Unassociated Document
FORM
10-Q
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
(Mark
One)
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
quarterly period ended May
31, 2007
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ____________________ to ____________________
Commission
File Number 001-08495
CONSTELLATION
BRANDS, INC.
|
(Exact
name of registrant as specified in its charter)
|
|
Delaware
|
|
16-0716709
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
No.)
|
370
Woodcliff Drive, Suite 300, Fairport, New York
|
14450
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(585)
218-3600
|
(Registrant’s
telephone number, including area code)
|
|
|
(Former
name, former address and former fiscal year, if changed since last
report)
|
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. Yes x
No
o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of accelerated
filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check
One):
Large
accelerated filer X Accelerated
filer ___ Non-accelerated
filer ___
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o
No
x
The
number of shares outstanding with respect to each of the classes of common
stock
of Constellation Brands, Inc., as of June 30, 2007, is set forth
below:
Class
|
|
Number
of Shares Outstanding
|
Class
A Common Stock, Par Value $.01 Per Share
|
|
191,759,160
|
Class
B Common Stock, Par Value $.01 Per Share
|
|
23,819,238
|
This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are subject
to
a number of risks and uncertainties, many of which are beyond the Company’s
control, that could cause actual results to differ materially from those set
forth in, or implied by, such forward-looking statements. For further
information regarding such forward-looking statements, risks and uncertainties,
please see “Information Regarding Forward-Looking Statements” under Part I -
Item 2 “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” of this Quarterly Report on Form 10-Q.
|
|
|
|
|
|
|
|
Item
1. Financial
Statements
|
|
|
|
|
|
|
|
|
|
|
|
CONSTELLATION
BRANDS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
(in
millions, except share and per share data)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
May
31,
|
|
February
28,
|
|
|
|
2007
|
|
2007
|
|
ASSETS
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
Cash
and cash investments
|
|
$
|
33.5
|
|
$
|
33.5
|
|
Accounts
receivable, net
|
|
|
763.9
|
|
|
881.0
|
|
Inventories
|
|
|
1,955.3
|
|
|
1,948.1
|
|
Prepaid
expenses and other
|
|
|
156.6
|
|
|
160.7
|
|
Total
current assets
|
|
|
2,909.3
|
|
|
3,023.3
|
|
PROPERTY,
PLANT AND EQUIPMENT, net
|
|
|
1,744.2
|
|
|
1,750.2
|
|
GOODWILL
|
|
|
3,348.9
|
|
|
3,083.9
|
|
INTANGIBLE
ASSETS, net
|
|
|
1,218.9
|
|
|
1,135.4
|
|
OTHER
ASSETS, net
|
|
|
604.9
|
|
|
445.4
|
|
Total
assets
|
|
$
|
9,826.2
|
|
$
|
9,438.2
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
$
|
242.3
|
|
$
|
153.3
|
|
Current
maturities of long-term debt
|
|
|
362.8
|
|
|
317.3
|
|
Accounts
payable
|
|
|
270.6
|
|
|
376.1
|
|
Accrued
excise taxes
|
|
|
64.9
|
|
|
73.7
|
|
Other
accrued expenses and liabilities
|
|
|
566.9
|
|
|
670.7
|
|
Total
current liabilities
|
|
|
1,507.5
|
|
|
1,591.1
|
|
LONG-TERM
DEBT, less current maturities
|
|
|
4,381.8
|
|
|
3,714.9
|
|
DEFERRED
INCOME TAXES
|
|
|
490.8
|
|
|
474.1
|
|
OTHER
LIABILITIES
|
|
|
317.8
|
|
|
240.6
|
|
STOCKHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
Class
A Common Stock, $.01 par value-
Authorized,
300,000,000 shares;
Issued,
219,840,821 shares at May 31, 2007,
and
219,090,309 shares at February 28, 2007
|
|
|
2.2
|
|
|
2.2
|
|
Class
B Convertible Common Stock, $.01 par value-
Authorized,
30,000,000 shares;
Issued,
28,826,638 shares at May 31, 2007,
and
28,831,138 shares at February 28, 2007
|
|
|
0.3
|
|
|
0.3
|
|
Additional
paid-in capital
|
|
|
1,292.4
|
|
|
1,271.1
|
|
Retained
earnings
|
|
|
1,949.1
|
|
|
1,919.3
|
|
Accumulated
other comprehensive income
|
|
|
508.2
|
|
|
349.1
|
|
|
|
|
3,752.2
|
|
|
3,542.0
|
|
Less-Treasury
stock-
|
|
|
|
|
|
|
|
Class
A Common Stock, 28,324,992 shares at
May
31, 2007, and 8,046,370 shares at
February
28, 2007, at cost
|
|
|
(621.7
|
)
|
|
(122.3
|
)
|
Class
B Convertible Common Stock, 5,005,800 shares
at
May 31, 2007, and February 28, 2007, at cost
|
|
|
(2.2
|
)
|
|
(2.2
|
)
|
|
|
|
(623.9
|
)
|
|
(124.5
|
)
|
Total
stockholders' equity
|
|
|
3,128.3
|
|
|
3,417.5
|
|
Total
liabilities and stockholders' equity
|
|
$
|
9,826.2
|
|
$
|
9,438.2
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
|
|
|
CONSOLIDATED
STATEMENTS OF INCOME
|
|
(in
millions, except per share data)
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
For
the Three Months Ended May 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
SALES
|
|
$
|
1,175.4
|
|
$
|
1,430.2
|
|
Less
- Excise taxes
|
|
|
(274.2
|
)
|
|
(274.3
|
)
|
Net
sales
|
|
|
901.2
|
|
|
1,155.9
|
|
COST
OF PRODUCT SOLD
|
|
|
(633.0
|
)
|
|
(837.3
|
)
|
Gross
profit
|
|
|
268.2
|
|
|
318.6
|
|
SELLING,
GENERAL AND ADMINISTRATIVE
EXPENSES
|
|
|
(197.6
|
)
|
|
(172.6
|
)
|
ACQUISITION-RELATED
INTEGRATION COSTS
|
|
|
(2.0
|
)
|
|
(0.7
|
)
|
RESTRUCTURING
AND RELATED CHARGES
|
|
|
(0.4
|
)
|
|
(2.3
|
)
|
Operating
income
|
|
|
68.2
|
|
|
143.0
|
|
EQUITY
IN EARNINGS OF EQUITY
METHOD
INVESTEES
|
|
|
75.8
|
|
|
0.1
|
|
INTEREST
EXPENSE, net
|
|
|
(79.7
|
)
|
|
(48.7
|
)
|
GAIN
ON CHANGE IN FAIR VALUE OF
DERIVATIVE
INSTRUMENT
|
|
|
-
|
|
|
52.5
|
|
Income
before income taxes
|
|
|
64.3
|
|
|
146.9
|
|
PROVISION
FOR INCOME TAXES
|
|
|
(34.5
|
)
|
|
(61.4
|
)
|
NET
INCOME
|
|
|
29.8
|
|
|
85.5
|
|
Dividends
on preferred stock
|
|
|
-
|
|
|
(2.5
|
)
|
INCOME
AVAILABLE TO COMMON
STOCKHOLDERS
|
|
$
|
29.8
|
|
$
|
83.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHARE
DATA:
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
Basic
- Class A Common Stock
|
|
$
|
0.13
|
|
$
|
0.38
|
|
Basic
- Class B Common Stock
|
|
$
|
0.12
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
Diluted
- Class A Common Stock
|
|
$
|
0.13
|
|
$
|
0.36
|
|
Diluted
- Class B Common Stock
|
|
$
|
0.12
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
|
|
|
|
|
Basic
- Class A Common Stock
|
|
|
205.636
|
|
|
199.571
|
|
Basic
- Class B Common Stock
|
|
|
23.824
|
|
|
23.853
|
|
|
|
|
|
|
|
|
|
Diluted
- Class A Common Stock
|
|
|
233.439
|
|
|
240.100
|
|
Diluted
- Class B Common Stock
|
|
|
23.824
|
|
|
23.853
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
|
CONSTELLATION
BRANDS, INC. AND SUBSIDIARIES
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
(in
millions)
|
|
(unaudited)
|
|
|
|
For
the Three Months Ended May 31,
|
|
|
|
2007
|
|
2006
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
Net
income
|
|
$
|
29.8
|
|
$
|
85.5
|
|
|
|
|
|
|
|
|
|
Adjustments
to reconcile net income to net cash (used in)
provided
by operating activities:
|
|
|
|
|
|
|
|
Depreciation
of property, plant and equipment
|
|
|
36.1
|
|
|
26.7
|
|
Stock-based
compensation expense
|
|
|
9.4
|
|
|
3.6
|
|
Loss
on disposal of business
|
|
|
6.3
|
|
|
17.3
|
|
Deferred
tax provision
|
|
|
3.6
|
|
|
15.6
|
|
Amortization
of intangible and other assets
|
|
|
2.6
|
|
|
2.0
|
|
Loss
on disposal or impairment of long-lived assets, net
|
|
|
0.8
|
|
|
0.3
|
|
Equity
in earnings of equity method investees, net of distributed earnings
|
|
|
(46.6
|
)
|
|
(0.1
|
)
|
Gain
on change in fair value of derivative instrument
|
|
|
-
|
|
|
(52.5
|
)
|
Change
in operating assets and liabilities, net of effects
from
purchases and sales of businesses:
|
|
|
|
|
|
|
|
Accounts
receivable, net
|
|
|
(38.9
|
)
|
|
(66.4
|
)
|
Inventories
|
|
|
(28.0
|
)
|
|
(31.3
|
)
|
Prepaid
expenses and other current assets
|
|
|
(4.7
|
)
|
|
(10.9
|
)
|
Accounts
payable
|
|
|
(23.1
|
)
|
|
45.4
|
|
Accrued
excise taxes
|
|
|
1.9
|
|
|
(9.7
|
)
|
Other
accrued expenses and liabilities
|
|
|
(17.6
|
)
|
|
(12.2
|
)
|
Other,
net
|
|
|
(17.7
|
)
|
|
(7.7
|
)
|
Total
adjustments
|
|
|
(115.9
|
)
|
|
(79.9
|
)
|
Net
cash (used in) provided by operating activities
|
|
|
(86.1
|
)
|
|
5.6
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
Purchase
of business, net of cash acquired
|
|
|
(385.5
|
)
|
|
-
|
|
Purchases
of property, plant and equipment
|
|
|
(17.7
|
)
|
|
(45.1
|
)
|
Payment
of accrued earn-out amount
|
|
|
(2.9
|
)
|
|
(1.1
|
)
|
Proceeds
from formation of joint venture
|
|
|
185.6
|
|
|
-
|
|
Proceeds
from sales of businesses
|
|
|
3.0
|
|
|
28.0
|
|
Proceeds
from sales of assets
|
|
|
1.8
|
|
|
0.7
|
|
Other
investing activities
|
|
|
-
|
|
|
(2.1
|
)
|
Net
cash used in investing activities
|
|
|
(215.7
|
)
|
|
(19.6
|
)
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Proceeds
from issuance of long-term debt
|
|
|
716.1
|
|
|
-
|
|
Net
proceeds from notes payable
|
|
|
89.9
|
|
|
83.9
|
|
Exercise
of employee stock options
|
|
|
7.0
|
|
|
8.6
|
|
Excess
tax benefits from share-based payment awards
|
|
|
5.0
|
|
|
2.8
|
|
Purchases
of treasury stock
|
|
|
(500.0
|
)
|
|
-
|
|
Principal
payments of long-term debt
|
|
|
(9.0
|
)
|
|
(52.6
|
)
|
Payment
of financing costs of long-term debt
|
|
|
(5.3
|
)
|
|
-
|
|
Payment
of preferred stock dividends
|
|
|
-
|
|
|
(2.5
|
)
|
Net
cash provided by financing activities
|
|
|
303.7
|
|
|
40.2
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on cash and cash investments
|
|
|
(1.9
|
)
|
|
0.4
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH AND CASH INVESTMENTS
|
|
|
-
|
|
|
26.6
|
|
CASH
AND CASH INVESTMENTS, beginning of period
|
|
|
33.5
|
|
|
10.9
|
|
CASH
AND CASH INVESTMENTS, end of period
|
|
$
|
33.5
|
|
$
|
37.5
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES OF NON-CASH INVESTING
AND
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
Fair
value of assets acquired, including cash acquired
|
|
$
|
427.2
|
|
$
|
-
|
|
Liabilities
assumed
|
|
|
(39.9
|
)
|
|
-
|
|
Net
assets acquired
|
|
|
387.3
|
|
|
-
|
|
Less
- cash acquired
|
|
|
(1.6
|
)
|
|
-
|
|
Less
- direct acquisition costs accrued
|
|
|
(0.2
|
)
|
|
-
|
|
Net
cash paid for purchases of businesses
|
|
$
|
385.5
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these statements.
|
CONSTELLATION
BRANDS, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
MAY
31,
2007
1)
|
MANAGEMENT’S
REPRESENTATIONS:
|
The
consolidated financial statements included herein have been prepared by
Constellation Brands, Inc. and its subsidiaries (the “Company”), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
applicable to quarterly reporting on Form 10-Q and reflect, in the opinion
of
the Company, all adjustments necessary to present fairly the financial
information for the Company. All such adjustments are of a normal recurring
nature. Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted as permitted by such rules and
regulations. These consolidated financial statements and related notes should
be
read in conjunction with the consolidated financial statements and related
notes
included in the Company’s Annual Report on Form 10-K for the fiscal year ended
February 28, 2007. Results of operations for interim periods are not necessarily
indicative of annual results.
2) RECENTLY
ADOPTED ACCOUNTING PRONOUNCEMENTS:
Effective
March 1, 2007, the Company adopted Financial Accounting Standards Board (“FASB”)
Interpretation No. 48 (“FIN No. 48”), “Accounting for Uncertainty in Income
Taxes - an interpretation of FASB Statement No. 109.” FIN No. 48 clarifies the
accounting for uncertainty in income taxes recognized in an enterprise’s
financial statements in accordance with FASB Statement No. 109. FIN No. 48
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to
be
taken in a tax return. Additionally, FIN No. 48 provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition (see Note 9).
3) ACQUISITIONS:
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 acquisition of
Svedka supports the Company’s strategy of expanding the Company’s premium
spirits business. The acquisition provides a foundation from which the Company
looks to leverage its existing and future premium spirits portfolio for growth.
In addition, Svedka complements the Company’s 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 $385.4 million. In
addition, the Company expects to incur direct acquisition costs of approximately
$1.3 million. The purchase price is subject to final closing adjustments which
the Company does not expect to be material. The purchase price was financed
with
revolver borrowings under the Company’s 2006 Credit Agreement (as defined in
Note 8). 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 have been included in the consolidated results of operations
of the Company from the date of acquisition.
The
following table summarizes the estimated fair values of the assets acquired
and
liabilities assumed in the Svedka Acquisition at the date of acquisition. The
Company is in the process of obtaining third-party valuations of certain assets
and liabilities. Accordingly, the allocation of the purchase price is
preliminary and subject to change. Estimated fair values at March 19, 2007,
are
as follows:
(in
millions)
|
|
|
|
Current
assets
|
|
$
|
20.1
|
|
Property,
plant and equipment
|
|
|
0.1
|
|
Goodwill
|
|
|
349.3
|
|
Trademark
|
|
|
36.4
|
|
Other
assets
|
|
|
20.7
|
|
Total
assets acquired
|
|
|
426.6
|
|
|
|
|
|
|
Current
liabilities
|
|
|
23.8
|
|
Long-term
liabilities
|
|
|
16.1
|
|
Total
liabilities assumed
|
|
|
39.9
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
386.7
|
|
The
trademark is not subject to amortization. Approximately $85 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”), Canada’s premier wine company. Vincor is
Canada’s largest producer and marketer of wine. At the time of the acquisition,
Vincor was the world’s eighth largest producer and distributor of wine and
related products by revenue and was also one of the largest wine importers,
marketers and distributors in the U.K. Through this transaction, the Company
acquired various additional winery and vineyard interests used in the production
of premium, super-premium and fine wines from Canada, California, Washington
State, Western Australia and New Zealand. In addition, as a result of the
acquisition, the Company sources, markets and sells premium wines from South
Africa. Well-known premium brands acquired in the acquisition of
Vincor include Inniskillin, Jackson-Triggs, Sawmill Creek, Sumac
Ridge, R.H. Phillips, Toasted Head, Hogue, Kim Crawford and Kumala.
The
acquisition of Vincor supports the Company’s strategy of strengthening the
breadth of its portfolio across price segments and geographic regions to
capitalize on the overall growth in the wine industry. In addition to
complementing the Company’s current operations in the U.S., U.K., Australia and
New Zealand, the acquisition of Vincor increases the Company’s global presence
by adding Canada as another core market and provides the Company with the
ability to capitalize on broader geographic distribution in strategic
international markets. In addition, the acquisition of Vincor makes the Company
the largest wine company in Canada and strengthens the Company’s position as the
largest wine company in the world and the largest premium wine company in the
U.S.
Total
consideration paid in cash to the Vincor shareholders was $1,115.8 million.
In
addition, the Company incurred direct acquisition costs of $11.4 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 Company’s June 2006 Credit Agreement (as defined in Note
8). 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.
In
connection with the acquisition of Vincor, 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 three
months ended May 31, 2006, the Company recorded a gain of $52.5 million in
connection with this derivative instrument. Under Statement of Financial
Accounting Standards No. 133 (“SFAS 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 Company’s Consolidated Statements of
Income.
The
results of operations of the Vincor business are reported in the Constellation
Wines segment and have been included in the Consolidated Statements of Income
since the acquisition date.
The
following table summarizes the fair values of the assets acquired and
liabilities assumed in the acquisition of Vincor at the date of
acquisition:
(in
millions)
|
|
|
|
Current
assets
|
|
$
|
390.5
|
|
Property,
plant and equipment
|
|
|
241.4
|
|
Goodwill
|
|
|
876.8
|
|
Trademarks
|
|
|
224.3
|
|
Other
assets
|
|
|
49.5
|
|
Total
assets acquired
|
|
|
1,782.5
|
|
|
|
|
|
|
Current
liabilities
|
|
|
418.3
|
|
Long-term
liabilities
|
|
|
237.0
|
|
Total
liabilities assumed
|
|
|
655.3
|
|
|
|
|
|
|
Net
assets acquired
|
|
$
|
1,127.2
|
|
The
trademarks are not subject to amortization. None of the goodwill is expected
to
be deductible for tax purposes.
The
following table sets forth the unaudited historical results of operations and
the unaudited pro forma results
of operations of the Company for the three months ended May 31, 2007, and May
31, 2006, respectively. Unaudited pro forma results of operation of the Company
for the three months ended May 31, 2007, are not presented to give effect to
the
Svedka Acquisition as if it had occurred on March 1, 2006, as they are not
significant. The unaudited pro forma results of operations for the three months
ended May 31, 2006, give effect to the Svedka Acquisition and the
acquisition of Vincor as if they occurred on March 1, 2006. The unaudited
pro forma results of operations are presented after giving effect to certain
adjustments for depreciation, amortization of certain intangible assets and
deferred financing costs, interest expense on the acquisition financing,
interest expense associated with adverse grape contracts, and related income
tax
effects. The unaudited pro forma results of operations are based upon currently
available information and certain assumptions that the Company believes are
reasonable under the circumstances. The unaudited pro forma results of
operations for the three months ended May 31, 2006, 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 Company’s 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
Company’s financial position or results of operations at any future date or for
any future period.
|
|
For
the Three Months Ended May 31,
|
|
|
|
2007
|
|
2006
|
|
(in
millions, except per share data)
|
|
|
|
|
|
Net
sales
|
|
$
|
901.2
|
|
$
|
1,282.5
|
|
Income
before income taxes
|
|
$
|
64.3
|
|
$
|
97.1
|
|
Net
income
|
|
$
|
29.8
|
|
$
|
52.4
|
|
Income
available to common stockholders
|
|
$
|
29.8
|
|
$
|
49.9
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic:
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
$
|
0.13
|
|
$
|
0.23
|
|
Class
B Common Stock
|
|
$
|
0.12
|
|
$
|
0.21
|
|
Earnings
per common share - diluted:
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
$
|
0.13
|
|
$
|
0.22
|
|
Class
B Common Stock
|
|
$
|
0.12
|
|
$
|
0.20
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic:
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
205.636
|
|
|
199.571
|
|
Class
B Common Stock
|
|
|
23.824
|
|
|
23.853
|
|
Weighted
average common shares outstanding - diluted:
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
233.439
|
|
|
240.100
|
|
Class
B Common Stock
|
|
|
23.824
|
|
|
23.853
|
|
Inventories
are stated at the lower of cost (computed in accordance with the first-in,
first-out method) or market. Elements of cost include materials, labor and
overhead and consist of the following:
|
|
May
31,
2007
|
|
February
28,
2007
|
|
(in
millions)
|
|
|
|
|
|
Raw
materials and supplies
|
|
$
|
108.1
|
|
$
|
106.5
|
|
In-process
inventories
|
|
|
1,294.5
|
|
|
1,264.4
|
|
Finished
case goods
|
|
|
552.7
|
|
|
577.2
|
|
|
|
$
|
1,955.3
|
|
$
|
1,948.1
|
|
The
changes in the carrying amount of goodwill for the three months ended May 31,
2007, are as follows:
|
|
Constellation
Wines
|
|
Constellation
Spirits
|
|
Crown
Imports
|
|
Consolidations
and
Eliminations
|
|
Consolidated
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
February 28, 2007
|
|
$
|
2,939.5
|
|
$
|
144.4
|
|
$
|
13.0
|
|
$
|
(13.0
|
)
|
$
|
3,083.9
|
|
Purchase
accounting
allocations
|
|
|
(8.0
|
)
|
|
349.3
|
|
|
-
|
|
|
-
|
|
|
341.3
|
|
Foreign
currency
translation
adjustments
|
|
|
64.4
|
|
|
1.4
|
|
|
-
|
|
|
-
|
|
|
65.8
|
|
Purchase
price earn-out
|
|
|
1.3
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
1.3
|
|
Disposal
of business
|
|
|
(143.4
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(143.4
|
)
|
Balance,
May
31, 2007
|
|
$
|
2,853.8
|
|
$
|
495.1
|
|
$
|
13.0
|
|
$
|
(13.0
|
)
|
$
|
3,348.9
|
|
The
Constellation Spirits segment’s purchase accounting allocations totaling $349.3
million consist of purchase accounting allocations primarily associated with
the Svedka Acquisition. The Constellation Wines segment’s purchase
accounting allocations totaling ($8.0) million consist primarily of a reduction
of $17.0 million in connection with an adjustment to income taxes payable
acquired in a prior acquisition, partially offset by final purchase accounting
allocations associated with the acquisition of Vincor of $8.7 million. The
Constellation Wines segment’s disposal of business of $143.4 million consists of
the Company reduction of goodwill in connection with the Company’s
contribution of its U.K. wholesale business associated with the formation of
a
joint venture with Punch Taverns plc (“Punch”) (see Note 7).
6) INTANGIBLE
ASSETS:
The
major
components of intangible assets are as follows:
|
|
May
31, 2007
|
|
February
28, 2007
|
|
|
|
Gross
Carrying
Amount
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Net
Carrying
Amount
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Amortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
55.2
|
|
$
|
52.7
|
|
$
|
32.9
|
|
$
|
31.3
|
|
Distribution
agreements
|
|
|
19.9
|
|
|
6.7
|
|
|
19.9
|
|
|
6.9
|
|
Other
|
|
|
3.4
|
|
|
2.0
|
|
|
2.4
|
|
|
1.1
|
|
Total
|
|
$
|
78.5
|
|
|
61.4
|
|
$
|
55.2
|
|
|
39.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonamortizable
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
|
|
|
1,153.3
|
|
|
|
|
|
1,091.9
|
|
Agency
relationships
|
|
|
|
|
|
4.2
|
|
|
|
|
|
4.2
|
|
Total
|
|
|
|
|
|
1,157.5
|
|
|
|
|
|
1,096.1
|
|
Total
intangible assets
|
|
|
|
|
$
|
1,218.9
|
|
|
|
|
$
|
1,135.4
|
|
The
difference between the gross carrying amount and net carrying amount for each
item presented is attributable to accumulated amortization. Amortization expense
for intangible assets was $1.1 million and $0.6 million for the three months
ended May 31, 2007, and May 31, 2006, respectively. Estimated amortization
expense for the remaining nine months of fiscal 2008 and for each of the five
succeeding fiscal years and thereafter is as follows:
(in
millions)
|
|
|
|
2008
|
|
$
|
3.5
|
|
2009
|
|
$
|
4.6
|
|
2010
|
|
$
|
4.6
|
|
2011
|
|
$
|
4.5
|
|
2012
|
|
$
|
3.9
|
|
2013
|
|
$
|
3.7
|
|
Thereafter
|
|
$
|
36.6
|
|
Investment
in 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 in the
Company’s Consolidated Statements of Income from the date of investment. As of
May 31, 2007, the Company's investment in Matthew Clark was $70.3
million.
Investment
in Crown Imports -
On
January 2, 2007, Barton
Beers, Ltd. (“Barton”), an indirect wholly-owned subsidiary of the Company, and
Diblo, S.A. de C.V. (“Diblo”), an entity owned 76.75% by Grupo Modelo, S.A. de
C.V. (“Modelo”) and 23.25% by Anheuser-Busch, Inc., completed the formation of
Crown Imports LLC (“Crown Imports”), a joint venture in which Barton
and Diblo each have, directly or indirectly, equal interests. Crown Imports
has
the exclusive right to import, market and sell Modelo’s 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 in
the
Company’s Consolidated Statements of Income from the date of investment. As of
May 31, 2007, the Company’s investment in Crown Imports was $208.8 million. The
carrying amount of the investment is greater than the Company’s equity in the
underlying assets of Crown Imports by $13.6 million due to the difference
in the
carrying amounts of the indefinite lived intangible assets contributed to
Crown
Imports by each party.
Summary
financial information for Crown Imports for the three months ended May 31,
2007,
is presented below. The amounts shown represent 100% of Crown Imports
consolidated operating results.
|
|
For
the
Three
Months
Ended
May
31, 2007
|
|
(in
millions)
|
|
|
|
Net
sales
|
|
$
|
658.1
|
|
Gross
profit
|
|
$
|
204.7
|
|
Net
income
|
|
$
|
146.4
|
|
Senior
credit facility -
In
connection with the acquisition of Vincor, on June 5, 2006, the Company and
certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and
administrative agent, and certain other agents, lenders, and financial
institutions entered into a new credit agreement (the “June 2006 Credit
Agreement”). On February 23, 2007, the June 2006 Credit Agreement was amended
(the “February Amendment”). The June 2006 Credit Agreement together with the
February Amendment is referred to as the “2006 Credit Agreement”. The 2006
Credit Agreement provides for aggregate credit facilities of $3.9 billion,
consisting of a $1.2 billion tranche A term loan facility due in June 2011,
a
$1.8 billion tranche B term loan facility due in June 2013, and a $900 million
revolving credit facility (including a sub-facility for letters of credit of
up
to $200 million) which terminates in June 2011. Proceeds of the June 2006 Credit
Agreement were used to pay off the Company’s obligations under its prior senior
credit facility, to fund the acquisition of Vincor and to repay certain
indebtedness of Vincor. The Company uses its revolving credit facility under
the
2006 Credit Agreement for general corporate purposes, including working capital,
on an as needed basis.
As
of May
31, 2007, the required principal repayments of the tranche A term loan and
the
tranche B term loan for the remaining nine months of fiscal 2008 and for each
of
the five succeeding fiscal years are as follows:
|
|
Tranche
A
Term
Loan
|
|
Tranche
B
Term
Loan
|
|
Total
|
|
(in
millions)
|
|
|
|
|
|
|
|
2008
|
|
$
|
90.0
|
|
$
|
7.6
|
|
$
|
97.6
|
|
2009
|
|
|
210.0
|
|
|
15.2
|
|
|
225.2
|
|
2010
|
|
|
270.0
|
|
|
15.2
|
|
|
285.2
|
|
2011
|
|
|
300.0
|
|
|
15.2
|
|
|
315.2
|
|
2012
|
|
|
150.0
|
|
|
15.2
|
|
|
165.2
|
|
2013
|
|
|
-
|
|
|
1,431.6
|
|
|
1,431.6
|
|
|
|
$
|
1,020.0
|
|
$
|
1,500.0
|
|
$
|
2,520.0
|
|
The
rate
of interest on borrowings under the 2006 Credit Agreement is a function of
LIBOR
plus a margin, the federal funds rate plus a margin, or the prime rate plus
a
margin. The margin is fixed with respect to the tranche B term loan facility
and
is adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit
Agreement) with respect to the tranche A term loan facility and the revolving
credit facility. As of May 31, 2007, the LIBOR margin for the revolving credit
facility and the tranche A term loan facility is 1.25%, while the LIBOR margin
on the tranche B term loan facility is 1.50%.
The
February Amendment amended the June 2006 Credit Agreement to, among other
things, (i) increase the revolving credit facility from $500.0 million to $900.0
million, which increased the aggregate credit facilities from $3.5 billion
to
$3.9 billion; (ii) increase the aggregate amount of cash payments the Company
is
permitted to make in respect or on account of its capital stock; (iii) remove
certain limitations on the application of proceeds from the incurrence of senior
unsecured indebtedness; (iv) increase the maximum permitted total “Debt Ratio”
and decrease the required minimum “Interest Coverage Ratio”; and (v) eliminate
the “Senior Debt Ratio” covenant and the “Fixed Charges Ratio”
covenant.
The
Company’s obligations are guaranteed by certain of its U.S. subsidiaries. These
obligations are also secured by a pledge of (i) 100% of the ownership interests
in certain of the Company’s U.S. subsidiaries and (ii) 65% of the voting capital
stock of certain of the Company’s foreign subsidiaries.
The
Company and its subsidiaries are also subject to covenants that are contained
in
the 2006 Credit Agreement, including those restricting the incurrence of
additional indebtedness (including guarantees of indebtedness), additional
liens, mergers and consolidations, disposition or acquisition of property,
the
payment of dividends, transactions with affiliates and the making of certain
investments, in each case subject to numerous conditions, exceptions and
thresholds. The financial covenants are limited to maximum total
debt coverage
ratios and minimum interest coverage ratios.
As
of May
31, 2007, under the 2006 Credit Agreement, the Company had outstanding tranche
A
term loans of $1.0 billion bearing an interest rate of 6.6%, tranche B term
loans of $1.5 billion bearing an interest rate of 6.9%, revolving loans of
$45.5
million bearing an interest rate of 6.5%, outstanding letters of credit of
$34.3
million, and $820.2 million in revolving loans available to be
drawn.
As
of May
31, 2007, the Company had outstanding interest rate swap agreements which fixed
LIBOR interest rates on $1.2 billion of the Company’s floating LIBOR rate debt
at an average rate of 4.1% through fiscal
2010.
For the three months ended May 31, 2007, and May 31, 2006, the Company
reclassified $1.8 million, net of tax effect of $1.2 million, and $0.8 million,
net of tax effect of $0.5 million, respectively, from AOCI (as defined in Note
14) to the interest expense, net line in the Company’s Consolidated
Statements of Income. This non-cash
operating activity is included on the other, net line in the Company’s
Consolidated Statements of Cash Flows.
On
May
14, 2007, the
Company
issued $700.0 million aggregate principal amount of 7 1/4% Senior Notes due
May
2017 (the “May 2007 Senior Notes”). The net proceeds of the offering ($694.5
million) were used to reduce a corresponding amount of borrowings under the
revolving portion of the Company’s 2006 Credit Agreement. Interest on the
May 2007 Senior Notes is payable semiannually on May 15 and November 15 of
each
year, beginning November 15, 2007. The May 2007 Senior Notes are redeemable,
in
whole or in part, at the option of the Company at any time at a redemption
price
equal to 100% of the outstanding principal amount, plus accrued and unpaid
interest to the redemption date, plus a make whole payment based on the
present value of the future payments at the applicable Treasury Rate plus
50 basis points. The May 2007 Senior Notes are unsecured senior obligations
and rank equally in right of payment to all existing and future unsecured senior
indebtedness of the Company. Certain of the Company’s significant U.S.
operating subsidiaries guarantee the May 2007 Senior Notes, on an
unsecured senior basis. As of May 31, 2007, the Company had outstanding
$700.0 million aggregate principal amount of May 2007 Senior Notes.
Subsidiary
credit facilities -
The
Company has additional credit arrangements totaling $381.6 million as of May
31,
2007. These arrangements primarily support the financing needs of the Company’s
domestic and foreign subsidiary operations. Interest rates and other terms
of
these borrowings vary from country to country, depending on local market
conditions. As of May 31, 2007, amounts outstanding under these arrangements
were $271.3 million.
As
noted in Note 2, effective March 1, 2007, the Company adopted FIN No.
48. The Company did not record any cumulative effect adjustment to
retained earnings as a result of the adoption of FIN No. 48. Upon
adoption, the liability for income taxes associated with uncertain tax positions
was $108.1 million. Unrecognized tax benefits of $62.8 million would affect
the
Company’s effective tax rate if recognized. The Company reclassified $83.9
million of income tax liabilities from current to non-current liabilities
because payment of cash is not anticipated within one year of the balance sheet
date. These non-current liabilities are recorded in the other liabilities
line in the Company's Consolidated Balance Sheet. Due to ongoing tax
examinations, it is expected that the amount of unrecognized tax benefit will
change in the next twelve months; however, the Company does not expect the
change to have a material impact on its results of operations or financial
position.
In
accordance with the Company’s accounting policy, the Company recognizes accrued
interest and penalties related to unrecognized tax benefits as a component
of
income tax expense. This policy did not change as a result of the adoption
of
FIN No. 48. As of the date of adoption, $8.5 million, net of tax
benefit, was included in the liability for uncertain tax positions for the
possible payment of interest and penalties.
The
federal income tax returns for the years ended February 28, 2005, and February
29, 2004, are under examination by the Internal Revenue Service. Various state
and foreign income tax returns are also under examination by taxing authorities.
The Company does not believe that the outcome of any examination will have
a
material impact on its consolidated financial statements.
The
Company’s effective tax rate for the three months ended May 31, 2007, and May
31, 2006, was 53.7% and 41.8%, respectively. The increase in the Company’s
effective tax rate for the three months ended May 31, 2007, is primarily due
to
the recognition of a nondeductible pretax loss of $6.1 million in connection
with the Company’s contribution of its U.K. wholesale business to the Matthew
Clark joint venture and an additional U.S. tax provision of $7.2 million related
to the future repatriation of unremitted earnings. In addition, the provision
for income taxes for the three months ended May 31, 2007, included a net $1.4
million benefit consisting of a $4.0 million reduction in deferred income taxes
as a result of a prior year legislative change in a certain foreign
jurisdiction, partially offset by a $2.6 million provision related to interest
on certain prior years’ uncertain tax positions.
10)
|
RETIREMENT
SAVINGS PLANS AND POSTRETIREMENT BENEFIT
PLANS:
|
Net
periodic benefit costs reported in the Consolidated Statements of Income for
the
Company’s defined benefit pension plans include the following
components:
|
|
For
the Three
Months
Ended
May 31,
|
|
|
|
2007
|
|
2006
|
|
(in
millions)
|
|
|
|
|
|
Service
cost
|
|
$
|
1.4
|
|
$
|
0.6
|
|
Interest
cost
|
|
|
6.2
|
|
|
4.8
|
|
Expected
return on plan assets
|
|
|
(7.6
|
)
|
|
(5.4
|
)
|
Amortization
of prior service cost
|
|
|
0.1
|
|
|
-
|
|
Recognized
net actuarial loss
|
|
|
2.2
|
|
|
0.5
|
|
Net
periodic benefit cost
|
|
$
|
2.3
|
|
$
|
0.5
|
|
Net
periodic benefit costs reported in the Consolidated Statements of Income for
the
Company’s unfunded postretirement benefit plans include the following
components:
|
|
For
the Three
Months
Ended
May 31,
|
|
|
|
2007
|
|
2006
|
|
(in
millions)
|
|
|
|
|
|
Service
cost
|
|
$
|
0.1
|
|
$
|
-
|
|
Interest
cost
|
|
|
0.1
|
|
|
0.1
|
|
Amortization
of prior service cost
|
|
|
-
|
|
|
-
|
|
Recognized
net actuarial loss
|
|
|
-
|
|
|
-
|
|
Net
periodic benefit cost
|
|
$
|
0.2
|
|
$
|
0.1
|
|
Contributions
of $2.9 million have been made by the Company to fund its defined benefit
pension plans for the three months ended May 31, 2007. The Company presently
anticipates contributing an additional $8.5 million to fund its defined benefit
pension plans during the year ending February 29, 2008, resulting in total
employer contributions of $11.4 million for the year ending February 29,
2008.
11)
|
STOCKHOLDERS’
EQUITY:
|
In
February 2007, the Company’s Board of Directors authorized the repurchase of up
to $500.0 million of the Company’s Class A Common Stock and Class B Common
Stock. During the three months ended May 31, 2007, the Company repurchased
20,399,262 shares of Class A Common Stock pursuant to this authorization at
an
aggregate cost of $500.0 million, or an average cost of $24.51 per share,
through a combination of open market transactions and an accelerated share
repurchase (“ASR”) transaction that was announced in May 2007. The Company used
revolver borrowings under the 2006 Credit Agreement to pay the purchase price
for these shares. The repurchased shares have become treasury shares. As
of May 31, 2007, the Company has no obligation to make any additional
payments or return any shares already received in connection with the ASR
transaction. The Company may be entitled to receive additional shares pursuant
to the ASR transaction at the end of a calculation period based on the
application of a formula. The calculation period is scheduled to end in
October 2007 but may be terminated earlier at the option of the counterparty
to
the ASR transaction.
12)
|
EARNINGS
PER COMMON SHARE:
|
Basic
earnings per common share excludes the effect of common stock equivalents and
is
computed using the two-class computation method. Diluted earnings per common
share for Class A Common Stock reflects the potential dilution that could result
if securities to issue common stock were exercised or converted into common
stock. Diluted earnings per common share for Class A Common Stock assumes the
exercise of stock options using the treasury stock method and the conversion
of
Class B Convertible Common Stock and Preferred Stock using the more dilutive
if-converted method. Diluted earnings per common share for Class B Convertible
Common Stock is presented without assuming conversion into Class A Common Stock
and is computed using the two-class computation method.
The
computation of basic and diluted earnings per common share is as
follows:
|
|
For
the Three Months
Ended
May 31,
|
|
|
|
2007
|
|
2006
|
|
(in
millions, except per share data)
|
|
|
|
|
|
Net
income
|
|
$
|
29.8
|
|
$
|
85.5
|
|
Dividends
on preferred stock
|
|
|
-
|
|
|
(2.5
|
)
|
Income
available to common stockholders
|
|
$
|
29.8
|
|
$
|
83.0
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic:
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
|
205.636
|
|
|
199.571
|
|
Class
B Common Stock
|
|
|
23.824
|
|
|
23.853
|
|
Total
weighted average common shares outstanding - basic
|
|
|
229.460
|
|
|
223.424
|
|
Stock
options
|
|
|
3.979
|
|
|
6.693
|
|
Preferred
stock
|
|
|
-
|
|
|
9.983
|
|
Weighted
average common shares outstanding - diluted
|
|
|
233.439
|
|
|
240.100
|
|
|
|
|
|
|
|
|
|
Earnings
per common share - basic:
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
$
|
0.13
|
|
$
|
0.38
|
|
Class
B Common Stock
|
|
$
|
0.12
|
|
$
|
0.34
|
|
Earnings
per common share - diluted:
|
|
|
|
|
|
|
|
Class
A Common Stock
|
|
$
|
0.13
|
|
$
|
0.36
|
|
Class
B Common Stock
|
|
$
|
0.12
|
|
$
|
0.33
|
|
Stock
options to purchase 10.1 million and 8.7 million shares of Class A Common Stock
at a weighted average price per share of $25.91 and $26.46 were outstanding
during the three months ended May 31, 2007, and May 31, 2006, respectively,
but
were not included in the computation of the diluted earnings per common share
because the stock options’ exercise price was greater than the average market
price of the Class A Common Stock for the period.
13)
|
STOCK-BASED
COMPENSATION:
|
The
Company recorded $9.4 million and $3.6 million of stock-based compensation
cost
in its Consolidated Statements of Income for the three months ended May 31,
2007, and May 31, 2006, respectively. Of the $9.4 million, $4.2 million is
related to the granting of 8.4 million nonqualified stock options under the
Company’s Long-Term Stock Incentive Plan to employees and nonemployee directors,
and $1.0 million is related to the accelerated vesting of 0.1 million
nonqualified stock options granted during the year ended February 28, 2007,
to
employees of the Company’s then existing 100% owned U.K. wholesale business.
These options were accelerated prior to the Company’s formation of the joint
venture with Punch in April 2007. The remainder is related primarily to the
amortization of employee and nonemployee directors stock options granted during
the year ended February 28, 2007.
14)
|
COMPREHENSIVE
INCOME:
|
Comprehensive
income (loss) consists of net income, foreign currency translation adjustments,
net unrealized gains or losses on derivative instruments and
pension/postretirement adjustments. The reconciliation of net income to
comprehensive income is as follows:
|
|
For
the Three Months
Ended
May 31,
|
|
|
|
2007
|
|
2006
|
|
(in
millions)
|
|
|
|
|
|
Net
income
|
|
$
|
29.8
|
|
$
|
85.5
|
|
Other
comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments, net of tax benefit (expense)
of $1.2 and
($7.6), respectively
|
|
|
156.6
|
|
|
61.4
|
|
Cash
flow hedges:
|
|
|
|
|
|
|
|
Net
derivative gains (losses), net of tax (expense) benefit of ($0.3)
and
$1.1, respectively
|
|
|
5.2
|
|
|
(5.6
|
)
|
Reclassification
adjustments, net of tax benefit of $0.6 and $1.5,
respectively
|
|
|
(1.3
|
)
|
|
(3.2
|
)
|
Net
cash flow hedges
|
|
|
3.9
|
|
|
(8.8
|
)
|
Pension/postretirement
adjustments, net of tax benefit of $0.6 and $2.7,
respectively
|
|
|
(1.4
|
)
|
|
(6.3
|
)
|
Total
comprehensive income
|
|
$
|
188.9
|
|
$
|
131.8
|
|
Accumulated
other comprehensive income (“AOCI”), net of tax effects, includes the following
components:
|
|
Foreign
Currency
Translation
Adjustments
|
|
Net
Unrealized
Gains
on
Derivatives
|
|
Pension/
Postretirement
Adjustments
|
|
Accumulated
Other
Comprehensive
Income
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
Balance,
February
28, 2007
|
|
$
|
446.8
|
|
$
|
13.3
|
|
$
|
(111.0)
|
|
$
|
349.1
|
|
Current
period change
|
|
|
156.6
|
|
|
3.9
|
|
|
(1.4)
|
|
|
159.1
|
|
Balance,
May 31, 2007
|
|
$
|
603.4
|
|
$
|
17.2
|
|
$
|
(112.4)
|
|
$
|
508.2
|
|
15) ACQUISITION-RELATED
INTEGRATION COSTS:
For
the
three months ended May 31, 2007, the Company recorded $2.0 million of
acquisition-related integration costs associated primarily with the Vincor
Plan
(as defined in Note 16). The Company defines acquisition-related integration
costs as nonrecurring costs incurred to integrate newly acquired businesses
after a business combination which are incremental to those of the Company
prior
to the business combination. As such, acquisition-related integration costs
include, but are not limited to, (i) employee-related costs such as salaries
and
stay bonuses paid to employees of the acquired business that will be terminated
after their integration activities are completed, (ii) costs to relocate fixed
assets and inventories, and (iii) facility costs and other one-time costs such
as external services and consulting fees. For the three months ended May 31,
2007, acquisition-related integration costs included $0.4 million of
employee-related costs and $1.6 million of facilities and other one-time costs.
For the three months ended May 31, 2006, the Company recorded $0.7 million
of
acquisition-related integration costs associated with the Robert Mondavi Plan
(as defined in Note 16).
16)
|
RESTRUCTURING
AND RELATED CHARGES:
|
The
Company has several restructuring plans within its Constellation Wines segment
as follows:
Robert
Mondavi Plan -
The
Company’s plan announced in January 2005 to restructure and integrate the
operations of The Robert Mondavi Corporation (the “Robert Mondavi Plan”). The
objective of the Robert Mondavi Plan is to achieve operational efficiencies
and
eliminate redundant costs resulting from the December 22, 2004, acquisition
of
The Robert Mondavi Corporation (“Robert Mondavi”). The Robert Mondavi Plan
includes the elimination of certain employees, the consolidation of certain
field sales and administrative offices, and the termination of various
contracts. Although restructuring and related charges in connection with the
Robert Mondavi Plan have been completed as of February 28, 2007, a balance
remains for amounts not yet paid as of May 31, 2007. The remaining
liability is expected to be paid through the year ending February 29,
2012.
Fiscal
2006 Plan -
The
Company’s worldwide wine reorganizations and the Company’s plan to consolidate
certain west coast production processes in the U.S., both announced during
fiscal 2006, (collectively, the “Fiscal 2006 Plan”). The Fiscal 2006 Plan’s
principal features are to reorganize and simplify the infrastructure and
reporting structure of the Company’s global wine business and to consolidate
certain west coast production processes. This Fiscal 2006 Plan is part of the
Company’s ongoing effort to enhance its administrative, operational and
production efficiencies in light of its ongoing growth. The objective of the
Fiscal 2006 Plan is to achieve greater efficiency in sales, administrative
and
operational activities and eliminate redundant costs. The Fiscal 2006 Plan
includes the termination of employment of certain employees in various locations
worldwide, the consolidation of certain worldwide wine selling and
administrative functions, the consolidation of certain warehouse and production
functions, the termination of various contracts, investment in new assets and
the reconfiguration of certain existing assets. The Company expects the Fiscal
2006 Plan to be complete by February 28, 2009.
Vincor
Plan -
The
Company’s plan announced in July 2006 to restructure and integrate the
operations of Vincor (the “Vincor Plan”). The objective of the Vincor Plan is to
achieve operational efficiencies and eliminate redundant costs resulting from
the June 5, 2006, acquisition of Vincor, as well as to achieve greater
efficiency in sales, marketing, administrative and operational activities.
The
Vincor Plan includes the elimination of certain employment redundancies,
primarily in the United States, United Kingdom and Australia, and the
termination of various contracts. The Company expects the Vincor Plan to be
complete by February 28, 2009.
Fiscal
2007 Wine Plan -
The
Company’s plans 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”). The U.K. portion of the
plan includes new investments in property, plant and equipment and certain
disposals of property, plant and equipment and is expected to increase wine
bottling capacity and efficiency and reduce costs of transport, production
and
distribution. The U.K. portion of the plan also includes costs for employee
terminations. The Australian portion of the plan includes the buy-out of certain
grape supply and processing contracts and the sale of certain property, plant
and equipment. The initiatives are part of the Company’s ongoing efforts to
maximize asset utilization, further reduce costs and improve long-term return
on
invested capital throughout its international operations. The Company expects
the Australian portion of the plan to be complete by February 29, 2008, and
the
U.K. portion of the plan to be complete by February 28, 2010.
For
the
three months ended May 31, 2007, and May 31, 2006, the Company recorded $0.4
million and $2.3 million, respectively, of restructuring and related charges
associated primarily with the Fiscal 2006 Plan.
Restructuring
and related charges consisting of employee termination benefit costs, contract
termination costs, and other associated costs are accounted for under
either Statement of Financial Accounting Standards No. 112 (“SFAS No.
112”), “Employers' Accounting for Postemployment Benefits - an Amendment of
FASB Statements No. 5 and 4,” or Statement of Financial Accounting
Standards No. 146 (“SFAS No. 146”), “Accounting for Costs Associated with
Exit a Disposal Activities,” as appropriate. Employee termination benefit
costs are accounted for under SFAS No. 112, as the Company has had several
restructuring programs which have provided employee termination benefits in
the
past. The Company includes employee severance, related payroll benefit costs
such as costs to provide continuing health insurance, and outplacement services
as employee termination benefit costs. Contract termination costs, and other
associated costs including, but not limited to, facility consolidation and
relocation costs are accounted for under SFAS No. 146. Per SFAS
No. 146, contract termination costs are costs to terminate a contract that
is not a capital lease, including costs to terminate the contract before the
end
of its term or costs that will continue to be incurred under the contract for
its remaining term without economic benefit to the entity. The Company includes
costs to terminate certain operating leases for buildings, computer and IT
equipment, and costs to terminate contracts, including distributor contracts
and
contracts for long-term purchase commitments, as contract termination costs.
Per
SFAS No. 146, other associated costs include, but are not limited to, costs
to
consolidate or close facilities and relocate employees. The Company includes
employee relocation costs and equipment relocation costs as other associated
costs.
Details
of each plan are presented in the following table:
|
|
Fiscal
2007
Wine
Plan
|
|
Vincor
Plan
|
|
Fiscal
2006
Plan
|
|
Robert
Mondavi
Plan
|
|
Total
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
liability, February 28, 2007
|
|
$
|
2.8
|
|
$
|
21.2
|
|
$
|
3.5
|
|
$
|
5.4
|
|
$
|
32.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vincor
acquisition
|
|
|
-
|
|
|
(1.4
|
)
|
|
-
|
|
|
-
|
|
|
(1.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring
charges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
|
-
|
|
|
(0.1
|
)
|
|
0.1
|
|
|
-
|
|
|
-
|
|
Contract
termination costs
|
|
|
-
|
|
|
-
|
|
|
0.2
|
|
|
-
|
|
|
0.2
|
|
Facility
consolidation/relocation costs
|
|
|
-
|
|
|
0.1
|
|
|
0.1
|
|
|
-
|
|
|
0.2
|
|
Restructuring
charges, May 31, 2007
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
expenditures
|
|
|
(0.3
|
)
|
|
(2.8
|
)
|
|
(1.1
|
)
|
|
(0.4
|
)
|
|
(4.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
currency translation adjustments
|
|
|
0.1
|
|
|
0.3
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
Restructuring
liability, May 31, 2007
|
|
$
|
2.6
|
|
$
|
17.3
|
|
$
|
2.8
|
|
$
|
5.0
|
|
$
|
27.7
|
|
In
addition, the following table presents other related costs incurred in
connection with the Fiscal 2007 Wine Plan, Vincor Plan and the Fiscal 2006
Plan:
|
|
For
the Three Months Ended May 31, 2007
|
|
|
|
Fiscal
2007
Wine
Plan
|
|
Vincor
Plan
|
|
Fiscal
2006
Plan
|
|
Total
|
|
Accelerated
depreciation/inventory write-down (cost of product sold)
|
|
$
|
1.1
|
|
$
|
0.1
|
|
$
|
1.0
|
|
$
|
2.2
|
|
Asset
write-down/other costs (selling, general and administrative
expenses)
|
|
$
|
0.3
|
|
$
|
-
|
|
$
|
0.2
|
|
$
|
0.5
|
|
A
summary
of restructuring charges and other related costs incurred since inception for
each plan, as well as total expected costs for each plan, are presented in
the
following table:
|
|
Fiscal
2007
Wine
Plan
|
|
Vincor
Plan
|
|
Fiscal
2006
Plan
|
|
(in
millions)
|
|
|
|
|
|
|
|
Costs
incurred to date
|
|
|
|
|
|
|
|
Restructuring
charges:
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
$
|
2.0
|
|
$
|
1.5
|
|
$
|
26.5
|
|
Contract
termination costs
|
|
|
24.0
|
|
|
1.0
|
|
|
1.0
|
|
Facility
consolidation/relocation costs
|
|
|
-
|
|
|
0.3
|
|
|
0.9
|
|
Total
restructuring charges
|
|
|
26.0
|
|
|
2.8
|
|
|
28.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
related costs:
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation/inventory write-down
|
|
|
4.4
|
|
|
0.4
|
|
|
18.0
|
|
Asset
write-down/other costs
|
|
|
13.2
|
|
|
-
|
|
|
3.7
|
|
Total
other related costs
|
|
|
17.6
|
|
|
0.4
|
|
|
21.7
|
|
Total
costs incurred to date
|
|
$
|
43.6
|
|
$
|
3.2
|
|
$
|
50.1
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
expected costs
|
|
|
|
|
|
|
|
|
|
|
Restructuring
charges:
|
|
|
|
|
|
|
|
|
|
|
Employee
termination benefit costs
|
|
$
|
2.0
|
|
$
|
1.5
|
|
$
|
27.2
|
|
Contract
termination costs
|
|
|
24.8
|
|
|
1.1
|
|
|
8.7
|
|
Facility
consolidation/relocation costs
|
|
|
0.2
|
|
|
0.3
|
|
|
1.6
|
|
Total
restructuring charges
|
|
|
27.0
|
|
|
2.9
|
|
|
37.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
related costs:
|
|
|
|
|
|
|
|
|
|
|
Accelerated
depreciation/inventory write-down
|
|
|
12.8
|
|
|
0.6
|
|
|
19.5
|
|
Asset
write-down/other costs
|
|
|
24.0
|
|
|
-
|
|
|
3.7
|
|
Total
other related costs
|
|
|
36.8
|
|
|
0.6
|
|
|
23.2
|
|
Total
expected costs
|
|
$
|
63.8
|
|
$
|
3.5
|
|
$
|
60.7
|
|
In
connection with the Company’s acquisition of Vincor and Robert Mondavi, the
Company accrued $38.4 million and $50.5 million of liabilities for exit costs,
respectively, as of the respective acquisition date. As of May
31,
2007, the balances of the Vincor
and Robert
Mondavi purchase accounting accruals were $16.0 million and $4.9 million,
respectively. As of February 28, 2007, the balances of the Vincor
and Robert
Mondavi purchase accounting accruals were $19.3 million and $5.4 million,
respectively.
17)
|
CONDENSED
CONSOLIDATING FINANCIAL
INFORMATION:
|
The
following information sets forth the condensed consolidating balance sheets
as
of May 31, 2007, and February 28, 2007, the condensed consolidating statements
of income for the three months ended May 31, 2007, and May 31, 2006, and
the
condensed consolidating statements of cash flows for the three months ended
May
31, 2007, and May 31, 2006, for the Company, the parent company, the combined
subsidiaries of the Company which guarantee the Company’s senior notes and
senior subordinated notes (“Subsidiary Guarantors”) and the combined
subsidiaries of the Company which are not Subsidiary Guarantors (primarily
foreign subsidiaries). The Subsidiary Guarantors are wholly-owned and the
guarantees are full, unconditional, joint and several obligations of each
of the
Subsidiary Guarantors. Separate financial statements for the Subsidiary
Guarantors of the Company are not presented because the Company has determined
that such financial statements would not be material to investors. The
accounting policies of the parent company, the Subsidiary Guarantors and
the
Subsidiary Nonguarantors are the same as those described for the Company
in the
Summary of Significant Accounting Policies in Note 1 to the Company’s
consolidated financial statements included in the Company’s Annual Report on
Form 10-K for the fiscal year ended February 28, 2007, and include the
recently
adopted accounting pronouncements described in Note 2 herein. There are
no
restrictions on the ability of the Subsidiary Guarantors to transfer funds
to
the Company in the form of cash dividends, loans or advances.
|
|
Parent
Company
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Nonguarantors
|
|
Eliminations
|
|
Consolidated
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Balance Sheet at May 31, 2007
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash investments
|
|
$
|
1.0
|
|
$
|
2.8
|
|
$
|
29.7
|
|
$
|
-
|
|
$
|
33.5
|
|
Accounts
receivable, net
|
|
|
232.9
|
|
|
80.3
|
|
|
450.7
|
|
|
-
|
|
|
763.9
|
|
Inventories
|
|
|
41.2
|
|
|
1,029.7
|
|
|
889.6
|
|
|
(5.2
|
)
|
|
1,955.3
|
|
Prepaid
expenses and other
|
|
|
8.2
|
|
|
143.0
|
|
|
47.1
|
|
|
(41.7
|
)
|
|
156.6
|
|
Intercompany
receivable (payable)
|
|
|
1,035.0
|
|
|
(971.2
|
)
|
|
(63.8
|
)
|
|
-
|
|
|
-
|
|
Total
current assets
|
|
|
1,318.3
|
|
|
284.6
|
|
|
1,353.3
|
|
|
(46.9
|
)
|
|
2,909.3
|
|
Property,
plant and equipment, net
|
|
|
45.3
|
|
|
811.0
|
|
|
887.9
|
|
|
-
|
|
|
1,744.2
|
|
Investments
in subsidiaries
|
|
|
6,640.4
|
|
|
88.2
|
|
|
153.0
|
|
|
(6,881.6
|
)
|
|
-
|
|
Goodwill
|
|
|
-
|
|
|
1,843.9
|
|
|
1,505.0
|
|
|
-
|
|
|
3,348.9
|
|
Intangible
assets, net
|
|
|
-
|
|
|
623.7
|
|
|
595.2
|
|
|
-
|
|
|
1,218.9
|
|
Other
assets, net
|
|
|
77.1
|
|
|
309.7
|
|
|
258.3
|
|
|
(40.2
|
)
|
|
604.9
|
|
Total
assets
|
|
$
|
8,081.1
|
|
$
|
3,961.1
|
|
$
|
4,752.7
|
|
$
|
(6,968.7
|
)
|
$
|
9,826.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
$
|
45.5
|
|
$
|
-
|
|
$
|
196.8
|
|
$
|
-
|
|
$
|
242.3
|
|
Current
maturities of long-term debt
|
|
|
348.5
|
|
|
10.6
|
|
|
3.7
|
|
|
-
|
|
|
362.8
|
|
Accounts
payable
|
|
|
6.9
|
|
|
79.6
|
|
|
184.1
|
|
|
-
|
|
|
270.6
|
|
Accrued
excise taxes
|
|
|
8.6
|
|
|
20.0
|
|
|
36.3
|
|
|
-
|
|
|
64.9
|
|
Other
accrued expenses and liabilities
|
|
|
128.1
|
|
|
148.4
|
|
|
333.4
|
|
|
(43.0
|
)
|
|
566.9
|
|
Total
current liabilities
|
|
|
537.6
|
|
|
258.6
|
|
|
754.3
|
|
|
(43.0
|
)
|
|
1,507.5
|
|
Long-term
debt, less current maturities
|
|
|
4,327.2
|
|
|
25.9
|
|
|
28.7
|
|
|
-
|
|
|
4,381.8
|
|
Deferred
income taxes
|
|
|
-
|
|
|
427.0
|
|
|
104.0
|
|
|
(40.2
|
)
|
|
490.8
|
|
Other
liabilities
|
|
|
88.0
|
|
|
68.7
|
|
|
161.1
|
|
|
-
|
|
|
317.8
|
|
|
|
Parent
Company
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Nonguarantors
|
|
Eliminations
|
|
Consolidated
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
162.0
|
|
|
1,430.9
|
|
|
(1,592.9
|
)
|
|
-
|
|
Class
A and Class B common stock
|
|
|
2.5
|
|
|
100.7
|
|
|
184.3
|
|
|
(285.0
|
)
|
|
2.5
|
|
Additional
paid-in capital
|
|
|
1,292.4
|
|
|
1,280.9
|
|
|
1,223.9
|
|
|
(2,504.8
|
)
|
|
1,292.4
|
|
Retained
earnings
|
|
|
1,949.1
|
|
|
1,617.9
|
|
|
283.2
|
|
|
(1,901.1
|
)
|
|
1,949.1
|
|
Accumulated
other comprehensive
income
|
|
|
508.2
|
|
|
19.4
|
|
|
582.3
|
|
|
(601.7
|
)
|
|
508.2
|
|
Treasury
stock
|
|
|
(623.9
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(623.9
|
)
|
Total
stockholders’ equity
|
|
|
3,128.3
|
|
|
3,180.9
|
|
|
3,704.6
|
|
|
(6,885.5
|
)
|
|
3,128.3
|
|
Total
liabilities and
stockholders’
equity
|
|
$
|
8,081.1
|
|
$
|
3,961.1
|
|
$
|
4,752.7
|
|
$
|
(6,968.7
|
)
|
$
|
9,826.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Balance Sheet at February 28, 2007
|
Current
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash investments
|
|
$
|
2.4
|
|
$
|
1.1
|
|
$
|
30.0
|
|
$
|
-
|
|
$
|
33.5
|
|
Accounts
receivable, net
|
|
|
342.7
|
|
|
57.5
|
|
|
480.8
|
|
|
-
|
|
|
881.0
|
|
Inventories
|
|
|
38.1
|
|
|
1,045.3
|
|
|
870.5
|
|
|
(5.8
|
)
|
|
1,948.1
|
|
Prepaid
expenses and other
|
|
|
2.0
|
|
|
105.3
|
|
|
62.1
|
|
|
(8.7
|
)
|
|
160.7
|
|
Intercompany
receivable (payable)
|
|
|
1,080.3
|
|
|
(775.1
|
)
|
|
(305.2
|
)
|
|
-
|
|
|
-
|
|
Total
current assets
|
|
|
1,465.5
|
|
|
434.1
|
|
|
1,138.2
|
|
|
(14.5
|
)
|
|
3,023.3
|
|
Property,
plant and equipment, net
|
|
|
42.2
|
|
|
810.9
|
|
|
897.1
|
|
|
-
|
|
|
1,750.2
|
|
Investments
in subsidiaries
|
|
|
6,119.9
|
|
|
115.6
|
|
|
-
|
|
|
(6,235.5
|
)
|
|
-
|
|
Goodwill
|
|
|
-
|
|
|
1,509.1
|
|
|
1,574.8
|
|
|
-
|
|
|
3,083.9
|
|
Intangible
assets, net
|
|
|
-
|
|
|
566.7
|
|
|
568.7
|
|
|
-
|
|
|
1,135.4
|
|
Other
assets, net
|
|
|
32.2
|
|
|
245.4
|
|
|
167.8
|
|
|
-
|
|
|
445.4
|
|
Total
assets
|
|
$
|
7,659.8
|
|
$
|
3,681.8
|
|
$
|
4,346.6
|
|
$
|
(6,250.0
|
)
|
$
|
9,438.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes
payable to banks
|
|
$
|
30.0
|
|
$
|
-
|
|
$
|
123.3
|
|
$
|
-
|
|
$
|
153.3
|
|
Current
maturities of long-term debt
|
|
|
299.2
|
|
|
10.2
|
|
|
7.9
|
|
|
-
|
|
|
317.3
|
|
Accounts
payable
|
|
|
7.1
|
|
|
112.8
|
|
|
256.2
|
|
|
-
|
|
|
376.1
|
|
Accrued
excise taxes
|
|
|
10.9
|
|
|
31.4
|
|
|
31.4
|
|
|
-
|
|
|
73.7
|
|
Other
accrued expenses and liabilities
|
|
|
242.4
|
|
|
105.2
|
|
|
333.5
|
|
|
(10.4
|
)
|
|
670.7
|
|
Total
current liabilities
|
|
|
589.6
|
|
|
259.6
|
|
|
752.3
|
|
|
(10.4
|
)
|
|
1,591.1
|
|
Long-term
debt, less current maturities
|
|
|
3,672.7
|
|
|
18.5
|
|
|
23.7
|
|
|
-
|
|
|
3,714.9
|
|
Deferred
income taxes
|
|
|
(24.1
|
)
|
|
405.0
|
|
|
93.2
|
|
|
-
|
|
|
474.1
|
|
Other
liabilities
|
|
|
4.1
|
|
|
36.7
|
|
|
199.8
|
|
|
-
|
|
|
240.6
|
|
Stockholders’
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
-
|
|
|
9.0
|
|
|
1,013.9
|
|
|
(1,022.9
|
)
|
|
-
|
|
Class
A and Class B common stock
|
|
|
2.5
|
|
|
100.7
|
|
|
190.3
|
|
|
(291.0
|
)
|
|
2.5
|
|
Additional
paid-in capital
|
|
|
1,271.1
|
|
|
1,280.9
|
|
|
1,296.9
|
|
|
(2,577.8
|
)
|
|
1,271.1
|
|
Retained
earnings
|
|
|
1,919.3
|
|
|
1,553.6
|
|
|
349.1
|
|
|
(1,902.7
|
)
|
|
1,919.3
|
|
Accumulated
other comprehensive
income
|
|
|
349.1
|
|
|
17.8
|
|
|
427.4
|
|
|
(445.2
|
)
|
|
349.1
|
|
Treasury
stock
|
|
|
(124.5
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(124.5
|
)
|
Total
stockholders’ equity
|
|
|
3,417.5
|
|
|
2,962.0
|
|
|
3,277.6
|
|
|
(6,239.6
|
)
|
|
3,417.5
|
|
Total
liabilities and
stockholders’
equity
|
|
$
|
7,659.8
|
|
$
|
3,681.8
|
|
$
|
4,346.6
|
|
$
|
(6,250.0
|
)
|
$
|
9,438.2
|
|
|
|
|
Parent
Company
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Nonguarantors
|
|
Eliminations
|
|
Consolidated
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statement of Income for the Three Months Ended
May 31,
2007
|
Sales
|
|
$
|
202.5
|
|
$
|
492.8
|
|
$
|
663.2
|
|
$
|
(183.1
|
)
|
$
|
1,175.4
|
|
Less
- excise taxes
|
|
|
(28.9
|
)
|
|
(92.4
|
)
|
|
(152.9
|
)
|
|
-
|
|
|
(274.2
|
)
|
Net
sales
|
|
|
173.6
|
|
|
400.4
|
|
|
510.3
|
|
|
(183.1
|
)
|
|
901.2
|
|
Cost
of product sold
|
|
|
(136.3
|
)
|
|
(274.5
|
)
|
|
(389.1
|
)
|
|
166.9
|
|
|
(633.0
|
)
|
Gross
profit
|
|
|
37.3
|
|
|
125.9
|
|
|
121.2
|
|
|
(16.2
|
)
|
|
268.2
|
|
Selling,
general and administrative
expenses
|
|
|
(58.0
|
)
|
|
(71.6
|
)
|
|
(84.3
|
)
|
|
16.3
|
|
|
(197.6
|
)
|
Restructuring
and related charges
|
|
|
-
|
|
|
(0.3
|
)
|
|
(0.1
|
)
|
|
-
|
|
|
(0.4
|
)
|
Acquisition-related
integration costs
|
|
|
(0.1
|
)
|
|
(0.7
|
)
|
|
(1.2
|
)
|
|
-
|
|
|
(2.0
|
)
|
Operating
(loss) income
|
|
|
(20.8
|
)
|
|
53.3
|
|
|
35.6
|
|
|
0.1
|
|
|
68.2
|
|
Equity
in earnings of equity
method
investees and subsidiaries
|
|
|
106.5
|
|
|
72.8
|
|
|
2.5
|
|
|
(106.0
|
)
|
|
75.8
|
|
Gain
on change in fair value of
derivative
instrument
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Interest
(expense) income, net
|
|
|
(55.6
|
)
|
|
(19.1
|
)
|
|
(5.0
|
)
|
|
-
|
|
|
(79.7
|
)
|
Income
before income taxes
|
|
|
30.1
|
|
|
107.0
|
|
|
33.1
|
|
|
(105.9
|
)
|
|
64.3
|
|
(Provision
for) benefit from income
taxes
|
|
|
(0.3
|
)
|
|
(41.8
|
)
|
|
7.9
|
|
|
(0.3
|
)
|
|
(34.5
|
)
|
Net
income
|
|
|
29.8
|
|
|
65.2
|
|
|
41.0
|
|
|
(106.2
|
)
|
|
29.8
|
|
Dividends
on preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Income
available to common
stockholders
|
|
$
|
29.8
|
|
$
|
65.2
|
|
$
|
41.0
|
|
$
|
(106.2
|
)
|
$
|
29.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statement of Income for the Three Months Ended
May 31,
2006
|
Sales
|
|
$
|
319.7
|
|
$
|
764.6
|
|
$
|
569.7
|
|
$
|
(223.8
|
)
|
$
|
1,430.2
|
|
Less
- excise taxes
|
|
|
(37.2
|
)
|
|
(112.6
|
)
|
|
(124.5
|
)
|
|
-
|
|
|
(274.3
|
)
|
Net
sales
|
|
|
282.5
|
|
|
652.0
|
|
|
445.2
|
|
|
(223.8
|
)
|
|
1,155.9
|
|
Cost
of product sold
|
|
|
(219.0
|
)
|
|
(475.9
|
)
|
|
(367.2
|
)
|
|
224.8
|
|
|
(837.3
|
)
|
Gross
profit
|
|
|
63.5
|
|
|
176.1
|
|
|
78.0
|
|
|
1.0
|
|
|
318.6
|
|
Selling,
general and administrative
expenses
|
|
|
(46.2
|
)
|
|
(58.9
|
)
|
|
(67.5
|
)
|
|
-
|
|
|
(172.6
|
)
|
Restructuring
and related charges
|
|
|
-
|
|
|
(2.3
|
)
|
|
-
|
|
|
-
|
|
|
(2.3
|
)
|
Acquisition-related
integration costs
|
|
|
-
|
|
|
(0.7
|
)
|
|
-
|
|
|
-
|
|
|
(0.7
|
)
|
Operating
income
|
|
|
17.3
|
|
|
114.2
|
|
|
10.5
|
|
|
1.0
|
|
|
143.0
|
|
Equity
in earnings of equity
method
investees and subsidiaries
|
|
|
82.7
|
|
|
1.4
|
|
|
0.6
|
|
|
(84.6
|
)
|
|
0.1
|
|
Gain
on change in fair value of
derivative
instrument
|
|
|
-
|
|
|
52.5
|
|
|
-
|
|
|
-
|
|
|
52.5
|
|
Interest
expense, net
|
|
|
(21.5
|
)
|
|
(25.0
|
)
|
|
(2.2
|
)
|
|
-
|
|
|
(48.7
|
)
|
Income
before income taxes
|
|
|
78.5
|
|
|
143.1
|
|
|
8.9
|
|
|
(83.6
|
)
|
|
146.9
|
|
Benefit
from (provision for)
income
taxes
|
|
|
7.0
|
|
|
(67.6
|
)
|
|
(1.0
|
)
|
|
0.2
|
|
|
(61.4
|
)
|
Net
income
|
|
|
85.5
|
|
|
75.5
|
|
|
7.9
|
|
|
(83.4
|
)
|
|
85.5
|
|
Dividends
on preferred stock
|
|
|
(2.5
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2.5
|
)
|
Income
available to common
stockholders
|
|
$
|
83.0
|
|
$
|
75.5
|
|
$
|
7.9
|
|
$
|
(83.4
|
)
|
$
|
83.0
|
|
|
|
Parent
Company
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Nonguarantors
|
|
Eliminations
|
|
Consolidated
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statement of Cash Flows for the Three Months Ended
May 31,
2007
|
Net
cash (used in) provided by
operating
activities
|
|
$
|
(24.8
|
)
|
$
|
23.3
|
|
$
|
(84.6
|
)
|
$
|
-
|
|
$
|
(86.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of business, net of cash
acquired
|
|
|
(1.2
|
)
|
|
(383.8
|
)
|
|
(0.5
|
)
|
|
|
|
|
(385.5
|
)
|
Purchases
of property, plant and
equipment
|
|
|
(0.7
|
)
|
|
(3.7
|
)
|
|
(13.3
|
)
|
|
-
|
|
|
(17.7
|
)
|
Payment
of accrued earn-out amount
|
|
|
-
|
|
|
(2.9
|
)
|
|
-
|
|
|
-
|
|
|
(2.9
|
)
|
Proceeds
from formation of joint
venture
|
|
|
-
|
|
|
-
|
|
|
185.6
|
|
|
|
|
|
185.6
|
|
Proceeds
from sales of businesses
|
|
|
(4.0
|
)
|
|
7.8
|
|
|
(0.8
|
)
|
|
-
|
|
|
3.0
|
|
Proceeds
from sales of assets
|
|
|
-
|
|
|
0.8
|
|
|
1.0
|
|
|
-
|
|
|
1.8
|
|
Other
investing activities
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
cash (used in) provided by
investing
activities
|
|
|
(5.9
|
)
|
|
(381.8
|
)
|
|
172.0
|
|
|
-
|
|
|
(215.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
financings, net
|
|
|
(192.4
|
)
|
|
363.5
|
|
|
(171.1
|
)
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of long-term
debt
|
|
|
700.0
|
|
|
-
|
|
|
16.1
|
|
|
-
|
|
|
716.1
|
|
Net
proceeds from notes payable
|
|
|
15.5
|
|
|
-
|
|
|
74.4
|
|
|
-
|
|
|
89.9
|
|
Exercise
of employee stock options
|
|
|
7.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7.0
|
|
Excess
tax benefits from share-based
payment
awards
|
|
|
5.0
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
5.0
|
|
Purchases
of treasury stock
|
|
|
(500.0
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(500.0
|
)
|
Principal
payments of long-term debt
|
|
|
(0.5
|
)
|
|
(3.3
|
)
|
|
(5.2
|
)
|
|
-
|
|
|
(9.0
|
)
|
Payment
of financing costs of long-term debt
|
|
|
(5.3
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(5.3
|
)
|
Payment
of preferred stock dividends
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Net
cash provided by (used in)
financing
activities
|
|
|
29.3
|
|
|
360.2
|
|
|
(85.8)
|
|
|
-
|
|
|
303.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on
cash
and cash investments
|
|
|
-
|
|
|
- |
|
|
(1.9
|
)
|
|
-
|
|
|
(1.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) increase in cash and
cash
investments
|
|
|
(1.4
|
)
|
|
1.7
|
|
|
(0.3
|
)
|
|
-
|
|
|
-
|
|
Cash
and cash investments, beginning
of
period
|
|
|
2.4
|
|
|
1.1
|
|
|
30.0
|
|
|
-
|
|
|
33.5
|
|
Cash
and cash investments, end of
period
|
|
$
|
1.0
|
|
$
|
2.8
|
|
$
|
29.7
|
|
$
|
-
|
|
$
|
33.5
|
|
|
|
Parent
Company
|
|
Subsidiary
Guarantors
|
|
Subsidiary
Nonguarantors
|
|
Eliminations
|
|
Consolidated
|
|
(in
millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Consolidating Statement of Cash Flows for the Three Months Ended
May 31,
2006
|
Net
cash (used in) provided by
operating
activities
|
|
$
|
(20.8
|
)
|
$
|
74.1
|
|
$
|
(47.7
|
)
|
$
|
-
|
|
$
|
5.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of business, net of cash
acquired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Purchases
of property, plant and
equipment
|
|
|
(0.5
|
)
|
|
(13.1
|
)
|
|
(31.5
|
)
|
|
-
|
|
|
(45.1
|
)
|
Payment
of accrued earn-out amount
|
|
|
-
|
|
|
(1.1
|
)
|
|
-
|
|
|
-
|
|
|
(1.1
|
)
|
Proceeds
from formation of joint
venture
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Proceeds
from sales of businesses
|
|
|
-
|
|
|
-
|
|
|
28.0
|
|
|
-
|
|
|
28.0
|
|
Proceeds
from sales of assets
|
|
|
-
|
|
|
-
|
|
|
0.7
|
|
|
-
|
|
|
0.7
|
|
Other
investing activities
|
|
|
-
|
|
|
(2.1
|
)
|
|
-
|
|
|
-
|
|
|
(2.1
|
)
|
Net
cash used in investing activities
|
|
|
(0.5
|
)
|
|
(16.3
|
)
|
|
(2.8
|
)
|
|
-
|
|
|
(19.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intercompany
financings, net
|
|
|
55.1
|
|
|
(55.6
|
)
|
|
0.5
|
|
|
-
|
|
|
-
|
|
Proceeds
from issuance of long-term
debt
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
proceeds from notes payable
|
|
|
7.5
|
|
|
-
|
|
|
76.4
|
|
|
-
|
|
|
83.9
|
|
Exercise
of employee stock options
|
|
|
8.6
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
8.6
|
|
Excess
tax benefits from share-based
payment
awards
|
|
|
2.8
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2.8
|
|
Purchases
of treasury stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Principal
payments of long-term debt
|
|
|
(50.0
|
)
|
|
(1.4
|
)
|
|
(1.2
|
)
|
|
-
|
|
|
(52.6
|
)
|
Payment
of financing costs of long-term debt
|
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
Payment
of preferred stock dividends
|
|
|
(2.5
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(2.5
|
)
|
Net
cash provided by (used in)
financing
activities
|
|
|
21.5
|
|
|
(57.0
|
)
|
|
75.7
|
|
|
-
|
|
|
40.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate changes on
cash
and cash investments
|
|
|
-
|
|
|
-
|
|
|
0.4
|
|
|
-
|
|
|
0.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and
cash
investments
|
|
|
0.2
|
|
|
0.8
|
|
|
25.6
|
|
|
-
|
|
|
26.6
|
|
Cash
and cash investments, beginning
of
period
|
|
|
0.9
|
|
|
1.2
|
|
|
8.8
|
|
|
-
|
|
|
10.9
|
|
Cash
and cash investments, end of
period
|
|
$
|
1.1
|
|
$
|
2.0
|
|
$
|
34.4
|
|
$
|
-
|
|
$
|
37.5
|
|
18)
|
BUSINESS
SEGMENT INFORMATION:
|
As
a
result of the Company’s investment in Crown Imports, the Company has changed its
internal management financial reporting to consist of three business divisions,
Constellation Wines, Constellation Spirits and Crown Imports. Prior to the
investment in the joint venture, the Company’s internal management financial
reporting included the Constellation Beers business division. Consequently,
the
Company reports its operating results in five segments: Constellation Wines
(branded wine, and wholesale and other), Constellation Spirits (distilled
spirits), Constellation Beers (imported beer), Corporate Operations and Other
and Crown Imports (imported beer). Segment results for Constellation Beers
are
for the period prior to January 2, 2007, and segment results for Crown Imports
are for the period on and after January 2, 2007. Amounts included in the
Corporate Operations and Other segment consist of general corporate
administration and finance expenses. These amounts include costs of executive
management, corporate development, corporate finance, human resources, internal
audit, investor relations, legal, public relations, global
information technology and global strategic sourcing.
Any
costs incurred at the corporate office that are applicable to the segments
are
allocated to the appropriate segment. The amounts included in the Corporate
Operations and Other segment are general costs that are applicable to the
consolidated group and are therefore not allocated to the other reportable
segments. All costs reported within the Corporate Operations and Other segment
are not included in the chief operating decision maker’s evaluation of the
operating income performance of the other operating segments.
The
new
business segments reflect how the Company’s operations are managed, how
operating performance within the Company is evaluated by senior management
and
the structure of its internal financial reporting. The financial information
for
the three months ended May 31, 2006, has been restated to conform to the new
segment presentation.
In
addition, the Company excludes acquisition-related integration costs,
restructuring and related charges and unusual items that affect comparability
from its definition of operating income for segment purposes as these items
are
not reflective of normal continuing operations of the segments. The Company
excludes these items as segment operating performance and segment management
compensation is evaluated based upon a normalized segment operating income.
As
such, the performance measures for incentive compensation purposes for segment
management do not include the impact of these items.
For
the
three months ended May 31, 2007, acquisition-related integration costs,
restructuring and related charges and unusual costs consist of the loss on
the
contribution of the U.K. wholesale business of $6.1 million, the flow through
of
inventory step-up associated primarily with the Company’s acquisition of Vincor
of $2.9 million, accelerated depreciation associated with the Fiscal 2007 Wine
Plan and Fiscal 2006 Plan of $2.1 million, acquisition-related integration
costs
of $2.0 million, and other related costs, restructuring and related charges
and
inventory write-offs associated with the Fiscal 2006 Plan, Fiscal 2007 Wine
Plan
and the Vincor Plan of $0.5 million, $0.4 million and $0.1 million,
respectively. For the three months ended May 31, 2006, acquisition-related
integration costs, restructuring and related charges and unusual costs consist
of the loss on sale of the Company’s branded bottled water business of $14.1
million; restructuring and related charges and other costs associated primarily
with the Fiscal 2006 Plan of $2.3 million and $1.5 million, respectively; the
flow through of adverse grape cost (as
described below) associated
with the acquisition of Robert Mondavi of $1.5 million; accelerated
depreciation costs in connection with the Fiscal 2006 Plan of $1.1 million;
and
acquisition-related integration costs and the flow through of inventory step-up
associated primarily with the acquisition of Robert Mondavi of $0.7
million and $0.6 million, respectively. Adverse grape cost represents the amount
of historical inventory cost on Robert Mondavi’s balance sheet that exceeds the
Company’s estimated ongoing grape cost and is primarily due to the purchase of
grapes by Robert Mondavi prior to the acquisition date at above-market prices
as
required under the terms of their then existing grape purchase
contracts.
The
Company evaluates performance based on operating income of the respective
business units. The accounting policies of the segments are the same as those
described for the Company in the Summary of Significant Accounting Policies
in
Note 1 to the Company’s consolidated financial statements included in the
Company’s Annual Report on Form 10-K for the fiscal year ended February 28,
2007, and include the recently adopted accounting pronouncements described
in
Note 2 herein. Transactions between segments consist mainly of sales of products
and are accounted for at cost plus an applicable margin.
Segment
information is as follows:
|
|
For
the Three Months
Ended
May 31,
|
|
|
|
2007
|
|
2006
|
|
(in
millions)
|
|
|
|
|
|
Constellation
Wines:
|
|
|
|
|
|
Net
sales:
|
|
|
|
|
|
Branded
wine
|
|
$
|
619.9
|
|
$
|
517.2
|
|
Wholesale
and other
|
|
|
184.4
|
|
|
247.3
|
|
Net
sales
|
|
$
|
804.3
|
|
$
|
764.5
|
|
Segment
operating income
|
|
$
|
86.2
|
|
$
|
96.2
|
|
Equity
in earnings of equity method investees
|
|
$
|
2.4
|
|
$
|
0.1
|
|
Long-lived
tangible assets
|
|
$
|
1,603.6
|
|
$
|
1,334.7
|
|
Investment
in equity method investees
|
|
$
|
237.1
|
|
$
|
152.5
|
|
Total
assets
|
|
$
|
8,420.9
|
|
$
|
6,693.3
|
|
Capital
expenditures
|
|
$
|
14.9
|
|
$
|
43.5
|
|
Depreciation
and amortization
|
|
$
|
33.2
|
|
$
|
24.1
|
|
|
|
|
|
|
|
|
|
Constellation
Spirits:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
96.9
|
|
$
|
83.3
|
|
Segment
operating income
|
|
$
|
15.8
|
|
$
|
17.7
|
|
Long-lived
tangible assets
|
|
$
|
101.1
|
|
$
|
94.6
|
|
Total
assets
|
|
$
|
1,100.4
|
|
$
|
669.0
|
|
Capital
expenditures
|
|
$
|
2.5
|
|
$
|
1.4
|
|
Depreciation
and amortization
|
|
$
|
3.2
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
Constellation
Beers:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
$
|
308.1
|
|
Segment
operating income
|
|
$
|
-
|
|
$
|
65.1
|
|
Long-lived
tangible assets
|
|
$
|
-
|
|
$
|
1.0
|
|
Total
assets
|
|
$
|
-
|
|
$
|
234.1
|
|
Capital
expenditures
|
|
$
|
-
|
|
$
|
-
|
|
Depreciation
and amortization
|
|
$
|
-
|
|
$
|
0.4
|
|
|
|
|
|
|
|
|
|
Corporate
Operations and Other:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
-
|
|
$
|
-
|
|
Segment
operating loss
|
|
$
|
(19.7
|
)
|
$
|
(14.2
|
)
|
Long-lived
tangible assets
|
|
$
|
39.5
|
|
$
|
12.4
|
|
Total
assets
|
|
$
|
96.1
|
|
$
|
75.1
|
|
Capital
expenditures
|
|
$
|
0.3
|
|
$
|
0.2
|
|
Depreciation
and amortization
|
|
$
|
2.3
|
|
$
|
1.8
|
|
|
|
|
For
the Three Months
Ended
May 31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
|
|
Crown
Imports:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
658.1
|
|
$
|
-
|
|
Segment
operating income
|
|
$
|
146.3
|
|
$
|
-
|
|
Long-lived
tangible assets
|
|
$
|
2.2
|
|
$
|
-
|
|
Total
assets
|
|
$
|
477.1
|
|
$
|
-
|
|
Capital
expenditures
|
|
$
|
1.1
|
|
$
|
-
|
|
Depreciation
and amortization
|
|
$
|
0.1
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Acquisition-Related
Integration Costs, Restructuring and Related Charges and Unusual
Costs:
|
|
|
|
|
|
|
|
Operating
loss
|
|
$
|
(14.1
|
)
|
$
|
(21.8
|
)
|
|
|
|
|
|
|
|
|
Consolidation
and Eliminations:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
(658.1
|
)
|
$
|
-
|
|
Operating
income
|
|
$
|
(146.3
|
)
|
$
|
-
|
|
Equity
in earnings of Crown Imports
|
|
$
|
73.4
|
|
$
|
-
|
|
Long-lived
tangible assets
|
|
$
|
(2.2
|
)
|
$
|
-
|
|
Investment
in equity method investees
|
|
$
|
208.8
|
|
$
|
-
|
|
Total
assets
|
|
$
|
(268.3
|
)
|
$
|
-
|
|
Capital
expenditures
|
|
$
|
(1.1
|
)
|
$
|
-
|
|
Depreciation
and amortization
|
|
$
|
(0.1
|
)
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Consolidated:
|
|
|
|
|
|
|
|
Net
sales
|
|
$
|
901.2
|
|
$
|
1,155.9
|
|
Operating
income
|
|
$
|
68.2
|
|
$
|
143.0
|
|
Equity
in earnings of equity method investees
|
|
$
|
75.8
|
|
$
|
0.1
|
|
Long-lived
tangible assets
|
|
$
|
1,744.2
|
|
$
|
1,442.7
|
|
Investment
in equity method investees
|
|
$
|
445.9
|
|
$
|
152.5
|
|
Total
assets
|
|
$
|
9,826.2
|
|
$
|
7,671.5
|
|
Capital
expenditures
|
|
$
|
17.7
|
|
$
|
45.1
|
|
Depreciation
and amortization
|
|
$
|
38.7
|
|
$
|
28.7
|
|
19) ACCOUNTING
PRONOUNCEMENTS NOT YET ADOPTED:
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 defines fair
value, establishes a framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 emphasizes that fair value is a market-based measurement, not
an
entity-specific measurement, and states that a fair value measurement should
be
determined based on assumptions that market participants would use in pricing
the asset or liability. The Company is required to adopt SFAS No. 157 for fiscal
years and interim periods beginning March 1, 2008. The Company is currently
assessing the financial impact of SFAS No. 157 on its consolidated financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132(R).” SFAS No. 158 requires companies to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. The Company has adopted this provision of SFAS
No.
158 and has provided the required disclosures as of February 28, 2007. SFAS
No.
158 also requires companies to measure the funded status of a plan as of the
date of the company’s fiscal year-end (with limited exceptions), which provision
the Company is required to adopt as of February 28, 2009. The Company does
not
expect the adoption of the remaining provision of SFAS No. 158 to have a
material impact on its consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159
permits companies to choose to measure many financial instruments and certain
other items at fair value. Most of the provisions in SFAS No. 159 are elective;
however, the amendment to Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities”,
applies
to all entities with available-for-sale and trading securities. The fair value
option established by SFAS No. 159 allows companies to choose to measure
eligible items at fair value at specified election dates. The Company will
report unrealized gains and losses on items for which the fair value option
has
been elected in earnings at each subsequent reporting date. The fair value
option: (i) may be applied instrument by instrument, with a few exceptions,
such
as investments otherwise accounted for by the equity method; (ii) is irrevocable
(unless a new election date occurs); and (iii) is applied only to entire
instruments and not to portions of instruments. The Company is required to
adopt
SFAS No. 159 for fiscal years beginning after February 28, 2009. The Company
does not expect the adoption of SFAS No. 159 to have a material impact on its
consolidated financial statements.
Item
2. Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Overview
The
Company is a leading international producer and marketer of beverage alcohol
brands with a broad portfolio across the wine, spirits and imported beer
categories. The Company continues to supply imported beer in the United States
(“U.S.”) through its investment in Crown Imports (as defined in “Equity Method
Investments in Fiscal 2008 and Fiscal 2007” below). The Company has the largest
wine business in the world and is the largest multi-category (wine, spirits
and
imported beer) supplier of beverage alcohol in the U.S.; a leading producer
and
exporter of wine from Australia and New Zealand; the largest producer and
marketer of wine in Canada; and both a major supplier of beverage
alcohol and, through its investment in Matthew Clark (see “Equity Method
Investments in Fiscal 2008 and Fiscal 2007” below), a major independent drinks
wholesaler in the United Kingdom (“U.K.”).
Through
January 1, 2007, the Company reported its operating results in three segments:
Constellation Wines (branded wines, and U.K. wholesale and other), Constellation
Beers and Spirits (imported beers and distilled spirits) and Corporate
Operations and Other. As a result of the Company’s investment in Crown Imports,
the Company has changed its internal management financial reporting to consist
of three business divisions, Constellation Wines, Constellation Spirits and
Crown Imports. Prior to the investment in Crown Imports, the Company’s internal
management financial reporting included the Constellation Beers business
division. Consequently, as of May 31, 2007, the Company reports its operating
results in five segments: Constellation Wines (branded wine, and wholesale
and
other), Constellation Beers (imported beer), Constellation Spirits (distilled
spirits), Corporate Operations and Other and Crown Imports (imported beer).
Segment results for Constellation Beers are for the period prior to January
2,
2007, and segment results for Crown Imports are for the period on and after
January 2, 2007. Amounts included in the Corporate Operations and Other segment
consist of general corporate administration and finance expenses. These amounts
include costs of executive management, corporate development, corporate finance,
human resources, internal audit, investor relations, legal, public relations,
global
information technology and global strategic sourcing.
Any
costs incurred at the corporate office that are applicable to the segments
are
allocated to the appropriate segment. The amounts included in the Corporate
Operations and Other segment are general costs that are applicable to the
consolidated group and are therefore not allocated to the other reportable
segments. All costs reported within the Corporate Operations and Other segment
are not included in the chief operating decision maker’s evaluation of the
operating income performance of the other operating segments. The new business
segments reflect how the Company’s operations are managed, how operating
performance within the Company is evaluated by senior management and the
structure of its internal financial reporting. The financial information for
First Quarter 2007 (as defined below) has been restated to conform to the new
segment presentation.
In
addition, the Company excludes acquisition-related integration costs,
restructuring and related charges and unusual items that affect comparability
from its definition of operating income for segment purposes as these items
are
not reflective of normal continuing operations of the segments. The Company
excludes these items as segment operating performance and segment management
compensation is evaluated based upon a normalized segment operating income.
As
such, the performance measures for incentive compensation purposes for segment
management do not include the impact of these items.
The
Company’s business strategy is to remain focused across the beverage alcohol
industry by offering a broad range of products in each of the Company’s three
major categories: wine, spirits and, through Crown Imports, imported beer.
The
Company intends to keep its portfolio positioned for superior top-line growth
while maximizing the profitability of its brands. In addition, the Company
seeks
to increase its relative importance to key customers in major markets by
increasing its share of their overall purchasing, which is increasingly
important in a consolidating industry. The Company’s strategy of breadth across
categories and geographies is designed to deliver long-term profitable growth.
This strategy allows the Company more investment choices, provides flexibility
to address changing market conditions and creates stronger
routes-to-market.
Marketing,
sales and distribution of the Company’s products, particularly the Constellation
Wines segment’s products, are managed on a geographic basis in order to fully
leverage leading market positions within each core market. Market dynamics
and
consumer trends vary significantly across the Company’s five core markets (U.S.,
Canada, U.K., Australia and New Zealand) within the Company’s three geographic
regions (North America, Europe and Australia/New Zealand). Within North America,
the Company offers a wide range of beverage alcohol products across the branded
wine and spirits and, through Crown Imports, imported beer categories in the
U.S. and is the largest producer and marketer of branded wines in Canada. In
Europe, the Company leverages its position as the largest wine supplier in
the
U.K. In addition, the Company leverages its investment in Matthew Clark as
a
strategic route-to-market for its imported wine portfolio and as a key supplier
of a full range of beverage alcohol products primarily to the on-premise
business. Within Australia/New Zealand, where consumer trends favor domestic
wine products, the Company leverages its position as one of the largest
producers and marketers of wine in Australia and New Zealand.
The
Company remains committed to its long-term financial model of growing sales
(both organically and through acquisitions), expanding margins and increasing
cash flow to achieve superior earnings per share growth and improve return
on
invested capital.
The
environment for the Company’s products is competitive in each of the Company’s
core markets, due, in part, to industry and retail consolidation. In particular,
the U.K. and Australian markets have grown increasingly competitive, as further
described below. Competition in the U.S. beer and spirits markets is normally
intense, with domestic and imported beer producers increasing brand spending
in
an effort to gain market share.
The
U.K.
wine market is primarily an import market, with Australian wines comprising
nearly one-quarter of all wine sales in the U.K. off-premise business. The
Australian wine market is primarily a domestic market. The Company has leading
share positions in the Australian wine category in both the U.K. and Australian
markets.
These
markets have become increasingly competitive making it difficult for the
Company 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. A surplus of Australian wine has made very low cost
bulk wine available to retailers which has allowed certain of these large
retailers to quickly create and build private label brands in the Australian
wine category. While the Company experienced a slight volume growth in its
U.K.
base branded wine business in First Quarter 2008, with growth in the U.K. wine
market moderating and significant growth in private label brands, the Company
has experienced declines in both volume and pricing in recent
prior quarters. In Australia, the domestic market remains competitive due
to the surplus of Australian bulk wine, resulting in pricing pressures on the
Company’s products, in particular on the box wine category. These conditions are
expected to persist in the near term. These factors have resulted in decreased
gross profit and operating income for First Quarter 2008 associated with the
Company’s Australian portfolio sold in the U.K. and Australia.
Two
years
of record Australian grape harvests in calendar 2004 and 2005 have contributed
to the surplus of Australian bulk wine. The calendar 2006 Australian grape
harvest was slightly lower than the prior year’s harvest. However, this has not
had a significant impact on the current surplus. The calendar 2007 Australian
grape harvest was significantly lower than the calendar 2006 Australian grape
harvest as a result of an ongoing drought and late spring frosts in several
regions. The effects of the ongoing drought conditions are also expected by
many
industry projections to impact the size of the calendar 2008 Australian grape
harvest. Significant reductions in the calendar 2007 and 2008 Australian grape
harvests could have a substantial impact on the current surplus and may result
in higher pricing for Australian bulk wine. In the U.S., the smaller than
average calendar 2006 California grape harvest which followed a larger than
average calendar 2005 California grape harvest should result in overall supply
remaining generally in balance with demand.
For
the
three months ended May 31, 2007 (“First Quarter 2008”), the Company’s net sales
decreased 22% over the three months ended May 31, 2006 (“First Quarter 2007”),
primarily due to (i) the formation of Crown Imports on January 2, 2007, and
Matthew Clark on April 17, 2007, and the accounting for these investments under
the equity method of accounting, and (ii) the Company’s Constellation Wines
segment implementation of a program to reduce distributor wine inventory levels
in the U.S. during the first half of fiscal 2008 (as discussed below),
partially offset by net sales of products acquired in the acquisition of
Vincor and Svedka Acquisition (see “Acquisitions in Fiscal 2008 and 2007”
below) and a favorable foreign currency impact. Operating income decreased
52%
over the comparable prior year period resulting primarily from (i) the decreased
imported beer and U.K. wholesale sales discussed above, and (ii) the decreased
Constellation Wines segment’s net sales discussed above without a corresponding
decrease in promotional, advertising, selling and general and administrative
spend within the Constellation Wines segment. Net income decreased 65% over
the
comparable prior year period primarily due to the factors discussed above
combined with increased interest expense and an increase in the provision for
income taxes, partially offset by an increase in equity in earnings of equity
method investees in connection primarily with Crown Imports.
The
Company’s Constellation Wines segment implemented a program to
reduce
distributor wine inventory levels in the U.S. during the year ending February
29, 2008 (“Fiscal 2008”), in response to the consolidation of distributors over
the past few years and supply chain technology improvements. As distributors
are
looking to operate with lower levels of inventory while maintaining appropriate
service levels to retailers, the Company is working closely with its
distributors on supply-chain efficiencies, thereby
lowering costs for both the Company and its distributors,
and
ultimately making the Company’s brands more competitive in the marketplace. The
Company began its reduction of distributor inventory levels First Quarter 2008
and expects to complete the program during the second quarter of fiscal 2008.
This decision is expected to have a significant impact on the Company’s
Fiscal 2008 financial performance, including a reduction of net sales estimated
to be in the range of $160 million to $190 million and a reduction in diluted
earnings per share estimated to be in the range of $0.15 to
$0.20.
The
following discussion and analysis summarizes the significant factors affecting
(i) consolidated results of operations of the Company for First Quarter 2008
compared to First Quarter 2007 and (ii) financial liquidity and capital
resources for First Quarter 2008. This discussion and analysis also identifies
certain acquisition-related integration costs, restructuring and related charges
and unusual items expected to affect consolidated results of operations of
the
Company for Fiscal 2008. This discussion and analysis should be read in
conjunction with the Company’s consolidated financial statements and notes
thereto included herein and in the Company’s Annual Report on Form 10-K for the
fiscal year ended February 28, 2007 (“Fiscal 2007”). References
to base branded wine net sales and base branded wine gross profit exclude the
impact of branded wine acquired in the acquisition of Vincor.
Acquisitions
in Fiscal 2008 and Fiscal 2007
Acquisition
of Svedka
On
March
19, 2007, the Company acquired the SVEDKA Vodka brand (“Svedka”) in connection
with the acquisition of Spirits Marque One LLC and related business (the “Svedka
Acquisition”). Svedka is a premium Swedish vodka and is the fastest growing
major imported premium vodka in the U.S. Svedka is the fifth largest imported
vodka in the U.S. The acquisition of Svedka supports the Company’s strategy of
expanding the Company’s premium spirits business. The acquisition provides a
foundation from which the Company looks to leverage its existing and future
premium spirits portfolio for growth. In addition, Svedka complements the
Company’s existing portfolio of super-premium and value vodka brands by
adding a premium vodka brand that has experienced rapid
growth.
Total
consideration paid in cash for the Svedka Acquisition was $385.4 million. In
addition, the Company expects to incur direct acquisition costs of approximately
$1.3 million. The purchase price is subject to final closing adjustments which
the Company does not expect to be material. The purchase price was financed
with
revolver borrowings under the Company’s 2006 Credit Agreement.
The
results of operations of the Svedka business are reported in the Constellation
Spirits segment and have been included in the consolidated results of operations
of the Company from the date of acquisition. The Svedka Acquisition will have
a
significant impact on the Company’s interest expense associated with the
additional revolver borrowings.
Acquisition
of Vincor
On
June
5, 2006, the Company acquired all of the issued and outstanding common shares
of
Vincor International Inc. (“Vincor”), Canada’s premier wine company. Vincor is
Canada’s largest producer and marketer of wine. At the time of the acquisition,
Vincor was the world’s eighth largest producer and distributor of wine and
related products by revenue and was also one of the largest wine importers,
marketers and distributors in the U.K. Through this transaction, the Company
acquired various additional winery and vineyard interests used in the production
of premium, super-premium and fine wines from Canada, California, Washington
State, Western Australia and New Zealand. In addition, as a result of the
acquisition, the Company sources, markets and sells premium wines from South
Africa. Well-known premium brands acquired in the acquisition of Vincor
include Inniskillin, Jackson-Triggs, Sawmill Creek, Sumac Ridge, R.H.
Phillips, Toasted Head, Hogue, Kim Crawford and Kumala.
The
acquisition of Vincor supports the Company’s strategy of strengthening the
breadth of its portfolio across price segments and geographic regions to
capitalize on the overall growth in the wine industry. In addition to
complementing the Company’s current operations in the U.S., U.K., Australia and
New Zealand, the acquisition of Vincor increases the Company’s global presence
by adding Canada as another core market and provides
the Company with the ability to capitalize on broader geographic distribution
in
strategic international markets.
In
addition, the acquisition of Vincor makes the Company the largest wine company
in Canada and strengthens the Company’s position as the largest wine company in
the world and the largest premium wine company in the U.S.
Total
consideration paid in cash to the Vincor shareholders was $1,115.8 million.
In
addition, the Company incurred direct acquisition costs of $11.4 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
$1,447.4 million. The purchase price was financed with borrowings under the
Company’s June 2006 Credit Agreement (as defined below). The results of
operations of the Vincor business are reported in the Constellation Wines
segment and are included in the consolidated results of operations of the
Company from the date of acquisition.
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 will
reinforce Matthew Clark’s position as the U.K.’s largest independent premier
drinks wholesaler serving the on-trade drinks industry. The Company received
$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 in the
Company’s Consolidated Statements of Income from the date of
investment.
Investment
in Crown Imports
On
July
17, 2006, Barton Beers, Ltd. (“Barton”), an indirect wholly-owned subsidiary of
the Company, entered into an Agreement to Establish Joint Venture (the “Joint
Venture Agreement”) with Diblo, S.A. de C.V. (“Diblo”), an entity owned 76.75%
by Grupo Modelo, S.A. de C.V. (“Modelo”) and 23.25% by Anheuser-Busch, Inc.,
pursuant to which Modelo’s Mexican beer portfolio (the “Modelo Brands”) will be
exclusively imported, marketed and sold in the 50 states of the U.S., the
District of Columbia and Guam. In addition, the owners of the Tsingtao and
St.
Pauli Girl brands transferred exclusive importing, marketing and selling rights
with respect to these brands in the U.S. to the joint venture. On January 2,
2007, the parties completed the closing (the “Closing”) of the transactions
contemplated in the Joint Venture Agreement, as amended at Closing.
Pursuant
to the Joint Venture Agreement, Barton established Crown Imports LLC, a
wholly-owned subsidiary formed as a Delaware limited liability company. On
January 2, 2007, pursuant to a Barton Contribution Agreement, dated July 17,
2006, among Barton, Diblo and Crown Imports LLC (the “Barton Contribution
Agreement”), Barton transferred to Crown Imports LLC substantially all of its
assets relating to importing, marketing and selling beer under the Corona Extra,
Corona Light, Coronita, Modelo Especial, Negra Modelo, Pacifico, St. Pauli
Girl
and Tsingtao brands and the liabilities associated therewith (the “Barton
Contributed Net Assets”). At the Closing, GModelo Corporation, a Delaware
corporation (the “Diblo Subsidiary”), a subsidiary of Diblo joined Barton as a
member of Crown Imports LLC, and, in exchange for a 50% membership interest
in
Crown Imports LLC, contributed cash in an amount equal to the Barton Contributed
Net Assets, subject to specified adjustments. This imported beers joint venture
is referred to hereinafter as “Crown Imports”.
Also
on
January 2, 2007, Crown Imports and Extrade II S.A. de C.V. (“Extrade II”), an
affiliate of Modelo, entered into an Importer Agreement (the “Importer
Agreement”), pursuant to which Extrade II granted to Crown Imports the exclusive
right to import, market and sell the Modelo Brands in the territories mentioned
above, and Crown Imports and Marcas Modelo, S.A. de C.V. (“Marcas Modelo”),
entered into a Sub-license Agreement (the “Sub-license Agreement”), pursuant to
which Marcas Modelo granted Crown Imports an exclusive sub-license to use
certain trademarks related to the Modelo Brands within this
territory.
As
a
result of these transactions, Barton and Diblo each have, directly or
indirectly, equal interests in Crown Imports and each of Barton and Diblo have
appointed an equal number of directors to the Board of Directors of Crown
Imports.
The
importer agreement that previously gave Barton the exclusive right to import,
market and sell the Modelo Brands primarily west of the Mississippi River was
superseded by the transactions contemplated by the Joint Venture
Agreement,
as
amended. The contribution by Diblo Subsidiary in exchange for a 50% membership
interest in Crown does not constitute the acquisition of a business by the
Company.
The
joint
venture and the related importation arrangements provide that, subject to the
terms and conditions of those agreements, the joint venture and the related
importation arrangements will continue for an initial term of 10 years, and
renew in 10-year periods unless Diblo Subsidiary gives notice prior to the
end
of year seven of any term. Upon
consummation of the transactions, the Company discontinued consolidation of
the
imported beer business and accounts for the investment in Crown Imports under
the equity method. Accordingly, the results of operations of Crown Imports
are
included in the equity in earnings of equity method investees line in the
Company’s Consolidated Statements of Income from the date of
investment.
Results
of Operations
First
Quarter 2008 Compared to First Quarter 2007
Net
Sales
The
following table sets forth the net sales (in millions of dollars) by operating
segment of the Company for First Quarter 2008 and First Quarter
2007.
|
|
First
Quarter 2008 Compared to First Quarter 2007
|
|
|
|
Net
Sales
|
|
|
|
2008
|
|
2007
|
|
%
Increase /
(Decrease)
|
|
Constellation
Wines:
|
|
|
|
|
|
|
|
Branded
wine
|
|
$
|
619.9
|
|
$
|
517.2
|
|
|
20
%
|
|
Wholesale
and other
|
|
|
184.4
|
|
|
247.3
|
|
|
(25)%
|
|
Constellation
Wines net sales
|
|
|
804.3
|
|
|
764.5
|
|
|
5
%
|
|
Constellation
Spirits net sales
|
|
|
96.9
|
|
|
83.3
|
|
|
16
%
|
|
Constellation
Beers net sales
|
|
|
-
|
|
|
308.1
|
|
|
(100)%
|
|
Crown
Imports net sales
|
|
|
658.1
|
|
|
-
|
|
|
N/A
|
|
Consolidations
and eliminations
|
|
|
(658.1
|
)
|
|
-
|
|
|
N/A
|
|
Consolidated
Net Sales
|
|
$
|
901.2
|
|
$
|
1,155.9
|
|
|
(22)%
|
|
Net
sales
for First Quarter 2008 decreased to $901.2 million from $1,155.9 million for
First Quarter 2007, a decrease of $254.7 million, or (22%). This decrease
resulted primarily from a decrease in net sales of $308.1 million and $92.6
million for the Crown Imports and Matthew Clark investments,
respectively, which are accounted for under the equity method of
accounting, and the Company’s implementation of a program to reduce distributor
wine inventory levels in the U.S., partially offset by net sales of products
acquired in the acquisition of Vincor and Svedka Acquisition of $133.7
million and $11.6 million, respectively, and a favorable foreign currency impact
of $32.7 million.
Constellation
Wines
Net
sales
for Constellation Wines increased to $804.3 million for First Quarter 2008
from
$764.5 million in First Quarter 2007, an increase of $39.8 million, or 5%.
Branded wine net sales increased $102.7 million primarily due to $126.3 million
of net sales of branded wine acquired in the acquisition of Vincor and a
favorable foreign currency impact of $17.5 million, partially offset by the
lower U.S. base branded wine net sales resulting primarily from the Company’s
implementation
of a program to reduce
distributor wine inventory levels in the U.S. Wholesale and other net sales
decreased $62.9 million primarily due to a decrease of $92.6 million resulting
from the accounting for the Matthew Clark investment under the equity method
of
accounting, partially offset by a favorable foreign currency impact of $15.3
million.
Constellation
Spirits
Net
sales
for Constellation Spirits increased to $96.9 million for First Quarter 2008
from
$83.3 million for First Quarter 2007, an increase of $13.6 million, or 16%.
This
increase resulted primarily from $11.6 million of net sales of branded spirits
acquired in the Svedka Acquisition.
Constellation
Beers
Net
sales
for Constellation Beers decreased to $308.1 million, or (100%), from First
Quarter 2007 as the Crown Imports investment is accounted for under the
equity method of accounting.
Gross
Profit
The
Company’s gross profit decreased to $268.2 million for First Quarter 2008 from
$318.6 million for First Quarter 2007, a decrease of $50.4 million, or (16%).
The Constellation Wines segment’s gross profit increased $32.5 million primarily
due to increased gross profit of $53.2 million due to the acquisition of
Vincor,
partially offset by lower U.S. base branded wine gross profit of $21.9 million
resulting from the lower U.S. branded wine net sales primarily as a result
of the Company’s implementation of a program to reduce distributor inventory
levels. The Constellation Spirits segment’s gross profit increased slightly
primarily due to increased gross profit of $6.2 million due to the Svedka
Acquisition, partially offset by increased material costs for spirits. The
Constellation Beers segment’s gross profit was down $85.3 million due to the
formation of Crown Imports on January 2, 2007, and the accounting for this
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 higher by $1.9
million
in First Quarter 2008 versus First Quarter 2007. This increase resulted
primarily from increased flow through of inventory step-up of $2.3 million
associated primarily with the acquisition of Vincor. Gross profit as a percent
of net sales increased to 29.8% for First Quarter 2008 from 27.6% for First
Quarter 2007 primarily due to the benefit of reporting the lower margin U.K.
wholesale business under the equity method of accounting in the second half
of
the quarter combined with the sales of higher-margin wine and spirits brands
acquired in the acquisition of Vincor and Svedka Acquisition, respectively,
partially offset by lower margins in the U.S. branded wine business
primarily due to the distributor inventory reduction program.
Selling,
General and Administrative Expenses
Selling,
general and administrative expenses increased to $197.6 million for First
Quarter 2008 from $172.6 million for First Quarter 2007, an increase of $25.0
million, or 14%. This increase is due primarily to an increase of $42.5 million
in the Constellation Wines segment, an increase of $6.2 million in the
Constellation Spirits segment, and an increase of $5.5 million in Corporate
Operations and Other, partially offset by a $20.2 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 $9.0 million. The increase in the Constellation Wines segment’s
selling, general and administrative expenses is primarily due to increased
general and administrative expenses of $15.4
million,
selling expenses of $14.3
million,
and advertising expenses of $12.8
million
resulting primarily from the acquisition of Vincor and the recognition of
an
additional $3.1 million of stock-based compensation expense. The increase
in the
Constellation Spirits segment’s selling, general and administrative expenses is
primarily due to an increase in advertising expenses of $2.8 million and
an
increase in selling expenses of $2.4 million resulting primarily from the
Svedka
Acquisition. The Corporate Operations and Other segment’s selling, general and
administrative expenses were up $5.5 million, primarily due to the recognition
of additional stock-based compensation expense in First Quarter 2008 of $2.4
million and increased general and administrative expenses to support the
Company’s growth. The decrease in unusual costs was primarily due to the
recognition of a $14.1 million loss in First Quarter 2007 on the sale of
the
Company’s branded bottled water business partially offset by the recognition of
a $6.1 million loss in First Quarter 2008 in connection with the contribution
of
the Company’s U.K. wholesale business to the Matthew Clark joint
venture.
Selling,
general and administrative expenses as a percent of net sales increased to
21.9%
for First Quarter 2008 as compared to 14.9% for First Quarter 2007 primarily
due
to (i) accounting for the imported beer business under the equity method
of
accounting and (ii) 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.
Acquisition-Related
Integration Costs
Acquisition-related
integration costs increased to $2.0 million for First Quarter 2008 from $0.7
million for First Quarter 2007. Acquisition-related integration costs for
First
Quarter 2008 consisted of costs recorded primarily in connection with the
Company’s plan to restructure and integrate the operations of Vincor (the
“Vincor Plan”). These costs included $0.4 million of employee-related costs and
$1.6 million of facilities and other one-time costs. Acquisition-related
integration costs for First Quarter 2007 consisted of costs recorded in
connection with the Company’s plan to restructure and integrate the operations
of The Robert Mondavi Corporation (the “Robert Mondavi Plan”).
For
Fiscal 2008, the Company expects to incur total acquisition-related integration
costs of $7.4 million primarily in connection with the Vincor Plan.
Restructuring
and Related Charges
The
Company recorded $0.4 million of restructuring and related charges for First
Quarter 2008 associated primarily with the Company’s worldwide wine
reorganizations announced during Fiscal 2006 and the Company’s program to
consolidate certain west coast production processes in the U.S. (collectively,
the “Fiscal 2006 Plan”). Restructuring and related charges included $0.2 million
of contract termination costs and $0.2 million of facility
consolidation/relocation costs. In addition, in connection with the Company’s
plan to invest in new distribution and bottling facilities in the U.K. and
to
streamline certain Australian wine operations (collectively, the “Fiscal 2007
Wine Plan”), the Fiscal 2006 Plan and the Vincor Plan, the Company recorded (i)
$2.1 million of accelerated depreciation costs and $0.1 million of inventory
write-downs and (ii) $0.5 million of other related costs which were recorded
in
the cost of product sold line and selling, general and administrative expenses
line, respectively, within the Company’s Consolidated Statements of Income. The
Company recorded $2.3 million of restructuring and related charges for First
Quarter 2007 associated primarily with the Fiscal 2006 Plan.
For
Fiscal 2008, the Company expects to incur total restructuring and related
charges of $3.4 million associated with the Fiscal 2006 Plan, Fiscal 2007 Wine
Plan and Vincor Plan. In addition, with respect to these plans, the Company
expects to incur total accelerated depreciation costs, other charges and
inventory write-downs for Fiscal 2008 of $6.9 million, $2.4 million and $0.3
million, respectively.
Operating
Income
The
following table sets forth the operating income (loss) (in millions of dollars)
by operating segment of the Company for First Quarter 2008 and First Quarter
2007.
|
|
First
Quarter 2008 Compared to First Quarter 2007
|
|
|
|
Operating
Income (Loss)
|
|
|
|
2008
|
|
2007
|
|
%
Increase
(Decrease)
|
|
Constellation
Wines
|
|
$
|
86.2
|
|
$
|
96.2
|
|
|
(10)%
|
|
Constellation
Spirits
|
|
|
15.8
|
|
|
17.7
|
|
|
(11)%
|
|
Constellation
Beers
|
|
|
-
|
|
|
65.1
|
|
|
(100)%
|
|
Corporate
Operations and Other
|
|
|
(19.7
|
)
|
|
(14.2
|
)
|
|
39
%
|
|
Crown
Imports
|
|
|
146.3
|
|
|
-
|
|
|
N/A
|
|
Consolidations
and eliminations
|
|
|
(146.3
|
)
|
|
-
|
|
|
N/A
|
|
Total
Reportable Segments
|
|
|
82.3
|
|
|
164.8
|
|
|
(50)%
|
|
Acquisition-Related
Integration Costs,
Restructuring
and Related Charges
and
Unusual Costs
|
|
|
(14.1
|
)
|
|
(21.8
|
)
|
|
(35)%
|
|
Consolidated
Operating Income
|
|
$
|
68.2
|
|
$
|
143.0
|
|
|
(52)%
|
|
As
a
result of the factors discussed above, consolidated operating income decreased
to $68.2 million for First Quarter 2008 from $143.0 million for First Quarter
2007, a decrease of $74.8 million, or (52%). Acquisition-related integration
costs, restructuring and related charges and unusual costs of $14.1 million
for
First Quarter 2008 consist of certain costs that are excluded by management
in
their evaluation of the results of each operating segment. These costs represent
the loss on the contribution of the U.K. wholesale business of $6.1 million,
the
flow through of inventory step-up associated primarily with the Company’s
acquisition of Vincor of $2.9 million, accelerated depreciation associated
with
the Fiscal 2007 Wine Plan and Fiscal 2006 Plan of $2.1 million,
acquisition-related integration costs of $2.0 million, and other related
costs,
restructuring and related charges and inventory write-offs associated with
the
Fiscal 2006 Plan, Fiscal 2007 Wine Plan and the Vincor Plan of $0.5 million,
$0.4 million and $0.1 million, respectively. Acquisition-related integration
costs, restructuring and related charges and unusual costs of $21.8 million
for
First Quarter 2007 represent the loss on sale of the Company’s branded bottled
water business of $14.1 million; restructuring and related charges and other
costs associated primarily with the Fiscal 2006 Plan of $2.3 million and
$1.5
million, respectively; the flow through of adverse grape cost associated
with
the acquisition of The Robert Mondavi Corporation (“Robert Mondavi”) of $1.5
million; accelerated depreciation costs in connection with the Fiscal 2006
Plan
of $1.1 million; and acquisition-related integration costs and the flow through
of inventory step-up associated primarily with the acquisition of Robert
Mondavi
of $0.7 million and $0.6 million, respectively.
Equity
in Earnings of Equity Method Investees
The
Company’s equity in earnings of equity method investees increased to $75.8
million in First Quarter 2008 from $0.1 million in First Quarter 2007. This
increase is primarily due to the January 2, 2007, consummation of the Crown
Imports beer joint venture and the reporting of the results of operations
of
that joint venture since that date under the equity method of accounting
of
$73.4 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 acquisition of Vincor to fix the U.S. dollar cost of the acquisition
and the payment of certain outstanding indebtedness. As of May 31, 2006,
this
derivative instrument had a fair value of $52.5 million. Under SFAS No. 133,
a
transaction that involves a business combination is not eligible for hedge
accounting treatment. As such, the derivative was recorded on the balance
sheet
at its fair value with the change in the fair value recognized separately
on the
Company’s Consolidated Statements of Income.
In
the
second quarter of fiscal 2007, the Company recorded an additional gain of
$2.6
million related to the settlement of the foreign currency forward contract
entered into in conjunction with the acquisition of Vincor.
Interest
Expense, Net
Interest
expense, net of interest income of $0.4 million and $0.9 million, for First
Quarter 2008 and First Quarter 2007, respectively, increased to $79.7 million
for First Quarter 2008 from $48.7 million for First Quarter 2007, an increase
of
$31.0 million, or 64%. The increase resulted primarily from higher average
borrowings in First Quarter 2008 as a result of the funding of the acquisition
of Vincor and the Svedka Acquisition, and the $500.0 million of share
repurchases (see discussion below).
Provision
for Income Taxes
The
Company’s effective tax rate increased to 53.7% for First Quarter 2008 from
41.8% for First Quarter 2007, an increase of 11.9 percentage points.
The
increase in the Company’s effective tax rate for First Quarter 2008 is primarily
due to the recognition of a nondeductible pretax loss of $6.1 million in
connection with the Company’s contribution of its U.K. wholesale business to the
Matthew Clark joint venture and an additional U.S. tax provision of $7.2
million
related to the future repatriation of unremitted earnings. In addition, the
provision for income taxes for First Quarter 2008 included a net $1.4 million
benefit consisting of a $4.0 million reduction in deferred income taxes as
a
result of a prior year legislative change in a certain foreign jurisdiction,
partially offset by a $2.6 million provision related to interest on certain
prior years’ uncertain tax positions.
Net
Income
As
a
result of the above factors, net income decreased to $29.8
million
for First Quarter 2008 from $85.5
million
for First Quarter 2007, a decrease of $55.7 million, or (65%).
Financial
Liquidity and Capital Resources
General
The
Company’s principal use of cash in its operating activities is for purchasing
and carrying inventories and carrying seasonal accounts receivable. The
Company’s primary source of liquidity has historically been cash flow from
operations, except during annual grape harvests when the Company has relied
on
short-term borrowings. In the United States, the annual grape crush normally
begins in August and runs through October. In Australia, the annual grape
crush
normally begins in February and runs through May. The Company generally begins
taking delivery of grapes at the beginning of the crush season with payments
for
such grapes beginning to come due one month later. The Company’s short-term
borrowings to support such purchases generally reach their highest levels
one to
two months after the crush season has ended. Historically, the Company has
used
cash flow from operating activities to repay its short-term borrowings and
fund
capital expenditures. The Company will continue to use its short-term borrowings
to support its working capital requirements. The Company believes that cash
provided by operating activities and its financing activities, primarily
short-term borrowings, will provide adequate resources to satisfy its working
capital, scheduled principal and interest payments on debt, and anticipated
capital expenditure requirements for both its short-term and long-term capital
needs.
First
Quarter 2008 Cash Flows
Operating
Activities
Net
cash
used in operating activities for First Quarter 2008 was $86.1 million, which
resulted from $29.8 million of net income, plus $12.2 million of net non-cash
items charged to the Consolidated Statement of Income, less $110.4 million
representing the net change in the Company’s operating assets and liabilities,
less $17.7 million of other items.
The
net
non-cash items consisted primarily of depreciation of property, plant and
equipment and equity in earnings of equity method investees, net of distributed
earnings. The net change in operating assets and liabilities resulted primarily
from increases in accounts receivable and inventories of $38.9 million and
$27.6
million, respectively, and a decrease in accounts payable of $23.1 million.
The
increase in accounts receivable is primarily due to seasonality as January
and
February are typically the Company’s lowest selling months. The increase in
inventories is primarily attributable to increases in Australian and New
Zealand
inventory levels resulting from the 2007 grape crush. The decrease in accounts
payable was primarily seen in North America due to seasonality as the Company’s
North American accounts payable are typically at their lowest points during
the
summer months prior to the fall harvest. The other items consist primarily
of
$13.1 million of non-cash gains on foreign currency denominated intercompany
balances, which are offset in the income statement by losses on derivative
instruments designed to economically hedge such foreign currency
risks.
Investing
Activities
Net
cash
used in investing activities for First Quarter 2008 was $215.7 million, which
resulted primarily from the use of $385.5 million for the Svedka Acquisition,
partially offset by $185.6 million of net proceeds from the formation of
the
U.K. wholesale joint venture.
Financing
Activities
Net
cash
provided by financing activities for First Quarter 2008 was $303.7 million
resulting primarily from proceeds from issuance of long-term debt of $716.1
million and net proceeds from notes payable of $89.9 million, partially offset
by purchases of treasury stock of $500.0 million.
Share
Repurchases
During
February 2006, the Company’s Board of Directors replenished a June 1998 Board of
Directors authorization to repurchase up to $100.0 million of the Company’s
Class A Common Stock and Class B Common Stock. During the second and third
quarters of 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 Company’s Board of Directors authorized the repurchase of up to $500.0
million of the Company’s Class A Common Stock and Class B Common Stock. During
First Quarter 2008, the Company repurchased 20,399,262 shares of Class A
Common
Stock pursuant to this authorization at an aggregate cost of $500.0 million,
or
an average cost of $24.51 per share, through a combination of open market
transactions and an accelerated share repurchase (“ASR”) transaction that was
announced in May 2007. The Company used revolver borrowings under the 2006
Credit Agreement to pay the purchase price for these shares. The repurchased
shares have become treasury shares. As of May 31, 2007, the Company has no
obligation to make any additional payments or return any shares already received
in connection with the ASR transaction. The Company may be entitled to receive
additional shares pursuant to the ASR transaction at the end of a calculation
period based on the application of a formula. The calculation period is
scheduled to end in October 2007 but may be terminated earlier at the option
of
the counterparty to the ASR transaction.
Debt
Total
debt outstanding as of May 31, 2007, amounted to $4,986.9 million, an increase
of $801.4 million from February 28, 2007. The ratio of total debt to total
capitalization increased to 61.5% as of May 31, 2007, from 55.1% as of February
28, 2007.
Senior
Credit Facility
2006
Credit Agreement
In
connection with the acquisition of Vincor, on June 5, 2006, the Company and
certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and
administrative agent, and certain other agents, lenders, and financial
institutions entered into a new credit agreement (the “June 2006 Credit
Agreement”). On February 23, 2007, the June 2006 Credit Agreement was amended
(the “February Amendment”). The June 2006 Credit Agreement together with the
February Amendment is referred to as the “2006 Credit Agreement”. The 2006
Credit Agreement provides for aggregate credit facilities of $3.9 billion,
consisting of a $1.2 billion tranche A term loan facility due in June 2011,
a
$1.8 billion tranche B term loan facility due in June 2013, and a $900 million
revolving credit facility (including a sub-facility for letters of credit of
up
to $200 million) which terminates in June 2011. Proceeds of the June 2006 Credit
Agreement were used to pay off the Company’s obligations under its prior senior
credit facility, to fund the acquisition of Vincor and to repay certain
indebtedness of Vincor. The Company uses its revolving credit facility under
the
2006 Credit Agreement for general corporate purposes, including working capital,
on an as needed basis.
As
of May
31, 2007, the required principal repayments of the tranche A term loan and
the
tranche B term loan for the remaining nine months of fiscal 2008 and for each
of
the five succeeding fiscal years are as follows:
|
|
Tranche
A
Term
Loan
|
|
Tranche
B
Term
Loan
|
|
Total
|
|
(in
millions)
|
|
|
|
|
|
|
|
2008
|
|
$
|
90.0
|
|
$
|
7.6
|
|
$
|
97.6
|
|
2009
|
|
|
210.0
|
|
|
15.2
|
|
|
225.2
|
|
2010
|
|
|
270.0
|
|
|
15.2
|
|
|
285.2
|
|
2011
|
|
|
300.0
|
|
|
15.2
|
|
|
315.2
|
|
2012
|
|
|
150.0
|
|
|
15.2
|
|
|
165.2
|
|
2013
|
|
|
-
|
|
|
1,431.6
|
|
|
1,431.6
|
|
|
|
$
|
1,020.0
|
|
$
|
1,500.0
|
|
$
|
2,520.0
|
|
The
rate
of interest on borrowings under the 2006 Credit Agreement is a function of
LIBOR
plus a margin, the federal funds rate plus a margin, or the prime rate plus
a
margin. The margin is fixed with respect to the tranche B term loan facility
and
is adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit
Agreement) with respect to the tranche A term loan facility and the revolving
credit facility. As of May 31, 2007, the LIBOR margin for the revolving credit
facility and the tranche A term loan facility is 1.25%, while the LIBOR margin
on the tranche B term loan facility is 1.50%.
The
February Amendment amended the June 2006 Credit Agreement to, among other
things, (i) increase the revolving credit facility from $500.0 million to $900.0
million, which increased the aggregate credit facilities from $3.5 billion
to
$3.9 billion; (ii) increase the aggregate amount of cash payments the Company
is
permitted to make in respect or on account of its capital stock; (iii) remove
certain limitations on the application of proceeds from the incurrence of senior
unsecured indebtedness; (iv) increase the maximum permitted total “Debt Ratio”
and decrease the required minimum “Interest Coverage Ratio”; and (v) eliminate
the “Senior Debt Ratio” covenant and the “Fixed Charges Ratio”
covenant.
The
Company’s obligations are guaranteed by certain of its U.S. subsidiaries. These
obligations are also secured by a pledge of (i) 100% of the ownership interests
in certain of the Company’s U.S. subsidiaries and (ii) 65% of the voting capital
stock of certain of the Company’s foreign subsidiaries.
The
Company and its subsidiaries are also subject to covenants that are contained
in
the 2006 Credit Agreement, including those restricting the incurrence of
additional indebtedness (including guarantees of indebtedness), additional
liens, mergers and consolidations, disposition or acquisition of property,
the
payment of dividends, transactions with affiliates and the making of certain
investments, in each case subject to numerous conditions, exceptions and
thresholds. The financial covenants are limited to maximum total
debt coverage
ratios and minimum interest coverage ratios.
As
of May
31, 2007, under the 2006 Credit Agreement, the Company had outstanding tranche
A
term loans of $1.0 billion bearing an interest rate of 6.6%, tranche B term
loans of $1.5 billion bearing an interest rate of 6.9%, revolving loans of
$45.5
million bearing an interest rate of 6.5%, outstanding letters of credit of
$34.3
million, and $820.2 million in revolving loans available to be
drawn.
As
of May
31, 2007, the Company had outstanding interest rate swap agreements which fixed
LIBOR interest rates on $1.2 billion of the Company’s floating LIBOR rate debt
at an average rate of 4.1% through fiscal
2010.
For the three months ended May 31, 2007, and May 31, 2006, the Company
reclassified $1.8 million, net of tax effect of $1.2 million, and $0.8 million,
net of tax effect of $0.5 million, respectively, from AOCI to the interest
expense, net line in the Company’s Consolidated Statements of Income. This
non-cash
operating activity is included on the other, net line in the Company’s
Consolidated Statements of Cash Flows.
Senior
Notes
As
of May
31, 2007, the Company had outstanding £1.0 million ($2.0 million) aggregate
principal amount of 8 1/2% Series B Senior Notes due November 2009 (the
“Sterling Series B Senior Notes”). In addition, as of May 31, 2007, the Company
had outstanding £154.0 million ($304.6 million, net of $0.3 million unamortized
discount) aggregate principal amount of 8 1/2% Series C Senior Notes due
November 2009 (the “Sterling Series C Senior Notes”). The Sterling Series B
Senior Notes and Sterling Series C Senior Notes are currently redeemable, in
whole or in part, at the option of the Company.
In
addition, as of May 31, 2007, the Company had outstanding $200.0 million
aggregate principal amount of 8% Senior Notes due February 2008 (the “February
2001 Senior Notes”). The February 2001 Senior Notes are currently redeemable, in
whole or in part, at the option of the Company.
Also,
as
of May 31, 2007, the Company had outstanding $693.5 million (net
of
$6.5 million unamortized discount) aggregate
principal amount of 7 1/4%
Senior
Notes due September 2016 (the “August 2006 Senior Notes”). The August 2006
Senior Notes are redeemable, in whole or in part, at the option of the Company
at any time at a redemption price equal to 100% of the outstanding principal
amount and a make whole payment based on the present value of the future
payments at the applicable Treasury Rate plus 50 basis points.
On
May
14, 2007, the Company issued $700.0 million aggregate principal amount of 7
1/4%
Senior Notes due May 2017 (the “May 2007 Senior Notes”). The net proceeds of the
offering ($694.5 million) were used to reduce a corresponding amount of
borrowings under the revolving portion of the Company’s 2006 Credit Agreement.
Interest on the May 2007 Senior Notes is payable semiannually on May 15 and
November 15 of each year, beginning November 15, 2007. The May 2007 Senior
Notes
are redeemable, in whole or in part, at the option of the Company at any time
at
a redemption price equal to 100% of the outstanding principal amount, plus
accrued and unpaid interest to the redemption date, plus a make
whole payment based on the present value of the future payments at the
applicable Treasury Rate plus 50 basis points. The May 2007 Senior Notes are
unsecured senior obligations and rank equally in right of payment to all
existing and future unsecured senior indebtedness of the Company.
Certain of the Company’s significant U.S. operating subsidiaries guarantee the
May 2007 Senior Notes, on an unsecured senior basis. As of May 31, 2007,
the Company had outstanding $700.0 million aggregate principal amount of May
2007 Senior Notes.
Senior
Subordinated Notes
As
of May
31, 2007, the Company had outstanding $250.0 million aggregate principal amount
of 8 1/8% Senior Subordinated Notes due January 2012 (the “January 2002 Senior
Subordinated Notes”). The January 2002 Senior Subordinated Notes are
currently redeemable, in whole or in part, at the option of the
Company.
Subsidiary
Credit Facilities
The
Company has additional credit arrangements totaling $381.6 million as of May
31,
2007. These arrangements primarily support the financing needs of the Company’s
domestic and foreign subsidiary operations. Interest rates and other terms
of
these borrowings vary from country to country, depending on local market
conditions. As of May 31, 2007, amounts outstanding under these arrangements
were $271.3 million.
Accounting
Pronouncements Not Yet Adopted
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157 (“SFAS No. 157”), “Fair Value Measurements.” SFAS No. 157 defines fair
value, establishes a framework for measuring fair value under generally accepted
accounting principles, and expands disclosures about fair value measurements.
SFAS No. 157 emphasizes that fair value is a market-based measurement, not
an
entity-specific measurement, and states that a fair value measurement should
be
determined based on assumptions that market participants would use in pricing
the asset or liability. The Company is required to adopt SFAS No. 157 for fiscal
years and interim periods beginning March 1, 2008. The Company is currently
assessing the financial impact of SFAS No. 157 on its consolidated financial
statements.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158 (“SFAS No. 158”), “Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106,
and 132(R).” SFAS No. 158 requires companies to recognize the overfunded or
underfunded status of a defined benefit postretirement plan (other than a
multiemployer plan) as an asset or liability in its balance sheet and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. The Company adopted this provision of SFAS No.
158
and provided the required disclosures as of February 28, 2007. SFAS No. 158
also
requires companies to measure the funded status of a plan as of the date of
the
company’s fiscal year-end (with limited exceptions), which provision the Company
is required to adopt as of February 28, 2009. The Company does not expect the
adoption of the remaining provision of SFAS No. 158 to have a material impact
on
its consolidated financial statements.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No.
159 (“SFAS No. 159”), “The Fair Value Option for Financial Assets and Financial
Liabilities - Including an Amendment of FASB Statement No. 115.” SFAS No. 159
permits companies to choose to measure many financial instruments and certain
other items at fair value. Most of the provisions in SFAS No. 159 are elective;
however, the amendment to Statement of Financial Accounting Standards No. 115,
“Accounting for Certain Investments in Debt and Equity Securities”,
applies
to all entities with available-for-sale and trading securities. The fair value
option established by SFAS No. 159 allows companies to choose to measure
eligible items at fair value at specified election dates. The Company will
report unrealized gains and losses on items for which the fair value option
has
been elected in earnings at each subsequent reporting date. The fair value
option: (i) may be applied instrument by instrument, with a few exceptions,
such
as investments otherwise accounted for by the equity method; (ii) is irrevocable
(unless a new election date occurs); and (iii) is applied only to entire
instruments and not to portions of instruments. The Company is required to
adopt
SFAS No. 159 for fiscal years beginning after February 28, 2009. The Company
does not expect the adoption of SFAS No. 159 to have a material impact on its
consolidated financial statements.
Information
Regarding Forward-Looking Statements
This
Quarterly Report on Form 10-Q contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are subject
to
a number of risks and uncertainties, many of which are beyond the Company’s
control, 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 Quarterly Report on Form
10-Q, including without limitation statements under Part I - Item 2
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations” regarding (i) the Company’s business strategy, future financial
position, prospects, plans and objectives of management, (ii) the expected
impact upon the Company’s net sales and diluted earnings per share resulting
from the decision to reduce distributor inventory wine levels in the U.S.,
(iii)
the Company’s expected restructuring and related charges, accelerated
depreciation costs, acquisition-related integration costs, and other related
charges, and (iv) information regarding expected actions of third parties are
forward-looking statements. When used in this Quarterly Report on Form 10-Q,
the
words “anticipate,” “intend,” “expect,” and similar expressions are intended to
identify forward-looking statements, although not all forward-looking statements
contain such identifying words. All forward-looking statements speak only as
of
the date of this Quarterly Report on Form 10-Q. The Company undertakes no
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events or otherwise. Although the Company
believes that the expectations reflected in the forward-looking statements
are
reasonable, it can give no assurance that such expectations will prove to be
correct. In addition to the risks and uncertainties of ordinary business
operations, the forward-looking statements of the Company contained in this
Quarterly Report on Form 10-Q are also subject to the risk and uncertainty
that
(i) the impact upon net sales and diluted earnings per share resulting from
the
decision to reduce distributor wine inventory levels will vary from current
expectations due to the actual levels of distributor wine inventory level
reductions and (ii) the Company’s restructuring and related charges, accelerated
depreciation costs, acquisition-related integration costs, and other related
charges may exceed current expectations due to, among other reasons, variations
in anticipated headcount reductions, contract terminations or greater than
anticipated implementation costs. For additional information about risks and
uncertainties that could adversely affect the Company’s forward-looking
statements, please refer to Item 1A “Risk Factors” of the Company’s Annual
Report on Form 10-K for the fiscal year ended February 28, 2007.
Item
3. Quantitative
and Qualitative Disclosures About Market Risk
The
Company, as a result of its global operating, acquisition and financing
activities, is exposed to market risk associated with changes in foreign
currency exchange rates and interest rates. To manage the volatility relating
to
these risks, the Company periodically purchases and/or sells derivative
instruments including foreign currency exchange contracts and interest rate
swap
agreements. The Company uses derivative instruments solely to reduce the
financial impact of these risks and does not use derivative instruments for
trading purposes.
Foreign
currency forward contracts are or may be used to hedge existing foreign currency
denominated assets and liabilities, forecasted foreign currency denominated
sales both to third parties as well as intercompany sales, intercompany
principal and interest payments, and in connection with acquisitions or joint
venture investments outside the U.S. As of May 31, 2007, the Company had
exposures to foreign currency risk primarily related to the Australian dollar,
euro, New Zealand dollar, British pound sterling, Canadian dollar and Mexican
peso.
As
of May
31, 2007, and May 31, 2006, the Company had outstanding foreign exchange
derivative instruments with a notional value of $2,177.3 million and $2,636.3
million,
respectively. Approximately 67% of the Company’s total exposures were hedged as
of May 31, 2007. Using a sensitivity analysis based on estimated fair value
of
open contracts using forward rates, if the contract base currency had been
10%
weaker as of May 31, 2007, and May 31, 2006, the fair value of open foreign
exchange contracts would have been increased by $162.4 million and $27.2
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 Company’s total fixed
rate debt, including current maturities, was $2,282.4 million and $1,017.5
million as of May 31, 2007, and May 31, 2006, respectively. A hypothetical
1%
increase from prevailing interest rates as of May 31, 2007, and May 31, 2006,
would have resulted in a decrease in fair value of fixed interest rate long-term
debt by $112.7 million and $31.3 million, respectively.
As
of May
31, 2007, and May 31, 2006, the Company had outstanding interest rate swap
agreements to minimize interest rate volatility. The swap agreements fix LIBOR
interest rates on $1,200.0 million of the Company’s floating LIBOR rate debt at
an average rate of 4.1% through fiscal 2010. A hypothetical 1% increase from
prevailing interest rates as of May
31,
2007, and May 31, 2006, would have increased the fair value of the interest
rate
swaps by $34.0 million and $41.0 million, respectively.
In
addition to
the
$2,282.4 million and $1,017.5 million estimated fair value of fixed
rate
debt outstanding as of May 31, 2007, and May 31, 2006, respectively, the Company
also had variable rate debt outstanding
(primarily LIBOR based) as of May 31, 2007, and May 31, 2006, of $2,762.3
million and $1,890.3 million, respectively. Using a sensitivity analysis based
on a hypothetical 1% increase in prevailing interest rates over
a
12-month period,
the approximate increase in cash required for interest as of May 31, 2007,
and
May 31, 2006, is $27.6 million and $18.9 million, respectively.
Item
4. Controls
and Procedures
Disclosure
Controls and Procedures
The
Company’s Chief Executive Officer and its Chief Financial Officer have
concluded, based on their evaluation as of the end of the period covered by
this
report, that the Company’s “disclosure controls and procedures” (as defined in
the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective
to ensure that information required to be disclosed in the reports that the
Company files or submits under the Securities Exchange Act of 1934 is (i)
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms, and (ii) is
accumulated and communicated to the Company’s management, including its Chief
Executive Officer and its Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Internal
Control Over Financial Reporting
In
connection with the foregoing evaluation by the Company’s Chief Executive
Officer and its Chief Financial Officer, no changes were identified in the
Company’s “internal control over financial reporting” (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) that occurred
during the Company’s fiscal quarter ended May 31, 2007 that have materially
affected, or are reasonably likely to materially affect, the Company’s internal
control over financial reporting.
PART
II - OTHER INFORMATION
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
ISSUER
PURCHASES OF EQUITY SECURITIES
Period
|
|
Total
Number
of
Shares
Purchased
|
|
Average
Price
Paid
Per
Share
|
|
Total
Number
of
Shares Purchased as
Part
of a Publicly Announced
Program
|
|
Approximate
Dollar Value
of
Shares that May Yet Be
Purchased
Under
the
Program(1)
|
|
March
1 - 31, 2007
|
|
|
-
|
|
$
|
-
|
|
|
-
|
|
$
|
500,000,000
|
|
April
1 - 30, 2007
|
|
|
2,855,600
|
|
|
22.52
|
|
|
2,855,600
|
|
|
435,704,733
|
|
May
1 - 31, 2007
|
|
|
17,543,662(2)
|
|
|
24.84(2)
|
|
|
17,543,662
|
|
|
-
|
|
Total
|
|
|
20,399,262
|
|
$
|
24.51
|
|
|
20,399,262
|
|
$
|
-
|
|
(1) As
announced on March 1, 2007, during February 2007 the Company’s Board of
Directors authorized the repurchase from time to time of up to $500.0 million
of
the Company’s Class A and Class B Common Stock (the “2007 Authorization”). The
Board of Directors did not specify a date upon which this authorization would
expire. The accelerated share repurchase transaction described in footnote
(2)
and the
other purchases reported in this table have utilized fully the 2007
Authorization.
(2) Includes
16,899,062 shares of Class A Common Stock (the “Minimum Shares”) received by the
Company on May 8, 2007, pursuant to a Confirmation, dated May 6, 2007, between
the Company and Citibank, N.A. (“Citibank”) with respect to an accelerated share
repurchase of the Company’s Class A Common Stock (the “Confirmation”). Pursuant
to the Confirmation, the Company paid Citibank a fixed purchase price of
$421,079,174 on May 8, 2006, in exchange for the Minimum Shares. At the end
of a
pricing period, Citibank may be obligated to deliver additional shares of Class
A Common Stock to the Company based on the application of a formula set forth
in
the Confirmation. The average price paid per share reflected in the table is
calculated based on the allocation of the entire purchase price paid
pursuant to the Confirmation to the Minimum Shares.
Item
6. Exhibits
Exhibits
required to be filed by Item 601 of Regulation S-K.
For
the
exhibits that are filed herewith or incorporated herein by reference, see the
Index to Exhibits located on page 50 of this report. The Index to Exhibits
is incorporated herein by reference.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant
has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
CONSTELLATION
BRANDS, INC.
|
|
|
|
Dated:
July 10, 2007
|
By:
|
/s/
Thomas F. Howe
|
|
|
Thomas
F. Howe, Senior Vice President, Controller
|
|
|
|
Dated:
July 10, 2007
|
By:
|
/s/
Robert Ryder
|
|
|
Robert
Ryder, Executive Vice President and Chief Financial Officer (principal
financial officer and principal accounting
officer)
|
INDEX
TO EXHIBITS
|
Exhibit
No.
|
|
2.1
|
|
Agreement
and Plan of Merger, dated as of November 3, 2004, by and among
Constellation Brands, Inc., a Delaware corporation, RMD Acquisition
Corp.,
a California corporation and a wholly-owned subsidiary of Constellation
Brands, Inc., and The Robert Mondavi Corporation, a California
corporation
(filed as Exhibit 2.6 to the Company’s Quarterly Report on Form 10-Q for
the fiscal quarter ended November 30, 2004 and incorporated herein
by
reference).
|
2.2
|
|
Support
Agreement, dated as of November 3, 2004, by and among Constellation
Brands, Inc., a Delaware corporation and certain shareholders of
The
Robert Mondavi Corporation (filed as Exhibit 2.7 to the Company’s
Quarterly Report on Form 10-Q for the fiscal quarter ended November
30,
2004 and incorporated herein by reference).
|
2.3
|
|
Arrangement
Agreement dated April 2, 2006 by and among Constellation Brands,
Inc.,
Constellation Canada Holdings Limited, and Vincor International
Inc.
(filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated
April 2, 2006 and incorporated herein by reference).
|
2.4
|
|
Amending
Agreement, dated as of April 21, 2006 by and among Constellation
Brands,
Inc., Constellation Canada Holdings Limited, and Vincor International
Inc.
(filed as
Exhibit 2.4 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended May 31, 2006 and incorporated herein by
reference).
|
2.5
|
|
Agreement
to Establish Joint Venture, dated July 17, 2006, between Barton
Beers, Ltd. and Diblo, S.A. de C.V. (filed as Exhibit 2.1 to the
Company’s
Current Report on Form 8-K dated July 17, 2006, filed July 18,
2006 and
incorporated herein by reference). +
|
2.6
|
|
Amendment
No. 1, dated as of January 2, 2007 to the Agreement to Establish
Joint
Venture, dated July 17, 2006, between Barton Beers, Ltd.
and Diblo, S.A. de C.V. (filed as Exhibit 2.1 to the Company’s
Current Report on Form 8-K dated January 2, 2007, filed January
3, 2007
and incorporated herein by reference).
+
|
2.7
|
|
Barton
Contribution Agreement, dated July 17, 2006, among Barton Beers,
Ltd.,
Diblo, S.A. de C.V. and Company (a Delaware limited liability company
to
be formed) (filed as Exhibit 2.2 to the Company’s Current Report on Form
8-K dated July 17, 2006, filed July 18, 2006 and incorporated herein
by
reference).+
|
3.1
|
|
Restated
Certificate of Incorporation of the Company (filed as Exhibit 3.2
to the
Company’s Current Report on Form 8-K dated October 11, 2006, filed October
12, 2006 and incorporated herein by
reference).
|
3.2
|
|
By-Laws
of the Company (filed as Exhibit 3.2 to the Company’s Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31, 2002 and incorporated
herein by reference). #
|
4.1
|
|
Indenture,
dated as of February 25, 1999, among the Company, as issuer, certain
principal subsidiaries, as Guarantors, and BNY Midwest Trust Company
(successor Trustee to Harris Trust and Savings Bank), as Trustee
(filed as
Exhibit 99.1 to the Company’s Current Report on Form 8-K dated February
25, 1999 and incorporated herein by reference). #
|
4.2
|
|
Supplemental
Indenture No. 3, dated as of August 6, 1999, by and among the Company,
Canandaigua B.V., Barton Canada, Ltd., Simi Winery, Inc., Franciscan
Vineyards, Inc., Allberry, Inc., M.J. Lewis Corp., Cloud Peak Corporation,
Mt. Veeder Corporation, SCV-EPI Vineyards, Inc., and BNY Midwest Trust
Company (successor Trustee to Harris Trust and Savings Bank), as
Trustee
(filed as Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 1999 and incorporated herein
by
reference). #
|
4.3
|
|
Supplemental
Indenture No. 4, with respect to 8 1/2% Senior Notes due 2009,
dated as of
May 15, 2000, by and among the Company, as Issuer, certain principal
subsidiaries, as Guarantors, and BNY Midwest Trust Company (successor
Trustee to Harris Trust and Savings Bank), as Trustee (filed as
Exhibit
4.17 to the Company’s Annual Report on Form 10-K for the fiscal year ended
February 29, 2000 and incorporated herein by reference).
#
|
4.4
|
|
Supplemental
Indenture No. 5, dated as of September 14, 2000, by and among the
Company,
as Issuer, certain principal subsidiaries, as Guarantors, and BNY
Midwest
Trust Company (successor Trustee to The Bank of New York), as Trustee
(filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 2000 and incorporated herein
by
reference). #
|
4.5
|
|
Supplemental
Indenture No. 6, dated as of August 21, 2001, among the Company,
Ravenswood Winery, Inc. and BNY Midwest Trust Company (successor
trustee
to Harris Trust and Savings Bank and The Bank of New York, as applicable),
as Trustee (filed as Exhibit 4.6 to the Company’s Registration Statement
on Form S-3 (Pre-effective Amendment No. 1) (Registration No. 333-63480)
and incorporated herein by reference).
|
4.6
|
|
Supplemental
Indenture No. 7, dated as of January 23, 2002, by and among the
Company,
as Issuer, certain principal subsidiaries, as Guarantors, and BNY
Midwest
Trust Company, as Trustee (filed as Exhibit 4.2 to the Company’s Current
Report on Form 8-K dated January 17, 2002 and incorporated herein
by
reference). #
|
4.7
|
|
Supplemental
Indenture No. 9, dated as of July 8, 2004, by and among the Company,
BRL
Hardy Investments (USA) Inc., BRL Hardy (USA) Inc., Pacific Wine
Partners
LLC, Nobilo Holdings, and BNY Midwest Trust Company, as Trustee
(filed as
Exhibit 4.10 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004 and incorporated herein by
reference).
|
4.8
|
|
Supplemental
Indenture No. 10, dated as of September 13, 2004, by and among
the
Company, Constellation Trading, Inc., and BNY Midwest Trust Company,
as
Trustee (filed as Exhibit 4.11 to the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended August 31, 2004 and incorporated
herein
by reference).
|
4.9
|
|
Supplemental
Indenture No. 11, dated as of December 22, 2004, by and among the
Company,
The Robert Mondavi Corporation, R.M.E. Inc., Robert Mondavi Winery,
Robert
Mondavi Investments, Robert Mondavi Affilates d/b/a Vichon Winery
and
Robert Mondavi Properties, Inc., and BNY Midwest Trust Company,
as Trustee
(filed as
Exhibit 4.12 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 2004 and incorporated herein by
reference).
|
4.10
|
|
Supplemental
Indenture No. 12, dated as of August 11, 2006, by and among the
Company,
Constellation Leasing, LLC, and BNY Midwest Trust Company, as Trustee
(filed as
Exhibit 4.12 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2006 and incorporated herein by
reference).
|
4.11
|
|
Supplemental
Indenture No. 13, dated as of November 30, 2006, by and among the
Company,
Vincor International Partnership, Vincor International II, LLC,
Vincor
Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor
Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed
as
Exhibit 4.11 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 2006 and incorporated herein by
reference).
|
4.12
|
|
Supplemental
Indenture No. 15, dated as of May 4, 2007, by and among the Company,
Barton SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC,
and BNY
Midwest Trust Company, as Trustee (filed herewith).
|
4.13
|
|
Indenture,
with respect to 8 1/2% Senior Notes due 2009, dated as of November
17,
1999, among the Company, as Issuer, certain principal subsidiaries,
as
Guarantors, and BNY Midwest Trust Company (successor to Harris
Trust and
Savings Bank), as Trustee (filed as Exhibit 4.1 to the Company’s
Registration Statement on Form S-4 (Registration No. 333-94369)
and
incorporated herein by reference).
|
4.14
|
|
Supplemental
Indenture No. 1, dated as of August 21, 2001, among the Company,
Ravenswood Winery, Inc. and BNY Midwest Trust Company (successor
to Harris
Trust and Savings Bank), as Trustee (filed as Exhibit 4.4 to the
Company’s
Quarterly Report on Form 10-Q for the fiscal quarter ended August
31, 2001
and incorporated herein by
reference).#
|
4.15
|
|
Supplemental
Indenture No. 3, dated as of July 8, 2004, by and among the Company,
BRL
Hardy Investments (USA) Inc., BRL Hardy (USA) Inc., Pacific Wine
Partners
LLC, Nobilo Holdings, and BNY Midwest Trust Company, as Trustee
(filed as
Exhibit 4.15 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004 and incorporated herein by
reference).
|
4.16
|
|
Supplemental
Indenture No. 4, dated as of September 13, 2004, by and among the
Company,
Constellation Trading, Inc., and BNY Midwest Trust Company, as
Trustee
(filed as Exhibit 4.16 to the Company’s Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 2004 and incorporated herein
by
reference).
|
4.17
|
|
Supplemental
Indenture No. 5, dated as of December 22, 2004, by and among the
Company,
The Robert Mondavi Corporation, R.M.E. Inc., Robert Mondavi Winery,
Robert
Mondavi Investments, Robert Mondavi Affilates d/b/a Vichon Winery
and
Robert Mondavi Properties, Inc., and BNY Midwest Trust Company,
as Trustee
(filed as
Exhibit 4.18 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 2004 and incorporated herein by
reference).
|
4.18
|
|
Supplemental
Indenture No. 6, dated as of August 11, 2006, by and among the
Company,
Constellation Leasing, LLC, and BNY Midwest Trust Company, as Trustee
(filed as
Exhibit 4.19 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2006 and incorporated herein by
reference).
|
4.19
|
|
Supplemental
Indenture No. 7, dated as of November 30, 2006, by and among the
Company,
Vincor International Partnership, Vincor International II, LLC,
Vincor
Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor
Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed
as
Exhibit 4.18 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 2006 and incorporated herein by
reference).
|
4.20
|
|
Supplemental
Indenture No. 9, dated as of May 4, 2007, by and among the Company,
Barton
SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC, and
BNY Midwest
Trust Company, as Trustee (filed herewith).
|
4.21
|
|
Indenture,
with respect to 8% Senior Notes due 2008, dated as of February
21, 2001,
by and among the Company, as Issuer, certain principal subsidiaries,
as
Guarantors and BNY Midwest Trust Company, as Trustee (filed as
Exhibit 4.1
to the Company’s Registration Statement filed on Form S-4 (Registration
No. 333-60720) and incorporated herein by reference).
|
4.22
|
|
Supplemental
Indenture No. 1, dated as of August 21, 2001, among the Company,
Ravenswood Winery, Inc. and BNY Midwest Trust Company, as Trustee
(filed
as Exhibit 4.7 to the Company’s Pre-effective Amendment No. 1 to its
Registration Statement on Form S-3 (Registration No. 333-63480)
and
incorporated herein by reference).
|
4.23
|
|
Supplemental
Indenture No. 3, dated as of July 8, 2004, by and among the Company,
BRL
Hardy Investments (USA) Inc., BRL Hardy (USA) Inc., Pacific Wine
Partners
LLC, Nobilo Holdings, and BNY Midwest Trust Company, as Trustee
(filed as
Exhibit 4.20 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2004 and incorporated herein by
reference).
|
4.24
|
|
Supplemental
Indenture No. 4, dated as of September 13, 2004, by and among the
Company,
Constellation Trading, Inc., and BNY Midwest Trust Company, as
Trustee
(filed as Exhibit 4.21 to the Company’s Quarterly Report on Form 10-Q for
the fiscal quarter ended August 31, 2004 and incorporated herein
by
reference).
|
4.25
|
|
Supplemental
Indenture No. 5, dated as of December 22, 2004, by and among the
Company,
The Robert Mondavi Corporation, R.M.E. Inc., Robert Mondavi Winery,
Robert
Mondavi Investments, Robert Mondavi Affilates d/b/a Vichon Winery
and
Robert Mondavi Properties, Inc., and BNY Midwest Trust Company,
as Trustee
(filed as
Exhibit 4.24 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 2004 and incorporated herein by
reference).
|
4.26
|
|
Supplemental
Indenture No. 6, dated as of August 11, 2006, by and among the
Company,
Constellation Leasing, LLC, and BNY Midwest Trust Company, as Trustee
(filed as
Exhibit 4.26 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2006 and incorporated herein by
reference).
|
4.27
|
|
Supplemental
Indenture No. 7, dated as of November 30, 2006, by and among the
Company,
Vincor International Partnership, Vincor International II, LLC,
Vincor
Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor
Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed
as
Exhibit 4.25 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended November 30, 2006 and incorporated herein by
reference).
|
4.28
|
|
Supplemental
Indenture No. 9, dated as of May 4, 2007, by and among the Company,
Barton
SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC, and
BNY Midwest
Trust Company, as Trustee (filed herewith).
|
4.29
|
|
Indenture,
with respect to 7.25% Senior Notes due 2016, dated as of August
15, 2006,
by and among the Company, as Issuer, certain subsidiaries, as Guarantors
and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.1
to the
Company’s Current Report on Form 8-K dated August 15, 2006, filed August
18, 2006 and incorporated herein by reference).
|
4.30
|
|
Supplemental
Indenture No. 1, dated as of August 15, 2006, among the Company,
as
Issuer, certain subsidiaries, as Guarantors
and BNY Midwest Trust Company, as Trustee (filed as Exhibit 4.2
to the
Company’s Current Report on Form 8-K dated August 15, 2006, filed August
18, 2006 and incorporated herein by
reference).
|
4.31
|
|
Supplemental
Indenture No. 2, dated as of November 30, 2006, by and among the
Company,
Vincor International Partnership, Vincor International II, LLC,
Vincor
Holdings, Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., Vincor
Finance, LLC, and BNY Midwest Trust Company, as Trustee (filed
as Exhibit
4.28 to
the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 2006 and incorporated herein by reference).
|
4.32
|
|
Supplemental
Indenture No. 3, dated as of May 4, 2007, by and among the Company,
Barton
SMO Holdings LLC, ALCOFI INC., and Spirits Marque One LLC, and
BNY Midwest
Trust Company, as Trustee (filed herewith).
|
4.33
|
|
Indenture,
with respect to 7 1/4% Senior Notes due May 2017, dated May 14,
2007, by
and among the Company, as Issuer, certain subsidiaries, as Guarantors,
and
The Bank of New York Trust Company, N.A., as Trustee (filed as
Exhibit 4.1
to the Company’s Current Report on Form 8-K dated May 9, 2007, filed May
14, 2007 and incorporated herein by reference).
|
4.34
|
|
Registration
Rights Agreement, with respect to 7 1/4% Senior Notes due May 2017,
dated
May 14, 2007, among the Company, certain subsidiaries, as Guarantors,
and
Banc of America Securities LLC and Citigroup Global Markets Inc.,
as
Initial Purchasers (filed as Exhibit 4.2 to the Company’s Current Report
on Form 8-K dated May 9, 2007, filed May 14, 2007 and incorporated
herein
by reference).
|
4.35
|
|
Credit
Agreement,
dated as of June 5, 2006, among Constellation, the Subsidiary
Guarantors party thereto, the Lenders party thereto, JPMorgan Chase
Bank,
N.A., as Administrative Agent, Citicorp North America, Inc., as
Syndication Agent, J.P. Morgan Securities Inc. and Citigroup Global
Markets Inc., as Joint Lead Arrangers and Bookrunners, and The
Bank of
Nova Scotia and SunTrust Bank, as Co-Documentation Agents (filed
as
Exhibit 4.1 to the Company’s Current Report on Form 8-K, dated June 5,
2006, filed June 9, 2006 and incorporated herein by
reference).
|
4.36
|
|
Amendment
No. 1, dated as of February 23, 2007, to the Credit Agreement,
dated as of
June 5, 2006, among Constellation, the subsidiary guarantors referred
to
on the signature pages to such Amendment No. 1, and JPMorgan Chase
Bank,
N.A., in its capacity as Administrative Agent
(filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K, dated
and filed February 23, 2007, and incorporated herein by
reference).
|
4.37
|
|
Guarantee
Assumption Agreement, dated as of August 11, 2006, by Constellation
Leasing, LLC, in favor of JPMorgan Chase Bank, N.A., as Administrative
Agent, pursuant to the Credit Agreement dated as of June 5, 2006
(as
modified and supplemented and in effect from time to time) (filed
as
Exhibit 4.29 to the Company’s Quarterly Report on Form 10-Q for the fiscal
quarter ended August 31, 2006 and incorporated herein by
reference).
|
4.38
|
|
Guarantee
Assumption Agreement, dated as of November 30, 2006, by Vincor
International Partnership, Vincor International II, LLC, Vincor
Holdings,
Inc., R.H. Phillips, Inc., The Hogue Cellars, Ltd., and Vincor
Finance,
LLC in favor of JPMorgan Chase Bank, N.A., as Administrative Agent,
pursuant to the Credit Agreement dated as of June 5, 2006 (as modified
and
supplemented and in effect from time to time) (filed as Exhibit
4.31 to
the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended
November 30, 2006 and incorporated herein by
reference).
|
4.39
|
|
Guarantee
Assumption Agreement, dated as of May 4, 2007, by Barton SMO Holdings
LLC,
ALCOFI INC., and Spirits Marque One LLC in favor of JPMorgan Chase
Bank,
N.A., as Administrative Agent, pursuant to the Credit Agreement
dated as
of June 5, 2006 (as modified and supplemented and in effect from
time to
time) (filed herewith).
|
10.1
|
|
Amendment
Number Three to the Company’s Annual Management Incentive Plan (filed as
Exhibit 99.1 to the Company’s Current Report on Form 8-K dated
April 27, 2007, filed May 2, 2007 and incorporated herein by
reference).*
|
10.2
|
|
2008
Fiscal Year Award Program for Executive Officers to the Company’s Annual
Management Incentive Plan (filed
herewith).
*+
|
10.3
|
|
Guarantee
Assumption Agreement, dated as of May 4, 2007, by Barton SMO Holdings
LLC,
ALCOFI INC., and Spirits Marque One LLC in favor of JPMorgan Chase
Bank,
N.A., as Administrative Agent, pursuant to the Credit Agreement
dated as
of June 5, 2006 (as modified and supplemented and in effect from
time to
time) (filed as Exhibit 4.39 to the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended May 31, 2007 and incorporated
herein by
reference).
|
10.4
|
|
Confirmation,
dated as of May 6, 2007, with respect to an Issuer Forward Repurchase
Transaction between the Company and Citibank, N.A. (filed
herewith).
|
10.5
|
|
Letter
Agreement dated April 26, 2007 (together with addendum dated May
8, 2007)
between the Company and Robert Ryder addressing compensation (filed
herewith).*
|
10.6
|
|
Purchase
Agreement, dated May 9, 2007, among the Company, certain subsidiaries,
as
Guarantors, and Banc of America Securities LLC and Citigroup Global
Markets Inc., as Initial Purchasers (filed as Exhibit 99.1 to the
Company’s Current Report on Form 8-K dated May 9, 2007, filed May 14, 2007
and incorporated herein by reference).
|
10.7
|
|
First
Amendment to the Constellation Brands, Inc. 2005 Supplemental Executive
Retirement Plan (filed herewith).
*
|
31.1
|
|
Certificate
of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of
the Securities Exchange Act of 1934, as amended (filed
herewith).
|
31.2
|
|
Certificate
of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a)
of
the Securities Exchange Act of 1934, as amended (filed
herewith).
|
32.1
|
|
Certification
of Chief Executive Officer pursuant to Section 18 U.S.C. 1350 (filed
herewith).
|
32.2
|
|
Certification
of Chief Financial Officer pursuant to Section 18 U.S.C. 1350 (filed
herewith).
|
*
Designates management contract or compensatory plan or arrangement.
#
Company’s Commission File No. 001-08495. For filings prior to October 4, 1999,
use Commission File No. 000-07570.
+
This
Exhibit has been filed separately with the Commission pursuant to an application
for confidential treatment. The confidential portions of this Exhibit have
been
omitted and are marked by an asterisk.
The
Company agrees, upon request of the Securities and Exchange Commission, to
furnish copies of each instrument that defines the rights of holders of
long-term debt of the Company or its subsidiaries that is not filed herewith
pursuant to Item 601(b)(4)(iii)(A) because the total amount of long-term debt
authorized under such instrument does not exceed 10% of the total assets of
the
Company and its subsidiaries on a consolidated basis.