FORM 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 28, 2009
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
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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207 High Point Drive, Building 100, Victor, New York
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14564 |
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(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code (585) 678-7100
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered |
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Class A Common Stock (par value $.01 per share)
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New York Stock Exchange |
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 whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) 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
(Do not check if a smaller reporting company) |
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Smaller reporting company o |
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 $3,972,797,456. 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 20, 2009, is set forth below:
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Class
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Number of Shares Outstanding |
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Class A Common Stock, par value $.01 per share
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197,253,230 |
Class B Common Stock, par value $.01 per share
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23,743,494 |
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 23, 2009 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, (iii) information concerning expected actions of third
parties, and (iv) future worldwide or domestic economic conditions and the global credit
environment 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 and conditions in the general economy and markets in
which the Company competes, 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 or modifications, equipment
relocation, proceeds from the sale of assets identified for sale, product portfolio
rationalizations, production footprint and/or other 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 2009, Fiscal 2008, and Fiscal 2007 shall
refer to the Companys fiscal year ended the last day of February of the indicated year. All
references to Fiscal 2010 shall refer to the Companys fiscal year ending February 28, 2010.
Market positions and industry data discussed in this Annual Report on Form 10-K are as of
calendar 2008 and have been obtained or derived from industry and government publications and
Company estimates. The industry and government publications include: Adams Liquor Handbook; Adams
Wine Handbook; Adams Beer Handbook; Adams Handbook Advance; The U.S. Wine Market: Impact Databank
Review and Forecast; The U.S. Beer Market: Impact Databank Review and Forecast; The U.S. Spirits
Market: Impact Databank Review and Forecast; Euromonitor; Australian Bureau of Statistics;
Information Resources, Inc.; ACNielsen; Association for Canadian Distillers; AZTEC; and DISCUS.
The Company has not independently verified the data from the industry and government publications.
Unless otherwise noted, all references to market positions are based on equivalent 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 6,600 employees located throughout the
world and the corporate headquarters are located in Victor, New York. 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.
The Company is a leading international producer and marketer of beverage alcohol with a strong
portfolio of premium wine brands complemented by premium spirits, imported beers and other select
beverage alcohol products. 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 is the largest marketer of imported beer in the U.S. through its January 2, 2007,
investment in Crown Imports, 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. along with certain other imported brands (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.
1
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 (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).
Matthew Clark is 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. The Company
leverages Matthew Clark as a strategic route-to-market for its branded product portfolio.
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
many of its customers, who include wholesale distributors, retailers, on-premise locations and
government alcohol beverage control agencies.
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 28, |
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% of |
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February 29, |
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% of |
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(in millions) |
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2009 |
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Total |
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2008 |
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Total |
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Branded wine |
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3,015.3 |
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83 |
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$ |
3,016.9 |
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80 |
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Wholesale and other |
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220.6 |
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6 |
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341.9 |
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9 |
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Spirits |
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418.7 |
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11 |
% |
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414.2 |
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11 |
% |
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Consolidated Net Sales |
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$ |
3,654.6 |
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100 |
% |
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3,773.0 |
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% |
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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). 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 28, |
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% of |
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February 29, |
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% of |
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(in millions) |
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2009 |
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Total |
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2008 |
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Total |
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North America |
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$ |
2,154.7 |
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72 |
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2,005.6 |
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67 |
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Europe |
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521.3 |
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17 |
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637.9 |
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21 |
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Australia/New Zealand |
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339.3 |
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11 |
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373.4 |
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12 |
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Consolidated Net Sales |
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$ |
3,015.3 |
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100 |
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3,016.9 |
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During the past 10 years, there have been 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, with premium wines growing faster than
value-priced wines; and |
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In the U.S. within the beer category, high-end beer (imports and crafts) growing
faster than domestic beer. |
2
To capitalize on these trends and become more competitive, the Company has employed a strategy
of growing through a combination of internal growth, acquisitions and investments in joint
ventures, with an increasing focus on higher-margin premium categories of the beverage alcohol
industry. Key elements of the Companys strategy include:
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Leveraging its existing portfolio of leading brands; |
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Developing new products, new packaging and line extensions; |
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Strengthening relationships with wholesalers and retailers; |
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Expanding distribution of its product portfolio; |
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Enhancing production capabilities; |
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Realizing operating efficiencies and synergies; |
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Maximizing asset utilization; and |
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Acquiring additional management, operational, marketing, and product development
expertise. |
Over the last two fiscal years, the Company has complemented this strategy by divesting
certain businesses, brands, and assets as part of its efforts to increase its mix of premium
brands, improve margins, create operating efficiencies and reduce debt.
During Fiscal 2009, an increasingly challenging global economic environment has contributed to
some slowing of premium wine growth in the near-term but the Company believes consumers will
continue to trade up to premium wines over the long-term.
Recent Acquisitions, Equity Method Investments and Divestitures
In March 2009, as part of its strategic focus on higher-margin premium brands in its
portfolio, the Company sold its value spirits business for $330.5 million, net of direct costs to
sell. The Company retained the SVEDKA Vodka and Black Velvet Canadian Whisky premium spirit
brands, which have scale in the marketplace and higher margins than the value spirits brands that
were sold. To achieve synergies and operating efficiencies, these brands will be consolidated into
the Companys North American wine operations. The Paul Masson Grande Amber Brandy brand, which is
already being managed by the Companys North American wine business, was also retained.
In June 2008, the Company sold certain businesses consisting of several California wineries
and wine brands that had been acquired as part of the December 2007 acquisition of the Fortune
Brands U.S. wine business, as well as certain wineries and wine brands from the states of
Washington and Idaho (collectively, the Pacific Northwest Business) for cash proceeds of $204.2
million, net of direct costs to sell. This transaction contributes to the Companys streamlining
of its U.S. wine portfolio by eliminating brand duplication and excess production capacity.
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 $133.5 million, net of direct costs to sell.
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 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.
3
In April 2007, the Company along with Punch, a 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 has become the fastest growing major premium spirits brand in the world
and is the third largest imported vodka in the U.S. This acquisition increased the Companys mix
of premium spirits.
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 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.
4
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 22 to the
Companys consolidated financial statements located in Item 8 of this Annual Report on Form 10-K.
Constellation Wines
Constellation Wines is the leading producer and marketer of wine in the world. It sells a
large number of wine brands across all categories table wine, sparkling wine and dessert wine
and across all price points popular, premium, super-premium and fine wine. The portfolio of
super-premium and fine wines is supported by vineyard holdings in the U.S., Canada, Australia and
New Zealand. As the largest producer and marketer of wine in the world, Constellation Wines has
leading market positions in several countries. It is a leading producer and marketer of wine in
the U.S., Canada, Australia and New Zealand and the largest marketer of wine in the U.K. Wine
produced by the Company in the U.S. is primarily marketed domestically and in the U.K. and Canada.
Wine produced in Australia and New Zealand is primarily marketed domestically and in the U.S.,
Canada 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 18 of the top-selling 100 table brands and is the
largest premium wine company. In Canada, it has wine across all price points, and has six 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 Brands, Franciscan Oakville
Estate, Wild Horse, Simi, Toasted Head, Estancia, Clos du Bois, Blackstone, Ravenswood, Black Box,
Vendange, Arbor Mist, Inniskillin, Kim Crawford, Ruffino, Nobilo, Jackson-Triggs, Alice White,
Hardys, Banrock Station, Stowells, and Kumala. Constellation Wines also produces and sells Paul
Masson Grande Amber Brandy, a leading brand in the brandy/cognac category.
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, Olde English and Gaymers, 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.
5
Constellation Spirits
Through fiscal 2009, Constellation Spirits produced, bottled, imported and marketed a
diversified line of distilled spirits. The majority of the segments distilled spirits unit volume
consisted of products marketed in the value price category, including Chi-Chis prepared cocktails,
Barton, Sköl, Fleischmanns, Canadian LTD, Montezuma, Ten High, Mr. Boston and Inver House, and
Svedka Vodka and Black Velvet Canadian Whisky in the premium price category.
As discussed above, in March 2009, the Company sold its value spirits business while retaining
the Svedka and Black Velvet premium spirit brands, both of which have a leading position in their
respective categories, as well as certain other spirits brands.
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 and Tsingtao brands.
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 while St. Pauli Girl is the number two selling German Beer and Tsingtao is the
number one selling Chinese 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 supply
chain.
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 in the U.S., the Company leverages its sales and
marketing skills across the organization and segments.
6
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.
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. At the end of the Companys fiscal year
ended February 28, 2009, these agreements included, 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. On that date the Company also held an
import and license agreement for the Caravella brands with Sperone SPA, which expires in 2057,
under which it owned the Caravella trademarks in the U.S. during the term, and a distribution and
license agreement with C.D.G., SA that expires in 2015 for the Meukow brand. As previously
discussed, in March 2009, the Company sold its value spirits business. The Companys rights to
various trademarks were transferred as part of that divestiture, including the Companys rights to
all of the foregoing named trademarks.
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.
7
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, S.A. de C.V. (Diblo), gives notice
prior to the end of year seven of any term.
Competition
The beverage alcohol industry is highly competitive. The Company competes on the basis of
quality, price, brand recognition and distribution strength. The 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, Fosters Group, WJ
Deutsch, Kendall-Jackson, Ste. Michelle Wine Estates, Diageo and Brown Forman 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 Heineken 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, MillerCoors and Diageo in
the imported beer category as well as domestic producers such as Anheuser-Busch InBev and
MillerCoors.
Production
In the U.S., the Company operates 19 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 Companys Canadian whisky requirements are produced and aged at its Canadian distillery in
Lethbridge, Alberta. The Companys requirements of grains and bulk spirits it uses in the
production of Canadian whisky, are primarily purchased from various suppliers.
8
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. All cider production takes place at the Companys facility
at Shepton Mallet, England.
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 1,150 independent growers in the U.S.,
approximately 1,300 independent growers in Australia, approximately 120 independent growers in New
Zealand and approximately 110 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 700 of the 1,300
growers belong to a grape growers cooperative. The Company purchases the majority of its
Australian grape requirements from this cooperative under a long-term arrangement. In the U.K.,
the Company produces wine from materials purchased either on a contract basis or on the open
market.
At February 28, 2009, the Company owned or leased approximately 24,400 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 and imported 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.
9
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.
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 2009, the Company had approximately 6,600 full-time employees
throughout the world. Approximately 2,900 full-time employees were in the U.S. and approximately
3,700 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.
10
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.
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., 207 High Point Drive, Building 100, Victor, New
York 14564, 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.
11
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.
Recent worldwide and domestic economic trends and financial market conditions could adversely
impact our financial performance.
As widely reported, the worldwide and domestic economies have experienced adverse conditions
and may be subject to further deterioration for the foreseeable future. We are subject to risks
associated with these adverse conditions, including economic slowdown and the disruption,
volatility and tightening of credit and capital markets.
In addition, this global economic situation could adversely impact our major suppliers,
distributors and retailers. The inability of suppliers, distributors or retailers to conduct
business or to access liquidity could impact our ability to produce and distribute our products.
We have a committed credit facility and additional liquidity facilities available to us. While to
date we have not experienced problems with accessing these facilities, to the extent that the
financial institutions that participate in these facilities were to default on their obligation to
fund, those funds would not be available to us.
The timing and nature of any recovery in the financial markets remains uncertain, and there
can be no assurance that market conditions will improve in the near future. A prolonged downturn,
further worsening or broadening of the adverse conditions in the worldwide and domestic economies
could affect consumer spending patterns and purchases of our products, and create or exacerbate
credit issues, cash flow issues and other financial hardships for us and for our suppliers,
distributors, retailers and consumers. Depending upon their severity and duration, these
conditions could have a material adverse impact on our business, liquidity, financial condition and
results of operations. The Company is unable to predict the likely duration and severity of the
current disruption in the financial markets and the adverse economic conditions in the United
States and its other major markets outside the United States.
12
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. |
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.
13
Our acquisition, disposition and joint venture strategies may not be successful.
We have made a number of acquisitions, including our 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 or separating from our existing operations the operations
and personnel of businesses of which we dispose 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 or the conduct of our overall business strategies, we
may periodically restructure our businesses and/or sell assets or portions of our business,
including the recent sale of our value spirits business. We may not achieve expected cost savings
from restructuring activities or realize the expected proceeds from sales of assets or portions of
our business, 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.
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.
14
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. There may be further consideration by governmental entities
to increase taxes upon beverage alcohol products as governmental entities explore available
alternatives for raising funds during the current macroeconomic climate. In addition, federal,
state, local and foreign governmental agencies extensively regulate the beverage alcohol products
industry concerning such matters as licensing, trade and pricing practices, permitted and required
labeling, advertising and relations with wholesalers and retailers. Certain federal and state or
provincial regulations also require warning labels and signage. New or revised regulations or
increased licensing fees, requirements or taxes could also have a material adverse effect on our
financial condition or results of operations.
We rely on the performance of wholesale distributors, major retailers and government agencies for the
success of our business.
Local market structures and distribution channels vary worldwide. In the U.S., we sell our products principally to wholesalers for resale to retail outlets
including grocery stores, club and discount stores, package liquor stores and restaurants and also directly to government agencies. In the
U.K., we sell our products principally to retailers and also to wholesalers.
In Australia, we sell our products principally to wholesalers and
also directly to retailers, while in Canada, we sell our products to government agencies. The replacement or poor performance of our major wholesalers,
retailers or government agencies could materially and adversely affect our results of operations
and financial condition. Our inability to collect accounts receivable from our major wholesalers,
retailers or government agencies 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, market share 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.
15
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.
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.
16
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.
During the years ended February 28, 2009, and February 29, 2008, we recorded impairment losses
of $300.4 million and $812.2 million, respectively, on our goodwill and intangible assets. We
continue to have a significant amount of intangible assets, such as goodwill and trademarks. In
accordance with the provisions of the Financial Accounting Standards Boards Statement of Financial
Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets, goodwill and
indefinite lived intangible assets are subject to a periodic impairment evaluation. Reductions in
our net income caused by the write-down of any of these intangible assets could materially and
adversely affect our results of operations.
The termination of our joint venture with Modelo relating to importing, marketing and selling
imported beer could have a material adverse effect on our business.
On January 2, 2007, we participated in establishing and commencing operations of a joint
venture with Modelo, pursuant to which Corona Extra and the other Modelo Brands are imported,
marketed and sold by the joint venture in the U.S. (including the District of Columbia) and Guam
along with certain other imported beer brands in their respective territories. Pursuant to the
joint venture and related importation arrangements, the joint venture will continue for an initial
term of 10 years, and renew in 10-year periods unless GModelo Corporation, a Delaware corporation
and subsidiary of Diblo, gives notice prior to the end of year seven of any term of its intention
to purchase our interest we hold through our subsidiary, Constellation Beers Ltd. (Constellation
Beers). The joint venture may also terminate under other circumstances involving action by
governmental authorities, certain changes in control of us or Constellation Beers 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 Constellation Beers interest or for
other reasons noted above could have a material adverse effect on our business, financial condition
or results of operations.
17
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 types of lawsuits or a significant decline in
the social acceptability of beverage alcohol products that results from 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.
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.
18
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.
19
Item 2. Properties
Through its business segments, the Company operates wineries, distilling and 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; 16 wineries in California, located in Acampo, Esparto,
Geyserville, Gonzales, Healdsburg, Kenwood, Madera, Oakville, Soledad, Rutherford, Templeton,
Ukiah, two in Lodi, two in Sonoma; and one winery in Washington, located in Prosser. All of these
wineries are owned. 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 28, 2009, the Company owned or leased
approximately 12,600 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.
20
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. Four 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
6,100 acres of vineyards in South Australia, Western Australia, Victoria, and Tasmania, and
approximately 3,900 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 and two
third party storage 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. The Company also operates an additional satellite warehouse in leased facilities
in Severnside. Matthew Clark 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, and a finished goods warehouse and sales office in
Dartmouth, Nova Scotia. 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).
21
Through the Constellation Wines segment, as of February 28, 2009, the Company owned or leased
approximately 1,800 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.
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 currently owns and operates a distilling plant located in
Lethbridge, Alberta, Canada. The Company also previously owned and operated a distilling plant in
Valleyfield, Quebec which it sold to a third party during Fiscal 2009. The Company has moved the
operations previously conducted at the Valleyfield, Quebec plant to its Lethbridge, Alberta, Canada
facility. In addition, as discussed in Item 1 of this Annual Report on Form 10-K under the caption
Business Recent Acquisitions, Equity Method Investments and Divestitures, subsequent to
February 28, 2009, the Company sold its value spirits business, which included the sale of the
Companys U.S. distilling, bottling and aging plant located in Bardstown, Kentucky. The Company
considers this segments principal distilling plant to be the facility located in Lethbridge
(Alberta), which distills, bottles and stores Canadian whisky for the segment, and distills and/or
bottles and stores Canadian whisky, vodka, rum, gin and liqueurs for third parties. The Company
also had previously considered this segments distilling plants located in Bardstown (Kentucky) and
Valleyfield (Quebec) to be principal facilities. The Bardstown facility distilled bottled and
warehoused distilled spirits products for the Company and, on a contractual basis, for other
industry members. The Valleyfield, Quebec facility distilled, bottled and stored Canadian whisky
for the segment, and distilled and/or bottled and stored Canadian whisky, vodka, rum, gin and
liqueurs for third parties.
In the U.S., the Company through its Constellation Spirits segment also previously operated
two bottling plants, located in Owensboro, Kentucky and Carson, California. Subsequent to February
28, 2009, the Company disposed of both these facilities in connection with the sale of its value
spirits business. The facility located in Owensboro (Kentucky) was owned, while the facility in
Carson (California) was leased. The Company had previously considered this segments bottling
plant located in Owensboro to be one of the segments principal facilities, and the Owensboro
facility bottled and warehoused distilled spirits products for the segment and was 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. It
currently has contracted with 18 providers of warehouse space and services in various locations
throughout the U.S. Crown Imports maintains leased offices in Chicago, Illinois as well as in
seven other locations throughout the U.S.
Corporate Operations and Other
The Companys corporate headquarters are located in leased offices in Victor, New York.
22
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.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Executive Officers of the Company
Information with respect to the current executive officers of the Company is as follows:
|
|
|
|
|
|
|
NAME |
|
AGE |
|
OFFICE OR POSITION HELD |
Richard Sands
|
|
|
58 |
|
|
Chairman of the Board |
Robert Sands
|
|
|
50 |
|
|
President and Chief Executive Officer |
Alexander L. Berk
|
|
|
59 |
|
|
Chief Executive Officer, Constellation Beers and Spirits, and President and Chief Executive Officer,
Constellation Services LLC |
Jose F. Fernandez
|
|
|
53 |
|
|
Chief Executive Officer, Constellation Wines North America |
F. Paul Hetterich
|
|
|
46 |
|
|
Executive Vice President, Business Development and Corporate Strategy |
Jon Moramarco
|
|
|
52 |
|
|
Chief Executive Officer, Constellation International |
Thomas J. Mullin
|
|
|
57 |
|
|
Executive Vice President and General Counsel |
Robert Ryder
|
|
|
49 |
|
|
Executive Vice President and Chief Financial Officer |
W. Keith Wilson
|
|
|
58 |
|
|
Executive Vice President, Chief Administrative Officer and Chief Human Resources Officer |
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.
23
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 Constellation Services LLC (successor by merger to 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. Mr.
Berk has announced that he will retire May 31, 2009, and has agreed to thereafter provide
consultation services to the Company for up to one year.
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.
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.
24
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, he 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.
25
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 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
24.61 |
|
|
$ |
25.79 |
|
|
$ |
26.46 |
|
|
$ |
24.97 |
|
Low |
|
$ |
18.83 |
|
|
$ |
21.23 |
|
|
$ |
22.39 |
|
|
$ |
19.01 |
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
21.90 |
|
|
$ |
23.09 |
|
|
$ |
23.48 |
|
|
$ |
17.16 |
|
Low |
|
$ |
17.21 |
|
|
$ |
18.82 |
|
|
$ |
10.66 |
|
|
$ |
11.54 |
|
CLASS B STOCK
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st Quarter |
|
2nd Quarter |
|
3rd Quarter |
|
4th Quarter |
Fiscal 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
24.42 |
|
|
$ |
25.60 |
|
|
$ |
26.34 |
|
|
$ |
24.91 |
|
Low |
|
$ |
19.00 |
|
|
$ |
21.40 |
|
|
$ |
22.54 |
|
|
$ |
19.20 |
|
Fiscal 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
21.76 |
|
|
$ |
22.96 |
|
|
$ |
23.32 |
|
|
$ |
17.55 |
|
Low |
|
$ |
17.00 |
|
|
$ |
19.21 |
|
|
$ |
10.78 |
|
|
$ |
11.64 |
|
At April 20, 2009, the number of holders of record of Class A Stock and Class B Stock of the
Company were 961 and 198, 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.
26
Item 6. Selected Financial Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 28, |
|
|
February 29, |
|
|
February 28, |
|
|
February 28, |
|
|
February 28, |
|
(in millions, except per share data) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
Sales |
|
$ |
4,723.0 |
|
|
$ |
4,885.1 |
|
|
$ |
6,401.8 |
|
|
$ |
5,707.0 |
|
|
$ |
5,139.8 |
|
Less-excise taxes |
|
|
(1,068.4 |
) |
|
|
(1,112.1 |
) |
|
|
(1,185.4 |
) |
|
|
(1,103.5 |
) |
|
|
(1,052.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
3,654.6 |
|
|
|
3,773.0 |
|
|
|
5,216.4 |
|
|
|
4,603.5 |
|
|
|
4,087.6 |
|
Cost of product sold |
|
|
(2,424.6 |
) |
|
|
(2,491.5 |
) |
|
|
(3,692.5 |
) |
|
|
(3,278.9 |
) |
|
|
(2,947.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,230.0 |
|
|
|
1,281.5 |
|
|
|
1,523.9 |
|
|
|
1,324.6 |
|
|
|
1,140.6 |
|
Selling, general and administrative
expenses |
|
|
(830.4 |
) |
|
|
(807.3 |
) |
|
|
(768.8 |
) |
|
|
(612.4 |
) |
|
|
(555.7 |
) |
Impairment of goodwill and
intangible assets(1) |
|
|
(300.4 |
) |
|
|
(812.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring charges(2) |
|
|
(68.0 |
) |
|
|
(6.9 |
) |
|
|
(32.5 |
) |
|
|
(29.3 |
) |
|
|
(7.6 |
) |
Acquisition-related integration
costs(3) |
|
|
(8.2 |
) |
|
|
(11.8 |
) |
|
|
(23.6 |
) |
|
|
(16.8 |
) |
|
|
(9.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
23.0 |
|
|
|
(356.7 |
) |
|
|
699.0 |
|
|
|
666.1 |
|
|
|
567.9 |
|
Equity in earnings of equity method
investees |
|
|
186.6 |
|
|
|
257.9 |
|
|
|
49.9 |
|
|
|
0.8 |
|
|
|
1.8 |
|
Interest expense, net |
|
|
(316.4 |
) |
|
|
(341.8 |
) |
|
|
(268.7 |
) |
|
|
(189.6 |
) |
|
|
(137.7 |
) |
Gain on change in fair value of
derivative instruments |
|
|
|
|
|
|
|
|
|
|
55.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income
taxes |
|
|
(106.8 |
) |
|
|
(440.6 |
) |
|
|
535.3 |
|
|
|
477.3 |
|
|
|
432.0 |
|
Provision for income taxes |
|
|
(194.6 |
) |
|
|
(172.7 |
) |
|
|
(203.4 |
) |
|
|
(152.0 |
) |
|
|
(155.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
|
(301.4 |
) |
|
|
(613.3 |
) |
|
|
331.9 |
|
|
|
325.3 |
|
|
|
276.5 |
|
Dividends on preferred stock |
|
|
|
|
|
|
|
|
|
|
(4.9 |
) |
|
|
(9.8 |
) |
|
|
(9.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income available to common
stockholders |
|
$ |
(301.4 |
) |
|
$ |
(613.3 |
) |
|
$ |
327.0 |
|
|
$ |
315.5 |
|
|
$ |
266.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Class A Common Stock |
|
$ |
(1.40 |
) |
|
$ |
(2.83 |
) |
|
$ |
1.44 |
|
|
$ |
1.44 |
|
|
$ |
1.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Class B Common Stock |
|
$ |
(1.27 |
) |
|
$ |
(2.57 |
) |
|
$ |
1.31 |
|
|
$ |
1.31 |
|
|
$ |
1.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Class A Common
Stock |
|
$ |
(1.40 |
) |
|
$ |
(2.83 |
) |
|
$ |
1.38 |
|
|
$ |
1.36 |
|
|
$ |
1.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Class B Common
Stock |
|
$ |
(1.27 |
) |
|
$ |
(2.57 |
) |
|
$ |
1.27 |
|
|
$ |
1.25 |
|
|
$ |
1.09 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,036.5 |
|
|
$ |
10,052.8 |
|
|
$ |
9,438.2 |
|
|
$ |
7,400.6 |
|
|
$ |
7,804.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, including current
maturities |
|
$ |
4,206.3 |
|
|
$ |
4,878.0 |
|
|
$ |
4,032.2 |
|
|
$ |
2,729.9 |
|
|
$ |
3,272.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
For a detailed discussion of impairment of goodwill and intangible assets for the
years ended February 28, 2009, and 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 2009 Compared to Fiscal 2008 Impairment of Goodwill and
Intangible Assets and Fiscal 2008 Compared to Fiscal 2007 Impairment of Goodwill and
Intangible Assets, respectively. |
|
(2) |
|
For a detailed discussion of restructuring charges for the years ended February 28,
2009, 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
under the captions Fiscal 2009 Compared to Fiscal 2008 Restructuring Charges and Fiscal
2008 Compared to Fiscal 2007 Restructuring Charges, respectively. |
27
(3) |
|
For a detailed discussion of acquisition-related integration costs for the years
ended February 28, 2009, 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 under the caption Fiscal 2009 Compared to Fiscal 2008
Acquisition-Related Integration Costs and Fiscal 2008 Compared to Fiscal 2007
Acquisition-Related Integration Costs, respectively. |
For the years ended February 28, 2009, and 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 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 the largest wine company in the world with a strong portfolio of
consumer-preferred premium wine brands complemented by spirits, imported beer and other select
beverage alcohol products. The Company continues to supply imported beer in the United States
(U.S.) through its investment in a joint venture with Grupo Modelo, S.A.B. de C.V. (Modelo).
This imported beers joint venture operates as Crown Imports LLC and is referred to hereinafter as
Crown Imports. As a result of their joint venture transactions, the Company and Modelo, through
their affiliates, each have equal interests in Crown Imports and have appointed an equal number of
directors to the Board of Directors of Crown Imports. Crown Imports commenced operations on
January 2, 2007. The Company has the largest wine business in the world and is the largest premium
wine company 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 Investment in Fiscal 2008 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 supply chain. 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 reportable segments.
28
In addition, the Company excludes acquisition-related integration costs, restructuring charges
and unusual items that affect comparability from its definition of operating income for segment
purposes as these items are not reflective of normal continuing operations of the segments. The
Company excludes these items as segment operating performance and segment management compensation
is evaluated based upon a normalized segment operating income. As such, the performance measures
for incentive compensation purposes for segment management do not include the impact of these
items.
The Companys business strategy is to remain focused on consumer preferred premium wine
brands, complemented by premium spirits and imported beers. The Company intends to continue to
invest in fast growing premium product categories and geographic markets and expects to capitalize
on its size and scale in the marketplace to profitably grow the business. 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.
Worldwide and domestic economies have experienced adverse conditions and may be subject to
further deterioration for the foreseeable future. The economic and consumer conditions in the
Companys key markets and on a global basis are currently very challenging and are contributing to
an increasing intensity of the competitive environment in the marketplace. In addition, the global
credit and capital markets continue to experience significant volatility and remain tight. This
global economic situation has or could adversely affect the Companys major suppliers, distributors
and retailers. The inability of suppliers, distributors or retailers to conduct business or to
access liquidity could adversely impact the Companys business and financial performance. In order
to mitigate the impact of these challenging conditions, the Company is focusing on improving
operating efficiencies, containing costs and optimizing cash flow and return on invested capital.
The Company has also maintained adequate liquidity to meet current obligations and fund capital
expenditures. However, depending upon their severity and duration, adverse conditions in the
worldwide and domestic economies could have a material adverse impact on the Companys business,
liquidity, financial condition and results of operations.
Marketing, sales and distribution of the Companys 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 range of beverage alcohol
products across the branded wine and spirits and, through Crown Imports, imported beer categories
in the U.S. Within the Companys remaining geographies, the Company offers primarily branded wine.
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.
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.
29
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 continuing surplus of Australian wine
has made and continues to make very low cost bulk wine available to these U.K. retailers which has
allowed certain of these large retailers to create and build private label brands in the Australian
wine category. 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 November 2008, the U.K. announced an
additional increase in duty to be effective December 1, 2008. In an effort to offset the impact of
this December 2008 duty increase, the Company immediately implemented an additional price increase
in the U.K. In addition, the Company also implemented a price increase in Australia during the
first quarter of calendar 2008 in an effort to improve profitability. These price increases,
combined with the concentrated retail environment, competition from private label causing
deterioration of retail pricing, foreign exchange volatility, and the escalating consumer
recession, have all contributed to a greater than expected negative effect on the Companys results
of operations for its U.K. and Australian businesses for Fiscal 2009 (as defined below).
The calendar years 2004, 2005 and 2006 were years of record Australian grape harvests that
contributed to a surplus of Australian bulk wine. 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 various conditions surrounding
the calendar 2008 Australian grape harvest, the Company previously expected the supply of wine to
continue to move toward balance with demand. However, the calendar 2008 Australian grape harvest
was higher than expected, and, although the calendar 2009 Australian grape harvest is expected to
be lower than the calendar 2008 Australian grape harvest, the current Australian bulk wine surplus,
and related intense competitive conditions in the U.K. and Australian markets, are not expected to
subside in the near term. In the U.S., although the calendar 2008 grape harvest was slightly lower
than the calendar 2007 grape harvest, the Company expects the overall supply of wine to remain
generally in balance with demand.
In the fourth quarter of fiscal 2009, 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 amount of goodwill assigned to the Constellation Wines segments U.K.
reporting unit exceeded its implied fair value and recorded an impairment loss of $252.7 million,
which is included in impairment of goodwill and intangible assets on the Companys Consolidated
Statements of Operations. The impairment loss was determined by comparing the carrying value of
goodwill assigned to the specific reporting unit within the segment as of January 1, 2009, 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 the reporting unit
discounted using market based 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 the resulting impairment loss
was driven primarily by the accelerated deterioration in the Companys U.K. business during the
fourth quarter of fiscal 2009 and the resulting adjustment to the Companys long-term financial
forecasts, which showed lower estimated future operating results reflecting the significant fourth
quarter deterioration in market conditions in the U.K.
30
In addition, during the fourth quarter of fiscal 2009, the Company performed its review of
indefinite lived intangible assets for impairment. The Company determined that certain trademarks
associated primarily with the Constellation Wines segments U.K. reporting unit were impaired
largely due to the aforementioned market declines in the U.K. during the fourth quarter, and the
resulting lower revenue and profit forecasts associated with products incorporating these assets
which reflected the significant fourth quarter deterioration in market conditions in the U.K. 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
cash flows. As a result of this review, the Company recorded impairment losses of $25.9
million, which are included in impairment of goodwill and intangible assets on the Companys
Consolidated Statements of Operations. The Company had previously recorded impairment losses of
$21.8 million during its second quarter of fiscal 2009 in connection with the Companys Australian
Initiative (as defined below) and the resulting lower revenue and profit forecasts associated with
certain brands incorporating assets impacted by the Australian Initiative.
Additionally, during the fourth quarter of fiscal 2009, the Company performed its review of equity
method investments for other-than-temporary impairment. The Company determined that two of the
Companys Constellation Wines segments international equity method investments, Matthew Clark and
Ruffino S.r.l., were impaired primarily due to the decline in revenue and profit forecasts for
these two equity method investees reflecting the significant market deterioration during the fourth
quarter of fiscal 2009. 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 cash flows. As a result of this review, the Company recorded
impairment losses of $79.2 million in equity in earnings of equity method investees on the
Companys Consolidated Statements of Operations.
For the year ended February 28, 2009 (Fiscal 2009), the Companys net sales decreased 3%
over the year ended February 29, 2008 (Fiscal 2008), primarily due to the divestitures of the
Almaden and Inglenook wine brands and the Pacific Northwest wine brands (see Divestitures in
Fiscal 2009 and Fiscal 2008 below); an unfavorable year-over-year foreign currency translation
impact; and accounting for the Matthew Clark investment under the equity method of accounting (see
Equity Method Investments in Fiscal 2008 and Fiscal 2007 below); partially offset by net sales of
branded wine acquired in the BWE Acquisition (as defined below) and the Companys Constellation
Wines segments Fiscal 2008 initiative to reduce distributor wine inventory levels in the U.S.,
which negatively impacted net sales in the first half of fiscal 2008 as discussed below. Operating
income (loss) increased over the comparable prior year period primarily due to lower impairment
losses for Fiscal 2009 combined with the incremental benefit from (i) the BWE Acquisition and (ii)
the increased net sales discussed above in connection with the Fiscal 2008 distributor wine
inventory reduction initiative without a corresponding increase in promotional, advertising, and
selling, general and administrative spend within the Constellation Wines segment. These factors
were partially offset by costs recognized in Fiscal 2009 in connection with the Companys plan to
sell certain assets and implement operational changes designed to improve the efficiencies and
returns associated with the Australian business, primarily by consolidating certain winemaking and
packaging operations and reducing the Companys overall grape supply due to reduced capacity needs
resulting from a streamlining of the Companys product portfolio (the Australian Initiative).
The Companys net loss decreased over the comparable prior year periods net loss primarily due to
the factors discussed above, partially offset by a decrease in equity in earnings of equity method
investees associated primarily with the Fiscal 2009 impairment losses recorded on certain of the
Companys international equity method investments (as discussed above).
31
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 to improve supply-chain
efficiencies. The Company substantially completed its reduction of distributor wine 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 2009 compared to Fiscal 2008, and
Fiscal 2008 compared to the year ended February 28, 2007 (Fiscal 2007), and (ii) financial
liquidity and capital resources for Fiscal 2009. This discussion and analysis also identifies
certain acquisition-related integration costs, restructuring charges and net unusual costs expected
to affect consolidated results of operations of the Company for Fiscal 2010. References to base
branded wine net sales, base branded wine gross profit and base branded wine business exclude the
impact of (i) branded wine acquired in the BWE Acquisition and (ii) branded wine disposed of in
the Almaden and Inglenook divestiture and the Pacific Northwest Business divestiture. 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.
Recent Developments
Divestiture of Value Spirits Business
In March 2009, the Company sold its value spirits business for $330.5 million, net of direct
costs to sell, subject to post-closing adjustments. The Company received $274.5 million in cash
proceeds and a note receivable for $60.0 million. The Company retained certain mid-premium spirits
brands, including Svedka Vodka, Black Velvet Canadian Whisky and Paul Masson Grande Amber Brandy.
This transaction is consistent with the Companys strategic focus on premium, higher growth and
higher margin brands in its portfolio. In connection with the classification of this business as
an asset group held for sale as of February 28, 2009, the Companys Constellation Spirits segment
recorded a loss of $15.6 million for Fiscal 2009, primarily related to asset impairments. This
loss is included in selling, general and administrative expenses on the Companys Consolidated
Statements of Operations.
32
Fiscal 2010 Global Initiative
On April 7, 2009, the Company announced its plan to simplify its business, increase
efficiencies and reduce its cost structure on a global basis (the Global Initiative). The Global
Initiative includes the elimination of approximately five percent of the Companys global workforce
and the closure of certain office, production and warehouse facilities. In addition, the Global
Initiative includes the termination of certain contracts, and a streamlining of the Companys
production footprint and sales and administrative organizations. Lastly, the Global Initiative
includes other non-material restructuring activities primarily in connection with the consolidation
of the Companys remaining spirits business into its North American wine business following the
recent disposition of its value spirits business. This initiative is part of the Companys ongoing
efforts to maximize asset utilization, reduce costs and improve long-term return on invested
capital throughout the Companys operations. The Company expects all costs associated with the
Global Initiative to be recognized in its Consolidated Statements of Operations by February 28,
2011.
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 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 and Wild
Horse. In June 2008, the Company sold certain assets acquired in the BWE Acquisition (see
Divestitures in Fiscal 2009 and Fiscal 2008 below).
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 $877.3 million. In addition, the Company incurred direct
acquisition costs of $1.4 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 (each as defined below). 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.
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 has become the fastest growing major premium spirits brand in the world. At
the time of the acquisition, Svedka was the fifth largest imported vodka in the U.S. and, since the
date of the acquisition, Svedka has become the third largest imported vodka in the U.S. In
addition, at the time of the acquisition, the Svedka Acquisition supported the Companys strategy
of expanding the Companys premium spirits business. The acquisition provided a foundation from
which the Company looked to leverage its existing and future premium spirits portfolio for growth.
In addition, Svedka complemented the Companys then existing portfolio of super-premium and value
vodka brands by adding a premium vodka brand that had and continues to experience rapid growth.
33
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. 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.
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.
34
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 equity in earnings of
equity method investees on the Companys Consolidated Statements of Operations from the date of
investment.
As discussed previously, the Company recorded an impairment of its investment in Matthew Clark
during the fourth quarter of fiscal 2009. This impairment loss of $30.1 million is included in
equity in earnings of equity method investees on the Companys Consolidated Statements of
Operations.
Investment in Crown Imports
On July 17, 2006, Barton Beers, Ltd. (Barton, now known as Constellation Beers Ltd.
Constellation Beers), 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, Constellation Beers and Diblo each have, directly or
indirectly, equal interests in Crown Imports and each of Constellation Beers 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.
35
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 Statements of Operations from the date of investment.
Divestitures in Fiscal 2009 and Fiscal 2008
Pacific Northwest Business
In June 2008, the Company sold certain businesses consisting of several California wineries
and wine brands acquired in the BWE Acquisition, as well as certain wineries and wine brands from
the states of Washington and Idaho (collectively, the Pacific Northwest Business) for cash
proceeds of $204.2 million, net of direct costs to sell. In addition, if certain objectives are
achieved by the buyer, the Company could receive up to an additional $25.0 million in cash
payments. This transaction contributes to the Companys streamlining of its U.S. wine portfolio by
eliminating brand duplication and excess production capacity. In connection with this divestiture,
the Companys Constellation Wines segment recorded a loss of $23.2 million for Fiscal 2009, which
includes a loss on business sold of $15.8 million and losses on contractual obligations of $7.4
million. The loss of $23.2 million is included in selling, general and administrative expenses on
the Companys Consolidated Statements of Operations.
Almaden and Inglenook
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 value-priced wine brands, Almaden and Inglenook, and
certain other assets for cash proceeds of $133.5 million, net of direct costs to sell. The Company
recorded a loss of $27.8 million on this sale in the fourth quarter of fiscal 2008, which is
included in selling, general and administrative expenses on the Companys Consolidated Statements
of Operations.
36
Results of Operations
Fiscal 2009 Compared to Fiscal 2008
Net Sales
The following table sets forth the net sales (in millions of dollars) by operating segment of
the Company for Fiscal 2009 and Fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 Compared to Fiscal 2008 |
|
|
|
Net Sales |
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Constellation Wines: |
|
|
|
|
|
|
|
|
|
|
|
|
Branded wine |
|
$ |
3,015.3 |
|
|
$ |
3,016.9 |
|
|
|
|
|
Wholesale and other |
|
|
220.6 |
|
|
|
341.9 |
|
|
|
(35 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Constellation Wines net sales |
|
|
3,235.9 |
|
|
|
3,358.8 |
|
|
|
(4 |
)% |
Constellation Spirits net sales |
|
|
418.7 |
|
|
|
414.2 |
|
|
|
1 |
% |
Crown Imports net sales |
|
|
2,393.2 |
|
|
|
2,391.0 |
|
|
|
1 |
% |
Consolidations and eliminations |
|
|
(2,393.2 |
) |
|
|
(2,391.0 |
) |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
Consolidated Net Sales |
|
$ |
3,654.6 |
|
|
$ |
3,773.0 |
|
|
|
(3 |
)% |
|
|
|
|
|
|
|
|
|
|
|
Net sales for Fiscal 2009 decreased to $3,654.6 million from $3,773.0 million for Fiscal 2008,
a decrease of $118.4 million, or (3%). This decrease was driven primarily by a reduction in
wholesale and other net sales resulting largely from the accounting for the Matthew Clark
investment under the equity method of accounting. A decrease in branded wine net sales due to the
divestitures of the Almaden and Inglenook wine brands and the Pacific Northwest wine brands of
$128.4 million and an unfavorable year-over-year foreign currency translation impact of $108.8
million was partially offset by net sales of branded wine acquired in the BWE Acquisition of $147.3
million and the Companys Fiscal 2008 initiative to reduce distributor wine inventory levels in the
U.S., which negatively impacted net sales in the first and second quarters of fiscal 2008 as
discussed above.
Constellation Wines
Net sales for Constellation Wines decreased to $3,235.9 million for Fiscal 2009 from $3,358.8
million in Fiscal 2008, a decrease of $122.9 million, or (4%). Branded wine net sales decreased
$1.6 million primarily due to the decrease in net sales associated with the divestitures of the
Almaden and Inglenook wine brands and the Pacific Northwest wine brands of $128.4 million and an
unfavorable year-over-year foreign currency translation impact of $108.8 million being
substantially offset by the net sales of branded wine acquired in the BWE Acquisition of $147.3
million and the benefit from the distributor wine inventory reduction initiative discussed above.
Wholesale and other net sales decreased $121.3 million primarily due to the accounting for the
Matthew Clark investment under the equity method of accounting.
Constellation Spirits
Net sales for Constellation Spirits increased to $418.7 million for Fiscal 2009 from $414.2
million for Fiscal 2008, an increase of $4.5 million, or 1%. This slight increase resulted
primarily from net sales growth within the Companys branded spirits portfolio which was driven
primarily by Svedka, partially offset by a decrease in contract production services net sales of
$21.3 million resulting predominantly from the Companys August 2008 sale of a nonstrategic
Canadian distilling facility.
37
Crown Imports
As this segment is eliminated in consolidation, see Equity in Earnings of Equity Method
Investments below for a discussion of Crown Imports net sales, gross profit, selling, general and
administrative expenses, and operating income.
Gross Profit
The Companys gross profit decreased to $1,230.0 million for Fiscal 2009 from $1,281.5 million
for Fiscal 2008, a decrease of $51.5 million, or (4%). This decrease was driven primarily by an
increase in unusual costs, which consist of certain costs that are excluded by management in their
evaluation of the results of each operating segment, which were higher by $93.7 million in Fiscal
2009 versus Fiscal 2008. This increase resulted predominantly from (i) an increase in inventory
write-downs of $83.7 million in Fiscal 2009 in connection primarily with the Companys Australian
Initiative of $53.9 million and a loss of $37.0 million on the adjustment of certain inventory,
primarily Australian, related to prior years; and (ii) increased flow through of inventory
step-up of $10.8 million associated primarily with the BWE Acquisition. The Constellation Wines
segments gross profit increased $36.3 million primarily due to higher U.S. base branded wine gross
profit resulting largely from increased gross profit of $69.5 million due to the BWE Acquisition
and the benefit from the Companys Fiscal 2008 distributor wine inventory reduction initiative,
partially offset by reduced gross profit in the U.K. largely attributed to the increasing duty and
an unfavorable year-over-year foreign currency translation impact of $28.7 million. The
Constellation Spirits segments gross profit increased $5.9 million primarily due to increased
gross profit from the increase in branded spirits net sales.
Gross profit as a percent of net sales decreased to 33.7% for Fiscal 2009 from 34.0% for
Fiscal 2008 primarily due to the higher unusual costs, partially offset by (i) the benefit of
reporting the lower margin U.K. wholesale business under the equity method of accounting for Fiscal
2009, (ii) the benefit from the divestiture of the lower margin Almaden and Inglenook wine brands
and the Pacific Northwest wine brands, and (iii) sales of higher margin wine brands acquired in
the BWE Acquisition.
38
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $830.4 million for Fiscal 2009 from
$807.3 million for Fiscal 2008, an increase of $23.1 million, or 2.9%. This increase is due to an
increase in unusual items which consist of certain items that are excluded by management in their
evaluation of the results of each operating segment of $34.0 million and increases of $8.3 million
and $7.9 million in the Constellation Spirits segment and the Corporate Operations and Other
segment, respectively, partially offset by a decrease of $27.1 million in the Constellation Wines
segment. The increase in unusual items was primarily due to the recognition in Fiscal 2009 of
losses of $23.2 million and $15.6 million (discussed previously) in connection with the June 2008
sale of the Pacific Northwest Business and the loss, primarily on assets held for sale, in
connection with the March 2009 sale of the value spirits business, respectively, and an increase of
$14.3 million in connection with the Companys plan (announced in August 2006) 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), partially offset by the loss on the sale of
the Companys Almaden and Inglenook wine brands and certain other assets of $27.8 million
recognized in Fiscal 2008. The increase in the Constellation Spirits segments selling, general
and administrative expenses is primarily due to increases in general and administrative expenses of
$4.6 million, primarily due to losses on foreign currency transactions, and selling expenses of
$2.3 million, supporting the growth in net sales. The increase in the Corporate Operations and
Other segments selling, general and administrative expenses is primarily due to higher consulting
service fees associated with the Companys review of its businesses and process improvement
opportunities and an increase of $6.7 million of stock-based compensation expense, partially offset
by lower annual management incentive compensation expense. The decrease in the Constellation Wines
segments selling, general and administrative expenses is largely due to (i) a favorable
year-over-year foreign currency translation impact; and (ii) lower general and administrative
expenses resulting primarily from increased cost reduction efforts offset by higher losses on
foreign currency transactions. These decreases were partially offset by higher selling expenses
within the Constellation Wines segment.
Selling, general and administrative expenses as a percent of net sales increased to 22.7% for
Fiscal 2009 as compared to 21.4% for Fiscal 2008 primarily due to the higher unusual items,
combined with increased losses on foreign currency transactions within the Constellation Wines and
Constellation Spirits segments and higher stock-based compensation expense, partially offset by the
incremental benefit from the BWE Acquisition and the lower annual management incentive compensation
expense.
Impairment of Goodwill and Intangible Assets
During Fiscal 2009, the Company recorded impairment losses of $300.4 million, consisting of
impairments of goodwill and intangible assets of $252.8 million and $47.6 million, respectively,
related primarily to its Constellation Wines segments U.K. reporting unit as more fully discussed
in the Overview above. During Fiscal 2008, the Company recorded impairment losses of $812.2
million, consisting of impairments of goodwill and intangible assets of $599.9 million and $212.3
million, respectively, related primarily to its Constellation Wines segments Australian and U.K.
reporting units.
39
Restructuring Charges
The Company recorded $68.0 million of restructuring charges for Fiscal 2009 associated
primarily with the Australian Initiative. Restructuring charges included $16.5 million of employee
termination costs, $3.2 million of contract termination costs, $1.8 million of facility
consolidation/relocation costs, and $46.5 million of impairment charges on assets held for sale in
Australia. The Company recorded $6.9 million of restructuring charges for Fiscal 2008 associated
primarily with the Companys Fiscal 2008 Plan and the Companys Fiscal 2006 Plan (both as defined
below) of $12.0 million, partially offset by the reversal of prior accruals related primarily to
the Companys plan to restructure and integrate the operations of Vincor (the Vincor Plan) of
$5.1 million. The Fiscal 2008 Plan consists of (i) the Companys plans (announced in November
2007) 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; (ii) certain other restructuring charges incurred during the third quarter of
fiscal 2008 in connection with the consolidation of certain spirits production processes in the
U.S.; and (iii) the Companys plans (announced in January 2008) 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 are
collectively referred to as the Fiscal 2008 Plan. The Fiscal 2006 Plan consists of the Companys
worldwide wine reorganizations and the Companys program to consolidate certain west coast
production processes in the U.S., both announced during Fiscal 2006.
In addition, the Company incurred additional costs for Fiscal 2009 and Fiscal 2008 in
connection with the Companys restructuring and acquisition-related integration plans. Total costs
incurred in connection with these plans for Fiscal 2009 and Fiscal 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
(in millions) |
|
2009 |
|
2008 |
Cost of Product Sold |
|
|
|
|
|
|
|
|
Inventory write-downs |
|
$ |
56.8 |
|
|
$ |
10.1 |
|
Accelerated depreciation |
|
$ |
11.2 |
|
|
$ |
12.0 |
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses |
|
|
|
|
|
|
|
|
Other costs |
|
$ |
24.2 |
|
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
Impairment of Intangible Assets |
|
$ |
22.2 |
|
|
$ |
7.4 |
|
|
|
|
|
|
|
|
|
|
Restructuring Charges |
|
$ |
68.0 |
|
|
$ |
6.9 |
|
|
|
|
|
|
|
|
|
|
Acquisition-Related Integration Costs (see below) |
|
$ |
8.2 |
|
|
$ |
11.8 |
|
40
The Company expects to incur the following costs in connection with its restructuring and
acquisition-related integration plans for Fiscal 2010, including the Fiscal 2010 Global Initiative
discussed previously:
|
|
|
|
|
|
|
Expected |
|
|
Fiscal |
(in millions) |
|
2010 |
Cost of Product Sold |
|
|
|
|
Accelerated depreciation |
|
$ |
27.2 |
|
|
|
|
|
|
Selling, General and Administrative Expenses |
|
|
|
|
Other costs |
|
$ |
45.5 |
|
|
|
|
|
|
Restructuring Charges |
|
$ |
50.6 |
|
|
|
|
|
|
Acquisition-Related Integration Costs |
|
$ |
4.4 |
|
Acquisition-Related Integration Costs
Acquisition-related integration costs decreased to $8.2 million for Fiscal 2009 from $11.8
million for Fiscal 2008. Acquisition-related integration costs for Fiscal 2009 consisted of costs
recorded primarily in connection with the Companys Fiscal 2008 Plan. The Fiscal 2009 costs
included $2.5 million of employee-related costs and $5.7 million of facilities and other one-time
costs. Acquisition-related integration costs for Fiscal 2008 consisted of costs recorded primarily
in connection with the Vincor Plan.
Operating Income (Loss)
The following table sets forth the operating income (loss) (in millions of dollars) by
operating segment of the Company for Fiscal 2009 and Fiscal 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009 Compared to Fiscal 2008 |
|
|
|
Operating Income (Loss) |
|
|
|
|
|
|
|
|
|
|
|
% Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Constellation Wines |
|
$ |
621.8 |
|
|
$ |
558.4 |
|
|
|
11 |
% |
Constellation Spirits |
|
|
69.6 |
|
|
|
72.0 |
|
|
|
(3 |
)% |
Corporate Operations and Other |
|
|
(93.4 |
) |
|
|
(85.5 |
) |
|
|
9 |
% |
Crown Imports |
|
|
504.1 |
|
|
|
509.0 |
|
|
|
(1 |
)% |
Consolidations and eliminations |
|
|
(504.1 |
) |
|
|
(509.0 |
) |
|
|
1 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total Reportable Segments |
|
|
598.0 |
|
|
|
544.9 |
|
|
|
10 |
% |
Acquisition-Related Integration Costs,
Restructuring Charges
and Unusual Costs |
|
|
(575.0 |
) |
|
|
(901.6 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Operating Income (Loss) |
|
$ |
23.0 |
|
|
$ |
(356.7 |
) |
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
41
As a result of the factors discussed above, consolidated operating income increased to $23.0
million for Fiscal 2009 from a consolidated operating loss of $356.7 million for Fiscal 2008, an
increase of $379.7 million. Acquisition-related integration costs, restructuring charges and
unusual costs of $575.0 million and $901.6 million for Fiscal 2009 and Fiscal 2008, respectively,
consist of certain costs that are excluded by management in their evaluation of the results of each
operating segment. These costs include:
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Cost of Product Sold |
|
|
|
|
|
|
|
|
Flow through of inventory step-up |
|
$ |
22.2 |
|
|
$ |
11.4 |
|
Inventory write-downs |
|
|
56.8 |
|
|
|
10.1 |
|
Accelerated depreciation |
|
|
11.2 |
|
|
|
12.0 |
|
Other |
|
|
37.1 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
Cost of Product Sold |
|
|
127.3 |
|
|
|
33.6 |
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses |
|
|
|
|
|
|
|
|
Loss on sale of Pacific Northwest Business |
|
|
23.2 |
|
|
|
|
|
Loss, primarily on assets held for sale,
in connection with the March 2009 sale of
the value spirits business |
|
|
15.6 |
|
|
|
|
|
Loss (gain) on sale of non-strategic assets |
|
|
8.1 |
|
|
|
(4.8 |
) |
Loss on sale of Almaden and Inglenook wine
brands and certain other assets |
|
|
|
|
|
|
27.8 |
|
Loss on the contribution of the U.K.
wholesale business |
|
|
|
|
|
|
6.6 |
|
Other costs |
|
|
24.2 |
|
|
|
7.5 |
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses |
|
|
71.1 |
|
|
|
37.1 |
|
|
|
|
|
|
|
|
|
|
Impairment of Goodwill and Intangible Assets |
|
|
300.4 |
|
|
|
812.2 |
|
|
|
|
|
|
|
|
|
|
Restructuring Charges |
|
|
68.0 |
|
|
|
6.9 |
|
|
|
|
|
|
|
|
|
|
Acquisition-Related Integration Costs |
|
|
8.2 |
|
|
|
11.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-Related Integration Costs,
Restructuring Charges and Unusual Costs |
|
$ |
575.0 |
|
|
$ |
901.6 |
|
|
|
|
|
|
|
|
Equity in Earnings of Equity Method Investees
The Companys equity in earnings of equity method investees decreased to $186.6 million in
Fiscal 2009 from $257.9 million in Fiscal 2008, a decrease of $71.3 million, or (28%). This
decrease is primarily due to $83.3 million of impairment losses recognized in Fiscal 2009 on
certain of the Companys international equity method investments, primarily in the fourth quarter
of fiscal 2009 (as more fully discussed in the Overview above) versus a $15.1 million impairment
loss recognized in the fourth quarter of fiscal 2008.
Net sales for Crown Imports increased slightly to $2,393.2 million for Fiscal 2009 from
$2,391.0 million for Fiscal 2008, an increase of $2.2 million, or 1%. Crown Imports gross profit
decreased $17.9 million, as the slight increase in net sales was more than offset by a contractual
price increase in Mexican beer costs. Selling, general and administrative expenses decreased $13.0
million, primarily due to a decrease in advertising spend resulting from timing of marketing
activities. Operating income decreased $4.8 million, or (1%), primarily due to these factors.
42
Interest Expense, Net
Interest expense, net of interest income of $3.8 million and $5.7 million, for Fiscal 2009 and
Fiscal 2008, respectively, decreased to $316.4 million for Fiscal 2009 from $341.8 million for
Fiscal 2008, a decrease of $25.4 million, or (7%). This was primarily due to lower average
interest rates for Fiscal 2009.
Provision for Income Taxes
The Companys effective tax rate for Fiscal 2009 of (182.2%) was driven largely by (i) a
non-deductible portion of the impairment losses related to goodwill, equity method investments and
trademarks of $268.8 million, $83.3 million and $23.6 million, respectively; (ii) the recognition
of a valuation allowance of $67.4 million against net operating losses primarily in Australia
resulting largely from the Australian Initiative; and (iii) the recognition of income tax expense
in connection with the gain on settlement of certain foreign currency economic hedges. The
Companys effective tax rate for Fiscal 2008 of (39.2%) was impacted primarily by 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.
Net (Loss) Income
As a result of the above factors, net loss decreased to a net loss of $301.4 million for
Fiscal 2009 from a net loss of $613.3 million for Fiscal 2008, or $311.9 million.
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 |
)% |
|
|
|
|
|
|
|
|
|
|
|
43
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.
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.
44
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.
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 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, (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.
45
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,
related primarily to its Constellation Wines segments Australian and U.K. reporting units.
Restructuring Charges
The Company recorded $6.9 million of restructuring charges for Fiscal 2008 associated
primarily with the Companys Fiscal 2008 Plan and 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 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. The
Company recorded $32.5 million of restructuring charges for Fiscal 2007 associated primarily with
the Companys Fiscal 2007 Wine Plan and Fiscal 2006 Plan.
In addition, the Company incurred additional costs for Fiscal 2008 and Fiscal 2007 in
connection with the Companys restructuring and acquisition-related integration plans. Total costs
incurred in connection with the Companys restructuring and acquisition-related integration plans
for Fiscal 2008 and Fiscal 2007 are as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
(in millions) |
|
2008 |
|
2007 |
Cost of Product Sold |
|
|
|
|
|
|
|
|
Inventory write-downs |
|
$ |
10.1 |
|
|
$ |
0.6 |
|
Accelerated depreciation |
|
$ |
12.0 |
|
|
$ |
6.6 |
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses |
|
|
|
|
|
|
|
|
Other costs |
|
$ |
2.2 |
|
|
$ |
16.3 |
|
|
|
|
|
|
|
|
|
|
Impairment of Intangible Assets |
|
$ |
7.4 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charges |
|
$ |
6.9 |
|
|
$ |
32.5 |
|
|
|
|
|
|
|
|
|
|
Acquisition-Related Integration Costs (see below) |
|
$ |
11.8 |
|
|
$ |
23.6 |
|
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 Vincor Plan and 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.
46
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 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 charges and unusual costs of $901.6 million and $143.6 million for Fiscal 2008 and
Fiscal 2007, respectively, consist of certain costs that are excluded by management in their
evaluation of the results of each operating segment. These costs include:
47
|
|
|
|
|
|
|
|
|
|
|
Fiscal |
|
(in millions) |
|
2008 |
|
|
2007 |
|
Cost of Product Sold |
|
|
|
|
|
|
|
|
Flow through of inventory step-up |
|
$ |
11.4 |
|
|
$ |
30.2 |
|
Inventory write-downs |
|
|
10.1 |
|
|
|
0.6 |
|
Accelerated depreciation |
|
|
12.0 |
|
|
|
6.6 |
|
Other |
|
|
0.1 |
|
|
|
3.1 |
|
|
|
|
|
|
|
|
Cost of Product Sold |
|
|
33.6 |
|
|
|
40.5 |
|
|
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses |
|
|
|
|
|
|
|
|
Gain on sale of non-strategic asset |
|
|
(4.8 |
) |
|
|
|
|
Loss on sale of Almaden and Inglenook wine brands
and certain other assets |
|
|
27.8 |
|
|
|
|
|
Loss on the contribution of the U.K. wholesale
business |
|
|
6.6 |
|
|
|
|
|
Loss on sale of the branded bottled water business |
|
|
|
|
|
|
13.4 |
|
Financing costs |
|
|
|
|
|
|
11.9 |
|
Foreign currency losses on foreign denominated
intercompany loan balances |
|
|
|
|
|
|
5.4 |
|
Other costs |
|
|
7.5 |
|
|
|
16.3 |
|
|
|
|
|
|
|
|
Selling, General and Administrative Expenses |
|
|
37.1 |
|
|
|
47.0 |
|
|
|
|
|
|
|
|
|
|
Impairment of Goodwill and Intangible Assets |
|
|
812.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring Charges |
|
|
6.9 |
|
|
|
32.5 |
|
|
|
|
|
|
|
|
|
|
Acquisition-Related Integration Costs |
|
|
11.8 |
|
|
|
23.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition-Related Integration Costs, Restructuring
Charges and Unusual Costs |
|
$ |
901.6 |
|
|
$ |
143.6 |
|
|
|
|
|
|
|
|
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.
48
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.
Financial Liquidity and Capital Resources
General
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 global credit crisis has imposed exceptional levels of volatility in the capital markets,
severely diminished liquidity and credit availability, and increased counterparty risk.
Nevertheless, the Company has maintained adequate liquidity to meet current working capital
requirements, fund capital expenditures, repay scheduled principal and interest payments on debt,
and prepay certain future principal payments on debt. Absent further severe deterioration of
market conditions, 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.
49
As of April 20, 2009, the Company had $707.5 million in revolving loans available to be drawn
under its 2006 Credit Agreement. The member financial institutions participating in the Companys
2006 Credit Agreement have complied with prior funding requests and the Company believes the member
financial institutions will comply with ongoing funding requests. However, there can be no
assurances that any particular financial institution will continue to do so in the future.
Fiscal 2009 Cash Flows
Operating Activities
Net cash provided by operating activities for Fiscal 2009 was $506.9 million, which resulted
primarily from a net loss of $301.4 million of net income, plus $748.0 million of net non-cash
items charged to the Consolidated Statements of Operations and $159.3 million of other, net, less
$99.0 million representing the net change in the Companys operating assets and liabilities.
The net non-cash items consisted primarily of impairment losses of goodwill and intangible
assets; depreciation of property, plant and equipment; equity in earnings of equity method
investees, net of distributed earnings; and the write-down of inventory in Australia.
The net change in operating assets and liabilities resulted primarily from an increase in
inventories of $86.0 million and a decrease in other accrued expenses and liabilities of $95.0
million, partially offset by a decrease in accounts receivable of $87.4 million. The offsetting
increase in inventories and decrease in accounts receivable are both attributable primarily to
lower net sales for the Companys fourth quarter of fiscal 2009 compared to the Companys fourth
quarter of fiscal 2008. The decrease in other accrued expenses and liabilities is primarily
attributable to an increase in cash paid for income taxes.
Other, net, consisted primarily of (i) cash proceeds of $94.8 million from the gain on
settlement of certain foreign currency hedges which were designed to economically hedge foreign
currency risk associated with certain foreign currency denominated intercompany balances; (ii)
cash proceeds of $27.5 million for tenant allowances received in connection with the Companys 19.5
year lease of a new warehousing and production facility in the U.K. as part of the Fiscal 2007 Wine
Plan; (iii) $11.5 million of non-cash losses on certain foreign currency denominated intercompany balances, net of non-cash gains on certain foreign currency hedges which were designed to economically hedge foreign currency risk associated with these certain foreign currency denominated intercompany balances and (iv) a $9.1 million non-cash loss associated with the settlement of pension and
postretirement liabilities as a result of the sale of a nonstrategic Canadian distilling facility;
and (v) $7.4 million of non-cash losses on contractual obligations recorded in connection with
the sale of the Pacific Northwest Business.
Investing Activities
Net cash provided by investing activities for Fiscal 2009 was $128.6 million, which resulted
primarily from the proceeds from the sale of the Pacific Northwest Business of $204.2 million, net
of direct costs to sell, less $128.6 million of capital expenditures.
Financing Activities
Net cash used in financing activities for Fiscal 2009 was $647.4 million resulting primarily
from principal payments of long-term debt of $577.6 million and net repayment of notes payable of
$109.7 million.
50
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.
51
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. 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.
Debt
Total debt outstanding as of February 28, 2009, amounted to $4,433.6 million, a decrease of
$823.9 million from February 29, 2008. The ratio of total debt to total capitalization increased
to 69.9% as of February 28, 2009, from 65.5% as of February 29, 2008. The increase is attributable
primarily to the foreign currency impact on the Companys total capitalization.
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.
52
As of February 28, 2009, the required principal repayments of the tranche A term loan and the
tranche B term loan for each of the five succeeding fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche A |
|
|
Tranche B |
|
|
|
|
(in millions) |
|
Term Loan |
|
|
Term Loan |
|
|
Total |
|
2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2011 |
|
|
225.0 |
|
|
|
4.0 |
|
|
|
229.0 |
|
2012 |
|
|
150.0 |
|
|
|
4.0 |
|
|
|
154.0 |
|
2013 |
|
|
|
|
|
|
714.0 |
|
|
|
714.0 |
|
2014 |
|
|
|
|
|
|
712.0 |
|
|
|
712.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
375.0 |
|
|
$ |
1,434.0 |
|
|
$ |
1,809.0 |
|
|
|
|
|
|
|
|
|
|
|
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
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. The margin is fixed
with respect to the tranche B term loan facility. As of February 28, 2009, the LIBOR margin for
the tranche A term loan facility and the revolving credit facility is currently at the maximum rate
of 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.
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 28, 2009, under the 2006 Credit Agreement, the Company had outstanding tranche
A term loans of $375.0 million bearing an interest rate of 2.2%, tranche B term loans of $1,434.0
million bearing an interest rate of 3.3%, revolving loans of $67.2 million bearing an interest rate
of 1.7%, outstanding letters of credit of $32.0 million, and $800.8 million in revolving loans
available to be drawn.
53
Subsequent to February 28, 2009,
the Company used proceeds from the sales of certain assets,
including proceeds from the March 2009 sale of its value spirits business,
to prepay $260.0 million on the Companys tranche A and tranche B term loans under the 2006 Credit Agreement.
As of April 20, 2009, under the 2006 Credit Agreement, the Company had outstanding tranche A
term loans of $321.0 million bearing an interest rate of 2.0%, tranche B term loans of $1,228.0
million bearing an interest rate of 2.7%, revolving loans of $160.0 million bearing an interest
rate of 1.7%, outstanding letters of credit of $32.5 million, and $707.5 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 28, 2009. 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 is being 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 2009 and Fiscal 2008, the Company
reclassified $12.6 million and $7.1 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 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 28, 2009, the Company had outstanding £1.0 million ($1.4 million) aggregate
principal amount of 8 1/2% Series B Senior Notes due November 2009 (the Sterling Series B Senior
Notes). In addition, as of February 28, 2009, the Company had outstanding £154.0 million ($220.5
million, net of $0.1 million unamortized discount) aggregate principal amount of 8 1/2% Series C
Senior Notes due November 2009 (the 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. As of February 28, 2009, the Company
had outstanding $694.4 million (net of $5.6 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. 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 28, 2009, the Company had outstanding $700.0 million aggregate principal amount of May
2007 Senior Notes.
54
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. As of February 28, 2009, the Company had outstanding $497.2 million (net of $2.8 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.
Senior Subordinated Notes
As of February 28, 2009, 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
$334.6 million as of February 28, 2009. 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 28, 2009, amounts outstanding under these arrangements were $193.9 million.
Contractual Obligations and Commitments
The following table sets forth information about the Companys long-term contractual
obligations outstanding at February 28, 2009. The table brings together data for easy reference
from the consolidated balance sheet and from individual notes to the Companys consolidated
financial statements. See Notes 9, 10, 11, 12, 13, and 14 to the Companys consolidated financial
statements located in Item 8 of this Annual Report on Form 10-K for a detailed discussion of the
items noted in the following table.
55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAYMENTS DUE BY PERIOD |
|
|
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
After |
|
(in millions) |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Contractual obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to banks |
|
$ |
227.3 |
|
|
$ |
227.3 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Interest payments on notes
payable to banks(1) |
|
|
6.3 |
|
|
|
6.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (excluding
unamortized discount) |
|
|
4,214.8 |
|
|
|
235.3 |
|
|
|
648.9 |
|
|
|
1,429.1 |
|
|
|
1,901.5 |
|
Interest payments on long-term debt(2) |
|
|
1,405.8 |
|
|
|
278.1 |
|
|
|
425.5 |
|
|
|
330.5 |
|
|
|
371.7 |
|
Operating leases |
|
|
568.8 |
|
|
|
75.1 |
|
|
|
117.1 |
|
|
|
78.6 |
|
|
|
298.0 |
|
Other long-term liabilities(3) |
|
|
306.9 |
|
|
|
148.5 |
|
|
|
85.6 |
|
|
|
28.7 |
|
|
|
44.1 |
|
Unconditional purchase
obligations(4) |
|
|
2,198.9 |
|
|
|
425.5 |
|
|
|
656.5 |
|
|
|
379.0 |
|
|
|
737.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual
obligations |
|
$ |
8,928.8 |
|
|
$ |
1,396.1 |
|
|
$ |
1,933.6 |
|
|
$ |
2,245.9 |
|
|
$ |
3,353.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Interest payments on notes payable to banks include interest on both revolving
loans under the Companys senior credit facility and on foreign subsidiary credit facilities.
The weighted average interest rate on the revolving loans under the Companys senior credit
facility was 1.7% as of February 28, 2009. Interest rates on foreign subsidiary credit
facilities range from 1.1% to 5.0% as of February 28, 2009. |
(2) |
|
Interest rates on long-term debt obligations range from 3.1% 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 0.8% of the Companys total long-term debt, as amounts are not
material. |
(3) |
|
Other long-term liabilities include $35.4 million associated with expected payments
for unrecognized tax benefit liabilities as of February 28, 2009, including $21.4 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 $101.3 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 11 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 $16.1 million for contracts to
purchase various spirits over the next four fiscal years, $1,941.1 million for contracts to
purchase grapes over the next sixteen fiscal years, $49.2 million for contracts to purchase
bulk wine over the next four fiscal years, $163.1 million for a contract to purchase a certain raw material over the next three fiscal years and $29.4 million for processing contracts over the
next four fiscal years. See Note 14 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 2009, the Company incurred $128.6 million for capital expenditures. The Company
plans to spend from $150.0 million to $170.0 million for capital expenditures in Fiscal 2010.
Included within the planned expenditures for Fiscal 2010 are amounts associated with the Companys
initiative relating to the implementation of a comprehensive, multi-year program that will
strengthen and enhance the Companys global business capabilities and processes through the
creation of an integrated technology platform to improve the accessibility of information and
visibility of global data. Management reviews the capital expenditure program periodically and
modifies it as required to meet current business needs.
56
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 intends to pass along rising costs through
increased selling prices and identifying on-going cost savings initiatives, subject to normal
competitive conditions. There can be no assurances, however, that the Company will be able to pass
along rising costs through increased selling prices.
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:
|
|
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 $712.1 million, $733.7 million and $635.6
million for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively. Accrued promotion
costs were $100.3 million and $143.9 million as of February 28, 2009, and February 29,
2008, 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 $1,828.7 million and $2,179.5 million as of February 28, 2009, and
February 29, 2008, respectively. |
57
|
|
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 $6.8 million, $4.8 million
and $2.8 million for Fiscal 2009, Fiscal 2008 and Fiscal 2007, respectively.
Amortizable intangible assets were $75.7 million and $68.5 million as of February 28,
2009, and February 29, 2008, respectively. |
|
|
Impairment of goodwill and intangible assets with indefinite lives. Intangible
assets with indefinite lives consist primarily of trademarks. 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, including the reporting
unit goodwill, and record an impairment loss for the excess of the carrying value over
the fair value. The estimate of fair value of the intangible 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 one of the
reporting units, including its goodwill, exceeding its 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 the changes individually, for only the discount rate,
would have resulted in one unit of accountings carrying value exceeding its fair value. |
58
In the fourth quarter of fiscal 2009, 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 amount of goodwill assigned to the
Constellation Wines segments U.K. reporting unit exceeded its implied fair value and
recorded an impairment loss of $252.7 million, which is included in impairment of
goodwill and intangible assets on the Companys Consolidated Statements of Operations.
In the fourth quarter of fiscal 2008, as a result of its annual goodwill impairment
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 are included in
impairment of goodwill and intangible assets on the Companys Consolidated Statements of
Operations. No impairment losses of goodwill were recorded for Fiscal 2007. Goodwill
was $2,615.0 million and $3,123.9 million as of February 28, 2009, and February 29,
2008, respectively.
During the fourth quarter of fiscal 2009, the Company performed its review of indefinite
lived intangible assets for impairment. The Company determined that certain trademarks
associated primarily with the Constellation Wines segments U.K. reporting unit were
impaired. Accordingly, the Company recorded impairment losses of $25.9
million, which are included in impairment of goodwill and intangible assets on the
Companys Consolidated Statements of Operations. During the fourth quarter of fiscal
2008, 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 are included in
impairment of goodwill and intangible assets on the Companys Consolidated Statements of
Operations. The Company recorded an immaterial impairment loss for Fiscal 2007 for
intangible assets with indefinite lives associated with assets held-for-sale.
Intangible assets with indefinite lives were $924.9 million and $1,121.5 million as of
February 28, 2009, and February 29, 2008, respectively.
59
|
|
|
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 2009, Fiscal 2008 and Fiscal 2007 would have
increased by $22.5 million, resulting in an increase of $4.6 million of stock-based
compensation expense for Fiscal 2009. 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 2009, Fiscal 2008 and Fiscal 2007 would have decreased by $23.4
million, resulting in a decrease of $4.8 million of stock-based compensation expense for
Fiscal 2009. The total amount of stock-based compensation recognized under SFAS No.
123(R) for Fiscal 2009 was $47.5 million, of which $42.9 million was expensed for Fiscal
2009 and $4.6 million was capitalized in inventory as of February 28, 2009. 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. |
Accounting Pronouncements Not Yet Adopted
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. The adoption of SFAS No. 141(R) on March 1, 2009, did not have a material impact on
the Companys consolidated financial statements.
60
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. The adoption of SFAS No. 160 on March 1, 2009, did
not have a material impact on the Companys consolidated financial statements.
In April 2008, the FASB issued FASB Staff Position No. FAS 142-3, (FSP No. 142-3),
Determination of the Useful Life of Intangible Assets. FSP No. 142-3 amends the factors that
should be considered in developing renewal or extension assumptions used to determine the useful
life of a recognized intangible asset under Statement of Financial Accounting Standards No. 142
(SFAS No. 142), Goodwill and Other Intangible Assets. The intent of FSP No. 142-3 is to
improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142
and the period of expected cash flows used to measure the fair value of the asset under SFAS No.
141(R) and other U.S. generally accepted accounting principles. FSP No. 142-3 is effective for the
Company as of March 1, 2009. The adoption of FSP No. 142-3 on March 1, 2009, did not have a
material impact on the Companys consolidated financial statements and will be applied
prospectively to future business combinations.
61
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 forward and option contracts and interest rate swap
agreements. The Company uses derivative instruments solely to reduce the financial impact of these
risks and does not use derivative instruments for trading purposes.
Foreign currency derivative instruments are or may be used to hedge existing foreign currency
denominated assets and liabilities, forecasted foreign currency denominated sales/purchases to/from
third parties as well as intercompany sales/purchases, intercompany principal and interest
payments, and in connection with acquisitions or joint venture investments outside the U.S. As of
February 28, 2009, the Company had exposures to foreign currency risk primarily related to the
Australian dollar, euro, New Zealand dollar, British pound sterling, Canadian dollar and South
African rand.
As of February 28, 2009, and February 29, 2008, the Company had outstanding foreign currency
derivative instruments with a notional value of $1,719.4 million and $2,473.5 million,
respectively. Approximately 73% of the Companys total exposures were hedged as of February 28,
2009. The estimated fair value of the Companys foreign currency derivative instruments was $7.6
million and $6.3 million as of February 28, 2009, and February 29, 2008, respectively. Using a
sensitivity analysis based on estimated fair value of open contracts using forward rates, if the
contract base currency had been 10% weaker as of February 28, 2009, and February 29, 2008, the fair
value of open foreign currency contracts would have been decreased by $40.4 million and $155.2
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 $2,353.3 million and $2,507.2 million as of February 28, 2009, and February 29,
2008, respectively. A hypothetical 1% increase from prevailing interest rates as of February 28,
2009, and February 29, 2008, would have resulted in a decrease in fair value of fixed interest rate
long-term debt by $107.9 million and $124.7 million, respectively.
As of February 28, 2009, and February 29, 2008, 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 28, 2009,
and February 29, 2008, would have increased the fair value of the interest rate swaps by $9.3
million and $23.6 million, respectively.
In addition to the $2,353.3 million and $2,507.2 million estimated fair value of fixed rate
debt outstanding as of February 28, 2009, and February 29, 2008, respectively, the Company also had
variable rate debt outstanding (primarily LIBOR based) as of February 28, 2009, and February 29,
2008, of $2,036.4 million and $2,749.5 million, respectively. Using a sensitivity analysis based
on a hypothetical 1% increase in prevailing interest rates over a 12-month period, the approximate
increase in cash required for interest as of February 28, 2009, and February 29, 2008, is $20.4
million and $27.5 million, respectively.
62
Item 8. Financial Statements and Supplementary Data
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2009
The following information is presented in this Annual Report on Form 10-K:
|
|
|
|
|
|
|
Page |
Report of Independent Registered Public Accounting Firm KPMG LLP |
|
|
64 |
|
Report of Independent Registered Public Accounting Firm KPMG LLP |
|
|
65 |
|
Managements Annual Report on Internal Control Over Financial Reporting |
|
|
67 |
|
Consolidated Balance Sheets February 28, 2009, and February 29, 2008 |
|
|
68 |
|
Consolidated Statements of Operations for the years ended February 28, 2009,
February 29, 2008, and February 28, 2007 |
|
|
69 |
|
Consolidated Statements of Changes in Stockholders Equity for the years ended
February 28, 2009, February 29, 2008, and February 28, 2007 |
|
|
70 |
|
Consolidated Statements of Cash Flows for the years ended February 28, 2009,
February 29, 2008, and February 28, 2007 |
|
|
72 |
|
Notes to Consolidated Financial Statements |
|
|
74 |
|
Selected Quarterly Financial Information (unaudited) |
|
|
139 |
|
63
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 28, 2009 and February 29, 2008, 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 28, 2009. 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 28, 2009 and February 29, 2008, and the results of their operations and their cash flows
for each of the years in the three-year period ended February 28, 2009, in conformity with
U.S. generally accepted accounting principles.
As
discussed in Note 11, 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), Constellation Brands, Inc.s internal control over financial reporting as of
February 28, 2009, 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, 2009 expressed an adverse opinion on the effectiveness of Constellation Brands, Inc.s
internal control over financial reporting.
/s/ KPMG LLP
Rochester, New York
April 29, 2009
64
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 28, 2009, 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.
A material weakness is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material misstatement of
the Companys annual or interim financial statements will not be prevented or detected on a timely
basis. A material weakness related to the Companys reconciliation and review of inventory accounts
at its Australian subsidiary has been identified and included in managements assessment as of
February 28, 2009. We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated balance sheets of Constellation
Brands, Inc. and subsidiaries as of February 28, 2009 and February 29, 2008, 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 28, 2009. This material weakness was considered
in determining the nature, timing, and extent of audit tests applied in our audit of the 2009
consolidated financial statements, and this report does not affect our report dated April 29, 2009,
which expressed an unqualified opinion on those consolidated financial statements.
65
In our opinion, because of the effect of the aforementioned material weakness on the achievement of
the objectives of the control criteria, Constellation Brands, Inc. has not maintained effective
internal control over financial reporting as of February 28, 2009, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission.
/s/ KPMG LLP
Rochester, New York
April 29, 2009
66
Managements Annual Report on Internal Control Over Financial Reporting
Management of Constellation Brands, Inc. and 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.
A material weakness is a deficiency, or combination of deficiencies, in internal control over
financial reporting such that there is a reasonable possibility that a material misstatement of the
Companys annual or interim financial statements will not be prevented or detected on a timely
basis.
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 (COSO) of the Treadway Commission. Based on that evaluation, management concluded that the Companys internal control over financial reporting was not effective as
of February 28, 2009, because of the following material weakness:
During the Companys evaluation of the
effectiveness of internal control over financial reporting as of February 28,
2009, the Company determined that the policies and procedures over the reconciliation and review of
bulk inventory accounts were not properly designed and did not operate effectively at the Companys
Australian operations. Specifically, the reconciliation and review controls for vineyard farming
costs and bulk inventory at the Australian operations did not include identifying cost
accumulation, and subsequent release to finished goods, by respective vintage year. In addition,
reviews of inventory reconciliations were not performed with sufficient precision. As a result, it
was at least reasonably possible for discrepancies to accumulate in these inventory accounts, which could have resulted in
material differences between the actual costs for inventory on hand and the costs that should have
been released to cost of product sold. This deficiency resulted in immaterial adjustments to inventories and cost of product
sold in the Companys consolidated financial statements as of and for the fiscal year ended February 28, 2009,
which adjustments also corrected immaterial errors related to prior periods.
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.
67
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
CURRENT ASSETS: |
|
|
|
|
|
|
|
|
Cash and cash investments |
|
$ |
13.1 |
|
|
$ |
20.5 |
|
Accounts receivable, net |
|
|
524.6 |
|
|
|
731.6 |
|
Inventories |
|
|
1,828.7 |
|
|
|
2,179.5 |
|
Prepaid expenses and other |
|
|
168.1 |
|
|
|
267.4 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,534.5 |
|
|
|
3,199.0 |
|
PROPERTY, PLANT AND EQUIPMENT, net |
|
|
1,547.5 |
|
|
|
2,035.0 |
|
GOODWILL |
|
|
2,615.0 |
|
|
|
3,123.9 |
|
INTANGIBLE ASSETS, net |
|
|
1,000.6 |
|
|
|
1,190.0 |
|
OTHER ASSETS, net |
|
|
338.9 |
|
|
|
504.9 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,036.5 |
|
|
$ |
10,052.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES: |
|
|
|
|
|
|
|
|
Notes payable to banks |
|
$ |
227.3 |
|
|
$ |
379.5 |
|
Current maturities of long-term debt |
|
|
235.2 |
|
|
|
229.3 |
|
Accounts payable |
|
|
288.7 |
|
|
|
349.4 |
|
Accrued excise taxes |
|
|
57.6 |
|
|
|
62.4 |
|
Other accrued expenses and liabilities |
|
|
517.6 |
|
|
|
697.7 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
1,326.4 |
|
|
|
1,718.3 |
|
|
|
|
|
|
|
|
LONG-TERM DEBT, less current maturities |
|
|
3,971.1 |
|
|
|
4,648.7 |
|
|
|
|
|
|
|
|
DEFERRED INCOME TAXES |
|
|
543.6 |
|
|
|
535.8 |
|
|
|
|
|
|
|
|
OTHER LIABILITIES |
|
|
287.1 |
|
|
|
384.1 |
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES (NOTE 14) |
|
|
|
|
|
|
|
|
STOCKHOLDERS EQUITY: |
|
|
|
|
|
|
|
|
Preferred Stock, $.01 par value- |
|
|
|
|
|
|
|
|
Authorized, 1,000,000 shares; Issued, none
at February 28, 2009, and February 29, 2008 |
|
|
|
|
|
|
|
|
Class A Common Stock, $.01 par value- |
|
|
|
|
|
|
|
|
Authorized, 315,000,000 shares;
Issued, 223,584,959 shares at February 28, 2009,
and 221,296,639 shares at February 29, 2008, |
|
|
2.2 |
|
|
|
2.2 |
|
Class B Convertible Common Stock, $.01 par value- |
|
|
|
|
|
|
|
|
Authorized, 30,000,000 shares;
Issued, 28,749,294 shares at February 28, 2009,
and 28,782,954 shares at February 29, 2008, |
|
|
0.3 |
|
|
|
0.3 |
|
Class 1 Common Stock, $.01 par value- |
|
|
|
|
|
|
|
|
Authorized, 15,000,000 shares; Issued, none
at February 28, 2009, and February 29, 2008 |
|
|
|
|
|
|
|
|
Additional paid-in capital |
|
|
1,426.3 |
|
|
|
1,344.0 |
|
Retained earnings |
|
|
1,003.5 |
|
|
|
1,306.0 |
|
Accumulated other comprehensive income |
|
|
94.2 |
|
|
|
736.0 |
|
|
|
|
|
|
|
|
|
|
|
2,526.5 |
|
|
|
3,388.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less-Treasury stock- |
|
|
|
|
|
|
|
|
Class A Common Stock, 28,184,448 shares at
February 28, 2009, and 29,020,781 shares at
February 29, 2008, at cost |
|
|
(616.0 |
) |
|
|
(620.4 |
) |
Class B Convertible Common Stock, 5,005,800 shares
at February 28, 2009, and February 29, 2008, at cost |
|
|
(2.2 |
) |
|
|
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
(618.2 |
) |
|
|
(622.6 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
1,908.3 |
|
|
|
2,765.9 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
8,036.5 |
|
|
$ |
10,052.8 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
68
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 28, |
|
|
February 29, |
|
|
February 28, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
SALES |
|
$ |
4,723.0 |
|
|
$ |
4,885.1 |
|
|
$ |
6,401.8 |
|
Less Excise taxes |
|
|
(1,068.4 |
) |
|
|
(1,112.1 |
) |
|
|
(1,185.4 |
) |
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
3,654.6 |
|
|
|
3,773.0 |
|
|
|
5,216.4 |
|
COST OF PRODUCT SOLD |
|
|
(2,424.6 |
) |
|
|
(2,491.5 |
) |
|
|
(3,692.5 |
) |
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
1,230.0 |
|
|
|
1,281.5 |
|
|
|
1,523.9 |
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
|
|
(830.4 |
) |
|
|
(807.3 |
) |
|
|
(768.8 |
) |
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS |
|
|
(300.4 |
) |
|
|
(812.2 |
) |
|
|
|
|
RESTRUCTURING CHARGES |
|
|
(68.0 |
) |
|
|
(6.9 |
) |
|
|
(32.5 |
) |
ACQUISITION-RELATED INTEGRATION COSTS |
|
|
(8.2 |
) |
|
|
(11.8 |
) |
|
|
(23.6 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
23.0 |
|
|
|
(356.7 |
) |
|
|
699.0 |
|
EQUITY IN EARNINGS OF EQUITY METHOD INVESTEES |
|
|
186.6 |
|
|
|
257.9 |
|
|
|
49.9 |
|
INTEREST EXPENSE, net |
|
|
(316.4 |
) |
|
|
(341.8 |
) |
|
|
(268.7 |
) |
GAIN ON CHANGE IN FAIR VALUE OF
DERIVATIVE INSTRUMENTS |
|
|
|
|
|
|
|
|
|
|
55.1 |
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
|
(106.8 |
) |
|
|
(440.6 |
) |
|
|
535.3 |
|
PROVISION FOR INCOME TAXES |
|
|
(194.6 |
) |
|
|
(172.7 |
) |
|
|
(203.4 |
) |
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME |
|
|
(301.4 |
) |
|
|
(613.3 |
) |
|
|
331.9 |
|
Dividends on preferred stock |
|
|
|
|
|
|
|
|
|
|
(4.9 |
) |
|
|
|
|
|
|
|
|
|
|
(LOSS) INCOME AVAILABLE TO COMMON
STOCKHOLDERS |
|
$ |
(301.4 |
) |
|
$ |
(613.3 |
) |
|
$ |
327.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE DATA: |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Class A Common Stock |
|
$ |
(1.40 |
) |
|
$ |
(2.83 |
) |
|
$ |
1.44 |
|
|
|
|
|
|
|
|
|
|
|
Basic
Class B Convertible Common Stock |
|
$ |
(1.27 |
) |
|
$ |
(2.57 |
) |
|
$ |
1.31 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Class A Common Stock |
|
$ |
(1.40 |
) |
|
$ |
(2.83 |
) |
|
$ |
1.38 |
|
|
|
|
|
|
|
|
|
|
|
Diluted Class B Convertible Common Stock |
|
$ |
(1.27 |
) |
|
$ |
(2.57 |
) |
|
$ |
1.27 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic Class A Common Stock |
|
|
193.906 |
|
|
|
195.135 |
|
|
|
204.966 |
|
Basic Class B Convertible Common Stock |
|
|
23.753 |
|
|
|
23.812 |
|
|
|
23.840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Class A Common Stock |
|
|
193.906 |
|
|
|
195.135 |
|
|
|
239.772 |
|
Diluted Class B Convertible Common Stock |
|
|
23.753 |
|
|
|
23.812 |
|
|
|
23.840 |
|
The accompanying notes are an integral part of these statements.
69
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, 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 |
|
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 |
|
70
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 29, 2008 |
|
$ |
|
|
|
$ |
2.2 |
|
|
$ |
0.3 |
|
|
$ |
1,344.0 |
|
|
$ |
1,306.0 |
|
|
$ |
736.0 |
|
|
$ |
(622.6 |
) |
|
$ |
2,765.9 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for Fiscal 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301.4 |
) |
|
|
|
|
|
|
|
|
|
|
(301.4 |
) |
Other comprehensive (loss) income, net of income tax
effect: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(683.6 |
) |
|
|
|
|
|
|
(683.6 |
) |
Unrealized loss on cash flow hedges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net derivative losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16.4 |
) |
|
|
|
|
|
|
(16.4 |
) |
Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
0.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss recognized in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15.6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial gains |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.3 |
|
|
|
|
|
|
|
44.3 |
|
Reclassification adjustments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12.1 |
|
|
|
|
|
|
|
12.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net gain recognized in other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss, net of income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(642.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(944.2 |
) |
Adjustments to apply change in measurement date provision
of SFAS No. 158, net of income tax effect |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.1 |
) |
|
|
1.0 |
|
|
|
|
|
|
|
(0.1 |
) |
Conversion of 33,660 Class B Convertible Common
shares to Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise of 2,254,660 Class A stock options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27.1 |
|
Employee stock purchases of 376,297 treasury shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.6 |
|
|
|
|
|
|
|
|
|
|
|
2.0 |
|
|
|
5.6 |
|
Stock-based employee compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44.6 |
|
Issuance of 460,036 restricted Class A Common shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2.4 |
) |
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
|
|
Amortization of unearned restricted stock compensation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.9 |
|
Tax benefit on Class A stock options exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.5 |
|
Tax benefit on disposition of employee stock purchases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE, February 28, 2009 |
|
$ |
|
|
|
$ |
2.2 |
|
|
$ |
0.3 |
|
|
$ |
1,426.3 |
|
|
$ |
1,003.5 |
|
|
$ |
94.2 |
|
|
$ |
(618.2 |
) |
|
$ |
1,908.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
71
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 28, |
|
|
February 29, |
|
|
February 28, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
(301.4 |
) |
|
$ |
(613.3 |
) |
|
$ |
331.9 |
|
|
Adjustments to reconcile net (loss) income to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Impairment of goodwill and intangible assets |
|
|
300.4 |
|
|
|
812.2 |
|
|
|
|
|
Depreciation of property, plant and equipment |
|
|
143.6 |
|
|
|
154.7 |
|
|
|
131.7 |
|
Equity in earnings of equity method investees, net of distributed earnings |
|
|
90.3 |
|
|
|
20.7 |
|
|
|
(41.0 |
) |
Write-down of Australian inventory |
|
|
75.5 |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
46.1 |
|
|
|
32.0 |
|
|
|
16.5 |
|
Loss on disposal or impairment of long-lived assets, net |
|
|
44.9 |
|
|
|
1.8 |
|
|
|
12.5 |
|
Loss on businesses sold or held for sale |
|
|
31.5 |
|
|
|
34.6 |
|
|
|
16.9 |
|
Amortization of intangible and other assets |
|
|
13.4 |
|
|
|
11.2 |
|
|
|
7.6 |
|
Deferred tax provision |
|
|
2.3 |
|
|
|
98.0 |
|
|
|
52.7 |
|
Noncash portion of loss on extinguishment of debt |
|
|
|
|
|
|
|
|
|
|
11.8 |
|
Gain on change in fair value of derivative instruments |
|
|
|
|
|
|
|
|
|
|
(55.1 |
) |
Change in operating assets and liabilities, net of effects
from purchases and sales of businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
87.4 |
|
|
|
56.2 |
|
|
|
(6.3 |
) |
Inventories |
|
|
(86.0 |
) |
|
|
(37.8 |
) |
|
|
(85.1 |
) |
Prepaid expenses and other current assets |
|
|
9.4 |
|
|
|
(5.8 |
) |
|
|
44.3 |
|
Accounts payable |
|
|
(26.9 |
) |
|
|
16.3 |
|
|
|
34.3 |
|
Accrued excise taxes |
|
|
12.1 |
|
|
|
2.4 |
|
|
|
1.0 |
|
Other accrued expenses and liabilities |
|
|
(95.0 |
) |
|
|
(34.2 |
) |
|
|
(157.2 |
) |
Other, net |
|
|
159.3 |
|
|
|
(29.2 |
) |
|
|
(3.3 |
) |
|
|
|
|
|
|
|
|
|
|
Total adjustments |
|
|
808.3 |
|
|
|
1,133.1 |
|
|
|
(18.7 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
506.9 |
|
|
|
519.8 |
|
|
|
313.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of businesses |
|
|
204.2 |
|
|
|
136.5 |
|
|
|
28.4 |
|
Proceeds from sales of assets |
|
|
25.4 |
|
|
|
19.4 |
|
|
|
9.8 |
|
Capital distributions from equity method investees |
|
|
20.8 |
|
|
|
|
|
|
|
|
|
Purchases of businesses, net of cash acquired |
|
|
0.1 |
|
|
|
(1,302.0 |
) |
|
|
(1,093.7 |
) |
Purchases of property, plant and equipment |
|
|
(128.6 |
) |
|
|
(143.8 |
) |
|
|
(192.0 |
) |
Investments
in equity method investees |
|
|
(3.2 |
) |
|
|
(4.6 |
) |
|
|
|
|
Payment of accrued earn-out amount |
|
|
|
|
|
|
(4.0 |
) |
|
|
(3.6 |
) |
Proceeds from formation of joint venture |
|
|
|
|
|
|
185.6 |
|
|
|
|
|
Proceeds from maturity of derivative instrument |
|
|
|
|
|
|
|
|
|
|
55.1 |
|
Other investing activities |
|
|
9.9 |
|
|
|
|
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
128.6 |
|
|
|
(1,112.9 |
) |
|
|
(1,197.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Principal payments of long-term debt |
|
|
(577.6 |
) |
|
|
(374.9 |
) |
|
|
(2,786.9 |
) |
Net (repayment of) proceeds from notes payable |
|
|
(109.7 |
) |
|
|
219.4 |
|
|
|
47.1 |
|
Exercise of employee stock options |
|
|
27.1 |
|
|
|
20.6 |
|
|
|
63.4 |
|
Excess tax benefits from stock-based payment awards |
|
|
7.2 |
|
|
|
11.3 |
|
|
|
21.4 |
|
Proceeds from employee stock purchases |
|
|
5.6 |
|
|
|
6.2 |
|
|
|
5.9 |
|
Proceeds from issuance of long-term debt |
|
|
|
|
|
|
1,212.9 |
|
|
|
3,705.4 |
|
Purchases of treasury stock |
|
|
|
|
|
|
(500.0 |
) |
|
|
(100.0 |
) |
Payment of financing costs of long-term debt |
|
|
|
|
|
|
(10.6 |
) |
|
|
(23.8 |
) |
Payment of preferred stock dividends |
|
|
|
|
|
|
|
|
|
|
(7.3 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(647.4 |
) |
|
|
584.9 |
|
|
|
925.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash investments |
|
|
4.5 |
|
|
|
(4.8 |
) |
|
|
(18.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS |
|
|
(7.4 |
) |
|
|
(13.0 |
) |
|
|
22.6 |
|
CASH AND CASH INVESTMENTS, beginning of year |
|
|
20.5 |
|
|
|
33.5 |
|
|
|
10.9 |
|
|
|
|
|
|
|
|
|
|
|
CASH AND CASH INVESTMENTS, end of year |
|
$ |
13.1 |
|
|
$ |
20.5 |
|
|
$ |
33.5 |
|
|
|
|
|
|
|
|
|
|
|
72
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 28, |
|
|
February 29, |
|
|
February 28, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
$ |
332.8 |
|
|
$ |
328.6 |
|
|
$ |
220.8 |
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
137.8 |
|
|
$ |
38.9 |
|
|
$ |
153.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of assets acquired, including cash acquired |
|
$ |
18.5 |
|
|
$ |
1,448.7 |
|
|
$ |
1,775.0 |
|
Liabilities assumed |
|
|
(5.7 |
) |
|
|
(141.2 |
) |
|
|
(648.2 |
) |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
|
12.8 |
|
|
|
1,307.5 |
|
|
|
1,126.8 |
|
Plus payment of direct acquisition costs previously accrued |
|
|
0.8 |
|
|
|
0.4 |
|
|
|
|
|
Plus settlement of note payable |
|
|
0.6 |
|
|
|
|
|
|
|
2.3 |
|
Less cash received from seller |
|
|
(11.3 |
) |
|
|
|
|
|
|
|
|
Less cash acquired |
|
|
(2.8 |
) |
|
|
(2.0 |
) |
|
|
(35.0 |
) |
Less direct acquisition costs accrued |
|
|
(0.2 |
) |
|
|
(1.2 |
) |
|
|
(0.4 |
) |
Less note payable issuance |
|
|
|
|
|
|
(2.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash paid for purchases of businesses |
|
$ |
(0.1 |
) |
|
$ |
1,302.0 |
|
|
$ |
1,093.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in Joint Venture |
|
$ |
|
|
|
$ |
|
|
|
$ |
124.4 |
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these statements.
73
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2009
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 (see Note 24). 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 8) and certain other
imported beer brands through the Companys joint venture, Crown Imports (as defined in Note 8). 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
8), 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.
74
Equity investments are reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of the investments may not be recoverable.
In the fourth quarter of fiscal 2009, the Company performed its review of equity method investments for other-than-temporary
impairment. The Company determined that two of the Companys Constellation Wines segments international equity
method investments, Ruffino S.r.l (Ruffino) and Matthew Clark, were impaired primarily due to a decline in revenue and
profit forecasts for these two equity method investees reflecting significant market deterioration during the fourth quarter
of fiscal 2009. 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 cash flows. As a result of this
review, the Company recorded impairment losses of $79.2 million in equity in earnings of equity method investees on the Companys
Consolidated Statements of Operations. For the year ended February 29, 2008, the Company recorded an impairment loss of $15.1 million
associated with its investment in Ruffino, which 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 year ended February 28, 2007.
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.
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 28, 2009, and February 29,
2008, were not material. Advertising expense for the years ended February 28, 2009, February 29,
2008, and February 28, 2007, was $175.7 million, $180.4 million and $182.7 million, respectively.
75
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 were $26.3 million, $15.3 million and $9.9
million for the years ended February 28, 2009, February 29, 2008, and February 28, 2007,
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 fair value. The amounts at
February 28, 2009, and February 29, 2008, 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 $4.1 million and $7.6 million as of February 28, 2009, and February 29, 2008,
respectively.
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 28, 2009 |
|
February 29, 2008 |
|
|
Carrying |
|
Fair |
|
Carrying |
|
Fair |
(in millions) |
|
Amount |
|
Value |
|
Amount |
|
Value |
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash investments |
|
$ |
13.1 |
|
|
$ |
13.1 |
|
|
$ |
20.5 |
|
|
$ |
20.5 |
|
Accounts receivable |
|
$ |
524.6 |
|
|
$ |
524.6 |
|
|
$ |
731.6 |
|
|
$ |
731.6 |
|
Foreign
currency contracts |
|
$ |
78.7 |
|
|
$ |
78.7 |
|
|
$ |
87.6 |
|
|
$ |
87.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes payable to banks |
|
$ |
227.3 |
|
|
$ |
227.3 |
|
|
$ |
379.5 |
|
|
$ |
379.5 |
|
Accounts payable |
|
$ |
288.7 |
|
|
$ |
288.7 |
|
|
$ |
349.4 |
|
|
$ |
349.4 |
|
Long-term debt, including
current portion |
|
$ |
4,206.3 |
|
|
$ |
4,162.4 |
|
|
$ |
4,878.0 |
|
|
$ |
4,877.2 |
|
Foreign currency
contracts |
|
$ |
71.1 |
|
|
$ |
71.1 |
|
|
$ |
81.3 |
|
|
$ |
81.3 |
|
Interest rate swap
contracts |
|
$ |
51.1 |
|
|
$ |
51.1 |
|
|
$ |
57.2 |
|
|
$ |
57.2 |
|
76
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.
Foreign
currency contracts: The fair value is estimated using market-based inputs, obtained
from independent pricing services, into valuation models (see Note 5).
Interest rate swap contracts: The fair value is estimated based on quoted market prices from
respective counterparties (see Note 5).
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.
The Company enters into derivative instruments, primarily interest rate swaps and foreign
currency forward and option contracts, to manage interest rate and foreign currency risks. In accordance with
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.
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.
77
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 undesignated 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 undesignated derivatives when the derivative instrument is settled within the fiscal
quarter or offsets a recognized balance sheet exposure. In these circumstances, the mark to fair
value is reported currently through earnings in selling, general and administrative expenses on the
Companys Consolidated Statements of Operations. As of February 28, 2009, and February 29, 2008,
the Company had undesignated foreign currency contracts outstanding with a notional
value of $402.6 million and $931.5 million, respectively.
Furthermore,
when the Company determines that a derivative instrument which
qualified for hedge
accounting treatment has ceased to be highly effective as a hedge, the Company
discontinues hedge accounting prospectively. The Company discontinues hedge accounting
prospectively when (i) the derivative is no longer highly effective in offsetting changes in the
cash flows or fair value 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.
Cash flow hedges:
The Company is exposed to foreign denominated cash flow fluctuations in connection with third
party and intercompany sales and purchases and third party financing arrangements. The Company
primarily uses foreign currency forward and option contracts to hedge certain of these risks. In addition,
the Company utilizes interest rate swaps to manage its exposure to changes in interest rates.
Derivatives managing the 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
Company recognizes the change in the fair value of the hedging derivative instrument from
the prior assessment date 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. As of February 28, 2009, and February 29, 2008,
the Company had cash flow designated foreign currency contracts outstanding with a notional value
of $1,316.8 million and $1,542.0 million, respectively. In addition, as of February 28, 2009, and
February 29, 2008, the Company had interest rate swap agreements outstanding with a notional value
of $1,200.0 million (see Note 10).
The Company records the fair value of its foreign currency contracts qualifying for cash flow
hedge accounting treatment in its consolidated balance sheet with the effective portion of the
related gain or loss on those contracts deferred in stockholders equity (as a component of AOCI).
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 highly 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.
78
The Company expects $17.4 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 28, 2009, February 29, 2008, and February 28,
2007, was not material. All components of the Companys derivative instruments gains or losses
are included in the assessment of hedge effectiveness. 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 (or within the two months following) was not material for the years ended February 28,
2009, February 29, 2008, and February 28, 2007.
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 28, 2009,
February 29, 2008, and February 28, 2007.
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 certain of 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. During February
2009, the Company discontinued the hedging relationship between the Companys Sterling Series B
Senior Notes and Sterling Series C Senior Notes (as defined in Note 10) totaling £155.0 million
aggregate principal amount and the Companys investment in its U.K. subsidiary. For the years
ended February 28, 2009, February 29, 2008, and February 28, 2007, net gains (losses) of $84.3
million, ($3.9) million and ($32.6) million, respectively, have been
deferred within foreign currency
translation adjustments within AOCI.
79
Fair values of derivative instruments:
The fair values and locations of the Companys derivative instruments on its Consolidated
Balance Sheets are as follows (see Note 5):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives |
|
|
Liability Derivatives |
|
|
|
Balance |
|
|
|
|
|
|
Balance |
|
|
|
|
|
|
Sheet |
|
|
February 28, |
|
|
Sheet |
|
|
February 28, |
|
(in millions) |
|
Location |
|
|
2009 |
|
|
Location |
|
|
2009 |
|
Derivatives designated as hedging instruments under SFAS No. 133 |
|
|
|
|
Foreign
currency
contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
Prepaid expenses and other |
|
$ |
47.1 |
|
|
Other accrued expenses and liabilities |
|
$ |
32.8 |
|
Long-term |
|
Other assets, net |
|
|
24.4 |
|
|
Other liabilities |
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
Prepaid expenses and other |
|
|
|
|
|
Other accrued expenses and liabilities |
|
|
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
71.5 |
|
|
|
|
|
|
|
113.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated as hedging instruments under SFAS No. 133 |
|
|
|
|
Foreign currency
contracts |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
Prepaid expenses and other |
|
|
6.9 |
|
|
Other accrued expenses and liabilities |
|
|
8.1 |
|
Long-term |
|
Other assets, net |
|
|
0.3 |
|
|
Other liabilities |
|
|
0.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
7.2 |
|
|
|
|
|
|
|
8.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
derivative instruments |
|
|
|
|
|
$ |
78.7 |
|
|
|
|
|
|
$ |
122.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The effect of the Companys derivative instruments on its Consolidated Statements of
Operations and Other Comprehensive Income (OCI) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
Gain (Loss) |
|
|
|
|
|
|
Reclassified |
|
|
|
Recognized |
|
|
|
|
|
|
from AOCI to |
|
|
|
in OCI for the |
|
|
|
|
|
|
Income for the |
|
|
|
Three Months |
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
|
|
|
Ended |
|
|
|
February 28, |
|
|
|
|
|
|
February 28, |
|
Derivatives in SFAS |
|
2009 |
|
|
Location of Gain (Loss) |
|
|
2009 |
|
No. 133 Cash Flow |
|
(Effective |
|
|
Reclassified from AOCI to |
|
|
(Effective |
|
Hedging Relationships |
|
portion) |
|
|
Income (Effective portion) |
|
|
portion) |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency contracts |
|
$ |
8.1 |
|
|
Sales |
|
$ |
(1.1 |
) |
Foreign currency contracts |
|
|
2.6 |
|
|
Cost of product sold |
|
|
0.7 |
|
Foreign currency contracts |
|
|
1.9 |
|
|
Selling, general and administrative expenses |
|
|
(1.9 |
) |
Interest rate contracts |
|
|
(4.6 |
) |
|
Interest expense, net |
|
|
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
8.0 |
|
|
Total |
|
$ |
1.7 |
|
|
|
|
|
|
|
|
|
|
|
|
80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
|
Recognized |
|
|
|
|
|
|
|
in Income |
|
|
|
|
|
|
|
for the |
|
|
|
|
|
|
|
Three Months |
|
|
|
|
|
|
|
Ended |
|
|
|
|
|
|
|
February 28, |
|
Derivatives in SFAS |
|
Location of Gain (Loss) |
|
|
2009 |
|
No. 133 Cash Flow |
|
Recognized in Income |
|
|
(Ineffective |
|
Hedging Relationships |
|
(Ineffective portion) |
|
|
portion) |
|
(in millions) |
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
Selling, general and administrative expenses |
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
Gain (Loss) |
|
|
|
|
|
|
Reclassified |
|
|
|
Recognized |
|
|
|
|
|
|
from AOCI to |
|
|
|
in OCI for the |
|
|
|
|
|
|
Income for the |
|
|
|
Three Months |
|
|
|
|
|
|
Three Months |
|
|
|
Ended |
|
|
|
|
|
|
Ended |
|
Non-derivative |
|
February 28, |
|
|
|
|
|
|
February 28, |
|
Instruments in SFAS |
|
2009 |
|
|
Location of Gain (Loss) |
|
|
2009 |
|
No. 133 Net Investment |
|
(Effective |
|
|
Reclassified from AOCI to |
|
|
(Effective |
|
Hedging Relationships |
|
portion) |
|
|
Income (Effective portion) |
|
|
portion) |
|
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Sterling Senior Notes |
|
$ |
14.4 |
|
|
Selling, general and administrative expenses |
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) |
|
|
|
|
|
|
|
Recognized |
|
|
|
|
|
|
|
in Income |
|
|
|
|
|
|
|
for the |
|
|
|
|
|
|
|
Three Months |
|
Derivatives not Designated as |
|
|
|
|
|
Ended |
|
Hedging Instruments under |
|
Location of Gain (Loss) |
|
|
February 28, |
|
SFAS No. 133 |
|
Recognized in Income |
|
|
2009 |
|
(in millions) |
|
|
|
|
|
|
|
|
Foreign
currency contracts |
|
Selling, general and administrative expenses |
|
$ |
(1.3 |
) |
|
|
|
|
|
|
|
|
Credit risk:
The Company enters into master agreements with its bank derivative trading counterparties that
allow netting of certain derivative positions in order to manage credit risk. The Companys derivative instruments are not subject to credit rating
contingencies or collateral requirements. As of February 28, 2009, the fair value of derivative
instruments in a net liability position due to counterparties was $74.7 million. If the Company
were required to settle the net liability position under these derivative instruments on February
28, 2009, the Company would have had sufficient availability under its revolving credit facility to
satisfy this obligation.
81
Counterparty credit risk:
Counterparty credit risk relates to losses the Company could incur if a counterparty defaults
on a derivative contract. The Company manages exposure to counterparty credit risk by requiring
specified minimum credit standards and diversification of counterparties. The Company enters into
master agreements with its bank derivative trading counterparties that allow netting of certain
derivative positions in order to manage counterparty credit risk. As of February 28, 2009, all of
the Companys counterparty exposures are with financial institutions which have investment grade
ratings. The Company has procedures to monitor counterparty credit risk for both current and
future potential credit exposures. As of February 28, 2009, the fair value of derivative
instruments in a net receivable position due from counterparties was $31.2 million.
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 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Raw materials and supplies |
|
$ |
57.9 |
|
|
$ |
85.4 |
|
In-process inventories |
|
|
1,218.4 |
|
|
|
1,421.8 |
|
Finished case goods |
|
|
552.4 |
|
|
|
672.3 |
|
|
|
|
|
|
|
|
|
|
$ |
1,828.7 |
|
|
$ |
2,179.5 |
|
|
|
|
|
|
|
|
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. During the year ended
February 28, 2009, the Company recorded an immaterial adjustment to inventory of $35.5 million
related to prior periods of $10.4 million, $7.1 million and $18.0 million for the years ended
February 29, 2008, February 28, 2007, and February 28, 2006 and prior, respectively. This
adjustment was to correct for costs, primarily in the Companys
Australian business, which were not properly released from inventory as the product
was sold.
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.
82
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 January 1
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 7 provides a
summary of intangible assets segregated between amortizable and nonamortizable amounts.
In the fourth quarter of fiscal 2009, 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 amount of goodwill assigned to the Constellation Wines segments U.K.
reporting unit exceeded its implied fair value and recorded an impairment loss of $252.7 million,
which is included in impairment of goodwill and intangible assets on the Companys Consolidated
Statements of Operations. The impairment loss was determined by comparing the carrying value of
goodwill assigned to the specific reporting unit within the segment as of January 1, 2009, 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 the reporting unit
discounted using market based 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 the resulting impairment loss
was driven primarily by the accelerated deterioration in the Companys U.K. business during the
fourth quarter of fiscal 2009 and the resulting adjustment to the Companys long-term financial
forecasts, which showed lower estimated future operating results reflecting the significant fourth
quarter deterioration in market conditions in the U.K. In the fourth quarter of fiscal 2008, as a
result of its annual goodwill impairment 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 are
included in impairment of goodwill and intangible assets on the Companys Consolidated Statements
of Operations. No impairment losses were recorded for the year ended February 28, 2007.
83
In addition, during the fourth quarter of fiscal 2009, the Company performed its review of
indefinite lived intangible assets for impairment. The Company determined that certain trademarks
associated primarily with the Constellation Wines segments U.K. reporting unit were impaired
largely due to the aforementioned market declines in the U.K. during the fourth quarter, and the
resulting lower revenue and profit forecasts associated with products incorporating these assets
which reflected the significant fourth quarter deterioration in market conditions in the U.K. 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
cash flows. As a result of this review, the Company recorded impairment losses of $25.9
million, which are included in impairment of goodwill and intangible assets on the Companys
Consolidated Statements of Operations. The Company had previously recorded impairment losses of
$21.8 million during its second quarter of fiscal 2009 in connection with the Companys Australian
Initiative (as defined in Note 19) and the resulting lower revenue and profit forecasts associated
with certain brands incorporating assets impacted by the Australian Initiative. In addition,
during the fourth quarter of fiscal 2008, the Company determined that certain intangible assets
associated with the Constellation Wines segments Australian and U.K. reporting units, primarily
trademarks, were impaired and recorded additional impairment losses of $204.9 million, which are
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.
Other assets
Other assets include the following: (i) investments in equity method investees which are
carried under the equity method of accounting (see Note 8); (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 11); and (iv) derivative assets which are stated at fair value (see
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 (see
below).
84
Pursuant to this policy, for the year ended February 28, 2009, in connection with the
Companys Australian Initiative (as defined in Note 19), the Companys Constellation Wines segment
recorded asset impairment losses of $46.5 million associated primarily 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 restructuring charges on the
Companys Consolidated Statements of Operations. 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 within the Constellation Wines segment. 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. This
impairment loss is included in selling, general and administrative expenses on the Companys
Consolidated Statements of Operations.
Assets held for sale
As of February 28, 2009, in connection with the Companys divestiture of the value spirits
business (see Note 24) and the Australian Initiative, the Company had $374.6 million of assets held
for sale, of which $339.4 million is reported within the Constellation Spirits segment and $35.2
million is reported within the Constellation Wines segment. As of February 29, 2008, in connection
primarily with the divestiture of the Pacific Northwest Business (see Note 3), the Company had
$202.7 million of assets held for sale reported primarily within the Constellation Wines segment.
The carrying amounts of the major classes of assets and liabilities classified as held for sale as
of February 28, 2009, and February 29, 2008, are presented below. Amounts presented below are
included within the respective line on the Companys Consolidated Balance Sheets as amounts are not
deemed material for separate presentation on the face of the Companys Consolidated Balance Sheets.
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Inventories |
|
$ |
94.5 |
|
|
$ |
49.1 |
|
Prepaid expenses and other |
|
|
8.2 |
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
102.7 |
|
|
|
49.1 |
|
Property, plant and equipment, net |
|
|
80.8 |
|
|
|
120.2 |
|
Goodwill |
|
|
157.4 |
|
|
|
3.1 |
|
Intangible assets, net |
|
|
33.7 |
|
|
|
30.3 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
374.6 |
|
|
$ |
202.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
$ |
0.4 |
|
|
$ |
|
|
Other liabilities |
|
|
5.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
6.1 |
|
|
$ |
|
|
|
|
|
|
|
|
|
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.
85
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 28, 2009, and February 29, 2008.
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 15). 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 computation 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 excludes the effect of common stock equivalents and is
computed using the two-class computation method (see Note 16). Earnings per common share
diluted for Class A Common Stock reflects the potential dilution that could result if securities or
other contracts to issue common stock were exercised or converted into common stock. Earnings per
common share diluted for Class A Common Stock has been computed using the more dilutive of the
if-converted or two-class computation method. Using the if-converted method, earnings per common
share 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 15). Using the two-class computation method, earnings per common share diluted for Class A
Common Stock assumes the exercise of stock options using the treasury
stock method and the conversion of Preferred Stock, but no
conversion of Class B Convertible Common Stock. Earnings per common share diluted for Class B
Convertible Common Stock is presented without assuming conversion into Class A Common Stock
and is computed using the two-class computation method.
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 15. The Company applies a grant date
fair-value-based measurement method in accounting for its share-based payment arrangements and
records all costs resulting from share-based payment transactions
ratably over the requisite service period in its consolidated financial statements.
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. In accordance with the provisions of SFAS No.
123(R), the Company recognizes compensation expense immediately for awards granted to
retirement-eligible employees or ratably 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.
86
Total compensation cost for stock-based awards is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 28, |
|
|
February 29, |
|
|
February 28, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Total compensation cost for stock-based awards
recognized in the Consolidated Statements of
Income |
|
$ |
46.1 |
|
|
$ |
32.0 |
|
|
$ |
16.5 |
|
|
|
|
|
|
|
|
|
|
|
Total income tax benefit recognized in the
Consolidated Statements of Operations for
stock-based compensation |
|
$ |
14.0 |
|
|
$ |
9.2 |
|
|
$ |
4.5 |
|
|
|
|
|
|
|
|
|
|
|
Total compensation cost for stock-based awards
capitalized in inventory in the Consolidated
Balance Sheets |
|
$ |
4.6 |
|
|
$ |
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.
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.
2. RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS:
Effective February 28, 2009, the Company adopted the final provision 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).
The first provision of 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 associated required disclosures as of February 28, 2007. The second provision of
SFAS No. 158 requires companies to measure the funded status of a defined benefit postretirement
plan as of the date of the companys fiscal year-end (with limited exceptions). The Company had
previously used a December 31 measurement date for its defined benefit pension and other
postretirement plans. On March 1, 2008, the Company 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 postretirement plan
assets or liabilities. These adjustments did not have a material impact on the Companys
consolidated financial statements. The Company completed its adoption of this final provision of
SFAS No. 158 on February 28, 2009, when the Company changed its measurement date for its defined
benefit pension and other postretirement plans to February 28, 2009 (see Note 13).
87
Effective March 1, 2008, the Company adopted 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. In addition, 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 adoption of SFAS No. 159 did not have a material impact on
the Companys consolidated financial statements.
Effective December 1, 2008, the Company adopted Statement of Financial Accounting Standards
No. 161 (SFAS No. 161), Disclosures about Derivative Instruments and Hedging Activities An Amendment of FASB
Statement No. 133. 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 adoption of the disclosure
requirements of SFAS No. 161 did not have a material impact on the Companys consolidated financial
statements.
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
and Wild Horse. 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 $877.3 million. In addition, the Company incurred direct
acquisition costs of $1.4 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 10). 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. In
June 2008, the Company sold certain businesses consisting of several of the California wineries and
wine brands acquired in the BWE Acquisition, as well as certain wineries and wine brands from the
states of Washington and Idaho (collectively, the Pacific Northwest Business) for cash proceeds
of $204.2 million, net of direct costs to sell. In addition, if certain objectives are achieved by
the buyer, the Company could receive up to an additional $25.0 million in cash payments. In
connection with the sale of the Pacific Northwest Business, the Company recorded a loss of $23.2
million for the year ended February 28, 2009, which includes a loss on business sold of $15.8
million and losses on contractual obligations of $7.4 million. The loss of $23.2 million is
included in selling, general and administrative expenses on the Companys Consolidated Statements
of Operations.
88
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 fair values of the assets acquired and liabilities assumed
in the BWE Acquisition at the date of acquisition.
|
|
|
|
|
(in millions) |
|
|
|
|
Current assets |
|
$ |
288.4 |
|
Property, plant and equipment |
|
|
232.8 |
|
Goodwill |
|
|
334.6 |
|
Trademarks |
|
|
97.9 |
|
Other assets |
|
|
30.2 |
|
|
|
|
|
Total assets acquired |
|
|
983.9 |
|
|
|
|
|
|
Current liabilities |
|
|
103.9 |
|
Long-term liabilities |
|
|
1.3 |
|
|
|
|
|
Total liabilities assumed |
|
|
105.2 |
|
|
|
|
|
|
|
|
|
|
Net assets acquired |
|
$ |
878.7 |
|
|
|
|
|
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 supported the Companys strategy of expanding
the Companys premium spirits business. The acquisition provided a foundation from which the
Company looked to leverage its existing and future premium spirits portfolio for growth. In
addition, Svedka complemented the Companys then 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 $1.3 million. The purchase price was financed
with revolver borrowings under the Companys June 2006 Credit Agreement, 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.
89
The following table summarizes the 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.
90
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 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.
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.
Other
During the year ended February 28, 2009, the Company completed its acquisition of the
remaining 50% ownership interest in a Canadian joint venture distribution business for a purchase
price of $12.8 million. 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.
91
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 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, |
|
(in millions, except per share data) |
|
2008 |
|
|
2007 |
|
Net sales |
|
$ |
3,984.0 |
|
|
$ |
5,589.1 |
|
(Loss) income before income taxes |
|
$ |
(450.0 |
) |
|
$ |
441.7 |
|
Net (loss) income |
|
$ |
(622.1 |
) |
|
$ |
268.6 |
|
(Loss) income available to common stockholders |
|
$ |
(622.1 |
) |
|
$ |
263.7 |
|
|
|
|
|
|
|
|
|
|
(Loss) earnings per common share basic: |
|
|
|
|
|
|
|
|
Class A Common Stock |
|
$ |
(2.87 |
) |
|
$ |
1.16 |
|
|
|
|
|
|
|
|
Class B Convertible Common Stock |
|
$ |
(2.61 |
) |
|
$ |
1.06 |
|
|
|
|
|
|
|
|
(Loss) 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 |
|
92
4. PROPERTY, PLANT AND EQUIPMENT:
The major components of property, plant and equipment are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Land and land improvements |
|
$ |
326.2 |
|
|
$ |
394.4 |
|
Vineyards |
|
|
189.6 |
|
|
|
259.0 |
|
Buildings and improvements |
|
|
409.5 |
|
|
|
516.6 |
|
Machinery and equipment |
|
|
1,213.7 |
|
|
|
1,430.5 |
|
Motor vehicles |
|
|
36.6 |
|
|
|
43.1 |
|
Construction in progress |
|
|
48.1 |
|
|
|
99.0 |
|
|
|
|
|
|
|
|
|
|
|
2,223.7 |
|
|
|
2,742.6 |
|
Less Accumulated depreciation |
|
|
(676.2 |
) |
|
|
(707.6 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,547.5 |
|
|
$ |
2,035.0 |
|
|
|
|
|
|
|
|
5. FAIR VALUE MEASUREMENTS:
In September 2006, the Financial Accounting Standards Board (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 an asset or liability. In February 2008, the FASB issued FASB
Staff Position No. FAS 157-2 (FSP No. 157-2), Effective Date of FASB Statement No. 157. FSP
No. 157-2 amended SFAS No. 157 to defer the effective date of SFAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis, at least annually, including goodwill and
trademarks. On March 1, 2008, the Company adopted the provisions of SFAS No. 157 that were not
deferred by FSP No. 157-2. The adoption of these provisions of SFAS No. 157 did not have a
material impact on the Companys consolidated financial statements. In accordance with FSP No.
157-2, the Company is required to adopt the remaining provisions of SFAS No. 157 on March 1, 2009.
The adoption of the remaining provisions of SFAS No. 157 on March 1, 2009, did not have a material impact on the Companys
consolidated financial statements.
SFAS No. 157 establishes a hierarchy for inputs used in measuring fair value that maximizes
the use of observable inputs and minimizes the use of unobservable inputs by requiring that the
most observable inputs be used when available. The hierarchy is broken down into three levels:
Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2
inputs include data points that are observable such as quoted prices for similar assets or
liabilities in active markets, quoted prices for identical assets or similar assets or liabilities
in markets that are not active, and inputs (other than quoted prices) such as interest rates and
yield curves that are observable for the asset and liability, either directly or indirectly; Level
3 inputs are unobservable data points for the asset or liability, and include situations where
there is little, if any, market activity for the asset or liability.
93
The following table presents the fair value hierarchy for the Companys financial assets and
liabilities measured at fair value on a recurring basis as of February 28, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements as of February 28, 2009 |
|
|
|
Quoted |
|
|
Significant |
|
|
|
|
|
|
|
|
|
Prices in |
|
|
Other |
|
|
Significant |
|
|
|
|
|
|
Active |
|
|
Observable |
|
|
Unobservable |
|
|
|
|
|
|
Markets |
|
|
Inputs |
|
|
Inputs |
|
|
|
|
(in millions) |
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
Total |
|
Recurring Fair Value Measures |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
$ |
|
|
|
$ |
78.7 |
|
|
$ |
|
|
|
$ |
78.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts |
|
$ |
|
|
|
$ |
71.1 |
|
|
$ |
|
|
|
$ |
71.1 |
|
Interest rate swap contracts |
|
|
|
|
|
|
51.1 |
|
|
|
|
|
|
|
51.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
122.2 |
|
|
$ |
|
|
|
$ |
122.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys foreign currency contracts consist of foreign currency forward and option
contracts which are valued using market-based inputs, obtained from independent pricing services,
into valuation models. These valuation models require various inputs, including contractual terms,
market foreign exchange prices, interest-rate yield curves and currency volatilities. Interest
rate swap fair values are based on quotes from respective counterparties. Quotes are corroborated
by the Company using discounted cash flow calculations based upon forward interest-rate yield
curves, which are obtained from independent pricing services.
6. GOODWILL:
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidations |
|
|
|
|
|
|
Constellation |
|
|
Constellation |
|
|
Crown |
|
|
and |
|
|
|
|
(in millions) |
|
Wines |
|
|
Spirits |
|
|
Imports |
|
|
Eliminations |
|
|
Consolidated |
|
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 |
|
Purchase accounting
allocations |
|
|
23.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.8 |
|
Foreign currency
translation
adjustments |
|
|
(245.7 |
) |
|
|
(4.0 |
) |
|
|
|
|
|
|
|
|
|
|
(249.7 |
) |
Disposal of businesses |
|
|
(15.8 |
) |
|
|
(14.5 |
) |
|
|
|
|
|
|
|
|
|
|
(30.3 |
) |
Impairment of goodwill |
|
|
(252.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(252.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2009 |
|
$ |
2,123.7 |
|
|
$ |
491.3 |
|
|
$ |
13.0 |
|
|
$ |
(13.0 |
) |
|
$ |
2,615.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
For the year ended February 29, 2008, the changes in the carrying amount of goodwill consist
of the following components. 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 8) 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
$133.5 million, net of direct costs to sell. 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.
For the year ended February 28, 2009, the changes in the carrying amount of goodwill consist
of the following components. The Constellation Wines segments purchase accounting allocations
totaling $23.8 million consist primarily of purchase accounting allocations associated with the BWE
Acquisition of $14.5 million and purchase accounting allocations associated with the purchase of an
immaterial business of $6.4 million. The Constellation Wines segments disposal of business
consists of the Companys reduction of goodwill in connection with the June 2008 sale of the
Pacific Northwest Business. The Constellation Spirits segments disposal of business consists of
the impairment of goodwill on an asset group held for sale in connection with the March 2009 sale
of the value spirits business.
7. INTANGIBLE ASSETS:
The major components of intangible assets are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2009 |
|
|
February 29, 2008 |
|
|
|
Gross |
|
|
Net |
|
|
Gross |
|
|
Net |
|
|
|
Carrying |
|
|
Carrying |
|
|
Carrying |
|
|
Carrying |
|
(in millions) |
|
Amount |
|
|
Amount |
|
|
Amount |
|
|
Amount |
|
Amortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
80.0 |
|
|
$ |
70.3 |
|
|
$ |
67.3 |
|
|
$ |
62.0 |
|
Other |
|
|
11.4 |
|
|
|
5.4 |
|
|
|
12.7 |
|
|
|
6.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
91.4 |
|
|
|
75.7 |
|
|
$ |
80.0 |
|
|
|
68.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonamortizable intangible assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks |
|
|
|
|
|
|
915.2 |
|
|
|
|
|
|
|
1,117.3 |
|
Other |
|
|
|
|
|
|
9.7 |
|
|
|
|
|
|
|
4.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
924.9 |
|
|
|
|
|
|
|
1,121.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets |
|
|
|
|
|
$ |
1,000.6 |
|
|
|
|
|
|
$ |
1,190.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
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 $6.8 million, $4.8 million and $2.8 million for the years ended February 28, 2009, February 29,
2008, and February 28, 2007, respectively. Estimated amortization expense for each of the five
succeeding fiscal years and thereafter is as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
2010 |
|
$ |
6.3 |
|
2011 |
|
$ |
6.0 |
|
2012 |
|
$ |
5.4 |
|
2013 |
|
$ |
5.3 |
|
2014 |
|
$ |
5.3 |
|
Thereafter |
|
$ |
47.4 |
|
8. OTHER ASSETS:
The major components of other assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Investments in equity method investees |
|
$ |
258.1 |
|
|
$ |
394.1 |
|
Deferred financing costs |
|
|
44.0 |
|
|
|
51.4 |
|
Other |
|
|
57.2 |
|
|
|
80.6 |
|
|
|
|
|
|
|
|
|
|
|
359.3 |
|
|
|
526.1 |
|
Less Accumulated amortization |
|
|
(20.4 |
) |
|
|
(21.2 |
) |
|
|
|
|
|
|
|
|
|
$ |
338.9 |
|
|
$ |
504.9 |
|
|
|
|
|
|
|
|
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 28, 2009, and February 29, 2008, the Companys investment in Matthew
Clark was $28.8 million and $75.8 million, respectively. For the year ended February 28, 2009, the
Company recorded an other-than-temporary impairment of its investment in Matthew Clark of $30.1
million. The Company did not receive any cash distributions from Matthew Clark for the years ended
February 28, 2009, and February 29, 2008.
Amounts sold to Matthew Clark for the years ended February 28, 2009, and February 29, 2008,
were not material. As of February 28, 2009, and February 29, 2008, amounts receivable from Matthew
Clark were not material.
96
Crown Imports:
On January 2, 2007, Barton Beers, Ltd. (Barton now known as Constellation Beers Ltd. Constellation Beers), 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 Constellation Beers 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 28, 2009, and February 29, 2008, the Companys
investment in Crown Imports was $136.9 million and $150.5 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 $265.9 million
and $268.0 million of cash distributions from Crown Imports for the years ended February 28, 2009,
and February 29, 2008, respectively, all of which represent distributions of earnings. The Company
did not receive any cash distributions from Crown Imports for the year ended February 28, 2007.
Constellation Beers provides certain administrative services to Crown Imports. Amounts
related to the performance of these services for the years ended February 28, 2009, February 29,
2008, and February 28, 2007, were not material. In addition, as of February 28, 2009, and February
29, 2008, amounts receivable from Crown Imports were not material.
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 28, 2009, and February 29, 2008, the Companys
investment in Opus One was $55.2 million and $63.7 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 28, 2009, and February 29, 2008, the Companys investment in Ruffino was $24.8
million and $84.5 million, respectively. For the years ended February 28, 2009, and February 29,
2008, the Company recorded other-than-temporary impairments of its investment in Ruffino of $48.6
million and $15.1 million, respectively.
97
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 28, 2009, February 29, 2008, and February 28, 2007, were not material. As of
February 28, 2009, and February 29, 2008, amounts payable to Ruffino were not material.
Summarized financial information for the Companys Crown Imports equity method investment 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 28, 2009 |
|
February 29, 2008 |
|
|
Crown |
|
|
|
|
|
|
|
|
|
Crown |
|
|
|
|
(in millions) |
|
Imports |
|
Other |
|
Total |
|
Imports |
|
Other |
|
Total |
Current assets |
|
$ |
291.4 |
|
|
$ |
284.7 |
|
|
$ |
576.1 |
|
|
$ |
327.1 |
|
|
$ |
337.5 |
|
|
$ |
664.6 |
|
Noncurrent assets |
|
$ |
32.8 |
|
|
$ |
204.9 |
|
|
$ |
237.7 |
|
|
$ |
31.9 |
|
|
$ |
185.3 |
|
|
$ |
217.2 |
|
Current liabilities |
|
$ |
(74.7 |
) |
|
$ |
(211.0 |
) |
|
$ |
(285.7 |
) |
|
$ |
(75.7 |
) |
|
$ |
(251.2 |
) |
|
$ |
(326.9 |
) |
Noncurrent
liabilities |
|
$ |
(2.8 |
) |
|
$ |
(128.6 |
) |
|
$ |
(131.4 |
) |
|
$ |
(2.1 |
) |
|
$ |
(157.9 |
) |
|
$ |
(160.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Crown |
|
|
|
|
(in millions) |
|
Imports |
|
Other |
|
Total |
For the Year Ended February 28, 2009 |
|
|
|
|
|
|
|
|
Net sales |
|
$ |
2,393.2 |
|
|
$ |
988.0 |
|
|
$ |
3,381.2 |
|
Gross profit |
|
$ |
720.9 |
|
|
$ |
183.9 |
|
|
$ |
904.8 |
|
Income from
continuing
operations |
|
$ |
504.6 |
|
|
$ |
32.8 |
|
|
$ |
537.4 |
|
Net income |
|
$ |
504.6 |
|
|
$ |
32.8 |
|
|
$ |
537.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Other items
Amortization expense for other assets was included in selling, general and administrative
expenses and was $6.6 million, $6.4 million and $4.8 million for the years ended February 28, 2009,
February 29, 2008, and February 28, 2007, respectively.
98
9. OTHER ACCRUED EXPENSES AND LIABILITIES:
The major components of other accrued expenses and liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Advertising and promotions |
|
$ |
103.6 |
|
|
$ |
148.8 |
|
Fair value
of derivative instruments |
|
|
92.0 |
|
|
|
84.4 |
|
Salaries and commissions |
|
|
77.1 |
|
|
|
106.6 |
|
Accrued interest |
|
|
72.9 |
|
|
|
97.1 |
|
Income taxes payable |
|
|
32.8 |
|
|
|
34.1 |
|
Accrued restructuring |
|
|
22.6 |
|
|
|
38.5 |
|
Adverse grape contracts (Note 14) |
|
|
14.1 |
|
|
|
17.8 |
|
Other |
|
|
102.5 |
|
|
|
170.4 |
|
|
|
|
|
|
|
|
|
|
$ |
517.6 |
|
|
$ |
697.7 |
|
|
|
|
|
|
|
|
10. BORROWINGS:
Borrowings consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 29, |
|
|
|
February 28, 2009 |
|
|
2008 |
|
(in millions) |
|
Current |
|
|
Long-term |
|
|
Total |
|
|
Total |
|
Notes Payable to Banks: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility
Revolving Credit Loans |
|
$ |
67.2 |
|
|
$ |
|
|
|
$ |
67.2 |
|
|
$ |
308.0 |
|
Other |
|
|
160.1 |
|
|
|
|
|
|
|
160.1 |
|
|
|
71.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
227.3 |
|
|
$ |
|
|
|
$ |
227.3 |
|
|
$ |
379.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Senior Credit Facility Term Loans |
|
$ |
|
|
|
$ |
1,809.0 |
|
|
$ |
1,809.0 |
|
|
$ |
2,370.0 |
|
Senior Notes |
|
|
221.9 |
|
|
|
1,891.6 |
|
|
|
2,113.5 |
|
|
|
2,198.8 |
|
Senior Subordinated Notes |
|
|
|
|
|
|
250.0 |
|
|
|
250.0 |
|
|
|
250.0 |
|
Other Long-term Debt |
|
|
13.3 |
|
|
|
20.5 |
|
|
|
33.8 |
|
|
|
59.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
235.2 |
|
|
$ |
3,971.1 |
|
|
$ |
4,206.3 |
|
|
$ |
4,878.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
99
As of February 28, 2009, the required principal repayments of the tranche A term loan and the
tranche B term loan for each of the five succeeding fiscal years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tranche A |
|
|
Tranche B |
|
|
|
|
(in millions) |
|
Term Loan |
|
|
Term Loan |
|
|
Total |
|
2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2011 |
|
|
225.0 |
|
|
|
4.0 |
|
|
|
229.0 |
|
2012 |
|
|
150.0 |
|
|
|
4.0 |
|
|
|
154.0 |
|
2013 |
|
|
|
|
|
|
714.0 |
|
|
|
714.0 |
|
2014 |
|
|
|
|
|
|
712.0 |
|
|
|
712.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
375.0 |
|
|
$ |
1,434.0 |
|
|
$ |
1,809.0 |
|
|
|
|
|
|
|
|
|
|
|
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 28, 2009, 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.
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 28, 2009, under the 2006 Credit Agreement, the Company had outstanding tranche
A term loans of $375.0 million bearing an interest rate of 2.2%, tranche B term loans of $1,434.0
million bearing an interest rate of 3.3%, revolving loans of $67.2 million bearing an interest rate
of 1.7%, outstanding letters of credit of $32.0 million, and $800.8 million in revolving loans
available to be drawn.
100
In March 2005, the Company replaced its then outstanding five year interest rate swap
agreements with new five year delayed start interest rate swap agreements effective March 1, 2006,
which are outstanding as of February 28, 2009. 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 is being 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 28, 2009, February 29,
2008, and February 28, 2007, the Company reclassified $12.6 million, $7.1 million and $5.9 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 28, 2009, and February 29,
2008, the Company had outstanding £1.0 million ($1.4 million and $2.0 million, respectively)
aggregate principal amount of Sterling Series B Senior Notes.
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 28, 2009, and
February 29, 2008, the Company had outstanding £154.0 million ($220.5 million, net of $0.1 million
unamortized discount, and $306.1 million, net of $0.2 million unamortized discount, respectively)
aggregate principal amount of Sterling Series C Senior Notes.
101
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 28, 2009, and February 29, 2008, the Company had outstanding $694.4 million (net of
$5.6 million unamortized discount) and $693.9 million (net of $6.1 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 28, 2009, and 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 28, 2009, and February 29, 2008, the
Company had outstanding $497.2 million (net of $2.8 million unamortized discount) and $496.8
million (net of $3.2 million unamortized discount), respectively, 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.
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 28, 2009, and February 29, 2008, the Company had
outstanding $250.0 million aggregate principal amount of January 2002 Senior Subordinated Notes.
102
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
$334.6 million and $397.0 million as of February 28, 2009, and February 29, 2008, respectively.
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 28, 2009, and February 29, 2008,
amounts outstanding under these arrangements were $193.9 million and $130.7 million, respectively.
Debt payments
Principal payments required under long-term debt obligations (excluding unamortized discount
of $8.5 million) during the next five fiscal years and thereafter are as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
2010 |
|
$ |
235.3 |
|
2011 |
|
|
243.3 |
|
2012 |
|
|
405.6 |
|
2013 |
|
|
715.6 |
|
2014 |
|
|
713.5 |
|
Thereafter |
|
|
1,901.5 |
|
|
|
|
|
|
|
$ |
4,214.8 |
|
|
|
|
|
11. INCOME TAXES:
(Loss) income before income taxes was generated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 28, |
|
|
February 29, |
|
|
February 28, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Domestic |
|
$ |
401.9 |
|
|
$ |
231.3 |
|
|
$ |
449.2 |
|
Foreign |
|
|
(508.7 |
) |
|
|
(671.9 |
) |
|
|
86.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(106.8 |
) |
|
$ |
(440.6 |
) |
|
$ |
535.3 |
|
|
|
|
|
|
|
|
|
|
|
103
The income tax provision (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 28, |
|
|
February 29, |
|
|
February 28, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
133.8 |
|
|
$ |
57.2 |
|
|
$ |
112.8 |
|
State |
|
|
36.4 |
|
|
|
11.8 |
|
|
|
15.1 |
|
Foreign |
|
|
22.1 |
|
|
|
5.7 |
|
|
|
22.8 |
|
|
|
|
|
|
|
|
|
|
|
Total current |
|
|
192.3 |
|
|
|
74.7 |
|
|
|
150.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
22.7 |
|
|
|
55.1 |
|
|
|
55.4 |
|
State |
|
|
(3.5 |
) |
|
|
9.2 |
|
|
|
14.1 |
|
Foreign |
|
|
(16.9 |
) |
|
|
33.7 |
|
|
|
(16.8 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred |
|
|
2.3 |
|
|
|
98.0 |
|
|
|
52.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision |
|
$ |
194.6 |
|
|
$ |
172.7 |
|
|
$ |
203.4 |
|
|
|
|
|
|
|
|
|
|
|
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.
Significant components of deferred tax assets (liabilities) consist of the following:
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Net operating losses |
|
$ |
115.1 |
|
|
$ |
114.7 |
|
Stock-based compensation |
|
|
26.2 |
|
|
|
11.9 |
|
Employee benefits |
|
|
14.5 |
|
|
|
32.6 |
|
Derivative instruments |
|
|
12.5 |
|
|
|
|
|
Inventory |
|
|
11.6 |
|
|
|
|
|
Insurance accruals |
|
|
8.1 |
|
|
|
9.0 |
|
Foreign tax credit |
|
|
|
|
|
|
5.2 |
|
Other accruals |
|
|
19.2 |
|
|
|
108.2 |
|
|
|
|
|
|
|
|
Gross deferred tax assets |
|
|
207.2 |
|
|
|
281.6 |
|
Valuation allowances |
|
|
(147.2 |
) |
|
|
(114.0 |
) |
|
|
|
|
|
|
|
Deferred tax assets, net |
|
|
60.0 |
|
|
|
167.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Intangible assets |
|
|
(310.5 |
) |
|
|
(301.7 |
) |
Property, plant and equipment |
|
|
(185.4 |
) |
|
|
(199.0 |
) |
Investment in equity method investees |
|
|
(36.8 |
) |
|
|
(34.2 |
) |
Unrealized foreign exchange |
|
|
(7.7 |
) |
|
|
(20.7 |
) |
Provision for unremitted earnings |
|
|
(1.2 |
) |
|
|
(15.6 |
) |
Derivative instruments |
|
|
|
|
|
|
(41.5 |
) |
Inventory |
|
|
|
|
|
|
(10.0 |
) |
|
|
|
|
|
|
|
Total deferred tax liabilities |
|
|
(541.6 |
) |
|
|
(622.7 |
) |
|
|
|
|
|
|
|
Deferred tax liabilities, net |
|
$ |
(481.6 |
) |
|
$ |
(455.1 |
) |
|
|
|
|
|
|
|
104
Amounts recognized in the Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Current deferred tax assets |
|
$ |
60.3 |
|
|
$ |
82.7 |
|
Long-term deferred tax assets |
|
|
1.7 |
|
|
|
|
|
Current deferred tax liabilities |
|
|
|
|
|
|
(2.0 |
) |
Long-term deferred tax liabilities |
|
|
(543.6 |
) |
|
|
(535.8 |
) |
|
|
|
|
|
|
|
|
|
$ |
(481.6 |
) |
|
$ |
(455.1 |
) |
|
|
|
|
|
|
|
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 projected 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 negatively impacted the Companys assessment regarding the realizability of certain
net operating losses and intangible assets resulting in the recording of additional valuation
allowances. During the year ended February 28, 2009, the Company recorded additional valuation
allowances, primarily associated with its Australian business, as a result of
continuing operating losses for this business.
Operating loss carryforwards totaling $383.7 million at February 28, 2009, are being carried
forward in a number of 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, $46.2 million will expire in 2011 through 2027 and $337.5 million of operating
losses in foreign jurisdictions may be carried forward indefinitely.
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, 2009, various federal, state, and international
examinations were finalized. A tax benefit of $12.1 million was recorded primarily related to the
resolution of certain tax positions in connection with those examinations.
105
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 28, 2009 |
|
|
February 29, 2008 |
|
|
February 28, 2007 |
|
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Pretax |
|
|
|
|
|
|
Pretax |
|
|
|
|
|
|
Pretax |
|
(in millions, except % of pretax income data) |
|
Amount |
|
|
Income |
|
|
Amount |
|
|
Income |
|
|
Amount |
|
|
Income |
|
Income tax (benefit) provision
at statutory rate |
|
$ |
(37.4 |
) |
|
|
35.0 |
|
|
$ |
(154.2 |
) |
|
|
35.0 |
|
|
$ |
187.3 |
|
|
|
35.0 |
|
State and local income taxes, net of
federal income tax benefit |
|
|
21.3 |
|
|
|
(20.0 |
) |
|
|
13.6 |
|
|
|
(3.1 |
) |
|
|
19.0 |
|
|
|
3.5 |
|
Write-off of non-deductible goodwill, equity method investments
and other intangible assets |
|
|
131.5 |
|
|
|
(123.1 |
) |
|
|
277.8 |
|
|
|
(63.1 |
) |
|
|
7.9 |
|
|
|
1.5 |
|
Net operating loss valuation allowance |
|
|
67.4 |
|
|
|
(63.2 |
) |
|
|
51.7 |
|
|
|
(11.7 |
) |
|
|
|
|
|
|
|
|
Nontaxable foreign exchange gains
and losses |
|
|
11.4 |
|
|
|
(10.6 |
) |
|
|
(7.2 |
) |
|
|
1.6 |
|
|
|
|
|
|
|
|
|
Earnings of subsidiaries taxed at other
than U.S. statutory rate |
|
|
(3.5 |
) |
|
|
3.3 |
|
|
|
(12.5 |
) |
|
|
2.8 |
|
|
|
(14.4 |
) |
|
|
(2.7 |
) |
Miscellaneous items, net |
|
|
3.9 |
|
|
|
(3.6 |
) |
|
|
3.5 |
|
|
|
(0.7 |
) |
|
|
3.6 |
|
|
|
0.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
194.6 |
|
|
|
(182.2 |
) |
|
$ |
172.7 |
|
|
|
(39.2 |
) |
|
$ |
203.4 |
|
|
|
38.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Effective March 1, 2007, the Company adopted Financial Accounting Standards Board
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, Accounting for Income Taxes. As of February 28, 2009,
the liability for income taxes
associated with uncertain tax positions, excluding interest and penalties, was $136.7 million. A
reconciliation of the beginning and ending unrecognized tax benefit liabilities is as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
Balance, March 1, 2008 |
|
$ |
(131.1 |
) |
Increases in unrecognized tax benefit liabilities as a result of
tax positions taken during a prior period |
|
|
(13.4 |
) |
Decreases in unrecognized tax benefit liabilities as a result of
tax positions taken during a prior period |
|
|
13.2 |
|
Increases in unrecognized tax benefit liabilities as a result of
tax positions taken during the current period |
|
|
(20.9 |
) |
Decreases in unrecognized tax benefit liabilities related to
settlements with tax authorities |
|
|
13.4 |
|
Decreases in unrecognized tax benefit liabilities related to
lapse of applicable statute of limitations |
|
|
2.1 |
|
|
|
|
|
Balance, February 28, 2009 |
|
$ |
(136.7 |
) |
|
|
|
|
As of February 28, 2009, and February 29, 2008, the Company had $132.1 million and $142.5
million, respectively, 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.
106
As of February 28, 2009, and February 29, 2008, the Company had $106.9 million and $87.3
million, respectively, of unrecognized tax benefit liabilities 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 benefit liabilities 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 years ended February 28, 2009, and February 29,
2008, the Company recorded $1.4 million and $8.3 million of interest expense, net of income tax
effect, and penalties, respectively. As of February 28, 2009, and February 29, 2008, $16.8
million, net of income tax effect, and $16.9 million, net of income tax effect, respectively, 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 benefit
liabilities 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 28, 2009, the Company
estimates that unrecognized tax benefit liabilities could change by a range of zero to $77 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 29, 2004.
12. OTHER LIABILITIES:
The major components of other liabilities are as follows:
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Unrecognized tax benefit liabilities |
|
$ |
132.1 |
|
|
$ |
142.5 |
|
Accrued pension liability |
|
|
49.0 |
|
|
|
121.6 |
|
Adverse grape contracts (Note 14) |
|
|
22.5 |
|
|
|
26.6 |
|
Other |
|
|
83.5 |
|
|
|
93.4 |
|
|
|
|
|
|
|
|
|
|
$ |
287.1 |
|
|
$ |
384.1 |
|
|
|
|
|
|
|
|
13. 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 $14.0 million, $15.1
million and $15.2 million for the years ended February 28, 2009, February 29, 2008, and February
28, 2007, respectively.
107
In addition to the Plan discussed above, the Company has the Constellation Wines Australia
Superannuation Plan (the Constellation Wines Australia Plan) which covers substantially all of
its salaried Australian employees. The Constellation Wines Australia 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 Constellation Wines Australia 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 Constellation Wines Australia 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
$8.5 million, $9.8 million and $9.3 million for the years ended February 28, 2009, February 29,
2008, and February 28, 2007, respectively.
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
Constellation Wines Australia 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. The Company adopted the recognition and related disclosure provisions
of SFAS No. 158 as of February 28, 2007 (see Note 2). The Company adopted the measurement date
provision of SFAS No. 158 as of February 28, 2009. Accordingly, the Company uses the last day of
February as its measurement date for all of its plans for the year ended February 28, 2009. For the years ended February 29, 2008, and February 28, 2007, the Company used a December 31 measurement date for all its plans. For the year ended February 28, 2009, in
connection with the Companys August 2008 sale of a nonstrategic Canadian distilling facility, the
Company recognized a settlement loss and curtailment loss of $8.6 million and $0.4 million,
respectively, associated with the settlement of the related pension obligation. Net periodic
benefit cost reported in the Consolidated Statements of Operations for all of the Companys defined
benefit pension plans includes the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
|
February 28, |
|
|
February 29, |
|
|
February 28, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
|
2007 |
|
Service cost |
|
$ |
3.9 |
|
|
$ |
5.5 |
|
|
$ |
3.9 |
|
Interest cost |
|
|
23.4 |
|
|
|
24.9 |
|
|
|
21.5 |
|
Expected return on plan assets |
|
|
(27.5 |
) |
|
|
(29.7 |
) |
|
|
(25.2 |
) |
Amortization of prior service cost |
|
|
0.2 |
|
|
|
0.4 |
|
|
|
0.2 |
|
Recognized net actuarial loss |
|
|
6.9 |
|
|
|
8.4 |
|
|
|
6.8 |
|
Recognized loss due to curtailment |
|
|
0.4 |
|
|
|
|
|
|
|
|
|
Recognized net loss (gain) due to settlement |
|
|
8.6 |
|
|
|
(0.8 |
) |
|
|
(0.3 |
) |
Special termination benefits |
|
|
|
|
|
|
|
|
|
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
Net periodic benefit cost |
|
$ |
15.9 |
|
|
$ |
8.7 |
|
|
$ |
7.9 |
|
|
|
|
|
|
|
|
|
|
|
108
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 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Change in benefit obligation: |
|
|
|
|
|
|
|
|
Benefit obligation as of March 1 |
|
$ |
507.7 |
|
|
$ |
474.4 |
|
SFAS No. 158 measurement date provision |
|
|
5.1 |
|
|
|
|
|
Service cost |
|
|
3.9 |
|
|
|
5.5 |
|
Interest cost |
|
|
23.4 |
|
|
|
24.9 |
|
Plan participants contributions |
|
|
2.1 |
|
|
|
2.0 |
|
Plan amendment |
|
|
0.4 |
|
|
|
|
|
Actuarial (gain) loss |
|
|
(77.7 |
) |
|
|
0.8 |
|
Settlement |
|
|
(35.8 |
) |
|
|
(7.1 |
) |
Benefits paid |
|
|
(16.8 |
) |
|
|
(16.4 |
) |
Foreign currency exchange rate changes |
|
|
(123.5 |
) |
|
|
23.6 |
|
|
|
|
|
|
|
|
Benefit obligation as of the last day of February |
|
$ |
288.8 |
|
|
$ |
507.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
|
February 29, |
|
(in millions) |
|
2009 |
|
|
2008 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets as of March 1 |
|
$ |
391.9 |
|
|
$ |
352.1 |
|
SFAS No. 158 measurement date provision |
|
|
(4.5 |
) |
|
|
|
|
Actual return on plan assets |
|
|
(14.9 |
) |
|
|
27.7 |
|
Employer contribution |
|
|
11.2 |
|
|
|
10.8 |
|
Plan participants contributions |
|
|
2.1 |
|
|
|
2.0 |
|
Settlement |
|
|
(33.6 |
) |
|
|
(7.1 |
) |
Benefits paid |
|
|
(16.9 |
) |
|
|
(16.4 |
) |
Foreign currency exchange rate changes |
|
|
(95.2 |
) |
|
|
22.8 |
|
|
|
|
|
|
|
|
Fair value of plan assets as of the last day of February |
|
$ |
240.1 |
|
|
$ |
391.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of the plan as of the last day of February: |
|
|
|
|
|
|
|
|
Funded status |
|
$ |
(48.7 |
) |
|
$ |
(115.8 |
) |
Employer contributions from measurement date to fiscal
year end |
|
|
|
|
|
|
0.7 |
|
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(48.7 |
) |
|
$ |
(115.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance Sheets consist of: |
|
|
|
|
|
|
|
|
Long-term pension asset |
|
$ |
0.4 |
|
|
$ |
6.6 |
|
Current accrued pension liability |
|
|
(0.1 |
) |
|
|
(0.1 |
) |
Long-term accrued pension liability |
|
|
(49.0 |
) |
|
|
(121.6 |
) |
|
|
|
|
|
|
|
Net amount recognized |
|
$ |
(48.7 |
) |
|
$ |
(115.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in accumulated other comprehensive income: |
|
|
|
|
|
|
|
|
Unrecognized prior service cost |
|
$ |
0.6 |
|
|
$ |
0.9 |
|
Unrecognized actuarial loss |
|
|
70.0 |
|
|
|
155.4 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, gross |
|
|
70.6 |
|
|
|
156.3 |
|
Cumulative tax impact |
|
|
19.7 |
|
|
|
47.0 |
|
|
|
|
|
|
|
|
Accumulated other comprehensive income, net |
|
$ |
50.9 |
|
|
$ |
109.3 |
|
|
|
|
|
|
|
|
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 |
|
$ |
0.1 |
|
Net actuarial loss |
|
$ |
2.7 |
|
109
As of February 28, 2009, and February 29, 2008, the accumulated benefit obligation for all
defined benefit pension plans was $283.1 million and $494.5 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 28, |
|
February 29, |
(in millions) |
|
2009 |
|
2008 |
Projected benefit obligation |
|
$ |
288.8 |
|
|
$ |
425.1 |
|
Accumulated benefit obligation |
|
$ |
283.1 |
|
|
$ |
411.9 |
|
Fair value of plan assets |
|
$ |
240.1 |
|
|
$ |
304.4 |
|
The following table sets forth the weighted average assumptions used in developing the net
periodic pension expense:
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended |
|
|
February 28, |
|
February 29, |
|
|
2009 |
|
2008 |
Rate of return on plan assets |
|
|
7.31 |
% |
|
|
8.08 |
% |
Discount rate |
|
|
5.41 |
% |
|
|
5.07 |
% |
Rate of compensation increase |
|
|
4.16 |
% |
|
|
4.00 |
% |
The following table sets forth the weighted average assumptions used in developing the benefit
obligation:
|
|
|
|
|
|
|
|
|
|
|
February 28, |
|
February 29, |
|
|
2009 |
|
2008 |
Discount rate |
|
|
6.82 |
% |
|
|
5.65 |
% |
Rate of compensation increase |
|
|
4.03 |
% |
|
|
4.30 |
% |
The
Companys weighted average expected long-term rate of return on plan assets is 7.31%. 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 28, |
|
February 29, |
|
|
2009 |
|
2008 |
Asset Category: |
|
|
|
|
|
|
|
|
Equity securities |
|
|
28.9 |
% |
|
|
41.1 |
% |
Debt securities |
|
|
24.0 |
% |
|
|
22.3 |
% |
Real estate |
|
|
0.4 |
% |
|
|
0.5 |
% |
Other |
|
|
46.7 |
% |
|
|
36.1 |
% |
|
|
|
|
|
|
|
|
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
110
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 32.0% equity securities, 19.9% fixed income
securities, 3.5% real estate and 44.6% 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.
The Company expects to contribute $6.8 million to its pension plans during the year ended
February 28, 2010.
Benefit payments, which reflect expected future service, as appropriate, expected to be paid
during the next ten fiscal years are as follows:
|
|
|
|
|
(in millions) |
|
|
|
|
2010 |
|
$ |
13.2 |
|
2011 |
|
$ |
15.7 |
|
2012 |
|
$ |
13.8 |
|
2013 |
|
$ |
14.9 |
|
2014 |
|
$ |
16.1 |
|
2015 2019 |
|
$ |
97.6 |
|
14. 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) |
|
|
|
|
2010 |
|
$ |
75.1 |
|
2011 |
|
|
63.7 |
|
2012 |
|
|
53.4 |
|
2013 |
|
|
42.4 |
|
2014 |
|
|
36.2 |
|
Thereafter |
|
|
298.0 |
|
|
|
|
|
|
|
$ |
568.8 |
|
|
|
|
|
Rental expense was $94.4 million, $88.6 million and $79.6 million for the years ended February
28, 2009, February 29, 2008, and February 28, 2007, respectively.
111
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 aggregate minimum purchase obligations under these
agreements, based upon exchange rates at February 28, 2009, are estimated to be $16.1 million for contracts
expiring through December 2012.
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 sixteen 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 $446.1 million, $417.8 million, and $364.2 million of grapes under contracts for the years ended February 28, 2009, February 29,
2008, and February 28, 2007, respectively. Based on current
production yields and published grape prices, the aggregate minimum purchase obligations under these contracts are estimated to be $1,941.1 million over the remaining terms of the
contracts which extend through December 2024.
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 28,
2009, and February 29, 2008, the remaining balance on this liability is $36.6 million and $44.4 million, respectively.
The Companys aggregate minimum purchase obligations under bulk wine purchase contracts are estimated to be $49.2 million
over the remaining terms of the contracts which extend through December 2012. The Companys aggregate minimum purchase obligation under a certain raw material purchase contract is estimated to be $163.1 million over the remaining term of the contract which extends through December 2012.
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 minimum contractual sobligations under these processing contracts are estimated to be $29.4
million over the remaining terms of the contracts which extend through December 2011.
Employment contracts -
The Company has employment contracts with its executive officers and certain other management
personnel with either automatic one year renewals after an initial term 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 may 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 28, 2009, the aggregate commitment
for future compensation and severance, excluding incentive bonuses, was $40.9 million, of which
$2.3 million was accrued.
112
Employees covered by collective bargaining agreements -
Approximately 23% of the Companys full-time employees are covered by collective bargaining
agreements at February 28, 2009. Agreements expiring within one year cover approximately 19% 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.
15. 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
Convertible Common Stock and Class 1 Stock must always be the same.
113
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.
At February 28, 2009, there were 195,400,511 shares of Class A Common Stock and 23,743,494
shares of Class B Convertible Common Stock outstanding, net of treasury stock. There were no
shares outstanding of Class 1 Common Stock at February 28, 2009.
Stock repurchases -
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. The repurchased shares have become treasury
shares.
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. No
shares were repurchased during the year ended February 28, 2009.
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.
114
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 28, 2009, February 29, 2008, and February 28, 2007, no stock appreciation rights were
granted.
Incentive stock option plan -
The Companys Incentive Stock Option Plan provides for the grant of incentive stock 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. While unexercised incentive stock options are currently held by certain grant recipients, 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, 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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted |
|
|
8,730,084 |
|
|
$ |
19.18 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(2,254,660 |
) |
|
$ |
12.03 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(2,371,314 |
) |
|
$ |
22.79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2009 |
|
|
34,095,963 |
|
|
$ |
19.39 |
|
|
|
17,499,016 |
|
|
$ |
17.99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
A summary of restricted Class A Common Stock activity under the Companys Long-Term Stock
Incentive Plan is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Awards |
|
Restricted Stock Units |
|
|
Number |
|
Weighted |
|
Fair |
|
Number |
|
Weighted |
|
Fair |
|
|
of Restricted |
|
Average |
|
Value of |
|
of Restricted |
|
Average |
|
Value of |
|
|
Stock Awards |
|
Grant-date |
|
Shares |
|
Stock Units |
|
Grant-date |
|
Shares |
|
|
Outstanding |
|
Price |
|
Vested |
|
Outstanding |
|
Price |
|
Vested |
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 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
Granted |
|
|
460,036 |
|
|
$ |
19.25 |
|
|
|
|
|
|
|
173,400 |
|
|
$ |
20.05 |
|
|
|
|
|
Vested |
|
|
(13,726 |
) |
|
$ |
22.21 |
|
|
$ |
304,874 |
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Forfeited |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
(21,100 |
) |
|
$ |
20.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance,
February 28, 2009 |
|
|
460,036 |
|
|
$ |
19.25 |
|
|
|
|
|
|
|
152,300 |
|
|
$ |
20.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding at February 28,
2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Remaining |
|
|
Average |
|
|
Aggregate |
|
|
|
of |
|
|
Contractual |
|
|
Exercise |
|
|
Intrinsic |
|
Range of Exercise Prices |
|
Options |
|
|
Life |
|
|
Price |
|
|
Value |
|
|