CONSTELLATION BRANDS, INC. INTRODUCTION
This MD&A provides additional information on our businesses, current developments, financial condition, cash flows, and results of operations. It should be read in conjunction with our consolidated financial statements and notes thereto included herein (the "Financial Statements") and with our consolidated financial statements and notes included in our 2020 Annual Report. This MD&A is organized as follows:
•Overview. This section provides a general description of our business, which we believe is important in understanding the results of our operations, financial condition, and potential future trends.
•Strategy. This section provides a description of our strategy and a discussion of recent developments, significant investments, acquisitions, and divestitures.
•Results of operations. This section provides an analysis of our results of operations presented on a business segment basis for the three months endedMay 31, 2020 ("First Quarter 2021"), andMay 31, 2019 ("First Quarter 2020"). In addition, a brief description of significant transactions and other items that affect the comparability of the results is provided. •Financial liquidity and capital resources. This section provides an analysis of our cash flows, outstanding debt, and a discussion of the amount of financial capacity available to fund our ongoing operations and future commitments, as well as a discussion of other financing arrangements.
OVERVIEW
We are an international beverage alcohol company with a broad portfolio of consumer-preferred high-end imported beer brands, and higher-end wine and spirits brands. Many of our products are recognized as leaders in their respective categories. We are one of the leadingU.S. growth drivers at retail among beverage alcohol suppliers. In the U.S. market, we are the third-largest beer company and a leading higher-end wine and spirits company. Our internal management financial reporting consists of three business divisions: (i) Beer, (ii)Wine and Spirits , and (iii) Canopy and we report our operating results in four segments: (i) Beer, (ii)Wine and Spirits , (iii) Corporate Operations and Other, and (iv) Canopy. OurCanopy Equity Method Investment makes up the Canopy segment. In the Beer segment, our portfolio consists of high-end imported beer, craft beer, and alternative beverage alcohol brands. We have an exclusive perpetual brand license to import, market, and sell our Mexican beer portfolio in theU.S. In theWine and Spirits segment, our portfolio includes higher-margin, higher-growth wine brands complemented by certain higher-end spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of executive management, corporate development, corporate finance, corporate growth and strategy, human resources, internal audit, investor relations, legal, public relations, and information technology, as well as our investments made through our corporate venture capital function. All costs 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 our CODM's evaluation of the operating income (loss) performance of the other reportable segments. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management, and the structure of our internal financial reporting.
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MD&A Table of Contents STRATEGY Our overall strategy is to drive industry-leading growth, build unrivaled shareholder value, and shape the future of our industry by building brands that people love. We believe sharing a toast, unwinding after a day, celebrating milestones, and helping people connect, is Worth Reaching For. We position our portfolio to benefit from the consumer-led trend towards premiumization, which we believe will continue to result in faster growth rates in the higher-end of the beer, wine, and spirits categories. We focus on developing our expertise in consumer insights and category management, as well as our strong distributor network, which provides an effective route-to-market. Additionally, we leverage our scale across the total beverage alcohol market and our level of diversification hedges our portfolio risk. In addition to growing our existing business, we focus on targeted acquisitions of, and investments in, businesses that are higher-margin, higher-growth, consumer-led, have a low integration risk, and/or fill a gap in our portfolio. We also strive to identify, meet, and stay ahead of evolving consumer trends and market dynamics. See "Investments, Acquisitions, and Divestitures - Canopy Investments" below.
We strive to strengthen our portfolio of higher-end beer, wine, and spirits brands and differentiate ourselves through:
•leveraging our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio; •strengthening relationships with wholesalers and retailers by providing consumer and beverage alcohol insights; •investing in brand building and innovation activities; •positioning ourselves for success with consumer-led products that identify, meet, and stay ahead of evolving consumer trends and market dynamics; •realizing operating efficiencies through expanding and enhancing production capabilities and maximizing asset utilization; and •developing employees to enhance performance in the marketplace. Our business strategy for the Beer segment focuses on leading the high-end segment ofU.S. beer and includes continued focus on growing our beer portfolio in theU.S. through expanding distribution for key brands, as well as new product development and innovation within the existing portfolio of brands, and continued expansion, construction, and optimization activities for ourMexico beer operations. Additionally, in an effort to more fully compete in growing sectors of the high-end segment of theU.S. beer market, we have leveraged our innovation capabilities to introduce new brands that align with consumer trends. We continue to refine our options to optimize the value of our Beer segment and drive increased focus on our high-performing import portfolio and new product introductions. See "Investments, Acquisitions, and Divestitures -Ballast Point Divestiture" below. In connection with our business strategy for the Beer segment, we have more than tripled the production capacity of our brewery located inNava, Coahuila, Mexico ("theNava Brewery ") since itsJune 2013 acquisition. Additionally, we are continuing to invest to expand our brewery operations in Obregon,Sonora, Mexico (the "Obregon Brewery "), where expansion is expected to be completed by the end of Fiscal 2021, although further COVID-19 containment measures may alter that timeline. At this time, we have paused allMexicali Brewery construction activities, following a negative result from a public consultation held inMexico , see "Capital expenditures" below. Expansion, construction, and optimization efforts inMexico continue to align with our anticipated future growth expectations. Our business strategy for theWine and Spirits segment is to build an industry-leading portfolio of higher-end wine and spirits brands. We are investing to meet the evolving needs of consumers; building brands through consumer insights, sensory expertise, and innovation; and refreshing existing brands, as we continue to focus on moving our branded wine and spirits portfolio towards a higher-margin, higher-growth portfolio of brands. We dedicate a large share of our sales and marketing resources to well-known wine and spirits brands sold in theU.S. , which comprise theU.S. Power Brands ("Power Brands"), as they represent a majority of ourU.S. wine and spiritsConstellation Brands, Inc. Q1 FY 2021 Form 10-Q #WORTHREACHINGFOR I 34
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revenue and profitability, and generally hold strong positions in their
respective price categories. These brands and/or portfolio of brands include:
Wine Portfolio
Wine Brands of Brands Spirits Brands
? 7 Moons ? Drylands ? SIMI ? Charles Smith ? Casa Noble
? Auros ? Kim Crawford ? Spoken Barrel ? Prisoner ? High West
? Champagne Palmer & Co ? Meiomi ? Robert Mondavi ? Mi CAMPO
? Cooper & Thief ? Mount Veeder ? Schrader ? Nelson's Green Brier
? Crafters Union ? Nobilo (1) ? SVEDKA
? Cuvée Sauvage ? Ruffino ? The Real McCoy
(1)See "Business Transformation - Wine and Spirits Transactions" below.
We focus our innovation and investment dollars on those brands within our
portfolio which position us to benefit from the consumer-led trend towards
premiumization. Additionally, in connection with the Wine and Spirits
Transactions and Other Wine and Spirits Transactions, we expect to optimize the
value of our wine and spirits portfolio by driving increased focus on our
higher-end Power Brands to accelerate growth and improve overall operating
margins. In markets where it is feasible, we entered into contractual
arrangements to consolidate our U.S. distribution network in order to obtain
dedicated distributor selling resources which focus on our U.S. wine and spirits
portfolio to drive organic growth. This consolidated U.S. distribution network
currently represents about 65% of our branded wine and spirits volume in the
U.S. Throughout the terms of these contracts, we generally expect shipments on
an annual basis to these distributors to essentially equal the distributors'
shipments to retailers.
Marketing, sales, and distribution of our products are managed on a geographic
basis in order to fully leverage leading market positions. In addition, market
dynamics and consumer trends vary across each of our markets. Within our primary
market in the U.S. , we offer a range of beverage alcohol products across the
imported beer, craft beer, alternative beverage alcohol, branded wine, and
spirits categories, with generally separate distribution networks utilized for
(i) our beer portfolio and (ii) our wine and spirits portfolio. The environment
for our products is competitive in each of our markets.
We complemented our total beverage alcohol strategy in an adjacent category by
making investments in Canopy, a world-leading, diversified cannabis company.
These investments are consistent with our long-term strategy to identify, meet,
and stay ahead of evolving consumer trends and market dynamics, and they
represent a significant expansion of our strategic relationship to position
Canopy as a global leader in cannabis production, branding, intellectual
property, and retailing.
We remain committed to our long-term financial model of: growing sales,
expanding margins, and increasing cash flow in order to achieve earnings per
share growth, maintain our targeted leverage ratio, and deliver returns to
shareholders through the payment of quarterly cash dividends and periodic share
repurchases.
Recent Developments
COVID-19
We have an existing Crisis Management Committee that has been closely monitoring
the impact of the virus that causes COVID-19, on our Company and our workforce
since January 2020 . In March 2020 , the World Health Organization ("WHO")
recognized COVID-19 as a pandemic. COVID-19 has severely restricted the level of
economic activity around the world. In response to COVID-19, the governments of
many countries, states, cities, and other geographic regions took preventative
or protective actions, such as imposing restrictions on travel and business
operations and advising or requiring individuals to limit or forgo their time
outside of their homes. Temporary closures of businesses were ordered, and
numerous other businesses temporarily closed voluntarily. Further, individuals'
ability to travel was curtailed through mandated travel restrictions and may be
further limited
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through additional voluntary or mandated closures of travel-related businesses. In the key markets where we sell our products, the beverage alcohol industry has been classified as an essential business. We have implemented various measures to reduce the spread of the virus including working from home, restricting visitors to our production locations, splitting our production workforces, reducing the on-site production workforce levels, screening workers before they enter facilities, implementing social distancing, and encouraging employees to adhere to prevention measures recommended by theCenter for Disease Control ("CDC") and theWHO . These prevention measures have been effective as evidenced by the minimal number of COVID-19 cases within our workforce. Since our non-production workforce is able to work remotely using various technology tools, we are able to maintain our operations and internal controls over financial reporting and disclosures. COVID-19 containment measures have affected us primarily in the reduction of (i) depletion volume on our products in the on-premise business due to bar and restaurant closures and (ii) shipment volume related to the reduced production activity at our major breweries inMexico . The on-premise business has historically been about 10% to 15% of our depletion volume for beer, wine, and spirits. VariousU.S. states are in the process of reopening their economies including bars and restaurants which we expect to begin increasing our on-premise depletion volumes. The decrease in the on-premise business was partially offset by an increase in off-premise, including eCommerce, which has increased sinceMarch 2020 . Currently, our breweries, wineries, and bottling facilities are operating at close to normal capacity. InJune 2020 , beer production at our major breweries inMexico returned to normal levels. We expect the impacts from the COVID-19 related slowdown of beer production inMexico will extend into the second quarter of fiscal 2021. We have recently begun reopening our hospitality, tasting rooms, retail, restaurants, and other non-essential public facilities. Our supply chains and distribution channels have not been materially impacted and we are working to rebuild our supply of products to meet forecasted demand. As a result of decreased production levels, we are closely monitoring distributor inventory to optimize stock levels. Product inventories are expected to return to more normal levels during the third quarter of fiscal 2021. We have also been impacted by the containment actions imposed by the Mexican government, including a temporary halt on expansion activities at theObregon Brewery . InJune 2020 , we resumed construction on a planned additional five million hectoliters expansion. Expansion is expected to be completed by the end of Fiscal 2021, although any further containment actions associated with COVID-19 may alter that timeline. We are not able to estimate the long-term impact of COVID-19 on our business, financial condition, results of operations, and/or cash flow. We believe we have sufficient liquidity available from operating cash flow, cash on hand, and availability under our$2.0 billion revolving credit facility. We expect to have continued access to capital markets and to continue to return value to shareholders. Empathy Wines InJune 2020 , we acquired Empathy Wines, which primarily included the acquisition of goodwill, trademarks, and inventory, plus an earn-out over five years based on performance. This acquisition, which included a digitally-native wine brand, strengthens our position in the direct-to-consumer and eCommerce markets. The results of operations of Empathy Wines will be reported in theWine and Spirits segment and will be included in our consolidated results of operations from the date of acquisition. Paul Masson Transaction InJune 2020 , we entered into the Paul Masson Transaction. The Paul Masson Transaction is subject toFTC review and clearance, and is expected to close in the second quarter of fiscal 2021. We expect to use the net cash proceeds from the Paul Masson Transaction primarily to reduce outstanding borrowings. Concentrate Business Transaction InJune 2020 , we entered into the Concentrate Business Transaction. The Concentrate Business Transaction is subject toFTC review and clearance, and is expected to close in the second quarter of fiscal 2021.
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Nobilo Wine Transaction InJune 2020 , we entered into a definitive agreement to sell theNew Zealand -based Nobilo Wine brand and certain related assets and liabilities, subject to certain purchase price adjustments. The definitive agreement was generally consistent with the terms described in "Business Transformation - Wine and Spirits Transactions" below. New Acreage Agreement InJune 2020 , Canopy announced the New Acreage Agreement. The New Acreage Agreement reduces (i) the ratio of Canopy shares required to be exchanged for Acreage shares uponU.S. Federal cannabis legalization and (ii) the number of Acreage shares subject to the fixed exchange ratio from 100% to 70%, calculated as a percentage of Acreage's issued and outstanding shares. The amended agreement is subject to Acreage shareholder and regulatory approval. The issuance of Canopy shares in exchange for Acreage shares that would occur uponU.S. Federal cannabis legalization would decrease our ownership interest in Canopy and could have a significant effect on our share of Canopy's reported earnings or losses.
Investments, acquisitions, and divestitures
Canopy segment Canopy investments InMay 2020 , we exercised theNovember 2017 Canopy Warrants at an exercise price ofC$12.98 per warrant share forC$245.0 million , or$173.9 million , which increased our ownership interest in Canopy to 38.6%.
We recognized an unrealized net gain (loss) from the changes in fair value of our Canopy investments accounted for at fair value in income (loss) from unconsolidated investments as follows:
First First
Date of Quarter Quarter
Investment Investment 2021 2020
(in millions)
Nov 2017 Warrants (1) $ (61.8) $ (134.1)
June 2018 Convertible debt securities (12.5) (32.6)
Nov 2018 Warrants (123.0) (660.8)
$ (197.3) $ (827.5) (1)For additional information on the
We expect the value of the Canopy investments accounted for at fair value to be volatile in future periods. We evaluated the Canopy investments as ofMay 31, 2020 , and determined that there was not an other-than-temporary-impairment. Additionally, sinceNovember 1, 2018 , we recognize equity in earnings (losses) and related activities for ourCanopy Equity Method Investment on a two-month lag. Accordingly, we recognized our share of Canopy's fourth quarter fiscal 2020 earnings (losses) for the period January throughMarch 2020 , in our First Quarter 2021 results. We recognized our share of Canopy's fourth quarter fiscal 2019 earnings (losses) from January throughMarch 2019 , in our First Quarter 2020 results. We expect Canopy's earnings to be volatile in future periods. As ofMay 31, 2020 , the conversion of Canopy equity securities held by its employees and/or held by other third parties, excluding our NewNovember 2018 Canopy Warrants,Canopy Debt Securities , and the Acreage Financial Instrument would not have a significant effect on our share of Canopy's reported earnings or losses. Additionally, under an amended and restated investor rights agreement, we have the option to purchase additional common shares of Canopy at the then-current price of the underlying equity security to allow us to maintain our relative ownership interest. If we exercised all of our NewNovember 2018 Canopy Warrants, expiringNovember 1, 2023 , andNovember 1, 2026 , it could have a significant effect on our share of Canopy's reported earnings or losses and our ownership interest in Canopy would be expected to increase to greater than 50 percent. In connection with the Acreage Transaction, Canopy has the Acreage Financial Instrument, which would require the issuance of Canopy shares. If Canopy exercised the Acreage Financial Instrument it could have aConstellation Brands, Inc. Q1 FY 2021 Form 10-Q #WORTHREACHINGFOR I 37
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significant effect on our share of Canopy's reported earnings or losses and our ownership interest in Canopy would decrease and no longer be expected to be greater than 50 percent.
As previously noted, these investments are consistent with our long-term strategy to identify, meet, and stay ahead of evolving consumer trends and market dynamics, and they represent a significant expansion of our strategic relationship to position Canopy as a global leader in cannabis production, branding, intellectual property, and retailing.
Beer segment Ballast Point Divestiture OnMarch 2, 2020 , we sold theBallast Point craft beer business, including a number of its associated production facilities and brewpubs. Accordingly, our consolidated results of operations include the results of operations of ourBallast Point craft beer business through the date of divestiture. This divestiture is consistent with our strategic focus on our high-performing import portfolio and new product introductions.Wine and Spirits segment Other equity method investment InApril 2020 , we invested in a wine business that is accounted for under the equity method. We will recognize our share of their equity in earnings (losses) in our consolidated financial statements in theWine and Spirits segment. Black Velvet Divestiture OnNovember 1, 2019 , we sold the Black Velvet Canadian Whisky business and the brand's associated production facility, along with a subset of Canadian whisky brands produced at that facility, and related inventory at a transaction value of$266.3 million . Accordingly, our consolidated results of operations include the results of operations of our Canadian whisky business through the date of divestiture. We received cash proceeds of$269.7 million , subject to estimated working capital adjustments. This divestiture is consistent with our strategic focus on higher-margin, higher-growth brands. We recognized a net gain of$73.5 million on the sale of the business primarily in the third quarter of fiscal 2020. Nelson's Green Brier acquisition InMay 2019 , we increased our ownership interest in Nelson's Green Brier to 75%, resulting in consolidation of the business and recognition of a 25% noncontrolling interest. This acquisition included a portfolio of award-winning,Tennessee -based craft bourbon and whiskey products. The fair value of the business combination was allocated primarily to goodwill, trademarks, inventory, and property, plant, and equipment. The results of operations of Nelson's Green Brier are reported in theWine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Business transformation
Wine and Spirits Transactions InApril 2019 , we entered into a definitive agreement withE. & J. Gallo Winery ("Gallo") to sell a portion of our wine and spirits business, including approximately 30 lower-margin, lower-growth wine and spirits brands, wineries, vineyards, offices, and facilities. InDecember 2019 , we agreed to revise and supersede the Original Wine and Spirits Transaction. The revisions to the transaction address competitive concerns raised by theFTC specifically related to the sparkling wine, brandy, dessert wine, and concentrate categories. As a result, the brandsCook's California Champagne ,J. Roget American Champagne , Paul Masson Grande Amber Brandy, and our concentrate business will be excluded from the Original Wine and Spirits Transaction. InMay 2020 , we further revised the Original Wine and Spirits Transaction to also exclude theMission Bell Winery inMadera, California and certain related real estate, equipment, contracts, and employees, resulting in an adjusted transaction price of approximately$783 million , with the potential to earn an incremental$250 million of contingent consideration if certain brand performance provisions are met over a two-year period after closing. The Further Revised Wine and Spirits Transaction isConstellation Brands, Inc. Q1 FY 2021 Form 10-Q #WORTHREACHINGFOR I 38
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expected to close in the second quarter of fiscal 2021 and is subject toFTC review and clearance. Additionally, in a separate, but related, transaction we agreed that upon execution and delivery of a definitive agreement for the Further Revised Wine and Spirits Transaction, we would enter into an agreement to sell theNew Zealand -based Nobilo Wine brand and certain related assets for$130 million to Gallo. The Nobilo Wine Transaction is expected to close by the end of second quarter of fiscal 2021 and is subject toFTC review and clearance. Completion of the Nobilo Transaction is also conditioned on completion of the Further Revised Wine and Spirits Transaction. We expect to use the net cash proceeds from the Wine and Spirits Transactions primarily to reduce outstanding borrowings. The Wine and Spirits Transactions are consistent with our strategic focus on higher-margin, higher-growth brands. We have communicated our intent to retain the brands Cook's California Champagne andJ. Roget American Champagne and theMission Bell Winery contemplated to be sold in the Original Wine and Spirits Transaction. TheFTC is currently reviewing our business plans to support these brands in the future.The Mission Bell Winery has the production capability to support the production of these retained brands. Other Wine and Spirits Transactions We plan to divest the Paul Masson Grande Amber Brandy brand and concentrate business excluded from the Original Wine and Spirits Transaction to companies with more aligned business strategies.
In connection with the Wine and Spirits Transactions and the Other Wine and
Spirits Transactions, we have wine and spirits net assets of
Selected financial information included in our results of operations for the
portion of the business that we expect will no longer be part of our
consolidated results after the closing of the Wine and Spirits Transactions and
Other Wine and Spirits Transactions is as follows:
Net Sales Gross Profit Marketing (1)
(in millions)
First Quarter 2021
Wine and Spirits segment results $ 187 $ 78 $ 1
(1)Included in selling, general, and administrative expenses within our consolidated results of operations.
For additional information on these recent developments, investments, acquisitions, and divestitures, and business transformation updates refer to Notes 3, 5, and 8 of the Financial Statements.
RESULTS OF OPERATIONS FINANCIAL HIGHLIGHTS References to organic throughout the following discussion exclude the impact of divested brand activity in connection with the Ballast Point Divestiture (beer) and Black Velvet Divestiture (wine and spirits), as appropriate.
For First Quarter 2021 compared with First Quarter 2020:
•Our results of operations were negatively impacted by (i) equity in losses from Canopy's results of operations and related activities and (ii) COVID-19 containment measures affecting on-premise sales and reduced production activity at our major breweries inMexico , partially offset by a decrease in unrealized net loss from the changes in fair value of our investments in Canopy in First Quarter 2021 as compared with First Quarter 2020.
•Net sales decreased 6% due to (i) a decrease in Beer net sales driven
predominantly by volume decline largely from COVID-19 containment measures and
(ii)
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a result of COVID-19 containment measures, partially offset by favorable impact
from pricing within both the
•Operating income (loss) decreased 2% largely due to the net sales volume decline and an impairment of long-lived assets held for sale primarily in connection with the Wine and Spirits Transactions and theOther Wine and Spirits Transactions, partially offset by favorable impact from pricing within theBeer and Wine and Spirits segments and decreased marketing spend within the Beer segment which largely resulted from COVID-19 containment measures. •Net loss attributable to CBI and diluted net loss per common share attributable to CBI decreased largely from the decrease in loss from unconsolidated investments related to our investments in Canopy, partially offset by the First Quarter 2021 provision for income taxes as compared with the benefit from income taxes for First Quarter 2020.
COMPARABLE ADJUSTMENTS
Management excludes items that affect comparability from its evaluation of the results of each operating segment as these Comparable Adjustments are not reflective of core operations of the segments. Segment operating performance and segment management compensation are evaluated based on core segment operating income (loss). As such, the performance measures for incentive compensation purposes for segment management do not include the impact of these Comparable Adjustments.
As more fully described herein and in the related Notes to the Financial Statements, the Comparable Adjustments that impacted comparability in our segment results for each period are as follows:
First First
Quarter Quarter
2021 2020
(in millions)
Cost of product sold
Net gain (loss) on undesignated commodity derivative contracts $ (26.8) $ (15.9)
Strategic business development costs (24.3) (44.5)
COVID-19 incremental costs (4.6) -
Settlements of undesignated commodity derivative contracts 10.4 1.8
Accelerated depreciation - (3.5)
Flow through of inventory step-up - (0.4)
Total cost of product sold (45.3) (62.5)
Selling, general, and administrative expenses
Net gain (loss) on foreign currency derivative contracts (8.0) -
COVID-19 incremental costs (6.5) -
Restructuring and other strategic business development costs (3.1) (23.6)
Transaction, integration, and other acquisition-related costs (0.8) (2.3)
Other gains (losses) 7.4 13.4
Total selling, general, and administrative expenses (11.0) (12.5)
Impairment of assets held for sale (25.0) -
Comparable Adjustments, Operating income (loss) Income (loss) from unconsolidated investments$ (543.2) $ (879.1) Cost of product sold Undesignated commodity derivative contracts Net gain (loss) on undesignated commodity derivative contracts represents a net gain (loss) from the changes in fair value of undesignated commodity derivative contracts. The net gain (loss) is reported outside of Constellation Brands, Inc. Q1 FY 2021 Form 10-Q #WORTHREACHINGFOR I 40
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segment operating results until such time that the underlying exposure is recognized in the segment operating results. At settlement, the net gain (loss) from the changes in fair value of the undesignated commodity derivative contracts is reported in the appropriate operating segment, allowing the results of our operating segments to reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility. Strategic business development costs We recognized costs primarily in connection with losses on write-downs of excess inventory and contract terminations resulting from our ongoing efforts to optimize our portfolio, gain efficiencies, and reduce our cost structure within theWine and Spirits segment. COVID-19 incremental costs We recognized costs for incremental wages and hazard payments to employees, costs associated with the unused beer keg reimbursement program with distributors, purchases of personal protective equipment, and more frequent and thorough cleaning and sanitization of our facilities. Selling, general, and administrative expenses Net gain (loss) on foreign currency derivative contracts We recognized a net loss primarily in connection with the settlement of foreign currency forward contracts entered into to fix theU.S. dollar cost of theMay 2020 Canopy Investment . COVID-19 incremental costs We recognized costs for payments to third-party general contractors to maintain their workforce for expansion activities at theObregon Brewery and recognized costs for incremental wages and hazard payments to employees.
Restructuring and other strategic business development costs
We recognized costs primarily in connection with costs to optimize our
portfolio, gain efficiencies, reduce our cost structure within the
Transaction, integration, and other acquisition-related costs We recognized transaction, integration, and other acquisition-related costs in connection with our acquisitions, divestitures, and investments.
Other gains (losses) We recognized other gains (losses) primarily in connection with a gain recognized on the sale of a vineyard (First Quarter 2021) and a gain on the remeasurement of our previously held equity interest in Nelson's Green Brier to the acquisition-date fair value (First Quarter 2020). Impairment of assets held for sale We recognized an impairment of long-lived assets held for sale in connection with the Wine and Spirits Transactions and theOther Wine and Spirits Transactions. Income (loss) from unconsolidated investments We recognized an unrealized gain (loss) primarily from (i) equity losses from Canopy related to costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand (First Quarter 2021), (ii) the changes in fair value of our securities measured at fair value, and (iii) equity in earnings (losses) from Canopy's results of operations and related activities. For additional information, refer to Notes 5 and 8 of the Financial Statements.
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FIRST QUARTER 2021 COMPARED TO FIRST QUARTER 2020
Net sales
First First
Quarter Quarter Dollar Percent
2021 2020 Change Change
(in millions)
Beer $ 1,384.1 $ 1,477.4 $ (93.3) (6 %)
Wine and Spirits:
Wine 499.6 535.0 (35.4) (7 %)
Spirits 79.7 84.8 (5.1) (6 %)
Total Wine and Spirits 579.3 619.8 (40.5) (7 %)
Canopy 80.3 70.7 9.6 14 %
Consolidation and Eliminations (80.3) (70.7) (9.6) (14 %)
Consolidated net sales $ 1,963.4 $ 2,097.2 $ (133.8) (6 %)
Beer segment First First
Quarter Quarter Dollar Percent
2021 2020 Change Change
(in millions, branded product, 24-pack, 12-ounce case equivalents)
Net sales $ 1,384.1 $ 1,477.4 $ (93.3) (6 %)
Shipment volume
Total 76.2 82.1 (7.2 %)
Organic (1) 76.2 81.3 (6.3 %)
Depletion volume (1) (2) 5.6 %
(1)Includes an adjustment to remove volume associated with the Ballast Point
Divestiture for the period March 2, 2019 , through May 31, 2019 .
(2)Depletions represent distributor shipments of our respective branded products
to retail customers, based on third-party data.
[[Image Removed: stz-20200531_g2.jpg]] The decrease in Beer net sales is primarily due to
within our Mexican beer portfolio, which was impacted by COVID-19 containment
measures negatively affecting on-premise sales and production activity at our
major breweries in Mexico , and
The decline was partially offset
by an
in select markets within our Mexican beer portfolio. The depletion volume trend
outpaced the shipment volume trend for First Quarter Fiscal 2021, driven by
reduced production activity in response to COVID-19 containment measures. We
expect shipment volume will begin to align with depletion volume during the third
quarter of fiscal 2021 as we replenish distribution channels and COVID-19
containment measures allow for return to on-premise.
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Wine and Spirits segment First First
Quarter Quarter Dollar Percent
2021 2020 Change Change
(in millions, branded product, 9-liter case equivalents)
Net sales $ 579.3 $ 619.8 $ (40.5) (7 %)
Shipment volume
Total 10.8 12.4 (12.9 %)
Organic (3) 10.8 11.9 (9.2 %)
U.S. Domestic 9.9 11.3 (12.4 %)
Organic U.S. Domestic (3) 9.9 10.8 (8.3 %)
U.S. Domestic Power Brands 5.0 4.5 11.1 %
Depletion volume (2)
U.S. Domestic (3) (1.1 %)
U.S. Domestic Power Brands 4.7 %
(3)Includes an adjustment to remove volume associated with the Black Velvet
Divestiture for the period
[[Image Removed: stz-20200531_g3.jpg]] The decrease in
decline in branded wine and
spirits volume and
Divestiture, partially offset by
million increase from favorable product mix shift. The Wine and Spirits First
Quarter 2021 results have been negatively impacted by (i) on-premise and retail
tasting room closures as a result of COVID-19 containment measures and
(ii) transition activities with
distributors
brands upon closing the Wine and Spirits Transactions, partially offset by an
increase in off-premise, including eCommerce. During Fiscal 2021 as these transition
activities with distributors continue to occur we do not expect shipment volume to
be aligned with depletion volume.
[[Image Removed: stz-20200531_g4.jpg]] Canopy segment
Our ownership interest in Canopy allows us to exercise significant influence, but
not control, and, therefore, we account for our investment in Canopy under the
equity method. Amounts included for the Canopy segment represent 100% of Canopy's
reported results on a two-month
lag, prepared in accordance with
converted from Canadian dollars
to
the outstanding shares of Canopy, 100% of the Canopy results are included and
subsequently eliminated in order to reconcile to our consolidated financial
statements. See "Income (Loss) from Unconsolidated Investments" below for a
discussion of Canopy's net sales, gross profit (loss), selling, general, and
administrative expenses, and operating income (loss).
Gross profit
First First
Quarter Quarter Dollar Percent
2021 2020 Change Change
(in millions)
Beer $ 769.7 $ 819.5 $ (49.8) (6 %)
Wine and Spirits 263.9 271.7 (7.8) (3 %)
Canopy (57.3) 11.3 (68.6) NM
Consolidation and Eliminations 57.3 (11.3) 68.6 NM
Comparable Adjustments (45.3) (62.5) 17.2 28 %
Consolidated gross profit $ 988.3 $ 1,028.7 $ (40.4) (4 %)
NM = Not Meaningful
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[[Image Removed: stz-20200531_g5.jpg]] The decrease in Beer is primarily due to
million of higher cost of product
sold, partially offset by
favorable impact from pricing. The higher cost of product sold is largely related
to COVID-19 containment measures and increased focus on the production of our
fastest moving products and packaging sizes to meet forecasted demand. This drove
a $9.8 million increase in operational costs primarily consisting of higher
material costs, including glass, pallets, and cartons, and unfavorable fixed cost
absorption.
[[Image Removed: stz-20200531_g6.jpg]] The decrease in
branded wine and spirits volume,
a decrease of
the Black Velvet Divestiture,
room closures as a result of
COVID-19 containment measures, and
higher cost of product sold,
partially offset by
pricing and $8.5 million of favorable product mix shift.
Gross profit as a percent of net sales increased to 50.3% for First Quarter 2021 compared with 49.1% for First Quarter 2020. This was largely due to (i) a favorable change of approximately 90 basis points in Comparable Adjustments and (ii) a favorable impact from Beer pricing in select markets, which contributed approximately 50 basis points of rate growth.
Selling, general, and administrative expenses
First First
Quarter Quarter Dollar Percent
2021 2020 Change Change
(in millions)
Beer $ 191.9 $ 238.9 $ (47.0) (20 %)
Wine and Spirits 99.9 110.9 (11.0) (10 %)
Corporate Operations and Other 50.5 43.7 6.8 16 %
Canopy 675.9 181.3 494.6 NM
Consolidation and Eliminations (675.9) (181.3) (494.6) NM
Comparable Adjustments 11.0 12.5 (1.5) (12 %)
Consolidated selling, general, and
administrative expenses $ 353.3 $ 406.0 $ (52.7) (13 %)
[[Image Removed: stz-20200531_g7.jpg]] The decrease in Beer is primarily due to a decrease of
spend that largely resulted from COVID-19 containment measures. Our planned
investment to support the growth of our Mexican beer portfolio through media and
event sponsorships was suspended and/or canceled in First Quarter 2021. The
favorable marketing spend as a percentage of net sales recognized in First Quarter
2021 is expected to return to targeted assumptions during the remainder of Fiscal
2021.
[[Image Removed: stz-20200531_g8.jpg]] The decrease in
general and administrative expenses. The decrease in general and administrative
expenses is largely driven by certain cost saving initiatives including decreased
compensation and benefits and decreased travel and entertainment expenses resulting
from COVID-19 containment measures.
[[Image Removed: stz-20200531_g9.jpg]] The increase in Corporate Operations and Other is largely due to approximately
$5 million of unfavorable foreign
currency losses and an increase of approximately
$3 million in charitable
contributions, primarily driven by COVID-19 support
efforts.
Selling, general, and administrative expenses as a percent of net sales decreased to 18.0% for First Quarter 2021 as compared with 19.4% for First Quarter 2020. The decrease is driven largely by Beer selling, general, and administrative expenses, largely related to decreased marketing spend, which results in approximately 150 basis points of rate decline.
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Operating income (loss)
First First
Quarter Quarter Dollar Percent
2021 2020 Change Change
(in millions)
Beer $ 577.8 $ 580.6 $ (2.8) - %
Wine and Spirits 164.0 160.8 3.2 2 %
Corporate Operations and Other (50.5) (43.7) (6.8) (16 %)
Canopy (733.2) (170.0) (563.2) NM
Consolidation and Eliminations 733.2 170.0 563.2
NM
Comparable Adjustments (81.3) (75.0) (6.3) (8 %) Consolidated operating income (loss)$ 610.0 $ 622.7 $ (12.7)
(2 %)
[[Image Removed: stz-20200531_g10.jpg]] The decrease in Beer is primarily attributable to the net sales decline and higher
cost of product sold, partially offset by decreased marketing spend and favorable
pricing impact.
[[Image Removed: stz-20200531_g11.jpg]] The decrease in
spirits volume and the Black Velvet Divestiture, partially offset by favorable
pricing and decreased compensation and benefits.
[[Image Removed: stz-20200531_g12.jpg]] As previously discussed, the Corporate Operations and Other increase in operating
loss is due largely to unfavorable foreign currency losses and an increase in
charitable contributions.
Income (loss) from unconsolidated investments
General
Loss from unconsolidated investments decreased to $571.2 million for First
Quarter 2021 from $930.6 million for First Quarter 2020, a decrease of $359.4
million . This decrease is driven largely by an unrealized net loss from the
changes in fair value of our securities measured at fair value of $197.3 million
for First Quarter 2021, as compared to $827.5 million for First Quarter 2020.
The First Quarter 2021 decrease in loss from unconsolidated investments was
partially offset by $377.6 million of equity in losses from Canopy's results of
operations, and related activities in First Quarter 2021, as compared to $106.0
million for First Quarter 2020. The First Quarter 2021 equity losses included
$235.4 million of costs designed to improve their organizational focus,
streamline operations, and align production capability with projected demand.
[[Image Removed: stz-20200531_g13.jpg]] Canopy segment
Canopy net sales increased to
for First Quarter 2020. This
increase of
attributable to an increase in
medical sales, largely resulting from their
acquisition of C3, Europe's largest cannabinoid-based pharmaceuticals company,
partially offset by a decline in Canadian recreational sales. Canopy gross profit
(loss) decreased to $(57.3) million for First Quarter 2021 from
Quarter 2020. This decrease of
write-downs related to its organizational and strategic review of their business and
detailed evaluation of inventory. Canopy selling, general, and administrative expenses
increased $494.6 million primarily from their decision to close greenhouse facilities
as well as other changes related to its organizational and strategic review of their
business. The combination of these factors were the main contributors to the decrease
in operating income (loss) of $563.2 million .
Interest expense
Interest expense decreased to $100.0 million for First Quarter 2021 from $114.6
million for First Quarter 2020. This decrease of $14.6 million or 13% is
predominantly due to lower average borrowings of approximately $1.2 billion
primarily attributable to the partial repayment of financing entered into in
connection with the November 2018 Canopy Transaction.
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(Provision for) benefit from income taxes Our effective tax rate for First Quarter 2021 was 153.1% of tax expense as compared with 43.9% of tax benefit for First Quarter 2020. In comparison to prior year, our taxes were negatively impacted primarily by:
•valuation allowances on the net unrealized loss from the changes in fair value of our investments in Canopy and Canopy equity in earnings (losses); •valuation allowances on existing capital loss carryforwards; and to a lesser extent, •the recognition of tax expense resulting from legislative and governmental initiatives under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") in the First Quarter 2021.
For additional information, refer to Note 10 of the Financial Statements.
Net income (loss) attributable to CBI Net income (loss) attributable to CBI decreased to$(177.9) million for First Quarter 2021 from$(245.4) million for First Quarter 2020. This decrease in net loss of$67.5 million is largely attributable to the decrease in loss from unconsolidated investments, largely offset by the First Quarter 2021 provision for income taxes as compared with a benefit from income taxes for First Quarter 2020.
FINANCIAL LIQUIDITY AND CAPITAL RESOURCES
General
Our ability to consistently generate cash flow from operating activities is one of our most significant financial strengths. Our strong cash flows enable us to invest in our people and our brands, make appropriate capital investments, provide a quarterly cash dividend program, and from time-to-time, repurchase shares of our common stock, and make strategic investments and acquisitions that we believe will enhance stockholder value. Our primary source of liquidity has been cash flow from operating activities. Our principal use of cash in our operating activities is for purchasing and carrying inventories and carrying seasonal accounts receivable. Historically, we have used cash flow from operating activities to repay our short-term borrowings and fund capital expenditures. Additionally, we have a commercial paper program which we use to fund our short-term borrowing requirements and to maintain our access to the capital markets. We will continue to use our short-term borrowings, including our commercial paper program, to support our working capital requirements and capital expenditures. COVID-19 has negatively impacted the global economy and financial markets which could interfere with our ability to access sources of liquidity at favorable rates and generate operating cash flows. We are taking advantage of opportunities to temporarily defer some payments including certain excise and payroll taxes under the CARES Act. We have maintained adequate liquidity to meet working capital requirements, fund capital expenditures, and repay scheduled principal and interest payments on debt. Absent deterioration of market conditions, we believe that cash flows from operating activities and financing activities, primarily short-term borrowings, will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments, and anticipated capital expenditure requirements for both our short-term and long-term capital needs.
We plan to sell a portion of our wine and spirits business. We expect to use the net cash proceeds from closing these transactions primarily to reduce outstanding borrowings.
OnMay 1, 2020 , we exercised theNovember 2017 Canopy Warrants at an exercise price ofC$12.98 per warrant share forC$245.0 million , or$173.9 million . TheMay 2020 Canopy Transaction was funded with cash from operations.
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Cash flows
First First
Quarter Quarter Dollar
2021 2020 Change
(in millions)
Net cash provided by (used in):
Operating activities $ 686.5 $ 593.1 $ 93.4
Investing activities (299.1) (213.5) (85.6)
Financing activities (169.0) (374.4) 205.4
Effect of exchange rate changes on cash and cash
equivalents 3.0 (0.1) 3.1
Net increase (decrease) in cash and cash equivalents
5.1 $ 216.3
Operating activities
The increase in net cash provided by operating activities for First Quarter 2021
is largely due to benefits from reduced inventory levels for the Beer segment
and decreased accounts receivable related to net sales decline for the Beer and
Wine and Spirits segments all largely resulting from COVID-19 containment
measures. The increase in net cash provided by operating activities was
partially offset by higher income tax payments in First Quarter 2021 primarily
due to the receipt of a federal tax refund in First Quarter 2020.
Investing activities
Net cash used in investing activities for First Quarter 2021 increased primarily
due to the $173.9 million exercise of the November 2017 Canopy Warrants in May
2020 . The increase in net cash used in investing activities was partially offset
by proceeds of $41.1 million from the March 2020 Ballast Point Divestiture and
lower First Quarter 2021 business acquisition activity of $36.2 million .
Financing activities
The decrease in net cash provided by (used in) financing activities consists of:
First First
Quarter Quarter Dollar
2021 2020 Change
(in millions)
Net proceeds from (payments of) debt, current and
long-term, and related activities $ (21.9) $ (227.9) $ 206.0
Dividends paid (143.9) (143.0) (0.9)
Net cash provided by stock-based compensation
activities (3.2) (3.5) 0.3
Net cash provided by (used in) financing activities
(374.4)
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MD&A Table of Contents Debt Total debt outstanding as ofMay 31, 2020 , amounted to$12,174.0 million , a decrease of$10.6 million fromFebruary 29, 2020 . This decrease consisted of: [[Image Removed: stz-20200531_g14.jpg]] Bank facilities InMarch 2020 , we entered into the 2020 Restatement Agreement that amended and restated the 2018 Credit Agreement. The 2020 Restatement Agreement resulted in (i) the removal of the subsidiary guarantees and termination of the guarantee agreement, (ii) the inclusion of the parent guaranty provisions in connection with the termination of the guarantee agreement, (iii) the removal of certain provisions pertaining to term loans since no term loans are outstanding, and (iv) the revision of the LIBOR successor rate provisions to permit the use of rates based on the SOFR administered by theFederal Reserve Bank of New York . InMarch 2020 , we entered into the Term Loan Restatement Agreement and the 2020 Term Loan Restatement Agreement, that amended and restated the Term Credit Agreement and the 2019 Term Credit Agreement, respectively. The Term Loan Restatement Agreement and the 2020 Term Loan Restatement Agreement each resulted in (i) the removal of the subsidiary guarantees and termination of the respective guarantee agreements and (ii) the revision of the LIBOR successor rate provisions in each to permit the use of rates based on SOFR.
In
Senior notes InApril 2020 , we issued theApril 2020 Senior Notes. Proceeds from this offering, net of discount and debt issuance costs, of$1,183.4 million were primarily used for the repayment of our 2.25%November 2017 Senior Notes and the repayment of a portion of the Three-Year Term Facility outstanding obligations under our 2020 Term Credit Agreement.
General
The majority of our outstanding borrowings as ofMay 31, 2020 , consisted of fixed-rate senior unsecured notes, with maturities ranging from calendar 2021 to calendar 2050, and variable-rate senior unsecured term loan facilities under our Term Credit Agreement and 2019 Term Credit Agreement, with maturities ranging from calendar 2021 to calendar 2024.
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Additionally, we have a commercial paper program which provides for the issuance of up to an aggregate principal amount of$2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 2020 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility under our 2020 Credit Agreement. We do not have purchase commitments from buyers for our commercial paper and, therefore, our ability to issue commercial paper is subject to market demand. If the commercial paper market is not available to us for any reason when outstanding commercial paper borrowings mature, we will utilize unused commitments under our revolving credit facility under our 2020 Credit Agreement to repay commercial paper borrowings. We do not expect that fluctuations in demand for commercial paper will affect our liquidity given our borrowing capacity available under our revolving credit facility under our 2020 Credit Agreement. We had the following borrowing capacity available under our 2020 Credit Agreement: Remaining Borrowing Capacity May 31, June 26, 2020 2020 (in millions) Revolving Credit Facility (1)$ 1,988.2 $ 1,988.2
(1)Net of outstanding revolving credit facility borrowings and outstanding letters of credit under our 2020 Credit Agreement and outstanding borrowings under our commercial paper program.
The financial institutions participating in our 2020 Credit Agreement have complied with prior funding requests and we believe such financial institutions will comply with any future funding requests. However, there can be no assurances that any particular financial institution will continue to do so.
We and our subsidiaries are subject to covenants that are contained in our 2020 Credit Agreement, including those restricting the incurrence of additional indebtedness, additional liens, mergers and consolidations, transactions with affiliates, and sale and leaseback transactions, in each case subject to numerous conditions, exceptions, and thresholds. The financial covenants are limited to a minimum interest coverage ratio and a maximum net leverage ratio, both as defined in our 2020 Credit Agreement. As ofMay 31, 2020 , under our 2020 Credit Agreement, the minimum interest coverage ratio was 2.5x and the maximum net leverage ratio was 4.5x.
The representations, warranties, covenants, and events of default set forth in
our 2020 Term Credit Agreement and our
Our indentures relating to our outstanding senior notes contain certain covenants, including, but not limited to: (i) a limitation on liens on certain assets, (ii) a limitation on certain sale and leaseback transactions, and (iii) restrictions on mergers, consolidations, and the transfer of all or substantially all of our assets to another person.
As of
For a complete discussion and presentation of all borrowings and available sources of borrowing, refer to Note 13 of our consolidated financial statements included in our 2020 Annual Report and Note 9 of the Financial Statements.
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MD&A Table of Contents Common stock dividends OnJune 30, 2020 , our Board of Directors declared a quarterly cash dividend of$0.75 per share of Class A Common Stock,$0.68 per share of ClassB Convertible Common Stock, and$0.68 per share of Class 1 Common Stock payable onAugust 25, 2020 , to stockholders of record of each class onAugust 11, 2020 .
We currently expect to continue to pay a regular quarterly cash dividend to stockholders of our common stock in the future, but such payments are subject to approval of our Board of Directors and are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A "Risk Factors" of our 2020 Annual Report.
Share Repurchase Program
Our Board of Directors have authorized the repurchase of up to
As of
Class A Common Shares
Dollar Value of
Repurchase Shares Number of Shares
Authorization Repurchased Repurchased(in millions, except share data)
2018 Authorization$ 3,000.0 $ 1,045.9 4,897,605 Share repurchases under the 2018 Authorization may be accomplished at management's discretion from time to time based on market conditions, our cash and debt position, and other factors as determined by management. Shares may be repurchased through open market or privately negotiated transactions. We may fund future share repurchases with cash generated from operations and/or proceeds from borrowings. Any repurchased shares will become treasury shares. We currently expect to continue to repurchase shares in the future, but such repurchases are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A "Risk Factors" of our 2020 Annual Report.
For additional information, refer to Note 18 of our consolidated financial statements included in our 2020 Annual Report and Note 11 of the Financial Statements.
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MD&A Table of Contents Capital expenditures Management reviews the capital expenditure program periodically and modifies it as required to meet current business needs. We do not believe it is prudent at this time to provide capital expenditure guidance for Fiscal 2021 as we are not able to estimate the long-term impact of COVID-19, including the demand for our products and the impact on the timeframes for completion of our expansion, construction, and optimization projects inMexico . To the extent possible, we plan to continue capital expenditures during Fiscal 2021 for the Beer segment associated primarily with ourObregon Brewery optimization and expansion. In fiscal 2017, we began construction of theMexicali Brewery . InMarch 2020 , a public consultation on the construction of ourMexicali Brewery was held. We have initiated early stage discussions with government officials inMexico regarding next steps for our brewery construction project and options elsewhere in the country following the negative result of the public consultation. These discussions have been positive and we will continue working with government officials to mutually agree upon a path forward. At this time, we have paused all construction activities at ourMexicali Brewery . As ofMay 31, 2020 , we capitalized approximately$740 million of construction in progress related to theMexicali Brewery . Future impairments may result based upon our plans for these assets for any capitalized amounts that are not deemed recoverable.
Guidance
Accounting guidance Accounting guidance adopted for First Quarter 2021 did not have a material impact on our consolidated financial statements. Disclosure guidance InMay 2020 , theSecurities and Exchange Commission ("SEC") issued a final rule that amends business acquisition and disposition financial disclosure requirements. Among other modifications, the amendments change certain criteria in the significance tests used to determine audited financial statements and related pro forma financial information requirements, the periods audited financial statements must cover, and the form and content of the pro forma financial information. We are required to comply with this rule for our annual and interim periods beginningMarch 1, 2021 , however early compliance is permitted. We are currently assessing the impact of this rule on ourSEC filings.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. All statements other than statements of historical fact included in this Quarterly Report on Form 10-Q are forward-looking statements, including without limitation: •The statements regarding the current global COVID-19 pandemic. •The statements under Part I - Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations" regarding: •our business strategy, future operations, future financial position, future net sales and expected volume trends, prospects, plans, and objectives of management; •information concerning expected or potential actions of third parties, including potential changes to international trade agreements, tariffs, taxes, and other governmental rules and regulations; •information concerning the future expected balance of supply and demand for our products; •timing and source of funds for operating activities and NewNovember 2018 Canopy Warrant exercises, if any;Constellation Brands, Inc. Q1 FY 2021 Form 10-Q #WORTHREACHINGFOR I 51
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•the manner, timing, and duration of the share repurchase program and source of funds for share repurchases; and •the amount and timing of future dividends. •The statements regarding our beer expansion, construction, and optimization activities, including anticipated costs and timeframes for completion, discussions with government officials inMexico , and potential future impairment of non-recoverable brewery construction assets. •The statements regarding: •the volatility of the fair value of our investments in Canopy measured at fair value; •our activities surrounding our investments in Canopy; •our targeted leverage ratio; •the NewNovember 2018 Canopy Warrants; and •our future ownership level in Canopy and our future share of Canopy's reported earnings and losses. •The statements regarding the Wine and Spirits Transactions and the Other Wine and Spirits Transactions, including expected form and amount of consideration, amount and use of expected proceeds, estimated remaining costs, and any expected restructuring charge. •The statements regarding Canopy's transaction with Acreage. When used in this Quarterly Report on Form 10-Q, the words "anticipate," "intend," "expect," and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. In addition to the risks and uncertainties of ordinary business operations and conditions in the general economy and markets in which we compete, our forward-looking statements contained in this Quarterly Report on Form 10-Q are also subject to the risk and uncertainty that: •the duration and impact of the COVID-19 pandemic, including but not limited to the closure of non-essential businesses, which may include our manufacturing facilities, and other associated governmental containment actions, may vary from our current expectations; •the actual balance of supply and demand for our products will vary from current expectations due to, among other reasons, actual raw material supply, actual shipments to distributors, and actual consumer demand; •the actual demand, net sales, and volume trends for our products will vary from current expectations due to, among other reasons, actual shipments to distributors and actual consumer demand; •the amount, timing, and source of funds for any share repurchases or Canopy warrant exercises, if any, may vary due to market conditions; our cash and debt position; the impact of the beer operations expansion activities; the impact of our investments in Canopy; any future exercise of the NewNovember 2018 Canopy Warrants; the expected impacts of the Wine and Spirits Transactions and the Other Wine and Spirits Transactions; and other factors as determined by management from time to time; •the amount and timing of future dividends may differ from our current expectations if our ability to use cash flow to fund dividends is affected by unanticipated increases in total net debt, we are unable to generate cash flow at anticipated levels, or we fail to generate expected earnings; •the fair value of our investments in Canopy may vary due to market and economic conditions in Canopy's markets and business locations; •the accuracy of management's projections relating to the Canopy investment may vary from management's current expectations due to Canopy's actual results of operations and market and economic conditions; •the timeframe and actual costs associated with the beer operations expansion activities and amount of impairment, if any, for non-recoverable brewery construction assets inMexico may vary from management's current expectations due to market conditions, our cash and debt position, receipt of required regulatory approvals by the expected dates and on the expected terms, results of discussionsConstellation Brands, Inc. Q1 FY 2021 Form 10-Q #WORTHREACHINGFOR I 52
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with government officials inMexico , actual amount of non-recoverable brewery construction assets, and other factors as determined by management; •any consummation of the Wine and Spirits Transactions or the Other Wine and Spirits Transactions and any actual date of consummation of any of them may vary from our current expectations; the actual restructuring charge, if any, will vary based on management's final plans; and the amount of additional loss, if any, on the future write-down of assets held for sale will vary based on the form of consideration, amount of consideration actually received, and future brand performance; •any impact ofU.S. federal laws on the transaction between Acreage and Canopy or upon the implementation of that transaction, or the impact of the Acreage Transaction upon our future ownership level in Canopy or our future share of Canopy's reported earnings and losses, may vary from management's current expectations; and •our targeted leverage ratio may vary from management's current expectations due to market conditions, our ability to generate cash flow at expected levels and our ability to generate expected earnings. The Wine and Spirits Transactions are subject to the satisfaction of certain closing conditions. The Nobilo Transaction is also conditioned on completion of the Further Revised Wine and Spirits Transaction. For additional information about risks and uncertainties that could adversely affect our forward looking statements, please refer to Item 1A. "Risk Factors" of our 2020 Annual Report.Constellation Brands, Inc. Q1 FY 2021 Form 10-Q #WORTHREACHINGFOR I 53
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