What drove the growth in Constellation Brands' Fiscal 2003 results?

Net sales grew 4.8% to $2,731.6 million, driven mainly by higher imported beer sales, including a price increase on the Mexican beer portfolio that took effect in the first quarter of Fiscal 2003, and by a $50.7 million favorable foreign currency impact in the U.K. Brands and Wholesale segment. Fine Wine sales rose 18.1%, while Popular and Premium Wine sales fell 3.7%. Gross margin improved to 27.8% of net sales from 26.7%.

What is the Hardy Acquisition and how is it being financed?

The Company acquired BRL Hardy Limited, now Hardy Wine Company Limited, Australia's largest wine producer, completing the transaction on April 9, 2003. Total consideration to Hardy shareholders was $1,137.4 million, including a cash portion of $1,060.2 million financed with $660.2 million from the 2003 Credit Agreement and $400.0 million from the Bridge Agreement, plus 3,288,913 shares of Class A Common Stock valued at $77.2 million. The Company also acquired the remaining 50% of Pacific Wine Partners LLC as part of the deal.

How did the Company's debt position change during the year, and what happens after year-end?

Total debt was $1,265.5 million at February 28, 2003, down $164.0 million from the prior year, and the debt-to-total-capitalization ratio fell to 51.9% from 59.9%. After year-end, the Company drew $1,200.0 million in term loans and $8.0 million in revolving debt under the 2003 Credit Agreement and $400.0 million under the Bridge Agreement, using the proceeds to repay the 2000 Credit Agreement and fund the Hardy payment. The Bridge Loans are due on the first anniversary of funding, with the option to convert to term loans maturing seven years after funding.

Is the Company paying dividends, and what restricts them?

No. The Company's policy is to retain all earnings to finance the development and expansion of its business, and it has not paid cash dividends since its 1973 initial public offering. The senior credit facility, bridge loan agreement, and several note indentures also restrict the payment of cash dividends.

What are the main risks flagged in the filing?

The filing highlights the substantial indebtedness incurred to finance acquisitions, the risk that acquisitions and joint ventures, including Hardy, may not be integrated successfully, and intense industry competition. It also cites excise tax increases, dependence on wholesale distributors and major retailers, consumption declines, raw material price volatility and reliance on limited glass bottle suppliers, currency and geopolitical exposure following the Hardy Acquisition, goodwill impairment risk with $722.2 million of goodwill, and the termination or non-renewal of imported beer distribution agreements, including the Corona Extra agreement.

STZ 10-K FY2003 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed May 13, 2003. Cited figures are marked; the original filing is the authoritative source.

Constellation Brands, Inc. (STZ) reported its Form 10-K for the fiscal year ended February 28, 2003 (Fiscal 2003).

Net sales rose to $2,731.6 million^a from $2,606.8 million, an increase of $124.9 million, or 4.8%. Operating income increased to $405.0 million from $342.5 million, and net income increased to $203.3 million, or $2.19 diluted earnings per share, from $136.4 million. Growth was driven by Imported Beer and Spirits, where net sales rose 5.7% on a price increase in the Mexican beer portfolio, and by Fine Wine, up 18.1%.

Popular and Premium Wine net sales declined 3.7% on lower volumes amid heavier industry promotional spending. The most consequential development is the Hardy Acquisition. The Company completed its acquisition of BRL Hardy Limited (now Hardy Wine Company Limited), Australia's largest wine producer, on April 9, 2003, for total consideration of $1,137.4 million^b in cash and Class A Common Stock.

The cash portion of $1,060.2 million^c was financed with $660.2 million of borrowings under a new 2003 Credit Agreement and $400.0 million under a Bridge Agreement. The Company states the acquisition is expected to have a material impact on its future results of operations, financial position and cash flows. Beginning in Fiscal 2004, the Company will report three segments: Constellation Wines, Constellation Beers and Spirits, and Corporate Operations and Other.

At February 28, 2003, total debt was $1,265.5 million^d, down $164.0 million from the prior year, and the ratio of total debt to total capitalization fell to 51.9% from 59.9%. Net cash provided by operating activities was $236.1 million, and capital expenditures were $71.6 million. Subsequent to year-end, the Company drew $1,200.0 million in term loans and $8.0 million in revolving debt under the 2003 Credit Agreement, plus the $400.0 million Bridge Agreement borrowing, to repay the 2000 Credit Agreement and fund the Hardy payment, which substantially increases its debt load going forward.

02—Key points

Key Highlights

Net sales increased 4.8% to $2,731.6 million; operating income rose 18.2% to $405.0 million.
Net income increased 49.0% to $203.3 million, or $2.19 per diluted share, versus $136.4 million in Fiscal 2002.
Imported Beer and Spirits net sales rose 5.7% to $1,058.3 million, led by a price increase on the Mexican beer portfolio; Fine Wine net sales grew 18.1% to $155.8 million.
Popular and Premium Wine net sales fell 3.7% to $749.4 million, with volumes hurt by heavy industry promotional spending that the Company did not match.
Acquired Hardy (now Hardy Wine Company Limited) on April 9, 2003 for $1,137.4 million in cash and stock; the Company expects a material impact on future results.
Total debt decreased $164.0 million to $1,265.5 million, and the debt-to-total-capitalization ratio improved to 51.9% from 59.9%; new 2003 Credit Agreement and Bridge Agreement borrowings substantially increase debt after year-end.
Fiscal 2004 will bring a new three-segment reporting structure and expected charges including a $3.2 million Hardy integration restructuring charge and an $8.2 million write-off of bank fees.

03—Questions

Frequently Asked Questions

What drove the growth in Constellation Brands' Fiscal 2003 results?
Net sales grew 4.8% to $2,731.6 million, driven mainly by higher imported beer sales, including a price increase on the Mexican beer portfolio that took effect in the first quarter of Fiscal 2003, and by a $50.7 million favorable foreign currency impact in the U.K. Brands and Wholesale segment. Fine Wine sales rose 18.1%, while Popular and Premium Wine sales fell 3.7%. Gross margin improved to 27.8% of net sales from 26.7%.
What is the Hardy Acquisition and how is it being financed?
The Company acquired BRL Hardy Limited, now Hardy Wine Company Limited, Australia's largest wine producer, completing the transaction on April 9, 2003. Total consideration to Hardy shareholders was $1,137.4 million, including a cash portion of $1,060.2 million financed with $660.2 million from the 2003 Credit Agreement and $400.0 million from the Bridge Agreement, plus 3,288,913 shares of Class A Common Stock valued at $77.2 million. The Company also acquired the remaining 50% of Pacific Wine Partners LLC as part of the deal.
How did the Company's debt position change during the year, and what happens after year-end?
Total debt was $1,265.5 million at February 28, 2003, down $164.0 million from the prior year, and the debt-to-total-capitalization ratio fell to 51.9% from 59.9%. After year-end, the Company drew $1,200.0 million in term loans and $8.0 million in revolving debt under the 2003 Credit Agreement and $400.0 million under the Bridge Agreement, using the proceeds to repay the 2000 Credit Agreement and fund the Hardy payment. The Bridge Loans are due on the first anniversary of funding, with the option to convert to term loans maturing seven years after funding.
Is the Company paying dividends, and what restricts them?
No. The Company's policy is to retain all earnings to finance the development and expansion of its business, and it has not paid cash dividends since its 1973 initial public offering. The senior credit facility, bridge loan agreement, and several note indentures also restrict the payment of cash dividends.
What are the main risks flagged in the filing?
The filing highlights the substantial indebtedness incurred to finance acquisitions, the risk that acquisitions and joint ventures, including Hardy, may not be integrated successfully, and intense industry competition. It also cites excise tax increases, dependence on wholesale distributors and major retailers, consumption declines, raw material price volatility and reliance on limited glass bottle suppliers, currency and geopolitical exposure following the Hardy Acquisition, goodwill impairment risk with $722.2 million of goodwill, and the termination or non-renewal of imported beer distribution agreements, including the Corona Extra agreement.

04—Continue

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