XFRA:CB1A Constellation Brands Inc Class A Quarterly Report 10-Q Filing - 5/31/2012

Effective Date 5/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2012
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 001-08495
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
16-0716709
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
207 High Point Drive, Building 100, Victor, New York
14564
 
 
(Address of principal executive offices)
(Zip Code)
 
(585) 678-7100
(Registrant’s telephone number, including area code)
  
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
        Large accelerated filer x
  
Accelerated filer ¨
 
        Non-accelerated filer ¨
  
Smaller reporting company ¨
 
(Do not check if a smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of June 30, 2012, is set forth below:
 
Class
Number of Shares Outstanding
Class A Common Stock, par value $.01 per share
153,791,943
Class B Common Stock, par value $.01 per share
23,540,335
Class 1 Common Stock, par value $.01 per share
11,549



TABLE OF CONTENTS
 



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 the Companys control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. For further information regarding such forward-looking statements, risks and uncertainties, please see “Information Regarding Forward-Looking Statements” under Part I - Item 2 “Managements Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” under Part II - Item 1A of this Quarterly Report on Form 10-Q.



PART I - FINANCIAL INFORMATION
 
Item 1.
Financial Statements.

CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
 
May 31, 2012
 
February 29, 2012
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash investments
$
69.1

 
$
85.8

Accounts receivable, net
457.8

 
437.6

Inventories
1,325.2

 
1,374.5

Prepaid expenses and other
119.3

 
136.4

Total current assets
1,971.4

 
2,034.3

PROPERTY, PLANT AND EQUIPMENT, net
1,219.1

 
1,255.8

GOODWILL
2,599.2

 
2,632.9

INTANGIBLE ASSETS, net
854.7

 
866.4

OTHER ASSETS, net
363.8

 
320.5

Total assets
$
7,008.2

 
$
7,109.9

 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Notes payable to banks
$
97.9

 
$
377.9

Current maturities of long-term debt
37.7

 
330.2

Accounts payable
117.2

 
130.5

Accrued excise taxes
23.4

 
24.8

Other accrued expenses and liabilities
311.7

 
336.2

Total current liabilities
587.9

 
1,199.6

LONG-TERM DEBT, less current maturities
3,285.4

 
2,421.4

DEFERRED INCOME TAXES
607.1

 
608.7

OTHER LIABILITIES
228.0

 
204.2

COMMITMENTS AND CONTINGENCIES (NOTE 10)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Class A Common Stock, $.01 par value- Authorized, 322,000,000 shares; Issued, 234,467,959 shares at May 31, 2012, and 233,751,797 shares at February 29, 2012
2.3

 
2.3

Class B Convertible Common Stock, $.01 par value- Authorized, 30,000,000 shares; Issued, 28,546,135 shares at May 31, 2012, and 28,583,916 shares at February 29, 2012
0.3

 
0.3

Additional paid-in capital
1,716.7

 
1,691.4

Retained earnings
2,179.3

 
2,107.3

Accumulated other comprehensive income
83.1

 
173.7

 
3,981.7

 
3,975.0

Less: Treasury stock -
 
 
 
Class A Common Stock, 81,008,532 shares at May 31, 2012, and 63,015,441 shares at February 29, 2012, at cost
(1,679.7
)
 
(1,296.8
)
Class B Convertible Common Stock, 5,005,800 shares at May 31, 2012, and February 29, 2012, at cost
(2.2
)
 
(2.2
)
 
(1,681.9
)
 
(1,299.0
)
Total stockholders’ equity
2,299.8

 
2,676.0

Total liabilities and stockholders’ equity
$
7,008.2

 
$
7,109.9


The accompanying notes are an integral part of these statements.

2


CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME
(in millions, except per share data)
(unaudited)
 
 
For the Three Months Ended
 
May 31,
 
2012
 
2011
SALES
$
725.3

 
$
710.7

Less - excise taxes
(90.5
)
 
(75.4
)
Net sales
634.8

 
635.3

COST OF PRODUCT SOLD
(384.2
)
 
(384.3
)
Gross profit
250.6

 
251.0

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(144.0
)
 
(138.2
)
RESTRUCTURING CHARGES
(0.5
)
 
(11.1
)
Operating income
106.1

 
101.7

EQUITY IN EARNINGS OF EQUITY METHOD INVESTEES
60.6

 
62.2

INTEREST EXPENSE, net
(50.7
)
 
(44.3
)
LOSS ON WRITE-OFF OF FINANCING COSTS
(2.8
)
 

Income before income taxes
113.2

 
119.6

PROVISION FOR INCOME TAXES
(41.2
)
 
(45.1
)
NET INCOME
$
72.0

 
$
74.5

 
 
 
 
COMPREHENSIVE (LOSS) INCOME
$
(18.6
)
 
$
109.4

 
 
 
 
SHARE DATA:
 
 
 
Earnings per common share:
 
 
 
Basic - Class A Common Stock
$
0.39

 
$
0.36

Basic - Class B Convertible Common Stock
$
0.36

 
$
0.32

 
 
 
 
Diluted - Class A Common Stock
$
0.38

 
$
0.35

Diluted - Class B Convertible Common Stock
$
0.35

 
$
0.32

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic - Class A Common Stock
162,259

 
187,046

Basic - Class B Convertible Common Stock
23,554

 
23,604

 
 
 
 
Diluted - Class A Common Stock
190,261

 
214,914

Diluted - Class B Convertible Common Stock
23,554

 
23,604


The accompanying notes are an integral part of these statements.

3


CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
 
For the Three Months Ended
 
May 31,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
72.0

 
$
74.5

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation of property, plant and equipment
26.3

 
23.2

Deferred tax provision
12.3

 
10.8

Stock-based compensation expense
11.6

 
13.7

Amortization of intangible and other assets
3.2

 
3.7

Loss on extinguishment of debt
2.8

 

Equity in earnings of equity method investees, net of distributed earnings
(28.0
)
 
(2.4
)
(Gain) loss on disposal of long-lived assets, net
(0.9
)
 
0.1

Gain on business sold, net

 
(1.4
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
(27.5
)
 
(42.4
)
Inventories
31.2

 
67.5

Prepaid expenses and other current assets
(0.8
)
 
11.4

Accounts payable
(11.8
)
 
(21.8
)
Accrued excise taxes
(1.2
)
 
9.0

Other accrued expenses and liabilities
(19.9
)
 
71.8

Other, net
27.1

 
23.6

Total adjustments
24.4

 
166.8

Net cash provided by operating activities
96.4

 
241.3

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(19.6
)
 
(21.0
)
Proceeds from sales of assets
7.7

 
0.1

Proceeds from notes receivable
1.7

 
1.0

Payments related to sale of business

 
(7.5
)
Other investing activities
(0.9
)
 
(6.4
)
Net cash used in investing activities
(11.1
)
 
(33.8
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Principal payments of long-term debt
(832.2
)
 
(417.3
)
Purchases of treasury stock
(383.0
)
 

Net (repayment of) proceeds from notes payable
(274.4
)
 
168.5

Payment of financing costs of long-term debt
(22.8
)
 

Payment of minimum tax withholdings on stock-based payment awards
(0.5
)
 
(2.2
)
Proceeds from issuance of long-term debt
1,400.0

 

Proceeds from exercises of employee stock options
12.4

 
36.5

Proceeds from excess tax benefits from stock-based payment awards
2.6

 
9.9

Net cash used in financing activities
(97.9
)
 
(204.6
)
 
 
 
 
Effect of exchange rate changes on cash and cash investments
(4.1
)
 
1.3

 
 
 
 
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS
(16.7
)
 
4.2

CASH AND CASH INVESTMENTS, beginning of period
85.8

 
9.2

CASH AND CASH INVESTMENTS, end of period
$
69.1

 
$
13.4

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Property, plant and equipment acquired under financing arrangements
$
2.1

 
$
4.1

 
 
 
 

The accompanying notes are an integral part of these statements.

4


CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2012
(unaudited)
 
1.
BASIS OF PRESENTATION:

The consolidated financial statements included herein have been prepared by Constellation Brands, Inc. and its subsidiaries (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2012. Results of operations for interim periods are not necessarily indicative of annual results.
 
2.
RECENTLY ADOPTED ACCOUNTING GUIDANCE:

Fair value measurements –
Effective March 1, 2012, the Company adopted the Financial Accounting Standards Board (“FASB”) amended guidance to achieve common fair value measurement and disclosure requirements under generally accepted accounting principles in the U.S. and International Financial Reporting Standards. This amended guidance provides clarification about the application of existing fair value measurement and disclosure requirements, and expands certain other disclosure requirements. The adoption of this amended guidance on March 1, 2012, did not have a material impact on the Company's consolidated financial statements.

Presentation of comprehensive income –
Effective March 1, 2012, the Company adopted the FASB amended guidance requiring an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This amended guidance eliminates the option to present the components of other comprehensive income as part of the statement of stockholders' equity. In addition, this amended guidance requires retrospective application. In December 2011, the FASB issued additional guidance deferring the effective date of the June 2011 amended guidance related to the presentation of reclassification adjustments by component in both the statement where net income is presented and the statement where other comprehensive income is presented for further redeliberation. The adoption of this amended guidance on March 1, 2012, did not have a material impact on the Company's consolidated financial statements.

Intangibles – goodwill and other –
Effective March 1, 2012, the Company adopted the FASB amended guidance for goodwill impairment testing. The amended guidance allows an entity to assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If an entity determines it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, then performing the two-step impairment test would be unnecessary. If an entity concludes otherwise, the entity would be required to complete the two-step impairment test by calculating the fair value of the reporting unit and then comparing the fair value with the carrying amount of the reporting unit. The adoption of this amended guidance on March 1, 2012, did not have a material impact on the Company's consolidated financial statements.

5


 
3.
INVENTORIES:

Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following:

 
May 31, 2012
 
February 29, 2012
(in millions)
 
 
 
Raw materials and supplies
$
48.6

 
$
47.6

In-process inventories
967.9

 
1,048.4

Finished case goods
308.7

 
278.5

 
$
1,325.2

 
$
1,374.5

 
4.    DERIVATIVE INSTRUMENTS:

As a multinational company, the Company is exposed to market risk from changes in foreign currency exchange rates and interest rates that could affect the Company’s results of operations and financial condition. The amount of volatility realized will vary based upon the effectiveness and level of derivative instruments outstanding during a particular period of time, as well as the currency and interest rate market movements during that same period.

The Company enters into derivative instruments, primarily interest rate swaps and foreign currency forward and option contracts, to manage interest rate and foreign currency risks. In accordance with the FASB guidance for derivatives and hedging, the Company recognizes all derivatives as either assets or liabilities on its consolidated balance sheet and measures those instruments at fair value (see Note 5). The fair values of the Company’s derivative instruments change with fluctuations in interest rates and/or currency rates and are expected to offset changes in the values of the underlying exposures. The Company’s derivative instruments are held solely to hedge economic exposures. The Company follows strict policies to manage interest rate and foreign currency risks, including prohibitions on derivative market-making or other speculative activities.

To qualify for hedge accounting treatment under the FASB guidance for derivatives and hedging, the details of the hedging relationship must be formally documented at inception of the arrangement, including the risk management objective, hedging strategy, hedged item, specific risk that is being hedged, the derivative instrument, how effectiveness is being assessed and how ineffectiveness will be measured. The derivative must be highly effective in offsetting either changes in the fair value or cash flows, as appropriate, of the risk being hedged. Effectiveness is evaluated on a retrospective and prospective basis based on quantitative measures.

Certain of the Company’s derivative instruments do not qualify for hedge accounting treatment under the FASB guidance for derivatives and hedging; for others, the Company chooses not to maintain the required documentation to apply hedge accounting treatment. These undesignated instruments are used to economically hedge the Company’s exposure to fluctuations in the value of foreign currency denominated receivables and payables; foreign currency investments, primarily consisting of loans to subsidiaries; and cash flows related primarily to repatriation of those loans or investments. Foreign currency contracts, generally less than 12 months in duration, are used to hedge some of these risks. The Company’s derivative policy permits the use of undesignated derivatives when the derivative instrument is settled within the fiscal quarter or offsets a recognized balance sheet exposure. In these circumstances, the mark to fair value is reported currently through earnings in selling, general and administrative expenses on the Company’s Consolidated Statements of Comprehensive (Loss) Income. As of May 31, 2012, and February 29, 2012, the Company had undesignated foreign currency contracts outstanding with a notional value of $198.6 million and $148.6 million, respectively. In addition, the Company had offsetting undesignated interest rate swap agreements with an absolute notional amount of $1.0 billion outstanding as of May 31, 2012 (see Note 9). The Company had no undesignated interest rate swap agreements outstanding as of February 29, 2012.

6



Furthermore, when the Company determines that a derivative instrument which qualified for hedge accounting treatment has ceased to be highly effective as a hedge, the Company discontinues hedge accounting prospectively. The Company also discontinues hedge accounting prospectively when (i)  a derivative expires or is sold, terminated, or exercised; (ii)  it is no longer probable that the forecasted transaction will occur; or (iii)  management determines that designating the derivative as a hedging instrument is no longer appropriate.

Cash flow hedges:
The Company is exposed to foreign denominated cash flow fluctuations in connection with third party and intercompany sales and purchases and, historically, third party financing arrangements. The Company primarily uses foreign currency forward and option contracts to hedge certain of these risks. In addition, the Company utilizes interest rate swaps to manage its exposure to changes in interest rates. Derivatives managing the Company’s cash flow exposures generally mature within three years or less, with a maximum maturity of five years. Throughout the term of the designated cash flow hedge relationship, but at least quarterly, a retrospective evaluation and prospective assessment of hedge effectiveness is performed. All components of the Company’s derivative instruments’ gains or losses are included in the assessment of hedge effectiveness. In the event the relationship is no longer effective, the Company recognizes the change in the fair value of the hedging derivative instrument from the date the hedging derivative instrument became no longer effective immediately in the Company’s Consolidated Statements of Comprehensive (Loss) Income. In conjunction with its effectiveness testing, the Company also evaluates ineffectiveness associated with the hedge relationship. Resulting ineffectiveness, if any, is recognized immediately on the Company’s Consolidated Statements of Comprehensive (Loss) Income in selling, general and administrative expenses.

The Company records the fair value of its foreign currency and interest rate swap contracts qualifying for cash flow hedge accounting treatment on its consolidated balance sheet with the effective portion of the related gain or loss on those contracts deferred in stockholders’ equity (as a component of AOCI (as defined in Note 13)). These deferred gains or losses are recognized in the Company’s Consolidated Statements of Comprehensive (Loss) Income in the same period in which the underlying hedged items are recognized and on the same line item as the underlying hedged items. However, to the extent that any derivative instrument is not considered to be highly effective in offsetting the change in the value of the hedged item, the hedging relationship is terminated and the amount related to the ineffective portion of such derivative instrument is immediately recognized on the Company’s Consolidated Statements of Comprehensive (Loss) Income in selling, general and administrative expenses.

As of May 31, 2012, and February 29, 2012, the Company had cash flow designated foreign currency contracts outstanding with a notional value of $346.5 million and $353.7 million, respectively. In addition, as of May 31, 2012, and February 29, 2012, the Company had cash flow designated interest rate swap agreements outstanding with a notional value of $500.0 million (see Note 9). The Company expects $6.4 million of net losses, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months.

Fair value hedges:
Fair value hedges are hedges that offset the risk of changes in the fair values of recorded assets and liabilities, and firm commitments. The Company records changes in fair value of derivative instruments which are designated and deemed effective as fair value hedges, in earnings offset by the corresponding changes in the fair value of the hedged items. The Company did not designate any derivative instruments as fair value hedges for the three months ended May 31, 2012, and May 31, 2011.

Net investment hedges:
Net investment hedges are hedges that use derivative instruments or non-derivative instruments to hedge the foreign currency exposure of a net investment in a foreign operation. Historically, the Company has managed currency exposures resulting from certain of its net investments in foreign subsidiaries principally with debt denominated in the related foreign currency. Accordingly, gains and losses on these instruments were recorded as foreign currency translation adjustments in AOCI. The Company did not designate any derivative or non-derivative instruments as net investment hedges for the three months ended May 31, 2012, and May 31, 2011.

7



Fair values of derivative instruments:
The fair value and location of the Company’s derivative instruments on its Consolidated Balance Sheets are as follows:

Balance Sheet Location
 
May 31, 2012
 
February 29, 2012
(in millions)
 
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
 
Foreign currency contracts:
 
 
 
 
Prepaid expenses and other
 
$
5.4

 
$
7.9

Other accrued expenses and liabilities
 
$
3.7

 
$
2.7

Other assets, net
 
$
1.9

 
$
3.6

Other liabilities
 
$
2.7

 
$
2.2

 
 
 
 
 
Interest rate swap contracts:
 
 
 
 
Other accrued expenses and liabilities
 
$
4.9

 
$
15.0

Other liabilities
 
$
0.1

 
$
30.7

 
 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
 
Foreign currency contracts:
 
 
 
 
Prepaid expenses and other
 
$
2.4

 
$
1.4

Other accrued expenses and liabilities
 
$
4.1

 
$
1.1

Other assets, net
 
$
0.2

 
$
0.3

Other liabilities
 
$
0.4

 
$
0.4

 
 
 
 
 
Interest rate swap contracts:
 
 
 
 
Prepaid expenses and other
 
$
2.3

 
$

Other accrued expenses and liabilities
 
$
13.2

 
$

Other liabilities
 
$
31.3

 
$



8


The effect of the Company’s derivative instruments designated in cash flow hedging relationships on its Consolidated Statements of Comprehensive (Loss) Income, as well as its Other Comprehensive Income (“OCI”), net of income tax effect, is as follows:
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
Net
Gain (Loss)
Recognized
in OCI
(Effective
portion)
 
Location of Net Gain (Loss)
Reclassified from AOCI to
Income (Effective portion)
 
Net
Gain (Loss)
Reclassified
from AOCI to
Income
(Effective
portion)
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2012
 
 
 
 
 
 
Foreign currency contracts
 
$
0.4

 
Sales
 
$
1.2

Foreign currency contracts
 
(3.8
)
 
Cost of product sold
 
0.5

Interest rate swap contracts
 
(2.7
)
 
Interest expense, net
 
(2.1
)
Total
 
$
(6.1
)
 
Total
 
$
(0.4
)
 
 
 
 
 
 
 
For the Three Months Ended May 31, 2011
 
 
 
 
 
 
Foreign currency contracts
 
$
3.7

 
Sales
 
$
1.0

Foreign currency contracts
 
3.9

 
Cost of product sold
 

Interest rate swap contracts
 
(9.6
)
 
Interest expense, net
 

Total
 
$
(2.0
)
 
Total
 
$
1.0


Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
Location of Net Gain
Recognized in Income
(Ineffective portion)
 
Net Gain
Recognized
in Income
(Ineffective
portion)
(in millions)
 
 
 
 
For the Three Months Ended May 31, 2012
 
 
 
 
Foreign currency contracts
 
Selling, general and
      administrative expenses
 
$
0.1

 
 
 
 
 
For the Three Months Ended May 31, 2011
 
 
 
 
Foreign currency contracts
 
Selling, general and
      administrative expenses
 
$
0.6



9


The effect of the Company’s undesignated derivative instruments on its Consolidated Statements of Comprehensive (Loss) Income is as follows:

Derivative Instruments Not
Designated as Hedging Instruments
 
Location of Net (Loss) Gain
Recognized in Income
 
Net
(Loss) Gain
Recognized
in Income
(in millions)
 
 
 
 
For the Three Months Ended May 31, 2012
 
 
 
 
Foreign currency contracts
 
Selling, general and
      administrative expenses
 
$
(4.3
)
Interest rate swap contracts
 
Interest expense, net
 
(0.1
)
 
 
 
 
$
(4.4
)
 
 
 
 
 
For the Three Months Ended May 31, 2011
 
 
 
 
Foreign currency contracts
 
Selling, general and
      administrative expenses
 
$
3.1


Credit risk:
The Company enters into master agreements with its bank derivative trading counterparties that allow netting of certain derivative positions in order to manage credit risk. The Company’s derivative instruments are not subject to credit rating contingencies or collateral requirements. As of May 31, 2012, the fair value of derivative instruments in a net liability position due to counterparties was $54.0 million. If the Company were required to settle the net liability position under these derivative instruments on May 31, 2012, the Company would have had sufficient availability under its revolving credit facility to satisfy this obligation.

Counterparty credit risk:
Counterparty credit risk relates to losses the Company could incur if a counterparty defaults on a derivative contract. The Company manages exposure to counterparty credit risk by requiring specified minimum credit standards and diversification of counterparties. The Company enters into master agreements with its bank derivative trading counterparties that allow netting of certain derivative positions in order to manage counterparty credit risk. As of May 31, 2012, all of the Company’s counterparty exposures are with financial institutions which have investment grade ratings. The Company has procedures to monitor counterparty credit risk for both current and future potential credit exposures. As of May 31, 2012, the fair value of derivative instruments in a net receivable position due from counterparties was $5.8 million.
 
5.    FAIR VALUE OF FINANCIAL INSTRUMENTS:

The Company calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available, the Company uses standard pricing models for various types of financial instruments (such as forwards, options, swaps, etc.) which take into account the present value of estimated future cash flows.


10


The carrying amount and estimated fair value of the Company’s financial instruments are summarized as follows:

 
May 31, 2012
 
February 29, 2012
  
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
(in millions)
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and cash investments
$
69.1

 
$
69.1

 
$
85.8

 
$
85.8

Accounts receivable
$
457.8

 
$
457.8

 
$
436.0

 
$
436.0

Available-for-sale debt securities
$
27.4

 
$
27.4

 
$
28.5

 
$
28.5

Foreign currency contracts
$
9.9

 
$
9.9

 
$
13.2

 
$
13.2

Interest rate swap contracts
$
2.3

 
$
2.3

 
$

 
$

Notes receivable
$

 
$

 
$
1.6

 
$
1.6

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Notes payable to banks
$
97.9

 
$
98.7

 
$
377.9

 
$
377.6

Accounts payable
$
117.2

 
$
117.2

 
$
130.5

 
$
130.5

Long-term debt, including current portion
$
3,323.1

 
$
3,580.1

 
$
2,751.6

 
$
3,007.9

Foreign currency contracts
$
10.9

 
$
10.9

 
$
6.4

 
$
6.4

Interest rate swap contracts
$
49.5

 
$
49.5

 
$
45.7

 
$
45.7


The following methods and assumptions are used to estimate the fair value of each class of financial instruments:

Cash and cash investments, accounts receivable and accounts payable: The carrying amounts approximate fair value due to the short maturity of these instruments (Level 1 fair value measurement).
Available-for-sale (“AFS”) debt securities: The fair value is estimated by discounting cash flows using market-based inputs (see “Fair value measurements” below) (Level 3 fair value measurement).
Foreign currency contracts: The fair value is estimated using market-based inputs, obtained from independent pricing services, into valuation models (see “Fair value measurements” below) (Level 2 fair value measurement).
Interest rate swap contracts: The fair value is estimated based on quoted market prices from respective counterparties (see “Fair value measurements” below) (Level 2 fair value measurement).
Notes receivable: These instruments are fixed interest rate bearing notes. The fair value is estimated by discounting cash flows using market-based inputs, including counterparty credit risk (Level 3 fair value measurement).
Notes payable to banks: The revolving credit facility under the Company's senior credit facility is a variable interest rate bearing note which includes a fixed margin which is adjustable based upon the Company's debt ratio (as defined in the Company's senior credit facility). The fair value of the revolving credit facility is estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions. The remaining instruments are variable interest rate bearing notes for which the carrying value approximates the fair value (Level 2 fair value measurement).
Long-term debt: The term loans under the Company's senior credit facility are variable interest rate bearing notes which include a fixed margin which is adjustable based upon the Company's debt ratio. The fair value of the term loans is estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions. The fair value of the remaining long-term debt, which is all fixed rate, is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).


11


Fair value measurements –
The FASB guidance on fair value measurements and disclosures defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and requires disclosures about fair value measurements. This guidance emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on assumptions that market participants would use in pricing an asset or liability. The fair value measurement guidance establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy is broken down into three levels: Level 1 inputs are quoted prices in active markets for identical assets or liabilities; Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset and liability, either directly or indirectly; and Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis.

 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
(in millions)
 
 
 
 
 
 
 
May 31, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$

 
$

 
$
27.4

 
$
27.4

Foreign currency contracts
$

 
$
9.9

 
$

 
$
9.9

Interest rate swap contracts
$

 
$
2.3

 
$

 
$
2.3

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
10.9

 
$

 
$
10.9

Interest rate swap contracts
$

 
$
49.5

 
$

 
$
49.5

 
 
 
 
 
 
 
 
February 29, 2012
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$

 
$

 
$
28.5

 
$
28.5

Foreign currency contracts
$

 
$
13.2

 
$

 
$
13.2

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
6.4

 
$

 
$
6.4

Interest rate swap contracts
$

 
$
45.7

 
$

 
$
45.7


The Company’s foreign currency contracts consist of foreign currency forward and option contracts which are valued using market-based inputs, obtained from independent pricing services, into valuation models. These valuation models require various inputs, including contractual terms, market foreign exchange prices, interest-rate yield curves and currency volatilities. Interest rate swap fair values are based on quotes from respective counterparties. Quotes are corroborated by the Company using discounted cash flow calculations based upon forward interest-rate yield curves, which are obtained from independent pricing services. AFS debt securities are valued using market-based inputs into discounted cash flow models.


12


The following table represents a reconciliation of the changes in fair value of the Company's financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3).

 
May 31,
2012
 
May 31,
2011
(in millions)
 
 
 
AFS Debt Securities
 
 
 
Balance as of March 1
$
28.5

 
$
40.8

Total net gains (losses):
 
 
 
Included in earnings (interest expense, net)
1.2

 
1.5

Included in other comprehensive income (net unrealized losses on AFS debt securities)
(2.3
)
 

Included in other comprehensive income (foreign currency translation adjustments)

 
1.6

Total net (losses) gains
(1.1
)
 
3.1

Settlements

 

Transfers in and/or out of Level 3

 

Balance as of the end of the period
$
27.4

 
$
43.9


The fair value of the Level 3 AFS debt securities is based upon market-based inputs into discounted cash flow models that use unobservable inputs. The significant unobservable inputs used in the fair value measurement of AFS debt securities are the Australian risk-free interest rate and the global high yield “B” rated option adjusted spread. Significant changes in the unobservable inputs could result in a significant change in the value of the AFS debt securities. As of May 31, 2012, the Australian risk-free interest rate was 3.75% and the global high yield “B” rated option adjusted spread was 7.63%. During the twelve month period ended May 31, 2012, the Australian risk-free interest rate ranged from 3.75% to 4.75%, and the global high yield “B” rated option adjusted spread ranged from 5.23% to 7.63%. If these unobservable inputs used in the fair value measurement at May 31, 2012, had been 100 basis points lower, the fair value of the Level 3 AFS debt securities would have been approximately $0.9 million higher. If these unobservable inputs used in the fair value measurement at May 31, 2012, had been 100 basis points higher, the fair value of the Level 3 AFS debt securities would have been approximately $0.8 million lower. These calculated amounts are based solely on changes in the unobservable inputs and do not take into account any other changes to the fair value measurement calculation.




13


6.    GOODWILL:

The changes in the carrying amount of goodwill are as follows:

 
Constellation
Wines
and Spirits
 
Crown
Imports
LLC
 
Consolidations
and
Eliminations
 
Consolidated
(in millions)
 
 
 
 
 
 
 
Balance, February 28, 2011
 
 
 
 
 
 
 
Goodwill
$
2,619.8

 
$
13.0

 
$
(13.0
)
 
$
2,619.8

Accumulated impairment losses

 

 

 

 
2,619.8

 
13.0

 
(13.0
)
 
2,619.8

Purchase accounting allocations
9.3

 

 

 
9.3

Foreign currency translation adjustments
3.8

 

 

 
3.8

Balance, February 29, 2012
 
 
 
 
 
 
 
Goodwill
2,632.9

 
13.0

 
(13.0
)
 
2,632.9

Accumulated impairment losses

 

 

 

 
2,632.9

 
13.0

 
(13.0
)
 
2,632.9

Foreign currency translation adjustments
(33.7
)
 

 

 
(33.7
)
Balance, May 31, 2012
 
 
 
 
 
 
 
Goodwill
2,599.2

 
13.0

 
(13.0
)
 
2,599.2

Accumulated impairment losses

 

 

 

 
$
2,599.2

 
$
13.0

 
$
(13.0
)
 
$
2,599.2


For the year ended February 29, 2012, purchase accounting allocations of $9.3 million in the Constellation Wines and Spirits segment (formerly known as the Constellation Wines North America segment) consist of purchase accounting allocations associated with the acquisition of Ruffino (see Note 8).

7.    INTANGIBLE ASSETS:

The major components of intangible assets are as follows:

 
May 31, 2012
 
February 29, 2012
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
(in millions)
 
 
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
81.7

 
$
57.2

 
$
82.8

 
$
59.1

Other
7.7

 
3.8

 
7.0

 
3.7

Total
$
89.4

 
61.0

 
$
89.8

 
62.8

 
 
 
 
 
 
 
 
Nonamortizable intangible assets:
 
 
 
 
 
 
 
Trademarks
 
 
788.4

 
 
 
798.0

Other
 
 
5.3

 
 
 
5.6

Total
 
 
793.7

 
 
 
803.6

Total intangible assets, net
 
 
$
854.7

 
 
 
$
866.4



14


The Company did not incur costs to renew or extend the term of acquired intangible assets during the three months ended May 31, 2012, and May 31, 2011. The difference between the gross carrying amount and net carrying amount for each item presented is attributable to accumulated amortization. Amortization expense for intangible assets was $1.8 million and $1.2 million for the three months ended May 31, 2012, and May 31, 2011, respectively. Estimated amortization expense for the remaining nine months of fiscal 2013 and for each of the five succeeding fiscal years and thereafter is as follows:

(in millions)
 
2013
$
5.3

2014
$
5.8

2015
$
5.0

2016
$
5.0

2017
$
4.7

2018
$
4.6

Thereafter
$
30.6

 
8.    INVESTMENTS:

Investments in equity method investees
Crown Imports:
Constellation Beers Ltd. (“Constellation Beers”), an indirect wholly-owned subsidiary of the Company, and Diblo, S.A. de C.V. (“Diblo”), an entity owned 76.75% by Grupo Modelo, S.A.B. de C.V. (“Modelo”) and 23.25% by Anheuser-Busch Companies, Inc., each have, directly or indirectly, equal interests in a joint venture, Crown Imports LLC (“Crown Imports”). Crown Imports has the exclusive right to import, market and sell primarily Modelo’s Mexican beer portfolio (the “Modelo Brands”) in the U.S. and Guam.

The Company accounts for its investment in Crown Imports under the equity method. Accordingly, the results of operations of Crown Imports are included in equity in earnings of equity method investees on the Company’s Consolidated Statements of Comprehensive (Loss) Income. As of May 31, 2012, and February 29, 2012, the Company’s investment in Crown Imports was $205.0 million and $176.4 million, respectively. As of May 31, 2012, the carrying amount of the investment is greater than the Company’s equity in the underlying assets of Crown Imports by $13.6 million due to the difference in the carrying amounts of the indefinite lived intangible assets contributed to Crown Imports by each party. As of February 29, 2012, the carrying amount of the investment is greater than the Company’s equity in the underlying assets of Crown Imports by $26.4 million due to the difference in the carrying amounts of the indefinite lived intangible assets contributed to Crown Imports by each party and timing of receipt of certain cash distributions from Crown Imports. The Company received $32.7 million and $59.4 million of cash distributions from Crown Imports for the three months ended May 31, 2012, and May 31, 2011, respectively, all of which represent distributions of earnings.

The following table presents summarized financial information for the Company’s Crown Imports equity method investment. The amounts shown represent 100% of this equity method investment’s results of operations.

 
For the Three Months Ended
 
May 31,
 
2012
 
2011
(in millions)
 
 
 
Net sales
$
724.1

 
$
677.5

Gross profit
$
211.2

 
$
199.6

Income from continuing operations
$
122.8

 
$
119.6

Net income
$
122.8

 
$
119.6



15


Ruffino:
Prior to the acquisition of Ruffino S.r.l. (“Ruffino”), the well-known Italian fine wine company, on October 5, 2011 (as further discussed below), the Company had a 49.9% interest in Ruffino. The Company did not have a controlling interest in Ruffino or exert any managerial control and the Company accounted for its investment in Ruffino under the equity method. Accordingly, the results of operations of Ruffino were included in equity in earnings of equity method investees on the Company's Consolidated Statements of Comprehensive (Loss) Income through October 5, 2011. In addition, prior to October 5, 2011, the Company's Constellation Wines and Spirits segment distributed Ruffino's products primarily in the U.S. Amounts purchased from Ruffino under this arrangement for the three months ended May 31, 2011, were not material. As of May 31, 2011, amounts payable to Ruffino were not material.

On October 5, 2011, the Company acquired the entire remaining 50.1% interest in Ruffino for €50.3 million ($68.6 million). As a result of this acquisition, the Company assumed indebtedness of Ruffino, net of cash acquired, of €54.2 million ($73.1 million). The purchase price was financed with revolver borrowings under the Company's then existing senior credit facility. In accordance with the acquisition method of accounting, the identifiable assets acquired and the liabilities assumed have been measured at their acquisition-date fair values. The acquisition of Ruffino was not material for purposes of supplemental disclosure per the FASB guidance on business combinations. The results of operations of the Ruffino business are reported in the Company’s Constellation Wines and Spirits segment and are included in the consolidated results of operations of the Company from the date of acquisition.

Investment in Accolade –
The Company retained a less than 20% interest in Accolade, its previously owned Australian and U.K. business divested in January 2011, which consists of equity securities and AFS debt securities. The investment in the equity securities is accounted for under the cost method. Accordingly, the Company recognizes earnings only upon the receipt of a dividend from Accolade. Dividends received in excess of net accumulated earnings since the date of investment are considered a return of investment and are recorded as a reduction of the cost of the investment. No dividends were received for the three months ended May 31, 2012, and May 31, 2011. The AFS debt securities are measured at fair value on a recurring basis with unrealized holding gains and losses, including foreign currency gains and losses, reported in AOCI until realized. Interest income is recognized based on the interest rate implicit in the AFS debt securities’ fair value and is reported in interest expense, net, on the Company’s Consolidated Statements of Comprehensive (Loss) Income. Interest income of $1.2 million and $1.5 million was recognized in connection with the AFS debt securities for the three months ended May 31, 2012, and May 31, 2011, respectively. The AFS debt securities contractually mature in January 2023 and can be settled, at the option of the issuer, in cash, equity shares of the issuer, or a combination thereof.

The Company is party to several agreements with Accolade, including distribution agreements under which the Company's Constellation Wines and Spirits segment distributes Accolade's products primarily in the U.S. and Canada, and Accolade distributes Constellation Wines and Spirits products primarily in Australia, the U.K., and Mainland Europe; certain bulk wine supply agreements; and certain bottling agreements. Amounts sold to Accolade or related to services performed for Accolade under these arrangements for the three months ended May 31, 2012, and May 31, 2011, were $24.5 million and $27.0 million, respectively. Amounts purchased from Accolade or related to services performed by Accolade under these arrangements for the three months ended May 31, 2012, and May 31, 2011, were $4.0 million and $3.3 million, respectively. As of May 31, 2012, and February 29, 2012, amounts receivable from or payable to Accolade under these arrangements were not material.

16


 
9.    BORROWINGS:

Borrowings consist of the following:

 
May 31, 2012
 
February 29, 2012
 
Current
 
Long-term
 
Total
 
Total
(in millions)
 
 
 
 
 
 
 
Notes Payable to Banks
 
 
 
 
 
 
 
Senior Credit Facility –
 
 
 
 
 
 
 
Revolving Credit Loans
$
26.2

 
$

 
$
26.2

 
$
298.0

Other
71.7

 

 
71.7

 
79.9

 
$
97.9

 
$

 
$
97.9

 
$
377.9

 
 
 
 
 
 
 
 
Long-term Debt
 
 
 
 
 
 
 
Senior Credit Facility – Term Loans
$
22.5

 
$
777.5

 
$
800.0

 
$
826.6

Senior Notes

 
2,495.0

 
2,495.0

 
1,894.8

Other Long-term Debt
15.2

 
12.9

 
28.1

 
30.2

 
$
37.7

 
$
3,285.4

 
$
3,323.1

 
$
2,751.6


Senior credit facility –
On May 3, 2012 (the “Closing Date”), the Company, Bank of America, N.A., as administrative agent, and certain other lenders (all such parties other than the Company are collectively referred to as the “Lenders”) entered into a new Credit Agreement (the “2012 Credit Agreement”). The 2012 Credit Agreement provides for aggregate credit facilities of $1,650.0 million, consisting of a $550.0 million term loan facility maturing on May 3, 2017 (the “Term A Facility”), a $250.0 million term loan facility maturing on May 3, 2019 (the “Term A-1 Facility”), and an $850.0 million revolving credit facility (including a sub-facility for letters of credit of up to $200.0 million) which terminates on May 3, 2017 (the “Revolving Credit Facility”). The 2012 Credit Agreement also permits the Company from time to time after the Closing Date to elect to increase the Lenders' revolving credit commitments or add one or more tranches of additional term loans, subject to the willingness of existing or new lenders to fund such increase or term loans and other customary conditions. The minimum aggregate principal amount of such incremental revolving credit commitment increases or additional term loans may be no less than $25 million and the aggregate outstanding principal amount of all such incremental revolving credit commitment increases and additional term loans, other than term loans the proceeds of which are applied to repay existing term loans, may be no more than $750 million. A portion of the proceeds of the 2012 Credit Agreement were used to repay the outstanding obligations under the Company's then existing senior credit facility. The Company uses its revolving credit facility under the 2012 Credit Agreement for general corporate purposes.

The rate of interest on borrowings under the 2012 Credit Agreement is a function of LIBOR plus a margin, the federal funds rate plus a margin, or the prime rate plus a margin. The margin is adjustable based upon the Company's debt ratio (as defined in the 2012 Credit Agreement). As of May 31, 2012, the LIBOR margin for the Term A Facility and the Revolving Credit Facility is 1.75%; and the LIBOR margin for the Term A-1 Facility is 2.0%.

The obligations under the 2012 Credit Agreement are guaranteed by certain of its U.S. subsidiaries. These obligations are also secured by a pledge of (i)  100% of the ownership interests in certain of the Company's U.S. subsidiaries and (ii)  55-65% of certain interests of certain of the Company's foreign subsidiaries.


17


The Company and its subsidiaries are also subject to covenants that are contained in the 2012 Credit Agreement, including those restricting the incurrence of additional indebtedness (including guarantees of indebtedness), additional liens, mergers and consolidations, the payment of dividends, the making of certain investments, prepayments of certain debt, transactions with affiliates, agreements that restrict the Company's non-guarantor subsidiaries from paying dividends, and dispositions of property, 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 debt coverage ratio.

As of May 31, 2012, under the 2012 Credit Agreement, the Company had outstanding Term A Facility of $550.0 million bearing an interest rate of 2.0%, Term A-1 Facility of $250.0 million bearing an interest rate of 2.2%, Revolving Credit Facility of $26.2 million bearing an interest rate of 4.0%, outstanding letters of credit of $13.4 million, and $810.4 million in revolving loans available to be drawn.

As of May 31, 2012, the required principal repayments of the Term A Facility and the Term A-1 Facility for the remaining nine months of fiscal 2013 and for each of the five succeeding fiscal years and thereafter are as follows:

 
Term A
Facility
 
Term A-1
Facility
 
Total
(in millions)
 
 
 
 
 
2013
$
13.7

 
$
1.3

 
$
15.0

2014
27.5

 
2.5

 
30.0

2015
41.3

 
2.5

 
43.8

2016
55.0

 
2.5

 
57.5

2017
55.0

 
2.5

 
57.5

2018
357.5

 
2.5

 
360.0

Thereafter

 
236.2

 
236.2

 
$
550.0

 
$
250.0

 
$
800.0


In April 2012, the Company transitioned its interest rate swap agreements to a one-month LIBOR base rate versus the then existing three-month LIBOR base rate. Accordingly, the Company entered into new interest rate swap agreements which were designated as cash flow hedges of $500.0 million of the Company's floating LIBOR rate debt. In addition, the then existing interest rate swap agreements were dedesignated by the Company and the Company entered into additional undesignated interest rate swap agreements for $500.0 million to offset the prospective impact of the newly undesignated interest rate swap agreements. The unrealized losses in AOCI related to the dedesignated interest rate swap agreements are being reclassified from AOCI ratably into earnings in the same period in which the original hedged item is recorded in the Consolidated Statements of Comprehensive (Loss) Income. Accordingly, the Company has fixed its interest rates on $500.0 million of the Company's floating LIBOR rate debt at an average rate of 2.8% (exclusive of borrowing margins) through September 1, 2016. For the three months ended May 31, 2012, the Company reclassified net losses of $2.1 million, net of income tax effect, from AOCI to interest expense, net on the Company's Consolidated Statements of Comprehensive (Loss) Income. The Company did not reclassify any amount from AOCI to interest expense, net on its Consolidated Statements of Comprehensive (Loss) Income for the three months ended May 31, 2011.

18



Senior notes -
On April 17, 2012, the Company issued $600.0 million aggregate principal amount of 6% Senior Notes due May 2022 (the “April 2012 Senior Notes”). The net proceeds of the offering ($591.4 million) were used for general corporate purposes, including, among others, reducing the outstanding indebtedness under the Company's prior senior credit facility and common stock share repurchases under the 2013 Authorization (as defined in Note 11). Interest on the April 2012 Senior Notes is payable semiannually on May 1 and November 1 of each year, beginning November 1, 2012. The April 2012 Senior Notes are redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to 100% of the outstanding principal amount plus a make whole payment based on the present value of the future payments at the adjusted Treasury Rate plus 50 basis points. The senior notes are senior unsecured obligations and rank equally in right of payment to all existing and future senior unsecured indebtedness of the Company. Certain of the Company's significant U.S. operating subsidiaries guarantee the senior notes, on a senior unsecured basis. As of May 31, 2012, the Company had outstanding $600.0 million aggregate principal amount of April 2012 Senior Notes.

Debt payments -
Principal payments required under long-term debt obligations (excluding unamortized discount of $5.0 million) for the remaining nine months of fiscal 2013 and for each of the five succeeding fiscal years and thereafter are as follows:

(in millions)
 
2013
$
28.2

2014
36.4

2015
550.0

2016
59.6

2017
757.6

2018
1,060.0

Thereafter
836.3

 
$
3,328.1

 

10.    COMMITMENTS AND CONTINGENCIES:

Indemnification liabilities
In connection with the Company's January 2011 divestiture of 80.1% of its Australian and U.K. business (the “CWAE Divestiture”), the Company indemnified respective parties against certain liabilities that may arise related to certain contracts with certain investees of Accolade, a certain facility in the U.K. and certain income tax matters. As of May 31, 2012, and February 29, 2012, the carrying amount of these indemnification liabilities was $22.4 million. If the indemnified party were to incur a liability, pursuant to the terms of the indemnification, the Company would be required to reimburse the indemnified party. As of May 31, 2012, the Company estimates that these indemnifications could require the Company to make potential future payments of up to $303.5 million under these indemnifications with $282.1 million of this amount able to be recovered by the Company from third parties under recourse provisions. The Company does not expect to be required to make material payments under the indemnifications and the Company believes that the likelihood is remote that the indemnifications could have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.


19


In addition, prior to January 1, 2012, Constellation Beers provided certain administrative services to Crown Imports. On January 1, 2012, in accordance with the terms of the original joint venture agreement, such administrative services were discontinued. In connection with the discontinuation of the Company's administrative services agreement with Crown Imports, Crown Imports entered into a contract with a third party for the lease of certain office facilities. The Company is jointly and severally liable with Modelo to indemnify the third party for lease payments over the term of the contract which extends through June 2021. The fair value of the liability recorded at January 1, 2012, was not material. As of May 31, 2012, if the indemnified party were to incur a liability, pursuant to the terms of the indemnification, the Company would be required to reimburse the indemnified party. As of May 31, 2012, this indemnification could require the Company to make potential future payments of up to $39.2 million with none of this amount able to be recovered by the Company from third parties under recourse provisions. The Company does not expect to be required to make material payments under this indemnification and the Company believes that the likelihood is remote that this indemnification could have a material adverse effect on the Company's financial position, results of operations, cash flows or liquidity. As of May 31, 2012, and February 29, 2012, the carrying amount of this indemnification liability was not material.

11.    STOCKHOLDERS’ EQUITY:

In April 2011, the Company’s Board of Directors authorized the repurchase of up to $500.0 million of the Company’s Class A Common Stock and Class B Convertible Common Stock (the “2012 Authorization”). During the year ended February 29, 2012, the Company repurchased 21,234,266 shares of Class A Common Stock pursuant to the 2012 Authorization at an aggregate cost of $413.7 million, or an average cost of $19.48 per share, through open market transactions. During the three months ended May 31, 2012, the Company utilized the remaining $86.3 million outstanding under the 2012 Authorization to repurchase 3,970,481 shares of Class A Common Stock at an average cost of $21.74 per share, through open market transactions. In total, the Company has repurchased 25,204,747 shares of Class A Common Stock pursuant to the 2012 Authorization at an aggregate cost of $500.0 million, or an average cost of $19.84 per share. The Company used proceeds from revolver borrowings under its then existing senior credit facility and cash generated from operations to pay the purchase price for the repurchased shares. The repurchased shares have become treasury shares.

In April 2012, the Company's Board of Directors authorized the repurchase of up to $1.0 billion of the Company's Class A Common Stock and Class B Convertible Common Stock (the “2013 Authorization”). The Board of Directors did not specify a date upon which the 2013 Authorization would expire. Share repurchases under the 2013 Authorization may be accomplished at management's discretion from time to time based on market conditions, the Company's cash and debt position, and other factors as determined by management. Shares may be repurchased through open market or privately negotiated transactions. The Company may fund share repurchases with cash generated from operations, proceeds from borrowings under its senior credit facility or proceeds from the April 2012 Senior Notes. Any repurchased shares will become treasury shares.

During the three months ended May 31, 2012, the Company repurchased 14,023,985 shares of Class A Common Stock pursuant to the 2013 Authorization at an aggregate cost of $296.7 million, or an average cost of $21.15 per share, through open market transactions. The Company used proceeds from the April 2012 Senior Notes, revolver borrowings under both the 2012 Credit Agreement and its prior senior credit facility, and cash generated from operations to pay the purchase price for the repurchased shares. The repurchased shares have become treasury shares.

20




12.    EARNINGS PER COMMON SHARE:

Earnings per common share – basic excludes the effect of common stock equivalents and is computed using the two-class computation method. Earnings per common share – diluted for Class A Common Stock reflects the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Earnings per common share – diluted for Class A Common Stock has been computed using the more dilutive of the if-converted or two-class computation method. Using the if-converted method, earnings per common share – diluted for Class A Common Stock assumes the exercise of stock options using the treasury stock method and the conversion of Class B Convertible Common Stock. Using the two-class computation method, earnings per common share – diluted for Class A Common Stock assumes the exercise of stock options using the treasury stock method and no conversion of Class B Convertible Common Stock. For the three months ended May 31, 2012, and May 31, 2011, earnings per common share – diluted for Class A Common Stock has been calculated using the if-converted method. For the three months ended May 31, 2012, and May 31, 2011, earnings per common share – diluted for Class B Convertible Common Stock is presented without assuming conversion into Class A Common Stock and is computed using the two-class computation method.

The computation of basic and diluted earnings per common share is as follows:

 
For the Three Months Ended
 
May 31,
 
2012
 
2011
(in millions, except per share data)
 
 
 
Income available to common stockholders
$
72.0

 
$
74.5

 
 
 
 
Weighted average common shares outstanding – basic:
 
 
 
Class A Common Stock
162.259

 
187.046

Class B Convertible Common Stock
23.554

 
23.604

 
 
 
 
Weighted average common shares outstanding – diluted:
 
 
 
Class A Common Stock
162.259

 
187.046

Class B Convertible Common Stock
23.554

 
23.604

Stock-based awards, primarily stock options
4.448

 
4.264

Weighted average common shares outstanding – diluted
190.261

 
214.914

 
 
 
 
Earnings per common share – basic:
 
 
 
Class A Common Stock
$
0.39

 
$
0.36

Class B Convertible Common Stock
$
0.36

 
$
0.32

Earnings per common share – diluted:
 
 
 
Class A Common Stock
$
0.38

 
$
0.35

Class B Convertible Common Stock
$
0.35

 
$
0.32


For the three months ended May 31, 2012, and May 31, 2011, stock-based awards, primarily stock options, which could result in the issuance of 9.8 million and 8.7 million shares, respectively, of Class A Common Stock were outstanding, but were not included in the computation of earnings per common share – diluted for Class A Common Stock because the effect of including such awards would have been antidilutive.



21


13.    COMPREHENSIVE (LOSS) INCOME:

Comprehensive (loss) income consists of net income, foreign currency translation adjustments, net unrealized losses on derivative instruments, net unrealized losses on AFS debt securities and pension/postretirement adjustments. The reconciliation of net income to comprehensive (loss) income is as follows:

 
Before Tax
Amount
 
Tax (Expense)
Benefit
 
Net of Tax
Amount
(in millions)
 
 
 
 
 
For the Three Months Ended May 31, 2012
 
 
 
 
 
Net income
 
 
 
 
$
72.0

Other comprehensive (loss) income:
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
Net losses
$
(83.1
)
 
$
(0.2
)
 
(83.3
)
Reclassification adjustments

 

 

Net loss recognized in other comprehensive income
(83.1
)
 
(0.2
)
 
(83.3
)
Unrealized loss on cash flow hedges:
 
 
 
 
 
Net derivative losses
(8.5
)
 
2.4

 
(6.1
)
Reclassification adjustments
1.0

 
(0.7
)
 
0.3

Net loss recognized in other comprehensive income
(7.5
)
 
1.7

 
(5.8
)
Unrealized loss on AFS debt securities:
 
 
 
 
 
Net AFS debt securities losses
(2.3
)
 

 
(2.3
)
Reclassification adjustments

 

 

Net loss recognized in other comprehensive income
(2.3
)
 

 
(2.3
)
Pension/postretirement adjustments:
 
 
 
 
 
Net actuarial gains
0.8

 
(0.2
)
 
0.6

Reclassification adjustments
0.2

 

 
0.2

Net gain recognized in other comprehensive income
1.0

 
(0.2
)
 
0.8

Other comprehensive loss
$
(91.9
)
 
$
1.3

 
(90.6
)
Total comprehensive loss
 
 
 
 
$
(18.6
)
 
 
 
 
 
 
For the Three Months Ended May 31, 2011
 
 
 
 
 
Net income
 
 
 
 
$
74.5

Other comprehensive income (loss):
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
Net gains
$
39.3

 
$
(0.8
)
 
38.5

Reclassification adjustments

 

 

Net gain recognized in other comprehensive income
39.3

 
(0.8
)
 
38.5

Unrealized loss on cash flow hedges:
 
 
 
 
 
Net derivative losses
(5.4
)
 
3.4

 
(2.0
)
Reclassification adjustments
(2.0
)
 
0.4

 
(1.6
)
Net loss recognized in other comprehensive income
(7.4
)
 
3.8

 
(3.6
)
Other comprehensive income
$
31.9

 
$
3.0

 
34.9

Total comprehensive income
 
 
 
 
$
109.4



22


Accumulated other comprehensive income (“AOCI”), net of income tax effect, includes the following components:
 
 
Foreign
Currency
Translation
Adjustments
 
Net
Unrealized
Losses on
Derivatives
 
Net
Unrealized
Gains (Losses)
on AFS Debt
Securities
 
Pension/
Postretirement
Adjustments
 
Accumulated
Other
Comprehensive
Income
(in millions)
 
 
 
 
 
 
 
 
 
Balance, February 29, 2012
$
207.8

 
$
(20.5
)
 
$
1.0

 
$
(14.6
)
 
$
173.7

Current period change
(83.3
)
 
(5.8
)
 
(2.3
)
 
0.8

 
(90.6
)
Balance, May 31, 2012
$
124.5

 
$
(26.3
)
 
$
(1.3
)
 
$
(13.8
)
 
$
83.1


14.    RESTRUCTURING CHARGES:

Restructuring charges consist of employee termination benefit costs, contract termination costs and other associated costs. Employee termination benefit costs are accounted for under the FASB guidance for compensation – nonretirement postemployment benefits, as the Company has had several restructuring programs which have provided employee termination benefits in the past. The Company includes employee severance, related payroll benefit costs (such as costs to provide continuing health insurance) and outplacement services as employee termination benefit costs. Contract termination costs, and other associated costs including, but not limited to, facility consolidation and relocation costs, are accounted for under the FASB guidance for exit or disposal cost obligations. Contract termination costs are costs to terminate a contract that is not a capital lease, including costs to terminate the contract before the end of its term or costs that will continue to be incurred under the contract for its remaining term without economic benefit to the Company. The Company includes costs to terminate certain operating leases for buildings, computer and IT equipment, and costs to terminate contracts, including distributor contracts and contracts for long-term purchase commitments, as contract termination costs. Other associated costs include, but are not limited to, costs to consolidate or close facilities and relocate employees. The Company includes employee relocation costs and equipment relocation costs as other associated costs.

The Company’s significant restructuring plan with current activity is as follows:

Fiscal 2012 Initiative –
In May 2011, the Company committed to a plan (announced in June 2011) to streamline operations, gain efficiencies and reduce its cost structure following the CWAE Divestiture (the “Fiscal 2012 Initiative”). The Fiscal 2012 Initiative includes an approximate two to three percent reduction in the Company’s then existing global workforce. This initiative is part of the Company’s ongoing efforts to maximize asset utilization, reduce costs and improve long-term return on invested capital throughout the Company’s operations. The Company expects all costs and related cash expenditures associated with the Fiscal 2012 Initiative to be substantially complete by February 28, 2013.


23


Details of this plan for which the Company expects to incur additional costs are presented separately in the following table. Plans for which exit activities were substantially complete prior to March 1, 2012, are reported below under “Other Plans.”

 
Fiscal
2012
Initiative
 
Other
Plans
 
Total
(in millions)
 
 
 
 
 
Restructuring liability, February 29, 2012
$
8.0

 
$
6.8

 
$
14.8

 
 
 
 
 
 
Restructuring charges:
 
 
 
 
 
Employee termination benefit costs
0.4

 

 
0.4

Contract termination costs

 

 

Facility consolidation/relocation costs

 
0.1

 
0.1

Restructuring charges, May 31, 2012
0.4

 
0.1

 
0.5

 
 
 
 
 
 
Cash expenditures
(3.9
)
 
(1.0
)
 
(4.9
)
 
 
 
 
 
 
Foreign currency translation and other noncash adjustments

 
(0.1
)
 
(0.1
)
Restructuring liability, May 31, 2012
$
4.5

 
$
5.8

 
$
10.3



24


The following table presents a summary of restructuring charges and other costs incurred, including a summary of amounts incurred by each of the Company’s reportable segments, in connection with the Company’s restructuring plans noted above.

 
Fiscal
2012
Initiative
 
Other
Plans
 
Total
(in millions)
 
 
 
 
 
For the Three Months Ended May 31, 2012
 
 
 
 
 
Restructuring charges
$
0.4

 
$
0.1

 
$
0.5

Other costs:
 
 
 
 
 
Accelerated depreciation (cost of product sold)

 

 

Other costs (selling, general and administrative expenses)
2.7

 

 
2.7

Total other costs
2.7

 

 
2.7

Total costs
$
3.1

 
$
0.1

 
$
3.2

 
 
 
 
 
 
Total Costs by Reportable Segment:
 
 
 
 
 
Constellation Wines and Spirits
 
 
 
 
 
Restructuring charges
$
0.6

 
$
0.1

 
$
0.7

Other costs
1.6

 

 
1.6

Total Constellation Wines and Spirits
$
2.2

 
$
0.1

 
$
2.3

 
 
 
 
 
 
Corporate Operations and Other
 
 
 
 
 
Restructuring charges
$
(0.2
)
 
$

 
$
(0.2
)
Other costs
1.1

 

 
1.1

Total Corporate Operations and Other
$
0.9

 
$

 
$
0.9

 
 
 
 
 
 
For the Three Months Ended May 31, 2011
 
 
 
 
 
Restructuring charges
$
11.0

 
$
0.1

 
$
11.1

Other costs:
 
 
 
 
 
Accelerated depreciation (cost of product sold)

 
0.2

 
0.2

Other costs (selling, general and administrative expenses)
1.0

 
0.1

 
1.1

Total other costs
1.0

 
0.3

 
1.3

Total costs
$
12.0

 
$
0.4

 
$
12.4

 
 
 
 
 
 
Total Costs by Reportable Segment:
 
 
 
 
 
Constellation Wines and Spirits
 
 
 
 
 
Restructuring charges
$
5.5

 
$
0.1

 
$
5.6

Other costs
0.1

 
0.3

 
0.4

Total Constellation Wines and Spirits
$
5.6

 
$
0.4

 
$
6.0

 
 
 
 
 
 
Corporate Operations and Other
 
 
 
 
 
Restructuring charges
$
5.5

 
$

 
$
5.5

Other costs
0.9

 

 
0.9

Total Corporate Operations and Other
$
6.4

 
$

 
$
6.4



25


A summary of restructuring charges and other costs incurred since inception for the Company's significant restructuring plan with current activity, as well as total expected costs for such plan, is presented in the following table.

 
Fiscal
2012
Initiative
(in millions)
 
Costs Incurred to Date
 
Restructuring charges:
 
Employee termination benefit costs
$
12.6

Contract termination costs

Facility consolidation/relocation costs

Total restructuring charges
12.6

Other costs:
 
Accelerated depreciation (cost of product sold)

Other costs (selling, general and administrative expenses)
10.0

Total other costs
10.0

Total costs incurred to date
$
22.6

 
 
Total Costs Incurred to Date by Reportable Segment:
 
Constellation Wines and Spirits
 
Restructuring charges
$
8.5

Other costs
6.8

Total Constellation Wines and Spirits
$
15.3

 
 
Corporate Operations and Other
 
Restructuring charges
$
4.1

Other costs
3.2

Total Corporate Operations and Other
$
7.3

 
 
Total Expected Costs
 
Restructuring charges:
 
Employee termination benefit costs
$
13.3

Contract termination costs
0.4

Facility consolidation/relocation costs

Total restructuring charges
13.7

Other costs:
 
Accelerated depreciation (cost of product sold)

Other costs (selling, general and administrative expenses)
16.2

Total other costs
16.2

Total expected costs
$
29.9

 
 

26


 
Fiscal
2012
Initiative
(in millions)
 
Total Expected Costs by Reportable Segment:
 
Constellation Wines and Spirits
 
Restructuring charges
$
9.0

Other costs
9.9

Total Constellation Wines and Spirits
$
18.9

 
 
Corporate Operations and Other
 
Restructuring charges
$
4.7

Other costs
6.3

Total Corporate Operations and Other
$
11.0




15.    CONDENSED CONSOLIDATING FINANCIAL INFORMATION:

The following information sets forth the condensed consolidating balance sheets as of May 31, 2012, and February 29, 2012, the condensed consolidating statements of comprehensive (loss) income for the three months ended May 31, 2012, and May 31, 2011, and the condensed consolidating statements of cash flows for the three months ended May 31, 2012, and May 31, 2011, for the Company, the parent company, the combined subsidiaries of the Company which guarantee the Company’s senior notes (“Subsidiary Guarantors”) and the combined subsidiaries of the Company which are not Subsidiary Guarantors (primarily foreign subsidiaries) (“Subsidiary Nonguarantors”). The Subsidiary Guarantors are wholly-owned and the guarantees are joint and several obligations of each of the Subsidiary Guarantors. The guarantees are full and unconditional, as those terms are used in Rule 3-10 of Regulation S-X, except that a Subsidiary Guarantor can be automatically released and relieved of its obligations under certain customary circumstances contained in the indentures governing the Company's senior notes. These customary circumstances include, so long as other applicable provisions of the indentures are adhered to, the termination or release of a Subsidiary Guarantor’s guarantee of other indebtedness or upon the legal defeasance or covenant defeasance or satisfaction and discharge of the Company’s senior notes. Separate financial statements for the Subsidiary Guarantors of the Company are not presented because the Company has determined that such financial statements would not be material to investors. The accounting policies of the parent company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2012, and include the recently adopted accounting guidance described in Note 2 herein. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.


27


 
Parent
Company
 
Subsidiary
Guarantors
 
Subsidiary
Nonguarantors
 
Eliminations
 
Consolidated
(in millions)
 
 
 
 
 
 
 
 
 
Condensed Consolidating Balance Sheet at May 31, 2012
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash investments
$
0.2

 
$
2.4

 
$
66.5

 
$

 
$
69.1

Accounts receivable, net
291.7

 
87.5

 
78.6

 

 
457.8

Inventories
150.2

 
864.6

 
318.5

 
(8.1
)
 
1,325.2

Prepaid expenses and other
22.2

 
113.4

 
398.1

 
(414.4
)
 
119.3

Intercompany (payable) receivable
(1,122.4
)
 
997.7

 
124.7

 

 

Total current assets
(658.1
)
 
2,065.6

 
986.4

 
(422.5
)
 
1,971.4

Property, plant and equipment, net
60.9

 
810.5

 
347.7

 

 
1,219.1

Investments in subsidiaries
6,755.2

 
164.4

 

 
(6,919.6
)
 

Goodwill

 
1,987.4

 
611.8

 

 
2,599.2

Intangible assets, net

 
672.5

 
182.2

 

 
854.7

Other assets, net
39.2

 
290.7

 
56.3

 
(22.4
)
 
363.8

Total assets
$
6,197.2

 
$
5,991.1

 
$
2,184.4

 
$
(7,364.5
)