CONSTELLATION BRANDS, INC. 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended February 29, 2008
OR
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from
to
Commission File Number 001-08495
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
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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
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14450 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (585) 218-3600
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 |
Class A Common Stock (par value $.01 per share)
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New York Stock Exchange |
Class B Common Stock (par value $.01 per share)
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New York Stock Exchange |
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 þ No o
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 o No þ
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 þ No o
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 registrants 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. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer,
a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in
Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
The aggregate market value of the voting common equity held by non-affiliates of the registrant,
based upon the closing sales prices of the registrants Class A and Class B Common Stock as
reported on the New York Stock Exchange as of the last business day of the registrants most
recently completed second fiscal quarter was $4,594,746,812. On that date the registrant had 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 17, 2008, is set forth below:
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Class |
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Number of Shares Outstanding |
Class A Common Stock, par value $.01 per share |
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193,328,783 |
Class B Common Stock, par value $.01 per share |
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23,771,154 |
Class 1 Common Stock, par value $.01 per share |
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None |
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 17, 2008 is incorporated by reference in Part III to
the extent described therein.
TABLE OF CONTENTS
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 Companys 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 Managements Discussion and Analysis of Financial
Condition and Results of Operation regarding (i) the Companys business strategy, future
financial position, prospects, plans and objectives of management, (ii) the Companys expected
purchase price allocations, restructuring charges, accelerated depreciation, acquisition-related
integration costs, and other costs, and (iii) 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 the Companys purchase
price allocations, restructuring charges, accelerated depreciation, acquisition-related integration
costs, and other costs may vary materially from current expectations due to, among other reasons,
variations in anticipated headcount reductions, contract terminations, equipment relocation or
costs of implementation. Additional important factors that could cause actual results to differ
materially from those set forth in, or implied, by the Companys 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 Companys
method of classification. All references to Fiscal 2008, Fiscal 2007, and Fiscal 2006 shall
refer to the Companys fiscal year ended the last day of February of the indicated year. All
references to Fiscal 2009 shall refer to the Companys fiscal year ending February 28, 2009.
Market positions and industry data discussed in this Annual Report on Form 10-K are as of
calendar 2007 and have been obtained or derived from industry and government publications and
Company estimates and include brands acquired in connection with the December 2007 acquisition of
the Fortune Brands U.S. wine business and excludes the Almaden and Inglenook brands which were sold
in February 2008. 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 8,200 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.B. de C.V. (Modelo) pursuant to which Modelos 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 Companys wholesale
business in the U.K. This U.K. wholesale joint venture is referred to hereinafter as Matthew
Clark.
1
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, Equity Method Investments and Divestiture below and Investment in Crown
Imports under Managements Discussion and Analysis of Financial Condition and Results of
Operation 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 Companys products are recognized leaders in their respective categories and geographic
markets. The Companys 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, Equity Method Investments and Divestiture below and Investment in Matthew
Clark under Managements Discussion and Analysis of Financial Condition and Results of Operation
in Item 7 of this Annual Report on Form 10-K). The Company continues to leverage Matthew Clark as
a strategic route-to-market for its branded product portfolio.
The Companys net sales by product category are summarized as follows:
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For the Year |
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For the Year |
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Ended |
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Ended |
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February 29, |
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% of |
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February 28, |
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% of |
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2008 |
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Total |
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2007 |
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Total |
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(in millions) |
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Branded wine |
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$ |
3,016.9 |
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80 |
% |
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$ |
2,755.7 |
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53 |
% |
Wholesale and other |
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341.9 |
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9 |
% |
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1,087.7 |
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21 |
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Spirits |
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414.2 |
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11 |
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329.4 |
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6 |
% |
Imported beers |
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1,043.6 |
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20 |
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Consolidated Net Sales |
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3,773.0 |
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5,216.4 |
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The Companys 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
Companys wholesale and other category net sales are primarily related to the Companys 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:
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For the Year |
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For the Year |
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Ended |
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Ended |
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February 29, |
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% of |
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February 28, |
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% of |
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2008 |
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Total |
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2007 |
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Total |
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(in millions) |
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North America |
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$ |
2,005.6 |
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67 |
% |
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$ |
1,933.2 |
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70 |
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Europe |
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637.9 |
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21 |
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495.7 |
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18 |
% |
Australia/New Zealand |
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373.4 |
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12 |
% |
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326.8 |
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12 |
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Consolidated Net Sales |
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$ |
3,016.9 |
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$ |
2,755.7 |
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% |
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2
There are certain key trends within the beverage alcohol industry, which include:
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Consolidation of suppliers, wholesalers and retailers; |
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An increase in global wine consumption; and |
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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 Companys strategy include:
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Leveraging the Companys existing portfolio of leading brands; |
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Developing new products, new packaging and line extensions; |
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Diversifying the Companys product portfolio with an emphasis on premium spirits and
premium, super-premium and fine wines; |
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Strengthening its relationships with wholesalers and retailers; |
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Expanding its distribution and enhancing its production capabilities; |
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Realizing operating synergies; and |
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Acquiring additional management, operational, marketing, and product development
expertise. |
Recent Acquisitions, Equity Method Investments and Divestiture
In February 2008, as part of ongoing efforts to increase focus on premium wine offerings in
the U.S., the Company sold its lower margin popular-priced wine brands, Almaden and Inglenook, and certain other assets for
cash proceeds of $133.7 million.
In December 2007, the Company acquired the Fortune Brands U.S. wine business, which includes
wineries and vineyards in California and produces, markets and sells super-premium and fine wines
including Clos du Bois, Geyser Peak and Wild Horse. The transaction expands the Companys
portfolio of super-premium plus wine brands and strengthens its position as the largest premium
wine company in the U.S.
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 is now the fourth largest imported vodka and fastest growing major
imported premium vodka in the U.S. This acquisition increases the Companys mix of premium spirits
and provides a foundation from which the Company looks to leverage its premium spirits portfolio
for growth.
3
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 Modelos
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), Canadas premier wine
company. Vincor is Canadas largest producer and marketer of wines. At the time of the
acquisition, Vincor was the worlds 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.
For more information about these transactions, see Managements Discussion and Analysis of
Financial Condition and Results of Operation in Item 7 of this Annual Report on Form 10-K.
Business Segments
As a result of the Companys 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 the joint venture, the
Companys internal management financial reporting included the Constellation Beers business
division. Consequently, the Company reports its operating results in five segments: Constellation
Wines (branded wine, and wholesale and other), Constellation Spirits (distilled spirits),
Constellation Beers (imported beer), 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. The business
segments, described more fully below, reflect how the Companys 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 Companys
business segments and information regarding geographic areas is set forth in Note 21 to the
Companys consolidated financial statements located in Item 8 of this Annual Report on Form 10-K.
4
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. and Canada.
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 21 of the top-selling 100 table brands and has the
largest portfolio of premium, super-premium and fine wines. In Canada, it has wine across all
price points, and has four of the top-selling 25 table wine brands and the leading Icewine brand
with Inniskillin. It has five of the top-selling 25 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 six of the
top-selling 25 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, Wild Horse, Kim Crawford, Estancia, Toasted Head, Clos du Bois,
Ravenswood, Jackson-Triggs, Blackstone, Robert Mondavi Private Selection, Ruffino, Nobilo, Rex
Goliath, Hogue, Woodbridge by Robert Mondavi, Alice White, Hardys, Kumala, Black Box, Banrock
Station, Vendange, Arbor Mist 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. 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. Matthew Clark has
approximately 20,000 on-premise accounts and 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.
Constellation Wines is also the second largest producer and marketer of cider in the U.K.,
with leading cider brands Blackthorn and Gaymers 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 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 segments distilled spirits unit volume consists of products marketed in the
value and mid-premium price category, including Black Velvet,
Chi-Chis prepared cocktails, Barton, Sköl, Fleischmanns, Canadian LTD, Montezuma, Ten High, Mr.
Boston and Inver House.
5
The segment is continuing efforts to increase its premium spirits mix. These efforts include
the Svedka acquisition and increased focus on premium brands such as Black Velvet Reserve, the 99
Schnapps family, Effen Vodka, Ridgemont Reserve 1792 Bourbon, Meukow Cognac, Monte Alban Mezcal,
the di Amore cordial family, Caravella, and Old Pulteney and Speyburn single-malt scotches.
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. In the
U.S., Crown Imports has six of the top-selling 25 imported beer brands. Corona Extra is the
best-selling imported beer and the sixth best-selling beer overall and Corona Light is the leading
imported light beer.
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 Companys 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 segments.
In North America, the Companys 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
Companys products in that agencys state or province. State and provincial governments can affect
prices paid by consumers of the Companys 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
Companys products through an alcohol beverage control agency, by directly setting retail prices
for the Companys products.
6
In the U.K., the Companys products are distributed either directly to retailers or through
wholesalers and importers. Matthew Clark sells and distributes the Companys 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 Companys 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 Companys 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, Lauders and Imperial Spirits brands, and a long-term license
agreement with Chi-Chis, Inc., which expires in 2117, for the production, marketing and sale of
beverage products, alcoholic and non-alcoholic, utilizing the Chi-Chis brand name. The Company
also holds an import and license agreement for the Caravella brands with Sperone SPA, which expires
in 2057, under which it owns the Caravella trademarks in the U.S. during the term; a distribution
and license agreement with Inver House Distillers Limited, which expires in 2009, for the Old
Pulteney and Speyburn brands; and a distribution and license agreement with C.D.G., SA that expires
in 2015 for the Meukow brand.
All of the Companys 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 through 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.
7
Competition
The beverage alcohol industry is highly competitive. The Company competes on the basis of
quality, price, brand recognition and distribution strength. The Companys 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,
Fosters Group, WJ Deutsch, Diageo and Kendall-Jackson in the U.S.; Andrew Peller, Fosters Group,
Maison des Futailles and E&J Gallo Winery in Canada; Fosters Group, E&J Gallo Winery, Diageo, and
Pernod Ricard in the U.K.; and Fosters Group and Pernod Ricard in Australia and New Zealand.
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.
Crown Imports principal competitors include: Heineken, Anheuser-Busch, InBev, 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 26 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 11 wineries where wine is produced from many varieties of grapes
grown in most of the major viticultural regions. The Company also operates 10 wineries in Canada,
four wineries in New Zealand and one winery in South Africa. Grapes are crushed at most of the
Companys wineries and stored as wine until packaged for sale under the Companys brand names or
sold in bulk. In the U.S. and Canada, the Companys inventories of wine are usually at their
highest levels in September through November during and after the crush of each years grape
harvest, and are reduced prior to the subsequent years crush. Similarly, in Australia and New
Zealand, the Companys inventories of wine are usually at their highest levels in March through May
during and after the crush of each years grape harvest, and are reduced prior to the subsequent
years crush.
The Company has five 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 Companys primary
distilled spirits bottling facility in the U.S. is in Owensboro, Kentucky. The majority of the
Companys Canadian whisky requirements are produced and aged at its Canadian distilleries in
Lethbridge, Alberta, and Valleyfield, Quebec. The Companys 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
Companys facility at Bristol, England. The Bristol facility also produces fortified British wine
and wine style drinks. All cider production takes place at the Companys facility at Shepton
Mallet, England.
8
Sources and Availability of Production Materials
The principal components in the production of the Companys branded beverage alcohol products
are agricultural products, such as grapes and grain, and packaging materials (primarily glass).
Most of the Companys annual grape requirements are satisfied by purchases from each years
harvest which normally begins in August and runs through October in the U.S. and Canada, and begins
in February and runs through May in Australia and New Zealand. 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 1,175 independent growers in the U.S.,
approximately 1,350 independent growers in Australia, approximately 140 independent growers in New
Zealand and approximately 100 independent growers in Canada. The Company enters into written
purchase agreements with a majority of these growers and pricing generally varies year-to-year and
is generally based on then-current market prices. In Australia, approximately 725 of the 1,350
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 29, 2008, the Company owned or leased approximately 26,000 acres of land and
vineyards, either fully bearing or under development, in California (U.S.), New York (U.S.),
Canada, Australia and New Zealand. This acreage supplies only a small
percentage of the Companys 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 Companys 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 Companys
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 Companys glass container
requirements for its U.S. operations and another producer supplies substantially all of the
Companys glass container requirements for its Australian operations and an affiliate of that
producer supplies a majority of the Companys 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 Companys glass bottle suppliers to satisfy the Companys requirements could adversely affect
the Companys operations.
9
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 Companys 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 Companys fiscal year, which correspond to the Spring and Summer
periods in the U.S.
Employees
As of the end of March 2008, the Company had approximately 8,200 full-time employees
throughout the world. Approximately 3,900 full-time employees were in the U.S. and approximately
4,300 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 Companys internet address is http://www.cbrands.com. The Companys 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 SECs site is http://www.sec.gov. Also, the public may read and copy any materials
that the Company files with the SEC at the SECs 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.
10
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 Companys internet website, together with the Companys Global Code of Responsible
Practices for Beverage Alcohol Advertising and Marketing, its Board of Directors Corporate
Governance Guidelines and the Charters of the Boards Audit Committee, Human Resources Committee
(which serves as the Boards compensation committee) and Corporate Governance Committee (which
serves as the Boards nominating committee). All of these materials are accessible on the
Companys Internet site at
http://www.cbrands.com/CBI/constellationbrands/Investors/CorporateGovernance. Amendments to, and
waivers granted to the Companys directors and executive officers under the Companys codes of
ethics, if any, will be posted in this area of the Companys 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 Companys Investor Center at 1-888-922-2150.
The foregoing information regarding the Companys website and its content is for your
convenience only. The content of the Companys 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:
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Our ability to obtain financing for future working capital needs or acquisitions or
other purposes may be limited; |
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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; |
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Our ability to conduct our business could be limited by restrictive covenants; and |
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Our vulnerability to adverse economic conditions may be greater than less leveraged
competitors and, thus, our ability to withstand competitive pressures may be limited. |
11
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, engage in changes of control and engage in certain other fundamental
changes. Certain of our existing indentures under which debt securities have been issued contain
additional covenants and provisions that affect our ability to incur additional debt, sell assets,
pay dividends, enter into transactions with affiliates, make investments and engage in certain
other additional 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 the Fortune Brands,
Inc. U.S. wine business, our Svedka acquisition and our Vincor acquisition 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 or
realize anticipated operational synergies. Integrating the operations and personnel of acquired
companies into our existing operations may result in difficulties, significant expense and
accounting charges, disrupt our business or divert managements time and attention. In connection
with the integration of acquired operations, we may periodically restructure our businesses and/or
sell assets. We may not achieve expected cost savings from restructuring activities or realize the
expected proceeds from asset sales, and actual charges, costs and adjustments due to restructuring
activities may vary materially from our estimates. Additionally, our final determinations and
appraisals of the fair value of assets acquired and liabilities assumed in our acquisitions may
vary materially from earlier estimates. We cannot assure you that the fair value of acquired
businesses will remain constant.
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.
12
We have entered into joint ventures, including our 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. Our joint venture
arrangements may require us to pay certain costs or to make certain capital investments and we may
have little control over the amount or the timing of these payments and investments. 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
or that forecasts regarding joint venture activities will be accurate. In particular, risks and
uncertainties associated with our joint ventures include, among others, the joint ventures ability
to operate its business successfully, the joint ventures ability to develop appropriate standards,
controls, procedures and policies for the growth and management of the joint venture and the
strength of the joint ventures 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 import and excise duties or other 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 import
and excise duties and other taxes on beverage alcohol products in varying amounts which have been
subject to change. Significant increases in import and excise duties 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.
13
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:
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A general decline in economic or geo-political conditions; |
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Increased concern about the health consequences of consuming beverage alcohol
products and about drinking and driving; |
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A general decline in the consumption of beverage alcohol products in on-premise
establishments, such as may result from smoking bans; |
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A trend toward a healthier diet including lighter, lower calorie beverages such as
diet soft drinks, juices and water products; |
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The increased activity of anti-alcohol groups; |
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Increased federal, state or foreign excise or other taxes on beverage alcohol
products; and |
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Increased regulation placing restrictions on the purchase or consumption of 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.
14
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 producers 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
one of its affiliates 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.
15
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 Bartons 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 and brand equity.
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 or protect 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.
16
An increase in the cost of energy or the cost of environmental regulatory compliance 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. We may
experience significant future increases in the costs associated with environmental regulatory
compliance. 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 or increased costs associated with environmental regulatory compliance 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 or other agricultural raw materials.
Various diseases, pests, fungi, viruses, drought, frosts and certain other weather conditions
could affect the quality and quantity of grapes and other agricultural raw materials available,
decreasing the supply of our products and negatively impacting profitability. We cannot guarantee
that our grape suppliers or suppliers of other agricultural raw materials will succeed in
preventing contamination in existing vineyards or fields 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. Growing agricultural raw materials also requires adequate water
supplies. A substantial reduction in water supplies could result in material losses of grape crops
and vines or other crops, which could lead to a shortage of our product supply.
Item 1B. Unresolved Staff Comments
Not Applicable.
17
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 segments wholesaling business in the U.K. In addition to
the Companys properties described below, certain of the Companys 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 Companys 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, South Africa 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; Healdsburg, 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; 20 wineries in California, located in Acampo, Esparto,
Gonzales, Healdsburg, Kenwood, Napa, Oakville, Soledad, Rutherford, Templeton, Ukiah, two in
Geyserville, two in Lodi, two in Madera and three 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. In California, the Constellation Wines segment also operates a
distribution center and four warehouses.
Through the Constellation Wines segment, as of February 29, 2008, the Company owned or leased
approximately 13,800 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.
18
Australia/New Zealand
Through the Constellation Wines segment, the Company owns and operates 11 Australian wineries,
five of which are in South Australia, three in Western Australia and the other three in New South
Wales, 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 segments 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
6,800 acres of vineyards in South Australia, 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 operates two facilities in
England, located in Bristol and Shepton Mallet. The Bristol facility, which is leased, is
considered a principal facility and produces, bottles and packages wine; and the Shepton Mallet
facility, which is owned, 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 Companys 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 in support of the Companys business of marketing, storing and distributing
alcoholic beverages in the Republic of Ireland.
Canada
Through the Constellation Wines segment, the Company owns and operates 10 Canadian wineries,
four of which are in British Columbia, four 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 segments 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 29, 2008, the Company owned or leased
approximately 1,700 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.
19
South Africa
Through the Constellation Wines segment, the Company operates a leased winery facility in
South Africa.
Constellation Spirits
Through the Constellation Spirits segment, the Company maintains leased division offices in
Chicago, Illinois.
Through this segment, the Company owns and operates three distilling plants, one in the U.S.
and two in Canada. The distilling plant in the U.S. is located in Bardstown, Kentucky. The
Company previously owned and operated a distilling plant in Albany, Georgia, which is in the
process of being sold to a third party in the Companys first
quarter of fiscal 2009. The
Company has moved the operations previously conducted at the Albany, Georgia plant to other Company
facilities. The two distilling plants in Canada are located in Valleyfield, Quebec and Lethbridge,
Alberta. The Company considers this segments 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 two bottling
plants, located in Owensboro, Kentucky and Carson, California. The facility located in Owensboro
(Kentucky) is owned, while the facility in Carson (California) is leased. During the fourth
quarter of fiscal 2008, the Company closed its bottling plant located in Atlanta, Georgia and
moved that plants bottling operations to other Company facilities. The Company considers this
segments bottling plant located in Owensboro to be one of the segments principal facilities. The
Owensboro facility bottles and warehouses distilled spirits products for the segment and is also
utilized for contract bottling.
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.
Corporate Operations and Other
The Companys corporate headquarters are located in leased offices in Fairport, New York.
20
Item 3. Legal Proceedings
In the ordinary course of their business, the Company and its subsidiaries are subject to
lawsuits, arbitrations, claims and other legal proceedings in connection with their business. Some
of the legal actions include claims for substantial or unspecified compensatory and/or punitive
damages. A substantial adverse judgment or other unfavorable resolution of these matters could
have a material adverse effect on the Companys financial condition, results of operations and cash
flows. Management believes that the Company has adequate legal defenses with respect to the legal
proceedings to which it is a defendant or respondent and that the outcome of these pending
proceedings is not likely to have a material adverse effect on the financial condition, results of
operations or cash flows of the Company. However, the Company is unable to predict the outcome of
these matters.
Regulatory Matters The Company and its subsidiaries are in discussions with various
governmental agencies concerning matters raised during regulatory examinations or otherwise subject
to such agencies inquiry. These matters could result in censures, fines or other sanctions.
Management believes the outcome of any pending regulatory matters will not have a material adverse
effect on the Companys financial condition, results of operations or cash flows. However, the
Company is unable to predict the outcome of these matters.
Western Wines Limited (Western Wines), an entity that the Company acquired in June 2006 as
part of its Vincor acquisition, was a party to a proceeding in the Crown Court in the U.K. that was
resolved on January 22, 2008. The proceeding was based on claims made by the Environment Agency in
the U.K. that Western Wines failed to comply with certain U.K. recovery and recycling regulations
in each of the three years 2003, 2004 and 2005 inclusive. The Environment Agency had asserted that
if Western Wines had complied with its obligations it would have paid the Environment Agency
assessments totaling £187,545 with respect to the three year period. Western Wines had not
disputed that the violation occurred or its responsibility for the violation. The matter was heard
by the Crown Court on January 22, 2008, where the Crown Court imposed a fine of £225,000
(representing primarily the £187,545 that Western Wines would have paid had it registered) and
awarded the Environment Agency compensation and costs of approximately £6,000. Western Wines did
not appeal the decision and has paid the amounts ordered by the Crown Court.
21
Item 4. Submission of Matters to a Vote of Security Holders
At a Special Meeting of Stockholders of Constellation Brands, Inc. held on December 6, 2007
(the Special Meeting), the holders of the Companys Class A Common Stock (the Class A Stock)
and the holders of the Companys Class B Common Stock (the Class B Stock), voting together as a
single class with holders of Class A Stock having one (1) vote per share and holders of Class B
Stock having ten (10) votes per share, approved a proposal to approve the amendment and restatement
of the Companys Certificate of Incorporation and also approved a proposal to approve the amendment
and restatement of the Companys Long-Term Stock Incentive Plan.
Set forth below is the number of votes cast for, against or withheld, as well as the number of
abstentions and broker nonvotes, as applicable, as to each of the foregoing matters.
|
I. |
|
The amendment and restatement of the Companys
Certificate of Incorporation was approved with the
following votes: |
|
|
|
|
|
For: |
|
|
373,612,800 |
|
Against: |
|
|
2,472,339 |
|
Abstain: |
|
|
1,775,961 |
|
Broker Nonvotes: |
|
|
0 |
|
|
II. |
|
The amendment and restatement of the Companys Long-Term
Stock Incentive Plan was approved with the following
votes: |
|
|
|
|
|
For: |
|
|
356,547,130 |
|
Against: |
|
|
12,976,003 |
|
Abstain: |
|
|
1,859,439 |
|
Broker Nonvotes: |
|
|
6,478,528 |
|
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 |
|
57 |
|
Chairman of the Board |
Robert Sands |
|
49 |
|
President and Chief Executive Officer |
Alexander L. Berk |
|
58 |
|
Chief Executive Officer, Constellation Beers and Spirits, and President and Chief Executive Officer, Barton Incorporated |
Jose F. Fernandez |
|
52 |
|
Chief Executive Officer, Constellation Wines North America |
F. Paul Hetterich |
|
45 |
|
Executive Vice President, Business Development and Corporate Strategy |
Jon Moramarco |
|
51 |
|
Chief Executive Officer, Constellation International |
Thomas J. Mullin |
|
56 |
|
Executive Vice President and General Counsel |
Robert Ryder |
|
48 |
|
Executive Vice President and Chief Financial Officer |
W. Keith Wilson |
|
57 |
|
Executive Vice President and Chief Administrative Officer |
22
Richard Sands, Ph.D., is the Chairman of the Board of the Company. He has been employed by
the Company in various capacities since 1979. He has served as a director since 1982. In
September 1999, Mr. Sands was elected Chairman of the Board. He served as Chief Executive Officer
from October 1993 to July 2007, 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 Executive Officer of the Company. He was appointed Chief
Executive Officer in July 2007 and appointed as President in December 2002. He has served as a
director since January 1990. Mr. Sands also served as Chief Operating Officer from December 2002
to July 2007, 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.
Jose F. Fernandez is the Chief Executive Officer, Constellation Wines North America and the
President and Chief Executive Officer of Constellation Wines U.S., Inc. Mr. Fernandez has held
various positions with the Company since 2000. He was appointed Chief Executive Officer of
Constellation Wines North America in July 2007 and has served as President and Chief Executive
Officer of Constellation Wines U.S., Inc. since December 2003. Mr. Fernandez also served as
President and Chief Executive Officer of Pacific Wine Partners (a previous joint venture between
the Company and Hardy Wine Company Limited) from August 2001 until November 2003 and as Chief
Executive Officer of BRL Hardy North America (previously an affiliate of Hardy Wine Company
Limited) from October 2000 to August 2001. The Company acquired Hardy Wine Company Limited in
calendar 2003. It is now known as Constellation Australia Limited. Mr. Fernandez has been in the
beverage alcohol industry for most of his career, serving in various positions with other beverage
alcohol companies.
F. Paul Hetterich has been the Companys Executive Vice President, Business Development and
Corporate Strategy since June 2003. From April 2001 to June 2003, Mr. Hetterich served as the
Companys Senior Vice President, Corporate Development. Prior to that, Mr. Hetterich held several
increasingly senior positions in the Companys marketing and business development groups. Mr.
Hetterich has been with the Company since 1986.
Jon Moramarco is the Chief Executive Officer, Constellation International, having served in
that role since March 2007. From February 2006 through February 2007, he was the President and
Chief Executive Officer of Constellation Europe, and from December 2003 through January
2006 he was President and Chief Executive Officer, Icon Estates. He served as President and Chief
Executive Officer, Canandaigua Wine Company, Inc. (now named Constellation Wines U.S., Inc.) from
October 1999 through November 2003. Mr. Moramarco has more than 20 years of diverse experience in
the wine industry.
23
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.
Robert Ryder joined the Company in May 2007 as Executive Vice President and Chief Financial
Officer. Mr. Ryder previously served from 2005 to 2006 as Executive Vice President and Chief
Financial and Administrative Officer of IMG, a sports marketing and media company. From 2002 to
2005, he was Senior Vice President and Chief Financial Officer of American Greetings Corporation, a
publicly traded, multi-national consumer products company. From 1989 to 2002, he held several
management positions of increasing responsibility with PepsiCo, Inc. These included control,
strategic planning, mergers and acquisitions and CFO and Controller positions serving at PepsiCos
corporate headquarters and at its Frito-Lay International and Frito-Lay North America divisions.
Mr. Ryder is a certified public accountant.
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. In July 2007 was appointed Chief Administrative Officer while retaining
the position of 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,
which 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.
24
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
The Companys 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. There is no public trading market for the Companys Class 1 Common Stock. 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.
CLASS A STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
28.02 |
|
|
$ |
27.29 |
|
|
$ |
29.09 |
|
|
$ |
29.17 |
|
Low |
|
$ |
23.32 |
|
|
$ |
24.13 |
|
|
$ |
26.90 |
|
|
$ |
23.01 |
|
Fiscal 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
24.61 |
|
|
$ |
25.79 |
|
|
$ |
26.46 |
|
|
$ |
24.97 |
|
Low |
|
$ |
18.83 |
|
|
$ |
21.23 |
|
|
$ |
22.39 |
|
|
$ |
19.01 |
|
CLASS B STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
27.73 |
|
|
$ |
27.29 |
|
|
$ |
29.00 |
|
|
$ |
29.14 |
|
Low |
|
$ |
24.00 |
|
|
$ |
23.85 |
|
|
$ |
26.85 |
|
|
$ |
23.15 |
|
Fiscal 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
24.42 |
|
|
$ |
25.60 |
|
|
$ |
26.34 |
|
|
$ |
24.91 |
|
Low |
|
$ |
19.00 |
|
|
$ |
21.40 |
|
|
$ |
22.54 |
|
|
$ |
19.20 |
|
At April 17, 2008, the number of holders of record of Class A Stock and Class B Stock of the
Company were 998 and 211, respectively. There were no holders of record of Class 1 Common Stock.
With respect to its common stock, the Companys 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 Companys senior credit facility, the Company is currently constrained from paying
cash dividends on its common stock. Also, certain of the indentures for the Companys 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, the
terms of any preferred stock 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.
25
Item 6. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
February 28, |
|
|
February 29, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
(in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales |
|
$ |
4,885.1 |
|
|
$ |
6,401.8 |
|
|
$ |
5,707.0 |
|
|
$ |
5,139.8 |
|
|
$ |
4,469.3 |
|
Less-excise taxes |
|
|
(1,112.1 |
) |
|
|
(1,185.4 |
) |
|
|
(1,103.5 |
) |
|
|
(1,052.2 |
) |
|
|
(916.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
3,773.0 |
|
|
|
5,216.4 |
|
|
|
4,603.5 |
|
|
|
4,087.6 |
|
|
|
3,552.4 |
|
Cost of product sold |
|
|
(2,491.5 |
) |
|
|
(3,692.5 |
) |
|
|
(3,278.9 |
) |
|
|
(2,947.0 |
) |
|
|
(2,576.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,281.5 |
|
|
|
1,523.9 |
|
|
|
1,324.6 |
|
|
|
1,140.6 |
|
|
|
975.8 |
|
Selling, general and
administrative expenses |
|
|
(807.3 |
) |
|
|
(768.8 |
) |
|
|
(612.4 |
) |
|
|
(555.7 |
) |
|
|
(457.3 |
) |
Impairment of goodwill and
intangible assets(1) |
|
|
(812.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-related integration
costs(2) |
|
|
(11.8 |
) |
|
|
(23.6 |
) |
|
|
(16.8 |
) |
|
|
(9.4 |
) |
|
|
|
|
Restructuring and
related charges(3) |
|
|
(6.9 |
) |
|
|
(32.5 |
) |
|
|
(29.3 |
) |
|
|
(7.6 |
) |
|
|
(31.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(356.7 |
) |
|
|
699.0 |
|
|
|
666.1 |
|
|
|
567.9 |
|
|
|
487.4 |
|
Equity in earnings of equity
method investees |
|
|
257.9 |
|
|
|
49.9 |
|
|
|
0.8 |
|
|
|
1.8 |
|
|
|
0.5 |
|
Interest expense, net |
|
|
(341.8 |
) |
|
|
(268.7 |
) |
|
|
(189.6 |
) |
|
|
(137.7 |
) |
|
|
(144.7 |
) |
Gain on change in fair value of
derivative instruments |
|
|
|
|
|
|
55.1 |
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before
income taxes |
|
|
(440.6 |
) |
|
|
535.3 |
|
|
|
477.3 |
|
|
|
432.0 |
|
|
|
344.4 |
|
Provision for income taxes |
|
|
(172.7 |
) |
|
|
(203.4 |
) |
|
|
(152.0 |
) |
|
|
(155.5 |
) |
|
|
(124.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(613.3 |
) |
|
|
331.9 |
|
|
|
325.3 |
|
|
|
276.5 |
|
|
|
220.4 |
|
Dividends on preferred stock |
|
|
|
|
|
|
(4.9 |
) |
|
|
(9.8 |
) |
|
|
(9.8 |
) |
|
|
(5.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income available to
common stockholders |
|
$ |
(613.3 |
) |
|
$ |
327.0 |
|
|
$ |
315.5 |
|
|
$ |
266.7 |
|
|
$ |
214.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common
share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Class A Common
Stock |
|
$ |
(2.83 |
) |
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
$ |
1.25 |
|
|
$ |
1.08 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Class B Common
Stock |
|
$ |
(2.57 |
) |
|
$ |
1.31 |
|
|
$ |
1.31 |
|
|
$ |
1.14 |
|
|
$ |
0.98 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Class A Common
Stock |
|
$ |
(2.83 |
) |
|
$ |
1.38 |
|
|
$ |
1.36 |
|
|
$ |
1.19 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Class B Common
Stock |
|
$ |
(2.57 |
) |
|
$ |
1.27 |
|
|
$ |
1.25 |
|
|
$ |
1.09 |
|
|
$ |
0.95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
10,052.8 |
|
|
$ |
9,438.2 |
|
|
$ |
7,400.6 |
|
|
$ |
7,804.2 |
|
|
$ |
5,558.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including
current maturities |
|
$ |
4,878.0 |
|
|
$ |
4,032.2 |
|
|
$ |
2,729.9 |
|
|
$ |
3,272.8 |
|
|
$ |
2,046.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For a detailed discussion of impairment of goodwill and intangible assets for the
year ended February 29, 2008, see Managements Discussion and Analysis of Financial Condition
and Results of Operation under Item 7 of this Annual Report on Form 10-K under the caption
Fiscal 2008 Compared to Fiscal 2007 Impairment of Goodwill and Intangible Assets. |
|
(2) |
|
For a detailed discussion of acquisition-related integration costs for the years
ended February 29, 2008, February 28, 2007, and February 28, 2006, see Managements Discussion
and Analysis of Financial Condition and Results of Operation under Item 7 of this Annual
Report on Form 10-K under the caption Fiscal 2008 Compared to Fiscal 2007
Acquisition-Related Integration Costs and Fiscal 2007 Compared to Fiscal 2006
Acquisition-Related Integration Costs, respectively. |
26
|
|
|
(3) |
|
For a detailed discussion of restructuring and related charges for the years ended
February 29, 2008, February 28, 2007, and February 28, 2006, see Managements Discussion and
Analysis of Financial Condition and Results of Operation under Item 7 of this Annual Report on
Form 10-K under the captions Fiscal 2008 Compared to Fiscal 2007 Restructuring and Related
Charges and Fiscal 2007 Compared to Fiscal 2006 Restructuring and Related Charges,
respectively. |
For the years ended February 29, 2008, and February 28, 2007, see Managements Discussion and
Analysis of Financial Condition and Results of Operation 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. Managements Discussion and Analysis of Financial Condition and Results of
Operation
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. The Company continues to
supply imported beer in the United States (U.S.) through its investment in Crown Imports (as
defined in Equity Method Investments in Fiscal 2008 and Fiscal 2007 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 U.S.; a leading producer and exporter of wine from
Australia and New Zealand; the largest producer and marketer of wine in Canada; and both a major
supplier of beverage alcohol and, through its investment in Matthew Clark (see Equity Method
Investments in Fiscal 2008 and Fiscal 2007 below), a major independent drinks wholesaler in the
United Kingdom (U.K.).
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
Companys 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 Crown Imports, the Companys internal management
financial reporting included the Constellation Beers business division. Consequently, the Company
reports its operating results in five segments: Constellation Wines (branded wine, and wholesale
and other), Constellation Spirits (distilled spirits), Constellation Beers (imported beer),
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 makers
evaluation of the operating income performance of the other operating segments.
The business segments reflect how the Companys operations are managed, how operating
performance within the Company is evaluated by senior management and the structure of its internal
financial reporting.
27
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 as these items are not reflective of normal continuing operations of the
segments. The Company excludes these items as segment operating performance and segment management
compensation is evaluated based upon a normalized segment operating income. As such, the
performance measures for incentive compensation purposes for segment management do not include the
impact of these items.
The Companys business strategy is to remain focused across the beverage alcohol industry by
offering a broad range of products in each of the Companys three major categories: wine, spirits
and, through Crown Imports, imported beer. The Company intends to keep its portfolio positioned
for 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
Companys 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 Companys products, particularly the Constellation
Wines segments 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 Companys five core markets (U.S., Canada, U.K., Australia and New Zealand) within the
Companys 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 both 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 and marketers 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
earnings per share growth and improve return on invested capital.
The environment for the Companys products is competitive in each of the Companys core
markets, due, in part, to industry and retail consolidation. In particular, the U.K. and
Australian markets are highly 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
approximately 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.
28
Due to competitive conditions in the U.K. and Australia, it has been difficult for the Company
in recent fiscal periods 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 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. The recent surplus of Australian wine made
very low cost bulk wine available to these U.K. retailers which allowed certain of these large
retailers to create and build private label brands in the Australian wine category. However, the
Australian bulk wine supply is now declining. In January 2008, the Company implemented a price
increase in the U.K. to cover certain cost increases. In March 2008, the U.K. announced a
significant increase in duty as well as the expectation for future annual increases to approximate
two percentage points above the rate of inflation. The Company immediately implemented an additional
price increase in an effort to offset the impact of this March 2008 duty increase. In addition, the Company also implemented a price
increase in Australia during the first quarter of calendar 2008 to cover certain cost increases.
The calendar years 2004, 2005 and 2006 were years of record Australian grape harvests that
contributed to a surplus of Australian bulk wine. However, the calendar 2007 Australian grape
harvest was significantly lower than the calendar 2006 Australian grape harvest as a result of an
ongoing drought and late spring frosts in several regions. As a result of the significant
reduction in the calendar 2007 Australian grape harvest, the Company has begun to see a reduction
in the current surplus and an increase in pricing for Australian bulk wine. Continuing drought
conditions throughout most of calendar 2007 were expected to impact the size of the calendar 2008
Australian grape harvest as well. However, precipitation during the Companys fourth quarter has
alleviated some of the drought conditions in key wine producing regions of Australia resulting in
the expectation for the calendar 2008 Australian grape harvest to be higher than the calendar 2007
Australian grape harvest. The Company expects the supply to continue to move into balance with
demand as a result of two consecutive years of lower than recent average Australian grape harvests;
however, the highly competitive conditions in the U.K. and Australian markets are expected to
persist. In the U.S., while the calendar 2007 U.S. grape harvest yielded lower levels than the
calendar 2006 U.S. grape harvest, the Company expects that the overall supply should remain
generally in balance with demand.
In the fourth quarter of fiscal 2008, pursuant to the Companys accounting policy, the Company
performed its annual goodwill impairment analysis. As a result of this analysis, the Company
concluded that the carrying amounts of goodwill assigned to the Constellation Wines segments
Australian and U.K. reporting units exceeded their implied fair values and recorded impairment
losses of $599.9 million, which is included in impairment of goodwill and intangible assets on the
Companys Consolidated Statement of Operations. The impairment losses were determined by comparing
the carrying value of goodwill assigned to specific reporting units within the segment as of
December 31, 2007, with the implied fair value of the goodwill. In determining the implied fair
value of the goodwill, the Company considered estimates of future operating results and cash flows
of each of the reporting units discounted using estimated discount rates. The estimates of future
operating results and cash flows were principally derived from the Companys updated long-term
financial forecast, which was developed as part of the Companys strategic planning cycle conducted
during the Companys fourth quarter. The decline in the implied fair value of the goodwill and
resulting impairment losses were primarily driven by the updated long-term financial forecasts,
which showed lower estimated future operating results primarily due to changes in market conditions
in Australia and the U.K. in the fourth quarter of fiscal 2008.
29
In addition, during the fourth quarter of fiscal 2008, the Company performed its review of
indefinite lived intangible assets for impairment. The Company determined that certain intangible
assets associated with the Constellation Wines segments Australian and U.K. reporting units,
primarily trademarks, were impaired primarily due to the revised lower revenue and profit forecasts
associated with products incorporating these assets. The Company measured the amount of impairment
by calculating the amount by which the carrying value of these assets exceeded their estimated fair
values, which were based on projected discounted future net cash flows. As a result of this
review, the Company recorded additional impairment losses of $204.9 million, which is included in
impairment of goodwill and intangible assets on the Companys Consolidated Statement of Operations.
Lastly, in connection with the Companys Fiscal 2008 Plan (as defined below in Restructuring and
Related Charges), the Company recorded asset impairment losses of $7.4 million associated primarily
with certain definite lived trademarks of brands to be discontinued.
For the year ended February 29, 2008 (Fiscal 2008), the Companys net sales decreased 28%
over the year ended February 28, 2007 (Fiscal 2007), primarily due to accounting for the Crown
Imports and Matthew Clark investments under the equity method of accounting, partially offset by
net sales of products acquired in the Vincor Acquisition, Svedka Acquisition and BWE Acquisition
(as defined below) and a favorable foreign currency impact. Operating (loss) income decreased over
the comparable prior year period resulting primarily from (i) impairment losses, (ii) the
decreased imported beer and U.K. wholesale sales discussed above and (iii) the Companys
Constellation Wines segments program to reduce distributor wine inventory levels in the U.S.
during the first half of fiscal 2008 (as discussed below) without a corresponding decrease in
promotional, advertising, selling and general and administrative spend within the Constellation
Wines segment, partially offset by the incremental benefit from the Vincor Acquisition, Svedka
Acquisition and BWE Acquisition. Net (loss) income decreased over the comparable prior year period
primarily due to the factors discussed above combined with income tax provision and increased
interest expense, partially offset by an increase in equity in earnings of equity method investees
in connection primarily with Crown Imports.
The Companys Constellation Wines segment implemented a program to reduce distributor wine
inventory levels in the U.S. during the first half of 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 has worked closely with its distributors on supply-chain efficiencies,
ultimately making the Companys brands more competitive in the marketplace. The Company
substantially completed its reduction of distributor inventory levels during the second quarter of
fiscal 2008. This initiative had a significant impact on the Companys Fiscal 2008 financial
performance, including a reduction of net sales of approximately $110 million and a reduction in
diluted earnings per share of approximately $0.15 per share.
The following discussion and analysis summarizes the significant factors affecting (i)
consolidated results of operations of the Company for Fiscal 2008 compared to Fiscal 2007, and
Fiscal 2007 compared to the year ended February 28, 2006 (Fiscal 2006), and (ii) financial
liquidity and capital resources for Fiscal 2008. 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 2009.
References to base branded wine net sales, base branded wine gross profit and base branded wine
business exclude the impact of branded wine acquired in the Vincor Acquisition and/or the BWE
Acquisition, as appropriate. References to base branded spirits net sales and base branded spirits
gross profit exclude the impact of branded spirits acquired in the Svedka Acquisition. This
discussion and analysis should be read in conjunction with the Companys consolidated financial
statements and notes thereto included herein.
30
Acquisitions in Fiscal 2008 and Fiscal 2007
Acquisition of BWE
On December 17, 2007, the Company acquired all of the issued and outstanding capital stock of
Beam Wine Estates, Inc. (BWE), an indirect wholly-owned subsidiary of Fortune Brands, Inc.,
together with BWEs subsidiaries: Atlas Peak Vineyards, Inc., Buena Vista Winery, Inc., Clos du
Bois, Inc., Gary Farrell Wines, Inc. and Peak Wines International, Inc. (the BWE Acquisition).
As a result of the BWE Acquisition, the Company has acquired the U.S. wine portfolio of Fortune
Brands, Inc., including certain wineries, vineyards or interests therein in the State of
California, as well as various super-premium and fine California wine brands including Clos du
Bois, Wild Horse and Geyser Peak.
The BWE Acquisition supports the Companys strategy of strengthening its portfolio with
fast-growing super-premium and above wines. The BWE Acquisition strengthens the Companys position
as the largest wine company in the world and the largest premium wine company in the U.S.
Total consideration paid in cash was $888.6 million, subject to certain purchase price
adjustments. In addition, the Company expects to incur direct acquisition costs of approximately
$1.3 million. The purchase price was financed with the net proceeds from the Companys December
2007 Senior Notes and revolver borrowings under the Companys 2006 Credit Agreement (as defined
below). In accordance with the purchase method of accounting, the acquired net assets are recorded
at fair value at the date of acquisition. The purchase price allocation, including the third-party
appraisal, is in process.
The results of operations of the BWE 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 Company expects the BWE Acquisition to have a material impact on the Companys
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 anticipated inventory step-up, restructuring, integration and related charges, and
interest expense associated with borrowings to finance the purchase price. The restructuring,
integration and related charges relate to the Companys January 2008 announcement of its plans to
streamline certain of its operations in the U.S., primarily in connection with the restructuring
and integration of the operations of BWE (the U.S. Initiative).
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). Svedka
is a premium Swedish vodka and is the fastest growing major imported premium vodka in the U.S. At
the time of the acquisition, Svedka was the fifth largest imported vodka in the U.S. The Svedka
Acquisition supports the Companys strategy of expanding the Companys premium spirits business.
The acquisition provides a foundation from which the Company looks to leverage its existing and
future premium spirits portfolio for growth. In addition, Svedka complements the Companys
existing portfolio of super-premium and value vodka brands by adding a premium vodka brand that has
experienced rapid growth.
Total consideration paid in cash for the Svedka Acquisition was $385.8 million. In addition,
the Company incurred direct acquisition costs of $1.3 million. The purchase price was financed
with revolver borrowings under the Companys June 2006 Credit Agreement (as defined below) as
amended in February 2007.
31
The results of operations of the Svedka business are reported in the Constellation Spirits
segment and are included in the consolidated results of operations of the Company from the
date of acquisition. The Svedka Acquisition had a significant impact on the Companys interest
expense associated with the additional revolver borrowings.
Acquisition of Vincor
On June 5, 2006, the Company acquired all of the issued and outstanding common shares of
Vincor International Inc. (Vincor), Canadas premier wine company (the Vincor Acquisition).
Vincor is Canadas largest producer and marketer of wine. At the time of the acquisition, Vincor
was the worlds 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.
The Vincor Acquisition supports the Companys 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 Companys current operations in the U.S., U.K.,
Australia and New Zealand, the Vincor Acquisition increases the Companys 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 Vincor Acquisition
makes the Company the largest wine company in Canada and strengthens the Companys 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 incurred direct acquisition costs of $9.4 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 $1,445.4 million. The purchase price was financed with borrowings
under the Companys June 2006 Credit Agreement. 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.
Equity Method Investments in Fiscal 2008 and Fiscal 2007
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 reinforces Matthew Clarks position as the U.K.s largest independent premier drinks
wholesaler serving the on-trade drinks industry. The Company received $185.6 million of cash
proceeds from the formation of the joint venture.
32
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 are included in the equity in earnings of
equity method investees line on the Companys Consolidated Statement of Operations from the date of
investment.
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.B. de C.V. (Modelo)
and 23.25% by Anheuser-Busch Companies, Inc., pursuant to which Modelos 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,
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, 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, 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 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.
33
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 on the
Companys Consolidated Statement of Operations from the date of investment.
Divestiture in Fiscal 2008
In February 2008, as part of ongoing efforts to increase focus on premium wine offerings in
the U.S., the Company sold its lower margin popular-priced wine brands, Almaden and Inglenook, and certain other assets for
cash proceeds of $133.7 million. The Company recorded a loss of $27.8 million on this sale which is included in selling, general and administrative
expenses on the Companys Consolidated Statements of Operations.
Results of Operations
Fiscal 2008 Compared to Fiscal 2007
Net Sales
The following table sets forth the net sales (in millions of dollars) by operating segment of
the Company for Fiscal 2008 and Fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 Compared to Fiscal 2007 |
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Constellation Wines: |
|
|
|
|
|
|
|
|
|
|
|
|
Branded wine |
|
$ |
3,016.9 |
|
|
$ |
2,755.7 |
|
|
|
(9 |
)% |
Wholesale and other |
|
|
341.9 |
|
|
|
1,087.7 |
|
|
|
(69 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Constellation Wines net sales |
|
|
3,358.8 |
|
|
|
3,843.4 |
|
|
|
(13 |
)% |
Constellation Spirits net sales |
|
|
414.2 |
|
|
|
329.4 |
|
|
|
26 |
% |
Constellation Beers net sales |
|
|
|
|
|
|
1,043.6 |
|
|
|
(100 |
)% |
Crown Imports net sales |
|
|
2,391.0 |
|
|
|
368.8 |
|
|
NM |
Consolidations and eliminations |
|
|
(2,391.0 |
) |
|
|
(368.8 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Sales |
|
$ |
3,773.0 |
|
|
$ |
5,216.4 |
|
|
|
(28 |
)% |
|
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful
Net sales for Fiscal 2008 decreased to $3,773.0 million from $5,216.4 million for Fiscal 2007,
a decrease of $1,443.4 million, or (28%). This decrease resulted primarily from a decrease in net
sales of $1,043.6 million and $759.8 million for the Crown Imports and Matthew Clark investments,
respectively, which are accounted for under the equity method of accounting, partially offset by
net sales of products acquired in the Vincor Acquisition, Svedka Acquisition and BWE Acquisition of
$202.7 million and a favorable foreign currency impact of $133.5 million.
34
Constellation Wines
Net sales for Constellation Wines decreased to $3,358.8 million for Fiscal 2008 from $3,843.4
million in Fiscal 2007, a decrease of $484.6 million, or (13%). Branded wine net sales increased
$261.2 million primarily due to $140.2 million of net sales of branded wine acquired in the Vincor
Acquisition and BWE Acquisition, a favorable foreign currency impact of $108.2 million and a
benefit of $55.7 million due to branded wine net sales for the U.K. previously sold through the
Companys U.K. wholesale business, partially offset by lower U.S. base branded wine net sales
resulting primarily from the Companys implementation of a program to reduce distributor wine
inventory levels in the U.S. Wholesale and other net sales decreased $745.8 million primarily due
to accounting for the Matthew Clark investment under the equity method of accounting, partially
offset by a favorable foreign currency impact of $25.3 million.
Constellation Spirits
Net sales for Constellation Spirits increased to $414.2 million for Fiscal 2008 from $329.4
million for Fiscal 2007, an increase of $84.8 million, or 26%. This increase resulted primarily
from $55.1 million of net sales of branded spirits acquired in the Svedka Acquisition and an
increase in base branded spirits net sales of $19.9 million due primarily to higher average selling
prices.
Constellation Beers
Net sales for Constellation Beers decreased $1,043.6 million, or (100%), from Fiscal 2007 as
the Crown Imports investment is accounted for under the equity method of accounting.
Gross Profit
The Companys gross profit decreased to $1,281.5 million for Fiscal 2008 from $1,523.9 million
for Fiscal 2007, a decrease of $242.4 million, or (16%). The Constellation Wines segments gross
profit increased $4.9 million primarily due to increased gross profit of $58.5 million due to the
Vincor Acquisition and BWE Acquisition and a favorable foreign currency impact of $40.6 million,
partially offset by a decrease of $77.8 million resulting from accounting for the Matthew Clark
investment under the equity method of accounting and lower U.S. base branded wine gross profit
resulting from the lower U.S. base branded wine net sales primarily as a result of the Companys
program to reduce distributor inventory levels. The Constellation Spirits segments gross profit
increased $36.7 million primarily due to increased gross profit of $26.2 million due to the Svedka
Acquisition and increased base branded spirits gross profit of $9.0 million resulting from the
higher average selling prices. The Constellation Beers segments gross profit was down $290.9
million due to accounting for the Crown Imports investment under the equity method of accounting.
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 $6.9 million in Fiscal 2008
versus Fiscal 2007. This decrease resulted primarily from decreased flow through of inventory
step-up of $18.8 million associated primarily with the Vincor Acquisition, partially offset by an
increase in inventory write-offs and accelerated depreciation of $9.5 million and $5.4 million,
respectively, primarily associated with the Fiscal 2008 Plan. Gross profit as a percent of net
sales increased to 34.0% for Fiscal 2008 from 29.2% for Fiscal 2007 primarily due to the benefit of
reporting the lower margin U.K. wholesale and imported beer businesses under the equity method of
accounting, partially offset by (i) lower margins in the U.S. base branded wine business primarily
due to the distributor inventory reduction program and (ii) lower margins in the U.K. branded wine
business primarily due to the Companys absorption of increased duty costs.
35
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $807.3 million for Fiscal 2008 from
$768.8 million for Fiscal 2007, an increase of $38.5 million, or 5%. This increase is due to an
increase of $76.4 million in the Constellation Wines segment, an increase of $30.2 million in the
Constellation Spirits segment, and an increase of $24.6 million in Corporate Operations and Other,
partially offset by a $82.8 million decrease in selling, general and administrative expenses within
the Constellation Beers segment as the Crown Imports investment is accounted for under the equity
method of accounting, and a reduction in unusual costs which consist of certain items that are
excluded by management in their evaluation of the results of each operating segment of $9.9
million. The increase in the Constellation Wines segments selling, general and administrative
expenses is due to increased general and administrative expenses of $43.2 million, advertising
expenses of $20.4 million and selling expenses of $12.8 million resulting primarily from the Vincor
Acquisition and BWE Acquisition and the recognition of an additional $6.5 million of stock-based
compensation expense. The increase in the Constellation Spirits segments selling, general and
administrative expenses is primarily due to increases in advertising expenses of $14.0 million and
selling expenses of $11.8 million resulting primarily from the Svedka Acquisition. The Corporate
Operations and Other segments selling, general and administrative expenses increased primarily due
to increased general and administrative expenses to support the Companys growth and the
recognition of additional stock-based compensation expense in Fiscal 2008 of $6.8 million. The
decrease in unusual costs was primarily due to the recognition in Fiscal 2008 of (i) $35.3 million
of other costs associated primarily with the loss on the sale of the Companys Almaden and
Inglenook wine brands and certain other assets and (ii) a $6.6 million loss in connection with the contribution of the
Companys U.K. wholesale business to the Matthew Clark joint venture, net of a $4.8 million
realized gain on a prior asset sale; partially offset by the recognition in Fiscal 2007 of (i)
$16.3 million of other costs associated with the Fiscal 2007 Wine Plan (as defined below in
Restructuring and Related Charges) (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 (as defined
below in Restructuring and Related Charges), (ii) a $13.4 million loss on the sale of the
Companys 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 Companys 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 21.4% for
Fiscal 2008 as compared to 14.7% for Fiscal 2007 primarily due to (i) the reporting of the
imported beer and U.K. wholesale businesses under the equity method of accounting, (ii) the
percent increase in general and administrative expenses supporting the Companys growth within the
Corporate Operations and Other segment and the Constellation Wines segment growing at a faster rate
than the increase in the respective segments net sales (including a combined increase of $13.3
million of stock-based compensation expense for those segments) and (iii) the lower net sales
associated with the reduction in the distributor wine inventory levels without a corresponding
decrease in selling, general and administrative expenses within the U.S. branded wine business.
36
Impairment of Goodwill and Intangible Assets
The Company recorded $812.2 million of impairment losses for Fiscal 2008, consisting of
impairments of goodwill and intangible assets of $599.9 million and $212.3 million, respectively,
as more fully discussed in the Overview above.
Acquisition-Related Integration Costs
Acquisition-related integration costs decreased to $11.8 million for Fiscal 2008 from $23.6
million for Fiscal 2007. Acquisition-related integration costs for Fiscal 2008 consisted of costs
recorded primarily in connection with the Companys plan to restructure and integrate the
operations of Vincor (the Vincor Plan) and the Companys plan to streamline certain of its
international operations and costs associated with the consolidation of certain spirits production
processes in the U.S., collectively with the U.S. Initiative, the Fiscal 2008 Plan. These costs
included $4.8 million of employee-related costs and $7.0 million of facilities and other costs.
Acquisition-related integration costs for Fiscal 2007 consisted of costs recorded primarily in
connection with the Vincor Plan.
For Fiscal 2009, the Company expects to incur total acquisition-related integration costs of
$10.3 million primarily in connection with the Fiscal 2008 Plan.
Restructuring and Related Charges
The Company recorded $6.9 million of restructuring and related charges for Fiscal 2008
associated primarily with the Companys Fiscal 2008 Plan and the Companys worldwide wine
reorganizations announced during Fiscal 2006 and the Companys program to consolidate certain west
coast production processes in the U.S. (collectively, the Fiscal 2006 Plan) of $12.0 million,
partially offset by the reversal of prior accruals related primarily to the Vincor Plan of $5.1
million. Restructuring and related charges included $10.2 million of employee termination benefit
costs, ($3.4) million of contract termination costs and $0.1 million of facility
consolidation/relocation costs. In addition, in connection with the Fiscal 2008 Plan, the
Companys 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), the Fiscal 2006
Plan and the Vincor Plan, the Company recorded (i) $12.0 million of accelerated depreciation and
$10.1 million of inventory write-downs, (ii) $7.4 million of intangible asset impairments and
(iii) $2.2 million of other costs which were recorded in the cost of product sold line, impairment
of goodwill and intangible assets line and selling, general and administrative expenses line,
respectively, within the Companys Consolidated Statements of Operations. The Company recorded
$32.5 million of restructuring and related charges for Fiscal 2007 associated primarily with the
Companys Fiscal 2007 Wine Plan and Fiscal 2006 Plan.
For Fiscal 2009, the Company expects to incur total restructuring and related charges of $16.7
million associated primarily with the Fiscal 2008 Plan and the Fiscal 2006 Plan. In addition, with
respect to the Fiscal 2008 Plan, Fiscal 2007 Wine Plan and the Vincor Plan, the Company expects to
incur $14.7 million and $8.1 million of charges in selling, general and administrative expenses and
cost of product sold, respectively, related primarily to duplicative facility costs in the U.K. and
accelerated depreciation, respectively.
37
Operating (Loss) Income
The following table sets forth the operating (loss) income (in millions of dollars) by
operating segment of the Company for Fiscal 2008 and Fiscal 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2008 Compared to Fiscal 2007 |
|
|
|
Operating (Loss) Income |
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
Constellation Wines |
|
$ |
558.4 |
|
|
$ |
629.9 |
|
|
|
(11 |
)% |
Constellation Spirits |
|
|
72.0 |
|
|
|
65.5 |
|
|
|
10 |
% |
Constellation Beers |
|
|
|
|
|
|
208.1 |
|
|
|
(100 |
)% |
Corporate Operations and Other |
|
|
(85.5 |
) |
|
|
(60.9 |
) |
|
|
40 |
% |
Crown Imports |
|
|
509.0 |
|
|
|
78.4 |
|
|
NM |
Consolidations and eliminations |
|
|
(509.0 |
) |
|
|
(78.4 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments |
|
|
544.9 |
|
|
|
842.6 |
|
|
|
(35 |
)% |
Acquisition-Related Integration Costs,
Restructuring and Related Charges
and Unusual Costs |
|
|
(901.6 |
) |
|
|
(143.6 |
) |
|
|
528 |
% |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Operating (Loss) Income |
|
$ |
(356.7 |
) |
|
$ |
699.0 |
|
|
|
(151 |
)% |
|
|
|
|
|
|
|
|
|
|
|
As a result of the factors discussed above, consolidated operating (loss) income decreased to
an operating loss of $356.7 million for Fiscal 2008 from operating income of $699.0 million for
Fiscal 2007, a decrease of $1,055.7 million, or (151%). Acquisition-related integration costs,
restructuring and related charges and unusual costs of $901.6 million for Fiscal 2008 consist of
certain costs that are excluded by management in their evaluation of the results of each operating
segment. These costs represent impairment losses of goodwill and intangible assets primarily
associated with the Companys Australian and U.K. businesses of $812.2 million; other costs
associated primarily with the sale of the Companys Almaden and Inglenook wine brands and certain other assets of $35.3
million; accelerated depreciation associated primarily with the Fiscal 2007 Wine Plan and Fiscal
2008 Plan of $12.0 million; acquisition-related integration costs and inventory write-offs
associated primarily with the Vincor Plan and Fiscal 2008 Plan of $11.8 million and $10.1 million;
the flow through of inventory step-up associated primarily with the Companys Vincor Acquisition
and BWE Acquisition of $11.4 million; restructuring and related charges associated primarily with
the Fiscal 2008 Plan of $6.9 million; the loss on the contribution of the U.K. wholesale business
of $6.6 million; and the flow through of adverse grape cost of $0.1 million associated with the
acquisition of The Robert Mondavi Corporation (Robert Mondavi); partially offset by a $4.8
million realized gain on a prior asset sale. Acquisition-related integration costs, restructuring
and related charges and unusual costs of $143.6 million for Fiscal 2007 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
Companys Vincor Acquisition; acquisition-related integration costs of $23.6 million associated
primarily with the Vincor Plan; other costs of $16.3 million associated with the Fiscal 2007 Wine
Plan and Fiscal 2006 Plan; loss on the
sale of the branded bottled water business of $13.4 million; financing costs of $11.9 million
related primarily to the Companys 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 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.
38
Equity in Earnings of Equity Method Investees
The Companys equity in earnings of equity method investees increased to $257.9 million in
Fiscal 2008 from $49.9 million in Fiscal 2007. This increase is primarily due to the January 2,
2007, consummation of the Crown Imports joint venture and the reporting of the results of
operations of that joint venture since that date under the equity method of accounting of $255.1
million.
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 Vincor Acquisition 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 Statement of Financial Accounting Standards No.
133, Accounting for Derivative Instruments and Hedging Activities, as amended, a transaction that
involves a business combination is not eligible for hedge accounting treatment. As such, the gain
was recognized separately on the Companys Consolidated Statements of Operations.
Interest Expense, Net
Interest expense, net of interest income of $5.7 million and $5.4 million, for Fiscal 2008 and
Fiscal 2007, respectively, increased to $341.8 million for Fiscal 2008 from $268.7 million for
Fiscal 2007, an increase of $73.1 million, or 27%. The increase resulted primarily from higher
average borrowings in Fiscal 2008 as a result of the funding of the Vincor Acquisition, Svedka
Acquisition and BWE Acquisition, and the $500.0 million of share repurchases, partially offset by
$185.6 million of net proceeds from the formation of the U.K. wholesale joint venture.
Provision for Income Taxes
The Companys effective tax rate was (39.2%) for Fiscal 2008 as compared to 38.0% for Fiscal
2007. The change in the Companys effective tax rate for Fiscal 2008 is primarily due to a
non-deductible portion of the impairment losses related to goodwill and certain other intangible
assets of $599.9 million and $177.0 million, respectively. In addition, the Company recorded a
valuation allowance against net operating loss carryforwards in Australia of $51.7 million for
Fiscal 2008. 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
Companys effective tax rate for Fiscal 2007.
Net (Loss) Income
As a result of the above factors, net (loss) income decreased to a net loss of $613.3 million
for Fiscal 2008 from net income of $331.9 million for Fiscal 2007, a decrease of $945.2 million.
39
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 Spirits net sales |
|
|
329.4 |
|
|
|
324.6 |
|
|
|
1 |
% |
Constellation Beers net sales |
|
|
1,043.6 |
|
|
|
1,043.5 |
|
|
|
N/A |
|
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 Companys 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 Companys Mexican beer portfolio from increased retail consumer demand.
40
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 Companys 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 segments 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 segments 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 segments 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 of $6.8 million associated with the Fiscal
2006 Plan and Fiscal 2007 Wine Plan, 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.
41
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
segments 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 segments 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 segments 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 segments 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 Companys 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 costs 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 Companys 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
Companys 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.
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 costs. The Company recorded $16.8 million of acquisition-related
integration costs for Fiscal 2006 in connection with the Companys plan to restructure and
integrate the operations of Robert Mondavi (the Robert Mondavi Plan).
42
Restructuring and Related Charges
The Company recorded $32.5 million of restructuring and related charges for Fiscal 2007
associated primarily with the Companys Fiscal 2007 Wine Plan and 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 $0.3 million). In
addition, in connection with the Fiscal 2007 Wine Plan, the Fiscal 2006 Plan and the Vincor Plan,
the Company recorded (i) $6.6 million of accelerated depreciation and $0.6 million of inventory
write-downs and (ii) $16.3 million of other costs which were recorded in the cost of product sold
line and selling, general and administrative expenses line, respectively, within the Companys
Consolidated Statements of Operations. The Company recorded $29.3 million of restructuring and
related charges for Fiscal 2006 associated primarily with the Fiscal 2006 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) |
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
Constellation Wines |
|
$ |
629.9 |
|
|
$ |
530.4 |
|
|
|
19 |
% |
Constellation Spirits |
|
|
65.5 |
|
|
|
73.4 |
|
|
|
(11 |
)% |
Constellation Beers |
|
|
208.1 |
|
|
|
219.2 |
|
|
|
(5 |
)% |
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 |
% |
|
|
|
|
|
|
|
|
|
|
|
43
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
Companys Vincor Acquisition; acquisition-related integration costs of $23.6 million associated
primarily with the Vincor Plan; other costs of $16.3 million associated with the Fiscal 2007 Wine
Plan and Fiscal 2006 Plan; loss on the
sale of the branded bottled water business of $13.4 million; financing costs of $11.9 million
related primarily to the Companys 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 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
Companys acquisition of Robert Mondavi of $23.0 million, $16.8 million, and $7.9 million,
respectively; accelerated depreciation and other costs 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 Companys evaluation of a potential offer
for Allied Domecq of $3.4 million.
Equity in Earnings of Equity Method Investees
The Companys 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 Crown Imports joint venture and the
reporting of the results of operations of that 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
Companys investment in Ruffino S.r.l. (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 Vincor Acquisition 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 Companys Consolidated Statements of Operations.
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.
44
Provision for Income Taxes
The Companys 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 Companys 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%.
Financial Liquidity and Capital Resources
The Companys principal use of cash in its operating activities is for purchasing and carrying
inventories and carrying seasonal accounts receivable. The Companys primary source of liquidity
has historically been cash flow from operations, except during annual grape harvests when the
Company has relied on short-term borrowings. In the U.S. and Canada, the annual grape crush
normally begins in August and runs through October. In Australia and New Zealand, the annual
grape crush normally begins in February and runs through May. The Company generally begins taking
delivery of grapes at the beginning of the crush season with payments for such grapes beginning to
come due one month later. The Companys 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.
45
Fiscal 2008 Cash Flows
Operating
Activities
Net cash provided by operating activities for Fiscal 2008 was $519.8 million, which resulted
primarily from a net loss of $613.3 million and net payments of $32.1 million associated with the
change in operating assets and liabilities (net of effects from purchases and sales of businesses),
partially offset by $1,165.2 million of net non-cash items charged to the Companys Consolidated
Statements of Operations. The net change in operating assets and liabilities was primarily driven
by a $37.8 million increase in inventories and $29.2 million of other items, partially offset by a
decrease in accounts receivable, net, of $56.2 million. The increase in inventories was due
primarily to a delay in the release of the Canadian icewine vintage and an increase in U.S. wine
inventory balances as a result of the Companys program to reduce distributor wine inventory
levels. The other items consist primarily of $24.7 million of
losses on cash settlement of derivative
instruments designed to economically hedge foreign currency risk
associated with foreign currency denominated intercompany balances.
These losses offset non-cash gains in the Companys Consolidated
Statements of Operations associated with the foreign currency
denominated intercompany balances. The decrease in accounts
receivable, net, is due to lower U.S. sales in the fourth quarter of fiscal 2008 in connection with
the Companys program to reduce distributor wine inventory levels and collection of accounts
receivable balances acquired in the BWE Acquisition, partially offset by increased U.K. accounts
receivable in connection with sales to Matthew Clark. The net non-cash items consisted primarily
of impairment losses of goodwill and intangible assets, depreciation of property, plant and
equipment and deferred tax provision.
Investing Activities
Net cash used in investing activities for Fiscal 2008 was $1,112.9 million, which resulted
primarily from the use of $1,274.1 million, net of cash acquired, for the Svedka Acquisition and
BWE Acquisition, and $143.8 million of capital expenditures, partially offset by $185.6 million of
net proceeds from the formation of the U.K. wholesale joint venture and $133.7 million from the
sale of the Companys Almaden and Inglenook wine brands and certain other assets.
Financing Activities
Net cash provided by financing activities for Fiscal 2008 was $584.9 million resulting
primarily from proceeds from issuance of long-term debt of $1,212.9 million and from notes payable
of $219.4 million, partially offset by purchases of treasury stock of $500.0 million and principal
payments of long-term debt of $374.9 million.
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
Companys Consolidated Statements of Operations, less $163.4 million representing the net change in
the Companys operating assets and liabilities and $55.1 million of proceeds from maturity of
derivative instrument reflected in investing activities.
46
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 Companys 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 Companys contribution of the beer
business to Crown Imports. As Crown Imports began selling and importing 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 Companys 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 Vincor Acquisition.
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.
Share Repurchase Programs
During February 2006, the Companys Board of Directors replenished a June 1998 Board of
Directors authorization to repurchase up to $100.0 million of the Companys Class A Common Stock
and Class B Convertible 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. During February
2007, the Companys Board of Directors authorized the repurchase of up to $500.0 million of the
Companys Class A Common Stock and Class B Convertible Common Stock. During Fiscal 2008, the
Company repurchased 21,332,468 shares of Class A Common Stock pursuant to this authorization at an
aggregate cost of $500.0 million, or an average cost of $23.44 per share, through a combination of
open market transactions and an accelerated share repurchase (ASR) transaction that was announced
in May 2007. The repurchased shares include 933,206 shares of Class A Common Stock that were
received by the Company in July 2007 in connection with the early termination of the calculation
period for the ASR transaction by the counterparty to the ASR transaction. The Company used
revolver borrowings under the 2006 Credit Agreement to pay the purchase price for the repurchased
shares. The repurchased shares have become treasury shares.
47
Debt
Total debt outstanding as of February 29, 2008, amounted to $5,257.5 million, an increase of
$1,072.0 million from February 28, 2007. The ratio of total debt to total capitalization increased
to 65.5% as of February 29, 2008, from 55.1% as of February 28, 2007, primarily as a result of the
additional borrowings to finance the Svedka Acquisition and the BWE Acquisition, the $500.0 million
of share repurchases and the impairment losses of goodwill and intangible assets of $812.2 million.
Senior Credit Facility
2006 Credit Agreement
In connection with the Vincor Acquisition, 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, and on November 19, 2007, the June 2006 Credit
Agreement was amended (collectively, the 2007 Amendments). The June 2006 Credit Agreement
together with the 2007 Amendments 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 Companys obligations under its prior senior credit facility, to
fund the Vincor Acquisition 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.
As of February 29, 2008, 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 |
|
|
Tranche B |
|
|
|
|
|
|
Term Loan |
|
|
Term Loan |
|
|
Total |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
210.0 |
|
|
$ |
2.0 |
|
|
$ |
212.0 |
|
2010 |
|
|
270.0 |
|
|
|
4.0 |
|
|
|
274.0 |
|
2011 |
|
|
300.0 |
|
|
|
4.0 |
|
|
|
304.0 |
|
2012 |
|
|
150.0 |
|
|
|
4.0 |
|
|
|
154.0 |
|
2013 |
|
|
|
|
|
|
1,426.0 |
|
|
|
1,426.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
930.0 |
|
|
$ |
1,440.0 |
|
|
$ |
2,370.0 |
|
|
|
|
|
|
|
|
|
|
|
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 Companys
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 29, 2008, 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%.
48
The February 23, 2007, 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 incurrence of senior unsecured indebtedness
and the application of proceeds thereof; (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 November 19, 2007, amendment clarified
certain provisions governing the incurrence of senior unsecured indebtedness and the application of
proceeds thereof under the June 2006 Credit Agreement, as previously amended.
The Companys 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
Companys U.S. subsidiaries and (ii) 65% of the voting capital stock of certain of the Companys
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 ratios and minimum interest coverage
ratios.
As of February 29, 2008, under the 2006 Credit Agreement, the Company had outstanding tranche
A term loans of $930.0 million bearing an interest rate of 5.7%, tranche B term loans of $1,440.0
million bearing an interest rate of 6.6%, revolving loans of $308.0 million bearing an interest
rate of 4.4%, outstanding letters of credit of $35.8 million, and $556.2 million in revolving loans
available to be drawn.
As of April 25, 2008, under the 2006 Credit Agreement, the Company had outstanding tranche A
term loans of $885.0 million bearing an interest rate of 4.9%, tranche B term loans of $1,440.0 million
bearing an interest rate of 4.9%, revolving loans of $354.0 million bearing an interest rate of 4.0%,
outstanding letters of credit of $37.1 million, and $508.9 million in revolving loans available to be
drawn.
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 29, 2008. 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 Companys 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 Operations. For Fiscal 2008 and Fiscal 2007, the Company
reclassified $7.1 million and $5.9 million, net of income tax effect, respectively, from AOCI to
interest expense, net on the Companys Consolidated Statement of Operations. This non-cash
operating activity is included in the other, net line in the Companys Consolidated Statements of
Cash Flows.
49
Senior Notes
In August 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.
In February 2001, the Company issued $200.0 million aggregate principal amount of 8% Senior
Notes due February 2008 (the February 2001 Senior Notes). On February 15, 2008, the Company
repaid the February 2001 Senior Notes with proceeds from its revolving credit facility under the
2006 Credit Agreement.
As of February 29, 2008, 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 29, 2008, the Company had outstanding £154.0 million ($306.1
million, net of $0.2 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.
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 Companys June 2006 Credit Agreement. 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. As of February
29, 2008, the Company had outstanding $693.9 million (net of $6.1 million unamortized discount)
aggregate principal amount of August 2006 Senior Notes.
On May 14, 2007, the Company issued $700.0 million aggregate principal amount of 7 1/4% Senior
Notes due May 2017 (the Original May 2007 Senior Notes). The net proceeds of the offering
($693.9 million) were used to reduce a corresponding amount of borrowings under the revolving
portion of the Companys 2006 Credit Agreement. The Original May 2007 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, plus accrued and unpaid interest to the redemption date, plus
a make whole payment based on the present value of the future payments at the applicable Treasury
Rate plus 50 basis points. In January 2008, the Company exchanged $700.0 million aggregate
principal amount of 7 1/4% Senior Notes due May 2017 (the May 2007 Senior Notes) for all of the
Original May 2007 Senior Notes. The terms of the May 2007 Senior Notes are substantially identical
in all material respects to the Original May 2007 Senior Notes, except that the May 2007 Senior
Notes are registered under the Securities Act of 1933, as amended. As of February 29, 2008, the
Company had outstanding $700.0 million aggregate principal amount of May 2007 Senior Notes.
50
On December 5, 2007, the Company issued $500.0 million aggregate principal amount of 8 3/8%
Senior Notes due December 2014 at an issuance price of $496.7 million (net of $3.3 million
unamortized discount, with an effective interest rate of 8.5%) (the December 2007 Senior Notes).
The net proceeds of the offering ($492.2 million) were used to fund a portion of the purchase price
of BWE. The December 2007 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, plus a
make whole payment based on the present value of the remaining scheduled payments of principal and
interest on the notes at a discount rate equal to the Treasury Rate plus 50 basis points. As of
February 29, 2008, the Company had outstanding $496.8 million (net of $3.2 million unamortized
discount) aggregate principal amount of December 2007 Senior Notes.
Senior Subordinated Notes
As of February 29, 2008, 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
$397.0 million as of February 29, 2008. These arrangements primarily support the financing needs
of the Companys 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 29, 2008, amounts outstanding under these arrangements were $130.7 million.
Contractual Obligations and Commitments
The following table sets forth information about the Companys long-term contractual
obligations outstanding at February 29, 2008. It brings together data for easy reference from the
consolidated balance sheet and from individual notes to the Companys consolidated financial
statements. See Notes 8, 9, 10, 11, 12, and 13 to the Companys 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.
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|
|
PAYMENTS DUE BY PERIOD |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
|
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to banks |
|
$ |
379.5 |
|
|
$ |
379.5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest payments on notes
payable to banks(1) |
|
|
18.2 |
|
|
|
18.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding
unamortized discount) |
|
|
4,887.5 |
|
|
|
229.3 |
|
|
|
921.5 |
|
|
|
1,121.4 |
|
|
|
2,615.3 |
|
Interest payments on long-
term debt(2) |
|
|
1,757.4 |
|
|
|
314.1 |
|
|
|
490.7 |
|
|
|
421.6 |
|
|
|
531.0 |
|
Operating leases |
|
|
706.2 |
|
|
|
80.4 |
|
|
|
127.7 |
|
|
|
99.4 |
|
|
|
398.7 |
|
Other long-term liabilities(3) |
|
|
385.6 |
|
|
|
139.3 |
|
|
|
126.7 |
|
|
|
40.1 |
|
|
|
79.5 |
|
Unconditional purchase
obligations(4) |
|
|
3,182.0 |
|
|
|
546.6 |
|
|
|
843.1 |
|
|
|
467.9 |
|
|
|
1,324.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations |
|
$ |
11,316.4 |
|
|
$ |
1,707.4 |
|
|
$ |
2,509.7 |
|
|
$ |
2,150.4 |
|
|
$ |
4,948.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51
|
|
|
(1) |
|
Interest payments on notes payable to banks include interest on both revolving
loans under the Companys senior credit facility and on foreign subsidiary facilities. The
weighted average interest rate on the revolving loans under the Companys senior credit
facility was 4.4% as of February 29, 2008. Interest rates on foreign subsidiary facilities
range from 1.9% to 8.7% as of February 29, 2008. |
|
(2) |
|
Interest rates on long-term debt obligations range from 4.4% to 8.5%. Interest
payments on long-term debt obligations include amounts associated with the Companys
outstanding interest rate swap agreements to fix LIBOR interest rates on $1,200.0 million of
the Companys 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 1.2% of the Companys total long-term debt, as amounts are not
material. |
|
(3) |
|
Other long-term liabilities include $25.9 million associated with expected payments
for unrecognized tax benefit liabilities as of February 29, 2008, including $5.5 million in
the less than one year period. The payments are reflected in the period in which the Company
believes they will ultimately be settled based on the Companys experience in these matters.
Other long-term liabilities do not include payments for unrecognized tax benefit liabilities
of $105.2 million due to the uncertainty of the timing of future cash flows associated with
these unrecognized tax benefit liabilities. In addition, other long-term liabilities do not
include expected payments for interest and penalties associated with unrecognized tax benefit
liabilities as amounts are not material. See Note 10 to the Companys consolidated financial
statements located in Item 8 of this Annual Report on Form 10-K for a detailed discussion of
these items. |
|
(4) |
|
Total unconditional purchase obligations consist of $17.3 million for contracts to
purchase various spirits over the next four fiscal years, $3,071.7 million for contracts to
purchase grapes over the next seventeen fiscal years, $62.2 million for contracts to purchase
bulk wine over the next five fiscal years and $30.8 million for processing contracts over the
next four fiscal years. See Note 13 to the Companys 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 2008, the Company incurred $143.8 million for capital expenditures. The Company
plans to spend from $150 million to $170 million for capital expenditures in Fiscal 2009. 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 Companys 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.
52
Critical Accounting Policies
The Companys significant accounting policies are more fully described in Note 1 to the
Companys consolidated financial statements located in Item 8 of this Annual Report on Form 10-K.
However, certain of the Companys accounting policies are particularly important to the portrayal
of the Companys financial position and results of operations and require the application of
significant judgment by the Companys management; as a result they are subject to an inherent
degree of uncertainty. In applying those policies, the Companys management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain estimates. Those
estimates are based on the Companys historical experience, the Companys observance of trends in
the industry, information provided by the Companys 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 Companys business. The Companys critical
accounting policies include:
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|
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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 Companys 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 Companys
financial statements. Promotional costs were $733.7 million, $635.6 million and $501.9
million for Fiscal 2008, Fiscal 2007 and Fiscal 2006, respectively. Accrued promotion
costs were $143.9 million and $150.3 million as of February 29, 2008, and February 28,
2007, 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 Companys 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 Companys products
is less favorable than the Companys 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 Companys financial statements.
Inventories were $2,179.5 million and $1,948.1 million as of February 29, 2008, and
February 28, 2007, respectively. |
53
|
|
|
Accounting for business combinations. The acquisition of businesses is an important
element of the Companys 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 Companys
financial statements. For example, the Companys 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 $4.8 million, $2.8 million and $1.9
million for Fiscal 2008, Fiscal 2007 and Fiscal 2006, respectively. Amortizable
intangible assets were $68.5 million and $39.3 million as of February 29, 2008, and
February 28, 2007, 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 Companys financial statements. The
most significant assumptions used in the discounted future cash flows calculation to
determine the fair value of the Companys 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
the changes individually, for only the discount rate and the expected long-term growth
rate, would have resulted in the carrying value of the net assets of two of the
reporting units, including their goodwill, exceeding their fair value, which would
indicate the potential for impairment and the requirement to measure the amount of
impairment, if any. 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 each change individually would not have
resulted in any unit of accountings carrying value exceeding its fair value. For this
sensitivity analysis, the Company excluded reporting units and units of accounting
acquired during Fiscal 2008. |
54
|
|
|
In the fourth quarter of fiscal 2008, pursuant to the Companys accounting policy, the
Company performed its annual goodwill impairment analysis. As a result of this
analysis, the Company concluded that the carrying amounts of goodwill assigned to the
Constellation Wines segments Australian and U.K. reporting units exceeded their implied
fair values and recorded impairment losses of $599.9 million, which is included in
impairment of goodwill and intangible assets on the Companys Consolidated Statement of
Operations. No impairment losses were recorded for Fiscal 2007 and Fiscal 2006.
Goodwill was $3,123.9 million and $3,083.9 million as of February 29, 2008, and February
28, 2007, respectively. |
|
|
|
|
In addition, during the fourth quarter of fiscal 2008, the Company performed its review
of indefinite lived intangible assets for impairment. The Company determined that
certain intangible assets associated with the Constellation Wines segment, primarily
trademarks, were impaired. Accordingly, the Company recorded additional impairment
losses of $204.9 million, which is included in impairment of goodwill and intangible
assets on the Companys Consolidated Statement of Operations. 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 for intangible assets with
indefinite lives was recorded in Fiscal 2006. Intangible assets with indefinite lives
were $1,121.5 million and $1,096.1 million as of February 29, 2008, and February 28,
2007, 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 Companys 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 for its stock-based awards that was one
year longer, the fair value of stock-based awards granted during Fiscal 2008 and Fiscal
2007 would have increased by $14.2 million, resulting in an increase of $3.0 million of
stock-based compensation expense for Fiscal 2008. 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 granted during Fiscal 2008 and Fiscal 2007 would have decreased by $17.5
million, resulting in a decrease of $3.1 million of stock-based compensation expense
for Fiscal 2008. The total amount of stock-based compensation recognized under SFAS
No. 123(R) for Fiscal 2008 was $33.6 million, of which $30.4 million was expensed for
Fiscal 2008 and $3.2 million was capitalized in inventory as of February 29, 2008. The
total amount of stock-based compensation recognized under SFAS No. 123(R) for Fiscal 2007
was $18.1 million, of which $16.5 million was expensed for Fiscal 2007 and $1.6 million
was capitalized in inventory as of February 28, 2007. |
55
Accounting Pronouncements Not Yet Adopted
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 adoption of SFAS No. 157 on March 1, 2008, did not have a material impact on the
Companys 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 adopted this provision of SFAS No. 158 and 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 companys fiscal year-end (with limited exceptions), which provision the Company is
required to adopt as of February 28, 2009. The Company uses a December 31 measurement date for its
defined benefit pension and other post-retirement plans and has elected to transition to a fiscal
year-end measurement date utilizing the second alternative prescribed by SFAS No. 158.
Accordingly, on March 1, 2008, the Company recognized adjustments to its opening retained earnings,
accumulated other comprehensive income, net of income tax effect, and pension and other
post-retirement plan assets or liabilities. These adjustments did not have a material impact on
the Companys 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 March 1, 2008. The adoption of SFAS
No. 159 on March 1, 2008, did not have a material impact on the
Companys consolidated financial statements.
56
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 141 (revised
2007) (SFAS No. 141(R)), Business Combinations. SFAS No. 141(R), among other things,
establishes principles and requirements for how the acquirer in a business combination (i)
recognizes and measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interest in the acquired business, (ii) recognizes and
measures the goodwill acquired in the business combination or a gain from a bargain purchase, and
(iii) determines what information to disclose to enable users of the financial statements to
evaluate the nature and financial effects of the business combination. The Company is required to
adopt SFAS No. 141(R) for all business combinations for which the acquisition date is on or after
March 1, 2009. Earlier adoption is prohibited.
In
December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160 (SFAS
No. 160), Noncontrolling Interests in Consolidated Financial Statements An Amendment of ARB
No. 51. SFAS No. 160 amends Accounting Research Bulletin No. 51 (ARB No. 51), Consolidated
Financial Statements, to establish accounting and reporting standards for the noncontrolling
interest in a subsidiary and for the deconsolidation of a subsidiary. This statement also amends
certain of ARB No. 51s consolidation procedures for consistency with the requirements of SFAS No.
141(R). In addition, SFAS No. 160 also includes expanded disclosure requirements regarding the
interests of the parent and its noncontrolling interest. The Company is required to adopt SFAS No.
160 for fiscal years beginning March 1, 2009. Earlier adoption is prohibited. The Company is
currently assessing the financial impact of SFAS No. 160 on its consolidated financial statements.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities An Amendment of FASB Statement
No. 133 (SFAS No. 161). SFAS No. 161 requires enhanced disclosures about an entitys derivative
and hedging activities to enable investors to better understand their effects on an entitys
financial position, financial performance, and cash flows. The Company is required to adopt SFAS
No. 161 for its interim period beginning December 1, 2008, with earlier application encouraged.
The Company is currently assessing the financial impact of SFAS
No. 161 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 derivative 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 29,
2008, 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.
57
As of February 29, 2008, and February 28, 2007, the Company had outstanding foreign exchange
derivative instruments with a notional value of $2,473.5 million and $2,383.3 million,
respectively. Approximately 70% of the Companys total exposures were hedged as of February 29,
2008. 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 29, 2008, and February 28,
2007, the fair value of open foreign exchange contracts would have been decreased by $156.5 million
and $161.8 million, respectively. Losses or gains from the revaluation or settlement of the
related underlying positions would substantially offset such gains or losses on the derivative
instruments.
The fair value of fixed rate debt is subject to interest rate risk, credit risk and foreign
currency risk. The estimated fair value of the Companys total fixed rate debt, including current
maturities, was $2,507.2 million and $1,589.3 million as of February 29, 2008, and February 28,
2007, respectively. A hypothetical 1% increase from prevailing interest rates as of February 29,
2008, and February 28, 2007, would have resulted in a decrease in fair value of fixed interest rate
long-term debt by $124.7 million and $69.6 million, respectively.
As of February 29, 2008, and February 28, 2007, 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 Companys floating LIBOR rate debt at an average rate of 4.1% through
fiscal 2010. A hypothetical 1% increase from prevailing interest rates as of February 29, 2008,
and February 28, 2007, would have increased the fair value of the interest rate swaps by $23.6
million and $36.7 million, respectively.
In addition to the $2,507.2 million and $1,589.3 million estimated fair value of fixed rate
debt outstanding as of February 29, 2008, and February 28, 2007, respectively, the Company also had
variable rate debt outstanding (primarily LIBOR based) as of February 29, 2008, and February 28,
2007, of $2,749.5 million and $2,688.7 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 29, 2008, and February 28, 2007, is $27.5
million and $26.9 million, respectively.
58
Item 8. Financial Statements and Supplementary Data
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2008
The following information is presented in this Annual Report on Form 10-K:
|
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Page |
Report of Independent Registered Public Accounting Firm KPMG LLP |
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60 |
|
Report of Independent Registered Public Accounting Firm KPMG LLP |
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61 |
|
Managements Annual Report on Internal Control Over Financial Reporting |
|
|
63 |
|
Consolidated Balance Sheets February 29, 2008, and February 28, 2007 |
|
|
64 |
|
Consolidated Statements of Operations for the years ended February 29, 2008,
February 28, 2007, and February 28, 2006 |
|
|
65 |
|
Consolidated Statements of Changes in Stockholders Equity for the years ended
February 29, 2008, February 28, 2007, and February 28, 2006 |
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|
66 |
|
Consolidated Statements of Cash Flows for the years ended February 29, 2008,
February 28, 2007, and February 28, 2006 |
|
|
68 |
|
Notes to Consolidated Financial Statements |
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|
70 |
|
Selected Quarterly Financial Information (unaudited) |
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|
130 |
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59
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 (the Company) as of February 29, 2008 and February 28, 2007, and the related
consolidated statements of operations, changes in stockholders equity, and cash flows for each of
the years in the three-year period ended February 29, 2008. These consolidated financial
statements are the responsibility of the Companys 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 29, 2008 and February 28, 2007, and the results of their operations and their cash flows
for each of the years in the three-year period ended February 29, 2008, in conformity with U.S.
generally accepted accounting principles.
As discussed in Note 2, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes an interpretation of FASB Statement No. 109, effective March 1, 2007. As
discussed in Note 1, the Company adopted Statement of Financial Accounting Standards No. 123(R),
Share-Based Payment, effective March 1, 2006.
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 29, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO), and our report dated April 29, 2008 expressed an unqualified opinion on the
effectiveness of Constellation Brands, Inc.s internal control over financial reporting.
/s/ KPMG LLP
Rochester, New York
April 29, 2008
60
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Constellation Brands, Inc.:
We have audited Constellation Brands, Inc.s (the Company) internal control over financial
reporting as of February 29, 2008, based on criteria established in Internal ControlIntegrated
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, included in the accompanying Managements Annual Report on Internal Control
Over Financial Reporting. Our responsibility is to express an opinion on the effectiveness of the
Companys 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, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A companys 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
companys 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 companys 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, Constellation Brands, Inc. maintained, in all material respects, effective internal
control over financial reporting as of February 29, 2008, based on criteria established in Internal
ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
61
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 Companys system of internal control over financial
reporting was effective as of February 29, 2008. This evaluation excluded the internal control
over financial reporting of the Fortune Brands U.S. wine business, which the Company acquired on
December 17, 2007. As of February 29, 2008, total assets, net sales and loss before income taxes
of the Fortune Brands U.S. wine business not evaluated with respect to the effectiveness of
internal control over financial reporting comprised 9.6%, 0.4%, and 1.5% of the consolidated total
assets, net sales, and loss 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 Fortune Brands U.S. wine business.
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 29, 2008 and February 28, 2007, and the related consolidated statements
of operations, changes in stockholders equity, and cash flows for each of the years in the
three-year period ended February 29, 2008, and our report dated April 29, 2008 expressed an
unqualified opinion on those consolidated financial statements.
/s/ KPMG LLP
Rochester, New York
April 29, 2008
62
Managements 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 Companys 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 Companys 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 Companys system of internal control over financial reporting was
effective as of February 29, 2008. This evaluation excluded the internal control over financial
reporting of the Fortune Brands U.S. wine business, which the Company acquired on December 17,
2007. As of February 29, 2008, total assets, net sales and loss before income taxes of the Fortune
Brands U.S. wine business not evaluated with respect to the effectiveness of internal control over
financial reporting comprised 9.6%, 0.4%, and 1.5% of the consolidated total assets, net sales, and
loss before income taxes of the Company.
The effectiveness of the Companys 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.
63
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash investments |
|
$ |
20.5 |
|
|
$ |
33.5 |
|
Accounts receivable, net |
|
|
731.6 |
|
|
|
881.0 |
|
Inventories |
|
|
2,179.5 |
|
|
|
1,948.1 |
|
Prepaid expenses and other |
|
|
267.4 |
|
|
|
160.7 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
3,199.0 |
|
|
|
3,023.3 |
|
PROPERTY, PLANT AND EQUIPMENT, net |
|
|
2,035.0 |
|
|
|
1,750.2 |
|
GOODWILL |
|
|
3,123.9 |
|
|
|
3,083.9 |
|
INTANGIBLE ASSETS, net |
|
|
1,190.0 |
|
|
|
1,135.4 |
|
OTHER ASSETS, net |
|
|
504.9 |
|
|
|
445.4 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
10,052.8 |
|
|
$ |
9,438.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Notes payable to banks |
|
$ |
379.5 |
|
|
$ |
153.3 |
|
Current maturities of long-term debt |
|
|
229.3 |
|
|
|
317.3 |
|
Accounts payable |
|
|
349.4 |
|
|
|
376.1 |
|
Accrued excise taxes |
|
|
62.4 |
|
|
|
73.7 |
|
Other accrued expenses and liabilities |
|
|
697.7 |
|
|
|
670.7 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,718.3 |
|
|
|
1,591.1 |
|
|
|
|
|
|
|
|
LONG-TERM DEBT, less current maturities |
|
|
4,648.7 |
|
|
|
3,714.9 |
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES |
|
|
535.8 |
|
|
|
474.1 |
|
|
|
|
|
|
|
|
OTHER LIABILITIES |
|
|
384.1 |
|
|
|
240.6 |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 13) |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Preferred Stock, $.01 par value-
Authorized, 1,000,000 shares; Issued, none
at February 29, 2008, and February 28, 2007 |
|
|
|
|
|
|
|
|
Class A Common Stock, $.01 par value-
Authorized, 315,000,000 shares;
Issued, 221,296,639 shares at February 29, 2008,
and 219,090,309 shares at February 28, 2007 |
|
|
2.2 |
|
|
|
2.2 |
|
Class B Convertible Common Stock, $.01 par value-
Authorized, 30,000,000 shares;
Issued, 28,782,954 shares at February 29, 2008,
and 28,831,138 shares at February 28, 2007 |
|
|
0.3 |
|
|
|
0.3 |
|
Class 1 Common Stock, $.01 par value-
Authorized, 15,000,000 shares; Issued, none
at February 29, 2008, and February 28, 2007 |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
1,344.0 |
|
|
|
1,271.1 |
|
Retained earnings |
|
|
1,306.0 |
|
|
|
1,919.3 |
|
Accumulated other comprehensive income |
|
|
736.0 |
|
|
|
349.1 |
|
|
|
|
|
|
|
|
|
|
|
3,388.5 |
|
|
|
3,542.0 |
|
|
|
|
|
|
|
|
Less-Treasury stock- |
|
|
|
|
|
|
|
|
Class A Common Stock, 29,020,781 shares at
February 29, 2008, and 8,046,370 shares at
February 28, 2007, at cost |
|
|
(620.4 |
) |
|
|
(122.3 |
) |
Class B Convertible Common Stock, 5,005,800 shares
at February 29, 2008, and February 28, 2007, at cost |
|
|
(2.2 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
(622.6 |
) |
|
|
(124.5 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,765.9 |
|
|
|
3,417.5 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
10,052.8 |
|
|
$ |
9,438.2 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
64
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SALES |
|
$ |
4,885.1 |
|
|
$ |
6,401.8 |
|
|
$ |
5,707.0 |
|
Less Excise taxes |
|
|
(1,112.1 |
) |
|
|
(1,185.4 |
) |
|
|
(1,103.5 |
) |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
3,773.0 |
|
|
|
5,216.4 |
|
|
|
4,603.5 |
|
COST OF PRODUCT SOLD |
|
|
(2,491.5 |
) |
|
|
(3,692.5 |
) |
|
|
(3,278.9 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,281.5 |
|
|
|
1,523.9 |
|
|
|
1,324.6 |
|
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES |
|
|
(807.3 |
) |
|
|
(768.8 |
) |
|
|
(612.4 |
) |
IMPAIRMENT OF GOODWILL AND INTANGIBLE
ASSETS |
|
|
(812.2 |
) |
|
|
|
|
|
|
|
|
ACQUISITION-RELATED INTEGRATION COSTS |
|
|
(11.8 |
) |
|
|
(23.6 |
) |
|
|
(16.8 |
) |
RESTRUCTURING AND RELATED CHARGES |
|
|
(6.9 |
) |
|
|
(32.5 |
) |
|
|
(29.3 |
) |
|
|
|
|
|
|
|
|
|
|
Operating (loss) income |
|
|
(356.7 |
) |
|
|
699.0 |
|
|
|
666.1 |
|
EQUITY IN EARNINGS OF EQUITY METHOD
INVESTEES |
|
|
257.9 |
|
|
|
49.9 |
|
|
|
0.8 |
|
INTEREST EXPENSE, net |
|
|
(341.8 |
) |
|
|
(268.7 |
) |
|
|
(189.6 |
) |
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS |
|
|
|
|
|
|
55.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(440.6 |
) |
|
|
535.3 |
|
|
|
477.3 |
|
PROVISION FOR INCOME TAXES |
|
|
(172.7 |
) |
|
|
(203.4 |
) |
|
|
(152.0 |
) |
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME |
|
|
(613.3 |
) |
|
|
331.9 |
|
|
|
325.3 |
|
Dividends on preferred stock |
|
|
|
|
|
|
(4.9 |
) |
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME AVAILABLE TO COMMON
STOCKHOLDERS |
|
$ |
(613.3 |
) |
|
$ |
327.0 |
|
|
$ |
315.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Class A Common Stock |
|
$ |
(2.83 |
) |
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
Basic Class B Common Stock |
|
$ |
(2.57 |
) |
|
$ |
1.31 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Class A Common Stock |
|
$ |
(2.83 |
) |
|
$ |
1.38 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
|
Diluted Class B Common Stock |
|
$ |
(2.57 |
) |
|
$ |
1.27 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Class A Common Stock |
|
|
195.135 |
|
|
|
204.966 |
|
|
|
196.907 |
|
Basic Class B Common Stock |
|
|
23.812 |
|
|
|
23.840 |
|
|
|
23.904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Class A Common Stock |
|
|
195.135 |
|
|
|
239.772 |
|
|
|
238.707 |
|
Diluted Class B Common Stock |
|
|
23.812 |
|
|
|
23.840 |
|
|
|
23.904 |
|
The accompanying notes are an integral part of these statements.
65
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Class A |
|
|
Class B |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, February 28, 2005 |
|
$ |
|
|
|
$ |
2.0 |
|
|
$ |
0.3 |
|
|
$ |
1,097.1 |
|
|
$ |
1,276.8 |
|
|
$ |
431.8 |
|
|
$ |
(28.1 |
) |
|
$ |
2,779.9 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for Fiscal 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
325.3 |
|
|
|
|
|
|
|
|
|
|
|
325.3 |
|
Other comprehensive income (loss), net of income
tax effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159.2 |
) |
|
|
|
|
|
|
(159.2 |
) |
Unrealized gain (loss) on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
0.1 |
|
Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.4 |
) |
|
|
|
|
|
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss recognized in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18.9 |
) |
|
|
|
|
|
|
(18.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(184.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
140.9 |
|
Conversion of 102,922 Class B Convertible Common
shares to Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of 3,662,997 Class A stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31.3 |
|
Employee stock purchases of 342,129 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
1.9 |
|
|
|
6.3 |
|
Acceleration of 5,130,778 Class A stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.3 |
|
Dividend on Preferred Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
|
(9.8 |
) |
Issuance of 7,150 restricted Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned restricted stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.2 |
|
Tax benefit on Class A stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19.0 |
|
Tax benefit on disposition of employee stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, February 28, 2006 |
|
|
|
|
|
|
2.0 |
|
|
|
0.3 |
|
|
|
1,159.4 |
|
|
|
1,592.3 |
|
|
|
247.4 |
|
|
|
(26.2 |
) |
|
|
2,975.2 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for Fiscal 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
331.9 |
|
|
|
|
|
|
|
|
|
|
|
331.9 |
|
Other comprehensive income (loss), net of income
tax effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132.1 |
|
|
|
|
|
|
|
132.1 |
|
Unrealized loss on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7.3 |
) |
|
|
|
|
|
|
(7.3 |
) |
Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10.4 |
) |
|
|
|
|
|
|
(10.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss recognized in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum pension liability adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.4 |
) |
|
|
|
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442.9 |
|
Adjustments to initially apply SFAS No. 158, net of
income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9.3 |
) |
|
|
|
|
|
|
(9.3 |
) |
Repurchase of 3,894,978 Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(100.0 |
) |
|
|
(100.0 |
) |
Conversion of 32,000 Class B Convertible Common
shares to Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of 5,423,708 Class A stock options |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
63.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
63.7 |
|
Employee stock purchases of 318,137 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.1 |
|
|
|
|
|
|
|
|
|
|
|
1.8 |
|
|
|
5.9 |
|
Stock-based employee compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17.9 |
|
Dividend on Preferred Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
(4.9 |
) |
Conversion of 170,500 Mandatory Convertible Preferred
shares |
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of 8,614 restricted Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unearned restricted stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Tax benefit on Class A stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26.0 |
|
Tax benefit on disposition of employee stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.1 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, February 28, 2007 |
|
$ |
|
|
|
$ |
2.2 |
|
|
$ |
0.3 |
|
|
$ |
1,271.1 |
|
|
$ |
1,919.3 |
|
|
$ |
349.1 |
|
|
$ |
(124.5 |
) |
|
$ |
3,417.5 |
|
66
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
(in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
Preferred |
|
|
Common Stock |
|
|
Paid-in |
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
|
|
|
|
Stock |
|
|
Class A |
|
|
Class B |
|
|
Capital |
|
|
Earnings |
|
|
Income (Loss) |
|
|
Stock |
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, February 28, 2007 |
|
$ |
|
|
|
$ |
2.2 |
|
|
$ |
0.3 |
|
|
$ |
1,271.1 |
|
|
$ |
1,919.3 |
|
|
$ |
349.1 |
|
|
$ |
(124.5 |
) |
|
$ |
3,417.5 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for Fiscal 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(613.3 |
) |
|
|
|
|
|
|
|
|
|
|
(613.3 |
) |
Other comprehensive income (loss), net of income
tax effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
412.2 |
|
|
|
|
|
|
|
412.2 |
|
Unrealized loss on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(23.6 |
) |
|
|
|
|
|
|
(23.6 |
) |
Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3.1 |
) |
|
|
|
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss recognized in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(26.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4.1 |
) |
|
|
|
|
|
|
(4.1 |
) |
Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.5 |
|
|
|
|
|
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain recognized in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
386.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(226.4 |
) |
Repurchase of 21,332,468 Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(500.0 |
) |
|
|
(500.0 |
) |
Conversion of 48,184 Class B Convertible Common
shares to Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of 2,158,146 Class A stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20.3 |
|
Employee stock purchases of 344,331 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4.4 |
|
|
|
|
|
|
|
|
|
|
|
1.8 |
|
|
|
6.2 |
|
Stock-based employee compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.6 |
|
Issuance of 13,726 restricted Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(0.1 |
) |
|
|
|
|
|
|
|
|
|
|
0.1 |
|
|
|
|
|
Amortization of unearned restricted stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.3 |
|
Tax benefit on Class A stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14.4 |
|
Tax benefit on disposition of employee stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, February 29, 2008 |
|
$ |
|
|
|
$ |
2.2 |
|
|
$ |
0.3 |
|
|
$ |
1,344.0 |
|
|
$ |
1,306.0 |
|
|
$ |
736.0 |
|
|
$ |
(622.6 |
) |
|
$ |
2,765.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
67
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(613.3 |
) |
|
$ |
331.9 |
|
|
$ |
325.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net (loss) income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and intangible assets |
|
|
812.2 |
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
154.7 |
|
|
|
131.7 |
|
|
|
119.9 |
|
Deferred tax provision |
|
|
98.0 |
|
|
|
52.7 |
|
|
|
30.1 |
|
Loss on disposal of business |
|
|
34.6 |
|
|
|
16.9 |
|
|
|
|
|
Stock-based compensation expense |
|
|
32.0 |
|
|
|
16.5 |
|
|
|
7.5 |
|
Equity in earnings of equity method investees, net |
|
|
20.7 |
|
|
|
(41.0 |
) |
|
|
10.3 |
|
Amortization of intangible and other assets |
|
|
11.2 |
|
|
|
7.6 |
|
|
|
8.2 |
|
Loss on disposal or impairment of long-lived assets, net |
|
|
1.8 |
|
|
|
12.5 |
|
|
|
2.2 |
|
Noncash portion of loss on extinguishment of debt |
|
|
|
|
|
|
11.8 |
|
|
|
|
|
Gain on change in fair value of derivative instruments |
|
|
|
|
|
|
(55.1 |
) |
|
|
|
|
Proceeds from early termination of derivative contracts |
|
|
|
|
|
|
|
|
|
|
48.8 |
|
Change in operating assets and liabilities, net of effects
from purchases and sales of businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
56.2 |
|
|
|
(6.3 |
) |
|
|
44.2 |
|
Inventories |
|
|
(37.8 |
) |
|
|
(85.1 |
) |
|
|
(121.9 |
) |
Prepaid expenses and other current assets |
|
|
(5.8 |
) |
|
|
44.3 |
|
|
|
7.2 |
|
Accounts payable |
|
|
16.3 |
|
|
|
34.3 |
|
|
|
(1.2 |
) |
Accrued excise taxes |
|
|
2.4 |
|
|
|
1.0 |
|
|
|
4.0 |
|
Other accrued expenses and liabilities |
|
|
(34.2 |
) |
|
|
(157.2 |
) |
|
|
(35.1 |
) |
Other, net |
|
|
(29.2 |
) |
|
|
(3.3 |
) |
|
|
(13.5 |
) |
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
1,133.1 |
|
|
|
(18.7 |
) |
|
|
110.7 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
519.8 |
|
|
|
313.2 |
|
|
|
436.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of businesses, net of cash acquired |
|
|
(1,302.0 |
) |
|
|
(1,093.7 |
) |
|
|
(45.9 |
) |
Purchases of property, plant and equipment |
|
|
(143.8 |
) |
|
|
(192.0 |
) |
|
|
(132.5 |
) |
Investment in equity method investee |
|
|
(4.6 |
) |
|
|
|
|
|
|
(2.7 |
) |
Payment of accrued earn-out amount |
|
|
(4.0 |
) |
|
|
(3.6 |
) |
|
|
(3.1 |
) |
Proceeds from formation of joint venture |
|
|
185.6 |
|
|
|
|
|
|
|
|
|
Proceeds from sales of businesses |
|
|
136.5 |
|
|
|
28.4 |
|
|
|
17.9 |
|
Proceeds from sales of assets |
|
|
19.4 |
|
|
|
9.8 |
|
|
|
119.7 |
|
Proceeds from maturity of derivative instrument |
|
|
|
|
|
|
55.1 |
|
|
|
|
|
Proceeds from sale of equity method investment |
|
|
|
|
|
|
|
|
|
|
35.9 |
|
Other investing activities |
|
|
|
|
|
|
(1.1 |
) |
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(1,112.9 |
) |
|
|
(1,197.1 |
) |
|
|
(15.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
1,212.9 |
|
|
|
3,705.4 |
|
|
|
9.6 |
|
Net proceeds from notes payable |
|
|
219.4 |
|
|
|
47.1 |
|
|
|
63.8 |
|
Exercise of employee stock options |
|
|
20.6 |
|
|
|
63.4 |
|
|
|
31.5 |
|
Excess tax benefits from stock-based payment awards |
|
|
11.3 |
|
|
|
21.4 |
|
|
|
|
|
Proceeds from employee stock purchases |
|
|
6.2 |
|
|
|
5.9 |
|
|
|
6.3 |
|
Purchases of treasury stock |
|
|
(500.0 |
) |
|
|
(100.0 |
) |
|
|
|
|
Principal payments of long-term debt |
|
|
(374.9 |
) |
|
|
(2,786.9 |
) |
|
|
(527.6 |
) |
Payment of financing costs of long-term debt |
|
|
(10.6 |
) |
|
|
(23.8 |
) |
|
|
|
|
Payment of preferred stock dividends |
|
|
|
|
|
|
(7.3 |
) |
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
584.9 |
|
|
|
925.2 |
|
|
|
(426.2 |
) |
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash investments |
|
|
(4.8 |
) |
|
|
(18.7 |
) |
|
|
(0.9 |
) |
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS |
|
|
(13.0 |
) |
|
|
22.6 |
|
|
|
(6.7 |
) |
CASH AND CASH INVESTMENTS, beginning of year |
|
|
33.5 |
|
|
|
10.9 |
|
|
|
17.6 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH INVESTMENTS, end of year |
|
$ |
20.5 |
|
|
$ |
33.5 |
|
|
$ |
10.9 |
|
|
|
|
|
|
|
|
|
|
|
68
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
328.6 |
|
|
$ |
220.8 |
|
|
$ |
198.8 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
38.9 |
|
|
$ |
153.5 |
|
|
$ |
42.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired, including cash acquired |
|
$ |
1,448.7 |
|
|
$ |
1,775.0 |
|
|
$ |
49.5 |
|
Liabilities assumed |
|
|
(141.2 |
) |
|
|
(648.2 |
) |
|
|
(1.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
1,307.5 |
|
|
|
1,126.8 |
|
|
|
48.2 |
|
Plus settlement of note payable |
|
|
|
|
|
|
2.3 |
|
|
|
|
|
Less note payable issuance |
|
|
(2.7 |
) |
|
|
|
|
|
|
(2.3 |
) |
Less direct acquisition costs accrued or previously paid |
|
|
(0.8 |
) |
|
|
(0.4 |
) |
|
|
|
|
Less cash acquired |
|
|
(2.0 |
) |
|
|
(35.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for purchases of businesses |
|
$ |
1,302.0 |
|
|
$ |
1,093.7 |
|
|
$ |
45.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Joint Venture |
|
$ |
|
|
|
$ |
124.4 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
69
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 29, 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Description of business
Constellation Brands, Inc. and its subsidiaries (the Company) operate primarily in the
beverage alcohol industry. 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 is the largest
multi-category supplier of beverage alcohol in the United States (U.S.); a leading producer and
exporter of wine from Australia and New Zealand; the largest producer and marketer of wine in
Canada; and a major supplier of beverage alcohol in the United Kingdom (U.K.). In North America,
the Company distributes its products through wholesale distributors. In addition, the Company
imports, markets and sells the Modelo Brands (as defined in Note 7) and certain other imported beer
brands through the Companys joint venture, Crown Imports (as defined in Note 7). In Australia,
the Company distributes its products directly to off-premise accounts, such as major retail chains,
on-premise accounts, such as hotels and restaurants, and large wholesalers. In the U.K., the
Company distributes its products directly to off-premise accounts, such as major retail chains, and
to other wholesalers and, through its investment in Matthew Clark (as defined in Note 7), the
Company distributes its branded products and those of other major drinks companies to on-premise
accounts: pubs, clubs, hotels and restaurants.
Principles of consolidation
The consolidated financial statements of the Company include the accounts of the Company and
its majority-owned subsidiaries and entities in which the Company has a controlling financial
interest after the elimination of intercompany accounts and transactions. The Company has a
controlling financial interest if the Company owns a majority of the outstanding voting common
stock or has significant control over an entity through contractual or economic interests in which
the Company is the primary beneficiary.
Equity investments
If the Company is not required to consolidate its investment in another company, the Company
uses the equity method if the Company can exercise significant influence over the other company.
Under the equity method, investments are carried at cost, plus or minus the Companys equity in the
increases and decreases in the investees net assets after the date of acquisition and certain
other adjustments. The Companys share of the net income or loss of the investee is included in
equity in earnings of equity method investees on the Companys Consolidated Statements of
Operations. Dividends received from the investee reduce the carrying amount of the investment.
Equity investments are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the investments may not be recoverable. The Company recorded an
impairment loss on its investment in Ruffino S.r.l (Ruffino) of $15.1 million for the year ended
February 29, 2008. This impairment loss is included in equity in earnings of equity method
investees on the Companys Consolidated Statements of Operations. No instances of impairment were
noted on the Companys equity method investments for the years ended February 28, 2007, and
February 28, 2006.
Managements use of estimates
The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial
statements and the reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
70
Revenue recognition
Sales are recognized when title passes to the customer, which is generally when the product is
shipped. Amounts billed to customers for shipping and handling are classified as sales. 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.
Cost of product sold
The types of costs included in cost of product sold are raw materials, packaging materials,
manufacturing costs, plant administrative support and overheads, and freight and warehouse costs
(including distribution network costs). Distribution network costs include inbound freight charges
and outbound shipping and handling costs, purchasing and receiving costs, inspection costs,
warehousing and internal transfer costs.
Selling, general and administrative expenses
The types of costs included in selling, general and administrative expenses consist
predominately of advertising and non-manufacturing administrative and overhead costs. Distribution
network costs are not included in the Companys selling, general and administrative expenses, but
are included in cost of product sold as described above. The Company expenses advertising costs as
incurred, shown or distributed. Prepaid advertising costs at February 29, 2008, and February 28,
2007, were not material. Advertising expense for the years ended February 29, 2008, February 28,
2007, and February 28, 2006, was $180.4 million, $182.7 million and $142.4 million, respectively.
Foreign currency translation
The functional currency of the Companys subsidiaries outside the U.S. is the respective
local currency. The translation from the applicable foreign currencies to U.S. dollars is
performed for balance sheet accounts using exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average exchange rate for the period. The
resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive
Income (Loss) (AOCI). Gains or losses resulting from foreign currency denominated transactions
are included in selling, general and administrative expenses on the Companys Consolidated
Statements of Operations. The Company engages in foreign currency denominated transactions with
customers and suppliers, as well as between subsidiaries with different functional currencies.
Aggregate foreign currency transaction net (losses) gains were ($15.3) million, ($9.9) million and
$5.1 million for the years ended February 29, 2008, February 28, 2007, and February 28, 2006,
respectively.
Cash investments
Cash investments consist of highly liquid investments with an original maturity when purchased
of three months or less and are stated at cost, which approximates market value. The amounts at
February 29, 2008, and February 28, 2007, are not significant.
Allowance for doubtful accounts
The Company records an allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The majority of the accounts receivable
balance is generated from sales to independent distributors with whom the Company has a
predetermined collection date arranged through electronic funds transfer. The allowance for
doubtful accounts was $7.6 million and $14.4 million as of February 29, 2008, and February 28,
2007, respectively.
71
Fair value of financial instruments
To meet the reporting requirements of Statement of Financial Accounting Standards No. 107,
Disclosures about Fair Value of Financial Instruments, the Company calculates the fair value of
financial instruments using quoted market prices whenever available. When quoted market prices are
not available, the Company uses standard pricing models for various types of financial instruments
(such as forwards, options, swaps, etc.) which take into account the present value of estimated
future cash flows.
The carrying amount and estimated fair value of the Companys financial instruments are
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 29, 2008 |
|
February 28, 2007 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
|
|
Amount |
|
Value |
|
Amount |
|
Value |
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash investments |
|
$ |
20.5 |
|
|
$ |
20.5 |
|
|
$ |
33.5 |
|
|
$ |
33.5 |
|
Accounts receivable |
|
$ |
731.6 |
|
|
$ |
731.6 |
|
|
$ |
881.0 |
|
|
$ |
881.0 |
|
Currency forward
contracts |
|
$ |
87.6 |
|
|
$ |
87.6 |
|
|
$ |
27.4 |
|
|
$ |
27.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to banks |
|
$ |
379.5 |
|
|
$ |
379.5 |
|
|
$ |
153.3 |
|
|
$ |
153.3 |
|
Accounts payable |
|
$ |
349.4 |
|
|
$ |
349.4 |
|
|
$ |
376.1 |
|
|
$ |
376.1 |
|
Long-term debt, including
current portion |
|
$ |
4,878.0 |
|
|
$ |
4,877.2 |
|
|
$ |
4,032.2 |
|
|
$ |
4,124.7 |
|
Currency forward
contracts |
|
$ |
81.3 |
|
|
$ |
81.3 |
|
|
$ |
27.5 |
|
|
$ |
27.5 |
|
Interest rate swap
contracts |
|
$ |
57.2 |
|
|
$ |
57.2 |
|
|
$ |
0.9 |
|
|
$ |
0.9 |
|
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments:
Cash and cash investments, accounts receivable and accounts payable: The carrying amounts
approximate fair value due to the short maturity of these instruments.
Currency forward contracts: The fair value is estimated based on quoted market prices.
Interest rate swap contracts: The fair value is estimated based on quoted market prices.
Notes payable to banks: These instruments are variable interest rate bearing notes for which
the carrying value approximates the fair value.
Long-term debt: The senior credit facility is subject to variable interest rates which are
frequently reset; accordingly, the carrying value of this debt approximates its fair value. The
fair value of the remaining long-term debt, which is all fixed rate, is estimated by discounting
cash flows using interest rates currently available for debt with similar terms and maturities.
Derivative instruments
As a multinational company, the Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates that could affect the Companys results of operations
and financial condition. The amount of volatility realized will vary based upon the effectiveness
and level of derivative instruments outstanding during a particular period of time, as well as the
currency and interest rate market movements during that same period.
72
The Company enters into derivative instruments, primarily interest rate swaps and foreign currency
forwards, to manage interest rate and foreign currency risks. In accordance with Statement of
Financial Accounting Standards No. 133 (SFAS No. 133), Accounting for Derivative Instruments and
Hedging Activities, as amended, the Company recognizes all derivatives as either assets or
liabilities on the balance sheet and measures those instruments at fair value. The fair values of
the Companys derivative instruments change with fluctuations in interest rates and/or currency
rates and are expected to offset changes in the values of the underlying exposures. The Companys
derivative instruments are held solely to hedge economic exposures. The Company follows strict
policies to manage interest rate and foreign currency risks, including prohibitions on derivative
market-making or other speculative activities. As of February 29, 2008, and February 28, 2007, the
Company had foreign exchange contracts outstanding with a notional value of $2,473.5 million and
$2,383.3 million, respectively. In addition, as of February 29, 2008, and February 28, 2007, the
Company had interest rate swap agreements outstanding with a notional value of $1,200.0 million
(see Note 9).
To qualify for hedge accounting under SFAS No. 133, the details of the hedging relationship
must be formally documented at inception of the arrangement, including the risk management
objective, hedging strategy, hedged item, specific risk that is being hedged, the derivative
instrument, how effectiveness is being assessed and how ineffectiveness will be measured. The
derivative must be highly effective in offsetting either changes in the fair value or cash flows,
as appropriate, of the risk being hedged. Effectiveness is evaluated on a retrospective and
prospective basis based on quantitative measures.
Certain of the Companys derivative instruments do not qualify for SFAS No. 133 hedge
accounting treatment; for others, the Company chooses not to maintain the required documentation to
apply hedge accounting treatment. These instruments are used to hedge the Companys exposure to
fluctuations in the value of foreign currency denominated receivables and payables, foreign
currency investments, primarily consisting of loans to subsidiaries, and cash flows related
primarily to repatriation of those loans or investments. Forward contracts, generally less than 12
months in duration, are used to hedge some of these risks. The Companys derivative policy permits
the use of non-SFAS No. 133 hedging when the hedging instrument is settled within the fiscal
quarter or offsets a recognized balance sheet exposure. In these circumstances, the mark to fair
value is reported currently through earnings in selling, general and administrative expenses on the
Companys Consolidated Statements of Operations.
Furthermore, when it is determined that a derivative instrument which qualifies for hedge
accounting treatment is not, or has ceased to be, highly effective as a hedge, the Company
discontinues hedge accounting prospectively. The Company discontinues hedge accounting
prospectively when (i) the derivative is no longer highly effective in offsetting changes in the
cash flows of a hedged item; (ii) the derivative expires or is sold, terminated, or exercised;
(iii) it is no longer probable that the forecasted transaction will occur; or (iv) management
determines that designating the derivative as a hedging instrument is no longer appropriate.
73
Cash flow hedges:
The Company is exposed to foreign denominated cash flow fluctuations in connection with sales
to third parties, intercompany sales, and intercompany financing arrangements. Foreign currency
forward contracts are used to hedge certain of these risks. In addition, the Company utilizes
interest rate swaps to manage its exposure to changes in interest rates. Derivatives managing the
Companys cash flow exposures generally mature within three years or less, with a maximum maturity
of five years. Throughout the term of the designated cash flow hedge relationship, but at least
quarterly, a retrospective evaluation and prospective assessment of hedge effectiveness is
performed. In the event the relationship is no longer effective, the fair market value of the
hedging derivative instrument is recognized immediately in the Companys Consolidated Statements of
Operations. In conjunction with its effectiveness testing, the Company also evaluates
ineffectiveness associated with the hedge relationship. Resulting ineffectiveness, if any, is
recognized immediately in the Companys Consolidated Statements of Operations.
The Company records the fair value of its foreign exchange contracts qualifying for cash flow
hedge accounting treatment in its consolidated balance sheet with the related gain or loss on those
contracts deferred in stockholders equity (as a component of AOCI). These deferred gains or
losses are recognized in the Companys Consolidated Statements of Operations in the same period in
which the underlying hedged items are recognized, and on the same line item as the underlying
hedged items. However, to the extent that any derivative instrument is not considered to be
perfectly effective in offsetting the change in the value of the hedged item, the amount related to
the ineffective portion of this derivative instrument is immediately recognized in the Companys
Consolidated Statements of Operations in selling, general and administrative expenses.
The Company expects $8.5 million of losses, net of income tax effect, to be reclassified from
AOCI to earnings within the next 12 months. The amount of hedge ineffectiveness associated with
the Companys designated cash flow hedge instruments recognized in the Companys Consolidated
Statements of Operations for the years ended February 29, 2008, February 28, 2007, and February 28,
2006, was not material. All components of the Companys derivative instruments gains or losses
are included in the assessment of hedge effectiveness. In addition, the amount of net gains
reclassified into earnings as a result of the discontinuance of cash flow hedge accounting due to
the probability that the original forecasted transaction would not occur by the end of the
originally specified time period was not material for the years ended February 29, 2008, February
28, 2007, and February 28, 2006.
Fair value hedges:
Fair value hedges are hedges that offset the risk of changes in the fair values of recorded
assets and liabilities, and firm commitments. The Company records changes in fair value of
derivative instruments which are designated and deemed effective as fair value hedges, in earnings
offset by the corresponding changes in the fair value of the hedged items. The Company did not
designate any derivative instruments as fair value hedges for the years ended February 29, 2008,
February 28, 2007, and February 28, 2006.
74
Net investment hedges:
Net investment hedges are hedges that use derivative instruments or non-derivative instruments
to hedge the foreign currency exposure of a net investment in a foreign operation. The Company
manages currency exposures resulting from its net investments in foreign subsidiaries principally
with debt denominated in the related foreign currency. Gains and losses on these instruments are
recorded as foreign currency translation adjustments in AOCI. Currently, the Company has
designated the Sterling Senior Notes and the Sterling Series C Senior Notes (as defined in Note 9)
totaling £155.0 million aggregate principal amount as a hedge against the net investment in the
Companys U.K. subsidiary. For the years ended February 29, 2008, February 28, 2007, and February
28, 2006, net (losses) gains of ($3.9) million, ($32.6) million and $25.9 million, respectively,
are included in foreign currency translation adjustments within AOCI.
Counterparty credit risk:
Counterparty credit risk relates to losses the Company could incur if a counterparty defaults
on a derivative contract. The Company manages exposure to counterparty credit risk by requiring
specified minimum credit standards and diversification of counterparties. The Company enters into
master agreements with its counterparties that allow netting of certain exposures in order to
manage this risk. All of the Companys counterpart exposures are with counterparts that have
investment grade ratings. The Company has procedures to monitor the credit exposure for both mark
to market and future potential exposures.
Inventories
Inventories are stated at the lower of cost (computed in accordance with the first-in,
first-out method) or market. Elements of cost include materials, labor and overhead and are
classified as follows:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
|
|
Raw materials and supplies |
|
$ |
115.2 |
|
|
$ |
106.5 |
|
In-process inventories |
|
|
1,392.0 |
|
|
|
1,264.4 |
|
Finished case goods |
|
|
672.3 |
|
|
|
577.2 |
|
|
|
|
|
|
|
|
|
|
$ |
2,179.5 |
|
|
$ |
1,948.1 |
|
|
|
|
|
|
|
|
A substantial portion of barreled whiskey and brandy will not be sold within one year because
of the duration of the aging process. All barreled whiskey and brandy are classified as in-process
inventories and are included in current assets, in accordance with industry practice. Bulk wine
inventories are also included as in-process inventories within current assets, in accordance with
the general practices of the wine industry, although a portion of such inventories may be aged for
periods greater than one year. Warehousing, insurance, ad valorem taxes and other carrying charges
applicable to barreled whiskey and brandy held for aging are included in inventory costs.
The Company assesses the valuation of its inventories and reduces the carrying value of those
inventories that are obsolete or in excess of the Companys 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 Companys products is less favorable than the Companys
forecasts, then the value of the inventories may be required to be reduced, which would result in
additional expense to the Company and affect its results of operations.
75
Property, plant and equipment
Property, plant and equipment is stated at cost. Major additions and betterments are charged
to property accounts, while maintenance and repairs are charged to operations as incurred. The
cost of properties sold or otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts at the time of disposal and resulting gains and losses are included as
a component of operating income. During the year ended February 29, 2008, the Company changed its
policy related to dispensing equipment in the U.K. to be expensed as incurred. In connection with
this policy change, the Company recognized an immaterial loss in selling, general and
administrative expenses for the year ended February 29, 2008, in connection with the write-off of
previously capitalized dispensing equipment in the U.K.
Depreciation
Depreciation is computed primarily using the straight-line method over the following estimated
useful lives:
|
|
|
|
|
|
|
Depreciable Life in Years |
Land improvements |
|
|
15 to 32 |
|
Vineyards |
|
|
16 to 26 |
|
Buildings and improvements |
|
|
10 to 44 |
|
Machinery and equipment |
|
|
3 to 35 |
|
Motor vehicles |
|
|
3 to 7 |
|
Goodwill and other intangible assets
In accordance with Statement of Financial Accounting Standards No. 142 (SFAS No. 142),
Goodwill and Other Intangible Assets, the Company reviews its goodwill and indefinite lived
intangible assets annually for impairment, or sooner, if events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. The Company uses December 31
as its annual impairment test measurement date. Indefinite lived intangible assets consist
principally of trademarks. Intangible assets determined to have a finite life, primarily customer
relationships, are amortized over their estimated useful lives and are subject to review for
impairment in accordance with the provisions of SFAS No. 144 (as defined below). Note 6 provides a
summary of intangible assets segregated between amortizable and nonamortizable amounts.
In the fourth quarter of fiscal 2008, pursuant to the Companys accounting policy, the Company
performed its annual goodwill impairment analysis. As a result of this analysis, the Company
concluded that the carrying amounts of goodwill assigned to the Constellation Wines segments
Australian and U.K. reporting units exceeded their implied fair values and recorded impairment
losses of $599.9 million, which is included in impairment of goodwill and intangible assets on the
Companys Consolidated Statements of Operations. The impairment losses were determined by
comparing the carrying value of goodwill assigned to specific reporting units within the segment as
of December 31, 2007, with the implied fair value of the goodwill. In determining the implied fair
value of the goodwill, the Company considered estimates of future operating results and cash flows
of each of the reporting units discounted using estimated discount rates. The estimates of future
operating results and cash flows were principally derived from the Companys updated long-term
financial forecast, which was developed as part of the Companys strategic planning cycle conducted
during the Companys fourth quarter. The decline in the implied fair value of the goodwill and
resulting impairment losses were primarily driven by the updated long-term financial forecasts,
which showed lower estimated future operating results primarily due to changes in market conditions
in Australia and the U.K. in the fourth quarter of fiscal 2008. No instances of impairment were
noted on the Companys goodwill for the years ended February 28, 2007, and February 28, 2006.
76
In addition, during the fourth quarter of fiscal 2008, the Company performed its review of
indefinite lived intangible assets for impairment. The Company determined that certain intangible
assets associated with the Constellation Wines segments Australian and U.K. reporting units,
primarily trademarks, were impaired primarily due to the revised lower revenue and profit forecasts
associated with products incorporating these assets. The Company measured the amount of impairment
by calculating the amount by which the carrying value of these assets exceeded their estimated fair
values, which were based on projected discounted future net cash flows. As a result of this
review, the Company recorded additional impairment losses of $204.9 million, which is included in
impairment of goodwill and intangible assets on the Companys Consolidated Statements of
Operations. The Company recorded an immaterial impairment loss for the year ended February 28,
2007, for indefinite lived intangible assets associated with assets held-for-sale. No instances of
impairment were noted on the Companys indefinite lived intangible assets for the year ended
February 28, 2006.
Other assets
Other assets include the following: (i) investments in equity method investees which are
carried under the equity method of accounting (see Note 7); (ii) deferred financing costs which
are stated at cost, net of accumulated amortization, and are amortized on an effective interest
basis over the term of the related debt; (iii) deferred tax assets which are stated at cost, net of
valuation allowances (see Note 10); and (iv) derivative assets which are stated at fair value (see
discussion above).
Long-lived assets impairment
In accordance with Statement of Financial Accounting Standards No. 144 (SFAS No. 144),
Accounting for the Impairment or Disposal of Long-Lived Assets, the Company reviews its
long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
undiscounted future cash flows, an impairment loss is recognized for the amount by which the
carrying amount of the asset exceeds its fair value. Assets held for sale are reported at the
lower of the carrying amount or fair value less costs to sell and are no longer depreciated. Total
assets held for sale as of February 29, 2008, and February 28, 2007, are not material.
Pursuant to this policy, for the year ended February 29, 2008, in connection with the
Companys Fiscal 2008 Plan (as defined in Note 19), the Company recorded asset impairment losses of
$7.4 million associated primarily with certain definite lived trademarks of brands to be
discontinued. These asset impairment losses are included in impairment of goodwill and intangible
assets on the Companys Consolidated Statements of Operations. For the year ended February 28,
2007, in connection with the Constellation Wines segments Fiscal 2007 Wine Plan (as defined in
Note 19), the Company recorded an asset impairment loss of $11.8 million in connection with the
write-down of certain winery and vineyard assets which satisfied the conditions necessary to be
classified as held-for-sale. These assets were written down to a value based on the Companys
estimate of fair value less cost to sell. This impairment loss is included in selling, general and
administrative expenses on the Companys Consolidated Statements of Operations. No instances of
impairment were noted on the Companys long-lived assets for the year ended February 28, 2006.
Income taxes
The Company uses the asset and liability method of accounting for income taxes. This method
accounts for deferred income taxes by applying statutory rates in effect at the balance sheet date
to the difference between the financial reporting and tax bases of assets and liabilities.
77
Environmental
Environmental expenditures that relate to current operations or to an existing condition
caused by past operations, and which do not contribute to current or future revenue generation, are
expensed. Liabilities for environmental risks or components thereof are recorded when
environmental assessments and/or remedial efforts are probable, and the cost can be reasonably
estimated. Generally, the timing of these accruals coincides with the completion of a feasibility
study or the Companys commitment to a formal plan of action. Liabilities for environmental costs
were not material at February 29, 2008, and February 28, 2007.
Earnings per common share
The Company has two classes of outstanding common stock: Class A Common Stock and Class B
Convertible Common Stock (see Note 14). With respect to dividend rights, the Class A Common Stock
is entitled to cash dividends of at least ten percent higher than those declared and paid on the
Class B Convertible Common Stock. Accordingly, the Company uses the two-class method for the
computation of earnings per common share basic and earnings per common share diluted. The
two-class computation method for each period reflects the amount of allocated undistributed
earnings per share computed using the participation percentage which reflects the minimum dividend
rights of each class of stock. Earnings per common share basic has been computed using the
two-class method. Earnings per common share diluted for Class A Common Stock has been computed
using the more dilutive of the if-converted method or the two-class method. Earnings per common
share diluted for Class B Convertible Common Stock has been computed using the two-class method
(see Note 15).
Basic earnings per common share excludes the effect of common stock equivalents and is
computed using the two-class computation method. Diluted earnings per common share for Class A
Common Stock reflects the potential dilution that could result if securities or other contracts to
issue common stock were exercised or converted into common stock. Diluted earnings per common
share for Class A Common Stock assumes the exercise of stock options using the treasury stock
method and the conversion of Class B Convertible Common Stock and Preferred Stock (as defined in
Note 14) using the more dilutive if-converted method. Diluted earnings per common share for Class
B Convertible Common Stock is presented without assuming conversion into Class A Common Stock and
is computed using the two-class computation method.
Stock-based employee compensation plans
Effective March 1, 2006, the Company adopted Statement of Financial Accounting Standards No.
123 (revised 2004) (SFAS No. 123(R)), Share-Based Payment, for its four stock-based employee
compensation plans, which are described more fully in Note 14. SFAS No. 123(R) replaces Statement
of Financial Accounting Standards No. 123 (SFAS No. 123), Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25 (APB Opinion No. 25),
Accounting for Stock Issued to Employees. SFAS No. 123(R) requires the cost resulting from all
share-based payment transactions be recognized in the financial statements. In addition, SFAS No.
123(R) establishes fair value as the measurement objective in accounting for share-based payment
arrangements and requires all entities to apply a grant date fair-value-based measurement method in
accounting for share-based payment transactions. SFAS No. 123(R) also amends Statement of
Financial Accounting Standards No. 95 (SFAS No. 95), Statement of Cash Flows, to require that
excess tax benefits be reported as a financing cash inflow rather than as a reduction of taxes
paid. SFAS No. 123(R) applies to all awards granted, modified, repurchased, or cancelled by the
Company after March 1, 2006. On March 29, 2005, the Securities and Exchange Commission (SEC)
staff issued Staff Accounting Bulletin No. 107 (SAB No. 107), Share-Based Payment, to express
the views of the staff regarding the interaction between SFAS No. 123(R) and certain SEC rules and
regulations and to provide the staffs views regarding the valuation of share-based payment
arrangements for public companies. The SAB No. 107 guidance was taken into consideration with the
implementation of SFAS No. 123(R).
78
Prior to March 1, 2006, the Company applied the intrinsic value method described in Accounting
Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and
related interpretations in accounting for its stock-based employee compensation plans. In
accordance with APB No. 25, the compensation cost for stock options was recognized in income based
on the excess, if any, of the quoted market price of the stock at the grant date of the award or
other measurement date over the amount an employee must pay to acquire the stock. Options granted
under the Companys stock option plans have an exercise price equal to the market value of the
underlying common stock on the date of grant; therefore, no incremental compensation expense has
been recognized for grants made to employees under the Companys stock option plans. The Company
utilized the disclosure-only provisions of Statement of Financial Accounting Standards No. 123
(SFAS No. 123), Accounting for Stock-Based Compensation, as amended.
The following table illustrates the effect on net income and earnings per share for the year
ended February 28, 2006, as if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation:
|
|
|
|
|
|
|
For the Year |
|
|
|
Ended |
|
|
|
February 28, |
|
|
|
2006 |
|
(in millions, except per share data) |
|
|
|
|
Net income, as reported |
|
$ |
325.3 |
|
Add: Stock-based employee compensation
expense included in reported net income,
net of related tax effects |
|
|
4.8 |
|
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax effects |
|
|
(38.7 |
) |
|
|
|
|
Pro forma net income |
|
$ |
291.4 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share basic: |
|
|
|
|
Class A Common Stock, as reported |
|
$ |
1.44 |
|
|
|
|
|
Class B Convertible Common Stock, as reported |
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
Class A Common Stock, pro forma |
|
$ |
1.29 |
|
|
|
|
|
Class B Convertible Common Stock, pro forma |
|
$ |
1.17 |
|
|
|
|
|
|
|
|
|
|
Earnings per common share diluted: |
|
|
|
|
Class A Common Stock, as reported |
|
$ |
1.36 |
|
|
|
|
|
Class B Convertible Common Stock, as reported |
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
Class A Common Stock, pro forma |
|
$ |
1.21 |
|
|
|
|
|
Class B Convertible Common Stock, pro forma |
|
$ |
1.11 |
|
|
|
|
|
The Company adopted SFAS No. 123(R) using the modified prospective transition method. Under
the modified prospective transition method, the Company is required to record stock-based
compensation expense for all awards granted after the adoption date and for the unvested portion of
previously granted awards outstanding on the adoption date. Compensation cost related to the
unvested portion of previously granted awards is based on the grant-date fair value estimated in
accordance with the original provisions of SFAS No. 123. Compensation cost for awards granted
after the adoption date is based on the grant-date fair value estimated in accordance with the
provisions of SFAS No. 123(R). Results for prior periods have not been restated and do not reflect
the recognition of stock-based compensation in accordance with the provisions of SFAS No. 123(R).
79
Stock-based awards, primarily stock options, granted by the Company are subject to specific
vesting conditions, generally time vesting, or upon retirement, disability or death of the employee
(as defined by the stock option plan), if earlier. Under APB No. 25, as the exercise price is
equal to the market value of the underlying common stock on the date of grant, no compensation
expense is recognized for the granting of these stock options. Under the disclosure only
provisions of SFAS No. 123, for stock-based awards that specify an employee vests in the award upon
retirement, the Company accounts for the compensation expense ratably over the stated vesting
period. If the employee retires, becomes disabled or dies before the end of the stated vesting
period, then any remaining unrecognized compensation expense is accounted for at the date of the
event. The Company continues to apply this policy for any awards granted prior to the Companys
adoption of SFAS No. 123(R) on March 1, 2006, and for the unrecognized compensation expense
associated with the remaining portion of the then unvested outstanding awards. The remaining
portion of the unvested outstanding awards as of the Companys adoption date of SFAS No. 123(R) on
March 1, 2006, was not material. The unrecognized compensation expense associated with the
remaining portion of the March 1, 2006, unvested outstanding awards, is included in the Companys
Consolidated Statements of Operations for the year ended February 28, 2007.
With the Companys adoption of SFAS No. 123(R) on March 1, 2006, the Company revised its
approach for recognition of compensation expense for all new stock-based awards that accelerate
vesting upon retirement. Under this revised approach, compensation expense will be recognized
immediately for awards granted to retirement-eligible employees or over the period from the date of
grant to the date of retirement-eligibility if that is expected to occur during the requisite
service period.
Prior to the adoption of SFAS No. 123(R), the Company reported all tax benefits resulting from
the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows.
SFAS No. 123(R) requires cash flows resulting from the tax deductions in excess of the related
compensation cost recognized in the financial statements (excess tax benefits) to be classified as
financing cash flows. In accordance with SFAS No. 123(R), excess tax benefits recognized in
periods after the adoption date have been properly classified as financing cash flows. Excess tax
benefits recognized in periods prior to the adoption date are classified as operating cash flows.
Total compensation cost for stock-based awards is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Total compensation cost for stock-based awards
recognized in the Consolidated Statements of
Income |
|
$ |
32.0 |
|
|
$ |
16.5 |
|
|
$ |
7.5 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit recognized in the
Consolidated Statements of Operations for
stock-based compensation |
|
$ |
9.2 |
|
|
$ |
4.5 |
|
|
$ |
2.7 |
|
|
|
|
|
|
|
|
|
|
|
Total compensation cost for stock-based awards
capitalized in inventory in the Consolidated
Balance Sheets |
|
$ |
3.2 |
|
|
$ |
1.6 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
In March 2007, the Companys Board of Directors approved the accelerated vesting of certain
unvested stock options held by approximately 70 employees of the Company who transferred to Matthew
Clark on April 17, 2007, effective as of the end of the day on the date
preceding the formation of the joint venture, April 16, 2007. The total incremental compensation
cost associated with this modification was $1.0 million.
80
On December 21, 2006, the Human Resources Committee of the Companys Board of Directors
approved the accelerated vesting of certain unvested stock options held by approximately 100
employees of the Company who transferred to Crown Imports on January 2, 2007, effective as of the
end of the day on the date preceding the formation of the joint venture, January 1, 2007. The total
incremental compensation cost associated with this modification was $1.8 million.
On February 16, 2006, the Companys Board of Directors approved the accelerated vesting of
certain unvested stock options previously awarded under the Companys Long-Term Stock Incentive
Plan and Incentive Stock Option Plan. Nearly all of the accelerated vesting was for stock options
awarded with a performance-based acceleration feature. The acceleration of these stock options
enabled the Company to more accurately forecast future compensation expense and to reduce related
earnings volatility. As a result of the accelerated vesting, options to purchase 5,130,778 shares
of the Companys Class A Common Stock, of which 98.7% were in-the-money, became fully exercisable.
The acceleration eliminated future compensation expense of approximately $38.8 million that would
have otherwise been recognized in the Companys Consolidated Statements of Operations beginning
March 1, 2006, through February 28, 2010. Also on February 16, 2006, the Company announced its
worldwide wines reorganization (see Note 19). As a result of these foregoing actions, the Company
recorded $7.3 million of stock-based employee compensation expense for the year ended February 28,
2006, of which $6.9 million is recorded as restructuring and related charges and $0.4 million is
recorded as selling, general and administrative expenses on the Companys Consolidated Statements
of Operations.
2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENT:
Effective March 1, 2007, the Company adopted Financial Accounting Standards Board (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 enterprises 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 (see Note 10).
3. ACQUISITIONS:
Acquisition of BWE
On December 17, 2007, the Company acquired all of the issued and outstanding capital stock of
Beam Wine Estates, Inc. (BWE), an indirect wholly-owned subsidiary of Fortune Brands, Inc.,
together with BWEs subsidiaries: Atlas Peak Vineyards, Inc., Buena Vista Winery, Inc., Clos du
Bois, Inc., Gary Farrell Wines, Inc. and Peak Wines International, Inc. (the BWE Acquisition).
As a result of the BWE Acquisition, the Company has acquired the U.S. wine portfolio of Fortune
Brands, Inc., including certain wineries, vineyards or interests therein in the State of
California, as well as various super-premium and fine California wine brands including Clos du
Bois, Wild Horse and Geyser Peak. The BWE Acquisition supports the Companys strategy of
strengthening its portfolio with fast-growing super-premium and above wines. The BWE Acquisition
strengthens the Companys position as the largest wine company in the world and the largest premium
wine company in the U.S.
81
Total consideration paid in cash was $888.6 million, subject to certain purchase price
adjustments. In addition, the Company expects to incur direct acquisition costs of approximately
$1.3 million. The purchase price was financed with the net proceeds from the Companys December
2007 Senior Notes and revolver borrowings under the Companys 2006 Credit Agreement (as defined in
Note 9). In accordance with the purchase method of accounting, the acquired net assets are
recorded at fair value at the date of acquisition. The purchase price was based primarily on the
estimated future operating results of the BWE business, including the factors described above.
The results of operations of the BWE 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 following table summarizes the Companys estimated fair values of the assets acquired and
liabilities assumed in the BWE Acquisition at the date of acquisition. The allocation of the
purchase price is preliminary and subject to change. Estimated fair values at December 17, 2007,
are as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
Current assets |
|
$ |
283.6 |
|
Property, plant and equipment |
|
|
242.4 |
|
Goodwill |
|
|
320.1 |
|
Trademarks |
|
|
133.3 |
|
Other assets |
|
|
10.2 |
|
|
|
|
|
Total assets acquired |
|
|
989.6 |
|
|
|
|
|
|
Current liabilities |
|
|
98.5 |
|
Long-term liabilities |
|
|
1.2 |
|
|
|
|
|
Total liabilities assumed |
|
|
99.7 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
889.9 |
|
|
|
|
|
The trademarks are not subject to amortization. All of the goodwill is expected to be
deductible for tax purposes.
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). Svedka
is a premium Swedish vodka. The Svedka Acquisition supports the Companys strategy of expanding
the Companys premium spirits business. The acquisition provides a foundation from which the
Company looks to leverage its existing and future premium spirits portfolio for growth. In
addition, Svedka complements the Companys existing portfolio of super-premium and value vodka
brands by adding a premium vodka brand.
Total consideration paid in cash for the Svedka Acquisition was $385.8 million. In addition,
the Company incurred direct acquisition costs of approximately $1.3 million. The purchase price
was financed with revolver borrowings under the Companys June 2006 Credit Agreement (as defined in
Note 9), as amended in February 2007. In accordance with the purchase method of accounting, the
acquired net assets are recorded at fair value at the date of acquisition. The purchase price was
based primarily on the estimated future operating results of the Svedka business, including the
factors described above.
The results of operations of the Svedka business are reported in the Constellation Spirits
segment and are included in the consolidated results of operations of the Company from the
date of acquisition.
82
The following table summarizes the Companys fair values of the assets acquired and
liabilities assumed in the Svedka Acquisition at the date of acquisition.
|
|
|
|
|
(in millions) |
|
|
|
|
Current assets |
|
$ |
20.1 |
|
Property, plant and equipment |
|
|
0.1 |
|
Goodwill |
|
|
349.7 |
|
Trademark |
|
|
36.4 |
|
Other assets |
|
|
20.7 |
|
|
|
|
|
Total assets acquired |
|
|
427.0 |
|
|
|
|
|
|
Current liabilities |
|
|
23.8 |
|
Long-term liabilities |
|
|
16.1 |
|
|
|
|
|
Total liabilities assumed |
|
|
39.9 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
387.1 |
|
|
|
|
|
The trademark is not subject to amortization. Approximately $87 million of the goodwill is
expected to be deductible for tax purposes.
Acquisition of Vincor
On June 5, 2006, the Company acquired all of the issued and outstanding common shares of
Vincor International Inc. (Vincor), Canadas premier wine company (the Vincor Acquisition).
Vincor is Canadas largest producer and marketer of wine. At the time of the acquisition, Vincor
was the worlds 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.
The Vincor Acquisition supports the Companys 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 Companys current operations in the U.S., U.K.,
Australia and New Zealand, the Vincor Acquisition increases the Companys 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 Vincor Acquisition
makes the Company the largest wine company in Canada and strengthens the Companys 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 incurred direct acquisition costs of $9.4 million. At closing, the Company
also assumed outstanding indebtedness of Vincor, net of cash acquired, of $320.2 million. The
purchase price was financed with borrowings under the Companys June 2006 Credit Agreement. In
accordance with the purchase method of accounting, the acquired net assets are recorded at fair
value at the date of acquisition. The purchase price was based primarily on the estimated future
operating results of the Vincor business, including the factors described above, as well as an
estimated benefit from operating cost synergies.
83
In connection with the Vincor Acquisition, the Company entered into a foreign currency forward
contract to fix the U.S. dollar cost of the acquisition and the payment of certain outstanding
indebtedness in April 2006. During the year ended February 28, 2007, the Company recorded a gain
of $55.1 million in connection with this derivative instrument. Under Statement of Financial
Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities, as
amended, a transaction that involves a business combination is not eligible for hedge accounting
treatment. As such, the gain was recognized separately on the Companys Consolidated Statements of
Operations.
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 following table summarizes the fair values of the assets acquired and liabilities assumed
in the Vincor Acquisition at the date of acquisition:
|
|
|
|
|
(in millions) |
|
|
|
|
Current assets |
|
$ |
389.1 |
|
Property, plant and equipment |
|
|
241.4 |
|
Goodwill |
|
|
871.6 |
|
Trademarks |
|
|
224.3 |
|
Other assets |
|
|
49.4 |
|
|
|
|
|
Total assets acquired |
|
|
1,775.8 |
|
|
|
|
|
|
Current liabilities |
|
|
413.6 |
|
Long-term liabilities |
|
|
237.0 |
|
|
|
|
|
Total liabilities assumed |
|
|
650.6 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
1,125.2 |
|
|
|
|
|
The trademarks are not subject to amortization. None of the goodwill is expected to be
deductible for tax purposes.
During the year ended February 29, 2008, the Company completed its acquisition of several
immaterial businesses for a total combined purchase price of $27.4 million. During the year ended
February 28, 2006, the Company completed its acquisition of two immaterial businesses for a total
combined purchase price of $48.2 million.
84
The following table sets forth the unaudited pro forma results of operations of the Company
for the years ended February 29, 2008, and February 28, 2007, respectively. The unaudited pro
forma results of operations for the year ended February 29, 2008, give effect to the BWE
Acquisition as if it occurred on March 1, 2006. The unaudited pro forma results of operations for
the year ended February 29, 2008, are not presented to give effect to the Svedka Acquisition as if
it had occurred on March 1, 2006, as it is not significant. The unaudited pro forma results of
operations for the year ended February 28, 2007, give effect to the BWE Acquisition, the Svedka
Acquisition and the Vincor Acquisition as if they occurred on March 1, 2006. The unaudited pro
forma results of operations are presented after giving effect to certain adjustments for
depreciation, amortization of certain intangible assets and deferred financing costs, interest
expense on the acquisition financing, interest expense associated with adverse grape contracts, and
related income tax effects. The unaudited pro forma results of operations are based upon currently
available information and certain assumptions that the Company believes are reasonable under the
circumstances. The unaudited pro forma results of operations for the year ended February 28, 2007,
do not reflect total pretax nonrecurring charges of $29.5 million ($0.09 per share on a diluted
basis) related to transaction costs, primarily for the acceleration of vesting of stock options,
legal fees and investment banker fees, all of which were incurred by Vincor prior to the
acquisition. The unaudited pro forma results of operations do not purport to present what the
Companys results of operations would actually have been if the aforementioned transactions had in
fact occurred on such date or at the beginning of the period indicated, nor do they project the
Companys financial position or results of operations at any future date or for any future period.
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions, except per share data) |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
3,983.9 |
|
|
$ |
5,589.1 |
|
(Loss) income before income taxes |
|
$ |
(449.8 |
) |
|
$ |
442.3 |
|
Net (loss) income |
|
$ |
(622.1 |
) |
|
$ |
269.0 |
|
(Loss) income available to common stockholders |
|
$ |
(622.1 |
) |
|
$ |
264.1 |
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share basic: |
|
|
|
|
|
|
|
|
Class A Common Stock |
|
$ |
(2.87 |
) |
|
$ |
1.17 |
|
|
|
|
|
|
|
|
Class B Convertible Common Stock |
|
$ |
(2.61 |
) |
|
$ |
1.06 |
|
|
|
|
|
|
|
|
Earnings per common share diluted: |
|
|
|
|
|
|
|
|
Class A Common Stock |
|
$ |
(2.87 |
) |
|
$ |
1.12 |
|
|
|
|
|
|
|
|
Class B Convertible Common Stock |
|
$ |
(2.61 |
) |
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic: |
|
|
|
|
|
|
|
|
Class A Common Stock |
|
|
195.135 |
|
|
|
204.966 |
|
Class B Convertible Common Stock |
|
|
23.812 |
|
|
|
23.840 |
|
Weighted average common shares outstanding
diluted: |
|
|
|
|
|
|
|
|
Class A Common Stock |
|
|
195.135 |
|
|
|
239.772 |
|
Class B Convertible Common Stock |
|
|
23.812 |
|
|
|
23.840 |
|
85
4. |
|
PROPERTY, PLANT AND EQUIPMENT: |
The major components of property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
|
|
Land and land improvements |
|
$ |
394.4 |
|
|
$ |
301.2 |
|
Vineyards |
|
|
259.0 |
|
|
|
207.9 |
|
Buildings and improvements |
|
|
516.6 |
|
|
|
448.1 |
|
Machinery and equipment |
|
|
1,430.5 |
|
|
|
1,288.3 |
|
Motor vehicles |
|
|
43.1 |
|
|
|
39.6 |
|
Construction in progress |
|
|
99.0 |
|
|
|
95.2 |
|
|
|
|
|
|
|
|
|
|
|
2,742.6 |
|
|
|
2,380.3 |
|
Less Accumulated depreciation |
|
|
(707.6 |
) |
|
|
(630.1 |
) |
|
|
|
|
|
|
|
|
|
$ |
2,035.0 |
|
|
$ |
1,750.2 |
|
|
|
|
|
|
|
|
The changes in the carrying amount of goodwill for the year ended February 29, 2008, are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations |
|
|
|
|
|
|
Constellation |
|
|
Constellation |
|
|
Crown |
|
|
and |
|
|
|
|
|
|
Wines |
|
|
Spirits |
|
|
Imports |
|
|
Eliminations |
|
|
Consolidated |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2007 |
|
$ |
2,939.5 |
|
|
$ |
144.4 |
|
|
$ |
13.0 |
|
|
$ |
(13.0 |
) |
|
$ |
3,083.9 |
|
Purchase accounting
allocations |
|
|
309.3 |
|
|
|
362.7 |
|
|
|
|
|
|
|
|
|
|
|
672.0 |
|
Foreign currency
translation adjustments |
|
|
144.4 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
147.1 |
|
Purchase price earn-out |
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.2 |
|
Disposal of businesses |
|
|
(180.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(180.4 |
) |
Impairment of goodwill |
|
|
(599.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(599.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 29, 2008 |
|
$ |
2,614.1 |
|
|
$ |
509.8 |
|
|
$ |
13.0 |
|
|
$ |
(13.0 |
) |
|
$ |
3,123.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Constellation Spirits segments purchase accounting allocations totaling $362.7 million
consist primarily of purchase accounting allocations associated with the Svedka Acquisition. The
Constellation Wines segments purchase accounting allocations totaling $309.3 million consist
primarily of purchase accounting allocations of $320.1 million associated with the BWE Acquisition,
partially offset by a reduction of $17.3 million in connection with an adjustment to income taxes
payable acquired in a prior acquisition. Disposal of businesses within the Constellation Wines
segment consist of $143.4 million related to the Companys reduction of goodwill in connection with
the Companys contribution of its U.K. wholesale business associated with the formation of a joint
venture with Punch Taverns plc (Punch) (see Note 7) and $37.0 million related to the Companys
reduction of goodwill in connection with the Companys sale of the Almaden and Inglenook wine
brands and certain other assets. In February 2008, as part of ongoing efforts to increase focus on premium wine offerings
in the U.S., the Company sold its lower margin popular-priced wine brands, Almaden and Inglenook, and certain other assets
for cash proceeds of $133.7 million. The Company recorded a loss of $27.8 million on this sale which is included in selling, general and administrative
expenses on the Companys Consolidated Statements of Operations.
86
6. INTANGIBLE ASSETS:
The major components of intangible assets are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 29, 2008 |
|
|
February 28, 2007 |
|
|
|
Gross |
|
|
Net |
|
|
Gross |
|
|
Net |
|
|
|
Carrying |
|
|
Carrying |
|
|
Carrying |
|
|
Carrying |
|
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
67.3 |
|
|
$ |
62.0 |
|
|
$ |
32.9 |
|
|
$ |
31.3 |
|
Distribution agreements |
|
|
10.0 |
|
|
|
5.2 |
|
|
|
19.9 |
|
|
|
6.9 |
|
Other |
|
|
2.7 |
|
|
|
1.3 |
|
|
|
2.4 |
|
|
|
1.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
80.0 |
|
|
|
68.5 |
|
|
$ |
55.2 |
|
|
|
39.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonamortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
1,117.3 |
|
|
|
|
|
|
|
1,091.9 |
|
Agency relationships |
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
1,121.5 |
|
|
|
|
|
|
|
1,096.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
1,190.0 |
|
|
|
|
|
|
$ |
1,135.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The difference between the gross carrying amount and net carrying amount for each item
presented is attributable to accumulated amortization. Amortization expense for intangible assets
was $4.8 million, $2.8 million and $1.9 million for the years ended February 29, 2008, February 28,
2007, and February 28, 2006, respectively. Estimated amortization expense for each of the five
succeeding fiscal years and thereafter is as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
2009 |
|
$ |
5.3 |
|
2010 |
|
$ |
5.3 |
|
2011 |
|
$ |
5.1 |
|
2012 |
|
$ |
4.5 |
|
2013 |
|
$ |
4.3 |
|
Thereafter |
|
$ |
44.0 |
|
7. OTHER ASSETS:
The major components of other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
|
|
Investments in equity method investees |
|
$ |
394.1 |
|
|
$ |
327.2 |
|
Deferred financing costs |
|
|
51.4 |
|
|
|
40.7 |
|
Other |
|
|
80.6 |
|
|
|
92.3 |
|
|
|
|
|
|
|
|
|
|
|
526.1 |
|
|
|
460.2 |
|
Less Accumulated amortization |
|
|
(21.2 |
) |
|
|
(14.8 |
) |
|
|
|
|
|
|
|
|
|
$ |
504.9 |
|
|
$ |
445.4 |
|
|
|
|
|
|
|
|
87
Investment in equity method investees
Matthew Clark:
On April 17, 2007, the Company and 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 Company received $185.6 million
of cash proceeds from the formation of the joint venture.
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 are included in the equity in earnings of
equity method investees line on the Companys Consolidated Statements of Operations from the date
of investment. As of February 29, 2008, the Companys investment in Matthew Clark was $75.8
million. The Company did not receive any cash distributions from Matthew Clark for the year ended
February 29, 2008.
Amounts sold to Matthew Clark for the year ended February 29, 2008, were not material. As of
February 29, 2008, amounts receivable from Matthew Clark were not material.
Crown Imports:
On January 2, 2007, Barton Beers, Ltd. (Barton), an indirect wholly-owned subsidiary of the
Company, and Diblo, S.A. de C.V. (Diblo), an entity owned 76.75% by Grupo Modelo, S.A.B. de C.V.
(Modelo) and 23.25% by Anheuser-Busch Companies, Inc., completed the formation of Crown Imports
LLC (Crown Imports), a joint venture in which Barton and Diblo each have, directly or indirectly,
equal interests. Crown Imports has the exclusive right to import, market and sell Modelos Mexican
beer portfolio (the Modelo Brands) 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 have transferred exclusive
importing, marketing and selling rights with respect to those brands in the U.S. to the joint
venture. 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 consummated by the newly formed joint venture.
Upon commencement of operations of the joint venture, 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 on the Companys Consolidated Statements of Operations
from the date of investment. As of February 29, 2008, and February 28, 2007, the Companys
investment in Crown Imports was $150.5 million and $163.4 million, respectively. The carrying
amount of the investment is greater than the Companys equity in the underlying assets of Crown
Imports by $13.6 million due to the difference in the carrying amounts of the indefinite lived
intangible assets contributed to Crown Imports by each party. The Company received $268.0 million
of cash distributions from Crown Imports for the year ended February 29, 2008, all of which
represent distributions of equity in earnings. The Company did not receive any cash distributions
from Crown Imports for the year ended February 28, 2007.
Barton provides certain administrative services to Crown Imports. Amounts related to the
performance of these services for the years ended February 29, 2008, and February 28, 2007, were
not material. In addition, as of February 29, 2008, and February 28, 2007, amounts receivable from
Crown Imports were not material.
88
Other:
In connection with prior acquisitions, the Company acquired several investments which are
being accounted for under the equity method. The primary investment consists of Opus One, a 50%
owned joint venture arrangement. As of February 29, 2008, and February 28, 2007, the Companys
investment in Opus One was $63.7 million and $63.1 million, respectively. The percentage of
ownership of the remaining investments ranges from 20% to 50%.
In addition, the Company has a 40% interest in Ruffino, the well-known Italian fine wine
company. The Company does not have a controlling interest in Ruffino or exert any managerial
control. The Company accounts for the investment in Ruffino under the equity method; accordingly,
the results of operations of Ruffino are included in the equity in earnings of equity method
investees line on the Companys Consolidated Statements of Operations from the date of investment.
As of February 29, 2008, and February 28, 2007, the Companys investment in Ruffino was $84.5
million and $86.3 million, respectively.
As of February 1, 2005, the Companys Constellation Wines segment began distribution of
Ruffinos products in the U.S. Amounts purchased from Ruffino under this arrangement for the years
ended February 29, 2008, February 28, 2007, and February 28, 2006, were not material. As of
February 29, 2008, and February 28, 2007, amounts payable to Ruffino were not material.
Summarized financial information for the Companys significant equity method investment, Crown
Imports, and other material equity method investments are presented below. The amounts shown represent 100% of these equity method investments financial position and results of operations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 29, 2008 |
|
February 28, 2007 |
|
|
Crown |
|
|
|
|
|
|
|
|
|
Crown |
|
|
|
|
|
|
Imports |
|
Other |
|
Total |
|
Imports |
|
Other |
|
Total |
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets |
|
$ |
327.1 |
|
|
$ |
333.6 |
|
|
$ |
660.7 |
|
|
$ |
340.8 |
|
|
$ |
127.3 |
|
|
$ |
468.1 |
|
Noncurrent assets |
|
$ |
31.9 |
|
|
$ |
182.4 |
|
|
$ |
214.3 |
|
|
$ |
28.6 |
|
|
$ |
68.3 |
|
|
$ |
96.9 |
|
Current liabilities |
|
$ |
(75.7 |
) |
|
$ |
(246.7 |
) |
|
$ |
(322.4 |
) |
|
$ |
(69.3 |
) |
|
$ |
(84.0 |
) |
|
$ |
(153.3 |
) |
Noncurrent liabilities |
|
$ |
(2.1 |
) |
|
$ |
(156.0 |
) |
|
$ |
(158.1 |
) |
|
$ |
|
|
|
$ |
(74.7 |
) |
|
$ |
(74.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crown |
|
|
|
|
|
|
|
|
|
|
Imports |
|
Other |
|
Total |
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended February 29, 2008 |
|
|
Net sales |
|
$ |
2,391.0 |
|
|
$ |
1,115.7 |
|
|
$ |
3,506.7 |
|
Gross profit |
|
$ |
738.7 |
|
|
$ |
213.3 |
|
|
$ |
952.0 |
|
Income from continuing operations |
|
$ |
509.8 |
|
|
$ |
34.0 |
|
|
$ |
543.8 |
|
Net income |
|
$ |
509.8 |
|
|
$ |
34.0 |
|
|
$ |
543.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended February 28, 2007 |
|
|
Net sales |
|
$ |
368.8 |
|
|
$ |
113.4 |
|
|
$ |
482.2 |
|
Gross profit |
|
$ |
106.5 |
|
|
$ |
62.2 |
|
|
$ |
168.7 |
|
Income from continuing operations |
|
$ |
78.4 |
|
|
$ |
26.0 |
|
|
$ |
104.4 |
|
Net income |
|
$ |
78.4 |
|
|
$ |
26.0 |
|
|
$ |
104.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended February 28, 2006 |
|
|
Net sales |
|
$ |
|
|
|
$ |
104.3 |
|
|
$ |
104.3 |
|
Gross profit |
|
$ |
|
|
|
$ |
57.2 |
|
|
$ |
57.2 |
|
Income from continuing operations |
|
$ |
|
|
|
$ |
16.0 |
|
|
$ |
16.0 |
|
Net income |
|
$ |
|
|
|
$ |
16.0 |
|
|
$ |
16.0 |
|
89
Other items
Amortization expense for other assets was included in selling, general and administrative
expenses and was $6.4 million, $4.8 million and $6.2 million for the years ended February 29, 2008,
February 28, 2007, and February 28, 2006, respectively.
8. OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
|
|
Advertising and promotions |
|
$ |
148.8 |
|
|
$ |
156.4 |
|
Salaries and commissions |
|
|
106.6 |
|
|
|
85.1 |
|
Accrued interest |
|
|
97.1 |
|
|
|
79.7 |
|
Fair value of derivative instruments |
|
|
84.4 |
|
|
|
19.7 |
|
Accrued restructuring |
|
|
38.5 |
|
|
|
32.1 |
|
Income taxes payable |
|
|
34.1 |
|
|
|
94.7 |
|
Adverse grape contracts (Note 13) |
|
|
17.8 |
|
|
|
31.7 |
|
Other |
|
|
170.4 |
|
|
|
171.3 |
|
|
|
|
|
|
|
|
|
|
$ |
697.7 |
|
|
$ |
670.7 |
|
|
|
|
|
|
|
|
9. BORROWINGS:
Borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
|
February 29, 2008 |
|
|
2007 |
|
|
|
Current |
|
|
Long-term |
|
|
Total |
|
|
Total |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes Payable to Banks: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility
Revolving Credit Loans |
|
$ |
308.0 |
|
|
$ |
|
|
|
$ |
308.0 |
|
|
$ |
30.0 |
|
Other |
|
|
71.5 |
|
|
|
|
|
|
|
71.5 |
|
|
|
123.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
379.5 |
|
|
$ |
|
|
|
$ |
379.5 |
|
|
$ |
153.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility Term Loans |
|
$ |
212.0 |
|
|
$ |
2,158.0 |
|
|
$ |
2,370.0 |
|
|
$ |
2,520.0 |
|
Senior Notes |
|
|
|
|
|
|
2,198.8 |
|
|
|
2,198.8 |
|
|
|
1,197.5 |
|
Senior Subordinated Notes |
|
|
|
|
|
|
250.0 |
|
|
|
250.0 |
|
|
|
250.0 |
|
Other Long-term Debt |
|
|
17.3 |
|
|
|
41.9 |
|
|
|
59.2 |
|
|
|
64.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
229.3 |
|
|
$ |
4,648.7 |
|
|
$ |
4,878.0 |
|
|
$ |
4,032.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
Senior credit facility
In connection with the Vincor Acquisition, 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, and on November 19, 2007, the June 2006 Credit
Agreement was amended (collectively, the 2007 Amendments). The June 2006 Credit Agreement
together with the 2007 Amendments 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 Companys obligations under its prior senior credit facility, to
fund the Vincor Acquisition 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.
As of February 29, 2008, 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 |
|
|
Tranche B |
|
|
|
|
|
|
Term Loan |
|
|
Term Loan |
|
|
Total |
|
(in millions) |
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
210.0 |
|
|
$ |
2.0 |
|
|
$ |
212.0 |
|
2010 |
|
|
270.0 |
|
|
|
4.0 |
|
|
|
274.0 |
|
2011 |
|
|
300.0 |
|
|
|
4.0 |
|
|
|
304.0 |
|
2012 |
|
|
150.0 |
|
|
|
4.0 |
|
|
|
154.0 |
|
2013 |
|
|
|
|
|
|
1,426.0 |
|
|
|
1,426.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
930.0 |
|
|
$ |
1,440.0 |
|
|
$ |
2,370.0 |
|
|
|
|
|
|
|
|
|
|
|
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 Companys
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 29, 2008, 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 23, 2007, 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 incurrence of senior unsecured indebtedness
and the application of proceeds thereof; (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 November 19, 2007, amendment clarified
certain provisions governing the incurrence of senior unsecured indebtedness and the application of
proceeds thereof under the June 2006 Credit Agreement, as previously amended.
The Companys 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
Companys U.S. subsidiaries and (ii) 65% of the voting capital stock of certain of the Companys
foreign subsidiaries.
91
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 ratios and minimum interest coverage
ratios.
As of February 29, 2008, under the 2006 Credit Agreement, the Company had outstanding tranche
A term loans of $930.0 million bearing an interest rate of 5.7%, tranche B term loans of $1,440.0
million bearing an interest rate of 6.6%, revolving loans of $308.0 million bearing an interest
rate of 4.4%, outstanding letters of credit of $35.8 million, and $556.2 million in revolving loans
available to be drawn.
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 29, 2008. 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 Companys 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 Operations. For the years ended February 29, 2008, February 28,
2007, and February 28, 2006, the Company reclassified $7.1 million, $5.9 million and $3.6 million,
net of income tax effect, respectively, from AOCI to interest expense, net on the Companys
Consolidated Statements of Operations. This non-cash operating activity is included in the other,
net line in the Companys Consolidated Statements of Cash Flows.
Senior notes
In August 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.
In February 2001, the Company issued $200.0 million aggregate principal amount of 8% Senior
Notes due February 2008 (the February 2001 Senior Notes). On February 15, 2008, the Company
repaid the February 2001 Senior Notes with proceeds from its revolving credit facility under the
2006 Credit Agreement.
On November 17, 1999, the Company issued £75.0 million ($121.7 million upon issuance)
aggregate principal amount of 8 1/2% Senior Notes due November 2009 (the Sterling Senior Notes).
Interest on the Sterling Senior Notes is payable semiannually on May 15 and November 15. In March
2000, the Company exchanged £75.0 million aggregate principal amount of 8 1/2% Series B Senior
Notes due in November 2009 (the Sterling Series B Senior Notes) for all of the Sterling Senior
Notes. The terms of the Sterling Series B Senior Notes are identical in all material respects to
the Sterling Senior Notes. In October 2000, the Company exchanged £74.0 million aggregate
principal amount of Sterling Series C Senior Notes (as defined below) for £74.0 million of the
Sterling Series B Notes. The terms of the Sterling Series C Senior Notes are identical in all
material respects to the Sterling Series B Senior Notes. As of February 29, 2008, and February 28,
2007, the Company had outstanding £1.0 million ($2.0 million) aggregate principal amount of
Sterling Series B Senior Notes.
92
On May 15, 2000, the Company issued £80.0 million ($120.0 million upon issuance) aggregate
principal amount of 8 1/2% Series C Senior Notes due November 2009 at an issuance price of £79.6
million ($119.4 million upon issuance, net of $0.6 million unamortized discount, with an effective
interest rate of 8.6%) (the Sterling Series C Senior Notes). Interest on the Sterling Series C
Senior Notes is payable semiannually on May 15 and November 15. As of February 29, 2008, and
February 28, 2007, the Company had outstanding £154.0 million ($306.1 million, net of $0.2 million
unamortized discount, and $302.1 million, net of $0.3 million unamortized discount, respectively)
aggregate principal amount of Sterling Series C Senior Notes.
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 Companys 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. As
of February 29, 2008, and February 28, 2007, the Company had outstanding $693.9 million (net of
$6.1 million unamortized discount) and $693.4 million (net of $6.6 million unamortized discount),
respectively, aggregate principal amount of August 2006 Senior Notes.
On May 14, 2007, the Company issued $700.0 million aggregate principal amount of 7 1/4% Senior
Notes due May 2017 (the Original May 2007 Senior Notes). The net proceeds of the offering
($693.9 million) were used to reduce a corresponding amount of borrowings under the revolving
portion of the Companys 2006 Credit Agreement. Interest on the Original May 2007 Senior Notes is
payable semiannually on May 15 and November 15 of each year, beginning November 15, 2007. In
January 2008, the Company exchanged $700.0 million aggregate principal amount of 7 1/4% Senior
Notes due May 2017 (the May 2007 Senior Notes) for all of the Original May 2007 Senior Notes.
The terms of the May 2007 Senior Notes are substantially identical in all material respects to the
Original May 2007 Senior Notes, except that the May 2007 Senior Notes are registered under the
Securities Act of 1933, as amended. As of February 29, 2008, the Company had outstanding $700.0
million aggregate principal amount of May 2007 Senior Notes.
On December 5, 2007, the Company issued $500.0 million aggregate principal amount of 8 3/8%
Senior Notes due December 2014 at an issuance price of $496.7 million (net of $3.3 million
unamortized discount, with an effective interest rate of 8.5%) (the December 2007 Senior Notes).
The net proceeds of the offering ($492.2 million) were used to fund a portion of the purchase price
of BWE. Interest on the December 2007 Senior Notes is payable semiannually on June 15 and December
15 of each year, beginning June 15, 2008. As of February 29, 2008, the Company had outstanding
$496.8 million (net of $3.2 million unamortized discount) aggregate principal amount of December
2007 Senior Notes.
The senior notes described above 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
or adjusted Gilt rate plus 50 basis points. The 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 Companys significant U.S. operating subsidiaries guarantee the senior
notes, on a senior unsecured basis.
93
Senior subordinated notes
On January 23, 2002, the Company issued $250.0 million aggregate principal amount of 8 1/8%
Senior Subordinated Notes due January 2012 (January 2002 Senior Subordinated Notes). Interest on
the January 2002 Senior Subordinated Notes is payable semiannually on January 15 and July 15. The
January 2002 Senior Subordinated Notes are redeemable at the option of the Company, in whole or in
part, at any time on or after January 15, 2007. The January 2002 Senior Subordinated Notes are
unsecured and subordinated to the prior payment in full of all senior indebtedness of the Company,
which includes the senior credit facility. The January 2002 Senior Subordinated Notes are
guaranteed, on a senior subordinated unsecured basis, by certain of the Companys significant U.S.
operating subsidiaries. As of February 29, 2008, and February 28, 2007, the Company had
outstanding $250.0 million aggregate principal amount of January 2002 Senior Subordinated Notes.
Trust Indentures
Certain of the Companys Trust Indentures relating to the senior notes and senior subordinated
notes contain certain covenants, including, but not limited to: (i) limitation on indebtedness;
(ii) limitation on restricted payments; (iii) limitation on transactions with affiliates; (iv)
limitation on senior subordinated indebtedness; (v) limitation on liens; (vi) limitation on sale of
assets; (vii) limitation on issuance of guarantees of and pledges for indebtedness; (viii)
restriction on transfer of assets; (ix) limitation on subsidiary capital stock; (x) limitation on
dividends and other payment restrictions affecting subsidiaries; and (xi) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of the Company to another
person. The limitation on indebtedness covenant is governed by a rolling four quarter fixed charge
ratio requiring a specified minimum.
Subsidiary credit facilities
In addition to the above arrangements, the Company has additional credit arrangements totaling
$397.0 million as of February 29, 2008. These arrangements primarily support the financing needs
of the Companys 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 29, 2008, and February 28, 2007, amounts outstanding under these arrangements were $130.7
million and $188.0 million, respectively.
Debt payments
Principal payments required under long-term debt obligations (excluding unamortized discount
of $9.5 million) during the next five fiscal years and thereafter are as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
2009 |
|
$ |
229.3 |
|
2010 |
|
|
614.9 |
|
2011 |
|
|
306.6 |
|
2012 |
|
|
405.9 |
|
2013 |
|
|
715.5 |
|
Thereafter |
|
|
2,615.3 |
|
|
|
|
|
|
|
$ |
4,887.5 |
|
|
|
|
|
94
(Loss) income before income taxes was generated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(in millions) |
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
231.3 |
|
|
$ |
449.2 |
|
|
$ |
446.8 |
|
Foreign |
|
|
(671.9 |
) |
|
|
86.1 |
|
|
|
30.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(440.6 |
) |
|
$ |
535.3 |
|
|
$ |
477.3 |
|
|
|
|
|
|
|
|
|
|
|
The income tax provision (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(in millions) |
|
|
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
57.2 |
|
|
$ |
112.8 |
|
|
$ |
95.1 |
|
State |
|
|
11.8 |
|
|
|
15.1 |
|
|
|
18.9 |
|
Foreign |
|
|
5.7 |
|
|
|
22.8 |
|
|
|
7.9 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
74.7 |
|
|
|
150.7 |
|
|
|
121.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
55.1 |
|
|
|
55.4 |
|
|
|
27.0 |
|
State |
|
|
9.2 |
|
|
|
14.1 |
|
|
|
5.1 |
|
Foreign |
|
|
33.7 |
|
|
|
(16.8 |
) |
|
|
(2.0 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
98.0 |
|
|
|
52.7 |
|
|
|
30.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
172.7 |
|
|
$ |
203.4 |
|
|
$ |
152.0 |
|
|
|
|
|
|
|
|
|
|
|
The foreign provision (benefit) for income taxes is based on foreign pretax earnings.
Earnings of foreign subsidiaries would be subject to U.S. income taxation on repatriation to the
U.S. The Companys consolidated financial statements provide for anticipated tax liabilities on
amounts that may be repatriated.
Deferred tax assets and liabilities reflect the future income tax effects of temporary
differences between the consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and are measured using enacted tax rates that apply to
taxable income.
95
Significant components of deferred tax assets (liabilities) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
114.7 |
|
|
$ |
93.0 |
|
Employee benefits |
|
|
32.6 |
|
|
|
45.8 |
|
Stock-based compensation |
|
|
11.9 |
|
|
|
5.0 |
|
Insurance accruals |
|
|
9.0 |
|
|
|
6.8 |
|
Foreign tax credit |
|
|
5.2 |
|
|
|
13.8 |
|
Inventory |
|
|
|
|
|
|
28.1 |
|
Other accruals |
|
|
108.2 |
|
|
|
51.5 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
281.6 |
|
|
|
244.0 |
|
Valuation allowances |
|
|
(114.0 |
) |
|
|
(5.5 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net |
|
|
167.6 |
|
|
|
238.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(301.7 |
) |
|
|
(344.7 |
) |
Property, plant and equipment |
|
|
(199.0 |
) |
|
|
(203.2 |
) |
Derivative instruments |
|
|
(41.5 |
) |
|
|
(6.0 |
) |
Investment in equity method investees |
|
|
(34.2 |
) |
|
|
(36.5 |
) |
Unrealized foreign exchange |
|
|
(20.7 |
) |
|
|
(16.6 |
) |
Provision for unremitted earnings |
|
|
(15.6 |
) |
|
|
(1.5 |
) |
Inventory |
|
|
(10.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(622.7 |
) |
|
|
(608.5 |
) |
|
|
|
|
|
|
|
Deferred tax liabilities, net |
|
$ |
(455.1 |
) |
|
$ |
(370.0 |
) |
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
Current deferred tax assets |
|
$ |
82.7 |
|
|
$ |
60.7 |
|
Long-term deferred tax assets |
|
|
|
|
|
|
56.6 |
|
Current deferred tax liabilities |
|
|
(2.0 |
) |
|
|
(13.2 |
) |
Long-term deferred tax liabilities |
|
|
(535.8 |
) |
|
|
(474.1 |
) |
|
|
|
|
|
|
|
|
|
$ |
(455.1 |
) |
|
$ |
(370.0 |
) |
|
|
|
|
|
|
|
In assessing the realizability of deferred tax assets, management considers whether it is more
likely than not that some or all of the deferred tax assets will not be realized. Management
considers the reversal of deferred tax liabilities and projected future taxable income in making
this assessment. Based upon this assessment, management believes it is more likely than not that
the Company will realize the benefits of these deductible differences, net of any valuation
allowances. During the fourth quarter of fiscal 2008, lower estimates of future operating results
and cash flows impacted the Companys assessment regarding the realizability of certain net
operating losses and intangible assets. As a result of this assessment, the Company determined
that additional valuation allowances were required as of February 29, 2008.
Operating loss carryforwards totaling $425.9 million at February 29, 2008, are being carried
forward in a number of U.S. and foreign jurisdictions where the Company is permitted to use tax
operating losses from prior periods to reduce future taxable income. Of these operating loss
carryforwards, $46.1 million will expire in 2011 through 2025 and $379.8 million of operating
losses in foreign jurisdictions may be carried forward indefinitely. In addition, certain tax
credits generated of $5.2 million are available to offset future income taxes. These credits will
expire, if not utilized, in 2015 through 2016.
96
On October 22, 2004, the American Jobs Creation Act (AJCA) was signed into law. The AJCA
includes a special one-time 85% dividends received deduction for certain foreign earnings that are
repatriated. For the year ended February 28, 2006, the Company repatriated $95.7 million of
earnings under the provisions of the AJCA. Deferred taxes had previously been provided for a
portion of the dividends remitted. The reversal of deferred taxes offset the tax costs to
repatriate the earnings and the Company recorded a net benefit of $6.8 million.
The Company is subject to ongoing tax examinations and assessments in various jurisdictions.
Accordingly, the Company provides for additional tax expense based on probable outcomes of such
matters. While it is often difficult to predict the final outcome or the timing of resolution of
any particular tax matter, the Company believes the reserves reflect the probable outcome of known
tax contingencies. Unfavorable settlement of any particular issue would require use of cash.
Favorable resolution would be recognized as a reduction to the effective tax rate in the year of
resolution. During the year ended February 28, 2006, various federal, state, and international
examinations were finalized. A tax benefit of $16.2 million was recorded primarily related to the
resolution of certain tax positions in connection with those examinations.
A reconciliation of the total tax provision to the amount computed by applying the statutory
U.S. Federal income tax rate to (loss) income before provision for income taxes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, 2008 |
|
|
February 28, 2007 |
|
|
February 28, 2006 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Pretax |
|
|
|
|
|
|
Pretax |
|
|
|
|
|
|
Pretax |
|
|
|
Amount |
|
|
Income |
|
|
Amount |
|
|
Income |
|
|
Amount |
|
|
Income |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (benefit) provision
at statutory rate |
|
$ |
(154.2 |
) |
|
|
35.0 |
|
|
$ |
187.3 |
|
|
|
35.0 |
|
|
$ |
167.0 |
|
|
|
35.0 |
|
State and local income taxes, net of
federal income tax benefit |
|
|
13.6 |
|
|
|
(3.1 |
) |
|
|
19.0 |
|
|
|
3.5 |
|
|
|
15.7 |
|
|
|
3.3 |
|
Write-off of non-deductible goodwill
and other intangible assets |
|
|
272.6 |
|
|
|
(61.9 |
) |
|
|
7.9 |
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
Net operating loss valuation allowance |
|
|
51.7 |
|
|
|
(11.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings of subsidiaries taxed at other
than U.S. statutory rate |
|
|
(12.5 |
) |
|
|
2.8 |
|
|
|
(14.4 |
) |
|
|
(2.7 |
) |
|
|
(20.7 |
) |
|
|
(4.3 |
) |
Resolution of certain tax positions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.2 |
) |
|
|
(3.4 |
) |
Miscellaneous items, net |
|
|
1.5 |
|
|
|
(0.3 |
) |
|
|
3.6 |
|
|
|
0.7 |
|
|
|
6.2 |
|
|
|
1.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
172.7 |
|
|
|
(39.2 |
) |
|
$ |
203.4 |
|
|
|
38.0 |
|
|
$ |
152.0 |
|
|
|
31.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of earnings of foreign subsidiaries includes the difference between the U.S.
statutory rate and local jurisdiction tax rates, as well as the (benefit) provision for incremental
U.S. taxes on unremitted earnings of foreign subsidiaries offset by foreign tax credits and other
foreign adjustments.
97
Effective March 1, 2007, the Company adopted FIN No. 48. The adoption of FIN No. 48 did not
impact the amount of the Companys liability for unrecognized tax benefits. Upon adoption, the
liability for income taxes associated with uncertain tax positions, excluding interest and
penalties, was $100.2 million. As of February 29, 2008, the liability for income taxes associated
with uncertain tax positions, excluding interest and penalties, was $131.1 million. A
reconciliation of the beginning and ending unrecognized tax benefit liabilities is as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
Balance, March 1, 2007 |
|
$ |
(100.2 |
) |
Increases in unrecognized tax benefit liabilities as a result of
tax positions taken during a prior period |
|
|
(22.0 |
) |
Decreases in unrecognized tax benefit liabilities as a result of
tax positions taken during a prior period |
|
|
14.1 |
|
Increases in unrecognized tax benefit liabilities as a result of
tax positions taken during the current period |
|
|
(25.1 |
) |
Decreases in unrecognized tax benefit liabilities related to
lapse of applicable statute of limitations |
|
|
2.1 |
|
|
|
|
|
Balance, February 29, 2008 |
|
$ |
(131.1 |
) |
|
|
|
|
As of February 29, 2008, the Company has $142.5 million of non-current unrecognized tax
benefit liabilities, including interest and penalties, recorded in other liabilities on the Companys Consolidated Balance Sheet.
These liabilities are recorded as non-current as payment of cash is not anticipated within one year
of the balance sheet date.
As of March 1, 2007, and February 29, 2008, the Company had $61.3 million and $87.3 million,
respectively, of unrecognized tax benefits that, if recognized, would decrease the effective tax
rate.
In accordance with the Companys accounting policy, the Company recognizes interest and
penalties related to unrecognized tax benefits as a component of the provision for income taxes on
the Companys Consolidated Statements of Operations. This policy did not change as a result of the
adoption of FIN No. 48. For the year ended February 29, 2008, the Company recorded $8.3 million of
interest expense, net of income tax effect, and penalties. As of February 29, 2008, $16.9 million,
net of income tax effect, was included in the liability for uncertain tax positions for the
possible payment of interest and penalties.
Various U.S. federal, state, and foreign income tax examinations are currently in progress.
It is reasonably possible that the liability associated with the Companys unrecognized tax
benefits will increase or decrease within the next twelve months as a result of these examinations
or the expiration of statutes of limitation. As of February 29, 2008, the Company estimates that
unrecognized tax benefits could change by a range of zero to $55 million. The Company files U.S.
federal income tax returns and various state, local and foreign income tax returns. Major tax
jurisdictions where the Company is subject to examination by tax authorities include Australia,
Canada, New Zealand, the U.K. and the U.S. With few exceptions, the Company is no longer subject
to U.S. federal, state, local or foreign income tax examinations for fiscal years prior to February
28, 2003.
98
11. OTHER LIABILITIES:
The major components of other liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
|
|
Unrecognized tax benefit liabilities |
|
$ |
142.5 |
|
|
$ |
|
|
Accrued pension liability |
|
|
121.6 |
|
|
|
132.9 |
|
Adverse grape contracts (Note 13) |
|
|
26.6 |
|
|
|
38.8 |
|
Other |
|
|
93.4 |
|
|
|
68.9 |
|
|
|
|
|
|
|
|
|
|
$ |
384.1 |
|
|
$ |
240.6 |
|
|
|
|
|
|
|
|
12. DEFINED CONTRIBUTION AND DEFINED BENEFIT PLANS:
Defined contribution plans
The Companys retirement and profit sharing plan, the Constellation Brands, Inc. 401(k) and
Profit Sharing Plan (the Plan), covers substantially all U.S. employees, excluding those
employees covered by collective bargaining agreements. The 401(k) portion of the Plan permits
eligible employees to defer a portion of their compensation (as defined in the Plan) on a pretax
basis. Participants may defer up to 50% of their compensation for the year, subject to limitations
of the Plan. The Company makes a matching contribution of 50% of the first 6% of compensation a
participant defers. The amount of the Companys contribution under the profit sharing portion of
the Plan is a discretionary amount as determined by the Board of Directors on an annual basis,
subject to limitations of the Plan. Company contributions under the Plan were $15.1 million, $15.2
million and $15.9 million for the years ended February 29, 2008, February 28, 2007, and February
28, 2006, respectively.
In addition to the Plan discussed above, the Company has the Hardy Wine Company Superannuation
Plan (the Hardy Plan) which covers substantially all of its salaried Australian employees. The
Hardy Plan has a defined benefit component and a defined contribution component. The Company also
has a statutory obligation to provide a minimum defined contribution on behalf of any Australian
employees who are not covered by the Hardy Plan. In addition, the Company has a defined
contribution plan that covers substantially all of its U.K. employees and a defined contribution
plan that covers certain of its Canadian employees. Lastly, in connection with the Vincor
Acquisition, the Company acquired the Retirement Plan for Salaried Employees of Vincor
International Inc. (the Vincor Retirement Plan) which covers substantially all of its salaried
Canadian employees. The Vincor Retirement Plan has a defined benefit component and a defined
contribution component. Company contributions under the defined contribution component of the
Hardy Plan, the Australian statutory obligation, the U.K. defined contribution plan, the Canadian
defined contribution plan and the defined contribution component of the Vincor Retirement Plan
aggregated $9.8 million, $9.3 million and $7.7 million for the years ended February 29, 2008,
February 28, 2007, and February 28, 2006, respectively.
99
Defined benefit pension plans
The Company also has defined benefit pension plans that cover certain of its non-U.S.
employees. These consist of a Canadian plan, an U.K. plan, the defined benefit components of the
Hardy Plan and the Vincor Retirement Plan, and two defined benefit pension plans acquired in
connection with the Vincor Acquisition which cover substantially all of its hourly Canadian
employees. For the year ended February 28, 2006, the Companys net periodic benefit cost included
$6.4 million of recognized net actuarial loss due to an adjustment in the Companys defined benefit
U.K. pension plan. Of that amount, $2.7 million represented current year expense. The Company
uses a December 31 measurement date for all of its plans. The Company adopted the recognition and
related disclosure provisions of 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), as of February 28, 2007 (see Note 22).
Net periodic benefit cost reported in the Consolidated Statements of Operations for these plans
includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
5.5 |
|
|
$ |
3.9 |
|
|
$ |
2.1 |
|
Interest cost |
|
|
24.9 |
|
|
|
21.5 |
|
|
|
17.3 |
|
Expected return on plan assets |
|
|
(29.7 |
) |
|
|
(25.2 |
) |
|
|
(16.5 |
) |
Special termination benefits |
|
|
|
|
|
|
1.0 |
|
|
|
|
|
Amortization of prior service cost |
|
|
0.4 |
|
|
|
0.2 |
|
|
|
0.2 |
|
Recognized net actuarial loss |
|
|
8.4 |
|
|
|
6.8 |
|
|
|
9.4 |
|
Recognized gain due to settlement |
|
|
(0.8 |
) |
|
|
(0.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
8.7 |
|
|
$ |
7.9 |
|
|
$ |
12.5 |
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the funded status of the Companys defined benefit pension
plans and the related amounts included in the Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
|
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation as of March 1 |
|
$ |
474.4 |
|
|
$ |
393.2 |
|
Service cost |
|
|
5.5 |
|
|
|
3.9 |
|
Interest cost |
|
|
24.9 |
|
|
|
21.5 |
|
Plan participants contributions |
|
|
2.0 |
|
|
|
1.9 |
|
Plan amendment |
|
|
|
|
|
|
0.5 |
|
Actuarial loss (gain) |
|
|
0.8 |
|
|
|
(14.2 |
) |
Special termination benefits |
|
|
|
|
|
|
1.0 |
|
Settlement |
|
|
(7.1 |
) |
|
|
(2.8 |
) |
Acquisition |
|
|
|
|
|
|
46.2 |
|
Benefits paid |
|
|
(16.4 |
) |
|
|
(14.8 |
) |
Foreign currency exchange rate changes |
|
|
23.6 |
|
|
|
38.0 |
|
|
|
|
|
|
|
|
Benefit obligation as of the last day of February |
|
$ |
507.7 |
|
|
$ |
474.4 |
|
|
|
|
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets as of March 1 |
|
$ |
352.1 |
|
|
$ |
259.5 |
|
Actual return on plan assets |
|
|
27.7 |
|
|
|
16.8 |
|
Acquisition |
|
|
|
|
|
|
56.1 |
|
Employer contribution |
|
|
10.8 |
|
|
|
12.5 |
|
Plan participants contributions |
|
|
2.0 |
|
|
|
1.9 |
|
Settlement |
|
|
(7.1 |
) |
|
|
(2.8 |
) |
Benefits paid |
|
|
(16.4 |
) |
|
|
(14.8 |
) |
Foreign currency exchange rate changes |
|
|
22.8 |
|
|
|
22.9 |
|
|
|
|
|
|
|
|
Fair value of plan assets as of the
last day of February |
|
$ |
391.9 |
|
|
$ |
352.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plan as of the last day of
February: |
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(115.8 |
) |
|
$ |
(122.3 |
) |
Employer contributions from measurement date
to fiscal year end |
|
|
0.7 |
|
|
|
0.3 |
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(115.1 |
) |
|
$ |
(122.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated
Balance Sheets consist of: |
|
|
|
|
|
|
|
|
Long-term pension asset |
|
$ |
6.6 |
|
|
$ |
11.0 |
|
Current accrued pension liability |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Long-term accrued pension liability |
|
|
(121.6 |
) |
|
|
(132.9 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(115.1 |
) |
|
$ |
(122.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated
other comprehensive income: |
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
$ |
0.9 |
|
|
$ |
1.0 |
|
Unrecognized actuarial loss |
|
|
155.4 |
|
|
|
157.1 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, gross |
|
|
156.3 |
|
|
|
158.1 |
|
Cumulative tax impact |
|
|
47.0 |
|
|
|
47.6 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net |
|
$ |
109.3 |
|
|
$ |
110.5 |
|
|
|
|
|
|
|
|
The estimated amounts that will be amortized from accumulated other comprehensive income, net
of income tax effect, into net periodic benefit cost over the next fiscal year are as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
Prior service cost |
|
$ |
0.2 |
|
Net actuarial loss |
|
$ |
6.1 |
|
As of February 29, 2008, and February 28, 2007, the accumulated benefit obligation for all
defined benefit pension plans was $494.5 million and $449.5 million, respectively. The following
table summarizes the projected benefit obligation, accumulated benefit obligation and fair value of
plan assets for only those pension plans with an accumulated benefit obligation in excess of plan
assets:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
(in millions) |
|
|
|
|
|
|
|
|
Projected benefit obligation |
|
$ |
425.1 |
|
|
$ |
404.9 |
|
Accumulated benefit obligation |
|
$ |
411.9 |
|
|
$ |
392.2 |
|
Fair value of plan assets |
|
$ |
304.4 |
|
|
$ |
273.1 |
|
101
The following table sets forth the weighted average assumptions used in developing the net
periodic pension expense:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
February 29, |
|
February 28, |
|
|
2008 |
|
2007 |
Rate of return on plan assets |
|
|
8.08 |
% |
|
|
7.64 |
% |
Discount rate |
|
|
5.07 |
% |
|
|
4.89 |
% |
Rate of compensation increase |
|
|
4.00 |
% |
|
|
3.84 |
% |
The following table sets forth the weighted average assumptions used in developing the benefit
obligation:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
February 28, |
|
|
2008 |
|
2007 |
Discount rate |
|
|
5.65 |
% |
|
|
5.12 |
% |
Rate of compensation increase |
|
|
4.30 |
% |
|
|
4.07 |
% |
The Companys weighted average expected long-term rate of return on plan assets is 8.08%. The
Company considers the historical level of long-term returns and the current level of expected
long-term returns for each asset class, as well as the current and expected allocation of assets
when developing its expected long-term rate of return on assets assumption. The expected return
for each asset class is weighted based on the target asset allocation to develop the expected
long-term rate of return on assets assumption for the Companys portfolios.
The following table sets forth the weighted average asset allocations by asset category:
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
February 28, |
|
|
2008 |
|
2007 |
Asset Category: |
|
|
|
|
|
|
|
|
Equity securities |
|
|
41.1 |
% |
|
|
42.5 |
% |
Debt securities |
|
|
22.3 |
% |
|
|
18.1 |
% |
Real estate |
|
|
0.5 |
% |
|
|
1.2 |
% |
Other |
|
|
36.1 |
% |
|
|
38.2 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
For each of its Canadian, U.K. and Australian defined benefit plans, the Company employs an
investment return approach whereby a mix of equities and fixed income investments are used (on a
plan by plan basis) to maximize the long-term rate of return on plan assets for a prudent level of
risk. From time to time, the Company will target asset allocation on a plan by plan basis to
enhance total return while balancing risks. The established weighted average target allocations
across all of the Companys plans are approximately 37% equity securities, 21% fixed income
securities, 3% real estate and 39% other. The other component results primarily from investments
held by the Companys U.K. plan and consists primarily of U.K. hedge funds which have
characteristics of both equity and fixed income securities. Risk tolerance is established
separately for each plan through careful consideration of plan liabilities, plan funded status, and
corporate financial condition. The individual investment portfolios contain a diversified blend of
equity and fixed-income investments. Equity investments are diversified across each plans local
jurisdiction stocks as well as international stocks, and across multiple asset classifications,
including growth, value, and large and small capitalizations. Investment risk is measured and
monitored for each plan separately on an ongoing basis through periodic investment portfolio
reviews and annual liability measures.
102
The Company expects to contribute $11.6 million to its pension plans during the year ended
February 28, 2009.
Benefit payments, which reflect expected future service, as appropriate, expected to be paid
during the next ten fiscal years are as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
2009 |
|
$ |
19.0 |
|
2010 |
|
$ |
19.1 |
|
2011 |
|
$ |
21.2 |
|
2012 |
|
$ |
21.1 |
|
2013 |
|
$ |
22.6 |
|
2014 2018 |
|
$ |
127.1 |
|
Defined benefit postretirement plans
The Company currently sponsors multiple unfunded defined benefit postretirement benefit plans
for certain of its Constellation Spirits and Constellation Wines segment employees. As of February
29, 2008, and February 28, 2007, the Companys benefit obligation was $7.9 million and $7.4
million, respectively. Net periodic benefit cost for these plans reported in the Consolidated
Statements of Operations was $0.7 million, $0.6 million, and $0.4 million, for the years ended
February 29, 2008, February 28, 2007, and February 28, 2006, respectively.
13. |
|
COMMITMENTS AND CONTINGENCIES: |
Operating leases
Step rent provisions, escalation clauses, capital improvement funding and other lease
concessions, when present in the Companys leases, are taken into account in computing the minimum
lease payments. The minimum lease payments for the Companys operating leases are recognized on a
straight-line basis over the minimum lease term. Future payments under noncancelable operating
leases having initial or remaining terms of one year or more are as follows during the next five
fiscal years and thereafter:
|
|
|
|
|
(in millions) |
|
|
|
|
2009 |
|
$ |
80.4 |
|
2010 |
|
|
69.5 |
|
2011 |
|
|
58.2 |
|
2012 |
|
|
52.9 |
|
2013 |
|
|
46.5 |
|
Thereafter |
|
|
398.7 |
|
|
|
|
|
|
|
$ |
706.2 |
|
|
|
|
|
Rental expense was $88.6 million, $79.6 million and $70.5 million for the years ended February
29, 2008, February 28, 2007, and February 28, 2006, respectively.
Purchase commitments and contingencies
The Company has agreements with suppliers to purchase various spirits of which certain
agreements are denominated in British pound sterling. The maximum future obligation under these
agreements, based upon exchange rates at February 29, 2008, aggregate $17.3 million for contracts
expiring through the year ending February 29, 2012.
103
In connection with previous acquisitions as well as with the BWE Acquisition, the Vincor
Acquisition and the acquisition of all of the outstanding capital stock of The Robert Mondavi
Corporation (Robert Mondavi), the Company has assumed grape purchase contracts with certain
growers and suppliers. In addition, the Company has entered into other grape purchase contracts
with various growers and suppliers in the normal course of business. Under the grape purchase
contracts, the Company is committed to purchase all grape production yielded from a specified
number of acres for a period of time from one to seventeen years. The actual tonnage and price of
grapes that must be purchased by the Company will vary each year depending on certain factors,
including weather, time of harvest, overall market conditions and the agricultural practices and
location of the growers and suppliers under contract. The Company purchased $417.8 million and
$364.2 million of grapes under contracts for the years ended February 29, 2008, and February 28,
2007, respectively. Based on current production yields and published grape prices, the Company
estimates that the aggregate purchases under these contracts over the remaining terms of the
contracts will be $3,071.7 million.
In connection
with previous acquisitions as well as with the BWE Acquisition, the
Vincor Acquisition and the Robert
Mondavi acquisition, the Company established a liability for the estimated loss on firm purchase
commitments assumed at the time of acquisition. As of February 29, 2008, the remaining balance on
this liability is $44.4 million.
The Companys aggregate obligations under bulk wine purchase contracts will be $62.2 million
over the remaining terms of the contracts which extend through the year ending February 28, 2013.
In connection with a previous acquisition, the Company assumed certain processing contracts
which commit the Company to utilize outside services to process and/or package a minimum volume
quantity. In addition, the Company has a processing contract utilizing outside services to process
a minimum volume of brandy at prices which are dependent on the processing ingredients provided by
the Company. The Companys aggregate obligations under these processing contracts will be $30.8
million over the remaining terms of the contracts which extend through the year ending February 29,
2012.
Employment contracts
The Company has employment contracts with certain of its executive officers and certain other
management personnel with either automatic one year renewals or an indefinite term of employment
unless terminated by either party. These employment contracts provide for minimum salaries, as
adjusted for annual increases, and may include incentive bonuses based upon attainment of specified
management goals. These employment contracts also provide for severance payments in the event of
specified termination of employment. In addition, the Company has employment arrangements with
certain other management personnel which provide for severance payments in the event of specified
termination of employment. As of February 29, 2008, the aggregate commitment for future
compensation and severance, excluding incentive bonuses, was $13.5 million, none of which was
accruable at that date.
Employees covered by collective bargaining agreements
Approximately 31% of the Companys full-time employees are covered by collective bargaining
agreements at February 29, 2008. Agreements expiring within one year cover approximately 16% of
the Companys full-time employees.
Legal matters
In the course of its business, the Company is 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 Companys
financial condition, results of operations or cash flows.
104
14. |
|
STOCKHOLDERS EQUITY: |
Common stock
Through December 5, 2007, the Company had two classes of common stock: Class A Common Stock
and Class B Convertible Common Stock. Class B Convertible Common Stock shares are convertible into
shares of Class A Common Stock on a one-to-one basis at any time at the option of the holder.
Holders of Class B Convertible Common Stock are entitled to ten votes per share. Holders of Class
A Common Stock are entitled to one vote per share and a cash dividend premium. If the Company pays
a cash dividend on Class B Convertible Common Stock, each share of Class A Common Stock will
receive an amount at least ten percent greater than the amount of the cash dividend per share paid
on Class B Convertible Common Stock. In addition, the Board of Directors may declare and pay a
dividend on Class A Common Stock without paying any dividend on Class B Convertible Common Stock.
However, under the terms of the Companys senior credit facility, the Company is currently
constrained from paying cash dividends on its common stock. In addition, the indentures for the
Companys outstanding senior notes and senior subordinated notes may restrict the payment of cash
dividends on its common stock under certain circumstances.
Effective December 6, 2007, the Company filed a Restated Certificate of Incorporation (the
Restated Certificate) which created a new class of common stock consisting of 15,000,000 shares
of Class 1 Common Stock, $0.01 par value per share (the Class 1 Common Stock). The Restated
Certificate increased the aggregate number of authorized shares of the Companys common and
preferred stock to 361,000,000 shares. While the aggregate number of authorized shares of the
Companys common and preferred stock has been increased by the Restated Certificate, the Companys
ability to actually issue more shares has not been increased. Because shares of Class 1 Common
Stock are convertible into shares of Class A Common Stock, for each share of Class 1 Common Stock
issued, the Company must reserve one share of Class A Common Stock for issuance upon the conversion
of the share of Class 1 Common Stock. This requirement effectively reduces the number of shares of
Class A Common Stock that the Company may issue by the number of shares of Class 1 Common Stock
that the Company issues. Because the number of authorized shares of Class A Common Stock was not
increased by the Restated Certificate, the aggregate number of shares that the Company is able to
issue has not been increased.
Shares of Class 1 Common Stock do not generally have voting rights. Class 1 Common Stock
shares are convertible into shares of Class A Common Stock on a one-to-one basis at any time at the
option of the holder, provided that the holder immediately sells the Class A Common Stock acquired
upon conversion. Holders of Class 1 Common Stock do not have any preference as to dividends, but
may participate in any dividend if and when declared by the Board of Directors. If the Company
pays a cash dividend on Class 1 Common Stock, each share of Class A Stock will receive an amount at
least ten percent greater than the amount of cash dividend per share paid on Class 1 Common Stock.
In addition, the Board of Directors may declare and pay a dividend on Class A Common Stock without
paying a dividend on Class 1 Common Stock. The cash dividends declared and paid on Class B Stock
and Class 1 Stock must always be the same.
In July 2007, the stockholders of the Company approved an increase in the number of authorized
shares of Class A Common Stock from 300,000,000 shares to 315,000,000 shares, thereby increasing
the aggregate number of authorized shares of the Companys common and preferred stock to
346,000,000 shares.
In July 2005, the stockholders of the Company approved an increase in the number of authorized
shares of Class A Common Stock from 275,000,000 shares to 300,000,000 shares, thereby increasing
the aggregate number of authorized shares of the Companys common and preferred stock to
331,000,000 shares.
105
At February 29, 2008, there were 192,275,858 shares of Class A Common Stock and 23,777,154
shares of Class B Convertible Common Stock outstanding, net of treasury stock. There were no
shares outstanding of Class 1 Common Stock at February 29, 2008.
Stock repurchases
In February 2007, the Companys Board of Directors authorized the repurchase of up to $500.0
million of the Companys Class A Common Stock and Class B Convertible Common Stock. During the
year ended February 29, 2008, the Company repurchased 21,332,468 shares of Class A Common Stock
pursuant to this authorization at an aggregate cost of $500.0 million, or an average cost of $23.44
per share, through a combination of open market transactions and an accelerated share repurchase
(ASR) transaction that was announced in May 2007. The repurchased shares include 933,206 shares
of Class A Common Stock that were received by the Company in July 2007 in connection with the early
termination of the calculation period for the ASR transaction by the counterparty to the ASR
transaction. The Company used revolver borrowings under the 2006 Credit Agreement to pay the
purchase price for the repurchased shares. The repurchased shares have become treasury shares.
In February 2006, the Companys Board of Directors replenished a June 1998 Board of Directors
authorization to repurchase up to $100.0 million of the Companys Class A Common Stock and Class B
Convertible Common Stock. During the year ended February 28, 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 the year
ended February 28, 2006. The repurchased shares have become treasury shares.
Preferred stock
During the year ended February 29, 2004, the Company issued 5.75% Series A Mandatory
Convertible Preferred Stock (Preferred Stock). Dividends were cumulative and payable quarterly,
if declared, in cash, shares of the Companys Class A Common Stock, or a combination thereof, at
the discretion of the Company. Dividends were payable, if declared, on the first business day of
March, June, September, and December of each year, commencing on December 1, 2003. On September 1,
2006, the Preferred Stock was converted into 9,983,066 shares of the Companys Class A Common
Stock. The September 1, 2006, conversion includes both mandatory conversions as well as optional
conversions initiated during August 2006. No fractional shares of the Companys Class A Common
Stock were issued in the conversions.
Long-term stock incentive plan
Under the Companys Long-Term Stock Incentive Plan, nonqualified stock options, stock
appreciation rights, restricted stock and other stock-based awards may be granted to employees,
officers and directors of the Company. The aggregate number of shares of the Companys Class A
Common Stock and Class 1 Common Stock available for awards under the Companys Long-Term Stock
Incentive Plan is 94,000,000 shares. The exercise price, vesting period and term of nonqualified
stock options granted are established by the committee administering the plan (the Committee).
The exercise price of any nonqualified stock option may not be less than the fair market value of
the Companys Class A Common Stock on the date of grant. Nonqualified stock options generally vest
and become exercisable over a four-year period from the date of grant. Nonqualified stock options
expire at the times established by the Committee, but not later than ten years after the grant
date.
106
Grants of stock appreciation rights, restricted stock and other stock-based awards may contain
such vesting, terms, conditions and other requirements as the Committee may establish. The
purchase price for an award of restricted stock is $0.00 per share. Restricted stock awards based
on service generally vest for one to four years from the date of grant. During the years ended
February 29, 2008, February 28, 2007, and February 28, 2006, no stock appreciation rights were
granted.
Incentive stock option plan
Under the Companys Incentive Stock Option Plan, incentive stock options may be granted to
employees, including officers, of the Company. Grants, in the aggregate, may not exceed 8,000,000
shares of the Companys Class A Common Stock. The exercise price of any incentive stock option may
not be less than the fair market value of the Companys Class A Common Stock on the date of grant.
The vesting period and term of incentive stock options granted are established by the Committee.
Incentive stock options generally vest and become exercisable over a four-year period from the date
of grant. Incentive stock options expire at the times established by the Committee, but not later
than ten years after the grant date. Under the current terms of the Incentive Stock Option Plan,
no additional grants of incentive stock options are permitted.
A summary of stock option activity under the Companys Long-Term Stock Incentive Plan and the
Incentive Stock Option Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Weighted |
|
Number |
|
Weighted |
|
|
of |
|
Average |
|
of |
|
Average |
|
|
Options |
|
Exercise |
|
Options |
|
Exercise |
|
|
Outstanding |
|
Price |
|
Exercisable |
|
Price |
Balance, February 28, 2005 |
|
|
23,600,750 |
|
|
$ |
11.48 |
|
|
|
20,733,345 |
|
|
$ |
10.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
3,952,825 |
|
|
$ |
27.24 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(3,662,997 |
) |
|
$ |
8.56 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(237,620 |
) |
|
$ |
24.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2006 |
|
|
23,652,958 |
|
|
$ |
14.43 |
|
|
|
23,149,228 |
|
|
$ |
14.43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
5,670,181 |
|
|
$ |
25.97 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(5,423,708 |
) |
|
$ |
11.74 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(530,905 |
) |
|
$ |
25.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2007 |
|
|
23,368,526 |
|
|
$ |
17.61 |
|
|
|
17,955,262 |
|
|
$ |
15.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
10,033,913 |
|
|
$ |
21.31 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,158,146 |
) |
|
$ |
9.40 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(1,252,440 |
) |
|
$ |
24.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 29, 2008 |
|
|
29,991,853 |
|
|
$ |
19.16 |
|
|
|
16,989,765 |
|
|
$ |
16.56 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
A summary of restricted Class A Common Stock award activity under the Companys Long-Term
Stock Incentive Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
Weighted |
|
Fair |
|
|
of Restricted |
|
Average |
|
Value of |
|
|
Stock Awards |
|
Grant-date |
|
Shares |
|
|
Outstanding |
|
Price |
|
Vested |
Nonvested balance, February 28, 2005 |
|
|
5,330 |
|
|
$ |
18.86 |
|
|
|
|
|
Granted |
|
|
7,150 |
|
|
$ |
27.96 |
|
|
|
|
|
Vested |
|
|
(6,760 |
) |
|
$ |
20.79 |
|
|
$ |
140,507 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance, February 28, 2006 |
|
|
5,720 |
|
|
$ |
27.96 |
|
|
|
|
|
Granted |
|
|
8,614 |
|
|
$ |
24.75 |
|
|
|
|
|
Vested |
|
|
(5,720 |
) |
|
$ |
27.96 |
|
|
$ |
159,931 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance, February 28, 2007 |
|
|
8,614 |
|
|
$ |
24.75 |
|
|
|
|
|
Granted |
|
|
133,726 |
|
|
$ |
20.94 |
|
|
|
|
|
Vested |
|
|
(8,614 |
) |
|
$ |
24.75 |
|
|
$ |
213,215 |
|
Forfeited |
|
|
(120,000 |
) |
|
$ |
20.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance, February 29, 2008 |
|
|
13,726 |
|
|
$ |
22.21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding at February 29,
2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Average |
|
|
Aggregate |
|
|
|
of |
|
|
Contractual |
|
|
Exercise |
|
|
Intrinsic |
|
Range of Exercise Prices |
|
Options |
|
|
Life |
|
|
Price |
|
|
Value |
|
$5.59 $10.67 |
|
|
5,068,337 |
|
|
2.6 years |
|
$ |
8.38 |
|
|
|
|
|
$11.70 $16.63 |
|
|
6,073,760 |
|
|
5.4 years |
|
$ |
14.36 |
|
|
|
|
|
$18.55 $23.48 |
|
|
10,231,567 |
|
|
8.9 years |
|
$ |
21.32 |
|
|
|
|
|
$24.13 $30.52 |
|
|
8,618,189 |
|
|
7.8 years |
|
$ |
26.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
29,991,853 |
|
|
6.8 years |
|
$ |
19.16 |
|
|
$ |
84,427,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable |
|
|
16,989,765 |
|
|
5.3 years |
|
$ |
16.56 |
|
|
$ |
84,344,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other information pertaining to stock options is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
February 29, |
|
February 28, |
|
February 28, |
|
|
2008 |
|
2007 |
|
2006 |
Weighted average grant-date fair value
of stock options granted |
|
$ |
7.91 |
|
|
$ |
10.04 |
|
|
$ |
9.55 |
|
Total fair value of stock options vested |
|
$ |
15,572,907 |
|
|
$ |
3,675,819 |
|
|
$ |
53,089,149 |
|
Total intrinsic value of stock options
exercised |
|
$ |
30,020,460 |
|
|
$ |
78,294,306 |
|
|
$ |
63,444,953 |
|
Tax benefit realized from stock options
exercised |
|
$ |
11,362,302 |
|
|
$ |
23,450,237 |
|
|
$ |
19,014,429 |
|
108
The fair value of options is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
February 29, |
|
February 28, |
|
February 28, |
|
|
2008 |
|
2007 |
|
2006 |
Expected life |
|
5.6 years |
|
5.5 years |
|
5.0 years |
Expected volatility |
|
|
30.2 |
% |
|
|
31.7 |
% |
|
|
31.3 |
% |
Risk-free interest rate |
|
|
4.5 |
% |
|
|
4.8 |
% |
|
|
4.1 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
For the years ended February 29, 2008, February 28, 2007, and February 28, 2006, the Company
used a projected expected life for each award granted based on historical experience of employees
exercise behavior for similar type grants. Expected volatility for the years ended February 29,
2008, February 28, 2007, and February 28, 2006, is based on historical volatility levels of the
Companys Class A Common Stock. The risk-free interest rate for the years ended February 29, 2008,
February 28, 2007, and February 28, 2006, is based on the implied yield currently available on U.S.
Treasury zero coupon issues with a remaining term equal to the expected life.
Employee stock purchase plans
The Company has a stock purchase plan under which 9,000,000 shares of Class A Common Stock may
be issued. Under the terms of the plan, eligible employees may purchase shares of the Companys
Class A Common Stock through payroll deductions. The purchase price is the lower of 85% of the
fair market value of the stock on the first or last day of the purchase period. During the years
ended February 29, 2008, February 28, 2007, and February 28, 2006, employees purchased 343,868
shares, 265,295 shares and 249,507 shares, respectively, under this plan.
The weighted average fair value of purchase rights granted during the years ended February 29,
2008, February 28, 2007, and February 28, 2006, was $5.22, $5.49 and $6.23, respectively. The fair
value of purchase rights granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
February 29, |
|
February 28, |
|
February 28, |
|
|
2008 |
|
2007 |
|
2006 |
Expected life |
|
0.5 years |
|
0.5 years |
|
0.5 years |
Expected volatility |
|
|
30.2 |
% |
|
|
23.3 |
% |
|
|
27.3 |
% |
Risk-free interest rate |
|
|
3.6 |
% |
|
|
5.2 |
% |
|
|
4.1 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
|
|
0.0 |
% |
The Company has a stock purchase plan under which 2,000,000 shares of the Companys Class A
Common Stock may be issued to eligible employees and directors of the Companys U.K. subsidiaries.
Under the terms of the plan, participants may purchase shares of the Companys Class A Common Stock
through payroll deductions. The purchase price may be no less than 80% of the closing price of the
stock on the day the purchase price is fixed by the committee administering the plan. During the
years ended February 29, 2008, February 28, 2007, and February 28, 2006, employees purchased 463
shares, 52,842 shares and 92,622 shares, respectively, under this plan.
109
The weighted average fair value of purchase rights granted during the years ended February 29,
2008, and February 28, 2007, was $9.73 and $11.22, respectively. During the year ended February
28, 2006, there were no purchase rights granted. The maximum number of shares which can be
purchased under purchase rights granted during the years ended February 29, 2008, and February 28,
2007, is 73,987 shares and 396,803 shares, respectively. The fair value of the purchase rights
granted is estimated on the date of grant using the Black-Scholes option-pricing model with the
following weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
Expected life |
|
4.0 years |
|
3.9 years |
Expected volatility |
|
|
27.0 |
% |
|
|
27.9 |
% |
Risk-free interest rate |
|
|
4.1 |
% |
|
|
4.8 |
% |
Expected dividend yield |
|
|
0.0 |
% |
|
|
0.0 |
% |
As of February 29, 2008, there was $86.2 million of total unrecognized compensation cost
related to nonvested stock-based compensation arrangements granted under the Companys four
stock-based employee compensation plans. This cost is expected to be recognized in the Companys
Consolidated Statements of Operations over a weighted-average period of 2.8 years. With respect to
the issuance of shares under any of the Companys stock-based compensation plans, the Company has
the option to issue authorized but unissued shares or treasury shares.
15. |
|
EARNINGS PER COMMON SHARE: |
Earnings per common share are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
(in millions, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(613.3 |
) |
|
$ |
331.9 |
|
|
$ |
325.3 |
|
Dividends on preferred stock |
|
|
|
|
|
|
(4.9 |
) |
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income available to common stockholders |
|
$ |
(613.3 |
) |
|
$ |
327.0 |
|
|
$ |
315.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock |
|
|
195.135 |
|
|
|
204.966 |
|
|
|
196.907 |
|
|
|
|
|
|
|
|
|
|
|
Class B Convertible Common Stock |
|
|
23.812 |
|
|
|
23.840 |
|
|
|
23.904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock |
|
|
195.135 |
|
|
|
204.966 |
|
|
|
196.907 |
|
Class B Convertible Common Stock |
|
|
|
|
|
|
23.840 |
|
|
|
23.904 |
|
Stock options |
|
|
|
|
|
|
5.933 |
|
|
|
7.913 |
|
Preferred stock |
|
|
|
|
|
|
5.033 |
|
|
|
9.983 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding diluted |
|
|
195.135 |
|
|
|
239.772 |
|
|
|
238.707 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock |
|
$ |
(2.83 |
) |
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
Class B Convertible Common Stock |
|
$ |
(2.57 |
) |
|
$ |
1.31 |
|
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Class A Common Stock |
|
$ |
(2.83 |
) |
|
$ |
1.38 |
|
|
$ |
1.36 |
|
|
|
|
|
|
|
|
|
|
|
Class B Convertible Common Stock |
|
$ |
(2.57 |
) |
|
$ |
1.27 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
110
For the year ended February 29, 2008, the computation of diluted loss per common share
excluded 23.8 million shares of Class B Convertible Common Stock and stock options to purchase 30.0
million shares of Class A Common Stock at a weighted average price per share of $19.16 because the
inclusion of such potentially dilutive common shares would have been anti-dilutive. In addition,
for the years ended February 28, 2007, and February 28, 2006, stock options to purchase 3.8 million
and 3.6 million shares of Class A Common Stock at a weighted average price per share of $27.25 and
$27.30, respectively, were not included in the computation of diluted earnings per common share
because the stock options exercise price was greater than the average market price of the Class A
Common Stock for the respective periods.
16. |
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS): |
Other comprehensive (loss) income, net of income tax effect, includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before Tax |
|
|
Tax (Expense) |
|
|
Net of Tax |
|
|
|
Amount |
|
|
or Benefit |
|
|
Amount |
|
Other comprehensive (loss) income, February 28,
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
(166.0 |
) |
|
$ |
6.8 |
|
|
$ |
(159.2 |
) |
Unrealized gain (loss) on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative gains |
|
|
3.4 |
|
|
|
(3.3 |
) |
|
|
0.1 |
|
Reclassification adjustments |
|
|
(10.6 |
) |
|
|
4.2 |
|
|
|
(6.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss recognized in other comprehensive income |
|
|
(7.2 |
) |
|
|
0.9 |
|
|
|
(6.3 |
) |
Minimum pension liability adjustment |
|
|
(27.1 |
) |
|
|
8.2 |
|
|
|
(18.9 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive (loss) income, February 28, 2006 |
|
$ |
(200.3 |
) |
|
$ |
15.9 |
|
|
$ |
(184.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), February 28,
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
142.2 |
|
|
$ |
(10.1 |
) |
|
$ |
132.1 |
|
Unrealized loss on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative losses |
|
|
(11.6 |
) |
|
|
4.3 |
|
|
|
(7.3 |
) |
Reclassification adjustments |
|
|
(15.5 |
) |
|
|
5.1 |
|
|
|
(10.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss recognized in other comprehensive income |
|
|
(27.1 |
) |
|
|
9.4 |
|
|
|
(17.7 |
) |
Pension adjustment |
|
|
(4.5 |
) |
|
|
1.1 |
|
|
|
(3.4 |
) |
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), February 28, 2007 |
|
$ |
110.6 |
|
|
$ |
0.4 |
|
|
$ |
111.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), February 29,
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
$ |
401.5 |
|
|
$ |
10.7 |
|
|
$ |
412.2 |
|
Unrealized loss on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative losses |
|
|
(46.9 |
) |
|
|
23.3 |
|
|
|
(23.6 |
) |
Reclassification adjustments |
|
|
(3.0 |
) |
|
|
(0.1 |
) |
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
Net loss recognized in other comprehensive income |
|
|
(49.9 |
) |
|
|
23.2 |
|
|
|
(26.7 |
) |
Pension and post-retirement benefit plans: |
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial losses |
|
|
(5.8 |
) |
|
|
1.7 |
|
|
|
(4.1 |
) |
Reclassification adjustments |
|
|
7.9 |
|
|
|
(2.4 |
) |
|
|
5.5 |
|
|
|
|
|
|
|
|
|
|
|
Net gain recognized in other comprehensive income |
|
|
2.1 |
|
|
|
(0.7 |
) |
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), February 29, 2008 |
|
$ |
353.7 |
|
|
$ |
33.2 |
|
|
$ |
386.9 |
|
|
|
|
|
|
|
|
|
|
|
111
Accumulated other comprehensive income (loss), net of income tax effect, includes the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
|
Foreign |
|
|
Unrealized |
|
|
|
|
|
|
Accumulated |
|
|
|
Currency |
|
|
Gains |
|
|
Pension / |
|
|
Other |
|
|
|
Translation |
|
|
(Losses) on |
|
|
Post-Retirement |
|
|
Comprehensive |
|
|
|
Adjustments |
|
|
Derivatives |
|
|
Adjustments |
|
|
Income |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2007 |
|
$ |
446.8 |
|
|
$ |
13.3 |
|
|
$ |
(111.0 |
) |
|
$ |
349.1 |
|
Current period change |
|
|
412.2 |
|
|
|
(26.7 |
) |
|
|
1.4 |
|
|
|
386.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 29, 2008 |
|
$ |
859.0 |
|
|
$ |
(13.4 |
) |
|
$ |
(109.6 |
) |
|
$ |
736.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the year ended February 28, 2006, the Company changed the structure of certain of its
cash flow hedges of forecasted foreign currency denominated transactions. As a result, the Company
received $18.5 million in proceeds from the early termination of related foreign currency
derivative instruments. 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 Operations. See Note 9 for
discussion of $30.3 million cash proceeds received from the early termination of interest rate swap
agreements in March 2005.
17. |
|
SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK: |
Sales to the five largest
customers represented 32.8%, 21.7% and 21.1% of the Companys sales
for the years ended February 29, 2008, February 28, 2007, and February 28, 2006, respectively.
Sales to the Companys largest customer, Southern Wine and Spirits, represent 12.3% of the
Companys sales for the year ended February 29, 2008, of which 85.6% is reported within the Constellation Wines segment and 14.4% is reported within the Constellation Spirits segment. No single customer was responsible for
greater than 10% of sales for the years ended February 28, 2007, and February 28, 2006. Accounts
receivable from the Companys largest customer represented 9.0%, 13.0%
and 11.0% of the Companys total accounts receivable as of February 29, 2008, February 28, 2007,
and February 28, 2006, respectively. Sales to the Companys five largest customers are expected to
continue to represent a significant portion of the Companys revenues. The Companys arrangements
with certain of its customers may, generally, be terminated by either party with prior notice. The
Company performs ongoing credit evaluations of its customers financial position, and management of
the Company is of the opinion that any risk of significant loss is reduced due to the diversity of
customers and geographic sales area.
18. |
|
ACQUISITION-RELATED INTEGRATION COSTS: |
For the year ended February 29, 2008, the Company recorded $11.8 million of
acquisition-related integration costs associated primarily with the
Vincor Plan (as defined in Note 19) and
the Fiscal 2008 Plan. The Company defines acquisition-related integration costs as
nonrecurring costs incurred to integrate newly acquired businesses after a business combination
which are incremental to those of the Company prior to the business combination. As such,
acquisition-related integration costs include, but are not limited to, (i) employee-related costs
such as salaries and stay bonuses paid to employees of the acquired business that will be
terminated after their integration activities are completed, (ii) costs to relocate fixed assets
and inventories, and (iii) facility costs and other costs such as external services and consulting
fees. For the year ended February 29, 2008, acquisition-related integration costs included $4.8
million of employee-related costs and $7.0 million of facilities and other costs. For the years
ended February 28, 2007, and February 28, 2006, the Company recorded $23.6 million of
acquisition-related integration costs associated primarily with the Vincor Plan and $16.8 million
of acquisition-related integration costs associated with the Robert Mondavi Plan (as defined in
Note 19), respectively.
112
19. |
|
RESTRUCTURING AND RELATED CHARGES: |
The Company has several restructuring plans within its Constellation Wines segment as follows:
Fiscal 2004 Plan
During fiscal 2004, the Company announced a plan to further realign business operations and a
plan to exit the commodity concentrate product line in the U.S. (the Fiscal 2004 Plan). The
Fiscal 2004 Plan consists of exiting the commodity concentrate product line located in Madera,
California, and selling the Companys Escalon facility located in Escalon, California. The
decision to exit the commodity concentrate product line resulted from the fact that the line was
facing declining sales and profits and was not part of the Companys core beverage alcohol
business. By exiting the commodity concentrate line, the Company was able to free up capacity at
its winery in Madera, and move production and storage from Escalon to Madera, and forego further
investment in its aging Escalon facility. The Fiscal 2004 Plan includes the renegotiation of
existing grape contracts associated with commodity concentrate inventory, asset write-offs and
severance-related costs. The Fiscal 2004 Plan has been completed as of February 29, 2008.
Robert Mondavi Plan
In
January 2005, the Company announced a plan to restructure and integrate the operations of
Robert Mondavi (the Robert Mondavi Plan). The objective of the Robert Mondavi
Plan is to achieve operational efficiencies and eliminate redundant costs resulting from the
December 22, 2004, acquisition of Robert Mondavi. The Robert Mondavi Plan includes the elimination
of certain employees, the consolidation of certain field sales and administrative offices, and the
termination of various contracts. The Company does not expect any additional costs associated with
the Robert Mondavi Plan to be recognized in its Consolidated Statements of Operations. The Company
expects related cash expenditures to be completed by February 29, 2012.
Fiscal 2006 Plan
During fiscal 2006, the Company announced a plan to reorganize certain worldwide wine
operations and a plan to consolidate certain west coast production processes in the U.S.
(collectively, the Fiscal 2006 Plan). The Fiscal 2006 Plans principal features are to
reorganize and simplify the infrastructure and reporting structure of the Companys global wine
business and to consolidate certain west coast production processes. This Fiscal 2006 Plan is part
of the Companys ongoing effort to enhance its administrative, operational and production
efficiencies in light of its ongoing growth. The objective of the Fiscal 2006 Plan is to achieve
greater efficiency in sales, administrative and operational activities and to eliminate redundant
costs. The Fiscal 2006 Plan includes the termination of employment of certain employees in various
locations worldwide, the consolidation of certain worldwide wine selling and administrative
functions, the consolidation of certain warehouse and production functions, the termination of
various contracts, investment in new assets and the reconfiguration of certain existing assets.
The Company expects all costs associated with the Fiscal 2006 Plan to be recognized in its
Consolidated Statements of Operations by February 28, 2009, with related cash expenditures to be
completed by February 28, 2009.
Vincor Plan
In July 2006, the Company announced a plan to restructure and integrate the operations of
Vincor (the Vincor Plan). The objective of the Vincor Plan is to achieve operational
efficiencies and eliminate redundant costs resulting from the June 5, 2006, Vincor Acquisition, as
well as to achieve greater efficiency in sales, marketing, administrative and operational
activities. The Vincor Plan includes the elimination of certain employment redundancies, primarily
in the U.S., U.K. and Australia, and the termination of various contracts. The Company expects all
costs associated with the Vincor Plan to be recognized in its Consolidated Statements of Operations
by February 28, 2009, with related cash expenditures to be completed by February 29, 2012.
113
Fiscal 2007 Wine Plan
In August 2006, the Company announced a 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). The U.K. portion of the plan includes new investments in property, plant
and equipment and certain disposals of property, plant and equipment and is expected to increase
wine bottling capacity and efficiency and reduce costs of transport, production and distribution.
The U.K. portion of the plan also includes costs for employee terminations. The Australian portion
of the plan includes the buy-out of certain grape supply and processing contracts and the sale of
certain property, plant and equipment. The initiatives are part of the Companys ongoing efforts
to maximize asset utilization, further reduce costs and improve long-term return on invested
capital throughout its international operations. The Company expects all costs associated with
Fiscal 2007 Wine Plan to be recognized in its Consolidated Statements of Operations by February 28,
2011, with related cash expenditures to be completed by February 28, 2011.
Fiscal 2008 Plan
During November 2007, the Company initiated its plans to streamline certain of its
international operations, including the consolidation of certain winemaking and packaging
operations in Australia, the buy-out of certain grape processing and wine storage contracts in
Australia, equipment relocation costs in Australia, and certain employee termination costs. In
addition, the Company incurred certain other restructuring and related charges during the third
quarter of fiscal 2008 in connection with the consolidation of certain spirits production processes
in the U.S. In January 2008, the Company announced its plans to streamline certain of its
operations in the U.S., primarily in connection with the restructuring and integration of the
operations acquired in the BWE Acquisition (the U.S. Initiative). These initiatives will
collectively be referred to as the Fiscal 2008 Plan. The Fiscal 2008 Plan is part of the Companys
ongoing efforts to maximize asset utilization, further reduce costs and improve long-term return on
invested capital throughout its domestic and international operations. The Company expects all
costs associated with Fiscal 2008 Plan to be recognized in its Consolidated Statements of
Operations by February 28, 2010, with related cash expenditures to be completed by February 28,
2010.
Restructuring and related charges consisting of employee termination benefit costs, contract
termination costs, and other associated costs are accounted for under either SFAS 112 or SFAS 146,
as appropriate. Employee termination benefit costs are accounted for under SFAS 112, as the
Company has had several restructuring programs which have provided employee termination benefits in
the past. The Company includes employee severance, related payroll benefit costs such as costs to
provide continuing health insurance, and outplacement services as employee termination benefit
costs. Contract termination costs, and other associated costs including, but not limited to,
facility consolidation and relocation costs are accounted for under SFAS 146. Per SFAS 146,
contract termination costs are costs to terminate a contract that is not a capital lease, including
costs to terminate the contract before the end of its term or costs that will continue to be
incurred under the contract for its remaining term without economic benefit to the entity. The
Company includes costs to terminate certain operating leases for buildings, computer and IT
equipment, and costs to terminate contracts, including distributor contracts and contracts for
long-term purchase commitments, as contract termination costs. Per SFAS 146, other associated
costs include, but are not limited to, costs to consolidate or close facilities and relocate
employees. The Company includes employee relocation costs and equipment relocation costs as other
associated costs.
114
Details of each plan are presented in the following table. The Robert Mondavi Plan and the
Fiscal 2004 Plan are collectively referred to as Other Plans in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
|
2007 |
|
|
|
|
|
|
Fiscal |
|
|
|
|
|
|
|
|
|
2008 |
|
|
Wine |
|
|
Vincor |
|
|
2006 |
|
|
Other |
|
|
|
|
|
|
Plan |
|
|
Plan |
|
|
Plan |
|
|
Plan |
|
|
Plans |
|
|
Total |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
  |