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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the fiscal year ended February 28, 2011
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________________ to ____________________
Commission File Number 001-08495
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 16-0716709 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) |
207 High Point Drive, Building 100, Victor, New York 14564
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (585) 678-7100
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Name of each exchange on which registered | |||
| Class A Common Stock (par value $.01 per share) | New York Stock Exchange | |||
| Class B Common Stock (par value $.01 per share) | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act. Yes X No ___
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Act.
Yes ____ No X
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes X No ___
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes
X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check One):
Large accelerated filer X
|
Accelerated filer ___ | |
Non-accelerated filer ___
|
Smaller reporting company ___ | |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes ____ No X
The aggregate market value of the voting common equity held by non-affiliates of the registrant,
based upon the closing sales prices of the registrant’s Class A and Class B Common Stock as
reported on the New York Stock Exchange as of the last business day of the registrant’s most
recently completed second fiscal quarter was $2,998,865,745. On that date the registrant had no
non-voting common equity.
The number of shares outstanding with respect to each of the classes of common stock of
Constellation Brands, Inc., as of April 19, 2011, is set forth below:
| Class | Number of Shares Outstanding | |||
Class A Common Stock, par value $.01 per share
|
189,422,727 | |||
Class B Common Stock, par value $.01 per share
|
23,600,158 | |||
Class 1 Common Stock, par value $.01 per share
|
None | |||
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement of Constellation Brands, Inc. to be issued for the Annual Meeting of
Stockholders which is expected to be held July 21, 2011 is incorporated by reference in Part III to
the extent described therein.
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Table of Contents
This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These forward-looking statements are subject to a number of risks and uncertainties, many of which
are beyond the Company’s control, which could cause actual results to differ materially from those
set forth in, or implied by, such forward-looking statements. All statements other than statements
of historical fact included in this Annual Report on Form 10-K, including without limitation the
statements under Item 1 “Business” and Item 7 “Management’s Discussion and Analysis of Financial
Condition and Results of Operations” regarding (i) the Company’s business strategy, future
financial position, prospects, plans and objectives of management, (ii) the Company’s expected
restructuring charges, accelerated depreciation and other costs, (iii) information concerning
expected or potential actions of third parties, (iv) information concerning the future expected
balance of supply and demand for wine, (v) the expected impact upon results of operations
resulting from the Company’s decision to consolidate its U.S. distributor network, and (vi) the
duration of the share repurchase implementation are forward-looking statements. When used in this
Annual Report on Form 10-K, the words “anticipate,” “intend,” “expect,” and similar expressions are
intended to identify forward-looking statements, although not all forward-looking statements
contain such identifying words. All forward-looking statements speak only as of the date of this
Annual Report on Form 10-K. The Company undertakes no obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise.
Although the Company believes that the expectations reflected in the forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to be correct. In addition
to the risks and uncertainties of ordinary business operations and conditions in the general
economy and markets in which the Company competes, the forward-looking statements of the Company
contained in this Annual Report on Form 10-K are also subject to the risk and uncertainty that (i)
the impact upon results of operations resulting from the decision to consolidate the Company’s U.S.
distributor network will vary from current expectations due to actual U.S. distributor experience, (ii) the actual balance of supply
and demand for wine products will vary from current expectations due to, among other reasons,
actual consumer demand, (iii) the Company’s restructuring charges, accelerated depreciation
and other costs may vary materially from current expectations due to, among other reasons,
variations in anticipated headcount reductions, contract terminations or modifications, equipment
relocation, product portfolio rationalizations, production footprint, and/or other costs of
implementation, and (iv) the amount and timing of any share repurchases may vary
due to market conditions, the Company’s cash and debt position, and other factors as determined by management from time to time. Additional important factors that could cause actual results to differ materially from
those set forth in, or implied, by the Company’s forward-looking statements contained in this
Annual Report on Form 10-K are those described in Item 1A “Risk Factors” and elsewhere in this
report and in other Company filings with the Securities and Exchange Commission.
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PART I
Item 1. Business.
Introduction
Unless the context otherwise requires, the terms “Company,” “we,” “our,” or “us” refer to
Constellation Brands, Inc. and its subsidiaries, and all references to “net sales” refer to gross
sales less promotions, returns and allowances, and excise taxes to conform with the Company’s
method of classification. All references to “Fiscal 2011,”
“Fiscal 2010,” and “Fiscal 2009” refer
to the Company’s fiscal year ended the last day of February of the indicated year. All references
to “Fiscal 2012” refer to the Company’s fiscal year ending February 29, 2012.
Market positions and industry data discussed in this Annual Report on Form 10-K are as of
calendar 2010 and have been obtained or derived from industry and government publications and
Company estimates. The industry and government publications include: Beverage Information Group;
Impact Databank Review and Forecast; SymphonyIRI Group; Nielsen; Beer Marketer’s Insights;
Euromonitor International; International Wine and Spirit Record; Association for Canadian
Distillers; and AZTEC. The Company has not independently verified the data from the industry and
government publications. Unless otherwise noted, all references to market positions are based on
equivalent unit volume.
The Company is a Delaware corporation incorporated on December 4, 1972, as the successor to a
business founded in 1945. The Company has approximately 4,300 employees located primarily in the
United States (“U.S.”) and Canada with the corporate headquarters located in Victor, New York. The
Company conducts its business through entities it wholly owns as well as through a variety of joint
ventures and other entities.
The Company is the world’s leading premium wine company with a leading market position in each
of its core markets, which include the U.S., Canada and New Zealand. Prior to January
31, 2011, the Company had a leading market position in both Australia and the United Kingdom
(“U.K.”) through its Australian and U.K. business. On January 31, 2011, the Company sold 80.1% of
its Australian and U.K. business as part of its efforts to premiumize its portfolio and improve
margins and return on invested capital (see additional discussion regarding this divestiture
below). The Company’s wine portfolio is complemented by select premium spirits brands and other
select beverage alcohol products.
The Company is the leading marketer of imported beer in the U.S. through its investment in
Crown Imports, a joint venture with Grupo Modelo, S.A.B. de C.V. (“Modelo”) pursuant to which
Modelo’s Mexican beer portfolio (the “Modelo Brands”) are imported, marketed and sold by the joint
venture in the U.S. along with certain other imported brands.
Many of the Company’s products are recognized leaders in their respective categories and
geographic markets. The Company’s strong market positions make the Company a supplier of choice to
many of its customers, who include wholesale distributors, retailers, on-premise locations and
government alcohol beverage control agencies.
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The Company reports net sales in two reportable segments – Constellation Wines North America
and Constellation Wines Australia and Europe (see additional discussion regarding business segments
below). Net sales reported by these segments (based on the location of the selling company) are
summarized as follows:
| For the Year | For the Year | |||||||||||||||
| Ended | Ended | |||||||||||||||
| February 28, | % of | February 28, | % of | |||||||||||||
| 2011 | Total | 2010 | Total | |||||||||||||
| (in millions) | ||||||||||||||||
Constellation Wines North America |
$ | 2,557.3 | 77% | $ | 2,434.7 | 72% | ||||||||||
Constellation Wines Australia
and Europe |
774.7 | 23% | 930.1 | 28% | ||||||||||||
Consolidated Net Sales |
$ | 3,332.0 | 100% | $ | 3,364.8 | 100% | ||||||||||
During the past 10 years, there have been certain key trends within the beverage alcohol
industry, which include:
| • | Consolidation of suppliers, wholesalers and retailers; | ||
| • | An increase in global wine consumption, with premium wines growing faster than value-priced wines; | ||
| • | Premium spirits growing faster than value-priced spirits; and | ||
| • | High-end beer (imports and crafts) growing faster than domestic beer in the U.S. |
To capitalize on these trends and become more competitive, the Company has generally employed
a strategy focused on a combination of organic growth, acquisitions and investments in joint
ventures and other entities, with an increasing focus on the higher-margin premium categories of
the beverage alcohol industry. Key elements of the Company’s strategy include:
| • | Leveraging its existing portfolio of leading brands; | ||
| • | Developing new products, new packaging and line extensions; | ||
| • | Strengthening relationships with wholesalers and retailers; | ||
| • | Expanding distribution of its product portfolio; | ||
| • | Enhancing production capabilities; | ||
| • | Realizing operating efficiencies and synergies; and | ||
| • | Maximizing asset utilization. |
Over the last four fiscal years, the Company has complemented this strategy by divesting
certain businesses, brands, and assets as part of its efforts to increase its mix of premium
brands, improve margins, create operating efficiencies and reduce debt.
A challenging global economic environment contributed to some slowing of premium wine industry
growth during calendar 2008 and the first half of calendar 2009. Premium wine industry growth
began to show improvement in the second half of calendar 2009 and this trend continued in calendar
2010. The Company believes consumers will continue to trade up to premium wines over the
long-term.
Recent Divestitures
In January 2011, the Company sold 80.1% of its Australian and U.K. business (the
“CWAE Divestiture”) at a transaction value of $266.9 million, subject to post-closing adjustments.
The Company received cash proceeds, net of cash divested of $15.8 million and direct costs paid of
$2.3 million, of $221.3 million, subject to post-closing adjustments, and retained a 19.9% interest
in the business. This transaction is consistent with the Company’s strategic focus on premiumizing
the Company’s portfolio and improving margins and return on invested capital.
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In January 2010, the Company sold its U.K. cider business for cash proceeds of £43.9 million
($71.6 million), net of direct costs to sell. This transaction is consistent with the Company’s
strategic focus on premium higher-growth, higher-margin wine, beer and spirits brands.
In March 2009, as part of its strategic focus on higher-margin premium brands in its
portfolio, the Company sold its value spirits business for $336.4 million, net of direct costs to
sell. The Company received $276.4 million, net of direct costs to sell, in cash proceeds and a
note receivable for $60.0 million. In the first quarter of fiscal 2011, the Company received full
payment of the note receivable. The Company retained the SVEDKA Vodka and Black Velvet Canadian
Whisky premium spirit brands, which have marketplace scale and higher margins than the value
spirits brands that were sold. To achieve synergies and operating efficiencies, these brands were
consolidated into the Company’s North American wine operations during Fiscal 2010.
In June 2008, the Company sold certain businesses consisting of several California wineries
and wine brands that had been acquired as part of the December 2007 acquisition of the Fortune
Brands U.S. wine business, as well as certain wineries and wine brands from the states of
Washington and Idaho (collectively, the “Pacific Northwest Business”) for cash proceeds of $204.2
million, net of direct costs to sell. This transaction contributed to the Company’s streamlining
of its U.S. wine portfolio by eliminating brand duplication and reducing excess production
capacity.
For more information about these transactions, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K.
Business Segments
As a result of the Company’s changes during the first quarter of fiscal 2011 within its
internal management structure for its Australian and U.K. business, and the Company’s revised
business strategy within these markets, the Company changed its internal management financial
reporting on May 1, 2010, to consist of four business divisions: Constellation Wines North
America, Constellation Wines Australia and Europe, Constellation Wines New Zealand and Crown
Imports. However, due to a number of factors, including the size of the Constellation Wines New
Zealand segment’s operations, the similarity of its economic characteristics and long-term
financial performance with that of the Constellation Wines North America business, and the fact
that the vast majority of the wine produced by the Constellation Wines New Zealand operating
segment is sold in the U.S. and Canada, the Company has aggregated the results of this operating
segment with its Constellation Wines North America operating segment to form one reportable
segment. Accordingly, beginning May 1, 2010, the Company began reporting its operating results in
four segments: Constellation Wines North America (wine and spirits) (“CWNA”), Constellation Wines
Australia and Europe (wine) (“CWAE”), Corporate Operations and Other, and Crown Imports (imported
beer). Prior to the changes noted above, the Company’s internal management financial reporting
consisted of two business divisions, Constellation Wines and Crown Imports. The business segments,
described more fully below, reflect how the Company’s operations are managed, how operating
performance within the Company is evaluated by senior management and the structure of its internal
financial reporting. As a result of the January 2011 CWAE Divestiture, as of February 1, 2011, the
Company is no longer reporting operating results for the CWAE segment.
Information regarding net sales, operating income and total assets of each of the Company’s
business segments and information regarding geographic areas is set forth in Note 23 to the
Company’s consolidated financial statements located in Item 8 of this Annual Report on Form 10-K.
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Constellation Wines North America
CWNA is the leading producer and marketer of premium wine in the world. It has a leading
market position in each of its core markets – U.S., Canada and New Zealand and sells a large
number of wine brands across all categories – table wine, sparkling wine and dessert wine – and
across all price points – popular, premium, super-premium and fine wine. The portfolio of
super-premium and fine wines is supported by vineyard holdings in the U.S., Canada and New Zealand.
Wine produced by the Company in the U.S. is primarily marketed domestically and in the U.K. and
Canada. Wine produced in New Zealand is primarily marketed domestically and in the U.S., Canada,
Australia and the U.K., while wine produced in Canada is primarily marketed domestically. In
addition, CWNA exports its wine products to other major wine consuming markets of the world.
In
the U.S., CWNA sells 14 of the top-selling 100 table wine brands and is the leading premium
wine company. In Canada, it has wine across all price points, and has seven of the top-selling 25
table wine brands and the leading icewine brand with Inniskillin.
CWNA’s well-known wine brands include Robert Mondavi Brands, Clos du Bois, Blackstone,
Estancia, Arbor Mist, Toasted Head, Simi, Black Box, Ravenswood, Rex Goliath, Kim Crawford,
Franciscan Estate, Wild Horse, Ruffino, Nobilo, Mount Veeder, Inniskillin and Jackson-Triggs.
Premium spirit brands in CWNA’s portfolio include SVEDKA Vodka, Black Velvet Canadian Whisky
and Paul Masson Grande Amber Brandy, all of which have a leading position in their respective
categories.
CWNA is also a leading producer and marketer of wine kits and beverage alcohol refreshment
drinks in Canada.
In conjunction with its wine production, CWNA produces and sells bulk wine and other related
products and services.
Constellation Wines Australia and Europe
Prior to the January 2011 CWAE Divestiture, the Company’s CWAE segment was a leading producer
and marketer of wine in Australia and a leading marketer of wine in the U.K. Wine produced by the
Company in Australia was primarily marketed domestically and in the U.K. CWAE had wine brands
across all price points and varieties, and was the leading producer of value-priced cask (box)
wines in Australia.
Crown Imports
In January 2007, the Company completed the formation of the Crown Imports joint venture with
Modelo. The Company and Modelo indirectly each have an equal interest in Crown Imports, which has
the exclusive right to import, market and sell the Modelo Brands, which include Corona Extra,
Corona Light, Coronita, Modelo Especial, Pacifico, Negra Modelo and Victoria, as well as the St.
Pauli Girl and Tsingtao brands in all 50 states of the U.S. In the U.S., Crown Imports has six of
the top-selling 25 imported beer brands. Corona Extra is the best-selling imported beer and the
sixth best-selling beer overall and Corona Light is the leading imported light beer, while St.
Pauli Girl is the number two selling German Beer and Tsingtao is the number one selling Chinese
Beer. The Company accounts for its investment in Crown Imports under the equity method.
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Corporate Operations and Other
The Corporate Operations and Other segment includes traditional corporate-related items
including executive management, corporate development, corporate finance, human resources, internal
audit, investor relations, legal, public relations, global information technology and global supply
chain.
Marketing and Distribution
The Company’s segments employ full-time, in-house marketing, sales and customer service
organizations to maintain a high degree of focus on their respective product categories. The
organizations use a range of marketing strategies and tactics designed to build brand equity and
increase sales, including market research, consumer and trade advertising, price promotions,
point-of-sale materials, event sponsorship, on-premise promotions and public relations. Where
opportunities exist, particularly with national accounts in the U.S., the Company leverages its
sales and marketing skills across the organization and segments.
In North America, the Company’s products are primarily distributed by wholesale distributors
as well as state and provincial alcoholic beverage control agencies. As is the case with all other
beverage alcohol companies, products sold through state or provincial alcoholic beverage control
agencies are subject to obtaining and maintaining listings to sell the Company’s products in that
agency’s state or province. State and provincial governments can affect prices paid by consumers
of the Company’s products. This is possible either through the imposition of taxes or, in states
and provinces in which the government acts as the distributor of the Company’s products through an
alcohol beverage control agency, by directly setting retail prices for the Company’s products. In
New Zealand, the Company’s products are primarily distributed either directly to retailers or
through wholesalers and importers with the distribution channels dominated by a small number of
industry leaders.
Trademarks and Distribution Agreements
Trademarks are an important aspect of the Company’s business. The Company sells its products
under a number of trademarks, which the Company owns or uses under license. Throughout its
segments, the Company also has various licenses and distribution agreements for the sale, or the
production and sale, of its products and products of third parties. These licenses and
distribution agreements have varying terms and durations. At the end of the Company’s year ended
February 28, 2011, these agreements included, among others, a long-term license agreement with the
B. Manischewitz Company, which expires in 2042, for the Manischewitz brand, and a distribution,
importation and license agreement with Baron Philippe de Rothschild which expires in December 2016
for the Mouton Cadet brand. Additionally, in connection with the CWAE Divestiture, the Company
entered into distribution, importation and license agreements that expire in 2014 regarding the
distribution, importation and licensing of products owned by the divested business which include
various brands, such as, but not limited to, the Hardy’s brands.
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All of the Company’s imported beer products are imported, marketed and sold through Crown
Imports. Crown Imports has entered into exclusive importation agreements with the suppliers of the
imported beer products. These agreements have terms that vary and prohibit Crown Imports from
importing beer products from other producers from the same country. Crown Imports’ Mexican beer
portfolio, the Modelo Brands, currently consists of the Corona Extra, Corona Light, Coronita,
Modelo Especial, Negra Modelo, Pacifico and Victoria brands. Crown Imports has the right to market
and sell the Modelo Brands in all 50 states of the U.S., the District of Columbia and Guam. Crown
Imports also has entered into license and importation agreements with the owners of the German St.
Pauli Girl and the Chinese Tsingtao brands for their importation, marketing and sale within the
U.S. With respect to the Modelo Brands, Crown Imports has an exclusive sub-license to use certain
trademarks related to Modelo Brands beer products in the U.S. (including the District of Columbia
and Guam) pursuant to a sub-license agreement between Crown Imports and Marcas Modelo, S.A. de C.V.
This sub-license agreement continues for the duration of the Crown Imports joint venture.
Crown Imports and Extrade II S.A. de C.V. (“Extrade II”), an affiliate of Modelo,
have entered into an Importer Agreement, pursuant to which Extrade II granted to Crown Imports the
exclusive right to sell the Modelo Brands in the territories mentioned above. The joint venture
and the related importation arrangements provide that, subject to the terms and conditions of those
agreements, the joint venture and the related importation arrangements will continue through 2016
for an initial term of 10 years, and renew in 10-year periods unless GModelo Corporation, a
Delaware corporation and subsidiary of Diblo, S.A. de C.V. (“Diblo”), gives notice prior to the end
of year seven of any term.
Competition
The beverage alcohol industry is highly competitive. The Company competes on the basis of
quality, price, brand recognition and distribution strength. The Company’s beverage alcohol
products compete with other alcoholic and non-alcoholic beverages for consumer purchases, as well
as shelf space in retail stores, restaurant presence and wholesaler attention. The Company
competes with numerous multinational producers and distributors of beverage alcohol products, some
of which have greater resources than the Company.
CWNA’s
principal wine competitors include: E&J Gallo Winery, The Wine
Group, Treasury Wine Estates, W.J.
Deutsch & Sons, Ste. Michelle Wine Estates, Kendall-Jackson and Diageo in the U.S.; Andrew Peller,
Treasury Wine Estates, Kruger and E&J Gallo Winery in Canada; and Pernod Ricard, Lion Nathan and
Treasury Wine Estates in New Zealand. CWNA’s principal distilled spirits competitors include:
Diageo, Fortune Brands, Pernod Ricard, Bacardi and Brown-Forman.
Crown Imports’ principal competitors include: Anheuser-Busch InBev, MillerCoors and Heineken.
Production
In the U.S., the Company operates 18 wineries where wine is produced from many varieties of
grapes grown principally in the Napa, Sonoma, Monterey and San Joaquin regions of California. The
Company also operates nine wineries in Canada and four wineries in New Zealand. Grapes are crushed
at most of the Company’s wineries and stored as wine until packaged for sale under the Company’s
brand names or sold in bulk. In the U.S. and Canada, the Company’s inventories of wine are usually
at their highest levels in September through November during and after the crush of each year’s
grape harvest, and are reduced prior to the subsequent year’s crush. Similarly, in New Zealand,
the Company’s inventories of wine are usually at their highest levels in March through May during
and after the crush of each year’s grape harvest, and are reduced prior to the subsequent year’s
crush.
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The Company’s Canadian whisky requirements are produced and aged at its Canadian distillery in
Lethbridge, Alberta. The Company’s requirements of grains and bulk spirits it uses in the
production of Canadian whisky are purchased from various suppliers.
Sources and Availability of Production Materials
The principal components in the production of the Company’s branded beverage alcohol products
are agricultural products, such as grapes and grain, and packaging materials (primarily glass).
Most of the Company’s annual grape requirements are satisfied by purchases from each year’s
harvest which normally begins in August and runs through October in the U.S. and Canada, and begins
in February and runs through May in New Zealand. The Company believes that it has adequate sources
of grape supplies to meet its sales expectations. However, when demand for certain wine products
exceeds expectations, the Company sources the extra requirements from the bulk wine markets.
Depending upon overall demand, the Company could experience shortages.
The Company receives grapes from approximately 1,160 independent growers in the U.S.,
approximately 110 independent growers in New Zealand and approximately 110 independent growers in
Canada. The Company enters into written purchase agreements with a majority of these growers and
pricing generally varies year-to-year and is generally based on then-current market prices.
At February 28, 2011, the Company owned or leased approximately 17,900 acres of land and
vineyards, either fully bearing or under development, in California (U.S.), New York (U.S.), Canada
and New Zealand. This acreage supplies only a small percentage of the Company’s overall total
grape needs for wine production. However, most of this acreage is used to supply a large portion
of the grapes used for the production of the Company’s super-premium and fine wines. The Company
continues to consider the purchase or lease of additional vineyards, and additional land for
vineyard plantings, to supplement its grape supply.
The distilled spirits manufactured and imported by the Company require various agricultural
products, neutral grain spirits and bulk spirits. The Company fulfills its requirements through
purchases from various sources by contractual arrangement and through purchases on the open market.
The Company believes that adequate supplies of the aforementioned products are available at the
present time.
The Company utilizes glass and polyethylene terephthalate (“PET”) bottles and other materials
such as caps, corks, capsules, labels, wine bags and cardboard cartons in the bottling and
packaging of its products. After grape purchases, glass bottle costs are the largest component of
the Company’s cost of product sold. In the U.S. and Canada, the glass bottle industry is highly
concentrated with only a small number of producers. The Company has traditionally obtained, and
continues to obtain, its glass requirements from a limited number of producers under long-term
supply arrangements. Currently, one producer supplies most of the Company’s glass container
requirements for its U.S. operations and another producer supplies a majority of the Company’s
glass container requirements for its Canadian operations. The Company has been able to satisfy its
requirements with respect to the foregoing and considers its sources of supply to be adequate at
this time. However, the inability of any of the Company’s glass bottle suppliers to satisfy the
Company’s requirements could adversely affect the Company’s operations.
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Government Regulation
The Company is subject to a range of regulations in the countries in which it operates. Where
it produces products, the Company is subject to environmental laws and regulations and may be
required to obtain permits and licenses to operate its facilities. Where it markets and sells
products, it may be subject to laws and regulations on trademark and brand registration, packaging
and labeling, distribution methods and relationships, pricing and price changes, sales promotions,
advertising and public relations. The Company is also subject to rules and regulations relating to
changes in officers or directors, ownership or control.
The Company believes it is in compliance in all material respects with all applicable
governmental laws and regulations in the countries in which it operates. The Company also believes
that the cost of administration and compliance with, and liability under, such laws and regulations
does not have, and is not expected to have, a material adverse impact on its financial condition,
results of operations or cash flows.
Seasonality
The beverage alcohol industry is subject to seasonality in each major category. As a result,
in response to wholesaler and retailer demand which precedes consumer purchases, the Company’s wine
and spirits sales are typically highest during the third quarter of its fiscal year, primarily due
to seasonal holiday buying. Crown Imports’ imported beer sales are typically highest during the
first and second quarters of the Company’s fiscal year, which correspond to the Spring and Summer
periods in the U.S.
Employees
As of the end of March 2011, the Company had approximately 4,300 full-time employees.
Approximately 2,800 full-time employees were in the U.S. and approximately 1,500 full-time
employees were outside of the U.S., primarily in Canada and New Zealand. Additional workers may be
employed by the Company during the grape crushing seasons. The Company considers its employee
relations generally to be good.
Company Information
The Company’s internet address is http://www.cbrands.com. The Company’s filings with the
Securities and Exchange Commission (“SEC”), including its annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or
furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are accessible
free of charge at http://www.cbrands.com as soon as reasonably practicable after the Company
electronically files such material with, or furnishes it to, the SEC. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other information
regarding issuers, such as the Company, that file electronically with the SEC. The internet
address of the SEC’s site is http://www.sec.gov. Also, the public may read and copy any materials
that the Company files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E.,
Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330.
The Company has adopted a Chief Executive Officer and Senior Financial Executive Code of
Ethics that specifically applies to its chief executive officer, its principal financial officer,
and controller. This Chief Executive Officer and Senior Financial Executive Code of Ethics meets
the requirements as set forth in the Securities Exchange Act of 1934, Item 406 of Regulation S-K.
The Company has posted on its internet website a copy of the Chief Executive Officer and Senior
Financial Executive Code of Ethics. It is located at
http://www.cbrands.com/investors/corporate-governance.
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The Company also has adopted a Code of Business Conduct and Ethics that applies to all
employees, directors and officers, including each person who is subject to the Chief Executive
Officer and Senior Financial Executive Code of Ethics. The Code of Business Conduct and Ethics is
available on the Company’s internet website, together with the Company’s Global Code of Responsible
Practices for Beverage Alcohol Advertising and Marketing, its Board of Directors Corporate
Governance Guidelines and the Charters of the Board’s Audit Committee, Human Resources Committee
(which serves as the Board’s compensation committee) and Corporate Governance Committee (which
serves as the Board’s nominating committee). All of these materials are accessible on the
Company’s Internet site at http://www.cbrands.com/investors/corporate-governance. Amendments to,
and waivers granted to the Company’s directors and executive officers under the Company’s codes of
ethics, if any, will be posted in this area of the Company’s website. A copy of the Code of
Business Conduct and Ethics, Global Code of Responsible Practices for Beverage Alcohol Advertising
and Marketing, Chief Executive Officer and Senior Financial Executive Code of Ethics, and/or the
Board of Directors Corporate Governance Guidelines and committee charters are available in print to
any shareholder who requests it. Shareholders should direct such requests in writing to Investor
Relations Department, Constellation Brands, Inc., 207 High Point Drive, Building 100, Victor, New
York 14564, or by telephoning the Company’s Investor Center at 1-888-922-2150.
The foregoing information regarding the Company’s website and its content is for your
convenience only. The content of the Company’s website is not deemed to be incorporated by
reference in this report or filed with the SEC.
Item 1A. Risk Factors.
In addition to the other information set forth in this report, you should carefully consider
the following factors which could materially affect our business, financial condition or results of
operations. The risks described below are not the only risks we face. Additional factors not
presently known to us or that we currently deem to be immaterial also may materially adversely
affect our business, cash flows, financial condition or results of operations in future periods.
Worldwide and domestic economic trends and financial market conditions could adversely impact our
financial performance.
Although we believe the severe worldwide and domestic economic conditions experienced over
recent years have improved, the degree and pace of recovery is uncertain and is expected to vary
around the globe. Worldwide and domestic economies remain subject to prolongation, exacerbation
and expansion of adverse conditions. We are subject to risks associated with adverse economic
conditions, including economic slowdown, inflation, and the disruption, volatility and tightening
of credit and capital markets.
In addition, adverse global or domestic economic situations could adversely impact our major
suppliers, distributors and retailers. The inability of suppliers, distributors or retailers to
conduct business or to access liquidity could impact our ability to produce and distribute our
products. We have a committed credit facility and additional liquidity facilities available to us.
While to date we have not experienced problems with accessing these facilities, to the extent that
the financial institutions that participate in these facilities were to default on their obligation
to fund, those funds would not be available to us.
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The timing and nature of any recovery in the financial markets remains uncertain, and there
can be no assurance that market conditions will improve in the near future. A prolonged downturn,
further worsening or broadening of the adverse conditions in the worldwide and domestic economies,
or return of high levels of inflation could affect consumer spending patterns and purchases of our
products, and create or exacerbate credit issues, cash flow issues and other financial hardships
for us and for our suppliers, distributors, retailers and consumers. Depending upon their severity
and duration, these conditions could have a material adverse impact on our business, liquidity,
financial condition and results of operations. We are not able to predict the pace of recovery of the recent adverse
economic conditions in the United States and our other major markets outside the United States.
Our indebtedness could have a material adverse effect on our financial health.
We have incurred substantial indebtedness to finance our acquisitions. In the future, we may
incur substantial additional indebtedness to finance further acquisitions, the buyback of our
shares or for other purposes. Our ability to satisfy our debt obligations outstanding from time to
time will depend upon our future operating performance. We do not have complete control over our
future operating performance because it is subject to prevailing economic conditions, levels of
interest rates and financial, business and other factors. We cannot assure you that our business
will generate sufficient cash flow from operations to meet all of our debt service requirements and
to fund our capital expenditure requirements.
Our current and future debt service obligations and covenants could have important
consequences to you. These consequences include, or may include, the following:
| • | Our ability to obtain financing for future working capital needs or acquisitions or other purposes may be limited; | ||
| • | Our funds available for operations, expansion or distributions will be reduced because we will dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our indebtedness; | ||
| • | Our ability to conduct our business could be limited by restrictive covenants; and | ||
| • | Our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, thus, our ability to withstand competitive pressures may be limited. |
Our senior credit facility and the indentures under which our debt securities have been issued
contain restrictive covenants. These covenants affect our ability to, among other things, grant
liens and restrict changes of control and certain other fundamental changes. Our senior credit
facility also contains covenants that restrict our ability to make acquisitions, incur debt, sell
assets, pay dividends, enter into transactions with affiliates and make investments. It also
contains certain financial covenants, including a debt ratio test and an interest coverage ratio
test. These covenants could limit our ability to conduct business. If we fail to comply with the
obligations contained in the senior credit facility, our existing or future indentures or other
loan agreements, we could be in default under such agreements, which could require us to
immediately repay the related debt and also debt under other agreements that may contain
cross-acceleration or cross-default provisions.
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Our acquisition, divestiture and joint venture strategies may not be successful.
We have made a number of acquisitions and we anticipate that we may, from time to time,
acquire additional businesses, assets or securities of companies that we believe would provide a
strategic fit with our business. We will need to integrate acquired businesses with our existing
operations. We cannot assure you that we will effectively assimilate the business or product
offerings of acquired companies into our business or realize anticipated operational synergies.
Integrating the operations and personnel of acquired companies into our existing operations or
separating from our existing operations the operations and personnel of businesses of which we
divest may result in difficulties, significant expense and accounting charges, disrupt our business
or divert management’s time and attention. In connection with the integration of acquired
operations or the conduct of our overall business strategies, we may periodically restructure our
businesses and/or sell assets or portions of our business, including the recent sales of 80.1% of
our Australian and U.K. business, our U.K. cider business and our value spirits business. We may
not achieve expected cost savings or efficiencies from restructuring activities or realize the
expected proceeds from sales of assets or portions of our business, and actual charges, costs and
adjustments due to restructuring activities may vary materially from our estimates. We may provide
various indemnifications in connection with the sale of assets or portions of our business.
Additionally, our final determinations and appraisals of the fair value of assets acquired and
liabilities assumed in our acquisitions may vary materially from earlier estimates. We cannot
assure you that the fair value of acquired businesses will remain constant.
Acquisitions involve numerous other risks, including potential exposure to unknown liabilities
of acquired companies and the possible loss of key employees and customers of the acquired
business. In connection with acquisitions or joint venture investments outside the U.S., we may
enter into derivative contracts to purchase foreign currency in order to hedge against the risk of
foreign currency fluctuations in connection with such acquisitions or joint venture investments,
which subjects us to the risk of foreign currency fluctuations associated with such derivative
contracts.
We have also acquired or retained equity or membership interests in companies which we do not
control, such as our holdings in Ruffino S.r.l. and our retained 19.9% interest in certain
companies that comprised our Australian and U.K. business. The other parties that hold the
remaining equity or membership interests in these types of companies may at any time have economic,
business or legal interests or goals that are inconsistent with our goals or the goals of those
companies. The arrangements through which we acquired or hold our equity or membership interests
may require us, among other matters, to pay certain costs or to purchase other parties’ interests. Our
failure to adequately manage the risks associated with any acquisition, or the failure of an entity
in which we have an equity or membership interest, could adversely affect our financial condition
or our valuation of these types of investments.
We have entered into joint ventures, including our joint venture with Modelo and our holdings
in Opus One Winery LLC, and we may enter into additional joint ventures. We share control of our
joint ventures. Our joint venture partners may at any time have economic, business or legal
interests or goals that are inconsistent with our goals or the goals of the joint venture. Our
joint venture arrangements may require us, among other matters, to pay certain costs or to make
certain capital investments. In addition, our joint venture partners may be unable to meet their
economic or other obligations and we may be required to fulfill those obligations alone. Our
failure or the failure of an entity in which we have a joint venture interest to adequately manage
the risks associated with any acquisitions or joint ventures could have a material adverse effect
on our financial condition or results of operations.
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We cannot assure you that any of our acquisitions, investments or joint ventures will be
profitable or that forecasts regarding joint venture activities will be accurate. In particular,
risks and uncertainties associated with our joint ventures include, among others, the joint
venture’s ability to operate its business successfully, the joint venture’s ability to develop
appropriate standards, controls, procedures and policies for the growth and management of the joint
venture and the strength of the joint venture’s relationships with its employees, suppliers and
customers.
Competition could have a material adverse effect on our business.
We are in a highly competitive industry and the dollar amount and unit volume of our sales
could be negatively affected by our inability to maintain or increase prices, changes in geographic
or product mix, a general decline in beverage alcohol consumption or the decision of wholesalers,
retailers or consumers to purchase competitive products instead of our products. Wholesaler,
retailer and consumer purchasing decisions are influenced by, among other things, the perceived
absolute or relative overall value of our products, including their quality or pricing, compared to
competitive products. Unit volume and dollar sales could also be affected by pricing, purchasing,
financing, operational, advertising or promotional decisions made by wholesalers, state and
provincial agencies, and retailers which could affect their supply of, or consumer demand for, our
products. We could also experience higher than expected selling, general and administrative
expenses if we find it necessary to increase the number of our personnel or our advertising or
marketing expenditures to maintain our competitive position or for other reasons.
An increase in import and excise duties or other taxes or government regulations could have a
material adverse effect on our business.
The U.S., Canada and other countries in which we operate impose import and excise duties and
other taxes on beverage alcohol products in varying amounts which have been subject to change.
Significant increases in import and excise duties or other taxes on beverage alcohol products could
materially and adversely affect our financial condition or results of operations. Many U.S. states
have considered proposals to increase, and some of these states have increased, state alcohol
excise taxes. There may be further consideration by governmental entities to increase taxes upon
beverage alcohol products as governmental entities explore available alternatives for raising funds
during the current macroeconomic climate. In addition, federal, state, local and foreign
governmental agencies extensively regulate the beverage alcohol products industry concerning such
matters as licensing, trade and pricing practices, permitted and required labeling, advertising and
relations with wholesalers and retailers. Certain federal and state or provincial regulations also
require warning labels and signage. New or revised regulations or increased licensing fees,
requirements or taxes could also have a material adverse effect on our financial condition or
results of operations.
Benefit cost increases could reduce our profitability.
Our profitability is affected by employee medical costs and other employee
benefits. In recent years, employee medical costs have increased due to factors such as the
increase in health care costs in the U.S. These factors, plus the enactment of the Patient
Protection and Affordable Care Act in March 2010, will continue to put pressure on our business and
financial performance due to higher employee benefit costs. Although we actively seek to control
increases in employee benefit costs and encourage employees to maintain healthy lifestyles to
reduce future potential medical costs, there can be no assurance that we will succeed in limiting
future cost increases. Continued employee benefit cost increases could have an adverse affect on
our results of operations and financial condition.
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We also sponsor a very limited number of defined benefit plans that cover some of our non-U.S.
employees. Our costs of providing defined benefit plans are dependent upon a number of factors,
such as discount rates, the rates of return on the plans’ assets, exchange rate fluctuations,
future governmental regulation, global equity prices, and our required and/or voluntary
contributions to the plans. Without sustained growth in pension investments over time to increase
the value of the plans’ assets, and depending upon the other factors relating to worldwide and
domestic economic trends and financial market conditions, we could be required to increase funding
for some or all of our defined benefit plans.
We rely on the performance of wholesale distributors, major retailers and government agencies for
the success of our business.
Local market structures and distribution channels vary worldwide. In the U.S., we sell our
products principally to wholesalers for resale to retail outlets including grocery stores, club and
discount stores, package liquor stores and restaurants and also directly to government agencies,
while in Canada, we sell our products principally to government agencies. In the U.S., we have
entered into exclusive arrangements with certain wholesalers that
generate a large portion of our
U.S. net sales. The replacement or poor performance of our major wholesalers, retailers or
government agencies could materially and adversely affect our results of operations and financial
condition. Our inability to collect accounts receivable from our major wholesalers, retailers or
government agencies could also materially and adversely affect our results of operations and
financial condition.
The industry is being affected by the trend toward consolidation in the wholesale and retail
distribution channels, particularly in the U.S. If we are unable to successfully adapt to this
changing environment, our net income, market share and volume growth could be negatively affected.
In addition, wholesalers and retailers of our products offer products which compete directly with
our products for retail shelf space and consumer purchases. Accordingly, wholesalers or retailers
may give higher priority to products of our competitors. In the future, our wholesalers and
retailers may not continue to purchase our products or provide our products with adequate levels of
promotional support.
Our business could be adversely affected by a decline in the consumption of products we sell.
While over the past several years there have been modest increases in consumption of beverage
alcohol in most of our product categories and geographic markets, there have been periods in the
past in which there were substantial declines in the overall per capita consumption of beverage
alcohol products in the U.S. and other markets in which we participate. A limited or general
decline in consumption in one or more of our product categories could occur in the future due to a
variety of factors, including:
| • | A general decline in economic or geo-political conditions; | ||
| • | Increased concern about the health consequences of consuming beverage alcohol products and about drinking and driving; | ||
| • | A general decline in the consumption of beverage alcohol products in on-premise establishments, such as may result from smoking bans and stricter laws related to driving while under the influence of alcohol; | ||
| • | A trend toward a healthier diet including lighter, lower calorie beverages such as diet soft drinks, sports drinks and water products; | ||
| • | The increased activity of anti-alcohol groups; | ||
| • | Increased federal, state, provincial or foreign excise or other taxes on beverage alcohol products; and | ||
| • | Increased regulation placing restrictions on the purchase or consumption of beverage alcohol products. |
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We are primarily a branded consumer products company and we rely on consumers’ demand for our
products. Consumer preferences may shift due to a variety of factors, including changes in
demographic or social trends, public health policies, and changes in leisure, dining and beverage
consumption patterns. Our continued success will require us to anticipate and respond effectively
to shifts in consumer behavior and drinking tastes. If consumer preferences were to move away from
our premium brands in any of our major markets, our financial results might be adversely affected.
Other factors may also reduce consumer spending on our products, including economic declines,
inflation, a trend towards frugality even as the economy improves, wars, pandemics, weather, and
natural or man-made disasters. As the cost of gasoline and other petroleum-based products
increases, consumers may not have as much discretionary funds available to buy our products.
In addition, our continued success depends, in part, on our ability to develop new
products. The launch and ongoing success of new products are inherently uncertain especially with
regard to their appeal to consumers. The launch of a new product can give rise to a variety of
costs and an unsuccessful launch, among other things, can affect consumer perception of existing
brands. Unsuccessful implementation or short-lived popularity of our product innovations may
result in inventory write-offs and other costs.
We generally purchase raw materials under short-term supply contracts, and we are subject to
substantial price fluctuations for grapes and grape-related materials, and we have a limited group
of suppliers of glass bottles.
Our business is heavily dependent upon raw materials, such as grapes, grape juice concentrate,
grains, alcohol and packaging materials from third-party suppliers. We could experience raw
material supply, production or shipment difficulties that could adversely affect our ability to
supply goods to our customers. Increases in the costs of raw materials also directly affect us. In
the past, we have experienced dramatic increases in the cost of grapes. Although we believe we
have adequate sources of grape supplies, we could experience shortages if the demand for particular
wine products exceeds expectations.
The wine industry swings between cycles of grape oversupply and undersupply. In a severe
oversupply environment, the ability of wine producers, including ourselves, to raise prices is
limited, and, in certain situations, the competitive environment may put pressure on producers to
lower prices. Further, although an oversupply may enhance opportunities to purchase grapes at
lower costs, a producer’s selling and promotional expenses associated with the sale of its wine
products can rise in such an environment.
Glass bottle costs are one of our largest components of cost of product sold. In the U.S. and
Canada, glass bottles have only a small number of producers. Currently, one producer supplies most
of our glass container requirements for our U.S. operations and another producer supplies
substantially all of our glass container requirements for our Canadian operations. The inability
of any of our glass bottle suppliers to satisfy our requirements could adversely affect our
business.
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Climate change, or legal, regulatory or market measures to address climate change, may negatively
affect our business, operations or financial performance, and water scarcity or poor quality could
negatively impact our production costs and capacity.
Our business depends upon agricultural activity and natural resources. There has been much
public discussion related to concerns that carbon dioxide and other greenhouse gases in the
atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency
and severity of extreme weather and natural disasters. Severe weather events and climate change
may negatively affect agricultural productivity in the regions from which we presently source our
agricultural raw materials such as grapes. Decreased availability of our raw materials may
increase the cost of goods for our products. Changes in frequency or intensity of weather can also
disrupt our supply chain, which may affect production operations, insurance cost and coverage, as
well as delivery of our products to wholesalers, retailers and consumers. Water is essential in
the production of our products and the quality and quantity of water available for use is important
to the supply of grapes and our ability to operate our business. Water is a limited resource in
many parts of the world and if climate patterns change and droughts become more severe, there may
be a scarcity of water or poor water quality which may affect our production costs or impose
capacity constraints. Such events could adversely affect our results of operations and financial
condition.
Our operations subject us to risks relating to currency rate fluctuations, interest rate
fluctuations and geopolitical uncertainty which could have a material adverse effect on our
business.
We have operations in Canada and New Zealand, our products are produced in various countries
around the world and we sell our products in numerous countries throughout the world. Therefore,
we are subject to risks associated with currency fluctuations. We are also exposed to risks
associated with interest rate fluctuations. We manage our exposure to foreign currency and
interest rate risks utilizing derivative instruments and other means to reduce those risks. We
could experience changes in our ability to hedge against or manage fluctuations in foreign currency
exchange rates or interest rates and, accordingly, there can be no assurance that we will be
successful in reducing those risks. We could also be affected by nationalizations or unstable
governments or legal systems or intergovernmental disputes. These currency, economic and political
uncertainties may have a material adverse effect on our results of operations and financial
condition, especially to the extent these matters, or the decisions, policies or economic strength
of our suppliers, affect our global operations.
We have a material amount of intangible assets, such as goodwill and trademarks, and if we are
required to write-down any of these intangible assets, it would reduce our net income, which in
turn could have a material adverse effect on our results of operations.
During the years ended February 28, 2011, February 28, 2010, and February 28, 2009, we
recorded impairment losses of $23.6 million, $103.2 million and $300.4 million, respectively, on
our goodwill and/or other intangible assets. We continue to have a significant amount of
intangible assets such as goodwill and trademarks and may acquire more intangible assets in the
future. In accordance with the Financial Accounting Standards Board (“FASB”) guidance for
intangibles – goodwill and other, goodwill and indefinite lived intangible assets are subject to a
periodic impairment evaluation. Reductions in our net income caused by the write-down of any of
these intangible assets could materially and adversely affect our results of operations and
financial condition.
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The termination of our joint venture with Modelo relating to importing, marketing and selling
imported beer could have a material adverse effect on our business.
On January 2, 2007, we participated in establishing and commencing operations of a joint
venture with Modelo, pursuant to which Corona Extra and the other Modelo Brands are imported,
marketed and sold by the joint venture in the U.S. (including the District of Columbia) and Guam
along with certain other imported beer brands in their respective territories. Pursuant to the
joint venture and related importation arrangements, the joint venture will continue for an initial
term of 10 years, and renew in 10-year periods unless GModelo Corporation, a Delaware corporation
and subsidiary of Diblo, gives notice prior to the end of year seven of any term of its intention
to purchase our interest we hold through our subsidiary, Constellation Beers Ltd. (“Constellation
Beers”). The joint venture may also terminate under other circumstances involving action by
governmental authorities, certain changes in control of us or Constellation Beers as well as in
connection with certain breaches of the importation and related sub-license agreements, after
notice and cure periods.
The termination of the joint venture by acquisition of Constellation Beers’ interest or for
other reasons noted above could have a material adverse effect on our business, financial condition
or results of operations.
Class action or other litigation relating to alcohol abuse, the misuse of alcohol, product
liability or marketing or sales practices could adversely affect our business.
There has been public attention directed at the beverage alcohol industry, which we
believe is due to concern over problems related to alcohol abuse, including drinking and driving,
underage drinking and health consequences from the misuse of alcohol. We also could be exposed to
lawsuits relating to product liability or marketing or sales practices. Adverse developments in
lawsuits concerning these types of matters or a significant decline in the social acceptability of
beverage alcohol products that results from lawsuits could have a material adverse effect on our
business.
Any damage to our reputation could have an adverse effect on our business, financial condition and
results of operation.
Maintaining a good reputation globally is critical to selling our branded products. Product
contamination or tampering or the failure to maintain high standards for product quality, safety
and integrity, including with respect to raw materials obtained from suppliers, may reduce demand
for our products or cause production and delivery disruptions. If any of our products becomes
unfit for consumption, misbranded or causes injury, we may have to engage in a product recall
and/or be subject to liability. A widespread product recall or a significant product liability
judgment could cause our products to be unavailable for a period of time, which could further
reduce consumer demand and brand equity. Our reputation could be impacted negatively by public
perception, adverse publicity (whether or not valid), or our responses relating to:
| • | A perceived failure to maintain high ethical, social and environmental standards for all of our operations and activities; | ||
| • | Our environmental impact, including use of agricultural materials, packaging, water and energy use and waste management; or | ||
| • | Efforts that are perceived as insufficient to promote the responsible use of alcohol. |
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Failure to comply with local laws and regulations, to maintain an effective system of internal
controls or to provide accurate and timely financial statement information could also hurt our
reputation. Damage to our reputation or loss of consumer confidence in our products for any of
these or other reasons could result in decreased demand for our products and could have a material
adverse effect on our business, financial condition and results of operations, as well as require
additional resources to rebuild our reputation, competitive position and brand equity.
We depend upon our trademarks and proprietary rights, and any failure to protect our intellectual
property rights or any claims that we are infringing upon the rights of others may adversely affect
our competitive position and brand equity.
Our future success depends significantly on our ability to protect our current and future
brands and products and to defend our intellectual property rights. We have been granted numerous
trademark registrations covering our brands and products and have filed, and expect to continue to
file, trademark applications seeking to protect newly-developed brands and products. We cannot be
sure that trademark registrations will be issued with respect to any of our trademark applications.
There is also a risk that we could, by omission, fail to timely renew or protect a trademark or
that our competitors will challenge, invalidate or circumvent any existing or future trademarks
issued to, or licensed by, us.
Contamination could harm the integrity of or consumer support for our brands and adversely affect
the sales of our products.
The success of our brands depends upon the positive image that consumers have of those brands.
Contamination, whether arising accidentally or through deliberate third-party action, or other
events that harm the integrity or consumer support for those brands, could adversely affect their
sales. Contaminants in raw materials purchased from third parties and used in the production of
our wine and spirits products or defects in the distillation or fermentation process could lead to
low beverage quality as well as illness among, or injury to, consumers of our products and may
result in reduced sales of the affected brand or all of our brands.
An increase in the cost of energy or the cost of environmental regulatory compliance could affect
our profitability.
We have experienced significant increases in energy costs, and energy costs could continue to
rise, which would result in higher transportation, freight and other operating costs. We may
experience significant future increases in the costs associated with environmental regulatory
compliance. Our future operating expenses and margins will be dependent on our ability to manage
the impact of cost increases. We cannot guarantee that we will be able to pass along increased
energy costs or increased costs associated with environmental regulatory compliance to our
customers through increased prices.
In addition, we may be party to various environmental remediation obligations arising in the
normal course of our business or in connection with historical activities of businesses we acquire.
Due to regulatory complexities, uncertainties inherent in litigation and the risk of unidentified
contaminants in our current and former properties, the potential exists for remediation, liability
and indemnification costs to differ materially from the costs that we have estimated. We cannot
assure you that our costs in relation to these matters will not exceed our projections or otherwise
have an adverse effect upon our business reputation, financial condition or results of operations.
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Our reliance upon complex information systems distributed worldwide and our reliance upon third
party global networks means we could experience interruptions to our business services.
We depend on information technology to enable us to operate efficiently and interface with
customers, as well as maintain financial accuracy and efficiency. If we do not allocate, and
effectively manage, the resources necessary to build and sustain the proper technology
infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of
customers, business disruptions, or the loss of or damage to intellectual property through security
breach. As with all large systems, our information systems could be penetrated by outside parties
intent on extracting information, corrupting information or disrupting business processes. Such
unauthorized access could disrupt our business operations and could result in the loss of assets
and have a material adverse effect on our business, financial condition or results of operations.
We have outsourced various functions to third-party service providers and may outsource
other functions in the future. We rely on those third-party service providers to provide
services on a timely and effective basis. Although we closely monitor the performance of
these third parties and maintain contingency plans in case they are unable to perform as
agreed, we do not ultimately control their performance. Their failure to perform as
expected or as required by contract could result in significant disruptions and costs to our
operations, which could materially affect our business, financial condition, operating
results and cash flow, and could impair our ability to make required filings with various
reporting agencies on a timely or accurate basis.
Changes in accounting standards and guidance and taxation requirements could affect our financial
results.
New accounting guidance that may become applicable to us from time to time, or changes in the
interpretations of existing guidance, could have a significant effect on our reported results for
the affected periods. The Financial Accounting Standards Board and the International Accounting
Standards Board continue to work towards a convergence of accounting standards. Certain standards
may become applicable to us and change the interpretation of existing guidance. Such events could
have a significant effect on our reported results for the affected periods. In addition, our
products are subject to import and excise duties and/or sales or value-added taxes in many
jurisdictions in which we operate. Increases in indirect taxes could affect our products’
affordability and therefore reduce our sales. We are also subject to income tax in numerous
jurisdictions in which we generate revenues. Changes in tax laws, tax rates or tax rulings may have
a significant adverse impact on our effective tax rate. Our tax liabilities are affected by the
mix of pretax income or loss among the tax jurisdictions in which we operate. We must exercise
judgment in determining our worldwide provision for income taxes, interest and penalties;
accordingly, future events could change management’s assessment of these amounts.
Various diseases, pests and certain weather conditions could affect quality and quantity of grapes
or other agricultural raw materials.
Various diseases, pests, fungi, viruses, drought, frosts and certain other weather conditions
could affect the quality and quantity of grapes and other agricultural raw materials available,
decreasing the supply of our products and negatively impacting profitability. We cannot guarantee
that our grape suppliers or suppliers of other agricultural raw materials will succeed in
preventing contamination in existing vineyards or fields or that we will succeed in preventing
contamination in our existing vineyards or future vineyards we may acquire. Future government
restrictions regarding the use of certain materials used in grape growing may increase vineyard
costs and/or reduce production. Growing agricultural raw materials also requires adequate water
supplies. A substantial reduction in water supplies could result in material losses of grape crops
and vines or other crops, which could lead to a shortage of our product supply.
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Risks generally associated with building and sustaining our information technology infrastructure
or implementation of our integrated technology platform may adversely affect our business and
results of operations or the effectiveness of internal control over financial reporting.
We have undertaken a comprehensive, multi-year business transformation initiative that we call
Project Fusion. Project Fusion is our effort to create, design, implement and migrate certain of
our financial processing systems to an enterprise-wide systems solution intended to improve our
reporting capabilities and cost efficiencies. It is a planned initiative that will include an
integrated technology platform intended to improve the accessibility of information, the visibility
of global data, further enhance operating efficiencies and provide more effective management of our
business operations. Enterprise resource planning system projects, such as Project Fusion, are
complex and time-consuming projects that can involve substantial expenditures for system hardware,
software, management focus and implementation activities that can continue for several years.
There can be no certainty that Project Fusion will deliver the expected benefits. The failure to
deliver our goals may impact our ability to (1) process transactions accurately and efficiently and
(2) remain in step with the changing needs of the trade, which could result in the loss of
customers. In addition, the failure to either deliver system and process upgrades on time, or
anticipate the necessary readiness and training needs, could lead to business disruption and loss
of customers and revenue.
Project Fusion will include an upgrade to our existing business accounting and journal entry
system. This upgrade will be deployed for use throughout our company in various “go live” phases
targeted to begin in the second quarter of Fiscal 2012. Upgrading an accounting system and
conversion to a new information technology platform is costly and involves risks inherent in the
conversion to the upgraded system, including potential loss of information, disruption to our
normal operations, changes in accounting procedures and internal control over financial reporting,
as well as problems achieving accuracy in the conversion of electronic data. Although we are
expending resources which are intended to properly or adequately address these issues,
implementation risks include a potential increase in costs, the diversion of management’s and
employees’ attention and resources and a potentially adverse affect on our operating results,
internal controls over financial reporting and ability to manage our business effectively. While
Project Fusion is intended to further improve and enhance our information systems, it exposes us to
the risks of integrating the system upgrades with our existing systems and processes. Disruption
of our financial reporting could impair our ability to make required
filings with various reporting agencies on a timely or accurate basis.
Item 1B. Unresolved Staff Comments.
Not Applicable.
Item 2. Properties.
Through its business segments, the Company operates wineries, a distilling plant and bottling
plants, many of which include warehousing and distribution facilities on the premises. In addition
to the Company’s properties described below, certain of the Company’s businesses maintain office
space for sales and similar activities and offsite warehouse and distribution facilities in a
variety of geographic locations.
The Company believes that its facilities, taken as a whole, are in good condition and working
order and have adequate capacity to meet its needs for the foreseeable future, although it does
possess certain underutilized assets.
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As a result of the January 2011 sale of 80.1% of the Company’s Australian and
U.K. business, as of February 1, 2011, the Company is no longer reporting results for its CWAE
segment. The
following discussion details the properties associated with the Company’s remaining three business segments.
Constellation Wines North America
Through the Constellation Wines North America segment (“CWNA”), the Company maintains
facilities in the U.S., New Zealand and Canada. These facilities include wineries, a distilling
plant, bottling plants, warehousing and distribution facilities, distribution centers and office
facilities. The segment maintains owned and/or leased division offices in a variety of locations,
including Canandaigua, New York; St. Helena, California; San Francisco, California; Chicago,
Illinois; Mississauga, Ontario; and Huapai, New Zealand.
United States
In the U.S., the Company, through its CWNA segment, operates one winery in New York, located
in Canandaigua; 16 wineries in California, located in Acampo, Geyserville, Gonzales, Healdsburg,
Madera, Oakville, Soledad, Rutherford, Templeton, Ukiah, two in Lodi, two in Napa, two in Sonoma;
and one winery in Washington, located in Prosser. Sixteen of these wineries are owned and one
winery in Napa, California and one winery in Sonoma, California are leased. The Company considers
the segment’s principal facilities in the U.S. to be the Mission Bell winery in Madera
(California), the Canandaigua winery in Canandaigua (New York), the Franciscan Vineyards winery in
Rutherford (California), the Woodbridge Winery in Acampo (California), the Turner Road Vintners
Wineries in Lodi (California), the Robert Mondavi Winery in Oakville (California), the Clos du Bois
Winery in Geyserville (California) and the Gonzales Winery in Gonzales (California). The Mission
Bell winery crushes grapes, produces, bottles and distributes wine and produces specialty
concentrates and Mega Colors for sale. The Canandaigua winery crushes grapes and produces, bottles
and distributes wine. The other principal wineries crush grapes, vinify, cellar and bottle wine.
In California, the CWNA segment also operates a distribution center and two warehouses and, in New
York, operates a warehouse, all of which are leased.
Through the CWNA segment, as of February 28, 2011, the Company owned or leased approximately
12,100 acres of vineyards, either fully bearing or under development, in California and New York to
supply a portion of the grapes used in the production of wine.
Canada
Through the CWNA segment, the Company operates nine Canadian wineries, four of
which are in British Columbia, four in Ontario, and one in Quebec. Seven of these wineries are
owned, one winery in British Columbia is leased and one winery in Ontario is leased. The British
Columbia and Ontario operations all harvest a domestic crop and all locations vinify and cellar
wines. Four wineries include bottling and/or packaging operations. The Company also operates a
warehousing and distribution facility and sales office in Scoudouc, New Brunswick. In addition,
through the segment, the Company operates facilities in Vancouver, British Columbia and Kitchener,
Ontario in connection with its beer and wine making kit business. The Company also operates
various retail stores in rented facilities throughout Ontario. The Company considers the segment’s
principal facilities in Canada to be Niagara Cellars located in Niagara Falls (Ontario), the Vincor
Quebec Division located in Rougemont (Quebec), the Vincor Production Facility located in Oliver
(British Columbia) and the warehousing and distribution facility located in Scoudouc (New
Brunswick).
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Through the CWNA segment, as of February 28, 2011, the Company owned or leased approximately
1,800 acres of vineyards, either fully bearing or under development, in Ontario and British
Columbia to supply a portion of the grapes used in the production of wine.
Through this segment, the Company currently owns and operates a distilling plant located in
Lethbridge, Alberta, Canada. This facility distills, bottles and stores Canadian whisky for the
segment, and distills and/or bottles and stores Canadian whisky, vodka, rum, gin and liqueurs for
third parties. The Company considers this facility to be a principal facility.
New Zealand
Through the CWNA segment, the Company owns and operates four wineries in New Zealand. All of
these New Zealand wineries vinify and cellar wine, and three of these wineries crush grapes. One
includes bottling and packaging operations. The Company considers the segment’s principal
facilities in New Zealand to be the Nobilo Winery located in Huapai, West Auckland (North Island)
and the Drylands Winery located in Marlborough (South Island).
Through the CWNA segment, as of February 28, 2011, the Company owns or has interests in
approximately 4,000 acres of vineyards, either fully bearing or under development, in New Zealand.
Crown Imports
Crown Imports has entered into various arrangements to satisfy its warehouse requirements. It
currently has contracted with seven providers of warehouse space and services in a total of 12
locations throughout the U.S. Crown Imports maintains leased offices in Chicago, Illinois as well
as in four other locations throughout the U.S.
Corporate Operations and Other
The Company’s corporate headquarters are located in leased offices in Victor, New York.
Item 3. Legal Proceedings.
In the ordinary course of their business, the Company and its subsidiaries are subject to
lawsuits, arbitrations, claims and other legal proceedings in connection with their business. Some
of the legal actions include claims for substantial or unspecified compensatory and/or punitive
damages. A substantial adverse judgment or other unfavorable resolution of these matters could
have a material adverse effect on the Company’s financial condition, results of operations and cash
flows. Management believes that the Company has adequate legal defenses with respect to the legal
proceedings to which it is a defendant or respondent and that the outcome of these pending
proceedings is not likely to have a material adverse effect on the financial condition, results of
operations or cash flows of the Company. However, the Company is unable to predict the outcome of
these matters.
Regulatory Matters – The Company and its subsidiaries are in discussions with various
governmental agencies concerning matters raised during regulatory examinations or otherwise subject
to such agencies’ inquiry. These matters could result in censures, fines or other sanctions.
Management believes the outcome of any pending regulatory matters will not have a material adverse
effect on the Company’s financial condition, results of operations or cash flows. However, the
Company is unable to predict the outcome of these matters.
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On February 14, 2011, a subsidiary of the Company received from the United States
Environmental Protection Agency (“EPA”) a Notification of Potential Enforcement Action for
Violations of Section 112(r)(7) of the Clean Air Act. The notification is based on the findings of
an October 2009 inspection of the Company’s Woodbridge Winery facility by the EPA. The EPA has
indicated that anticipated allegations against the Company include the failure to recertify or
replace ammonia system relief valves in the facility within the timeframes as required under risk
management plan regulations for prevention of accidental releases and related paperwork
deficiencies. The Company promptly effected all necessary corrections when the deficiencies were
brought to its attention in 2009 and has fully cooperated with all of the EPA’s requests. No
ammonia relief valves malfunctioned and there was no discharge of materials into the environment as
a result of these deficiencies. The Company believes that its Woodbridge Winery is currently in
compliance with the relevant section of the Clean Air Act. On March 28, 2011, the EPA extended to
the Company an opportunity to discuss resolving any penalty action prior to the filing of a formal
Determination of Violation, Compliance Order and Notice of Right to
Request a Hearing. The EPA has indicated that it will propose a
penalty of $226,000. The Company will dispute such a penalty.
Item 4. (Removed and Reserved).
Executive Officers of the Company
Information with respect to the current executive officers of the Company is as follows:
| NAME | AGE | OFFICE OR POSITION HELD | ||||
Richard Sands
|
60 | Chairman of the Board | ||||
Robert Sands
|
52 | President and Chief Executive Officer | ||||
F. Paul Hetterich
|
48 | Executive Vice President, Business Development, Corporate
Strategy and International |
||||
Thomas J. Mullin
|
59 | Executive Vice President and General Counsel |
||||
Robert Ryder
|
51 | Executive Vice President and Chief Financial Officer |
||||
W. Keith Wilson
|
60 | Executive Vice President, Chief Human Resources and Administrative Officer |
||||
John A. (Jay) Wright
|
52 | President, Constellation Wines North America |
||||
Richard Sands, Ph.D., is the Chairman of the Board of the Company. He has been employed by
the Company in various capacities since 1979. He has served as a director since 1982. In
September 1999, Mr. Sands was elected Chairman of the Board. He served as Chief Executive Officer
from October 1993 to July 2007, as Executive Vice President from 1982 to May 1986, as President
from May 1986 to December 2002 and as Chief Operating Officer from May 1986 to October 1993. He is
the brother of Robert Sands.
Robert Sands is President and Chief Executive Officer of the Company. He was
appointed Chief Executive Officer in July 2007 and appointed as President in December 2002. He has
served as a director since January 1990. Mr. Sands also served as Chief Operating Officer from
December 2002 to July 2007, as Group President from April 2000 through December 2002, as Chief
Executive Officer, International from December 1998 through April 2000, as Executive Vice President
from October 1993 through April 2000, as General Counsel from June 1986 through May 2000, and as
Vice President from June 1990 through October 1993. He is the brother of Richard Sands.
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F. Paul Hetterich has been the Company’s Executive Vice President, Business
Development, Corporate Strategy and International since July 2009. From June 2003 until July 2009,
he served as Executive Vice President, Business Development and Corporate Strategy. From April
2001 to June 2003, Mr. Hetterich served as the Company’s Senior Vice President, Corporate
Development. Prior to that, Mr. Hetterich held several increasingly senior positions in the
Company’s marketing and business development groups. Mr. Hetterich has been with the Company since
1986.
Thomas J. Mullin joined the Company as Executive Vice President and General Counsel in May
2000. Prior to joining the Company, Mr. Mullin served as President and Chief Executive Officer of
TD Waterhouse Bank, NA, a national banking association, since February 2000, of CT USA, F.S.B.
since September 1998, and of CT USA, Inc. since March 1997. He also served as Executive Vice
President, Business Development and Corporate Strategy of C.T. Financial Services, Inc. from March
1997 through February 2000. From 1985 through 1997, Mr. Mullin served as Vice Chairman and Senior
Executive Vice President of First Federal Savings and Loan Association of Rochester, New York and
from 1982 through 1985, he was a partner in the law firm of Phillips Lytle LLP.
Robert Ryder joined the Company in May 2007 as Executive Vice President and Chief Financial
Officer. Mr. Ryder previously served from 2005 to 2006 as Executive Vice President and Chief
Financial and Administrative Officer of IMG, a sports marketing and media company. From 2002 to
2005, he was Senior Vice President and Chief Financial Officer of American Greetings Corporation, a
publicly traded, multi-national consumer products company. From 1989 to 2002, he held several
management positions of increasing responsibility with PepsiCo, Inc. These included control,
strategic planning, mergers and acquisitions and CFO and Controller positions serving at PepsiCo’s
corporate headquarters and at its Frito-Lay International and Frito-Lay North America divisions.
Mr. Ryder is a certified public accountant.
W. Keith Wilson joined the Company in January 2002 as Senior Vice President, Human Resources.
In September 2002, he was elected Chief Human Resources Officer and in April 2003 he was elected
Executive Vice President. In July 2007, he was appointed Chief Administrative Officer while
retaining the position of Executive Vice President. From 1999 to 2001, Mr. Wilson served as Senior
Vice President, Global Human Resources of Xerox Engineering Systems, a subsidiary of Xerox
Corporation, which engineers, manufactures and sells hi-tech reprographics equipment and software
worldwide. From 1990 to 1999, he served in various senior human resource positions with the
banking, marketing and real estate and relocation businesses of Prudential Life Insurance of
America, an insurance company that also provides other financial products.
John A. (Jay) Wright is currently President, Constellation Wines North America and the
President of Constellation Wines U.S., Inc., having held these positions since December 2009.
Prior to that, he served as Executive Vice President and Chief Commercial Officer of Constellation
Wines U.S., Inc. from March 2009 until December 2009. Mr. Wright joined the Company in June 2006
with the Company’s acquisition of Vincor International Inc. Mr. Wright served as President of
Vincor International Inc. from June 2006 until March 2009 and, prior to that, as President and
Chief Operating Officer of Vincor International Inc.’s Canadian Wine Division from October 2001
until June 2006. Before that, he held various positions of increasing responsibility with various
other consumer products companies.
Executive officers of the Company are generally chosen or elected to their positions annually
and hold office until the earlier of their removal or resignation or until their successors are
chosen and qualified.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities.
The Company’s Class A Common Stock (the “Class A Stock”) and Class B Common Stock (the “Class
B Stock”) trade on the New York Stock ExchangeÒ (“NYSE”) under the symbols STZ and STZ.B,
respectively. There is no public trading market for the Company’s Class 1 Common Stock. The
following tables set forth for the periods indicated the high and low sales prices of the Class A
Stock and the Class B Stock as reported on the NYSE.
| CLASS A STOCK | ||||||||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||||
Fiscal 2010 |
||||||||||||||||||||||
High |
$ | 13.50 | $ | 15.20 | $ | 17.56 | $ | 17.46 | ||||||||||||||
Low |
$ | 10.72 | $ | 11.62 | $ | 14.36 | $ | 14.60 | ||||||||||||||
Fiscal 2011 |
||||||||||||||||||||||
High |
$ | 18.87 | $ | 17.56 | $ | 21.01 | $ | 22.52 | ||||||||||||||
Low |
$ | 15.06 | $ | 14.97 | $ | 16.64 | $ | 18.84 | ||||||||||||||
| CLASS B STOCK | ||||||||||||||||||||||
| 1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||||
Fiscal 2010 |
||||||||||||||||||||||
High |
$ | 13.53 | $ | 15.12 | $ | 17.50 | $ | 17.22 | ||||||||||||||
Low |
$ | 10.50 | $ | 11.75 | $ | 14.62 | $ | 14.75 | ||||||||||||||
Fiscal 2011 |
||||||||||||||||||||||
High |
$ | 18.74 | $ | 17.44 | $ | 20.94 | $ | 22.29 | ||||||||||||||
Low |
$ | 15.00 | $ | 15.03 | $ | 16.82 | $ | 18.50 | ||||||||||||||
At April 19, 2011, the number of holders of record of Class A Stock and Class B Stock of
the Company were 904 and 178, respectively. There were no holders of record of Class 1 Common
Stock.
With respect to its common stock, the Company’s policy is to retain all of its earnings to
finance the development and expansion of its business, and the Company has not paid any cash
dividends on its common stock since its initial public offering in 1973. In addition, the
Company’s senior credit facility limits the cash dividends that can be paid by the Company on its
common stock to an amount determined in accordance with the terms of the 2006 Credit Agreement (as
defined under Item 7 of this Annual Report on Form 10-K under the caption “Financial Liquidity and
Capital Resources – Debt – Senior Credit Facility”). Any indentures for debt securities issued
in the future, the terms of any preferred stock issued in the future and any credit agreements
entered into in the future may also restrict or prohibit the payment of cash dividends on common
stock.
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Table of Contents
| Item 6. | Selected Financial Data. |
| For the Years Ended | ||||||||||||||||||||
| February 28, | February 28, | February 28, | February 29, | February 28, | ||||||||||||||||
| 2011 | 2010 | 2009 | 2008 | 2007 | ||||||||||||||||
| (in millions, except per share data) | ||||||||||||||||||||
Sales |
$ | 4,096.7 | $ | 4,213.0 | $ | 4,723.0 | $ | 4,885.1 | $ | 6,401.8 | ||||||||||
Less – excise taxes |
(764.7 | ) | (848.2 | ) | (1,068.4 | ) | (1,112.1 | ) | (1,185.4 | ) | ||||||||||
Net sales |
3,332.0 | 3,364.8 | 3,654.6 | 3,773.0 | 5,216.4 | |||||||||||||||
Cost of product sold |
(2,141.9 | ) | (2,220.0 | ) | (2,424.6 | ) | (2,491.5 | ) | (3,692.5 | ) | ||||||||||
Gross profit |
1,190.1 | 1,144.8 | 1,230.0 | 1,281.5 | 1,523.9 | |||||||||||||||
Selling, general and administrative
expenses (1) |
(640.9 | ) | (682.5 | ) | (832.0 | ) | (812.6 | ) | (787.2 | ) | ||||||||||
Impairment of goodwill and intangible
assets (2) |
(23.6 | ) | (103.2 | ) | (300.4 | ) | (812.2 | ) | - | |||||||||||
Restructuring charges (3) |
(23.1 | ) | (47.6 | ) | (68.0 | ) | (6.9 | ) | (32.5 | ) | ||||||||||
Operating income (loss) |
502.5 | 311.5 | 29.6 | (350.2 | ) | 704.2 | ||||||||||||||
Equity in earnings of equity method
investees |
243.8 | 213.6 | 186.6 | 257.9 | 49.9 | |||||||||||||||
Interest expense, net |
(195.3 | ) | (265.1 | ) | (323.0 | ) | (348.3 | ) | (273.9 | ) | ||||||||||
Loss on write-off of financing costs |
- | (0.7 | ) | - | - | - | ||||||||||||||
Gain on change in fair value of
derivative instruments |
- | - | - | - | 55.1 | |||||||||||||||
Income (loss) before income taxes |
551.0 | 259.3 | (106.8 | ) | (440.6 | ) | 535.3 | |||||||||||||
Benefit from (provision for) income
taxes |
8.5 | (160.0 | ) | (194.6 | ) | (172.7 | ) | (203.4 | ) | |||||||||||
Net income (loss) |
559.5 | 99.3 | (301.4 | ) | (613.3 | ) | 331.9 | |||||||||||||
Dividends on preferred stock |
- | - | - | - | (4.9 | ) | ||||||||||||||
Income (loss) available to common
stockholders |
$ | 559.5 | $ | 99.3 | $ | (301.4 | ) | $ | (613.3 | ) | $ | 327.0 | ||||||||
Earnings (loss) per common share: |
||||||||||||||||||||
Basic – Class A Common Stock |
$ | 2.68 | $ | 0.46 | $ | (1.40 | ) | $ | (2.83 | ) | $ | 1.44 | ||||||||
Basic – Class B Convertible Common
Stock |
$ | 2.44 | $ | 0.41 | $ | (1.27 | ) | $ | (2.57 | ) | $ | 1.31 | ||||||||
Diluted – Class A Common Stock |
$ | 2.62 | $ | 0.45 | $ | (1.40 | ) | $ | (2.83 | ) | $ | 1.38 | ||||||||
Diluted – Class B Convertible
Common Stock |
$ | 2.40 | $ | 0.41 | $ | (1.27 | ) | $ | (2.57 | ) | $ | 1.27 | ||||||||
Total assets |
$ | 7,167.6 | $ | 8,094.3 | $ | 8,036.5 | $ | 10,052.8 | $ | 9,438.2 | ||||||||||
Long-term debt, including current
maturities |
$ | 3,152.6 | $ | 3,464.3 | $ | 4,206.3 | $ | 4,878.0 | $ | 4,032.2 | ||||||||||
| (1) | During the first quarter of the year ended February 28, 2011, the Company reclassified acquisition-related integration costs to selling, general and administrative expenses. Accordingly, all periods presented have been reclassified to reflect this revised presentation. | |
| (2) | For a detailed discussion of impairment of goodwill and intangible assets for the years ended February 28, 2011, February 28, 2010, and February 28, 2009, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Annual Report on Form 10-K under the caption “Fiscal 2011 Compared to Fiscal 2010 – Impairment of Goodwill and Intangible Assets” and “Fiscal 2010 Compared to Fiscal 2009 – Impairment of Goodwill and Intangible Assets,” respectively. |
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| (3) | For a detailed discussion of restructuring charges for the years ended February 28, 2011, February 28, 2010, and February 28, 2009, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Annual Report on Form 10-K under the captions “Fiscal 2011 Compared to Fiscal 2010 – Restructuring Charges” and “Fiscal 2010 Compared to Fiscal 2009 – Restructuring Charges,” respectively. |
For the years ended February 28, 2011, and February 28, 2010, see Management’s
Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this
Annual Report on Form 10-K and the consolidated financial statements and notes thereto under Item 8
of this Annual Report on Form 10-K.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Overview
The Company is the world’s leading premium wine company with a broad portfolio of
consumer-preferred premium wine brands complemented by premium spirits, imported beer and other
select beverage alcohol products. The Company continues to supply imported beer in the United
States (“U.S.”) through its investment in a joint venture with Grupo Modelo, S.A.B. de C.V. This
imported beers joint venture operates as Crown Imports LLC and is referred to hereinafter as “Crown
Imports.” The Company is the leading premium wine company in the U.S.; the leading producer and
marketer of wine in Canada; and a leading producer and exporter of wine from New Zealand. Prior to
January 31, 2011, the Company had leading market positions in both Australia and the United Kingdom
(“U.K.”) through its Australian and U.K. business. On January 31, 2011, the Company completed the
sale of 80.1% of its Australian and U.K. business (the “CWAE Divestiture”) as further discussed
below under “Divestitures in Fiscal 2011, Fiscal 2010 and Fiscal 2009”.
In connection with the Company’s changes during the first quarter of fiscal 2011 within its
internal management structure for its Australian and U.K. business, and the Company’s revised
business strategy within these markets, the Company changed its internal management financial
reporting on May 1, 2010, to consist of four business divisions: Constellation Wines North
America, Constellation Wines Australia and Europe, Constellation Wines New Zealand and Crown
Imports. However, due to a number of factors, including the size of the Constellation Wines New
Zealand segment’s operations, the similarity of its economic characteristics and long-term
financial performance with that of the Constellation Wines North America business, and the fact
that the vast majority of the wine produced by the Constellation Wines New Zealand operating
segment is sold in the U.S. and Canada, the Company has aggregated the results of this operating
segment with its Constellation Wines North America operating segment to form one reportable
segment. Accordingly, beginning May 1, 2010, the Company began reporting its operating results in
four segments: Constellation Wines North America (wine and spirits) (“CWNA”), Constellation Wines
Australia and Europe (wine) (“CWAE”), Corporate Operations and Other, and Crown Imports (imported
beer). Prior to the changes noted above, the Company’s internal management financial reporting
consisted of two business divisions, Constellation Wines and Crown Imports. As a result of the
CWAE Divestiture, as of February 1, 2011, the Company is no longer reporting operating results for
the CWAE segment. Amounts included in the Corporate Operations and Other segment consist of costs
of executive management, corporate development, corporate finance, human resources, internal audit,
investor relations, legal, public relations, global information technology and global supply chain.
Any costs incurred at the corporate office that are applicable to the segments are allocated to
the appropriate segment. The amounts included in the Corporate Operations and Other segment are
general costs that are applicable to the consolidated group and are therefore not allocated to the
other reportable segments. All costs reported within the Corporate Operations and Other segment
are not included in the chief operating decision maker’s evaluation of the operating income
performance of the other reportable segments.
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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 Fiscal 2010 and Fiscal 2009 (each as defined
below) has been restated to conform to the new segment presentation.
In addition, the Company excludes restructuring charges and unusual items that affect
comparability from its definition of operating income for segment purposes as these items are not
reflective of normal continuing operations of the segments. The Company excludes these items as
segment operating performance and segment management compensation is evaluated based upon a
normalized segment operating income. As such, the performance measures for incentive compensation
purposes for segment management do not include the impact of these items.
The Company’s business strategy in the CWNA segment is to remain focused on consumer-preferred
premium wine brands, complemented by premium spirits. In this segment, the Company intends to
continue to focus on growing premium product categories and expects to capitalize on its size and
scale in the marketplace to profitably grow the business. During Fiscal 2010, the Company began
implementation of a strategic project to consolidate its U.S. distributor network in key markets
and create a new go-to-market strategy designed to focus the full power of its U.S. wine and
spirits portfolio in order to improve alignment of dedicated, selling resources which is expected
to drive organic growth. In connection with this strategy, the Company negotiated long-term
contracts with five U.S. distributors who currently represent about 60% of the Company’s branded
wine and spirits volume in the U.S. During the second half of fiscal 2010 and throughout Fiscal
2011 (as defined below), the Company’s net sales and operating income for its U.S. branded wine and
spirits business has benefited from these contracts as the Company’s shipments to distributors
exceeded distributor shipments to retailers. Following the end of Fiscal 2011, the distributor
inventory levels related to the Company’s branded wine and spirits products should remain stable as
shipments on an annual basis to these distributors will essentially equal the distributors’
shipments to retailers for the remainder of the terms of these contracts, which extend through the
end of fiscal 2015. The Company believes that this is the right strategy to take in order to
position the Company for future growth in a consolidating market. In addition, recent U.S. market
trends and sales from distributors to retailers of the Company’s branded wine and spirits products
indicate that the Company has benefited from this new go-to-market strategy in Fiscal 2011.
In addition, in the U.S., the calendar 2010 grape harvest came in lower than the calendar 2009
grape harvest. The Company continues to expect the overall supply of wine to remain generally in
balance with demand within the U.S.
Prior to the CWAE Divestiture, the Company’s business strategy in the CWAE segment previously
included tightening of its portfolio focus, increasing efficiencies, reducing costs and improving
cash generation in response to the continuing competitive conditions in the U.K. and Australia.
This strategy was adopted to assist the Company in its efforts to effectively deal with some of the
long-term challenges the Company had been facing in the U.K. and Australia markets, including (i)
annual duty increases in the U.K.; (ii) significant consolidation of U.K. retailers which resulted
in a limited number of retailers controlling a significant portion of the off-premise wine
business; (iii) continuing surplus of Australian wine which made low cost wine available to U.K.
retailers who were able to create and build private label brands in the Australian wine category;
and (iv) foreign exchange volatility. For these reasons, combined with the Company’s strategic
focus on premiumizing its portfolio, generating strong free cash flow and improving return on
invested capital, the Company decided to substantially reduce its exposure to the U.K. and
Australian markets through the CWAE Divestiture.
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The Company remains committed to its long-term financial model of growing sales, including
international expansion of its CWNA segment’s branded portfolio, expanding margins, increasing cash
flow and reducing borrowings to achieve earnings per share growth and improve return on invested
capital.
Marketing, sales and distribution of the Company’s products are managed on a
geographic basis in order to fully leverage leading market positions within each core market.
Market dynamics and consumer trends vary significantly across the Company’s remaining three core
markets (U.S., Canada and New Zealand) within the Company’s remaining two geographic regions (North
America and New Zealand). Within North America, the Company offers a range of beverage alcohol
products across the branded wine and spirits and, through Crown Imports, imported beer categories
in the U.S. Within New Zealand, the Company primarily offers branded wine. The environment for
the Company’s products is competitive in each of the Company’s core markets.
For the year ended February 28, 2011 (“Fiscal 2011”), the Company’s net sales
decreased 1% over the year ended February 28, 2010 (“Fiscal 2010”), primarily due to the
divestiture of the U.K. cider business (see “Divestitures in Fiscal 2011, Fiscal 2010 and Fiscal
2009” below) and the CWAE Divestiture, partially offset by a combination of volume growth and
favorable product mix shift in the U.S. base branded wine portfolio (as defined below). Operating
income for Fiscal 2011 increased 61% over Fiscal 2010 primarily due to a decrease in restructuring
charges and unusual items for Fiscal 2011 compared to Fiscal 2010. Net income for Fiscal 2011
increased significantly over Fiscal 2010 primarily due to the items discussed above combined with a
benefit from income taxes and lower interest expense.
The following discussion and analysis summarizes the significant factors affecting (i)
consolidated results of operations of the Company for Fiscal 2011 compared to Fiscal 2010, and
Fiscal 2010 compared to the year ended February 28, 2009 (“Fiscal 2009”), and (ii) financial
liquidity and capital resources for Fiscal 2011. References to U.S. base branded wine exclude the
impact of (i) branded wine for the CWNA segment previously sold through the Company’s CWAE
segment, (ii) branded spirits divested of in the value spirits divestiture (as discussed below)
and/or (iii) branded wine divested of in the Pacific Northwest Business divestiture (as defined
below), as appropriate. References to U.K. base branded wine exclude the impact of U.K. cider
divested of in the U.K. cider business divestiture (as discussed below). This discussion and
analysis should be read in conjunction with the Company’s consolidated financial statements and
notes thereto included herein.
Divestitures in Fiscal 2011, Fiscal 2010 and Fiscal 2009
Australian and U.K. Business
In January 2011, the Company sold 80.1% of its Australian and U.K. business (the
“CWAE Divestiture”) at a transaction value of $266.9 million, subject to post-closing adjustments.
The Company received cash proceeds, net of cash divested of $15.8 million and direct costs paid of
$2.3 million, of $221.3 million, subject to post-closing adjustments. The Company retained a 19.9%
interest in its previously owned Australian and U.K. business. This transaction is consistent with
the Company’s strategic focus on premiumizing the Company’s portfolio and improving margins and
return on invested capital.
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The following table summarizes the net gain recognized and the net
cash proceeds received in connection with this divestiture:
(in millions) |
||||
Net assets sold |
$ | (734.1 | ) | |
Cash received from buyer, net of cash divested |
223.6 | |||
Retained interest in previously owned business |
48.2 | |||
Estimated post-closing adjustments |
(19.3 | ) | ||
Foreign currency reclassification |
678.8 | |||
Indemnification liabilities |
(26.1 | ) | ||
Direct costs to sell, paid and accrued |
(14.0 | ) | ||
Other |
8.0 | |||
Net gain on sale |
165.1 | |||
Loss on settlement of pension |
(109.9 | ) | ||
Net gain |
$ | 55.2 | ||
In addition, the Company’s CWAE segment recorded an additional net gain of $28.5
million, primarily associated with a net gain on derivative instruments of $20.8 million, related
to this divestiture. Total net gains associated with this divestiture of $83.7 million are
included in selling, general and administrative expenses on the Company’s Consolidated Statements
of Operations.
U.K. Cider Business
In January 2010, the Company sold its U.K. cider business for cash proceeds of £43.9
million ($71.6 million), net of direct costs to sell. This transaction is consistent with the
Company’s strategic focus on premium higher-growth, higher-margin wine, beer and spirits brands.
In connection with this divestiture, the Company’s CWAE segment recorded a gain of $11.2 million
for Fiscal 2010 which is included in selling, general and administrative expenses on the Company’s
Consolidated Statements of Operations.
Value Spirits Business
In March 2009, the Company sold its value spirits business for $336.4 million, net
of direct costs to sell. The Company received $276.4 million, net of direct costs to sell, in cash
proceeds and a note receivable for $60.0 million in connection with this divestiture. In the first
quarter of fiscal 2011, the Company received full payment of the note receivable. The Company
retained certain premium spirits brands, including SVEDKA Vodka, Black Velvet Canadian Whisky and
Paul Masson Grande Amber Brandy. This transaction is consistent with the Company’s strategic focus
on premium, higher-growth and higher-margin brands in its portfolio. In connection with the
classification of this business as an asset group held for sale as of February 28, 2009, the
Company’s CWNA segment recorded a loss of $15.6 million in the fourth quarter of fiscal 2009,
primarily related to asset impairments. In the first quarter of fiscal 2010, the Company’s CWNA
segment recognized a net gain of $0.2 million, which included a gain on settlement of a
postretirement obligation of $1.0 million, partially offset by an additional loss of $0.8 million.
These amounts are included in selling, general and administrative expenses on the Company’s
Consolidated Statements of Operations.
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Pacific Northwest Business
In June 2008, the Company sold certain businesses consisting of several California wineries
and wine brands acquired in the acquisition of all of the issued and outstanding capital stock of
Beam Wine Estates, Inc. (“BWE”), as well as certain wineries and wine brands from the states of
Washington and Idaho (collectively, the “Pacific Northwest Business”) for cash proceeds of $204.2
million, net of direct costs to sell. In addition, if certain objectives are achieved by the
buyer, the Company could receive up to an additional $25.0 million in cash payments. This
transaction contributes to the Company’s streamlining of its U.S. wine portfolio by eliminating
brand duplication and reducing excess production capacity. In connection with this divestiture,
the Company’s CWNA segment recorded a loss of $23.2 million for Fiscal 2009, which included a loss
on business sold of $15.8 million and losses on contractual obligations of $7.4 million. The loss
of $23.2 million is included in selling, general and administrative expenses on the Company’s
Consolidated Statements of Operations.
Equity Method Investment in Fiscal 2011
In connection with the Company’s December 2004 investment in Ruffino S.r.l. (“Ruffino”), the
Company granted separate irrevocable and unconditional options to the two other shareholders of
Ruffino to put to the Company all of the ownership interests held by these shareholders for a price
as calculated in the joint venture agreement. Each option was exercisable during the period
starting from January 1, 2010, and ending on December 31, 2010. For the year ended February 28,
2010, in connection with the notification by the 9.9% shareholder of Ruffino to exercise its option
to put its entire equity interest in Ruffino to the Company for the specified minimum value of
€23.5 million, the Company recognized a loss of $34.3 million for the third quarter of fiscal 2010
on the contractual obligation created by this notification. This loss was included in selling,
general and administrative expenses on the Company’s Consolidated Statements of Operations. In May
2010, the Company settled this put option through a cash payment of €23.5 million ($29.6 million)
to the 9.9% shareholder of Ruffino, thereby increasing the Company’s equity interest in Ruffino
from 40.0% to 49.9%. In December 2010, the Company received notification from the 50.1%
shareholder of Ruffino that it was exercising its option to put its entire equity interest in
Ruffino to the Company for €55.9 million. Prior to this notification, the Company had initiated
arbitration proceedings against the 50.1% shareholder alleging various matters which should affect
the validity of the put option. However, subsequent to the initiation of the arbitration
proceedings, the Company began discussions with the 50.1% shareholder on a framework for settlement
of all legal actions. The framework of the settlement would include the Company’s purchase of the
50.1% shareholder’s entire equity interest in Ruffino on revised terms to be agreed upon by both
parties. As a result, the Company recognized a loss for the fourth quarter of fiscal 2011 of €43.4
million ($60.0 million) on the contingent obligation. This loss is included in selling, general
and administrative expenses on the Company’s Consolidated Statements of Operations. As of February
28, 2011, the Company’s investment in Ruffino was $7.4 million.
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Results of Operations
Fiscal 2011 Compared to Fiscal 2010
Net Sales
The following table sets forth the net sales by reportable segment of the Company for Fiscal
2011 and Fiscal 2010.
| Fiscal | Fiscal | % Increase | ||||||||||
| 2011 | 2010 | (Decrease) | ||||||||||
| (in millions) | ||||||||||||
CWNA net sales |
$ | 2,557.3 | $ | 2,434.7 | 5 | % | ||||||
CWAE net sales |
774.7 | 930.1 | (17 | )% | ||||||||
Crown Imports net sales |
2,392.9 | 2,256.2 | 6 | % | ||||||||
Consolidations and eliminations |
(2,392.9 | ) | (2,256.2 | ) | (6 | )% | ||||||
Consolidated Net Sales |
$ | 3,332.0 | $ | 3,364.8 | (1 | )% | ||||||
Net sales for Fiscal 2011 decreased to $3,332.0 million from $3,364.8 million for Fiscal
2010, a decrease of $32.8 million, or (1%). This decrease resulted primarily from the divestiture
of the U.K. cider business, the CWAE Divestiture and the divestiture of the value spirits business
of $178.2 million, partially offset by an increase in U.S. base branded wine net sales of $85.9
million and a favorable year-over-year foreign currency translation impact of $52.6 million.
Constellation Wines North America
Net sales for CWNA increased to $2,557.3 million for Fiscal 2011 from $2,434.7 million for
Fiscal 2010, an increase of $122.6 million, or 5%. This increase is primarily due to volume growth
and favorable product mix shift in the U.S. base branded wine portfolio due largely to certain U.S.
distributor contractual commitments, and a favorable year-over-year foreign currency translation
impact of $36.4 million, partially offset by increased promotional spend, primarily in the U.S.
The Fiscal 2011 U.S. volume growth is even more pronounced as a result of the Company’s strategic
decision in the fourth quarter of fiscal 2010 to work with certain of its U.S. distributors to
reduce their U.S. branded wine inventory levels and not require these distributors to purchase the
originally contracted branded wine amounts during that quarter. The Company believes that this
strategic decision has helped and will continue to help its U.S. distributors improve depletion
trends and consumer takeaway as distributor cost savings associated with carrying lower levels of
inventory were invested by the U.S. distributors in additional marketing and promotional
programming behind the CWNA segment’s U.S. branded wine portfolio during Fiscal 2011 and such
investments are expected to continue during Fiscal 2012.
Constellation Wines Australia and Europe
Net sales for CWAE decreased to $774.7 million for Fiscal 2011 from $930.1 million for Fiscal
2010, a decrease of $155.4 million, or (17%). This decrease is primarily due to a decrease in net
sales of $171.7 million in connection with the divestiture of the U.K. cider business and the CWAE
Divestiture, partially offset by a favorable year-over-year foreign currency translation impact of
$16.2 million.
Crown Imports
As this segment is eliminated in consolidation, see “Equity in Earnings of Equity Method
Investees” below for a discussion of Crown Imports’ net sales, gross profit, selling, general and
administrative expenses, and operating income.
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Gross Profit
The Company’s gross profit increased to $1,190.1 million for Fiscal 2011 from $1,144.8 million
for Fiscal 2010, an increase of $45.3 million, or 4%. This increase is due to an increase in
CWNA’s gross profit of $48.3 million and a decrease in unusual items, which consist of certain
amounts that are excluded by management in their evaluation of the results of each operating
segment, of $27.7 million, partially offset by a decrease in CWAE’s gross profit of $30.7 million.
The increase in CWNA’s gross profit is primarily due to favorable product mix shift and volume
growth (primarily in the U.S. base branded wine portfolio) combined with a favorable year-over-year
foreign currency translation impact of $15.9 million, partially offset by increased U.S.
promotional spend and the flow through of higher calendar 2008 U.S. grape costs. The decrease in
unusual items is primarily due to decreases in accelerated depreciation of $15.5 million associated
with certain restructuring programs and the flow through of inventory step-up of $6.0 million
associated primarily with the December 2007 BWE acquisition. The decrease in CWAE’s gross profit
is primarily due to the divestiture of the U.K. cider business and the CWAE Divestiture.
Gross profit as a percent of net sales increased to 35.7% for Fiscal 2011 from 34.0% for
Fiscal 2010 primarily due to the lower unusual items and growth of higher-margin CWNA branded wine
and spirits net sales (driven primarily by favorable U.S. base branded wine product mix shift and
the divestitures of the lower-margin Australian and U.K. business and
the U.K. cider business),
partially offset by the negative impact of the flow through of the higher calendar 2008 U.S. grape
costs and the increased U.S. promotional spend.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $640.9 million for Fiscal 2011 from
$682.5 million for Fiscal 2010, a decrease of $41.6 million, or (6%). This decrease is due to
decreases in unusual items, which consist of certain amounts that are excluded by management in
their evaluation of the results of each operating segment, of $85.7 million, and the CWAE segment
of $23.1 million, partially offset by increases in the CWNA segment of $55.3 million and the
Corporate Operations and Other segment of $11.9 million. The decrease in unusual items consists of
the following:
| Fiscal | Fiscal | (Decrease) | ||||||||||
| 2011 | 2010 | Increase | ||||||||||
| (in millions) | ||||||||||||
Net gains on the CWAE Divestiture and related activities |
$ | (83.7 | ) | $ | – | $ | (83.7 | ) | ||||
Net gain on sale of nonstrategic assets/business |
(3.3 | ) | (11.2 | ) | 7.9 | |||||||
Loss on contractual obligation from put option of Ruffino
shareholder |
60.0 | 34.3 | 25.7 | |||||||||
Acquisition-related integration costs |
0.5 | 0.2 | 0.3 | |||||||||
Net gain on March 2009 sale of value spirits business |
– | (0.2 | ) | 0.2 | ||||||||
Other costs |
6.3 | 42.4 | (36.1 | ) | ||||||||
| $ | (20.2 | ) | $ | 65.5 | $ | (85.7 | ) | |||||
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The decrease in other costs above is driven primarily by the Company’s plan (announced in
April 2009) to simplify its business, increase efficiencies and reduce its cost structure on a
global basis (the “Global Initiative”). The decrease in CWAE’s selling, general and administrative
expenses is primarily due to the divestiture of the U.K. cider business and the CWAE Divestiture.
The increase in CWNA’s selling, general and administrative expenses is due to increases (on a
constant currency basis) in general and administrative expenses of $21.4 million, selling expenses
of $15.2 million and advertising expenses of $9.6 million, combined with an unfavorable
year-over-year foreign currency translation impact of $9.1 million. The increases in general and
administrative expenses and selling expenses are primarily due to (i) costs associated with the
Company’s initiative to implement a comprehensive, multi-year program to strengthen and enhance the
Company’s global business capabilities and processes through the creation of an integrated
technology platform to improve the accessibility of information and visibility of global data
(“Project Fusion”); (ii) higher compensation and benefits driven largely by higher annual
management incentive compensation expense; and (iii) higher consulting service fees associated
with the segment’s review of certain business and process improvement opportunities. The increase
in advertising expenses is primarily due to a planned increase in marketing and advertising spend
behind the segment’s branded wine and spirits portfolio. The increase in Corporate Operations and
Other’s selling, general and administrative expenses is due to an increase in general and
administrative expenses resulting largely from higher annual management incentive compensation
expense and higher stock-based compensation expense.
Selling, general and administrative expenses as a percent of net sales decreased to 19.2% for
Fiscal 2011 as compared to 20.3% for Fiscal 2010 primarily due to the factors discussed above,
partially offset by the increased U.S. promotional spend.
Impairment of Goodwill and Intangible Assets
The Company recorded impairment losses of $23.6 million and $103.2 million for Fiscal 2011 and
Fiscal 2010, respectively. The Fiscal 2011 impairment losses resulted primarily from the Company’s
fourth quarter annual review, pursuant to the Company’s accounting policy, of indefinite lived
intangible assets for impairment. The Company determined that certain trademarks associated with
the CWNA segment’s Canadian reporting unit were impaired largely due to lower revenue and
profitability associated with products incorporating these assets included in long-term financial
forecasts developed as part of the strategic planning cycle conducted during the Company’s fourth
quarter. As a result of this review, the Company recorded an impairment loss of $19.7 million,
which is included in impairment of goodwill and intangible assets on the Company’s Consolidated
Statements of Operations. In addition, in the third quarter of fiscal 2011, in connection with the
Company’s decision to discontinue certain wine brands within its CWNA segment’s U.S. wine
portfolio, the Company determined that certain indefinite lived trademarks associated with the CWNA
segment’s U.S. reporting unit were impaired. As a result of this decision, the Company recorded an
impairment loss of $6.9 million, which is included in impairment of goodwill and intangible assets
on the Company’s Consolidated Statements of Operations. The Fiscal 2010 impairment losses resulted
from the Company’s fourth quarter annual review, pursuant to the Company’s accounting policy, of
indefinite lived intangible assets for impairment. The Company determined that certain trademarks
associated primarily with the CWAE segment’s Australian reporting unit were impaired largely due to
lower revenue and profitability associated with products incorporating these assets included in
long-term financial forecasts developed as part of the strategic planning cycle conducted during
the Company’s fourth quarter. As a result of this review, the Company recorded an impairment loss
of $103.2 million, which is included in impairment of goodwill and intangible assets on the
Company’s Consolidated Statements of Operations.
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Table of Contents
Restructuring Charges
The Company recorded $23.1 million of restructuring charges for Fiscal 2011 associated
primarily with the Company’s Global Initiative and the Company’s plan (announced in August 2008)
to sell certain assets and implement operational changes designed to improve the efficiencies and
returns associated with the Australian business, primarily by consolidating certain winemaking and
packaging operations and reducing the Company’s overall grape supply due to reduced capacity needs
resulting from a streamlining of the Company’s product portfolio (the “Australian Initiative”).
Restructuring charges include $12.1 million of employee termination benefit costs, $5.2 million of
contract termination costs, $4.2 million of net noncash charges on assets sold in Australia, and
$1.6 million of facility consolidation/relocation costs. The Company recorded $47.6 million of
restructuring charges for Fiscal 2010 associated primarily with the Company’s Global Initiative and
Australian Initiative.
In addition, the Company incurred additional costs for Fiscal 2011 and Fiscal 2010 in
connection with the Company’s restructuring and acquisition-related integration plans. Total costs
incurred in connection with these plans for Fiscal 2011 and Fiscal 2010 are as follows:
| Fiscal | Fiscal | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Cost of Product Sold |
||||||||
Accelerated depreciation |
$ | 2.2 | $ | 17.7 | ||||
Inventory write-downs |
$ | – | $ | 1.6 | ||||
Other |
$ | – | $ | 4.7 | ||||
Selling, General and Administrative Expenses |
||||||||
Gain on sale of nonstrategic assets |
$ | (1.0 | ) | $ | – | |||
Acquisition-related integration costs |
$ | 0.5 | $ | 0.2 | ||||
Other costs |
$ | 6.3 | $ | 42.4 | ||||
Restructuring Charges |
$ | 23.1 | $ | 47.6 | ||||
The Company does not expect to incur any material costs in connection with its existing
restructuring plans for Fiscal 2012.
Operating Income
The following table sets forth the operating income (loss) by reportable segment of the
Company for Fiscal 2011 and Fiscal 2010.
| Fiscal | Fiscal | % (Decrease) | ||||||||||
| 2011 | 2010 | Increase | ||||||||||
| (in millions) | ||||||||||||
CWNA |
$ | 631.0 | $ | 638.0 | (1 | )% | ||||||
CWAE |
9.3 | 16.9 | (45 | )% | ||||||||
Corporate Operations and Other |
(106.6 | ) | (94.7 | ) | (13 | )% | ||||||
Crown Imports |
453.0 | 444.1 | 2 | % | ||||||||
Consolidations and eliminations |
(453.0 | ) | (444.1 | ) | (2 | )% | ||||||
Total Reportable Segments |
533.7 | 560.2 | (5 | )% | ||||||||
Restructuring Charges and Unusual Items |
(31.2 | ) | (248.7 | ) | NM |
|||||||
Consolidated Operating Income |
$ | 502.5 | $ | 311.5 | 61 | % | ||||||
| NM = Not Meaningful |
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As a result of the factors discussed above, consolidated operating income increased to
$502.5 million for Fiscal 2011 from $311.5 million for Fiscal 2010, an increase of $191.0 million,
or 61%. Restructuring charges and unusual items of $31.2 million and $248.7 million for Fiscal
2011 and Fiscal 2010, respectively, consist of certain amounts that are excluded by management in
their evaluation of the results of each operating segment. These amounts include:
| Fiscal | Fiscal | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Cost of Product Sold |
||||||||
Flow through of inventory step-up |
$ | 2.4 | $ | 8.4 | ||||
Accelerated depreciation |
2.2 | 17.7 | ||||||
Inventory write-downs |
– | 1.6 | ||||||
Other |
0.1 | 4.7 | ||||||
Cost of Product Sold |
4.7 | 32.4 | ||||||
Selling, General and Administrative Expenses |
||||||||
Net gains on the CWAE Divestiture and related activities |
(83.7 | ) | – | |||||
Net gain on sale of nonstrategic assets/business |
(3.3 | ) | (11.2 | ) | ||||
Loss on contractual obligation from put option of
Ruffino shareholder |
60.0 | 34.3 | ||||||
Acquisition-related integration costs |
0.5 | 0.2 | ||||||
Net gain on March 2009 sale of value spirits business |
– | (0.2 | ) | |||||
Other costs |
6.3 | 42.4 | ||||||
Selling, General and Administrative Expenses |
(20.2 | ) | 65.5 | |||||
Impairment of Intangible Assets |
23.6 | 103.2 | ||||||
Restructuring Charges |
23.1 | 47.6 | ||||||
Restructuring Charges and Unusual Items |
$ | 31.2 | $ | 248.7 | ||||
Equity in Earnings of Equity Method Investees
The Company’s equity in earnings of equity method investees increased to $243.8 million for
Fiscal 2011 from $213.6 million for Fiscal 2010, an increase of $30.2 million, or 14%. This
increase is primarily due to the Company’s Fiscal 2010 recognition of an impairment of $25.4
million related to its CWNA segment’s investment in Ruffino and higher Fiscal 2011 equity in
earnings of $4.2 million from the Company’s Crown Imports joint venture. The Fiscal 2010
impairment resulted from the Company’s third quarter review of its equity method investments for
other-than-temporary impairment. As a result of this review, the Company determined that the CWNA
segment’s investment in Ruffino was impaired primarily due to a decline in revenue and profit
forecasts for this international equity method investee combined with an unfavorable foreign
exchange movement between the euro and the U.S. Dollar. Accordingly, the Company recorded an
impairment loss of $25.4 million in equity in earnings of equity method investees on the Company’s
Consolidated Statements of Operations.
Net sales for Crown Imports increased to $2,392.9 million for Fiscal 2011 from $2,256.2
million for Fiscal 2010, an increase of $136.7 million, or 6%. This increase resulted primarily
from volume growth within the Crown Imports’ Mexican beer portfolio. Crown Imports’ gross profit
increased $32.1 million, or 5%, primarily due to the volume growth, partially offset by a
contractual price increase in Mexican beer costs. Selling, general and administrative expenses
increased $23.2 million, or 11%, primarily due to an increase in general and administrative
expenses driven largely by an unfavorable arbitration panel decision in the third quarter of fiscal
2011 related to a matter with one of Crown Imports’ former distributors, and a planned increase in
advertising spend. Operating income increased $8.9 million, or 2%, primarily due to these factors.
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Interest Expense, Net
Interest expense, net of interest income of $3.5 million and $10.4 million, for Fiscal 2011
and Fiscal 2010, respectively, decreased to $195.3 million for Fiscal 2011 from $265.1 million for
Fiscal 2010, a decrease of $69.8 million, or (26%). The decrease resulted from lower average
interest rates for the Company combined with reduced average borrowings for Fiscal 2011.
Provision for Income Taxes
The Company’s effective tax rate for Fiscal 2011 and Fiscal 2010 is (1.5%) and
61.7%, respectively. The Company’s effective tax rate for Fiscal 2011 of (1.5%) was driven largely
by a benefit of $207.0 million associated with the deduction for investments and loans related to
the CWAE Divestiture and a decrease in uncertain tax positions of $36.0 million in connection with
the completion of various income tax examinations and the expiration of statutes of limitation
during Fiscal 2011, partially offset by the recognition of valuation allowances against net
operating losses in the U.K. and Australia. The Company’s effective tax rate for Fiscal 2010 of
61.7% was driven largely by (i) a nondeductible portion of the impairment loss related to certain
trademarks of $93.7 million, (ii) the recognition of nondeductible charges of $59.7 million
related to the Company’s Ruffino investment and (iii) $37.5 million of taxes associated with the
sale of the value spirits business, primarily related to the write-off of nondeductible goodwill;
partially offset by a decrease in uncertain tax positions of $33.0 million in connection with the
completion of various income tax examinations during Fiscal 2010.
Net Income
As a result of the above factors, net income increased to $559.5 million for Fiscal 2011 from
$99.3 million for Fiscal 2010, an increase of $460.2 million.
Fiscal 2010 Compared to Fiscal 2009
Net Sales
The following table sets forth the net sales by reportable segment of the Company for Fiscal
2010 and Fiscal 2009.
| Fiscal | Fiscal | % (Decrease) | ||||||||||
| 2010 | 2009 | Increase | ||||||||||
| (in millions) | ||||||||||||
CWNA net sales |
$ | 2,434.7 | $ | 2,703.4 | (10 | )% | ||||||
CWAE net sales |
930.1 | 951.2 | (2 | )% | ||||||||
Crown Imports net sales |
2,256.2 | 2,395.4 | (6 | )% | ||||||||
Consolidations and eliminations |
(2,256.2 | ) | (2,395.4 | ) | 6 | % | ||||||
Consolidated Net Sales |
$ | 3,364.8 | $ | 3,654.6 | (8 | )% | ||||||
Net sales for Fiscal 2010 decreased to $3,364.8 million from $3,654.6 million for Fiscal
2009, a decrease of $289.8 million, or (8%). This decrease resulted primarily from decreases in
spirits net sales and U.S. base branded wine net sales of $195.2 million and $70.7 million,
respectively, and an unfavorable year-over-year foreign currency translation impact of $66.8
million, partially offset by growth of U.K. branded wine net sales of $35.2 million (on a constant
currency basis).
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Constellation Wines North America
Net sales for CWNA decreased to $2,434.7 million for Fiscal 2010 from $2,703.4 million for
Fiscal 2009, a decrease of $268.7 million, or (10%). This decrease resulted primarily from
decreases in spirits net sales of $195.2 million and U.S. base branded wine net sales of $70.7
million. The decrease in spirits net sales was due to a decrease of $230.0 million in connection
with the divestitures of the value spirits business and a Canadian distilling facility, partially
offset by growth within the retained spirits business driven largely by volume growth of SVEDKA
Vodka. The decrease in the U.S. base branded wine net sales was due primarily to the Company’s
fourth quarter of fiscal 2010 strategic decision to assist U.S. distributors in reducing their
higher than average inventory levels. The higher inventory levels resulted primarily from a
planned build in inventory levels during the second quarter of fiscal 2010 in advance of the
September 1, 2009, U.S. distributor transition program. These actions had the planned effect of
moving a portion of third quarter of fiscal 2010 sales into the second quarter of fiscal 2010.
However, during the third quarter of fiscal 2010, distributor depletions were not as strong as
expected. As a result, U.S. distributor inventory levels were higher than expected at the end of
the third quarter of fiscal 2010. As such, the Company, in collaboration with certain of its newly
contracted U.S. distributors, did not require these distributors to purchase the original
contracted amount during the fourth quarter of fiscal 2010. The Company estimated that this
decision unfavorably impacted the U.S. branded wine net sales by approximately $60 to $70 million.
Constellation Wines Australia and Europe
Net sales for CWAE decreased to $930.1 million for Fiscal 2010 from $951.2 million for Fiscal
2009, a decrease of $21.1 million, or (2%). This decrease was driven primarily by an unfavorable
year-over-year foreign currency translation impact of $61.4 million, partially offset by $35.2
million of U.K. base branded wine growth on a constant currency basis. This increase was due
primarily to volume growth of lower priced products.
Crown Imports
As this segment is eliminated in consolidation, see “Equity in Earnings of Equity Method
Investees” below for a discussion of Crown Imports’ net sales, gross profit, selling, general and
administrative expenses, and operating income.
Gross Profit
The Company’s gross profit decreased to $1,144.8 million for Fiscal 2010 from $1,230.0 million
for Fiscal 2009, a decrease of $85.2 million, or (7%). This decrease was due to a decrease in
CWNA’s gross profit of $122.0 million and CWAE’s gross profit of $58.1 million, partially offset by
a decrease in unusual items, which consist of certain amounts that are excluded by management in
their evaluation of the results of each operating segment, of $94.9 million. The decrease in
CWNA’s gross profit was primarily due to the divestitures of certain lower margin businesses,
primarily the value spirits business, of $76.6 million, and a decrease in the U.S. base branded
wine portfolio of $35.8 million. The decrease in the U.S. base branded wine gross profit was
largely due to the lower net sales to certain U.S. distributors. The decrease in CWAE’s gross
profit was primarily due to the flow through of higher Australian calendar 2008 harvest costs and
an unfavorable mix of sales towards lower margin products. The lower unusual items was primarily
due to a decrease in inventory write-downs of $92.2 million in Fiscal 2010 compared to Fiscal 2009
due largely to (i) inventory write-downs of $53.9 million recorded in Fiscal 2009 in connection
with the Company’s Australian Initiative and (ii) a loss of $37.0 million on the adjustment of
certain inventory, primarily Australian, related to prior years.
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Gross profit as a percent of net sales increased to 34.0% for Fiscal 2010 from 33.7% for
Fiscal 2009 primarily due to the lower unusual items, partially offset by the decrease in CWAE’s
gross profit resulting primarily from the flow through of higher Australian calendar 2008 harvest
costs and the unfavorable mix of sales towards lower margin products.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased to $682.5 million for Fiscal 2010 from
$832.0 million for Fiscal 2009, a decrease of $149.5 million, or (18%). This decrease was due to
decreases in the CWNA segment of $115.7 million, the CWAE segment of $27.9 million and unusual
items, which consist of certain amounts that are excluded by management in their evaluation of the
results of each operating segment, of $13.8 million, partially offset by an increase in the
Corporate Operations and Other segment of $7.9 million. The decrease in CWNA’s selling, general
and administrative expenses was primarily due to decreases (on a constant currency basis) in
general and administrative expenses of $51.4 million, selling expenses of $37.6 million and
advertising expenses of $25.2 million. These decreases are largely attributable to (i) the
divestitures of certain lower margin value businesses, primarily the value spirits business; (ii)
cost savings in connection with the Company’s various restructuring activities; (iii) planned
reductions in marketing and advertising spend; and (iv) an overlap of prior year losses on foreign
currency transactions. The decrease in CWAE’s selling, general and administrative expenses was
primarily due to decreases (on a constant currency basis) in advertising expenses of $12.5 million
and selling expenses of $3.6 million, combined with a favorable year-over-year foreign currency
translation impact of $10.4 million. These decreases are due largely to planned reductions in
marketing and advertising spend and cost savings in connection with the Company’s various
restructuring activities. The decrease in unusual items consists of the following:
| Fiscal | Fiscal | (Decrease) | ||||||||||
| 2010 | 2009 | Increase | ||||||||||
| (in millions) | ||||||||||||
Loss on contractual obligation from put option of
Ruffino shareholder |
$ | 34.3 | $ | – | $ | 34.3 | ||||||
(Gain) loss on sale of nonstrategic business/assets |
(11.2 | ) | 8.1 | (19.3 | ) | |||||||
Net (gain) loss on March 2009 sale of value
spirits business |
(0.2 | ) | 15.6 | (15.8 | ) | |||||||
Acquisition-related integration costs |
0.2 | 8.2 | (8.0 | ) | ||||||||
Loss on sale of Pacific Northwest Business |
– | 23.2 | (23.2 | ) | ||||||||
Other costs |
42.4 | 24.2 | 18.2 | |||||||||
| $ | 65.5 | $ | 79.3 | $ | (13.8 | ) | ||||||
The increase in other costs above is due largely to $34.9 million of other
costs recognized in Fiscal 2010 in connection with the Company’s Global Initiative plan compared to
$16.0 million of other costs recognized in Fiscal 2009 in connection with the Company’s plan
(announced in August 2006) to invest in new distribution and bottling facilities in the U.K. and to
streamline certain Australian wine operations (collectively, the “Fiscal 2007 Wine Plan”). The
increase in the Corporate Operations and Other segment’s selling, general and administrative
expenses was due to an increase in general and administrative expenses resulting primarily from
Project Fusion.
Selling, general and administrative expenses as a percent of net sales decreased to 20.3% for
Fiscal 2010 as compared to 22.8% for Fiscal 2009 primarily due to cost savings in connection with
the Company’s various restructuring activities, the planned reductions in marketing and advertising
spend and the overlap of prior year losses on foreign currency transactions.
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Impairment of Goodwill and Intangible Assets
During Fiscal 2010, the Company recorded impairment losses of $103.2 million, consisting of
impairment of certain trademarks related primarily to its CWAE segment’s Australian reporting unit.
During Fiscal 2009, the Company recorded impairment losses of $300.4 million, consisting of
impairments of goodwill and certain trademarks of $252.8 million and $47.6 million, respectively,
related primarily to its CWAE segment’s U.K. reporting unit.
Restructuring Charges
The Company recorded $47.6 million of restructuring charges for Fiscal 2010 associated
primarily with the Company’s Global Initiative and Australian Initiative. Restructuring charges
included $25.0 million of employee termination benefit costs, $13.4 million of impairment charges
on assets sold or held for sale in Australia, $7.6 million of contract termination costs and $1.6
million of facility consolidation/relocation costs. The Company recorded $68.0 million of
restructuring charges for Fiscal 2009 associated primarily with the Company’s Australian
Initiative.
In addition, the Company incurred additional costs for Fiscal 2010 and Fiscal 2009 in
connection with the Company’s restructuring and acquisition-related integration plans. Total costs
incurred in connection with these plans for Fiscal 2010 and Fiscal 2009 are as follows:
| Fiscal | Fiscal | |||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
Cost of Product Sold |
||||||||
Accelerated depreciation |
$ | 17.7 | $ | 11.2 | ||||
Inventory write-downs |
$ | 1.6 | $ | 56.8 | ||||
Other |
$ | 4.7 | $ | – | ||||
Selling, General and Administrative Expenses |
||||||||
Acquisition-related integration costs |
$ | 0.2 | $ | 8.2 | ||||
Other costs |
$ | 42.4 | $ | 24.2 | ||||
Impairment of Intangible Assets |
$ | – | $ | 22.2 | ||||
Restructuring Charges |
$ | 47.6 | $ | 68.0 | ||||
Operating Income
The following table sets forth the operating income (loss) by reportable segment of the
Company for Fiscal 2010 and Fiscal 2009.
| Fiscal | Fiscal | % (Decrease) | ||||||||||
| 2010 | 2009 | Increase | ||||||||||
| (in millions) | ||||||||||||
CWNA |
$ | 638.0 | $ | 644.3 | (1 | )% | ||||||
CWAE |
16.9 | 47.1 | (64 | )% | ||||||||
Corporate Operations and Other |
(94.7 | ) | (86.8 | ) | (9 | )% | ||||||
Crown Imports |
444.1 | 504.1 | (12 | )% | ||||||||
Consolidations and eliminations |
(444.1 | ) | (504.1 | ) | 12 | % | ||||||
Total Reportable Segments |
560.2 | 604.6 | (7 | )% | ||||||||
Restructuring Charges and Unusual Items |
(248.7 | ) | (575.0 | ) | NM |
|||||||
Consolidated Operating Income |
$ | 311.5 | $ | 29.6 | NM |
|||||||
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As a result of the factors discussed above, consolidated operating income increased to
$311.5 million for Fiscal 2010 from $29.6 million for Fiscal 2009, an increase of $281.9 million.
Restructuring charges and unusual items of $248.7 million and $575.0 million for Fiscal 2010 and
Fiscal 2009, respectively, consist of certain costs that are excluded by management in their
evaluation of the results of each operating segment. These costs include:
| Fiscal | Fiscal | |||||||
| 2010 | 2009 | |||||||
| (in millions) | ||||||||
Cost of Product Sold |
||||||||
Accelerated depreciation |
$ | 17.7 | $ | 11.2 | ||||
Flow through of inventory step-up |
8.4 | 22.2 | ||||||
Inventory write-downs |
1.6 | 56.8 | ||||||
Other |
4.7 | 37.1 | ||||||
Cost of Product Sold |
32.4 | 127.3 | ||||||
Selling, General and Administrative Expenses |
||||||||
Loss on contractual obligation from put option of
Ruffino shareholder |
34.3 | – | ||||||
(Gain) loss on sale of nonstrategic business/assets |
(11.2 | ) | 8.1 | |||||
Net (gain) loss on March 2009 sale of value
spirits business |
(0.2 | ) | 15.6 | |||||
Acquisition-related integration costs |
0.2 | 8.2 | ||||||
Loss on sale of Pacific Northwest Business |
– | 23.2 | ||||||
Other costs |
42.4 | 24.2 | ||||||
Selling, General and Administrative Expenses |
65.5 | 79.3 | ||||||
Impairment of Goodwill and Intangible Assets |
103.2 | 300.4 | ||||||
Restructuring Charges |
47.6 | 68.0 | ||||||
Restructuring Charges and Unusual Items |
$ | 248.7 | $ | 575.0 | ||||
Equity in Earnings of Equity Method Investees
The Company’s equity in earnings of equity method investees increased to $213.6 million for
Fiscal 2010 from $186.6 million for Fiscal 2009, an increase of $27.0 million, or 14%. This
increase was primarily due to the recognition of a $25.4 million impairment loss recognized in
Fiscal 2010 related to the Company’s CWNA segment’s international equity method investment in
Ruffino as compared to $83.3 million of impairment losses recognized in Fiscal 2009 related
primarily to Ruffino ($48.6 million) and the Company’s CWAE segment’s international equity method
investment in the U.K. wholesale business, Matthew Clark ($30.1 million). The increase in equity
in earnings of equity method investees from lower impairment losses in Fiscal 2010 was partially
offset by a decrease of $30.4 million in equity in earnings from the Company’s Crown Imports joint
venture.
Net sales for Crown Imports decreased to $2,256.2 million for Fiscal 2010 from $2,395.4
million for Fiscal 2009, a decrease of $139.2 million, or (6%). This decrease resulted primarily
from lower volumes within the Crown Imports Mexican beer portfolio. Crown Imports gross profit
decreased $59.0 million, or (8%), primarily due to these lower sales volumes and a contractual
price increase in Mexican beer costs. Selling, general and administrative expenses increased $1.0
million, primarily due to an increase in selling expenses as increased advertising spend by Crown
Imports in connection with certain Fiscal 2010 national media programs was offset by contributions
from the brand owner for this increased advertising spend in Fiscal 2010. Operating income
decreased $60.0 million, or (12%), primarily due to these factors.
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Interest Expense, Net
Interest expense, net of interest income of $10.4 million and $3.8 million, for Fiscal 2010
and Fiscal 2009, respectively, decreased to $265.1 million for Fiscal 2010 from $323.0 million for
Fiscal 2009, a decrease of $57.9 million, or (18%). This decrease was primarily due to lower
average borrowings for Fiscal 2010 resulting predominantly from the repayment of a portion of the
Company’s outstanding borrowings using the proceeds from the sale of the value spirits business and
the U.K. cider business.
Provision for Income Taxes
The Company’s effective tax rate for Fiscal 2010 of 61.7% was driven largely by (i)
a nondeductible portion of the impairment loss related to certain trademarks of $93.7 million,
(ii) the recognition of nondeductible charges of $59.7 million related to the Company’s Ruffino
investment; and (iii) $37.5 million of taxes associated with the sale of the value spirits
business, primarily related to the write-off of nondeductible goodwill; partially offset by a
decrease in uncertain tax positions of $33.0 million in connection with the completion of various
income tax examinations during Fiscal 2010. The Company’s effective tax rate for Fiscal 2009 of
(182.2%) was impacted primarily by (i) a nondeductible portion of the impairment losses related to
goodwill, equity method investments and certain trademarks of $268.8 million, $83.3 million and
$23.6 million, respectively; (ii) the recognition of a valuation allowance of $67.4 million
against net operating losses primarily in Australia resulting largely from the Australian
Initiative; and (iii) the recognition of income tax expense in connection with the gain on
settlement of certain foreign currency economic hedges.
Net
Income (Loss)
As a result of the above factors, net income increased to $99.3 million for Fiscal 2010 from a
net loss of $301.4 million for Fiscal 2009, or $400.7 million.
Financial Liquidity and Capital Resources
General
The Company’s principal use of cash in its operating activities is for purchasing and carrying
inventories and carrying seasonal accounts receivable. The Company’s primary source of liquidity
has historically been cash flow from operations, except during annual grape harvests when the
Company has relied on short-term borrowings. In the U.S. and Canada, the annual grape crush
normally begins in August and runs through October. In New Zealand, the annual grape crush
normally begins in February and runs through May. The Company generally begins taking delivery of
grapes at the beginning of the crush season with the majority of payments for such grapes coming
due within 90 days. The Company’s short-term borrowings to support such purchases generally reach
their highest levels one to two months after the crush season has ended. Historically, the Company
has used cash flow from operating activities to repay its short-term borrowings and fund capital
expenditures. The Company will continue to use its short-term borrowings to support its working
capital requirements.
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The Company has maintained adequate liquidity to meet current working capital requirements,
fund capital expenditures and repay scheduled principal and interest payments on debt. Absent
deterioration of market conditions, the Company believes that cash flows from operating activities
and its financing activities, primarily short-term borrowings, will provide adequate resources to
satisfy its working capital, scheduled principal and interest payments on debt, and anticipated
capital expenditure requirements for both its short-term and long-term capital needs.
As of April 19, 2011, the Company had $595.4 million in revolving loans available to be drawn
under its 2006 Credit Agreement (as defined below). The member financial institutions
participating in the Company’s 2006 Credit Agreement have complied with prior funding requests and
the Company believes the member financial institutions will comply with ongoing funding requests.
However, there can be no assurances that any particular financial institution will continue to do
so in the future.
Fiscal 2011 Cash Flows
Operating Activities
Net cash provided by operating activities for Fiscal 2011 was $619.3 million, which resulted
primarily from net income of $559.5 million, plus $255.7 million of net noncash items charged to
the Consolidated Statements of Operations, partially offset by net cash used in the net change in
the Company’s operating assets and liabilities of $161.0 million.
The net noncash items consisted primarily of depreciation expense, loss on settlement of
pension obligations associated with the CWAE Divestiture, deferred tax provision, loss on
contractual obligation from put option of Ruffino shareholder and stock-based compensation expense,
partially offset by the net gain on business sold associated with the CWAE Divestiture. The net
cash used in the net change in the Company’s operating assets and liabilities is driven primarily
by decreases in other accrued expenses and liabilities of $168.6 million and accounts payable of
$82.5 million combined with an increase in accounts receivable, net, of $86.0 million, partially
offset by a decrease in inventories of $190.8 million. The decrease in other accrued expenses and
liabilities is due largely to the recognition of income tax benefits in connection with the CWAE
Divestiture. The decrease in accounts payable is due primarily to lower grape grower payables in
Australia as a result of the timing of the January 2011 CWAE Divestiture in advance of the calendar 2011 Australian grape harvest
and the timing of payments in the U.K. (through January 31,
2011). The increase in accounts receivable, net is due primarily to the net sales volume growth in
the U.S. branded wine portfolio. The decrease in inventories is due largely to decreases in
Australian, U.S. and New Zealand inventory levels. The reduction in Australian inventory levels is
primarily due to a later calendar 2011 grape harvest combined with the January 2011 CWAE
Divestiture. The decrease in the U.S. inventory levels is primarily due to the flow through of
higher 2008 U.S. calendar grape costs combined with the net sales volume growth during the fourth
quarter of fiscal 2011 in the U.S. branded wine portfolio. The reduction in New Zealand inventory
levels is primarily due to lower tonnage and grape costs associated with the calendar 2011 grape
harvest.
Investing Activities
Net cash provided by investing activities for Fiscal 2011 was $188.1 million, which resulted
primarily from proceeds from the sale of businesses, net of cash
divested, of $219.7 million driven primarily by the
proceeds from the CWAE Divestiture, net of direct costs to sell, and proceeds from the note
receivable received in connection with the divestiture of the value spirits business of $60.0
million, partially offset by capital expenditures of $89.1 million and a payment in connection with
the settlement of the irrevocable and unconditional put option of the incremental 9.9% ownership
interest associated with the Company’s equity method investment, Ruffino, of $29.6 million.
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Financing Activities
Net cash used in financing activities for Fiscal 2011 was $845.7 million resulting primarily
from principal payments of long-term debt of $328.5 million, purchases of treasury stock through
the ASB transaction (as defined below) of $300.0 million and net repayment of notes payable of $289.7
million, partially offset by proceeds from exercise of employee stock options of $61.0 million.
Fiscal 2010 Cash Flows
Operating Activities
Net cash provided by operating activities for Fiscal 2010 was $402.5 million, which resulted
primarily from net income of $99.3 million, plus $312.0 million of net noncash items charged to the
Consolidated Statements of Operations and $47.1 million of other, net, less $55.9 million
representing the net change in the Company’s operating assets and liabilities.
The net noncash items consisted primarily of depreciation expense, impairment of goodwill and
intangible assets, stock-based compensation expense and loss on the contractual obligation from the
put option of a Ruffino shareholder. Other, net, consists primarily of cash proceeds from the
settlement of certain derivative instruments designated to hedge foreign currency risk associated
with certain foreign currency denominated transactions. The net change in operating assets and
liabilities resulted primarily from a decrease in other accrued expenses and liabilities of $110.6
million and a decrease of $42.7 million in accounts payable, partially offset by a decrease in
accounts receivable, net, and inventories of $61.9 million and $51.0 million, respectively. The
decrease in other accrued expenses and liabilities of $110.6 million is primarily due to higher
income tax payments for Fiscal 2010 and lower accrued interest resulting primarily from the timing
of interest payments. The decrease in accounts payable of $42.7 million is due largely to lower
grape grower payables in Australia associated with the calendar 2010 harvest and the timing of
payments in the U.K. business. The decrease in accounts receivable, net, of $61.9 million
primarily reflects the impact of the reduced branded wine net sales in the U.S. during the fourth
quarter of fiscal 2010 and the liquidation of the accounts receivable balances associated with the
January 2010 divestiture of the U.K. cider business. The decrease in inventories of $51.0 million
is primarily due to the flow through of the higher calendar 2008 Australian harvest costs in Fiscal
2010, partially offset by an increase in the Company’s U.S. branded wine inventory levels resulting
largely from the reduced branded wine net sales in the U.S. during the fourth quarter of fiscal
2010.
Investing Activities
Net cash provided by investing activities for Fiscal 2010 was $256.6 million, which resulted
primarily from the proceeds of $349.6 million from the divestitures of the value spirits business
and the U.K. cider business, both net of direct costs to sell, partially offset by $107.7 million
of capital expenditures.
Financing Activities
Net cash used in financing activities for Fiscal 2010 was $623.0 million resulting primarily
from principal payments of long-term debt of $781.3 million,
partially offset by net proceeds from
notes payable of $117.1 million and proceeds from maturity of a derivative instrument of $33.2
million.
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Share Repurchase Programs
In April 2010, the Company’s Board of Directors authorized the repurchase of up to $300.0
million of the Company’s Class A Common Stock and Class B Convertible Common Stock. During Fiscal
2011, the Company repurchased 17,223,404 shares of Class A Common Stock pursuant to this
authorization at an aggregate cost of $300.0 million, or an average cost of $17.42 per share,
through a collared accelerated stock buyback (“ASB”) transaction that was announced in April 2010.
The Company paid the purchase price under the ASB transaction in April 2010, at which time it
received an initial installment of 11,016,451 shares of Class A Common Stock. In May 2010, the
Company received an additional installment of 2,785,029 shares of Class A Common Stock in
connection with the early termination of the hedge period on May 10, 2010. In November 2010, the
Company received the final installment of 3,421,924 shares of Class A Common Stock following the
end of the calculation period on November 24, 2010. The Company used revolver borrowings under the
2006 Credit Agreement to pay the purchase price for the repurchased shares. During Fiscal 2011, the
Company has used cash flows from operating activities to repay the revolver borrowings under the
2006 Credit Agreement used to pay the purchase price for the repurchased shares. The repurchased
shares have become treasury shares.
In April 2011, the Company’s Board of Directors authorized the repurchase of up to $500.0
million of the Company’s Class A Common Stock and Class B Convertible Common Stock. The Board of
Directors did not specify a date upon which this authorization would expire. Share repurchases
under this authorization are expected to be accomplished from time to time based on market
conditions, the Company’s cash and debt position, and other factors as determined by management.
Shares may be repurchased through open market or privately negotiated transactions, and management
currently expects that the repurchase under this authorization will be implemented over a
multi-year period. The Company may fund share repurchases with cash generated from operations or
proceeds of borrowings under its senior credit facility. Any repurchased shares will become
treasury shares. As of April 28, 2011, no shares have been repurchased pursuant to this
authorization.
Debt
Total debt outstanding as of February 28, 2011, amounted to $3,236.3 million, a decrease of
$599.2 million from February 28, 2010.
Senior Credit Facility
2006 Credit Agreement
The Company and certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and
administrative agent, and certain other agents, lenders, and financial institutions are parties to
a credit agreement, as amended (the “2006 Credit Agreement”). The 2006 Credit Agreement provides
for aggregate credit facilities of $3,842.0 million, consisting of (i) a $1,200.0 million tranche
A term loan facility with an original final maturity in June 2011, fully repaid as of February 28,
2011 (the “Tranche A Term Loans”), (ii) a $1,800.0 million tranche B term loan facility, of which
$1,500.0 million has a final maturity in June 2013 (the “2013 Tranche B Term Loans”) and $300.0
million has a final maturity in June 2015 (the “2015 Tranche B Term Loans”), and (iii) an $842.0
million revolving credit facility (including a sub-facility for
letters of credit of up to $200
million), of which $192.0 million terminates in June 2011 (the “2011 Revolving Facility”) and
$650.0 million terminates in June 2013 (the “2013 Revolving Facility”). The Company uses its
revolving credit facility under the 2006 Credit Agreement for general corporate purposes.
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As of February 28, 2011, the required principal repayments of the tranche B term loan facility
for each of the five succeeding fiscal years and thereafter are as follows:
| Tranche B | ||||
| Term Loan | ||||
| Facility | ||||
| (in millions) | ||||
2012 |
$ | 5.6 | ||
2013 |
466.4 | |||
2014 |
465.1 | |||
2015 |
146.2 | |||
2016 |
144.7 | |||
Thereafter |
– | |||
| $ | 1,228.0 | |||
The rate of interest on borrowings under the 2006 Credit Agreement is a function of
LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate plus a margin. The
margin is adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit Agreement)
with respect to the 2011 Revolving Facility and the 2013 Revolving Facility, and is fixed with
respect to the 2013 Tranche B Term Loans and the 2015 Tranche B Term Loans. As of February 28,
2011, the LIBOR margin for the 2011 Revolving Facility is 1.25%; the LIBOR margin for the 2013
Revolving Facility is 2.50%; the LIBOR margin for the 2013 Tranche B Term Loans is 1.50%; and the
LIBOR margin on the 2015 Tranche B Term Loans is 2.75%.
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, the 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 maintaining a maximum total debt coverage ratio and minimum
interest coverage ratio.
As of February 28, 2011, under the 2006 Credit Agreement, the Company had outstanding 2013
Tranche B Term Loans of $928.0 million bearing an interest rate of 1.8%, 2015 Tranche B Term Loans
of $300.0 million bearing an interest rate of 3.1%, 2011 Revolving Facility of $7.5 million bearing
an interest rate of 3.5%, 2013 Revolving Facility of $67.4 million bearing an interest rate of
3.1%, outstanding letters of credit of $13.9 million, and $753.2 million in revolving loans
available to be drawn.
As
of April 19, 2011, following a $300.0 million prepayment of the
tranche B term loan facility in March 2011, under the 2006 Credit Agreement, the Company had outstanding 2013
Tranche B Term Loans of $700.2 million bearing an interest rate of 1.8%, 2015 Tranche B Term Loans
of $226.4 million bearing an interest rate 3.0%, 2011 Revolving Facility of $43.3 million bearing
an interest rate of 1.5%, 2013 Revolving Facility of $189.4 million bearing an interest rate of
2.6%, outstanding letters of credit of $13.9 million, and $595.4 million in revolving loans
available to be drawn.
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Through February 28, 2010, the Company had outstanding interest rate swap agreements which
were designated as cash flow hedges of $1,200.0 million of the Company’s floating LIBOR rate debt.
The designated cash flow hedges fixed the Company’s interest rates on $1,200.0 million of the
Company’s floating LIBOR rate debt through February 28, 2010. In addition, the Company had
offsetting undesignated interest rate swap agreements with an absolute notional amount of $2,400.0
million outstanding as of February 28, 2010. On March 1, 2010, the Company paid $11.9 million in
connection with the maturity of these outstanding interest rate swap agreements, which is reported
in other, net in cash flows from operating activities in the Company’s Consolidated Statements of
Cash Flows. In June 2010, the Company entered into a new five year delayed start interest rate
swap agreement effective September 1, 2011, which was designated as a cash flow hedge for $500.0
million of the Company’s floating LIBOR rate debt. Accordingly, the Company fixed its interest
rates on $500.0 million of the Company’s floating LIBOR rate debt at an average rate of 2.9%
(exclusive of borrowing margins) through September 1, 2016. For Fiscal 2011, the Company did not
reclassify any amount from Accumulated Other Comprehensive Income (“AOCI”) to interest expense, net
on its Consolidated Statements of Operations. For Fiscal 2010 and Fiscal 2009, the Company
reclassified net losses of $27.7 million and $12.6 million, respectively, net of income tax effect,
from AOCI to interest expense, net on the Company’s Consolidated Statements of Operations.
Senior Notes
In November 1999, the Company issued £75.0 million ($121.7 million upon issuance) aggregate
principal amount of 8 1/2% Senior Notes due November 2009 (the “Sterling Senior Notes”). In March
2000, the Company exchanged £75.0 million aggregate principal amount of 8 1/2% Series B Senior
Notes due November 2009 (the “Sterling Series B Senior Notes”) for all of the Sterling Senior
Notes. In October 2000, the Company exchanged £74.0 million aggregate principal amount of Sterling
Series C Senior Notes (as defined below) for £74.0 million of the Sterling Series B Senior Notes.
On May 15, 2000, the Company issued £80.0 million ($120.0 million upon issuance) aggregate
principal amount of 8 1/2% Series C Senior Notes due November 2009 (the “Sterling Series C Senior
Notes”). In November 2009, the Company repaid the Sterling Series B Senior Notes and the Sterling
Series C Senior Notes with proceeds from the Company’s revolving credit facility under its then
existing senior credit facility and cash flows from operating activities.
In February 2009, the Company entered into a foreign currency forward contract to fix the U.S.
dollar payment of the Sterling Series B Senior Notes and Sterling Series C Senior Notes. In
accordance with the Financial Accounting Standards Board (“FASB”) guidance for derivatives and
hedging, this foreign currency forward contract qualified for cash flow hedge accounting treatment.
In November 2009, the Company received $33.2 million of proceeds from the maturity of this
derivative instrument. This amount is reported in cash flows from financing activities on the
Company’s Consolidated Statements of Cash Flows for Fiscal 2010.
As of February 28, 2011, the Company had outstanding $695.6 million (net of $4.4 million
unamortized discount) aggregate principal amount of 7 1/4% Senior Notes due September 2016 (the
“August 2006 Senior Notes”).
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In May 2007, the Company issued $700.0 million aggregate principal amount of 7 1/4% Senior
Notes due May 2017 (the “Original May 2007 Senior Notes”). The net proceeds of the offering
($693.9 million) were used to reduce a corresponding amount of borrowings under the revolving
portion of the Company’s then existing senior credit facility. In January 2008, the Company
exchanged $700.0 million aggregate principal amount of 7 1/4% Senior Notes due May 2017 (the “May
2007 Senior Notes”) for all of the Original May 2007 Senior Notes. The terms of the May 2007
Senior Notes are substantially identical in all material respects to the Original May 2007 Senior
Notes, except that the May 2007 Senior Notes are registered under the Securities Act of 1933, as
amended. As of February 28, 2011, the Company had outstanding $700.0 million aggregate principal
amount of May 2007 Senior Notes.
In December 2007, the Company issued $500.0 million aggregate principal amount of 8 3/8%
Senior Notes due December 2014 at an issuance price of $496.7 million (net of $3.3 million
unamortized discount, with an effective interest rate of 8.5%) (the “December 2007 Senior Notes”).
The net proceeds of the offering ($492.2 million) were used to fund a portion of the purchase price
of BWE. As of February 28, 2011, the Company had outstanding $498.0 million (net of $2.0 million
unamortized discount) aggregate principal amount of December 2007 Senior Notes.
The senior notes described above are redeemable, in whole or in part, at the option of the
Company at any time at a redemption price equal to 100% of the outstanding principal amount plus a
make whole payment based on the present value of the future payments at the adjusted Treasury Rate
plus 50 basis points. The senior notes are senior unsecured obligations and rank equally in right
of payment to all existing and future senior unsecured indebtedness of the Company. Certain of the
Company’s significant U.S. operating subsidiaries guarantee the senior notes, on a senior unsecured
basis.
Senior Subordinated Notes
In January 2002, the Company issued $250.0 million aggregate principal amount of 8 1/8% Senior
Subordinated Notes due January 2012 (the “January 2002 Senior Subordinated Notes”). On February
25, 2010, the Company repaid the January 2002 Senior Subordinated Notes with proceeds from its
revolving credit facility under the 2006 Credit Agreement and cash flows from operating activities.
Indentures
The Company’s indentures under which its outstanding senior notes were issued contain
customary covenants, requirements and restrictions, the breach of which could result in an
acceleration of the Company’s obligation to repay the senior notes.
Subsidiary Credit Facilities
The Company has additional credit arrangements totaling $154.2 million as of February 28,
2011. These arrangements primarily support the financing needs of the Company’s domestic and
foreign subsidiary operations. Interest rates and other terms of these borrowings vary from
country to country, depending on local market conditions. As of February 28, 2011, amounts
outstanding under these arrangements were $39.8 million.
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Contractual Obligations and Commitments
The following table sets forth information about the Company’s long-term contractual
obligations outstanding at February 28, 2011. The table brings together data for easy reference
from the consolidated balance sheet and from individual notes to the Company’s consolidated
financial statements. See Notes 10, 11, 12, 13, 14, and 15 to the Company’s consolidated financial
statements located in Item 8 of this Annual Report on Form 10-K for a detailed discussion of the
items noted in the following table.
| PAYMENTS DUE BY PERIOD | ||||||||||||||||||||
| Less than | After | |||||||||||||||||||
| Total | 1 year | 1-3 years | 3-5 years | 5 years | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Contractual obligations |
||||||||||||||||||||
Notes payable to banks |
$ | 83.7 | $ | 83.7 | $ | – | $ | – | $ | – | ||||||||||
Interest payments on notes payable to
banks(1) |
2.6 | 2.6 | ||||||||||||||||||
Long-term debt (excluding unamortized
discount) |
3,159.0 | 15.9 | 939.8 | 796.5 | 1,406.8 | |||||||||||||||
Interest payments on long-term
debt(2) |
971.9 | 175.4 | 328.7 | 242.9 | 224.9 | |||||||||||||||
Operating leases |
340.2 | 59.8 | 76.0 | 46.1 | 158.3 | |||||||||||||||
Other long-term liabilities(3) |
141.3 | 25.5 | 36.2 | 10.4 | 69.2 | |||||||||||||||
Unconditional purchase
obligations(4) |
1,401.5 | 423.0 | 616.8 | 256.5 | 105.2 | |||||||||||||||
Total contractual obligations |
$ | 6,100.2 | $ | 785.9 | $ | 1,997.5 | $ | 1,352.4 | $ | 1,964.4 | ||||||||||
| (1) | Interest payments on notes payable to banks include interest on both revolving loans under the Company’s senior credit facility and on foreign subsidiary credit facilities. The weighted average interest rate on the revolving loans under the Company’s senior credit facility was 3.2% as of February 28, 2011. Interest rates on foreign subsidiary credit facilities range from 3.0% to 5.9% as of February 28, 2011. | |
| (2) | Interest rates on long-term debt obligations range from 2.1% to 8.4% as of February 28, 2011. Interest payments on long-term debt obligations include amounts associated with the Company’s outstanding interest rate swap agreements to fix LIBOR interest rates on $500.0 million of the Company’s floating LIBOR rate debt. Interest payments on long-term debt do not include interest related to capital lease obligations or certain foreign credit arrangements, which represent approximately 1.0% of the Company’s total long-term debt, as amounts are not material. | |
| (3) | Other long-term liabilities include $21.5 million associated with expected payments for unrecognized tax benefit liabilities as of February 28, 2011, including $5.3 million in the less than one year period. The payments are reflected in the period in which the Company believes they will ultimately be settled based on the Company’s experience in these matters. Other long-term liabilities do not include payments for unrecognized tax benefit liabilities of $132.9 million due to the uncertainty of the timing of future cash flows associated with these unrecognized tax benefit liabilities. In addition, other long-term liabilities do not include expected payments for interest and penalties associated with unrecognized tax benefit liabilities as amounts are not material. See Note 12 to the Company’s consolidated financial statements located in Item 8 of this Annual Report on Form 10-K for a detailed discussion of these items. | |
| (4) | Total unconditional purchase obligations consist of $915.5 million for contracts to purchase grapes over the next fourteen fiscal years, $29.4 million for contracts to purchase bulk wine over the next three fiscal years, $326.5 million for contracts to purchase certain raw materials over the next four fiscal years, and $130.1 million for processing contracts over the next nine fiscal years. See Note 15 to the Company’s consolidated financial statements located in Item 8 of this Annual Report on Form 10-K for a detailed discussion of these items. |
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Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that either have, or are
reasonably likely to have, a current or future effect on the Company’s financial condition, changes
in financial condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources that is material to investors.
Capital Expenditures
During Fiscal 2011, the Company incurred $89.1 million for capital expenditures. The Company
plans to spend from $85 million to $95 million for capital expenditures in Fiscal 2012. Included
within the planned expenditures for Fiscal 2012 are amounts associated with the Company’s Project
Fusion. Management reviews the capital expenditure program periodically and modifies it as
required to meet current business needs.
Effects of Inflation and Changing Prices
The Company’s results of operations and financial condition have not been significantly
affected by inflation and changing prices. The Company intends to pass along rising costs through
increased selling prices, subject to normal competitive conditions. There can be no assurances,
however, that the Company will be able to pass along rising costs through increased selling prices.
In addition, the Company continues to identify on-going cost savings initiatives.
Critical Accounting Policies
The Company’s significant accounting policies are more fully described in Note 1 to the
Company’s consolidated financial statements located in Item 8 of this Annual Report on Form 10-K.
However, certain of the Company’s accounting policies are particularly important to the portrayal
of the Company’s financial position and results of operations and require the application of
significant judgment by the Company’s management; as a result, they are subject to an inherent
degree of uncertainty. In applying those policies, the Company’s management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain estimates. Those
estimates are based on the Company’s historical experience, the Company’s observance of trends in
the industry, information provided by the Company’s customers and information available from other
outside sources, as appropriate. On an ongoing basis, the Company reviews its estimates to ensure
that they appropriately reflect changes in the Company’s business. The Company’s critical
accounting policies include:
| • | Inventory valuation. Inventories are stated at the lower of cost or market, cost being determined on the first-in, first-out method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analyses and assumptions including, but not limited to, historical usage, future demand and market requirements. Reductions to the carrying value of inventories are recorded in cost of product sold. If the future demand for the Company’s products is less favorable than the Company’s forecasts, then the value of the inventories may be required to be reduced, which could result in material additional expense to the Company and have a material adverse impact on the Company’s financial statements. The Company recognized inventory write-downs to net realizable value of $1.6 million and $56.8 million for Fiscal 2010 and Fiscal 2009, respectively, in connection with certain of the Company’s restructuring plans, primarily the Australian Initative. Inventory write-downs to net realizable value recognized in the ordinary course of business were not material for Fiscal 2011, Fiscal 2010 and Fiscal 2009. Inventories were $1,369.3 million and $1,879.9 million as of February 28, 2011, and February 28, 2010, respectively. |
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| • | Goodwill and other intangible assets. The Company accounts for goodwill and other intangible assets by classifying intangible assets into three categories: (i) intangible assets with definite lives subject to amortization; (ii) intangible assets with indefinite lives not subject to amortization; and (iii) goodwill. For intangible assets with definite lives, impairment testing is required if conditions exist that indicate the carrying value may not be recoverable. For intangible assets with indefinite lives and for goodwill, impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired. The Company performs annual impairment tests and re-evaluates the useful lives of other intangible assets with indefinite lives at its annual impairment test measurement date of January 1 or when circumstances arise that indicate a possible impairment might exist. The Company uses a two-step process to evaluate goodwill for impairment. In the first step, the fair value of each reporting unit is compared to the carrying value of the reporting unit, including goodwill. The estimate of fair value of the reporting unit is generally determined on the basis of discounted future cash flows supplemented by the market approach. If the estimated fair value of the reporting unit is less than the carrying value of the reporting unit, a second step is performed to determine the amount of the goodwill impairment the Company should record. In the second step, an implied fair value of the reporting unit’s goodwill is determined by allocating the reporting unit’s fair value to all of its assets and liabilities other than goodwill (including any unrecognized intangible assets). The resulting implied fair value of the goodwill is compared to the carrying value of goodwill. The amount of impairment charge for goodwill is equal to the excess of the carrying value of the goodwill over the implied fair value of that goodwill. The Company’s reporting units include the U.S., Canada and New Zealand. In estimating the fair value of the reporting units, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings and other factors. The assumptions used in the estimate of fair value are consistent with historical trends and the projections and assumptions that are used in current operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment loss for these assets. The recording of any resulting impairment loss could have a material adverse impact on the Company’s financial statements. | ||
| The most significant assumptions used in the discounted cash flows calculation to determine the fair value of the Company’s reporting units in connection with impairment testing are: (i) the discount rate, (ii) the expected long-term growth rate and (iii) the annual cash flow projections. If the Company used a discount rate that was 50 basis points higher or used an expected long-term growth rate that was 50 basis points lower or used annual cash flow projections that were 100 basis points lower in its impairment testing of goodwill, then the changes individually would not have resulted in the carrying value of the respective reporting unit’s net assets, including its goodwill, exceeding its fair value, which would indicate the potential for impairment and the requirement to measure the amount of impairment, if any. |
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| In the fourth quarter of fiscal 2011, pursuant to the Company’s accounting policy, the Company performed its annual goodwill impairment analysis. No indication of impairment was noted for any of the Company’s reporting units, as the fair value of each of the Company’s reporting units with goodwill exceeded their carrying value. Based on this analysis, the fair value of the Company’s U.S., New Zealand and Canadian reporting units exceeded their carrying value by approximately 20%, 19% and 18%, respectively. In the fourth quarter of fiscal 2010, as a result of its annual goodwill impairment analysis, the Company concluded that there were no indications of impairment for any of the Company’s reporting units. In the fourth quarter of fiscal 2009, as a result of its annual goodwill impairment analysis, the Company concluded that the carrying value of goodwill assigned to the CWAE segment’s U.K. reporting unit exceeded its implied fair value and recorded an impairment loss of $252.7 million, which is included in impairment of goodwill and intangible assets on the Company’s Consolidated Statements of Operations. Goodwill was $2,619.8 million and $2,570.6 million as of February 28, 2011, and February 28, 2010, respectively. | |||
| The Company’s other intangible assets consist primarily of customer relationships and trademarks obtained through business acquisitions. Customer relationships are amortized over their estimated useful lives. The useful lives of existing trademarks that were determined to be indefinite are not amortized. These trademarks are evaluated for impairment by comparing the carrying value of the trademarks to their estimated fair value. The estimated fair value of trademarks is calculated based on an income approach using the relief from royalty methodology. The estimated fair value of trademarks is generally determined on the basis of discounted cash flows. The estimate of fair value is then compared to the carrying value of each trademark. If the estimated fair value is less than the carrying value of the trademark, then an impairment charge is recorded by the Company to reduce the carrying value of the trademark to its estimated fair value. In estimating the fair value of the trademarks, management must make assumptions and projections regarding such items as future cash flows, future revenues, future earnings and other factors. The assumptions used in the estimate of fair value are consistent with historical trends and the projections and assumptions that are used in current operating plans. These assumptions reflect management’s estimates of future economic and competitive conditions and are, therefore, subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, the Company may be required to record an impairment loss for these assets. The recording of any resulting impairment loss could have a material adverse impact on the Company’s financial statements. | |||
| The most significant assumptions used in the discounted cash flows calculation to determine the fair value of intangible assets with indefinite lives in connection with impairment testing are: (i) the discount rate, (ii) the expected long-term growth rate and (iii) the annual cash flow projections. If the Company used a discount rate that was 50 basis points higher or used an expected long-term growth rate that was 50 basis points lower or used annual cash flow projections that were 100 basis points lower in its impairment testing of intangible assets with indefinite lives, then each change individually would not have resulted in any non-impaired unit of accounting’s carrying value exceeding its fair value. |
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| In the fourth quarter of fiscal 2011, pursuant to the Company’s accounting policy, the Company performed its annual review of indefinite lived intangible assets for impairment. The Company determined that certain trademarks associated with the CWNA segment’s Canadian reporting unit were impaired. As a result of this review, the Company recorded impairment losses of $16.7 million, which are included in impairment of goodwill and intangible assets on the Company’s Consolidated Statements of Operations. The Company had previously recorded impairment losses of $6.9 million during its third quarter of fiscal 2011 in connection with the Company’s decision to discontinue certain wine brands within its CWNA segment’s U.S. wine portfolio. In the fourth quarter of fiscal 2010, as a result of its annual review of indefinite lived intangible assets for impairment, the Company determined that certain trademarks associated primarily with the CWAE segment’s Australian reporting unit were impaired. As a result of this review, the Company recorded impairment losses of $103.2 million, which are included in impairment of goodwill and intangible assets on the Company’s Consolidated Statements of Operations. In the fourth quarter of fiscal 2009, as a result of its annual review of indefinite lived intangible assets for impairment, the Company determined that certain trademarks associated primarily with the CWAE segment’s U.K. reporting unit were impaired. As a result of this review, the Company recorded impairment losses of $25.9 million, which are included in impairment of goodwill and intangible assets on the Company’s Consolidated Statements of Operations. The Company had previously recorded impairment losses of $21.8 million during its second quarter of fiscal 2009 in connection with the Company’s Australian Initiative. Intangible assets with indefinite lives were $822.2 million and $855.7 million as of February 28, 2011, and February 28, 2010, respectively. | |||
| • | Accounting for promotional activities. Sales reflect reductions attributable to consideration given to customers in various customer incentive programs, including pricing discounts on single transactions, volume discounts, promotional and advertising allowances, coupons, and rebates. Certain customer incentive programs require management to estimate the cost of those programs. The accrued liability for these programs is determined through analysis of programs offered, historical trends, expectations regarding customer and consumer participation, sales and payment trends, and experience with payment patterns associated with similar programs that have been offered previously. If assumptions included in the Company’s estimates were to change or market conditions were to change, then material incremental reductions to revenue could be required, which could have a material adverse impact on the Company’s financial statements. Promotional costs were $699.0 million, $749.8 million and $712.1 million for Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively. Accrued promotion costs were $52.3 million and $111.4 million as of February 28, 2011, and February 28, 2010, respectively. |
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| • | Accounting for stock-based compensation. The Company adopted the fair value recognition provisions using the modified prospective transition method on March 1, 2006 in accordance with the FASB guidance for compensation – stock compensation. Under the fair value recognition provisions of this guidance, stock-based compensation cost is calculated at the grant date based on the fair value of the award and is recognized as expense, net of estimated pre-vesting forfeitures, ratably over the vesting period of the award. In addition, this guidance requires additional accounting related to the income tax effects and disclosure regarding the cash flow effects resulting from stock-based payment arrangements. The Company selected the Black-Scholes option-pricing model as the most appropriate fair value method for its awards granted after March 1, 2006. The calculation of fair value of stock-based awards requires the input of assumptions, including the expected term of the stock-based awards and the associated stock price volatility. The assumptions used in calculating the fair value of stock-based awards represent the Company’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, then stock-based compensation expense could be materially different in the future. If the Company used an expected term for its stock-based awards that was one year longer, the fair value of stock-based awards granted during Fiscal 2011, Fiscal 2010, Fiscal 2009 and for the years ended February 29, 2008 (“Fiscal 2008”), and February 28, 2007 (“Fiscal 2007”), would have increased by $27.1 million, resulting in an increase of $5.5 million of stock-based compensation expense for Fiscal 2011. If the Company used an expected term of the stock-based awards that was one year shorter, the fair value of the stock-based awards granted during Fiscal 2011, Fiscal 2010, Fiscal 2009, Fiscal 2008 and Fiscal 2007 would have decreased by $27.4 million, resulting in a decrease of $5.3 million of stock-based compensation expense for Fiscal 2011. The total amount of stock-based compensation recognized for Fiscal 2011 was $47.0 million, of which $43.1 million was expensed for Fiscal 2011 and $3.9 million was capitalized in inventory as of February 28, 2011. The total amount of stock-based compensation recognized for Fiscal 2010 was $56.8 million, of which $51.7 million was expensed for Fiscal 2010 and $5.1 million was capitalized in inventory as of February 28, 2010. The total amount of stock-based compensation recognized for Fiscal 2009 was $47.5 million, of which $42.9 million was expensed for Fiscal 2009 and $4.6 million was capitalized in inventory as of February 28, 2009. |
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| • | Accounting for income taxes. The Company estimates its income tax expense, deferred tax assets and liabilities and reserves for unrecognized tax benefits based upon various factors including, but not limited to, historical pretax operating income, future estimates of pretax operating income, differences between book and tax treatment of items of income and expense and tax planning strategies. The Company is subject to income taxes in the U.S., Canada, New Zealand and other jurisdictions. The Company recognizes its deferred tax assets and liabilities based upon the expected future tax outcome of amounts recognized in the Company’s Consolidated Statements of Operations. If necessary, the Company records a valuation allowance on deferred tax assets if the realization of the asset appears doubtful. The Company believes that all tax positions are fully supported, however the Company records tax liabilities in accordance with the FASB’s guidance for income tax accounting when certain positions are likely to be challenged and may not succeed. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company’s current estimate of the tax liabilities. In addition, changes in existing tax laws or rates could significantly change the Company’s current estimate of its tax liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. Changes in current estimates, if significant, could have a material adverse impact on the Company’s financial statements. The annual effective tax rate was (1.5%), 61.7% and (182.2%) for Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively. | ||
| • | Accounting for business combinations. The acquisition of businesses is an important element of the Company’s strategy. Under the acquisition method, the Company is required to record the net assets acquired at the estimated fair value at the date of acquisition. The determination of the fair value of the assets acquired and liabilities assumed requires the Company to make estimates and assumptions that affect the Company’s financial statements. For example, the Company’s acquisitions typically result in the recognition of goodwill and other intangible assets; the value and estimated life of those assets may affect the amount of future period amortization expense for intangible assets with finite lives as well as possible impairment charges that may be incurred. Amortization expense for amortizable intangible assets was $5.5 million, $5.8 million and $6.8 million for Fiscal 2011, Fiscal 2010 and Fiscal 2009, respectively. Amortizable intangible assets were $64.1 million and $69.3 million as of February 28, 2011, and February 28, 2010, respectively. |
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Accounting Guidance Not Yet Adopted
Fair value measurements and disclosures –
In January 2010, the FASB issued amended guidance for fair value measurements and disclosures. This guidance requires an entity to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers, and (ii) present separately information about purchases, sales, issuances and settlements on a gross basis in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). This guidance also clarifies existing disclosures requiring an entity to provide fair value measurement disclosures for each class of assets and liabilities and, for Level 2 or Level 3 fair value measurements, disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Effective March 1, 2010, the Company adopted the additional disclosure requirements and clarifications of existing disclosures of this guidance, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The Company is required to adopt those disclosures for its annual and interim periods beginning March 1, 2011. The adoption of the applicable provisions of this guidance on March 1, 2010, did not have a material impact on the Company’s consolidated financial statements. The adoption of the remaining provision of this guidance on March 1, 2011, did not have a material impact on the Company’s consolidated financial statements.
In January 2010, the FASB issued amended guidance for fair value measurements and disclosures. This guidance requires an entity to (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers, and (ii) present separately information about purchases, sales, issuances and settlements on a gross basis in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). This guidance also clarifies existing disclosures requiring an entity to provide fair value measurement disclosures for each class of assets and liabilities and, for Level 2 or Level 3 fair value measurements, disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements. Effective March 1, 2010, the Company adopted the additional disclosure requirements and clarifications of existing disclosures of this guidance, except for the disclosures about purchases, sales, issuances and settlements in the reconciliation for fair value measurements using significant unobservable inputs (Level 3). The Company is required to adopt those disclosures for its annual and interim periods beginning March 1, 2011. The adoption of the applicable provisions of this guidance on March 1, 2010, did not have a material impact on the Company’s consolidated financial statements. The adoption of the remaining provision of this guidance on March 1, 2011, did not have a material impact on the Company’s consolidated financial statements.
Intangibles – goodwill and other –
In December 2010, the FASB issued amended guidance for when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amended guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. Any resulting goodwill impairment upon adoption should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. The Company is required to adopt the guidance for its annual and interim periods beginning March 1, 2011. The adoption of this amended guidance on March 1, 2011, did not have a material impact on the Company’s consolidated financial statements.
In December 2010, the FASB issued amended guidance for when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The amended guidance modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. Any resulting goodwill impairment upon adoption should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. The Company is required to adopt the guidance for its annual and interim periods beginning March 1, 2011. The adoption of this amended guidance on March 1, 2011, did not have a material impact on the Company’s consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company, as a result of its global operating, acquisition and financing activities, is
exposed to market risk associated with changes in foreign currency exchange rates and interest
rates. To manage the volatility relating to these risks, the Company periodically purchases and/or
sells derivative instruments including foreign currency forward and option contracts and interest
rate swap agreements. The Company uses derivative instruments solely to reduce the financial
impact of these risks and does not use derivative instruments for trading purposes.
Foreign currency derivative instruments are or may be used to hedge existing foreign currency
denominated assets and liabilities, forecasted foreign currency denominated sales/purchases to/from
third parties as well as intercompany sales/purchases, intercompany principal and interest
payments, and in connection with acquisitions or joint venture investments outside the U.S. As of
February 28, 2011, the Company had exposures to foreign currency risk primarily related to the
euro, New Zealand dollar and Canadian dollar.
55
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As of February 28, 2011, and February 28, 2010, the Company had outstanding foreign currency
derivative instruments with a notional value of $326.4 million and $1,020.1 million, respectively.
Approximately 47% of the Company’s total exposures were hedged as of February 28, 2011, including
most of the Company’s balance sheet exposures and certain of the Company’s forecasted transactional
exposures. The estimated fair value of the Company’s foreign currency derivative instruments was a
net asset of $11.7 million and $14.6 million as of February 28, 2011, and February 28, 2010,
respectively. Using a sensitivity analysis based on estimated fair value of open contracts using
forward rates, if the contract base currency had been 10% weaker as of February 28, 2011, and
February 28, 2010, the fair value of open foreign currency contracts would have been decreased by
$0.4 million and $13.2 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 $2,104.0 million and $1,974.3 million as of February 28, 2011, and February 28,
2010, respectively. A hypothetical 1% increase from prevailing interest rates as of February 28,
2011, and February 28, 2010, would have resulted in a decrease in fair value of fixed interest rate
long-term debt by $90.3 million and $97.3 million, respectively.
As of February 28, 2011, and February 28, 2010, the Company had outstanding cash
flow designated interest rate swap agreements to minimize interest rate volatility. As of February
28, 2011, the swap agreements fix LIBOR interest rates on $500.0 million of the Company’s floating
LIBOR rate debt at an average rate of 2.9% (exclusive of borrowing margins) through September 1,
2016. As of February 28, 2010, the swap agreements fixed LIBOR interest rates on $1,200.0 million
of the Company’s floating LIBOR rate debt at an average rate of 4.1% through February 28, 2010. In
addition, as of February 28, 2010, the Company had offsetting outstanding undesignated interest
rate swap agreements with an absolute notional value of $2,400.0 million. The Company’s interest
rate swap agreements that were outstanding as of February 28, 2010, matured on March 1, 2010. The
estimated fair value of the Company’s interest rate swap agreements was a net liability of $4.4
million and $12.0 million as of February 28, 2011, and February 28, 2010, respectively. A
hypothetical 1% increase from prevailing interest rates as of February 28, 2011, would have
favorably increased the fair value of the interest rate swap agreements by $25.1 million. A
hypothetical 1% increase from prevailing interest rates as of February 28, 2010, would not have
resulted in a significant change in the fair value of the interest rate swap agreements.
In addition to the $2,104.0 million and $1,974.3 million estimated fair value of fixed rate
debt outstanding as of February 28, 2011, and February 28, 2010, respectively, the Company also had
variable rate debt outstanding (primarily LIBOR-based), certain of which includes a fixed margin.
As of February 28, 2011, and February 28, 2010, the estimated fair value of the Company’s total
variable rate debt, including current maturities was $1,278.0 million and $1,879.2 million,
respectively. Using a sensitivity analysis based on a hypothetical 1% increase in prevailing
interest rates over a 12-month period, the approximate increase in cash required for interest as of
February 28, 2011, and February 28, 2010, is $29.0 million and $19.2 million, respectively.
56
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Item 8. Financial Statements and Supplementary Data.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2011
The following information is presented in this Annual Report on Form 10-K:
| Page | |||
| 58 | |||
| 59 | |||
| 61 | |||
| 62 | |||
| 63 | |||
| 64 | |||
| 66 | |||
| 68 | |||
| 135 | |||
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Constellation Brands, Inc.:
Constellation Brands, Inc.:
We have audited the accompanying consolidated balance sheets of Constellation Brands, Inc. and
subsidiaries (the Company) as of February 28, 2011 and 2010, and the related consolidated
statements of operations, changes in stockholders’ equity, and cash flows for each of the years in
the three-year period ended February 28, 2011. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Constellation Brands, Inc. and subsidiaries as of
February 28, 2011 and 2010, and the results of their operations and their cash flows for each of
the years in the three-year period ended February 28, 2011, in conformity with U.S. generally
accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Constellation Brands, Inc.’s internal control over financial reporting as of
February 28, 2011, based on criteria established in Internal Control—Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report
dated April 29, 2011 expressed an unqualified opinion on the effectiveness of Constellation Brands,
Inc.’s internal control over financial reporting.
/s/ KPMG LLP
Rochester, New York
April 29, 2011
April 29, 2011
58
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Constellation Brands, Inc.:
Constellation Brands, Inc.:
We have audited Constellation Brands, Inc.’s (the Company) internal control over financial
reporting as of February 28, 2011, based on criteria established in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Constellation Brands, Inc.’s management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over
financial reporting, included in the accompanying Management’s Annual Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
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Table of Contents
In our opinion, Constellation Brands, Inc. maintained, in all material respects, effective internal
control over financial reporting as of February 28, 2011, based on criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Constellation Brands, Inc. and
subsidiaries as of February 28, 2011 and 2010, and the related consolidated statements of
operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year
period ended February 28, 2011, and our report dated April 29, 2011 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Rochester, New York
April 29, 2011
April 29, 2011
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Management’s Annual Report on Internal Control Over Financial Reporting
Management of Constellation Brands, Inc. and subsidiaries (the “Company”) is responsible for
establishing and maintaining an adequate system of internal control over financial reporting. This
system is designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
The Company’s internal control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and expenditures of the
Company are being made only in accordance with authorizations of management and directors of the
Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the Company’s assets that could have a material
effect on the financial statements.
Because of its inherent limitations, a system of internal control over financial reporting can
provide only reasonable assurance and may not prevent or detect misstatements. Further, because of
changes in conditions, effectiveness of internal controls over financial reporting may vary over
time.
Management conducted an evaluation of the effectiveness of the system of internal control over
financial reporting based on the framework in Internal Control - Integrated Framework issued by the
Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on that evaluation,
management concluded that the Company’s internal control over financial reporting was effective as
of February 28, 2011.
The effectiveness of the Company’s internal control over financial reporting has been audited by
KPMG LLP, an independent registered public accounting firm, as stated in their report which is
included herein.
61
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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(in millions, except share and per share data)
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS: |
||||||||
Cash and cash investments |
$ | 9.2 | $ | 43.5 | ||||
Accounts receivable, net |
417.4 | 514.7 | ||||||
Inventories |
1,369.3 | 1,879.9 | ||||||
Prepaid expenses and other |
287.1 | 151.0 | ||||||
Total current assets |
2,083.0 | 2,589.1 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net |
1,219.6 | 1,567.2 | ||||||
GOODWILL |
2,619.8 | 2,570.6 | ||||||
INTANGIBLE ASSETS, net |
886.3 | 925.0 | ||||||
OTHER ASSETS, net |
358.9 | 442.4 | ||||||
Total assets |
$ | 7,167.6 | $ | 8,094.3 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY |
||||||||
CURRENT LIABILITIES: |
||||||||
Notes payable to banks |
$ | 83.7 | $ | 371.2 | ||||
Current maturities of long-term debt |
15.9 | 187.2 | ||||||
Accounts payable |
129.2 | 268.8 | ||||||
Accrued excise taxes |
14.2 | 43.8 | ||||||
Other accrued expenses and liabilities |
419.9 | 501.6 | ||||||
Total current liabilities |
662.9 | 1,372.6 | ||||||
LONG-TERM DEBT, less current maturities |
3,136.7 | 3,277.1 | ||||||
DEFERRED INCOME TAXES |
583.1 | 536.2 | ||||||
OTHER LIABILITIES |
233.0 | 332.1 | ||||||
COMMITMENTS AND CONTINGENCIES (NOTE 15) |
||||||||
STOCKHOLDERS’ EQUITY: |
||||||||
Preferred Stock, $.01 par value- Authorized, 1,000,000 shares; Issued, none at February 28, 2011, and February 28, 2010 |
- | - | ||||||
Class A Common Stock, $.01 par value- Authorized, 322,000,000 shares; Issued, 230,290,798 shares at February 28, 2011, and 225,062,547 shares at February 28, 2010 |
2.3 | 2.3 | ||||||
Class B Convertible Common Stock, $.01 par value- Authorized, 30,000,000 shares; Issued, 28,617,758 shares at February 28, 2011, and 28,734,637 shares at February 28, 2010 |
0.3 | 0.3 | ||||||
Class 1 Common Stock, $.01 par value- Authorized, 25,000,000 shares; Issued, none at February 28, 2011, and February 28, 2010 |
- | - | ||||||
Additional paid-in capital |
1,602.4 | 1,493.2 | ||||||
Retained earnings |
1,662.3 | 1,102.8 | ||||||
Accumulated other comprehensive income |
188.8 | 587.2 | ||||||
| 3,456.1 | 3,185.8 | |||||||
Less: Treasury stock- |
||||||||
Class A Common Stock, 42,739,831 shares at
February 28, 2011, and 26,549,546 shares at
February 28, 2010, at cost |
(902.0 | ) | (607.3 | ) | ||||
Class B Convertible Common Stock, 5,005,800 shares
at February 28, 2011, and February 28, 2010, at cost |
(2.2 | ) | (2.2 | ) | ||||
| (904.2 | ) | (609.5 | ) | |||||
Total stockholders’ equity |
2,551.9 | 2,576.3 | ||||||
Total liabilities and stockholders’ equity |
$ | 7,167.6 | $ | 8,094.3 | ||||
The accompanying notes are an integral part of these statements.
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Table of Contents
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(in millions, except per share data)
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
SALES |
$ | 4,096.7 | $ | 4,213.0 | $ | 4,723.0 | ||||||
Less - excise taxes |
(764.7 | ) | (848.2 | ) | (1,068.4 | ) | ||||||
Net sales |
3,332.0 | 3,364.8 | 3,654.6 | |||||||||
COST OF PRODUCT SOLD |
(2,141.9 | ) | (2,220.0 | ) | (2,424.6 | ) | ||||||
Gross profit |
1,190.1 | 1,144.8 | 1,230.0 | |||||||||
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
(640.9 | ) | (682.5 | ) | (832.0 | ) | ||||||
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS |
(23.6 | ) | (103.2 | ) | (300.4 | ) | ||||||
RESTRUCTURING CHARGES |
(23.1 | ) | (47.6 | ) | (68.0 | ) | ||||||
Operating income |
502.5 | 311.5 | 29.6 | |||||||||
EQUITY IN EARNINGS OF EQUITY METHOD INVESTEES |
243.8 | 213.6 | 186.6 | |||||||||
INTEREST EXPENSE, net |
(195.3 | ) | (265.1 | ) | (323.0 | ) | ||||||
LOSS ON WRITE-OFF OF FINANCING COSTS |
- | (0.7 | ) | - | ||||||||
Income (loss) before income taxes |
551.0 | 259.3 | (106.8 | ) | ||||||||
BENEFIT FROM (PROVISION FOR) INCOME TAXES |
8.5 | (160.0 | ) | (194.6 | ) | |||||||
NET INCOME (LOSS) |
$ | 559.5 | $ | 99.3 | $ | (301.4 | ) | |||||
SHARE DATA: |
||||||||||||
Earnings (loss) per common share: |
||||||||||||
Basic - Class A Common Stock |
$ | 2.68 | $ | 0.46 | $ | (1.40 | ) | |||||
Basic - Class B Convertible Common Stock |
$ | 2.44 | $ | 0.41 | $ | (1.27 | ) | |||||
Diluted - Class A Common Stock |
$ | 2.62 | $ | 0.45 | $ | (1.40 | ) | |||||
Diluted - Class B Convertible Common Stock |
$ | 2.40 | $ | 0.41 | $ | (1.27 | ) | |||||
Weighted average common shares outstanding: |
||||||||||||
Basic - Class A Common Stock |
187.224 | 196.095 | 193.906 | |||||||||
Basic - Class B Convertible Common Stock |
23.686 | 23.736 | 23.753 | |||||||||
Diluted - Class A Common Stock |
213.765 | 221.210 | 193.906 | |||||||||
Diluted - Class B Convertible Common Stock |
23.686 | 23.736 | 23.753 | |||||||||
The accompanying notes are an integral part of these statements.
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Table of Contents
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in millions, except share data)
(in millions, except share data)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||
| Class A | Class B | Capital | Earnings | Income (Loss) | Stock | Total | ||||||||||||||||||||||
BALANCE, February 29, 2008 |
$ | 2.2 | $ | 0.3 | $ | 1,344.0 | $ | 1,306.0 | $ | 736.0 | $ | (622.6 | ) | $ | 2,765.9 | |||||||||||||
Comprehensive loss: |
||||||||||||||||||||||||||||
Net loss for Fiscal 2009 |
- | - | - | (301.4 | ) | - | - | (301.4 | ) | |||||||||||||||||||
Other comprehensive (loss) income, net of income tax effect: |
||||||||||||||||||||||||||||
Foreign currency translation adjustments |
- | - | - | - | (683.5 | ) | - | (683.5 | ) | |||||||||||||||||||
Unrealized loss on cash flow hedges: |
||||||||||||||||||||||||||||
Net derivative losses |
- | - | - | - | (16.4 | ) | - | (16.4 | ) | |||||||||||||||||||
Reclassification adjustments |
- | - | - | - | 0.8 | - | 0.8 | |||||||||||||||||||||
Net loss recognized in other comprehensive income |
(15.6 | ) | ||||||||||||||||||||||||||
Pension/postretirement: |
||||||||||||||||||||||||||||
Net actuarial gains |
- | - | - | - | 44.3 | - | 44.3 | |||||||||||||||||||||
Reclassification adjustments |
- | - | - | - | 12.0 | - | 12.0 | |||||||||||||||||||||
Net gain recognized in other comprehensive income |
56.3 | |||||||||||||||||||||||||||
Other comprehensive loss, net of income tax effect |
(642.8 | ) | ||||||||||||||||||||||||||
Comprehensive loss |
(944.2 | ) | ||||||||||||||||||||||||||
Adjustments to apply change in measurement date provision of
compensation - retirement benefits, net of income tax effect |
- | - | - | (1.1 | ) | 1.0 | - | (0.1 | ) | |||||||||||||||||||
Conversion of 33,660 Class B Convertible Common
shares to Class A Common shares |
- | - | - | - | - | - | - | |||||||||||||||||||||
Exercise of 2,254,660 Class A stock options |
- | - | 27.1 | - | - | - | 27.1 | |||||||||||||||||||||
Employee stock purchases of 376,297 treasury shares |
- | - | 3.6 | - | - | 2.0 | 5.6 | |||||||||||||||||||||
Grant of 460,036 Class A Common shares - restricted
stock awards |
- | - | (2.4 | ) | - | - | 2.4 | - | ||||||||||||||||||||
Stock-based employee compensation |
- | - | 47.5 | - | - | - | 47.5 | |||||||||||||||||||||
Tax benefit on stock-based employee compensation awards |
- | - | 6.5 | - | - | - | 6.5 | |||||||||||||||||||||
BALANCE, February 28, 2009 |
$ | 2.2 | $ | 0.3 | $ | 1,426.3 | $ | 1,003.5 | $ | 94.2 | $ | (618.2 | ) | $ | 1,908.3 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income for Fiscal 2010 |
- | - | - | 99.3 | - | - | 99.3 | |||||||||||||||||||||
Other comprehensive income (loss), net of income tax effect: |
||||||||||||||||||||||||||||
Foreign currency translation adjustments |
- | - | - | - | 497.5 | - | 497.5 | |||||||||||||||||||||
Unrealized gain on cash flow hedges: |
||||||||||||||||||||||||||||
Net derivative gains |
- | - | - | - | 60.2 | - | 60.2 | |||||||||||||||||||||
Reclassification adjustments |
- | - | - | - | (11.6 | ) | - | (11.6 | ) | |||||||||||||||||||
Net gain recognized in other comprehensive income |
48.6 | |||||||||||||||||||||||||||
Pension/postretirement: |
||||||||||||||||||||||||||||
Net actuarial losses |
- | - | - | - | (57.7 | ) | - | (57.7 | ) | |||||||||||||||||||
Reclassification adjustments |
- | - | - | - | 4.6 | - | 4.6 | |||||||||||||||||||||
Net loss recognized in other comprehensive income |
(53.1 | ) | ||||||||||||||||||||||||||
Other comprehensive income, net of income tax effect |
493.0 | |||||||||||||||||||||||||||
Comprehensive income |
592.3 | |||||||||||||||||||||||||||
Conversion of 14,657 Class B Convertible Common
shares to Class A Common shares |
- | - | - | - | - | - | - | |||||||||||||||||||||
Exercise of 1,453,431 Class A stock options |
0.1 | - | 12.2 | - | - | - | 12.3 | |||||||||||||||||||||
Employee stock purchases of 388,294 treasury shares |
- | - | 2.5 | - | - | 2.0 | 4.5 | |||||||||||||||||||||
Grant of 1,365,460 Class A Common shares - restricted
stock awards |
- | - | (7.3 | ) | - | - | 7.3 | - | ||||||||||||||||||||
Vesting of 27,145 restricted stock units (17,645 treasury shares
and 9,500 Class A Common shares), net of 11,110 shares
withheld to satisfy tax withholding requirements |
- | - | (0.2 | ) | - | - | 0.1 | (0.1 | ) | |||||||||||||||||||
Cancellation of 136,497 restricted Class A Common shares |
- | - | 0.7 | - | - | (0.7 | ) | - | ||||||||||||||||||||
Stock-based employee compensation |
- | - | 56.8 | - | - | - | 56.8 | |||||||||||||||||||||
Tax benefit on stock-based employee compensation awards |
- | - | 2.2 | - | - | - | 2.2 | |||||||||||||||||||||
BALANCE, February 28, 2010 |
$ | 2.3 | $ | 0.3 | $ | 1,493.2 | $ | 1,102.8 | $ | 587.2 | $ | (609.5 | ) | $ | 2,576.3 | |||||||||||||
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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in millions, except share data)
(in millions, except share data)
| Accumulated | ||||||||||||||||||||||||||||
| Additional | Other | |||||||||||||||||||||||||||
| Common Stock | Paid-in | Retained | Comprehensive | Treasury | ||||||||||||||||||||||||
| Class A | Class B | Capital | Earnings | Income (Loss) | Stock | Total | ||||||||||||||||||||||
BALANCE, February 28, 2010 |
$ | 2.3 | $ | 0.3 | $ | 1,493.2 | $ | 1,102.8 | $ | 587.2 | $ | (609.5 | ) | $ | 2,576.3 | |||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||
Net income for Fiscal 2011 |
- | - | - | 559.5 | - | - | 559.5 | |||||||||||||||||||||
Other comprehensive income (loss), net of income tax effect: |
||||||||||||||||||||||||||||
Foreign currency translation adjustments: |
||||||||||||||||||||||||||||
Net gains |
178.2 | 178.2 | ||||||||||||||||||||||||||
Reclassification adjustments |
(657.1 | ) | (657.1 | ) | ||||||||||||||||||||||||
Net loss recognized in other comprehensive income |
(478.9 | ) | ||||||||||||||||||||||||||
Unrealized loss on cash flow hedges: |
||||||||||||||||||||||||||||
Net derivative gains |
- | - | - | - | 9.1 | - | 9.1 | |||||||||||||||||||||
Reclassification adjustments |
- | - | - | - | (24.5 | ) | - | (24.5 | ) | |||||||||||||||||||
Net loss recognized in other comprehensive income |
(15.4 | ) | ||||||||||||||||||||||||||
Pension/postretirement: |
||||||||||||||||||||||||||||
Net actuarial gains |
- | - | - | - | 9.3 | - | 9.3 | |||||||||||||||||||||
Reclassification adjustments |
- | - | - | - | 86.6 | - | 86.6 | |||||||||||||||||||||
Net gain recognized in other comprehensive income |
95.9 | |||||||||||||||||||||||||||
Other comprehensive loss, net of income tax effect |
(398.4 | ) | ||||||||||||||||||||||||||
Comprehensive income |
161.1 | |||||||||||||||||||||||||||
Repurchase of 17,240,101 Class A Common shares |
- | - | - | - | - | (300.3 | ) | (300.3 | ) | |||||||||||||||||||
Conversion of 116,879 Class B Convertible Common
shares to Class A Common shares |
- | - | - | - | - | - | - | |||||||||||||||||||||
Exercise of 5,100,677 Class A stock options |
- | - | 62.3 | - | - | - | 62.3 | |||||||||||||||||||||
Employee stock purchases of 305,207 treasury shares |
- | - | 2.6 | - | - | 1.7 | 4.3 | |||||||||||||||||||||
Grant of 739,388 Class A Common shares - restricted
stock awards |
- | - | (3.9 | ) | - | - | 3.9 | - | ||||||||||||||||||||
Vesting of 53,780 restricted stock units (43,085 treasury shares
and 10,695 Class A Common shares), net of 23,628 shares
withheld to satisfy tax withholding requirements |
- | - | (0.6 | ) | - | - | 0.2 | (0.4 | ) | |||||||||||||||||||
Cancellation of 37,864 restricted Class A Common shares |
- | - | 0.2 | - | - | (0.2 | ) | - | ||||||||||||||||||||
Stock-based employee compensation |
- | - | 47.0 | - | - | - | 47.0 | |||||||||||||||||||||
Tax benefit on stock-based employee compensation awards |
- | - | 1.6 | - | - | - | 1.6 | |||||||||||||||||||||
BALANCE, February 28, 2011 |
$ | 2.3 | $ | 0.3 | $ | 1,602.4 | $ | 1,662.3 | $ | 188.8 | $ | (904.2 | ) | $ | 2,551.9 | |||||||||||||
The accompanying notes are an integral part of these statements.
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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(in millions)
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||
Net income (loss) |
$ | 559.5 | $ | 99.3 | $ | (301.4 | ) | |||||
Adjustments to reconcile net income (loss) to net cash provided by
operating activities: |
||||||||||||
Depreciation of property, plant and equipment |
119.2 | 143.8 | 143.6 | |||||||||
Loss on settlement of pension obligations |
109.9 | - | - | |||||||||
Deferred tax provision (benefit) |
70.9 | (30.6 | ) | 2.3 | ||||||||
Loss on contractual obligation from put option of Ruffino shareholder |
60.0 | 34.3 | - | |||||||||
Stock-based compensation expense |
46.0 | 56.3 | 46.1 | |||||||||
Impairment of goodwill and intangible assets |
23.6 | 103.2 | 300.4 | |||||||||
Amortization of intangible and other assets |
14.6 | 12.1 | 13.4 | |||||||||
Loss on disposal or impairment of long-lived assets, net |
0.4 | 15.7 | 44.9 | |||||||||
(Gain) loss on businesses sold or held for sale, net |
(165.1 | ) | (10.4 | ) | 31.5 | |||||||
Equity in earnings of equity method investees, net of distributed earnings |
(23.8 | ) | (13.1 | ) | 90.3 | |||||||
Noncash portion of loss on extinguishment of debt |
- | 0.7 | - | |||||||||
Write-down of Australian inventory |
- | - | 75.5 | |||||||||
Change in operating assets and liabilities, net of effects
from purchases and sales of businesses: |
||||||||||||
Accounts receivable, net |
(86.0 | ) | 61.9 | 87.4 | ||||||||
Inventories |
190.8 | 51.0 | (86.0 | ) | ||||||||
Prepaid expenses and other current assets |
(7.6 | ) | 2.6 | 9.4 | ||||||||
Accounts payable |
(82.5 | ) | (42.7 | ) | (26.9 | ) | ||||||
Accrued excise taxes |
(7.1 | ) | (18.1 | ) | 12.1 | |||||||
Other accrued expenses and liabilities |
(168.6 | ) | (110.6 | ) | (95.0 | ) | ||||||
Other, net |
(34.9 | ) | 47.1 | 159.3 | ||||||||
Total adjustments |
59.8 | 303.2 | 808.3 | |||||||||
Net cash provided by operating activities |
619.3 | 402.5 | 506.9 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||
Proceeds from sales of businesses, net of cash divested |
219.7 | 349.6 | 204.2 | |||||||||
Proceeds from note receivable |
60.0 | - | - | |||||||||
Proceeds from sales of assets |
19.5 | 17.2 | 25.4 | |||||||||
Capital distributions from equity method investees |
0.3 | 0.2 | 20.8 | |||||||||
Purchases of property, plant and equipment |
(89.1 | ) | (107.7 | ) | (128.6 | ) | ||||||
Investments in equity method investees |
(29.7 | ) | (0.9 | ) | (3.2 | ) | ||||||
Purchases of businesses, net of cash acquired |
- | - | 0.1 | |||||||||
Other investing activities |
7.4 | (1.8 | ) | 9.9 | ||||||||
Net cash provided by investing activities |
188.1 | 256.6 | 128.6 | |||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||
Principal payments of long-term debt |
(328.5 | ) | (781.3 | ) | (577.6 | ) | ||||||
Purchases of treasury stock |
(300.0 | ) | - | - | ||||||||
Net (repayment of) proceeds from notes payable |
(289.7 | ) | 117.1 | (109.7 | ) | |||||||
Payment of financing costs of long-term debt |
(0.2 | ) | (11.5 | ) | - | |||||||
Proceeds from exercise of employee stock options |
61.0 | 12.3 | 27.1 | |||||||||
Proceeds from excess tax benefits from stock-based payment awards |
7.4 | 2.7 | 7.2 | |||||||||
Proceeds from employee stock purchases |
4.3 | 4.5 | 5.6 | |||||||||
Proceeds from maturity of derivative instrument |
- | 33.2 | - | |||||||||
Net cash used in financing activities |
(845.7 | ) | (623.0 | ) | (647.4 | ) | ||||||
Effect of exchange rate changes on cash and cash investments |
4.0 | (5.7 | ) | 4.5 | ||||||||
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS |
(34.3 | ) | 30.4 | (7.4 | ) | |||||||
CASH AND CASH INVESTMENTS, beginning of year |
43.5 | 13.1 | 20.5 | |||||||||
CASH AND CASH INVESTMENTS, end of year |
$ | 9.2 | $ | 43.5 | $ | 13.1 | ||||||
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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||
Cash paid during the year for: |
||||||||||||
Interest |
$ | 203.3 | $ | 307.7 | $ | 332.8 | ||||||
Income taxes |
$ | 79.7 | $ | 221.4 | $ | 137.8 | ||||||
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING
AND FINANCING ACTIVITIES: |
||||||||||||
Property, plant and equipment acquired under financing arrangements |
$ | 28.4 | $ | - | $ | - | ||||||
Sales of businesses |
||||||||||||
Investment in Accolade |
$ | 48.2 | $ | - | $ | - | ||||||
Indemnification liabilities |
$ | 26.1 | $ | - | $ | - | ||||||
Note receivable from sale of value spirits business |
$ | - | $ | 60.0 | $ | - | ||||||
The accompanying notes are an integral part of these statements.
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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FEBRUARY 28, 2011
| 1. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: |
Description of business –
Constellation Brands, Inc. and its subsidiaries (the “Company”) operate primarily in the
beverage alcohol industry. The Company is a leading international producer and marketer of
beverage alcohol with a broad portfolio of premium brands across the wine, spirits and imported
beer categories. The Company has the leading premium wine business in the world and is a leading
producer and marketer of wine in the United States (“U.S.”); the leading producer and marketer of
wine in Canada; and a leading producer and exporter of wine from New Zealand. In North America,
the Company’s products are primarily sold to wholesale distributors as well as state and
provincial alcoholic beverage control agencies. In New Zealand, the Company’s products are
primarily sold to retailers, wholesalers and importers. In
addition, the Company imports, markets and sells the Modelo Brands (as defined in Note 9) and
certain other imported beer brands through the Company’s joint venture, Crown Imports (as defined
in Note 9).
On January 31, 2011, the Company sold 80.1% of its Australian and U.K. business (the “CWAE
Divestiture”) (see Note 7). Prior to this divestiture, the Company was also a leading producer and
exporter of wine from Australia and a major supplier of beverage alcohol in the United Kingdom
(“U.K.”). In connection with the Company’s changes during the first quarter of fiscal 2011 within
its internal management structure for this business, and the Company’s revised business strategy
within the Australian and U.K. markets, the Company changed its reportable operating segments on
May 1, 2010, to consist of: Constellation Wines North America (“CWNA”), Constellation Wines
Australia and Europe (“CWAE”), Corporate Operations and Other, and Crown Imports (see Note 23).
All financial information for the years ended February 28, 2010, and February 28, 2009, has been
restated to conform to the new segment presentation. As a result of the CWAE Divestiture, as of
February 1, 2011, the Company is no longer reporting operating results for the CWAE segment.
Principles of consolidation –
The consolidated financial statements of the Company include the accounts of the Company and
its majority-owned subsidiaries and entities in which the Company has a controlling financial
interest after the elimination of intercompany accounts and transactions. The Company has a
controlling financial interest if the Company owns a majority of the outstanding voting common
stock or has significant control over an entity through contractual or economic interests in which
the Company is the primary beneficiary.
Management’s use of estimates –
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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Equity investments –
If the Company is not required to consolidate its investment in
another entity, the Company
uses the equity method if the Company (i) can exercise significant
influence over the other entity and
(ii) holds common stock and/or in-substance common stock of the other
entity. Under the equity method,
investments are carried at cost, plus or minus the Company’s equity in the increases and decreases
in the investee’s net assets after the date of acquisition and certain other adjustments. The
Company’s share of the net income or loss of the investee is included in equity in earnings of
equity method investees on the Company’s Consolidated Statements of Operations. Dividends received
from the investee reduce the carrying amount of the investment.
Equity method investments are also reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of the investments may not be recoverable. No
instances of impairment were noted on the Company’s equity method investments for the year ended
February 28, 2011. During the third quarter of fiscal 2010, the Company determined that its CWNA
segment’s international equity method investment, Ruffino S.r.l. (“Ruffino”) was impaired primarily
due to a decline in revenue and profit forecasts for this equity method investee combined with an
unfavorable foreign exchange movement between the Euro and the U.S. Dollar. The Company measured
the amount of impairment by calculating the amount by which the carrying value of its investment
exceeded its estimated fair value, based on projected discounted cash flows of this equity method
investee (Level 3 fair value measurement – see Note 6). As a result of this review, the Company
recorded an impairment loss of $25.4 million in equity in earnings of equity method investees on
the Company’s Consolidated Statements of Operations. For the year ended February 28, 2009, the
Company recorded impairment losses of $79.2 million primarily associated with Ruffino ($48.6
million) and its CWAE segment’s international equity method investment, Matthew Clark ($30.1
million). These impairment losses resulted primarily from a decline in revenue and profit
forecasts for these two equity method investees reflecting significant market deterioration during
the fourth quarter of fiscal 2009. The Company measured the amount of impairment for each
investment by calculating the amount by which the carrying value of its investment exceeded its
estimated fair value, based on projected discounted cash flows of each equity method investee.
These impairment losses are included in equity in earnings of equity method investees on the
Company’s Consolidated Statements of Operations.
Revenue recognition –
Sales are recognized when title and risk of loss pass to the customer, which is generally when
the product is shipped. Amounts billed to customers for shipping and handling are classified as
sales. Sales reflect reductions attributable to consideration given to customers in various
customer incentive programs, including pricing discounts on single transactions, volume discounts,
promotional and advertising allowances, coupons, and rebates.
Cost of product sold –
The types of costs included in cost of product sold are raw materials, packaging materials,
manufacturing costs, plant administrative support and overheads, and freight and warehouse costs
(including distribution network costs). Distribution network costs include inbound freight charges
and outbound shipping and handling costs, purchasing and receiving costs, inspection costs,
warehousing and internal transfer costs.
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Selling, general and administrative expenses –
The types of costs included in selling, general and administrative expenses consist
predominately of advertising and non-manufacturing administrative and overhead costs. Distribution
network costs are not included in the Company’s selling, general and administrative expenses, but
are included in cost of product sold as described above. The Company expenses advertising costs as
incurred, shown or distributed. Prepaid advertising costs at February 28, 2011, and February 28,
2010, were not material. Advertising expense for the years ended February 28, 2011, February 28,
2010, and February 28, 2009, was $128.6 million, $132.5 million and $175.7 million, respectively.
Foreign currency translation –
The “functional currency” of the Company’s subsidiaries outside the U.S. is the respective
local currency. The translation from the applicable foreign currencies to U.S. dollars is
performed for balance sheet accounts using exchange rates in effect at the balance sheet date and
for revenue and expense accounts using a weighted average exchange rate for the period. The
resulting translation adjustments are recorded as a component of Accumulated Other Comprehensive
Income (Loss) (“AOCI”). As a result of the January 2011 CWAE Divestiture, the Company reclassified
$657.1 million, net of income tax effect, from AOCI to selling, general and administrative expenses
on the Company’s Consolidated Statements of Operations (see Note 7, Note 19). Gains or losses
resulting from foreign currency denominated transactions are also included in selling, general and
administrative expenses on the Company’s Consolidated Statements of Operations. The Company
engages in foreign currency denominated transactions with customers and suppliers, as well as
between subsidiaries with different functional currencies. Aggregate foreign currency transaction
net losses were $2.3 million, $4.6 million and $26.3 million for the years ended February 28, 2011,
February 28, 2010, and February 28, 2009, respectively.
Cash investments –
Cash investments consist of highly liquid investments with an original maturity when purchased
of three months or less and are stated at cost, which approximates fair value. The amounts at
February 28, 2011, and February 28, 2010, are not significant.
Allowance for doubtful accounts –
The Company records an allowance for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The majority of the accounts receivable
balance is generated from sales to independent distributors with whom the Company has a
predetermined collection date arranged through electronic funds transfer. The allowance for
doubtful accounts was $0.8 million and $3.0 million as of February 28, 2011, and February 28, 2010,
respectively.
Fair value of financial instruments –
The Company calculates the fair value of financial instruments using quoted market prices
whenever available. When quoted market prices are not available, the Company uses standard pricing
models for various types of financial instruments (such as forwards, options, swaps, etc.) which
take into account the present value of estimated future cash flows (see Note 6).
Derivative instruments –
As a multinational company, the Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates that could affect the Company’s results of operations
and financial condition. The amount of volatility realized will vary based upon the effectiveness
and level of derivative instruments outstanding during a particular period of time, as well as the
currency and interest rate market movements during that same period.
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The Company enters into derivative instruments, primarily interest rate swaps and foreign
currency forward and option contracts, to manage interest rate and foreign currency risks. In
accordance with the Financial Accounting Standards Board (“FASB”) guidance for derivatives and
hedging, the Company recognizes all derivatives as either assets or liabilities on the balance
sheet and measures those instruments at fair value (see Note 5, Note 6). The fair values of the
Company’s derivative instruments change with fluctuations in interest rates and/or currency rates
and are expected to offset changes in the values of the underlying exposures. The Company’s
derivative instruments are held solely to hedge economic exposures. The Company follows strict
policies to manage interest rate and foreign currency risks, including prohibitions on derivative
market-making or other speculative activities.
To qualify for hedge accounting treatment under the FASB guidance for derivatives and hedging,
the details of the hedging relationship must be formally documented at inception of the
arrangement, including the risk management objective, hedging strategy, hedged item, specific risk
that is being hedged, the derivative instrument, how effectiveness is being assessed and how
ineffectiveness will be measured. The derivative must be highly effective in offsetting either
changes in the fair value or cash flows, as appropriate, of the risk being hedged. Effectiveness
is evaluated on a retrospective and prospective basis based on quantitative measures.
Certain of the Company’s derivative instruments do not qualify for hedge accounting treatment
under the FASB guidance for derivatives and hedging; for others, the Company chooses not to
maintain the required documentation to apply hedge accounting treatment. These undesignated
instruments are used to economically hedge the Company’s exposure to fluctuations in the value of
foreign currency denominated receivables and payables; foreign currency investments, primarily
consisting of loans to subsidiaries; and cash flows related primarily to repatriation of those
loans or investments. Foreign currency contracts, generally less than 12 months in duration, are
used to hedge some of these risks. The Company’s derivative policy permits the use of undesignated
derivatives when the derivative instrument is settled within the fiscal quarter or offsets a
recognized balance sheet exposure. In these circumstances, the mark to fair value is reported
currently through earnings in selling, general and administrative expenses on the Company’s
Consolidated Statements of Operations. As of February 28, 2011, and February 28, 2010, the Company
had undesignated foreign currency contracts outstanding with a notional value of $160.0 million and
$554.9 million, respectively. In addition, the Company had offsetting undesignated interest rate
swap agreements with an absolute notional amount of $2,400.0 million outstanding at February 28,
2010 (see Note 11). The Company had no undesignated interest rate swap agreements outstanding as
of February 28, 2011.
Furthermore, when the Company determines that a derivative instrument which qualified for
hedge accounting treatment has ceased to be highly effective as a hedge, the Company discontinues
hedge accounting prospectively. The Company also discontinues hedge accounting prospectively when
(i) a derivative expires or is sold, terminated, or exercised; (ii) it is no longer probable that
the forecasted transaction will occur; or (iii) management determines that designating the
derivative as a hedging instrument is no longer appropriate.
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Cash flow hedges:
The Company is exposed to foreign denominated cash flow fluctuations in connection with third
party and intercompany sales and purchases and, historically, third party financing arrangements.
The Company primarily uses foreign currency forward and option contracts to hedge certain of these
risks. In addition, the Company utilizes interest rate swaps to manage its exposure to changes in
interest rates. Derivatives managing the Company’s cash flow exposures generally mature within
three years or less, with a maximum maturity of five years. Throughout the term of the designated
cash flow hedge relationship, but at least quarterly, a retrospective evaluation and prospective
assessment of hedge effectiveness is performed. All components of the Company’s derivative
instruments’ gains or losses are included in the assessment of hedge effectiveness. In the event
the relationship is no longer effective, the Company recognizes the change in the fair value of the
hedging derivative instrument from the date the hedging derivative instrument became no longer
effective immediately in the Company’s Consolidated Statements of Operations. In conjunction with
its effectiveness testing, the Company also evaluates ineffectiveness associated with the hedge
relationship. Resulting ineffectiveness, if any, is recognized immediately in the Company’s
Consolidated Statements of Operations.
The Company records the fair value of its foreign currency and interest rate swap contracts
qualifying for cash flow hedge accounting treatment in its consolidated balance sheet with the
effective portion of the related gain or loss on those contracts deferred in stockholders’ equity
(as a component of AOCI). These deferred gains or losses are recognized in the Company’s
Consolidated Statements of Operations in the same period in which the underlying hedged items are
recognized and on the same line item as the underlying hedged items. However, to the extent that
any derivative instrument is not considered to be highly effective in offsetting the change in the
value of the hedged item, the hedging relationship is terminated and the amount related to the
ineffective portion of this derivative instrument is immediately recognized in the Company’s
Consolidated Statements of Operations in selling, general and administrative expenses.
As of February 28, 2011, and February 28, 2010, the Company had cash flow designated foreign
currency contracts outstanding with a notional value of $166.4 million and $465.2 million,
respectively. In addition, as of February 28, 2011, and February 28, 2010, the Company had cash
flow designated interest rate swap agreements outstanding with a notional value of $500.0 million
and $1,200.0 million, respectively (see Note 11). The Company expects $1.6 million of net gains,
net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months.
Fair value hedges:
Fair value hedges are hedges that offset the risk of changes in the fair values of recorded
assets and liabilities, and firm commitments. The Company records changes in fair value of
derivative instruments which are designated and deemed effective as fair value hedges, in earnings
offset by the corresponding changes in the fair value of the hedged items. The Company did not
designate any derivative instruments as fair value hedges for the years ended February 28, 2011,
February 28, 2010, and February 28, 2009.
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Net investment hedges:
Net investment hedges are hedges that use derivative instruments or non-derivative instruments
to hedge the foreign currency exposure of a net investment in a foreign operation. Historically,
the Company has managed currency exposures resulting from certain of its net investments in foreign
subsidiaries principally with debt denominated in the related foreign currency. Accordingly, gains
and losses on these instruments were recorded as foreign currency translation adjustments in AOCI.
In February 2009, the Company discontinued its then existing net investment hedging relationship
between the Company’s then existing Sterling Series B Senior Notes and Sterling Series C Senior
Notes (as defined in Note 11) totaling £155.0 million aggregate principal amount and the Company’s
investment in its U.K. subsidiary. The Company did not designate any derivative or non-derivative
instruments as net investment hedges for the years ended February 28, 2011, and February 28, 2010.
For the year ended February 28, 2009, net gains of $51.0 million, net of income tax effect, were
deferred within foreign currency translation adjustments within AOCI. As a result of the CWAE
Divestiture, the Company reclassified $17.8 million, net of income tax effect, from AOCI to
earnings related to its prior net investment hedges of its U.K. subsidiary (see Note 5).
Credit risk:
The Company enters into master agreements with its bank derivative trading counterparties that
allow netting of certain derivative positions in order to manage credit risk. The Company’s
derivative instruments are not subject to credit rating contingencies or collateral requirements.
As of February 28, 2011, the fair value of derivative instruments in a net liability position due
to counterparties was $6.4 million. If the Company were required to settle the net liability
position under these derivative instruments on February 28, 2011, the Company would have had
sufficient availability under its revolving credit facility to satisfy this obligation.
Counterparty credit risk:
Counterparty credit risk relates to losses the Company could incur if a counterparty defaults
on a derivative contract. The Company manages exposure to counterparty credit risk by requiring
specified minimum credit standards and diversification of counterparties. The Company enters into
master agreements with its bank derivative trading counterparties that allow netting of certain
derivative positions in order to manage counterparty credit risk. As of February 28, 2011, all of
the Company’s counterparty exposures are with financial institutions which have investment grade
ratings. The Company has procedures to monitor counterparty credit risk for both current and
future potential credit exposures. As of February 28, 2011, the fair value of derivative
instruments in a net receivable position due from counterparties was $13.6 million.
Inventories –
Inventories are stated at the lower of cost (computed in accordance with the first-in,
first-out method) or market. Elements of cost include materials, labor and overhead and are
classified as follows:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Raw materials and supplies |
$ | 38.2 | $ | 44.3 | ||||
In-process inventories |
1,012.1 | 1,327.9 | ||||||
Finished case goods |
319.0 | 507.7 | ||||||
| $ | 1,369.3 | $ | 1,879.9 | |||||
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Bulk wine inventories are included as in-process inventories within current assets, in
accordance with the general practices of the wine industry, although a portion of such inventories
may be aged for periods greater than one year. A substantial portion of barreled whiskey and
brandy will not be sold within one year because of the duration of the aging process. All barreled
whiskey and brandy are classified as in-process inventories and are included in current assets, in
accordance with industry practice. Warehousing, insurance, ad valorem taxes and other carrying
charges applicable to barreled whiskey and brandy held for aging are included in inventory costs.
The Company assesses the valuation of its inventories and reduces the carrying value of those
inventories that are obsolete or in excess of the Company’s forecasted usage to their estimated net
realizable value. The Company estimates the net realizable value of such inventories based on
analyses and assumptions including, but not limited to, historical usage, future demand and market
requirements. Reductions to the carrying value of inventories are recorded in cost of product
sold. If the future demand for the Company’s products is less favorable than the Company’s
forecasts, then the value of the inventories may be required to be reduced, which could result in
additional expense to the Company and affect its results of operations. During the year ended
February 28, 2009, the Company recorded an immaterial adjustment to inventory of $35.5 million to
correct for costs, primarily in the Company’s Australian business, which were not properly released
from inventory as the product was sold in prior fiscal year periods.
Property, plant and equipment –
Property, plant and equipment is stated at cost. Major additions and betterments are charged
to property accounts, while maintenance and repairs are charged to operations as incurred. The
cost of properties sold or otherwise disposed of and the related accumulated depreciation are
eliminated from the accounts at the time of disposal and resulting gains and losses are included as
a component of operating income.
Depreciation –
Depreciation is computed primarily using the straight-line method over the following estimated
useful lives:
| Depreciable Life in Years | ||
Land improvements |
15 to 32 | |
Vineyards |
16 to 26 | |
Buildings and improvements |
10 to 44 | |
Machinery and equipment |
3 to 35 | |
Motor vehicles |
3 to 7 |
Goodwill and other intangible assets –
In accordance with the FASB guidance for intangibles – goodwill and other, the Company
reviews its goodwill and indefinite lived intangible assets annually for impairment, or sooner, if
events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company uses January 1 as its annual impairment test measurement date.
Indefinite lived intangible assets consist principally of trademarks. Intangible assets determined
to have a finite life, primarily customer relationships, are amortized over their estimated useful
lives and are subject to review for impairment in accordance with the FASB guidance for property,
plant and equipment. Note 8 provides a summary of intangible assets segregated between amortizable
and nonamortizable amounts.
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In the fourth quarters of fiscal 2011 and 2010, pursuant to the Company’s accounting policy,
the Company performed its annual goodwill impairment analysis. No indication of impairment was
noted for any of the Company’s reporting units for the years ended February 28, 2011, and February
28, 2010, as the fair value of each of the Company’s reporting units with goodwill exceeded their
carrying value. In the fourth quarter of fiscal 2009, as a result of its annual goodwill
impairment analysis, the Company concluded that the carrying amount of goodwill assigned to the
CWAE segment’s U.K. reporting unit exceeded its implied fair value and recorded an impairment loss
of $252.7 million, which is included in impairment of goodwill and intangible assets on the
Company’s Consolidated Statements of Operations. The impairment loss was determined by comparing
the carrying value of goodwill assigned to the specific reporting unit within the segment as of
January 1, 2009, with the implied fair value of the goodwill. In determining the implied fair
value of the goodwill, the Company considered estimates of future operating results and cash flows
of the reporting unit discounted using market based discount rates. The estimates of future
operating results and cash flows were principally derived from the Company’s then updated long-term
financial forecast, which was developed as part of the Company’s strategic planning cycle conducted
during the fourth quarter of fiscal 2009. The decline in the implied fair value of the goodwill
and the resulting impairment loss was driven primarily by the accelerated deterioration in the
Company’s U.K. business during the fourth quarter of fiscal 2009 and the resulting adjustment to
the Company’s long-term financial forecasts, which showed lower estimated future operating results
reflecting the significant fourth quarter deterioration in market conditions in the U.K.
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In the fourth quarter of fiscal 2011, pursuant to the Company’s accounting policy, the Company
performed its annual review of indefinite lived intangible assets for impairment. The Company
determined that certain trademarks associated primarily with the CWNA segment’s Canadian reporting
unit were impaired largely due to lower revenue and profitability associated with products
incorporating these assets included in long-term financial forecasts developed as part of the
strategic planning cycle conducted during the Company’s fourth quarter. The Company measured the
amount of impairment by calculating the amount by which the carrying value of these assets exceeded
their estimated fair values, which were based on projected discounted cash flows (Level 3 fair
value measurement – see Note 6). As a result of this review, the Company recorded impairment
losses of $16.7 million, which are included in impairment of goodwill and intangible assets on the
Company’s Consolidated Statements of Operations. The Company had previously recorded impairment
losses of $6.9 million, which are included in impairment of goodwill and intangible assets on the
Company’s Consolidated Statements of Operations, during its third quarter of fiscal 2011 in
connection with its decision to discontinue certain wine brands within its CWNA segment’s wine
portfolio (Level 3 fair value measurement – see Note 6). In the fourth quarter of fiscal 2010, as
a result of its annual review of indefinite lived intangible assets for impairment, the Company
determined that certain trademarks associated primarily with the CWAE segment’s Australian
reporting unit were impaired largely due to lower revenue and profitability associated with
products incorporating these assets included in long-term financial forecasts developed as part of
the strategic planning cycle conducted during the Company’s fourth quarter. The Company measured
the amount of impairment by calculating the amount by which the carrying value of these assets
exceeded their estimated fair values, which were based on projected discounted cash flows (Level 3
fair value measurement – see Note 6). As a result of this review, the Company recorded impairment
losses of $103.2 million, which are included in impairment of goodwill and intangible assets on the
Company’s Consolidated Statements of Operations. In the fourth quarter of fiscal 2009, as a result
of its annual review of indefinite lived intangible assets for impairment, the Company determined
that certain trademarks associated primarily with the CWAE segment’s U.K. reporting unit were
impaired largely due to the aforementioned market declines in the U.K. during the fourth quarter of
fiscal 2009, and the resulting lower revenue and profit forecasts associated with products
incorporating these assets which reflected the significant fourth quarter deterioration in market
conditions in the U.K. The Company measured the amount of impairment by calculating the amount by
which the carrying value of these assets exceeded their estimated fair values, which were based on
projected discounted cash flows. As a result of this review, the Company recorded impairment
losses of $25.9 million, which are included in impairment of goodwill and intangible assets on the
Company’s Consolidated Statements of Operations. The Company had previously recorded impairment
losses of $21.8 million during its second quarter of fiscal 2009 in connection with the Company’s
Australian Initiative (as defined in Note 21) and the resulting lower revenue and profit forecasts
associated with certain brands incorporating these assets impacted by the Australian Initiative.
Other assets –
Other assets include the following: (i) investments in equity method investees which are
carried under the equity method of accounting (see Note 9); (ii) an investment in Accolade (as
defined in Note 7) consisting of cost method investments which are carried at cost and
available-for-sale debt securities which are carried at fair value (see Note 9); (iii) deferred
financing costs which are stated at cost, net of accumulated amortization, and are amortized on an
effective interest basis over the term of the related debt; (iv) notes receivable which are stated
at cost; (v) derivative assets which are stated at fair value; and (vi) deferred tax assets which
are stated net of valuation allowances (see Note 12).
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Long-lived assets impairment –
In accordance with the FASB guidance for property, plant and equipment, the Company reviews
its long-lived assets for impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used
is measured by a comparison of the carrying amount of an asset to estimated undiscounted cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated
undiscounted cash flows, an impairment loss is recognized to the extent that the carrying value of
the asset exceeds its fair value (Level 3 fair value measurement – see Note 6). Assets held for
sale are reported at the lower of the carrying amount or fair value less costs to sell and are no
longer depreciated (see below).
Pursuant to this policy, for the years ended February 28, 2011, February 28, 2010, and
February 28, 2009, in connection with the Company’s Australian Initiative, the Company’s CWAE
segment recorded asset impairment losses of $5.8 million, $13.4 million and $46.5 million,
respectively, associated primarily with the write-down of certain winery and vineyard assets which
satisfied the conditions necessary to be classified as held for sale. These assets were written
down to a value based on the Company’s estimate of fair value less cost to sell. These impairment
losses are included in restructuring charges on the Company’s Consolidated Statements of
Operations.
Assets held for sale –
As of February 28, 2011, the Company had no assets classified as held for sale. As of
February 28, 2010, in connection with the Australian Initiative, the Company’s CWAE segment had
$21.9 million of property, plant and equipment, net, classified as held for sale. This amount is
included in property, plant and equipment, net on the Company’s Consolidated Balance Sheets as the
amount is not deemed material for separate presentation on the face of the Company’s Consolidated
Balance Sheets.
Indemnification liabilities –
The Company has indemnified respective parties against certain liabilities that may arise in
connection with certain acquisitions and divestitures. The carrying value of the indemnification
liabilities are included in other liabilities on the Company’s Consolidated Balance Sheets (see
Note 13, Note 15).
Income taxes –
The Company uses the asset and liability method of accounting for income taxes. This method
accounts for deferred income taxes by applying statutory rates in effect at the balance sheet date
to the difference between the financial reporting and tax bases of assets and liabilities.
Environmental –
Environmental expenditures that relate to current operations or to an existing condition
caused by past operations, and which do not contribute to current or future revenue generation, are
expensed. Liabilities for environmental risks or components thereof are recorded when
environmental assessments and/or remedial efforts are probable, and the cost can be reasonably
estimated. Generally, the timing of these accruals coincides with the completion of a feasibility
study or the Company’s commitment to a formal plan of action. Liabilities for environmental costs
were not material at February 28, 2011, and February 28, 2010.
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Earnings per common share –
The Company has two classes of outstanding common stock: Class A Common Stock and Class B
Convertible Common Stock (see Note 16). With respect to dividend rights, the Class A Common Stock
is entitled to cash dividends of at least ten percent higher than those declared and paid on the
Class B Convertible Common Stock. Accordingly, the Company uses the two-class computation method
for the computation of earnings per common share – basic and earnings per common share – diluted.
The two-class computation method for each period reflects the amount of allocated undistributed
earnings per share computed using the participation percentage which reflects the minimum dividend
rights of each class of stock.
Earnings per common share – basic excludes the effect of common stock equivalents and is
computed using the two-class computation method (see Note 18). Earnings per common share –
diluted for Class A Common Stock reflects the potential dilution that could result if securities or
other contracts to issue common stock were exercised or converted into common stock. Earnings per
common share – diluted for Class A Common Stock has been computed using the more dilutive of the
if-converted or two-class computation method. Using the if-converted method, earnings per common
share – diluted for Class A Common Stock assumes the exercise of stock options using the treasury
stock method and the conversion of Class B Convertible Common Stock. Using the two-class
computation method, earnings per common share – diluted for Class A Common Stock assumes the
exercise of stock options using the treasury stock method and no conversion of Class B Convertible
Common Stock. For the years ended February 28, 2011, and February 28, 2010, earnings per common
share – diluted for Class A Common Stock has been calculated using the if-converted method. For
the year ended February 28, 2009, loss per common share – diluted for Class A Common Stock has
been calculated using the two-class computation method. For the years ended February 28, 2011,
February 28, 2010, and February 28, 2009, earnings per common share – diluted for Class B
Convertible Common Stock is presented without assuming conversion into Class A Common Stock and is
computed using the two-class computation method.
Stock-based employee compensation plans –
The Company has four stock-based employee compensation plans (see Note 17). The Company
applies a grant date fair-value-based measurement method in accounting for its stock-based payment
arrangements and records all costs resulting from stock-based payment transactions ratably over the
requisite service period in its consolidated financial statements. Stock-based awards, primarily
stock options, granted by the Company are subject to specific vesting conditions, generally time
vesting, or upon retirement, disability or death of the employee (as defined by the stock option
plan), if earlier. In accordance with the FASB guidance for compensation – stock compensation,
the Company recognizes compensation expense immediately for awards granted to retirement-eligible
employees or ratably over the period from the date of grant to the date of retirement-eligibility
if that is expected to occur during the requisite service period, when appropriate.
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| 2. | RECENTLY ADOPTED ACCOUNTING GUIDANCE: |
Consolidation of variable interest entities –
Effective March 1, 2010, the Company adopted the FASB June 2009 amended guidance for
consolidation. This guidance, among other things, (i) requires an entity to perform an analysis
to determine whether an entity’s variable interest or interests give it a controlling financial
interest in a variable interest entity; (ii) requires ongoing reassessments of whether an entity
is the primary beneficiary of a variable interest entity and eliminates the quantitative approach
previously required for determining the primary beneficiary of a variable interest entity; (iii)
amends previously issued guidance for determining whether an entity is a variable interest entity;
and (iv) requires enhanced disclosure that will provide users of financial statements with more
transparent information about an entity’s involvement in a variable interest entity. In addition,
effective March 1, 2010, the Company adopted the FASB additional December 2009 guidance on
assessing whether a variable interest entity should be consolidated. This guidance identifies the
determination of whether a reporting entity should consolidate another entity is based upon, among
other things, (i) the other entity’s purpose and design, and (ii) the reporting entity’s ability
to direct the activities of the other entity that most significantly impact the other entity’s
economic performance. This guidance also requires additional disclosures about an entity’s
involvement with a variable interest entity, including significant changes in risk exposure due to
an entity’s involvement with a variable interest entity and how the involvement with the variable
interest entity affects the financial statements of the reporting entity. The adoption of the
combined guidance did not have a material impact on the Company’s consolidated financial
statements.
Fair value measurements and disclosures –
In January 2010, the FASB issued amended guidance for fair value measurements and disclosures.
This guidance requires an entity to (i) disclose separately the amounts of significant transfers
in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers, and
(ii) present separately information about purchases, sales, issuances and settlements on a gross
basis in the reconciliation for fair value measurements using significant unobservable inputs
(Level 3). This guidance also clarifies existing disclosures requiring an entity to provide fair
value measurement disclosures for each class of assets and liabilities and, for Level 2 or Level 3
fair value measurements, disclosures about the valuation techniques and inputs used to measure fair
value for both recurring and nonrecurring fair value measurements. Effective March 1, 2010, the
Company adopted the additional disclosure requirements and clarifications of existing disclosures
of this guidance, except for the disclosures about purchases, sales, issuances and settlements in
the reconciliation for fair value measurements using significant unobservable inputs (Level 3).
The Company is required to adopt those disclosures for its annual and interim periods beginning
March 1, 2011. The adoption of the applicable provisions of this guidance on March 1, 2010, did
not have a material impact on the Company’s consolidated financial statements. The adoption of the
remaining provision of this guidance on March 1, 2011, did not have a material impact on the
Company’s consolidated financial statements.
| 3. | PREPAID EXPENSES AND OTHER: |
The major components of prepaid expenses and other are as follows:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Income taxes receivable |
$ | 193.8 | $ | 34.4 | ||||
Deferred tax assets |
42.1 | 50.0 | ||||||
Other |
51.2 | 66.6 | ||||||
| $ | 287.1 | $ | 151.0 | |||||
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| 4. | PROPERTY, PLANT AND EQUIPMENT: |
The major components of property, plant and equipment are as follows:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Land and land improvements |
$ | 298.9 | $ | 327.3 | ||||
Vineyards |
206.1 | 211.6 | ||||||
Buildings and improvements |
312.6 | 416.1 | ||||||
Machinery and equipment |
900.7 | 1,232.5 | ||||||
Motor vehicles |
49.3 | 58.5 | ||||||
Construction in progress |
86.4 | 44.0 | ||||||
| 1,854.0 | 2,290.0 | |||||||
Less – Accumulated depreciation |
(634.4 | ) | (722.8 | ) | ||||
| $ | 1,219.6 | $ | 1,567.2 | |||||
| 5. | DERIVATIVE INSTRUMENTS: |
The fair value and location of the Company’s derivative instruments on its Consolidated
Balance Sheets are as follows (see Note 6):
| February 28, | February 28, | |||||||
| Balance Sheet Location | 2011 | 2010 | ||||||
| (in millions) | ||||||||
| Derivative instruments designated as hedging instruments | ||||||||
Foreign currency contracts |
||||||||
Prepaid expenses and other |
$ | 11.0 | $ | 17.1 | ||||
Other accrued expenses and liabilities |
$ | 3.4 | $ | 15.1 | ||||
Other assets, net |
$ | 2.8 | $ | 13.5 | ||||
Other liabilities |
$ | 0.9 | $ | 5.5 | ||||
Interest rate swap contracts |
||||||||
Other accrued expenses and liabilities |
$ | 6.1 | $ | 11.8 | ||||
Other assets, net |
$ | 1.7 | $ | - | ||||
| Derivative instruments not designated as hedging instruments | ||||||||
Foreign currency contracts |
||||||||
Prepaid expenses and other |
$ | 3.2 | $ | 12.0 | ||||
Other accrued expenses and liabilities |
$ | 1.0 | $ | 7.8 | ||||
Other assets, net |
$ | - | $ | 1.6 | ||||
Other liabilities |
$ | - | $ | 1.2 | ||||
Interest rate swap contracts |
||||||||
Prepaid expenses and other |
$ | - | $ | 2.7 | ||||
Other accrued expenses and liabilities |
$ | - | $ | 2.9 | ||||
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The effect of the Company’s derivative instruments designated in cash flow hedging
relationships on its Consolidated Statements of Operations, as well as its Other Comprehensive
Income (“OCI”), net of income tax effect, for the years ended February 28, 2011, and February 28,
2010, is as follows. As a result of the CWAE Divestiture, the Company recognized net gains of $6.3
million, net of income tax effect, for the year ended February 28, 2011, related to the
discontinuance of cash flow hedge accounting due to the probability that the original forecasted
transaction would not occur by the end of the originally specified time period (or within the two
months following). There were no such amounts recognized for the years ended February 28, 2010,
and February 28, 2009. As the Company adopted the FASB guidance for the below enhanced disclosures
surrounding derivatives and hedging on December 1, 2008, the required comparative disclosures for
the three months ended February 28, 2009, have not been included as amounts are not material.
| Net | ||||||||||
| Net | Gain (Loss) | |||||||||
| Gain (Loss) | Reclassified | |||||||||
| Recognized | from AOCI to | |||||||||
| Derivative Instruments in | in OCI | Location of Net Gain (Loss) | Income | |||||||
| Designated Cash Flow | (Effective | Reclassified from AOCI to | (Effective | |||||||
| Hedging Relationships | portion) | Income (Effective portion) | portion) | |||||||
| (in millions) | ||||||||||
| For the Year Ended February 28, 2011 | ||||||||||
| Foreign currency contracts | $ | 11.2 | Sales |
$ | 13.6 | |||||
| Foreign currency contracts | 0.6 | Cost of product sold |
9.5 | |||||||
| Interest rate swap contracts | (2.7 | ) | Interest expense, net |
- | ||||||
Total |
$ | 9.1 | Total |
$ | 23.1 | |||||
| For the Year Ended February 28, 2010 | ||||||||||
| Foreign currency contracts | $ | 39.3 | Sales |
$ | 18.6 | |||||
| Foreign currency contracts | 13.2 | Cost of product sold |
(4.6 | ) | ||||||
| Foreign currency contracts | 12.4 | Selling, general and
administrative expenses |
22.8 | |||||||
| Interest rate swap contracts | (4.7 | ) | Interest expense, net |
(27.7 | ) | |||||
Total |
$ | 60.2 | Total |
$ | 9.1 | |||||
| Net | ||||||||||
| Gain | ||||||||||
| Recognized | ||||||||||
| Derivative Instruments in | Location of Net Gain | in Income | ||||||||
| Designated Cash Flow | Recognized in Income | (Ineffective | ||||||||
| Hedging Relationships | (Ineffective portion) | portion) | ||||||||
| (in millions) | ||||||||||
| For the Year Ended February 28, 2011 | ||||||||||
| Foreign currency contracts | Selling, general and
administrative expenses |
$ | 1.4 | |||||||
| For the Year Ended February 28, 2010 | ||||||||||
| Foreign currency contracts | Selling, general and
administrative expenses |
$ | 2.5 | |||||||
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| Net | Net Gain | |||||||||
| Gain (Loss) | Reclassified | |||||||||
| Recognized | from AOCI to | |||||||||
| Non-Derivative Instruments in | in OCI | Location of Net Gain | Income | |||||||
| Designated Net Investment | (Effective | Reclassified from AOCI to | (Effective | |||||||
| Hedging Relationships | portion) | Income (Effective portion) | portion) | |||||||
| (in millions) | ||||||||||
| Sterling Senior Debt Instruments | $ | – | Selling, general and administrative expenses |
$ | 17.8 | |||||
The effect of the Company’s undesignated derivative instruments on its Consolidated
Statements of Operations for the years ended February 28, 2011, and February 28, 2010, is as
follows. As the Company adopted the FASB guidance for the below enhanced disclosures surrounding
derivatives and hedging on December 1, 2008, the required comparative disclosures for the three
months ended February 28, 2009, have not been included as amounts are not material.
| Net | ||||||
| Gain (Loss) | ||||||
| Derivative Instruments not | Location of Net Gain (Loss) | Recognized | ||||
| Designated as Hedging Instruments | Recognized in Income | in Income | ||||
| (in millions) | ||||||
| For the Year Ended February 28, 2011 | ||||||
| Foreign currency contracts | Selling, general and
administrative expenses |
$ | 4.3 | |||
Total |
$ | 4.3 | ||||
| For the Year Ended February 28, 2010 | ||||||
| Foreign currency contracts | Selling, general and
administrative expenses |
$ | 12.8 | |||
| Interest rate swap contracts | Interest expense, net |
(0.4 | ) | |||
Total |
$ | 12.4 | ||||
| 6. | FAIR VALUE OF FINANCIAL INSTRUMENTS: |
The carrying amount and estimated fair value of the Company’s financial instruments are
summarized as follows:
| February 28, 2011 | February 28, 2010 | |||||||||||||||
| Carrying | Fair | Carrying | Fair | |||||||||||||
| Amount | Value | Amount | Value | |||||||||||||
| (in millions) | ||||||||||||||||
Assets: |
||||||||||||||||
Cash and cash investments |
$ | 9.2 | $ | 9.2 | $ | 43.5 | $ | 43.5 | ||||||||
Accounts receivable |
$ | 417.4 | $ | 417.4 | $ | 514.7 | $ | 514.7 | ||||||||
Available-for-sale debt
securities |
$ | 40.8 | $ | 40.8 | $ | - | $ | - | ||||||||
Foreign currency contracts |
$ | 17.0 | $ | 17.0 | $ | 44.2 | $ | 44.2 | ||||||||
Interest rate swap contracts |
$ | 1.7 | $ | 1.7 | $ | 2.7 | $ | 2.7 | ||||||||
Notes receivable |
$ | 4.8 | $ | 4.8 | $ | 65.7 | $ | 65.7 | ||||||||
Liabilities: |
||||||||||||||||
Notes payable to banks |
$ | 83.7 | $ | 83.8 | $ | 371.2 | $ | 370.1 | ||||||||
Accounts payable |
$ | 129.2 | $ | 129.2 | $ | 268.8 | $ | 268.8 | ||||||||
Long-term debt, including
current portion |
$ | 3,152.6 | $ | 3,298.2 | $ | 3,464.3 | $ | 3,483.4 | ||||||||
Foreign currency contracts |
$ | 5.3 | $ | 5.3 | $ | 29.6 | $ | 29.6 | ||||||||
Interest rate swap contracts |
$ | 6.1 | $ | 6.1 | $ | 14.7 | $ | 14.7 | ||||||||
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The following methods and assumptions are used to estimate the fair value of each class
of financial instruments:
Cash and cash investments, accounts receivable and accounts payable: The carrying amounts
approximate fair value due to the short maturity of these instruments.
Available-for-sale debt securities: The fair value is estimated by discounting cash flows
using market-based inputs (see “Fair Value Measurements” below).
Foreign currency contracts: The fair value is estimated using market-based inputs, obtained
from independent pricing services, into valuation models (see “Fair Value Measurements” below).
Interest rate swap contracts: The fair value is estimated based on quoted market prices from
respective counterparties (see “Fair Value Measurements” below).
Notes receivable: These instruments are fixed interest rate bearing notes. The fair value is
estimated by discounting cash flows using market-based inputs, including counterparty credit risk.
Notes payable to banks: The revolving credit facility under the 2006 Credit Agreement (as
defined in Note 11) is a variable interest rate bearing note which includes a fixed margin which is
adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit Agreement). The fair
value of the revolving credit facility is estimated by discounting cash flows using LIBOR plus a
margin reflecting current market conditions obtained from participating member financial
institutions. The remaining instruments are variable interest rate bearing notes for which the
carrying value approximates the fair value.
Long-term debt: The tranche A term loan facility under the 2006 Credit Agreement is a
variable interest rate bearing note which includes a fixed margin which is adjustable based upon
the Company’s debt ratio. The tranche B term loan facility under the 2006 Credit Agreement is a
variable interest rate bearing note which includes a fixed margin. The fair value of the tranche A
term loan facility and the tranche B term loan facility is estimated by discounting cash flows
using LIBOR plus a margin reflecting current market conditions obtained from participating member
financial institutions. The fair value of the remaining long-term debt, which is all fixed rate,
is estimated by discounting cash flows using interest rates currently available for debt with
similar terms and maturities.
Fair value measurements –
The FASB guidance on fair value measurements and disclosures defines fair value, establishes a
framework for measuring fair value under generally accepted accounting principles, and expands
disclosures about fair value measurements. This guidance emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and states that a fair value
measurement should be determined based on assumptions that market participants would use in pricing
an asset or liability. In February 2008, the FASB issued additional guidance which deferred the
effective date for fair value measurements and disclosures of nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in the financial
statements on a recurring basis, at least annually, including goodwill and trademarks. On March 1,
2008, the Company adopted the provisions for fair value measurements and disclosures that were not
deferred by additional guidance. The adoption of these provisions did not have a material impact
on the Company’s consolidated financial statements. On March 1, 2009, in accordance with the
additional guidance, the Company adopted the remaining provisions for fair value measurements and
disclosures. The adoption of the remaining provisions did not have a material impact on the
Company’s consolidated financial statements.
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The fair value measurement guidance establishes a hierarchy for inputs used in measuring fair
value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by
requiring that the most observable inputs be used when available. The hierarchy is broken down
into three levels: Level 1 inputs are quoted prices in active markets for identical assets or
liabilities; Level 2 inputs include data points that are observable such as quoted prices for
similar assets or liabilities in active markets, quoted prices for identical assets or similar
assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as
interest rates and yield curves that are observable for the asset and liability, either directly or
indirectly; Level 3 inputs are unobservable data points for the asset or liability, and include
situations where there is little, if any, market activity for the asset or liability.
The following table presents the Company’s financial assets and liabilities measured at fair
value on a recurring basis:
| Quoted | Significant | |||||||||||||||
| Prices in | Other | Significant | ||||||||||||||
| Active | Observable | Unobservable | ||||||||||||||
| Markets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| (in millions) | ||||||||||||||||
February 28, 2011 |
||||||||||||||||
Assets: |
||||||||||||||||
Available-for-sale debt securities |
$ | - | $ | - | $ | 40.8 | $ | 40.8 | ||||||||
Foreign currency contracts |
$ | - | $ | 17.0 | $ | - | $ | 17.0 | ||||||||
Interest rate swap contracts |
$ | - | $ | 1.7 | $ | - | $ | 1.7 | ||||||||
Liabilities: |
||||||||||||||||
Foreign currency contracts |
$ | - | $ | 5.3 | $ | - | $ | 5.3 | ||||||||
Interest rate swap contracts |
$ | - | $ | 6.1 | $ | - | $ | 6.1 | ||||||||
February 28, 2010 |
||||||||||||||||
Assets: |
||||||||||||||||
Foreign currency contracts |
$ | - | $ | 44.2 | $ | - | $ | 44.2 | ||||||||
Interest rate swap contracts |
$ | - | $ | 2.7 | $ | - | $ | 2.7 | ||||||||
Liabilities: |
||||||||||||||||
Foreign currency contracts |
$ | - | $ | 29.6 | $ | - | $ | 29.6 | ||||||||
Interest rate swap contracts |
$ | - | $ | 14.7 | $ | - | $ | 14.7 | ||||||||
The Company’s foreign currency contracts consist of foreign currency forward and option
contracts which are valued using market-based inputs, obtained from independent pricing services,
into valuation models. These valuation models require various inputs, including contractual terms,
market foreign exchange prices, interest-rate yield curves and currency volatilities. Interest
rate swap fair values are based on quotes from respective counterparties. Quotes are corroborated
by the Company using discounted cash flow calculations based upon forward interest-rate yield
curves, which are obtained from independent pricing services. Available-for-sale debt securities
are valued using market-based inputs into discounted cash flow models.
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The following table represents a reconciliation of the changes in fair value of financial
instruments measured at fair value on a recurring basis using significant unobservable inputs
(Level 3):
| Available- | ||||
| For-Sale | ||||
| Debt | ||||
| Securities | ||||
| (in millions) | ||||
Balance at February 28, 2010 |
$ | - | ||
Retained interest in Accolade (see Note 7) |
39.6 | |||
Total gains (losses): |
||||
Included in earnings |
0.4 | |||
Included in other comprehensive income (foreign currency translation adjustments) |
0.8 | |||
Total gains (losses) |
1.2 | |||
Transfers in and/or out of Level 3 |
- | |||
Balance at February 28, 2011 |
$ | 40.8 | ||
The following table presents the Company’s assets and liabilities measured at fair value
on a nonrecurring basis for which an impairment assessment was performed for the periods presented:
| Fair Value Measurements Using | ||||||||||||||||
| Quoted | Significant | |||||||||||||||
| Prices in | Other | Significant | ||||||||||||||
| Active | Observable | Unobservable | ||||||||||||||
| Markets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total Losses | |||||||||||||
| (in millions) | ||||||||||||||||
| For the Year Ended February 28, 2011 | ||||||||||||||||
Long-lived assets held for sale |
$ | - | $ | - | $ | 4.1 | $ | 5.8 | ||||||||
Trademarks |
- | - | 136.9 | 23.6 | ||||||||||||
Total |
$ | - | $ | - | $ | 141.0 | $ | 29.4 | ||||||||
| For the Year Ended February 28, 2010 | ||||||||||||||||
Long-lived assets held for sale |
$ | - | $ | - | $ | 21.9 | $ | 13.4 | ||||||||
Trademarks |
- | - | 162.7 | 103.2 | ||||||||||||
Investment in equity method investee |
- | - | 4.2 | 25.4 | ||||||||||||
Total |
$ | - | $ | - | $ | 188.8 | $ | 142.0 | ||||||||
Long-lived assets held for sale:
For the year ended February 28, 2011, in connection with the Company’s Australian Initiative,
long-lived assets held for sale with a carrying value of $10.1 million were written down to their
estimated fair value of $4.1 million, less cost to sell (which was estimated to be minimal),
resulting in a loss of $5.8 million. For the year ended February 28, 2010, in connection with the
Company’s Australian Initiative, long-lived assets held for sale with a carrying value of $35.9
million were written down to their estimated fair value of $22.5 million, less cost to sell of $0.6
million (or $21.9 million), resulting in a loss of $13.4 million. These losses are included in
restructuring charges on the Company’s Consolidated Statements of Operations. For each period,
these assets consisted primarily of certain winery and vineyard assets which had satisfied the
conditions necessary to be classified as held for sale. As such, these assets were written down to
a value based on the Company’s estimate of fair value less cost to sell. The fair value was
determined based on a market value approach adjusted for the different characteristics between
assets measured and the assets upon which the observable inputs were based.
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Trademarks:
For the year ended February 28, 2011, in connection with the Company’s annual review of
indefinite lived intangible assets for impairment, certain trademarks, with a carrying value of
$153.9 million, were written down to their fair value of $136.9 million, resulting in an impairment
of $16.7 million. In addition, in connection with the Company’s third quarter of fiscal 2011
decision to discontinue certain wine brands within its CWNA segment’s wine portfolio, certain
indefinite-lived trademarks, with a carrying value of $6.9 million, were written down to their
estimated fair value resulting in an impairment of $6.9 million. For the year ended February 28,
2010, in connection with the Company’s annual review of indefinite lived intangible assets for
impairment, certain trademarks, with a carrying value of $266.3 million, were written down to their
fair value of $162.7 million, resulting in an impairment of $103.2 million for the year ended
February 28, 2010. These impairments are included in impairment of goodwill and intangible assets
on the Company’s Consolidated Statements of Operations. For each period, the Company measured the
amount of impairment by calculating the amount by which the carrying value of these assets exceeded
their estimated fair values. The fair value was determined based on an income approach using the
relief from royalty method, which assumes that, in lieu of ownership, a third party would be
willing to pay a royalty in order to exploit the related benefits of trademark assets. The cash
flow models the Company uses to estimate the fair values of its trademarks involve several
assumptions, including (i) projected revenue growth rates; (ii) estimated royalty rates; (iii)
calculated after-tax royalty savings expected from ownership of the subject trademarks; and (iv)
discount rates used to derive the present value factors used in determining the fair value of the
trademarks.
Investment in equity method investee:
For the year ended February 28, 2010, in connection with the Company’s review of its equity
method investments for other-than-temporary impairment in the third quarter of fiscal 2010, the
Company’s CWNA segment’s international equity method investment, Ruffino, with a carrying value of
$29.8 million was written down to its fair value of $4.2 million, resulting in a loss of $25.4
million. This loss is included in equity in earnings of equity method investees on the Company’s
Consolidated Statements of Operations. The Company measured the amount of impairment by calculating
the amount by which the carrying value of its investment exceeded its estimated fair value, which
was based on projected discounted cash flows of this equity method investee.
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| 7. | GOODWILL: |
The changes in the carrying amount of goodwill are as follows:
| Consolidations | ||||||||||||||||||||
| Crown | and | |||||||||||||||||||
| CWNA | CWAE | Imports | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Balance, February 28, 2009 |
||||||||||||||||||||
Goodwill |
$ | 2,615.0 | $ | 852.6 | $ | 13.0 | $ | (13.0 | ) | $ | 3,467.6 | |||||||||
Accumulated impairment losses |
- | (852.6 | ) | - | - | (852.6 | ) | |||||||||||||
| 2,615.0 | - | 13.0 | (13.0 | ) | 2,615.0 | |||||||||||||||
Foreign currency translation
adjustments |
114.1 | - | - | - | 114.1 | |||||||||||||||
Divestiture of business |
(158.5 | ) | - | - | - | (158.5 | ) | |||||||||||||
Balance, February 28, 2010 |
||||||||||||||||||||
Goodwill |
2,570.6 | 852.6 | 13.0 | (13.0 | ) | 3,423.2 | ||||||||||||||
Accumulated impairment losses |
- | (852.6 | ) | - | - | (852.6 | ) | |||||||||||||
| 2,570.6 | - | 13.0 | (13.0 | ) | 2,570.6 | |||||||||||||||
Foreign currency translation
adjustments |
49.2 | - | - | - | 49.2 | |||||||||||||||
Divestiture of business |
||||||||||||||||||||
Goodwill |
- | (852.6 | ) | - | - | (852.6 | ) | |||||||||||||
Accumulated impairment losses |
- | 852.6 | - | - | 852.6 | |||||||||||||||
Balance, February 28, 2011 |
||||||||||||||||||||
Goodwill |
2,619.8 | - | 13.0 | (13.0 | ) | 2,619.8 | ||||||||||||||
Accumulated impairment losses |
- | - | - | - | - | |||||||||||||||
| $ | 2,619.8 | $ | - | $ | 13.0 | $ | (13.0 | ) | $ | 2,619.8 | ||||||||||
For the year ended February 28, 2010, the CWNA segment’s divestiture of business consists
of the Company’s reduction of goodwill in connection with the March 2009 sale of its value spirits
business. For the year ended February 28, 2011, the CWAE segment’s divestiture of business
consists of the Company’s reduction of goodwill and accumulated impairment losses in connection
with the January 2011 CWAE Divestiture.
Divestiture of the Pacific Northwest Business –
In June 2008, the Company sold certain businesses consisting of several of the California
wineries and wine brands acquired in the acquisition of all of the issued and outstanding capital
stock of Beam Wine Estates, Inc. (“BWE”), as well as certain wineries and wine brands from the
states of Washington and Idaho (collectively, the “Pacific Northwest Business”) for cash proceeds
of $204.2 million, net of direct costs to sell. In addition, if certain objectives are achieved by
the buyer, the Company could receive up to an additional $25.0 million in cash payments. In
connection with this divestiture, the Company’s CWNA segment recorded a loss of $23.2 million for
the year ended February 28, 2009, which included a loss on business sold of $15.8 million and
losses on contractual obligations of $7.4 million. This loss of $23.2 million is included in
selling, general and administrative expenses on the Company’s Consolidated Statements of
Operations.
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Divestiture of the Value Spirits Business –
In March 2009, the Company sold its value spirits business for $336.4 million, net of direct
costs to sell. The Company received $276.4 million, net of direct costs to sell, in cash proceeds
and a note receivable for $60.0 million in connection with this divestiture. In March 2010, the
Company received full payment of the note receivable. In connection with the classification of the
value spirits business as an asset group held for sale as of February 28, 2009, the Company’s CWNA
segment recorded a loss of $15.6 million in the fourth quarter of fiscal 2009, primarily related to
asset impairments, which is included in selling, general and administrative expenses on the
Company’s Consolidated Statements of Operations. In the first quarter of fiscal 2010, the
Company’s CWNA segment recognized a net gain of $0.2 million, which included a gain on settlement
of a postretirement obligation of $1.0 million, partially offset by an additional loss of $0.8
million. This net gain is included in selling, general and administrative expenses on the
Company’s Consolidated Statements of Operations.
Divestiture of the Australian and U.K. Business –
In January 2011, the Company sold 80.1% of its Australian and U.K. business (the “CWAE
Divestiture”) at a transaction value of $266.9 million, subject to post-closing adjustments. The
Company received cash proceeds, net of cash divested of $15.8 million and direct costs paid of $2.3
million, of $221.3 million, subject to post-closing adjustments. The Company retained a 19.9%
interest in its previously owned Australian and U.K. business, hereinafter referred to as Accolade
Wines (“Accolade”) (see Note 9). The following table summarizes the net gain recognized and the
net cash proceeds received in connection with this divestiture:
| (in millions) | ||||
Net assets sold |
$ | (734.1 | ) | |
Cash received from buyer, net of cash divested |
223.6 | |||
Retained interest in Accolade |
48.2 | |||
Estimated post-closing adjustments |
(19.3 | ) | ||
Foreign currency reclassification |
678.8 | |||
Indemnification liabilities |
(26.1 | ) | ||
Direct costs to sell, paid and accrued |
(14.0 | ) | ||
Other |
8.0 | |||
Net gain on sale |
165.1 | |||
Loss on settlement of pension (see Note 14) |
(109.9 | ) | ||
Net gain |
$ | 55.2 | ||
In addition, the Company’s CWAE segment recorded an additional net gain of $28.5 million,
primarily associated with a net gain on derivative instruments of $20.8 million, related to this
divestiture. Total net gains associated with this divestiture of $83.7 million are included in
selling, general and administrative expenses on the Company’s Consolidated Statements of
Operations.
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| 8. | INTANGIBLE ASSETS: |
The major components of intangible assets are as follows:
| February 28, 2011 | February 28, 2010 | |||||||||||||||
| Gross | Net | Gross | Net | |||||||||||||
| Carrying | Carrying | Carrying | Carrying | |||||||||||||
| Amount | Amount | Amount | Amount | |||||||||||||
| (in millions) | ||||||||||||||||
Amortizable intangible assets: |
||||||||||||||||
Customer relationships |
$ | 83.2 | $ | 64.1 | $ | 85.0 | $ | 69.0 | ||||||||
Other |
2.6 | - | 2.6 | 0.3 | ||||||||||||
Total |
$ | 85.8 | 64.1 | $ | 87.6 | 69.3 | ||||||||||
Nonamortizable intangible assets: |
||||||||||||||||
Trademarks |
816.5 | 846.0 | ||||||||||||||
Other |
5.7 | 9.7 | ||||||||||||||
Total |
822.2 | 855.7 | ||||||||||||||
Total intangible assets, net |
$ | 886.3 | $ | 925.0 | ||||||||||||
The Company did not incur costs to renew or extend the term of acquired intangible assets
during the years ended February 28, 2011, and February 28, 2010. The difference between the gross
carrying amount and net carrying amount for each item presented is attributable to accumulated
amortization. Amortization expense for intangible assets was $5.5 million, $5.8 million and $6.8
million for the years ended February 28, 2011, February 28, 2010, and February 28, 2009,
respectively. Estimated amortization expense for each of the five succeeding fiscal years and
thereafter is as follows:
| (in millions) | ||||
2012 |
$ | 4.7 | ||
2013 |
$ | 4.7 | ||
2014 |
$ | 4.6 | ||
2015 |
$ | 4.7 | ||
2016 |
$ | 4.7 | ||
Thereafter |
$ | 40.7 |
| 9. | OTHER ASSETS: |
The major components of other assets are as follows:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Investments in equity method investees |
$ | 262.9 | $ | 278.5 | ||||
Investment in Accolade |
49.6 | - | ||||||
Deferred financing costs |
47.3 | 47.1 | ||||||
Notes receivable |
4.8 | 65.7 | ||||||
Other |
22.4 | 70.2 | ||||||
| 387.0 | 461.5 | |||||||
Less – Accumulated amortization |
(28.1 | ) | (19.1 | ) | ||||
| $ | 358.9 | $ | 442.4 | |||||
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Investments in equity method investees –
Crown Imports:
Constellation Beers Ltd. (“Constellation Beers”) (previously known as Barton Beers, Ltd.), an
indirect wholly-owned subsidiary of the Company, and Diblo, S.A. de C.V. (“Diblo”), an entity owned
76.75% by Grupo Modelo, S.A.B. de C.V. (“Modelo”) and 23.25% by Anheuser-Busch Companies, Inc.,
each have, directly or indirectly, equal interests in a joint venture, Crown Imports LLC (“Crown
Imports”). Crown Imports has the exclusive right to import, market and sell Modelo’s Mexican beer
portfolio (the “Modelo Brands”) in the U.S. and Guam. In addition, Crown Imports also has the
exclusive rights to import, market and sell the Tsingtao and St. Pauli Girl brands in the U.S.
The Company accounts for the investment in Crown Imports under the equity method.
Accordingly, the results of operations of Crown Imports are included in equity in earnings of
equity method investees on the Company’s Consolidated Statements of Operations. As of February 28,
2011, and February 28, 2010, the Company’s investment in Crown Imports was $183.3 million and
$167.2 million, respectively. The carrying amount of the investment is greater than the Company’s
equity in the underlying assets of Crown Imports by $13.6 million due to the difference in the
carrying amounts of the indefinite lived intangible assets contributed to Crown Imports by each
party. The Company received $210.0 million, $191.7 million and $265.9 million of cash
distributions from Crown Imports for the years ended February 28, 2011, February 28, 2010, and
February 28, 2009, respectively, all of which represent distributions of earnings.
Constellation Beers provides certain administrative services to Crown Imports. Amounts
related to the performance of these services for the years ended February 28, 2011, February 28,
2010, and February 28, 2009, were not material. In addition, as of February 28, 2011, and February
28, 2010, amounts receivable from Crown Imports were not material.
Ruffino:
The Company has a 49.9% interest in Ruffino, the well-known Italian fine wine company. The
Company does not have a controlling interest in Ruffino or exert any managerial control. The
Company accounts for the investment in Ruffino under the equity method; accordingly, the results of
operations of Ruffino are included in equity in earnings of equity method investees on the
Company’s Consolidated Statements of Operations.
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In connection with the Company’s December 2004 investment in Ruffino, the Company granted
separate irrevocable and unconditional options to the two other shareholders of Ruffino to put to
the Company all of the ownership interests held by these shareholders for a price as calculated in
the joint venture agreement. Each option was exercisable during the period starting from January
1, 2010, and ending on December 31, 2010. For the year ended February 28, 2010, in connection with
the notification by the 9.9% shareholder of Ruffino to exercise its option to put its entire equity
interest in Ruffino to the Company for the specified minimum value of €23.5 million, the Company
recognized a loss of $34.3 million for the third quarter of fiscal 2010 on the contractual
obligation created by this notification. This loss was included in selling, general and
administrative expenses on the Company’s Consolidated Statements of Operations. In May 2010, the
Company settled this put option through a cash payment of €23.5 million ($29.6 million) to the 9.9%
shareholder of Ruffino, thereby increasing the Company’s equity interest in Ruffino from 40.0% to
49.9%. In December 2010, the Company received notification from the 50.1% shareholder of Ruffino
that it was exercising its option to put its entire equity interest in Ruffino to the Company for
€55.9 million. Prior to this notification, the Company had initiated arbitration proceedings
against the 50.1% shareholder alleging various matters which should affect the validity of the put
option. However, subsequent to the initiation of the arbitration proceedings, the Company began
discussions with the 50.1% shareholder on a framework for settlement of all legal actions. The
framework of the settlement would include the Company’s purchase of the 50.1% shareholder’s entire
equity interest in Ruffino on revised terms to be agreed upon by both parties. As a result, the
Company recognized a loss for the fourth quarter of fiscal 2011 of €43.4 million ($60.0 million) on
the contingent obligation. This loss is included in selling, general and administrative expenses
on the Company’s Consolidated Statements of Operations. As of February 28, 2011, and February 28,
2010, the Company’s investment in Ruffino was $7.4 million and $4.1 million, respectively.
The Company’s CWNA segment distributes Ruffino’s products, primarily in the U.S. Amounts
purchased from Ruffino under this arrangement for the years ended February 28, 2011, February 28,
2010, and February 28, 2009, were not material. As of February 28, 2011, and February 28, 2010,
amounts payable to Ruffino were not material.
Other:
In connection with prior acquisitions, the Company acquired several investments which are
being accounted for under the equity method. The primary investment consists of Opus One Winery
LLC (“Opus One”), a 50% owned joint venture arrangement. As of February 28, 2011, and February 28,
2010, the Company’s investment in Opus One was $57.2 million and $57.4 million, respectively. The
percentage of ownership of the remaining investments ranges from 20% to 50%.
The following table presents summarized financial information for the Company’s Crown Imports
equity method investment and the other material equity method investments discussed above. The
amounts shown represent 100% of these equity method investments’ financial position and results of
operations.
| February 28, 2011 | February 28, 2010 | |||||||||||||||||||||||
| Crown | Crown | |||||||||||||||||||||||
| Imports | Other | Total | Imports | Other | Total | |||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||
Current assets |
$ | 386.9 | $ | 110.1 | $ | 497.0 | $ | 336.6 | $ | 255.7 | $ | 592.3 | ||||||||||||
Noncurrent assets |
$ | 32.1 | $ | 120.9 | $ | 153.0 | $ | 32.3 | $ | 177.6 | $ | 209.9 | ||||||||||||
Current liabilities |
$ | (147.5 | ) | $ | (100.7 | ) | $ | (248.2 | ) | $ | (161.7 | ) | $ | (198.1 | ) | $ | (359.8 | ) | ||||||
Noncurrent liabilities |
$ | (0.1 | ) | $ | (76.3 | ) | $ | (76.4 | ) | $ | (0.1 | ) | $ | (122.4 | ) | $ | (122.5 | ) | ||||||
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| Crown | ||||||||||||
| Imports | Other | Total | ||||||||||
| (in millions) | ||||||||||||
| For the Year Ended February 28, 2011 | ||||||||||||
Net sales |
$ | 2,392.9 | $ | 987.5 | $ | 3,380.4 | ||||||
Gross profit |
$ | 690.5 | $ | 170.4 | $ | 860.9 | ||||||
Income from continuing operations |
$ | 452.3 | $ | 40.4 | $ | 492.7 | ||||||
Net income |
$ | 452.3 | $ | 40.4 | $ | 492.7 | ||||||
| For the Year Ended February 28, 2010 | ||||||||||||
Net sales |
$ | 2,256.2 | $ | 1,126.2 | $ | 3,382.4 | ||||||
Gross profit |
$ | 658.4 | $ | 186.3 | $ | 844.7 | ||||||
Income from continuing operations |
$ | 443.9 | $ | 36.7 | $ | 480.6 | ||||||
Net income |
$ | 443.9 | $ | 36.7 | $ | 480.6 | ||||||
| For the Year Ended February 28, 2009 | ||||||||||||
Net sales |
$ | 2,395.4 | $ | 988.0 | $ | 3,383.4 | ||||||
Gross profit |
$ | 717.4 | $ | 184.5 | $ | 901.9 | ||||||
Income from continuing operations |
$ | 504.6 | $ | 32.4 | $ | 537.0 | ||||||
Net income |
$ | 504.6 | $ | 32.4 | $ | 537.0 | ||||||
Investment in Accolade –
In connection with the Company’s CWAE Divestiture, the Company retained a 19.9% interest in
Accolade, its previously owned Australian and U.K. business, which consists of equity securities
and available-for-sale debt securities. The investment in the equity securities will be accounted
for under the cost method. Accordingly, the Company will recognize earnings only upon the receipt
of a dividend from Accolade. Dividends received in excess of net accumulated earnings since the
date of investment will be considered a return of investment and will be recorded as a reduction of
the cost of the investment. No dividends were received for the year ended February 28, 2011. The
available-for-sale debt securities will be measured at fair value on a recurring basis with
unrealized holding gains and losses, including foreign currency gains and losses, reported in other
comprehensive income until realized. Interest income will be recognized based on the interest rate
implicit in the available-for-sale debt securities’ fair value and will be reported in interest
expense, net, on the Company’s Consolidated Statements of Operations. Interest income recognized
in connection with the available-for-sale debt securities was not material for the year ended
February 28, 2011.
The available-for-sale debt securities have a contractual maturity of twelve years from the date of issuance and can be settled, at the option of the issuer, in cash, equity shares of the issuer,
or a combination thereof.
Other items –
Amortization of deferred financing costs of $9.1 million, $6.3 million and $6.6 million for
the years ended February 28, 2011, February 28, 2010, and February 28, 2009, respectively, is
included in interest expense, net on the Company’s Consolidated Statements of Operations.
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| 10. | OTHER ACCRUED EXPENSES AND LIABILITIES: |
The major components of other accrued expenses and liabilities are as follows:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Salaries and commissions |
$ | 76.1 | $ | 80.0 | ||||
Contractual obligation from put
option of Ruffino shareholder |
60.0 | 32.1 | ||||||
Advertising and promotions |
53.7 | 113.8 | ||||||
Deferred revenue |
31.7 | 33.4 | ||||||
Accrued interest |
23.9 | 26.8 | ||||||
Accrued insurance |
17.7 | 18.7 | ||||||
Accrued profit sharing |
15.8 | 12.7 | ||||||
Income taxes payable |
14.1 | 43.1 | ||||||
Other |
126.9 | 141.0 | ||||||
| $ | 419.9 | $ | 501.6 | |||||
| 11. | BORROWINGS: |
Borrowings consist of the following:
| February 28, | ||||||||||||||||
| February 28, 2011 | 2010 | |||||||||||||||
| Current | Long-term | Total | Total | |||||||||||||
| (in millions) | ||||||||||||||||
Notes Payable to Banks: |
||||||||||||||||
Senior Credit Facility – |
||||||||||||||||
Revolving Credit Loans |
$ | 74.9 | $ | - | $ | 74.9 | $ | 289.3 | ||||||||
Other |
8.8 | - | 8.8 | 81.9 | ||||||||||||
| $ | 83.7 | $ | - | $ | 83.7 | $ | 371.2 | |||||||||
Long-term Debt: |
||||||||||||||||
Senior Credit Facility –
Term Loans |
$ | 5.6 | $ | 1,222.4 | $ | 1,228.0 | $ | 1,549.1 | ||||||||
Senior Notes |
- | 1,893.6 | 1,893.6 | 1,892.6 | ||||||||||||
Other Long-term Debt |
10.3 | 20.7 | 31.0 | 22.6 | ||||||||||||
| $ | 15.9 | $ | 3,136.7 | $ | 3,152.6 | $ | 3,464.3 | |||||||||
Senior credit facility –
The Company and certain of its U.S. subsidiaries, JPMorgan Chase Bank, N.A. as a lender and
administrative agent, and certain other agents, lenders, and financial institutions are parties to
a credit agreement, as amended (the “2006 Credit Agreement”). The 2006 Credit Agreement provides
for aggregate credit facilities of $3,842.0 million, consisting of (i) a $1,200.0 million tranche
A term loan facility with an original final maturity in June 2011, fully repaid as of February 28,
2011 (the “Tranche A Term Loans”), (ii) a $1,800.0 million tranche B term loan facility, of which
$1,500.0 million has a final maturity in June 2013 (the “2013 Tranche B Term Loans”) and $300.0
million has a final maturity in June 2015 (the “2015 Tranche B Term Loans”), and (iii) an $842.0
million revolving credit facility (including a sub-facility for letters of credit of up to $200
million), of which $192.0 million terminates in June 2011 (the “2011 Revolving Facility”) and
$650.0 million terminates in June 2013 (the “2013 Revolving Facility”). The Company uses its
revolving credit facility under the 2006 Credit Agreement for general corporate purposes.
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As of February 28, 2011, the required principal repayments of the tranche B term loan facility
for each of the five succeeding fiscal years and thereafter are as follows:
| Tranche B | ||||
| Term Loan | ||||
| Facility | ||||
| (in millions) | ||||
2012 |
$ | 5.6 | ||
2013 |
466.4 | |||
2014 |
465.1 | |||
2015 |
146.2 | |||
2016 |
144.7 | |||
Thereafter |
- | |||
| $ | 1,228.0 | |||
The rate of interest on borrowings under the 2006 Credit Agreement is a function of LIBOR
plus a margin, the federal funds rate plus a margin, or the prime rate plus a margin. The margin
is adjustable based upon the Company’s debt ratio (as defined in the 2006 Credit Agreement) with
respect to the 2011 Revolving Facility and the 2013 Revolving Facility, and is fixed with respect
to the 2013 Tranche B Term Loans and the 2015 Tranche B Term Loans. As of February 28, 2011, the
LIBOR margin for the 2011 Revolving Facility is 1.25%; the LIBOR margin for the 2013 Revolving
Facility is 2.50%; the LIBOR margin for the 2013 Tranche B Term Loans is 1.50%; and the LIBOR
margin on the 2015 Tranche B Term Loans is 2.75%.
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, the 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 maintaining a maximum total debt coverage ratio and minimum
interest coverage ratio.
As of February 28, 2011, under the 2006 Credit Agreement, the Company had outstanding 2013
Tranche B Term Loans of $928.0 million bearing an interest rate of 1.8%, 2015 Tranche B Term Loans
of $300.0 million bearing an interest rate of 3.1%, 2011 Revolving Facility of $7.5 million bearing
an interest rate of 3.5%, 2013 Revolving Facility of $67.4 million bearing an interest rate of
3.1%, outstanding letters of credit of $13.9 million, and $753.2 million in revolving loans
available to be drawn.
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In April 2009, the Company transitioned its interest rate swap agreements to a one-month LIBOR
base rate versus the then existing three-month LIBOR base rate. Accordingly, the Company entered
into new interest rate swap agreements which were designated as cash flow hedges of $1,200.0
million of the Company’s floating LIBOR rate debt. In addition, the then existing interest rate
swap agreements were dedesignated by the Company and the Company entered into additional
undesignated interest rate swap agreements for $1,200.0 million to offset the prospective impact of
the newly undesignated interest rate swap agreements. As a result, the Company fixed its interest
rates on $1,200.0 million of the Company’s floating LIBOR rate debt at an average rate of 4.0%
through February 28, 2010. On March 1, 2010, the Company paid $11.9 million in connection with the
maturity of these outstanding interest rate swap agreements, which is reported in other, net in
cash flows from operating activities in the Company’s Consolidated Statements of Cash Flows. In
June 2010, the Company entered into a new five year delayed start interest rate swap agreement
effective September 1, 2011, which was designated as a cash flow hedge for $500.0 million of the
Company’s floating LIBOR rate debt. Accordingly, the Company fixed its interest rates on $500.0
million of the Company’s floating LIBOR rate debt at an average rate of 2.9% (exclusive of
borrowing margins) through September 1, 2016. For the year ended February 28, 2011, the Company
did not reclassify any amount from AOCI to interest expense, net on its Consolidated Statements of
Operations. For the years ended February 28, 2010, and February 28, 2009, the Company reclassified
net losses of $27.7 million and $12.6 million, net of income tax effect, respectively, from AOCI to
interest expense, net on the Company’s Consolidated Statements of Operations.
Senior notes –
In November 1999, the Company issued £75.0 million ($121.7 million upon issuance) aggregate
principal amount of 8 1/2% Senior Notes due November 2009 (the “Sterling Senior Notes”). In March
2000, the Company exchanged £75.0 million aggregate principal amount of 8 1/2% Series B Senior
Notes due in November 2009 (the “Sterling Series B Senior Notes”) for all of the Sterling Senior
Notes. In October 2000, the Company exchanged £74.0 million aggregate principal amount of Sterling
Series C Senior Notes (as defined below) for £74.0 million of the Sterling Series B Senior Notes.
On May 15, 2000, the Company issued £80.0 million ($120.0 million upon issuance) aggregate
principal amount of 8 1/2% Series C Senior Notes due November 2009 (the “Sterling Series C Senior
Notes”). In November 2009, the Company repaid the Sterling Series B Senior Notes and the Sterling
Series C Senior Notes with proceeds from its revolving credit facility under its then existing
senior credit facility and cash flows from operating activities.
In February 2009, the Company entered into a foreign currency forward contract to fix the U.S.
dollar payment of the Sterling Series B Senior Notes and Sterling Series C Senior Notes. In
accordance with the FASB guidance for derivatives and hedging, this foreign currency forward
contract qualified for cash flow hedge accounting treatment. In November 2009, the Company
received $33.2 million of proceeds from the maturity of this derivative instrument. This amount is
reported in cash flows from financing activities on the Company’s Consolidated Statements of Cash
Flows.
On August 15, 2006, the Company issued $700.0 million aggregate principal amount of 7 1/4%
Senior Notes due September 2016 at an issuance price of $693.1 million (net of $6.9 million
unamortized discount, with an effective interest rate of 7.4%) (the “August 2006 Senior Notes”).
The net proceeds of the offering ($685.6 million) were used to reduce a corresponding amount of
borrowings under the Company’s then existing senior credit facility. Interest on the August 2006
Senior Notes is payable semiannually on March 1 and September 1 of each year, beginning March 1,
2007. As of February 28, 2011, and February 28, 2010, the Company had outstanding $695.6 million
(net of $4.4 million unamortized discount) and $695.0 million (net of $5.0 million unamortized
discount), respectively, aggregate principal amount of August 2006 Senior Notes.
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On May 14, 2007, the Company issued $700.0 million aggregate principal amount of 7 1/4% Senior
Notes due May 2017 (the “Original May 2007 Senior Notes”). The net proceeds of the offering
($693.9 million) were used to reduce a corresponding amount of borrowings under the revolving
portion of the Company’s then existing senior credit facility. Interest on the Original May 2007
Senior Notes is payable semiannually on May 15 and November 15 of each year, beginning November 15,
2007. In January 2008, the Company exchanged $700.0 million aggregate principal amount of 7 1/4%
Senior Notes due May 2017 (the “May 2007 Senior Notes”) for all of the Original May 2007 Senior
Notes. The terms of the May 2007 Senior Notes are substantially identical in all material respects
to the Original May 2007 Senior Notes, except that the May 2007 Senior Notes are registered under
the Securities Act of 1933, as amended. As of February 28, 2011, and February 28, 2010, the
Company had outstanding $700.0 million aggregate principal amount of May 2007 Senior Notes.
On December 5, 2007, the Company issued $500.0 million aggregate principal amount of 8 3/8%
Senior Notes due December 2014 at an issuance price of $496.7 million (net of $3.3 million
unamortized discount, with an effective interest rate of 8.5%) (the “December 2007 Senior Notes”).
The net proceeds of the offering ($492.2 million) were used to fund a portion of the purchase price
of BWE. Interest on the December 2007 Senior Notes is payable semiannually on June 15 and December
15 of each year, beginning June 15, 2008. As of February 28, 2011, and February 28, 2010, the
Company had outstanding $498.0 million (net of $2.0 million unamortized discount) and $497.6
million (net of $2.4 million unamortized discount) aggregate principal amount of December 2007
Senior Notes.
The senior notes described above are redeemable, in whole or in part, at the option of the
Company at any time at a redemption price equal to 100% of the outstanding principal amount plus a
make whole payment based on the present value of the future payments at the adjusted Treasury Rate
plus 50 basis points. The senior notes are senior unsecured obligations and rank equally in right
of payment to all existing and future senior unsecured indebtedness of the Company. Certain of the
Company’s significant U.S. operating subsidiaries guarantee the senior notes, on a senior unsecured
basis.
Senior subordinated notes –
On January 23, 2002, the Company issued $250.0 million aggregate principal amount of 8 1/8%
Senior Subordinated Notes due January 2012 (the “January 2002 Senior Subordinated Notes”). On
February 25, 2010, the Company repaid the January 2002 Senior Subordinated Notes with proceeds from
its revolving credit facility under the 2006 Credit Agreement and cash flows from operating
activities.
Indentures –
The Company’s Indentures relating to its outstanding senior notes contain certain covenants,
including, but not limited to: (i) a limitation on liens on certain assets; (ii) a limitation on
certain sale and leaseback transactions; and (iii) restrictions on mergers, consolidations and the
transfer of all or substantially all of the assets of the Company to another person.
Subsidiary credit facilities –
The Company has additional credit arrangements totaling $154.2 million and $266.3 million as
of February 28, 2011, and February 28, 2010, respectively. These arrangements primarily support
the financing needs of the Company’s domestic and foreign subsidiary operations. Interest rates
and other terms of these borrowings vary from country to country, depending on local market
conditions. As of February 28, 2011, and February 28, 2010, amounts outstanding under these
arrangements were $39.8 million and $104.5 million, respectively.
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Debt payments –
Principal payments required under long-term debt obligations (excluding unamortized discount
of $6.4 million) for each of the five succeeding fiscal years and thereafter are as follows:
| (in millions) | ||||
2012 |
$ | 15.9 | ||
2013 |
471.1 | |||
2014 |
468.7 | |||
2015 |
650.3 | |||
2016 |
146.2 | |||
Thereafter |
1,406.8 | |||
| $ | 3,159.0 | |||
| 12. | INCOME TAXES: |
Income (loss) before income taxes was generated as follows:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions) | ||||||||||||
Domestic |
$ | 946.0 | $ | 365.6 | $ | 401.9 | ||||||
Foreign |
(395.0 | ) | (106.3 | ) | (508.7 | ) | ||||||
| $ | 551.0 | $ | 259.3 | $ | (106.8 | ) | ||||||
The income tax (benefit) provision consisted of the following:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions) | ||||||||||||
Current: |
||||||||||||
Federal |
$ | (112.9 | ) | $ | 139.4 | $ | 133.8 | |||||
State |
21.7 | 34.2 | 36.4 | |||||||||
Foreign |
11.8 | 17.0 | 22.1 | |||||||||
Total current |
(79.4 | ) | 190.6 | 192.3 | ||||||||
Deferred: |
||||||||||||
Federal |
31.8 | 5.4 | 22.7 | |||||||||
State |
4.6 | 0.9 | (3.5 | ) | ||||||||
Foreign |
34.5 | (36.9 | ) | (16.9 | ) | |||||||
Total deferred |
70.9 | (30.6 | ) | 2.3 | ||||||||
Income tax provision |
$ | (8.5 | ) | $ | 160.0 | $ | 194.6 | |||||
The foreign (benefit) provision for income taxes is based on foreign pretax earnings.
Earnings of foreign subsidiaries would be subject to U.S. income taxation on repatriation to the
U.S. The Company’s consolidated financial statements provide for anticipated tax liabilities on
amounts that may be repatriated.
Deferred tax assets and liabilities reflect the future income tax effects of temporary
differences between the consolidated financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and are measured using enacted tax rates that apply to
taxable income.
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Significant components of deferred tax assets (liabilities) consist of the following:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Deferred tax assets: |
||||||||
Stock-based compensation |
$ | 49.2 | $ | 43.0 | ||||
Inventory |
16.1 | 13.9 | ||||||
Net operating losses |
9.9 | 158.2 | ||||||
Insurance accruals |
6.4 | 6.7 | ||||||
Employee benefits |
4.1 | 30.6 | ||||||
Other accruals |
40.8 | 30.6 | ||||||
Gross deferred tax assets |
126.5 | 283.0 | ||||||
Valuation allowances |
(11.4 | ) | (234.7 | ) | ||||
Deferred tax assets, net |
115.1 | 48.3 | ||||||
Deferred tax liabilities: |
||||||||
Intangible assets |
(383.4 | ) | (286.5 | ) | ||||
Property, plant and equipment |
(192.8 | ) | (167.9 | ) | ||||
Investment in equity method investees |
(41.4 | ) | (33.7 | ) | ||||
Provision for unremitted earnings |
(22.6 | ) | (1.5 | ) | ||||
Unrealized foreign exchange |
(10.6 | ) | - | |||||
Derivative instruments |
(4.6 | ) | (14.5 | ) | ||||
Total deferred tax liabilities |
(655.4 | ) | (504.1 | ) | ||||
Deferred tax liabilities, net |
$ | (540.3 | ) | $ | (455.8 | ) | ||
Amounts recognized in the Consolidated Balance Sheets consist of:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Current deferred tax assets |
$ | 42.1 | $ | 50.0 | ||||
Long-term deferred tax assets |
1.8 | 30.8 | ||||||
Current deferred tax liabilities |
(1.1 | ) | (0.4 | ) | ||||
Long-term deferred tax liabilities |
(583.1 | ) | (536.2 | ) | ||||
| $ | (540.3 | ) | $ | (455.8 | ) | |||
In assessing the realizability of deferred tax assets, management considers whether it is
more likely than not that some or all of the deferred tax assets will not be realized. Management
considers the projected reversal of deferred tax liabilities and projected future taxable income in
making this assessment. Based upon this assessment, management believes it is more likely than not
that the Company will realize the benefits of these deductible differences, net of any valuation
allowances. During the years ended February 28, 2011, and February 28, 2010, the Company recorded
additional valuation allowances, primarily associated with its Australian and U.K. business. The
decrease in the valuation allowance as of February 28, 2011, is primarily related to the January
2011 CWAE Divestiture.
Operating loss carryforwards totaling $42.0 million at February 28, 2011, are being carried
forward in a number of foreign jurisdictions where the Company is permitted to use tax operating
losses from prior periods to reduce future taxable income. Of these operating loss carryforwards,
$27.0 million will expire in 2013 through 2027 and $15.0 million of operating losses in foreign
jurisdictions may be carried forward indefinitely. A U.S. tax loss of $235.2 million was generated
during the year ended February 28, 2011. The Company expects to carryback this loss and credits
generated during the year ended February 28, 2011, to the years ended February 28, 2010, and
February 28, 2009.
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The Company is subject to ongoing tax examinations and assessments in various jurisdictions.
Accordingly, the Company provides for additional tax expense based on probable outcomes of such
matters. While it is often difficult to predict the final outcome or the timing of resolution of
any particular tax matter, the Company believes the reserves reflect the probable outcome of known
tax contingencies. Unfavorable settlement of any particular issue would require the use of cash.
Favorable resolution would be recognized as a reduction to the effective tax rate in the year of
resolution. During the year ended February 28, 2011, various federal, state, and international
examinations were finalized. A tax benefit of $36.0 million was recorded primarily related to the
resolution of certain tax positions in connection with those examinations and the expiration of
statutes of limitation.
A reconciliation of the total tax provision to the amount computed by applying the statutory
U.S. Federal income tax rate to income (loss) before provision for income taxes is as follows:
| For the Years Ended | ||||||||||||||||||||||||
| February 28, 2011 | February 28, 2010 | February 28, 2009 | ||||||||||||||||||||||
| % of | % of | % of | ||||||||||||||||||||||
| Pretax | Pretax | Pretax | ||||||||||||||||||||||
| Amount | Income | Amount | Income | Amount | Income | |||||||||||||||||||
| (in millions, except % of pretax income data) | ||||||||||||||||||||||||
Income tax provision (benefit) at
statutory rate |
$ | 192.9 | 35.0 | $ | 90.8 | 35.0 | $ | (37.4 | ) | 35.0 | ||||||||||||||
State and local income taxes, net of
federal income tax benefit |
17.1 | 3.1 | 22.8 | 8.8 | 21.3 | (20.0 | ) | |||||||||||||||||
Deduction for investments and loans
related to the CWAE Divestiture |
(207.0 | ) | (37.5 | ) | - | - | - | - | ||||||||||||||||
CWAE Divestiture |
(19.7 | ) | (3.6 | ) | - | - | - | - | ||||||||||||||||
Impairments and dispositions of
nondeductible goodwill, equity method
investments and other intangible
assets |
21.0 | 3.8 | 61.5 | 23.7 | 131.5 | (123.1 | ) | |||||||||||||||||
Net operating loss valuation allowance |
46.8 | 8.5 | 18.6 | 7.2 | 67.4 | (63.2 | ) | |||||||||||||||||
Nontaxable foreign exchange gains and
losses |
(3.8 | ) | (0.7 | ) | (8.8 | ) | (3.4 | ) | 11.4 | (10.6 | ) | |||||||||||||
Earnings of subsidiaries taxed at
other than U.S. statutory rate |
(46.8 | ) | (8.5 | ) | (27.7 | ) | (10.7 | ) | (3.5 | ) | 3.3 | |||||||||||||
Miscellaneous items, net |
(9.0 | ) | (1.6 | ) | 2.8 | 1.1 | 3.9 | (3.6 | ) | |||||||||||||||
| $ | (8.5 | ) | (1.5 | ) | $ | 160.0 | 61.7 | $ | 194.6 | (182.2 | ) | |||||||||||||
The effect of earnings of foreign subsidiaries includes the difference between the U.S.
statutory rate and local jurisdiction tax rates, as well as the (benefit) provision for incremental
U.S. taxes on unremitted earnings of foreign subsidiaries offset by foreign tax credits and other
foreign adjustments.
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As of February 28, 2011, and February 28, 2010, the liability for income taxes associated with
uncertain tax positions, excluding interest and penalties, was $154.4 million and $124.0 million,
respectively. A reconciliation of the beginning and ending unrecognized tax benefit liabilities is
as follows:
| For the Years Ended | ||||||||
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Balance, March 1 |
$ | (124.0 | ) | $ | (146.6 | ) | ||
Increases as a result of tax positions taken during a prior period |
(9.5 | ) | (4.8 | ) | ||||
Decreases as a result of tax positions taken during a prior period |
1.8 | 10.8 | ||||||
Increases as a result of tax positions taken during the current
period |
(59.5 | ) | (25.3 | ) | ||||
Decreases related to settlements with tax authorities |
36.0 | 39.6 | ||||||
Decreases related to lapse of applicable statute of limitations |
0.8 | 2.3 | ||||||
Balance, February 28 |
$ | (154.4 | ) | $ | (124.0 | ) | ||
As of February 28, 2011, and February 28, 2010, the Company has $163.3 million and $130.8
million, respectively, of non-current unrecognized tax benefit liabilities, including interest and
penalties, recorded on the Company’s Consolidated Balance Sheet. These liabilities are recorded as
non-current as payment of cash is not anticipated within one year of the balance sheet date.
As of February 28, 2011, and February 28, 2010, the Company has $154.4 million and $124.0
million, respectively, of unrecognized tax benefit liabilities that, if recognized, would decrease
the effective tax rate.
In accordance with the Company’s accounting policy, the Company recognizes interest and
penalties related to unrecognized tax benefit liabilities as a component of the provision for
income taxes on the Company’s Consolidated Statements of Operations. For the years ended February
28, 2011, and February 28, 2010, the Company recorded ($4.1) million and ($1.1) million of net
interest expense (income), net of income tax effect, and penalties, respectively. As of February
28, 2011, and February 28, 2010, $11.6 million, net of income tax effect, and $15.7 million, net of
income tax effect, respectively, was included in the liability for uncertain tax positions for the
possible payment of interest and penalties.
Various U.S. Federal, state and foreign income tax examinations are currently in progress. It
is reasonably possible that the liability associated with the Company’s unrecognized tax benefit
liabilities will increase or decrease within the next twelve months as a result of these
examinations or the expiration of statutes of limitation. As of February 28, 2011, the Company
estimates that unrecognized tax benefit liabilities could change by a range of $25 million to $70
million. The Company files U.S. Federal income tax returns and various state, local and foreign
income tax returns. Major tax jurisdictions where the Company is subject to examination by tax
authorities include Australia, Canada, New Zealand, the U.K. and the U.S. With few exceptions, the
Company is no longer subject to U.S. Federal, state, local or foreign income tax examinations for
fiscal years prior to February 28, 2006.
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| 13. | OTHER LIABILITIES: |
The major components of other liabilities are as follows:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Unrecognized tax benefit liabilities |
$ | 151.7 | $ | 130.8 | ||||
Indemnification liabilities |
27.8 | 1.8 | ||||||
Accrued pension liability (see Note 14) |
10.3 | 115.6 | ||||||
Adverse grape contracts (see Note 15) |
9.3 | 15.9 | ||||||
Other |
33.9 | 68.0 | ||||||
| $ | 233.0 | $ | 332.1 | |||||
| 14. | DEFINED CONTRIBUTION AND DEFINED BENEFIT PLANS: |
Defined contribution plans –
The Company’s retirement and profit sharing plan, the Constellation Brands, Inc. 401(k) and
Profit Sharing Plan (the “Plan”), covers substantially all U.S. employees, excluding those
employees covered by collective bargaining agreements. The 401(k) portion of the Plan permits
eligible employees to defer a portion of their compensation (as defined in the Plan) on a pretax
basis. Participants may defer up to 50% of their compensation for the year, subject to limitations
of the Plan. The Company makes a matching contribution of 50% of the first 6% of compensation a
participant defers. The amount of the Company’s contribution under the profit sharing portion of
the Plan is a discretionary amount as determined by the Board of Directors on an annual basis,
subject to limitations of the Plan. Company contributions under the Plan were $13.6 million, $15.6
million and $14.0 million for the years ended February 28, 2011, February 28, 2010, and February
28, 2009, respectively.
In addition to the Plan discussed above, the Company has a defined contribution plan that
covers substantially all of its New Zealand employees and a defined contribution plan that covers
certain of its Canadian employees. The Company also has the Retirement Plan for Salaried Employees
of Vincor International Inc. (the “Vincor Retirement Plan”) which covers substantially all of its
salaried Canadian employees. The Vincor Retirement Plan has a defined benefit component and a
defined contribution component. Prior to the CWAE Divestiture, the Company also had the
Constellation Wines Australia Superannuation Plan (the “Constellation Wines Australia Plan”) which
covered substantially all of its salaried Australian employees. The Constellation Wines Australia
Plan had a defined benefit component and a defined contribution component. The Company also had a
statutory obligation to provide a minimum defined contribution on behalf of any Australian
employees who were not covered by the Constellation Wines Australia Plan. Lastly, the Company had
a defined contribution plan that covered substantially all of its U.K. employees. Company
contributions under the defined contribution component of the Constellation Wines Australia Plan,
the Australian statutory obligation, the U.K. defined contribution plan, the New Zealand defined
contribution plan, the Canadian defined contribution plan and the defined contribution component of
the Vincor Retirement Plan aggregated $7.0 million, $8.2 million and $8.6 million for the years
ended February 28, 2011, February 28, 2010, and February 28, 2009, respectively.
Defined benefit pension plans –
The Company also has defined benefit pension plans that cover certain of its non-U.S.
employees. These consist of a Canadian plan, the defined benefit component of the Vincor
Retirement Plan and one defined benefit pension plan which covers substantially all of its hourly
Canadian employees. Prior to the CWAE Divestiture, the Company also had defined benefit pension
plans that consisted of an U.K. plan and the defined benefit component of the Constellation Wines
Australia Plan.
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Effective February 28, 2009, the Company adopted amended FASB guidance for compensation –
retirement benefits. This guidance requires companies to measure the funded status of a defined
benefit postretirement plan as of the date of the company’s fiscal year-end (with limited
exceptions). The Company had previously used a December 31 measurement date for its defined
benefit pension and other postretirement plans. On March 1, 2008, the Company elected to
transition to a fiscal year-end measurement date utilizing the second alternative prescribed by the
amended FASB guidance. Accordingly, on March 1, 2008, the Company recognized adjustments to its
opening retained earnings, accumulated other comprehensive income, net of income tax effect, and
pension and other postretirement plan assets or liabilities. These adjustments did not have a
material impact on the Company’s consolidated financial statements. The Company completed its
adoption of this amended FASB guidance on February 28, 2009, when the Company changed its
measurement date for its defined benefit pension and other postretirement plans to February 28,
2009. Accordingly, the Company used the last day of February as its measurement date for all of
its plans for the years ended February 28, 2011, February 28, 2010 and February 28, 2009.
For the year ended February 28, 2011, in connection with the January 2011 CWAE Divestiture,
the Company recognized settlement losses of $109.9 million associated with the settlement of the
related pension obligations. For the year ended February 28, 2009, in connection with the
Company’s August 2008 sale of a nonstrategic Canadian distilling facility, the Company recognized a
settlement loss and curtailment loss of $8.6 million and $0.4 million, respectively, associated
with the settlement of the related pension obligation. Net periodic benefit cost reported in the
Consolidated Statements of Operations for all of the Company’s defined benefit pension plans
includes the following components:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions) | ||||||||||||
Service cost |
$ | 4.4 | $ | 2.4 | $ | 3.9 | ||||||
Interest cost |
22.2 | 21.8 | 23.4 | |||||||||
Expected return on plan assets |
(23.8 | ) | (25.5 | ) | (27.5 | ) | ||||||
Amortization of prior service cost |
0.1 | 0.1 | 0.2 | |||||||||
Recognized net actuarial loss |
9.0 | 4.4 | 6.9 | |||||||||
Recognized loss due to curtailment |
- | - | 0.4 | |||||||||
Recognized net loss due to settlement |
109.9 | 1.1 | 8.6 | |||||||||
Net periodic benefit cost |
$ | 121.8 | $ | 4.3 | $ | 15.9 | ||||||
The following table summarizes the funded status of the Company’s defined benefit pension
plans and the related amounts included in the Consolidated Balance Sheets:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Change in benefit obligation: |
||||||||
Benefit obligation as of March 1 |
$ | 397.6 | $ | 288.8 | ||||
Service cost |
4.4 | 2.4 | ||||||
Interest cost |
22.2 | 21.8 | ||||||
Plan participants’ contributions |
1.8 | 1.8 | ||||||
Curtailment |
(12.1 | ) | (1.6 | ) | ||||
Actuarial loss |
4.3 | 78.7 | ||||||
Plan amendment |
(2.6 | ) | - | |||||
Settlement |
(337.3 | ) | (4.5 | ) | ||||
Benefits paid |
(15.9 | ) | (15.5 | ) | ||||
Foreign currency exchange rate changes |
23.7 | 25.7 | ||||||
Benefit obligation as of the last day of February |
$ | 86.1 | $ | 397.6 | ||||
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| February 28, | February 28 , | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Change in plan assets: |
||||||||
Fair value of plan assets as of March 1 |
$ | 283.1 | $ | 240.1 | ||||
Actual return on plan assets |
45.7 | 29.4 | ||||||
Employer contribution |
10.4 | 7.5 | ||||||
Plan participants’ contributions |
1.8 | 1.8 | ||||||
Settlement |
(268.1 | ) | (4.5 | ) | ||||
Benefits paid |
(15.9 | ) | (15.5 | ) | ||||
Foreign currency exchange rate changes |
18.7 | 24.3 | ||||||
Fair value of plan assets as of the last day of February |
$ | 75.7 | $ | 283.1 | ||||
Funded status of the plan as of the last day of February |
$ | (10.4 | ) | $ | (114.5 | ) | ||
| Amounts recognized in the Consolidated Balance Sheets consist of: | ||||||||
Long-term pension asset |
$ | - | $ | 1.2 | ||||
Current accrued pension liability |
(0.1 | ) | (0.1 | ) | ||||
Long-term accrued pension liability |
(10.3 | ) | (115.6 | ) | ||||
| $ | (10.4 | ) | $ | (114.5 | ) | |||
| Amounts recognized in accumulated other comprehensive income: | ||||||||
Unrecognized prior service (credit) cost |
$ | (2.1 | ) | $ | 0.6 | |||
Unrecognized actuarial loss |
15.4 | 145.1 | ||||||
Accumulated other comprehensive income, gross |
13.3 | 145.7 | ||||||
Cumulative tax impact |
3.3 | 40.3 | ||||||
Accumulated other comprehensive income, net |
$ | 10.0 | $ | 105.4 | ||||
The estimated amounts that will be amortized from accumulated other comprehensive income,
net of income tax effect, into net periodic benefit cost over the next fiscal year are as follows:
| (in millions) | ||||
Prior service cost |
$ | 0.1 | ||
Net actuarial loss |
$ | 0.4 |
As of February 28, 2011, and February 28, 2010, the accumulated benefit obligation for
all defined benefit pension plans was $71.6 million and $379.2 million, respectively. The
following table summarizes the projected benefit obligation, accumulated benefit obligation and
fair value of plan assets for only those pension plans with an accumulated benefit obligation in
excess of plan assets:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Projected benefit obligation |
$ | 7.2 | $ | 323.2 | ||||
Accumulated benefit obligation |
$ | 6.9 | $ | 317.2 | ||||
Fair value of plan assets |
$ | 5.8 | $ | 217.6 | ||||
The following table sets forth the weighted average assumptions used in developing the
net periodic pension expense:
| For the Years Ended | ||||||||
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
Rate of return on plan assets |
9.11% | 9.72% | ||||||
Discount rate |
5.95% | 6.82% | ||||||
Rate of compensation increase |
4.40% | 4.03% | ||||||
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The actuarial present value of the benefit obligation is based on the expected date of
separation or retirement. The following table sets forth the weighted average assumptions used in
developing the benefit obligation:
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
Discount rate |
5.23% | 5.95% | ||||||
Rate of compensation increase |
3.50% | 4.40% | ||||||
The Company’s weighted average expected long-term rate of return on plan assets is 9.11%.
The Company considers the historical level of long-term returns and the current level of expected
long-term returns for each asset class, as well as the current and expected allocation of assets
when developing its expected long-term rate of return on assets assumption. The expected return
for each asset class is weighted based on the target asset allocation to develop the expected
long-term rate of return on assets assumption for the Company’s portfolios.
On February 28, 2010, the Company adopted the amended FASB guidance for compensation –
retirement benefits which provided additional guidance on an employer’s disclosures about plan
assets of a defined benefit pension or other postretirement plan. The following table presents the
major categories and the respective fair value hierarchy for the Company’s defined benefit pension
plan assets as of February 28, 2011, and February 28, 2010:
| Quoted | Significant | |||||||||||||||
| Prices in | Other | Significant | ||||||||||||||
| Active | Observable | Unobservable | ||||||||||||||
| Markets | Inputs | Inputs | ||||||||||||||
| (Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
| (in millions) | ||||||||||||||||
February 28, 2011 |
||||||||||||||||
Asset Class |
||||||||||||||||
Cash and cash equivalent funds |
$ | 3.4 | $ | - | $ | - | $ | 3.4 | ||||||||
Equity securities: |
||||||||||||||||
U. S. equities |
11.0 | - | - | 11.0 | ||||||||||||
Non-U.S. equities |
45.8 | - | - | 45.8 | ||||||||||||
Fixed income securities: |
||||||||||||||||
Corporate bonds |
- | 5.9 | - | 5.9 | ||||||||||||
Government bonds |
- | 9.2 | - | 9.2 | ||||||||||||
Mortgage-backed |
- | 0.4 | - | 0.4 | ||||||||||||
Total fair value of plan assets |
$ | 60.2 | $ | 15.5 | $ | - | $ | 75.7 | ||||||||
February 28, 2010 |
||||||||||||||||
Asset Class |
||||||||||||||||
Cash and cash equivalent funds |
$ | 12.8 | $ | - | $ | - | $ | 12.8 | ||||||||
Equity securities: |
||||||||||||||||
U. S. equities |
23.6 | - | - | 23.6 | ||||||||||||
Non-U.S. equities |
69.0 | - | - | 69.0 | ||||||||||||
Fixed income securities: |
- | |||||||||||||||
Corporate bonds |
40.0 | 5.2 | - | 45.2 | ||||||||||||
Government bonds |
18.7 | 6.9 | - | 25.6 | ||||||||||||
Mortgage-backed |
- | 0.5 | - | 0.5 | ||||||||||||
Asset-backed |
0.2 | 8.8 | - | 9.0 | ||||||||||||
Real estate |
- | 0.5 | - | 0.5 | ||||||||||||
Hedge funds |
27.0 | 26.0 | - | 53.0 | ||||||||||||
Other |
33.9 | 10.0 | - | 43.9 | ||||||||||||
Total fair value of plan assets |
$ | 225.2 | $ | 57.9 | $ | - | $ | 283.1 | ||||||||
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The following methods and assumptions were used to estimate the fair value of each asset
class:
Cash and cash equivalent funds: The value is based on cost, which approximates fair value.
Equity securities: Investments in stocks are valued using quoted market prices multiplied by
the number of shares held.
Fixed income securities: The value is determined using quoted prices in an active market; or
independent observable market inputs, such as matrix pricing, yield curves and indices.
Real estate: The value is based on the net asset value of units of ownership underlying the
assets held at year end. The fair value of real estate holdings is based on market data including
earnings capitalization, discounted cash flow analysis, comparable sales transactions or a
combination of these methods.
Hedge funds: The value is based on the net asset value of the underlying assets of the
investment. The underlying assets consist of cash, equity securities and fixed income securities.
Other: The value is calculated by the counterparty using a combination of quoted market
prices, discounted cash flow analysis, and the Black-Scholes option-pricing model.
For its Canadian defined benefit plans, the Company employs an investment return approach
whereby a mix of equities and fixed income investments are used to maximize the long-term rate of
return on plan assets for a prudent level of risk. From time to time, the Company will target
asset allocation to enhance total return while balancing risks. The established weighted average
target allocations are approximately 78.5% equity securities, 21.3% fixed income securities and
0.2% all other types of investments. Risk tolerance is established through careful consideration
of plan liabilities, plan funded status, and corporate financial condition. The individual
investment portfolios contain a diversified blend of equity and fixed income investments. Equity
investments are diversified across the plan’s local jurisdiction stocks as well as international
stocks, and across multiple asset classifications, including growth, value, and large and small
capitalizations. Investment risk is measured and monitored on an ongoing basis through periodic
investment portfolio reviews and annual liability measures.
The Company expects to contribute $4.2 million to its pension plans during the year ended
February 29, 2012.
Benefit payments, which reflect expected future service, as appropriate, expected to be paid
during the next ten fiscal years are as follows:
| (in millions) | ||||
2012 |
$ | 2.4 | ||
2013 |
$ | 2.8 | ||
2014 |
$ | 2.8 | ||
2015 |
$ | 3.1 | ||
2016 |
$ | 3.4 | ||
2017 – 2021 |
$ | 23.2 |
| 15. | COMMITMENTS AND CONTINGENCIES: |
Operating leases –
Step rent provisions, escalation clauses, capital improvement funding and other lease
concessions, when present in the Company’s leases, are taken into account in computing the minimum
lease payments. The minimum lease payments for the Company’s operating leases are recognized on a
straight-line basis over the minimum lease term.
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Future payments under noncancelable operating
leases having initial or remaining terms of one year or more are as follows for each of the five
succeeding fiscal years and thereafter:
| (in millions) | ||||
2012 |
$ | 59.8 | ||
2013 |
45.3 | |||
2014 |
30.7 | |||
2015 |
24.8 | |||
2016 |
21.3 | |||
Thereafter |
158.3 | |||
| $ | 340.2 | |||
Rental expense was $92.6 million, $99.4 million and $94.6 million for the years ended
February 28, 2011, February 28, 2010, and February 28, 2009, respectively.
Purchase commitments and contingencies –
In connection with previous acquisitions as well as with the BWE acquisition, the acquisition
of all the outstanding common shares of Vincor International Inc. (“Vincor”) and the acquisition of
all of the outstanding capital stock of The Robert Mondavi Corporation (“Robert Mondavi”), the
Company has assumed grape purchase contracts with certain growers and suppliers. In addition, the
Company has entered into other grape purchase contracts with various growers and suppliers in the
normal course of business. Under the grape purchase contracts, the Company is committed to
purchase grape production yielded from a specified number of acres for a period of time from one to
fourteen years. The actual tonnage and price of grapes that must be purchased by the Company
will vary each year depending on certain factors, including weather, time of harvest, overall
market conditions and the agricultural practices and location of the growers and suppliers under
contract. The Company purchased $383.4 million, $404.8 million and $446.2 million of grapes under
contracts for the years ended February 28, 2011, February 28, 2010, and February 28, 2009,
respectively. Based on current production yields and published grape prices, the aggregate minimum
purchase obligations under these contracts are estimated to be $915.5 million over the remaining
terms of the contracts which extend through December 2024.
In connection with previous acquisitions as well as with the BWE acquisition, the Vincor
acquisition and the Robert Mondavi acquisition, the Company established a liability for the
estimated loss on firm purchase commitments assumed at the time of acquisition. As of February 28,
2011, and February 28, 2010, the remaining balance on this liability is $14.1 million and $25.3
million, respectively.
The Company’s aggregate minimum purchase obligations under bulk wine purchase contracts are
estimated to be $29.4 million over the remaining terms of the contracts which extend through
December 2013. The Company’s aggregate minimum purchase obligations under certain raw material
purchase contracts are estimated to be $326.5 million over the remaining terms of the contracts
which extend through February 2015.
In connection with a previous acquisition, the Company assumed certain processing contracts
which commit the Company to utilize outside services to process and/or package a minimum volume
quantity. The Company’s aggregate minimum contractual obligations under these processing contracts
are estimated to be $130.1 million over the remaining terms of the contracts which extend through
March 2019.
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Indemnification liabilities –
In connection with the Company’s January 2011 CWAE Divestiture, the Company indemnified
respective parties against certain liabilities that may arise related to certain contracts with
certain investees of Accolade, a certain facility in the U.K. and a certain income tax matter. As
a result, the Company recorded liabilities with a fair value of $26.1 million at January 31, 2011,
resulting in a loss of $26.1 million. This loss is included in selling, general and administrative
expenses on the Company’s Consolidated Statements of Operations. The fair value was determined
using a probability-weighted cash flow analysis based on the credit profile of the issuer. As of
February 28, 2011, the carrying amount of these indemnification liabilities was $26.1 million. If
the indemnified party were to incur a liability, pursuant to the terms of the indemnification, the
Company would be required to reimburse the indemnified party. As of February 28, 2011, the Company
estimates that these indemnifications could require the Company to make potential future payments
of up to $331.9 million under these indemnifications with $282.1 million of this amount able to be
recovered by the Company from third parties under recourse provisions. The Company does not expect
to be required to make material payments under the indemnifications and the Company believes that
the likelihood is remote that the indemnifications could have a significant adverse effect on the
Company’s financial position, results of operations, cash flows or liquidity.
Other contingency –
In February 2011, the Company terminated early a certain agreement with a certain equity
method investee. Based upon the terms of the certain agreement and the related joint venture
agreement, the Company concluded as of February 28, 2011, that it is not probable that there is a
likelihood of loss under this contingency. Therefore, no liability has been recorded by the
Company related to this contingency. While the Company believes it should prevail against any
claim related to the early termination of this agreement, a loss of up to $55 million could be
incurred by the Company should it not prevail in any claim.
Employment contracts –
The Company has employment contracts with its executive officers and certain other management
personnel with either automatic one year renewals after an initial term or an indefinite term of
employment unless terminated by either party. These employment contracts provide for minimum
salaries, as adjusted for annual increases, and may include incentive bonuses based upon attainment
of specified management goals. These employment contracts may also provide for severance payments
in the event of specified termination of employment. In addition, the Company has employment
arrangements with certain other management personnel which provide for severance payments in the
event of specified termination of employment. As of February 28, 2011, the aggregate commitment
for future compensation and severance, excluding incentive bonuses, was $35.6 million, none of
which was accrued.
Employees covered by collective bargaining agreements –
Approximately 10% of the Company’s full-time employees are covered by collective bargaining
agreements at February 28, 2011. Agreements expiring within one year cover approximately 2% of the
Company’s full-time employees.
Legal matters –
In the course of its business, the Company is subject to litigation from time to time.
Although the amount of any liability with respect to such litigation cannot be determined, in the
opinion of management, such liability will not have a material adverse effect on the Company’s
financial condition, results of operations or cash flows.
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| 16. | STOCKHOLDERS’ EQUITY: |
Common stock –
The Company has two classes of outstanding common stock: Class A Common Stock and Class B
Convertible Common Stock. Class B Convertible Common Stock shares are convertible into shares of
Class A Common Stock on a one-to-one basis at any time at the option of the holder. Holders of
Class B Convertible Common Stock are entitled to ten votes per share. Holders of Class A Common
Stock are entitled to one vote per share and a cash dividend premium. If the Company pays a cash
dividend on Class B Convertible Common Stock, each share of Class A Common Stock will receive an
amount at least ten percent greater than the amount of the cash dividend per share paid on Class B
Convertible Common Stock. In addition, the Board of Directors may declare and pay a dividend on
Class A Common Stock without paying any dividend on Class B Convertible Common Stock. However, the
Company’s senior credit facility limits the cash dividends that can be paid by the Company on its
common stock to an amount determined in accordance with the terms of the 2006 Credit Agreement.
In addition, the Company has a class of common stock consisting of shares of Class 1 Common
Stock, $0.01 par value per share (the “Class 1 Common Stock”). Shares of Class 1 Common Stock do
not generally have voting rights. Class 1 Common Stock shares are convertible into shares of Class
A Common Stock on a one-to-one basis at any time at the option of the holder, provided that the
holder immediately sells the Class A Common Stock acquired upon conversion. Because shares of
Class 1 Common Stock are convertible into shares of Class A Common Stock, for each share of Class 1
Common Stock issued, the Company must reserve one share of Class A Common Stock for issuance upon
the conversion of the share of Class 1 Common Stock. Holders of Class 1 Common Stock do not have
any preference as to dividends, but may participate in any dividend if and when declared by the
Board of Directors. If the Company pays a cash dividend on Class 1 Common Stock, each share of
Class A Common Stock will receive an amount at least ten percent greater than the amount of cash
dividend per share paid on Class 1 Common Stock. In addition, the Board of Directors may declare
and pay a dividend on Class A Common Stock without paying a dividend on Class 1 Common Stock. The
cash dividends declared and paid on Class B Convertible Common Stock and Class 1 Common Stock must
always be the same.
In July 2009, the stockholders of the Company approved an increase in the number of authorized
shares of Class A Common Stock from 315,000,000 shares to 322,000,000 shares, and the number of
authorized shares of Class 1 Common Stock from 15,000,000 shares to 25,000,000 shares, thereby
increasing the aggregate number of authorized shares of the Company’s common and preferred stock to
378,000,000 shares.
At February 28, 2011, there were 187,550,967 shares of Class A Common Stock and 23,611,958
shares of Class B Convertible Common Stock outstanding, net of treasury stock. There were no
shares outstanding of Class 1 Common Stock at February 28, 2011.
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Stock repurchases –
In April 2010, the Company’s Board of Directors authorized the repurchase of up to $300.0
million of the Company’s Class A Common Stock and Class B Convertible Common Stock. During the
year ended February 28, 2011, the Company repurchased 17,223,404 shares of Class A Common Stock
pursuant to this authorization at an aggregate cost of $300.0 million, or an average cost of $17.42
per share, through a collared accelerated stock buyback (“ASB”) transaction that was announced in
April 2010. The Company paid the purchase price under the ASB transaction in April 2010, at which
time it received an initial installment of 11,016,451 shares of Class A Common Stock. In May 2010,
the Company received an additional installment of 2,785,029 shares of Class A Common Stock in
connection with the early termination of the hedge period on May 10, 2010. In November 2010, the
Company received the final installment of 3,421,924 shares of Class A Common Stock following the
end of the calculation period on November 24, 2010. The Company used revolver borrowings under the
2006 Credit Agreement to pay the purchase price for the repurchased shares. The repurchased shares
have become treasury shares. No shares were repurchased during the years ended February 28, 2010,
and February 28, 2009.
In April 2011, the Company’s Board of Directors authorized the repurchase of up to $500.0
million of the Company’s Class A Common Stock and Class B Convertible Common Stock. The Board of
Directors did not specify a date upon which this authorization would expire. Share repurchases
under this authorization are expected to be accomplished from time to time based on market
conditions, the Company’s cash and debt position, and other factors as determined by management.
Shares may be repurchased through open market or privately negotiated transactions, and management
currently expects that the repurchase under this authorization will be implemented over a
multi-year period. The Company may fund share repurchases with cash generated from operations or
proceeds of borrowings under its senior credit facility. Any repurchased shares will become
treasury shares. As of April 28, 2011, no shares have been repurchased pursuant to this
authorization.
| 17. | STOCK-BASED EMPLOYEE COMPENSATION: |
The Company has four stock-based employee compensation plans (as further discussed below).
Total compensation cost and income tax benefits recognized for the Company’s stock-based awards are
as follows:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions) | ||||||||||||
Total compensation cost for stock-based awards
recognized in the Consolidated Statements of
Operations |
$ | 48.2 | $ | 56.3 | $ | 46.1 | ||||||
Total income tax benefit recognized in the
Consolidated Statements of Operations for
stock-based compensation |
$ | 18.7 | $ | 18.1 | $ | 14.0 | ||||||
Total compensation cost for stock-based awards
capitalized in inventory in the Consolidated
Balance Sheets |
$ | 3.9 | $ | 5.1 | $ | 4.6 | ||||||
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Long-term stock incentive plan –
Under the Company’s Long-Term Stock Incentive Plan, nonqualified stock options, restricted stock, performance shares and other stock-based awards may be granted to employees,
officers and directors of the Company. The aggregate number of shares of the Company’s Class A
Common Stock and Class 1 Common Stock available for awards under the Company’s Long-Term Stock
Incentive Plan is 108,000,000 shares. The exercise price, vesting period and term of nonqualified
stock options granted are established by the committee administering the plan (the “Committee”).
The exercise price of any nonqualified stock option may not be less than the fair market value of
the Company’s Class A Common Stock on the date of grant. Nonqualified stock options generally vest
and become exercisable over a four-year period from the date of grant. Nonqualified stock options
expire at the times established by the Committee, but not later than ten years after the grant
date.
Grants of restricted stock, performance shares and other stock-based awards may contain
such vesting, terms, conditions and other requirements as the Committee may establish. Restricted
stock awards are generally based on service and vest over one to four years from the date of grant.
Performance share awards are based on service and the satisfaction of certain performance goals, and vest over one to three years from the date of grant.
The actual number of units to be awarded at the end of each performance period will range between 0% and 200% of the target, based upon a measure of performance as
determined by the Committee. Performance share awards granted during the year ended February 28, 2011, reflect the award at target.
In July 2009, the stockholders of the Company approved, among other things, an increase in the
aggregate number of shares of the Company’s Class A Common Stock and Class 1 Common Stock available
for awards under the Company’s Long-Term Stock Incentive Plan from 94,000,000 shares to 108,000,000
shares.
Incentive stock option plan –
The Company’s Incentive Stock Option Plan provides for the grant of incentive stock to
employees, including officers, of the Company. Grants, in the aggregate, may not exceed 8,000,000
shares of the Company’s Class A Common Stock. The exercise price of any incentive stock option may
not be less than the fair market value of the Company’s Class A Common Stock on the date of grant.
The vesting period and term of incentive stock options granted are established by the Committee.
Incentive stock options generally vest and become exercisable over a four-year period from the date
of grant. Incentive stock options expire at the times established by the Committee, but not later
than ten years after the grant date. While unexercised incentive stock options are currently held
by certain grant recipients, under the current terms of the Incentive Stock Option Plan, no
additional grants of incentive stock options are permitted.
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Table of Contents
A summary of stock option activity under the Company’s Long-Term Stock Incentive Plan and the
Incentive Stock Option Plan is as follows:
| Number | Weighted | Number | Weighted | |||||||||||||
| of | Average | of | Average | |||||||||||||
| Options | Exercise | Options | Exercise | |||||||||||||
| Outstanding | Price | Exercisable | Price | |||||||||||||
Balance, February 29, 2008 |
29,991,853 | $ | 19.16 | 16,989,765 | $ | 16.56 | ||||||||||
Granted |
8,730,084 | $ | 19.18 | |||||||||||||
Exercised |
(2,254,660 | ) | $ | 12.03 | ||||||||||||
Forfeited |
(1,274,860 | ) | $ | 21.11 | ||||||||||||
Expired |
(1,096,454 | ) | $ | 24.74 | ||||||||||||
Balance, February 28, 2009 |
34,095,963 | $ | 19.39 | 17,499,016 | $ | 17.99 | ||||||||||
Granted |
7,632,249 | $ | 11.87 | |||||||||||||
Exercised |
(1,453,431 | ) | $ | 8.43 | ||||||||||||
Forfeited |
(2,683,940 | ) | $ | 18.51 | ||||||||||||
Expired |
(2,744,746 | ) | $ | 22.12 | ||||||||||||
Balance, February 28, 2010 |
34,846,095 | $ | 18.05 | 19,277,958 | $ | 18.95 | ||||||||||
Granted |
3,340,413 | $ | 16.69 | |||||||||||||
Exercised |
(5,100,677 | ) | $ | 12.22 | ||||||||||||
Forfeited |
(1,331,443 | ) | $ | 17.42 | ||||||||||||
Expired |
(1,910,783 | ) | $ | 22.54 | ||||||||||||
Balance, February 28, 2011 |
29,843,605 | $ | 18.63 | 18,148,632 | $ | 20.31 | ||||||||||
A summary of restricted Class A Common Stock activity under the Company’s Long-Term Stock
Incentive Plan is as follows:
| Restricted Stock Awards | ||||||||||||
| Number of | Weighted | Fair | ||||||||||
| Restricted | Average | Value of | ||||||||||
| Stock Awards | Grant-Date | Shares | ||||||||||
| Outstanding | Price | Vested | ||||||||||
Nonvested balance, February 29, 2008 |
13,726 | $ | 22.21 | |||||||||
Granted |
460,036 | $ | 19.25 | |||||||||
Vested |
(13,726 | ) | $ | 22.21 | $ | 290,091 | ||||||
Forfeited |
- | $ | - | |||||||||
Nonvested balance, February 28, 2009 |
460,036 | $ | 19.25 | |||||||||
Granted |
1,365,460 | $ | 12.35 | |||||||||
Vested |
(180,641 | ) | $ | 18.06 | $ | 2,336,708 | ||||||
Forfeited |
(136,497 | ) | $ | 13.89 | ||||||||
Nonvested balance, February 28, 2010 |
1,508,358 | $ | 13.63 | |||||||||
Granted |
739,388 | $ | 16.67 | |||||||||
Vested |
(399,566 | ) | $ | 13.79 | $ | 7,302,455 | ||||||
Forfeited |
(37,864 | ) | $ | 14.23 | ||||||||
Nonvested balance, February 28, 2011 |
1,810,316 | $ | 14.83 | |||||||||
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| Restricted Stock Units | ||||||||||||
| Number of | Weighted | Fair | ||||||||||
| Restricted | Average | Value of | ||||||||||
| Stock Units | Grant-Date | Shares | ||||||||||
| Outstanding | Price | Vested | ||||||||||
Nonvested balance, February 29, 2008 |
- | $ | - | |||||||||
Granted |
173,400 | $ | 20.05 | |||||||||
Vested |
- | $ | - | $ | - | |||||||
Forfeited |
(21,100 | ) | $ | 20.05 | ||||||||
Nonvested balance, February 28, 2009 |
152,300 | $ | 20.05 | |||||||||
Granted |
368,966 | $ | 12.89 | |||||||||
Vested |
(38,255 | ) | $ | 20.01 | $ | 444,870 | ||||||
Forfeited |
(100,165 | ) | $ | 15.69 | ||||||||
Nonvested balance, February 28, 2010 |
382,846 | $ | 14.29 | |||||||||
Granted |
125,349 | $ | 16.35 | |||||||||
Vested |
(77,408 | ) | $ | 14.12 | $ | 1,414,244 | ||||||
Forfeited |
(211,289 | ) | $ | 14.60 | ||||||||
Nonvested balance, February 28, 2011 |
219,498 | $ | 15.23 | |||||||||
| Performance Stock Units | ||||||||||||
| Number of | Weighted | Fair | ||||||||||
| Performance | Average | Value of | ||||||||||
| Stock Units | Grant-Date | Shares | ||||||||||
| Outstanding | Price | Vested | ||||||||||
Nonvested balance, February 28, 2010 |
- | $ | - | |||||||||
Granted |
407,750 | $ | 16.67 | |||||||||
Vested |
- | $ | - | $ | - | |||||||
Forfeited |
(3,340 | ) | $ | 16.67 | ||||||||
Nonvested balance, February 28, 2011 |
404,410 | $ | 16.67 | |||||||||
The following table summarizes information about stock options outstanding at February
28, 2011:
| Weighted | ||||||||||||||||
| Average | Weighted | |||||||||||||||
| Number | Remaining | Average | Aggregate | |||||||||||||
| of | Contractual | Exercise | Intrinsic | |||||||||||||
Range of Exercise Prices |
Options | Life | Price | Value | ||||||||||||
$ 8.87 - $12.38 |
7,325,454 | 6.4 years | $ | 11.62 | ||||||||||||
$13.37 - $16.87 |
5,175,448 | 6.9 years | $ | 16.46 | ||||||||||||
$17.66 - $21.47 |
10,039,358 | 6.6 years | $ | 19.91 | ||||||||||||
$21.88 - $26.15 |
5,225,736 | 5.4 years | $ | 24.73 | ||||||||||||
$26.22 - $30.52 |
2,077,609 | 4.3 years | $ | 27.29 | ||||||||||||
Options outstanding |
29,843,605 | 6.2 years | $ | 18.63 | $ | 90,088,104 | ||||||||||
Options exercisable |
18,148,632 | 5.1 years | $ | 20.31 | $ | 38,142,651 | ||||||||||
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Other information pertaining to stock options is as follows:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Weighted average grant-date fair value
of stock options granted |
$ | 6.19 | $ | 4.19 | $ | 5.93 | ||||||
Total fair value of stock options vested |
$ | 37,360,244 | $ | 41,841,484 | $ | 32,000,344 | ||||||
Total intrinsic value of stock options
exercised |
$ | 33,134,478 | $ | 7,016,315 | $ | 18,335,574 | ||||||
Tax benefit realized from stock options
exercised |
$ | 7,810,198 | $ | 2,619,418 | $ | 6,980,681 | ||||||
The fair value of options is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Expected life |
5.9 years | 5.9 years | 5.3 years | |||||||||
Expected volatility |
32.2% | 31.7% | 27.7% | |||||||||
Risk-free interest rate |
3.2% | 2.6% | 2.8% | |||||||||
Expected dividend yield |
0.0% | 0.0% | 0.0% | |||||||||
For the years ended February 28, 2011, February 28, 2010, and February 28, 2009, the
Company used a projected expected life for each award granted based on historical experience of
employees’ exercise behavior for similar type grants. Expected volatility for the years ended
February 28, 2011, February 28, 2010, and February 28, 2009, is based on historical volatility
levels of the Company’s Class A Common Stock. The risk-free interest rate for the years ended
February 28, 2011, February 28, 2010, and February 28, 2009, is based on the implied yield
currently available on U.S. Treasury zero coupon issues with a remaining term equal to the expected
life.
Employee stock purchase plans –
The Company has a stock purchase plan under which 9,000,000 shares of Class A Common Stock may
be issued. Under the terms of the plan, eligible employees may purchase shares of the Company’s
Class A Common Stock through payroll deductions. The purchase price is the lower of 85% of the
fair market value of the stock on the first or last day of the purchase period. During the years
ended February 28, 2011, February 28, 2010, and February 28, 2009, employees purchased 304,916
shares, 388,294 shares and 376,297 shares, respectively, under this plan.
The weighted average fair value of purchase rights granted during the years ended February 28,
2011, February 28, 2010, and February 28, 2009, was $4.05, $3.55 and $4.92, respectively. The fair
value of purchase rights granted is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
Expected life |
0.5 years | 0.5 years | 0.5 years | |||||||||
Expected volatility |
25.7% | 32.4% | 45.8% | |||||||||
Risk-free interest rate |
0.2% | 0.2% | 1.1% | |||||||||
Expected dividend yield |
0.0% | 0.0% | 0.0% | |||||||||
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The Company has a stock purchase plan under which 2,000,000 shares of the Company’s Class
A Common Stock may be issued to eligible employees and directors of the Company’s U.K. subsidiaries
(the “U.K. Sharesave Scheme”). Under the terms of the plan, participants may purchase shares of
the Company’s Class A Common Stock through payroll deductions. The purchase price may be no less
than 80% of the closing price of the stock on the day the purchase price is fixed by the committee
administering the plan. There were 291 shares purchased under this plan during the year ended
February 28, 2011. There were no shares purchased under this plan during the years ended February
28, 2010, and February 28, 2009.
There were no purchase rights granted during the years ended February 28, 2011, and February
28, 2010. The weighted average fair value of purchase rights granted during the year ended
February 28, 2009, was $7.42. The fair value of the purchase rights granted for the year ended
February 28, 2009, is estimated on the date of grant using the Black-Scholes option-pricing model
with the following weighted average assumptions: risk-free interest rate of 2.2%, volatility of
29.1%, expected purchase right life of 3.7 years and a dividend yield of 0%. The maximum number of
shares which can be purchased under purchase rights granted during the year ended February 28,
2009, is 18,292 shares. While purchase rights are currently held by certain grant recipients,
under the current terms of the U.K. Sharesave Scheme, no additional grants of purchase rights are
permitted.
As of February 28, 2011, there was $59.7 million of total unrecognized compensation cost
related to nonvested stock-based compensation arrangements granted under the Company’s four stock-based employee compensation plans. This cost is expected to be recognized in the Company’s
Consolidated Statements of Operations over a weighted-average period of 2.1 years. With respect to
the issuance of shares under any of the Company’s stock-based compensation plans, the Company has
the option to issue authorized but unissued shares or treasury shares.
| 18. | EARNINGS (LOSS) PER COMMON SHARE: |
The computation of basic and diluted earnings (loss) per common share is as follows:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions, except per share data) | ||||||||||||
Income (loss) available to common stockholders |
$ | 559.5 | $ | 99.3 | $ | (301.4 | ) | |||||
Weighted average common shares outstanding – basic: |
||||||||||||
Class A Common Stock |
187.224 | 196.095 | 193.906 | |||||||||
Class B Convertible Common Stock |
23.686 | 23.736 | 23.753 | |||||||||
Weighted average common shares outstanding – diluted: |
||||||||||||
Class A Common Stock |
187.224 | 196.095 | 193.906 | |||||||||
Class B Convertible Common Stock |
23.686 | 23.736 | - | |||||||||
Stock-based awards, primarily stock options |
2.855 | 1.379 | - | |||||||||
Weighted average common shares outstanding – diluted |
213.765 | 221.210 | 193.906 | |||||||||
Earnings (loss) per common share – basic: |
||||||||||||
Class A Common Stock |
$ | 2.68 | $ | 0.46 | $ | (1.40 | ) | |||||
Class B Convertible Common Stock |
$ | 2.44 | $ | 0.41 | $ | (1.27 | ) | |||||
Earnings (loss) per common share – diluted: |
||||||||||||
Class A Common Stock |
$ | 2.62 | $ | 0.45 | $ | (1.40 | ) | |||||
Class B Convertible Common Stock |
$ | 2.40 | $ | 0.41 | $ | (1.27 | ) | |||||
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For the years ended February 28, 2011, and February 28, 2010, stock-based awards,
primarily stock options, which could result in the issuance of 20.7 million and 30.4 million
shares, respectively, of Class A Common Stock were outstanding, but were not included in the
computation of earnings per common share – diluted for Class A Common Stock because the effect of
including such awards would have been antidilutive. For the year ended February 28, 2009, the
computation of loss per common share – diluted for Class A Common Stock excluded 23.8 million
shares of Class B Convertible Common Stock and outstanding stock-based awards, primarily stock
options, which could result in the issuance of 34.1 million shares of Class A Common Stock because
the inclusion of such potentially dilutive common shares would have been antidilutive.
| 19. | ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME: |
Other comprehensive (loss) income, net of income tax effect, includes the following
components:
| Before Tax | Tax (Expense) | Net of Tax | ||||||||||
| Amount | or Benefit | Amount | ||||||||||
| (in millions) | ||||||||||||
Other comprehensive (loss) income, February 28,
2009: |
||||||||||||
Foreign currency translation adjustments |
$ | (676.6 | ) | $ | (6.9 | ) | $ | (683.5 | ) | |||
Unrealized loss on cash flow hedges: |
||||||||||||
Net derivative losses |
(2.8 | ) | (13.6 | ) | (16.4 | ) | ||||||
Reclassification adjustments |
2.4 | (1.6 | ) | 0.8 | ||||||||
Net loss recognized in other comprehensive income |
(0.4 | ) | (15.2 | ) | (15.6 | ) | ||||||
Pension/postretirement: |
||||||||||||
Net gains |
64.8 | (20.5 | ) | 44.3 | ||||||||
Reclassification adjustments |
16.5 | (4.5 | ) | 12.0 | ||||||||
Net gain recognized in other comprehensive income |
81.3 | (25.0 | ) | 56.3 | ||||||||
Other comprehensive loss, February 28, 2009 |
$ | (595.7 | ) | $ | (47.1 | ) | $ | (642.8 | ) | |||
Other comprehensive income (loss), February 28,
2010: |
||||||||||||
Foreign currency translation adjustments |
$ | 500.6 | $ | (3.1 | ) | $ | 497.5 | |||||
Unrealized gain on cash flow hedges: |
||||||||||||
Net derivative gains |
91.3 | (31.1 | ) | 60.2 | ||||||||
Reclassification adjustments |
(19.1 | ) | 7.5 | (11.6 | ) | |||||||
Net gain recognized in other comprehensive income |
72.2 | (23.6 | ) | 48.6 | ||||||||
Pension/postretirement: |
||||||||||||
Net losses |
(79.3 | ) | 21.6 | (57.7 | ) | |||||||
Reclassification adjustments |
6.2 | (1.6 | ) | 4.6 | ||||||||
Net loss recognized in other comprehensive income |
(73.1 | ) | 20.0 | (53.1 | ) | |||||||
Other comprehensive income, February 28, 2010 |
$ | 499.7 | $ | (6.7 | ) | $ | 493.0 | |||||
Other comprehensive (loss) income, February 28,
2011: |
||||||||||||
Foreign currency translation adjustments: |
||||||||||||
Net gains |
$ | 201.5 | $ | (23.3 | ) | $ | 178.2 | |||||
Reclassification adjustments |
(678.8 | ) | 21.7 | (657.1 | ) | |||||||
Net loss recognized in other comprehensive income |
(477.3 | ) | (1.6 | ) | (478.9 | ) | ||||||
Unrealized loss on cash flow hedges: |
||||||||||||
Net derivative gains |
11.4 | (2.3 | ) | 9.1 | ||||||||
Reclassification adjustments |
(49.4 | ) | 24.9 | (24.5 | ) | |||||||
Net loss recognized in other comprehensive income |
(38.0 | ) | 22.6 | (15.4 | ) | |||||||
Pension/postretirement: |
||||||||||||
Net gains |
12.9 | (3.6 | ) | 9.3 | ||||||||
Reclassification adjustments |
121.0 | (34.4 | ) | 86.6 | ||||||||
Net gain recognized in other comprehensive income |
133.9 | (38.0 | ) | 95.9 | ||||||||
Other comprehensive loss, February 28, 2011 |
$ | (381.4 | ) | $ | (17.0 | ) | $ | (398.4 | ) | |||
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Accumulated other comprehensive income (loss), net of income tax effect, includes the
following components:
| Net | ||||||||||||||||
| Foreign | Unrealized | Accumulated | ||||||||||||||
| Currency | Gains | Pension/ | Other | |||||||||||||
| Translation | (Losses) on | Postretirement | Comprehensive | |||||||||||||
| Adjustments | Derivatives | Adjustments | Income (Loss) | |||||||||||||
| (in millions) | ||||||||||||||||
Balance, February
28, 2010 |
$ | 672.9 | $ | 19.6 | $ | (105.3 | ) | $ | 587.2 | |||||||
Current period change |
(478.9 | ) | (15.4 | ) | 95.9 | (398.4 | ) | |||||||||
Balance, February
28, 2011 |
$ | 194.0 | $ | 4.2 | $ | (9.4 | ) | $ | 188.8 | |||||||
| 20. | SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK: |
Sales to the five largest customers represented 41.7%, 39.2% and 36.3% of the Company’s sales
for the years ended February 28, 2011, February 28, 2010, and February 28, 2009, respectively.
Sales to the Company’s largest customer, Southern Wine and Spirits, represented 19.5%, 17.7% and
15.7% of the Company’s sales for the years ended February 28, 2011, February 28, 2010, and February
28, 2009, respectively, all of which is reported within the CWNA segment. Accounts receivable from
the Company’s largest customer represented 35.7%, 19.4% and 13.4% of the Company’s total accounts
receivable as of February 28, 2011, February 28, 2010, and February 28, 2009, respectively. Sales
to the Company’s five largest customers are expected to continue to represent a significant portion
of the Company’s revenues. The Company’s arrangements with certain of its customers may,
generally, be terminated by either party with prior notice. The Company performs ongoing credit
evaluations of its customers’ financial position, and management of the Company is of the opinion
that any risk of significant loss is reduced due to the diversity of customers and geographic sales
area.
| 21. | RESTRUCTURING CHARGES: |
The Company has several restructuring plans primarily within its CWNA segment and, prior to
the CWAE Divestiture, the CWAE segment, as follows:
Robert Mondavi Plan –
In January 2005, the Company announced a plan to restructure and integrate the operations of
Robert Mondavi (the “Robert Mondavi Plan”). The objective of the Robert Mondavi Plan was to
achieve operational efficiencies and eliminate redundant costs resulting from the December 22,
2004, acquisition of Robert Mondavi. The Robert Mondavi Plan included the elimination of certain
employees, the consolidation of certain field sales and administrative offices, and the termination
of various contracts. The Company does not expect any additional costs associated with the Robert
Mondavi Plan to be recognized in its Consolidated Statements of Operations. The Company expects
the related cash expenditures to be completed by February 29, 2012.
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Fiscal 2006 Plan –
In fiscal 2006, the Company announced a plan to reorganize certain worldwide wine operations
and a plan to consolidate certain west coast production processes in the U.S. (collectively, the
“Fiscal 2006 Plan”). The Fiscal 2006 Plan’s principal features were 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 was 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 was to achieve greater efficiency in sales,
administrative and operational activities and to eliminate redundant costs. The Fiscal 2006 Plan
included 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. All costs and related cash expenditures
associated with the Fiscal 2006 Plan were complete as of February 28, 2009.
Vincor Plan –
In July 2006, the Company announced a plan to restructure and integrate the operations of
Vincor (the “Vincor Plan”). The objective of the Vincor Plan was to achieve operational
efficiencies and eliminate redundant costs resulting from the June 2006 Vincor acquisition, as well
as to achieve greater efficiency in sales, marketing, administrative and operational activities.
The Vincor Plan included the elimination of certain employment redundancies, primarily in the U.S.,
U.K. and Australia, and the termination of various contracts. All costs and related cash
expenditures associated with the Vincor Plan were complete as of February 28, 2011.
Fiscal 2007 Wine Plan –
In August 2006, the Company announced a plan to invest in new distribution and bottling
facilities in the U.K. and to streamline certain Australian wine operations (collectively, the
“Fiscal 2007 Wine Plan”). The U.K. portion of the plan included new investments in property, plant
and equipment and certain disposals of property, plant and equipment and was expected to increase
wine bottling capacity and efficiency and reduce costs of transport, production and distribution.
The U.K. portion of the plan also included costs for employee terminations. The Australian portion
of the plan included the buy-out of certain grape supply and processing contracts and the sale of
certain property, plant and equipment. The initiatives were 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. Prior to the January 2011 CWAE Divestiture, all
costs and related cash expenditures associated with the Fiscal 2007 Wine Plan were complete.
Fiscal 2008 Plan –
In November 2007, the Company initiated its plans to streamline certain of its international
operations, including the consolidation of certain winemaking and packaging operations in
Australia, the buy-out of certain grape processing and wine storage contracts in Australia,
equipment relocation costs in Australia, and certain employee termination costs. In addition, the
Company incurred certain other restructuring charges during the third quarter of fiscal 2008 in
connection with the consolidation of certain spirits production processes in the U.S. In January
2008, the Company announced its plans to streamline certain of its operations in the U.S.,
primarily in connection with the restructuring and integration of the operations acquired in the
BWE acquisition. These initiatives are collectively referred to as the Fiscal 2008 Plan. The
Fiscal 2008 Plan is part of the Company’s ongoing efforts to maximize asset utilization, further
reduce costs and improve long-term return on invested capital throughout its domestic and
international operations. The Company does not expect any additional costs associated with the
Fiscal 2008 Plan to be recognized in its Consolidated Statements of Operations. The Company
expects cash expenditures to be substantially complete by February 29, 2012.
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Australian Initiative –
In August 2008, the Company announced a plan to sell certain assets and implement operational
changes designed to improve the efficiencies and returns associated with the Australian business,
primarily by consolidating certain winemaking and packaging operations and reducing the Company’s
overall grape supply due to reduced capacity needs resulting from a streamlining of the Company’s
product portfolio (the “Australian Initiative”). The Australian Initiative included the planned
sale of three wineries and more than 20 vineyard properties, a streamlining of the Company’s wine
product portfolio and production footprint, the buy-out and/or renegotiation of certain grape
supply and other contracts, equipment relocations and costs for employee terminations. Included in
the Company’s restructuring charges on its Consolidated Statements of Operations for the years
ended February 28, 2011, February 28, 2010, and February 28, 2009, is $4.2 million, $13.4 million
and $46.5 million of net noncash charges related to the write-down of property, plant and
equipment, net, held for sale in connection with the Australian Initiative (which are excluded from
the restructuring liability rollforward table below). As a result of the CWAE Divestiture, all
costs and related cash expenditures associated with the Australian Initiative were complete as of
January 31, 2011.
Fiscal 2010 Global Initiative –
In April 2009, the Company announced its plan to simplify its business, increase efficiencies
and reduce its cost structure on a global basis (the “Global Initiative”). The Global Initiative
includes an approximately five percent reduction in the Company’s global workforce and the closing
of certain office, production and warehouse facilities. In addition, the Global Initiative
includes the termination of certain contracts, and a streamlining of the Company’s production
footprint and sales and administrative organizations. Lastly, the Global Initiative includes other
non-material restructuring activities primarily in connection with the consolidation of the
Company’s remaining spirits business into its North American wine business following the March 2009
divestiture of its value spirits business. This initiative is part of the Company’s ongoing
efforts to maximize asset utilization, reduce costs and improve long-term return on invested
capital throughout the Company’s operations. Included in the Company’s restructuring charges on
its Consolidated Statements of Operations for the year ended February 28, 2011, is $1.1 million of
noncash charges for other compensation costs (which are excluded from the restructuring liability
rollforward table below). The Company recognized substantially all costs associated with the
Global Initiative in its Consolidated Statements of Operations as of February 28, 2011, with the
related cash expenditures to be substantially complete by February 28, 2013.
Restructuring charges consist of employee termination benefit costs, contract termination
costs and other associated costs. Employee termination benefit costs are accounted for under the
FASB guidance for compensation – nonretirement postemployment benefits, as the Company has had
several restructuring programs which have provided employee termination benefits in the past. The
Company includes employee severance, related payroll benefit costs (such as costs to provide
continuing health insurance) and outplacement services as employee termination benefit costs.
Contract termination costs, and other associated costs including, but not limited to, facility
consolidation and relocation costs, are accounted for under the FASB guidance for exit or disposal
cost obligations. Contract termination costs are costs to terminate a contract that is not a
capital lease, including costs to terminate the contract before the end of its term or costs that
will continue to be incurred under the contract for its remaining term without economic benefit to
the 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. 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.
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Details of each plan for which the Company expects to incur additional costs are presented
separately in the following table. Plans for which exit activities were completed prior to March
1, 2010, are reported below under “Other Plans.” These plans include the Fiscal 2007 Wine Plan,
the Vincor Plan, the Fiscal 2006 Plan, the Robert Mondavi Plan and certain other immaterial
restructuring activities.
| Fiscal | ||||||||||||||||||||
| Global | Australian | 2008 | Other | |||||||||||||||||
| Initiative | Initiative | Plan | Plans | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Restructuring liability, February 29, 2008 |
$ | - | $ | - | $ | 26.2 | $ | 13.0 | $ | 39.2 | ||||||||||
BWE acquisition |
- | - | 4.5 | - | 4.5 | |||||||||||||||
Vincor acquisition |
- | - | - | (1.7 | ) | (1.7 | ) | |||||||||||||
Other acquisition |
- | - | - | 0.8 | 0.8 | |||||||||||||||
Restructuring charges: |
||||||||||||||||||||
Employee termination benefit costs |
- | 8.0 | (0.1 | ) | 8.6 | 16.5 | ||||||||||||||
Contract termination costs |
- | 0.5 | 1.1 | 1.6 | 3.2 | |||||||||||||||
Facility consolidation/relocation costs |
- | 0.7 | 0.9 | 0.2 | 1.8 | |||||||||||||||
Restructuring charges, February 28, 2009 |
- | 9.2 | 1.9 | 10.4 | 21.5 | |||||||||||||||
Cash expenditures |
- | (7.7 | ) | (23.9 | ) | (7.5 | ) | (39.1 | ) | |||||||||||
Foreign currency translation adjustments |
- | (0.3 | ) | (0.2 | ) | (2.0 | ) | (2.5 | ) | |||||||||||
Restructuring liability, February 28, 2009 |
- | 1.2 | 8.5 | 13.0 | 22.7 | |||||||||||||||
Restructuring charges: |
||||||||||||||||||||
Employee termination benefit costs |
24.4 | 1.5 | (0.5 | ) | (0.4 | ) | 25.0 | |||||||||||||
Contract termination costs |
3.7 | 3.0 | 0.3 | 0.6 | 7.6 | |||||||||||||||
Facility consolidation/relocation costs |
1.1 | 0.4 | 0.1 | - | 1.6 | |||||||||||||||
Restructuring charges, February 28, 2010 |
29.2 | 4.9 | (0.1 | ) | 0.2 | 34.2 | ||||||||||||||
Cash expenditures |
(21.6 | ) | (6.3 | ) | (4.6 | ) | (11.9 | ) | (44.4 | ) | ||||||||||
Foreign currency translation adjustments |
1.3 | 0.2 | 0.2 | 0.5 | 2.2 | |||||||||||||||
Restructuring liability, February 28, 2010 |
8.9 | - | 4.0 | 1.8 | 14.7 | |||||||||||||||
Restructuring charges: |
||||||||||||||||||||
Employee termination benefit costs |
10.0 | 1.0 | - | - | 11.0 | |||||||||||||||
Contract termination costs |
5.0 | 0.1 | - | 0.1 | 5.2 | |||||||||||||||
Facility consolidation/relocation costs |
1.5 | 0.1 | - | - | 1.6 | |||||||||||||||
Restructuring charges, February 28, 2011 |
16.5 | 1.2 | - | 0.1 | 17.8 | |||||||||||||||
Cash expenditures |
(15.5 | ) | (0.8 | ) | (2.6 | ) | (1.6 | ) | (20.5 | ) | ||||||||||
CWAE Divestiture |
(3.0 | ) | (0.5 | ) | - | - | (3.5 | ) | ||||||||||||
Foreign currency translation adjustments |
0.7 | 0.1 | 0.3 | 0.1 | 1.2 | |||||||||||||||
Restructuring liability, February 28, 2011 |
$ | 7.6 | $ | - | $ | 1.7 | $ | 0.4 | $ | 9.7 | ||||||||||
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In connection with the Company’s BWE acquisition, Vincor acquisition and Robert Mondavi
acquisition, the Company accrued $24.7 million, $37.7 million and $50.5 million of liabilities for
exit costs, respectively, as of the respective acquisition date. The BWE acquisition line item in
the table above for the year ended February 28, 2009, reflects adjustments to the fair value of
liabilities assumed in the BWE acquisition. The Vincor acquisition line item in the table above
for the year ended February 28, 2009, reflects adjustments to the fair value of liabilities assumed
in the Vincor acquisition. As of February 28, 2011, there was no remaining balance for the Vincor
purchase accounting accrual. As of February 28, 2011, the balances of the BWE and Robert Mondavi
purchase accounting accruals were $1.7 million and $0.4 million, respectively. As of February 28,
2010, the balances of the BWE, Vincor and Robert Mondavi purchase accounting accruals were $3.9
million, $0.3 million and $1.2 million, respectively. As of February 28, 2009, the balances of the
BWE, Vincor and Robert Mondavi purchase accounting accruals were $6.3 million, $0.7 million and
$2.7 million, respectively.
For the year ended February 28, 2011, employee termination benefit costs include the reversal
of prior accruals of $0.4 million associated with the Global Initiative. For the year ended
February 28, 2010, employee termination benefit costs include the reversal of prior accruals of
$1.5 million associated with the Fiscal 2008 Plan and other immaterial restructuring activities.
For the year ended February 28, 2009, employee termination benefit costs and contract termination
costs include the reversal of prior accruals of $0.5 million and $0.4 million, respectively,
associated primarily with the Fiscal 2006 Plan and the Vincor Plan, respectively.
The following table presents other costs incurred in connection with the Company’s
restructuring activities:
| Fiscal | ||||||||||||||||||||
| Global | Australian | 2008 | ||||||||||||||||||
| Initiative | Initiative | Plan | Other | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
For the Year Ended
February 28, 2011 |
||||||||||||||||||||
Restructuring charges |
$ | 17.6 | $ | 5.4 | $ | - | $ | 0.1 | $ | 23.1 | ||||||||||
Other costs: |
||||||||||||||||||||
Accelerated
depreciation/inventory
write-down/other costs (cost of
product sold) |
2.0 | - | 0.2 | - | 2.2 | |||||||||||||||
Asset write-down/other
costs/acquisition-related
integration costs (selling,
general and administrative
expenses) |
5.4 | 0.1 | 0.6 | (0.3 | ) | 5.8 | ||||||||||||||
Asset impairment (impairment of
goodwill and intangible assets) |
- | - | - | - | - | |||||||||||||||
Total other costs |
7.4 | 0.1 | 0.8 | (0.3 | ) | 8.0 | ||||||||||||||
Total costs |
$ | 25.0 | $ | 5.5 | $ | 0.8 | $ | (0.2 | ) | $ | 31.1 | |||||||||
Total Costs by Reportable Segment: |
||||||||||||||||||||
CWNA |
||||||||||||||||||||
Restructuring charges |
$ | 6.9 | $ | - | $ | - | $ | 0.1 | $ | 7.0 | ||||||||||
Other costs |
6.9 | - | 0.7 | - | 7.6 | |||||||||||||||
Total CWNA |
$ | 13.8 | $ | - | $ | 0.7 | $ | 0.1 | $ | 14.6 | ||||||||||
CWAE |
||||||||||||||||||||
Restructuring charges |
$ | 9.4 | $ | 5.4 | $ | - | $ | - | $ | 14.8 | ||||||||||
Other costs |
0.4 | 0.1 | 0.1 | (0.3 | ) | 0.3 | ||||||||||||||
Total CWAE |
$ | 9.8 | $ | 5.5 | $ | 0.1 | $ | (0.3 | ) | $ | 15.1 | |||||||||
Corporate Operations and Other |
||||||||||||||||||||
Restructuring charges |
$ | 1.3 | $ | - | $ | - | $ | - | $ | 1.3 | ||||||||||
Other costs |
0.1 | - | - | - | 0.1 | |||||||||||||||
Total Corporate Operations and Other |
$ | 1.4 | $ | - | $ | - | $ | - | $ | 1.4 | ||||||||||
120
Table of Contents
| Fiscal | ||||||||||||||||||||
| Global | Australian | 2008 | ||||||||||||||||||
| Initiative | Initiative | Plan | Other | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
For the Year Ended
February 28, 2010 |
||||||||||||||||||||
Restructuring charges |
$ | 29.2 | $ | 18.3 | $ | (0.1 | ) | $ | 0.2 | $ | 47.6 | |||||||||
Other costs: |
||||||||||||||||||||
Accelerated
depreciation/inventory
write-down/other costs (cost of
product sold) |
11.5 | 1.7 | - | 10.8 | 24.0 | |||||||||||||||
Asset write-down/other
costs/acquisition-related
integration costs (selling,
general and administrative
expenses) |
34.9 | 2.0 | 1.3 | 4.4 | 42.6 | |||||||||||||||
Asset impairment (impairment of
goodwill and intangible assets) |
- | - | - | - | - | |||||||||||||||
Total other costs |
46.4 | 3.7 | 1.3 | 15.2 | 66.6 | |||||||||||||||
Total costs |
$ | 75.6 | $ | 22.0 | $ | 1.2 | $ | 15.4 | $ | 114.2 | ||||||||||
Total Costs by Reportable Segment: |
||||||||||||||||||||
CWNA |
||||||||||||||||||||
Restructuring charges |
$ | 16.1 | $ | - | $ | (0.3 | ) | $ | 0.4 | $ | 16.2 | |||||||||
Other costs |
35.7 | - | 0.1 | 0.6 | 36.4 | |||||||||||||||
Total CWNA |
$ | 51.8 | $ | - | $ | (0.2 | ) | $ | 1.0 | $ | 52.6 | |||||||||
CWAE |
||||||||||||||||||||
Restructuring charges |
$ | 10.1 | $ | 18.3 | $ | 0.2 | $ | (0.2 | ) | $ | 28.4 | |||||||||
Other costs |
5.8 | 3.7 | 1.2 | 14.6 | 25.3 | |||||||||||||||
Total CWAE |
$ | 15.9 | $ | 22.0 | $ | 1.4 | $ | 14.4 | $ | 53.7 | ||||||||||
Corporate Operations and Other |
||||||||||||||||||||
Restructuring charges |
$ | 3.0 | $ | - | $ | - | $ | - | $ | 3.0 | ||||||||||
Other costs |
4.9 | - | - | - | 4.9 | |||||||||||||||
Total Corporate Operations and Other |
$ | 7.9 | $ | - | $ | - | $ | - | $ | 7.9 | ||||||||||
For the Year Ended
February 28, 2009 |
||||||||||||||||||||
Restructuring charges |
$ | - | $ | 55.7 | $ | 1.9 | $ | 10.4 | $ | 68.0 | ||||||||||
Other costs: |
||||||||||||||||||||
Accelerated
depreciation/inventory write-down/other costs (cost of
product sold) |
- | 57.5 | 3.4 | 7.1 | 68.0 | |||||||||||||||
Asset write-down/other
costs/acquisition- related
integration costs (selling,
general and administrative
expenses) |
- | 4.9 | 8.8 | 18.7 | 32.4 | |||||||||||||||
Asset impairment (impairment of
goodwill and intangible assets) |
- | 21.8 | - | 0.4 | 22.2 | |||||||||||||||
Total other costs |
- | 84.2 | 12.2 | 26.2 | 122.6 | |||||||||||||||
Total costs |
$ | - | $ | 139.9 | $ | 14.1 | $ | 36.6 | $ | 190.6 | ||||||||||
Total Costs by Reportable Segment: |
||||||||||||||||||||
CWNA |
||||||||||||||||||||
Restructuring charges |
$ | - | $ | - | $ | 0.1 | $ | 7.1 | $ | 7.2 | ||||||||||
Other costs |
- | - | 9.7 | 5.2 | 14.9 | |||||||||||||||
Total CWNA |
$ | - | $ | - | $ | 9.8 | $ | 12.3 | $ | 22.1 | ||||||||||
121
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| Fiscal | ||||||||||||||||||||
| Global | Australian | 2008 | ||||||||||||||||||
| Initiative | Initiative | Plan | Other | Total | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
CWAE |
||||||||||||||||||||
Restructuring charges |
$ | - | $ | 55.7 | $ | 1.8 | $ | 3.3 | $ | 60.8 | ||||||||||
Other costs |
- | 84.2 | 2.5 | 20.8 | 107.5 | |||||||||||||||
Total CWAE |
$ | - | $ | 139.9 | $ | 4.3 | $ | 24.1 | $ | 168.3 | ||||||||||
Corporate Operations and Other |
||||||||||||||||||||
Restructuring charges |
$ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
Other costs |
- | - | - | 0.2 | 0.2 | |||||||||||||||
Total Corporate Operations and Other |
$ | - | $ | - | $ | - | $ | 0.2 | $ | 0.2 | ||||||||||
A summary of restructuring charges and other costs incurred since inception for each
plan, as well as total expected costs for each plan, are presented in the following table:
| Fiscal | ||||||||||||||||
| Global | Australian | 2008 | ||||||||||||||
| Initiative | Initiative | Plan | Other Plans | |||||||||||||
| (in millions) | ||||||||||||||||
| Costs incurred to date | ||||||||||||||||
Restructuring charges: |
||||||||||||||||
Employee termination benefit costs |
$ | 35.5 | $ | 10.5 | $ | 8.7 | $ | 42.0 | ||||||||
Contract termination costs |
8.7 | 3.6 | 1.5 | 25.2 | ||||||||||||
Facility consolidation/relocation costs |
2.6 | 1.2 | 1.0 | 1.7 | ||||||||||||
Impairment charges on assets held for
sale, net of gains on sales of assets
held for sale |
- | 64.1 | - | - | ||||||||||||
Total restructuring charges |
46.8 | 79.4 | 11.2 | 68.9 | ||||||||||||
Other costs: |
||||||||||||||||
Accelerated depreciation/inventory
write-down/other costs (costs of
product sold) |
13.5 | 59.2 | 18.1 | 46.1 | ||||||||||||
Asset write-down/other
costs/acquisition-related integration
costs (selling, general and
administrative expenses) |
40.3 | 7.0 | 16.5 | 97.3 | ||||||||||||
Asset impairment (impairment of
goodwill and intangible assets) |
- | 21.8 | 7.4 | 0.4 | ||||||||||||
Total other costs |
53.8 | 88.0 | 42.0 | 143.8 | ||||||||||||
Total costs incurred to date |
$ | 100.6 | $ | 167.4 | $ | 53.2 | $ | 212.7 | ||||||||
Total Costs Incurred to Date by
Reportable Segment: |
||||||||||||||||
CWNA |
||||||||||||||||
Restructuring charges |
$ | 23.0 | $ | - | $ | 7.1 | $ | 24.2 | ||||||||
Other costs |
42.6 | - | 34.7 | 68.2 | ||||||||||||
Total CWNA |
$ | 65.6 | $ | - | $ | 41.8 | $ | 92.4 | ||||||||
CWAE |
||||||||||||||||
Restructuring charges |
$ | 19.5 | $ | 79.4 | $ | 4.1 | $ | 42.8 | ||||||||
Other costs |
6.2 | 88.0 | 7.1 | 72.7 | ||||||||||||
Total CWAE |
$ | 25.7 | $ | 167.4 | $ | 11.2 | $ | 115.5 | ||||||||
Corporate Operations and Other |
||||||||||||||||
Restructuring charges |
$ | 4.3 | $ | - | $ | - | $ | 1.9 | ||||||||
Other costs |
5.0 | - | 0.2 | 2.9 | ||||||||||||
Total Corporate Operations and Other |
$ | 9.3 | $ | - | $ | 0.2 | $ | 4.8 | ||||||||
122
Table of Contents
| Fiscal | ||||||||||||||||
| Global | Australian | 2008 | ||||||||||||||
| Initiative | Initiative | Plan | Other Plans | |||||||||||||
| (in millions) | ||||||||||||||||
| Total expected costs | ||||||||||||||||
Restructuring charges: |
||||||||||||||||
Employee termination benefit costs |
$ | 35.5 | $ | 10.5 | $ | 8.7 | $ | 42.0 | ||||||||
Contract termination costs |
8.7 | 3.6 | 1.5 | 25.2 | ||||||||||||
Facility consolidation/relocation costs |
2.9 | 1.2 | 1.0 | 1.7 | ||||||||||||
Impairment charges on assets held for
sale, net of gains on sales of assets
held for sale |
- | 64.1 | - | - | ||||||||||||
Total restructuring charges |
47.1 | 79.4 | 11.2 | 68.9 | ||||||||||||
Other costs: |
||||||||||||||||
Accelerated depreciation/inventory
write-down/other costs (costs of
product sold) |
13.9 | 59.2 | 18.1 | 46.1 | ||||||||||||
Asset write-down/other
costs/acquisition-related integration
costs (selling, general and
administrative expenses) |
42.1 | 7.0 | 16.5 | 97.3 | ||||||||||||
Asset impairment (impairment of
goodwill and intangible assets) |
- | 21.8 | 7.4 | 0.4 | ||||||||||||
Total other costs |
56.0 | 88.0 | 42.0 | 143.8 | ||||||||||||
Total expected costs |
$ | 103.1 | $ | 167.4 | $ | 53.2 | $ | 212.7 | ||||||||
Total Expected Costs by Reportable Segment: |
||||||||||||||||
CWNA |
||||||||||||||||
Restructuring charges |
$ | 23.3 | $ | - | $ | 7.1 | $ | 24.2 | ||||||||
Other costs |
44.8 | - | 34.7 | 68.2 | ||||||||||||
Total CWNA |
$ | 68.1 | $ | - | $ | 41.8 | $ | 92.4 | ||||||||
CWAE |
||||||||||||||||
Restructuring charges |
$ | 19.5 | $ | 79.4 | $ | 4.1 | $ | 42.8 | ||||||||
Other costs |
6.2 | 88.0 | 7.1 | 72.7 | ||||||||||||
Total CWAE |
$ | 25.7 | $ | 167.4 | $ | 11.2 | $ | 115.5 | ||||||||
Corporate Operations and Other |
||||||||||||||||
Restructuring charges |
$ | 4.3 | $ | - | $ | - | $ | 1.9 | ||||||||
Other costs |
5.0 | - | 0.2 | 2.9 | ||||||||||||
Total Corporate Operations and Other |
$ | 9.3 | $ | - | $ | 0.2 | $ | 4.8 | ||||||||
123
Table of Contents
22. CONDENSED CONSOLIDATING FINANCIAL INFORMATION:
The following information sets forth the condensed consolidating balance sheets as of February
28, 2011, and February 28, 2010, the condensed consolidating statements of operations for the years
ended February 28, 2011, February 28, 2010, and February 28, 2009, and the condensed consolidating
statements of cash flows for the years ended February 28, 2011, February 28, 2010, and February 28,
2009, for the Company, the parent company, the combined subsidiaries of the Company which guarantee
the Company’s senior notes (“Subsidiary Guarantors”) and the combined subsidiaries of the Company
which are not Subsidiary Guarantors (primarily foreign subsidiaries) (“Subsidiary Nonguarantors”).
The Subsidiary Guarantors are wholly owned and the guarantees are full, unconditional, joint and
several obligations of each of the Subsidiary Guarantors. Separate financial statements for the
Subsidiary Guarantors of the Company are not presented because the Company has determined that such
financial statements would not be material to investors. The accounting policies of the parent
company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are the same as those described
for the Company in the Summary of Significant Accounting Policies in Note 1 and include the
recently adopted accounting guidance described in Note 2. There are no restrictions on the ability
of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans
or advances.
| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Condensed Consolidating Balance Sheet at February 28, 2011 | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash investments |
$ | 0.7 | $ | 0.9 | $ | 7.6 | $ | - | $ | 9.2 | ||||||||||
Accounts receivable, net |
322.8 | 32.3 | 62.3 | - | 417.4 | |||||||||||||||
Inventories |
127.5 | 965.3 | 284.3 | (7.8 | ) | 1,369.3 | ||||||||||||||
Prepaid expenses and other |
23.1 | 118.2 | 370.9 | (225.1 | ) | 287.1 | ||||||||||||||
Intercompany (payable) receivable |
(522.3 | ) | 389.7 | 132.6 | - | - | ||||||||||||||
Total current assets |
(48.2 | ) | 1,506.4 | 857.7 | (232.9 | ) | 2,083.0 | |||||||||||||
Property, plant and equipment, net |
110.3 | 764.8 | 344.5 | - | 1,219.6 | |||||||||||||||
Investments in subsidiaries |
6,142.6 | 153.4 | - | (6,296.0 | ) | - | ||||||||||||||
Goodwill |
- | 1,987.4 | 632.4 | - | 2,619.8 | |||||||||||||||
Intangible assets, net |
- | 672.1 | 214.2 | - | 886.3 | |||||||||||||||
Other assets, net |
36.3 | 256.9 | 72.9 | (7.2 | ) | 358.9 | ||||||||||||||
Total assets |
$ | 6,241.0 | $ | 5,341.0 | $ | 2,121.7 | $ | (6,536.1 | ) | $ | 7,167.6 | |||||||||
Current liabilities: |
||||||||||||||||||||
Notes payable to banks |
$ | 74.9 | $ | - | $ | 8.8 | $ | - | $ | 83.7 | ||||||||||
Current maturities of long-term debt |
12.5 | 3.4 | - | - | 15.9 | |||||||||||||||
Accounts payable |
9.7 | 97.1 | 22.4 | - | 129.2 | |||||||||||||||
Accrued excise taxes |
10.2 | 1.8 | 2.2 | - | 14.2 | |||||||||||||||
Other accrued expenses and
liabilities |
354.6 | 137.2 | 155.0 | (226.9 | ) | 419.9 | ||||||||||||||
Total current liabilities |
461.9 | 239.5 | 188.4 | (226.9 | ) | 662.9 | ||||||||||||||
124
Table of Contents
| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Long-term debt, less current maturities |
3,117.3 | 19.4 | - | - | 3,136.7 | |||||||||||||||
Deferred income taxes |
- | 509.0 | 81.3 | (7.2 | ) | 583.1 | ||||||||||||||
Other liabilities |
109.9 | 37.0 | 86.1 | - | 233.0 | |||||||||||||||
Stockholders’ equity: |
||||||||||||||||||||
Preferred stock |
- | 9.0 | 1,130.7 | (1,139.7 | ) | - | ||||||||||||||
Common stock |
2.6 | 100.7 | 24.0 | (124.7 | ) | 2.6 | ||||||||||||||
Additional paid-in capital |
1,602.4 | 1,394.6 | 1,620.5 | (3,015.1 | ) | 1,602.4 | ||||||||||||||
Retained earnings (deficit) |
1,662.3 | 2,991.6 | (1,221.1 | ) | (1,770.5 | ) | 1,662.3 | |||||||||||||
Accumulated other comprehensive
income |
188.8 | 40.2 | 211.8 | (252.0 | ) | 188.8 | ||||||||||||||
Treasury stock |
(904.2 | ) | - | - | - | (904.2 | ) | |||||||||||||
Total stockholders’ equity |
2,551.9 | 4,536.1 | 1,765.9 | (6,302.0 | ) | 2,551.9 | ||||||||||||||
Total liabilities and stockholders’
equity |
$ | 6,241.0 | $ | 5,341.0 | $ | 2,121.7 | $ | (6,536.1 | ) | $ | 7,167.6 | |||||||||
| Condensed Consolidating Balance Sheet at February 28, 2010 | ||||||||||||||||||||
Current assets: |
||||||||||||||||||||
Cash and cash investments |
$ | 0.3 | $ | 3.3 | $ | 39.9 | $ | - | $ | 43.5 | ||||||||||
Accounts receivable, net |
219.5 | 22.6 | 272.6 | - | 514.7 | |||||||||||||||
Inventories |
119.8 | 1,017.5 | 754.0 | (11.4 | ) | 1,879.9 | ||||||||||||||
Prepaid expenses and other |
18.5 | 65.2 | 38.0 | 29.3 | 151.0 | |||||||||||||||
Intercompany receivable (payable) |
(68.6 | ) | (132.1 | ) | 200.7 | - | - | |||||||||||||
Total current assets |
289.5 | 976.5 | 1,305.2 | 17.9 | 2,589.1 | |||||||||||||||
Property, plant and equipment, net |
71.8 | 784.4 | 711.0 | - | 1,567.2 | |||||||||||||||
Investments in subsidiaries |
6,191.0 | 130.8 | - | (6,321.8 | ) | - | ||||||||||||||
Goodwill |
- | 1,985.9 | 584.7 | - | 2,570.6 | |||||||||||||||
Intangible assets, net |
- | 682.8 | 242.2 | - | 925.0 | |||||||||||||||
Other assets, net |
104.7 | 236.3 | 108.2 | (6.8 | ) | 442.4 | ||||||||||||||
Total assets |
$ | 6,657.0 | $ | 4,796.7 | $ | 2,951.3 | $ | (6,310.7 | ) | $ | 8,094.3 | |||||||||
Current liabilities: |
||||||||||||||||||||
Notes payable to banks |
$ | 289.3 | $ | - | $ | 81.9 | $ | - | $ | 371.2 | ||||||||||
Current maturities of long-term debt |
172.7 | 1.3 | 13.2 | - | 187.2 | |||||||||||||||
Accounts payable |
14.5 | 104.6 | 149.7 | - | 268.8 | |||||||||||||||
Accrued excise taxes |
8.3 | - | 35.5 | - | 43.8 | |||||||||||||||
Other accrued expenses and
liabilities |
190.2 | 85.3 | 201.0 | 25.1 | 501.6 | |||||||||||||||
Total current liabilities |
675.0 | 191.2 | 481.3 | 25.1 | 1,372.6 | |||||||||||||||
Long-term debt, less current maturities |
3,270.9 | 5.6 | 0.6 | - | 3,277.1 | |||||||||||||||
Deferred income taxes |
- | 475.5 | 67.5 | (6.8 | ) | 536.2 | ||||||||||||||
Other liabilities |
134.8 | 47.7 | 149.6 | - | 332.1 | |||||||||||||||
Stockholders’ equity: |
||||||||||||||||||||
Preferred stock |
- | 9.0 | 1,430.9 | (1,439.9 | ) | - | ||||||||||||||
Common stock |
2.6 | 100.7 | 184.0 | (284.7 | ) | 2.6 | ||||||||||||||
Additional paid-in capital |
1,493.2 | 1,323.6 | 1,269.0 | (2,592.6 | ) | 1,493.2 | ||||||||||||||
Retained earnings (deficit) |
1,102.8 | 2,611.0 | (1,260.8 | ) | (1,350.2 | ) | 1,102.8 | |||||||||||||
Accumulated other comprehensive
income |
587.2 | 32.4 | 629.2 | (661.6 | ) | 587.2 | ||||||||||||||
Treasury stock |
(609.5 | ) | - | - | - | (609.5 | ) | |||||||||||||
Total stockholders’ equity |
2,576.3 | 4,076.7 | 2,252.3 | (6,329.0 | ) | 2,576.3 | ||||||||||||||
Total liabilities and stockholders’
equity |
$ | 6,657.0 | $ | 4,796.7 | $ | 2,951.3 | $ | (6,310.7 | ) | $ | 8,094.3 | |||||||||
125
Table of Contents
| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Condensed Consolidating Statement of Operations for the Year Ended February 28, 2011 | ||||||||||||||||||||
Sales |
$ | 726.0 | $ | 1,916.1 | $ | 1,904.7 | $ | (450.1 | ) | $ | 4,096.7 | |||||||||
Less – excise taxes |
(136.9 | ) | (96.6 | ) | (531.2 | ) | - | (764.7 | ) | |||||||||||
Net sales |
589.1 | 1,819.5 | 1,373.5 | (450.1 | ) | 3,332.0 | ||||||||||||||
Cost of product sold |
(312.7 | ) | (1,173.1 | ) | (1,006.6 | ) | 350.5 | (2,141.9 | ) | |||||||||||
Gross profit |
276.4 | 646.4 | 366.9 | (99.6 | ) | 1,190.1 | ||||||||||||||
Selling, general and administrative
expenses |
(306.9 | ) | (262.0 | ) | (175.3 | ) | 103.3 | (640.9 | ) | |||||||||||
Impairment of goodwill and intangible
assets |
- | (6.9 | ) | (16.7 | ) | - | (23.6 | ) | ||||||||||||
Restructuring charges |
(1.3 | ) | (7.1 | ) | (14.7 | ) | - | (23.1 | ) | |||||||||||
Operating (loss) income |
(31.8 | ) | 370.4 | 160.2 | 3.7 | 502.5 | ||||||||||||||
Equity in earnings of equity method
investees and subsidiaries |
735.9 | 246.3 | 8.3 | (746.7 | ) | 243.8 | ||||||||||||||
Interest expense, net |
(213.3 | ) | 14.6 | 3.4 | - | (195.3 | ) | |||||||||||||
Loss on write-off of financing costs |
- | - | - | - | - | |||||||||||||||
Income before income taxes |
490.8 | 631.3 | 171.9 | (743.0 | ) | 551.0 | ||||||||||||||
Benefit from (provision for) income
taxes |
68.7 | (251.1 | ) | 194.1 | (3.2 | ) | 8.5 | |||||||||||||
Net income |
$ | 559.5 | $ | 380.2 | $ | 366.0 | $ | (746.2 | ) | $ | 559.5 | |||||||||
| Condensed Consolidating Statement of Operations for the Year Ended February 28, 2010 | ||||||||||||||||||||
Sales |
$ | 689.8 | $ | 1,803.9 | $ | 2,097.1 | $ | (377.8 | ) | $ | 4,213.0 | |||||||||
Less – excise taxes |
(147.4 | ) | (95.0 | ) | (605.8 | ) | - | (848.2 | ) | |||||||||||
Net sales |
542.4 | 1,708.9 | 1,491.3 | (377.8 | ) | 3,364.8 | ||||||||||||||
Cost of product sold |
(288.5 | ) | (1,067.6 | ) | (1,150.2 | ) | 286.3 | (2,220.0 | ) | |||||||||||
Gross profit |
253.9 | 641.3 | 341.1 | (91.5 | ) | 1,144.8 | ||||||||||||||
Selling, general and administrative
expenses |
(251.4 | ) | (236.8 | ) | (282.2 | ) | 87.9 | (682.5 | ) | |||||||||||
Impairment of goodwill and intangible
assets |
- | - | (103.2 | ) | - | (103.2 | ) | |||||||||||||
Restructuring charges |
(0.8 | ) | (14.9 | ) | (31.9 | ) | - | (47.6 | ) | |||||||||||
Operating income (loss) |
1.7 | 389.6 | (76.2 | ) | (3.6 | ) | 311.5 | |||||||||||||
Equity in earnings (losses) of equity
method investees and subsidiaries |
273.6 | 265.9 | (18.8 | ) | (307.1 | ) | 213.6 | |||||||||||||
Interest expense, net |
(257.8 | ) | (1.7 | ) | (5.6 | ) | - | (265.1 | ) | |||||||||||
Loss on write-off of financing costs |
(0.7 | ) | - | - | - | (0.7 | ) | |||||||||||||
Income (loss) before income taxes |
16.8 | 653.8 | (100.6 | ) | (310.7 | ) | 259.3 | |||||||||||||
Benefit from (provision for) income
taxes |
82.5 | (278.4 | ) | 32.9 | 3.0 | (160.0 | ) | |||||||||||||
Net income (loss) |
$ | 99.3 | $ | 375.4 | $ | (67.7 | ) | $ | (307.7 | ) | $ | 99.3 | ||||||||
126
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| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
| Condensed Consolidating Statement of Operations for the Year Ended February 28, 2009 | ||||||||||||||||||||
Sales |
$ | 533.3 | $ | 2,492.4 | $ | 2,097.9 | $ | (400.6 | ) | $ | 4,723.0 | |||||||||
Less – excise taxes |
(71.4 | ) | (440.4 | ) | (556.6 | ) | - | (1,068.4 | ) | |||||||||||
Net sales |
461.9 | 2,052.0 | 1,541.3 | (400.6 | ) | 3,654.6 | ||||||||||||||
Cost of product sold |
(225.1 | ) | (1,292.6 | ) | (1,200.6 | ) | 293.7 | (2,424.6 | ) | |||||||||||
Gross profit |
236.8 | 759.4 | 340.7 | (106.9 | ) | 1,230.0 | ||||||||||||||
Selling, general and administrative
expenses |
(241.2 | ) | (252.3 | ) | (443.8 | ) | 105.3 | (832.0 | ) | |||||||||||
Impairment of goodwill and intangible
assets |
- | - | (300.4 | ) | - | (300.4 | ) | |||||||||||||
Restructuring charges |
(2.3 | ) | (5.0 | ) | (60.7 | ) | - | (68.0 | ) | |||||||||||
Operating (loss) income |
(6.7 | ) | 502.1 | (464.2 | ) | (1.6 | ) | 29.6 | ||||||||||||
Equity in earnings (losses) of equity
method investees and subsidiaries |
(111.5 | ) | 252.3 | (78.1 | ) | 123.9 | 186.6 | |||||||||||||
Interest expense, net |
(241.9 | ) | (62.2 | ) | (18.9 | ) | - | (323.0 | ) | |||||||||||
Loss on write-off of financing costs |
- | - | - | - | - | |||||||||||||||
(Loss) income before income
taxes |
(360.1 | ) | 692.2 | (561.2 | ) | 122.3 | (106.8 | ) | ||||||||||||
Benefit from (provision for) income
taxes |
58.7 | (274.4 | ) | 21.4 | (0.3 | ) | (194.6 | ) | ||||||||||||
Net (loss) income |
$ | (301.4 | ) | $ | 417.8 | $ | (539.8 | ) | $ | 122.0 | $ | (301.4 | ) | |||||||
| Condensed Consolidating Statement of Cash Flows for the Year Ended February 28, 2011 | ||||||||||||||||||||
Net cash (used in) provided by
operating activities |
$ | (108.8 | ) | $ | 483.5 | $ | 244.6 | $ | - | $ | 619.3 | |||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Proceeds from sales of businesses,
net of cash divested |
(2.3 | ) | (3.5 | ) | 225.5 | - | 219.7 | |||||||||||||
Proceeds from notes receivable |
60.0 | - | - | - | 60.0 | |||||||||||||||
Proceeds from sales of assets |
- | 3.4 | 16.1 | - | 19.5 | |||||||||||||||
Capital distribution from equity
method investee |
- | - | 0.3 | - | 0.3 | |||||||||||||||
Purchases of property, plant and
equipment |
(39.4 | ) | (31.5 | ) | (18.2 | ) | - | (89.1 | ) | |||||||||||
Investments in equity method
investees |
- | (0.1 | ) | (29.6 | ) | - | (29.7 | ) | ||||||||||||
Purchases of businesses, net of
cash acquired |
- | - | - | - | - | |||||||||||||||
Other investing activities |
- | 7.0 | 0.4 | - | 7.4 | |||||||||||||||
Net cash provided by (used in)
investing activities |
18.3 | (24.7 | ) | 194.5 | - | 188.1 | ||||||||||||||
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| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Intercompany financings, net |
858.5 | (459.5 | ) | (399.0 | ) | - | - | |||||||||||||
Principal payments of long-term debt |
(325.7 | ) | (1.7 | ) | (1.1 | ) | - | (328.5 | ) | |||||||||||
Purchases of treasury stock |
(300.0 | ) | - | - | - | (300.0 | ) | |||||||||||||
Net (repayment of) proceeds from
notes payable |
(214.4 | ) | - | (75.3 | ) | - | (289.7 | ) | ||||||||||||
Payment of financing costs of
long-term debt |
(0.2 | ) | - | - | - | (0.2 | ) | |||||||||||||
Proceeds
from exercise of employee stock options |
61.0 | - | - | - | 61.0 | |||||||||||||||
Proceeds
from excess tax benefits from
stock-based payment awards |
7.4 | - | - | - | 7.4 | |||||||||||||||
Proceeds from employee stock
purchases |
4.3 | - | - | - | 4.3 | |||||||||||||||
Proceeds from maturity of
derivative instrument |
- | - | - | - | - | |||||||||||||||
Net cash provided by (used in)
financing activities |
90.9 | (461.2 | ) | (475.4 | ) | - | (845.7 | ) | ||||||||||||
Effect of exchange rate changes on
cash and cash investments |
- | - | 4.0 | - | 4.0 | |||||||||||||||
Net increase (decrease) in cash and
cash investments |
0.4 | (2.4 | ) | (32.3 | ) | - | (34.3 | ) | ||||||||||||
Cash and cash investments, beginning
of year |
0.3 | 3.3 | 39.9 | - | 43.5 | |||||||||||||||
Cash and cash investments, end of year |
$ | 0.7 | $ | 0.9 | $ | 7.6 | $ | - | $ | 9.2 | ||||||||||
| Condensed Consolidating Statement of Cash Flows for the Year Ended February 28, 2010 | ||||||||||||||||||||
Net cash (used in) provided by
operating activities |
$ | (139.4 | ) | $ | 287.3 | $ | 254.6 | $ | - | $ | 402.5 | |||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Proceeds from sales of businesses,
net of cash divested |
- | 262.1 | 87.5 | - | 349.6 | |||||||||||||||
Proceeds from note receivable |
- | - | - | - | - | |||||||||||||||
Proceeds from sales of assets |
- | 0.4 | 16.8 | - | 17.2 | |||||||||||||||
Capital distribution from equity
method investee |
- | - | 0.2 | - | 0.2 | |||||||||||||||
Purchases of property, plant and
equipment |
(21.7 | ) | (55.4 | ) | (30.6 | ) | - | (107.7 | ) | |||||||||||
Investment in equity method
investee |
- | (0.9 | ) | - | - | (0.9 | ) | |||||||||||||
Purchases of businesses, net of
cash acquired |
- | - | - | - | - | |||||||||||||||
Other investing activities |
1.7 | - | (3.5 | ) | - | (1.8 | ) | |||||||||||||
Net cash (used in) provided by
investing activities |
(20.0 | ) | 206.2 | 70.4 | - | 256.6 | ||||||||||||||
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| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Intercompany financings, net |
663.8 | (491.0 | ) | (172.8 | ) | - | - | |||||||||||||
Principal payments of long-term debt |
(769.7 | ) | (2.9 | ) | (8.7 | ) | - | (781.3 | ) | |||||||||||
Purchases of treasury stock |
- | - | - | - | - | |||||||||||||||
Net proceeds from (repayment of)
notes payable |
222.1 | - | (105.0 | ) | - | 117.1 | ||||||||||||||
Payment of financing costs of
long-term debt |
(11.5 | ) | - | - | - | (11.5 | ) | |||||||||||||
Proceeds
from exercise of employee stock options |
12.3 | - | - | - | 12.3 | |||||||||||||||
Proceeds
from excess tax benefits from
stock-based payment awards |
2.7 | - | - | - | 2.7 | |||||||||||||||
Proceeds from employee stock
purchases |
4.5 | - | - | - | 4.5 | |||||||||||||||
Proceeds from maturity of
derivative instrument |
33.2 | - | - | - | 33.2 | |||||||||||||||
Net cash provided by (used in)
financing activities |
157.4 | (493.9 | ) | (286.5 | ) | - | (623.0 | ) | ||||||||||||
Effect of exchange rate changes on
cash and cash investments |
- | - | (5.7 | ) | - | (5.7 | ) | |||||||||||||
Net (decrease) increase in cash and
cash investments |
(2.0 | ) | (0.4 | ) | 32.8 | - | 30.4 | |||||||||||||
Cash and cash investments, beginning
of year |
2.3 | 3.7 | 7.1 | - | 13.1 | |||||||||||||||
Cash and cash investments, end of year |
$ | 0.3 | $ | 3.3 | $ | 39.9 | $ | - | $ | 43.5 | ||||||||||
| Condensed Consolidating Statement of Cash Flows for the Year Ended February 28, 2009 | ||||||||||||||||||||
Net cash (used in) provided by
operating activities |
$ | (131.1 | ) | $ | 608.8 | $ | 29.2 | $ | - | $ | 506.9 | |||||||||
Cash flows from investing activities: |
||||||||||||||||||||
Proceeds from sale of business,
net of cash divested |
(2.4 | ) | 206.6 | - | - | 204.2 | ||||||||||||||
Proceeds from note receivable |
- | - | - | - | - | |||||||||||||||
Proceeds from sales of assets |
- | 2.1 | 23.3 | - | 25.4 | |||||||||||||||
Capital distributions from equity
method investees |
- | 20.7 | 0.1 | - | 20.8 | |||||||||||||||
Purchases of property, plant and
equipment |
(5.6 | ) | (41.2 | ) | (81.8 | ) | - | (128.6 | ) | |||||||||||
Investments in equity method
investees |
- | (1.0 | ) | (2.2 | ) | - | (3.2 | ) | ||||||||||||
Purchases of businesses, net of
cash acquired |
(0.6 | ) | 10.9 | (10.2 | ) | - | 0.1 | |||||||||||||
Other investing activities |
- | 9.9 | - | - | 9.9 | |||||||||||||||
Net cash (used in) provided by
investing activities |
(8.6 | ) | 208.0 | (70.8 | ) | - | 128.6 | |||||||||||||
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| Parent | Subsidiary | Subsidiary | ||||||||||||||||||
| Company | Guarantors | Nonguarantors | Eliminations | Consolidated | ||||||||||||||||
| (in millions) | ||||||||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||
Intercompany financings, net |
907.0 | (806.5 | ) | (100.5 | ) | - | - | |||||||||||||
Principal payments of long-term debt |
(564.4 | ) | (9.4 | ) | (3.8 | ) | - | (577.6 | ) | |||||||||||
Purchases of treasury stock |
- | - | - | - | - | |||||||||||||||
Net (repayment of) proceeds from
notes payable |
(240.8 | ) | - | 131.1 | - | (109.7 | ) | |||||||||||||
Payment of financing costs of long-term debt |
- | - | - | - | - | |||||||||||||||
Proceeds
from exercise of employee stock options |
27.1 | - | - | - | 27.1 | |||||||||||||||
Proceeds
from excess tax benefits from
stock-based payment awards |
7.2 | - | - | - | 7.2 | |||||||||||||||
Proceeds from employee stock
purchases |
5.6 | - | - | - | 5.6 | |||||||||||||||
Proceeds from maturity of
derivative instrument |
- | - | - | - | - | |||||||||||||||
Net cash provided by (used in)
financing activities |
141.7 | (815.9 | ) | 26.8 | - | (647.4 | ) | |||||||||||||
Effect of exchange rate changes on
cash and cash investments |
- | - | 4.5 | - | 4.5 | |||||||||||||||
Net increase (decrease) in cash and
cash investments |
2.0 | 0.9 | (10.3 | ) | - | (7.4 | ) | |||||||||||||
Cash and cash investments, beginning
of year |
0.3 | 2.8 | 17.4 | - | 20.5 | |||||||||||||||
Cash and cash investments, end of year |
$ | 2.3 | $ | 3.7 | $ | 7.1 | $ | - | $ | 13.1 | ||||||||||
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23. BUSINESS SEGMENT INFORMATION:
Prior to May 1, 2010, the Company’s internal management financial reporting consisted of two
business divisions, Constellation Wines and Crown Imports. In connection with the Company’s
changes during the first quarter of fiscal 2011 within its internal management structure for its
Australian and U.K. business, and the Company’s revised business strategy within these markets, the
Company changed its internal management financial reporting on May 1, 2010, to consist of four
business divisions: Constellation Wines North America, Constellation Wines Australia and Europe,
Constellation Wines New Zealand and Crown Imports. However, due to a number of factors, including
the size of the Constellation Wines New Zealand segment’s operations, the similarity of its
economic characteristics and long-term financial performance with that of the Constellation Wines
North America business, and the fact that the vast majority of the wine produced by the
Constellation Wines New Zealand operating segment is sold in the U.S. and Canada, the Company has
aggregated the results of this operating segment with its Constellation Wines North America
operating segment to form one reportable segment. Accordingly, beginning May 1, 2010, the Company
began reporting its operating results in four segments: Constellation Wines North America (wine
and spirits) (“CWNA”), Constellation Wines Australia and Europe (wine) (“CWAE”), Corporate
Operations and Other, and Crown Imports (imported beer). As a result of the January 2011 CWAE
Divestiture, as of February 1, 2011, the Company is no longer reporting operating results for the
CWAE segment. Amounts included in the Corporate Operations and Other segment consist of costs of
executive management, corporate development, corporate finance, human resources, internal audit,
investor relations, legal, public relations, global information technology and global supply chain.
Any costs incurred at the corporate office that are applicable to the segments are allocated to
the appropriate segment. The amounts included in the Corporate Operations and Other segment are
general costs that are applicable to the consolidated group and are therefore not allocated to the
other reportable segments. All costs reported within the Corporate Operations and Other segment
are not included in the chief operating decision maker’s evaluation of the operating income
performance of the other reportable 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 years ended February 28, 2010, and February
28, 2009, has been restated to conform to the new segment presentation.
In addition, the Company excludes restructuring charges and unusual items that affect
comparability from its definition of operating income for segment purposes as these items are not
reflective of normal continuing operations of the segments. The Company excludes these items as
segment operating performance and segment management compensation is evaluated based upon a
normalized segment operating income. As such, the performance measures for incentive compensation
purposes for segment management do not include the impact of these items.
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Table of Contents
For the years ended February 28, 2011, February 28, 2010, and February 28,
2009, restructuring charges and unusual items included in operating income consist of:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions) | ||||||||||||
Cost of Product Sold |
||||||||||||
Flow through of inventory step-up |
$ | 2.4 | $ | 8.4 | $ | 22.2 | ||||||
Accelerated depreciation |
2.2 | 17.7 | 11.2 | |||||||||
Inventory write-downs |
- | 1.6 | 56.8 | |||||||||
Other |
0.1 | 4.7 | 37.1 | |||||||||
Cost of Product Sold |
4.7 | 32.4 | 127.3 | |||||||||
Selling, General and Administrative Expenses |
||||||||||||
Net gains on the CWAE Divestiture and related
activities |
(83.7 | ) | - | - | ||||||||
Net (gain) loss on sale of nonstrategic assets/business |
(3.3 | ) | (11.2 | ) | 8.1 | |||||||
Loss on contractual obligation from put option of
Ruffino shareholder |
60.0 | 34.3 | - | |||||||||
Acquisition-related integration costs |
0.5 | 0.2 | 8.2 | |||||||||
Net (gain) loss on March 2009 sale of value spirits
business |
- | (0.2 | ) | 15.6 | ||||||||
Loss on sale of Pacific Northwest Business |
- | - | 23.2 | |||||||||
Other costs |
6.3 | 42.4 | 24.2 | |||||||||
Selling, General and Administrative Expenses |
(20.2 | ) | 65.5 | 79.3 | ||||||||
Impairment of Goodwill and Intangible Assets |
23.6 | 103.2 | 300.4 | |||||||||
Restructuring Charges |
23.1 | 47.6 | 68.0 | |||||||||
Restructuring Charges and Unusual Items |
$ | 31.2 | $ | 248.7 | $ | 575.0 | ||||||
For the year ended February 28, 2010, restructuring charges and unusual items included in
equity in losses of equity method investees of $25.4 million consist of an impairment loss on the
Company’s investment in Ruffino. For the year ended February 28, 2009, restructuring charges and
unusual items included in equity in losses of equity method investees of $83.3 million consist
primarily of impairment losses on the Company’s investments in Ruffino and Matthew Clark.
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 and include the recently adopted accounting
guidance described in Note 2.
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Table of Contents
Segment information is as follows:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions) | ||||||||||||
CWNA |
||||||||||||
Net sales |
$ | 2,557.3 | $ | 2,434.7 | $ | 2,703.4 | ||||||
Segment operating income |
$ | 631.0 | $ | 638.0 | $ | 644.3 | ||||||
Equity in earnings of equity method investees |
$ | 12.7 | $ | 11.8 | $ | 12.8 | ||||||
Long-lived assets |
$ | 1,101.7 | $ | 1,106.5 | $ | 1,126.5 | ||||||
Investment in equity method investees |
$ | 79.6 | $ | 75.6 | $ | 91.0 | ||||||
Total assets |
$ | 6,692.3 | $ | 6,476.1 | $ | 6,596.1 | ||||||
Capital expenditures |
$ | 52.1 | $ | 56.6 | $ | 71.9 | ||||||
Depreciation and amortization |
$ | 88.8 | $ | 103.2 | $ | 96.0 | ||||||
CWAE |
||||||||||||
Net sales |
$ | 774.7 | $ | 930.1 | $ | 951.2 | ||||||
Segment operating income |
$ | 9.3 | $ | 16.9 | $ | 47.1 | ||||||
Equity in earnings of equity method investees |
$ | 5.6 | $ | 5.3 | $ | 4.8 | ||||||
Long-lived assets |
$ | - | $ | 380.2 | $ | 380.7 | ||||||
Investment in equity method investees |
$ | - | $ | 35.7 | $ | 30.2 | ||||||
Total assets |
$ | - | $ | 1,228.4 | $ | 1,199.2 | ||||||
Capital expenditures |
$ | 5.3 | $ | 13.4 | $ | 53.4 | ||||||
Depreciation and amortization |
$ | 26.1 | $ | 39.7 | $ | 48.9 | ||||||
Corporate Operations and Other |
||||||||||||
Net sales |
$ | - | $ | - | $ | - | ||||||
Segment operating loss |
$ | (106.6 | ) | $ | (94.7 | ) | $ | (86.8 | ) | |||
Long-lived assets |
$ | 117.9 | $ | 80.5 | $ | 40.3 | ||||||
Total assets |
$ | 292.0 | $ | 222.6 | $ | 104.2 | ||||||
Capital expenditures |
$ | 31.7 | $ | 37.7 | $ | 3.3 | ||||||
Depreciation and amortization |
$ | 18.9 | $ | 13.0 | $ | 12.1 | ||||||
Crown Imports |
||||||||||||
Net sales |
$ | 2,392.9 | $ | 2,256.2 | $ | 2,395.4 | ||||||
Segment operating income |
$ | 453.0 | $ | 444.1 | $ | 504.1 | ||||||
Long-lived assets |
$ | 4.8 | $ | 5.0 | $ | 5.4 | ||||||
Total assets |
$ | 419.0 | $ | 368.9 | $ | 324.2 | ||||||
Capital expenditures |
$ | 1.6 | $ | 1.0 | $ | 2.0 | ||||||
Depreciation and amortization |
$ | 1.8 | $ | 1.5 | $ | 1.1 | ||||||
Restructuring Charges and Unusual Items |
||||||||||||
Operating loss |
$ | (31.2 | ) | $ | (248.7 | ) | $ | (575.0 | ) | |||
Equity in losses of equity method investees |
$ | (0.6 | ) | $ | (25.4 | ) | $ | (83.3 | ) | |||
Consolidation and Eliminations |
||||||||||||
Net sales |
$ | (2,392.9 | ) | $ | (2,256.2 | ) | $ | (2,395.4 | ) | |||
Operating income |
$ | (453.0 | ) | $ | (444.1 | ) | $ | (504.1 | ) | |||
Equity in earnings of Crown Imports |
$ | 226.1 | $ | 221.9 | $ | 252.3 | ||||||
Long-lived assets |
$ | (4.8 | ) | $ | (5.0 | ) | $ | (5.4 | ) | |||
Investment in equity method investees |
$ | 183.3 | $ | 167.2 | $ | 136.9 | ||||||
Total assets |
$ | (235.7 | ) | $ | (201.7 | ) | $ | (187.2 | ) | |||
Capital expenditures |
$ | (1.6 | ) | $ | (1.0 | ) | $ | (2.0 | ) | |||
Depreciation and amortization |
$ | (1.8 | ) | $ | (1.5 | ) | $ | (1.1 | ) | |||
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Table of Contents
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions) | ||||||||||||
Consolidated |
||||||||||||
Net sales |
$ | 3,332.0 | $ | 3,364.8 | $ | 3,654.6 | ||||||
Operating income |
$ | 502.5 | $ | 311.5 | $ | 29.6 | ||||||
Equity in earnings of equity method investees |
$ | 243.8 | $ | 213.6 | $ | 186.6 | ||||||
Long-lived assets |
$ | 1,219.6 | $ | 1,567.2 | $ | 1,547.5 | ||||||
Investment in equity method investees |
$ | 262.9 | $ | 278.5 | $ | 258.1 | ||||||
Total assets |
$ | 7,167.6 | $ | 8,094.3 | $ | 8,036.5 | ||||||
Capital expenditures |
$ | 89.1 | $ | 107.7 | $ | 128.6 | ||||||
Depreciation and amortization |
$ | 133.8 | $ | 155.9 | $ | 157.0 | ||||||
The Company’s areas of operations are principally in the U.S. Current operations outside
the U.S. are primarily in Canada and New Zealand and are included within the CWNA segment. Prior
to the Company’s January 2011 CWAE Divestiture, operations outside the U.S. also included Australia
and the U.K. and were reported within the CWAE segment. Revenues are attributed to countries based
on the location of the selling company.
Geographic data is as follows:
| For the Years Ended | ||||||||||||
| February 28, | February 28, | February 28, | ||||||||||
| 2011 | 2010 | 2009 | ||||||||||
| (in millions) | ||||||||||||
Net
Sales |
||||||||||||
U.S. |
$ | 2,087.7 | $ | 2,001.3 | $ | 2,266.1 | ||||||
Non-U.S. |
1,244.3 | 1,363.5 | 1,388.5 | |||||||||
Total |
$ | 3,332.0 | $ | 3,364.8 | $ | 3,654.6 | ||||||
| Significant non-U.S. revenue sources include: | ||||||||||||
U.K. |
$ | 478.0 | $ | 611.5 | $ | 631.7 | ||||||
Canada |
410.7 | 379.0 | 378.3 | |||||||||
Australia |
278.4 | 294.1 | 296.9 | |||||||||
New Zealand |
54.7 | 51.1 | 54.5 | |||||||||
Other |
22.5 | 27.8 | 27.1 | |||||||||
Total |
$ | 1,244.3 | $ | 1,363.5 | $ | 1,388.5 | ||||||
| February 28, | February 28, | |||||||
| 2011 | 2010 | |||||||
| (in millions) | ||||||||
Long-lived
assets |
||||||||
U.S. |
$ | 896.3 | $ | 878.3 | ||||
Non-U.S. |
323.3 | 688.9 | ||||||
Total |
$ | 1,219.6 | $ | 1,567.2 | ||||
| Significant non-U.S. long-lived assets include: | ||||||||
Canada |
$ | 176.2 | $ | 167.5 | ||||
New Zealand |
144.6 | 141.2 | ||||||
Australia |
- | 300.1 | ||||||
U.K. |
- | 78.7 | ||||||
Other |
2.5 | 1.4 | ||||||
Total |
$ | 323.3 | $ | 688.9 | ||||
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24. ACCOUNTING GUIDANCE NOT YET ADOPTED:
Intangibles – goodwill and other –
In December 2010, the FASB issued amended guidance for when to perform Step 2 of the goodwill
impairment test for reporting units with zero or negative carrying amounts. The amended guidance
modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying
amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill
impairment test if it is more likely than not that a goodwill impairment exists. In determining
whether it is more likely than not that a goodwill impairment exists, an entity should consider
whether there are any adverse qualitative factors indicating that an impairment may exist. Any
resulting goodwill impairment upon adoption should be recorded as a cumulative-effect adjustment to
beginning retained earnings in the period of adoption. The Company is required to adopt the
guidance for its annual and interim periods beginning March 1,
2011. The adoption of this amended guidance on March 1, 2011, did not have a material impact on the Company’s consolidated
financial statements.
25. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
A summary of selected quarterly financial information is as follows:
| QUARTER ENDED | ||||||||||||||||||||
| May 31, | August 31, | November 30, | February 28, | |||||||||||||||||
| Fiscal 2011 | 2010 | 2010 | 2010 | 2011 | Full Year | |||||||||||||||
| (in millions, except per share data) | ||||||||||||||||||||
Net sales |
$ | 787.5 | $ | 862.8 | $ | 966.4 | $ | 715.3 | $ | 3,332.0 | ||||||||||
Gross profit |
$ | 270.0 | $ | 314.2 | $ | 351.9 | $ | 254.0 | $ | 1,190.1 | ||||||||||
Net income (1) |
$ | 49.1 | $ | 91.3 | $ | 139.3 | $ | 279.8 | $ | 559.5 | ||||||||||
Earnings per common share (2): |
||||||||||||||||||||
Basic – Class A Common Stock |
$ | 0.23 | $ | 0.44 | $ | 0.67 | $ | 1.36 | $ | 2.68 | ||||||||||
Basic – Class B Convertible
Common Stock |
$ | 0.21 | $ | 0.40 | $ | 0.61 | $ | 1.24 | $ | 2.44 | ||||||||||
Diluted – Class A Common Stock |
$ | 0.22 | $ | 0.43 | $ | 0.65 | $ | 1.32 | $ | 2.62 | ||||||||||
Diluted – Class B Convertible
Common Stock |
$ | 0.21 | $ | 0.40 | $ | 0.60 | $ | 1.21 | $ | 2.40 | ||||||||||
| QUARTER ENDED | ||||||||||||||||||||
| May 31, | August 31, | November 30, | February 28, | |||||||||||||||||
| Fiscal 2010 | 2009 | 2009 | 2009 | 2010 | Full Year | |||||||||||||||
| (in millions, except per share data) | ||||||||||||||||||||
Net sales |
$ | 791.6 | $ | 876.8 | $ | 987.7 | $ | 708.7 | $ | 3,364.8 | ||||||||||
Gross profit |
$ | 268.7 | $ | 309.6 | $ | 344.1 | $ | 222.4 | $ | 1,144.8 | ||||||||||
Net income (loss)(3) |
$ | 6.5 | $ | 99.7 | $ | 44.1 | $ | (51.0 | ) | $ | 99.3 | |||||||||
Earnings (loss) per common share(2): |
||||||||||||||||||||
Basic – Class A Common Stock |
$ | 0.03 | $ | 0.46 | $ | 0.20 | $ | (0.23 | ) | $ | 0.46 | |||||||||
Basic – Class B Convertible
Common Stock |
$ | 0.03 | $ | 0.42 | $ | 0.18 | $ | (0.21 | ) | $ | 0.41 | |||||||||
Diluted – Class A Common Stock |
$ | 0.03 | $ | 0.45 | $ | 0.20 | $ | (0.23 | ) | $ | 0.45 | |||||||||
Diluted – Class B Convertible
Common Stock |
$ | 0.03 | $ | 0.41 | $ | 0.18 | $ | (0.21 | ) | $ | 0.41 | |||||||||
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| (1) | In Fiscal 2011, the Company recorded certain unusual items consisting of accelerated depreciation associated primarily with the Global Initiative; other cost of product sold related to costs incurred in connection with the sale of nonstrategic assets; net gains on the January 2011 CWAE Divestiture and related activities; net gain on the sale of nonstrategic assets; a loss on the potential settlement of the contractual obligation created by the notification by the 50.1% shareholder of Ruffino to exercise the option to put its entire equity interest to the Company; acquisition-related integration costs associated with the Fiscal 2008 Plan; other selling, general and administrative costs associated primarily with the Global Initiative; impairment of intangible assets associated primarily with the Company’s Canadian business; restructuring charges associated primarily with the Global Initiative and the Australian Initiative; other equity method investment loss; and a valuation allowance against deferred tax assets in the U.K. The following table identifies these items, net of income tax effect, by quarter and in the aggregate for Fiscal 2011: |
| QUARTER ENDED | ||||||||||||||||||||
| May 31, | August 31, | November 30, | February 28, | |||||||||||||||||
| Fiscal 2011 | 2010 | 2010 | 2010 | 2011 | Full Year | |||||||||||||||
| (in millions, net of income tax effect) | ||||||||||||||||||||
Accelerated depreciation |
$ | 0.6 | $ | 0.1 | $ | 0.3 | $ | 0.4 | $ | 1.4 | ||||||||||
Other cost of product sold costs |
$ | - | $ | - | $ | 0.1 | $ | - | $ | 0.1 | ||||||||||
Net gains on the CWAE Divestiture and
related activities |
$ | - | $ | - | $ | - | $ | (281.5 | ) | $ | (281.5 | ) | ||||||||
Net gain on sale of nonstrategic assets |
$ | (1.0 | ) | $ | - | $ | (2.3 | ) | $ | - | $ | (3.3 | ) | |||||||
Loss on contractual obligation from put
option of Ruffino shareholder |
$ | - | $ | - | $ | - | $ | 60.0 | $ | 60.0 | ||||||||||
Acquisition-related integration costs |
$ | 0.1 | $ | 0.1 | $ | - | $ | 0.1 | $ | 0.3 | ||||||||||
Other selling, general and administrative
costs |
$ | 0.6 | $ | 2.0 | $ | 1.0 | $ | 0.6 | $ | 4.2 | ||||||||||
Impairment of intangible assets |
$ | - | $ | - | $ | 4.2 | $ | 11.4 | $ | 15.6 | ||||||||||
Restructuring charges |
$ | 4.3 | $ | 13.2 | $ | (1.4 | ) | $ | 3.5 | $ | 19.6 | |||||||||
Other equity method investment loss |
$ | 0.5 | $ | 0.1 | $ | - | $ | - | $ | 0.6 | ||||||||||
Deferred tax assets valuation allowance |
$ | 28.1 | $ | 2.0 | $ | - | $ | - | $ | 30.1 | ||||||||||
| (2) | The sum of the quarterly earnings per common share in Fiscal 2011 and Fiscal 2010 may not equal the total computed for the respective years as the earnings per common share are computed independently for each of the quarters presented and for the full year. | |
| (3) | In Fiscal 2010, the Company recorded certain unusual items consisting of accelerated depreciation associated primarily with the Global Initiative and the Fiscal 2007 Wine Plan; inventory write-downs associated primarily with the Global Initiative; other cost of product sold primarily related to the Fiscal 2007 Wine Plan; a loss on the March 2009 sale of the Company’s value spirits business; a loss on the contractual obligation created by the notification by the 9.9% shareholder of Ruffino to exercise the option to put its entire equity interest to the Company; a gain on the sale of the Company’s nonstrategic U.K. cider business; acquisition-related integration costs associated primarily with the Fiscal 2008 Plan; other selling, general and administrative costs associated primarily with the Global Initiative; impairment of intangible assets associated primarily with the Company’s Australian business; restructuring charges associated primarily with the Global Initiative and the Australian Initiative; an impairment loss of the Company’s equity method investment in Ruffino; and a loss on the write-off of financing costs. The following table identifies these items, net of income tax effect, by quarter and in the aggregate for Fiscal 2010: |
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Table of Contents
| QUARTER ENDED | ||||||||||||||||||||
| May 31, | August 31, | November 30, | February 28, | |||||||||||||||||
| Fiscal 2010 | 2009 | 2009 | 2009 | 2010 | Full Year | |||||||||||||||
| (in millions, net of income tax effect) | ||||||||||||||||||||
Accelerated depreciation |
$ | 2.6 | $ | 7.6 | $ | 1.1 | $ | 1.3 | $ | 12.6 | ||||||||||
Inventory write-downs, restructuring
activities |
$ | 0.3 | $ | 0.5 | $ | 0.3 | $ | 0.1 | $ | 1.2 | ||||||||||
Other cost of product sold costs |
$ | 1.2 | $ | 1.1 | $ | 0.8 | $ | 0.7 | $ | 3.8 | ||||||||||
Loss on March 2009 sale of value spirits
business |
$ | 37.3 | $ | 0.1 | $ | - | $ | - | $ | 37.4 | ||||||||||
Loss on contractual obligation from put
option of Ruffino shareholder |
$ | - | $ | - | $ | 34.3 | $ | - | $ | 34.3 | ||||||||||
Gain on sale of nonstrategic U.K. cider
business |
$ | - | $ | - | $ | - | $ | (14.0 | ) | $ | (14.0 | ) | ||||||||
Acquisition-related integration costs |
$ | - | $ | - | $ | 0.1 | $ | - | $ | 0.1 | ||||||||||
Other selling, general and administrative
costs |
$ | 8.9 | $ | 6.9 | $ | 7.9 | $ | 5.6 | $ | 29.3 | ||||||||||
Impairment of intangible assets |
$ | - | $ | - | $ | - | $ | 97.9 | $ | 97.9 | ||||||||||
Restructuring charges |
$ | 14.3 | $ | 2.5 | $ | 5.2 | $ | 18.5 | $ | 40.5 | ||||||||||
Impairment of equity method investment |
$ | - | $ | - | $ | 25.4 | $ | - | $ | 25.4 | ||||||||||
Loss on write-off of financing costs |
$ | - | $ | - | $ | - | $ | 0.4 | $ | 0.4 | ||||||||||
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| Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure. |
Not Applicable.
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
The Company’s Chief Executive Officer and its Chief Financial Officer have concluded, based on
their evaluation as of the end of the period covered by this report, that the Company’s “disclosure
controls and procedures” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) are effective to ensure that information required to be disclosed in the reports that
the Company files or submits under the Securities Exchange Act of 1934 (i) is recorded, processed,
summarized and reported within the time periods specified in the Securities and Exchange
Commission’s rules and forms, and (ii) is accumulated and communicated to the Company’s management,
including its Chief Executive Officer and its Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
Internal Control over Financial Reporting
| (a) | See page 61 of this Annual Report on Form 10-K for Management’s Annual Report on Internal Control over Financial Reporting, which is incorporated herein by reference. | ||
| (b) | See page 59 of this Annual Report on Form 10-K for the attestation report of KPMG LLP, the Company’s independent registered public accounting firm, which is incorporated herein by reference. | ||
| (c) | In connection with management’s quarterly evaluation of “internal control over financial reporting” (as defined in the Securities Exchange Act of 1934 Rules 13a-15(f) and 15d-15(f)) no changes were identified in the Company’s internal control over financial reporting during the Company’s fiscal quarter ended February 28, 2011 (the Company’s fourth fiscal quarter) that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. |
Item 9B. Other Information.
Not Applicable.
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Table of Contents
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
The information required by this Item (except for the information regarding executive officers
required by Item 401 of Regulation S-K which is included in Part I hereof in accordance with
General Instruction G(3)) is incorporated herein by reference to the Company’s proxy statement to
be issued in connection with the Annual Meeting of Stockholders of the Company which is expected to
be held on July 21, 2011, under those sections of the proxy statement to be titled “Director
Nominees,” “The Board of Directors and Committees of the Board” and “Section 16(a) Beneficial
Ownership Reporting Compliance,” which proxy statement will be filed within 120 days after the end
of the Company’s fiscal year.
The Company has adopted the Chief Executive Officer and Senior Financial Executive Code of
Ethics which is a code of ethics that applies to its chief executive officer and its senior
financial officers. The Chief Executive Officer and Senior Financial Executive Code of Ethics is
located on the Company’s Internet website at http://www.cbrands.com/investors/corporate-governance.
Amendments to, and waivers granted under, the Company’s Chief Executive Officer and Senior
Financial Executive Code of Ethics, if any, will be posted to the Company’s website as well. The
Company will provide to anyone, without charge, upon request, a copy of such Code of Ethics. Such
requests should be directed in writing to Investor Relations Department, Constellation Brands,
Inc., 207 High Point Drive, Building 100, Victor, New York 14564 or by telephoning the Company’s
Investor Center at 1-888-922-2150.
Item 11. Executive Compensation.
The information required by this Item is incorporated herein by reference to the Company’s
proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company
which is expected to be held on July 21, 2011, under those sections of the proxy statement to be
titled “Executive Compensation,” “Compensation Committee Interlocks and Insider Participation” and
“Director Compensation,” which proxy statement will be filed within 120 days after the end of the
Company’s fiscal year. Notwithstanding the foregoing, the Compensation Committee Report included
within the section of the proxy statement to be titled “Executive Compensation” is only being
“furnished” hereunder and shall not be deemed “filed” with the Securities and Exchange Commission
or subject to the liabilities of Section 18 of the Securities Exchange Act of 1934.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item is incorporated herein by reference to the Company’s
proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company
which is expected to be held on July 21, 2011, under that section of the proxy statement to be
titled “Beneficial Ownership,” which proxy statement will be filed within 120 days after the end of
the Company’s fiscal year. Additional information required by this item is as follows:
139
Table of Contents
Securities Authorized for Issuance under Equity Compensation Plans
The following table sets forth information with respect to the Company’s compensation plans
under which its equity securities may be issued, as of February 28, 2011. The equity compensation
plans approved by security holders include the Company’s Long-Term Stock Incentive Plan, Incentive
Stock Option Plan, 1989 Employee Stock Purchase Plan and U.K. Sharesave Scheme.
Equity Compensation Plan Information
| (a) | (b) | (c) | ||||||||||
| Number of securities | ||||||||||||
| Number of securities | remaining available for | |||||||||||
| to be issued upon | Weighted-average | future issuance under | ||||||||||
| exercise of | exercise price of | equity compensation plans | ||||||||||
| outstanding options, | outstanding options, | (excluding securities | ||||||||||
| Plan Category | warrants and rights | warrants and rights | reflected in column (a)) | |||||||||
Equity compensation plans approved by
security holders |
30,871,923 (1) | $ | 18.63 (2) | 34,058,561 (3)(4)(5) | ||||||||
Equity compensation
plans not approved
by security holders |
- | - | - | |||||||||
Total |
30,871,923 | $ | 18.63 | 34,058,561 | ||||||||
| (1) | Includes 808,820 shares of unvested performance share units and 219,498 shares of unvested restricted stock units under the Company’s Long-Term Stock Incentive Plan. The unvested performance share units represent the maximum number of shares to be awarded, or 200% of the target shares granted. The Company currently estimates that only 150% of the target shares granted will be awarded based upon the current expectations regarding the achievement of specified performance targets. | |
| (2) | Excludes unvested performance share units and unvested restricted stock units under the Company’s Long-Term Stock Incentive Plan that can be exercised for no consideration. | |
| (3) | Includes 7,438,756 shares of Class A Common Stock under the Company’s Incentive Stock Option Plan. However, by the current terms of the Incentive Stock Option Plan, no additional grants of incentive stock options are permitted. | |
| (4) | Includes 1,641,255 shares of Class A Common Stock under the Company’s U.K. Sharesave Scheme. However, by the current terms of the U.K. Sharesave Scheme, no additional offerings under the U.K. Sharesave Scheme are permitted. | |
| (5) | Includes 2,506,279 shares of Class A Common Stock under the Company’s Employee Stock Purchase Plan remaining available for purchase, of which approximately 145,100 shares are subject to purchase during the current offering period. |
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated herein by reference to the Company’s
proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company
which is expected to be held on July 21, 2011, under those sections of the proxy statement to be
titled “Director Nominees,” “The Board of Directors and Committees of the Board” and “Certain
Relationships and Related Transactions,” which proxy statement will be filed within 120 days after
the end of the Company’s fiscal year.
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Table of Contents
Item 14. Principal Accountant Fees and Services.
The information required by this Item is incorporated herein by reference to the Company’s
proxy statement to be issued in connection with the Annual Meeting of Stockholders of the Company
which is expected to be held on July 21, 2011, under that section of the proxy statement to be
titled “Proposal 2 – Ratification of the Selection of KPMG LLP as Independent Registered Public
Accounting Firm,” which proxy statement will be filed within 120 days after the end of the
Company’s fiscal year.
PART IV
Item 15. Exhibits and Financial Statement Schedules.
| 1. | Financial Statements | ||
| The following consolidated financial statements of the Company are submitted herewith: |
| Report of Independent Registered Public Accounting Firm – KPMG LLP | |||
| Report of Independent Registered Public Accounting Firm – KPMG LLP | |||
| Management’s Annual Report on Internal Control Over Financial Reporting | |||
| Consolidated Balance Sheets – February 28, 2011, and February 28, 2010 | |||
| Consolidated Statements of Operations for the years ended February 28, 2011, February 28, 2010, and February 28, 2009 | |||
| Consolidated Statements of Changes in Stockholders’ Equity for the years ended February 28, 2011, February 28, 2010, and February 28, 2009 | |||
| Consolidated Statements of Cash Flows for the years ended February 28, 2011, February 28, 2010, and February 28, 2009 | |||
| Notes to Consolidated Financial Statements |
| 2. | Financial Statement Schedules | ||
| Schedules are not submitted because they are not applicable or not required under Regulation S-X or because the required information is included in the financial statements or notes thereto. | |||
| The following financial statements of the Company’s 50 percent owned joint venture, Crown Imports LLC, are included pursuant to Rule 3-09 of Regulation S-X: |
| Financial Statements as of and for the three years ended December 31, 2010 |
| 3. | 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 143 of this Report. The Index to Exhibits is incorporated herein by reference. |
141
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
| Dated: April 29, 2011 | CONSTELLATION BRANDS, INC. | |||
| By: | /s/ Robert Sands | |||
| Robert Sands, President and | ||||
| Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
/s/ Robert Sands
|
/s/ Robert Ryder
|
|||||
Chief Executive Officer (principal
|
President and Chief Financial Officer | |||||
executive officer) Dated: April 29, 2011 |
(principal financial officer and principal accounting officer) Dated: April 29, 2011 |
|||||
/s/ Richard Sands
|
/s/ Jerry Fowden
|
|||||
Chairman of the Board |
Dated: April 29, 2011 | |||||
Dated: April 29, 2011
|
||||||
/s/ Barry A. Fromberg
|
/s/ Jeananne K. Hauswald
|
|||||
Dated: April 29, 2011
|
Dated: April 29, 2011 | |||||
/s/ James A. Locke III
|
/s/ Paul L. Smith
|
|||||
Dated: April 29, 2011
|
Dated: April 29, 2011 | |||||
/s/ Mark Zupan
|
||||||
Dated: April 29, 2011 |
142
Table of Contents
INDEX TO EXHIBITS
| Exhibit No. | ||||
| 2.1 | 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).+ # |
|||
| 2.2 | 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).+ # |
|||
| 2.3 | 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).+
# |
|||
| 2.4 | Stock Purchase Agreement dated as of
November 9, 2007 by and between Beam
Global Spirits & Wine, Inc. and
Constellation Brands, Inc. (filed as
Exhibit 2.1 to the Company’s Current
Report on Form 8-K dated November 13,
2007, filed November 14, 2007 and
incorporated herein by reference). |
|||
| 2.5 | Assignment and Assumption Agreement made
as of November 29, 2007 between
Constellation Brands, Inc. and
Constellation Wines U.S., Inc. relating
to that certain Stock Purchase Agreement
dated as of November 9, 2007 by and
between Beam Global Spirits & Wine, Inc.
and Constellation Brands, Inc. (filed as
Exhibit 2.9 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended November 30, 2007 and
incorporated herein by reference). |
|||
| 2.6 | Share Subscription Agreement dated
December 23, 2010 among Constellation
Brands, Inc., Vincor U.K. Limited, CBI
Australia Holdings Pty Limited,
Perpetual Trustee Company Limited as
trustee of the CHAMP Buyout III Trust,
Perpetual Corporate Trust Limited as
trustee of the CHAMP Buyout III (SWF)
Trust, CHAMP Buyout III Pte Ltd, and
Canopus Holdco Limited (filed as Exhibit
2.1 to the Company’s Current Report on
Form 8-K dated December 23, 2010, filed
December 28, 2010 and incorporated
herein by reference). |
|||
| 2.7 | Deed of Amendment and Restatement dated
January 31, 2011 to the Share
Subscription Agreement dated December
23, 2010 among Constellation Brands,
Inc., Vincor U.K. Limited, CBI Australia
Holdings Pty Limited, Perpetual Trustee
Company Limited as trustee of the CHAMP
Buyout III Trust, Perpetual Corporate
Trust Limited as trustee of the CHAMP
Buyout III (SWF) Trust, CHAMP Buyout III
Pte Ltd, and Canopus Holdco Limited
(filed as Exhibit 2.1 to the Company’s
Current Report on Form 8-K dated January
31, 2011, filed February 4, 2011 and
incorporated herein by reference). |
|||
143
Table of Contents
| 3.1 | Restated Certificate of Incorporation of
the Company (filed as Exhibit 3.1 to the
Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31,
2009 and incorporated herein by
reference). |
|||
| 3.2 | Certificate of Amendment to the
Certificate of Incorporation of the
Company (filed as Exhibit 3.2 to the
Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31,
2009 and incorporated herein by
reference). |
|||
| 3.3 | Amended and Restated By-Laws of the
Company (filed as Exhibit 3.2 to the
Company’s Current Report on Form 8-K
dated December 6, 2007, filed December
12, 2007 and incorporated herein by
reference). |
|||
| 4.1 | Indenture, with respect to 7.25% Senior
Notes due 2016, dated as of August 15,
2006, by and among the Company, as
Issuer, certain subsidiaries, as
Guarantors and BNY Midwest Trust
Company, as Trustee (filed as Exhibit
4.1 to the Company’s Current Report on
Form 8-K dated August 15, 2006, filed
August 18, 2006 and incorporated herein
by reference).# |
|||
| 4.2 | Supplemental Indenture No. 1, dated as
of August 15, 2006, among the Company,
as Issuer, certain subsidiaries, as
Guarantors, and BNY Midwest Trust
Company, as Trustee (filed as Exhibit
4.2 to the Company’s Current Report on
Form 8-K dated August 15, 2006, filed
August 18, 2006 and incorporated herein
by reference).# |
|||
| 4.3 | 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).# |
|||
| 4.4 | Supplemental Indenture No. 3, dated as
of May 4, 2007, by and among the
Company, Barton SMO Holdings LLC, ALCOFI
INC., and Spirits Marque One LLC, and
BNY Midwest Trust Company, as Trustee
(filed as Exhibit 4.32 to the Company’s
Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 2007 and
incorporated herein by reference). |
|||
| 4.5 | Supplemental Indenture No. 4, with
respect to 8 3/8% Senior Notes due 2014,
dated as of December 5, 2007, by and
among the Company, as Issuer, certain
subsidiaries, as Guarantors, and The
Bank of New York Trust Company, N.A.,
(as successor to BNY Midwest Trust
Company), as Trustee (filed as Exhibit
4.1 to the Company’s Current Report on
Form 8-K dated December 5, 2007, filed
December 11, 2007 and incorporated
herein by reference). |
144
Table of Contents
| 4.6 | Supplemental Indenture No. 5, dated as
of January 22, 2008, by and among the
Company, BWE, Inc., Atlas Peak
Vineyards, Inc., Buena Vista Winery,
Inc., Clos du Bois Wines, Inc., Gary
Farrell Wines, Inc., Peak Wines
International, Inc., and Planet 10
Spirits, LLC, and The Bank of New York
Trust Company, N.A. (successor trustee
to BNY Midwest Trust Company), as
Trustee (filed as Exhibit 4.37 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 29, 2008
and incorporated herein by reference). |
|||
| 4.7 | Supplemental Indenture No. 6, dated as
of February 27, 2009, by and among the
Company, Constellation Services LLC, and
The Bank of New York Mellon Trust
Company National Association (successor
trustee to BNY Midwest Trust Company),
as Trustee (filed as Exhibit 4.31 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 28, 2009
and incorporated herein by reference). |
|||
| 4.8 | Indenture, with respect to 7.25% Senior
Notes due May 2017, dated May 14, 2007,
by and among the Company, as Issuer,
certain subsidiaries, as Guarantors, and
The Bank of New York Trust Company,
N.A., as Trustee (filed as Exhibit 4.1
to the Company’s Current Report on Form
8-K dated May 9, 2007, filed May 14,
2007 and incorporated herein by
reference). |
|||
| 4.9 | Supplemental Indenture No. 1, dated as
of January 22, 2008, by and among the
Company, BWE, Inc., Atlas Peak
Vineyards, Inc., Buena Vista Winery,
Inc., Clos du Bois Wines, Inc., Gary
Farrell Wines, Inc., Peak Wines
International, Inc., and Planet 10
Spirits, LLC, and The Bank of New York
Trust Company, N.A. (successor trustee
to BNY Midwest Trust Company), as
Trustee (filed as Exhibit 4.39 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 29, 2008
and incorporated herein by reference). |
|||
| 4.10 | Supplemental Indenture No. 2, dated as
of February 27, 2009, by and among the
Company, Constellation Services LLC, and
The Bank of New York Mellon Trust
Company National Association (successor
trustee to BNY Midwest Trust Company),
as Trustee (filed as Exhibit 4.34 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 28, 2009
and incorporated herein by reference). |
|||
| 4.11 | Credit Agreement, dated as of June 5,
2006, among Constellation, the
Subsidiary Guarantors party thereto, the
Lenders party thereto, JPMorgan Chase
Bank, N.A., as Administrative Agent,
Citicorp North America, Inc., as
Syndication Agent, J.P. Morgan
Securities Inc. and Citigroup Global
Markets Inc., as Joint Lead Arrangers
and Bookrunners, and The Bank of Nova
Scotia and SunTrust Bank, as
Co-Documentation Agents (filed as
Exhibit 4.11 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended May 31, 2010 and
incorporated herein by reference). |
145
Table of Contents
| 4.12 | Amendment No. 1, dated as of February
23, 2007, to the Credit Agreement, dated
as of June 5, 2006, among Constellation,
the subsidiary guarantors referred to on
the signature pages to such Amendment
No. 1, and JPMorgan Chase Bank, N.A., in
its capacity as Administrative Agent
(filed as Exhibit 99.1 to the Company’s
Current Report on Form 8-K, dated and
filed February 23, 2007, and
incorporated herein by reference). # |
|||
| 4.13 | Amendment No. 2, dated as of November
19, 2007, to the Credit Agreement, dated
as of June 5, 2006, among Constellation,
the Subsidiary Guarantors referred to on
the signature pages to such Amendment
No. 2, and JPMorgan Chase Bank, N.A., in
its capacity as Administrative Agent
(filed as Exhibit 4.1 to the Company’s
Current Report on Form 8-K, dated and
filed November 20, 2007, and
incorporated herein by reference). |
|||
| 4.14 | Amendment No. 3, dated as of January 25,
2010, to the Credit Agreement, dated as
of June 5, 2006, among Constellation
Brands, Inc., the Subsidiary Guarantors
referred to on the signature pages to
such Amendment No. 3, JPMorgan Chase
Bank, N.A., in its capacity as
Administrative Agent and Issuing Lender,
Bank of America, N.A., in its capacity
as Swingline Lender, The Bank of Nova
Scotia, in its capacity as Issuing
Lender, JPMorgan Securities Inc., in its
capacity as joint bookrunner, CoBank,
ACB, in its capacity as joint
bookrunner, Banc of America Securities
LLC, in its capacity as joint bookrunner
and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A.,
“Rabobank Nederland”, New York Branch in
its capacity as joint bookrunner (filed
as Exhibit 4.1 to the Company’s Current
Report on Form 8-K, dated January 25,
2010, filed January 26, 2010, and
incorporated herein by reference). |
|||
| 4.15 | Guarantee Assumption Agreement, dated as
of August 11, 2006, by Constellation
Leasing, LLC, in favor of JPMorgan Chase
Bank, N.A., as Administrative Agent,
pursuant to the Credit Agreement dated
as of June 5, 2006 (as modified and
supplemented and in effect from time to
time) (filed as Exhibit 4.29 to the
Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31,
2006 and incorporated herein by
reference). # |
|||
| 4.16 | Guarantee Assumption Agreement, dated as
of November 30, 2006, by Vincor
International Partnership, Vincor
International II, LLC, Vincor Holdings,
Inc., R.H. Phillips, Inc., The Hogue
Cellars, Ltd., and Vincor Finance, LLC
in favor of JPMorgan Chase Bank, N.A.,
as Administrative Agent, pursuant to the
Credit Agreement dated as of June 5,
2006 (as modified and supplemented and
in effect from time to time) (filed as
Exhibit 4.31 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended November 30, 2006 and
incorporated herein by reference). # |
|||
| 4.17 | Guarantee Assumption Agreement, dated as
of May 4, 2007, by Barton SMO Holdings
LLC, ALCOFI INC., and Spirits Marque One
LLC in favor of JPMorgan Chase Bank,
N.A., as Administrative Agent, pursuant
to the Credit Agreement dated as of June
5, 2006 (as modified and supplemented
and in effect from time to time) (filed
as Exhibit 4.39 to the Company’s
Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 2007 and
incorporated herein by reference). |
146
Table of Contents
| 4.18 | Guarantee Assumption Agreement, dated as
of January 22, 2008, by BWE, Inc., Atlas
Peak Vineyards, Inc., Buena Vista
Winery, Inc., Clos du Bois Wines, Inc.,
Gary Farrell Wines, Inc., Peak Wines
International, Inc., and Planet 10
Spirits, LLC in favor of JPMorgan Chase
Bank, N.A., as Administrative Agent,
pursuant to the Credit Agreement dated
as of June 5, 2006 (as modified and
supplemented and in effect from time to
time) (filed as Exhibit 4.46 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 29, 2008
and incorporated herein by reference). |
|||
| 4.19 | Guarantee Assumption Agreement, dated as
of February 27, 2009, by Constellation
Services LLC in favor of JPMorgan Chase
Bank, N.A., as Administrative Agent,
pursuant to the Credit Agreement dated
as of June 5, 2006 (as modified and
supplemented and in effect from time to
time) (filed as Exhibit 4.42 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 28, 2009
and incorporated herein by reference). |
|||
| 10.1 | Marvin Sands Split Dollar Insurance
Agreement (filed as Exhibit 10.9 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended August 31, 1993
and also filed as Exhibit 10.1 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 29, 2004
and incorporated herein by reference).# |
|||
| 10.2 | Constellation Brands, Inc. Long-Term
Stock Incentive Plan, amended and
restated as of December 6, 2007 (filed
as Exhibit 99.1 to the Company’s Current
Report on Form 8-K dated December 6,
2007, filed December 12, 2007 and
incorporated herein by reference).* |
|||
| 10.3 | First Amendment to the Company’s
Long-Term Stock Incentive Plan (filed as
Exhibit 99.1 to the Company’s Current
Report on Form 8-K, dated July 23, 2009,
filed July 24, 2009, and incorporated
herein by reference).* |
|||
| 10.4 | Form of Stock Option Amendment pursuant
to the Company’s Long-Term Stock
Incentive Plan (filed as Exhibit 99.2 to
the Company’s Current Report on Form 8-K
dated December 6, 2007, filed December
12, 2007 and incorporated herein by
reference).* |
|||
| 10.5 | Form of Terms and Conditions Memorandum
for Employees with respect to grants of
options to purchase Class A Common Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (filed as Exhibit
99.2 to the Company’s Current Report on
Form 8-K dated July 26, 2007, filed July
31, 2007 and incorporated herein by
reference).* |
|||
| 10.6 | Form of Terms and Conditions Memorandum
for Employees with respect to grants of
options to purchase Class 1 Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (grants before July
26, 2007) (filed as Exhibit 99.3 to the
Company’s Current Report on Form 8-K
dated December 6, 2007, filed December
12, 2007 and incorporated herein by
reference).* |
147
Table of Contents
| 10.7 | Form of Terms and Conditions Memorandum
for Employees with respect to grants of
options to purchase Class 1 Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (grants on or after
July 26, 2007 and before April 1, 2008)
(filed as Exhibit 99.4 to the Company’s
Current Report on Form 8-K dated
December 6, 2007, filed December 12,
2007 and incorporated herein by
reference).* |
|||
| 10.8 | Form of Terms and Conditions Memorandum
for Employees with respect to grants of
options to purchase Class 1 Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (grants on or after
April 1, 2008 and before April 6, 2009)
(filed as Exhibit 10.1 to the Company’s
Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2008 and
incorporated herein by reference).* |
|||
| 10.9 | Form of Terms and Conditions Memorandum
for Employees with respect to grants of
options to purchase Class 1 Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (grants on or after
April 6, 2009 and before April 5, 2010)
(filed as Exhibit 99.1 to the Company’s
Current Report on Form 8-K, dated April |
|||
6, 2009, filed April 9, 2009, and
incorporated herein by reference).* |
||||
| 10.10 | Form of Terms and Conditions Memorandum
for Employees with respect to grants of
options to purchase Class 1 Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (grants on or after
April 5, 2010) (filed as Exhibit 99.1 to
the Company’s Current Report on Form
8-K, dated April 5, 2010, filed April 9,
2010, and incorporated herein by
reference).* |
|||
| 10.11 | Form of Restricted Stock Award Agreement
for Employees with respect to the
Company’s Long-Term Stock Incentive Plan
(grants before April 6, 2009) (filed as
Exhibit 99.1 to the Company’s Current
Report on Form 8-K dated April 1, 2008,
filed April 7, 2008 and incorporated
herein by reference).* |
|||
| 10.12 | Form of Restricted Stock Award Agreement
for Employees with respect to the
Company’s Long-Term Stock Incentive Plan
(grants on or after April 6, 2009 and
before April 5, 2010) (filed as Exhibit
99.2 to the Company’s Current Report on
Form 8-K, dated April 6, 2009, filed
April 9, 2009, and incorporated herein
by reference).* |
|||
| 10.13 | Form of Restricted Stock Award Agreement
for Employees with respect to the
Company’s Long-Term Stock Incentive Plan
(grants on or after April 5, 2010 and
before April 5, 2011) (filed as Exhibit
99.2 to the Company’s Current Report on
Form 8-K, dated April 5, 2010, filed
April 9, 2010, and incorporated herein
by reference).* |
|||
| 10.14 | Form of Restricted Stock Award Agreement
for Employees with respect to the
Company’s Long-Term Stock Incentive Plan
(grants on or after April 5, 2011)
(filed as Exhibit 99.2 to the Company’s
Current Report on Form 8-K, dated April
5, 2011, filed April 8, 2011, and
incorporated herein by reference).* |
148
Table of Contents
| 10.15 | Form of Performance Share Unit Award
Agreement for Executives with respect to
the Company’s Long-Term Stock Incentive
Plan (awards before April 5, 2011)
(filed as Exhibit 99.3 to the Company’s
Current Report on Form 8-K, dated April
5, 2010, filed April 9, 2010, and
incorporated herein by reference).* |
|||
| 10.16 | Form of Performance Share Unit Award
Agreement for Executives with respect to
the Company’s Long-Term Stock Incentive
Plan (awards on or after April 5, 2011)
(filed as Exhibit 99.3 to the Company’s
Current Report on Form 8-K, dated April
5, 2011, filed April 8, 2011, and
incorporated herein by reference).* |
|||
| 10.17 | Form of Terms and Conditions Memorandum
for Directors with respect to options to
purchase Class A Common Stock pursuant
to the Company’s Long-Term Stock
Incentive Plan (filed as Exhibit 99.3 to
the Company’s Current Report on Form 8-K
dated July 26, 2007, filed July 31, 2007
and incorporated herein by reference).* |
|||
| 10.18 | Form of Terms and Conditions Memorandum
for Directors with respect to grants of
options to purchase Class 1 Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (grants before July
17, 2008) (filed as Exhibit 99.5 to the
Company’s Current Report on Form 8-K
dated December 6, 2007, filed December
12, 2007 and incorporated herein by
reference).* |
|||
| 10.19 | Form of Terms and Conditions Memorandum
for Directors with respect to grants of
options to purchase Class 1 Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (grants on or after
July 17, 2008 and before July 22, 2010)
(filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2008 and
incorporated herein by reference).* |
|||
| 10.20 | Form of Terms and Conditions Memorandum
for Directors with respect to a pro rata
grant of options to purchase Class 1
Stock pursuant to the Company’s
Long-Term Stock Incentive Plan (filed as
Exhibit 99.1 to the Company’s Current
Report on Form 8-K dated April 20, 2010,
filed April 22, 2010 and incorporated
herein by reference).* |
|||
| 10.21 | Form of Terms and Conditions Memorandum
for Directors with respect to grants of
options to purchase Class 1 Stock
pursuant to the Company’s Long-Term
Stock Incentive Plan (grants on or after
July 22, 2010) (filed as Exhibit 10.1 to
the Company’s Quarterly Report on Form
10-Q for the fiscal quarter ended August
31, 2010 and incorporated herein by
reference).* |
|||
| 10.22 | Form of Restricted Stock Agreement for
Directors with respect to the Company’s
Long-Term Stock Incentive Plan (grants
before July 22, 2010) (filed as Exhibit
10.13 to the Company’s Annual Report on
Form 10-K for the fiscal year ended
February 28, 2006 and incorporated
herein by reference).* # |
149
Table of Contents
| 10.23 | Form of Restricted Stock Agreement for
Directors with respect to a pro rata
award of restricted stock pursuant to
the Company’s Long-Term Stock Incentive
Plan (filed as Exhibit 99.2 to the
Company’s Current Report on Form 8-K
dated April 20, 2010, filed April 22,
2010 and incorporated herein by
reference).* |
|||
| 10.24 | Form of Restricted Stock Award Agreement
for Directors with respect to the
Company’s Long-Term Stock Incentive Plan
(grants on or after July 22, 2010)
(filed as Exhibit 10.2 to the Company’s
Quarterly Report on Form 10-Q for the
fiscal quarter ended August 31, 2010 and
incorporated herein by reference).* |
|||
| 10.25 | Incentive Stock Option Plan of the
Company (filed as Exhibit 10.2 to the
Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended August 31,
1997 and incorporated herein by
reference).* # |
|||
| 10.26 | Amendment Number One to the Company’s
Incentive Stock Option Plan (filed as
Exhibit 10.3 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended August 31, 1997 and
incorporated herein by reference).* # |
|||
| 10.27 | Amendment Number Two to the Company’s
Incentive Stock Option Plan (filed as
Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended August 31, 2000 and
incorporated herein by reference).* # |
|||
| 10.28 | Amendment Number Three to the Company’s
Incentive Stock Option Plan (filed as
Exhibit 10.13 to the Company’s Annual
Report on Form 10-K for the fiscal year
ended February 28, 2001 and incorporated
herein by reference).* # |
|||
| 10.29 | Form of Terms and Conditions Memorandum
with respect to the Company’s Incentive
Stock Option Plan (filed as Exhibit
10.18 to the Company’s Annual Report on
Form 10-K for the fiscal year ended
February 28, 2007 and incorporated
herein by reference).* # |
|||
| 10.30 | Constellation Brands, Inc. Annual
Management Incentive Plan, amended and
restated as of July 26, 2007 (filed as
Exhibit 99.4 to the Company’s Current
Report on Form 8-K dated July 26, 2007,
filed July 31, 2007 and incorporated
herein by reference).* |
|||
| 10.31 | Amendment Number 1, dated April 6, 2009,
to the Constellation Brands, Inc. Annual
Management Incentive Plan, amended and
restated as of July 26, 2007 (filed as
Exhibit 99.3 to the Company’s Current
Report on Form 8-K dated April 6, 2009,
filed April 9, 2009 and incorporated
herein by reference).* |
|||
| 10.32 | Supplemental Executive Retirement Plan
of the Company (filed as Exhibit 10.14
to the Company’s Annual Report on Form
10-K for the fiscal year ended February
28, 1999 and incorporated herein by
reference).* # |
150
Table of Contents
| 10.33 | First Amendment to the Company’s
Supplemental Executive Retirement Plan
(filed as Exhibit 10 to the Company’s
Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 1999 and
incorporated herein by reference).* # |
|||
| 10.34 | Second Amendment to the Company’s
Supplemental Executive Retirement Plan
(filed as Exhibit 10.20 to the Company’s
Annual Report on Form 10-K for the
fiscal year ended February 28, 2001 and
incorporated herein by reference).* # |
|||
| 10.35 | Third Amendment to the Company’s
Supplemental Executive Retirement Plan
(filed as Exhibit 99.2 to the Company’s
Current Report on Form 8-K dated April
7, 2005, filed April 13, 2005 and
incorporated herein by reference).* # |
|||
| 10.36 | 2005 Supplemental Executive Retirement
Plan of the Company (filed as Exhibit
99.3 to the Company’s Current Report on
Form 8-K dated April 7, 2005, filed
April 13, 2005 and incorporated herein
by reference).* # |
|||
| 10.37 | First Amendment to the Company’s 2005
Supplemental Executive Retirement Plan
(filed as Exhibit 10.7 to the Company’s
Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 2007 and
incorporated herein by reference).* |
|||
| 10.38 | Credit Agreement, dated as of June 5,
2006, among Constellation, the
Subsidiary Guarantors party thereto, the
Lenders party thereto, JPMorgan Chase
Bank, N.A., as Administrative Agent,
Citicorp North America, Inc., as
Syndication Agent, J.P. Morgan
Securities Inc. and Citigroup Global
Markets Inc., as Joint Lead Arrangers
and Bookrunners, and The Bank of Nova
Scotia and SunTrust Bank, as
Co-Documentation Agents (filed as
Exhibit 4.11 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended May 31, 2010 and
incorporated herein by reference). |
|||
| 10.39 | 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).# |
|||
| 10.40 | Amendment No. 2, dated as of November
19, 2007, to the Credit Agreement, dated
as of June 5, 2006, among Constellation,
the Subsidiary Guarantors referred to on
the signature pages to such Amendment
No. 2, and JPMorgan Chase Bank, N.A., in
its capacity as Administrative Agent
(filed as Exhibit 4.1 to the Company’s
Current Report on Form 8-K, dated and
filed November 20, 2007, and
incorporated herein by reference). |
151
Table of Contents
| 10.41 | Amendment No. 3, dated as of January 25,
2010, to the Credit Agreement, dated as
of June 5, 2006, among Constellation
Brands, Inc., the Subsidiary Guarantors
referred to on the signature pages to
such Amendment No. 3, JPMorgan Chase
Bank, N.A., in its capacity as
Administrative Agent and Issuing Lender,
Bank of America, N.A., in its capacity
as Swingline Lender, The Bank of Nova
Scotia, in its capacity as Issuing
Lender, JPMorgan Securities Inc., in its
capacity as joint bookrunner, CoBank,
ACB, in its capacity as joint
bookrunner, Banc of America Securities
LLC, in its capacity as joint bookrunner
and Cooperatieve Centrale
Raiffeisen-Boerenleenbank B.A.,
“Rabobank Nederland”, New York Branch in
its capacity as joint bookrunner (filed
as Exhibit 4.1 to the Company’s Current
Report on Form 8-K, dated January 25,
2010, filed January 26, 2010, and
incorporated herein by reference). |
|||
| 10.42 | 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).# |
|||
| 10.43 | 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).# |
|||
| 10.44 | 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). |
|||
| 10.45 | Guarantee Assumption Agreement, dated as
of January 22, 2008, by BWE, Inc., Atlas
Peak Vineyards, Inc., Buena Vista
Winery, Inc., Clos du Bois Wines, Inc.,
Gary Farrell Wines, Inc., Peak Wines
International, Inc., and Planet 10
Spirits, LLC in favor of JPMorgan Chase
Bank, N.A., as Administrative Agent,
pursuant to the Credit Agreement dated
as of June 5, 2006 (as modified and
supplemented and in effect from time to
time) (filed as Exhibit 4.46 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 29, 2008
and incorporated herein by reference). |
|||
| 10.46 | Guarantee Assumption Agreement, dated as
of February 27, 2009, by Constellation
Services LLC in favor of JPMorgan Chase
Bank, N.A., as Administrative Agent,
pursuant to the Credit Agreement dated
as of June 5, 2006 (as modified and
supplemented and in effect from time to
time) (filed as Exhibit 4.42 to the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 28, 2009
and incorporated herein by reference). |
152
Table of Contents
| 10.47 | The Constellation Brands UK Sharesave
Scheme, as amended (filed as Exhibit
10.4 to the Company’s Quarterly Report
on Form 10-Q for the fiscal quarter
ended August 31, 2006 and incorporated
herein by reference).* # |
|||
| 10.48 | Letter Agreement dated April 26, 2007
(together with addendum dated May 8,
2007) between the Company and Robert
Ryder addressing compensation (filed as
Exhibit 10.5 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended May 31, 2007 and
incorporated herein by reference).* |
|||
| 10.49 | Form of Executive Employment Agreement
between Constellation Brands, Inc. and
its Chairman of the Board and its
President and Chief Executive Officer
(filed as Exhibit 99.1 to the Company’s
Current Report on Form 8-K, dated and
filed May 21, 2008, and incorporated
herein by reference).* |
|||
| 10.50 | Form of Executive Employment Agreement
between Constellation Brands, Inc. and
its Other Executive Officers (filed as
Exhibit 99.2 to the Company’s Current
Report on Form 8-K, dated and filed May
21, 2008, and incorporated herein by
reference).* |
|||
| 10.51 | Amended and Restated Limited Liability
Company Agreement of Crown Imports LLC,
dated as of January 2, 2007 (filed as
Exhibit 99.1 to the Company’s Current
Report on Form 8-K dated January 2,
2007, filed January 3, 2007 and
incorporated herein by reference).+ # |
|||
| 10.52 | Importer Agreement, dated as of January
2, 2007, by and between Extrade II, S.A.
de C.V. and Crown Imports LLC (filed as
Exhibit 99.2 to the Company’s Current
Report on Form 8-K dated January 2,
2007, filed January 3, 2007 and
incorporated herein by reference).+ # |
|||
| 10.53 | Administrative Services Agreement, dated
as of January 2, 2007, by and between
Barton Incorporated and Crown Imports
LLC (filed as Exhibit 99.3 to the
Company’s Current Report on Form 8-K
dated January 2, 2007, filed January 3,
2007 and incorporated herein by
reference).+ # |
|||
| 10.54 | Sub-license Agreement, dated as of
January 2, 2007, by and between Marcas
Modelo, S.A. de C.V. and Crown Imports
LLC (filed as Exhibit 99.4 to the
Company’s Current Report on Form 8-K
dated January 2, 2007, filed January 3,
2007 and incorporated herein by
reference).+ # |
|||
| 10.55 | Agreement Regarding Products dated
October 28, 2010, between Extrade II,
S.A. de C.V., Crown Imports LLC and
Marcas Modelo, S.A. de C.V. (filed as
Exhibit 10.1 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended November 30, 2010 and
incorporated herein by reference).++ |
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Table of Contents
| 10.56 | Master Confirmation, dated as of April
16, 2010, with respect to a Collared
Accelerated Stock Buyback Transaction
between the Company and Goldman Sachs &
Co. (filed as Exhibit 10.10 to the
Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended May 31,
2010 and incorporated herein by
reference). |
|||
| 10.57 | Supplemental Confirmation, dated April
16, 2010, with respect to a Collared
Accelerated Stock Buyback Transaction
between the Company and Goldman Sachs &
Co. (filed as Exhibit 10.11 to the
Company’s Quarterly Report on Form 10-Q
for the fiscal quarter ended May 31,
2010 and incorporated herein by
reference). |
|||
| 10.58 | Trade Notification, dated May 10, 2010,
with respect to a Collared Accelerated
Stock Buyback Transaction between the
Company and Goldman Sachs & Co. (filed
as Exhibit 10.12 to the Company’s
Quarterly Report on Form 10-Q for the
fiscal quarter ended May 31, 2010 and
incorporated herein by reference). |
|||
| 21.1 | Subsidiaries of Company (filed herewith). |
|||
| 23.1 | Consent of KPMG LLP (filed herewith). |
|||
| 23.2 | Consent of PricewaterhouseCoopers LLP as
it relates to Crown Imports LLC (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). |
|||
| 99.1 | 1989 Employee Stock Purchase Plan
(Restated June 27, 2001) (filed as
Exhibit 99.1 to the Company’s Quarterly
Report on Form 10-Q for the fiscal
quarter ended August 31, 2001 and
incorporated herein by reference).# |
|||
| 99.2 | Financial Statements of Crown Imports
LLC as of and for the three years ended
December 31, 2010 (filed herewith). |
154
Table of Contents
| 101.1 | The following materials from the
Company’s Annual Report on Form 10-K for
the fiscal year ended February 28, 2011,
formatted in XBRL (eXtensible Business
Reporting Language): (i) Consolidated
Balance Sheets as of February 28, 2011
and February 28, 2010, (ii) Consolidated
Statements of Operations for the years
ended February 28, 2011, February 28,
2010 and February 28, 2009, (iii)
Consolidated Statements of Changes in
Stockholders’ Equity for the years ended
February 28, 2011, February 28, 2010,
and February 28, 2009 (iv) Consolidated
Statements of Cash Flows for the years
ended February 28, 2011, February 28,
2010 and February 28, 2009, and (v)
Notes to Consolidated Financial
Statements.** |
* Designates management contract or compensatory plan or arrangement. |
||||
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101
hereto are deemed not filed or part of a registration statement or prospectus for
purposes of Sections 11 or 12 of the Securities Act of 1933 (“Securities Act”), as
amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange
Act of 1934 (“Exchange Act”), as amended, and otherwise not subject to liability under
those sections. This exhibit shall not be deemed to be incorporated by reference into
any filing under the Securities Act or the Exchange Act, except to the extent that the
Registrant specifically incorporates this exhibit by reference. |
||||
# Company’s Commission File No. 001-08495. For filings prior to October
4, 1999, use Commission File No. 000-07570. |
||||
+ Portions of this exhibit were redacted pursuant to a confidential
treatment request filed with and approved by the Securities and Exchange Commission
pursuant to Rule 24b-2 under the Securities Exchange Act of 1934, as amended. |
||||
++ 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.
155
