10-K 1 stz_228201710k.htm 10-K Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K
(Mark One)
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2017
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
image_bw.jpg
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)
 
 
Registrant’s telephone number, including area code (585) 678-7100
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
Class A Common Stock (par value $.01 per share)
New York Stock Exchange
Class B Common Stock (par value $.01 per share)
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ¨
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 aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, based upon the closing sales prices of the registrant’s Class A and Class B Common Stock as reported on the New York Stock Exchange as of the last business day of the registrant’s most recently completed second fiscal quarter was $28,045,135,841.
The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of April 21, 2017, is set forth below:
Class
Number of Shares Outstanding
Class A Common Stock, par value $.01 per share
171,447,198
Class B Common Stock, par value $.01 per share
23,345,727
Class 1 Common Stock, par value $.01 per share
7,720

DOCUMENTS INCORPORATED BY REFERENCE

The Proxy Statement of Constellation Brands, Inc. to be issued for the Annual Meeting of Stockholders which is expected to be held July 18, 2017 is incorporated by reference in Part III to the extent described therein.



TABLE OF CONTENTS

 
 
Page
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
 
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
PART IV
Item 15.
Item 16.



This Annual Report on Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. All statements other than statements of historical fact included in this Annual Report on Form 10-K, including without limitation (I)  the statements under Item 1 “Business” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding (i)  our business strategy, future operations, future financial position, expected effective tax rates and anticipated tax liabilities, prospects, plans and objectives of management, including the duration of reinvestment of earnings of certain foreign subsidiaries, (ii)  information concerning expected or potential actions of third parties, including potential changes to international trade agreements, tariffs, taxes and other governmental rules and regulations, (iii)  information concerning the future expected balance of supply and demand for our products, (iv)  timing and source of funds for operating activities, (v) the manner, timing and duration of the share repurchase program and source of funds for share repurchases, and (vi) the amount and timing of future dividends, (II)  the statements regarding our beer operations expansion activities, including Mexicali Brewery construction, Obregon Brewery optimization, and the expansions of the Nava Brewery and glass plant, including anticipated costs and timeframes for completion and (III) the projections regarding the Canadian Divestiture and the Obregon Brewery acquisition are forward-looking statements. When used in this Annual Report on Form 10-K, the words “anticipate,” “intend,” “expect,” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. All forward-looking statements speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to be correct. In addition to the risks and uncertainties of ordinary business operations and conditions in the general economy and markets in which we compete, our forward-looking statements contained in this Annual Report on Form 10-K are also subject to the risk and uncertainty that (i)  the actual balance of supply and demand for our products will vary from current expectations due to, among other reasons, actual raw material supply, actual shipments to distributors and actual consumer demand, (ii)  the actual demand for our products will vary from current expectations due to, among other reasons, actual shipments to distributors and actual consumer demand, (iii)  the amount and timing of and source of funds for any share repurchases may vary due to market conditions, our cash and debt position, the impact of the beer operations expansion activities, and other factors as determined by management from time to time, (iv)  the amount and timing of future dividends may differ from our current expectations if our ability to use cash flow to fund dividends is affected by unanticipated increases in total net debt, we are unable to generate cash flow at anticipated levels, or we fail to generate expected earnings, (v)  the timeframe and actual costs associated with the beer operations expansion activities may vary from management’s current expectations due to market conditions, our cash and debt position, receipt of all required regulatory approvals by the expected dates and on the expected terms and other factors as determined by management, and (vi) the actual net gain realized and income taxes paid in connection with the Canadian Divestiture may vary from management’s estimates. Additional important factors that could cause actual results to differ materially from those set forth in or implied by our forward-looking statements contained in this Annual Report on Form 10-K are those described in Item 1A “Risk Factors” and elsewhere in this report and in our other filings with the Securities and Exchange Commission.

Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. All references to “net sales” refer to gross sales less promotions, returns and allowances, and excise taxes consistent with the Company’s method of classification. All references to “Fiscal 2017,” “Fiscal 2016” and “Fiscal 2015” refer to the Company’s fiscal year ended the last day of February of the indicated year. All references to “Fiscal 2018” refer to our fiscal year ending February 28, 2018. All references to “$” are to U.S. dollars and all references to “C$” are to Canadian dollars. Unless otherwise defined herein, refer to the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K for the definition of capitalized terms used herein.

Market positions and industry data discussed in this Annual Report on Form 10-K are as of calendar 2016 and have been obtained or derived from industry and government publications and our estimates. The industry and government publications include: Beer Marketers Insights; Beverage Information Group; Impact Databank Review and Forecast; International Wine and Spirits Research (IWSR); IRI; and National Alcohol Beverage Control Association. We have not independently verified the data from the industry and government publications. Unless otherwise noted, all references to market positions are based on equivalent unit volume.



PART I

Item 1. Business.

Introduction

We are an international producer and marketer of beer, wine and spirits with operations in the U.S., Mexico, New Zealand, Italy and Canada and more than 100 brands in our portfolio. In the U.S., we are the largest multi-category supplier (beer, wine and spirits) (“Multi-category Supplier”) of beverage alcohol. We are the third-largest beer company in the U.S. market and the world’s leading premium wine company. Many of our products are recognized as leaders in their respective categories. This, combined with our strong market positions, makes us a supplier of choice to many of our customers, who include wholesale distributors, retailers and on-premise locations.

Our vision is to elevate life with every glass raised and our mission is to build brands that people love. We are committed to brand building, our trade partners, the environment, our investors and to consumers around the world who choose our products when celebrating big moments or enjoying quiet ones.

Our key values are:

people;
customer focus;
entrepreneurship;
quality; and
integrity.

The Company is a Delaware corporation incorporated on December 4, 1972, as the successor to a business founded in 1945. We have approximately 8,700 employees located primarily in the U.S. and Mexico, with our corporate headquarters located in Victor, New York. We conduct our business through entities we wholly own as well as through a variety of joint ventures and other entities.

Strategy

Our overall strategy is to sustain profitable growth and build shareholder value. We position our portfolio to benefit from industry premiumization trends, which we believe will continue to result in faster growth rates in the high-end of the beer, wine and spirits categories.

Certain key U.S. industry trends include:

high-end beer (led by imported and craft) growing faster than total beer;
growth in U.S. per capita consumption of wine and spirits and volume of premium and above wine and spirits growing faster than value-priced wine and spirits; and
consolidation of suppliers, wholesalers and retailers.

To capitalize on these trends, become more competitive and grow our business, we have generally employed a strategy focused on a combination of organic growth and acquisitions, with an increasing focus on the higher-growth, higher-margin premium and above categories of the beverage alcohol industry. Key elements of our strategy include:

leveraging our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio and cross promotional opportunities;
strengthening relationships with wholesalers and retailers by providing consumer and beverage alcohol insights;
investing in brand building activities;
positioning ourselves for success with consumer-led innovation capabilities;
realizing operating efficiencies through expanding and enhancing production capabilities and maximizing asset utilization; and
developing employees to enhance performance in the marketplace.

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In the beer business, we completed the Beer Business Acquisition in June 2013, which solidified our position in the U.S. beer market over the long-term; diversified our profit base and enhanced our margins, results of operations and operating cash flow; and provided new avenues for growth. Since completing this transformational acquisition, we have made capital investments and acquisitions to increase beer production capacity to secure independence from a supply standpoint and to support the growth of the business. We enhanced our position in the high-end beer segment with the acquisition of Ballast Point, a highly-awarded craft brewer, which provided us with a high-growth premium platform to compete in the growing, emerging national craft beer category.

In our wine and spirits business, we have acquired higher-growth, higher-margin premium and above wine brands including Meiomi, Prisoner and Charles Smith wine brands, and divested the lower-margin Canadian wine business, as part of our efforts to increase our mix of premium and above brands, improve margins and create operating efficiencies. In addition, we have added high-growth, high-end brands to our spirits portfolio through the acquisitions of Casa Noble and High West.

For further information on our strategy, see Management’s Discussion and Analysis of Financial Condition and Results of Operations under Item 7 of this Annual Report on Form 10-K (“MD&A”).

Acquisitions, Investments and Divestitures

As part of our strategy to improve margins, enhance production capabilities and keep an increased focus on the higher-growth, higher-margin premium and above categories of the beverage alcohol industry, we have completed the following acquisitions, investments and divestitures:
Transaction
 
Date
 
Strategic Contribution
Beer Segment
 
 
 
 
Obregon Brewery acquisition
 
December 2016
 
Provided immediate functioning brewery capacity to support our fast-growing, high-end Mexican beer portfolio and flexibility for future innovation initiatives; enabled us to become fully independent from an interim supply agreement with Modelo.
Ballast Point acquisition
 
December 2015
 
Provided a high-growth premium platform to compete in the growing, emerging national craft beer category; further strengthened our position in the high-end of the U.S. beer market.
Glass production plant acquisition through joint venture with Owens-Illinois
 
December 2014
 
State-of-the-art glass production plant located adjacent to our Nava Brewery in Mexico; solidified our long-term glass sourcing strategy under favorable terms.
Beer Business Acquisition
 
June 2013
 
Provided complete, independent control of our U.S. commercial beer business, the state-of-the-art Nava Brewery and the exclusive perpetual brand rights to import, market and sell Corona and certain other Mexican beer brands in the U.S. market; solidified our position in the U.S. beer market for the long term; made us the third-largest brewer and seller of beer for the U.S. market; combined with our strong position in wine and spirits, solidified us as the largest Multi-category Supplier of beverage alcohol in the U.S.

Wine and Spirits Segment
 
 
 
 
Canadian Divestiture
 
December 2016
 
Divestiture of the lower-margin Canadian wine business.
Charles Smith acquisition
 
October 2016
 
Collection of five fast-growing, high-quality super and ultra-premium Washington State wine brands; strong consumer affinity and demand.
High West acquisition
 
October 2016
 
Portfolio of distinctive, award-winning, fast-growing and high-end craft whiskeys and other select spirits.
Prisoner acquisition
 
April 2016
 
Portfolio of five fast-growing, higher-margin, super-luxury wine brands; strengthened our position in the super-luxury wine category.
Meiomi acquisition
 
August 2015
 
Higher-margin, luxury growth brand; further strengthened our position in the U.S. pinot noir category.
Casa Noble acquisition
 
September 2014
 
Fast-growing, higher-margin, super-premium tequila business; complements our Mexican beer portfolio; further strengthened both our on and off-premise presence as tequila and Mexican beer share similar target consumers and drinking occasions.

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For further information about our Fiscal 2017, Fiscal 2016 and Fiscal 2015 transactions, refer to (i)  MD&A and (ii)  Note 2 of the Notes to the Consolidated Financial Statements under Item 8 of this Annual Report on Form 10-K (“Notes to the Financial Statements”).

Business Segments

We report our operating results in three segments: (i)  Beer, (ii)  Wine and Spirits, and (iii)  Corporate Operations and Other. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management and the structure of our internal financial reporting. We report net sales in two reportable segments, as follows:
 
For the Year Ended February 28, 2017
 
% of
Net Sales
 
For the Year Ended February 29, 2016
 
% of
Net Sales
 
For the Year Ended February 28, 2015
 
% of
Net Sales
(in millions)
 
 
 
 
 
 
 
 
 
 
 
Beer
$
4,229.3

 
57.7
%
 
$
3,622.6

 
55.3
%
 
$
3,188.6

 
52.9
%
Wine and Spirits:
 
 
 
 
 
 
 
 
 
 
 
Wine
2,739.3

 
37.4
%
 
2,591.4

 
39.6
%
 
2,523.4

 
41.9
%
Spirits
362.9

 
4.9
%
 
334.4

 
5.1
%
 
316.0

 
5.2
%
Total Wine and Spirits
3,102.2

 
42.3
%
 
2,925.8

 
44.7
%
 
2,839.4

 
47.1
%
Consolidated Net Sales
$
7,331.5

 
 
 
$
6,548.4

 
 
 
$
6,028.0

 
 

Beer Segment

We are the leader in the high-end segment of the U.S. beer market. We sell a number of brands in the import and craft beer categories.

Within the imported beer category, we have the exclusive right to import, market and sell these Mexican beer brands in all 50 states of the U.S.:

Corona Extra
Corona Light
Modelo Especial
Modelo Negra
Modelo Chelada
Pacifico
Victoria

In the U.S., we are the leading imported beer company and have six of the 15 top-selling imported beer brands. Corona Extra is the best-selling imported beer and the fifth best-selling beer overall in the U.S.; Corona Light is the leading imported light beer; and Modelo Especial is the second-largest and the fastest-growing major imported beer brand. During Fiscal 2017, we unified the Modelo brands under the Casa Modelo brand family as part of our effort to drive more effective cross promotion and establish a platform for future product innovation. Additionally, we are continuing efforts focused on increasing sales penetration of products in can and draft package formats.

Our craft beer products are primarily sold under the Ballast Point brand, which is one of the fastest-growing major craft brands in the U.S. beer market. Ballast Point produces more than 40 different styles of beer, led by its popular Sculpin IPA.

Since the Beer Business Acquisition, we have expanded our Nava Brewery from 10 million to 25 million hectoliters production capacity, with additional production capacity expansion activities underway. In addition, we are constructing a new, state-of-the-art brewery in Mexicali, Baja California, Mexico (the “Mexicali Brewery”),

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located near California, which is our largest beer market in the U.S., and we are investing in optimization to increase the output from our Obregon Brewery, which we acquired in December 2016. Expansion, construction and optimization efforts continue under our Mexico Beer Expansion Projects to align with our anticipated future growth expectations.

Total spend related to the Mexico Beer Expansion Projects is estimated to be approximately $3.9 billion through fiscal 2021. In total, we have invested approximately $2.1 billion for the Mexico Beer Expansion Projects, with approximately $700 million during Fiscal 2017. The majority of the remaining investment is expected to occur primarily during the next three fiscal year periods.

Prior to the Beer Business Acquisition, we and Modelo, indirectly, each had an equal interest in Crown Imports, which had the exclusive right to import, market and sell the Mexican Beer Brands.

Wine and Spirits Segment

We are the world’s leading premium wine company. We sell a large number of wine brands across all categories - table wine, sparkling wine and dessert wine - and across all price points - popular, premium and luxury categories, primarily within the $5 to $25 price range at U.S. retail - and we have a leading market position in the U.S. Our wine portfolio is supported by grapes purchased from independent growers, primarily in the U.S. and New Zealand, and vineyard holdings in the U.S., New Zealand and Italy.

Our wine produced in the U.S., New Zealand and Italy is primarily marketed in the U.S. In addition, we export our wine products to Canada and other major world markets.

In our spirits business, SVEDKA Vodka is imported from Sweden and is the largest imported vodka brand in the U.S. Black Velvet Canadian Whisky is the second-largest Canadian whisky brand in the U.S. Our high-end spirits brands include Casa Noble tequila and High West craft whiskeys.

In the U.S., we sell 18 of the 100 top-selling table wine brands and are the leading premium wine company. Some of our well-known wine and spirits brands sold in the U.S., which comprised our Fiscal 2017 U.S. Focus Brands (“Focus Brands”), included:
Wine Brands
 
Spirits Brands
Black Box
Mark West
Saved
 
SVEDKA Vodka
Clos du Bois
Meiomi
Simi
 
 
Estancia
Mount Veeder
The Dreaming Tree
 
 
Franciscan Estate
Nobilo
The Prisoner
 
 
Inniskillin
Robert Mondavi
Wild Horse
 
 
Kim Crawford
Ruffino
 
 
 

We dedicate a large share of sales and marketing resources to our Focus Brands as they represent a majority of our U.S. wine and spirits revenue and profitability, and generally have strong positions in their respective price categories.

We have been increasing resources in support of product innovation as we believe this is one of the key drivers of overall beverage alcohol category growth. In wine, we have launched varietal line extensions behind many of our Focus Brands and introduced newer brands like Ravage, 7 Moons and Cooper & Thief. In spirits, we have been introducing flavor extensions for SVEDKA Vodka and Paul Masson Brandy.

Corporate Operations and Other

The Corporate Operations and Other segment includes traditional corporate-related items including executive management, corporate development, corporate finance, human resources, internal audit, investor relations, legal, public relations and information technology.

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Further information regarding net sales, operating income and total assets of each of our business segments and information regarding geographic areas is set forth in Note 20 of the Notes to the Financial Statements.

Marketing and Distribution

To focus on their respective product categories, build brand equity and increase sales, our segments employ full-time, in-house marketing, sales and customer service functions. These functions engage in a range of marketing activities and strategies, including market research, consumer and trade advertising, price promotions, point-of-sale materials, event sponsorship, on-premise promotions and public relations. Where opportunities exist, particularly with national accounts in the U.S., we leverage our sales and marketing skills across the organization.

In the U.S., our products are primarily distributed by wholesale distributors, with separate distribution networks utilized for (i)  our beer portfolio and (ii)  our wine and spirits portfolio, as well as state alcohol beverage control agencies. As is the case with all other beverage alcohol companies, products sold through these agencies are subject to obtaining and maintaining listings to sell our products in that agency’s state. State governments can affect prices paid by consumers of our products through the imposition of taxes or, in states in which the government acts as the distributor of our products through an alcohol beverage control agency, by directly setting the retail prices.

Trademarks and Distribution Agreements

Trademarks are an important aspect of our business. We sell products under a number of trademarks, which we own or use under license. Throughout our segments, we also have various licenses and distribution agreements for the sale, or the production and sale, of our products and products of third parties. These licenses and distribution agreements have varying terms and durations.

Within the Beer segment, we have an exclusive sub-license to use trademarks related to our Mexican beer brands in the U.S. This sub-license agreement is perpetual. Prior to the Beer Business Acquisition, Crown Imports had exclusive importation agreements with the suppliers of certain imported beer products and had an exclusive renewable sub-license to use certain trademarks related to the imported beer brands in the U.S.

Competition

The beverage alcohol industry is highly competitive. We compete on the basis of quality, price, brand recognition and distribution strength. Our beverage alcohol products compete with other alcoholic and non-alcoholic beverages for consumer purchases, as well as shelf space in retail stores, restaurant presence and wholesaler attention. We compete with numerous multinational producers and distributors of beverage alcohol products, some of which have greater resources than we do. Our principal competitors include:
Beer
Anheuser-Busch InBev, Molson Coors, Heineken, Pabst Brewing Company, The Boston Beer Company
 
 
Wine
E&J Gallo Winery, The Wine Group, Trinchero Family Estates, Treasury Wine Estates, Ste. Michelle Wine Estates, Deutsch Family Wine & Spirits, Jackson Family Wines
 
 
Spirits
Diageo, Beam Suntory, Brown-Forman, Sazerac Company, Pernod Ricard

Production

For Fiscal 2017, approximately 80% of our Mexican Beer Brands requirements were produced by our Nava Brewery, which is located in Mexico, approximately 10 miles from the Texas border. The current capacity of the Nava Brewery is 25 million hectoliters. We intend to expand the Nava Brewery’s capacity to 27.5 million hectoliters production capacity. Additionally, the construction of the Mexicali Brewery, which will also be located in Mexico, approximately 10 miles from the California border, will initially be built to provide 5 million hectoliters production capacity with the ability to scale to 20 million hectoliters production capacity in the future.


5


Previously, to meet our beer supply requirements above the original 10 million hectoliter Nava Brewery production capacity, we entered into a three-year interim supply agreement with Modelo in June 2013. This agreement was initially extended for one additional year to June 2017. However, the purchase of the Obregon Brewery enabled us to become fully independent from this interim supply agreement, which was terminated at the time of this acquisition.

We currently operate five facilities in the greater San Diego, California area for the production of our Ballast Point brand, including Miramar, which serves as the primary production site for the brand. This facility was built in 2014 and may be expanded to accommodate future growth. Additionally, we are building a Ballast Point brewery in Daleville, Virginia.

In the U.S., we operate 18 wineries using many varieties of grapes grown principally in the Napa, Sonoma, Monterey and San Joaquin regions of California. We also operate four wineries in New Zealand and five wineries in Italy. Grapes are crushed at most of our wineries and stored as wine until packaged for sale under our brand names or sold in bulk. The inventories of wine are usually at their highest levels during and after the crush of each year’s grape harvest, and are reduced prior to the subsequent year’s crush. Wine inventories are usually at their highest levels in September through November in the U.S. and Italy, and in March through May in New Zealand.

Our Canadian whisky requirements are produced and aged at our Canadian distillery in Lethbridge, Alberta. We currently operate two facilities in the U.S. for the production of our High West whiskey brand. The requirements for grains and bulk spirits used in the production of our spirits are purchased from various suppliers.

Certain of our wines and spirits must be aged for more than one year up to multiple years. Therefore, our inventories of wines and spirits may be larger in relation to sales and total assets than in many other businesses.

Sources and Availability of Production Materials

The principal components in the production of our craft and Mexican beer brands include water; agricultural products, such as yeast and grains; and packaging materials, which include glass, aluminum and cardboard.

For our Mexican beer brands, packaging materials represent the largest cost component of production, with glass bottles representing the largest cost component of our packaging materials. In Fiscal 2017, the package format mix of our Mexican beer volume sold in the U.S. was 72% glass bottles, 26% aluminum cans and 2% in stainless steel kegs.

The Nava Brewery and the Obregon Brewery receive water originating from aquifers. We believe we have adequate access to water to support the breweries’ on-going requirements, as well as future requirements after the completion of planned expansion and optimization activities.

As part of our efforts to solidify our beer glass sourcing strategy over the long-term, we formed an equally-owned joint venture with Owens-Illinois, the world’s largest glass container manufacturer. The joint venture acquired a state-of-the-art glass production plant that is located adjacent to our Nava Brewery in Mexico, in December 2014. The glass plant currently has two operational glass furnaces and the joint venture intends to increase it to four furnaces by early calendar 2018. When fully operational with four furnaces, the glass plant is expected to supply approximately 50% of our glass requirements for the Nava Brewery. We also have long-term glass supply agreements with other glass producers.

The principal components in the production of our wine and spirits products are agricultural products, such as grapes and grain, and packaging materials (primarily glass).

Most of our annual grape requirements are satisfied by purchases from each year’s harvest which normally begins in August and runs through October in the U.S. and Italy, and begins in February and runs through May in New Zealand. We receive grapes from approximately 950 independent growers in the U.S. and approximately 125

6


independent growers located primarily in New Zealand. We enter into purchase agreements with a majority of these growers with pricing that generally varies year-to-year and is generally based on then-current market prices.

As of February 28, 2017, we owned or leased approximately 20,900 acres of land and vineyards, either fully bearing or under development, primarily in the U.S., New Zealand and Italy. This acreage supplies only a small percentage of our overall total grape needs for wine production. However, most of this acreage is used to supply a large portion of the grapes used for the production of certain of our higher-end wines. We continue to consider the purchase or lease of additional vineyards, and additional land for vineyard plantings, to supplement our grape supply.

We believe that we have adequate sources of grape supplies to meet our sales expectations. However, when demand for certain wine products exceeds expectations, we look to source the extra requirements from the bulk wine markets around the world.

The distilled spirits manufactured and imported by us require various agricultural products, neutral grain spirits and bulk spirits which we fulfill through purchases from various sources by contractual arrangement and through purchases on the open market. We believe that adequate supplies of the aforementioned products are available at the present time.

We utilize glass and polyethylene terephthalate (“PET”) bottles and other materials such as caps, corks, capsules, labels, wine bags and cardboard cartons in the bottling and packaging of our wine and spirits products. After grape purchases, glass bottle costs are the largest component of our cost of product sold. In the U.S., the glass bottle industry is highly concentrated with only a small number of producers. We have traditionally obtained, and continue to obtain, our glass requirements from a limited number of producers under long-term supply arrangements. Currently, one producer supplies most of our glass container requirements for our U.S. operations. We have been able to satisfy our requirements with respect to the foregoing and consider our sources of supply to be adequate at this time.

Government Regulation

We are subject to a range of laws and regulations in the countries in which we operate. Where we produce products, we are subject to environmental laws and regulations, and may be required to obtain environmental and alcohol beverage permits and licenses to operate our facilities. Where we market and sell products, we may be subject to laws and regulations on brand registration, packaging and labeling, distribution methods and relationships, pricing and price changes, sales promotions, advertising and public relations. We are also subject to rules and regulations relating to changes in officers or directors, ownership or control.

We believe we are in compliance in all material respects with all applicable governmental laws and regulations in the countries in which we operate. We also believe that the cost of administration and compliance with, and liability under, such laws and regulations does not have, and is not expected to have, a material adverse impact on our financial condition, results of operations or cash flows.

Seasonality

The beverage alcohol industry is subject to seasonality in each major category. As a result, in response to wholesaler and retailer demand which precedes consumer purchases, our beer sales are typically highest during the first and second quarters of our fiscal year, which correspond to the Spring and Summer periods in the U.S. Our wine and spirits sales are typically highest during the third quarter of our fiscal year, primarily due to seasonal holiday buying.

Employees

As of February 28, 2017, we had approximately 8,700 employees. Approximately 4,600 employees were in the U.S. and approximately 4,100 employees were outside of the U.S., primarily in Mexico. We may employ additional workers during the grape crushing seasons. Approximately 22% of our employees are covered by

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collective bargaining agreements. Collective bargaining agreements expiring within one year cover approximately 3% of our employees. We consider our employee relations generally to be good.

Executive Officers of the Company

Information with respect to our current executive officers is as follows:
NAME
AGE
OFFICE OR POSITION HELD
Richard Sands
66
Chairman of the Board
Robert Sands
58
President and Chief Executive Officer
William F. Hackett
65
Executive Vice President and Chairman, Beer Division
F. Paul Hetterich
54
Executive Vice President and President, Beer Division
Thomas M. Kane
56
Executive Vice President and Chief Human Resources Officer
David Klein
53
Executive Vice President and Chief Financial Officer
Thomas J. Mullin
65
Executive Vice President and General Counsel
William A. Newlands
58
Executive Vice President and Chief Operating Officer
Christopher Stenzel
49
Executive Vice President and President, Wine & Spirits Division

Richard Sands, Ph.D., is the Chairman of the Board of the Company. He has been employed by the Company in various capacities since 1979. He has served as a director since 1982. In September 1999, Mr. Sands was elected Chairman of the Board. He served as Chief Executive Officer from October 1993 to July 2007, as Executive Vice President from 1982 to May 1986, as President from May 1986 to December 2002 and as Chief Operating Officer from May 1986 to October 1993. He is the brother of Robert Sands.

Robert Sands is President and Chief Executive Officer of the Company. He was appointed Chief Executive Officer in July 2007 and appointed as President in December 2002. He has served as a director since January 1990. Mr. Sands also served as Chief Operating Officer from December 2002 to July 2007, as Group President from April 2000 through December 2002, as Chief Executive Officer, International from December 1998 through April 2000, as Executive Vice President from October 1993 through April 2000, as General Counsel from June 1986 through May 2000 and as Vice President from June 1990 through October 1993. He is the brother of Richard Sands.

William F. Hackett has served as an Executive Vice President of the Company since June 2013. Since January 2016 he has performed the role of Chairman, Beer Division and from June 2013 through January 2016 he performed the role of President, Beer Division. Crown Imports LLC was previously owned 50% by the Company, and as a result of the Beer Business Acquisition, it is now a wholly-owned indirect subsidiary of the Company. Mr. Hackett is also Chairman of Crown Imports LLC since January 2016 and before that he served as President of Crown Imports LLC from January 2007 through January 2016. Prior to that, he was President of Barton Beers, Ltd. (a wholly-owned indirect subsidiary of the Company now known as Constellation Beers Ltd.) having served in that role from 1993 until January 2007. Prior to that, Mr. Hackett held several increasingly senior positions in Barton Beers, Ltd., having joined that company in 1984.

F. Paul Hetterich has been an Executive Vice President of the Company since June 2003. Since January 2016 Mr. Hetterich has performed the role of President, Beer Division and President of Crown Imports LLC, a wholly-owned indirect subsidiary of the Company. From January 2015 through January 2016 he performed the role of Executive Vice President, Corporate Development & Beer Operations. From June 2011 until January 2015 he served as Executive Vice President, Business Development and Corporate Strategy, from July 2009 until June 2011 he served as Executive Vice President, Business Development, Corporate Strategy and International and from June 2003 until July 2009 he served as Executive Vice President, Business Development and Corporate Strategy. From April 2001 to June 2003 Mr. Hetterich served as the Company’s Senior Vice President, Corporate Development. Prior to that, Mr. Hetterich held several increasingly senior positions in the Company’s marketing and business development groups. Mr. Hetterich has been with the Company since 1986.


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Thomas M. Kane joined the Company in May 2013 as Executive Vice President and Chief Human Resources Officer. Mr. Kane previously served as Senior Vice President, Human Resources and Government Relations of Armstrong World Industries, Inc., a global producer of flooring products and ceiling systems, from February 2012 to May 2013, he served as its Senior Vice President, Human Resources from August 2010 to February 2012 and served as its Chief Compliance Officer from February 2011 to February 2012. Prior to that, Mr. Kane served as Global Vice President, Human Resources for Black & Decker Power Tools, a manufacturer of power and hand tools, from 2002 to 2010. From 1999 to 2002 Mr. Kane served as Global HR leader of GE Specialty Materials, a large manufacturer of silicone products.

David Klein has been the Company’s Executive Vice President and Chief Financial Officer since June 2015. Prior to that, Mr. Klein served as the Company’s Senior Vice President Finance, Beer Division, having held that position from May 2014 until June 2015. He served as the Company’s Senior Vice President and Treasurer from April 2009 to July 2014 and assumed the additional responsibilities of Controller in October 2013, also serving in that role to July 2014. From March 2007 to March 2009 Mr. Klein served as chief financial officer for the Company’s former United Kingdom operations. Mr. Klein joined the Company in 2004 as Vice President of Business Development.

Thomas J. Mullin joined the Company as Executive Vice President and General Counsel in May 2000. Prior to joining the Company, Mr. Mullin served as President and Chief Executive Officer of TD Waterhouse Bank, NA, a national banking association, since February 2000, of CT USA, F.S.B. since September 1998 and of CT USA, Inc. since March 1997. He also served as Executive Vice President, Business Development and Corporate Strategy of C.T. Financial Services, Inc. from March 1997 through February 2000. From 1985 through 1997 Mr. Mullin served as Vice Chairman and Senior Executive Vice President of First Federal Savings and Loan Association of Rochester, New York and from 1982 through 1985 he was a partner in the law firm of Phillips Lytle LLP.

William A. Newlands has been an Executive Vice President of the Company since he joined in January 2015 and has been the Company’s Chief Operating Officer since January 2017. From January 2016 to January 2017 he performed the role of President, Wine & Spirits Division and from January 2015 through January 2016 he performed the role of Chief Growth Officer. Mr. Newlands served from October 2011 until August 2014 as Senior Vice President and President, North America of Beam Inc., as Senior Vice President and President, North America of Beam Global Spirits & Wine, Inc. from December 2010 to October 2011 and as Senior Vice President and President, USA of Beam Global Spirits & Wine, Inc. from February 2008 to December 2010. Beam Inc., a producer and seller of branded distilled spirits products, merged with a subsidiary of Suntory Holding Limited, a Japanese company, in 2014. Prior to October 2011, Beam Global Spirits & Wine, Inc. was the spirits operating segment of Fortune Brands, Inc., which was a leading consumer products company that made and sold branded consumer products worldwide in the distilled spirits, home and security, and golf markets.

Christopher Stenzel has been the Company’s Executive Vice President and President, Wine & Spirits Division since January 2017. Prior to that, Mr. Stenzel was Senior Vice President of Finance in the Company’s Beer Division, having performed that role from July 2015 through January 2017, and was the Company’s Senior Vice President, Treasurer and Controller from July 2014 through July 2015. Mr. Stenzel joined the Company with the Company’s acquisition of Beam Wine Estates, Inc. in December 2007, serving as a Senior Vice President of Finance in the Company’s Wine Division until July 2014. Before that, he held various financial positions of increasing responsibility with other beverage alcohol companies.

Executive officers of the Company are generally chosen or elected to their positions annually and hold office until the earlier of their removal or resignation or until their successors are chosen and qualified.

Company Information

Our Internet website is http://www.cbrands.com. Our filings with the Securities and Exchange Commission (“SEC”), including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are accessible free of charge at http://www.cbrands.com as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains an Internet site that contains

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reports, proxy and information statements, and other information regarding issuers, such as ourselves, that file electronically with the SEC. The Internet address of the SEC’s site is http://www.sec.gov. Also, the public may read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-732-0330.

We have adopted a Chief Executive Officer and Senior Financial Executive Code of Ethics that specifically applies to our chief executive officer, our principal financial officer and our controller, and is available on our Internet site. This Chief Executive Officer and Senior Financial Executive Code of Ethics meets the requirements as set forth in the Securities Exchange Act of 1934, Item 406 of Regulation S-K.

We also have adopted a Code of Business Conduct and Ethics that applies to all employees, directors and officers, including each person who is subject to the Chief Executive Officer and Senior Financial Executive Code of Ethics. The Code of Business Conduct and Ethics is available on our Internet website, together with our Global Code of Responsible Practices for Beverage Alcohol Advertising and Marketing, our Board of Directors Corporate Governance Guidelines and the Charters of the Board’s Audit Committee, Human Resources Committee (which serves as the Board’s compensation committee) and Corporate Governance Committee (which serves as the Board’s nominating committee). All of these materials are accessible on our Internet website at http://www.cbrands.com/investors/corporate-governance. Amendments to, and waivers granted to our directors and executive officers under our codes of ethics, if any, will be posted in this area of our website. Copies of these materials are available in print to any shareholder who requests them. Shareholders should direct such requests in writing to Investor Relations Department, Constellation Brands, Inc., 207 High Point Drive, Building 100, Victor, New York 14564, or by telephoning our Investor Center at 1-888-922-2150.

The information regarding our website and its content is for your convenience only. The content of our website is not deemed to be incorporated by reference in this report or filed with the SEC.


Item 1A. Risk Factors.

In addition to the other information set forth in this report, you should carefully consider the following factors which could materially affect our business, financial condition or results of operations. The risks described below are not the only risks we face. Additional factors not presently known to us or that we currently deem to be immaterial also may materially adversely affect our business, cash flows, financial condition or results of operations in future periods.

International operations, currency rate fluctuations, interest rate fluctuations and geopolitical uncertainty

Our products are produced and sold in numerous countries throughout the world, we have employees in various countries throughout the world and we have production facilities currently in the U.S., Mexico, New Zealand, Italy and Canada.

Risks associated with international operations, any of which could have a material adverse effect on our business, liquidity, financial condition and results of operations, include:

changes in local political, economic, social and labor conditions;
potential disruption from socio-economic violence, including terrorism and drug-related violence;
restrictions on foreign ownership and investments or on repatriation of cash earned in countries outside the U.S.;
changes in laws, governmental regulations and policies in the U.S. and in many countries outside the U.S., including changes in tax laws and regulations;
import and export requirements;
currency exchange rate fluctuations;
a less developed and less certain legal and regulatory environment in some countries, which among other things can create uncertainty with regard to liability issues;
laws regarding the enforcement of contract and intellectual property rights;

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inadequate levels of compliance with applicable anti-bribery laws, including the Foreign Corrupt Practices Act; and
other challenges caused by distance, language and cultural differences.

Our success will depend, in part, on our ability to overcome the challenges we encounter with respect to these factors and other matters generally affecting U.S. companies with international operations. Although we have implemented policies and procedures designed to ensure compliance with U.S. and foreign laws and regulations, including anti-corruption and privacy laws and regulations, there can be no assurance that our employees, business partners or agents will not violate our policies or take action determined to be in violation of the law. Any determination that our operations or activities did not comply with applicable U.S. or foreign laws or regulations could result in the imposition of fines and penalties, interruptions of business, terminations of necessary licenses and permits, and other legal and equitable sanctions.

We are also exposed to risks associated with currency fluctuations and risks associated with interest rate fluctuations. Currency exchange rates between the U.S. dollar and foreign currencies in the markets in which we do business have fluctuated in recent years and are likely to continue to do so in the future. We manage our exposure to foreign currency and interest rate risks utilizing derivative instruments and other means to reduce those risks. We could experience changes in our ability to hedge against or manage fluctuations in foreign currency exchange rates or interest rates and, accordingly, there can be no assurance that we will be successful in reducing those risks. We could also be affected by nationalization of our international operations, unstable governments, unfamiliar or biased legal systems or intergovernmental disputes. These currency, economic and political uncertainties may have a material adverse effect on our results of operations and financial condition, especially to the extent these matters, or the decisions, policies or economic strength of our suppliers and distributors, affect our international operations.

Competition

We are in a highly competitive industry and the dollar amount and unit volume of our sales could be negatively affected by numerous factors including:

our inability to maintain or increase prices, particularly in our beer business;
new entrants in our market or categories;
a general decline in beverage alcohol consumption; or
the decision of wholesalers, retailers or consumers to purchase a competitor’s product instead of ours.

Unit volume and dollar amount of sales could also be affected by pricing, purchasing, financing, operational, advertising or promotional decisions made by wholesalers, state and provincial agencies, and retailers which could affect their supply of, or consumer demand for, our products. We could also experience higher than expected selling, general and administrative expenses if we find it necessary to increase the number of our personnel or our advertising or marketing expenditures to maintain our competitive position or for other reasons.

Worldwide and domestic economic trends and financial market conditions

We are subject to risks associated with adverse economic conditions, including economic slowdown, inflation, and the disruption, volatility and tightening of credit and capital markets. Unfavorable global or regional economic conditions could adversely impact our business, liquidity, financial condition and results of operations. Unemployment, tax increases, governmental spending cuts or a return of high levels of inflation could affect consumer spending patterns and purchases of our products. These could also create or exacerbate credit issues, cash flow issues and other financial hardships for us and our suppliers, distributors, retailers and consumers. The inability of suppliers, distributors and retailers to access liquidity could impact our ability to produce and distribute our products. We have a committed credit facility and additional liquidity facilities available to us. While to date we have not experienced problems with accessing these facilities, to the extent that the financial institutions that participate in these facilities were to default on their obligation to fund, those funds would not be available to us.


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Dependence on sales of our Mexican beer brands

Sales of our Mexican beer brands in the U.S. are a significant portion of our business. Accordingly, a decline in the growth rate, amount or profitability of our sales of the Mexican beer brands in the U.S. could adversely affect our business. Further, consumer preferences and tastes may shift away from the Mexican beer brands, the categories in which they compete, or beer generally due to, among other reasons, changing taste preferences, demographics or perceived value. Consequently, any material shift in consumer preferences and taste away from the Mexican beer brands, or from the categories in which they compete, could have a material adverse effect on our business, our financial condition and results of operations.

Supply of Mexican beer brands

In order to fulfill our current and projected Mexican beer brands product requirements, we are currently dependent on our Nava Brewery located in Nava, Coahuila, Mexico and our Obregon Brewery located in Obregon, Sonora, Mexico. Although we are in the process of optimizing our Obregon Brewery and constructing an additional brewery in Mexicali, Baja California, Mexico, our Nava Brewery and our Obregon Brewery are currently our sole source of supply for our Mexican beer brands. The Nava Brewery currently has the capacity to fill approximately 80% of our current product requirements with the balance able to be filled by our Obregon Brewery.

Our supply of Mexican beer brands is also dependent upon an adequate supply of glass bottles. We formed the Mexican glass plant joint venture which acquired and is expanding the glass plant adjacent to our Nava Brewery in order to increase bottle output to support increased production at our Nava Brewery.

We may not be able to satisfy all of our product supply requirements for the Mexican beer brands in the event of a significant partial destruction or the total destruction of the Nava Brewery or the Obregon Brewery. Also, if the contemplated Nava Brewery and glass plant expansions, Obregon Brewery optimization and Mexicali Brewery construction activities are not completed by their targeted completion dates, we may not be able to produce sufficient Mexican beer brands to satisfy our needs. Under such circumstances, we may be unable to obtain Mexican beer brands at a reasonable price from another source, if at all. A significant disruption at our Nava Brewery or our Obregon Brewery, even on a short-term basis, could impair our ability to produce and ship products to market on a timely basis. Alternative facilities with sufficient capacity or capabilities may not readily be available, may cost substantially more or may take a significant time to start production, any of which could negatively affect our business and financial performance. Similarly, although we have additional sources of supply of glass bottles, a significant partial destruction or the total destruction of the Mexican glass plant or the failure of the joint venture to complete the glass plant expansion could impair our ability to bottle and ship our Mexican beer products to market. Additionally, our general insurance policies may not cover certain types of catastrophes that might affect our supply of the Mexican beer brands. A major uninsured catastrophe could result in significant unrecoverable losses.

Expansion issues, construction issues and operational disruptions

We are currently expanding our Nava Brewery, optimizing our Obregon Brewery and constructing our Mexicali Brewery and our joint venture with Owens-Illinois is expanding the glass plant. While these multi-million dollar expansion and construction activities are progressing consistent with our plans, there is always the potential risk of completion delays and cost overruns.

Expansion and optimization of current production facilities and construction of new production facilities are subject to various regulatory and developmental risks, including but not limited to: (i)  our ability to obtain timely certificate authorizations, necessary approvals and permits from regulatory agencies and on terms that are acceptable to us; (ii)  potential changes in federal, state and local statutes and regulations, including environmental requirements, that prevent a project from proceeding or increase the anticipated cost of the project; (iii)  inability to acquire rights-of-way or land or water rights on a timely basis on terms that are acceptable to us; and (iv)  inability to acquire the necessary energy supplies, including electricity, natural gas and diesel fuel. Any of these events could delay the expansion, construction or optimization of our production facilities.


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Many of our production facilities, such as our breweries, wineries, distilleries and the glass plant are asset intensive. Our profitability could be affected by operational disruption of any of our production or bottling lines or the glass furnace. In such event we may experience an adverse effect to our business operations and profitability due to higher maintenance charges, unexpected capital spending or product supply constraints.

Supply of quality water, agricultural and other raw materials, certain raw materials and packaging materials purchased under short-term supply contracts, limited group of suppliers of glass bottles

The quality and quantity of water available for use is important to the supply of our agricultural raw materials and our ability to operate our business. Water is a limited resource in many parts of the world and if climate patterns change and droughts become more severe, there may be a scarcity of water or poor water quality which may affect our production costs or impose capacity constraints. We are dependent on sufficient amounts of quality water for operation of our breweries, our wineries and our distilleries, as well as to irrigate our vineyards and conduct our other operations. The suppliers of the agricultural raw materials we purchase are also dependent upon sufficient supplies of quality water for their vineyards and fields.

We have substantial wine operations in the state of California. Although certain areas in California have recently experienced flooding, the state had endured an extended period of drought and instituted restrictions on water usage. While we have undertaken a number of water saving initiatives and we currently believe we have sufficient water available for our California vineyards and wineries, a recurrence of severe drought conditions in California could have an adverse effect upon those operations, which effect could become more significant depending upon actual future drought conditions. Our Nava Brewery and the glass plant receive water originating from a mountain aquifer. Our Obregon Brewery receives its allocation of water originating from an aquifer and we expect our Mexicali Brewery will receive an allocation of water originating from an aquifer. Although we anticipate our breweries and the glass plant will receive water adequate to support their on-going requirements, including as a result of the anticipated optimization and expansions, there is no guarantee that the water available to them, our expectations as to the source of water, methods of water delivery, or their water requirements will not change materially in the future.

Growing agricultural raw materials also requires adequate water supplies. If water available to our operations or the operations of our suppliers becomes scarcer or the quality of that water deteriorates, we may incur increased production costs or face manufacturing constraints which could negatively affect our business and financial performance. Even if quality water is widely available, including to our breweries, our wineries, our distilleries and our vineyards, water purification and waste treatment infrastructure limitations could increase costs or constrain operation of our production facilities and vineyards. A substantial reduction in water supplies could result in material losses of grape crops and vines or other crops, which could lead to a shortage of our product supply. Any of these factors could have a material and adverse effect on our financial condition and results of operations.

Our breweries, the glass plant, our wineries and our distilleries also use a large volume of agricultural and other raw materials to produce their products. As to the Nava Brewery and the Obregon Brewery, these include corn starch, malt, hops and water; the glass plant uses large amounts of soda ash and silica sand; the Ballast Point breweries use large amounts of malt, hops, yeast and water, as well as corn sugars, spices and fruits; the wineries use large amounts of grapes and water; and the distilleries use large amounts of grain and water. Our breweries, our wineries and our distilleries all use large amounts of various packaging materials, including glass, aluminum, cardboard and other paper products. Our production facilities, including the glass plant, also use a significant amount of energy in their operations, including electricity, natural gas and diesel fuel. Certain raw materials and packaging materials are purchased under contracts of varying maturities. The supply and price of raw materials, packaging materials and energy can be affected by a number of factors beyond our control, including market demand, global geopolitical events (especially as to their impact on crude oil prices), droughts and other weather conditions, economic factors affecting growth decisions, inflation, plant diseases and theft. To the extent any of the foregoing factors, including supply of goods and energy, affect the prices of ingredients or packaging or we do not effectively or completely hedge changes in commodity price risks, or are unable to recoup costs through increases in the price of our finished products, our financial condition and results of operations could be materially and adversely impacted.

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Glass bottle costs are one of our largest components of cost of product sold. We currently have a small number of suppliers of glass bottles for our Mexican beer brands. In the U.S., glass bottles have only a small number of producers. Currently, one producer supplies most of our glass container requirements for our U.S. wine and spirits operations and a different supplier supplies our glass bottles for our craft beer. The inability of any of our glass bottle suppliers to satisfy our requirements could adversely affect our business.

Catastrophic loss to wineries, production facilities or distribution systems

Throughout the years, we have consolidated several of our winery and production facility operations. Approximately 80% of our total annual wine and spirits product volume is produced in the U.S., and three of our largest wineries are the Woodbridge Winery in Acampo, CA, the Canandaigua Winery in Canandaigua, NY, and the Mission Bell Winery in Madera, CA. These three facilities produce approximately 40.6 million cases (or approximately 75% of our U.S. production) which is approximately 60% of the total annual Constellation wine and spirits product volume globally. Currently, our entire Mexican beer brands product supply is produced at our breweries in Nava, Coahuila, Mexico and Obregon, Sonora, Mexico.

Additionally, many of our vineyards and production and distribution facilities, such as our California wineries, our Lodi Distribution Center in Lodi, CA, certain of our Ballast Point operations, and our planned Mexicali Brewery are located in areas which are prone to seismic activity. If any of these vineyards and facilities were to experience a catastrophic loss, it could disrupt our operations, delay production, shipments and revenue, and result in potentially significant expenses to repair or replace the vineyard or facility. If such a disruption were to occur, we could breach agreements, our reputation could be harmed, and our business and operating results could be adversely affected. In addition, since we have consolidated certain of our operations and various production and distribution facilities, we are more likely to experience an interruption of our operations in the event of a catastrophic event in any one location, such as through acts of war or terrorism, fires, floods, earthquakes, hurricanes or other natural or man-made disasters. Although we carry insurance for property damage and business interruption, certain catastrophes are not covered by our insurance policies as we believe this to be a prudent financial decision. Economic conditions and uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain insurance. If our insurance coverage is adversely affected, or to the extent we have elected to self-insure, we may be at greater risk that we may experience an adverse impact to our financial results. We take steps to minimize the damage that would be caused by a catastrophic event, but there is no certainty that our efforts would prove successful. If one or more significant uninsured events occur, we could suffer a major financial loss.

Changes to international trade agreements and tariffs, changes to accounting standards, elections or assertions, changes to tax laws, changes to import and excise duties or other taxes or other governmental rules and regulations, including significant additional labeling or warning requirements or limitations in the marketing or sale of our products, and accounting for tax positions and the resolution of tax disputes

The U.S. and other countries in which we operate impose import and excise duties, tariffs, and other taxes on beverage alcohol products in varying amounts which are subject to change. Significant increases in import and excise duties or other taxes on beverage alcohol products could materially and adversely affect our financial condition or results of operations. The U.S. federal budget and individual state, provincial or local municipal budget deficits could result in increased taxes on our products, business, customers or consumers. Various proposals to increase taxes on beverage alcohol products have been made at the federal and state or provincial level in recent years. Many U.S. states have considered proposals to increase, and some of these states have increased, state alcohol excise taxes. There may be further consideration by federal, state, provincial, local and foreign governmental entities to increase taxes upon beverage alcohol products as governmental entities explore available alternatives for raising funds during the current macroeconomic climate.

Comments made during the course of the 2016 U.S. presidential campaign and subsequent to the election indicate that the U.S. federal government may propose changes to international trade agreements, tariffs, taxes and other government rules and regulations. The current U.S. administration has indicated that tax reform is among its top priorities and the U.S. Congress is reviewing and may, in the future, review tax legislation proposals. While we

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cannot predict what changes will actually occur with respect to any of these items, such changes could affect our business and results of operations.

In addition, federal, state, provincial, local and foreign governmental agencies extensively regulate the beverage alcohol products industry concerning such matters as licensing, warehousing, trade and pricing practices, permitted and required labeling, advertising and relations with wholesalers and retailers. Certain federal, state or provincial regulations also require warning labels and signage. New or revised regulations or increased licensing fees, requirements or taxes could also have a material adverse effect on our financial condition or results of operations. Additionally, various jurisdictions may seek to adopt significant additional product labeling or warning requirements or limitations on the marketing or sale of our products as a result of what they contain or allegations that they cause adverse health effects. If these types of requirements become applicable to one or more of our major products under current or future environmental or health laws or regulations, they may inhibit sales of such products.

We may also make various accounting elections or assertions or change accounting elections or assertions that we have previously made. Our accounting elections or assertions or changes to our accounting elections or assertions are affected by various business factors which, collectively, may have an impact on our financial results or our effective tax rate.

Additionally, significant judgment is required to determine our effective tax rate and evaluate our tax positions. We provide for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement criteria prescribed by applicable accounting standards. Fluctuations in federal, state, local and foreign taxes or a change to uncertain tax positions, including related interest and penalties, may impact our effective tax rate and our financial results. When tax matters arise, a number of years may elapse before such matters are audited and finally resolved. Unfavorable resolution of any tax matter could increase the effective tax rate, which could have an adverse effect on our operating results. Any resolution of a tax issue may require the use of cash in the year of resolution.

Indebtedness

In recent years, we have incurred substantial indebtedness to finance acquisitions such as our acquisition of Ballast Point, The Prisoner Wine Company brand portfolio, the Charles Smith wines collection, High West, and the Obregon Brewery, fund the Beer Business Acquisition, expand our Nava Brewery and begin construction of our Mexicali Brewery, expand the glass plant, and repurchase shares of our common stock. In the future, we may continue to incur substantial additional indebtedness to finance acquisitions, repurchase shares of our stock and fund other general corporate purposes, including the Nava Brewery and glass plant expansions, Obregon Brewery optimization and Mexicali Brewery construction. We cannot assure you that our business will generate sufficient cash flow from operations to meet all our debt service requirements, to pay dividends, to repurchase shares of our common stock, and to fund our general corporate and capital requirements.

Our ability to satisfy our debt obligations will depend upon our future operating performance. We do not have complete control over our future operating performance because it is subject to prevailing economic conditions, levels of interest rates and financial, business and other factors.

Our current and future debt service obligations and covenants could have important consequences. These consequences include, or may include, the following:

our ability to obtain financing for future working capital needs or acquisitions or other purposes may be limited;
our funds available for operations, expansions, dividends or other distributions, or stock repurchases may be reduced because we dedicate a significant portion of our cash flow from operations to the payment of principal and interest on our indebtedness;
our ability to conduct our business could be limited by restrictive covenants; and
our vulnerability to adverse economic conditions may be greater than less leveraged competitors and, thus, our ability to withstand competitive pressures may be limited.


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Restrictive covenants in our senior credit facility and in our indentures place limits on our ability to conduct our business. Covenants in our senior credit facility include those that restrict our ability to make acquisitions, incur debt, encumber or sell assets, pay dividends, engage in mergers and consolidations, enter into transactions with affiliates, make investments and permit our subsidiaries to enter into certain restrictive agreements. It additionally contains certain financial covenants, including a net debt coverage ratio test and an interest coverage ratio test. Covenants in our indentures are generally less restrictive than those in our senior credit facility but nevertheless, among other things, limit our ability under certain circumstances to create liens or enter into sale-leaseback transactions and impose conditions on our ability to engage in mergers, consolidations and sales of all or substantially all of our assets.

These agreements also contain certain change of control provisions which, if triggered, may result in an acceleration of our obligation to repay the debt. If we fail to comply with the obligations contained in the senior credit facility, our existing or future indentures or other loan agreements, we could be in default under such agreements, which could require us to immediately repay the related debt and also debt under other agreements that may contain cross-acceleration or cross-default provisions.

Potential decline in the consumption of products we sell

We rely on consumers’ demand for our products. Consumer preferences may shift due to a variety of factors, including changes in demographic or social trends, public health policies, and changes in leisure, dining and beverage consumption patterns. Our continued success will require us to anticipate and respond effectively to shifts in consumer behavior and drinking tastes. If consumer preferences were to move away from our premium brands, including our Mexican beer brands, in any of our major markets, our financial results might be adversely affected.

While over the past several years there have been modest increases in the overall consumption of beverage alcohol and fluctuations in per capita consumption within categories of beverage alcohol, there have been periods in the past in which there were sequential declines in the overall per capita consumption of certain beverage alcohol product categories in the U.S. and other markets in which we participate. A limited or general decline in consumption in one or more of our product categories could occur in the future due to a variety of factors, including:

a general decline in economic or geopolitical conditions;
concern about the health consequences of consuming beverage alcohol products and about drinking and driving;
a general decline in the consumption of beverage alcohol products in on-premise establishments, such as may result from smoking bans and stricter laws relating to driving while under the influence of alcohol;
a decline in the consumption of beverage alcohol products as a result of consumers substituting legalized marijuana or other similar products in lieu of our products;
consumer dietary preferences favoring lighter, lower calorie beverages such as diet soft drinks, sports drinks and water products;
the increased activity of anti-alcohol groups;
increased federal, state, provincial and foreign excise or other taxes on beverage alcohol products and possible restrictions on beverage alcohol advertising and marketing;
increased regulation placing restrictions on the purchase or consumption of beverage alcohol products or increasing prices due to the imposition of duties or excise tax or changes to international trade agreements or tariffs;
inflation; and
wars, pandemics, weather and natural or man-made disasters.

In addition, our continued success depends, in part, on our ability to develop new products. The launch and ongoing success of new products are inherently uncertain especially with regard to their appeal to consumers. The launch of a new product can give rise to a variety of costs and an unsuccessful launch, among other things, can affect consumer perception of existing brands and our reputation. Unsuccessful implementation or short-lived popularity of our product innovations may result in inventory write-offs and other costs.

16



Acquisition, divestiture and joint venture strategy

We have made a number of acquisitions and divestitures and may, from time to time, acquire additional businesses, assets or securities of companies that we believe would provide a strategic fit with our business. Recently, these have included the Meiomi wine brand, the Ballast Point craft beer business, The Prisoner Wine Company brand portfolio, the Charles Smith Wines collection, High West, and the Obregon Brewery, as well as various minority investments by our Constellation Ventures function. We will need to integrate acquired businesses with our existing operations; our overall internal control over financial reporting processes; and our financial, operations and information systems. If the financial performance of our business, as supplemented by the assets and businesses acquired, does not meet our expectations, it may make it more difficult for us to service our debt obligations and our results of operations may fail to meet market expectations. We may also divest ourselves of businesses, assets or securities of companies that we believe no longer provide a strategic fit with our business. For example, we recently sold our Canadian wine business. We may be obligated to provide certain services on a transitional basis to divested operations. We cannot assure you that we will realize the expected benefits of divestitures.

We cannot assure you that we will realize the expected benefits of acquisitions or joint ventures, such as revenue, earnings or operating efficiency, and we may not effectively assimilate the business or product offerings of acquired companies into our business successfully or within the anticipated costs or timeframes. Complications with on-going integration of any acquisition or joint venture, including our Obregon Brewery acquisition or the glass plant joint venture, could result from the following circumstances, among others:

failure to implement our business plan for the combined business;
unanticipated issues in integrating, migrating or changing manufacturing, logistics, information, communications, financial, internal control and other systems;
failure to retain key customers and suppliers;
unanticipated changes in applicable laws and regulations;
failure to retain key employees;
operating risks inherent in the acquired businesses and assets and our business;
dependency upon the operational experience of employees who are relatively new to our organization;
unanticipated issues, expenses and liabilities;
failure to realize fully anticipated cost savings, growth opportunities and other potential synergies; and
unfamiliarity with operating new locations.

Our joint venture to operate a glass plant adjacent to our Nava Brewery is fully consolidated into our financial results and the entire output of that facility is being utilized to support our Mexican beer business and the production at our Nava Brewery. The integration of the Mexican glass plant can be further impacted by the following circumstances:

we share control of the joint venture with Owens-Illinois and while Owens-Illinois has deep experience running glass plants, we are not as experienced in that particular business; and
the ability of the joint venture to expand the glass plant capacity as planned in order to support the future growth of our beer business.

If any of these circumstances were to occur with respect to any of our acquisitions, including our Beer Business Acquisition or the joint venture’s acquisition of the glass plant, our business, financial condition and results of operations may be negatively impacted.

We may provide various indemnifications in connection with the sale of assets or portions of our business. Additionally, our final determinations and appraisals of the estimated fair value of assets acquired and liabilities assumed in our acquisitions may vary materially from earlier estimates. We cannot assure you that the fair value of acquired businesses will remain constant.

We have entered into various joint ventures and we may enter into additional joint ventures for other purposes and with other parties. We share control of our joint ventures. We have also acquired or retained

17


ownership interests in companies which we do not control, such as investments recently made through our Constellation Ventures function, such as our minority interests in Nelson’s Green Brier Tennessee Whiskey, The Bardstown Bourbon Company, Catoctin Creek Distilling Company, and Crafthouse Cocktails. Our joint venture partners or the other parties that hold the remaining ownership interests in companies which we do not control may at any time have economic, business or legal interests or goals that are inconsistent with our goals or the goals of the joint ventures or those companies. Our joint venture arrangements and the arrangements through which we acquired or hold our other equity or membership interests may require us, among other matters, to pay certain costs, to make capital investments, to fulfill alone our joint venture partners’ obligations, or to purchase other parties’ interests. Even though we share control of our glass plant joint venture, that joint venture’s financial results are consolidated into our financial results. Our failure to adequately manage the risks associated with any acquisition, or the failure of an entity in which we have an equity or membership interest, could adversely affect our financial condition or our valuation of these types of investments.

We cannot assure you that any of our acquisitions, investments or joint ventures will be profitable or that forecasts regarding acquisition, divestiture, joint venture or investment activities will be accurate.

Reliance on wholesale distributors, major retailers and government agencies

Local market structures and distribution channels vary worldwide. Within our primary market in the U.S., we offer a range of beverage alcohol products across the imported beer, craft beer, branded wine and spirits categories, with separate distribution networks utilized for our imported and craft beer portfolios and our wine and spirits portfolio. In the U.S., we sell our products principally to wholesalers for resale to retail outlets including grocery stores, club and discount stores, package liquor stores and restaurants and also directly to government agencies and we have entered into exclusive arrangements with certain wholesalers that generate a large portion of our U.S. wine and spirits sales. The replacement or poor performance of our major wholesalers, retailers or government agencies could result in temporary or longer-term sales disruptions or could materially and adversely affect our results of operations and financial condition for a particular period. Our inability to collect accounts receivable from our major wholesalers, retailers or government agencies could also materially and adversely affect our results of operations and financial condition.

Our industry is being affected by the trend toward consolidation in the wholesale and retail distribution channels, particularly in the U.S. If we are unable to adapt successfully to this changing environment, our net income, market share and volume growth could be negatively affected. In addition, wholesalers and retailers of our products offer products which compete directly with our products for retail shelf space, promotional support and consumer purchases. Accordingly, wholesalers or retailers may give higher priority to products of our competitors.

Reliance upon complex information systems and third party global networks

We depend on information technology to enable us to operate efficiently and interface with customers and suppliers, as well as maintain financial accuracy and efficiency. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, we could be subject to transaction errors, processing inefficiencies, the loss of customers, business disruptions, or the loss of or damage to intellectual property through security breach. We recognize that many groups on a world-wide basis have experienced increases in cyber attacks and other hacking activity. We have dedicated internal and external resources to review and address such threats. However, as with all large information technology systems, our systems could be penetrated by outside parties intent on extracting confidential or proprietary information, corrupting our information, disrupting our business processes, or engaging in the unauthorized use of strategic information about us or our employees, customers or consumers. Such unauthorized access could disrupt our business operations and could result in the loss of assets or revenues, litigation, remediation costs, damage to our reputation, or the failure by us to retain or attract customers following such an event. Such events could have a material adverse effect on our business, financial condition or results of operations.

We have outsourced various functions to third-party service providers and may outsource other functions in the future. We rely on those third-party service providers to provide services on a timely and effective basis. Although we believe we have robust service level agreements with such third parties, closely monitor their

18


performance and maintain contingency plans in case they are unable to perform as agreed, we do not ultimately control their performance. Their failure to perform as expected or as required by contract could result in significant disruptions and costs to our operations, which could materially affect our business, financial condition, operating results and cash flow, and could impair our ability to make required filings with various reporting agencies on a timely or accurate basis.

Damage to our reputation

Maintaining a good reputation is critical to selling our branded products. Product contamination or tampering or the failure to maintain our standards for product quality, safety and integrity, including with respect to raw materials, naturally occurring compounds, packaging materials or product components obtained from suppliers, may reduce demand for our products or cause production and delivery disruptions. Although we maintain standards for the materials and product components we receive from our suppliers, and we also audit our suppliers’ compliance with our standards, it is possible that a supplier may not provide materials or product components which meet our required standards or may falsify documentation associated with the fulfillment of those requirements. If any of our products becomes unsafe or unfit for consumption, is misbranded or causes injury, we may have to engage in a product recall and/or be subject to liability and incur additional costs. A widespread product recall, multiple product recalls, or a significant product liability judgment could cause our products to be unavailable for a period of time, which could further reduce consumer demand and brand equity. Our reputation could be impacted negatively by public perception, adverse publicity (whether or not valid), negative comments in social media, or our responses relating to:

a perceived failure to maintain high ethical, social and environmental standards for all of our operations and activities;
a perceived failure to address concerns relating to the quality, safety or integrity of our products;
our environmental impact, including use of agricultural materials, packaging, water and energy use, and waste management; or
effects that are perceived as insufficient to promote the responsible use of alcohol.

Failure to comply with local laws and regulations, to maintain an effective system of internal controls, to provide accurate and timely financial statement information, or to protect our information systems against service interruptions, misappropriation of data or breaches of security, could also hurt our reputation. Damage to our reputation or loss of consumer confidence in our products for any of these or other reasons could result in decreased demand for our products and could have a material adverse effect on our business, financial condition and results of operations, as well as require additional resources to rebuild our reputation, competitive position and brand equity.

Contamination

The success of our brands depends upon the positive image that consumers have of those brands. Contamination, whether arising accidentally or through deliberate third-party action, or other events that harm the integrity or consumer support for our brands, could adversely affect their sales. Contaminants in raw materials, packaging materials or product components purchased from third parties and used in the production of our beer, wine or spirits products or defects in the fermentation or distillation process could lead to low beverage quality as well as illness among, or injury to, consumers of our products and may result in reduced sales of the affected brand or all of our brands.

Dependence upon trademarks and proprietary rights, failure to protect our intellectual property rights

Our future success depends significantly on our ability to protect our current and future brands and products and to defend our intellectual property rights. We have been granted numerous trademark registrations covering our brands and products and have filed, and expect to continue to file, trademark applications seeking to protect newly-developed brands and products. We cannot be sure that trademark registrations will be issued with respect to any of our trademark applications. There is also a risk that we could, by omission, fail to timely renew or protect a trademark or that our competitors will challenge, invalidate or circumvent any existing or future trademarks issued to, or licensed by, us.

19



Intangible assets, such as goodwill and trademarks

We continue to have a significant amount of intangible assets such as goodwill and trademarks and may acquire more intangible assets in the future. Intangible assets are subject to a periodic impairment evaluation under applicable accounting standards. The write-down of any of these intangible assets could materially and adversely affect our net income.

Climate change, or legal, regulatory or market measures to address climate change

Our business depends upon agricultural activity and natural resources. There has been much public discussion related to concerns that carbon dioxide and other greenhouse gases in the atmosphere may have an adverse impact on global temperatures, weather patterns and the frequency and severity of extreme weather and natural disasters. Severe weather events, such as drought or flooding in California or a prolonged cold winter in New York, and climate change may negatively affect agricultural productivity in the regions from which we presently source our various agricultural raw materials. Decreased availability of our raw materials may increase the cost of goods for our products. Severe weather events or changes in the frequency or intensity of weather events can also disrupt our supply chain, which may affect production operations, insurance cost and coverage, as well as delivery of our products to wholesalers, retailers and consumers.

Various diseases, pests and certain weather conditions

Various diseases, pests, fungi, viruses, drought, frosts and certain other weather conditions could affect the quality and quantity of barley, hops, grapes and other agricultural raw materials available, decreasing the supply of our products and negatively impacting profitability. We cannot guarantee that our grape suppliers or our suppliers of other agricultural raw materials will succeed in preventing contamination in existing vineyards or fields or that we will succeed in preventing contamination in our existing vineyards or future vineyards we may acquire. Future government restrictions regarding the use of certain materials used in growing grapes or other agricultural raw materials may increase vineyard costs and/or reduce production of grapes or other crops.

Cost of energy or environmental regulatory compliance

We have experienced increases in energy costs in the past, and energy costs could rise in the future, which would result in higher transportation, freight and other operating costs. We may experience significant future increases in the costs associated with environmental regulatory compliance, including fees, licenses, and the cost of capital improvements to our operating facilities in order to meet environmental regulatory requirements. Our future operating expenses and margins will be dependent on our ability to manage the impact of cost increases. We cannot guarantee that we will be able to pass along increased energy costs or increased costs associated with environmental regulatory compliance to our customers through increased prices.

In addition, we may be party to various environmental remediation obligations arising in the normal course of our business or in connection with historical activities of businesses we acquire. Due to regulatory complexities, uncertainties inherent in litigation and the risk of unidentified contaminants in our current and former properties, the potential exists for remediation, liability and indemnification costs to differ materially from the costs that we have estimated. We may incur cost associated with environmental compliance arising from events we cannot control, such as unusually severe floods, hurricanes or earthquakes. We cannot assure you that our costs in relation to these matters will not exceed our projections or otherwise have an adverse effect upon our business reputation, financial condition or results of operations.

Control by the Sands Family

Our Class B Common Stock is principally held by members of the Sands family, either directly or through entities controlled by members of the Sands family. Holders of Class A Common Stock are entitled to one vote per share and holders of Class B Common Stock are entitled to 10 votes per share. Holders of Class 1 Common Stock generally do not have voting rights. The stock ownership of the Sands family and entities controlled by members of

20


the Sands family represents a majority of the combined voting power of all classes of our common stock as of April 21, 2017, voting as a single class. Consequently, the Sands family has the power to elect a majority of our directors and approve actions requiring the approval of the stockholders of the Company voting as a single class.

Benefit cost increases and labor relations

Our profitability is affected by employee medical costs and other employee benefits. In recent years, employee medical costs have increased due to factors such as the increase in health care costs in the U.S. These factors are expected to continue to put pressure on our business and financial performance due to higher employee benefit costs. Although we actively seek to control increases in employee benefit costs and encourage employees to maintain healthy lifestyles to reduce future potential medical costs, there can be no assurance that we will succeed in limiting future cost increases. Continued employee benefit cost increases could have an adverse effect on our results of operations and financial condition.

We believe our subsidiaries have good working relations with their employees. However, if their employees were to engage in a strike or other work stoppage, they could experience an operational disruption and/or experience higher on-going labor costs which may have a material adverse effect on our results of operations and financial condition.

Class action or other litigation relating to alcohol abuse, the misuse of alcohol, product liability, or marketing or sales practices

There has been public attention directed at the beverage alcohol industry, which we believe is due to concern over problems related to harmful use of alcohol, including drinking and driving, underage drinking and health consequences from the misuse of alcohol. We also could be exposed to lawsuits relating to product liability or marketing or sales practices. Adverse developments in lawsuits concerning these types of matters or a significant decline in the social acceptability of beverage alcohol products that may result from lawsuits could have a material adverse effect on our business.


Item 1B. Unresolved Staff Comments.

Not Applicable.


Item 2. Properties.

We operate breweries, wineries, distilling plants and bottling plants, many of which include warehousing and distribution facilities on the premises, and through a joint venture, we operate a glass production plant. In addition to our properties described below, certain of our businesses maintain office space for sales and similar activities and offsite warehouse and distribution facilities in a variety of geographic locations.

Our corporate headquarters are located in leased offices in Victor, New York. Our segments also maintain leased office spaces in other locations in the U.S. and internationally.

We believe that our facilities, taken as a whole, are in good condition and working order. Within the Wine and Spirits segment, we have adequate capacity to meet our needs for the foreseeable future. Within the Beer segment, we have adequate capacity to meet our current needs and we have undertaken activities to increase our production capacity to address our anticipated future needs. As of February 28, 2017, our properties include the following:

21


 
Owned
 
Leased
Beer Segment
 
 
 
Breweries
 
 
 
U.S.
 
 
5
Mexico
2
 
 
Total breweries
2
 
5
 
 
 
 
Glass production plant (1)
 
 
 
Mexico
1
 
 
 
 
 
 
Warehouse, distribution and other production facilities
 
 
 
U.S.
 
 
29
Mexico
1
 
 
Total warehouse, distribution and other production facilities
1
 
29
Total Beer Segment
4
 
34
 
 
 
 
 
 
 
 
Wine and Spirits Segment
 
 
 
Wineries
 
 
 
U.S.
 
 
 
California
15
 
1
New York
1
 
 
Washington
1
 
 
New Zealand
3
 
1
Italy
 
 
5
Total wineries
20
 
7
 
 
 
 
Distilleries
 
 
 
U.S.
1
 
1
Canada
1
 
 
Total distilleries
2
 
1
 
 
 
 
Warehouse, distribution and other production facilities
 
 
 
U.S.
 
 
6
Italy
1
 
8
Total warehouse, distribution and other production facilities
1
 
14
Total Wine and Spirits Segment
23
 
22
(1) 
The glass production plant in Nava, Coahuila, Mexico is owned and operated by an equally-owned joint venture with Owens-Illinois and is located adjacent to our Nava Brewery.

Within our Wine and Spirits segment, as of February 28, 2017, we owned, leased or had interests in approximately 13,600 acres of vineyards in California (U.S.), 6,400 acres of vineyards in New Zealand and 900 acres of vineyards in Italy.

As of February 28, 2017, our principal facilities, all of which are owned, consist of:

the Nava Brewery in Nava, Coahuila, Mexico;
the Obregon Brewery in Obregon, Sonora, Mexico;
the glass production plant in Nava, Coahuila, Mexico;
two wineries in California:  the Woodbridge Winery in Acampo and the Mission Bell winery in Madera;
the Canandaigua winery in Canandaigua, New York; and
the distillery in Lethbridge, Alberta, Canada.



22


Item 3. Legal Proceedings.

In the ordinary course of their business, the Company and its subsidiaries are subject to lawsuits, arbitrations, claims and other legal proceedings in connection with their business. Some of the legal actions include claims for substantial or unspecified compensatory and/or punitive damages. A substantial adverse judgment or other unfavorable resolution of these matters could have a material adverse effect on the Company’s financial condition, results of operations and cash flows. Management believes that the Company has adequate legal defenses with respect to the legal proceedings to which it is a defendant or respondent and that the outcome of these pending proceedings is not likely to have a material adverse effect on the financial condition, results of operations or cash flows of the Company. However, the Company is unable to predict the outcome of these matters.

Regulatory Matters – The Company and its subsidiaries are in discussions with various governmental agencies concerning matters raised during regulatory examinations or otherwise subject to such agencies’ inquiry. These matters could result in censures, fines or other sanctions. Management believes the outcome of any pending regulatory matters will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows. However, the Company is unable to predict the outcome of these matters.

As previously reported in the Company’s Form 10-K for the fiscal year ended February 28, 2014, the United States District Court for the District of Columbia (“District Court”) signed the Stipulation and Order filed by the Antitrust Division of the United States Department of Justice (“DOJ”), permitting the Company and Anheuser-Busch InBev SA/NV (“ABI”) to consummate the Beer Business Acquisition. After expiration of the 60-day public comment period as required under the Antitrust Procedures and Penalties Act, the DOJ moved the District Court for entry of the Final Judgment. The Final Judgment was signed on October 21, 2013, and entered into the District Court’s docket on October 24, 2013, without modification to the terms included in the Proposed Final Judgment. The Company is operating in accordance with the requirements of the Final Judgment.


Item 4. Mine Safety Disclosures.

Not Applicable.



23


PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our Class A Common Stock and Class B Common Stock trade on the New York Stock Exchange® (“NYSE”) under the symbols STZ and STZ.B, respectively. There is no public trading market for our Class 1 Common Stock. The following table sets forth, for the periods indicated, the high and low sales prices of our Class A Common Stock and Class B Common Stock as reported on the NYSE, and cash dividends declared for those classes of common stock. For all periods presented, the cash dividends declared for our Class 1 Common Stock are the same as those declared for our Class B Common Stock.
 
Fiscal 2017
 
Fiscal 2016
 
High
 
Low
 
Dividends
 
High
 
Low
 
Dividends
Class A Common Stock
 
 
 
 
 
 
 
 
 
 
 
1st Quarter
$
165.81

 
$
137.85

 
$
0.40

 
$
121.92

 
$
110.45

 
$
0.31

2nd Quarter
$
168.68

 
$
149.26

 
$
0.40

 
$
130.42

 
$
114.49

 
$
0.31

3rd Quarter
$
173.55

 
$
146.90

 
$
0.40

 
$
144.60

 
$
122.35

 
$
0.31

4th Quarter
$
162.48

 
$
144.00

 
$
0.40

 
$
155.68

 
$
130.23

 
$
0.31

 
 
 
 
 
 
 
 
 
 
 
 
Class B Common Stock
 
 
 
 
 
 
 
 
 
 
 
1st Quarter
$
162.68

 
$
140.00

 
$
0.36

 
$
121.57

 
$
109.24

 
$
0.28

2nd Quarter
$
171.00

 
$
151.60

 
$
0.36

 
$
129.84

 
$
116.22

 
$
0.28

3rd Quarter
$
175.50

 
$
150.91

 
$
0.36

 
$
144.36

 
$
126.32

 
$
0.28

4th Quarter
$
161.91

 
$
147.95

 
$
0.36

 
$
156.00

 
$
134.76

 
$
0.28

At April 21, 2017, the number of holders of record of our Class A Common Stock, Class B Common Stock and Class 1 Common Stock were 582, 105 and 3, respectively.

In April 2015, our Board of Directors approved the initiation of a dividend program under which we paid quarterly cash dividends during Fiscal 2017 and Fiscal 2016. Prior to Fiscal 2016, we had not paid any cash dividends on our common stock since our initial public offering in 1973 as we had retained all earning to finance the development and expansion of our business. On April 5, 2017, we declared an increased regular quarterly cash dividend of $0.52 per share of Class A Common Stock, $0.47 per share of Class B Convertible Common Stock and $0.47 per share of Class 1 Common Stock payable on May 24, 2017, to stockholders of record of each class on May 10, 2017.

We currently expect to continue to pay a regular quarterly cash dividend to stockholders of our common stock in the future, but such payments are subject to approval of our Board of Directors and are dependent upon our financial condition, results of operations, capital requirements and other factors, including those set forth under Item 1A “Risk Factors” of this Annual Report on Form 10-K. In addition, the terms of our 2016 Credit Agreement may restrict the payment of cash dividends on our common stock under certain circumstances. Any indentures for debt securities issued in the future, the terms of any preferred stock issued in the future and any credit agreements entered into in the future may also restrict or prohibit the payment of cash dividends on our common stock.


24


ISSUER PURCHASES OF EQUITY SECURITIES
Period
 
Total Number
of Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number
of Shares
Purchased as
Part of a
Publicly
Announced
Program
 
Approximate
Dollar Value
of Shares that
May Yet Be
Purchased
Under the
Program (1) (2)
 
December 1 – 31, 2016
 
2,982,453

 
$
150.88

 
2,982,453

 
$
846,879,288

(3) 
January 1 – 31, 2017
 
2,012,405

 
$
149.08

 
2,012,405

 
$
546,879,397

 
February 1 – 28, 2017
 

 
$

 

 
$
546,879,397

 
Total
 
4,994,858

 
$
150.15

 
4,994,858

 
 
 
(1) 
In April 2012, we announced that our Board of Directors authorized the repurchase of up to an aggregate amount of $1.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2013 Authorization. The Board of Directors did not specify a date upon which the 2013 Authorization would expire. In December 2016, we utilized the remaining $296.9 million available under the 2013 Authorization to repurchase 1,988,311 shares of Class A Common Stock at an average cost of $149.31 per share, through open market transactions, thereby completing the 2013 Authorization. (3) 
(2) 
In November 2016, we announced that our Board of Directors authorized the repurchase of up to an aggregate amount of $1.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2017 Authorization. The Board of Directors did not specify a date upon which the 2017 Authorization would expire.
(3) 
Repurchases were made pursuant to a Rule 10b5-1 trading plan.



25


Item 6. Selected Financial Data.

The following selected financial data should be read in conjunction with MD&A and our consolidated financial statements and notes thereto under Item 8 of this Annual Report on Form 10-K (the “Financial Statements”).
 
For the Years Ended
 
February 28, 2017 (1)
 
February 29,
2016
 
February 28,
2015
 
February 28, 2014 (2)
 
February 28,
2013
(in millions, except per share data)
 
 
 
 
 
 
 
 
 
Sales
$
8,061.6

 
$
7,223.8

 
$
6,672.1

 
$
5,411.0

 
$
3,171.4

Less – excise taxes
(730.1
)
 
(675.4
)
 
(644.1
)
 
(543.3
)
 
(375.3
)
Net sales
7,331.5

 
6,548.4

 
6,028.0

 
4,867.7

 
2,796.1

Cost of product sold
(3,802.1
)
 
(3,606.1
)
 
(3,449.4
)
 
(2,876.0
)
 
(1,687.8
)
Gross profit
3,529.4

 
2,942.3

 
2,578.6


1,991.7

 
1,108.3

Selling, general and administrative expenses (3)
(1,392.4
)
 
(1,177.2
)
 
(1,078.4
)
 
(1,196.0
)
 
(585.4
)
Gain on sale of business
262.4

 

 

 

 

Gain on remeasurement to fair value of equity method investment

 

 

 
1,642.0

 

Operating income
2,399.4

 
1,765.1

 
1,500.2

 
2,437.7

 
522.9

Earnings from unconsolidated investments
27.3

 
51.1

 
21.5

 
87.8

 
233.1

Interest expense
(333.3
)
 
(313.9
)
 
(337.7
)
 
(323.2
)
 
(227.1
)
Loss on write-off of debt issuance costs

 
(1.1
)
 
(4.4
)
 

 
(12.5
)
Income before income taxes
2,093.4

 
1,501.2


1,179.6

 
2,202.3

 
516.4

Provision for income taxes
(554.2
)
 
(440.6
)
 
(343.4
)
 
(259.2
)
 
(128.6
)
Net income
1,539.2

 
1,060.6

 
836.2

 
1,943.1

 
387.8

Net (income) loss attributable to noncontrolling interests
(4.1
)
 
(5.7
)
 
3.1

 

 

Net income attributable to CBI
$
1,535.1


$
1,054.9


$
839.3

 
$
1,943.1

 
$
387.8

 
 
 
 
 
 
 
 
 
 
Net income per common share attributable to CBI:
 
 
 
 
 
 
 
 
 
Basic – Class A Common Stock
$
7.79

 
$
5.42

 
$
4.40

 
$
10.45

 
$
2.15

Basic – Class B Convertible Common Stock
$
7.07

 
$
4.92

 
$
4.00

 
$
9.50

 
$
1.96

Diluted – Class A Common Stock
$
7.52

 
$
5.18

 
$
4.17

 
$
9.83

 
$
2.04

Diluted – Class B Convertible Common Stock
$
6.93

 
$
4.79

 
$
3.83

 
$
9.04

 
$
1.87

 
 
 
 
 
 
 
 
 
 
Cash dividends declared per common share:
 
 
 
 
 
 
 
 
 
Class A Common Stock
$
1.60

 
$
1.24

 
$

 
$

 
$

Class B Convertible Common Stock
$
1.44

 
$
1.12

 
$

 
$

 
$

 
 
 
 
 
 
 
 
 
 
Total assets
$
18,602.4

 
$
16,965.0

 
$
15,093.0

 
$
14,302.1

 
$
7,638.1

 
 
 
 
 
 
 
 
 
 
Long-term debt, including current maturities
$
8,631.6

 
$
7,672.9

 
$
7,244.1

 
$
6,963.3

 
$
3,305.4

(1) 
In December 2016, we completed the Canadian Divestiture. For a detailed discussion of this transaction, including the gain on sale of business, refer to Note 2 of the Notes to the Financial Statements.

26


(2) 
In June 2013, we completed the Beer Business Acquisition. In connection with this acquisition, our preexisting 50% equity interest in Crown Imports was remeasured to its estimated fair value based upon the estimated fair value of the acquired 50% equity interest, and a gain was recognized.
(3) 
Includes impairment of intangible assets of $46.0 million for the year ended February 28, 2017, and impairment of goodwill and intangible assets of $300.9 million for the year ended February 28, 2014. For a detailed discussion of impairment of intangible assets for the year ended February 28, 2017, refer to Note 7 of the Notes to the Financial Statements. For the year ended February 28, 2014, impairment of goodwill and intangible assets represents impairment losses recorded for certain goodwill and trademarks associated with our Wine and Spirits segment.


Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Introduction

This MD&A, which should be read in conjunction with our Financial Statements, provides additional information on our businesses, current developments, financial condition, cash flows and results of operations. It is organized as follows:

Overview.    This section provides a general description of our business, which we believe is important in understanding the results of our operations, financial condition and potential future trends.

Strategy.    This section provides a description of our strategy and a discussion of acquisitions and divestitures.

Results of operations.    This section provides an analysis of our results of operations presented on a business segment basis. In addition, a brief description of transactions and other items that affect the comparability of the results is provided.

Financial liquidity and capital resources.    This section provides an analysis of our cash flows and our outstanding debt and commitments. Included in the analysis of outstanding debt is a discussion of the amount of financial capacity available to fund our ongoing operations and future commitments, as well as a discussion of other financing arrangements.

Critical accounting estimates.    This section identifies those accounting policies that are considered important to our results of operations and financial condition, require significant judgment and involve significant management estimates. Our significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 1 of the Notes to the Financial Statements.


Overview

We are an international beverage alcohol company with a broad portfolio of consumer-preferred high-end imported and craft beer brands, and premium wine and spirits brands. We are the third-largest producer and marketer of beer for the U.S. market and the world’s leading premium wine company. We are the largest multi-category supplier (beer, wine and spirits) of beverage alcohol in the U.S., and a leading supplier of wine from New Zealand and Italy to North America.

Our internal management financial reporting consists of two business divisions:  (i)  Beer and (ii)  Wine and Spirits, and we report our operating results in three segments:  (i)  Beer, (ii)  Wine and Spirits, and (iii)  Corporate Operations and Other. In the Beer segment, our portfolio consists of high-end imported and craft beer brands. We have an exclusive perpetual brand license to import, market and sell in the U.S. our Mexican beer portfolio. In the Wine and Spirits segment, we sell a large number of wine brands across all categories – table wine, sparkling wine and dessert wine – and across all price points – popular, premium and luxury categories, primarily within the $5 to $25 price range at U.S. retail – complemented by certain premium spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of executive management, corporate development,

27


corporate finance, human resources, internal audit, investor relations, legal, public relations and information technology. The amounts included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are therefore not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in our chief operating decision maker’s evaluation of the operating income performance of the other reportable segments. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management and the structure of our internal financial reporting.


Strategy

Our overall strategy is to sustain profitable growth and build shareholder value. We position our portfolio to benefit from industry premiumization trends, which we believe will continue to result in faster growth rates in the high-end of the beer, wine and spirits categories. We focus on developing our expertise in consumer insights and category management as well as our strong distributor network, which provides an effective route-to-market. Additionally, we leverage our scale across the total beverage alcohol market and our level of diversification hedges our portfolio risk. In addition to growing our existing business, we seek targeted acquisitions of businesses that are premium, growing, high-margin, consumer-led, have a low integration risk and/or fill a gap in our portfolio.

We strive to strengthen our portfolio of premium beer, wine and spirits brands and differentiate ourselves through:

leveraging our leading position in total beverage alcohol and our scale with wholesalers and retailers to expand distribution of our product portfolio and cross promotional opportunities;
strengthening relationships with wholesalers and retailers by providing consumer and beverage alcohol insights;
investing in brand building activities;
positioning ourselves for success with consumer-led innovation capabilities;
realizing operating efficiencies through expanding and enhancing production capabilities and maximizing asset utilization; and
developing employees to enhance performance in the marketplace.

Our business strategy in the Beer segment focuses on leading the high-end of the U.S. beer market and includes continued focus on growing our beer portfolio in the U.S. through expanding distribution for key brands, as well as new product development and innovation within the existing portfolio of brands, and continued construction, expansion and optimization activities for our Mexico beer operations.

In connection with this strategy, we have expanded our Nava Brewery from 10 million to 25 million hectoliters production capacity since the acquisition of the Nava Brewery. Expansion, construction and optimization efforts continue under our Mexico Beer Expansion Projects to align with our anticipated future growth expectations. See “Capital Expenditures” below for additional discussion.

Our business strategy in the Wine and Spirits segment is to be the leader in the premium wine category and build a portfolio of premium spirits brands. We are investing to meet the evolving needs of consumers and building brands through consumer insights, sensory expertise, innovation and refreshing existing brands. In this segment, we continue to focus on the premiumization of our branded wine and spirits portfolio. We dedicate a large share of our sales and marketing resources to our U.S. Focus Brands as they represent a majority of our U.S. wine and spirits revenue and profitability, and generally have strong positions in their respective price categories. In markets where it is feasible, we have a consolidated U.S. distribution network in order to obtain dedicated distributor selling resources which focus on our U.S. wine and spirits portfolio to drive organic growth. This consolidated U.S. distribution network currently represents about 70% of our branded wine and spirits volume in the U.S. Throughout the terms of these contracts, we generally expect shipments on an annual basis to these distributors to essentially equal the distributors’ shipments to retailers.


28


Marketing, sales and distribution of our products are managed on a geographic basis in order to fully leverage leading market positions. In addition, market dynamics and consumer trends vary across each of our markets. Within our primary market in the U.S., we offer a range of beverage alcohol products across the imported beer, craft beer, branded wine and spirits categories, with separate distribution networks utilized for (i)  our beer portfolio and (ii)  our wine and spirits portfolio. The environment for our products is competitive in each of our markets.

We remain committed to our long-term financial model of growing sales, expanding margins and increasing cash flow in order to achieve earnings per share growth, reduce borrowings and pay quarterly cash dividends.

Acquisitions and Divestitures

Beer Segment

Obregon Brewery

In December 2016, we acquired the Obregon Brewery for cash paid of $568.7 million, net of cash acquired, subject to estimated working capital adjustments due to seller of $3.1 million. The transaction primarily included the acquisition of operations; goodwill; property, plant and equipment; and inventories. This acquisition provided us with immediate functioning brewery capacity to support our fast-growing, high-end Mexican beer portfolio and flexibility for future innovation initiatives. It also enabled us to become fully independent from an interim supply agreement with Modelo, which was terminated at the time of this acquisition. The results of operations of the Obregon Brewery are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.

Ballast Point Acquisition

In December 2015, we acquired Ballast Point for $998.5 million, net of cash acquired. The transaction primarily included the acquisition of operations, goodwill, trademarks and property, plant and equipment. This acquisition provided us with a high-growth premium platform that enables us to compete in the growing, emerging national craft beer category and further strengthened our position in the high-end U.S. beer market. The results of operations of Ballast Point are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.

Wine and Spirits Segment

Canadian Divestiture

In December 2016, we sold our Canadian wine business, which included Canadian wine brands such as Jackson-Triggs and Inniskillin, wineries, vineyards, offices, facilities and Wine Rack retail stores, at a transaction value of C$1.03 billion, or $775.2 million. Accordingly, our consolidated results of operations include the results of operations of our Canadian wine business through the date of divestiture. We received cash proceeds of $575.3 million, net of outstanding debt and direct costs to sell, subject to working capital adjustments. We will continue to export certain of our brands into the Canadian market, which remains our largest export market. This transaction is consistent with our strategic focus on premium, high-margin and high-growth brands. We recognized a net gain on the sale of the business in the fourth quarter of fiscal 2017 of $262.4 million. Additionally, our current estimate of the income taxes we expect to pay is approximately $77 million in total during Fiscal 2017 and Fiscal 2018 in connection with the Canadian Divestiture.


29


The following table presents selected financial information included in our historical consolidated financial statements that will no longer be part of our consolidated results after the Canadian Divestiture.
 
Fiscal 2017
 
Fiscal 2016
(in millions)
 
 
 
Net sales
$
311.2

 
$
365.1

Gross profit
$
131.2

 
$
152.9

Depreciation and amortization
$
9.1

 
$
11.1

Operating income
$
49.8

 
$
62.5

Income before income taxes
$
46.6

 
$
61.9

 
 
 
 
Cash flow from operating activities
$
47.2

 
$
80.0


Additionally, the impact on our historical wine and spirits segment results are the same as the impact on the historical consolidated results for net sales, gross profit, and depreciation and amortization. However, as segment results do not include the impact of Comparable Adjustments, amounts reported for our historical wine and spirits segment operating income that will no longer be part of the segment’s results after the Canadian Divestiture are $50.1 million and $63.3 million for Fiscal 2017 and Fiscal 2016, respectively.

High West Acquisition

In October 2016, we acquired High West, which primarily included the acquisition of operations, goodwill, trademarks, inventories and property, plant and equipment. This acquisition included a portfolio of distinctive, award-winning, fast-growing and high-end craft whiskeys and other select spirits. The results of operations of High West are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.

Charles Smith Acquisition

In October 2016, we acquired Charles Smith, which primarily included the acquisition of goodwill, trademarks, inventories and certain grape supply contracts. This acquisition included a collection of five super and ultra-premium wine brands and solidified our position as the second leading supplier of Washington State wines with this collection of fast-growing, high quality wines that have strong consumer affinity and demand. The results of operations of Charles Smith are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.

Prisoner Acquisition

In April 2016, we acquired Prisoner, which primarily included the acquisition of goodwill, inventories, trademarks and certain grape supply contracts. This acquisition, which included a portfolio of five fast-growing, higher-margin, super-luxury wine brands, aligned with our portfolio premiumization strategy and strengthened our position in the super-luxury wine category. The results of operations of Prisoner are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.

Meiomi Acquisition

In August 2015, we acquired Meiomi, which primarily included the acquisition of goodwill, inventories, the trademark and certain grape supply contracts. The acquisition of this higher-margin, luxury growth brand has complemented our existing portfolio and further strengthened our position in the U.S. pinot noir category. The results of operations of Meiomi are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.

For additional information on these acquisitions, refer to Note 2 of the Notes to the Financial Statements.

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Results of Operations

Financial Highlights

References to organic throughout the following discussion exclude the impact of acquired brand activity in connection with the acquisitions of Meiomi, Prisoner, High West and Charles Smith (wine and spirits), and the acquisition of Ballast Point (beer), and divested brand activity in connection with the Canadian Divestiture, as appropriate.

Financial Highlights for Fiscal 2017:

Our results of operations benefited from improvements in both the Beer and Wine and Spirits segments.

Net sales increased 12% primarily due to strong consumer demand across both segments and net sales from the acquired Ballast Point, Meiomi and Prisoner brands.

Operating income increased 36% primarily due to a gain on sale of business recognized in connection with the Canadian Divestiture, the strong consumer demand and the benefits from the acquired brands.

Net income attributable to CBI and diluted net income per common share attributable to CBI increased 46% and 45%, respectively, primarily due to the items discussed above and an income tax benefit driven largely by a change in our assertion regarding the indefinite reinvestment of certain foreign earnings in the third quarter of fiscal 2017.

Comparable Adjustments

Management excludes items that affect comparability from its evaluation of the results of each operating segment as these Comparable Adjustments are not reflective of core operations of the segments. Segment operating performance and segment management compensation are evaluated based on core segment operating income (loss). As such, the performance measures for incentive compensation purposes for segment management do not include the impact of these Comparable Adjustments.

As more fully described herein and in the related Notes to the Financial Statements, the Comparable Adjustments that impacted comparability in our results for each period are as follows:
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in millions)
 
 
 
 
 
Cost of product sold
 
 
 
 
 
Settlements of undesignated commodity derivative contracts
$
23.4

 
$
29.5

 
$
4.4

Net gain (loss) on undesignated commodity derivative contracts
16.3

 
(48.1
)
 
(32.7
)
Flow through of inventory step-up
(20.1
)
 
(18.4
)
 

Amortization of favorable interim supply agreement
(2.2
)
 
(31.7
)
 
(28.4
)
Other losses

 

 
(2.8
)
Total cost of product sold
17.4

 
(68.7
)
 
(59.5
)
 
 
 
 
 
 

31


 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in millions)
 
 
 
 
 
Selling, general and administrative expenses
 
 
 
 
 
Impairment of intangible assets
(37.6
)
 

 

Costs associated with the Canadian Divestiture and related activities
(20.4
)
 

 

Transaction, integration and other acquisition-related costs
(14.2
)
 
(15.4
)
 
(30.5
)
Restructuring and related charges
(0.9
)
 
(16.4
)
 

Other gains (losses)
(2.6
)
 

 
7.2

Total selling, general and administrative expenses
(75.7
)
 
(31.8
)
 
(23.3
)
 
 
 
 
 
 
Gain on sale of business
262.4

 

 

 
 
 
 
 
 
Earnings (losses) from unconsolidated investments
(1.7
)
 
24.5

 

 
 
 
 
 
 
Loss on write-off of debt issuance costs

 
(1.1
)
 
(4.4
)
Comparable Adjustments
$
202.4

 
$
(77.1
)
 
$
(87.2
)

Cost of Product Sold

Undesignated Commodity Derivative Contracts

Net gain (loss) on undesignated commodity derivative contracts represents a net gain (loss) from the changes in fair value of undesignated commodity derivative contracts. The net gain (loss) is reported outside of segment operating results until such time that the underlying exposure is recognized in the segment operating results. At settlement, the net gain (loss) from the changes in fair value of the undesignated commodity derivative contracts is reported in the appropriate operating segment, allowing the results of our operating segments to reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility.

Inventory Step-Up

In connection with acquisitions, the allocation of purchase price in excess of book value for certain inventories on hand at the date of acquisition is referred to as inventory step-up. Inventory step-up represents an assumed manufacturing profit attributable to the acquired business prior to acquisition. Flow through of inventory step-up was primarily associated with the Prisoner acquisition (Fiscal 2017) and Meiomi acquisition (Fiscal 2017 and Fiscal 2016).

Favorable Interim Supply Agreement

In connection with the Beer Business Acquisition, a temporary supply agreement was negotiated under a favorable pricing arrangement for the required volume of beer needed to fulfill expected U.S. demand in excess of the Nava Brewery’s capacity. Amortization of favorable interim supply agreement reflects amounts associated with non-Nava Brewery product purchased from the date of acquisition which has been sold to our U.S. customers during the respective period.

Selling, General and Administrative Expenses

Impairment of Intangible Assets

In connection with our continued focus on the premiumization of our branded wine and spirits portfolio, a decision was made to discontinue certain small-scale, low-margin U.S. brands within our Wine and Spirits’ portfolio. As a result, trademarks with a carrying value of $37.6 million were written down to their estimated fair value, resulting in an impairment of $37.6 million. In addition, see “Costs Associated With The Canadian

32


Divestiture and Related Activities” below for information about an additional impairment of intangible assets recognized in connection with the Canadian Divestiture.

Costs Associated With The Canadian Divestiture and Related Activities

Costs associated with the Canadian Divestiture and related activities represent costs incurred in connection with the evaluation of the merits of executing an initial public offering for a portion of our Canadian wine business and net other costs incurred in connection with the sale of the Canadian wine business.

In addition, in connection with the Canadian Divestiture, trademarks with a carrying value of $8.4 million were written down to their estimated fair value, resulting in an impairment of $8.4 million. These trademarks were associated with certain U.S. brands within our Wine and Spirits’ portfolio sold exclusively through the Canadian wine business, for which we expect future sales of these brands to be minimal subsequent to the Canadian Divestiture.

Transaction, Integration and Other Acquisition-Related Costs

Transaction, integration and other acquisition-related costs consist of costs associated with our acquisitions.

Restructuring and Related Charges

Restructuring and related charges consist primarily of employee termination benefit costs recognized in connection with our plan initiated in May 2015 to streamline and simplify processes, and shift resources and investment to long-term, profitable growth opportunities across the business.

Other Gains (Losses)

Other gains (losses) consist primarily of a gain from an adjustment to a certain guarantee originally recorded in connection with a prior divestiture (Fiscal 2015) and a net gain on the sale of and the write-down of certain property, plant and equipment (Fiscal 2015).

Gain on Sale of Business

Gain on sale of business consists of the net gain recognized in connection with the Canadian Divestiture.

Earnings (Losses) from Unconsolidated Investments

Earnings (losses) from unconsolidated investments consist primarily of dividend income from a retained interest in a previously divested business (Fiscal 2016).


33


Fiscal 2017 Compared to Fiscal 2016

Net Sales
 
Fiscal 2017
 
Fiscal 2016
 
% Increase
(in millions)
 
 
 
 
 
Beer
$
4,229.3

 
$
3,622.6

 
17
%
Wine and Spirits:
 
 
 
 
 
Wine
2,739.3

 
2,591.4

 
6
%
Spirits
362.9

 
334.4

 
9
%
Total Wine and Spirits
3,102.2

 
2,925.8

 
6
%
Consolidated net sales
$
7,331.5

 
$
6,548.4

 
12
%

Net sales increased $783.1 million due to increases in Beer’s net sales of $606.7 million driven predominately by volume growth within our Mexican beer portfolio, and Wine and Spirits’ net sales of $176.4 million due largely to net sales from acquired brands and organic volume growth, partially offset by a decrease in net sales due to the Canadian Divestiture.

Beer Segment
 
Fiscal 2017
 
Fiscal 2016
 
% Increase
(in millions, branded product, 24-pack, 12-ounce case equivalents)
 
 
 
 
 
Net sales
$
4,229.3

 
$
3,622.6

 
17
%
 
 
 
 
 
 
Shipment volume (1)
 
 
 
 
 
Total
246.4

 
218.0

 
13.0
%
Organic
242.3

 
218.0

 
11.1
%
 
 
 
 
 
 
Depletion volume (1) (2)
 
 
 
 
10.4
%
(1) 
Previously reported Beer shipment and depletion volumes were restated in the fourth quarter of fiscal 2017 for an immaterial error associated with the conversion of 7-ounce Coronita case equivalents to 12-ounce case equivalents.
(2) 
Depletions represent distributor shipments of our respective branded products to retail customers, based on third-party data, including acquired brands from the date of acquisition and for the comparable prior year period.

The increase in Beer’s net sales is primarily due to (i)  the volume growth within our Mexican beer portfolio of $404.4 million, which benefited from continued consumer demand and increased marketing spend; (ii)  net sales from the acquired Ballast Point brand of $124.9 million and (iii)  a favorable impact from pricing in select markets within our Mexican beer portfolio of $92.2 million.


34


Wine and Spirits Segment
 
Fiscal 2017
 
Fiscal 2016
 
% Increase
(in millions, branded product, 9-liter case equivalents)
 
 
 
 
 
Net sales
$
3,102.2

 
$
2,925.8

 
6
%
 
 
 
 
 
 
Shipment volume
 
 
 
 
 
Total
69.2

 
68.2

 
1.5
%
Organic
68.4

 
66.2

 
3.3
%
 
 
 
 
 
 
U.S. Domestic
55.0

 
51.9

 
6.0
%
Organic U.S. Domestic
54.2

 
51.9

 
4.4
%
 
 
 
 
 
 
U.S. Domestic Focus Brands
32.0

 
28.4

 
12.7
%
Organic U.S. Domestic Focus Brands
31.4

 
28.4

 
10.6
%
 
 
 
 
 
 
Depletion volume (2)
 
 
 
 
 
U.S. Domestic
 
 
 
 
2.9
%
U.S. Domestic Focus Brands
 
 
 
 
8.9
%

The increase in Wine and Spirits’ net sales is primarily due to net sales from acquired brands, primarily the Meiomi and Prisoner brands, of $124.0 million and organic branded wine and spirits volume growth of $95.9 million, partially offset by a decrease in net sales due to the Canadian Divestiture of $62.6 million.

Gross Profit
 
Fiscal 2017
 
Fiscal 2016
 
% Increase
(in millions)
 
 
 
 
 
Beer
$
2,151.3

 
$
1,776.0

 
21
%
Wine and Spirits
1,360.7

 
1,235.0

 
10
%
Comparable Adjustments
17.4

 
(68.7
)
 
NM

Consolidated gross profit
$
3,529.4

 
$
2,942.3

 
20
%
 
 
 
 
 
 
NM = Not meaningful
 
 
 
 
 

Gross profit increased $587.1 million primarily due to increases in Beer of $375.3 million and Wine and Spirits of $125.7 million. In addition, the change in Comparable Adjustments resulted in an increase in gross profit of $86.1 million.

The increase in Beer is primarily due to (i)  the volume growth and the favorable impact from pricing in select markets within our Mexican beer portfolio of $192.9 million and $92.2 million, respectively; (ii)  gross profit from the acquired Ballast Point brand of $53.4 million and (iii)  lower cost of product sold for our Mexican beer business of $41.7 million. The lower cost of product sold is primarily due to foreign currency transactional benefits within our Mexican beer portfolio of $54.6 million and brewery sourcing benefits of $35.3 million, partially offset by higher depreciation expense of $46.9 million.

The increase in Wine and Spirits is primarily due to gross profit from the acquired brands of $69.4 million and growth from the organic wine and spirits business driven primarily by branded wine and spirits volume growth and favorable product mix shift of $48.8 million and $33.1 million, respectively; partially offset by a decrease in gross profit due to the Canadian Divestiture of $27.2 million.

Gross profit as a percent of net sales increased to 48.1% for Fiscal 2017 compared with 44.9% for Fiscal 2016 primarily due to (i)  a favorable impact from the change in Comparable Adjustments of approximately 120

35


basis points, (ii)  lower cost of product sold across both segments which contributed approximately 75 basis points, (iii)  the favorable impact from Beer pricing in select markets of approximately 65 basis points and (iv)  the favorable impact from the acquired higher-margin wine and spirits brands and divestiture of the lower-margin Canadian wine business of approximately 25 basis points.

Selling, General and Administrative Expenses
 
Fiscal 2017
 
Fiscal 2016
 
% Increase
(in millions)
 
 
 
 
 
Beer
$
616.9

 
$
511.9

 
21
%
Wine and Spirits
559.9

 
508.0

 
10
%
Corporate Operations and Other
139.9

 
125.5

 
11
%
Comparable Adjustments
75.7

 
31.8

 
138
%
Consolidated selling, general and administrative expenses
$
1,392.4

 
$
1,177.2

 
18
%

Selling, general and administrative expenses increased $215.2 million due to increases in Beer of $105.0 million, Wine and Spirits of $51.9 million, Comparable Adjustments of $43.9 million and Corporate Operations and Other of $14.4 million.

The increase in Beer is due to increases in marketing spend of $58.8 million and general and administrative expenses of $46.2 million. The increase in marketing spend is due largely to planned investment to support the growth of our Mexican beer portfolio. The increase in general and administrative expenses is predominantly driven by higher compensation and benefits supporting the organic growth of the business of $22.2 million and general and administrative expenses associated with the acquired Ballast Point business of $19.7 million.

The increase in Wine and Spirits is primarily due to an increase in marketing spend of $25.7 million and general and administrative expenses of $25.0 million. The increase in marketing spend is due largely to planned investment to support the growth of our branded wine and spirits portfolio. The increase in general and administrative expenses is predominantly driven by (i)  higher compensation and benefits of $24.5 million and higher consulting expenses supporting the growth of the business and (ii)  an unfavorable overlap of prior year foreign currency transaction gains with current year foreign currency transaction losses, partially offset by a decrease in general and administrative expenses due to the Canadian Divestiture of $16.4 million.

The increase in Corporate Operations and Other is due to higher general and administrative expenses primarily attributable to (i)  higher consulting and information technology expenses, (ii)  higher travel and entertainment expenses and (iii)  an unfavorable overlap of prior year foreign currency transaction gains with current year foreign currency transaction losses. The increases in consulting, information technology and travel and entertainment expenses are all largely attributable to supporting the growth of the business.

Selling, general and administrative expenses as a percent of net sales increased to 19.0% for Fiscal 2017 as compared with 18.0% for Fiscal 2016. The increase is primarily attributable to the growth in Comparable Adjustments and Corporate Operations and Other selling, general and administrative expenses, which resulted in approximately 70 basis points of rate growth. Additionally, the growth in Wine and Spirits selling, general and administrative expenses having exceeded the growth in Wine and Spirits net sales resulted in approximately 25 basis points to the rate growth.


36


Operating Income
 
Fiscal 2017
 
Fiscal 2016
 
% Increase
(Decrease)
(in millions)
 
 
 
 
 
Beer
$
1,534.4

 
$
1,264.1

 
21
%
Wine and Spirits
800.8

 
727.0

 
10
%
Corporate Operations and Other
(139.9
)
 
(125.5
)
 
(11
%)
Comparable Adjustments
204.1

 
(100.5
)
 
NM

Consolidated operating income
$
2,399.4

 
$
1,765.1

 
36
%

Operating income increased $634.3 million primarily due to a favorable impact from the change in Comparable Adjustments of $304.6 million and increases in Beer and Wine and Spirits of $270.3 million and $73.8 million, respectively. The increase for Beer is primarily attributable to growth in the Mexican beer business of $238.9 million driven largely by the factors discussed above. The increase for Wine and Spirits is due to operating income from the acquired brands of $63.0 million and growth from the organic wine and spirits business driven primarily by the factors discussed above.

Earnings from Unconsolidated Investments

Earnings from unconsolidated investments decreased to $27.3 million for Fiscal 2017 from $51.1 million for Fiscal 2016, a decrease of $23.8 million. This decrease is primarily attributable to an unfavorable impact from the change in Comparable Adjustments for Fiscal 2017.

Interest Expense

Interest expense increased to $333.3 million for Fiscal 2017 from $313.9 million for Fiscal 2016, an increase of $19.4 million, or 6%. This increase is primarily due to higher average borrowings of $1.0 billion and lower average interest rates of 25 basis points, both driven largely by the $1.1 billion in new term loan facilities under our senior credit facility for Fiscal 2017 and issuance of the December 2015 Senior Notes and December 2016 Senior Notes, partially offset by the repayment of the August 2006 Senior Notes.

Provision for Income Taxes

Our effective tax rate for Fiscal 2017 and Fiscal 2016 was 26.5% and 29.3%, respectively. For Fiscal 2017, our effective tax rate was lower than the federal statutory rate of 35% primarily due to lower effective tax rates applicable to our foreign businesses, including a change in our assertion regarding indefinitely reinvesting earnings of certain foreign subsidiaries and the tax effects of the Canadian Divestiture. For Fiscal 2016, our effective tax rate was lower than the federal statutory rate primarily due to a decrease in uncertain tax positions and lower effective tax rates applicable to our foreign businesses.

We have historically provided deferred income taxes for the repatriation to the U.S. of earnings from our foreign subsidiaries. During the third quarter of fiscal 2017, in connection with the agreement to divest the Canadian wine business and the ongoing Beer capacity expansion activities in Mexico, including the agreement to acquire the Obregon Brewery, we changed our assertion regarding our ability and intent to indefinitely reinvest undistributed earnings of certain foreign subsidiaries. Approximately $420 million of our Fiscal 2017 earnings and all future earnings for these foreign subsidiaries are expected to be indefinitely reinvested. Accordingly, no deferred income taxes have been provided or will be provided, respectively, on the applicable undistributed earnings.

Because we intend to use our historical unremitted earnings generated from our existing foreign subsidiaries to continue to support our U.S. investments in the future, our intent to repatriate those historical

37


foreign earnings remains unchanged and accordingly, we continue to provide for anticipated tax liabilities on these amounts that are expected to be repatriated.

For additional information, refer to Note 12 of the Notes to the Financial Statements.

We expect our effective tax rate for the next fiscal year to be in the range of 21% to 23%. This includes the assertion of our intent for certain foreign earnings to be indefinitely reinvested and a favorable benefit from our March 1, 2017, adoption of the FASB’s amended guidance requiring the recognition of the income tax effect of stock based compensation awards in the income statement when the awards vest or are settled. Through February 28, 2017, this amount was recognized in additional paid-in capital at the time of vesting or settlement.

For Fiscal 2017, Fiscal 2016 and Fiscal 2015, we recognized excess tax benefits of $131.4 million, $203.4 million and $78.0 million, respectively, in additional paid-in capital. These amounts may not necessarily be indicative of future amounts that may be recognized subsequent to the adoption of this new standard, as any excess tax benefits recognized will be dependent upon future stock prices, employee exercise behavior and applicable tax rates. Our current range for next year’s effective tax rate includes an estimated 3% benefit related to the adoption of this guidance. Since this new standard requires recognition of these excess tax benefits in the income statement on a discrete basis, we anticipate that our effective tax rate will vary from quarter to quarter depending upon the amount of excess tax benefits realized.

Net Income Attributable to CBI

As a result of the above factors, net income attributable to CBI increased to $1,535.1 million for Fiscal 2017 from $1,054.9 million for Fiscal 2016, an increase of $480.2 million, or 46%.

Fiscal 2016 Compared to Fiscal 2015

Net Sales
 
Fiscal 2016
 
Fiscal 2015
 
% Increase
(in millions)
 
 
 
 
 
Beer
$
3,622.6

 
$
3,188.6

 
14
%
Wine and Spirits:
 
 
 
 


Wine
2,591.4

 
2,523.4

 
3
%
Spirits
334.4

 
316.0

 
6
%
Total Wine and Spirits
2,925.8

 
2,839.4

 
3
%
Consolidated net sales
$
6,548.4

 
$
6,028.0

 
9
%

Net sales increased $520.4 million due to increases in Beer’s net sales of $434.0 million (driven predominately by volume growth within our Mexican beer portfolio) and Wine and Spirits’ net sales of $86.4 million (due largely to net sales from the acquired Meiomi brand).

Beer Segment
 
Fiscal 2016
 
Fiscal 2015
 
% Increase
(in millions, branded product, 24-pack, 12-ounce case equivalents)
 
 
 
 
 
Net sales
$
3,622.6

 
$
3,188.6

 
14
%
 
 
 
 
 
 
Shipment volume (1)
 
 
 
 
 
Total
218.0

 
195.8

 
11.3
%
Organic
217.1

 
195.8

 
10.9
%
 
 
 
 
 
 
Depletion volume (1) (2)
 
 
 
 
12.3
%

38



(1) 
Previously reported Beer shipment and depletion volumes were restated in the fourth quarter of fiscal 2017 for an immaterial error associated with the conversion of 7-ounce Coronita case equivalents to 12-ounce case equivalents.
(2) 
Depletions represent distributor shipments of our respective branded products to retail customers, based on third-party data, including acquired brands from the date of acquisition and for the comparable prior year period.

The increase in Beer’s net sales is primarily due to (i)  the volume growth within our Mexican beer portfolio, which benefited from continued consumer demand and increased marketing spend; (ii)  a favorable impact from pricing in select markets and (iii)  net sales from the acquired Ballast Point brand of $27.2 million.

Wine and Spirits Segment
 
Fiscal 2016
 
Fiscal 2015
 
% Increase
(in millions, branded product, 9-liter case equivalents)
 
 
 
 
 
Net sales
$
2,925.8

 
$
2,839.4

 
3
%
 
 
 
 
 
 
Shipment volume
 
 
 
 
 
Total
68.2

 
66.0

 
3.3
%
Organic
67.6

 
66.0

 
2.4
%
 
 
 
 
 
 
U.S. Domestic
51.9

 
50.5

 
2.8
%
Organic U.S. Domestic
51.3

 
50.5

 
1.6
%
 
 
 
 
 
 
U.S. Domestic Focus Brands
27.8

 
25.6

 
8.6
%
Organic U.S. Domestic Focus Brands
27.2

 
25.6

 
6.3
%
 
 
 
 
 
 
Depletion volume (2)
 
 
 
 
 
U.S. Domestic
 
 
 
 
1.1
%
U.S. Domestic Focus Brands
 
 
 
 
5.0
%

The increase in Wine and Spirits’ net sales is primarily due to (i)  net sales from the acquired Meiomi brand of $73.8 million, (ii)  organic branded wine and spirits volume growth (due partly to the overlap of a planned reduction in inventory levels by one of our exclusive distributors in the U.S. for Fiscal 2015); and (iii)  favorable product mix shift (predominantly within the U.S. organic branded wine portfolio); partially offset by (i)  an unfavorable year-over-year foreign currency translation impact and (ii)  the unfavorable overlap of the recognition of a contractually required payment for Fiscal 2015 from the distributor noted above equal to the approximate profit lost on the reduced sales associated with the inventory reduction.

Gross Profit
 
Fiscal 2016
 
Fiscal 2015
 
% Increase (Decrease)
(in millions)
 
 
 
 
 
Beer
$
1,776.0

 
$
1,465.8

 
21
%
Wine and Spirits
1,235.0

 
1,172.3

 
5
%
Comparable Adjustments
(68.7
)
 
(59.5
)
 
(15
%)
Consolidated gross profit
$
2,942.3

 
$
2,578.6

 
14
%

Gross profit increased $363.7 million primarily due to increases in Beer of $310.2 million and Wine and Spirits of $62.7 million. The increase in Beer is primarily due to (i)  the volume growth within our Mexican beer portfolio, (ii)  the favorable impact from pricing in select markets and (iii)  lower organic cost of product sold. The increase in Wine and Spirits is primarily due to (i)  gross profit from the acquired Meiomi brand, (ii)  lower organic cost of product sold and (iii)  higher organic branded wine volume; partially offset by the unfavorable year-over-year foreign currency translation impact.

39



Gross profit as a percent of net sales increased to 44.9% for Fiscal 2016 compared with 42.8% for Fiscal 2015 primarily due to (i)  lower Beer and Wine and Spirits’ cost of product sold, (ii)  the favorable impact from Beer pricing in select markets and (iii)  the acquisitions of Meiomi and Ballast Point.

Selling, General and Administrative Expenses
 
Fiscal 2016
 
Fiscal 2015
 
% Increase
(in millions)
 
 
 
 
 
Beer
$
511.9

 
$
448.0

 
14
%
Wine and Spirits
508.0

 
498.0

 
2
%
Corporate Operations and Other
125.5

 
109.1

 
15
%
Comparable Adjustments
31.8

 
23.3

 
36
%
Consolidated selling, general and administrative expenses
$
1,177.2

 
$
1,078.4

 
9
%

Selling, general and administrative expenses increased $98.8 million primarily due to increases in Beer of $63.9 million, Corporate Operations and Other of $16.4 million and Wine and Spirits of $10.0 million.

The increases in Beer and Wine and Spirits are both primarily attributable to an increase in marketing spend due largely to planned investment behind our Mexican beer and branded wine and spirits portfolios. The increase in Corporate Operations and Other is due to higher general and administrative expenses primarily attributable to (i)  an increase in compensation and benefits driven primarily by higher annual management incentive compensation expense and an increase in employer payroll taxes related to employee equity award exercise activity during Fiscal 2016, and (ii)  higher consulting and information technology expenses supporting the growth of the business.

Selling, general and administrative expenses as a percent of net sales remained relatively flat at 18.0% for Fiscal 2016 as compared to 17.9% for Fiscal 2015.

Operating Income
 
Fiscal 2016
 
Fiscal 2015
 
% Increase
(Decrease)
(in millions)
 
 
 
 
 
Beer
$
1,264.1

 
$
1,017.8

 
24
%
Wine and Spirits
727.0

 
674.3

 
8
%
Corporate Operations and Other
(125.5
)
 
(109.1
)
 
(15
%)
Comparable Adjustments
(100.5
)
 
(82.8
)
 
(21
%)
Consolidated operating income
$
1,765.1

 
$
1,500.2

 
18
%

Operating income increased $264.9 million primarily due to increases in Beer and Wine and Spirits of $246.3 million and $52.7 million, respectively. The increases for both segments are primarily attributable to (i)  organic volume growth and lower cost of product sold and (ii)  benefits from the acquisitions of Meiomi (Wine and Spirits) and Ballast Point (Beer), partially offset by increased marketing spend supporting the growth of the businesses.

Earnings from Unconsolidated Investments

Earnings from unconsolidated investments increased to $51.1 million for Fiscal 2016 from $21.5 million for Fiscal 2015, an increase of $29.6 million. This increase is primarily attributable to a favorable impact from the change in Comparable Adjustments for Fiscal 2016.


40


Interest Expense

Interest expense decreased to $313.9 million for Fiscal 2016 from $337.7 million for Fiscal 2015, a decrease of $23.8 million, or (7%). This decrease was primarily due to lower average interest rates.

Provision for Income Taxes

Our effective tax rate for Fiscal 2016 and Fiscal 2015 was 29.3% and 29.1%, respectively. For Fiscal 2016, our effective tax rate was lower than the federal statutory rate of 35% primarily due to a decrease in uncertain tax positions and lower effective tax rates applicable to our foreign businesses. For Fiscal 2015, our effective tax rate was lower than the federal statutory rate primarily due to lower effective tax rates applicable to our foreign businesses.

Net Income Attributable to CBI

As a result of the above factors, net income attributable to CBI increased to $1,054.9 million for Fiscal 2016 from $839.3 million for Fiscal 2015, an increase of $215.6 million, or 26%.


Financial Liquidity and Capital Resources

General

Our ability to consistently generate cash flow from operating activities is one of our most significant financial strengths. Our strong cash flows enable us to invest in our people and our brands, make appropriate capital investments, provide a quarterly cash dividend program, and from time-to-time, repurchase shares of our common stock and make strategic acquisitions that we believe will enhance shareholder value. Our primary source of liquidity has been cash flow from operating activities. Our principal use of cash in our operating activities is for purchasing and carrying inventories and carrying seasonal accounts receivable. Historically, we have used cash flow from operating activities to repay our short-term borrowings and fund capital expenditures. We will continue to use our short-term borrowings, including our accounts receivable securitization facilities, to support our working capital requirements and capital expenditures.

We have maintained adequate liquidity to meet working capital requirements, fund capital expenditures and repay scheduled principal and interest payments on debt. Absent deterioration of market conditions, we believe that cash flows from operating activities and financing activities, primarily short-term borrowings, will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments and anticipated capital expenditure requirements for both our short-term and long-term capital needs, including (i)  our Nava Brewery and glass production plant expansions, (ii)  our Mexicali Brewery construction and (iii)  our Obregon Brewery optimization (collectively, the “Mexico Beer Expansion Projects”).

Cash Flows
 
Fiscal 2017
 
Fiscal 2016
 
Fiscal 2015
(in millions)
 
 
 
 
 
Net cash provided by operating activities
$
1,696.0

 
$
1,413.7

 
$
1,081.0

Net cash used in investing activities
(1,461.8
)
 
(2,207.4
)
 
(1,015.9
)
Net cash provided by (used in) financing activities
(134.8
)
 
776.0

 
(16.4
)
Effect of exchange rate changes on cash and cash equivalents
(5.1
)
 
(9.3
)
 
(2.5
)
Net increase (decrease) in cash and cash equivalents
$
94.3

 
$
(27.0
)
 
$
46.2



41


Operating Activities

Fiscal 2017 Compared to Fiscal 2016

Net cash provided by operating activities increased $282.3 million for Fiscal 2017 driven largely by strong cash flow from the Beer and Wine and Spirits segments. The increase in Beer was primarily due to the strong volume growth and the favorable pricing in the Mexican beer portfolio, partially offset by (i)  the timing of collections for recoverable value-added taxes and (ii)  an increase in beer inventory levels to support the continuing growth within the Mexican beer portfolio. The increase in Wine and Spirits resulted primarily from (i)  cash collections from strong net sales in the fourth quarter of fiscal 2016, (ii)  a benefit from accounts payable due largely to timing of payments and (iii)  a benefit from the timing of receipt of distributor payments for Fiscal 2017; partially offset by an increase in wine and spirits’ inventory levels due predominantly to a larger calendar year grape harvest for Fiscal 2017 compared with Fiscal 2016.

Fiscal 2016 Compared to Fiscal 2015

Net cash provided by operating activities increased $332.7 million for Fiscal 2016. This increase resulted primarily from (i)  higher cash provided by Beer (largely due to strong volume growth in the Mexican beer portfolio as well as a reduction in prepaid value-added taxes predominantly attributable to timing) and (ii)  lower income tax payments. The lower income tax payments within cash flows from operating activities are primarily due to an increase in tax benefits on employee equity award exercise and vesting activity, partially offset by an increase in income taxes payable largely attributable to higher taxable income driven by Beer.

Investing Activities

Fiscal 2017 Compared to Fiscal 2016

Net cash used in investing activities decreased $745.6 million for Fiscal 2017. This decrease resulted primarily from proceeds from the sale of the Canadian wine business in December 2016 of $575.3 million and lower payments for purchases of businesses for Fiscal 2017 of $205.4 million. Fiscal 2017 acquisitions consist of Prisoner (April 2016), High West and Charles Smith (October 2016), and the Obregon Brewery (December 2016) compared with Fiscal 2016 acquisitions of Meiomi (August 2015) and Ballast Point (December 2015).

Fiscal 2016 Compared to Fiscal 2015

Net cash used in investing activities increased $1,191.5 million for Fiscal 2016, primarily due to the Fiscal 2016 acquisitions of Meiomi and Ballast Point.

Financing Activities

Fiscal 2017 Compared to Fiscal 2016

Net cash used in financing activities increased $910.8 million for Fiscal 2017, primarily from the following:

Fiscal 2017 share repurchases under the 2013 Authorization and 2017 Authorization of $1,122.7 million;
Fiscal 2017 principal payments of long-term debt driven largely by the repayment of the August 2006 Senior Notes of $700.0 million;
Lower net proceeds from notes payable of $163.5 million for Fiscal 2017 compared with Fiscal 2016;
Higher cash dividend payments of $73.5 million for Fiscal 2017 compared with Fiscal 2016; and
Lower excess tax benefits from stock-based payment awards of $72.0 million for Fiscal 2017 compared with Fiscal 2016 due to decreased Fiscal 2017 employee equity award exercise activity;


42


partially offset by:

Fiscal 2017 proceeds from issuance of long-term debt of $1,965.6 million, including (i)  term loan borrowings under our senior credit facility of $700.0 million in March 2016 (used to refinance borrowings under our then-existing senior credit facility and accounts receivable securitization facilities, and for other general corporate purposes) and $400.0 million in October 2016 (used to finance the purchase price for the acquisitions of High West and Charles Smith, and for other general corporate purposes); (ii)  proceeds from issuance of the December 2016 Senior Notes of $600.0 million (used for general corporate purposes) and (iii)  term loan borrowings under the Canadian Credit Agreement of C$275.0 million ($214.1 million at issuance) (used for general corporate purposes); compared with
Fiscal 2016 proceeds from issuance of long-term debt of $610.0 million primarily from the issuance of the December 2015 Senior Notes of $400.0 million (used to fund a portion of the purchase price for the acquisition of Ballast Point) and from term loan borrowings under our senior credit facility of $200.0 million (used to fund a portion of the purchase price for the acquisition of Meiomi).

Fiscal 2016 Compared to Fiscal 2015

Net cash provided by financing activities increased $792.4 million for Fiscal 2016, primarily from the following:

Higher net proceeds from notes payable of $347.5 million for Fiscal 2016 compared with Fiscal 2015;
Higher excess tax benefits from stock-based payment awards of $125.4 million for Fiscal 2016 compared with Fiscal 2015 due to increased Fiscal 2016 employee equity award exercise and vesting activity;
Fiscal 2015 payment of delayed purchase price arrangement of $543.3 million in connection with the June 2013 Beer Business Acquisition; and
Fiscal 2015 principal payments of long-term debt for the repayment of our December 2007 senior notes of $500.0 million;

partially offset by:

Fiscal 2016 proceeds from issuance of long-term debt of $610.0 million primarily from the issuance of the December 2015 Senior Notes of $400.0 million (used to fund a portion of the purchase price for the acquisition of Ballast Point) and from term loan borrowings under the 2015 Credit Agreement of $200.0 million (used to fund a portion of the purchase price for the acquisition of Meiomi) compared with Fiscal 2015 proceeds from issuance of long-term debt of $905.0 million primarily from the issuance of the November 2014 Senior Notes (used primarily to redeem our December 2007 senior notes); and
Payment of quarterly cash dividends.

Debt

Total debt outstanding as of February 28, 2017, amounted to $9,238.1 million, an increase of $1,156.9 million from February 29, 2016. This increase was largely due to proceeds from the issuance of the European Term A-1 and European Term A-2 term loan borrowings under our senior credit facility and the December 2016 Senior Notes, partially offset by the repayment of the August 2006 Senior Notes.

Senior Credit Facility

In October 2016, we entered into the 2016 Restatement Agreement that amended and restated our March 2016 Credit Agreement. Among other things, the 2016 Restatement Agreement created a new $400.0 million European Term A-2 loan facility maturing on March 10, 2021. Proceeds from the October 2016 borrowings under the 2016 Credit Agreement were primarily used to finance the purchase price for the acquisitions of High West and Charles Smith, and for other general corporate purposes.

In March 2016, we entered into the March 2016 Restatement Agreement that amended and restated our then-existing senior credit facility. Among other things, the March 2016 Restatement Agreement created a new

43


$700.0 million European Term A-1 loan facility maturing on March 10, 2021. Proceeds from the March 2016 borrowings under the March 2016 Credit Agreement were used to refinance outstanding obligations under our then-existing senior credit facility and short-term borrowings under our accounts receivable securitization facilities, and for other general corporate purposes.

Senior Notes

In December 2016, we issued the December 2016 Senior Notes. Proceeds from this offering, net of discount and debt issuance costs, of $594.4 million were used for general corporate purposes, including the repayment of short-term borrowings and the repurchase of shares of our Class A Common Stock.

In August 2016, we repaid the August 2006 Senior Notes primarily with cash flows from operating activities.

General

The majority of our outstanding borrowings as of February 28, 2017, consisted of fixed-rate senior unsecured notes, with maturities ranging from calendar 2017 to calendar 2026, and variable-rate senior unsecured term loan facilities under our 2016 Credit Agreement, with maturities ranging from calendar 2020 to calendar 2021.

We had the following borrowing capacity available under our 2016 Credit Agreement and our accounts receivable securitization facilities:
 
Remaining Borrowing Capacity
 
February 28,
2017
 
April 21,
2017
(in millions)
 
 
 
Revolving Credit Facility
$
902.3

 
$
1,032.5

CBI Facility
$
88.9

 
$
89.7

Crown Facility
$
13.0

 
$
70.4


The financial institutions participating in our 2016 Credit Agreement and our accounts receivable securitization facilities have complied with prior funding requests and we believe such financial institutions will comply with any future funding requests. However, there can be no assurances that any particular financial institution will continue to do so.

As of February 28, 2017, we also have additional credit arrangements totaling $442.8 million, with $269.5 million outstanding under these arrangements. These arrangements primarily support the financing needs of our domestic and foreign subsidiary operations, as well as our glass production plant joint venture.

We have entered into various interest rate swap agreements to manage our exposure to the volatility of the interest rates associated with our variable-rate senior unsecured term loan facilities. As a result of these hedges, we have fixed our interest rates on $250.0 million of our floating LIBOR rate debt at an average rate of 1.1% (exclusive of borrowing margins) from September 1, 2016, through July 1, 2020.

We and our subsidiaries are subject to covenants that are contained in the 2016 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 our 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, both as defined in the 2016 Credit Agreement. As of February 28, 2017, the minimum interest coverage ratio was 2.5x and the maximum net debt coverage ratio was 4.0x.


44


Our indentures relating to our outstanding senior notes contain certain covenants, including, but not limited to:  (i)  a limitation on liens on certain assets, (ii)  a limitation on certain sale and leaseback transactions and (iii)  restrictions on mergers, consolidations and the transfer of all or substantially all of our assets to another person.

As of February 28, 2017, we were in compliance with all of our covenants under both our 2016 Credit Agreement and our indentures, and have met all debt payment obligations.

For a complete discussion and presentation of all borrowings and available sources of borrowing, refer to Note 11 of the Notes to the Financial Statements.

Common Stock Dividends

On April 5, 2017, our Board of Directors declared a quarterly cash dividend of $0.52 per share of Class A Common Stock, $0.47 per share of Class B Convertible Common Stock and $0.47 per share of Class 1 Common Stock payable on May 24, 2017, to stockholders of record of each class on May 10, 2017. We expect to return approximately $400 million to stockholders in Fiscal 2018 through cash dividends.

We currently expect to continue to pay a regular quarterly cash dividend to stockholders of our common stock in the future, but such payments are subject to approval of our Board of Directors and are dependent upon our financial condition, results of operations, capital requirements and other factors, including those set forth under Item 1A “Risk Factors” of this Annual Report on Form 10-K.

Share Repurchase Program

Our Board of Directors authorized the repurchase of up to $1.0 billion of our Class A Common Stock and Class B Convertible Common Stock under the 2017 Authorization. Shares repurchased under this authorization have become treasury shares.

As of February 28, 2017, total shares repurchased under this authorization are as follows:
 
 
 
Class A Common Shares
 
Repurchase Authorization
 
Dollar Value of Shares Repurchased
 
Number of Shares Repurchased
(in millions, except share data)
 
 
 
 
 
2017 Authorization
$
1,000.0

 
$
453.1

 
3,006,547

Share repurchases under the 2017 Authorization may be accomplished at management’s discretion from time to time based on market conditions, our cash and debt position, and other factors as determined by management. Shares may be repurchased through open market or privately negotiated transactions. We may fund future share repurchases with cash generated from operations and/or proceeds from borrowings. Any repurchased shares will become treasury shares.

For additional information, refer to Note 14 of the Notes to the Financial Statements.

Contractual Obligations and Commitments

The following table sets forth information about our contractual obligations outstanding at February 28, 2017. It brings together data for easy reference from our balance sheet and Notes to the Financial Statements. For a detailed discussion of the items noted in the following table, refer to Notes 10, 11, 12 and 13 of the Notes to the Financial Statements.

45


 
PAYMENTS DUE BY PERIOD
 
Total
 
Less than
1 year
 
1-3 years
 
3-5 years
 
After
5 years
(in millions)
 
 
 
 
 
 
 
 
 
Notes payable to banks
$
606.5

 
$
606.5

 
$

 
$

 
$

Long-term debt (excluding unamortized debt issuance costs and unamortized discount)
8,683.2

 
911.0