Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

106K characters. Original on sec.gov · Markdown

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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 Financial Statements and with our consolidated financial statements and notes included in our 2021 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 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 ended August 31, 2021, and August 31, 2020, and the six months ended August 31, 2021, and August 31, 2020. In addition, a brief description of significant transactions and other items that affect the comparability of the results is provided.

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 producer and marketer of beer, wine, and spirits with operations in the U.S., Mexico, New Zealand, and Italy with powerful, consumer-connected, high-quality brands like Corona Extra, Modelo Especial, Robert Mondavi, Kim Crawford, Meiomi, and SVEDKA Vodka. In the U.S., we are one of the top growth contributors at retail among beverage alcohol suppliers. We are the third-largest beer company and a leader in the high-end of the U.S. beer market and a higher-end wine and spirits company with many of our products as leaders in their respective categories. Our strong market positions make us a supplier of choice to many of our consumers and our customers, who include wholesale distributors, retailers, and on-premise locations. We conduct our business through entities we wholly own as well as through a variety of joint ventures and other entities.

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. Our Canopy Equity Method Investment makes up the Canopy segment.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 28


MD&A			Table of Contents

In the Beer segment, our portfolio consists of high-end imported beer brands, craft beer, and ABAs. We have an exclusive perpetual brand license to import, market, and sell our Mexican beer portfolio in the U.S. In the Wine 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.

Strategy

Business strategy

Our overall strategy is to drive growth and shape the future of our industry by building brands that people love and delivering unrivaled value to our shareholders. We endeavor to position our portfolio to benefit from the consumer-led premiumization trend, which we believe will continue to drive faster growth rates in the higher-end of the beer, wine, and spirits categories.

To capitalize on consumer-led premiumization trends, become more competitive, and grow our business, we have employed a strategy dedicated to a combination of organic growth and acquisitions, with a focus on the higher-margin, higher-growth categories of the beverage alcohol industry. Key elements of our strategy include:

leverage our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio;
strengthen relationships with wholesalers and retailers by providing consumer and beverage alcohol insights;
invest in brand building and innovation activities;
position ourselves for success with consumer-led products that identify, meet, and stay ahead of evolving consumer trends and market dynamics;
realize operating efficiencies by expanding and enhancing production capabilities and maximizing asset utilization; and
develop employees to enhance performance in the marketplace.

Our business strategy for the Beer segment focuses on leading the high-end segment of the U.S. beer market. This includes continued focus on growing our beer portfolio in the U.S. through expanding distribution for key brands, as well as innovation and continued expansion and construction activities for our Mexico beer operations. Additionally, in an effort to more fully compete in growing sectors of the high-end segment of the U.S. beer market, we have leveraged our innovation capabilities to introduce new brands that align with consumer trends.

Expansion efforts continue under our Mexico Beer Projects to align with our anticipated future growth expectations. However, at this time, we have suspended all Mexicali Brewery construction activities, following a negative result from a public consultation held in Mexico. To align with our anticipated future growth expectations we are also working with the Mexican government to explore options to add further capacity at other locations in Mexico where there is ample water and a skilled workforce to meet our long-term needs.

Our strategy for the Wine 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, including offering DTC and eCommerce platforms; building brands through consumer insights, sensory expertise, and innovation; and


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 29


MD&A			Table of Contents

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 focus our innovation and investment dollars on brands within our portfolio which position us to benefit from the consumer-led trend towards premiumization. Additionally, in connection with the recent divestitures, we expect to optimize the value of our wine and spirits portfolio by driving increased focus on our higher-end brands to accelerate growth and improve overall operating margins. In markets where it is feasible, we entered into a contractual arrangement to consolidate our U.S. distribution in order to obtain dedicated distributor selling resources which focus on our U.S. wine and spirits portfolio to drive organic growth. This U.S. distributor currently represents about 70% of our branded wine and spirits volume in the U.S.

Marketing, sales, and distribution of our products are managed on a geographic basis allowing us to 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, ABA, 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 complement our strategy with our investment in Canopy, by expanding our portfolio into adjacent categories. Canopy is a leading cannabis company with operations in countries across the world. This investment is consistent with our long-term strategy to identify, address, and stay ahead of evolving consumer trends and market dynamics. We expanded our strategic relationship with Canopy to help position it 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 dividends and periodic share repurchases. Our results of operations and financial condition have not been significantly affected by inflation and changing prices. In the event of future rising costs, we intend to pass along such rising costs through increased selling prices, subject to normal competitive conditions. There can be no assurances, however, that we will be able to pass along rising costs through increased selling prices. In addition, we continue to identify on-going cost savings initiatives.

CSR strategy

Our CSR strategy is designed to align with our business goals and stakeholder interests, reflect our company values, and more directly address pressing societal needs. Specifically, we dedicate our resources towards four focus areas:

Model water stewardship for our industry – We have made water conservation and stewardship the focus of our sustainability initiatives. We are committed to increasing site water efficiency, maintaining source availability and quality, using our relationships to advance conservation efforts, and reporting transparently.

Being a champion for the professional development and advancement of women – We are committed to providing resources to support the advancement of women within our company, our communities, and our industry.

Serving as a catalyst for economic development and prosperity for disadvantaged communities – We are committed to addressing the needs of disadvantaged communities, with a focus on Latinx/Hispanic and Black/African American communities.

Be a culture carrier of responsible consumption – We are committed to empowering adults to make responsible choices in their alcohol (substance) consumption by supporting fact-based education, engagement programs, and policies. We are evolving our approach to responsible consumption by embracing a contemporary mindset that aligns with consumer betterment trends.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 30


MD&A			Table of Contents

During Second Quarter 2022 we took the following steps to advance our CSR strategy:

released our 2021 Corporate Social Responsibility Report;
initiated a short-term investment, consisting of certificates of deposit, in a minority-owned financial institution;
continued to drive change and enhance diverse representation among our U.S. salaried population;
completed our global employee match day with employees donating to more than 150 not-for-profit organizations; and
developed a six-week wellness challenge that provided an opportunity for employees to learn more about conscious consumption and how our portfolio of brands plays a critical role.

COVID-19

COVID-19 containment measures affected us predominantly in the first half of Fiscal 2021 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 in Mexico which we were able to rectify in the second half of Fiscal 2021. The on-premise business has historically been about 10% to 15% of our depletion volume for beer, wine, and spirits. Our on-premise depletion volumes for Fiscal 2022 may continue to be impacted by regional COVID-19 case volumes, vaccine immunization rates, and new COVID-19 variants. Currently, our breweries, wineries, and bottling facilities are open and operational.

As reflected in the discussion below, we have seen customers shift more of their total shopping spend to online channels since the COVID-19 outbreak, which has led to increased eCommerce, including DTC, sales for our business.

In response to COVID-19, we have ensured our ongoing liquidity and financial flexibility through cash preservation initiatives, capital expense reductions, and cost control measures. We have used opportunities to defer some payments including certain payroll taxes under the CARES Act afforded to us during the pandemic. 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 be able to continue to return value to shareholders through dividends and periodic share repurchases.

Investments, acquisitions, and divestitures

Beer segment

Ballast Point Divestiture

In March 2020, we sold the Ballast Point craft beer business, including a number of its associated production facilities and brewpubs. This divestiture is consistent with our strategic focus on our high-performing import portfolio.

Wine and Spirits segment

Paul Masson Divestiture

In January 2021, we sold the Paul Masson Grande Amber Brandy brand, related inventory, and interests in certain contracts. We recognized a net gain of $58.4 million on the sale of business primarily in the fourth quarter of Fiscal 2021. This divestiture is consistent with our increased focus on consumer-led premiumization trends.

Wine and Spirits Divestitures

In January 2021, we sold a portion of our wine and spirits business, including lower-margin, lower-growth wine and spirits brands, related inventory, interests in certain contracts, wineries, vineyards, offices, and facilities. We have the potential to earn an incremental $250 million of contingent consideration if certain brand performance targets are met over a two-year period after closing. Also in January 2021, we sold the New Zealand-based Nobilo Wine brand and certain related assets. We recognized a net loss of $33.4 million on the Wine and


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 31


MD&A			Table of Contents

Spirits Divestitures primarily in the fourth quarter of Fiscal 2021. These divestitures are consistent with our increased focus on consumer-led premiumization trends.

Concentrate Business Divestiture

In December 2020, we sold certain brands used in our concentrates and high-color concentrate business, and certain related intellectual property, inventory, interests in certain contracts, and other assets. This divestiture is consistent with our focus on consumer-led premiumization trends.

The following presents selected financial information included in our historical consolidated financial statements that are no longer part of our consolidated results of operations following the Paul Masson Divestiture, the Wine and Spirits Divestitures, and the Concentrate Business Divestiture:


	Second Quarter 2021		Six Months 2021
(in millions)
Net sales	$	181.4	$	368.2
Gross profit	$	70.7	$	148.6
Marketing (1)	$	4.0	$	5.3

(1)Included in selling, general, and administrative expenses within our consolidated results of operations.

Copper & Kings acquisition

In September 2020, we acquired the remaining ownership interest in Copper & Kings which primarily included the acquisition of inventory, and property, plant, and equipment. This acquisition included a collection of traditional and craft batch-distilled American brandies and other select spirits. The results of operations of Copper & Kings are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. The Copper & Kings acquisition supported our strategic focus on building an industry-leading portfolio of higher-end spirits brands.

Empathy Wines acquisition

In June 2020, we acquired Empathy Wines, which primarily included the acquisition of goodwill, trademarks, and inventory. This acquisition, which included a digitally-native wine brand, strengthened our position in the DTC and eCommerce markets. The results of operations of Empathy Wines are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. The Empathy Wines acquisition supported our strategic focus on consumer-led premiumization trends and meeting the evolving needs of our consumers.

My Favorite Neighbor investment

In April 2020, we invested in My Favorite Neighbor, a super-luxury, DTC focused wine business that is accounted for under the equity method. We recognize our share of their equity in earnings (losses) in our consolidated financial statements in the Wine and Spirits segment. The My Favorite Neighbor investment supported our strategic focus on consumer-led premiumization trends and meeting the evolving needs of our consumers.

Canopy segment

Canopy investment

In May 2020, we exercised the November 2017 Canopy Warrants at an exercise price of C$12.98 per warrant share for C$245.0 million, or $173.9 million. This investment expanded our strategic relationship with Canopy.

For additional information on these investments, acquisitions, and divestitures, refer to Notes 3, 5, and 8.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 32


MD&A			Table of Contents

Results of Operations

Financial Highlights

References to organic throughout the following discussion exclude the impact of recent divestitures, as appropriate.

For Second Quarter 2022 compared with Second Quarter 2021

Our results of operations were negatively impacted by (i) an increase in unrealized net loss from the changes in fair value of our investment in Canopy, (ii) a decrease in Wine and Spirits net sales due largely to the recent divestitures, and (iii) an increase in obsolescence within the Beer segment, driven by hard seltzer, partially offset by equity in earnings from Canopy’s results for Second Quarter 2022 as compared with equity in losses for Second Quarter 2021, and an increase in Beer net sales.
Net sales increased 5%** due to an increase in Beer net sales driven primarily by volume growth, partially offset by the decrease in Wine and Spirits net sales due largely to the recent divestitures.
Operating income decreased 12%** largely due to (i) the increase in obsolescence within the Beer segment, (ii) the decrease in Wine and Spirits net sales, and (iii) a Second Quarter 2021 reduction to the previously recognized impairment of long-lived assets held for sale, partially offset by the increase in Beer net sales.
Net income attributable to CBI and diluted net income per common share attributable to CBI decreased largely due to the items discussed above.

For Six Months 2022 compared with Six Months 2021

Our results of operations were negatively impacted by (i) an increase in unrealized net loss from the changes in fair value of our investment in Canopy, (ii) an impairment of long-lived assets for Six Months 2022 in connection with certain assets at the Mexicali Brewery, (iii) a decrease in Wine and Spirits net sales due largely to the recent divestitures, and (iv) an increase in obsolescence within the Beer segment, driven by hard seltzer, partially offset by a decrease in equity in losses from Canopy’s results, as well as an increase in Beer net sales.
Net sales increased 4%** due to an increase in Beer net sales driven primarily by volume growth, partially offset by the decrease in Wine and Spirits net sales due largely to the recent divestitures.
Operating income decreased 44%** largely due to (i) the impairment of long-lived assets in connection with certain assets at the Mexicali Brewery, (ii) the decrease in Wine and Spirits net sales, (iii) an increase in marketing spend for both the Beer and Wine and Spirits segments, driven by timing, and (iv) the increase in obsolescence within the Beer segment, partially offset by the increase in Beer net sales.
Net loss attributable to CBI and diluted net loss per common share attributable to CBI increased largely due to the items discussed above, partially offset by a decrease in the provision for income taxes.

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 the incentive compensation of segment management are evaluated based on core segment operating income (loss) which do not include the impact of these Comparable Adjustments.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 33


MD&A			Table of Contents

As more fully described herein and in the related Notes, the Comparable Adjustments that impacted comparability in our segment results for each period are as follows:


	Second Quarter 2022		Second Quarter 2021		Six Months 2022		Six Months 2021
(in millions)
Cost of product sold

Net gain (loss) on undesignated commodity derivative contracts	$	24.0	$	17.4	$	48.1	$	(9.4)
Flow through of inventory step-up	0.1		(0.1)		0.1		(0.1)
Settlements of undesignated commodity derivative contracts	(8.9)		13.2		(12.3)		23.6
Strategic business development costs	—		(0.8)		(2.6)		(25.1)
COVID-19 incremental costs	—		(0.9)		—		(5.5)


Total cost of product sold	15.2		28.8		33.3		(16.5)

Selling, general, and administrative expenses
Restructuring and other strategic business development costs	0.8		(5.8)		(0.1)		(8.9)
Transaction, integration, and other acquisition-related costs	—		(3.1)		—		(3.9)
Net gain (loss) on foreign currency derivative contracts	—		—		—		(8.0)
COVID-19 incremental costs	—		1.9		—		(4.6)


Other gains (losses)	(7.1)		(2.9)		(6.1)		4.5
Total selling, general, and administrative expenses	(6.3)		(9.9)		(6.2)		(20.9)

Impairment of brewery construction in progress	—		—		(665.9)		—
Impairment of assets held for sale	—		22.0		—		(3.0)

Comparable Adjustments, Operating income (loss)	$	8.9	$	40.9	$	(638.8)	$	(40.4)

Income (loss) from unconsolidated investments	$	(439.6)	$	(44.5)	$	(1,295.2)	$	(587.7)

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 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 the Wine and Spirits segment.

COVID-19 incremental costs

We recognized costs for incremental wages and hazard payments to employees, purchases of personal protective equipment, more frequent and thorough cleaning and sanitization of our facilities, and costs associated with the unused beer keg reimbursement program with distributors.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 34


MD&A			Table of Contents

Selling, general, and administrative expenses

Restructuring and other strategic business development costs

We recognized costs primarily in connection with costs to optimize our portfolio, gain efficiencies, and reduce our cost structure within the Wine and Spirits segment (Second Quarter 2021, Six Months 2021).

Transaction, integration, and other acquisition-related costs

We recognized transaction, integration, and other acquisition-related costs in connection with our investments, acquisitions, and divestitures.

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 the U.S. dollar cost of the May 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 the Obregon Brewery and recognized costs for incremental wages and hazard payments to employees.

Other gains (losses)

We recognized other gains (losses) primarily in connection with (i) transition services agreements activity related to the Wine and Spirits Divestitures (Second Quarter 2022, Six Months 2022), (ii) a loss in connection with working capital adjustments on the sale of the Black Velvet Canadian Whisky business (Second Quarter 2021, Six Months 2021), and (iii) a gain recognized on the sale of a vineyard (Six Months 2021).

Impairment of brewery construction in progress

We recognized an impairment of long-lived assets in connection with certain assets at the Mexicali Brewery. For additional information, refer to Note 5.

Impairment of assets held for sale

We recognized impairments of long-lived assets held for sale in connection with the Wine and Spirits Divestitures and the Concentrate Business Divestiture. For additional information, refer to Note 5.

Income (loss) from unconsolidated investments

We recognized an unrealized gain (loss) primarily from (i) the changes in fair value of our securities measured at fair value and (ii) equity in earnings (losses) from Canopy’s results, including equity in losses from Canopy largely related to costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand. For additional information, refer to Notes 5 and 8.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 35


MD&A			Table of Contents

Business segments

Second Quarter 2022 compared to Second Quarter 2021

Net sales


	Second Quarter 2022		Second Quarter 2021		Dollar Change		Percent Change
(in millions)
Beer	$	1,861.3	$	1,635.9	$	225.4	14	%
Wine and Spirits:
Wine	447.2		544.9		(97.7)		(18	%)
Spirits	62.6		79.6		(17.0)		(21	%)
Total Wine and Spirits	509.8		624.5		(114.7)		(18	%)
Canopy	110.8		79.7		31.1		39	%
Consolidation and Eliminations	(110.8)		(79.7)		(31.1)		(39	%)

Consolidated net sales	$	2,371.1	$	2,260.4	$	110.7	5	%


	Beer segment	Second Quarter 2022		Second Quarter 2021		Dollar Change		Percent Change
(in millions, branded product, 24-pack, 12-ounce case equivalents)
Net sales		$	1,861.3	$	1,635.9	$	225.4	14	%


Shipment volume		101.0		90.4				11.7	%


Depletion volume (1)								7.3	%

(1)Depletions represent U.S. domestic distributor shipments of our respective branded products to retail customers, based on third-party data.

The increase in Beer net sales is largely due to (i) $191.1 million of volume growth within our Mexican beer portfolio, which benefited from continued consumer demand and a return to on-premise, including bars and restaurants, and (ii) $41.9 million favorable impact from pricing in select markets within our Mexican beer portfolio, partially offset by $9.2 million of unfavorable product mix shift. Second Quarter 2022 depletion volume was moderated as distributors faced shipment challenges resulting from lower product inventory levels and severe weather. Product inventories continue to be tight and are expected to return to normal levels by the end of Fiscal 2022.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 36


MD&A			Table of Contents


	Wine and Spirits segment	Second Quarter 2022		Second Quarter 2021		Dollar Change		Percent Change
(in millions, branded product, 9-liter case equivalents)
Net sales		$	509.8	$	624.5	$	(114.7)	(18	%)

Shipment volume
Total		7.4		11.6				(36.2	%)
Organic (2)		7.4		7.0				5.7	%

U.S. Domestic		6.3		10.7				(41.1	%)
Organic U.S. Domestic (2)		6.3		6.3				—	%





Depletion volume (1) (2)								(2.3	%)

(2)Includes an adjustment to remove volume associated with the Wine and Spirits Divestitures and Paul Masson Divestiture for the period June 1, 2020, through August 31, 2020.

The decrease in Wine and Spirits net sales is due to $181.4 million from the recent divestitures, partially offset by a $66.7 million increase in organic net sales. The increase in organic net sales is driven by (i) $41.0 million increase from favorable product mix shift, (ii) $12.2 million increase in branded wine and spirits volume attributable to our continued focus on growing our brands and an overlap of lower volumes in Second Quarter 2021 mainly from on-premise and retail tasting room closures as a result of COVID-19 containment measures, and (iii) $11.2 million increase primarily from bulk wine net sales in connection with the 2020 U.S. wildfires. The increase in organic net sales was negatively impacted by global supply chain logistics and route to market changes. For Second Quarter 2022, the organic U.S. shipment volume was ahead of the U.S. depletion volume largely driven by a challenging overlap due to consumer pantry loading behavior in Second Quarter 2021. We expect U.S. shipment volume and depletion volume to be generally aligned for the second half of Fiscal 2022.


			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. Accordingly, we recognize our share of Canopy’s earnings (losses) for the periods (i) April through June 2021, in our Second Quarter 2022 results, (ii) April through June 2020, in our Second Quarter 2021 results, (iii) January through June 2021, in our Six Months 2022 results, and (iv) January through June 2020, in our Six Months 2021 results. Although we own less than 100% of 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). This discussion is based on information Canopy has publicly disclosed.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 37


MD&A			Table of Contents

Gross profit


	Second Quarter 2022		Second Quarter 2021		Dollar Change		Percent Change
(in millions)
Beer	$	984.0	$	910.5	$	73.5	8	%
Wine and Spirits	230.5		276.5		(46.0)		(17	%)
Canopy	22.2		4.7		17.5		NM
Consolidation and Eliminations	(22.2)		(4.7)		(17.5)		NM
Comparable Adjustments	15.2		28.8		(13.6)		(47	%)
Consolidated gross profit	$	1,229.7	$	1,215.8	$	13.9	1	%


			The increase in Beer is primarily due to $107.0 million of volume growth, $41.9 million of favorable impact from pricing, and approximately $8 million primarily from favorable product mix shift, partially offset by $82.1 million of higher cost of product sold. The higher cost of product sold is largely due to (i) a $66.0 million increase in obsolescence primarily from excess inventory of hard seltzers resulting from a slowdown in the overall category, (ii) a $21.5 million increase in brewery costs primarily driven by higher compensation and benefits, and (iii) $16.2 million of higher depreciation, partially offset by (i) $27.7 million of favorable fixed cost absorption related to an overlap of production focused on our fastest moving products and packaging sizes to meet forecasted demand following reduced production levels in early Fiscal 2021 as a result of COVID-19 containment measures.


			The decrease in Wine and Spirits gross profit is due to a decrease of $70.7 million from the recent divestitures, partially offset by a $24.7 million increase in organic gross profit. The increase in organic gross profit is attributable to (i) a $27.5 million increase from favorable product mix shift and (ii) $5.2 million of growth in branded wine and spirits volume, driven by our continued focus on growing our brands as well as the return of our on-premise business, including bars, restaurants, and tasting rooms following COVID-19 containment measures, partially offset by $10.7 million of higher cost of product sold. The higher cost of product sold was largely attributable to unfavorable fixed cost absorption including $8.0 million primarily from decreased production levels at certain facilities as a result of both a late frost in New Zealand and the 2020 U.S. wildfires which reduced the respective grape harvests and $7.9 million of increased transportation costs resulting from global supply chain logistics, including inflation, and route to market changes, partially offset by lower grape raw materials and other cost savings initiatives.

Gross profit as a percent of net sales decreased to 51.9% for Second Quarter 2022 compared with 53.8% for Second Quarter 2021. This decrease was largely due to (i) approximately 360 basis points of rate decline from cost of product sold within the Beer segment, driven by the increase in obsolescence, (ii) an unfavorable change of approximately 60 basis points in Comparable Adjustments, and (iii) approximately 45 basis points of rate decline from cost of product sold within the Wine and Spirits segment, partially offset by (i) approximately 125 basis points of favorable impact from the recent lower-margin wine and spirits divestitures, (ii) approximately 85 basis points of favorable impact from Beer pricing in select markets, and (iii) approximately 60 basis points primarily related to favorable product mix shift within the Beer segment.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 38


MD&A			Table of Contents

Selling, general, and administrative expenses


	Second Quarter 2022		Second Quarter 2021		Dollar Change		Percent Change
(in millions)
Beer	$	291.0	$	214.8	$	76.2	35	%
Wine and Spirits	130.3		115.0		15.3		13	%
Corporate Operations and Other	62.9		59.4		3.5		6	%
Canopy	175.0		129.1		45.9		36	%
Consolidation and Eliminations	(175.0)		(129.1)		(45.9)		(36	%)
Comparable Adjustments	6.3		9.9		(3.6)		(36	%)
Consolidated selling, general, and administrative expenses	$	490.5	$	399.1	$	91.4	23	%


			The increase in Beer is primarily due to $46.8 million of higher marketing spend and $29.0 million of increased general and administrative expenses. The higher marketing spend was driven by timing as many of our planned investments to support the growth of our Mexican beer portfolio through media and event sponsorships were suspended or canceled in Second Quarter 2021, resulting from COVID-19 containment measures which shifted our normal spend to the second half of Fiscal 2021. The increase in general and administrative expenses was driven primarily by increased legal expense, higher compensation and benefits, and increased depreciation and other costs related to the implementation of a new ERP.


			The increase in Wine and Spirits is primarily due to $10.1 million of higher marketing spend and $6.8 million increased general and administrative expenses. The higher marketing spend was driven by timing as many of our planned investments to support the growth of our brands through media and event sponsorships were suspended or canceled in Second Quarter 2021, resulting from COVID-19 containment measures which shifted our normal spend to the second half of Fiscal 2021. The increase in general and administrative expenses was driven by increased depreciation and other costs related to the implementation of a new ERP, and higher compensation and benefits.


			The increase in Corporate Operations and Other is largely due to approximately a $2 million increase in travel as compared to reduced travel in Second Quarter 2021 resulting from COVID-19 containment measures.

Selling, general, and administrative expenses as a percent of net sales increased to 20.7% for Second Quarter 2022 as compared with 17.7% for Second Quarter 2021. The increase is driven largely by (i) an increase in Beer selling, general, and administrative expenses, which resulted in approximately 155 basis points of rate growth, (ii) approximately 120 basis points of rate growth in connection with the recent wine and spirits divestitures, and (iii) the increase in Wine and Spirits selling, general, and administrative expenses exceeding the increase in organic net sales, adding 30 basis points of rate growth.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 39


MD&A			Table of Contents

Operating income (loss)


	Second Quarter 2022		Second Quarter 2021		Dollar Change		Percent Change
(in millions)
Beer	$	693.0	$	695.7	$	(2.7)	—	%
Wine and Spirits	100.2		161.5		(61.3)		(38	%)
Corporate Operations and Other	(62.9)		(59.4)		(3.5)		(6	%)
Canopy	(152.8)		(124.4)		(28.4)		(23	%)
Consolidation and Eliminations	152.8		124.4		28.4		23	%
Comparable Adjustments	8.9		40.9		(32.0)		(78	%)
Consolidated operating income (loss)	$	739.2	$	838.7	$	(99.5)	(12	%)


			Beer remained relatively flat primarily attributable to higher obsolescence, marketing spend, and increased general and administrative expenses, as described above, largely offset by the strong volume growth within our Mexican beer portfolio and favorable pricing impact.


			The decrease in Wine and Spirits is largely attributable to the recent divestitures, unfavorable cost of product sold, and higher marketing spend, partially offset by the increase in organic net sales, led by favorable product mix shift.


			As previously discussed, the Corporate Operations and Other increase in operating loss is largely due to the increase in travel as compared to Second Quarter 2021.

Income (loss) from unconsolidated investments

General


	Second Quarter 2022		Second Quarter 2021		Dollar Change		Percent Change
(in millions)
Unrealized net gain (loss) on securities measured at fair value	$	(590.0)	$	(47.6)	$	(542.4)	NM
Equity in earnings (losses) from Canopy and related activities	120.5		(31.0)		151.5		NM
Equity in earnings (losses) from other equity method investees	(1.3)		(2.1)		0.8		38	%

	$	(470.8)	$	(80.7)	$	(390.1)	NM


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 40


MD&A			Table of Contents


			Canopy segment Canopy net sales increased to $110.8 million for Second Quarter 2022 from $79.7 million for Second Quarter 2021. This increase of $31.1 million, or 39% is primarily attributable to increases in Canadian recreational sales and other consumer product sales. The Canadian recreational sales for Second Quarter 2022 benefited from (i) opening of retail stores across Canada, (ii) growth resulted from their recent acquisitions of AV Cannabis Inc. and Supreme Cannabis Company, Inc., and (iii) removal of COVID-19 containment measures which adversely impacted Canopy’s results in Second Quarter 2021. The increase in other consumer product sales largely resulted from expanded U.S. distribution for (i) vaporizers sold by Storz & Bickel GmbH & Co. KG and (ii) sports nutrition beverages and mixes sold by BioSteel. Canopy gross profit (loss) increased to $22.2 million for Second Quarter 2022 from $4.7 million for Second Quarter 2021. This increase of $17.5 million is primarily driven by increased net sales, favorable fixed cost absorption, and payroll subsidies received from the Canadian government in Second Quarter 2022 pursuant to a COVID-19 relief program. Canopy selling, general, and administrative expenses increased $45.9 million primarily from an increase in restructuring charges and sales and marketing expenses, partially offset by a decrease in stock-based compensation expense. The combination of these factors were the main contributors to the increase in operating loss of $28.4 million.

Interest expense

Interest expense decreased to $95.8 million for Second Quarter 2022 from $100.2 million for Second Quarter 2021. This decrease of $4.4 million or 4% 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.

Loss on extinguishment of debt

Loss on extinguishment of debt primarily consists of a make-whole payment in connection with the early redemption of our 2.70% May 2017 Senior Notes and 2.65% November 2017 Senior Notes (Second Quarter 2022).

(Provision for) benefit from income taxes

Our effective tax rate for Second Quarter 2022 was 91.7% as compared with 20.6% for Second Quarter 2021. In comparison to prior year, our taxes were impacted primarily by:

valuation allowances on the unrealized net loss from changes in fair value of our investment in Canopy and Canopy equity in earnings (losses); and
a lower net income tax benefit from stock-based compensation award activity for Second Quarter 2022 from changes in option exercise activity.

For additional information, refer to Note 10.

Net income (loss) attributable to CBI

Net income attributable to CBI decreased to $1.5 million for Second Quarter 2022 from $512.1 million for Second Quarter 2021. This decrease in net income of $510.6 million is largely attributable to (i) the increase in unrealized net loss from the changes in fair value of our investment in Canopy in Second Quarter 2022 as compared with Second Quarter 2021, (ii) the decrease in Wine and Spirits net sales largely due to the recent divestitures, and (iii) the increase in obsolescence within the Beer segment, partially offset by (i) equity in earnings from Canopy’s results for Second Quarter 2022 as compared with equity in losses for Second Quarter 2021 and (ii) volume growth within the Beer segment.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 41


MD&A			Table of Contents

Six Months 2022 compared to Six Months 2021

Net sales


	Six Months 2022		Six Months 2021		Dollar Change		Percent Change
(in millions)
Beer	$	3,433.3	$	3,020.0	$	413.3	14	%
Wine and Spirits:
Wine	844.9		1,044.5		(199.6)		(19	%)
Spirits	119.4		159.3		(39.9)		(25	%)
Total Wine and Spirits	964.3		1,203.8		(239.5)		(20	%)
Canopy	228.1		160.0		68.1		43	%
Consolidation and Eliminations	(228.1)		(160.0)		(68.1)		(43	%)

Consolidated net sales	$	4,397.6	$	4,223.8	$	173.8	4	%


	Beer segment	Six Months 2022		Six Months 2021		Dollar Change		Percent Change
(in millions, branded product, 24-pack, 12-ounce case equivalents)
Net sales		$	3,433.3	$	3,020.0	$	413.3	14	%


Shipment volume		185.8		166.6				11.5	%


Depletion volume (1)								8.8	%

(1)Depletions represent U.S. domestic distributor shipments of our respective branded products to retail customers, based on third-party data.

The increase in Beer net sales is largely due to (i) $344.7 million of volume growth within our Mexican beer portfolio, which benefited from continued consumer demand and a return to on-premise, including bars and restaurants, and (ii) $81.5 million favorable impact from pricing in select markets within our Mexican beer portfolio, partially offset by $17.8 million of unfavorable product mix shift. The increase in beer net sales was tempered by supply shortages from severe winter storms in early Fiscal 2022. Six Months 2021 depletion volume was moderated as distributors faced shipment challenges resulting from lower product inventory levels and severe weather.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 42


MD&A			Table of Contents


	Wine and Spirits segment	Six Months 2022		Six Months 2021		Dollar Change		Percent Change
(in millions, branded product, 9-liter case equivalents)
Net sales		$	964.3	$	1,203.8	$	(239.5)	(20	%)

Shipment volume
Total		14.1		22.4				(37.1	%)
Organic (2)		14.1		13.3				6.0	%

U.S. Domestic		12.3		20.6				(40.3	%)
Organic U.S. Domestic (2)		12.3		11.7				5.1	%





Depletion volume (1) (2)								(4.8	%)

(2)Includes an adjustment to remove volume associated with the Wine and Spirits Divestitures and Paul Masson Divestiture for the period March 1, 2020, through August 31, 2020.

The decrease in Wine and Spirits net sales is due to $368.2 million from the recent divestitures, partially offset by a $128.7 million increase in organic net sales. The increase in organic net sales is driven by (i) $51.9 million increase from favorable product mix shift, (ii) $38.7 million increase in branded wine and spirits volume attributable to our continued focus on growing our brands and an overlap of lower volumes in Six Months 2021 mainly from on-premise and retail tasting room closures as a result of COVID-19 containment measures, and (iii) $25.7 million increase primarily from bulk wine net sales in connection with the 2020 U.S. wildfires. The increase in organic net sales was negatively impacted by global supply chain logistics and route to market changes. For Six Months 2022, the organic U.S. shipment volume was ahead of the U.S. depletion volume largely driven by a challenging overlap due to consumer pantry loading behavior in Second Quarter 2021 and timing related to transition activities with distributors that occurred at the end of Fiscal 2021.

Gross profit


	Six Months 2022		Six Months 2021		Dollar Change		Percent Change
(in millions)
Beer	$	1,877.7	$	1,680.2	$	197.5	12	%
Wine and Spirits	438.0		540.4		(102.4)		(19	%)
Canopy	29.9		(52.6)		82.5		NM
Consolidation and Eliminations	(29.9)		52.6		(82.5)		NM
Comparable Adjustments	33.3		(16.5)		49.8		NM
Consolidated gross profit	$	2,349.0	$	2,204.1	$	144.9	7	%


			The increase in Beer is primarily due to $193.0 million of volume growth and $81.5 million of favorable impact from pricing, partially offset by $80.2 million of higher cost of product sold. The higher cost of product sold is largely due to (i) a $78.2 million increase in obsolescence primarily from excess inventory of hard seltzers resulting from a slowdown in the overall category, (ii) $35.6 million of brewery costs primarily driven by compensation and benefits and maintenance, and (iii) $16.3 million of higher depreciation, partially offset by $39.8 million of favorable fixed cost absorption as a result of COVID-19 containment measures related to an overlap of (i) production focused on our fastest moving products and packaging sizes to meet forecasted demand in Second Quarter 2021 and (ii) reduced production in early Fiscal 2021 as well as $13.2 million of foreign currency transactional benefits.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 43


MD&A			Table of Contents


			The decrease in Wine and Spirits gross profit is due to a decrease of $148.6 million from the recent divestitures, partially offset by a $46.2 million increase in organic gross profit. The increase in organic gross profit is attributable to (i) $25.2 million increase from favorable product mix shift, (ii) $18.9 million of growth in branded wine and spirits volume, driven by our continued focus on growing our brands as well as the return of our on-premise business, including bars, restaurants, and tasting rooms following COVID-19 containment measures, (iii) $6.2 million of favorable pricing, and (iv) $5.8 million primarily related to favorable DTC mix, partially offset by $11.2 million of higher cost of product sold. Higher cost of product sold was largely attributable to $14.2 million of increased transportation costs resulting from global supply chain logistics, including inflation, and route to market changes and $11.0 million from unfavorable fixed cost absorption. The unfavorable fixed cost absorption primarily resulted from decreased production levels at certain facilities as a result of both the 2020 U.S. wildfires and a late frost in New Zealand which reduced the respective grape harvests, partially offset by lower grape raw materials and other cost saving initiatives.

Gross profit as a percent of net sales increased to 53.4% for Six Months 2022 compared with 52.2% for Six Months 2021. This increase was largely due to (i) a favorable change of approximately 110 basis points in Comparable Adjustments, (ii) approximately 105 basis points of favorable impact from the recent lower-margin wine and spirits divestitures, and (iii) approximately 85 basis points of favorable impact from Beer pricing in select markets, partially offset by approximately 175 basis points of rate decline from cost of product sold within the Beer segment, driven by the increase in obsolescence.

Selling, general, and administrative expenses


	Six Months 2022		Six Months 2021		Dollar Change		Percent Change
(in millions)
Beer	$	511.6	$	406.7	$	104.9	26	%
Wine and Spirits	233.6		214.9		18.7		9	%
Corporate Operations and Other	117.4		109.9		7.5		7	%
Canopy	366.9		805.0		(438.1)		(54	%)
Consolidation and Eliminations	(366.9)		(805.0)		438.1		54	%
Comparable Adjustments	6.2		20.9		(14.7)		(70	%)
Consolidated selling, general, and administrative expenses	$	868.8	$	752.4	$	116.4	15	%


			The increase in Beer is primarily due to $73.7 million of higher marketing spend and $30.7 million increased general and administrative expenses. The higher marketing spend was driven by timing as many of our planned investments to support the growth of our Mexican beer portfolio through media and event sponsorships were suspended or canceled in Six Months 2021, resulting from COVID-19 containment measures which shifted our normal spend to the second half of Fiscal 2021. The increase in general and administrative expenses was primarily driven by increased legal expense, higher compensation and benefits, and increased depreciation and other costs related to the implementation of a new ERP.


			The increase in Wine and Spirits is primarily due to $12.4 million of higher marketing spend and $9.7 million increased general and administrative expenses. The higher marketing spend was driven by timing as many of our planned investments to support the growth of our brands through media and event sponsorships were suspended or canceled in Six Months 2021, resulting from COVID-19 containment measures which shifted our normal spend to the second half of Fiscal 2021. The increase in general and administrative expenses was driven by increased depreciation and other costs related to the implementation of a new ERP and higher compensation and benefits.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 44


MD&A			Table of Contents


			The increase in Corporate Operations and Other is largely due to approximately a $6 million increase in consulting services, primarily related to the implementation of a new ERP, and $5 million increase in compensation and benefits, partially offset by a $5 million favorable foreign currency impact as compared to Six Months 2021.

Selling, general, and administrative expenses as a percent of net sales increased to 19.8% for Six Months 2022 as compared with 17.8% for Six Months 2021. The increase is driven largely by approximately 130 basis points of rate growth in connection with the recent wine and spirits divestitures and an increase in Beer selling, general, and administrative expenses, which resulted in approximately 75 basis points of rate growth. The increase was partially offset by the favorable change in Comparable Adjustments, contributing approximately 30 basis points of rate decline.

Operating income (loss)


	Six Months 2022		Six Months 2021		Dollar Change		Percent Change
(in millions)
Beer	$	1,366.1	$	1,273.5	$	92.6	7	%
Wine and Spirits	204.4		325.5		(121.1)		(37	%)
Corporate Operations and Other	(117.4)		(109.9)		(7.5)		(7	%)
Canopy	(337.0)		(857.6)		520.6		61	%
Consolidation and Eliminations	337.0		857.6		(520.6)		(61	%)
Comparable Adjustments	(638.8)		(40.4)		(598.4)		NM
Consolidated operating income (loss)	$	814.3	$	1,448.7	$	(634.4)	(44	%)


			The increase in Beer is largely attributable to the strong volume growth within our Mexican beer portfolio and favorable pricing impact, partially offset by higher obsolescence, marketing spend, and general and administrative expenses, as discussed above.


			The decrease in Wine and Spirits is largely attributable to the recent divestitures, higher marketing spend, unfavorable cost of product sold, and increased general and administrative expenses, partially offset by the increase in organic net sales, led by favorable product mix shift and branded wine and spirits volume growth.


			As previously discussed, the Corporate Operations and Other increase in operating loss is largely due to the increase in consulting services and compensation and benefit costs, partially offset by favorable foreign currency impact as compared to Six Months 2021.

Income (loss) from unconsolidated investments

General


	Six Months 2022		Six Months 2021		Dollar Change		Percent Change
(in millions)
Unrealized net gain (loss) on securities measured at fair value	$	(1,335.1)	$	(244.9)	$	(1,090.2)	NM
Equity in earnings (losses) from Canopy and related activities (1)	(35.3)		(408.6)		373.3		91	%
Equity in earnings (losses) from other equity method investees	0.4		1.6		(1.2)		(75	%)

	$	(1,370.0)	$	(651.9)	$	(718.1)	(110	%)


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 45


MD&A			Table of Contents

(1)Includes $70.0 million and $235.4 million of costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand for Six Months 2022 and Six Months 2021, respectively.


			Canopy segment Canopy net sales increased to $228.1 million for Six Months 2022 from $160.0 million for Six Months 2021. This increase of $68.1 million, or 43% is primarily attributable to an increase in Canadian recreational sales and other consumer product sales. The Canadian recreational sales for Six Months 2022 benefited from (i) opening of retail stores across Canada, (ii) the removal of COVID-19 containment measures which adversely impacted Canopy’s results in Six Months 2021, and (iii) growth in flower sales. The increase in other consumer product sales largely resulted from expanded U.S. distribution for (i) sales of sports nutrition beverages and mixes sold by BioSteel and (ii) vaporizers sold by Storz & Bickel GmbH & Co. KG. Canopy gross profit (loss) increased to $29.9 million for Six Months 2022 from $(52.6) million for Six Months 2021. This increase of $82.5 million is primarily driven by inventory write-downs for Six Months 2021 related to its organizational and strategic review of their business and increased net sales for Six Months 2022. Canopy selling, general, and administrative expenses decreased $438.1 million primarily from a reduction in (i) asset impairment and restructuring charges related to their decision to close greenhouse facilities as well as other changes related to its organizational and strategic review of their business and (ii) stock-based compensation expense. The combination of these factors were the main contributors to the $520.6 million decrease in operating loss.

Interest expense

Interest expense decreased to $182.5 million for Six Months 2022 from $200.2 million for Six Months 2021. This decrease of $17.7 million, or 9% is predominantly due to lower average borrowings of approximately $1.5 billion primarily attributable to the partial repayment of financing entered into in connection with the November 2018 Canopy Transaction.

Loss on extinguishment of debt

(Provision for) benefit from income taxes

Our effective tax rate for Six Months 2022 was (15.3)% as compared with 40.7% for Six Months 2021. In comparison to prior year, our taxes were impacted primarily by:

valuation allowances on a portion of the unrealized net loss from changes in fair value of our investment in Canopy and Canopy equity in earnings (losses); and
the effective tax rates applicable to our foreign businesses, including the impact of the long-lived asset impairment of brewery construction in progress; partially offset by
a lower net income tax benefit from stock-based compensation award activity for Six Months 2022 from changes in option exercise activity.

For additional information, refer to Note 10.

We expect our reported effective tax rate for Fiscal 2022 to be in the range of 82% to 84%. This range includes the impacts of the long-lived asset impairment of brewery construction in progress and the unrealized net losses from our Canopy investment for Six Months 2022. For additional information, refer to Note 5. Since estimates are not currently available, this range does not reflect any future changes in the fair value of our Canopy investment measured at fair value and any future equity in earnings (losses) and related activities from the Canopy Equity Method Investment.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 46


MD&A			Table of Contents

Net income (loss) attributable to CBI

Net income (loss) attributable to CBI decreased to $(906.6) million for Six Months 2022 from $334.2 million for Six Months 2021. This decrease of $1,240.8 million is largely attributable to (i) the increase in unrealized net loss from the changes in fair value of our investment in Canopy, (ii) the impairment of long-lived assets for Six Months 2022 in connection with certain assets at the Mexicali Brewery, (iii) the decrease in Wine and Spirits net sales due largely to the recent divestitures, and (iv) the increase in obsolescence within the Beer segment, partially offset by strong volume growth within the Beer segment and a decrease in the provision for income taxes.

Liquidity and Capital Resources

General

Our primary source of liquidity has been cash flow from operating activities. Our ability to consistently generate robust cash flow from our operations is one of our most significant financial strengths; it enables us to invest in our people and our brands, make capital investments and strategic acquisitions, provide a cash dividend program, and from time-to-time, repurchase shares of our common stock. Our largest use of cash in our operations is for purchasing and carrying inventories and carrying seasonal accounts receivable. Historically, we have used this cash flow to repay our short-term borrowings and fund capital expenditures. Additionally, our commercial paper program is used to fund our short-term borrowing requirements and to maintain our access to the capital markets. We use our short-term borrowings, including our commercial paper program, to support our working capital requirements and capital expenditures.

We seek to maintain 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 will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments, periodic share repurchases, and anticipated capital expenditure requirements for both our short-term and long-term capital needs.

As of August 31, 2021, the exercise of all Canopy warrants held by us would have required a cash outflow of approximately $6.1 billion based on the terms of the November 2018 Canopy Warrants.

Cash flows


	Six Months 2022		Six Months 2021		Dollar Change
(in millions)
Net cash provided by (used in):
Operating activities	$	1,525.9	$	1,444.9	$	81.0
Investing activities	(377.1)		(455.3)		78.2
Financing activities	(1,506.4)		(872.1)		(634.3)
Effect of exchange rate changes on cash and cash equivalents	0.4		5.7		(5.3)
Net increase (decrease) in cash and cash equivalents	$	(357.2)	$	123.2	$	(480.4)

Operating activities

The increase in net cash provided by operating activities for Six Months 2022 is largely due to strong cash flow from the Beer segment driven primarily by the segment’s solid net sales results and benefits from (i) accounts payable primarily attributable to the timing of payments for both the Beer and Wine and Spirits segments, (ii) other accrued expenses and liabilities for the Beer segment primarily from the timing of certain marketing invoices, and (iii) an exclusivity payment in connection with distribution arrangements for our U.S. wine and spirits brand portfolio. The increase in net cash provided by operating activities was partially offset by higher inventory


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 47


MD&A			Table of Contents

levels for the Beer segment largely resulting from COVID-19 related containment measures in Six Months 2021 and increased accounts receivable for the Wine and Spirits segment. Additionally, the increase in net cash provided by operating activities was partially offset by higher income tax payments in Six Months 2022 as compared to Six Months 2021 primarily due to benefits resulting from stock-based compensation award activity.

Investing activities

Net cash used in investing activities for Six Months 2022 decreased primarily due to the $173.9 million exercise of the November 2017 Canopy Warrants in May 2020. The decrease was partially offset by higher capital expenditures of $75.6 million and lower proceeds from sale of business of $36.5 million for Six Months 2022 as compared with Six Months 2021.

Financing activities

The increase in net cash provided by (used in) financing activities consists of:


	Six Months 2022		Six Months 2021		Dollar Change
(in millions)
Net proceeds from (payments of) debt, current and long-term, and related activities	$	96.0	$	(598.9)	$	694.9
Dividends paid	(289.3)		(287.6)		(1.7)
Purchases of treasury stock	(1,305.0)		—		(1,305.0)
Net cash provided by stock-based compensation activities	13.1		24.4		(11.3)
Distributions to noncontrolling interests	(21.2)		(10.0)		(11.2)
Net cash provided by (used in) financing activities	$	(1,506.4)	$	(872.1)	$	(634.3)

Debt

Total debt outstanding as of August 31, 2021, amounted to $10,573.5 million, an increase of $131.2 million from February 28, 2021. This increase consisted of:


						Debt repayment						Debt issuance


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 48


MD&A			Table of Contents

Bank facilities

In June 2021, the Company and the Administrative Agent and Lender further amended the March 2020 Term Credit Agreement. The principal change effected by the June 2021 amendment was a reduction in LIBOR margin from 0.88% to 0.63% from June 1, 2021, through December 31, 2021.

Senior Notes

In July 2021, we issued the 2.25% July 2021 Senior Notes. Proceeds from this offering, net of discount and debt issuance costs, of $987.4 million were used towards the repayment of our 2.70% May 2017 Senior Notes and 2.65% November 2017 Senior Notes.

General

The majority of our outstanding borrowings as of August 31, 2021, consisted of fixed-rate senior unsecured notes, with maturities ranging from calendar 2023 to calendar 2050, and a variable-rate senior unsecured term loan facility under our June 2021 Term Credit Agreement, originally entered into in June 2019, with a calendar 2024 maturity date.

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.

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 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
	August 31, 2021		October 1, 2021
(in millions)
Revolving credit facility (1)	$	1,501.8	$	1,635.8

(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 they 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 of August 31, 2021, under our 2020 Credit Agreement, the minimum interest coverage ratio was 2.5x and the maximum net leverage ratio was 4.0x.

The representations, warranties, covenants, and events of default set forth in our June 2021 Term Credit Agreement are substantially similar to those set forth in our 2020 Credit Agreement.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 49


MD&A			Table of Contents

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 August 31, 2021, we were in compliance with our covenants under our 2020 Credit Agreement, our June 2021 Term Credit Agreement, and our indentures, and have met all debt payment obligations.

For a complete discussion and presentation of all borrowings and available sources of borrowing, refer to Note 12 of our consolidated financial statements included in our 2021 Annual Report and Note 9.

Common stock dividends

On October 5, 2021, our Board of Directors declared a quarterly cash dividend of $0.76 per share of Class A Common Stock, $0.69 per share of Class B Convertible Common Stock, and $0.69 per share of Class 1 Common Stock payable on November 19, 2021, to stockholders of record of each class on November 5, 2021.

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 2021 Annual Report.

Share Repurchase Program

Our Board of Directors have authorized the repurchase of up to $3.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2018 Authorization and an additional repurchase of up to $2.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2021 Authorization. Shares repurchased under the 2018 Authorization have become treasury shares. No shares have been repurchased under the 2021 Authorization.

During Six Months 2022, we repurchased 5,776,373 shares of Class A Common Stock pursuant to the 2018 Authorization at an aggregate cost of $1,305.0 million, or an average cost of $225.92 per share, through a combination of open market transactions and an ASR that was announced in June 2021. The shares repurchased pursuant to the ASR, at an average purchase price paid of $223.17 per share, include (i) 1,731,752 shares of Class A Common Stock that were received in July 2021 and (ii) 508,645 shares of Class A Common Stock received in August 2021 in connection with the early termination of the calculation period for the ASR by the counterparty to the ASR transaction. We primarily used cash on hand to pay the purchase price for the repurchased shares.

As of October 6, 2021, total shares repurchased under the 2018 Authorization and 2021 Authorization are as follows:


			Class A Common Shares
	Repurchase Authorization		Dollar Value of Shares Repurchased		Number of Shares Repurchased
(in millions, except share data)

2018 Authorization	$	3,000.0	$	2,436.4	11,076,620
2021 Authorization	$	2,000.0	$	—	—

Share repurchases under the 2018 Authorization and 2021 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 become treasury shares.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 50


MD&A			Table of Contents

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 2021 Annual Report.

For additional information, refer to Note 17 of our consolidated financial statements included in our 2021 Annual Report and Note 11.

Accounting Guidance

Accounting guidance adopted for Six Months 2022 did not have a material impact on our Financial Statements.

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 regarding the potential impact to supply, production levels, and costs due to wildfires and severe weather events.
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, future marketing spend, future effective tax rates and anticipated tax liabilities, 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 November 2018 Canopy Warrant exercises, if any;

◦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 and construction activities, including anticipated costs and timeframes for completion, discussions with government officials in Mexico, and potential future impairment of non-recoverable brewery construction assets.
The statements regarding:

◦the volatility of the fair value of our investment in Canopy measured at fair value;

◦our activities surrounding our investment in Canopy;

◦our targeted leverage ratio;

◦the November 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 Divestitures, including potential amount of contingent consideration.
The statements regarding Canopy’s expectations and the 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


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 51


MD&A			Table of Contents

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 impact and severity of new variants, the efficacy of the vaccine rollout, the closure of non-essential businesses, which may include our manufacturing facilities, and other associated governmental containment actions, may vary from our current expectations, and the increase in cyber-security attacks that have occurred while non-production employees work remotely;
the actual impact to supply, production levels, and costs due to wildfires and severe weather events may vary from our current expectations due to, among other reasons, the actual severity and geographical reach of wildfires and severe weather events;
the actual balance of supply and demand for our products and percentage of our portfolio distributed through any particular distributor will vary from current expectations due to, among other reasons, actual raw material and water 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 investment in Canopy; any future exercise of the November 2018 Canopy Warrants; the expected impacts of the Wine and Spirits Divestitures; and other factors as determined by management from time to time;
the amount and timing of future dividends are subject to the determination and discretion of the board of directors and 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 investment 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 and market and economic conditions;
the timeframe and actual costs associated with the beer operations expansion activities and amount of impairment for non-recoverable brewery construction assets in Mexico 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 discussions with government officials in Mexico, actual amount of non-recoverable brewery construction assets, and other factors as determined by management;
the amount of contingent consideration, if any, received in the Wine and Spirits Divestitures will depend on actual future brand performance;
any impact of U.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.

For additional information about risks and uncertainties that could adversely affect our forward looking statements, please refer to Item 1A. “Risk Factors” of our 2021 Annual Report.


Constellation Brands, Inc. Q2 FY 2022 Form 10-Q			#WORTHREACHINGFOR I 52


OTHER KEY INFORMATION			Table of Contents

Previous: Item 1. Financial Statements. · Next: Item 3. Quantitative and Qualitative Disclosures About Market Risk.