Form 10-K 022807
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
fiscal year ended February
28, 2007
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
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For
the
transition period from ____________________ to ____________________
Commission
File Number 001-08495
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CONSTELLATION
BRANDS, INC.
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|
(Exact
name of registrant as specified in its charter)
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| |
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Delaware
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16-0716709
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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370
Woodcliff Drive, Suite 300, Fairport, New
York 14450
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(Address
of principal executive
offices) (Zip
Code)
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| |
|
Registrant’s
telephone number, including area code (585)
218-3600
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Securities
registered pursuant to Section 12(b) of the Act:
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Title
of each class
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Name
of each exchange on which registered
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Class
A Common Stock (par value $.01 per share)
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New
York Stock Exchange
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Class
B Common Stock (par value $.01 per share)
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. Yes X No
___
Indicate
by check mark if the registrant is not required to file reports pursuant
to
Section 13 or Section 15(d) of the Act. Yes ___ No X
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
___
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the
best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment
to this
Form 10-K. [ ]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check
One):
Large
Accelerated Filer X
Accelerated
Filer ___
Non-accelerated
Filer ___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes ___ No X
The
aggregate market value of the voting common equity held by non-affiliates
of the
registrant, based upon the closing sales prices of the registrant’s Class A and
Class B Common Stock as reported on the New York Stock Exchange as of the
last
business day of the registrant’s most recently completed second fiscal quarter
was $5,416,393,626. The registrant has no non-voting common
equity.
The
number of shares outstanding with respect to each of the classes of common
stock
of Constellation Brands, Inc., as of April 13, 2007, is set forth
below:
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Class
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Number
of Shares Outstanding
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Class
A Common Stock, par value $.01 per share
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211,231,621
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Class
B Common Stock, par value $.01 per share
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23,825,338
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DOCUMENTS
INCORPORATED BY REFERENCE
The
proxy
statement of Constellation Brands, Inc. to be issued for the Annual Meeting
of
Stockholders which is expected to be held July 26, 2007 is incorporated by
reference in Part III to the extent described therein.
================================================================================================================
This
Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These
forward-looking statements are subject to a number of risks and uncertainties,
many of which are beyond the Company’s control, that could cause actual results
to differ materially from those set forth in, or implied by, such
forward-looking statements. All statements other than statements of historical
facts included in this Annual Report on Form 10-K, including without limitation
the statements under Item 1 “Business” and Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” regarding (i) the
Company’s business strategy, future financial position, prospects, plans and
objectives of management, (ii) the expected impact upon the Company’s net sales
and diluted earnings per share resulting from the decision to reduce distributor
wine inventory levels in the U.S., (iii) the Company’s expected restructuring
and related charges, accelerated depreciation costs, acquisition-related
integration costs, and other related charges, and (iv) information concerning
expected actions of third parties are forward-looking statements. When used
in
this Annual Report on Form 10-K, 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 Annual Report
on
Form 10-K. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. Although the Company believes that the expectations
reflected in the forward-looking statements are reasonable, it can give no
assurance that such expectations will prove to be correct. In addition to the
risks and uncertainties of ordinary business operations, the forward-looking
statements of the Company contained in this Annual Report on Form 10-K are
also
subject to the risk and uncertainty that (i) the impact upon net sales and
diluted earnings per share resulting from the decision to reduce distributor
wine inventory levels will vary from current expectations due to the actual
levels of distributor wine inventory reductions and (ii) the Company’s
restructuring and related charges, accelerated depreciation costs,
acquisition-related integration costs, and other related charges may exceed
current expectations due to, among other reasons, variations in anticipated
headcount reductions, contract terminations or greater than anticipated
implementation costs. Additional important factors that could cause actual
results to differ materially from those set forth in, or implied, by the
Company’s forward-looking statements contained in this Annual Report on Form
10-K are those described in Item 1A “Risk Factors” and elsewhere in this report
and in other Company filings with the Securities and Exchange
Commission.
PART
I
Item
1. Business
Introduction
Unless
the context otherwise requires, the terms “Company,” “we,” “our,” or “us” refer
to Constellation Brands, Inc. and its subsidiaries, and all references to “net
sales” refer to gross sales less promotions, returns and allowances, and excise
taxes to conform with the Company’s method of classification. All references to
“Fiscal 2007,” “Fiscal 2006,” and “Fiscal 2005” shall refer to the Company’s
fiscal year ended the last day of February of the indicated year. All references
to “Fiscal 2008” shall refer to the Company’s fiscal year ending February 29,
2008.
Market
positions and industry
data discussed in this Annual Report on Form 10-K are as of calendar 2006 and
have been obtained or
derived
from
industry and government publications and Company estimates. The industry and
government publications include: Adams Liquor Handbook; Adams Wine Handbook;
Adams Beer Handbook; Adams Handbook Advance; The U.S. Wine Market: Impact
Databank Review and Forecast; The U.S. Beer Market: Impact Databank Review
and
Forecast; The U.S. Spirits Market: Impact Databank Review and Forecast;
Euromonitor; Australian Bureau of Statistics; Information Resources, Inc.;
ACNielsen; Association for Canadian Distillers; AZTEC; and DISCUS.
The
Company has not independently verified the data from the industry and government
publications. Unless otherwise noted, all references to market positions are
based on unit volume.
The
Company is a Delaware corporation incorporated on December 4, 1972, as the
successor to a business founded in 1945. The Company has approximately
9,200
employees located throughout the world and the corporate headquarters are
located in Fairport, New York.
The
Company is a leading international producer and marketer of beverage alcohol
with a broad portfolio of brands across the wine, spirits and imported beer
categories. The Company has the largest wine business in the world and has
a
leading market position in each of its core markets, which include the United
States (“U.S.”), Canada, United Kingdom (“U.K.”), Australia and New
Zealand.
The
Company conducts its business through entities it wholly owns as well as
through
a variety of joint ventures with various other entities, both within and
outside
the U.S. On January 2, 2007, the Company participated in establishing and
commencing operations of a joint venture with Grupo Modelo, S.A. de C.V.
(“Modelo”) pursuant to which Modelo’s Mexican beer portfolio (the “Modelo
Brands”) are imported, marketed and sold by the joint venture in the U.S., the
District of Columbia and Guam, along with certain other imported beer brands
in
their respective territories. This imported beers joint venture is referred
to
hereinafter as “Crown Imports”. On April 17, 2007, the Company participated in
establishing and commencing operations of a joint venture with Punch Taverns
plc
(“Punch”) in which Punch acquired a 50% interest in the Company’s wholesale
business in the U.K. This U.K. wholesale joint venture is referred to
hereinafter as “Matthew Clark”.
In
the
U.S., the Company is the largest multi-category (wine, spirits and imported
beer) supplier of beverage alcohol. In addition to having a leading position
in
wine, the Company is also a leading producer and marketer of distilled spirits
in the U.S. The Company is the largest marketer of imported beer in the U.S.
through its January 2, 2007, investment in Crown Imports (see “Recent
Acquisitions and Equity Method Investments” below and “Investment in Crown
Imports” under “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 7 of this Annual Report on Form 10-K). Prior to
January 2, 2007, the Company was the largest marketer of imported beer in
25
primarily western U.S. states, where it had exclusive rights to import, market
and sell the Mexican brands in its portfolio.
With
its
broad product portfolio, the Company believes it is distinctly positioned to
satisfy an array of consumer preferences across all beverage alcohol categories
and price points. Many of the Company’s products are recognized leaders in their
respective categories and geographic markets. The Company’s strong market
positions make the Company a supplier of choice to its customers, who include
wholesale distributors, retailers, on-premise locations and government alcohol
beverage control agencies.
Prior
to
April 17, 2007, the Company owned and operated the leading independent
(non-brewery-owned) drinks wholesaler to the on-premise trade in the U.K.,
providing a full range of beverage alcohol and soft drinks. On April 17,
2007,
as discussed above, the Company participated in establishing and commencing
operations of the Matthew Clark joint venture (see “Recent Acquisitions and
Equity Method Investments” below and “Recent Developments - Investment in
Matthew Clark” under “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” in Item 7 of this Annual Report on Form
10-K). The Company intends to continue to leverage Matthew Clark as a strategic
route-to-market for its branded product portfolio.
The
Company's net sales by product category are summarized as
follows:
| |
|
For
the Year
Ended
February
28,
2007
|
|
%
of
Total
|
|
For
the Year
Ended
February
28,
2006
|
|
%
of
Total
|
|
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(in
millions)
|
|
|
|
|
|
|
|
|
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Branded
wine
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$
|
2,755.7
|
|
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53%
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$
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2,263.4
|
|
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49%
|
|
|
Wholesale
and other
|
|
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1,087.7
|
|
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21%
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972.0
|
|
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21%
|
|
|
Imported
beers
|
|
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1,043.6
|
|
|
20%
|
|
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1,043.5
|
|
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23%
|
|
|
Spirits
|
|
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329.4
|
|
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6%
|
|
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324.6
|
|
|
7%
|
|
|
Consolidated
Net Sales
|
|
$
|
5,216.4
|
|
|
100%
|
|
$
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4,603.5
|
|
|
100%
|
|
The
Company’s geographic markets include North America (primarily the U.S. and
Canada), Europe (primarily the U.K.) and Australia/New Zealand (primarily
Australia and New Zealand). The Company’s wholesale and other category net sales
are primarily related to the Company’s then wholly-owned wholesale business in
the U.K. Net sales for the imported beers category occurred in the U.S. while
net sales for spirits occurred in the North America market (primarily the U.S.).
Branded wine net sales by geographic area (based on the location of the selling
company) are summarized as follows:
| |
|
For
the Year
Ended
February
28,
2007
|
|
%
of
Total
|
|
For
the Year
Ended
February
28,
2006
|
|
%
of
Total
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
North
America
|
|
$
|
1,933.2
|
|
|
70%
|
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$
|
1,516.6
|
|
|
67%
|
|
|
Europe
|
|
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495.7
|
|
|
18%
|
|
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445.3
|
|
|
20%
|
|
|
Australia/New
Zealand
|
|
|
326.8
|
|
|
12%
|
|
|
301.5
|
|
|
13%
|
|
|
Consolidated
Net Sales
|
|
$
|
2,755.7
|
|
|
100%
|
|
$
|
2,263.4
|
|
|
100%
|
|
There
are
certain key trends within the beverage alcohol industry, which
include:
| · |
Consolidation
of suppliers, wholesalers and
retailers;
|
| · |
An
increase in global wine consumption;
and
|
| · |
Consumers
“trading up” to premium products within certain categories. On a global
basis, within the wine category, premium wines are growing faster
than
value-priced wines. In the U.S., within the beer category, imported
beers
are growing faster than domestic beers, and premium spirits are growing
faster than value-priced spirits.
|
To
capitalize on these trends, the Company has employed a strategy of growing
through a combination of internal growth, acquisitions and investments in joint
ventures to become more competitive, with a focus on the faster growing
segments of the beverage alcohol industry and developing strong market positions
in the wine, spirits and imported beers categories. Key elements of the
Company’s strategy include:
| · |
Leveraging
the Company’s existing portfolio of leading
brands;
|
| · |
Developing
new products, new packaging and line
extensions;
|
| · |
Diversifying
the Company’s product portfolio with an emphasis on premium spirits and
premium, super-premium and fine
wines;
|
| · |
Diversifying
geographic markets with a focus on expansion in Continental Europe
and
Japan;
|
| · |
Strengthening
its relationships with wholesalers and
retailers;
|
| · |
Expanding
its distribution and enhancing its production
capabilities;
|
| · |
Realizing
operating synergies; and
|
| · |
Acquiring
additional management, operational, marketing, and product development
expertise.
|
Recent
Acquisitions and Equity Method Investments
In
April
2007, the Company along with Punch, the leading pub company in the U.K.,
commenced operations of Matthew Clark, a joint venture which owns and operates
the U.K. wholesale business formerly owned entirely by the Company. The Company
and Punch, directly or indirectly, each have a 50% voting and economic interest
in Matthew Clark. On April 17, 2007, the Company discontinued consolidation
of the U.K. wholesale business and began accounting for its investment in
Matthew Clark under the equity method.
In
March
2007, the Company acquired the SVEDKA Vodka brand (“Svedka”) and related
business. Svedka is produced in Sweden and sold over one million cases in
calendar 2006. It is the fifth largest imported vodka and the fastest
growing major imported premium vodka in the U.S. This
acquisition increases the Company’s mix of premium spirits and provides a
selling and marketing platform for further expansion of the Company’s premium
spirits portfolio.
In
January 2007, the Company completed the formation of Crown Imports. The Company
and Modelo indirectly each have equal interest in Crown Imports, which has
the
exclusive right to import, market and sell the Modelo Brands, which include
Corona Extra, Corona Light, Coronita, Modelo Especial, Pacifico, and Negra
Modelo, in all 50 states of the U.S., the District of Columbia and Guam.
In
addition, the owners of the Tsingtao and St. Pauli Girl brands transferred
exclusive importing, marketing and selling rights with respect to these brands
in the U.S. to Crown Imports. Prior to January 2007, the Company had the
exclusive right to import, market and sell Modelo’s Mexican beer portfolio in 25
primarily western U.S. states and was the exclusive U.S. national importer,
marketer and seller of the Tsingtao and St. Pauli Girl brands. After completing
the formation of Crown Imports, the Company discontinued consolidation of
the
imported beer business and accounts for its investment in Crown Imports under
the equity method.
In
June
2006, the Company acquired Vincor International Inc. (“Vincor”), Canada’s
premier wine company. Vincor is Canada’s largest producer and marketer of wines.
At the time of the acquisition, Vincor was the world’s eighth largest producer
and distributor of wine and related products by revenue and was also one of
the
largest wine importers, marketers and distributors in the U.K. Through this
transaction, the Company acquired various additional winery and vineyard
interests used in the production of premium, super-premium and fine wines from
Canada, California, Washington State, Western Australia and New Zealand. In
addition, as a result of the acquisition, the Company sources, markets and
sells
premium wines from South Africa. Well-known premium brands acquired in the
Vincor acquisition include Inniskillin, Jackson-Triggs, Sawmill Creek, Sumac
Ridge, R.H. Phillips, Toasted Head, Hogue, Kim Crawford and Kumala.
In
December 2004, the Company acquired The Robert Mondavi Corporation (“Robert
Mondavi”), a leading premium wine producer based in Napa, California.
Through
this transaction, the Company acquired various additional winery and vineyard
interests, and, additionally produces, markets and sells premium, super-premium
and fine California wines under
the
Woodbridge by Robert Mondavi, Robert Mondavi Private Selection and Robert
Mondavi Winery brand names. Woodbridge and Robert Mondavi Private Selection
are
the leading domestic premium and super-premium wine brands, respectively, in
the
U.S.
As a
result of the Robert Mondavi acquisition, the Company acquired an ownership
interest in Opus One, a joint venture owned equally by Robert Mondavi and Baron
Philippe de Rothschild, S.A. During September 2005, the Company’s president and
Baroness Philippine de Rothschild announced an agreement to maintain equal
ownership of Opus One. Opus One produces fine wines at its Napa Valley winery.
The Company accounts for its investment in Opus One under the equity
method.
In
December 2004, the Company purchased a 40% interest in Ruffino S.r.l.
(“Ruffino”), the well-known Italian fine wine company, and in February 2005, the
Constellation Wines segment began distributing Ruffino’s products in the U.S.
Also in December 2004, the Company became a 50% owner in a joint venture with
jstar Brands (“Planet
10 Spirits”). The objective of Planet 10 Spirits is to create and market
premium spirit brands in the U.S. and key export markets. The first product
from
this joint venture is Effen Vodka, a luxury brand imported from
Holland.
For
more
information about these transactions,
see
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” in Item 7 of this Annual Report on Form 10-K.
Business
Segments
On
January 2, 2007, as a result of the Company’s investment in Crown Imports, the
Company changed its internal management financial reporting to consist of
three
business divisions, Constellation Wines, Constellation Spirits and Crown
Imports. Prior to the investment in the joint venture, the Company’s internal
management financial reporting included the Constellation Beers business
division. Consequently, as of February 28, 2007, the Company reports its
operating results in five segments: Constellation Wines (branded wine, and
U.K.
wholesale and other), Constellation Spirits (distilled spirits), Constellation
Beers (imported beer), Crown Imports (imported beer) and Corporate Operations
and Other. Segment results for Constellation Beers are for the period prior
to
January 2, 2007, and segment results for Crown Imports are for the period
on and
after January 2, 2007. The new business segments, described more fully below,
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.
Information
regarding net sales, operating income and total assets of each of the Company’s
business segments and information regarding geographic areas is set forth in
Note 22 to the Company’s consolidated financial statements located in Item 8 of
this Annual Report on Form 10-K.
Constellation
Wines
Constellation
Wines is the leading producer and marketer of wine in the world. It sells
a
large number of wine brands across all categories - table wine, sparkling
wine
and dessert wine - and across all price points - popular, premium, super-premium
and fine wine. The portfolio of super-premium and fine wines is supported
by
vineyard holdings in the U.S., Canada, Australia and New Zealand. As the
largest
producer and marketer of wine in the world, Constellation Wines has leading
market positions in several countries. It
is a
leading producer and marketer of wine in the U.S., Canada, Australia and
New
Zealand and the largest marketer of wine in the U.K.
Wine
produced by the Company in the U.S. is primarily marketed domestically and
in
the U.K. Wine produced in Australia and New Zealand is primarily marketed
domestically and in the U.S. and U.K., while wine produced in Canada is
primarily marketed domestically. In addition, Constellation Wines exports
its
wine products to other major wine consuming markets of the world.
In
the
U.S., Constellation Wines sells 24 of the top-selling 100
table
wine brands and has the largest portfolio of premium, super-premium and fine
wines. In Canada, it has wine across all price points, and has five of the
top
20 table wine brands and the leading Icewine brand with Inniskillin. It has
eight of the top-selling 20 table wine brands in the U.K. and the best selling
brand of fortified British wine. In Australia, it has wine brands across
all
price points and varieties, including a comprehensive range of premium wine
brands, and has five of the top-selling 20 wine brands and is the largest
producer of cask (box) wines.
Constellation
Wines’ well-known wine brands include Robert Mondavi Winery, Inniskillin, Simi,
Franciscan Oakville Estate, Kim Crawford, Estancia, Toasted Head, Ravenswood,
Jackson-Triggs, Blackstone, Robert Mondavi Private Selection, Ruffino, Nobilo,
Rex Goliath, Alice White, Hardys, Goundrey, Kumala, Woodbridge by
Robert Mondavi, Vendange, Arbor Mist, Almaden, and Stowells.
Throughout
Fiscal 2007 and prior to April 17, 2007, Constellation Wines owned entirely
the
leading independent beverage wholesaler to the on-premise trade in the U.K.,
with approximately 20,000 on-premise accounts. That
business distributes wine, distilled spirits, cider, beer, RTDs and soft
drinks. Those products include Constellation Wines’ branded wine and cider, and
products produced by other major drinks companies. As previously discussed,
on
April 17, 2007, the Company along with Punch completed the formation
of the Matthew Clark joint venture, which now owns and operates that U.K.
wholesale business.
Constellation
Wines is also the second largest producer and marketer of cider in the U.K.,
with leading cider brands Blackthorn and Gaymer’s Olde English, and a leading
producer and a leading marketer of wine kits and beverage alcohol refreshment
coolers in Canada.
In
conjunction with its wine production, Constellation Wines produces and sells
bulk wine and other related products and services.
Constellation
Beers
Prior
to
January 2, 2007, Constellation Beers was the largest marketer of imported beer
in 25 primarily western U.S. states, where it had exclusive rights to
import, market and sell the Mexican brands in its portfolio, Corona Extra,
Corona Light, Coronita, Modelo Especial, Pacifico, and Negra Modelo.
Constellation Beers also had exclusive rights to the entire U.S.
to import, market and sell the St. Pauli Girl brand, the number two
selling German Beer, and the Tsingtao brand, the number one selling Chinese
Beer.
Crown
Imports
Effective
January 2, 2007, the Constellation Beers operating segment was replaced with
the
Crown Imports operating segment as the Company completed the formation of
the
Crown Imports joint venture with Modelo. The Company and Modelo indirectly
each
have equal interest in Crown Imports, which has the exclusive right to import,
market and sell Corona Extra, Corona Light, Coronita, Modelo Especial, Pacifico,
Negra Modelo, St. Pauli Girl and Tsingtao brands in all 50 states of the
U.S.
The Company accounts for its investment in Crown Imports under the equity
method. The segment has six of the top-selling 25 imported beer brands in
the
U.S. Corona Extra is the best selling imported beer in the U.S. and the sixth
best selling beer overall in the U.S.
Constellation
Spirits
Constellation
Spirits produces, bottles, imports and markets a diversified line of distilled
spirits. Constellation Spirits is a leading producer and marketer of distilled
spirits in the U.S. The majority of the segment’s distilled spirits unit volume
consists of products marketed in the value and mid-premium priced category.
Principal distilled spirits brands include Black Velvet, Chi-Chi’s prepared
cocktails, Barton, Sköl, Fleischmann’s, Canadian LTD, Montezuma, Ten High, Mr.
Boston and Inver House. The
segment is continuing efforts to increase its premium spirits offerings,
with
brands that include Black Velvet Reserve, the 99 Schnapps family, Effen Vodka,
1792 Ridgemont Reserve, Meukow Cognac, Cocktails by Jenn, Monte Alban,
Danfield’s, di Amore, Caravella, Balblair, Old Pulteney and
Speyburn.
The
acquisition of Svedka and related business in March 2007 increases the
Company’s mix of premium spirits and provides a selling and marketing platform
for further expansion of the premium spirits portfolio.
Corporate
Operations and Other
The
Corporate Operations and Other segment includes traditional corporate-related
items including
executive management, corporate development, corporate finance, human resources,
internal audit, investor relations, legal, public relations, global information
technology and global strategic sourcing.
Marketing
and Distribution
The
Company’s segments employ full-time, in-house marketing, sales and customer
service organizations to maintain a high degree of focus on their respective
product categories. The organizations use a range of marketing strategies
and
tactics to build brand equity and increase sales, including market research,
consumer and trade advertising, price promotions, point-of-sale materials,
event
sponsorship, on-premise
promotions and public relations. Where opportunities exist, particularly
with
national accounts, the Company leverages its sales and marketing skills across
the organization and categories.
In
North
America, the Company’s products are primarily distributed by a broad base of
wholesale
distributors as well as state and provincial alcoholic beverage control
agencies. As is the case with all other beverage alcohol companies, products
sold through state or provincial alcoholic beverage control agencies are subject
to obtaining and maintaining listings to sell the Company’s products in that
agency’s state or province. State and provincial governments can affect prices
paid by consumers of the Company’s products. This is possible either through the
imposition of taxes or, in states and provinces in which the government acts
as
the distributor of the Company’s products through an alcohol beverage control
agency, by directly setting retail prices for the Company’s
products.
In
the
U.K., the Company’s products are distributed either directly to retailers or
through wholesalers and importers. Matthew Clark sells and distributes
the Company’s branded products and those of other major drinks companies to
on-premise locations through a network of depots located throughout the U.K.
In
Australia, New Zealand and other markets, the Company’s products are
primarily distributed either directly to retailers or through wholesalers and
importers. In the U.K., Australia and New Zealand, the distribution channels
are
dominated by a small number of industry leaders.
Trademarks
and Distribution Agreements
Trademarks
are an important aspect of the Company’s business. The Company sells its
products under a number of trademarks, which the Company owns or uses under
license. Throughout its segments, the Company also has various licenses and
distribution agreements for the sale, or the production and sale, of its
products and products of third parties. These licenses and distribution
agreements have varying terms and durations. Agreements include, among others,
a
long-term license agreement with Hiram Walker & Sons, Inc., which expires in
2116, for the Ten High, Crystal Palace, Northern Light, Lauder’s and Imperial
Spirits brands, and a long-term license agreement with Chi-Chi’s, Inc., which
expires in 2117, for the production, marketing and sale of beverage products,
alcoholic and non-alcoholic, utilizing the Chi-Chi’s brand name.
All
of
the Company’s imported beer products are imported, marketed and sold through
Crown Imports. Crown Imports has entered into exclusive importation agreements
with the suppliers of the imported beer products. These agreements have terms
that vary and prohibit Crown Imports from importing beer products from other
producers from the same country. Crown Imports’ Mexican beer portfolio, the
Modelo Brands, currently consists of the Corona Extra, Corona Light, Coronita,
Modelo Especial, Negra Modelo and Pacifico brands and is marketed and sold
in
all 50 states of the U.S., the District of Columbia and Guam. Crown Imports
also
has entered into license and importation agreements with the owners of the
German St. Pauli Girl and the Chinese Tsingtao brands for their importation,
marketing and sale within the U.S. With respect to the Modelo Brands, Crown
Imports has an exclusive sub-license to use certain trademarks related to
Modelo
Brands beer products in the U.S. (including the District of Columbia and
Guam)
pursuant to a sub-license agreement between Crown Imports and Marcas Modelo,
S.A. de C.V. This sub-license agreement continues for the duration of the
Crown
Imports joint venture.
Crown
Imports and Extrade II S.A. de C.V. (“Extrade II”), an affiliate of Modelo, have
entered into an Importer Agreement (the “Importer Agreement”), pursuant to which
Extrade II granted to Crown Imports the exclusive right to sell the Modelo
Brands in the territories mentioned above. The joint venture and the related
importation arrangements provide that, subject to the terms and conditions
of
those agreements, the joint venture and the related importation
arrangements will continue until 2016 for an initial term of 10 years, and
renew in 10-year periods unless GModelo Corporation, a Delaware corporation
and
subsidiary of Diblo, gives notice prior to the end of year seven of any term.
Competition
The
beverage alcohol industry is highly competitive. The Company competes on the
basis of quality, price, brand recognition and distribution strength. The
Company’s beverage alcohol products compete with other alcoholic and
non-alcoholic beverages for consumer purchases, as well as shelf space in retail
stores, restaurant presence and wholesaler attention. The Company competes
with
numerous multinational producers and distributors of beverage alcohol products,
some of which may have greater resources than the Company.
Constellation
Wines’ principal wine competitors include: E & J Gallo Winery, The Wine
Group, Foster’s Group, and Kendall-Jackson in the U.S.; Andrew Peller, Foster's
Group and Maison des Futailles in Canada; E & J Gallo Winery, Diageo,
Foster’s Group and Pernod Ricard in the U.K.; and Foster’s Group and Pernod
Ricard in Australia. Constellation Wines’ principal cider competitors include
Scottish and Newcastle and C&C Group.
Constellation
Spirits’ principal distilled spirits competitors include: Diageo, Fortune
Brands, Bacardi, Pernod
Ricard and
Brown-Forman.
Constellation
Beers and Crown Imports’ principal competitors include: Heineken, InBev,
Anheuser-Busch and Diageo in the imported beer category as well as domestic
producers such as Anheuser-Busch, SABMiller and Molson
Coors.
Production
In
the
U.S., the Company operates 21 wineries where wine is produced from many
varieties of grapes grown principally in the Napa, Sonoma, Monterey and San
Joaquin regions of California. In Australia, the Company operates 12 wineries
where wine is produced from many varieties of grapes grown in most of the major
viticultural regions. The Company also operates eight wineries in Canada and
four wineries in New Zealand. Grapes are crushed at most of the Company’s
wineries and stored as wine until packaged for sale under the Company’s brand
names or sold in bulk. In the U.S. and Canada, the Company’s inventories of wine
are usually at their highest levels in September through November during and
after the crush of each year’s grape harvest, and are reduced prior to the
subsequent year’s crush. Similarly, in Australia and New Zealand, the Company’s
inventories of wine are usually at their highest levels in March through May
during and after the crush of each year’s grape harvest, and are reduced prior
to the subsequent year’s crush.
The
Company has seven facilities for the production and bottling of its distilled
spirits products. The bourbon whiskeys and domestic blended whiskeys marketed
by
the Company are primarily produced and aged by the Company at its distillery
in
Bardstown, Kentucky. The Company’s primary distilled spirits bottling facility
in the U.S. is in Owensboro, Kentucky. The majority of the Company’s Canadian
whisky requirements are produced and aged at its Canadian distilleries in
Lethbridge, Alberta, and Valleyfield, Quebec. The Company’s requirements of
Scotch whisky, tequila, mezcal and the neutral grain spirits it uses in the
production of gin, vodka and other spirits products, are primarily purchased
from various suppliers.
The
Company operates
two facilities in the U.K. that produce, bottle and package wine and cider.
To
produce Stowells, wine is imported in bulk from various countries and packaged
at the Company’s facility at Bristol, England.
The
Bristol facility also produces fortified British wine and wine style drinks.
All
cider production takes place at the Company’s facility at Shepton Mallet,
England.
Sources
and Availability of Production Materials
The
principal components in the production of the Company’s branded beverage alcohol
products are agricultural products, such as grapes and grain, and packaging
materials (primarily glass).
Most
of
the Company’s annual grape requirements are satisfied by purchases from each
year’s harvest which normally begins in August and runs through October in the
U.S. and begins in February and runs through May in Australia. The Company
believes that it has adequate sources of grape supplies to meet its sales
expectations. However, in the event that demand for certain wine products exceed
expectations, the Company would seek to source the extra requirements from
the
bulk wine markets, but could experience shortages.
The
Company receives grapes from approximately 1,050 independent growers in the
U.S., approximately 1,400 growers in Australia and approximately 150
growers in both Canada and New Zealand. The Company enters into written purchase
agreements with a majority of these growers and pricing generally varies
year-to-year and generally based on then-current market prices. In Australia,
approximately 700 of the 1,400 growers belong to a grape growers’ cooperative.
The Company purchases the majority of its Australian grape requirements from
this cooperative under a long-term arrangement. In the U.K., the Company
produces wine from materials purchased either on a contract basis or on the
open
market.
At
February 28, 2007, the Company owned
or leased approximately 24,000 acres of land and vineyards, either fully bearing
or under development, in California (U.S.), New York (U.S.), Washington (U.S.),
Canada, Australia and New Zealand. This acreage supplies only a small percentage
of the Company’s overall total wine needs. However, most of this acreage is used
to supply a large portion of the grapes used for the production of the Company’s
super-premium and fine wines. The Company continues to consider the purchase
or
lease of additional vineyards, and additional land for vineyard plantings,
to
supplement its grape supply.
The
distilled spirits manufactured by
the Company require various agricultural products, neutral grain spirits and
bulk spirits. The Company fulfills its requirements through purchases from
various sources by contractual arrangement and through purchases on the open
market. The Company believes that adequate supplies of the aforementioned
products are available at the present time.
In
the U.K., the Company sources apples
for cider production primarily through long-term supply arrangements with owners
of apple orchards. The Company believes there are adequate supplies of apples
at
this particular time.
The
Company utilizes glass and
polyethylene terephthalate (“PET”) bottles and other materials such as caps,
corks, capsules, labels, wine bags and cardboard cartons in the bottling
and
packaging of its products. Glass bottle costs are one of the largest components
of the Company’s cost of product sold. In the U.S., Canada and Australia, the
glass bottle industry is highly concentrated with only a small number of
producers. The Company has traditionally obtained, and continues to obtain,
its
glass requirements from a limited number of producers under long-term supply
arrangements. Currently, one producer supplies most
of the Company’s glass container requirements for its U.S.
operations and another producer supplies substantially all of the
Company’s glass container requirements for its Australian operations
and a third producer supplies a majority of the Company’s glass
container requirements for its Canadian operations. The Company has
been able to satisfy its requirements with respect to the foregoing
and considers its sources of supply to be adequate at this time. However,
the
inability of any of the Company’s glass bottle suppliers to satisfy the
Company’s requirements could adversely affect the Company’s
operations.
Government
Regulation
The
Company is subject to a range of
regulations in the countries in which it operates. Where it produces products,
the Company is subject to environmental laws and regulations and may be required
to obtain permits and licenses to operate its facilities. Where it markets
and
sells products, it may be subject to laws and regulations on trademark and
brand
registration, packaging and labeling, distribution methods and relationships,
pricing and price changes, sales promotions, advertising and public relations.
The Company is also subject to rules and regulations relating to changes in
officers or directors, ownership or control.
The
Company believes it is in
compliance in all material respects with all applicable governmental laws and
regulations in the countries in which it operates. The Company also believes
that the cost of administration and compliance with, and liability under, such
laws and regulations does not have, and is not expected to have, a material
adverse impact on its financial condition, results of operations or cash
flows.
Seasonality
The
beverage alcohol industry is
subject to seasonality in each major category. As a result, in response to
wholesaler and retailer demand which precedes consumer purchases, the Company’s
wine and spirits sales are typically highest during the third quarter of its
fiscal year, primarily due to seasonal holiday buying. Crown Imports’
imported beer sales are typically highest during the first and second quarters
of the Company’s fiscal year, which correspond to the Spring and Summer periods
in the U.S.
Employees
As
of the
end of March 2007, the Company had approximately 9,200
full-time employees throughout the world. Approximately 3,700 full-time
employees were in the U.S. and approximately 5,500 full-time employees were
outside of the U.S.,
in
countries including Australia, the U.K., Canada and New Zealand. Additional
workers may be employed by the Company during the peak and grape crushing
seasons. The Company considers its employee relations generally to be
good.
Company
Information
The
Company’s internet address is http://www.cbrands.com. The Company’s filings with
the Securities and Exchange Commission (“SEC”), including its annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and
amendments to those reports, filed or furnished pursuant to Section 13(a) or
15
(d) of the Securities Exchange Act of 1934, are accessible free of charge at
http://www.cbrands.com as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the SEC. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding issuers, such as the Company, that
file electronically with the SEC. The internet address of the SEC’s site is
http://www.sec.gov. Also, the public may read and copy any materials that the
Company files with the SEC at the SEC’s Public Reference Room at 100 F Street,
N.E., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The
Company has adopted a Chief Executive Officer and Senior Financial Executive
Code of Ethics that specifically applies to its chief executive officer,
its
principal financial officer, and controller. This Chief Executive Officer
and
Senior Financial Executive Code of Ethics meets the requirements as set forth
in
the Securities Exchange Act of 1934, Item 406 of Regulation S-K. The Company
has
posted on its internet website a copy of the Chief Executive Officer and
Senior
Financial Officer Code of Ethics. It is accessible at
http://www.cbrands.com/CBI/constellationbrands/Investors/CorporateGovernance.
The
Company also has adopted a Code of Business Conduct and Ethics that applies
to
all employees, directors and officers, including each person who is subject
to
the Chief Executive Officer and Senior Financial Executive Code of Ethics.
The
Code of Business Conduct and Ethics is available on the Company’s internet
website, together with the Company’s Global Code of Responsible Practices for
Beverage Alcohol Advertising and Marketing, its Board of Directors Corporate
Governance Guidelines and the Charters of the Board’s Audit Committee, Human
Resources Committee (which serves as the Board’s compensation committee) and
Corporate Governance Committee (which serves as the Board’s nominating
committee). All of these materials are accessible on the Company’s Internet site
at http://www.cbrands.com/CBI/constellationbrands/Investors/CorporateGovernance.
Amendments to, and waivers granted to the Company’s directors and executive
officers under the Company’s codes of ethics, if any, will be posted in this
area of the Company’s website. A copy of the Code of Business Conduct and
Ethics, Global Code of Responsible Practices for Beverage Alcohol Advertising
and Marketing, Chief Executive Officer and Senior Financial Executive Code
of
Ethics, and/or the Board of Directors Corporate Governance Guidelines and
committee charters are available in print to any shareholder who requests
it.
Shareholders should direct such requests in writing to Investor Relations
Department, Constellation Brands, Inc., 370 Woodcliff Drive, Suite 300,
Fairport, New York 14450, or by telephoning the Company’s Investor Center at
1-888-922-2150.
The
foregoing information regarding the Company’s website and its content is for
your convenience only. The content of the Company’s website is not deemed to be
incorporated by reference in this report or filed with the SEC.
Item
1A. Risk
Factors
In
addition to the other information set forth in this report, you should carefully
consider the following factors which could materially affect our business,
financial condition or results of operations. The risks described below are
not
the only risks we face. Additional factors not presently known to us or that
we
currently deem to be immaterial also may materially adversely affect our
business operations.
Our
indebtedness could have a material adverse effect on our financial
health.
We
have
incurred substantial indebtedness to finance our acquisitions. In the future,
we
may incur substantial additional indebtedness to finance further acquisitions
or
for other purposes. Our ability to satisfy our debt obligations outstanding
from
time to time will depend upon our future operating performance. We do not have
complete control over our future operating performance because it is subject
to
prevailing economic conditions, levels of interest rates and financial, business
and other factors. We cannot assure you that our business will generate
sufficient cash flow from operations to meet all of our debt service
requirements and to fund our capital expenditure requirements.
Our
current and future debt service obligations and covenants could have important
consequences to you. These consequences include, or may include, the
following:
| · |
Our
ability to obtain financing for future working capital needs or
acquisitions or other purposes may be
limited;
|
| · |
Our
funds available for operations, expansion or distributions will be
reduced
because we will dedicate a significant portion of our cash flow from
operations to the payment of principal and interest on our
indebtedness;
|
| · |
Our
ability to conduct our business could be limited by restrictive covenants;
and
|
| · |
Our
vulnerability to adverse economic conditions may be greater than
less
leveraged competitors and, thus, our ability to withstand competitive
pressures may be limited.
|
Our
senior credit facility and the indentures under which our debt securities have
been issued contain restrictive covenants and provisions. These covenants and
provisions affect our ability to grant additional liens, incur additional debt,
sell assets, engage in changes of control, pay dividends, enter into
transactions with affiliates, make investments and engage in certain other
fundamental changes. Our senior credit facility also contains restrictions
on
our ability to make acquisitions and certain financial ratio tests, including
a
debt coverage ratio and an interest coverage ratio. These restrictions
could limit our ability to conduct business. If we fail to comply with the
obligations contained in the senior credit facility, our existing or future
indentures or other loan agreements, we could be in default under such
agreements, which could require us to immediately repay the related debt and
also debt under other agreements that may contain cross-acceleration or
cross-default provisions.
Our
acquisition and joint venture strategies may not be
successful.
We
have
made a number of acquisitions, including our recent acquisition of Svedka and
its related business and our acquisition of Vincor International Inc., and
we anticipate that we may, from time to time, acquire additional businesses,
assets or securities of companies that we believe would provide a strategic
fit
with our business. We will need to integrate acquired businesses with our
existing operations. We cannot assure you that we will effectively assimilate
the business or product offerings of acquired companies into our business or
product offerings. Integrating the operations and personnel of acquired
companies into our existing operations may result in difficulties and expense,
disrupt our business or divert management’s time and attention. Acquisitions
involve numerous other risks, including potential exposure to unknown
liabilities of acquired companies and the possible loss of key employees and
customers of the acquired business. In connection with acquisitions or joint
venture investments outside the U.S., we may enter into derivative contracts
to
purchase foreign currency in order to hedge against the risk of foreign currency
fluctuations in connection with such acquisitions or joint venture investments,
which subjects us to the risk of foreign currency fluctuations associated with
such derivative contracts.
We
have
entered into joint ventures, including our recently established joint venture
with Modelo and
our
joint venture with Punch and
we
may enter into additional joint ventures. We share control of our joint
ventures. Our joint venture partners may at any time have economic, business
or
legal interests or goals that are inconsistent with our goals or the goals
of
the joint venture. In addition, our joint venture partners may be unable to
meet
their economic or other obligations and we may be required to fulfill those
obligations alone. Our failure or the failure of an entity in which we have
a
joint venture interest to adequately manage the risks associated with any
acquisitions or joint ventures could have a material adverse effect on our
financial condition or results of operations. We cannot assure you that any
of
our acquisitions or joint ventures will be profitable. In particular,
risks
and
uncertainties associated with our recently established joint ventures
with
Modelo and
with
Punch
include,
among others, the joint venture’s ability to operate its business successfully,
the joint venture’s ability to develop appropriate standards, controls,
procedures and policies for the growth and management of the joint venture
and
the strength of the joint venture’s relationships with its employees, suppliers
and customers.
Competition
could have a material adverse effect on our business.
We
are in
a highly competitive industry and the dollar amount and unit volume of our
sales
could be negatively affected by our inability to maintain or increase prices,
changes in geographic or product mix, a general decline in beverage alcohol
consumption or the decision of wholesalers, retailers or consumers to purchase
competitive products instead of our products. Wholesaler, retailer and consumer
purchasing decisions are influenced by, among other things, the perceived
absolute or relative overall value of our products, including their quality
or
pricing, compared to competitive products. Unit volume and dollar sales could
also be affected by pricing, purchasing, financing, operational, advertising
or
promotional decisions made by wholesalers, state and provincial agencies, and
retailers which could affect their supply of, or consumer demand for, our
products. We could also experience higher than expected selling, general and
administrative expenses if we find it necessary to increase the number of our
personnel or our advertising or promotional expenditures to maintain our
competitive position or for other reasons.
An
increase in excise taxes or government regulations could have a material adverse
effect on our business.
The
U.S.,
the U.K., Canada,
Australia and other countries in which we operate impose excise and other taxes
on beverage alcohol products in varying amounts which have been subject to
change. Significant increases in excise or other taxes on beverage alcohol
products could materially and adversely affect our financial condition or
results of operations. Many U.S. states have considered proposals to
increase, and some of these states have increased, state alcohol excise taxes.
In addition, federal, state, local and foreign governmental agencies extensively
regulate the beverage alcohol products industry concerning such matters as
licensing, trade and pricing practices, permitted and required labeling,
advertising and relations with wholesalers and retailers. Certain federal and
state or
provincial
regulations also require warning labels and signage. New or revised regulations
or increased licensing fees, requirements or taxes could also have a material
adverse effect on our financial condition or results of operations.
We
rely on the performance of wholesale distributors, major retailers and chains
for the success of our business.
In
the
U.S., we sell our products principally to wholesalers for resale to retail
outlets including grocery stores, package liquor stores, club and discount
stores and restaurants. In the U.K., Canada
and
Australia, we sell our products principally to wholesalers and directly to
major
retailers and chains. The replacement or poor performance of our major
wholesalers, retailers or chains could materially and adversely affect our
results of operations and financial condition. Our inability to collect accounts
receivable from our major wholesalers, retailers or chains could also materially
and adversely affect our results of operations and financial
condition.
The
industry is being affected by the trend toward consolidation in the wholesale
and retail distribution channels, particularly in Europe and the U.S. If we
are
unable to successfully adapt to this changing environment, our net income,
share
of sales and volume growth could be negatively affected. In
addition, wholesalers and retailers of our products offer products which compete
directly with our products for retail shelf space and consumer purchases.
Accordingly, wholesalers or retailers may give higher priority to products
of
our competitors. In the future, our wholesalers and retailers may not continue
to purchase our products or provide our products with adequate levels of
promotional support.
Our
business could be adversely affected by a decline in the consumption of products
we sell.
Since
1995, there have been modest increases in consumption of beverage alcohol
in
most of our product categories and geographic markets. There have been periods
in the past, however, in which there were substantial declines in the overall
per capita consumption of beverage alcohol products in the U.S. and other
markets in which we participate. A limited or general decline in consumption
in
one or more of our product categories could occur in the future due to a
variety
of factors, including:
| · |
A
general decline in economic conditions;
|
| · |
Increased
concern about the health consequences of consuming beverage alcohol
products and about drinking and driving;
|
| · |
A
general decline in the consumption of beverage alcohol products in
on-premise establishments, such as may result from smoking
bans;
|
| · |
A
trend toward a healthier diet including lighter, lower calorie beverages
such as diet soft drinks, juices and water
products;
|
| · |
The
increased activity of anti-alcohol groups;
and
|
| · |
Increased
federal, state or foreign excise or other taxes on beverage alcohol
products.
|
In
addition, our continued success depends, in part, on our ability to develop
new
products. The launch and ongoing success of new products are inherently
uncertain especially with regard to their appeal to consumers. The launch of
a
new product can give rise to a variety of costs and an unsuccessful launch,
among other things, can affect consumer perception of existing
brands.
We
generally purchase raw materials under short-term supply contracts, and we
are
subject to substantial price fluctuations for grapes and grape-related
materials, and we have a limited group of suppliers of glass
bottles.
Our
business is heavily dependent upon raw materials, such as grapes, grape juice
concentrate, grains, alcohol and packaging materials from third-party suppliers.
We could experience raw material supply, production or shipment difficulties
that could adversely affect our ability to supply goods to our customers.
Increases in the costs of raw materials also directly affect us. In the past,
we
have experienced dramatic increases in the cost of grapes. Although we believe
we have adequate sources of grape supplies, in the event demand for certain
wine
products exceed expectations, we could experience shortages.
The
wine
industry swings between cycles of grape oversupply and undersupply. In a severe
oversupply environment, the ability of wine producers, including ourselves,
to
raise prices is limited, and, in certain situations, the competitive environment
may put pressure on producers to lower prices. Further, although an oversupply
may enhance opportunities to purchase grapes at lower costs, a producer’s
selling and promotional expenses associated with the sale of its wine products
can rise in such an environment.
Glass
bottle costs are one of our largest components of cost of product sold. In
the
U.S., Canada
and
Australia, glass bottles have only a small number of producers. Currently,
one
producer supplies most of our glass container requirements for our U.S.
operations and another producer supplies substantially all of our glass
container requirements for our Australian operations and
a
third producer supplies a majority of our glass container requirements
for our Canadian operations.
The
inability of any of our glass bottle suppliers to satisfy our requirements
could
adversely affect our business.
Our
operations subject us to risks relating to currency rate fluctuations, interest
rate fluctuations and geopolitical uncertainty which could have a material
adverse effect on our business.
We
have
operations in different countries throughout the world and, therefore, are
subject to risks associated with currency fluctuations. As a result of our
international acquisitions, we have significant exposure to foreign currency
risk as a result of having international operations in Australia, New Zealand
and the U.K. Following the Vincor acquisition, our exposure to foreign currency
risk increased significantly in Canada and also further increased in Australia,
New Zealand and the U.K. We are also exposed to risks associated with interest
rate fluctuations. We manage our exposure to foreign currency and interest
rate
risks utilizing derivative instruments and other means to reduce those risks.
We, however, could experience changes in our ability to hedge against or
manage
fluctuations in foreign currency exchange rates or interest rates and,
accordingly, there can be no assurance that we will be successful in reducing
those risks. We could also be affected by nationalizations or unstable
governments or legal systems or intergovernmental disputes. These currency,
economic and political uncertainties may have a material adverse effect on
our
results of operations, especially to the extent these matters, or the decisions,
policies or economic strength of our suppliers, affect our global
operations.
We
have a material amount of intangible assets, such as goodwill and trademarks,
and if we are required to write-down any of these intangible assets, it would
reduce our net income, which in turn could have a material adverse effect
on our
results of operations.
We
have a
significant amount of intangible assets, such as goodwill and trademarks.
We
adopted the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,”
in its entirety, on March 1, 2002. Under SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized, but instead are subject
to a
periodic impairment evaluation. Reductions in our net income caused by the
write-down of any of these intangible assets could materially and adversely
affect our results of operations.
The
termination of our joint venture with Modelo relating to importing, marketing
and selling imported beer could have a material adverse effect on our
business.
On
January 2, 2007, we participated in establishing and commencing operations
of a
joint venture with Modelo, pursuant to which Corona Extra and the other Modelo
Brands are imported, marketed and sold by the joint venture in the U.S.
(including the District of Columbia) and Guam along with certain other imported
beer brands in their respective territories. Pursuant to the joint venture
and
related importation arrangements, the joint venture will continue for an
initial
term of 10 years, and renew in 10-year periods unless GModelo Corporation,
a
Delaware corporation and subsidiary of Diblo, gives notice prior to the end
of
year seven of any term of its intention to purchase our interest we hold
through
our subsidiary, Barton Beers, Ltd. (“Barton”). The joint venture may also
terminate under other circumstances involving action by governmental
authorities, certain changes in control of us or Barton as well as in connection
with certain breaches of the importation and related sub-license agreements,
after notice and cure periods.
The
termination of the joint venture by acquisition of Barton’s interest or for
other reasons noted above could have a material adverse effect on our business,
financial condition or results of operations.
Class
action or other litigation relating to alcohol abuse or the misuse of alcohol
could adversely affect our business.
There
has
been increased public attention directed at the beverage alcohol industry,
which
we believe is due to concern over problems related to alcohol abuse, including
drinking and driving, underage drinking and health consequences from the misuse
of alcohol. Several beverage alcohol producers have been sued in several courts
regarding alleged advertising practices relating to underage consumers. Adverse
developments in these or similar lawsuits or a significant decline in the social
acceptability of beverage alcohol products that results from these lawsuits
could materially adversely affect our business.
We
depend upon our trademarks and proprietary rights, and any failure to protect
our intellectual property rights or any claims that we are infringing upon
the
rights of others may adversely affect our competitive
position.
Our
future success depends significantly on our ability to protect our current
and
future brands and products and to defend our intellectual property rights.
We
have been granted numerous trademark registrations covering our brands and
products and have filed, and expect to continue to file, trademark applications
seeking to protect newly-developed brands and products. We cannot be sure that
trademark registrations will be issued with respect to any of our trademark
applications. There is also a risk that we could, by omission, fail to timely
renew a trademark or that our competitors will challenge, invalidate or
circumvent any existing or future trademarks issued to, or licensed by,
us.
Contamination
could harm the integrity or customer support for our brands and adversely affect
the sales of our products.
The
success of our brands depends upon the positive image that consumers have of
those brands. Contamination, whether arising accidentally or through deliberate
third-party action, or other events that harm the integrity or consumer support
for those brands, could adversely affect their sales. Contaminants in raw
materials purchased from third parties and used in the production of our wine
and spirits products or defects in the distillation or fermentation process
could lead to low beverage quality as well as illness among, or injury to,
consumers of our products and may result in reduced sales of the affected brand
or all of our brands.
An
increase in the cost of energy could affect our
profitability.
We
have
experienced significant increases in energy costs, and energy costs could
continue to rise, which would result in higher transportation, freight and
other
operating costs. Our future operating expenses and margins will be dependent
on
our ability to manage the impact of cost increases. We cannot guarantee that
we
will be able to pass along increased energy costs to our customers through
increased prices.
Our
reliance upon complex information systems distributed worldwide and our reliance
upon third party global networks means we could experience interruptions to
our
business services.
We
depend
on information technology to enable us to operate efficiently and interface
with
customers, as well as maintain financial accuracy and efficiency. If we do
not
allocate, and effectively manage, the resources necessary to build and sustain
the proper technology infrastructure, we could be subject to transaction errors,
processing inefficiencies, the loss of customers, business disruptions, or
the
loss of or damage to intellectual property through security breach. As with
all
large systems, our information systems could be penetrated by outside parties
intent on extracting information, corrupting information or disrupting business
processes. Such unauthorized access could disrupt our business and could result
in the loss of assets.
Changes
in accounting standards and taxation requirements could affect our financial
results.
New
accounting standards or pronouncements that may become applicable to us from
time to time, or changes in the interpretation of existing standards and
pronouncements, could have a significant effect on our reported results for
the
affected periods. We are also subject to income tax in the numerous
jurisdictions in which we generate revenues. In addition, our products are
subject to import and excise duties and/or sales or value-added taxes in many
jurisdictions in which we operate. Increases in income tax rates could reduce
our after-tax income from affected jurisdictions, while increases in indirect
taxes could affect our products’
affordability and therefore reduce our sales.
Various
diseases, pests and certain weather conditions could affect quality and quantity
of grapes.
Various
diseases, pests, fungi, viruses, drought, frosts and certain other weather
conditions could affect the quality and quantity of grapes available, decreasing
the supply of our products and negatively impacting profitability. We cannot
guarantee that our grape suppliers will succeed in preventing contamination
in
existing vineyards or that we will succeed in preventing contamination in our
existing vineyards or future vineyards we may acquire. Future government
restrictions regarding the use of certain materials used in grape growing may
increase vineyard costs and/or reduce production. Grape growing also requires
adequate water supplies. A substantial reduction in water supplies could result
in material losses of grape crops and vines, which could lead to a shortage
of
our product supply.
Item
1B. Unresolved
Staff Comments
Not
Applicable.
Item
2.
Properties
Through
its business segments, the Company operates wineries, distilling plants,
bottling plants, and cider producing facilities, most of which include
warehousing and distribution facilities on the premises. Through Matthew
Clark, the Company also operates separate distribution centers serving the
Constellation Wines segment’s wholesaling business
in the
U.K. In addition to the Company’s properties described below, certain
of the Company’s businesses maintain office space for sales and similar
activities and offsite warehouse and distribution facilities in a variety of
geographic locations.
The
Company believes that its facilities, taken as a whole, are in good condition
and working order and have adequate capacity to meet its needs for the
foreseeable future.
The
following discussion details the properties associated with the Company’s five
business segments.
Constellation
Wines
Through
the Constellation Wines segment, the Company maintains facilities in the U.S.,
Australia, New Zealand, the U.K., the Republic of Ireland and Canada. These
facilities include wineries, bottling plants, cider producing facilities,
warehousing and distribution facilities, distribution centers and office
facilities. The segment maintains owned and/or leased division offices in
Canandaigua, New York; St. Helena, California; Gonzales, California; San
Francisco, California; Reynella, South Australia; Bristol, England; Guildford,
England; and Mississaugua, Ontario.
United
States
In
the
U.S., the Company through its Constellation Wines segment operates two wineries
in New York, located in Canandaigua and Naples; 15 wineries in California,
located in Acampo, Esparto, Gonzales, Healdsburg, Kenwood, Oakville, Soledad,
Rutherford, Ukiah, two in Lodi, two in Madera and two in Sonoma; three wineries
in Washington, located in Prosser, Woodinville and Sunnyside; and one winery
in
Caldwell, Idaho. All of these wineries are owned, except for the wineries in
Caldwell (Idaho) and Woodinville (Washington), which are leased. The
Constellation Wines segment considers its principal wineries in the U.S. to
be
the Mission Bell winery in Madera (California), the Canandaigua winery in
Canandaigua (New York), the Ravenswood wineries in Sonoma (California), the
Franciscan Vineyards winery in Rutherford (California), the Woodbridge Winery
in
Acampo (California), the Turner Road Vintners Winery in Lodi (California),
the
Robert Mondavi Winery in Oakville (California) and the Blackstone Winery in
Gonzales (California). The Mission Bell winery crushes grapes, produces, bottles
and distributes wine and produces specialty concentrates and Mega Colors for
sale. The Canandaigua winery crushes grapes and produces, bottles and
distributes wine. The other principal wineries crush grapes, vinify, cellar
and
bottle wine.
Through
the Constellation Wines segment, as of February 28, 2007, the Company owned
or
leased approximately 11,200 acres of vineyards, either fully bearing or under
development, in California and New York to supply a portion of the grapes used
in the production of wine.
Australia/New
Zealand
Through
the Constellation Wines segment, the Company owns and operates 12
Australian wineries, five of which are in South Australia, three in Western
Australia and the other four in New South Wales, Australian Capital Territory,
Victoria and Tasmania. Additionally, through this segment the Company also
owns
four wineries in New Zealand. All but one of these Australia/New
Zealand wineries crush grapes, vinify and cellar wine. Five include
bottling and/or packaging operations. The facility in Reynella, South Australia
bottles a significant portion of the wine produced in Australia, produces all
Australian sparkling wines and cellars wines. The Company considers the
segment’s principal facilities in Australia/New Zealand to be the Berri
Estates winery located in Glossop and the bottling facility located in Reynella,
both in South Australia.
Through
the Constellation Wines segment, the Company owns or has interests in
approximately 7,100 plantable acres of vineyards in South Australia, the
Australian Capital Territory, Western Australia, Victoria, and Tasmania, and
approximately 3,700 acres of vineyards, either fully bearing or under
development, in New Zealand.
Europe
Through
the Constellation Wines segment, in the U.K. the Company owns and operates
two
facilities in England, located in Bristol and Shepton Mallet. The Bristol
facility is considered a principal facility and produces, bottles and packages
wine; and the Shepton Mallet facility produces, bottles and packages
cider.
Through
this segment, the Company operates a National Distribution Centre, located
at a
leased facility in Severnside, Bristol, England, together with two leased
satellite facilities within the same region, to distribute the Company’s
products that are produced at the Bristol and Shepton Mallet facilities as
well
as products imported from other wine suppliers. To support its wholesaling
business, through
Matthew Clark
the
Company operates 11 physical distribution centers located throughout the U.K.,
10 of which are leased, as well as two virtual depots and two satellite depots.
These distribution centers and depots are used to distribute products produced
by the Company, as well as by third parties.
Additionally,
through the Constellation Wines segment, the Company leases warehouse and office
facilities in Dublin and has contracted with a third party with respect to
a
depot in Cork in support of the Company’s business of marketing, storing and
distributing alcoholic beverages in the Republic of Ireland.
Canada
Through
the Constellation Wines segment, the Company owns and operates eight
Canadian
wineries, three of which are in British Columbia, three in Ontario, one in
Quebec and one in New Brunswick. The British Columbia and Ontario operations
all
harvest a domestic crop and all locations vinify and cellar wines. Four wineries
include bottling and/or packaging operations. The Company also operates a
distribution center in Mississaugua, Ontario. In addition, through the segment
the Company operates facilities in Vancouver, British Columbia and Kitchener,
Ontario in connection with its beer and wine making kit business. The Company
considers the segment’s principal facilities in Canada to be Niagara Cellars
located in Niagara Falls (Ontario), the Vincor Quebec Division located in
Rougemont (Quebec), the Vincor Production Facility located in Oliver (British
Columbia) and the distribution center located in Mississaugua
(Ontario).
Through
the Constellation Wines segment, as of February 28, 2007, the Company owned
or
leased approximately 2,000 acres of vineyards, either fully bearing or under
development, in Ontario and British Columbia to supply a portion of the grapes
used in the production of wine.
Constellation
Beers and Crown Imports
Through
the Constellation Beers segment, the Company maintained leased division offices
in Chicago, Illinois and contracted with five providers of warehouse space
and
services in eight locations throughout the U.S. Coincident with the formation
of
Crown Imports on January 2, 2007, these warehouse space and services contracts
were transferred to the joint venture, and Crown Imports has entered into
additional arrangements to satisfy its warehouse requirements in the U.S.
and
Guam. It currently has contracted with 17 providers of warehouse space and
services in various locations throughout the U.S., District of Columbia and
Guam. Crown Imports maintains leased offices in Chicago, Illinois as well
as in
eight other locations throughout the U.S.
Constellation
Spirits
Through
the Constellation Spirits segment, the Company maintains leased division
offices
in Chicago, Illinois.
Through
this segment, the Company owns and operates four distilling plants, two in
the
U.S. and two in Canada. The two distilling plants in the U.S. are located
in
Bardstown, Kentucky and Albany, Georgia. The two distilling plants in Canada
are
located in Valleyfield, Quebec and Lethbridge, Alberta. The Company considers
this segment’s principal distilling plants to be the facilities located in
Bardstown (Kentucky), Valleyfield (Quebec) and Lethbridge (Alberta). The
Bardstown facility distills, bottles and warehouses distilled spirits products
for the Company and, on a contractual basis, for other industry members.
The two
Canadian facilities distill, bottle and store Canadian whisky for the segment,
and distill and/or bottle and store Canadian whisky, vodka, rum, gin and
liqueurs for third parties.
In
the
U.S., the Company through its Constellation Spirits segment also operates
three
bottling plants, located in Atlanta, Georgia; Owensboro, Kentucky and Carson,
California. The facilities located in Atlanta (Georgia) and Owensboro (Kentucky)
are owned, while the facility in Carson (California) is leased. The Company
considers this segment’s bottling plant located in Owensboro to be one of the
segment’s principal facilities. The Owensboro facility bottles and warehouses
distilled spirits products for the segment and is also utilized for contract
bottling.
Corporate
Operations and Other
The
Company’s corporate headquarters are located in leased offices in Fairport, New
York.
Item
3.
Legal
Proceedings
In
the
course of their business, the Company and its subsidiaries are subject to
litigation from time to time. Although the amount of any liability with respect
to such litigation cannot be determined, in the opinion of management, such
liability will not have a material adverse effect on the
Company’s financial condition, results of operations or cash flows.
Item
4. Submission
of Matters to a Vote of Security Holders
Not
Applicable.
Executive
Officers of the Company
Information
with respect to the current executive officers of the Company is as
follows:
|
NAME
|
AGE
|
OFFICE
OR POSITION HELD
|
|
Richard
Sands
|
56
|
Chairman
of the Board and Chief Executive Officer
|
|
Robert
Sands
|
48
|
President
and Chief Operating Officer
|
|
Alexander
L. Berk
|
57
|
Chief
Executive Officer, Constellation Beers and Spirits, and
President
and Chief Executive Officer, Barton Incorporated
|
|
F.
Paul Hetterich
|
44
|
Executive
Vice President, Business Development and Corporate
Strategy
|
|
Thomas
J. Mullin
|
55
|
Executive
Vice President and General Counsel
|
|
Thomas
S. Summer
|
53
|
Executive
Vice President and Chief Financial Officer
|
|
W.
Keith Wilson
|
56
|
Executive
Vice President and Chief Human Resources
Officer
|
Richard
Sands, Ph.D., is the Chairman of the Board and Chief Executive Officer of the
Company. He has been employed by the Company in various capacities since 1979.
He was elected Chief Executive Officer in October 1993 and has served as a
director since 1982. In September 1999, Mr. Sands was elected Chairman of the
Board. He served as Executive Vice President from 1982 to May 1986, as President
from May 1986 to December 2002 and as Chief Operating Officer from May 1986
to
October 1993. He is the brother of Robert Sands.
Robert
Sands is President and Chief Operating Officer of the Company. He was appointed
to these positions in December 2002 and has served as a director since January
1990. Mr. Sands also served as Group President from April 2000 through December
2002, as Chief Executive Officer, International from December 1998 through
April
2000, as Executive Vice President from October 1993 through April 2000, as
General Counsel from June 1986 through May 2000, and as Vice President from
June
1990 through October 1993. He is the brother of Richard Sands.
Alexander
L. Berk is the Chief Executive Officer of Constellation Beers and Spirits and
the President and Chief Executive Officer of Barton Incorporated. Since 1990
and
prior to becoming Chief Executive Officer of Barton Incorporated in March 1998,
Mr. Berk was President and Chief Operating Officer of Barton Incorporated and
from 1988 to 1990, he was the President and Chief Executive Officer of Schenley
Industries. Mr. Berk has been in the beverage alcohol industry for most of
his
career, serving in various positions.
F.
Paul
Hetterich has been the Company’s Executive Vice President, Business Development
and Corporate Strategy since June 2003. From April 2001 to June 2003, Mr.
Hetterich served as the Company’s Senior Vice President, Corporate Development.
Prior to that, Mr. Hetterich held several increasingly senior positions in
the
Company’s marketing and business development groups. Mr. Hetterich has been with
the Company since 1986.
Thomas
J.
Mullin joined the Company as Executive Vice President and General Counsel in
May
2000. Prior to joining the Company, Mr. Mullin served as President and Chief
Executive Officer of TD Waterhouse Bank, NA, a national banking association,
since February 2000, of CT USA, F.S.B. since September 1998, and of CT USA,
Inc.
since March 1997. He also served as Executive Vice President, Business
Development and Corporate Strategy of C.T. Financial Services, Inc. from March
1997 through February 2000. From 1985 through 1997, Mr. Mullin served as Vice
Chairman and Senior Executive Vice President of First Federal Savings and Loan
Association of Rochester, New York and from 1982 through 1985, he was a partner
in the law firm of Phillips, Lytle, Hitchcock, Blaine & Huber.
Thomas
S.
Summer joined the Company in April l997 as Senior Vice President and Chief
Financial Officer and in April 2000 was elected Executive Vice President.
From
November 1991 to April 1997, Mr. Summer served as Vice President, Treasurer
of
Cardinal Health, Inc., a large national health care services company, where
he
was responsible for directing financing strategies and treasury matters.
Prior
to that, from November 1987 to November 1991, Mr. Summer held several positions
in corporate finance and international treasury with PepsiCo, Inc. In October
2006, Mr. Summer announced that he planned to retire from the Company and
from
the position of Executive Vice President and Chief Financial Officer in May
2007, or such earlier date as a new chief financial officer is chosen. Mr.
Summer will continue in an advisory capacity to the Company until May 14,
2008
or such earlier date as the Company and Mr. Summer shall mutually
agree.
W.
Keith
Wilson joined the Company in January 2002 as Senior Vice President, Human
Resources. In September 2002, he was elected Chief Human Resources Officer
and in April 2003 he was elected Executive Vice President. From 1999 to 2001,
Mr. Wilson served as Senior Vice President, Global Human Resources of Xerox
Engineering Systems, a subsidiary of Xerox Corporation, that engineers,
manufactures and sells hi-tech reprographics equipment and software worldwide.
From 1990 to 1999, he served in various senior human resource positions with
the
banking, marketing and real estate and relocation businesses of Prudential
Life
Insurance of America, an insurance company that also provides other financial
products.
Executive
officers of the Company are generally chosen or elected to their positions
annually and hold office until the earlier of their removal or resignation
or
until their successors are chosen and qualified.
PART
II
|
Item
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity
Securities
|
The
Company’s Class A Common Stock (the “Class A Stock”) and Class B Common Stock
(the “Class B Stock”) trade on the New York Stock ExchangeÒ
(“NYSE”)
under the symbols STZ and STZ.B, respectively. The following tables set forth
for the periods indicated the high and low sales prices of the Class A Stock
and
the Class B Stock as reported on the NYSE.
| |
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|
Fiscal
2006
High
Low
|
$
30.08
$
24.50
|
$
31.60
$
26.26
|
$
29.01
$
21.15
|
$
27.39
$
23.16
|
|
Fiscal
2007
High
Low
|
$
28.02
$
23.32
|
$
27.29
$
24.13
|
$
29.09
$
26.90
|
$
29.17
$
23.01
|
| |
1st
Quarter
|
2nd
Quarter
|
3rd
Quarter
|
4th
Quarter
|
|
Fiscal
2006
High
Low
|
$
29.88
$
25.99
|
$
31.24
$
26.75
|
$
28.90
$
21.50
|
$
27.35
$
23.32
|
|
Fiscal
2007
High
Low
|
$
27.73
$
24.00
|
$
27.29
$
23.85
|
$
29.00
$
26.85
|
$
29.14
$
23.15
|
At
April
13,
2007,
the
number of holders of record of Class A Stock and Class B Stock of the Company
were 1,034 and 219, respectively.
With
respect to its common stock, the Company’s policy is to retain all of its
earnings to finance the development and expansion of its business, and the
Company has not paid any cash dividends on its common stock since its initial
public offering in 1973. In addition, under the terms of the Company’s senior
credit facility, the Company is currently constrained from paying cash dividends
on its common stock. Also, certain of the indentures for the Company’s
outstanding senior notes and senior subordinated notes may restrict the payment
of cash dividends on its common stock under certain circumstances. Any
indentures for debt securities issued in the future and any credit agreements
entered into in the future may also restrict or prohibit the payment of cash
dividends on common stock.
Item
6. Selected
Financial Data
| |
|
For
the Years Ended
|
|
| |
|
February
28,
2007
|
|
February
28,
2006
|
|
February
28,
2005
|
|
February
29,
2004
|
|
February
28,
2003
|
|
|
(in
millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
6,401.8
|
|
$
|
5,707.0
|
|
$
|
5,139.8
|
|
$
|
4,469.3
|
|
$
|
3,583.1
|
|
|
Less-excise
taxes
|
|
|
(1,185.4
|
)
|
|
(1,103.5
|
)
|
|
(1,052.2
|
)
|
|
(916.9
|
)
|
|
(851.5
|
)
|
|
Net
sales
|
|
|
5,216.4
|
|
|
4,603.5
|
|
|
4,087.6
|
|
|
3,552.4
|
|
|
2,731.6
|
|
|
Cost
of product sold
|
|
|
(3,692.5
|
)
|
|
(3,278.9
|
)
|
|
(2,947.0
|
)
|
|
(2,576.6
|
)
|
|
(1,970.9
|
)
|
|
Gross
profit
|
|
|
1,523.9
|
|
|
1,324.6
|
|
|
1,140.6
|
|
|
975.8
|
|
|
760.7
|
|
|
Selling,
general and
administrative
expenses
|
|
|
(768.8
|
)
|
|
(612.4
|
)
|
|
(555.7
|
)
|
|
(457.3
|
)
|
|
(350.9
|
)
|
|
Restructuring
and
related
charges(1)
|
|
|
(32.5
|
)
|
|
(29.3
|
)
|
|
(7.6
|
)
|
|
(31.1
|
)
|
|
(4.8
|
)
|
|
Acquisition-related
integration
costs(2)
|
|
|
(23.6
|
)
|
|
(16.8
|
)
|
|
(9.4
|
)
|
|
-
|
|
|
-
|
|
|
Operating
income
|
|
|
699.0
|
|
|
666.1
|
|
|
567.9
|
|
|
487.4
|
|
|
405.0
|
|
|
Equity
in earnings of equity
method
investees
|
|
|
49.9
|
|
|
0.8
|
|
|
1.8
|
|
|
0.5
|
|
|
12.2
|
|
|
Gain
on change in fair value of
derivative
instruments
|
|
|
55.1
|
|
|
-
|
|
|
-
|
|
|
1.2
|
|
|
23.1
|
|
|
Interest
expense, net
|
|
|
(268.7
|
)
|
|
(189.6
|
)
|
|
(137.7
|
)
|
|
(144.7
|
)
|
|
(105.4
|
)
|
|
Income
before income taxes
|
|
|
535.3
|
|
|
477.3
|
|
|
432.0
|
|
|
344.4
|
|
|
334.9
|
|
|
Provision
for income taxes
|
|
|
(203.4
|
)
|
|
(152.0
|
)
|
|
(155.5
|
)
|
|
(124.0
|
)
|
|
(131.6
|
)
|
|
Net
income
|
|
|
331.9
|
|
|
325.3
|
|
|
276.5
|
|
|
220.4
|
|
|
203.3
|
|
|
Dividends
on preferred stock
|
|
|
(4.9
|
)
|
|
(9.8
|
)
|
|
(9.8
|
)
|
|
(5.7
|
)
|
|
-
|
|
|
Income
available to common
stockholders
|
|
$
|
327.0
|
|
$
|
315.5
|
|
$
|
266.7
|
|
$
|
214.7
|
|
$
|
203.3
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share(3):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- Class A Common
Stock
|
|
$
|
1.44
|
|
$
|
1.44
|
|
$
|
1.25
|
|
$
|
1.08
|
|
$
|
1.15
|
|
|
Basic
- Class B Common
Stock
|
|
$
|
1.31
|
|
$
|
1.31
|
|
$
|
1.14
|
|
$
|
0.98
|
|
$
|
1.04
|
|
|
Diluted
- Class A Common
Stock
|
|
$
|
1.38
|
|
$
|
1.36
|
|
$
|
1.19
|
|
$
|
1.03
|
|
$
|
1.10
|
|
|
Diluted
- Class B Common
Stock
|
|
$
|
1.27
|
|
$
|
1.25
|
|
$
|
1.09
|
|
$
|
0.95
|
|
$
|
1.01
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
9,438.2
|
|
$
|
7,400.6
|
|
$
|
7,804.2
|
|
$
|
5,558.7
|
|
$
|
3,196.3
|
|
|
Long-term
debt, including
current
maturities
|
|
$
|
4,032.2
|
|
$
|
2,729.9
|
|
$
|
3,272.8
|
|
$
|
2,046.1
|
|
$
|
1,262.9
|
|
|
(1)
|
For
a detailed discussion of restructuring and related charges for the
years
ended February 28, 2007, February 28, 2006, and February 28, 2005,
see
Management’s Discussion and Analysis of Financial Condition and Results of
Operations under Item 7 of this Annual Report on Form 10-K under
the
captions “Fiscal 2007 Compared to Fiscal 2006 - Restructuring and Related
Charges” and “Fiscal 2006 Compared to Fiscal 2005 - Restructuring and
Related Charges,” respectively.
|
|
(2)
|
For
a detailed discussion of acquisition-related integration costs for
the
years ended February 28, 2007, February 28, 2006, and February 28,
2005,
see Management’s Discussion and Analysis of Financial Condition and
Results of Operations under Item 7 of this Annual Report on Form
10-K
under the caption “Fiscal 2007 Compared to Fiscal 2006 -
Acquisition-Related Integration Costs” and “Fiscal 2006 Compared to Fiscal
2005 - Acquisition-Related Integration Costs,”
respectively.
|
|
(3)
|
All
per share data have been adjusted to give effect to the two-for-one
splits
of the Company’s two classes of common stock, which were distributed in
the form of stock dividends in May
2005.
|
For
the
years ended February 28, 2007, and February 28, 2006, see Management’s
Discussion and Analysis of Financial Condition and Results of Operations under
Item 7 of this Annual Report on Form 10-K and the Consolidated Financial
Statements and notes thereto under Item 8 of this Annual Report on Form
10-K.
Item
7. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The
Company is a leading international producer and marketer of beverage alcohol
brands with a broad portfolio across the wine, spirits and imported beer
categories. As of January 2, 2007, the Company continues to supply imported
beer
in the U.S. through its investment in Crown Imports (as defined in “Acquisitions
in Fiscal 2007 and Fiscal 2005, and Equity Method Investments” below). The
Company has the largest wine business in the world and is the largest
multi-category (wine, spirits and imported beer) supplier of beverage alcohol
in
the United States (“U.S.”); a leading producer and exporter of wine from
Australia and New Zealand; and both a major producer and, through its investment
in Matthew Clark (see “Recent Developments” below), a major independent drinks
wholesaler in the United Kingdom (“U.K.”). In addition, with the acquisition of
Vincor (as defined below), the Company is the largest producer and marketer
of
wine in Canada.
Through
January 1, 2007, the Company reported its operating results in three segments:
Constellation Wines (branded wines, and U.K. wholesale and other), Constellation
Beers and Spirits (imported beers and distilled spirits) and Corporate
Operations and Other. As
a
result of the Company’s investment in Crown Imports, the Company has changed its
internal management financial reporting to consist of three business divisions,
Constellation Wines, Constellation Spirits and Crown Imports. Prior to the
investment in Crown Imports, the Company’s internal management financial
reporting included the Constellation Beers business division. Consequently,
as
of February 28, 2007, the Company reports its operating results in five
segments: Constellation Wines (branded wine, and U.K. wholesale and other),
Constellation Beers (imported beer), Constellation Spirits (distilled spirits),
Corporate Operations and Other and Crown Imports (imported beer). Segment
results for Constellation Beers are for the period prior to January 2, 2007,
and
segment results for Crown Imports are for the period on and after January 2,
2007. Amounts included in the Corporate Operations and Other segment consist
of
general corporate administration and finance expenses. These amounts include
costs of executive management, corporate development, corporate finance, human
resources, internal audit, investor relations, legal, public relations,
global
information technology and global strategic sourcing.
Any
costs incurred at the corporate office that are applicable to the segments
are
allocated to the appropriate segment. The amounts included in the Corporate
Operations and Other segment are general costs that are applicable to the
consolidated group and are therefore not allocated to the other reportable
segments. All costs reported within the Corporate Operations and Other segment
are not included in the chief operating decision maker’s evaluation of the
operating income performance of the other operating segments. The new business
segments reflect how the Company’s operations are managed, how operating
performance within the Company is evaluated by senior management and the
structure of its internal financial reporting. In addition, the Company excludes
acquisition-related integration costs, restructuring and related charges and
unusual items that affect comparability from its definition of operating income
for segment purposes. The financial information for Fiscal 2006 and Fiscal
2005
(as defined below) have been restated to conform to the new segment
presentation.
The
Company’s business strategy is to remain focused across the beverage alcohol
industry by offering a broad range of products in each of the Company’s three
major categories: wine and spirits and, through Crown Imports, imported beer.
The Company intends to keep its portfolio positioned for superior top-line
growth while maximizing the profitability of its brands. In addition, the
Company seeks to increase its relative importance to key customers in major
markets by increasing its share of their overall purchasing, which is
increasingly important in a consolidating industry. The Company’s strategy of
breadth across categories and geographies is designed to deliver long-term
profitable growth. This strategy allows the Company more investment choices,
provides flexibility to address changing market conditions and creates stronger
routes-to-market.
Marketing,
sales and distribution of the Company’s products, particularly the Constellation
Wines segment’s products, are managed on a geographic basis in order to fully
leverage leading market positions within each core market. Market dynamics
and
consumer trends vary significantly across the Company’s five core markets (U.S.,
Canada, U.K., Australia and New Zealand) within the Company’s three geographic
regions (North America, Europe and Australia/New Zealand). Within North America,
the Company offers a wide range of beverage alcohol products across the branded
wine and spirits and, through Crown Imports, imported beer categories in
the
U.S. and is the largest producer and marketer of branded wines in Canada.
In
Europe, the Company leverages its position as the largest wine supplier in
the
U.K. In addition, the Company leverages its investment in Matthew Clark as
a
strategic route-to-market for its imported wine portfolio and as a key supplier
of a full range of beverage alcohol products primarily to the on-premise
business. Within Australia/New Zealand, where consumer trends favor domestic
wine products, the Company leverages its position as one of the largest
producers of wine in Australia and New Zealand.
The
Company remains committed to its long-term financial model of growing sales
(both organically and through acquisitions), expanding margins and increasing
cash flow to achieve superior earnings per share growth and improve return
on
invested capital.
The
environment for the Company’s products is competitive in each of the Company’s
core markets, due, in part, to industry and retail consolidation. In particular,
the U.K. and Australian markets have grown increasingly competitive, as further
described below. Competition in the U.S. beer and spirits markets is normally
intense, with domestic and imported beer producers increasing brand spending
in
an effort to gain market share.
The
U.K.
wine market is primarily an import market, with Australian wines comprising
nearly one-quarter of all wine sales in the U.K. off-premise business. The
Australian wine market is primarily a domestic market. The Company has leading
share positions in the Australian wine category in both the U.K. and Australian
markets.
In
the
U.K., significant consolidation at the retail level has resulted in a limited
number of large retailers controlling a significant portion of the off-premise
wine business. A surplus of Australian wine has made very low cost bulk wine
available to retailers which has allowed certain of these large retailers to
quickly create and build private label brands in the Australian wine category.
With growth in the U.K. wine market moderating and significant growth in private
label brands, the Company has experienced declines in both volume and pricing.
These markets have become increasingly competitive resulting in the Company’s
difficulty to recover certain cost increases, in particular, the duty increases
in the U.K. which have been imposed annually for the past several years. In
Australia, the domestic market remains competitive due to the surplus of
Australian bulk wine, resulting in pricing pressures on the Company’s products,
in particular on the box wine category. These conditions are expected to persist
at least until the Australian bulk wine market firms. These factors have
resulted in a decrease for Fiscal 2007 (as defined below) in the Company’s net
sales for the U.K. and a decrease in gross profit associated with the Company’s
Australian portfolio sold in the U.K.
Two
years
of record Australian grape harvests in calendar 2004 and 2005 have contributed
to the surplus of Australian bulk wine. The calendar 2006 Australian grape
harvest was slightly lower than the prior year’s harvest. However, this has not
had a significant impact on the current surplus. The calendar 2007 Australian
grape harvest is expected to be significantly lower than the calendar 2006
Australian grape harvest as a result of an ongoing drought and late spring
frosts in several regions. The effects of the ongoing drought conditions are
also expected by many industry projections to impact the size of the calendar
2008 Australian grape harvest. Significant reductions in the calendar 2007
and
2008 Australian grape harvests could have a substantial impact on the current
surplus and may result in higher pricing for Australian bulk wine. In the U.S.,
the smaller than average calendar 2006 California grape harvest which followed
a
larger than average calendar 2005 California grape harvest should result in
overall supply remaining generally in balance with demand.
For
the
year ended February 28, 2007 (“Fiscal 2007”), the Company’s net sales increased
13% over the year ended February 28, 2006 (“Fiscal 2006”), primarily from net
sales of products acquired in the Vincor acquisition and an increase in base
branded wine net sales. (References to base branded wine net sales exclude
the
net sales of branded wine acquired in the acquisition of Vincor.) Operating
income increased 5% over the comparable prior year period resulting from the
increased sales discussed above, partially offset by increased
“acquisition-related integration costs, restructuring and related charges and
unusual costs,” the recognition of stock-based compensation expense due to the
Company’s March 1, 2006, adoption of Statement of Financial Accounting Standards
No. 123 (revised 2004) (“SFAS No. 123(R)”), “Share-Based Payment,” and the
competitive market conditions in the U.K. Net income increased 2% over the
comparable prior year period primarily due to increased interest expense
combined with an increased provision for income taxes, partially offset by
a
gain on change in fair value of derivative instrument entered into in connection
with the acquisition of Vincor, an increase in equity in earnings of equity
method investees in connection with Crown Imports, and the increase in operating
income.
The
Company’s Constellation Wines segment has made an operating plan decision to
reduce distributor wine inventory levels in the U.S. during the year ending
February 29, 2008 (“Fiscal 2008”), in response to the consolidation of
distributors over the past few years and supply chain technology improvements.
As distributors are looking to operate with lower levels of inventory while
maintaining appropriate service levels to retailers, the Company plans on
working closely with its distributors on supply-chain efficiencies, thereby
lowering costs for both the Company and its distributors, and ultimately making
the Company’s brands more competitive in the marketplace. The Company is
planning to reduce distributor inventory levels during the first half of Fiscal
2008. This decision is expected to have a significant impact on the
Company’s
Fiscal 2008 financial performance, including a reduction of net sales in the
range of $160 million to $190 million and a reduction in diluted earnings per
share in the range of $0.15 to $0.20.
The
following discussion and analysis summarizes the significant factors affecting
(i) consolidated results of operations of the Company for Fiscal 2007 compared
to Fiscal 2006, and Fiscal 2006 compared to the year ended February 28, 2005
(“Fiscal 2005”), and (ii) financial liquidity and capital resources for Fiscal
2007. This discussion and analysis also identifies certain acquisition-related
integration costs, restructuring and related charges and net unusual costs
expected to affect consolidated results of operations of the Company for Fiscal
2008. This discussion and analysis should be read in conjunction with the
Company’s consolidated financial statements and notes thereto included
herein.
Investment
in Matthew Clark
On
April
17, 2007, the Company and Punch Taverns plc (“Punch”) commenced operations of a
joint venture for the U.K. wholesale business (“Matthew Clark”). The U.K.
wholesale business was formerly owned entirely by the Company. Under the
terms
of the arrangement, the Company and Punch, directly or indirectly, each have
a
50% voting and economic interest in Matthew Clark. The joint venture will
reinforce Matthew Clark’s position as the U.K.’s largest independent premier
drinks wholesaler serving the on-trade drinks industry. The Company
received $178.8 million of cash proceeds from the formation of the joint
venture, subject to a post-closing adjustment.
Upon
formation of the joint venture, the Company discontinued consolidation of
the
U.K. wholesale business and accounts for the investment in Matthew Clark
under
the equity method. Accordingly, the results of operations of Matthew Clark
will
be included in the equity in earnings of equity method investees line in
the
Company’s Consolidated Statements of Income from the date of
investment.
Acquisition
of Svedka
On
March
19, 2007, the Company acquired the SVEDKA Vodka brand (“Svedka”) in connection
with the acquisition of Spirits Marque One LLC and related business (the “Svedka
Acquisition”) for cash consideration of $383.7 million, net of cash acquired. In
addition, the Company expects to incur direct acquisition costs of approximately
$1.0 million. Svedka is a premium vodka produced in Sweden and is the fastest
growing major imported premium vodka in the U.S. Svedka is the fifth
largest imported vodka in the U.S. The purchase price was financed
with revolver borrowings under the Company’s senior credit
facility.
The
results of operations of the Svedka business will be reported in the
Constellation Spirits segment and will be included in the consolidated results
of operations of the Company from the date of acquisition. The Company expects
the Svedka Acquisition to have a significant impact on the Company’s interest
expense associated with the additional revolver borrowings.
Acquisitions
in Fiscal 2007 and Fiscal 2005, and Equity Method
Investments
Acquisition
of Vincor
On
June
5, 2006, the Company acquired all of the issued and outstanding common shares
of
Vincor International Inc. (“Vincor”), Canada’s premier wine company. Vincor is
Canada’s largest producer and marketer of wine. At the time of the acquisition,
Vincor was the world’s eighth largest producer and distributor of wine and
related products by revenue and was also one of the largest wine importers,
marketers and distributors in the U.K. Through this transaction, the Company
acquired various additional winery and vineyard interests used in the production
of premium, super-premium and fine wines from Canada, California, Washington
State, Western Australia and New Zealand. In addition, as a result of the
acquisition, the Company sources, markets and sells premium wines from South
Africa. Well-known premium brands acquired in the Vincor acquisition include
Inniskillin, Jackson-Triggs, Sawmill Creek, R.H. Phillips, Toasted Head, Hogue,
Kim Crawford and Kumala.
The
acquisition of Vincor supports the Company’s strategy of strengthening the
breadth of its portfolio across price segments and geographic regions to
capitalize on the overall growth in the wine industry. In addition to
complementing the Company’s current operations in the U.S., U.K., Australia and
New Zealand, the acquisition of Vincor increases the Company’s global presence
by adding Canada as another core market and provides
the Company with the ability to capitalize on broader geographic distribution
in
strategic international markets.
In
addition, the acquisition of Vincor makes the Company the largest wine company
in Canada and strengthens the Company’s position as the largest wine company in
the world and the largest premium wine company in the U.S.
Total
consideration paid in cash to the Vincor shareholders was $1,115.8 million.
In
addition, the Company expects to incur direct acquisition costs of approximately
$11.0 million. At closing, the Company also assumed outstanding indebtedness
of
Vincor, net of cash acquired, of $320.2 million, resulting in a total
transaction value of $1,447.0 million. The purchase price was financed with
borrowings under the Company’s June 2006 Credit Agreement (as defined
below).
The
results of operations of the Vincor business are reported in the Constellation
Wines segment and are included in the consolidated results of operations of
the
Company from the date of acquisition. The acquisition of Vincor is significant
and the Company expects it to have a material impact on the Company’s future
results of operations, financial position and cash flows. In particular, the
Company expects its future results of operations to be significantly impacted
by, among other things, the flow through of inventory step-up,
acquisition-related integration costs and interest expense associated with
the
2006 Credit Agreement (as defined below).
Acquisition
of Robert Mondavi
On
December 22, 2004, the Company acquired all of the outstanding capital stock
of
The Robert Mondavi Corporation (“Robert Mondavi”), a leading premium wine
producer based in Napa, California. Through this transaction, the Company
acquired various additional winery and vineyard interests, and, additionally
produces, markets and sells premium, super-premium and fine California wines
under
the
Woodbridge by Robert Mondavi,
Robert
Mondavi Private Selection and Robert Mondavi Winery brand names. In the United
States, Woodbridge is the leading domestic premium wine brand and Robert Mondavi
Private Selection is the leading super-premium wine brand. As a result of the
Robert Mondavi acquisition, the Company acquired an ownership interest in Opus
One, a joint venture owned equally by Robert Mondavi and Baron Philippe de
Rothschild, S.A. During September 2005, the Company’s president and Baroness
Philippine de Rothschild announced an agreement to maintain equal ownership
of
Opus One. Opus One produces fine wines at its Napa Valley winery. The
Company accounts for the investment in Opus One under the equity method.
Accordingly, the results of operations of Opus One are included in the equity
in
earnings of equity method investees line in the Company’s Consolidated
Statements of Income since December 22, 2004.
The
acquisition of Robert Mondavi supports the Company’s strategy of strengthening
the breadth of its portfolio across price segments to capitalize on the overall
growth in the premium, super-premium and fine wine categories. The Company
believes that the acquired Robert Mondavi brand names have strong brand
recognition globally. The vast majority of sales from these brands are generated
in the United States. The Company is leveraging the Robert Mondavi brands in
the
United States through its selling, marketing and distribution infrastructure.
The Company has also expanded distribution for the Robert Mondavi brands in
Europe through its Constellation Europe infrastructure.
The
Robert Mondavi acquisition supports the Company’s strategy of growth and breadth
across categories and geographies, and strengthens its competitive position
in
certain of its core markets. The
Robert Mondavi acquisition provides the Company with a greater presence in
the
growing premium, super-premium and fine wine sectors within the United States
and the ability to capitalize on the broader geographic distribution in
strategic international markets. In
particular, the Company believes there are growth opportunities for premium,
super-premium and fine wines in the United Kingdom and other “new world” wine
markets. Total
consideration paid in cash to the Robert Mondavi shareholders
was $1,030.7 million. Additionally, the Company incurred direct acquisition
costs of $12.0 million.
The
purchase price was financed with borrowings under the Company’s prior senior
credit facility.
The
results of operations of the Robert Mondavi business have been reported in
the
Company’s Constellation Wines segment since December 22, 2004. Accordingly, the
Company’s results of operations for Fiscal 2007 and Fiscal 2006 include the
results of operations of the Robert Mondavi business for the entire period,
whereas the results of operations for Fiscal 2005 only include the results
of
operations of the Robert Mondavi business from December 22, 2004, to the end
of
Fiscal 2005.
Following
the Robert Mondavi acquisition, the Company sold certain of the acquired
vineyard properties and related assets, investments accounted for under the
equity method, and winery properties and related assets. The Company realized
net proceeds of $180.7 million from the sale of these assets since the date
of
acquisition through the end of Fiscal 2006. No amounts were realized for Fiscal
2007. No gain or loss was recognized upon the sale of these assets.
Investment
in Crown Imports
On
July
17, 2006, Barton Beers, Ltd. (“Barton”), an indirect wholly-owned subsidiary of
the Company, entered into an Agreement to Establish Joint Venture (the “Joint
Venture Agreement”) with Diblo, S.A. de C.V. (“Diblo”), an entity owned 76.75%
by Grupo Modelo, S.A. de C.V. (“Modelo”) and 23.25% by Anheuser-Busch, Inc.,
pursuant to which Modelo’s Mexican beer portfolio (the “Modelo Brands”) will be
exclusively imported, marketed and sold in the 50 states of the U.S., the
District of Columbia and Guam. In addition, the owners of the Tsingtao and
St.
Pauli Girl brands transferred exclusive importing, marketing and selling
rights
with respect to these brands in the U.S. to the joint venture. On January
2, 2007, the parties completed the closing (the “Closing”) of the transactions
contemplated in the Joint Venture Agreement, as amended at
Closing.
Pursuant
to the Joint Venture Agreement, Barton established Crown Imports LLC, a
wholly-owned subsidiary formed as a Delaware limited liability company. On
January 2, 2007, pursuant to a Barton Contribution Agreement, dated July 17,
2006, among Barton, Diblo and Crown Imports LLC (the “Barton Contribution
Agreement”), Barton transferred to Crown Imports LLC substantially all of
its assets relating to importing, marketing and selling beer under the Corona
Extra, Corona Light, Coronita, Modelo Especial, Negra Modelo, Pacifico, St.
Pauli Girl and Tsingtao brands and the liabilities associated therewith (the
“Barton Contributed Net Assets”). At the Closing, GModelo Corporation, a
Delaware corporation (the “Diblo Subsidiary”), a subsidiary of Diblo joined
Barton as a member of Crown Imports LLC, and, in exchange for a 50% membership
interest in Crown Imports LLC, contributed cash in an amount equal to the Barton
Contributed Net Assets, subject to specified adjustments. This
imported beers joint venture is referred to hereinafter as “Crown
Imports”.
Also
on
January 2, 2007, Crown Imports and Extrade II S.A. de C.V. (“Extrade II”), an
affiliate of Modelo, entered into an Importer Agreement (the “Importer
Agreement”), pursuant to which Extrade II granted to Crown Imports the exclusive
right to import, market and sell the Modelo Brands in the territories mentioned
above, and Crown Imports and Marcas Modelo, S.A. de C.V. (“Marcas Modelo”),
entered into a Sub-license Agreement (the “Sub-license Agreement”), pursuant to
which Marcas Modelo granted Crown Imports an exclusive sub-license to use
certain trademarks related to the Modelo Brands within this
territory.
As
a
result of these transactions, Barton and Diblo each have, directly or
indirectly, equal interests in Crown Imports and each of Barton and Diblo
have
appointed an equal number of directors to the Board of Directors of Crown
Imports.
The
Importer Agreement set forth an immediate increase in the price of the products
sold to Crown Imports of $0.25 per case, subject to adjustment by the parties.
Such initial price increase was not intended to be reflected in an automatic
corresponding price increase charged to Crown Imports customers. It was designed
to reflect the relative values of the importation rights for the Western
United
States previously held by Barton
and
the importation rights for the rest of the U.S. Subsequent to January 2,
2007,
it was determined that the initial price increase was not necessary as the
relative value of the importation rights for the Western United States was
comparable with that of the rest of the U.S. Accordingly, equity in earnings
of
equity method investees for Crown Imports does not include any initial price
increase from the date of investment. The importer agreement that previously
gave Barton the exclusive right to import, market and sell the Modelo Brands
primarily west of the Mississippi River was superseded by the transactions
contemplated by the Joint Venture Agreement,
as
amended. The contribution by Diblo Subsidiary in exchange for a 50% membership
interest in Crown does not constitute the acquisition of a business by the
Company.
The
joint
venture and the related importation arrangements provide that, subject
to
the terms and conditions of those agreements, the joint venture and the related
importation arrangements will continue for an initial term of 10 years,
and renew in 10-year periods unless Diblo Subsidiary gives notice prior to
the
end of year seven of any term. Upon
consummation of the transactions, the Company discontinued consolidation
of the
imported beer business and accounts for the investment in Crown Imports under
the equity method. Accordingly, the results of operations of Crown Imports
are
included in the equity in earnings of equity method investees line in the
Company’s Consolidated Statements of Income from the date of
investment.
Investment
in Ruffino
On
December 3, 2004, the Company purchased a 40% interest in Ruffino S.r.l.
(“Ruffino”), the well-known Italian fine wine company, for $89.6 million,
including direct acquisition costs of $7.5 million. As of February 1, 2005,
the
Constellation Wines segment began distributing Ruffino’s products in the United
States. The Company accounts for the investment in Ruffino under the equity
method; accordingly, the results of operations of Ruffino from December 3,
2004,
are included in the equity in earnings of equity method investees line in the
Company’s Consolidated Statements of Income.
Results
of Operations
Fiscal
2007 Compared to Fiscal 2006
Net
Sales
The
following table sets forth the net sales (in millions of dollars) by operating
segment of the Company for Fiscal 2007 and Fiscal 2006.
| |
|
Fiscal
2007 Compared to Fiscal 2006
|
|
| |
|
Net
Sales
|
|
| |
|
2007
|
|
2006
|
|
%
Increase
|
|
|
Constellation
Wines:
|
|
|
|
|
|
|
|
|
Branded
wine
|
|
$
|
2,755.7
|
|
$
|
2,263.4
|
|
|
22%
|
|
|
Wholesale
and other
|
|
|
1,087.7
|
|
|
972.0
|
|
|
12%
|
|
|
Constellation
Wines net sales
|
|
|
3,843.4
|
|
|
3,235.4
|
|
|
19%
|
|
|
Constellation
Beers net sales
|
|
|
1,043.6
|
|
|
1,043.5
|
|
|
N/A
|
|
|
Constellation
Spirits net sales
|
|
|
329.4
|
|
|
324.6
|
|
|
1%
|
|
|
Crown
Imports net sales
|
|
|
368.8
|
|
|
-
|
|
|
N/A
|
|
|
Consolidations
and eliminations
|
|
|
(368.8
|
)
|
|
-
|
|
|
N/A
|
|
|
Consolidated
Net Sales
|
|
$
|
5,216.4
|
|
$
|
4,603.5
|
|
|
13%
|
|
Net
sales
for Fiscal 2007 increased to $5,216.4 million from $4,603.5 million for Fiscal
2006, an increase of $612.9 million, or 13%. This increase was due primarily
to
$405.8 million of net sales of products acquired in the Vincor acquisition,
an
increase in base branded wine net sales of $95.7 million (on a constant currency
basis) and a favorable foreign currency impact of $66.2 million.
Constellation
Wines
Net
sales
for Constellation Wines increased to $3,843.4 million for Fiscal 2007 from
$3,235.4 million in Fiscal 2006, an increase of $608.0 million, or 19%. Branded
wine net sales increased $492.3 million primarily due to $379.9 million of
net
sales of branded wine acquired in the Vincor acquisition and increased base
branded wine net sales for North America (primarily the U.S.) of $118.9,
partially offset by decreased base branded wine net sales for Europe (primarily
the U.K.) of $27.4 million (on a constant currency basis). The increase in
base
branded wine net sales for the U.S. was driven by both higher average selling
prices as the consumer continues to trade up to higher priced premium wines
as
supported by volume gains in both the premium and super-premium categories
as
well as volume gains in the wine with fruit category. The decrease in base
branded wine net sales for the U.K. was driven primarily by lower pricing due
to
the highly competitive pricing market for private label and branded wine
resulting from the significant oversupply of Australian wine and highly
concentrated retail market place. Wholesale and other net sales increased $115.7
million primarily due to an increase of $51.0 million (on a constant currency
basis) in the Company’s U.K. wholesale business as a result of a shift in the
mix of sales towards higher priced products, a favorable foreign currency impact
of $48.9 million and $25.9 million of net sales of non-branded products acquired
in the Vincor acquisition.
Constellation
Beers
Net
sales
for Constellation Beers remained comparable for Fiscal 2007 at $1,043.6 million
from $1,043.5 million for Fiscal 2006. This is due to the formation of Crown
Imports on January 2, 2007, and the accounting for this investment under the
equity method of accounting. As such, Fiscal 2007 net sales include only ten
months of net sales versus Fiscal 2006 net sales which include twelve months
of
net sales. However, on a similar year over year period, with ten months of
net
sales for Fiscal 2006, the Constellation Beers net sales increased 15% primarily
due to volume growth in the Company’s Mexican beer portfolio from increased
retail consumer demand.
Constellation
Spirits
Net
sales
for Constellation Spirits increased slightly to $329.4 million for Fiscal 2007
from $324.6 million for Fiscal 2006, an increase of $4.8 million, or 1%. This
increase resulted primarily from an increase in branded spirits net sales of
$9.9 million partially offset by a decrease in bulk spirits net sales of
$5.1 million.
Gross
Profit
The
Company’s gross profit increased to $1,523.9 million for Fiscal 2007 from
$1,324.6 million for Fiscal 2006, an increase of $199.3 million, or 15%. The
Constellation Wines segment’s gross profit increased $199.1 million primarily
from gross profit of $166.8 million due to the Vincor acquisition and the
additional gross profit of $36.8 million associated with the increased base
branded wine net sales for North America. These amounts were partially offset
by
a $14.7 million decrease in U.K. and Australia gross profit resulting from
the
increased competition and promotional activities among suppliers in the U.K.
and
Australia, reflecting, in part, the effects of the oversupply of Australian
wine
and the retailer consolidation in the U.K., plus a late March 2006 increase
in
duty costs in the U.K. The Constellation Beers segment’s gross profit was
comparable with prior year due to ten months of gross profit for Fiscal 2007
versus twelve months for Fiscal 2006. The Constellation Spirits segment’s gross
profit was down slightly primarily due to increased material costs for spirits.
In addition, unusual items, which consist of certain costs that are excluded
by
management in their evaluation of the results of each operating segment, were
lower by $3.8 million in Fiscal 2007 versus Fiscal 2006. This decrease resulted
primarily from decreased flow through of adverse grape cost associated with
the
acquisition of Robert Mondavi of $19.9 million and decreased accelerated
depreciation costs of $6.8 million associated with the Fiscal 2006 Plan and
Fiscal 2007 Wine Plan (as each of those terms is defined below in Restructuring
and Related Charges), partially offset by increased flow through of inventory
step-up of $22.3 million associated primarily with the Vincor acquisition.
Gross
profit as a percent of net sales increased to 29.2% for Fiscal 2007 from 28.8%
for Fiscal 2006 primarily as a result of the factors discussed
above.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased to $768.8 million for Fiscal
2007
from $612.4 million for Fiscal 2006, an increase of $156.4 million, or 26%.
This
increase is due primarily to an increase of $99.7 million in the Constellation
Wines segment and a $43.5 million increase in unusual costs which consist of
certain items that are excluded by management in their evaluation of the results
of each operating segment. The increase in the Constellation Wines segment’s
selling, general and administrative expenses is primarily due to increased
advertising expenses of $28.0 million, selling expenses of $40.8 million and
general and administrative expenses of $30.9 million resulting primarily from
the Vincor acquisition and the recognition of stock-based compensation expense
of $8.4 million. The Constellation Beers segment’s selling, general and
administrative expenses increased $12.1 million primarily due to increased
advertising expenses of $12.1 million and general and administrative expenses
of
$2.7 million, partially offset by decreased selling expenses of $2.5 million
and
the impact of ten months of selling, general and administrative expenses for
Fiscal 2007 compared to twelve months of selling, general and administrative
expenses for Fiscal 2006. The Constellation Spirits segment’s selling, general
and administrative expenses were up slightly primarily due to the recognition
of
stock-based compensation expense of $1.5 million. The Corporate Operations
and
Other segment’s selling, general and administrative expenses were down slightly,
primarily due to costs recognized in Fiscal 2006 associated with professional
service fees incurred in connection with the Company’s tender offer for Vincor
that expired in December 2005 of $4.3 million and lower annual management
incentive compensation expense in Fiscal 2007, partially offset by the
recognition of stock-based compensation expense in Fiscal 2007 of $4.3 million
and expenses associated with the formation of Crown Imports of $1.5 million.
The
increase in unusual costs was primarily due to the recognition of (i) $16.3
million of other charges associated with the Fiscal 2007 Wine Plan (primarily
from the write-down of an Australian winery and certain Australian vineyards
to
fair value less cost to sell) and the Fiscal 2006 Plan, (ii) a $13.4 million
loss on the sale of the Company’s branded bottled water business resulting from
the write-off of $27.7 million of non-deductible intangible assets, primarily
goodwill, (iii) financing costs of $11.9 million related primarily to the
Company’s new senior credit facility entered into in connection with the Vincor
acquisition and (iv) foreign currency losses of $5.4 million on foreign
denominated intercompany loan balances associated with the Vincor acquisition.
Selling, general and administrative expenses as a percent of net sales increased
to 14.7% for Fiscal 2007 as compared to 13.3% for Fiscal 2006 primarily due
to
the increase in unusual costs and the recognition of stock-based compensation
expense of $16.5 million.
Restructuring
and Related Charges
The
Company recorded $32.5 million of restructuring and related charges for Fiscal
2007 associated primarily with the Company’s plan to invest in new distribution
and bottling facilities in the U.K. and to streamline certain Australian
wine
operations (collectively, the “Fiscal 2007 Wine Plan”) and the Company’s
worldwide wine reorganizations announced during Fiscal 2006 and the Company’s
program to consolidate certain west coast production processes in the U.S.
(collectively, the “Fiscal 2006 Plan”). Restructuring and related charges
included $5.9 million of employee termination benefit costs (net of reversal
of
prior accruals of $2.0 million), $25.6 million of contract termination costs
and
$1.0 million of facility consolidation/relocation costs (net of reversal
of
prior accruals of $0.4 million). In addition, in connection with the Fiscal
2007
Wine Plan, the Fiscal 2006 Plan and the Company’s plan to restructure and
integrate the operations of Vincor (the “Vincor Plan”), the Company recorded (i)
$6.6 million of accelerated depreciation costs and $0.6 million of inventory
write-downs and (ii) $16.3 million of other related costs which were recorded
in
the cost of product sold line and selling, general and administrative expenses
line, respectively, within the Company’s Consolidated Statements of Income. The
Company recorded $29.3 million of restructuring and related charges for Fiscal
2006 associated primarily with the Fiscal 2006 Plan.
For
Fiscal 2008, the Company expects to incur total restructuring and related
charges of $4.5 million associated with the Fiscal 2006 Plan, Fiscal 2007
Wine
Plan and Vincor Plan. In addition, with respect to these plans, the Company
expects to incur total accelerated depreciation costs, other charges and
inventory write-downs for Fiscal 2008 of $6.7 million, $1.9 million and $0.3
million, respectively.
Acquisition-Related
Integration Costs
Acquisition-related
integration costs increased to $23.6 million for Fiscal 2007 from $16.8 million
for Fiscal 2006, an increase of $6.8 million, or 40%. Acquisition-related
integration costs consisted of costs recorded primarily in connection with
the
Vincor Plan. Acquisition-related integration costs included $9.8 million
of
employee-related costs and $13.8 million of facilities and other one-time
costs.
The Company recorded $16.8 million of acquisition-related integration costs
for
Fiscal 2006 in connection with the Company’s
plan to restructure and integrate the operations of The Robert Mondavi
Corporation (the “Robert Mondavi Plan”).
For
Fiscal 2008, the Company expects to incur total acquisition-related integration
costs of $10.2 million, including $0.5 million of employee-related costs
and
$9.7 million of facilities and other one-time costs, primarily in connection
with the Vincor Plan.
Operating
Income
The
following table sets forth the operating income (loss) (in millions of dollars)
by operating segment of the Company for Fiscal 2007 and Fiscal
2006.
| |
|
Fiscal
2007 Compared to Fiscal 2006
|
|
| |
|
Operating
Income (Loss)
|
|
| |
|
2007
|
|
2006
|
|
%
Increase
(Decrease)
|
|
|
Constellation
Wines
|
|
$
|
629.9
|
|
$
|
530.4
|
|
|
19
%
|
|
|
Constellation
Beers
|
|
|
208.1
|
|
|
219.2
|
|
|
(5)%
|
|
|
Constellation
Spirits
|
|
|
65.5
|
|
|
73.4
|
|
|
(11)%
|
|
|
Corporate
Operations and Other
|
|
|
(60.9
|
)
|
|
(63.0
|
)
|
|
3
%
|
|
|
Crown
Imports
|
|
|
78.4
|
|
|
-
|
|
|
N/A
|
|
|
Consolidations
and eliminations
|
|
|
(78.4
|
)
|
|
-
|
|
|
N/A
|
|
|
Total
Reportable Segments
|
|
|
842.6
|
|
|
760.0
|
|
|
11
%
|
|
|
Acquisition-Related
Integration Costs,
Restructuring
and Related Charges
and
Unusual Costs
|
|
|
(143.6
|
)
|
|
(93.9
|
)
|
|
53
%
|
|
|
Consolidated
Operating Income
|
|
$
|
699.0
|
|
$
|
666.1
|
|
|
5
%
|
|
As
a
result of the factors discussed above, consolidated operating income increased
to $699.0 million for Fiscal 2007 from $666.1 million for Fiscal 2006, an
increase of $32.9 million, or 5%. Acquisition-related integration costs,
restructuring and related charges and unusual costs of $143.6 million for Fiscal
2007 consist of certain costs that are excluded by management in their
evaluation of the results of each operating segment. These costs represent
restructuring and related charges of $32.5 million associated primarily with
the
Fiscal 2007 Wine Plan and Fiscal 2006 Plan; the flow through of inventory
step-up of $30.2 million associated primarily with the Company’s acquisition of
Vincor; acquisition-related integration costs of $23.6 million associated
primarily with the Vincor Plan; other charges of $16.3 million associated with
the Fiscal 2007 Wine Plan and Fiscal 2006 Plan included within selling, general
and administrative expenses; loss on the sale of the branded bottled water
business of $13.4 million; financing costs of $11.9 million related primarily
to
the Company’s new senior credit facility entered into in connection with the
Vincor acquisition; foreign currency losses of $5.4 million on foreign
denominated intercompany loan balances associated with the Vincor acquisition;
the flow through of adverse grape cost of $3.1 million associated with the
acquisition of Robert Mondavi; and accelerated depreciation costs and the
write-down of certain inventory of $6.6 million and $0.6 million, respectively,
associated primarily with the Fiscal 2006 Plan and Fiscal 2007 Wine Plan.
Acquisition-related integration costs, restructuring and related charges and
unusual costs of $93.9 million for Fiscal 2006 represent restructuring and
related charges of $29.3 million associated primarily with the Fiscal 2006
Plan
and the Robert Mondavi Plan; the flow through of adverse grape cost,
acquisition-related integration costs, and the flow through of inventory step-up
associated primarily with the Company’s acquisition of Robert Mondavi of $23.0
million, $16.8 million, and $7.9 million, respectively; accelerated depreciation
costs and other charges of $13.4 million and $0.1 million, respectively,
associated with the Fiscal 2006 Plan; and costs associated with professional
service fees incurred for due diligence in connection with the Company’s
evaluation of a potential offer for Allied Domecq of $3.4 million.
Equity
in Earnings of Equity Method Investees
The
Company’s equity in earnings of equity method investees increased to $49.9
million in Fiscal 2007 from $0.8 million in Fiscal 2006, an increase of $49.1
million. This increase is primarily due to (i) the January 2, 2007, consummation
of the beer joint venture and the reporting of the results of operations of
the
joint venture since that date under the equity method of accounting of $38.9
million, and (ii) an increase of $8.1 million associated with the Company’s
investment in Ruffino due primarily to the write-down in Fiscal 2006 of certain
pre-acquisition Ruffino inventories.
Gain
on Change in Fair Value of Derivative Instrument
In
April
2006, the Company entered into a foreign currency forward contract in connection
with the acquisition of Vincor to fix the U.S. dollar cost of the acquisition
and the payment of certain outstanding indebtedness. For Fiscal 2007, the
Company recorded a gain of $55.1 million in connection with this derivative
instrument. Under SFAS No. 133, a transaction that involves a business
combination is not eligible for hedge accounting treatment. As such, the gain
was recognized separately on the Company’s Consolidated Statements of
Income.
Interest
Expense, Net
Interest
expense, net of interest income of $5.4 million and $4.2 million for Fiscal
2007
and Fiscal 2006, respectively, increased to $268.7 million for Fiscal 2007
from
$189.6 million for Fiscal 2006, an increase of $79.1 million, or 41.7%. The
increase resulted from both higher average borrowings in Fiscal 2007 (primarily
as a result of the financing of the Vincor acquisition) and higher average
interest rates.
Provision
for Income Taxes
The
Company’s effective tax rate increased to 38.0% for Fiscal 2007 from 31.8% for
Fiscal 2006, an increase of 6.2%. In Fiscal 2007, the Company sold its branded
bottled water business that resulted in the write-off of $27.7 million of
non-deductible intangible assets, primarily goodwill. The provision for income
taxes on the sale of the branded bottled water business increased the Company’s
effective tax rate for Fiscal 2007. In addition, the effective tax rate for
Fiscal 2006 reflected the benefits recorded for adjustments to income tax
accruals of $16.2 million in connection with the completion of various income
tax examinations as well as the preliminary conclusion regarding the impact
of
the American Jobs Creation Act of 2004 on planned distributions of certain
foreign earnings.
Net
Income
As
a
result of the above factors, net income increased to $331.9
million
for Fiscal 2007 from $325.3
million
for Fiscal 2006, an increase of $6.6 million, or 2%.
Fiscal
2006 Compared to Fiscal 2005
Net
Sales
The
following table sets forth the net sales (in millions of dollars) by operating
segment of the Company for Fiscal 2006 and Fiscal 2005.
| |
|
Fiscal
2006 Compared to Fiscal 2005
|
| |
|
Net
Sales
|
| |
|
2006
|
|
2005
|
|
%
Increase
(Decrease)
|
|
Constellation
Wines:
|
|
|
|
|
|
|
|
|
Branded
wine
|
|
$
|
2,263.4
|
|
$
|
1,830.8
|
|
|
24
|
%
|
|
Wholesale
and other
|
|
|
972.0
|
|
|
1,020.6
|
|
|
(5
|
)%
|
|
Constellation
Wines net sales
|
|
|
3,235.4
|
|
|
2,851.4
|
|
|
13
|
%
|
|
Constellation
Beers net sales
|
|
|
1,043.5
|
|
|
922.9
|
|
|
13
|
%
|
|
Constellation
Spirits net sales
|
|
|
324.6
|
|
|
313.3
|
|
|
4
|
%
|
|
Consolidated
Net Sales
|
|
$
|
4,603.5
|
|
$
|
4,087.6
|
|
|
13
|
%
|
Net
sales
for Fiscal 2006 increased to $4,603.5 million from $4,087.6 million for Fiscal
2005, an increase of $515.9 million, or 13%. This increase resulted primarily
from an increase in branded wine net sales of $440.1 million (on a constant
currency basis) and imported beer net sales of $120.5 million, partially offset
by an unfavorable foreign currency impact of $35.5 million.
Constellation
Wines
Net
sales
for Constellation Wines increased to $3,235.4 million for Fiscal 2006 from
$2,851.4 million in Fiscal 2005, an increase of $384.0 million, or 13%. Branded
wine net sales increased $432.6 million primarily from $337.5 million of net
sales of the acquired Robert Mondavi brands and $43.6 million of net sales
of
Ruffino brands, which the Company began distributing in the U.S. on February
1,
2005, as well as a $51.5 million increase in branded wine net sales (excluding
sales of Robert Mondavi and Ruffino brands). The $51.5 million increase is
due
primarily to growth in the Company’s branded wine net sales in the U.S. of $45.2
million resulting from a $28.2 million benefit from a shift in the mix of sales
towards higher priced products and $17.0 million from new product introductions.
Wholesale and other net sales decreased $48.5 million ($20.5 million on a
constant currency basis) as constant currency growth in the U.K. wholesale
business of $13.0 million was more than offset by a decrease in other net sales
of $33.5 million. The decrease in other net sales is primarily due to the
Company’s Fiscal 2004 decision to exit the commodity concentrate business during
Fiscal 2005.
Constellation
Beers
Net
sales
for Constellation Beers increased to $1,043.5 million for Fiscal 2006 from
$922.9 million for Fiscal 2005, an increase of $120.6 million, or 13%. This
increase resulted from volume growth in the Company’s Mexican beer portfolio
resulting from increased retail consumer demand.
Constellation
Spirits
Net
sales
for Constellation Spirits increased to $324.6 million for Fiscal 2006 from
$313.3 million for Fiscal 2005, an increase of $11.3 million, or 4%. This
increase is attributable primarily to an increase in the Company’s contract
production net sales for Fiscal 2006.
Gross
Profit
The
Company’s gross profit increased to $1,324.6 million for Fiscal 2006 from
$1,140.6 million for Fiscal 2005, an increase of $184.0 million, or 16%. The
Constellation Wines segment’s gross profit increased $191.0 million primarily
due to the additional gross profit of $171.7 million from the Robert Mondavi
acquisition and additional gross profit of $50.4 million from branded wine
net
sales in the U.S. primarily due to the favorable mix of sales towards higher
margin products and new product introductions, partially offset by reduced
gross
profit of $41.5 million from the decrease in other net sales. The Constellation
Beers segment’s gross profit increased $18.1 million primarily due to volume
growth in the Company’s Mexican beer portfolio of $37.4 million, partially
offset by higher Mexican beer product costs of $9.5 million and transportation
costs of $4.0 million. However, in connection with certain supply arrangements,
the higher Mexican beer product costs were offset by a corresponding decrease
in
advertising expenses resulting in no impact to operating income. The
Constellation Spirits segment’s gross profit increased $2.9 million. In
addition, unusual items, which consist of certain costs that are excluded by
management in their evaluation of the results of each operating segment, were
higher by $28.1 million in Fiscal 2006 versus Fiscal 2005. This increase
resulted primarily from accelerated depreciation costs associated with the
Fiscal 2006 Plan (as defined below) of $13.4 million and increased flow through
of adverse grape cost associated with the Robert Mondavi acquisition of $13.2
million. Gross profit as a percent of net sales increased to 28.8% for Fiscal
2006 from 27.9% for Fiscal 2005 primarily due to sales of higher-margin wine
brands acquired in the Robert Mondavi acquisition, partially offset by the
higher unusual items and higher Mexican beer product costs and transportation
costs.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased to $612.4 million for Fiscal
2006
from $555.7 million for Fiscal 2005, an increase of $56.7 million, or 10%.
The
Constellation Wines segment’s selling, general and administrative expenses
increased $67.2 million primarily due to increased selling expenses of $31.6
million, general and administrative expenses of $26.8 million, and advertising
expenses of $8.8 million to support the growth in the segment’s business,
primarily due to the costs related to the brands acquired in the Robert Mondavi
acquisition. Included in the increase in general and administrative expenses
was
an expense of $6.4 million associated with the segment’s U.K. defined benefit
pension plan related to a reduction in the period over which unrecognized
actuarial losses are amortized. The Constellation Beers segment’s selling,
general and administrative expenses decreased $4.3 million due to lower
advertising expenses of $8.3 million, partially offset by increased selling
expenses of $3.1 million and general and administrative expenses of $0.9
million. The Constellation Spirits segment’s selling, general and administrative
expenses increased $9.0 million due primarily to increased advertising expenses
of $5.2 million and selling expenses of $4.2 million. The Corporate Operations
and Other segment’s selling, general and administrative expenses increased $7.0
million primarily due to costs associated with professional service fees
incurred in connection with the Company’s tender offer for Vincor that expired
in December 2005 of $4.3 million and increased general and administrative
expenses of $2.7 million to support the Company’s growth. Lastly, there was a
decrease of $22.1 million of unusual costs which consist of certain items that
are excluded by management in their evaluation of the results of each operating
segment. Fiscal 2006 included costs associated primarily with professional
service fees incurred for due diligence in connection with the Company’s
evaluation of a potential offer for Allied Domecq of $3.4 million. Fiscal 2005
costs included $31.7 million of financing costs recorded in Fiscal 2005 related
to (i) the Company’s redemption of its $200.0 million aggregate principal amount
of 8 1/2% Senior Subordinated Notes due March 2009 (the “Senior Subordinated
Notes”) of $10.3 million and (ii) the Company’s new senior credit facility
entered into in connection with the Robert Mondavi acquisition of $21.4 million,
partially offset by net gains of $6.1 million recorded in Fiscal 2005 on the
sales of non-strategic assets of $3.1 million and the receipt of a payment
associated with the termination of a previously announced potential fine wine
joint venture of $3.0 million. Selling, general and administrative expenses
as a
percent of net sales decreased to 13.3% for Fiscal 2006 as compared to 13.6%
for
Fiscal 2005 primarily due to the decrease in unusual costs.
Restructuring
and Related Charges
The
Company recorded $29.3 million of restructuring and related charges for Fiscal
2006 associated with the restructuring plans of the Constellation Wines segment.
Restructuring and related charges resulted from (i) the further realignment
of
business operations and the Company’s plan to exit the commodity concentrate
product line in the U.S., both announced during fiscal 2004, (the “Fiscal 2004
Plan”), (ii) the Robert Mondavi Plan, and (iii) the Fiscal 2006 Plan.
Restructuring and related charges recorded in connection with the Fiscal 2004
Plan included $0.7 million of employee termination benefit costs and $1.3
million of facility consolidation and relocation costs. Restructuring and
related charges recorded in connection with the Robert Mondavi Plan included
$1.6 million of employee termination benefit costs, $0.7 million of contract
termination costs and $0.5 million of facility consolidation and relocation
costs. Restructuring and related charges recorded in connection with the Fiscal
2006 Plan included $24.3 million of employee termination benefit costs and
$0.2
million of facility consolidation and relocation costs. In addition, in
connection with the Fiscal 2006 Plan, the Company recorded (i) $13.4 million
of
accelerated depreciation costs in connection with the Company’s investment in
new assets and reconfiguration of certain existing assets under the plan and
(ii) $0.1 million of other related costs which were recorded in the cost of
product sold line and the selling, general and administrative expenses line,
respectively, within the Consolidated Statements of Income. The Company recorded
$7.6 million of restructuring and related charges for Fiscal 2005 associated
with the Fiscal 2004 Plan and the Robert Mondavi Plan.
Acquisition-Related
Integration Costs
The
Company recorded $16.8 million of acquisition-related integration costs for
Fiscal 2006 in connection with the Robert Mondavi Plan. Acquisition-related
integration costs included $5.3 million of employee-related costs and $11.5
million of facilities and other one-time costs. The Company recorded $9.4
million of acquisition-related integration costs for Fiscal 2005 in connection
with the Robert Mondavi Plan.
Operating
Income
The
following table sets forth the operating income (loss) (in millions of dollars)
by operating segment of the Company for Fiscal 2006 and Fiscal
2005.
| |
|
Fiscal
2006 Compared to Fiscal 2005
|
| |
|
Operating
Income (Loss)
|
| |
|
2006
|
|
2005
|
|
%
Increase
(Decrease)
|
|
Constellation
Wines
|
|
$
|
530.4
|
|
$
|
406.6
|
|
|
30
%
|
|
|
Constellation
Beers
|
|
|
219.2
|
|
|
196.8
|
|
|
11
%
|
|
|
Constellation
Spirits
|
|
|
73.4
|
|
|
79.3
|
|
|
(7)%
|
|
|
Corporate
Operations and Other
|
|
|
(63.0
|
)
|
|
(56.0
|
)
|
|
13
%
|
|
|
Total
Reportable Segments
|
|
|
760.0
|
|
|
626.7
|
|
|
21
%
|
|
|
Acquisition-Related
Integration Costs,
Restructuring
and Related Charges
and
Net Unusual Costs
|
|
|
(93.9
|
)
|
|
(58.8
|
)
|
|
60
%
|
|
|
Consolidated
Operating Income
|
|
$
|
666.1
|
|
$
|
567.9
|
|
|
17
%
|
|
As
a
result of the factors discussed above, consolidated operating income increased
to $666.1 million for Fiscal 2006 from $567.9 million for Fiscal 2005, an
increase of $98.2 million, or 17%. Acquisition-related integration costs,
restructuring and related charges and unusual costs of $93.9 million for Fiscal
2006 consist of certain costs that are excluded by management in their
evaluation of the results of each operating segment. These costs represent
restructuring and related charges of $29.3 million associated primarily with
the
Fiscal 2006 Plan and the Robert Mondavi Plan; the flow through of adverse grape
cost, acquisition-related integration costs, and the flow through of inventory
step-up associated primarily with the Company’s acquisition of Robert Mondavi of
$23.0 million, $16.8 million, and $7.9 million, respectively; accelerated
depreciation costs and other charges of $13.4 million and $0.1 million,
respectively, associated with the Fiscal 2006 Plan; and costs associated with
professional service fees incurred for due diligence in connection with the
Company’s evaluation of a potential offer for Allied Domecq of $3.4 million.
Acquisition-related integration costs, restructuring and related charges and
unusual costs of $58.8 million for Fiscal 2005 consist of financing costs
associated with the redemption of the Company’s Senior Subordinated Notes
and
the
repayment of the Company’s prior senior credit facility in connection with the
Robert Mondavi acquisition of $31.7 million;
the
flow through of adverse grape cost and acquisition-related integration costs
associated with the Robert Mondavi acquisition of $9.8 million and $9.4 million,
respectively; restructuring and related charges of $7.6 million associated
with
the Fiscal 2004 Plan and the Robert Mondavi Plan; and the flow through of
inventory step-up associated primarily with the acquisition of all of the
outstanding capital stock of BRL Hardy Limited, now known as Hardy Wine Company
Limited (the “Hardy Acquisition”) of $6.4 million; partially offset by a net
gain on the sale of non-strategic assets of $3.1 million and a gain related
to
the receipt of a payment associated with the termination of a previously
announced potential fine wine joint venture of $3.0 million.
Equity
in Earnings of Equity Method Investees
The
Company’s equity in earnings of equity method investees decreased to $0.8
million in Fiscal 2006 from $1.8 million in Fiscal 2005, a decrease of $0.9
million due primarily to a $5.0 million loss from the Company’s investment in
Ruffino, partially offset by an increase in earnings of $4.1 million associated
primarily with the Company’s investment in Opus One as a result of the Robert
Mondavi acquisition. The $5.0 million loss from the Company’s investment in
Ruffino is due primarily to the write-down of certain pre-acquisition Ruffino
inventories.
Interest
Expense, Net
Interest
expense, net of interest income of $4.2 million and $2.3 million for Fiscal
2006
and Fiscal 2005, respectively, increased to $189.7 million for Fiscal 2006
from
$137.7 million for Fiscal 2005, an increase of $52.0 million, or 38%. The
increase resulted primarily from higher average borrowings in Fiscal 2006
primarily due to the Robert Mondavi acquisition and the investment in Ruffino
in
the fourth quarter of fiscal 2005.
Provision
for Income Taxes
The
Company’s effective tax rate was 31.8% for Fiscal 2006 and 36.0% for Fiscal
2005, a decrease of 4.2%. This decrease was primarily due to a non-cash
reduction in the Company’s provision for income taxes of $16.2 million, or 3.4%,
as a result of adjustments to income tax accruals in connection with the
completion of various income tax examinations plus the income tax benefit the
Company recorded under the repatriation provisions of the “American Jobs
Creation Act of 2004” in connection with distributions of certain foreign
earnings.
Net
Income
As
a
result of the above factors, net income increased to $325.3
million
for Fiscal 2006 from $276.5 million for Fiscal 2005, an increase of
$48.8
million,
or 18%.
Financial
Liquidity and Capital Resources
General
The
Company’s principal use of cash in its operating activities is for purchasing
and carrying inventories and carrying seasonal accounts receivable. The
Company’s primary source of liquidity has historically been cash flow from
operations, except during annual grape harvests when the Company has relied
on
short-term borrowings. In the United States, the annual grape crush normally
begins in August and runs through October. In Australia, the annual grape crush
normally begins in February and runs through May. The Company generally begins
taking delivery of grapes at the beginning of the crush season with payments
for
such grapes beginning to come due one month later. The Company’s short-term
borrowings to support such purchases generally reach their highest levels one
to
two months after the crush season has ended. Historically, the Company has
used
cash flow from operating activities to repay its short-term borrowings and
fund
capital expenditures. The Company will continue to use its short-term borrowings
to support its working capital requirements. The Company believes that cash
provided by operating activities and its financing activities, primarily
short-term borrowings, will provide adequate resources to satisfy its working
capital, scheduled principal and interest payments on debt, and anticipated
capital expenditure requirements for both its short-term and long-term capital
needs.
Fiscal
2007 Cash Flows
Operating
Activities
Net
cash
provided by operating activities for Fiscal 2007 was $313.2 million, which
resulted from $331.9 million of net income, plus $199.8 million of net non-cash
items charged to the Consolidated Statement of Income, less $163.4 million
representing the net change in the Company’s operating assets and liabilities
and $55.1 million of proceeds from maturity of derivative instrument reflected
in investing activities.
The
net
non-cash items consisted primarily of depreciation of property, plant and
equipment, the deferred tax provision and equity in earnings of equity method
investments. The net change in operating assets and liabilities resulted
primarily from a decrease in other accrued expenses and liabilities of $157.2
million and an increase in inventories of $85.1 million, partially offset by
a
decrease in prepaid expenses and other current assets of $44.3 million. The
decrease in other accrued expenses and liabilities is primarily due to the
settlement of an outstanding marketing accrual in connection with the Company’s
prior Mexican beers distribution agreement, settlement of restructuring
accruals, increased income tax payments, and payments of non-recurring
liabilities assumed in connection with the Vincor acquisition. The increase
in
inventories was primarily due to the build-up of the imported beer inventories
prior to the Company’s contribution of the beer business to Crown Imports. As
Crown Imports began selling and importing under the Importer Agreement
in
the 50
states of the United States of America, the District of Columbia and Guam on
January 2, 2007, it
was
necessary to increase inventory levels in order to ensure there were adequate
inventory levels to support the additional territories. The decrease in prepaid
expenses and other current assets is primarily due to a decrease in prepaid
marketing expense due to the settlement of the outstanding marketing accrual
in
connection with the Company’s prior Mexican beers distribution agreement noted
above.
Investing
Activities
Net
cash
used in investing activities for Fiscal 2007 was $1,197.1 million, which
resulted primarily from $1,093.7 million for the purchase of a business and
$192.0 million of capital expenditures, partially offset by $55.1 million of
proceeds from maturity of derivative instrument entered into to fix the U.S.
dollar cost of the acquisition of Vincor.
Financing
Activities
Net
cash
provided by financing activities for Fiscal 2007 was $925.2 million resulting
primarily from proceeds from issuance of long-term debt of $3,705.4 million,
net
proceeds of $63.4 million from the exercise of employee stock options and net
proceeds of $47.1 million from notes payable partially offset by principal
payments of long-term debt of $2,786.9 million and purchases of treasury stock
of $100.0 million.
Fiscal
2006 Cash Flows
Operating
Activities
Net
cash
provided by operating activities for Fiscal 2006 was $436.0 million, which
resulted from $325.3 million of net income, plus $167.2 million of net non-cash
items charged to the Consolidated Statements of Income and $48.8 million of
cash
proceeds credited to accumulated other comprehensive income (“AOCI”) within the
Consolidated Balance Sheet, less $105.2 million representing the net change
in
the Company’s operating assets and liabilities.
The
net
non-cash items consisted primarily of depreciation of property, plant and
equipment and deferred tax provision. The cash proceeds credited to AOCI
consisted of $30.3 million in proceeds from the unwinding of certain interest
rate swaps (see discussion below under Senior Credit Facilities) and $18.5
million in proceeds from the early termination of certain foreign currency
derivative instruments related to the Company’s change in its structure of
certain of its cash flow hedges of forecasted foreign currency denominated
transactions. As the forecasted transactions are still probable, this amount
was
recorded to AOCI and will be reclassified from AOCI into earnings in the same
periods in which the original hedged items are recorded in the Consolidated
Statements of Income. The net change in operating assets and liabilities
resulted primarily from an increase in inventories of $121.9 million and
decreases in restructuring accruals and accrued advertising and promotion of
$31.8 million and $19.2 million, respectively, partially offset by a decrease
in
accounts receivable of $44.2 million. The increase in inventories was due
primarily to higher than expected yields for the 2005 calendar grape harvests
for both the U.S. and Australia. The decreases in restructuring accruals and
accrued advertising and promotion accruals were primarily due to timing of
cash
payments. The decrease in accounts receivable was due primarily to efforts
in
the Company’s U.K. business to reduce the number of days sales outstanding in
its accounts receivables.
Investing
Activities
Net
cash
used in investing activities for Fiscal 2006 was $15.6 million, which resulted
primarily from $132.5 million of capital expenditures and net cash paid of
$45.9
million for purchases of businesses, partially offset by $173.5 million of
net
proceeds from sales of assets, equity method investment, and businesses,
primarily attributable to sales of non-strategic Robert Mondavi
assets.
Financing
Activities
Net
cash
used in financing activities for Fiscal 2006 was $426.2 million resulting
primarily from principal payments of long-term debt of $527.6 million partially
offset by net proceeds of $63.8 million from notes payable and $31.5 million
of
proceeds from employee stock option exercises.
Share
Repurchase Programs
During
February 2006, the Company’s Board of Directors replenished a June 1998 Board of
Directors authorization to repurchase up to $100.0 million of the Company’s
Class A Common Stock and Class B Common Stock. During Fiscal 2007, the Company
repurchased 3,894,978 shares of Class A Common Stock at an aggregate cost
of
$100.0 million, or at an average cost of $25.67 per share. The Company used
revolver borrowings under the June 2006 Credit Agreement to pay the
purchase price for these shares. No shares were repurchased during Fiscal
2006
or Fiscal 2005. During February 2007, the Company’s Board of Directors
authorized the repurchase of up to $500.0 million of the Company’s Class A
Common Stock and Class B Common Stock. Between
the end of Fiscal 2007 and April
27,
2007, the Company repurchased 2,457,200 shares of Class A Common Stock
pursuant to this authorization in open market transactions.
The
aggregate cost of these shares was $55.1 million, or an average cost of $22.44
per share.
The
Company used revolver borrowings under the 2006 Credit Agreement to pay the
purchase price for these shares. The
Company may finance future share repurchases through cash generated
from operations or through revolver borrowings under the 2006 Credit
Agreement.
The
repurchased shares will become treasury shares.
Debt
Total
debt outstanding as of February 28, 2007, amounted to $4,185.5 million,
an increase of $1,375.7 million
from February 28, 2006. The ratio of total debt to total capitalization
increased to 55.1%
as of
February 28, 2007, from 48.6% as of February 28, 2006, primarily
as a result of the additional borrowings in the second quarter of fiscal 2007
to
finance the acquisition of Vincor. If
the
Company’s financing of the Svedka Acquisition, the repurchase of shares and the
proceeds from the Matthew Clark joint venture had occurred as
of February 28, 2007, the Company’s ratio of total debt to total
capitalization would have increased to 56.9%.
Senior
Credit Facility
2006
Credit Agreement
In
connection with the acquisition of Vincor, on June 5, 2006, the Company and
certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and
administrative agent, and certain other agents, lenders, and financial
institutions entered into a new credit agreement (the
“June 2006 Credit Agreement”). On February 23, 2007, the June 2006 Credit
Agreement was amended (the “February Amendment”). The June 2006 Credit Agreement
together with the February Amendment is referred to as the “2006 Credit
Agreement”. The 2006 Credit Agreement provides for aggregate
credit facilities of $3.9 billion, consisting of a $1.2 billion tranche A term
loan facility due in June 2011, a $1.8 billion tranche B term loan facility
due
in June 2013, and a $900 million revolving credit facility (including a
sub-facility for letters of credit of up to $200 million) which terminates
in
June 2011. Proceeds of the June 2006 Credit Agreement were used to pay off
the Company’s obligations under its prior senior credit facility, to fund the
acquisition of Vincor and to repay certain indebtedness of Vincor. The Company
uses its revolving credit facility under the 2006 Credit Agreement for general
corporate purposes, including working capital, on an as needed
basis.
The
tranche A term loan facility and the tranche B term loan facility were fully
drawn on June 5, 2006. In August 2006, the Company used proceeds from the August
2006 Senior Notes (as defined below) to repay $180.0 million of the tranche
A
term loan and $200.0 million of the tranche B term loan. In addition, the
Company prepaid an additional $100.0 million on the tranche B term loan in
August 2006. As of February 28, 2007, the required principal repayments of
the
tranche A term loan and the tranche B term loan for each of the five succeeding
fiscal years and thereafter are as follows:
| |
|
Tranche
A
Term
Loan
|
|
Tranche
B
Term
Loan
|
|
Total
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
90.0
|
|
$
|
7.6
|
|
$
|
97.6
|
|
|
2009
|
|
|
210.0
|
|
|
15.2
|
|
|
225.2
|
|
|
2010
|
|
|
270.0
|
|
|
15.2
|
|
|
285.2
|
|
|
2011
|
|
|
300.0
|
|
|
15.2
|
|
|
315.2
|
|
|
2012
|
|
|
150.0
|
|
|
15.2
|
|
|
165.2
|
|
|
Thereafter
|
|
|
-
|
|
|
1,431.6
|
|
|
1,431.6
|
|
| |
|
$
|
1,020.0
|
|
$
|
1,500.0
|
|
$
|
2,520.0
|
|
The
rate
of interest on borrowings under the 2006 Credit Agreement is a function of
LIBOR
plus a margin, the federal funds rate plus a margin, or the prime rate plus
a
margin. The margin is fixed with respect to the tranche B term loan facility
and
is adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit
Agreement) with respect to the tranche A term loan facility and the revolving
credit facility. As of February 28, 2007, the LIBOR margin for the revolving
credit facility and the tranche A term loan facility is 1.25%, while the LIBOR
margin on the tranche B term loan facility is 1.50%.
The
February Amendment amended the June 2006 Credit Agreement to, among other
things, (i) increase the revolving credit facility from $500.0 million to $900.0
million, which increased the aggregate credit facilities from $3.5 billion
to
$3.9 billion; (ii) increase the aggregate amount of cash payments the Company
is
permitted to make in respect or on account of its capital stock; (iii) remove
certain limitations on the application of proceeds from the incurrence of senior
unsecured indebtedness; (iv) increase the maximum permitted total “Debt Ratio”
and decrease the required minimum “Interest Coverage Ratio”; and (v) eliminate
the “Senior Debt Ratio” covenant and the “Fixed Charges Ratio”
covenant.
The
Company’s obligations are guaranteed by certain of its U.S. subsidiaries. These
obligations are also secured by a pledge of (i) 100% of the ownership interests
in certain of the Company’s U.S. subsidiaries and (ii) 65% of the voting capital
stock of certain of the Company’s foreign subsidiaries.
The
Company and its subsidiaries are also subject to covenants that are contained
in
the 2006 Credit Agreement, including those restricting the incurrence of
additional indebtedness (including guarantees of indebtedness), additional
liens, mergers and consolidations, disposition or acquisition of property,
the
payment of dividends, transactions with affiliates and the making of certain
investments, in each case subject to numerous conditions, exceptions and
thresholds. The financial covenants are limited to maximum total debt coverage
ratio and minimum interest coverage ratio.
As
of
February 28, 2007, under the 2006 Credit Agreement, the Company had outstanding
tranche A term loans of $1.0 billion bearing an interest rate of 6.6%, tranche
B
term loans of $1.5 billion bearing an interest rate of 6.9%, revolving loans
of
$30.0 million bearing an interest rate of 6.6%, outstanding letters of credit
of
$50.9 million, and $819.1 million in revolving loans available to be
drawn.
As
of
April 27, 2007, reflecting the Company's activities subsequent to February
28,
2007, the Company had outstanding tranche A term loans of $1.0 billion bearing
an interest rate of 6.6%, tranche B term loans of $1.5 billion bearing an
interest rate of 6.9%, revolving loans of $337.5 million bearing an interest
rate of 6.6%, outstanding letters of credit of $40.7 million, and $521.8 million
in revolving loans available to be drawn, under the 2006 Credit
Agreement.
In
March
2005, the Company replaced its then outstanding five year interest rate swap
agreements with new five year delayed start interest rate swap agreements
effective March 1, 2006, which are outstanding as of February 28, 2007. These
delayed start interest rate swap agreements extended the original hedged period
through fiscal 2010. The swap agreements fixed LIBOR interest rates on $1,200.0
million of the Company’s floating LIBOR rate debt at an average rate of 4.1%
over the five year term. The Company received $30.3 million in proceeds from
the
unwinding of the original swaps. This amount will be reclassified from
Accumulated Other Comprehensive Income (“AOCI”) ratably into earnings in the
same period in which the original hedged item is recorded in the Consolidated
Statements of Income. For Fiscal 2007 and Fiscal 2006, the Company reclassified
$5.9
million
and $3.6
million,
respectively, from AOCI to Interest Expense, net in the Company’s Consolidated
Statements of Income. This non-cash operating activity is included in the Other,
net line in the Company’s Consolidated Statements of Cash Flows.
Senior
Notes
On
August
4, 1999, the Company issued $200.0 million aggregate principal amount of 8
5/8%
Senior Notes due August 2006 (the “August 1999 Senior Notes”). On August 1,
2006, the Company repaid the August 1999 Senior Notes with proceeds from its
revolving credit facility under the June 2006 Credit
Agreement.
As
of
February 28, 2007, the Company had outstanding £1.0 million ($2.0 million)
aggregate principal amount of 8 1/2% Series B Senior Notes due November 2009
(the “Sterling Series B Senior Notes”). In addition, as of February 28, 2007,
the Company had outstanding £154.0 million ($302.1 million, net of $0.3 million
unamortized discount) aggregate principal amount of 8 1/2% Series C Senior
Notes
due November 2009 (the “Sterling Series C Senior Notes”). The Sterling Series B
Senior Notes and Sterling Series C Senior Notes are currently redeemable, in
whole or in part, at the option of the Company.
Also,
as
of February 28, 2007, the Company had outstanding $200.0 million aggregate
principal amount of 8% Senior Notes due February 2008 (the “February 2001 Senior
Notes”). The February 2001 Senior Notes are currently redeemable, in whole or in
part, at the option of the Company.
On
August
15, 2006, the Company issued $700.0 million aggregate principal amount of 7
1/4%
Senior
Notes due September 2016 at an issuance price of $693.1 million (net of $6.9
million unamortized discount, with an effective interest rate of 7.4%) (the
“August 2006 Senior Notes”). The net proceeds of the offering ($685.6
million)
were used to reduce a corresponding amount of borrowings under the Company’s
June 2006 Credit Agreement. Interest on the August 2006 Senior Notes is payable
semiannually on March 1 and September 1 of each year, beginning March 1, 2007.
The August 2006 Senior Notes are redeemable, in whole or in part, at the option
of the Company at any time at a redemption price equal to 100% of the
outstanding principal amount and a make whole payment based on the present
value
of the future payments at the adjusted Treasury rate plus 50 basis points.
The
August 2006 Senior Notes are senior unsecured obligations and rank equally
in
right of payment to all existing and future senior unsecured indebtedness of
the
Company. Certain of the Company’s significant operating subsidiaries guarantee
the August 2006 Senior Notes, on a senior basis. As of February 28, 2007, the
Company had outstanding $693.4 million (net of $6.6 million unamortized
discount) aggregate principal amount of August 2006 Senior Notes.
Senior
Subordinated Notes
As
of
February 28, 2007, the Company had outstanding $250.0 million aggregate
principal amount of 8 1/8% Senior Subordinated Notes due January 2012 (the
“January 2002 Senior Subordinated Notes”). The January 2002 Senior Subordinated
Notes are currently redeemable, in whole or in part, at the option of the
Company.
Subsidiary
Credit Facilities
In
addition to the above arrangements, the Company has additional credit
arrangements totaling $386.1 million as of February 28, 2007. These arrangements
primarily support the financing needs of the Company’s domestic and foreign
subsidiary operations. Interest rates and other terms of these borrowings vary
from country to country, depending on local market conditions. As of February
28, 2007, and February 28, 2006, amounts outstanding under these arrangements
were $188.0 million and $69.8 million, respectively.
Contractual
Obligations and Commitments
The
following table sets forth information about the Company’s long-term contractual
obligations outstanding at February 28, 2007. It brings together
data for easy reference from the consolidated balance sheet and from individual
notes to the Company’s consolidated financial statements. See Notes 8, 9, 11,
12, 13 and 14 to the Company’s consolidated financial statements
located
in
Item 8 of this Annual Report on Form 10-K for detailed discussion of items
noted
in the following table.
| |
|
PAYMENTS
DUE BY PERIOD
|
|
| |
|
Total
|
|
Less
than
1
year
|
|
1-3
years
|
|
3-5
years
|
|
After
5
years
|
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual
obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
$
|
153.3
|
|
$
|
153.3
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
|
Interest
payments on notes
payable
to banks(1)
|
|
|
10.3
|
|
|
10.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
Long-term
debt (excluding
unamortized
discount)
|
|
|
4,039.1
|
|
|
317.3
|
|
|
841.2
|
|
|
736.0
|
|
|
2,144.6
|
|
|
Interest
payments on long-
term
debt(2)
|
|
|
1,386.9
|
|
|
275.6
|
|
|
473.7
|
|
|
361.0
|
|
|
276.6
|
|
|
Operating
leases
|
|
|
540.3
|
|
|
72.9
|
|
|
122.9
|
|
|
73.8
|
|
|
270.7
|
|
|
Other
long-term liabilities
|
|
|
303.9
|
|
|
76.3
|
|
|
88.5
|
|
|
61.6
|
|
|
77.5
|
|
|
Unconditional
purchase
obligations(3)
|
|
|
2,320.7
|
|
|
466.7
|
|
|
692.3
|
|
|
414.3
|
|
|
747.4
|
|
|
Total
contractual
obligations
|
|
$
|
8,754.5
|
|
$
|
1,372.4
|
|
$
|
2,218.6
|
|
$
|
1,646.7
|
|
$
|
3,516.8
|
|
| |
(1)
|
Interest
payments on notes payable to banks include interest on both revolving
loans under the Company’s senior credit facility and on foreign subsidiary
facilities. The weighted average interest rate on the revolving
loans
under the Company’s senior credit facility was 6.6% as of February 28,
2007. Interest rates on foreign subsidiary facilities range from
1.8% to
9.2% as of February 28, 2007.
|
| |
(2)
|
Interest
rates on long-term debt obligations range from 6.4% to 8.5%. Interest
payments on long-term debt obligations include amounts associated
with the
Company’s outstanding interest rate swap agreements to fix LIBOR interest
rates on $1,200.0 million of the Company’s floating LIBOR rate debt.
Interest payments on long-term debt do not include interest related
to
capital lease obligations or certain foreign credit arrangements,
which
represent approximately 1.6% of the Company’s total long-term debt, as
amounts are not material.
|
| |
(3)
|
Total
unconditional purchase obligations consist of $26.0 million
for contracts to purchase various spirits over the next six
fiscal years, $2,182.2 million for contracts to purchase grapes
over the
next eighteen fiscal years, $82.5 million for contracts to purchase
bulk
wine over the next four fiscal years and $30.0 million for processing
contracts over the next four fiscal
years. See Note 14 to the Company’s consolidated financial statements
located in Item 8 of this Annual Report
on Form 10-K for a detailed discussion of these
items.
|
Capital
Expenditures
During
Fiscal 2007, the Company incurred $192.0 million for capital expenditures.
The
Company plans to spend approximately $165 million for capital expenditures
in
Fiscal 2008. In
addition, the Company continues to consider the purchase, lease and development
of vineyards and may incur additional expenditures for vineyards if
opportunities become available. See “Business - Sources and Availability of Raw
Materials” under Item 1 of this Annual Report on Form 10-K. Management reviews
the capital expenditure program periodically and modifies it as required to
meet
current business needs.
Effects
of Inflation and Changing Prices
The
Company’s results of operations and financial condition have not been
significantly affected by inflation and changing prices. The Company has been
able, subject to normal competitive conditions, to pass along rising costs
through increased selling prices and identifying on-going cost savings
initiatives. There can be no assurances, however, that the Company will continue
to be able to pass along rising costs through increased selling
prices.
Critical
Accounting Policies
The
Company’s significant accounting policies are more fully described in Note 1 to
the Company’s consolidated financial statements located in Item 8 of this Annual
Report on Form 10-K. However, certain of the Company’s accounting policies are
particularly important to the portrayal of the Company’s financial position and
results of operations and require the application of significant judgment by
the
Company’s management; as a result they are subject to an inherent degree of
uncertainty. In applying those policies, the Company’s management uses its
judgment to determine the appropriate assumptions to be used in the
determination of certain estimates. Those estimates are based on the Company’s
historical experience, the Company’s observance of trends in the industry,
information provided by the Company’s customers and information available from
other outside sources, as appropriate. On an ongoing basis, the Company reviews
its estimates to ensure that they appropriately reflect changes in the Company’s
business. The Company’s critical accounting policies include:
| · |
Accounting
for promotional activities. Sales
reflect reductions attributable to consideration given to customers
in
various customer incentive programs, including pricing discounts
on single
transactions, volume discounts, promotional and advertising allowances,
coupons, and rebates. Certain customer incentive programs require
management to estimate the cost of those programs. The accrued liability
for these programs is determined through analysis of programs offered,
historical trends, expectations regarding customer and consumer
participation, sales and payment trends, and experience with payment
patterns associated with similar programs that had been previously
offered. If assumptions included in the Company’s estimates were to change
or market conditions were to change, then material incremental reductions
to revenue could be required, which would have a material adverse
impact
on the Company’s financial statements. Promotional costs were $635.6
million, $501.9 million and $390.9 million for Fiscal 2007, Fiscal
2006
and Fiscal 2005, respectively. Accrued promotion costs were $150.3
million
and $135.4 million as of February 28, 2007, and February 28, 2006,
respectively.
|
| · |
Inventory
valuation.
Inventories are stated at the lower of cost or market, cost being
determined on the first-in, first-out method. The Company assesses
the
valuation of its inventories and reduces the carrying value of those
inventories that are obsolete or in excess of the Company’s forecasted
usage to their estimated net realizable value. The Company estimates
the
net realizable value of such inventories based on analyses and assumptions
including, but not limited to, historical usage, future demand and
market
requirements. Reductions to the carrying value of inventories are
recorded
in cost of product sold. If the future demand for the Company’s products
is less favorable than the Company’s forecasts, then the value of the
inventories may be required to be reduced, which could result in
material
additional expense to the Company and have a material adverse impact
on
the Company’s financial statements. Inventories were $1,948.1 million and
$1,704.4 million as of February 28, 2007, and February 28, 2006,
respectively.
|
| · |
Accounting
for business combinations.
The acquisition of businesses is an important element of the Company’s
strategy. Under the purchase method, the Company is required to record
the
net assets acquired at the estimated fair value at the date of
acquisition. The determination of the fair value of the assets acquired
and liabilities assumed requires the Company to make estimates and
assumptions that affect the Company’s financial statements. For example,
the Company’s acquisitions typically result in goodwill and other
intangible assets; the value and estimated life of those assets may
affect
the amount of future period amortization expense for intangible assets
with finite lives as well as possible impairment charges that may
be
incurred. Amortization expense for amortizable intangible assets
was $2.8
million, $1.9 million and $2.8 million for Fiscal 2007, Fiscal 2006
and
Fiscal 2005, respectively. Amortizable intangible assets were $39.3
million and $11.9 million as of February 28, 2007, and February 28,
2006,
respectively.
|
| · |
Impairment
of goodwill and intangible assets with indefinite lives.
Intangible assets with indefinite lives consist primarily of trademarks
as
well as agency relationships. The Company is required to analyze
its
goodwill and other intangible assets with indefinite lives for impairment
on an annual basis as well as when events and circumstances indicate
that
an impairment may have occurred. Certain factors that may occur and
indicate that an impairment exists include, but are not limited to,
operating results that are lower than expected and adverse industry
or
market economic trends. The impairment testing requires management
to
estimate the fair value of the assets or reporting unit and record
an
impairment loss for the excess of the carrying value over the fair
value.
The estimate of fair value of the assets is generally determined
on the
basis of discounted future cash flows. The estimate of fair value
of the
reporting unit is generally determined on the basis of discounted
future
cash flows supplemented by the market approach. In estimating the
fair
value, management must make assumptions and projections regarding
such
items as future cash flows, future revenues, future earnings and
other
factors. The assumptions used in the estimate of fair value are generally
consistent with the past performance of each reporting unit and other
intangible assets and are also consistent with the projections and
assumptions that are used in current operating plans. Such assumptions
are
subject to change as a result of changing economic and competitive
conditions. If these estimates or their related assumptions change
in the
future, the Company may be required to record an impairment loss
for these
assets. The recording of any resulting impairment loss could have
a
material adverse impact on the Company’s financial statements. The most
significant assumptions used in the discounted future cash flows
calculation to determine the fair value of the Company’s reporting units
and the fair value of intangible assets with indefinite lives in
connection with impairment testing are: (i) the discount rate, (ii)
the
expected long-term growth rate and (iii) the annual cash flow projections.
If the Company used a discount rate that was 50 basis points higher
or
used an expected long-term growth rate that was 50 basis points lower
or
used annual cash flow projections that were 100 basis points lower
in its
impairment testing of goodwill, then each change individually would
not
have resulted in the carrying value of the net assets of the reporting
unit, including its goodwill, exceeding the fair value. If the Company
used a discount rate that was 50 basis points higher or used an expected
long-term growth rate that was 50 basis points lower or used annual
cash
flow projections that were 100 basis points lower in its impairment
testing of intangible assets with indefinite lives, then the changes
individually, for only the discount rate and the expected long-term
growth
rate, would have resulted in only one unit of accounting’s carrying value
exceeding the fair value by an immaterial amount. For this sensitivity
analysis, the Company excluded reporting units and units of accounting
acquired during Fiscal 2007 and reporting units disposed of after
the
annual testing date.
|
The
Company recorded an immaterial impairment loss for Fiscal 2007 for intangible
assets with indefinite lives associated with assets held-for-sale. No impairment
loss was recorded in Fiscal 2006 and Fiscal 2005. With regard to goodwill,
no
impairment loss was recorded in Fiscal 2007, Fiscal 2006 and Fiscal 2005.
Intangible assets with indefinite lives were $1,096.1 million and $872.0 million
as of February 28, 2007, and February 28, 2006, respectively. Goodwill was
$3,083.9 million and $2,193.6 million as of February 28, 2007, and February
28,
2006, respectively.
| · |
Accounting
for Stock-Based Compensation. The
Company adopted the fair value recognition provisions of SFAS No.
123(R)
using the modified prospective transition method on March 1, 2006.
Under
the fair value recognition provisions of SFAS No. 123(R), stock-based
compensation cost is calculated at the grant date based on the fair
value
of the award and is recognized as expense, net of estimated pre-vesting
forfeitures, ratably over the vesting period of the award. In addition,
SFAS No. 123(R) requires additional accounting related to the income
tax
effects and disclosure regarding the cash flow effects resulting
from
stock-based payment arrangements. In March 2005, the Securities and
Exchange Commission issued Staff Accounting Bulletin No. 107, which
provided supplemental implementation guidance for SFAS No. 123(R).
The
Company selected the Black-Scholes option-pricing model as the most
appropriate fair value method for its awards granted after March
1, 2006.
The calculation of fair value of stock-based awards requires the
input of
assumptions, including the expected term of the stock-based awards
and the
associated stock price volatility. The assumptions used in calculating
the
fair value of stock-based awards represent the Company’s best estimates,
but these estimates involve inherent uncertainties and the application
of
management judgment. As a result, if factors change and the Company
uses
different assumptions, then stock-based compensation expense could
be
materially different in the future. If the Company used an expected
term
of the stock-based awards that was one year longer, the fair value
of the
stock-based awards would have increased by $5.9 million, resulting
in an
increase of $1.2 million of stock-based compensation expense for
Fiscal
2007. If the Company used an expected term of the stock-based awards
that
was one year shorter, the fair value of the stock-based awards would
have
decreased by $6.3 million, resulting in a decrease of $1.3 million
of
stock-based compensation expense for Fiscal 2007. The total amount
of
stock-based compensation recognized under SFAS 123(R) was $18.1 million
for Fiscal 2007, of which $16.5 million was expensed for Fiscal 2007
and
$1.6 million was capitalized in inventory as of February 28,
2007.
|
Accounting
Pronouncements Not Yet Adopted
In
July
2006, the Financial Accounting Standards Board (“FASB”) issued FASB
Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109. FIN No. 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. Additionally, FIN No. 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The Company is required to adopt FIN No.
48
for fiscal years beginning March 1, 2007, with the cumulative effect of applying
the provisions of FIN No. 48 reported as an adjustment to opening retained
earnings. The
Company is continuing to evaluate the financial impact of adopting FIN No.
48 on
its consolidated financial statements. However, the Company does not expect
the
adoption of FIN No. 48 to have a material impact on its consolidated financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 defines fair
value, establishes a framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 emphasizes that fair value is a market-based measurement, not
an
entity-specific measurement, and states that a fair value measurement should
be
determined based on assumptions that market participants would use in pricing
the asset or liability. The Company is required to adopt SFAS No. 157 for fiscal
years and interim periods beginning March 1, 2008. The Company is currently
assessing the financial impact of SFAS No. 157 on its consolidated financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132(R).” SFAS No. 158 requires companies to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. The Company has adopted this provision of SFAS
No.
158 and has provided the required disclosures as of February 28, 2007. SFAS
No.
158 also requires companies to measure the funded status of a plan as of the
date of the company’s fiscal year-end (with limited exceptions), which provision
the Company is required to adopt as of February 28, 2009. The Company does
not
expect the adoption of the remaining provision of SFAS No. 158 to have a
material impact on its consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159
permits companies to choose to measure many financial instruments and certain
other items at fair value. Most of the provisions in SFAS No. 159 are elective;
however, the amendment to Statement of Financial Accounting Standards No.
115,
“Accounting for Certain Investments in Debt and Equity Securities”,
applies
to all entities with available-for-sale and trading securities. The fair
value
option established by SFAS No. 159 allows companies to choose to measure
eligible items at fair value at specified election dates. The Company will
report unrealized gains and losses on items for which the fair value option
has
been elected in earnings at each subsequent reporting date. The fair value
option: (i) may be applied instrument by instrument, with a few exceptions,
such
as investments otherwise accounted for by the equity method; (ii) is irrevocable
(unless a new election date occurs); and (iii) is applied only to entire
instruments and not to portions of instruments. The Company is required to
adopt
SFAS No. 159 for fiscal years beginning after February 28, 2009. The Company
does not expect the adoption of SFAS No. 159 to have a material impact on
its
consolidated financial statements.
Item
7A. Quantitative
and Qualitative Disclosures About Market Risk
The
Company, as a result of its global operating, acquisition and financing
activities, is exposed to market risk associated with changes in foreign
currency exchange rates and interest rates. To manage the volatility relating
to
these risks, the Company periodically purchases and/or sells derivative
instruments including foreign currency exchange contracts and interest rate
swap
agreements. The Company uses derivative instruments solely to reduce the
financial impact of these risks and does not use derivative instruments for
trading purposes.
Foreign
currency forward contracts are or may be used to hedge existing foreign currency
denominated assets and liabilities, forecasted foreign currency denominated
sales both to third parties as well as intercompany sales, intercompany
principal and interest payments, and in connection with acquisitions or joint
venture investments outside the U.S. As of February 28, 2007, the Company had
exposures to foreign currency risk primarily related to the Australian dollar,
euro, New Zealand dollar, British pound sterling, Canadian dollar and Mexican
peso.
As
of
February 28, 2007, and February 28, 2006, the Company had outstanding foreign
exchange derivative instruments with a notional value of $2,383.3 million and
$1,254.7 million,
respectively. Approximately 69% of the Company’s total exposures were hedged as
of February 28, 2007. Using a sensitivity analysis based on estimated fair
value
of open contracts using forward rates, if the contract base currency had been
10% weaker as of February 28, 2007, and February 28, 2006, the fair value of
open foreign exchange contracts would have been decreased by $161.8 million
and
$77.5 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 $1,589.3 million and $1,010.5
million as of February 28, 2007,
and
February 28, 2006, respectively. A hypothetical 1% increase from prevailing
interest rates as of February 28, 2007, and
February 28, 2006, would have resulted in a decrease in fair value of fixed
interest rate long-term debt by $69.6 million
and
$26.9
million,
respectively.
As
of
February 28, 2007, and February 28, 2006, the Company had outstanding interest
rate swap agreements to minimize interest rate volatility. The swap agreements
fix LIBOR interest rates on $1,200.0 million of the Company’s floating LIBOR
rate debt at an average rate of 4.1% over the five year term. A hypothetical
1%
increase from prevailing interest rates as of February
28, 2007, and February 28, 2006, would have increased the fair value of the
interest rate swaps by $36.7 million and $43.8 million,
respectively.
In
addition to
the
$1,589.3 million and $1,010.5 million estimated fair value of fixed
rate
debt outstanding as of February 28, 2007, and February 28, 2006, respectively,
the Company also had variable rate debt outstanding
(primarily LIBOR based) as of February 28, 2007, and February 28, 2006, of
$2,688.7 million and $1,856.1 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 February 28, 2007,
and February 28, 2006, is $26.9 million and $18.6 million,
respectively.
Item
8. Financial
Statements and Supplementary Data
CONSTELLATION
BRANDS, INC. AND SUBSIDIARIES
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY
28, 2007
The
following information is presented in this Annual Report on Form
10-K:
| |
Page |
| Report
of Independent Registered Public Accounting Firm - KPMG
LLP................................. |
55
|
| Report
of Independent Registered Public Accounting Firm - KPMG
LLP................................. |
56
|
| Management’s
Annual Report on Internal Control Over Financial
Reporting ............................ |
58
|
| Consolidated
Balance Sheets - February 28, 2007, and February 28,
2006................................ |
59
|
|
Consolidated
Statements of Income for the years ended February 28, 2007,
February
28, 2006, and February 28,
2005......................................................................
|
|
|
Consolidated
Statements of Changes in Stockholders’ Equity for the years
ended
February 28, 2007, February 28, 2006, and February 28,
2005.........................
|
61
|
|
Consolidated
Statements of Cash Flows for the years ended February 28, 2007,
February
28, 2006, and February 28,
2005......................................................................
|
63
|
| Notes
to Consolidated Financial
Statements.................................................................................. |
64
|
| Selected
Quarterly Financial Information
(unaudited).................................................................. |
122 |
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Constellation
Brands, Inc.:
We
have
audited the accompanying consolidated balance sheets of Constellation Brands,
Inc. and subsidiaries as of February 28, 2007 and 2006, and the related
consolidated statements of income, changes in stockholders’ equity, and cash
flows for each of the years in the three-year period ended February 28, 2007.
These consolidated financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Constellation Brands, Inc.
and subsidiaries as of February 28, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended February 28, 2007, in conformity with U.S. generally accepted accounting
principles.
As
discussed in Note 1, effective March 1, 2006, the Company adopted Statement
of
Financial Accounting Standards No. 123(R), Share-Based
Payment.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the effectiveness of Constellation Brands,
Inc.’s internal control over financial reporting as of February 28, 2007, based
on criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and
our
report dated April 30, 2007 expressed an unqualified opinion on management’s
assessment of, and the effective operation of, internal control over financial
reporting.
/s/
KPMG
LLP
Rochester,
New York
April
30,
2007
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Stockholders
Constellation
Brands, Inc.:
We
have
audited management’s assessment, included in the accompanying Management’s
Annual Report on Internal Control Over Financial Reporting, that Constellation
Brands, Inc. maintained effective internal control over financial reporting
as
of February 28, 2007, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Constellation Brands, Inc.’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management’s
assessment and an opinion on the effectiveness of the Company’s internal control
over financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control
over
financial reporting, evaluating management’s assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing
such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain
to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors
of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may
not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In
our
opinion, management’s assessment that Constellation Brands, Inc. maintained
effective internal control over financial reporting as of February 28, 2007,
is
fairly stated, in all material respects, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion,
Constellation Brands, Inc. maintained, in all material respects, effective
internal control over financial reporting as of February 28, 2007, based on
criteria
established in Internal Control—Integrated Framework issued by the Committee
of
Sponsoring Organizations of the Treadway Commission (COSO).
As
described in Management’s Annual Report on Internal Control Over Financial
Reporting, management conducted an evaluation of the effectiveness of the system
of internal control over financial reporting based on the framework in
Internal
Control - Integrated Framework
issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this evaluation, management concluded that the Company’s system of
internal control over financial reporting was effective as of February 28,
2007.
This evaluation excluded the internal control over financial reporting of the
Canadian operations of Vincor International Inc., which the Company acquired
on
June 5, 2006. As of February 28, 2007, total assets, net sales and income
before income taxes of the Canadian operations of Vincor International Inc.
not
evaluated with respect to the effectiveness of internal control over financial
reporting comprised 9.4%, 4.7%, and 3.1% of the consolidated total assets,
net
sales, and income before income taxes of the Company. Our audit of internal
control over financial reporting of Constellation Brands, Inc. also excluded
an
evaluation of the internal control over financial reporting of the Canadian
operations of Vincor International Inc.
We
also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of
Constellation Brands, Inc. and subsidiaries as of February 28, 2007 and 2006,
and the related consolidated statements of income, changes in stockholders’
equity, and cash flows for each of the years in the three-year period ended
February 28, 2007, and our report dated April 30, 2007 expressed an unqualified
opinion on those consolidated financial statements.
/s/
KPMG
LLP
Rochester,
New York
April
30,
2007
Management’s
Annual Report on Internal Control Over Financial Reporting
Management
of Constellation Brands, Inc. (together with its subsidiaries, the “Company”) is
responsible for establishing and maintaining an adequate system of internal
control over financial reporting. This system is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America.
The
Company’s internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the Company; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation
of
financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made
only in accordance with authorizations of management and directors of the
Company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
Company’s assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, a system of internal control over financial
reporting can provide only reasonable assurance and may not prevent or detect
misstatements. Further, because of changes in conditions, effectiveness of
internal controls over financial reporting may vary over time. Our system
contains self-monitoring mechanisms, and actions are taken to correct
deficiencies as they are identified.
Management
conducted an evaluation of the effectiveness of the system of internal control
over financial reporting based on the framework in Internal
Control - Integrated Framework issued
by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on this evaluation, management concluded that the Company’s system of
internal control over financial reporting was effective as of February 28,
2007.
This evaluation excluded the internal control over financial reporting of the
Canadian operations of Vincor International Inc., which the Company acquired
on
June 5, 2006. As
of
February 28, 2007, total assets, net sales and income before income taxes of
the
Canadian operations of Vincor International Inc. not evaluated with respect
to
the effectiveness of internal control over financial reporting comprised 9.4%,
4.7%, and 3.1% of the consolidated total assets, net sales, and income before
income taxes of the Company.
Management’s
assessment of the effectiveness of the Company’s internal control over financial
reporting has been audited by KPMG LLP, an independent registered public
accounting firm, as stated in their report which is included
herein.
|
CONSTELLATION
BRANDS, INC. AND SUBSIDIARIES
|
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
(in
millions, except share and per share data)
|
|
| |
|
|
|
|
|
| |
|
February
28,
|
|
February
28,
|
|
| |
|
2007
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
Cash
and cash investments
|
|
$
|
33.5
|
|
$
|
10.9
|
|
|
Accounts
receivable, net
|
|
|
881.0
|
|
|
771.9
|
|
|
Inventories
|
|
|
1,948.1
|
|
|
1,704.4
|
|
|
Prepaid
expenses and other
|
|
|
160.7
|
|
|
213.7
|
|
|
Total
current assets
|
|
|
3,023.3
|
|
|
2,700.9
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
1,750.2
|
|
|
1,425.3
|
|
|
GOODWILL
|
|
|
3,083.9
|
|
|
2,193.6
|
|
|
INTANGIBLE
ASSETS, net
|
|
|
1,135.4
|
|
|
883.9
|
|
|
OTHER
ASSETS, net
|
|
|
445.4
|
|
|
196.9
|
|
|
Total
assets
|
|
$
|
9,438.2
|
|
$
|
7,400.6
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
$
|
153.3
|
|
$
|
79.9
|
|
|
Current
maturities of long-term debt
|
|
|
317.3
|
|
|
214.1
|
|
|
Accounts
payable
|
|
|
376.1
|
|
|
312.8
|
|
|
Accrued
excise taxes
|
|
|
73.7
|
|
|
76.7
|
|
|
Other
accrued expenses and liabilities
|
|
|
670.7
|
|
|
614.6
|
|
|
Total
current liabilities
|
|
|
1,591.1
|
|
|
1,298.1
|
|
|
LONG-TERM
DEBT, less current maturities
|
|
|
3,714.9
|
|
|
2,515.8
|
|
|
DEFERRED
INCOME TAXES
|
|
|
474.1
|
|
|
371.2
|
|
|
OTHER
LIABILITIES
|
|
|
240.6
|
|
|
240.3
|
|
|
COMMITMENTS
AND CONTINGENCIES (NOTE 14)
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred
Stock, $.01 par value-
Authorized,
1,000,000 shares; Issued, none
at
February 28, 2007, and 170,500 shares at
February
28, 2006
|
|
|
-
|
|
|
-
|
|
|
Class
A Common Stock, $.01 par value-
Authorized,
300,000,000 shares;
Issued,
219,090,309 shares at February 28, 2007,
and
203,651,535 shares at February 28, 2006
|
|
|
2.2
|
|
|
2.0
|
|
|
Class
B Convertible Common Stock, $.01 par value-
Authorized,
30,000,000 shares;
Issued,
28,831,138 shares at February 28, 2007,
and
28,863,138 shares at February 28, 2006
|
|
|
0.3
|
|
|
0.3
|
|
|
Additional
paid-in capital
|
|
|
1,271.1
|
|
|
1,159.4
|
|
|
Retained
earnings
|
|
|
1,919.3
|
|
|
1,592.3
|
|
|
Accumulated
other comprehensive income
|
|
|
349.1
|
|
|
247.4
|
|
| |
|
|
3,542.0
|
|
|
3,001.4
|
|
|
Less-Treasury
stock-
|
|
|
|
|
|
|
|
|
Class
A Common Stock, 8,046,370 shares at
February
28, 2007, and 4,474,371 shares at
February
28, 2006, at cost
|
|
|
(122.3
|
)
|
|
(24.0
|
)
|
|
Class
B Convertible Common Stock, 5,005,800 shares
at
February 28, 2007, and February 28, 2006, at cost
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
| |
|
|
(124.5
|
)
|
|
(26.2
|
)
|
|
Total
stockholders' equity
|
|
|
3,417.5
|
|
|
2,975.2
|
|
|
Total
liabilities and stockholders' equity
|
|
$
|
9,438.2
|
|
$
|
7,400.6
|
|
| |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
|
|
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
(in
millions, except per share data)
|
|
| |
|
|
|
|
|
|
|
| |
|
For
the Years Ended
|
|
| |
|
February
28,
|
|
February
28,
|
|
February
28,
|
|
| |
|
2007
|
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
|
|
SALES
|
|
$
|
6,401.8
|
|
$
|
5,707.0
|
|
$
|
5,139.8
|
|
|
Less
- Excise taxes
|
|
|
(1,185.4
|
)
|
|
(1,103.5
|
)
|
|
(1,052.2
|
)
|
|
Net
sales
|
|
|
5,216.4
|
|
|
4,603.5
|
|
|
4,087.6
|
|
|
COST
OF PRODUCT SOLD
|
|
|
(3,692.5
|
)
|
|
(3,278.9
|
)
|
|
(2,947.0
|
)
|
|
Gross
profit
|
|
|
1,523.9
|
|
|
1,324.6
|
|
|
1,140.6
|
|
|
SELLING,
GENERAL AND ADMINISTRATIVE
EXPENSES
|
|
|
(768.8
|
)
|
|
(612.4
|
)
|
|
(555.7
|
)
|
|
RESTRUCTURING
AND RELATED CHARGES
|
|
|
(32.5
|
)
|
|
(29.3
|
)
|
|
(7.6
|
)
|
|
ACQUISITION-RELATED
INTEGRATION COSTS
|
|
|
(23.6
|
)
|
|
(16.8
|
)
|
|
(9.4
|
)
|
|
Operating
income
|
|
|
699.0
|
|
|
666.1
|
|
|
567.9
|
|
|
EQUITY
IN EARNINGS OF EQUITY
METHOD
INVESTEES
|
|
|
49.9
|
|
|
0.8
|
|
|
1.8
|
|
|
GAIN
ON CHANGE IN FAIR VALUE OF
DERIVATIVE
INSTRUMENTS
|
|
|
55.1
|
|
|
-
|
|
|
-
|
|
|
INTEREST
EXPENSE, net
|
|
|
(268.7
|
)
|
|
(189.6
|
)
|
|
(137.7
|
)
|
|
Income
before income taxes
|
|
|
535.3
|
|
|
477.3
|
|
|
432.0
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
(203.4
|
)
|
|
(152.0
|
)
|
|
(155.5
|
)
|
|
NET
INCOME
|
|
|
331.9
|
|
|
325.3
|
|
|
276.5
|
|
|
Dividends
on preferred stock
|
|
|
(4.9
|
)
|
|
(9.8
|
)
|
|
(9.8
|
)
|
|
INCOME
AVAILABLE TO COMMON
STOCKHOLDERS
|
|
$
|
327.0
|
|
$
|
315.5
|
|
$
|
266.7
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
SHARE
DATA:
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- Class A Common Stock
|
|
$
|
1.44
|
|
$
|
1.44
|
|
$
|
1.25
|
|
|
Basic
- Class B Common Stock
|
|
$
|
1.31
|
|
$
|
1.31
|
|
$
|
1.14
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
Diluted
- Class A Common Stock
|
|
$
|
1.38
|
|
$
|
1.36
|
|
$
|
1.19
|
|
|
Diluted
- Class B Common Stock
|
|
$
|
1.27
|
|
$
|
1.25
|
|
$
|
1.09
|
|
| |
|
|
|
|