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UNITED STATES
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 29, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 001-08495
CONSTELLATION BRANDS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 16-0716709
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
370 Woodcliff Drive, Suite 300, Fairport, New York 14450
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (585) 218-3600
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Class A Common Stock New York Stock Exchange
(par value $.01 per share)
Class B Common Stock New York Stock Exchange
(par value $.01 per share)
Depositary Shares Each New York Stock Exchange
Representing 1/40 of a Share
of 5.75% Series A Mandatory
Convertible Preferred Stock
(par value $.01 per share)
Securities registered pursuant to Section 12(g) of the Act:
None
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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K 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 an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
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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 $2,670,810,814. The Registrant has 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 30, 2004, is set forth below:
Class Number of Shares Outstanding
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Class A Common Stock, par value $.01 per share 94,775,414
Class B Common Stock, par value $.01 per share 12,057,130
DOCUMENTS INCORPORATED BY REFERENCE
The proxy statement of Constellation Brands, Inc. to be issued for the Annual
Meeting of Stockholders to be held [July 20, 2004] is incorporated by reference
in Part III to the extent described therein.
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This Annual Report on Form 10-K contains forward-looking statements. In
connection therewith, please see the cautionary statements and risk factors
contained in Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Cautionary Information Regarding
Forward-Looking Statements" and elsewhere in this Report which identify
important factors which could cause actual results to differ materially from any
such forward-looking statements.
PART I
ITEM 1. BUSINESS
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INTRODUCTION
Unless the context otherwise requires, the term "Company" refers 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 2004", "Fiscal 2003" and "Fiscal 2002" shall refer to the Company's
fiscal year ended the last day of February of the indicated year. All
references to "Fiscal 2005" shall refer to the Company's fiscal year ending
February 28, 2005.
Market share and industry data disclosed in this Annual Report on Form 10-K
have been obtained from the following industry and government publications:
Adams Liquor Handbook; Adams Wine Handbook; Adams Beer Handbook; Adams Media
Handbook Advance; The U.S. Wine Market: Impact Databank Review and Forecast; The
U.S. Beer Market: Impact Databank Review and Forecast; The U.S. Spirits Market:
Impact Databank Review and Forecast; International Wine and Spirit Record;
Australian Wine and Brandy Reports; NACM; AC Nielsen; IRI; and The Drink
Pocketbook. The Company has not independently verified this data. Unless
otherwise noted, all references to market share data are based on unit volume
and unless otherwise noted, the most recent complete industry data available are
for calendar 2003.
The Company is a leading international producer and marketer of beverage
alcohol brands with a broad portfolio across the wine, spirits and imported beer
categories. The Company has the largest wine business in the world and is the
largest multi-category supplier of beverage alcohol in the United States; a
leading producer and exporter of wine from Australia and New Zealand; and both a
major producer and independent drinks wholesaler in the United Kingdom. The
Company's strong market positions increase its purchasing power and make the
Company a supplier of choice to its customers.
With its broad product portfolio, the Company believes it is distinctly
positioned to satisfy an array of consumer preferences across all beverage
alcohol categories and price points. Many of the Company's products are
recognized leaders in their respective categories. Leading brands in the
Company's portfolio include Corona Extra, Modelo Especial, Pacifico, St. Pauli
Girl, Franciscan Oakville Estate, Simi, Estancia, Ravenswood, Blackstone,
Banrock Station, Hardys, Nobilo, Houghton, Leasingham, Almaden, Inglenook, Arbor
Mist, Vendange, Alice White, Stowells, Black Velvet, Fleischmann's, Schenley,
Ten High and Blackthorn.
The Company is a Delaware corporation incorporated on December 4, 1972, as
the successor to a business founded in 1945. Since the Company's founding in
1945 as a producer and marketer of wine products, the Company has grown through
a combination of internal growth and acquisitions. The Company's internal
growth has been driven by leveraging the Company's existing portfolio of leading
brands, developing new products, new packaging and line extensions, and focusing
on the faster growing sectors of the beverage alcohol industry.
The Company has successfully integrated a number of major acquisitions that
have broadened its portfolio and increased its market share, net sales,
operating income and cash flow. Through these acquisitions, the Company has
become more competitive by: diversifying its portfolio; developing strong market
positions in the growing beverage alcohol product categories of varietal table
wine and imported beer; strengthening its relationships with wholesalers;
expanding its distribution and enhancing its production capabilities; and
acquiring additional management, operational, marketing, and research and
development expertise.
In April 2003, the Company completed the acquisition of BRL Hardy Limited,
now known as Hardy Wine Company Limited ("Hardy"), Australia's largest producer
of wine, which enhanced the Company's overall growth prospects and gave the
Company an immediate presence in the Australian domestic and export markets. As
a result of the acquisition of Hardy, the Company also acquired the remaining
50% ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the
Company established with Hardy in July 2001 that produces, markets and sells a
portfolio of premium wine in the United States, including a range of Australian
imports. The acquisition of Hardy along with the remaining interest in PWP is
referred to together as the "Hardy Acquisition." Among the well-known brands
acquired in the Hardy Acquisition are Banrock Station, Hardys Nottage Hill,
Hardys Stamp and VR, Eileen Hardy, Sir James, Omni, Nobilo, Leasingham and
Houghton. For more information about this and other recent acquisitions, 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 Hardy Acquisition, the Company has changed the structure
of its internal organization to consist of two business divisions, Constellation
Wines and Constellation Beers and Spirits. Separate division chief executives
report directly to the Company's chief operating officer. Consequently, the
Company reports its operating results in three segments: Constellation Wines
(branded wine, and U.K. wholesale and other), Constellation Beers and Spirits
(imported beers and distilled spirits) and Corporate Operations and Other
(primarily corporate related items and other). The new business segments,
described more fully below, reflect how the Company's operations are being
managed, how operating performance within the Company is being evaluated by
senior management and the structure of its internal financial reporting.
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 22 to the Company's consolidated financial statements located
in Item 8 of this Annual Report on Form 10-K.
CONSTELLATION WINES
Constellation Wines is the leading producer and marketer of wine in the
world. It sells a large number of wine brands across all categories - table
wine, dessert wine and sparkling wine - and across all price points - popular,
premium, super-premium and ultra-premium. The portfolio of super-premium and
ultra-premium wines is supported by vineyard holdings in California, Australia,
New Zealand and Chile. As the largest producer and marketer of wine in the
world, Constellation Wines has leading market positions in several countries.
It is the second largest producer and marketer of wine in the United States, the
largest producer and marketer of wine in Australia, and the largest marketer of
wine in the United Kingdom. In addition, Constellation Wines exports its wine
products to the major wine consuming markets of the world.
In the United States, Constellation Wines sells 18 of the top-selling 100
wine brands and has one of the largest fine wine portfolios. In the United
Kingdom, it has seven of the top-selling 20 selling table wine brands to the
off-premise market, three of the top-selling 10 table wine brands in the
on-premise market and the best selling brand of fortified British wine. In
Australia, it has wine brands across all price points and varieties, including
the most comprehensive range of premium wine brands, and is the largest producer
of cask (box) wines.
Constellation Wines' leading wine brands include Franciscan Oakville
Estate, Simi, Estancia, Ravenswood, Blackstone, Banrock Station, Hardys, Nobilo,
Houghton, Leasingham, Almaden, Inglenook, Arbor Mist, Vendange, Alice White and
Stowells.
Constellation Wines is also the leading independent beverage wholesaler to
the on-premise trade in the United Kingdom and has more than 16,000 on-premise
accounts. The wholesaling business is wine led, but also involves the
distribution of branded distilled spirits, cider, beer, RTDs and soft drinks.
While these products are primarily produced by other major drinks companies,
they also include Constellation Wines' branded wine, cider and water products.
Constellation Wines is also the second largest producer and marketer of
cider in the United Kingdom, with leading cider brands Blackthorn and Gaymer's
Olde English, and produces and markets Strathmore, the leading bottled water
brand in the United Kingdom on-premise market.
In conjunction with its wine production, Constellation Wines produces and
sells bulk wine and other related products and services.
CONSTELLATION BEERS AND SPIRITS
Constellation Beers and Spirits imports and markets a diversified line of
beer and produces, bottles, imports and markets a diversified line of distilled
spirits. It is the largest marketer of imported beer in 25 primarily western
U.S. states, where it has exclusive rights to distribute the Mexican brands in
its portfolio. Constellation Beers and Spirits has exclusive rights to the
entire United States for its non-Mexican beer brands. It distributes six of the
top 22 imported beer brands in the United States: Corona Extra, Modelo
Especial, Pacifico, Corona Light, St. Pauli Girl, and Negra Modelo. Corona
Extra is the best selling imported beer in the United States and the seventh
best selling beer overall in the United States. It also imports the Tsingtao
beer brand from China.
Constellation Beers and Spirits is the third largest producer and marketer
of distilled spirits in the United States and exports its distilled spirits to
other major distilled spirits consuming markets. Its principal distilled spirits
brands include Black Velvet, Barton, Skol, Fleischmann's, Canadian LTD,
Montezuma, Ten High, Chi-Chi's prepared cocktails, Mr. Boston, Inver House, and
Monte Alban. Substantially all of this segment's distilled spirits unit volume
consists of products marketed in the value and mid-premium priced category.
Constellation Beers and Spirits also sells bulk distilled spirits and other
related products and services.
CORPORATE OPERATIONS AND OTHER
The Corporate Operations and Other segment includes traditional
corporate-related items.
MARKETING AND DISTRIBUTION
The Company employs full-time, in-house marketing, sales and customer
service organizations within its segments to maintain a high degree of focus on
each of its product categories. The organizations use a range of marketing
strategies and tactics to build brand equity and increase sales, including
market research, consumer and trade advertising, price promotions, point-of-sale
materials, event sponsorship and public relations. Where opportunities exist,
particularly with national accounts, the Company leverages its sales and
marketing skills across the organization.
In North America, the Company's products are primarily distributed by more
than 1,000 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
alcoholic beverage control agency, by directly setting retail prices for the
Company's products. In the Company's other markets, products are primarily
distributed either directly to retailers or through wholesalers and importers.
In Australasia, the distribution channels are dominated by a small number of
industry leaders. Its U.K. wholesaling business sells and distributes the
Company's branded products and those of other major drinks companies through a
network of depots located throughout the United Kingdom.
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. Agreements include, among others,
a long-term license agreement with Hiram Walker & Sons, Inc., which expires in
2116, for the Ten High, Crystal Palace, Northern Light, Lauder's and Imperial
Spirits brands, and a long-term license agreement with Chi-Chi's, Inc., which
expires in 2117, for the production, marketing and sale of beverage products,
alcoholic and non-alcoholic, utilizing the Chi-Chi's brand name.
All of the Company's imported beer products are marketed and sold pursuant
to exclusive distribution agreements with the suppliers of these products.
These agreements have terms that vary and prohibit the Company from importing
other beer from other producers from the same country. The Company's agreement
to distribute Corona Extra and other Mexican beer brands exclusively throughout
25 primarily western U.S. states expires in December 2006 and, subject to
compliance with certain performance criteria, continued retention of certain
Company personnel and other terms under the agreement, will be automatically
renewed for additional terms of five years. Changes in control of the Company
or of its subsidiaries involved in importing the Mexican beer brands, changes in
the position of the Chief Executive Officer of Barton Beers, Ltd., including by
death or disability, or the termination of the President of Barton Incorporated,
may be a basis for the supplier, unless it consents to such changes, to
terminate the agreement. The supplier's consent to such changes may not be
unreasonably withheld. Prior to their expiration, all of the Company's imported
beer distribution agreements may be terminated if the Company fails to meet
certain performance criteria. The Company believes it is currently in
compliance with its material imported beer distribution agreements. From time
to time, the Company has failed, and may in the future fail, to satisfy certain
performance criteria in its distribution agreements. Although there can be no
assurance that the Company's material beer distribution agreements will be
renewed, given the Company's long-term relationships with its suppliers, the
Company expects that such agreements will be renewed prior to their expiration
and does not believe that these agreements will be terminated.
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
nonalcoholic beverages for consumer purchases, as well as shelf space in retail
stores, restaurant presence and wholesaler attention. The Company competes with
numerous multinational producers and distributors of beverage alcohol products,
some of which may have greater resources than the Company.
Constellation Wines' principal wine competitors include: E & J Gallo
Winery, The Wine Group, Beringer Blass, The Robert Mondavi Corporation and
Kendall-Jackson in the United States; Southcorp Wines, Orlando Wyndham and
Beringer Blass in Australia; and E & J Gallo Winery, Southcorp Wines, Western
Wines, Halewood Vintners and Pernod-Ricard in the United Kingdom. Its wholesale
business competes with major brewers who also have wholesale operations, in
particular, Scottish Courage, Coors, Interbrew and Carlsberg Tetley, and other
independent national and regional wholesalers. Constellation Wines' principal
cider competitor is Scottish & Newcastle.
Constellation Beers and Spirits' principal competitors include: Heineken
USA, Molson, Labatt USA and Guinness Import Company in the imported beer
category as well as domestic producers such as Anheuser Busch, Coors and
SAB-Miller; and Diageo, Brown-Forman Beverages, Jim Beam Brands and Heaven Hill
Distilleries in the distilled spirits category.
PRODUCTION
In the United States, the Company operates 17 wineries where wine is
produced from many varieties of grapes grown principally in the Napa, Sonoma,
Monterey and San Joaquin regions of California. In Australia, the Company
operates 11 wineries where wine is produced from many varieties of grapes grown
in most of the major viticultural regions. 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. Most of the Company's wine is packaged
and sold within 18 months after the grape crush. In the United States, the
Company's inventories of wine are usually at their highest levels in November
and December immediately after the crush of each year's grape harvest, and are
substantially reduced prior to the subsequent year's crush. Similarly, in
Australia, the Company's inventories of wine are usually at their highest levels
in April and May immediately after the crush of each year's grape harvest, and
are substantially reduced prior to the subsequent year's crush. The Company also
operates one winery in Chile and two wineries in New Zealand.
The bourbon whiskeys and domestic blended whiskeys marketed by the Company
are primarily produced and aged by the Company at its distillery in Bardstown,
Kentucky. The Company's primary distilled spirits bottling facility in the
United States is in Owensboro, Kentucky. The majority of the Company's Canadian
whisky requirements are produced and aged at its Canadian distilleries in
Lethbridge, Alberta, and Valleyfield, Quebec. The Company's requirements of
Scotch whisky, tequila, mezcal and the neutral grain spirits it uses in the
production of gin, vodka and other spirits products, are primarily purchased
from various suppliers.
The Company operates three facilities in the United Kingdom that produce,
bottle and package wine, cider and water. To produce Stowells, wine is imported
in bulk from various countries and packaged at the Company's facility at
Bristol. The Bristol facility also produces fortified British wine and wine
style drinks. All cider production takes place at the Company's facility at
Shepton Mallet. The Strathmore brand of bottled water is sourced and bottled in
Forfar, Scotland.
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 United States and begins in February and runs through May in
Australia. The Company believes that it has adequate sources of grape supplies
to meet its sales expectations. However, in the event demand for certain wine
products exceeds expectations, the Company would seek to source the extra
requirements from the bulk wine markets, but could experience shortages.
The Company receives grapes from approximately 800 independent growers in
the United States and 1,450 growers in Australia. The Company enters into
written purchase agreements with a majority of these growers and pricing
generally varies year-to-year based on then-current market prices. In
Australia, approximately 800 of the 1,450 growers belong to a grape growers'
cooperative. The Company purchases the majority of its Australian grape
requirements from this cooperative under a long-term arrangement. In the United
Kingdom, the Company produces wine from materials purchased either on a contract
basis or on the open market.
The Company currently owns or leases approximately 14,500 acres of land and
vineyards, either fully bearing or under development, in California (U.S.), New
York (U.S.), Australia, Chile and New Zealand. This acreage supplies only a
small percentage of the Company's overall total wine needs. However, most of
this acreage is used to supply a large portion of the grapes used for the
production of the Company's super-premium and ultra-premium 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 by the Company require various
agricultural products, neutral grain spirits and bulk spirits. The Company
fulfills its requirements through purchases from various sources by contractual
arrangement and through purchases on the open market. The Company believes that
adequate supplies of the aforementioned products are available at the present
time.
In the United Kingdom, the Company sources apples for cider production
primarily through long-term supply arrangements with owners of apple orchards.
There are adequate supplies of apples at this particular 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. Glass bottle
costs are one of the largest components of the Company's cost of product sold.
In the United States and Australia, the glass bottle industry is highly
concentrated with only a small number of producers. The Company has
traditionally obtained, and continues to obtain, its glass requirements from a
limited number of producers. Currently, substantially all of the Company's
glass container requirements for its United States operations are supplied by
one producer and most of the Company's glass container requirements for its
Australian operations are supplied by another producer. The Company has not
experienced difficulty in satisfying its requirements with respect to any of the
foregoing and considers its sources of supply to be adequate. 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.
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, and its 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 United States.
EMPLOYEES
As of the end of April 2004, the Company had approximately 7,800 full-time
employees throughout the world. Approximately 3,200 full-time employees were in
the United States and approximately 4,600 full-time employees were outside of
the United States, in countries including Australia, the United Kingdom, Canada
and New Zealand. Additional workers may be employed by the Company during the
peak and grape crushing seasons. The Company considers its employee relations
generally to be good.
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.
Alternatively, such reports may be accessed at the internet address of the SEC,
which 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 450
Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
The Company has adopted a Chief Executive Officer and Senior Financial
Executive Code of Ethics that specifically applies to its chief executive
officer, its principal financial officer, and controller. This Chief Executive
Officer and Senior Financial Executive Code of Ethics meets the requirements as
set forth in the Securities Exchange Act of 1934, Item 406 of Regulation S-K.
The Company has posted on its internet website a copy of the Chief Executive
Officer and Senior Financial Officer Code of Ethics. It is accessible at
http://www.cbrands.com/CBI/investors.htm.
The Company also has adopted a Code of Business Ethics and Conduct 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 Ethics and Conduct is also available on the
Company's internet website, together with 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). These materials are accessible at
http://www.cbrands.com/CBI/investors.htm. Additionally, 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 Ethics and Conduct 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 to Mark Maring, Vice President Investor Relations, 370 Woodcliff Drive,
Suite 300, Fairport, New York 14450.
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 2. PROPERTIES
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Through its business segments, the Company operates wineries, distilling
plants, bottling plants, and cider and water producing facilities, most of which
include warehousing and distribution facilities on the premises. The Company
also operates separate distribution centers under the Constellation Wines
segment's wholesaling business. 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.
The following discussion details the properties associated with the
Company's three business segments.
CONSTELLATION WINES
Through the Constellation Wines segment, the Company maintains facilities
in the United States, Australia, New Zealand, the United Kingdom, Chile and the
Republic of Ireland. These facilities include wineries, bottling plants, cider
and water producing facilities, warehousing and distribution facilities,
distribution centers and office facilities. The segment maintains owned and/or
leased division offices in Canandaigua, New York; St. Helena, California;
Gonzales, California; Reynella, South Australia; Bristol, England and Esher,
England.
United States
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In the United States, the Company through its Constellation Wines segment
operates two wineries in New York, located in Canandaigua and Naples; 12
wineries in California, located in Gonzales, Healdsburg, Kenwood, Soledad,
Rutherford, Ukiah, two in Lodi, two in Madera and two in Sonoma; two wineries in
Washington, located in Woodinville and Sunnyside; and one winery in Caldwell,
Idaho. All of these wineries are owned, except for the wineries in Caldwell
(Idaho) and Woodinville (Washington), which are leased. The Constellation Wines
segment considers its principal wineries in the United States to be the Mission
Bell winery in Madera (California), the Canandaigua winery in Canandaigua (New
York), the Ravenswood wineries in Sonoma (California), the Franciscan Vineyards
winery in Rutherford (California) and the Blackstone Winery in Gonzales
(California). The Mission Bell winery crushes grapes, produces, bottles and
distributes wine and produces specialty concentrates and Mega Colors for sale.
The Canandaigua winery crushes grapes and produces, bottles and distributes
wine. The other principal wineries crush grapes, vinify, cellar and bottle
wine. In Fiscal 2004, the segment closed and sold wineries located in Fresno
and Escalon (California) and closed a winery located in Batavia (New York).
Through the Constellation Wines segment, the Company owns or leases
approximately 5,400 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.
Australasia
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Through the Constellation Wines segment, the Company owns and operates 11
Australian wineries, six of which are in South Australia, two in Western
Australia and the other three in New South Wales, Australian Capital Territory
and Tasmania. Additionally, through this segment the Company also owns two
wineries in New Zealand. All but one of these Australasian wineries crush
grapes, vinify and cellar wine. Four include bottling and/or packaging
operations. The facility in Reynella, South Australia bottles a significant
portion of the wine produced in Australia, produces all Australian sparkling
wines and cellars wines. The Company considers the segment's principal
facilities in Australasia to be the Berri Estates winery located in Glossop and
the bottling facility located in Reynella, both in South Australia.
Through the Constellation Wines segment, the Company owns or has interests
in approximately 6,200 plantable acres of vineyards in South Australia, the
Australian Capital Territory, Western Australia, Victoria, and Tasmania, and
approximately 1,900 acres of vineyards, either fully bearing or under
development, in New Zealand.
Europe
------
Through the Constellation Wines segment, in the United Kingdom the Company
owns and operates two facilities in England, located in Bristol and Shepton
Mallet and one facility in Scotland, located in Forfar. The Bristol facility is
considered a principal facility and produces, bottles and packages wine; the
Shepton Mallet facility produces, bottles and packages cider; and the Forfar
facility produces, bottles and packages water products. The Constellation Wines
segment also owns another facility in Taunton, England, which it plans to sell
since the operations have been consolidated into the Shepton Mallet facility.
In Fiscal 2004, the Company sold its interest in a winery in France.
Through this segment, the Company operates a National Distribution Centre,
located at a leased facility in Severnside, England, to distribute the Company's
products that are produced at the Bristol and Shepton Mallet facilities as well
as products imported from other wine suppliers. To support its wholesaling
business, the Company operates 11 distribution centers located throughout the
United Kingdom, 10 of which are leased. These 11 distribution centers are used
to distribute products produced by third parties, as well as by the Company.
The Company has been and will continue consolidating the operations of its
United Kingdom wholesaling distribution centers.
Additionally, through the Constellation Wines segment, the Company leases
warehouse and office facilities in Dublin and leases back office facilities in
Cork in support of the Company's business of marketing and distributing
alcoholic beverages in the Republic of Ireland.
Chile
-----
Through the Constellation Wines segment, the Company also operates, through
a majority owned subsidiary, a winery in the Casablanca Valley, Chile, that
crushes grapes and vinifies, cellars and bottles wine. Through this segment,
the Company also owns or leases approximately 1,000 acres of vineyards, either
fully bearing or under development, in Chile for the production of wine.
CONSTELLATION BEERS AND SPIRITS
Through the Constellation Beers and Spirits segment, the Company maintains
leased division offices in Chicago, Illinois. On behalf of the segment's beer
business, the Company contracts with five providers of warehouse space and
services in eight locations throughout the United States.
Through this segment, the Company owns and operates four distilling plants,
two in the United States and two in Canada. The two distilling plants in the
United States are located in Bardstown, Kentucky and Albany, Georgia. The two
distilling plants in Canada are located in Valleyfield, Quebec and Lethbridge,
Alberta. The Company considers this segment's principal distilling plants to be
the facilities located in Bardstown (Kentucky), Valleyfield (Quebec) and
Lethbridge (Alberta). The Bardstown facility distills, bottles and warehouses
distilled spirits products for the Company and, on a contractual basis, for
other industry members. The two Canadian facilities distill, bottle and store
Canadian whisky for the segment, and distill and/or bottle and store Canadian
whisky, vodka, rum, gin and liqueurs for third parties.
In the United States, the Company through its Constellation Beers and
Spirits segment also operates three bottling plants, located in Atlanta,
Georgia; Owensboro, Kentucky and Carson, California. The facilities located in
Atlanta (Georgia) and Owensboro (Kentucky) are owned, while the facility in
Carson (California) is operated and leased through an arrangement involving an
ongoing management contract. The Company considers this segment's bottling
plant located in Owensboro to be one of the segment's principal facilities. The
Owensboro facility bottles and warehouses distilled spirits products for the
segment and is also utilized for contract bottling.
CORPORATE OPERATIONS AND OTHER
The Company's corporate headquarters are located in leased offices in
Fairport, New York.
ITEM 3. LEGAL PROCEEDINGS
- ------- -----------------
In the course of their business, the Company and its subsidiaries are
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------- ---------------------------------------------------
Not Applicable.
EXECUTIVE OFFICERS OF THE COMPANY
Information with respect to the current executive officers of the Company
is as follows:
NAME AGE OFFICE OR POSITION HELD
- ---- --- -----------------------
Richard Sands 53 Chairman of the Board and Chief Executive Officer
Robert Sands 45 President and Chief Operating Officer
Alexander L. Berk 54 Chief Executive Officer, Constellation Beers and
Spirits, and President and Chief Executive Officer,
Barton Incorporated
F. Paul Hetterich 41 Executive Vice President, Business Development and
Corporate Strategy
Stephen B. Millar 60 Chief Executive Officer, Constellation Wines
Thomas J. Mullin 52 Executive Vice President and General Counsel
Thomas S. Summer 50 Executive Vice President and Chief Financial Officer
W. Keith Wilson 53 Executive Vice President and Chief Human Resources
Officer
Richard Sands, Ph.D., is the Chairman of the Board and Chief Executive
Officer of the Company. He has been employed by the Company in various
capacities since 1979. He was elected Chief Executive Officer in October 1993
and has served as a director since 1982. In September 1999, Mr. Sands was
elected Chairman of the Board. He served 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 was appointed President and Chief Operating Officer of the
Company in December 2002 and has served as a director since January 1990. Mr.
Sands also had served as Group President from April 2000 through December 2002,
as Chief Executive Officer, International from December 1998 through April 2000,
as Executive Vice President from October 1993 through April 2000, as General
Counsel from June 1986 through May 2000, and as Vice President from June 1990
through October 1993. He is the brother of Richard Sands.
Alexander L. Berk is the Chief Executive Officer of Constellation Beers and
Spirits and the President and Chief Executive Officer of Barton Incorporated.
Since 1990 and prior to becoming Chief Executive Officer of Barton Incorporated
in March 1998, Mr. Berk was President and Chief Operating Officer of Barton
Incorporated and from 1988 to 1990, he was the President and Chief Executive
Officer of Schenley Industries. Mr. Berk has been in the beverage alcohol
industry for most of his career, serving in various positions.
F. Paul Hetterich has been the Company's Executive Vice President, Business
Development and Corporate Strategy since June 2003. 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.
Stephen B. Millar is the Chief Executive Officer of Constellation Wines and
has held this position since the closing of the Hardy Acquisition. Prior to the
Company's acquisition of Hardy, Mr. Millar was Hardy's Managing Director and had
held this position since 1991. Mr. Millar currently serves in leadership roles
in a number of industry organizations. He is an Executive Council Member and
Chairman of the Audit Committee of the Winemakers' Federation of Australia. He
also serves as the President of the Australian Wine and Brandy Producers'
Association, as the Deputy Chairman of the International Trade Advisory
Committee and the Australian Wine Export Council and as a Council Member of the
South Australian Wine Industry Council.
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 since February
2000, of CT USA, F.S.B. since September 1998, and of CT USA, Inc. since March
1997. He also served as Executive Vice President, Business Development and
Corporate Strategy of C.T. Financial Services, Inc. from March 1997 through
February 2000. From 1985 through 1997, Mr. Mullin served as Vice Chairman and
Senior Executive Vice President of First Federal Savings and Loan Association of
Rochester, New York and from 1982 through 1985, he was a partner in the law firm
of Phillips, Lytle, Hitchcock, Blaine & Huber.
Thomas S. Summer joined the Company in April l997 as Senior Vice President
and Chief Financial Officer and in April 2000 was elected Executive Vice
President. From November 1991 to April 1997, Mr. Summer served as Vice
President, Treasurer of Cardinal Health, Inc., a large national health care
services company, where he was responsible for directing financing strategies
and treasury matters. Prior to that, from November 1987 to November 1991, Mr.
Summer held several positions in corporate finance and international treasury
with PepsiCo, Inc.
W. Keith Wilson joined the Company in January 2002 as Senior Vice
President, Human Resources, and in September 2002, he was elected Chief Human
Resources Officer and in April 2003 he was elected 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, that
engineers, manufactures and sells hi-tech reprographics equipment and software
worldwide. From 1990 to 1999, he served in various senior human resource
positions with the banking, marketing and real estate and relocation businesses
of Prudential Life Insurance of America, an insurance company that also provides
other financial products.
Executive officers of the Company are generally chosen or elected to their
positions annually and hold office until the earlier of their removal or
resignation or until their successors are chosen and qualified.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
- ------- ----------------------------------------------------------------------
MATTERS
-------
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 Exchange (Registered)
("NYSE") under the symbols STZ and STZ.B, respectively. 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 2003
High $ 31.62 $ 32.00 $ 29.80 $ 26.26
Low $ 25.25 $ 24.10 $ 21.99 $ 22.30
Fiscal 2004
High $ 27.65 $ 31.80 $ 34.65 $ 35.92
Low $ 21.90 $ 26.61 $ 28.70 $ 29.30
CLASS B STOCK
-----------------------------------------------------
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
Fiscal 2003
High $ 31.50 $ 32.50 $ 30.05 $ 26.10
Low $ 25.50 $ 25.29 $ 21.64 $ 22.55
Fiscal 2004
High $ 27.65 $ 31.95 $ 34.25 $ 35.85
Low $ 22.75 $ 27.35 $ 29.00 $ 30.25
At April 30, 2004, the number of holders of record of Class A Stock and
Class B Stock of the Company were 1,000 and 237, respectively.
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, under the terms of the Company's senior
credit facility, the Company is currently constrained from paying cash dividends
on its common stock. Also, the indentures for the Company's outstanding senior
notes and senior subordinated notes may restrict the payment of cash dividends
on its common stock under certain circumstances. Any indentures for debt
securities issued in the future and any credit agreements entered into in the
future may also restrict or prohibit the payment of cash dividends on common
stock.
ITEM 6. SELECTED FINANCIAL DATA
- ------- -----------------------
For the Years Ended
------------------------------------------------------------------------
February 29, February 28, February 28, February 28, February 29,
2004 2003 2002 2001 2000
------------ ------------ ------------ ------------ ------------
(in thousands, except per share data)
Sales $ 4,469,270 $ 3,583,082 $ 3,420,213 $ 2,983,629 $ 2,909,954
Less-excise taxes (916,841) (851,470) (813,455) (757,609) (748,230)
------------ ------------ ------------ ------------ ------------
Net sales 3,552,429 2,731,612 2,606,758 2,226,020 2,161,724
Cost of product sold (2,576,641) (1,970,897) (1,911,598) (1,647,081) (1,626,804)
------------ ------------ ------------ ------------ ------------
Gross profit 975,788 760,715 695,160 578,939 534,920
Selling, general and
administrative expenses(1) (457,277) (350,993) (355,269) (308,071) (294,369)
Restructuring and
related charges(2) (31,154) (4,764) - - -
Nonrecurring charges(3) - - - - (5,510)
------------ ------------ ------------ ------------ ------------
Operating income 487,357 404,958 339,891 270,868 235,041
Gain on change in fair value of
derivative instruments 1,181 23,129 - - -
Equity in earnings
of joint ventures 542 12,236 1,667 - -
Interest expense, net (144,683) (105,387) (114,189) (108,631) (106,082)
------------ ------------ ------------ ------------ ------------
Income before income taxes 344,397 334,936 227,369 162,237 128,959
Provision for income taxes(1) (123,983) (131,630) (90,948) (64,895) (51,584)
------------ ------------ ------------ ------------ ------------
Net income 220,414 203,306 136,421 97,342 77,375
Dividends on preferred stock (5,746) - - - -
------------ ------------ ------------ ------------ ------------
Income available to common
stockholders $ 214,668 $ 203,306 $ 136,421 $ 97,342 $ 77,375
============ ============ ============ ============ ============
Earnings per common share(4):
Basic $ 2.13 $ 2.26 $ 1.60 $ 1.33 $ 1.07
============ ============ ============ ============ ============
Diluted $ 2.06 $ 2.19 $ 1.55 $ 1.30 $ 1.05
============ ============ ============ ============ ============
Supplemental data restated for
effect of SFAS No. 142:
Adjusted operating income $ 487,357 $ 404,958 $ 369,780 $ 290,372 $ 254,833
============ ============ ============ ============ ============
Adjusted net income $ 220,414 $ 203,306 $ 155,367 $ 111,635 $ 91,793
============ ============ ============ ============ ============
Adjusted income available
to common stockholders $ 214,668 $ 203,306 $ 155,367 $ 111,635 $ 91,793
============ ============ ============ ============ ============
Adjusted earnings per common share:
Basic $ 2.13 $ 2.26 $ 1.82 $ 1.52 $ 1.27
============ ============ ============ ============ ============
Diluted $ 2.06 $ 2.19 $ 1.77 $ 1.49 $ 1.24
============ ============ ============ ============ ============
Total assets $ 5,558,673 $ 3,196,330 $ 3,069,385 $ 2,512,169 $ 2,348,791
============ ============ ============ ============ ============
Long-term debt, including
current maturities $ 2,046,098 $ 1,262,895 $ 1,374,792 $ 1,361,613 $ 1,289,788
============ ============ ============ ============ ============
(1) Effective March 1, 2003, the Company completed its adoption of Statement
of Financial Accounting Standards No. 145 ("SFAS No. 145"), "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections." Accordingly, the adoption of the provisions
rescinding Statement of Financial Accounting Standards No. 4 ("SFAS
No. 4"), "Reporting Gains and Losses from Extinguishment of Debt,"
resulted in a reclassification of the extraordinary loss related to the
extinguishment of debt recorded in the fourth quarter of fiscal 2002
($1.6 million, net of income taxes), by increasing selling, general
and administrative expenses ($2.6 million) and decreasing the provision
for income taxes ($1.0 million).
(2) For a detailed discussion of restructuring and related charges for the
years ended February 29, 2004, and February 28, 2003, 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
2004 Compared to Fiscal 2003 - Restructuring and Related Charges" and
"Fiscal 2003 Compared to Fiscal 2002 - Restructuring and Related Charges,"
respectively.
(3) The Company incurred nonrecurring charges of $5.5 million for the year
ended February 29, 2000, related to (i) the closure of a cider production
facility within the U.K. Brands and Wholesale segment in the United Kingdom
and (ii) a management reorganization within the Popular and Premium Wine
segment in the United States.
(4) All per share data have been adjusted to give effect to the two-for-one
splits of the Company's two classes of common stock in each of May 2002 and
May 2001.
For the years ended February 29, 2004, and February 28, 2003, 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.
Effective March 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142 ("SFAS No. 142"), "Goodwill and Other Intangible
Assets." SFAS No. 142 addresses financial accounting and reporting for acquired
goodwill and other intangible assets and supersedes Accounting Principles Board
Opinion No. 17, "Intangible Assets." Under SFAS No. 142, goodwill and indefinite
lived intangible assets are no longer amortized but are reviewed at least
annually for impairment. Intangible assets that are not deemed to have an
indefinite life will continue to be amortized over their useful lives and are
subject to review for impairment. Upon adoption of SFAS No. 142, the Company
determined that certain of its intangible assets met the criteria to be
considered indefinite lived and, accordingly, ceased their amortization
effective March 1, 2002. These intangible assets consisted principally of
trademarks. The Company's trademarks relate to well established brands owned by
the Company which were previously amortized over 40 years. Intangible assets
determined to have a finite life, primarily distribution agreements, continue to
be amortized over their estimated useful lives which were not modified as a
result of adopting SFAS No. 142. The supplemental data section above presents
operating income, income before extraordinary item, net income, and earnings per
share information for the comparative periods as if the nonamortization
provisions of SFAS No. 142 had been applied as of March 1, 1999.
The consolidated financial statements for the years ended February 29,
2004, and February 28, 2003, were audited by KPMG LLP. The consolidated
financial statements for the years ended February 28, 2002, February 28, 2001,
and February 29, 2000, were audited by Arthur Andersen LLP and the reports for
those years have not been reissued by Arthur Andersen LLP.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------- ----------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OVERVIEW
- --------
The Company generates revenue through the production, marketing and sale of
beverage alcohol products, primarily in North America, Europe and Australia.
The Company has a broad portfolio of brands across the wine, imported beer and
distilled spirits categories, and with the acquisition of Hardy in Fiscal 2004
solidified its position as the world's largest wine company.
The Company's business strategy is to remain focused across the beverage
alcohol industry by offering a broad range of products in each of the Company's
three major categories: wine, beer and spirits. The Company intends to keep
its portfolio positioned for superior top-line growth while maximizing the
profitability of its brands. In addition, the Company seeks to increase its
relative importance to key customers in major markets by increasing its share of
their overall purchasing, which is increasingly important in a consolidating
industry. The Company's strategy of breadth across categories and geographies,
and strengthening scale in core markets, is designed to deliver long-term
profitable growth. This strategy allows the Company more investment choices,
provides flexibility to address changing market conditions and creates stronger
routes-to-market.
The Company's businesses fall within one of two areas: growth or scale.
The growth businesses represent approximately 60% of the Company's Fiscal 2004
net sales and include approximately half of the Company's branded wine business
(specifically premium wines in the U.S. and wines in the U.K.), imported beer in
the U.S. and the U.K. wholesale business. The scale businesses represent
approximately 40% of Fiscal 2004 net sales and include spirits, the remaining
half of the Company's branded wine business, cider, and non-branded sales. The
scale businesses are operated to maximize profitability and cash flow and to
maintain strong routes-to-market. With a solid foundation of growth and scale
businesses, the Company expects to continue to be able to leverage sales growth
into even higher growth in earnings and cash flow.
The U.S. beer industry has experienced a healthy pricing environment over
the last several years; however, this could change due to market dynamics.
Beginning January 2004, the Company raised prices to its wholesalers on the
Company's imported Mexican beer brands. The timing of this price increase
resulted in a shift in sales volume from Fiscal 2005 to Fiscal 2004 due to
wholesaler buy-in ahead of the price increase. As a result of the wholesaler
buy-in and as retailers and consumers adapt to the higher price, the Company
expects a negative impact on volume trends for Fiscal 2005.
The Company remains committed to its long-term financial model of growing
sales (both organically and through acquisitions), expanding margins and
increasing cash flow to achieve superior earnings per share growth and improve
return on invested capital.
INTRODUCTION
- ------------
The Company is a leading international producer and marketer of beverage
alcohol brands with a broad portfolio across the wine, spirits and imported beer
categories. The Company has the largest wine business in the world and is the
largest multi-category supplier of beverage alcohol in the United States; a
leading producer and exporter of wine from Australia and New Zealand; and both a
major producer and independent drinks wholesaler in the United Kingdom.
Through February 28, 2003, the Company reported its operating results in
five segments: Popular and Premium Wine (branded popular and premium wine and
brandy, and other, primarily grape juice concentrate and bulk wine); Imported
Beer and Spirits (primarily imported beer and distilled spirits); U.K. Brands
and Wholesale (branded wine, cider, and bottled water, and wholesale wine,
distilled spirits, cider, beer, RTDs and soft drinks); Fine Wine (primarily
branded super-premium and ultra-premium wine); and Corporate Operations and
Other (primarily corporate related items). As a result of the Hardy Acquisition
(as defined below), the Company has changed the structure of its internal
organization to consist of two business divisions, Constellation Wines and
Constellation Beers and Spirits. Separate division chief executives report
directly to the Company's chief operating officer. Consequently, the Company
reports its operating results in three segments: Constellation Wines (branded
wine, and U.K. wholesale and other), Constellation Beers and Spirits (imported
beer and distilled spirits) and Corporate Operations and Other (primarily
corporate related items and other). Amounts included in the Corporate
Operations and Other segment consist of general corporate administration and
finance expenses. These amounts include costs of executive management, investor
relations, internal audit, treasury, tax, corporate development, legal,
financial reporting, professional fees and public relations. Any costs incurred
at the corporate office that are applicable to the segments are allocated to the
appropriate segment. The amounts included in the Corporate Operations and Other
segment are general costs that are applicable to the consolidated group and are
therefore not allocated to the other reportable segments. All costs reported
within the Corporate Operations and Other segment are not included in the chief
operating decision maker's evaluation of the operating income performance of the
other operating segments. The new business segments reflect how the Company's
operations are being managed, how operating performance within the Company is
being evaluated by senior management and the structure of its internal financial
reporting. In addition, the Company changed its definition of operating income
for segment purposes to exclude restructuring and related charges and unusual
costs that affect comparability. Accordingly, the financial information for
Fiscal 2003 and Fiscal 2002 (as defined below) have been restated to conform to
the new segment presentation.
The following discussion and analysis summarizes the significant factors
affecting (i) consolidated results of operations of the Company for the year
ended February 29, 2004 ("Fiscal 2004"), compared to the year ended February 28,
2003 ("Fiscal 2003"), and Fiscal 2003 compared to the year ended February 28,
2002 ("Fiscal 2002"), and (ii) financial liquidity and capital resources for
Fiscal 2004. This discussion and analysis also identifies certain restructuring
and related charges expected to affect consolidated results of operations of the
Company for the year ended February 28, 2005 ("Fiscal 2005"). This discussion
and analysis should be read in conjunction with the Company's consolidated
financial statements and notes thereto included herein.
As discussed in Note 1 to the financial statements, the Company adopted
SFAS No. 142 on March 1, 2002. Upon the adoption of SFAS No. 142, the Company
ceased amortization of goodwill and indefinite lived intangible assets.
Retroactive application of SFAS No. 142 is not permitted.
ACQUISITIONS IN FISCAL 2004, FISCAL 2003 AND FISCAL 2002 AND JOINT VENTURE
ACQUISITION OF HARDY
On March 27, 2003, the Company acquired control of BRL Hardy Limited, now
known as Hardy Wine Company Limited ("Hardy"), and on April 9, 2003, the Company
completed its acquisition of all of Hardy's outstanding capital stock. As a
result of the acquisition of Hardy, the Company also acquired the remaining 50%
ownership of Pacific Wine Partners LLC ("PWP"), the joint venture the Company
established with Hardy in July 2001. The acquisition of Hardy along with the
remaining interest in PWP is referred to together as the "Hardy Acquisition."
Through this acquisition, the Company acquired Australia's largest wine producer
with interests in wineries and vineyards in most of Australia's major wine
regions as well as New Zealand and the United States. Hardy has a comprehensive
portfolio of wine products across all price points with a strong focus on
premium wine production. Hardy's wines are distributed worldwide through a
network of marketing and sales operations, with the majority of sales generated
in Australia, the United Kingdom and the United States.
Total consideration paid in cash and Class A Common Stock to the Hardy
shareholders was $1,137.4 million. Additionally, the Company recorded direct
acquisition costs of $17.7 million. The acquisition date for accounting
purposes is March 27, 2003. The Company has recorded a $1.6 million reduction
in the purchase price to reflect imputed interest between the accounting
acquisition date and the final payment of consideration. This charge is
included as interest expense in the Consolidated Statement of Income for the
year ended February 29, 2004. The cash portion of the purchase price paid to
the Hardy shareholders and optionholders ($1,060.2 million) was financed with
$660.2 million of borrowings under the Company's March 2003 Credit Agreement (as
defined below) and $400.0 million of borrowings under the Company's Bridge
Agreement (as defined below). Additionally, the Company issued 3,288,913 shares
of the Company's Class A Common Stock, which were valued at $77.2 million based
on the simple average of the closing market price of the Company's Class A
Common Stock beginning two days before and ending two days after April 4, 2003,
the day the Hardy shareholders elected the form of consideration they wished to
receive. The purchase price was based primarily on a discounted cash flow
analysis that contemplated, among other things, the value of a broader
geographic distribution in strategic international markets and a presence in the
important Australian winemaking regions. The Company and Hardy have
complementary businesses that share a common growth orientation and operating
philosophy. The Hardy Acquisition supports the Company's strategy of growth and
breadth across categories and geographies, and strengthens its competitive
position in its core markets. The purchase price and resulting goodwill were
primarily based on the growth opportunities of the brand portfolio of Hardy. In
particular, the Company believes there are growth opportunities for Australian
wines in the United Kingdom, United States and other wine markets. This
acquisition supports the Company's strategy of driving long-term growth and
positions the Company to capitalize on the growth opportunities in "new world"
wine markets.
The results of operations of Hardy and PWP have been reported in the
Company's Constellation Wines segment as of March 27, 2003.
ACQUISITION OF RAVENSWOOD WINERY
On July 2, 2001, the Company acquired all of the outstanding capital stock
of Ravenswood Winery, Inc. (the "Ravenswood Acquisition"), a leading premium
wine producer based in Sonoma, California. On June 30, 2002, Ravenswood Winery,
Inc. was merged into Franciscan Vineyards, Inc. (a wholly-owned subsidiary of
the Company). The Ravenswood business produces, markets and sells super-premium
and ultra-premium California wine, primarily under the Ravenswood brand name.
The vast majority of the wine the Ravenswood business produces and sells is red
wine, including the number one super-premium Zinfandel in the United States.
The results of operations of the Ravenswood business are reported in the
Constellation Wines segment and have been included in the consolidated results
of operations of the Company since the date of acquisition.
ACQUISITION OF THE CORUS ASSETS
On March 26, 2001, in an asset acquisition, the Company acquired certain
wine brands, wineries, working capital (primarily inventories), and other
related assets from Corus Brands, Inc. (the "Corus Assets"). In this
acquisition, the Company acquired several well-known premium wine brands
primarily sold in the northwestern United States, including Covey Run, Columbia,
Ste. Chapelle and Alice White. In connection with the transaction, the Company
also entered into long-term grape supply agreements with affiliates of Corus
Brands, Inc. covering more than 1,000 acres of Washington and Idaho vineyards.
The results of operations of the Corus Assets are reported in the Constellation
Wines segment and have been included in the consolidated results of operations
of the Company since the date of acquisition.
ACQUISITION OF THE TURNER ROAD VINTNERS ASSETS
On March 5, 2001, in an asset acquisition, the Company acquired several
well-known premium wine brands, including Vendange, Nathanson Creek, Heritage,
and Talus, working capital (primarily inventories), two wineries in California,
and other related assets from Sebastiani Vineyards, Inc. and Tuolomne River
Vintners Group (the "Turner Road Vintners Assets"). The results of operations
of the Turner Road Vintners Assets are reported in the Constellation Wines
segment and have been included in the consolidated results of operations of the
Company since the date of acquisition.
PACIFIC WINE PARTNERS
On July 31, 2001, the Company and Hardy completed the formation of PWP, a
joint venture owned equally by the Company and Hardy through March 26, 2003.
Pacific Wine Partners LLC ("PWP") produces, markets and sells a portfolio of
premium wine in the United States, including a range of Australian imports. PWP
also exports certain of its U.S.-produced wines to other countries. In
connection with the initial formation of the joint venture, PWP was given the
exclusive distribution rights in the United States and the Caribbean to several
brands, including Banrock Station, Hardys, Leasingham, Barossa Valley Estate and
Chateau Reynella from Australia; and Nobilo from New Zealand. PWP also owns
Farallon, a premium California coastal wine. In addition, PWP owns a winery and
controls 1,400 acres of vineyards in Monterey County, California.
On October 16, 2001, the Company announced that PWP completed the purchase
of certain assets of Blackstone Winery, including the Blackstone brand and the
Codera wine business in Sonoma County.
As a result of the Hardy Acquisition, PWP became a wholly-owned subsidiary
of the Company. Accordingly, as noted above, its results of operations have
been consolidated and reported in the Constellation Wines segment since March
27, 2003. Prior to March 27, 2003, the investment in PWP was accounted for
using the equity method; accordingly, the results of operations of PWP from July
31, 2001, through March 26, 2003, were included in the equity in earnings of
joint ventures line in the Consolidated Statements of Income of the Company.
RESULTS OF OPERATIONS
- ---------------------
FISCAL 2004 COMPARED TO FISCAL 2003
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2004 and Fiscal 2003.
Fiscal 2004 Compared to Fiscal 2003
---------------------------------------
Net Sales
---------------------------------------
2004 2003 %Increase
------------ ------------ ---------
Constellation Wines:
Branded wines $ 1,549,750 $ 983,505 57.6%
Wholesale and other 846,306 689,794 22.7%
------------ ------------
Constellation Wines net sales $ 2,396,056 $ 1,673,299 43.2%
------------ ------------
Constellation Beers and Spirits:
Imported beers $ 862,637 $ 776,006 11.2%
Spirits 284,551 282,307 0.8%
------------ ------------
Constellation Beers and Spirits net sales $ 1,147,188 $ 1,058,313 8.4%
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Unusual gain $ 9,185 $ - N/A
------------ ------------
Consolidated Net Sales $ 3,552,429 $ 2,731,612 30.0%
============ ============
Net sales for Fiscal 2004 increased to $3,552.4 million from $2,731.6
million for Fiscal 2003, an increase of $820.8 million, or 30.0%. This increase
resulted primarily from the inclusion of $571.4 million of net sales of products
acquired in the Hardy Acquisition as well as increases in imported beer sales of
$86.6 million and U.K. wholesale sales of $61.1 million (on a local currency
basis). In addition, net sales benefited from a favorable foreign currency
impact of $74.6 million.
Constellation Wines
Net sales for the Constellation Wines segment for Fiscal 2004 increased to
$2,396.1 million from $1,673.3 million for Fiscal 2003, an increase of $722.8
million, or 43.2%. Branded wine net sales increased $566.2 million, primarily
due to the addition of $548.4 million of net sales of branded wine acquired in
the Hardy Acquisition. Wholesale and other net sales increased $156.5 million
primarily due to a favorable foreign currency impact of $63.1 million, growth in
the U.K. wholesale business of $61.1 million (on a local currency basis), and
the addition of $23.0 million of net sales of bulk wine acquired in the Hardy
Acquisition. The net sales increase in the U.K. Wholesale business on a local
currency basis is primarily due to the addition of new accounts and increased
average delivery sizes as the Company's national accounts business continues to
grow. The Company continues to face competitive discounting within select
markets and geographies driven in part by excess grape supplies. The Company
believes that the grape supply/demand cycle should come into balance over the
next couple of years. The Company has taken a strategy of preserving the
long-term brand equity of its portfolio and investing its marketing dollars in
the higher growth sectors of the wine business.
Constellation Beers and Spirits
Net sales for the Constellation Beers and Spirits segment for Fiscal 2004
increased to $1,147.2 million from $1,058.3 million for Fiscal 2003, an increase
of $88.9 million, or 8.4%. This increase resulted primarily from volume gains on
the Company's imported beer portfolio, which increased $86.6 million. Spirits
net sales remained relatively flat as increased branded spirits sales were
offset by lower bulk whisky and contract production sales.
GROSS PROFIT
The Company's gross profit increased to $975.8 million for Fiscal 2004 from
$760.7 million for Fiscal 2003, an increase of $215.1 million, or 28.3%. The
Constellation Wines segment's gross profit increased $200.4 million primarily
due to gross profit on the sales of branded wine acquired in the Hardy
Acquisition. The Constellation Beers and Spirits segment's gross profit
increased $42.5 million primarily due to the volume growth in the segment's
imported beer portfolio. These increases were partially offset by $27.8 million
of net unusual costs which consist of certain items that are excluded by
management in their evaluation of the results of each operating segment. These
net costs represent the flow through of inventory step-up associated with the
Hardy Acquisition of $22.5 million and the write-down of concentrate inventory
recorded in connection with the Company's decision to exit the commodity
concentrate product line of $16.8 million (see additional discussion under
"Restructuring and Related Charges" below), partially offset by the relief from
certain excise tax, duty and other costs incurred in prior years of $11.5
million, which was recognized in the fourth quarter of fiscal 2004. Gross
profit as a percent of net sales decreased slightly to 27.5% for Fiscal 2004
from 27.8% for Fiscal 2003 as an increase in gross profit margin from sales of
higher margin wine brands acquired in the Hardy Acquisition was more than offset
by the net unusual costs discussed above and a decrease in gross profit margin
on the Constellation Wines' U.K. wholesale business.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses increased to $457.3 million
for Fiscal 2004 from $351.0 million for Fiscal 2003, an increase of $106.3
million, or 30.3%. The Constellation Wines segment's selling, general and
administrative expenses increased $76.8 million primarily due to $67.7 million
of selling, general and administrative expenses from the addition of the Hardy
and PWP businesses. The Constellation Beers and Spirits segment's selling,
general and administrative expenses increased $7.9 million due to increased
imported beer and spirits advertising and selling expenses to support the growth
across this segment's businesses, partially offset by foreign currency gains.
The Corporate Operations and Other segment's general and administrative expenses
increased $8.9 million primarily due to additional deferred financing costs
associated with the Company's new bank credit facility and increased general and
administrative expenses to support the Company's growth. In addition, there was
a $12.7 million increase in selling, general and administrative expenses related
to unusual costs which consist of certain items that are excluded by management
in their evaluation of the results of each operating segment. These costs
consist primarily of the additional amortized deferred financing costs
associated with the bridge financing in connection with the Hardy Acquisition of
$11.6 million. Selling, general and administrative expenses as a percent of net
sales increased slightly to 12.9% for Fiscal 2004 as compared to 12.8% for
Fiscal 2003 due primarily to the unusual costs and the increased general and
administrative expenses within the Corporate Operations and Other segment as
discussed above.
RESTRUCTURING AND RELATED CHARGES
The Company recorded $31.2 million of restructuring and related charges for
Fiscal 2004 associated with the restructuring plan of the Constellation Wines
segment. Restructuring and related charges resulted from (i) $10.0 million
related to the realignment of business operations and (ii) $21.2 million related
to exiting the commodity concentrate product line in the U.S. and selling its
winery located in Escalon, California. In total, the Company recorded $38.0
million of costs associated with exiting the commodity concentrate product line
and selling its Escalon facility allocated between cost of product sold ($16.8
million) and restructuring and related charges ($21.2 million).
The Company recorded $4.8 million of restructuring and related charges for
Fiscal 2003 associated with an asset impairment charge in connection with two of
Constellation Wines segment's production facilities.
In Fiscal 2005, the Company expects to incur additional restructuring and
related charges of $11.6 million associated with the restructuring plan of the
Constellation Wines segment. These charges are expected to consist of $7.2
million related to the further realignment of business operations in the
Constellation Wines segment and $4.4 million related to renegotiating existing
grape contracts as a result of exiting the commodity concentrate product line
and selling the Escalon facility.
Approximately half of the total charges in connection with exiting the
commodity concentrate product line and selling the Escalon facility are non-cash
charges.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2004 and Fiscal 2003.
Fiscal 2004 Compared to Fiscal 2003
---------------------------------------
Operating Income (Loss)
---------------------------------------
2004 2003 %Increase
------------ ------------ ---------
Constellation Wines $ 348,132 $ 224,556 55.0%
Constellation Beers and Spirits 252,533 217,963 15.9%
Corporate Operations and Other (41,717) (32,797) 27.2%
------------ ------------
Total Reportable Segments 558,948 409,722 36.4%
Restructuring and Related Charges
and Unusual Costs (71,591) (4,764) 1402.7%
------------ ------------
Consolidated Operating Income $ 487,357 $ 404,958 20.3%
============ ============
Restructuring and related charges and unusual costs of $71.6 million and
$4.8 million for Fiscal 2004 and Fiscal 2003, respectively, consist of certain
costs that are excluded by management in their evaluation of the results of each
operating segment. Fiscal 2004 costs represent the flow through of inventory
step-up and the amortization of deferred financing costs associated with the
Hardy Acquisition of $22.5 million and $11.6 million, respectively, and costs
associated with exiting the commodity concentrate product line and the Company's
realignment of its business operations in the wine segment, including the
write-down of concentrate inventory of $16.8 million and restructuring and
related charges of $31.2 million, partially offset by the relief from certain
excise taxes, duty and other costs incurred in prior years of $10.4 million.
Fiscal 2003 costs represent restructuring and related charges associated with
the Company's realignment of its business operations in the wine segment. As a
result of these costs and the above factors, consolidated operating income
increased to $487.4 million for Fiscal 2004 from $405.0 million for Fiscal 2003,
an increase of $82.4 million, or 20.3%.
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
The Company entered into a foreign currency collar contract in February
2003 in connection with the Hardy Acquisition to lock in a range for the cost of
the acquisition in U.S. dollars. As of February 28, 2003, this derivative
instrument had a fair value of $23.1 million. Under SFAS No. 133, a transaction
that involves a business combination is not eligible for hedge accounting
treatment. As such, the derivative was recorded on the balance sheet at its
fair value with the change in the fair value recognized separately on the
Company's Consolidated Statements of Income. During the first quarter of fiscal
2004, the gain on change in fair value of the derivative instrument of $1.2
million was recognized separately on the Company's Consolidated Statement of
Income.
EQUITY IN EARNINGS OF JOINT VENTURES
The Company's equity in earnings of joint ventures decreased to $0.5
million in Fiscal 2004 from $12.2 million in Fiscal 2003 due to the acquisition
of the remaining 50% ownership of PWP in March 2003 resulting in consolidation
of PWP's results of operations since the date of acquisition.
INTEREST EXPENSE, NET
Interest expense, net of interest income of $3.6 million and $0.8 million
for Fiscal 2004 and Fiscal 2003, respectively, increased to $144.7 million for
Fiscal 2004 from $105.4 million for Fiscal 2003, an increase of $39.3 million,
or 37.3%. The increase resulted from higher average borrowings due to the
financing of the Hardy Acquisition, partially offset by a lower average
borrowing rate, and $1.7 million of imputed interest expense related to the
Hardy Acquisition.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for Fiscal 2004 declined to 36.0% from
39.3% for Fiscal 2003 as a result of the Hardy Acquisition, which significantly
increased the allocation of income to jurisdictions with lower income tax rates.
NET INCOME
As a result of the above factors, net income increased to $220.4 million
for Fiscal 2004 from $203.3 million for Fiscal 2003, an increase of $17.1
million, or 8.4%.
FISCAL 2003 COMPARED TO FISCAL 2002
NET SALES
The following table sets forth the net sales (in thousands of dollars) by
operating segment of the Company for Fiscal 2003 and Fiscal 2002.
Fiscal 2003 Compared to Fiscal 2002
---------------------------------------
Net Sales
---------------------------------------
2003 2002 %Increase
------------ ------------ ---------
Constellation Wines:
Branded wines $ 983,505 $ 963,514 2.1%
Wholesale and other 689,794 641,589 7.5%
------------ ------------
Constellation Wines net sales $ 1,673,299 $ 1,605,103 4.2%
------------ ------------
Constellation Beers and Spirits:
Imported beers $ 776,006 $ 726,953 6.7%
Spirits 282,307 274,702 2.8%
------------ ------------
Constellation Beers and Spirits net sales $ 1,058,313 $ 1,001,655 5.7%
------------ ------------
Corporate Operations and Other $ - $ - N/A
------------ ------------
Consolidated Net Sales $ 2,731,612 $ 2,606,758 4.8%
============ ============
Net sales for Fiscal 2003 increased to $2,731.6 million from $2,606.8
million for Fiscal 2002, an increase of $124.9 million, or 4.8%. This increase
resulted primarily from increased sales of imported beer of $49.1 million and
the impact of foreign currency changes of $50.7 million in the Constellation
Wines segment. Also contributing to the sales growth were increased sales in
U.K. wholesale of $28.6 million (on a local currency basis), fine wine sales of
$23.8 million and spirits sales of $7.6 million, offset by lower bulk wine,
grape juice concentrate sales of $14.7 million, popular and premium branded wine
sales of $13.9 million and U.K. branded sales of $9.4 million (on a local
currency basis).
Constellation Wines
Net sales for the Constellation Wines segment for Fiscal 2003 increased to
$1,673.3 million from $1,605.1 million for Fiscal 2002, an increase of $68.2
million, or 4.2%. Branded wines sales increased $20.0 million due to increased
fine wine sales of $23.8 million and a favorable foreign currency impact of $9.3
million partially offset by lower popular and premium wine sales of $13.9
million. The increase in fine wine sales resulted from an additional four
months of sales of the brands acquired in the acquisition of Ravenswood Winery,
Inc. ("Ravenswood"), completed in July 2001, of $14.1 million, as well as an
increase of $9.7 million due to volume growth in the fine wine business
partially offset by higher promotional costs and a shift towards lower priced
fine wine brands. Popular and premium wine sales declined $13.9 million on
lower volume offset slightly by higher average selling prices. Volumes were
negatively impacted as a result of increased promotional spending in the
industry, which the Company did not participate in heavily. In this competitive
pricing environment, the Company continues to be selective in its promotional
activities, focusing instead on growth areas, long-term brand building
initiatives and increased profitability. Wholesale and other sales increased
$48.2 million primarily due to a favorable foreign currency impact of $41.4
million and a $28.6 million local currency increase in U.K. wholesale sales due
to the addition of new accounts and increased average delivery sizes, partially
offset by lower bulk wine, grape juice concentrate and cider sales of $24.7
million.
Constellation Beers and Spirits
Net sales for the Constellation Beers and Spirits segment for Fiscal 2003
increased to $1,058.3 million from $1,001.7 million for Fiscal 2002, an increase
of $56.7 million, or 5.7%. This increase resulted primarily from a $49.1
million increase in imported beer sales. The growth in imported beer sales was
due to a price increase on the Company's Mexican beer portfolio, which took
effect in the first quarter of fiscal 2003. Spirits sales increased $7.6
million due primarily to increased bulk whiskey sales of $6.4 million, along
with a slight increase in branded sales of $1.2 million.
GROSS PROFIT
The Company's gross profit increased to $760.7 million for Fiscal 2003 from
$695.2 million for Fiscal 2002, an increase of $65.6 million, or 9.4%. The
Constellation Wines segment's gross profit increased $30.8 million due to lower
wine costs, the additional four months of sales of the brands acquired in the
Ravenswood Acquisition (completed in July 2001), a favorable mix of sales
towards higher margin popular and premium wine, and a favorable foreign currency
impact. These increases were partially offset by lower gross profit on the
segment's reduced bulk wine and grape juice concentrate sales. The
Constellation Beers and Spirits segment's gross profit increased $34.8 million
due to increased gross profit on imported beer sales and increased gross profit
on spirits sales. The increased gross profit on imported beer sales is
primarily due to increased average selling prices in the Company's Mexican beer
portfolio and the increased gross profit on the segment's spirits business is
due to a favorable mix of sales towards higher margin products and lower average
spirits costs. As a result of the foregoing, gross profit as a percent of net
sales increased to 27.8% for Fiscal 2003 from 26.7% for Fiscal 2002.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $351.0 million
for Fiscal 2003 from $355.3 million for Fiscal 2002, a decrease of $4.3 million,
or (1.2%). The Company adopted SFAS No. 142 on March 1, 2002, and, accordingly,
stopped amortizing goodwill and other indefinite lived intangible assets.
Therefore, the decrease of $4.3 million consists of a decrease of $27.3 million
of amortization expense from Fiscal 2002 offset by an increase of $23.0 million.
The Constellation Wines segment's selling, general and administrative expenses
decreased $2.6 million due to lower amortization expense of $19.1 million
partially offset by (i) higher selling costs to support the growth in the U.K.
wholesale business, (ii) increased selling and advertising costs on certain
popular and premium wine brands, and (iii) higher selling, general and
administrative expenses to support the growth in the fine wine business. The
Constellation Beers and Spirits segment's selling, general and administrative
expenses decreased $4.4 million due to lower amortization expense of $8.2
million partially offset by increased selling, general and administrative
expenses to support the growth in the imported beer portfolio. The Corporate
Operations and Other segment's selling, general and administrative expenses
increased $2.7 million primarily due to increased personnel costs to support the
Company's growth. Selling, general and administrative expenses as a percent of
net sales decreased to 12.8% for Fiscal 2003 as compared to 13.6% for Fiscal
2002. This decrease was due to the reduced amortization expense noted above
partially offset by (i) the percent increase in general and administrative
expenses growing at a faster rate than the percent increase in net sales across
all segments, and (ii) the percent increase in the Constellation Wines
segment's U.K. wholesale and U.K. branded wine selling costs being greater than
the percent increase in the U.K. wholesale and U.K. branded wine net sales.
RESTRUCTURING AND RELATED CHARGES
The Company recorded a property, plant and equipment impairment charge of
$4.8 million in Fiscal 2003 in connection with the planned closure of two of its
production facilities within its Constellation Wines segment in Fiscal 2004.
During Fiscal 2004, the Company began the realignment of its business operations
within this segment to further improve productivity. This realignment is not
expected to have an impact on brand sales. No such charges were incurred in
Fiscal 2002.
OPERATING INCOME
The following table sets forth the operating income (loss) (in thousands of
dollars) by operating segment of the Company for Fiscal 2003 and Fiscal 2002.
Fiscal 2003 Compared to Fiscal 2002
-----------------------------------------
Operating Income (Loss)
-----------------------------------------
2003 2002 %Increase
---------- ---------- ---------
Constellation Wines $ 224,556 $ 191,227 17.4%
Constellation Beers and Spirits 217,963 178,805 21.9%
Corporate Operations and Other (32,797) (30,141) 8.8%
---------- ----------
Total Reportable Segments 409,722 339,891 20.5%
Restructuring and Related Charges
and Unusual Costs (4,764) - N/A
---------- ----------
Consolidated Operating Income . . $ 404,958 $ 339,891 19.1%
========== ==========
Restructuring and related charges and unusual costs of $4.8 million for
Fiscal 2003 consist of certain costs that are excluded by management in their
evaluation of the results of each operating segment. These costs represent
restructuring and related charges associated with the Company's realignment of
its business operations in the wine segment. As a result of the above factors,
operating income increased to $405.0 million for Fiscal 2003 from $339.9 million
for Fiscal 2002, an increase of $65.1 million, or 19.1%. Fiscal 2002 operating
income for Constellation Wines and Constellation Beers and Spirits included
amortization expense of $19.1 million and $8.2 million, respectively.
GAIN ON CHANGE IN FAIR VALUE OF DERIVATIVE INSTRUMENTS
In February 2003, the Company entered into a foreign currency collar
contract in connection with the Hardy Acquisition to lock in a range for the
cost of the acquisition in U.S. dollars. As of February 28, 2003, this
derivative instrument had a fair value of $23.1 million. Under SFAS No. 133, a
transaction that involves a business combination is not eligible for hedge
accounting treatment. As such, the derivative was recorded on the balance sheet
at its fair value with the change in the fair value recognized separately on the
Company's Consolidated Statements of Income.
EQUITY IN EARNINGS OF JOINT VENTURES
The Company's equity in earnings of joint venture increased to $12.2
million in Fiscal 2003 from $1.7 million in Fiscal 2002. Due to the formation
of the joint venture in July 2001, there were seven months of earnings in Fiscal
2002 versus twelve months of earnings in Fiscal 2003. In addition, Fiscal 2003
benefited from an additional seven months of earnings due to the joint venture's
purchase of certain assets of the Blackstone Winery, including the Blackstone
brand and the Codera wine business in Sonoma County, which was completed in
October 2001.
INTEREST EXPENSE, NET
Interest expense, net of interest income of $0.8 million and $1.6 million
for Fiscal 2003 and Fiscal 2002, respectively, decreased to $105.4 million for
Fiscal 2003 from $114.2 million for Fiscal 2002, a decrease of $8.8 million, or
(7.7)%. The decrease resulted from decreases in both the average borrowings for
the year and the average interest rate for the year.
PROVISION FOR INCOME TAXES
The Company's effective tax rate for Fiscal 2003 declined to 39.3% from
40.0% for Fiscal 2002 as a result of the adoption of SFAS No. 142 on March 1,
2002.
NET INCOME
As a result of the above factors, net income increased to $203.3 million
for Fiscal 2003 from $136.4 million for Fiscal 2002, an increase of $66.9
million, or 49.0%.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
- -----------------------------------------
GENERAL
The Company's principal use of cash in its operating activities is for
purchasing and carrying inventories and carrying seasonal accounts receivable.
The Company's primary source of liquidity has historically been cash flow from
operations, except during annual grape harvests when the Company has relied on
short-term borrowings. In the United States, the annual grape crush normally
begins in August and runs through October. In Australia, the annual grape crush
normally begins in February and runs through May. The Company generally begins
taking delivery of grapes at the beginning of the crush season with payments for
such grapes beginning to come due one month later. The Company's short-term
borrowings to support such purchases generally reach their highest levels one to
two months after the crush season has ended. Historically, the Company has used
cash flow from operating activities to repay its short-term borrowings and fund
capital expenditures. The Company will continue to use its short-term
borrowings to support its working capital requirements. The Company believes
that cash provided by operating activities and its financing activities,
primarily short-term borrowings, will provide adequate resources to satisfy its
working capital, scheduled principal and interest payments on debt, preferred
dividend payment requirements, and anticipated capital expenditure requirements
for both its short-term and long-term capital needs.
FISCAL 2004 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Fiscal 2004 was $340.3
million, which resulted from $220.4 million of net income, plus $137.9 million
of net noncash items charged to the Consolidated Statement of Income, less $18.0
million representing the net change in the Company's operating assets and
liabilities. The net non-cash items consisted primarily of depreciation of
property, plant and equipment, deferred tax provision and amortization of
intangible and other assets. The net change in operating assets and liabilities
resulted primarily from an increase in accounts receivable and a decrease in
accounts payable, partially offset by a decrease in inventories and an increase
in accrued advertising and promotion.
INVESTING ACTIVITIES
Net cash used in investing activities for Fiscal 2004 was $1,158.5 million,
which resulted primarily from net cash paid of $1,069.5 million for the
purchases of businesses and $105.1 million of capital expenditures.
FINANCING ACTIVITIES
Net cash provided by financing activities for Fiscal 2004 was $745.2
million resulting primarily from proceeds of $1,600.0 million from issuance of
long-term debt, including $1,060.2 million of long-term debt incurred to acquire
Hardy, plus net proceeds from the 2003 Equity Offerings (as defined below) of
$426.1 million. This amount was partially offset by principal payments of
long-term debt of $1,282.3 million.
FISCAL 2003 CASH FLOWS
OPERATING ACTIVITIES
Net cash provided by operating activities for Fiscal 2003 was $236.1
million, which resulted from $203.3 million of net income, plus $53.2 million of
net noncash items charged to the Consolidated Statement of Income, less $20.4
million representing the net change in the Company's operating assets and
liabilities. The net noncash items consisted primarily of depreciation of
property, plant and equipment and provision for deferred taxes, partially offset
by a gain on changes in fair value of derivative instrument. The net change in
operating assets and liabilities resulted primarily from an increase in
inventories and a reduction in accrued excise taxes and adverse grape contracts
partially offset by increases in accrued income taxes payable and accrued
advertising and promotion expenses.
INVESTING ACTIVITIES
Net cash used in investing activities for Fiscal 2003 was $72.0 million,
which resulted primarily from $71.6 million of capital expenditures.
FINANCING ACTIVITIES
Net cash used in financing activities for Fiscal 2003 was $161.5 million
resulting primarily from $151.1 million of principal payments of long-term debt
and $51.9 million of net repayments of notes payable. These debt payments were
partially funded by $28.7 million of proceeds from employee stock option
exercises and $10.0 million of proceeds from long-term debt which was used for
the repayment of debt at one of the Company's Chilean subsidiaries.
During June 1998, the Company's Board of Directors authorized the
repurchase of up to $100.0 million of its Class A Common Stock and Class B
Common Stock. The repurchase of shares of common stock will be accomplished,
from time to time, in management's discretion and depending upon market
conditions, through open market or privately negotiated transactions. The
Company may finance such repurchases through cash generated from operations or
through the senior credit facility. The repurchased shares will become treasury
shares. As of May 14, 2004, the Company had purchased a total of 4,075,344
shares of Class A Common Stock at an aggregate cost of $44.9 million, or at an
average cost of $11.01 per share. Of this total amount, no shares were
repurchased during Fiscal 2004, Fiscal 2003 or Fiscal 2002.
DEBT
Total debt outstanding as of February 29, 2004, amounted to $2,047.9
million, an increase of $782.4 million from February 28, 2003. The ratio of
total debt to total capitalization decreased to 46.3% as of February 29, 2004,
from 51.9% as of February 28, 2003.
SENIOR CREDIT FACILITY
Credit Agreement
----------------
In connection with the Hardy Acquisition, on January 16, 2003, the Company,
certain subsidiaries of the Company, JPMorgan Chase Bank, as a lender and
administrative agent (the "Administrative Agent"), and certain other lenders
entered into a new credit agreement (as subsequently amended and restated as of
March 19, 2003, the "March 2003 Credit Agreement"). In October 2003, the Company
entered into a Second Amended and Restated Credit Agreement (the " October
Credit Agreement") that (i) refinanced the then outstanding principal balance
under the Tranche B Term Loan facility on essentially the same terms as the
Tranche B Term Loan facility under the March 2003 Credit Agreement, but at a
lower Applicable Rate (as such term is defined in the October Credit Agreement)
and (ii) otherwise restated the terms of the March 2003 Credit Agreement, as
amended. The October Credit Agreement was further amended during February 2004
(the "Credit Agreement"). The March 2003 Credit Agreement provided for aggregate
credit facilities of $1.6 billion consisting of a $400.0 million Tranche A Term
Loan facility due in February 2008, an $800.0 million Tranche B Term Loan
facility due in November 2008 and a $400.0 million Revolving Credit facility
(including an Australian Dollar revolving sub-facility of up to A$10.0 million
and a sub-facility for letters of credit of up to $40.0 million) which expires
on February 29, 2008. Proceeds of the March 2003 Credit Agreement were used to
pay off the Company's obligations under its prior senior credit facility, to
fund a portion of the cash required to pay the former Hardy shareholders and to
pay indebtedness outstanding under certain of Hardy's credit facilities. The
Company uses the remaining availability under the Credit Agreement to fund its
working capital needs on an on-going basis.
The Tranche A Term Loan facility and the Tranche B Term Loan facility were
fully drawn on March 27, 2003. As of February 29, 2004, the Company has made
$40.0 million of scheduled and required payments on the Tranche A Term Loan
facility. In August 2003, the Company paid $100.0 million of the Tranche B Term
Loan facility. In October 2003, the Company paid an additional $200.0 million
of the Tranche B Term Loan facility. As of February 29, 2004, the required
annual repayments of the Tranche A Term Loan and the Tranche B Term Loan are as
follows:
Tranche A Tranche B
Term Loan Term Loan Total
---------- ---------- ---------
(in thousands)
2005 $ 60,000 $ - $ 60,000
2006 80,000 54,420 134,420
2007 100,000 54,420 154,420
2008 120,000 119,048 239,048
2009 - 272,112 272,112
---------- ---------- ---------
$ 360,000 $ 500,000 $ 860,000
========== ========== =========
The rate of interest payable, at the Company's option, 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 Credit Agreement) and, with respect to LIBOR borrowings, ranges
between 1.50% and 2.50%. As of February 29, 2004, the LIBOR margin for the
Revolving Credit facility and the Tranche A Term Loan facility is 1.75%, while
the LIBOR margin on the Tranche B Term Loan facility is 2.00%.
The Company's obligations are guaranteed by certain subsidiaries of the
Company ("Guarantors") and the Company is obligated to pledge collateral of (i)
100% of the capital stock of all of the Company's U.S. subsidiaries and (ii) 65%
of the voting capital stock of certain foreign subsidiaries of the Company.
The Company and its subsidiaries are subject to customary lending covenants
including those restricting additional liens, the incurrence of additional
indebtedness (including guarantees of indebtedness), the sale of assets, the
payment of dividends, transactions with affiliates and the making of certain
investments, in each case subject to baskets, exceptions and/or thresholds. As a
result of the prepayment of the Bridge Loans (as defined below) with the
proceeds from the 2003 Equity Offerings (see Note 16), the requirement under
certain circumstances for the Company and the Guarantors to pledge certain
assets consisting of, among other things, inventory, accounts receivable and
trademarks to secure the obligations under the Credit Agreement, ceased to
apply. The primary financial covenants require the maintenance of a debt
coverage ratio, a senior debt coverage ratio, a fixed charge ratio and an
interest coverage ratio. As of February 29, 2004, the Company is in compliance
with all of its covenants under its Credit Agreement.
As of February 29, 2004, under the Credit Agreement, the Company had
outstanding Tranche A Term Loans of $360.0 million bearing a weighted average
interest rate of 2.9%, Tranche B Term Loans of $500.0 million bearing a weighted
average interest rate of 3.2%, undrawn revolving letters of credit of $18.6
million, and $381.4 million in revolving loans available to be drawn. There
were no outstanding revolving loans under the Credit Agreement as of February
29, 2004.
Bridge Agreement
----------------
On January 16, 2003, the Company, certain subsidiaries of the Company,
JPMorgan Chase Bank, as a lender and Administrative Agent, and certain other
lenders (such other lenders, together with the Administrative Agent, are
collectively referred to herein as the "Bridge Lenders") entered into a bridge
loan agreement which was amended and restated as of March 26, 2003, containing
commitments of the Bridge Lenders to make bridge loans (the "Bridge Loans") of
up to, in the aggregate, $450.0 million (the "Bridge Agreement"). On April 9,
2003, the Company used $400.0 million of the Bridge Loans to fund a portion of
the cash required to pay the former Hardy shareholders. On July 30, 2003, the
Company used proceeds from the 2003 Equity Offerings to prepay the $400.0
million Bridge Loans in their entirety.
SUBSIDIARY FACILITIES
The Company has additional line of credit arrangements available totaling
$91.5 million and $44.5 million as of February 29, 2004, and February 28, 2003,
respectively. These lines support the borrowing needs of certain of the
Company's foreign subsidiary operations. Interest rates and other terms of
these borrowings vary from country to country, depending on local market
conditions. As of February 29, 2004, and February 28, 2003, amounts outstanding
under the subsidiary revolving credit facilities were $1.8 million and $0.6
million, respectively.
SENIOR NOTES
On August 4, 1999, the Company issued $200.0 million aggregate principal
amount of 8 5/8% Senior Notes due August 2006 (the "August 1999 Senior Notes").
Interest on the August 1999 Senior Notes is payable semiannually on February 1
and August 1. As of February 29, 2004, the Company had outstanding $200.0
million aggregate principal amount of August 1999 Senior Notes.
On November 17, 1999, the Company issued (pound) 75.0 million ($121.7
million upon issuance) aggregate principal amount of 8 1/2% Senior Notes due
November 2009 (the "Sterling Senior Notes"). Interest on the Sterling Senior
Notes is payable s