or joint venture investments outside the U.S. As of
May 31, 2011, the Company had exposures to foreign currency risk primarily related to the euro, New
Zealand dollar, and Canadian dollar.
As of May 31, 2011, and May 31, 2010, the Company had outstanding foreign currency derivative
instruments with a notional value of $504.7 million and $1,081.2 million
,
respectively.
Approximately 80.2% of the Company’s total exposures were hedged as of May 31, 2011, including most
of the Company’s balance sheet exposures and certain of the Company’s forecasted transactional
exposures. The estimated fair value of the Company’s foreign currency derivative instruments was a
net asset of $21.3 million and $2.2 million as of May 31, 2011, and May 31, 2010, respectively.
Using a sensitivity analysis based on estimated fair value of open contracts using forward rates,
if the contract base currency had been 10% weaker as of May 31, 2011, and May 31, 2010, the fair
value of open foreign currency contracts would have been increased by $4.8 million and decreased by
$14.8 million, respectively. Losses or gains from the revaluation or settlement of the related
underlying positions would substantially offset such gains or losses on the derivative instruments.
The fair value of fixed rate debt is subject to interest rate risk, credit risk and foreign
currency risk. The estimated fair value of the Company’s total fixed rate debt, including current
maturities, was $2,135.9 million and $1,922.5 million as of May 31, 2011, and May 31, 2010,
respectively. A hypothetical 1% increase from prevailing interest rates as of May 31, 2011, and
May 31, 2010, would have resulted in a decrease in fair value of fixed interest rate long-term debt
by $90.2 million and $91.3 million, respectively.
As of May 31, 2011, the Company had outstanding cash flow designated interest rate swap
agreements to minimize interest rate volatility. As of May 31, 2011, the swap agreements fix LIBOR
interest rates on $500.0 million of the Company’s floating LIBOR rate debt at an average rate of
2.9% (exclusive of borrowing margins) through September 1, 2016. The estimated fair value of the
Company’s interest rate swap agreements was a net liability of $20.2 million as of May 31, 2011. A
hypothetical 1% increase from prevailing interest rates as of May 31, 2011, would have favorably
increased the fair value of the interest rate swap agreements by $25.9 million.
In addition to the $2,135.9 million and $1,922.5 million estimated fair value of fixed rate
debt outstanding as of May 31, 2011, and May 31, 2010, respectively, the Company also had variable
rate debt outstanding (primarily LIBOR-based), certain of which includes a fixed margin. As of May
31, 2011, and May 31, 2010, the estimated fair value of the Company’s total variable rate debt,
including current maturities was $1,063.9 million and $1,957.6 million, respectively. Using a
sensitivity analysis based on a hypothetical 1% increase in prevailing interest rates over a
12-month period, the approximate increase in cash required for interest as of May 31, 2011, and May
31, 2010, is $20.6 million and $46.2 million, respectively.
45
Table of Contents
Item 4. Controls and Procedures.
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial Officer have concluded, based on
their evaluation as of the end of the period covered by this report, that the Company’s “disclosure
controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) are effective to ensure that information required to be disclosed in the reports that
the Company files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Internal Control Over Financial Reporting
In connection with the foregoing evaluation by the Company’s Chief Executive Officer and its
Chief Financial Officer, no changes were identified in the Company’s “internal control over
financial reporting” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and
15d-15(f)) that occurred during the Company’s fiscal quarter
ended May 31, 2011, that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
PART II - OTHER INFORMATION
Item 6. Exhibits.
Exhibits required to be filed by Item 601 of Regulation S-K.
For the exhibits that are filed herewith or incorporated herein by reference, see the Index to
Exhibits located on page 48 of this report. The Index to Exhibits is incorporated herein by
reference.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CONSTELLATION BRANDS, INC.
|
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| Dated: July 11, 2011 | By: | /s/ David M. Thomas | ||
| David M. Thomas, Senior Vice President, | ||||
| Finance and Controller | ||||
| Dated: July 11, 2011 | By: | /s/ Robert Ryder | ||
| Robert Ryder, Executive Vice President and | ||||
|
Chief Financial Officer (principal financial
officer and principal accounting officer) |
||||
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Table of Contents
INDEX TO EXHIBITS
| Exhibit No. | ||
|
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2.1
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Share Subscription Agreement dated December 23, 2010 among Constellation Brands, Inc., Vincor U.K. Limited, CBI Australia Holdings Pty Limited, Perpetual Trustee Company Limited as trustee of the CHAMP Buyout III Trust, Perpetual Corporate Trust Limited as trustee of the CHAMP Buyout III (SWF) Trust, CHAMP Buyout III Pte Ltd, and Canopus Holdco Limited (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated December 23, 2010, filed December 28, 2010 and incorporated herein by reference). | |
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2.2
|
Deed of Amendment and Restatement dated January 31, 2011 to the Share Subscription Agreement dated December 23, 2010 among Constellation Brands, Inc., Vincor U.K. Limited, CBI Australia Holdings Pty Limited, Perpetual Trustee Company Limited as trustee of the CHAMP Buyout III Trust, Perpetual Corporate Trust Limited as trustee of the CHAMP Buyout III (SWF) Trust, CHAMP Buyout III Pte Ltd, and Canopus Holdco Limited (filed as Exhibit 2.1 to the Company’s Current Report on Form 8-K dated January 31, 2011, filed February 4, 2011 and incorporated herein by reference). | |
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3.1
|
Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2009 and incorporated herein by reference). | |
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3.2
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Certificate of Amendment to the Certificate of Incorporation of the Company (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2009 and incorporated herein by reference). | |
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3.3
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Amended and Restated By-Laws of the Company (filed as Exhibit 3.2 to the Company’s Current Report on Form 8-K dated December 6, 2007, filed December 12, 2007 and incorporated herein by reference). | |
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4.1
|
Indenture, with respect to 7.25% Senior Notes due 2016, dated as of August 15, 2006, by and among the Company, as Issuer, certain subsidiaries, as Guarantors and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated August 15, 2006, filed August 18, 2006 and incorporated herein by reference).# | |
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4.2
|
Supplemental Indenture No. 1, dated as of August 15, 2006, among the Company, as Issuer, certain subsidiaries, as Guarantors, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.2 to the Company’s Current Report on Form 8-K dated August 15, 2006, filed August 18, 2006 and incorporated herein by reference).# |
48
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4.3
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Supplemental Indenture No. 2, dated as of November 30, 2006, by and among the Company, Vincor International Partnership, Vincor International II, LLC, Vincor Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.28 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2006 and incorporated herein by reference).# | |
|
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|
4.4
|
Supplemental Indenture No. 3, dated as of May 4, 2007, by and among the Company, Barton SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC, and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.32 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2007 and incorporated herein by reference).# | |
|
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|
4.5
|
Supplemental Indenture No. 4, with respect to 8 3/8% Senior Notes due 2014, dated as of December 5, 2007, by and among the Company, as Issuer, certain subsidiaries, as Guarantors, and The Bank of New York Trust Company, N.A., (as successor to BNY Midwest Trust Company), as Trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated December 5, 2007, filed December 11, 2007 and incorporated herein by reference). | |
|
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|
4.6
|
Supplemental Indenture No. 5, dated as of January 22, 2008, by and among the Company, BWE, Inc., Atlas Peak Vineyards, Inc., Buena Vista Winery, Inc., Clos du Bois Wines, Inc., Gary Farrell Wines, Inc., Peak Wines International, Inc., and Planet 10 Spirits, LLC, and The Bank of New York Trust Company, N.A. (successor trustee to BNY Midwest Trust Company), as Trustee (filed as Exhibit 4.37 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008 and incorporated herein by reference). | |
|
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|
4.7
|
Supplemental Indenture No. 6, dated as of February 27, 2009, by and among the Company, Constellation Services LLC, and The Bank of New York Mellon Trust Company National Association (successor trustee to BNY Midwest Trust Company), as Trustee (filed as Exhibit 4.31 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2009 and incorporated herein by reference). | |
|
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|
4.8
|
Indenture, with respect to 7.25% Senior Notes due May 2017, dated May 14, 2007, by and among the Company, as Issuer, certain subsidiaries, as Guarantors, and The Bank of New York Trust Company, N.A., as Trustee (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 9, 2007, filed May 14, 2007 and incorporated herein by reference).# | |
|
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|
4.9
|
Supplemental Indenture No. 1, dated as of January 22, 2008, by and among the Company, BWE, Inc., Atlas Peak Vineyards, Inc., Buena Vista Winery, Inc., Clos du Bois Wines, Inc., Gary Farrell Wines, Inc., Peak Wines International, Inc., and Planet 10 Spirits, LLC, and The Bank of New York Trust Company, N.A. (successor trustee to BNY Midwest Trust Company), as Trustee (filed as Exhibit 4.39 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008 and incorporated herein by reference). |
49
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|
4.10
|
Supplemental Indenture No. 2, dated as of February 27, 2009, by and among the Company, Constellation Services LLC, and The Bank of New York Mellon Trust Company National Association (successor trustee to BNY Midwest Trust Company), as Trustee (filed as Exhibit 4.34 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2009 and incorporated herein by reference). | |
|
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||
|
4.11
|
Credit Agreement, dated as of June 5, 2006, among Constellation, the Subsidiary Guarantors party thereto, the Lenders party thereto, JPMorgan Chase Bank, N.A., as Administrative Agent, Citicorp North America, Inc., as Syndication Agent, J.P. Morgan Securities Inc. and Citigroup Global Markets Inc., as Joint Lead Arrangers and Bookrunners, and The Bank of Nova Scotia and SunTrust Bank, as Co-Documentation Agents (filed as Exhibit 4.11 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2010 and incorporated herein by reference). | |
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|
4.12
|
Amendment No. 1, dated as of February 23, 2007, to the Credit Agreement, dated as of June 5, 2006, among Constellation, the subsidiary guarantors referred to on the signature pages to such Amendment No. 1, and JPMorgan Chase Bank, N.A., in its capacity as Administrative Agent (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K, dated and filed February 23, 2007, and incorporated herein by reference).# | |
|
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|
4.13
|
Amendment No. 2, dated as of November 19, 2007, to the Credit Agreement, dated as of June 5, 2006, among Constellation, the Subsidiary Guarantors referred to on the signature pages to such Amendment No. 2, and JPMorgan Chase Bank, N.A., in its capacity as Administrative Agent (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated and filed November 20, 2007, and incorporated herein by reference). | |
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4.14
|
Amendment No. 3, dated as of January 25, 2010, to the Credit Agreement, dated as of June 5, 2006, among Constellation Brands, Inc., the Subsidiary Guarantors referred to on the signature pages to such Amendment No. 3, JPMorgan Chase Bank, N.A., in its capacity as Administrative Agent and Issuing Lender, Bank of America, N.A., in its capacity as Swingline Lender, The Bank of Nova Scotia, in its capacity as Issuing Lender, JPMorgan Securities Inc., in its capacity as joint bookrunner, CoBank, ACB, in its capacity as joint bookrunner, Banc of America Securities LLC, in its capacity as joint bookrunner and Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A., “Rabobank Nederland”, New York Branch in its capacity as joint bookrunner (filed as Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated January 25, 2010, filed January 26, 2010, and incorporated herein by reference). | |
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|
4.15
|
Guarantee Assumption Agreement, dated as of August 11, 2006, by Constellation Leasing, LLC, in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, pursuant to the Credit Agreement dated as of June 5, 2006 (as modified and supplemented and in effect from time to time) (filed as Exhibit 4.29 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 31, 2006 and incorporated herein by reference).# |
50
Table of Contents
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|
4.16
|
Guarantee Assumption Agreement, dated as of November 30, 2006, by Vincor International Partnership, Vincor International II, LLC, Vincor Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., and Vincor Finance, LLC in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, pursuant to the Credit Agreement dated as of June 5, 2006 (as modified and supplemented and in effect from time to time) (filed as Exhibit 4.31 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2006 and incorporated herein by reference).# | |
|
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|
4.17
|
Guarantee Assumption Agreement, dated as of May 4, 2007, by Barton SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, pursuant to the Credit Agreement dated as of June 5, 2006 (as modified and supplemented and in effect from time to time) (filed as Exhibit 4.39 to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2007 and incorporated herein by reference).# | |
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|
4.18
|
Guarantee Assumption Agreement, dated as of January 22, 2008, by BWE, Inc., Atlas Peak Vineyards, Inc., Buena Vista Winery, Inc., Clos du Bois Wines, Inc., Gary Farrell Wines, Inc., Peak Wines International, Inc., and Planet 10 Spirits, LLC in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, pursuant to the Credit Agreement dated as of June 5, 2006 (as modified and supplemented and in effect from time to time) (filed as Exhibit 4.46 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2008 and incorporated herein by reference). | |
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|
4.19
|
Guarantee Assumption Agreement, dated as of February 27, 2009, by Constellation Services LLC in favor of JPMorgan Chase Bank, N.A., as Administrative Agent, pursuant to the Credit Agreement dated as of June 5, 2006 (as modified and supplemented and in effect from time to time) (filed as Exhibit 4.42 to the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2009 and incorporated herein by reference). | |
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10.1
|
Form of Restricted Stock Award Agreement for Employees with respect to the Company’s Long-Term Stock Incentive Plan (grants on or after April 5, 2011) (filed as Exhibit 99.2 to the Company’s Current Report on Form 8-K, dated April 5, 2011, filed April 8, 2011, and incorporated herein by reference).* | |
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|
10.2
|
Form of Performance Share Unit Award Agreement for Executives with respect to the Company’s Long-Term Stock Incentive Plan (awards on or after April 5, 2011) (filed as Exhibit 99.3 to the Company’s Current Report on Form 8-K, dated April 5, 2011, filed April 8, 2011, and incorporated herein by reference).* | |
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|
31.1
|
Certificate of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). | |
|
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|
31.2
|
Certificate of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended (filed herewith). |
51
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|
32.1
|
Certification of Chief Executive Officer pursuant to Section 18 U.S.C. 1350 (filed herewith). | |
|
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|
32.2
|
Certification of Chief Financial Officer pursuant to Section 18 U.S.C. 1350 (filed herewith). | |
|
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|
101.1
|
The following materials from the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2011, formatted in XBRL (eXtensible Business Reporting Language): | |
|
|
(i) Consolidated Balance Sheets as of May 31, 2011 and February 28, 2011, (ii) Consolidated Statements of Operations for the three months ended May 31, 2011 and 2010, (iii) Consolidated Statements of Cash Flows for the three months ended May 31, 2011 and 2010, and (iv) Notes to Consolidated Financial Statements.** |
| * Designates management contract or compensatory plan or arrangement. | ||
| ** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 (“Securities Act”), as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934 (“Exchange Act”), as amended, and otherwise not subject to liability under those sections. This exhibit shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the Registrant specifically incorporates this exhibit by reference. | ||
| # Company’s Commission File No. 001-08495. For filings prior to October 4, 1999, use Commission File No. 000-07570. |
The Company agrees, upon request of the Securities and Exchange Commission, to furnish copies
of each instrument that defines the rights of holders of long-term debt of the Company or its
subsidiaries that is not filed herewith pursuant to Item 601(b)(4)(iii)(A) because the total amount
of long-term debt authorized under such instrument does not exceed 10% of the total assets of the
Company and its subsidiaries on a consolidated basis.
52
TABLE OF CONTENTS
Part I - Financial InformationprintItem 1. Financial StatementsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart II - Other InformationprintItem 6. Exhibitsprint