10-Q 1 stz831201310q.htm 10-Q STZ 8.31.2013 10Q
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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 August 31, 2013
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
ý
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
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 September 30, 2013, is set forth below:
Class
 
Number of Shares Outstanding
Class A Common Stock, par value $.01 per share
 
165,875,270
Class B Common Stock, par value $.01 per share
 
23,460,435
Class 1 Common Stock, par value $.01 per share
 
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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.”


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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)
 
August 31, 2013
 
February 28, 2013
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash investments
$
116.8

 
$
331.5

Accounts receivable, net
655.9

 
471.9

Inventories
1,643.0

 
1,480.9

Prepaid expenses and other
254.4

 
186.9

Total current assets
2,670.1

 
2,471.2

PROPERTY, PLANT AND EQUIPMENT, net
1,870.4

 
1,229.0

GOODWILL
6,139.2

 
2,722.3

INTANGIBLE ASSETS, net
3,243.9

 
871.4

OTHER ASSETS, net
199.2

 
344.2

Total assets
$
14,122.8

 
$
7,638.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Notes payable to banks
$
272.1

 
$

Current maturities of long-term debt
115.7

 
27.6

Accounts payable
341.2

 
209.0

Accrued excise taxes
27.6

 
18.9

Other accrued expenses and liabilities
1,054.0

 
422.4

Total current liabilities
1,810.6

 
677.9

LONG-TERM DEBT, less current maturities
6,912.7

 
3,277.8

DEFERRED INCOME TAXES
696.8

 
599.6

OTHER LIABILITIES
192.3

 
222.5

COMMITMENTS AND CONTINGENCIES (NOTE 15)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Class A Common Stock, $.01 par value- Authorized, 322,000,000 shares; Issued, 246,034,797 shares at August 31, 2013, and 242,064,514 shares at February 28, 2013
2.5

 
2.4

Class B Convertible Common Stock, $.01 par value- Authorized, 30,000,000 shares; Issued, 28,470,735 shares at August 31, 2013, and 28,517,035 shares at February 28, 2013
0.3

 
0.3

Additional paid-in capital
2,037.0

 
1,907.1

Retained earnings
4,070.0

 
2,495.1

Accumulated other comprehensive income
64.6

 
132.1

 
6,174.4

 
4,537.0

Less: Treasury stock –
 
 
 
Class A Common Stock, 80,296,108 shares at August 31, 2013, and 80,799,298 shares at February 28, 2013, at cost
(1,661.8
)
 
(1,674.5
)
Class B Convertible Common Stock, 5,005,800 shares at August 31, 2013, and February 28, 2013, at cost
(2.2
)
 
(2.2
)
 
(1,664.0
)
 
(1,676.7
)
Total stockholders’ equity
4,510.4

 
2,860.3

Total liabilities and stockholders’ equity
$
14,122.8

 
$
7,638.1


The accompanying notes are an integral part of these statements.

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, except per share data)
(unaudited)
 
For the Six Months
Ended August 31,
 
For the Three Months
Ended August 31,
 
2013
 
2012
 
2013
 
2012
SALES
$
2,379.5

 
$
1,523.0

 
$
1,613.3

 
$
797.7

Less – excise taxes
(246.3
)
 
(189.7
)
 
(153.5
)
 
(99.2
)
Net sales
2,133.2

 
1,333.3

 
1,459.8

 
698.5

COST OF PRODUCT SOLD
(1,300.1
)
 
(797.6
)
 
(882.8
)
 
(413.4
)
Gross profit
833.1

 
535.7

 
577.0

 
285.1

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(429.7
)
 
(299.0
)
 
(244.1
)
 
(154.5
)
IMPAIRMENT OF GOODWILL AND INTANGIBLE ASSETS
(300.9
)
 

 
(300.9
)
 

GAIN ON REMEASUREMENT TO FAIR VALUE OF EQUITY METHOD INVESTMENT
1,642.0

 

 
1,642.0

 

Operating income
1,744.5

 
236.7

 
1,674.0

 
130.6

EQUITY IN EARNINGS OF EQUITY METHOD INVESTEES
70.3

 
131.1

 
3.7

 
70.5

INTEREST EXPENSE, net
(145.1
)
 
(105.3
)
 
(90.3
)
 
(54.6
)
LOSS ON WRITE-OFF OF FINANCING COSTS

 
(2.8
)
 

 

Income before income taxes
1,669.7

 
259.7

 
1,587.4

 
146.5

PROVISION FOR INCOME TAXES
(94.8
)
 
(63.1
)
 
(65.4
)
 
(21.9
)
NET INCOME
$
1,574.9

 
$
196.6

 
$
1,522.0

 
$
124.6

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
$
1,507.4

 
$
180.6

 
$
1,478.0

 
$
199.2

 
 
 
 
 
 
 
 
SHARE DATA:
 
 
 
 
 
 
 
Earnings per common share:
 
 
 
 
 
 
 
Basic – Class A Common Stock
$
8.53

 
$
1.09

 
$
8.18

 
$
0.71

Basic – Class B Convertible Common Stock
$
7.75

 
$
0.99

 
$
7.43

 
$
0.64

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
$
8.03

 
$
1.05

 
$
7.74

 
$
0.67

Diluted – Class B Convertible Common Stock
$
7.38

 
$
0.96

 
$
7.11

 
$
0.62

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic – Class A Common Stock
163.277

 
158.527

 
164.825

 
154.794

Basic – Class B Convertible Common Stock
23.485

 
23.545

 
23.472

 
23.536

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
196.056

 
187.458

 
196.767

 
184.640

Diluted – Class B Convertible Common Stock
23.485

 
23.545

 
23.472

 
23.536


The accompanying notes are an integral part of these statements.

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Six Months
Ended August 31,
 
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
1,574.9

 
$
196.6

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on remeasurement to fair value of equity method investment
(1,642.0
)
 

Equity in earnings of equity method investees, net of distributed earnings
(39.1
)
 
(0.6
)
Impairment of goodwill and intangible assets
300.9

 

Depreciation of property, plant and equipment
64.1

 
52.4

Stock-based compensation expense
25.6

 
21.4

Deferred tax provision
9.6

 
31.9

Amortization of intangible assets
7.1

 
3.6

Amortization of deferred financing costs
5.0

 
1.2

Loss (gain) on disposal of long-lived assets, net
0.1

 
(0.5
)
Loss on write-off of financing costs

 
2.8

Change in operating assets and liabilities, net of effects from purchase of business:
 
 
 
Accounts receivable, net
8.4

 
(51.1
)
Inventories
67.4

 
37.2

Prepaid expenses and other current assets
17.6

 
(1.0
)
Accounts payable
10.4

 
52.5

Accrued excise taxes
(5.6
)
 
2.9

Other accrued expenses and liabilities
59.8

 
3.7

Other, net
24.8

 
15.5

Total adjustments
(1,085.9
)
 
171.9

Net cash provided by operating activities
489.0

 
368.5

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchase of business, net of cash acquired
(4,672.9
)
 
(159.7
)
Purchases of property, plant and equipment
(49.2
)
 
(35.6
)
Proceeds from sales of assets
1.6

 
7.9

Proceeds from notes receivable

 
4.6

Other investing activities
1.1

 
(1.2
)
Net cash used in investing activities
(4,719.4
)
 
(184.0
)
 
 
 
 

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Six Months
Ended August 31,
 
2013
 
2012
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Proceeds from issuance of long-term debt
3,725.0

 
2,050.0

Net proceeds from (repayment of) notes payable
272.1

 
(358.3
)
Proceeds from exercises of employee stock options
77.5

 
110.5

Excess tax benefits from stock-based payment awards
53.8

 
11.4

Proceeds from employee stock purchases
2.5

 
2.1

Payment of financing costs of long-term debt
(82.2
)
 
(34.1
)
Payment of minimum tax withholdings on stock-based payment awards
(18.0
)
 
(0.5
)
Principal payments of long-term debt
(9.9
)
 
(838.0
)
Payment of restricted cash upon issuance of long-term debt

 
(650.0
)
Purchases of treasury stock

 
(383.0
)
Net cash provided by (used in) financing activities
4,020.8

 
(89.9
)
 
 
 
 
Effect of exchange rate changes on cash and cash investments
(5.1
)
 
(1.9
)
 
 
 
 
NET (DECREASE) INCREASE IN CASH AND CASH INVESTMENTS
(214.7
)
 
92.7

CASH AND CASH INVESTMENTS, beginning of period
331.5

 
85.8

CASH AND CASH INVESTMENTS, end of period
$
116.8

 
$
178.5

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Purchase of business
 
 
 
Fair value of assets acquired, including cash acquired
$
7,465.7

 
$
159.7

Liabilities assumed
(287.5
)
 

Net assets acquired
7,178.2

 
159.7

Less – fair value of preexisting 50% equity interest
(1,845.0
)
 

Less – purchase price and working capital adjustments not yet paid
(553.5
)
 

Less – cash acquired
(106.8
)
 

Net cash paid for purchase of business
$
4,672.9

 
$
159.7

 
 
 
 
Property, plant and equipment acquired under financing arrangements
$
6.7

 
$
8.3


The accompanying notes are an integral part of these statements.

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 2013
(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 28, 2013. Results of operations for interim periods are not necessarily indicative of annual results. During the three months ended August 31, 2013, the Company recorded an immaterial adjustment in provision for income taxes on the Company’s Consolidated Statements of Comprehensive Income of $6.6 million related to prior periods. This adjustment was to correct for previously unrecognized tax benefits associated with the resolution of certain tax positions.

2.
RECENTLY ADOPTED ACCOUNTING GUIDANCE:

Disclosures about offsetting assets and liabilities –
Effective March 1, 2013, the Company adopted the Financial Accounting Standards Board (“FASB”) amended guidance creating new disclosure requirements about the nature of an entity’s rights of setoff and related arrangements associated with its financial instruments and derivative instruments. In addition, this amended guidance requires retrospective application. The adoption of this amended guidance on March 1, 2013, did not have a material impact on the Company’s consolidated financial statements.

Intangibles – goodwill and other –
Effective March 1, 2013, the Company adopted the FASB amended guidance for indefinite lived intangible asset impairment testing. The amended guidance allows an entity to assess qualitative factors to determine whether the existence of events and circumstances indicate that it is more likely than not that an indefinite lived intangible asset is impaired. If an entity concludes it is not more likely than not that an indefinite lived intangible asset is impaired, the entity is not required to take further action. If an entity concludes otherwise, then the entity would be required to determine the fair value of the indefinite lived intangible asset and compare the fair value with the carrying amount of the indefinite lived intangible asset. The adoption of this amended guidance on March 1, 2013, did not have a material impact on the Company’s consolidated financial statements.

Comprehensive income –
Effective March 1, 2013, the Company adopted the amended guidance for reporting of amounts reclassified out of AOCI (as defined in Note 18). The amended guidance requires an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present significant amounts reclassified out of AOCI by the respective line items of net income, or, for amounts not required to be reclassified in their entirety to net income under generally accepted accounting principles in the U.S., an entity is required to cross-reference to other disclosures required under generally accepted accounting principles in the U.S. that provide additional detail about those amounts. The adoption of this amended guidance on March 1, 2013, did not have a material impact on the Company’s consolidated financial statements.

Derivative instruments –
Effective July 17, 2013, the Company adopted the amended guidance for inclusion of the Federal Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes, in addition to the interest rate on direct Treasury obligations of the U.S. Government and the London Interbank Offered Rate. The amended guidance also allows for the use of different benchmark rates for similar hedging relationships. The amended

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guidance is effective prospectively, for qualifying new or redesignated hedging relationships entered into on or after the effective date. The adoption of this amended guidance on July 17, 2013, did not have a material impact on the Company’s consolidated financial statements.

3.    ACQUISITION:

On June 7, 2013, the Company acquired (i)  the remaining 50% equity interest in Crown Imports (as defined in Note 11) (the “Crown Acquisition”) and (ii)(a)  all of the issued and outstanding equity interests of Compañía Cervecera de Coahuila, S. de R.L. de C.V. (the “Brewery Company”), which owns and operates a brewery located in Nava, Coahuila, Mexico (the “Brewery”), (ii)(b)  all of the issued and outstanding equity interests of Servicios Modelo de Coahuila, S. de R.L. de C.V., which provides personnel and services for the operation and maintenance of the Brewery (the “Service Company”), and (ii)(c)  an irrevocable, fully-paid license to produce in Mexico (or worldwide under certain circumstances) and exclusively import, market and sell the Mexican Beer Brands (as defined in Note 11) as of the date of acquisition, and certain extensions (all collectively referred to as the “Brewery Purchase”). The business of the Brewery Company and Service Company acquired by the Company is referred to as the “Brewery Business.” The Crown Acquisition and the Brewery Purchase are collectively referred to as the “Beer Business Acquisition.” In connection with the Beer Business Acquisition, the Company is required to build out and expand the Brewery to a nominal capacity of at least 20.0 million hectoliters of packaged beer annually by December 31, 2016. In addition, an interim supply agreement and a transition services agreement were entered into in association with the Beer Business Acquisition. The interim supply agreement obligates Modelo (as defined in Note 11) to provide Crown Imports with a supply of product not produced by the Brewery and the transition services agreement provides for certain specified services and production materials, both for a specified period of time. The associated agreements provide, among other things, that the United States will have approval rights, in its sole discretion, for amendments or modifications to the associated agreements and the United States will have a right of approval, in its sole discretion, of any extension of the term of the interim supply agreement beyond three years. The estimated aggregate purchase price of $5,226.4 million consists of cash paid at closing of $4,745.0 million, net of cash acquired of $106.8 million, plus additional estimated cash payments of $588.2 million (expected to be paid within 12 months of closing) which represent an adjustment to the purchase price for the finalization of the 2012 EBITDA (as defined below) as well as certain working capital adjustments. The aggregate cash paid at closing was financed with:

The proceeds from the issuance of $1,550.0 million aggregate principal amount of May 2013 Senior Notes (as defined in Note 13);
$1,500.0 million in term loans consisting of a $500.0 million European Term A Facility (as defined in Note 13) and a $1,000.0 million European Term B Facility (as defined in Note 13) under the 2013 Credit Agreement (as defined in Note 13);
$675.0 million in term loans under the U.S. Term A-2 facility (as defined in Note 13) under the 2013 Credit Agreement;
$208.0 million in proceeds of borrowings under the Company’s then existing accounts receivable securitization facility;
$580.0 million in borrowings under the revolving credit facility under the 2013 Credit Agreement; and
Approximately $232.0 million of cash on hand (inclusive of $13.0 million of borrowings under a subsidiary working capital facility).

As a result of the closing of the Beer Business Acquisition without utilizing any of the commitments under an amended and restated bridge financing, this agreement terminated pursuant to its terms on June 7, 2013.

The primary additional estimated payment consists of an adjustment to the purchase price if the Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”) of Modelo’s operations relating to the profit on all sales of beer to Crown Imports during calendar 2012, as defined in the purchase agreement and referred to below as the “2012 EBITDA,” is greater or less than $310.0 million. If the 2012 EBITDA is less than $310.0 million, the Company will be entitled to a purchase price refund equal to 9.3 times the amount by which the 2012 EBITDA is less than $310.0 million. If the 2012 EBITDA is greater than $310.0 million, the Company will be required to pay an additional purchase price equal to 9.3 times the amount by which the 2012 EBITDA is greater than $310.0 million; provided, the increased purchase price may not exceed a cap based on a 2012 EBITDA of $370.0 million.

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The potential undiscounted amount of all future payments that the Company could be required to make in connection with this adjustment is between $0.0 million and $558.0 million. The fair value of the additional estimated payment of $543.3 million related to the 2012 EBITDA was estimated by discounting future cash flows.

Prior to the Beer Business Acquisition, the Company accounted for its investment in Crown Imports under the equity method of accounting. In connection with the acquisition method of accounting, the Company’s preexisting 50% equity interest was remeasured to its estimated fair value of $1,845.0 million, and the Company recognized a gain of $1,642.0 million on its Consolidated Statements of Comprehensive Income for the second quarter of fiscal 2014. The fair value of the Company’s preexisting 50% equity interest was based upon the estimated fair value of the acquired 50% equity interest in Crown Imports. In connection with the Beer Business Acquisition, the Company is required to estimate the fair value of 100% of the separately identifiable assets acquired and liabilities assumed of Crown Imports.

The purchase price of the Beer Business Acquisition and the estimated fair value of the Company’s preexisting 50% equity interest in Crown Imports have been allocated to the assets acquired and the liabilities assumed based on estimated fair values as of the acquisition date. As of the date of filing this Quarterly Report on Form 10-Q, the purchase accounting has not been finalized due primarily to the proximity of the closing date of the transaction to the filing date of this Quarterly Report on Form 10-Q and the pending receipt of the final valuations for certain assets, including inventories, a favorable interim supply agreement, property, plant and equipment, and identifiable intangible assets. The following table summarizes the allocation of the estimated fair value of the Beer Business Acquisition to the separately identifiable assets acquired and liabilities assumed as of June 7, 2013:
(in millions)
 
Cash
$
106.8

Accounts receivable
193.7

Inventories
243.1

Prepaid expenses and other
103.9

Property, plant and equipment
698.9

Goodwill
3,715.8

Intangible assets
2,403.2

Other assets
0.3

Total assets acquired
7,465.7

Accounts payable
123.2

Accrued excise taxes
14.4

Other accrued expenses and liabilities
72.9

Deferred income taxes
66.4

Other liabilities
10.6

Total liabilities assumed
287.5

Total estimated fair value
7,178.2

Less – fair value of the Company’s preexisting 50% equity interest in Crown Imports
(1,845.0
)
Less – cash acquired
(106.8
)
Estimated aggregate purchase price
$
5,226.4


The acquired accounts receivable consist primarily of trade receivables, all of which are expected to be collectible. The acquired inventory was all sold during the second quarter of fiscal 2014. The preliminary intangible assets consist of definite lived customer relationships with an estimated fair value of $22.5 million which are being amortized over a life of 25 years; definite lived copyrights with an estimated fair value of $6.5 million which are being amortized over a life of 2 years; a definite lived distribution agreement with an estimated fair value of $0.4 million which is being amortized over a life of 1.6 years; a definite lived favorable interim supply agreement with an estimated fair value of $68.3 million which is being amortized over a life of 3 years; and a perpetual right to use trademarks with an estimated fair value of $2,305.5 million which is indefinite lived and therefore not subject to amortization.

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In determining the preliminary purchase price allocation, the Company considered, among other factors, market participants’ intentions to use the acquired assets and the historical and estimated future demand for the acquired Mexican Beer Brands. The estimated fair values for the customer relationships and the copyrights were determined using a cost approach. The estimated fair value for the distribution agreement was determined using an income approach. The estimated fair value for the trademarks was determined using an income approach, specifically, the relief from royalty method. The estimated fair value for the favorable supply contract was determined using an income approach, specifically, the differential method.

The intangible assets are being amortized either on a straight-line basis or an economic consumption basis, which is consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based upon estimated cash flows generated from such assets. Goodwill associated with the acquisition is primarily attributable to the distribution of the Mexican Beer Brands in the U.S. as well as complete control over the sourcing of product into the U.S. Approximately $1,649.4 million of the goodwill recognized is expected to be deductible for income tax purposes.

The Company has recognized total acquisition-related costs of $35.7 million and $6.1 million for the six months ended August 31, 2013, and August 31, 2012, respectively, and $8.1 million and $6.1 million for the three months ended August 31, 2013, and August 31, 2012, respectively. Through August 31, 2013, the Company has incurred total acquisition-related costs of $61.7 million, with $35.7 million recognized for the six months ended August 31, 2013, and $26.0 million recognized for the year ended February 28, 2013. These costs are included in selling, general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income.

The results of operations of the Beer Business Acquisition is reported in the Company’s Beer segment and has been included in the consolidated results of operations of the Company from the date of acquisition. The following unaudited pro forma financial information for the six months and three months ended August 31, 2013, and August 31, 2012, presents consolidated information as if the Beer Business Acquisition had occurred on March 1, 2012. Because of different fiscal period ends, and in order to present results for comparable periods, the unaudited pro forma financial information for the six months ended August 31, 2013, combines (i)  the Company’s historical statement of income for the six months ended August 31, 2013; (ii)  Crown Imports’ historical statement of income for (a)  the three months ended March 31, 2013, and (b)  the period from June 1, 2013, through June 6, 2013; and(iii)  the Brewery Business’ carve-out combined income statement for the three months ended March 31, 2013. The unaudited pro forma financial information for the three months ended August 31, 2013, combines (i)  the Company’s historical statement of income for the three months ended August 31, 2013; and (ii)  Crown Imports’ historical statement of income for the period from June 1, 2013, through June 6, 2013. The unaudited pro forma financial information for the six months and three months ended August 31, 2013, does not give effect to the Brewery Business’ carve-out combined income statement for the period from June 1, 2013, through June 6, 2013, as it is not significant. The unaudited pro forma financial information for the six months and three months ended August 31, 2012, combines (i)  the Company’s historical statement of income for the six months and three months ended August 31, 2012; (ii)  Crown Imports’ historical statement of income for the six months and three months ended June 30, 2012; and (iii)  the Brewery Business’ carve-out combined income statement for the six months and three months ended ended June 30, 2012. The unaudited pro forma financial information is presented after giving effect to certain adjustments for acquisition-related costs, depreciation, amortization of definite lived intangible assets, interest expense on acquisition financing, amortization of deferred financing costs and related income tax effects. The unaudited pro forma financial information excludes the estimated gain of $1,642.0 million on the remeasurement to fair value of the Company’s preexisting 50% equity interest in Crown Imports as it is a one-time, nonrecurring gain. The unaudited pro forma financial information is based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma financial information does not purport to present what the Company’s results of operations would actually have been if the aforementioned transaction had in fact occurred on such date or at the beginning of the period indicated, nor does it project the Company’s financial position or results of operations at any future date or for any future period.

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Table of Contents                                                    

 
For the Six Months
Ended August 31,
 
For the Three Months
Ended August 31,
 
2013
 
2012
 
2013
 
2012
(in millions, except per share data)
 
 
 
 
 
 
 
Net sales
$
2,750.6

 
$
2,643.4

 
$
1,511.6

 
$
1,465.8

Income (loss) before income taxes
$
156.5

 
$
450.4

 
$
(47.4
)
 
$
260.4

Net income (loss)
$
18.3

 
$
329.9

 
$
(115.3
)
 
$
204.0

 
 
 
 
 
 
 
 
Earnings (loss) per common share:
 
 
 
 
 
 
 
Basic – Class A Common Stock
$
0.10

 
$
1.83

 
$
(0.62
)
 
$
1.16

Basic – Class B Convertible Common Stock
$
0.09

 
$
1.67

 
$
(0.56
)
 
$
1.05

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
$
0.09

 
$
1.76

 
$
(0.62
)
 
$
1.10

Diluted – Class B Convertible Common Stock
$
0.09

 
$
1.62

 
$
(0.56
)
 
$
1.02

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic – Class A Common Stock
163.277

 
158.527

 
164.825

 
154.794

Basic – Class B Convertible Common Stock
23.485

 
23.545

 
23.472

 
23.536

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
196.056

 
187.458

 
196.767

 
184.640

Diluted – Class B Convertible Common Stock
23.485

 
23.545

 
23.472

 
23.536


4.    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:
 
August 31, 2013
 
February 28, 2013
(in millions)
 
 
 
Raw materials and supplies
$
90.6

 
$
45.5

In-process inventories
1,115.7

 
1,168.1

Finished case goods
436.7

 
267.3

 
$
1,643.0

 
$
1,480.9


5.    PREPAID EXPENSES AND OTHER:

The major components of prepaid expenses and other are as follows:
 
August 31, 2013
 
February 28, 2013
(in millions)
 
 
 
Income taxes receivable
$
98.5

 
$
117.2

Prepaid excise, sales and value added taxes
71.7

 
20.2

Other
84.2

 
49.5

 
$
254.4

 
$
186.9



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Table of Contents                                                    

6.    PROPERTY, PLANT AND EQUIPMENT:

The major components of property, plant and equipment are as follows:
 
August 31, 2013
 
February 28, 2013
(in millions)
 
 
 
Land and land improvements
$
330.4

 
$
304.6

Vineyards
214.4

 
214.5

Buildings and improvements
507.9

 
342.0

Machinery and equipment
1,533.0

 
1,090.6

Motor vehicles
47.5

 
47.3

Construction in progress
95.7

 
47.9

 
2,728.9

 
2,046.9

Less – Accumulated depreciation
(858.5
)
 
(817.9
)
 
$
1,870.4

 
$
1,229.0


7.    DERIVATIVE INSTRUMENTS:

As a multinational company, the Company is exposed to market risk from changes in foreign currency exchange rates, diesel fuel prices 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, fuel pricing and interest rate market movements during that same period.

The Company enters into derivative instruments, primarily interest rate swaps, foreign currency forward and option contracts, and diesel fuel swaps, to manage interest rate, foreign currency and diesel fuel pricing risks, respectively. In accordance with the FASB guidance for derivatives and hedging, the Company recognizes all derivatives as either assets or liabilities on its Consolidated Balance Sheets and measures those instruments at fair value (see Note 8). The fair values of the Company’s derivative instruments change with fluctuations in interest rates, currency rates and/or fuel prices 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, foreign currency and diesel fuel pricing 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 primarily 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 the repatriation of those loans or investments; and transportation fuel prices in the U.S. Foreign currency contracts, generally less than 12 months in duration, and diesel fuel swap contracts, generally less than 36 months in duration, are used to hedge some of these risks. The Company’s derivative policy permits the use of undesignated derivatives as approved by senior management. For these undesignated instruments, the mark to fair value is reported currently through earnings in selling, general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income. The Company had undesignated foreign currency contracts outstanding with an absolute notional value of $724.7 million and $355.1 million as of August 31, 2013, and

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February 28, 2013, respectively; offsetting undesignated interest rate swap agreements outstanding with an absolute notional value of $1.0 billion as of August 31, 2013, and February 28, 2013 (see Note 13); and undesignated diesel fuel swap contracts outstanding with an absolute notional value of $36.6 million as of August 31, 2013. The Company had no undesignated diesel fuel swap contracts outstanding as of February 28, 2013.

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 and diesel fuel swaps to manage its exposure to changes in diesel fuel prices. 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 on at least a quarterly basis, 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 on the Company’s Consolidated Statements of Comprehensive 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 Income in selling, general and administrative expenses.

The Company records the fair value of its foreign currency contracts, interest rate swap contracts and diesel fuel swap contracts qualifying for cash flow hedge accounting treatment on its Consolidated Balance Sheets with the effective portion of the related gain or loss on those contracts deferred in stockholders’ equity (as a component of AOCI). These deferred gains or losses are recognized on the Company’s Consolidated Statements of Comprehensive 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 Income in selling, general and administrative expenses.

The Company had cash flow designated foreign currency contracts outstanding with an absolute notional value of $210.8 million and $220.3 million as of August 31, 2013, and February 28, 2013, respectively; a cash flow designated interest rate swap agreement outstanding with a notional value of $500.0 million as of August 31, 2013, and February 28, 2013 (see Note 13); and cash flow designated diesel fuel swap contracts outstanding with an absolute notional value of $17.4 million as of February 28, 2013. The Company had no cash flow designated diesel fuel swap contracts outstanding as of August 31, 2013. The Company expects $6.8 million of net losses, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months.


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Fair values of derivative instruments:
The fair value and location of the Company’s derivative instruments on its Consolidated Balance Sheets are as follows (see Note 8):
Balance Sheet Location
 
August 31, 2013
 
February 28, 2013
(in millions)
 
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
 
Foreign currency contracts:
 
 
 
 
Prepaid expenses and other
 
$
3.7

 
$
6.4

Other accrued expenses and liabilities
 
$
0.8

 
$
0.1

Other assets, net
 
$
1.3

 
$
2.4

Other liabilities
 
$
1.3

 
$
0.1

 
 
 
 
 
Interest rate swap contracts:
 
 
 
 
Other accrued expenses and liabilities
 
$
3.5

 
$
3.2

Other assets, net
 
$
2.8

 
$

Other liabilities
 
$

 
$
3.1

 
 
 
 
 
Diesel fuel swap contracts:
 
 
 
 
Prepaid expenses and other
 
$

 
$
0.5

Other assets, net
 
$

 
$
0.1

Other liabilities
 
$

 
$
0.1

 
 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
 
Foreign currency contracts:
 
 
 
 
Prepaid expenses and other
 
$
5.9

 
$
0.9

Other accrued expenses and liabilities
 
$
7.8

 
$
5.1

 
 
 
 
 
Interest rate swap contracts:
 
 
 
 
Prepaid expenses and other
 
$
4.1

 
$
3.3

Other accrued expenses and liabilities
 
$
16.3

 
$
13.2

Other assets, net
 
$

 
$
3.3

Other liabilities
 
$
19.4

 
$
27.6

 
 
 
 
 
Diesel fuel swap contracts:
 
 
 
 
Prepaid expenses and other
 
$
1.4

 
$

Other assets, net
 
$
0.2

 
$

Other liabilities
 
$
0.1

 
$



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Table of Contents                                                    

The effect of the Company’s derivative instruments designated in cash flow hedging relationships on its Consolidated Statements of Comprehensive 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
(Loss) Gain
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 Six Months Ended August 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
$
(0.2
)
 
Sales
 
$
1.6

Foreign currency contracts
 
(1.8
)
 
Cost of product sold
 
0.2

Interest rate swap contracts
 
2.6

 
Interest expense, net
 
(4.1
)
Total
 
$
0.6

 
Total
 
$
(2.3
)
 
 
 
 
 
 
 
For the Six Months Ended August 31, 2012
 
 
 
 
 
 
Foreign currency contracts
 
$
(1.0
)
 
Sales
 
$
1.7

Foreign currency contracts
 
(1.8
)
 
Cost of product sold
 
1.4

Diesel fuel swap contracts
 
0.9

 
Cost of product sold
 

Interest rate swap contracts
 
(6.2
)
 
Interest expense, net
 
(4.1
)
Total
 
$
(8.1
)
 
Total
 
$
(1.0
)
 
 
 
 
 
 
 
For the Three Months Ended August 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
$
0.3

 
Sales
 
$
0.7

Foreign currency contracts
 
(0.6
)
 
Cost of product sold
 

Interest rate swap contracts
 
1.4

 
Interest expense, net
 
(2.0
)
Total
 
$
1.1

 
Total
 
$
(1.3
)
 
 
 
 
 
 
 
For the Three Months Ended August 31, 2012
 
 
 
 
 
 
Foreign currency contracts
 
$
(1.4
)
 
Sales
 
$
0.5

Foreign currency contracts
 
2.1

 
Cost of product sold
 
0.8

Diesel fuel swap contracts
 
0.9

 
Cost of product sold
 

Interest rate swap contracts
 
(3.5
)
 
Interest expense, net
 
(2.0
)
Total
 
$
(1.9
)
 
Total
 
$
(0.7
)

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Table of Contents                                                    

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 Six Months Ended August 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
0.2

Diesel fuel swap contracts
 
 
 
Selling, general and administrative expenses
 
0.1

 
 
 
 
 
 
$
0.3

 
 
 
 
 
 
 
For the Six Months Ended August 31, 2012
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
0.2

 
 
 
 
 
 
 
For the Three Months Ended August 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
0.1

 
 
 
 
 
 
 
For the Three Months Ended August 31, 2012
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
0.3


The effect of the Company’s undesignated derivative instruments on its Consolidated Statements of Comprehensive 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 Six Months Ended August 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
(2.6
)
Diesel fuel swap contracts
 
 
 
Selling, general and administrative expenses
 
1.6

 
 
 
 
 
 
$
(1.0
)
 
 
 
 
 
 
 
For the Six Months Ended August 31, 2012
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
(2.2
)
Interest rate swap contracts
 
 
 
Interest expense, net
 
(0.4
)
 
 
 
 
 
 
$
(2.6
)
 
 
 
 
 
 
 
For the Three Months Ended August 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
(0.6
)
Diesel fuel swap contracts
 
 
 
Selling, general and administrative expenses
 
2.6

 
 
 
 
 
 
$
2.0

 
 
 
 
 
 
 
For the Three Months Ended August 31, 2012
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
2.1

Interest rate swap contracts
 
 
 
Interest expense, net
 
(0.3
)
 
 
 
 
 
 
$
1.8


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 August 31, 2013, the fair value of derivative instruments in a net liability position due to counterparties was $38.6 million. If the Company were required to settle the net liability position under these derivative instruments on August 31, 2013, the Company would have had sufficient availability under its revolving credit facility to satisfy this obligation.

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Table of Contents                                                    


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 August 31, 2013, 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 August 31, 2013, the fair value of derivative instruments in a net receivable position due from counterparties was $8.8 million.

8.    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.

The carrying amount and estimated fair value of the Company’s financial instruments are summarized as follows:
 
August 31, 2013
 
February 28, 2013
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
(in millions)
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and cash investments
$
116.8

 
$
116.8

 
$
331.5

 
$
331.5

Accounts receivable, net
$
655.9

 
$
655.9

 
$
471.9

 
$
471.9

Available-for-sale debt securities
$
33.9

 
$
33.9

 
$
34.2

 
$
34.2

Foreign currency contracts
$
10.9

 
$
10.9

 
$
9.7

 
$
9.7

Interest rate swap contracts
$
6.9

 
$
6.9

 
$
6.6

 
$
6.6

Diesel fuel swap contracts
$
1.6

 
$
1.6

 
$
0.6

 
$
0.6

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Notes payable to banks
$
272.1

 
$
266.3

 
$

 
$

Accounts payable
$
341.2

 
$
341.2

 
$
209.0

 
$
209.0

Long-term debt, including current portion
$
7,028.4

 
$
6,962.9

 
$
3,305.4

 
$
3,603.6

Foreign currency contracts
$
9.9

 
$
9.9

 
$
5.3

 
$
5.3

Interest rate swap contracts
$
39.2

 
$
39.2

 
$
47.1

 
$
47.1

Diesel fuel swap contracts
$
0.1

 
$
0.1

 
$
0.1

 
$
0.1


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).

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Table of Contents                                                    

Diesel fuel 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 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 interest rate, is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).

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.


16

Table of Contents                                                    

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis.
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
(in millions)
 
 
 
 
 
 
 
August 31, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$

 
$

 
$
33.9

 
$
33.9

Foreign currency contracts
$

 
$
10.9

 
$

 
$
10.9

Interest rate swap contracts
$

 
$
6.9

 
$

 
$
6.9

Diesel fuel swap contracts
$

 
$
1.6

 
$

 
$
1.6

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
9.9

 
$

 
$
9.9

Interest rate swap contracts
$

 
$
39.2

 
$

 
$
39.2

Diesel fuel swap contracts
$

 
$
0.1

 
$

 
$
0.1

 
 
 
 
 
 
 
 
February 28, 2013
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$

 
$

 
$
34.2

 
$
34.2

Foreign currency contracts
$

 
$
9.7

 
$

 
$
9.7

Interest rate swap contracts
$

 
$
6.6

 
$

 
$
6.6

Diesel fuel swap contracts
$

 
$
0.6

 
$

 
$
0.6

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
5.3

 
$

 
$
5.3

Interest rate swap contracts
$

 
$
47.1

 
$

 
$
47.1

Diesel fuel swap contracts
$

 
$
0.1

 
$

 
$
0.1


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. Diesel fuel swap fair values are based on quotes from respective counterparties. Quotes are corroborated by the Company using market data. AFS debt securities are valued using market-based inputs into discounted cash flow models.


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The following table presents the Company’s assets and liabilities measured at fair value on a nonrecurring basis for which an impairment assessment was performed for the periods presented:
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Losses
(in millions)
 
 
 
 
 
 
 
For the Six Months Ended August 31, 2013
 
 
 
 
 
 
 
Goodwill
$

 
$

 
$
154.8

 
$
283.6

Trademarks

 

 
73.1

 
17.3

Total
$

 
$

 
$
227.9

 
$
300.9

 
 
 
 
 
 
 
 
For the Three Months Ended August 31, 2013
 
 
 
 
 
 
 
Goodwill
$

 
$

 
$
154.8

 
$
283.6

Trademarks

 

 
73.1

 
17.3

Total
$

 
$

 
$
227.9

 
$
300.9


Goodwill:
For the three months ended August 31, 2013, the Company identified certain negative trends within its Wine and Spirits’ Canadian reporting unit which, when combined with recent changes in strategy within the Canadian business, indicated that the fair value of the reporting unit might be below its carrying value. These negative trends included a reduction in market growth rates for certain segments of the domestic Canadian wine industry as well as the identification that certain improvement initiatives had not materialized in segments of the Canadian business such as refreshments and wine kits. In addition, imported brands have been experiencing market growth within the Canadian market, and certain of the Company’s non-Canadian branded wine products imported into Canada provide higher margin to the Company on a consolidated basis. Accordingly, the Company has modified its strategy to capitalize on this trend and shift focus from certain segments of the domestic business to imported brands. The Canadian reporting unit realizes only a portion of the overall profit attributable to imported brands whereas it realizes all of the profit attributable to the domestic business. Therefore, the Company performed the two-step process to evaluate goodwill for impairment for the Wine and Spirits’ Canadian reporting unit. In the first step, the fair value of the Canadian reporting unit was compared to the carrying value of the reporting unit, including goodwill. The estimate of fair value of the reporting unit was determined on the basis of discounted future cash flows. As the estimated fair value of the reporting unit was less than the carrying value of the reporting unit, a second step was performed to determine the amount of the goodwill impairment the Company should record. In the second step, an implied fair value of the reporting unit’s goodwill was determined by comparing the fair value of the reporting unit with the fair value of the reporting unit’s assets and liabilities other than goodwill (including any unrecognized intangible assets). In determining the estimated fair value of the reporting unit, the Company considered estimates of future operating results and cash flows of the reporting unit discounted using market based discount rates. The estimates of future operating results and cash flows were principally derived from the Company’s updated long-term financial forecast, which was developed as part of the Company’s new strategy for the Canadian business. The decline in the implied fair value of the goodwill and the resulting impairment loss was primarily driven by the updated long-term financial forecasts, which showed lower estimated future operating results primarily due to the change in the Company’s strategy for the Canadian business. The implied fair value of the Canadian reporting unit’s goodwill of $154.8 million compared to the carrying value of the Canadian reporting unit’s goodwill of $433.9 million resulted in the recognition of an impairment of $283.6 million. This impairment is included in impairment of goodwill and intangible assets on the Company’s Consolidated Statements of Comprehensive Income.

Trademarks:
For the three months ended August 31, 2013, prior to the goodwill impairment analysis, the Company performed a review of indefinite lived intangible assets for impairment. The Company determined that certain trademarks associated with the Wine and Spirits’ Canadian reporting unit were impaired largely due to lower

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revenue and profits associated with the related products included in the updated long-term financial forecasts developed as part of the Company’s new strategy for the Canadian business. The Company measured the amount of impairment by calculating the amount by which the carrying value of these assets exceeded their estimated fair values. The fair value was determined based on an income approach using the relief from royalty method, which assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to exploit the related benefits of trademark assets. The cash flow projections the Company uses to estimate the fair values of its trademarks involve several assumptions, including (i)  projected revenue growth rates; (ii)  estimated royalty rates; (iii)  calculated after-tax royalty savings expected from ownership of the subject trademarks; and (iv)  discount rates used to derive the present value factors used in determining the fair value of the trademarks. As a result of this review, trademarks for the Wine and Spirits’ Canadian reporting unit with a carrying value of $90.2 million were written down to their fair value of $73.1 million, resulting in an impairment of $17.3 million. This impairment is included in impairment of goodwill and intangible assets on the Company’s Consolidated Statements of Comprehensive Income.

9.    GOODWILL:

The changes in the carrying amount of goodwill are as follows:
 
Wine and Spirits
 
Beer
 
Consolidations
and
Eliminations
 
Consolidated
(in millions)
 
 
 
 
 
 
 
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

Purchase accounting allocations
110.0

 

 

 
110.0

Foreign currency translation adjustments
(20.6
)
 

 

 
(20.6
)
Balance, February 28, 2013
 
 
 
 
 
 
 
Goodwill
2,722.3

 
13.0

 
(13.0
)
 
2,722.3

Accumulated impairment losses

 

 

 

 
2,722.3

 
13.0

 
(13.0
)
 
2,722.3

Purchase accounting allocations

 
3,702.8

 
13.0

 
3,715.8

Impairment of goodwill
(283.6
)
 

 

 
(283.6
)
Foreign currency translation adjustments
(13.7
)
 
(1.6
)
 

 
(15.3
)
Balance, August 31, 2013
 
 
 
 
 
 
 
Goodwill
2,704.1

 
3,714.2

 

 
6,418.3

Accumulated impairment losses
(279.1
)
 

 

 
(279.1
)
 
$
2,425.0

 
$
3,714.2

 
$

 
$
6,139.2


For the year ended February 28, 2013, purchase accounting allocations of $110.0 million in the Wine and Spirits segment (formerly known as the Constellation Wine and Spirits segment) consist primarily of purchase accounting allocations associated with the acquisition of Mark West (as defined below). For the six months ended August 31, 2013, purchase accounting allocations of $3,702.8 million and $13.0 million in the Beer segment and Consolidations and Eliminations, respectively, consist of purchase accounting allocations associated with the Beer Business Acquisition. For the six months ended August 31, 2013, impairment of goodwill in the Wine and Spirits segment consists of an impairment loss of $283.6 million associated with goodwill assigned to the segment’s Canadian reporting unit.

Mark West –
In July 2012, the Company acquired Mark West for $159.3 million. The transaction primarily includes the acquisition of the Mark West trademark, related inventories and certain grape supply contracts (“Mark West”). The purchase price was financed with revolver borrowings under the Company’s then existing senior credit facility. In

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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 Mark West was not material for purposes of supplemental disclosure pursuant to the FASB guidance on business combinations. The results of operations of Mark West are reported in the Wine and Spirits segment and are included in the consolidated results of operations of the Company from the date of acquisition.

10.    INTANGIBLE ASSETS:

The major components of intangible assets are as follows:
 
August 31, 2013
 
February 28, 2013
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
(in millions)
 
 
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
104.8

 
$
74.2

 
$
82.9

 
$
54.7

Favorable interim supply agreement
68.3

 
65.5

 

 

Other
14.7

 
7.5

 
7.9

 
2.2

Total
$
187.8

 
147.2

 
$
90.8

 
56.9

 
 
 
 
 
 
 
 
Nonamortizable intangible assets:
 
 
 
 
 
 
 
Trademarks
 
 
3,091.5

 
 
 
809.1

Other
 
 
5.2

 
 
 
5.4

Total
 
 
3,096.7

 
 
 
814.5

Total intangible assets, net
 
 
$
3,243.9

 
 
 
$
871.4


The Company did not incur costs to renew or extend the term of acquired intangible assets during the six months and three months ended August 31, 2013, and August 31, 2012. 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 $7.1 million and $3.6 million for the six months ended August 31, 2013, and August 31, 2012, respectively, and $5.6 million and $1.8 million for the three months ended August 31, 2013, and August 31, 2012, respectively. Estimated amortization expense for the remaining six months of fiscal 2014 and for each of the five succeeding fiscal years and thereafter is as follows:
(in millions)
 
2014
$
8.9

2015
$
42.9

2016
$
35.1

2017
$
5.7

2018
$
5.5

2019
$
5.5

Thereafter
$
43.6



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11.    OTHER ASSETS:

The major components of other assets are as follows:
 
August 31, 2013
 
February 28, 2013
(in millions)
 
 
 
Deferred financing costs
$
84.8

 
$
54.4

Investments in equity method investees
73.2

 
243.6

Investment in Accolade
42.5

 
42.8

Other
17.5

 
17.3

 
218.0

 
358.1

Less – Accumulated amortization
(18.8
)
 
(13.9
)
 
$
199.2

 
$
344.2


Investments in equity method investees
Crown Imports:
Prior to June 7, 2013, 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 had, directly or indirectly, equal interests in a joint venture, Crown Imports LLC (“Crown Imports”). Crown Imports had the exclusive right to import, market and sell primarily Modelo’s Mexican beer portfolio sold in the U.S. and Guam (the “Mexican Beer Brands”).

In addition, prior to June 7, 2013, the Company accounted for its investment in Crown Imports under the equity method. Accordingly, the results of operations of Crown Imports were included in equity in earnings of equity method investees on the Company’s Consolidated Statements of Comprehensive Income through June 6, 2013. The Company received $30.3 million and $130.2 million of cash distributions from Crown Imports for the six months ended August 31, 2013, and August 31, 2012, respectively, all of which represent distributions of earnings. As of February 28, 2013, the Company’s investment in Crown Imports was $169.3 million. As of February 28, 2013, the carrying amount of the investment was 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.

The following table presents summarized financial information for the Company’s Crown Imports equity method investment. As the results of operations of Crown Imports have been included in the Company’s consolidated results of operations from the date of acquisition, amounts shown represent 100% of this equity method investment’s results of operations prior to the date of acquisition.
 
For the Six Months
Ended August 31,
 
For the Three Months
Ended August 31,
 
2013
 
2012
 
2013
 
2012
(in millions)
 
 
 
 
 
 
 
Net sales
$
813.4

 
$
1,512.5

 
$
51.8

 
$
788.4

Gross profit
$
241.5

 
$
436.8

 
$
15.9

 
$
225.6

Income from continuing operations
$
142.1

 
$
266.0

 
$
8.6

 
$
143.2

Net income
$
142.1

 
$
266.0

 
$
8.6

 
$
143.2



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12.    OTHER ACCRUED EXPENSES AND LIABILITIES:

The major components of other accrued expenses and liabilities are as follows:
 
August 31, 2013
 
February 28, 2013
(in millions)
 
 
 
Beer Business Acquisition payable
$
556.5

 
$

Advertising and promotions
108.6

 
80.3

Accrued interest
86.7

 
61.4

Salaries, commissions, and payroll benefits and withholdings
67.5

 
80.5

Deferred revenue
52.7

 
49.3

Income taxes payable
44.9

 
11.2

Other
137.1

 
139.7

 
$
1,054.0

 
$
422.4


13.    BORROWINGS:

Borrowings consist of the following:
 
August 31, 2013
 
February 28, 2013
 
Current
 
Long-term
 
Total
 
Total
(in millions)
 
 
 
 
 
 
 
Notes Payable to Banks:
 
 
 
 
 
 
 
Senior Credit Facility – Revolving Credit Loans
$
78.0

 
$

 
$
78.0

 
$

Other
194.1

 

 
194.1

 

 
$
272.1

 
$

 
$
272.1

 
$

 
 
 
 
 
 
 
 
Long-term Debt:
 
 
 
 
 
 
 
Senior Credit Facility – Term Loans
$
97.0

 
$
2,840.5

 
$
2,937.5

 
$
762.5

Senior Notes

 
4,046.7

 
4,046.7

 
2,496.0

Other Long-term Debt
18.7

 
25.5

 
44.2

 
46.9

 
$
115.7

 
$
6,912.7

 
$
7,028.4

 
$
3,305.4


Senior credit facility –
In connection with the Beer Business Acquisition, on May 2, 2013 (the “Restatement Date”), the Company, CIH International S.à r.l., an indirect wholly owned subsidiary of the Company (“CIH” and together with the Company, the “Borrowers”), and Bank of America, N.A., as administrative agent (the “Administrative Agent”), and certain other lenders (all such parties other than either of the Borrowers are collectively referred to as the “Lenders”) entered into a Restatement Agreement (the “Restatement Agreement”) that amended and restated the Company’s prior senior credit facility (as amended and restated by the Restatement Agreement, the “2013 Credit Agreement”). The Restatement Agreement was entered into by the Company to arrange a portion of the debt to finance the Beer Business Acquisition. The effective date of the Restatement Agreement, June 7, 2013, was the date on which all of the conditions to the 2013 Credit Agreement were satisfied, which occurred on the date of the closing of the Beer Business Acquisition (the “Restatement Effective Date”).

The 2013 Credit Agreement provides for aggregate credit facilities of $3,787.5 million, consisting of a $515.6 million U.S. term loan facility maturing on June 7, 2018 (the “U.S. Term A Facility”), a $246.9 million U.S. term loan facility maturing on June 7, 2019 (the “U.S. Term A-1 Facility”), a $675.0 million delayed draw U.S. term loan facility maturing on June 7, 2018 (the “U.S. Term A-2 Facility”), a $500.0 million delayed draw European term loan facility maturing on June 7, 2018 (the “European Term A Facility”), a $1,000.0 million European term loan facility maturing on June 7, 2020 (the “European Term B Facility”), and an $850.0 million revolving credit facility

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(including a sub-facility for letters of credit of up to $200.0 million) which terminates on June 7, 2018 (the “Revolving Credit Facility”). The 2013 Credit Agreement also permits the Company from time to time after the Restatement Effective 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 $25.0 million and the maximum aggregate 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 $750.0 million. A portion of the borrowings under the 2013 Credit Agreement were used to refinance the outstanding obligations under the Company’s prior senior credit facility with the remainder used to finance a portion of the purchase price for the Beer Business Acquisition and related expenses. The Company intends to use the remaining availability under the 2013 Credit Agreement for general corporate purposes.

The rate of interest for borrowings, excluding the European Term B Facility, under the 2013 Credit Agreement is a function of LIBOR plus a margin or the base rate plus a margin. The rate of interest for the European Term B Facility borrowings under the 2013 Credit Agreement is a function of LIBOR, subject to a minimum rate of 0.75%, plus a margin; or the base rate, subject to a minimum rate of 1.75%, plus a margin. The margin is adjustable based upon the Company’s debt ratio (as defined in the 2013 Credit Agreement). As of August 31, 2013, the LIBOR margin for the U.S. Term A Facility, the U.S. Term A-2 Facility, the European Term A Facility and the Revolving Credit Facility was 2.0%; the LIBOR margin for the U.S. Term A-1 Facility was 2.25%; and the LIBOR margin for the European Term B Facility was 2.0%.

The principal changes to the Company’s prior senior credit facility effected by the 2013 Credit Agreement are (i)  changes to the rate and term of the revolving credit facility and outstanding term loan facilities that took effect on the Restatement Effective Date, and a new $675.0 million delayed draw U.S. Term A-2 Facility that replaced the former delayed draw term A-2 facility, and (ii)  the creation of a $1,500.0 million delayed draw European term loan facility consisting of the $500.0 million European Term A Facility and the $1,000.0 million European Term B Facility. The Company is the borrower under the U.S. term loan facilities. CIH is the borrower under the European term loan facilities. The 2013 Credit Agreement also modified the maximum net debt coverage ratio financial covenant.

The U.S. obligations under the 2013 Credit Agreement are guaranteed by certain of the Company’s 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. The European obligations under the 2013 Credit Agreement are guaranteed by the Company. These obligations are also secured by a pledge of (i)  100% of certain interests in certain of CIH’s subsidiaries and (ii)  100% of the ownership interests in certain of the Company’s U.S. subsidiaries and 55-65% of certain interests of certain of the Company’s foreign subsidiaries.

The Company and its subsidiaries are also subject to covenants that are contained in the 2013 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 August 31, 2013, under the 2013 Credit Agreement, the Company had outstanding borrowings under the U.S. Term A Facility of $515.6 million bearing an interest rate of 2.2%, U.S. Term A-1 Facility of $246.9 million bearing an interest rate of 2.4%, U.S. Term A-2 Facility of $675.0 million bearing an interest rate of 2.2%, European Term A Facility of $500.0 million bearing an interest rate of 2.2%, European Term B Facility of $1,000.0 million bearing an interest rate of 2.8%, Revolving Credit Facility of $78.0 million bearing an interest rate of 2.2%, outstanding letters of credit of $14.1 million, and $757.9 million in revolving loans available to be drawn.


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As of August 31, 2013, the required principal repayments under the term loans of the 2013 Credit Agreement for the remaining six months of fiscal 2014 and for each of the five succeeding fiscal years and thereafter are as follows:
 
U.S.
Term A
Facility
 
U.S.
Term A-1
Facility
 
U.S.
Term A-2
Facility
 
European
Term A
Facility
 
European
Term B
Facility
 
Total
(in millions)
 
 
 
 
 
 
 
 
 
 
 
2014
$
12.9

 
$
1.2

 
$
16.9

 
$
12.5

 
$
5.0

 
$
48.5

2015
25.8

 
2.5

 
33.7

 
25.0

 
10.0

 
97.0

2016
38.7

 
2.5

 
50.6

 
37.5

 
10.0

 
139.3

2017
51.5

 
2.5

 
67.5

 
50.0

 
10.0

 
181.5

2018
51.5

 
2.5

 
67.5

 
50.0

 
10.0

 
181.5

2019
335.2

 
2.4

 
438.8

 
325.0

 
10.0

 
1,111.4

Thereafter

 
233.3