What drove the growth in Constellation Brands' fiscal 2006 results?

Net sales grew 13% to $4,603.4 million, mainly from branded wine net sales increasing $440.1 million on a constant currency basis and imported beer net sales rising $120.5 million. The Robert Mondavi acquisition contributed $337.5 million of branded wine net sales, and an extra ten months of Robert Mondavi operations were included in fiscal 2006. Operating income rose 17%, primarily from a favorable sales mix shift toward higher-margin acquired wine brands.

How much debt does the company carry and how has it changed?

Total debt outstanding at February 28, 2006 was $2,809.7 million, a decrease of $479.5 million from February 28, 2005. The reduction came mainly from paying down term debt with operating cash flow and proceeds from sales of non-strategic Robert Mondavi assets. Net proceeds from those asset sales totaled $180.7 million since the acquisition date through February 28, 2006.

What is the Vincor acquisition and how will it affect the company?

On April 2, 2006, the company agreed to acquire all outstanding common shares of Vincor International Inc. for Cdn$36.50 per share in cash, with total value of about Cdn$1.5 billion including Vincor's indebtedness. Vincor is Canada's largest wine producer and would make Canada a core market and the company the largest wine company in Canada. The company expects it to have a material impact on future results, financial position and cash flows and plans to finance it with an amended and restated senior credit facility. It also entered into a foreign currency forward contract for Cdn$1.4 billion at Cdn$1.149 to U.S.$1.00 to fix the U.S. dollar cost.

What risks does the company highlight for investors?

The filing highlights substantial indebtedness and restrictive covenants in its senior credit facility and indentures, the risk that acquisitions and joint ventures may not succeed, intense competition, excise tax increases, dependence on wholesale distributors and major retailers, and reliance on the Corona Extra and other Mexican beer distribution agreements, which expire in December 2006 and renew automatically for five-year terms subject to performance criteria. It also cites grape price and supply volatility, a limited number of glass bottle suppliers, currency and interest rate exposure, and goodwill of $2,193.6 million, or 29.6% of total assets, that could be impaired.

What is the company's dividend and capital return policy?

The company has not paid cash dividends on its common stock since its 1973 initial public offering and its policy is to retain earnings to finance growth. Its senior credit facility currently constrains cash dividends on common stock. Preferred stock dividends of $9.8 million were paid in fiscal 2006. The Board replenished a $100.0 million share repurchase authorization in February 2006, and no shares were repurchased in fiscal 2006, 2005 or 2004.

STZ 10-K FY2006 Annual Report — Revenue, Net Income, EPS

01—Abstract

Summary

Summary of the 10-K filed May 2, 2006. Cited figures are marked; the original filing is the authoritative source.

Constellation Brands, Inc. (Delaware; Class A and Class B stock trade on the NYSE as STZ and STZ.B) reported fiscal 2006 (year ended February 28, 2006) net sales of $4.60 billion^a, up 13% from $4.09 billion in fiscal 2005, with net income rising 18% to $325.3 million.

Operating income increased 17% to $666.1 million^b, driven mainly by higher-margin wine brands from the Robert Mondavi acquisition and branded wine volume growth, partly offset by higher acquisition-related integration costs, restructuring charges and unusual costs totaling $93.9 million. Gross margin improved to 28.8% of net sales from 27.9%. Interest expense rose to $189.7 million from $137.7 million on higher average borrowings tied to the Robert Mondavi acquisition.

Total debt fell to $2,809.7 million^c from a decrease of $479.5 million year over year, and the debt-to-total-capitalization ratio declined to 48.6% from 54.2%. Operating cash flow was $436.0 million and capital expenditures were $132.5 million. The company is subject to restrictive covenants under its 2004 Credit Agreement and reports that it complied with all covenants as of February 28, 2006.

Management intends to begin share repurchases under a replenished $100.0 million^d authorization in Fiscal 2007. A significant pending event is the April 2, 2006 agreement to acquire Vincor International Inc., Canada's largest wine producer, for Cdn$36.50 per share, with total value of approximately Cdn$1.5 billion including Vincor's indebtedness and an expected close in early June 2006. Management expects the deal to have a material impact on future results, financial position and cash flows, and to be financed through an amended and restated senior credit facility, which would significantly increase the debt-to-capitalization ratio.

02—Key points

Key Highlights

Net sales rose 13% to $4,603.4 million, led by branded wine (up 24% to $2,263.4 million) and imported beers (up 13% to $1,043.5 million).
Operating income increased 17% to $666.1 million; net income rose 18% to $325.3 million and diluted EPS was $1.36 versus $1.19.
Interest expense, net increased 38% to $189.7 million, reflecting higher average borrowings after the Robert Mondavi acquisition.
Total debt was reduced by $479.5 million to $2,809.7 million, lowering the debt-to-total-capitalization ratio to 48.6% from 54.2%.
Pending acquisition of Vincor International for about Cdn$1.5 billion (including debt), expected to close in early June 2006 and make Canada a core market.
Effective tax rate fell to 31.8% from 36.0%, aided by a $16.2 million non-cash reduction from resolved tax examinations.
Fiscal 2007 capital expenditures are planned at about $155 million, with stock repurchases planned to begin in Fiscal 2007 under a $100.0 million authorization.

03—Questions

Frequently Asked Questions

What drove the growth in Constellation Brands' fiscal 2006 results?
Net sales grew 13% to $4,603.4 million, mainly from branded wine net sales increasing $440.1 million on a constant currency basis and imported beer net sales rising $120.5 million. The Robert Mondavi acquisition contributed $337.5 million of branded wine net sales, and an extra ten months of Robert Mondavi operations were included in fiscal 2006. Operating income rose 17%, primarily from a favorable sales mix shift toward higher-margin acquired wine brands.
How much debt does the company carry and how has it changed?
Total debt outstanding at February 28, 2006 was $2,809.7 million, a decrease of $479.5 million from February 28, 2005. The reduction came mainly from paying down term debt with operating cash flow and proceeds from sales of non-strategic Robert Mondavi assets. Net proceeds from those asset sales totaled $180.7 million since the acquisition date through February 28, 2006.
What is the Vincor acquisition and how will it affect the company?
On April 2, 2006, the company agreed to acquire all outstanding common shares of Vincor International Inc. for Cdn$36.50 per share in cash, with total value of about Cdn$1.5 billion including Vincor's indebtedness. Vincor is Canada's largest wine producer and would make Canada a core market and the company the largest wine company in Canada. The company expects it to have a material impact on future results, financial position and cash flows and plans to finance it with an amended and restated senior credit facility. It also entered into a foreign currency forward contract for Cdn$1.4 billion at Cdn$1.149 to U.S.$1.00 to fix the U.S. dollar cost.
What risks does the company highlight for investors?
The filing highlights substantial indebtedness and restrictive covenants in its senior credit facility and indentures, the risk that acquisitions and joint ventures may not succeed, intense competition, excise tax increases, dependence on wholesale distributors and major retailers, and reliance on the Corona Extra and other Mexican beer distribution agreements, which expire in December 2006 and renew automatically for five-year terms subject to performance criteria. It also cites grape price and supply volatility, a limited number of glass bottle suppliers, currency and interest rate exposure, and goodwill of $2,193.6 million, or 29.6% of total assets, that could be impaired.
What is the company's dividend and capital return policy?
The company has not paid cash dividends on its common stock since its 1973 initial public offering and its policy is to retain earnings to finance growth. Its senior credit facility currently constrains cash dividends on common stock. Preferred stock dividends of $9.8 million were paid in fiscal 2006. The Board replenished a $100.0 million share repurchase authorization in February 2006, and no shares were repurchased in fiscal 2006, 2005 or 2004.

04—Continue

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