0000016918-19-000007.txt : 20190109 0000016918-19-000007.hdr.sgml : 20190109 20190109141529 ACCESSION NUMBER: 0000016918-19-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 88 CONFORMED PERIOD OF REPORT: 20181130 FILED AS OF DATE: 20190109 DATE AS OF CHANGE: 20190109 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONSTELLATION BRANDS, INC. CENTRAL INDEX KEY: 0000016918 STANDARD INDUSTRIAL CLASSIFICATION: BEVERAGES [2080] IRS NUMBER: 160716709 STATE OF INCORPORATION: DE FISCAL YEAR END: 0228 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08495 FILM NUMBER: 19517974 BUSINESS ADDRESS: STREET 1: 207 HIGH POINT DRIVE STREET 2: BUILDING 100 CITY: VICTOR STATE: NY ZIP: 14564 BUSINESS PHONE: 585-678-7100 MAIL ADDRESS: STREET 1: 207 HIGH POINT DRIVE STREET 2: BUILDING 100 CITY: VICTOR STATE: NY ZIP: 14564 FORMER COMPANY: FORMER CONFORMED NAME: CONSTELLATION BRANDS INC DATE OF NAME CHANGE: 20000920 FORMER COMPANY: FORMER CONFORMED NAME: CANANDAIGUA BRANDS INC DATE OF NAME CHANGE: 19970902 FORMER COMPANY: FORMER CONFORMED NAME: CANANDAIGUA WINE CO INC DATE OF NAME CHANGE: 19920703 10-Q 1 stz1130201810q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 30, 2018
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)
 
 
 
 
(585) 678-7100
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
Not Applicable
 
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                     ý  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  ý  Yes    ¨  No

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
¨
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 number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of December 31, 2018, is set forth below:
Class
 
Number of Shares Outstanding
Class A Common Stock, par value $.01 per share
 
166,548,089
Class B Common Stock, par value $.01 per share
 
23,316,629
Class 1 Common Stock, par value $.01 per share
 
11,983



TABLE OF CONTENTS
























This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond the Companys control, that could cause actual results to differ materially from those set forth in, or implied by, such forward-looking statements. For further information regarding such forward-looking statements, risks and uncertainties, please see “Information Regarding Forward-Looking Statements” under Part I – Item 2 “Managements Discussion and Analysis of Financial Condition and Results of Operations.”

Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. Unless otherwise defined herein, refer to the Notes to Consolidated Financial Statements under Item 1 of this Quarterly Report on Form 10-Q for the definition of capitalized terms used herein. All references to “Fiscal 2018” refer to our fiscal year ended February 28, 2018. All references to “Fiscal 2019” refer to our fiscal year ending February 28, 2019. All references to “$” are to U.S. dollars, all references to “C$” are to Canadian dollars and all references to “A$” are to Australian dollars.




PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
 
November 30,
2018
 
February 28,
2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
130.6

 
$
90.3

Accounts receivable
837.2

 
776.2

Inventories
2,198.0

 
2,084.0

Prepaid expenses and other
472.7

 
523.5

Total current assets
3,638.5

 
3,474.0

Property, plant and equipment
4,986.3

 
4,789.7

Goodwill
8,061.8

 
8,083.1

Intangible assets
3,307.8

 
3,304.8

Equity method investments
3,583.0

 
121.5

Other assets
4,313.0

 
765.6

Total assets
$
27,890.4

 
$
20,538.7

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Short-term borrowings
$
731.5

 
$
746.8

Current maturities of long-term debt
1,065.6

 
22.3

Accounts payable
882.7

 
592.2

Other accrued expenses and liabilities
683.6

 
678.3

Total current liabilities
3,363.4

 
2,039.6

Long-term debt, less current maturities
11,772.5

 
9,417.6

Other liabilities
1,234.5

 
1,089.8

Total liabilities
16,370.4

 
12,547.0

Commitments and contingencies

 

CBI stockholders’ equity:
 
 
 
Class A Common Stock, $.01 par value – Authorized, 322,000,000 shares; Issued, 185,514,404 shares and 258,718,356 shares, respectively
1.9

 
2.6

Class B Convertible Common Stock, $.01 par value – Authorized, 30,000,000 shares; Issued, 28,322,429 shares and 28,335,387 shares, respectively
0.3

 
0.3

Additional paid-in capital
1,368.8

 
2,825.3

Retained earnings
13,176.8

 
9,157.2

Accumulated other comprehensive loss
(505.9
)
 
(202.9
)
 
14,041.9

 
11,782.5

Less: Treasury stock –
 
 
 
Class A Common Stock, at cost, 18,970,734 shares and 90,743,239 shares, respectively
(2,783.0
)
 
(3,805.2
)
Class B Convertible Common Stock, at cost, 5,005,800 shares
(2.2
)
 
(2.2
)
 
(2,785.2
)
 
(3,807.4
)
Total CBI stockholders’ equity
11,256.7

 
7,975.1

Noncontrolling interests
263.3

 
16.6

Total stockholders’ equity
11,520.0

 
7,991.7

Total liabilities and stockholders’ equity
$
27,890.4

 
$
20,538.7


The accompanying notes are an integral part of these statements.

1




CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, except per share data)
(unaudited)
 
For the Nine Months Ended November 30,
 
For the Three Months Ended November 30,
 
2018
 
2017
 
2018
 
2017
Sales
$
6,916.3

 
$
6,390.6

 
$
2,160.6

 
$
1,981.7

Excise taxes
(597.5
)
 
(572.3
)
 
(188.0
)
 
(179.8
)
Net sales
6,318.8

 
5,818.3

 
1,972.6

 
1,801.9

Cost of product sold
(3,132.0
)
 
(2,851.0
)
 
(1,002.6
)
 
(891.6
)
Gross profit
3,186.8

 
2,967.3

 
970.0

 
910.3

Selling, general and administrative expenses
(1,239.9
)
 
(1,199.3
)
 
(413.5
)
 
(420.7
)
Operating income
1,946.9

 
1,768.0

 
556.5

 
489.6

Income (loss) from unconsolidated investments
918.2

 
249.7

 
(134.6
)
 
249.1

Interest expense
(248.6
)
 
(245.1
)
 
(72.8
)
 
(81.4
)
Loss on extinguishment of debt
(1.7
)
 
(19.1
)
 
(1.7
)
 
(10.3
)
Income before income taxes
2,614.8

 
1,753.5

 
347.4

 
647.0

Provision for income taxes
(405.1
)
 
(352.0
)
 
(35.3
)
 
(150.6
)
Net income
2,209.7

 
1,401.5

 
312.1

 
496.4

Net income attributable to noncontrolling interests
(13.3
)
 
(8.6
)
 
(9.0
)
 
(3.6
)
Net income attributable to CBI
$
2,196.4

 
$
1,392.9

 
$
303.1

 
$
492.8

 
 
 
 
 
 
 
 
Comprehensive income
$
1,891.7

 
$
1,605.3

 
$
98.2

 
$
369.2

Comprehensive (income) loss attributable to noncontrolling interests
1.7

 
(21.6
)
 
3.6

 
2.0

Comprehensive income attributable to CBI
$
1,893.4

 
$
1,583.7

 
$
101.8

 
$
371.2

 
 
 
 
 
 
 
 
Net income per common share attributable to CBI:
 
 
 
 
 
 
 
Basic – Class A Common Stock
$
11.66

 
$
7.22

 
$
1.62

 
$
2.55

Basic – Class B Convertible Common Stock
$
10.59

 
$
6.55

 
$
1.47

 
$
2.32

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
$
11.21

 
$
6.92

 
$
1.56

 
$
2.45

Diluted – Class B Convertible Common Stock
$
10.35

 
$
6.40

 
$
1.45

 
$
2.26

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic – Class A Common Stock
167.203

 
171.854

 
166.364

 
171.922

Basic – Class B Convertible Common Stock
23.322

 
23.339

 
23.318

 
23.333

 
 
 
 
 
 
 
 
Diluted – Class A Common Stock
195.921

 
201.183

 
194.820

 
201.177

Diluted – Class B Convertible Common Stock
23.322

 
23.339

 
23.318

 
23.333

 
 
 
 
 
 
 
 
Cash dividends declared per common share:
 
 
 
 
 
 
 
Class A Common Stock
$
2.22

 
$
1.56

 
$
0.74

 
$
0.52

Class B Convertible Common Stock
$
2.01

 
$
1.41

 
$
0.67

 
$
0.47


The accompanying notes are an integral part of these statements.

2




CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Nine Months Ended November 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
2,209.7

 
$
1,401.5

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Unrealized net gain on securities measured at fair value
(786.5
)
 
(216.8
)
Net gain on sale of unconsolidated investment
(99.8
)
 

Net income tax benefit related to the Tax Cuts and Jobs Act
(37.6
)
 

Equity in earnings of equity method investees, net of distributed earnings
(18.4
)
 
(20.5
)
Depreciation
250.1

 
214.4

Deferred tax provision
208.1

 
91.1

Stock-based compensation
51.1

 
45.5

Amortization of debt issuance costs and loss on extinguishment of debt
25.8

 
27.6

Amortization and impairment of intangible assets
4.5

 
91.2

Loss on contract termination

 
59.0

Change in operating assets and liabilities, net of effects from purchases of businesses:
 
 
 
Accounts receivable
(56.4
)
 
(38.4
)
Inventories
(127.7
)
 
(221.7
)
Prepaid expenses and other current assets
(56.6
)
 
(78.3
)
Accounts payable
301.3

 
157.7

Other accrued expenses and liabilities
33.7

 
(67.8
)
Other
72.6

 
23.9

Total adjustments
(235.8
)
 
66.9

Net cash provided by operating activities
1,973.9

 
1,468.4

 
 
 
 
Cash flows from investing activities:
 
 
 
Investments in equity method investees and securities
(4,077.3
)
 
(191.3
)
Purchases of property, plant and equipment
(620.3
)
 
(705.6
)
Purchases of businesses, net of cash acquired
(45.3
)
 
(131.9
)
Proceeds from sale of unconsolidated investment
110.2

 

Proceeds from sales of assets
46.3

 
1.2

Other investing activities
(0.9
)
 
(10.7
)
Net cash used in investing activities
(4,587.3
)
 
(1,038.3
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
3,657.6

 
6,017.9

Proceeds from shares issued under equity compensation plans
32.6

 
37.5

Purchases of treasury stock
(504.3
)
 
(239.2
)
Dividends paid
(417.9
)
 
(301.1
)
Principal payments of long-term debt
(45.3
)
 
(6,522.8
)
Payments of debt issuance costs
(33.3
)
 
(32.4
)
Net proceeds from (repayments of) short-term borrowings
(14.5
)
 
604.9

Payments of minimum tax withholdings on stock-based payment awards
(13.6
)
 
(22.9
)
Net cash provided by (used in) financing activities
2,661.3

 
(458.1
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(7.6
)
 
5.1

 
 
 
 
Net increase (decrease) in cash and cash equivalents
40.3

 
(22.9
)
Cash and cash equivalents, beginning of period
90.3

 
177.4

Cash and cash equivalents, end of period
$
130.6

 
$
154.5

 
 
 
 
Supplemental disclosures of noncash investing and financing activities:
 
 
 
Additions to property, plant and equipment
$
130.9

 
$
155.7

Conversion of long-term debt to noncontrolling equity interest
$
248.4

 
$

The accompanying notes are an integral part of these statements.

3




CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 2018
(unaudited)

1.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Basis of presentation –
Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. We have prepared the consolidated financial statements included herein, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in our opinion, all adjustments necessary to present fairly our financial information. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in our Annual Report on Form 10-K for the fiscal year ended February 28, 2018 (the “2018 Annual Report”), and include the recently adopted accounting guidance described below and in Note 2 herein. Results of operations for interim periods are not necessarily indicative of annual results.

Summary of significant accounting policies –
Revenue recognition:
Effective March 1, 2018, we adopted the FASB amended guidance regarding the recognition of revenue from contracts with customers using the retrospective application method (see Note 2 for impacts of adoption). Our revenue (referred to in our financial statements as “sales”) consists primarily of the sale of beer, wine and spirits domestically in the U.S. Sales of products are for cash or otherwise agreed-upon credit terms. Our payment terms vary by location and customer, however, the time period between when revenue is recognized and when payment is due is not significant. Our customers consist primarily of wholesale distributors. Our revenue generating activities have a single performance obligation and are recognized at the point in time when control transfers and our obligation has been fulfilled, which is when the related goods are shipped or delivered to the customer, depending upon the method of distribution and shipping terms. Revenue is measured as the amount of consideration we expect to receive in exchange for the sale of our product. Our sales terms do not allow for a right of return except for matters related to any manufacturing defects on our part. Amounts billed to customers for shipping and handling are included in sales.

As noted, the majority of our revenues are generated from the domestic sale of beer, wine and spirits to wholesale distributors in the U.S. Our other revenue generating activities include the export of certain of our products to select international markets, as well as the sale of our products through state alcohol beverage control agencies and on-premise, retail locations in certain markets. We have evaluated these other revenue generating activities under the disaggregation disclosure criteria outlined within the amended guidance and concluded that these other revenue generating activities are immaterial for separate disclosure. See Note 16 for disclosure of net sales by product type.

Sales reflect reductions attributable to consideration given to customers in various customer incentive programs, including pricing discounts on single transactions, volume discounts, promotional and advertising allowances, coupons and rebates. This variable consideration is recorded as a reduction of the transaction price based upon expected amounts at the time revenue for the corresponding product sale is recognized. For example, customer promotional discount programs are entered into with certain distributors for certain periods of time. The amount ultimately reimbursed to distributors is determined based upon agreed-upon promotional discounts which are applied to distributors’ sales to retailers. Other common forms of variable consideration include volume rebates for meeting established sales targets, and coupons and mail-in rebates offered to the end consumer. The determination of the reduction of the transaction price for variable consideration requires that we make certain estimates and assumptions that affect the timing and amounts of revenue and liabilities recognized. We estimate this variable consideration by taking into account factors such as the nature of the promotional activity, historical information and current trends, availability of actual results, and expectations of customer and consumer behavior.

4





Excise taxes remitted to tax authorities are government-imposed excise taxes on our beverage alcohol products. Excise taxes are shown on a separate line item as a reduction of sales. Excise taxes are recognized as a current liability in other accrued expenses and liabilities, with the liability subsequently reduced when the taxes are remitted to the tax authority.

2.    ACCOUNTING GUIDANCE:

Recently adopted accounting guidance –
Revenue recognition:
In May 2014, the FASB issued guidance regarding the recognition of revenue from contracts with customers. Under this guidance, an entity will recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Additionally, this guidance requires improved disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers.

We adopted this guidance on March 1, 2018, using the retrospective application method to allow for comparable reporting in all periods throughout the year ending February 28, 2019. Based on our analysis, we concluded that the adoption of the amended guidance did not have a material impact on our net sales recognition. However, the broad definition of variable consideration under this guidance requires us to estimate and recognize certain variable payments resulting from various sales incentives earlier than we have historically recognized them. This change in the timing of when we recognize sales incentive expenses resulted in a shift in net sales recognition primarily between our fiscal quarters. Under the retrospective application method, we recognized the cumulative impact of adopting this guidance in the first quarter of fiscal 2019 with a reduction to our March 1, 2016, opening retained earnings of $49.0 million, net of income tax effect, with an offsetting increase to current accrued promotion expense and the recognition of a deferred tax asset to align the timing of when we recognize sales incentive expense and when we recognize revenue.

The effects of the retrospective application method on our consolidated financial statements for the periods presented in this report were as follows:
 
As
Previously
Reported
 
Revenue
Recognition
Adjustments
 
As
Adjusted
(in millions, except per share data)
 
 
 
 
 
Consolidated Balance Sheet at February 28, 2018
 
 
 
 
 
Other accrued expenses and liabilities
$
583.4

 
$
94.9

 
$
678.3

Total current liabilities
$
1,944.7

 
$
94.9

 
$
2,039.6

Other liabilities (including deferred income taxes – as previously reported, $718.3 million; as adjusted, $694.4 million)
$
1,113.7

 
$
(23.9
)
 
$
1,089.8

Total liabilities
$
12,476.0

 
$
71.0

 
$
12,547.0

Retained earnings
$
9,228.2

 
$
(71.0
)
 
$
9,157.2

Total stockholders’ equity
$
8,062.7

 
$
(71.0
)
 
$
7,991.7

 
 
 
 
 
 

5




 
As
Previously
Reported
 
Revenue
Recognition
Adjustments
 
As
Adjusted
(in millions, except per share data)
 
 
 
 
 
Consolidated Statement of Comprehensive Income for the Nine Months Ended November 30, 2017
Sales
$
6,391.4

 
$
(0.8
)
 
$
6,390.6

Net sales
$
5,819.1

 
$
(0.8
)
 
$
5,818.3

Gross profit
$
2,968.1

 
$
(0.8
)
 
$
2,967.3

Operating income
$
1,768.8

 
$
(0.8
)
 
$
1,768.0

Income before income taxes
$
1,754.3

 
$
(0.8
)
 
$
1,753.5

Provision for income taxes
$
(352.3
)
 
$
0.3

 
$
(352.0
)
Net income
$
1,402.0

 
$
(0.5
)
 
$
1,401.5

Net income attributable to CBI
$
1,393.4

 
$
(0.5
)
 
$
1,392.9

Comprehensive income attributable to CBI
$
1,584.2

 
$
(0.5
)
 
$
1,583.7

 
 
 
 
 
 
Net income per common share attributable to CBI:
 
 
 
 
 
Basic – Class A Common Stock
$
7.22

 
$

 
$
7.22

Basic – Class B Convertible Common Stock
$
6.55

 
$

 
$
6.55

 
 
 
 
 
 
Diluted – Class A Common Stock
$
6.93

 
$
(0.01
)
 
$
6.92

Diluted – Class B Convertible Common Stock
$
6.40

 
$

 
$
6.40

 
 
 
 
 
 
Consolidated Statement of Comprehensive Income for the Three Months Ended November 30, 2017
Sales
$
1,978.9

 
$
2.8

 
$
1,981.7

Net sales
$
1,799.1

 
$
2.8

 
$
1,801.9

Gross profit
$
907.5

 
$
2.8

 
$
910.3

Operating income
$
486.8

 
$
2.8

 
$
489.6

Income before income taxes
$
644.2

 
$
2.8

 
$
647.0

Provision for income taxes
$
(149.5
)
 
$
(1.1
)
 
$
(150.6
)
Net income
$
494.7

 
$
1.7

 
$
496.4

Net income attributable to CBI
$
491.1

 
$
1.7

 
$
492.8

Comprehensive income attributable to CBI
$
369.5

 
$
1.7

 
$
371.2

 
 
 
 
 
 
Net income per common share attributable to CBI:
 
 
 
 
 
Basic – Class A Common Stock
$
2.54

 
$
0.01

 
$
2.55

Basic – Class B Convertible Common Stock
$
2.31

 
$
0.01

 
$
2.32

 
 
 
 
 
 
Diluted – Class A Common Stock
$
2.44

 
$
0.01

 
$
2.45

Diluted – Class B Convertible Common Stock
$
2.26

 
$

 
$
2.26


The adoption of the revenue recognition guidance had no impact to cash flows from operating, financing or investing activities in our consolidated statement of cash flows for the nine months ended November 30, 2017.

Income taxes:
In October 2016, the FASB issued guidance that simplifies the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. Under this guidance, an entity is required to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Prior guidance prohibited the recognition in earnings of current and deferred income taxes for an intra-entity asset transfer until the asset had been sold to an outside party or recovered through use.

We adopted this guidance on March 1, 2018, using the modified retrospective basis, which requires a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Based on

6




our assessment of intra-entity asset transfers that are in scope and the related deferred income taxes, in the first quarter of fiscal 2019, we recognized a net increase in our March 1, 2018, opening retained earnings and deferred tax assets of $2.2 billion, primarily in connection with the intra-entity transfer of certain intellectual property related to our imported beer business for the year ended February 28, 2018.

Accounting guidance not yet adopted
Leases:
In February 2016, the FASB issued guidance for the accounting for leases. Under this guidance, a lessee will recognize assets and liabilities on its balance sheet for most leases, but will recognize expense similar to current lease accounting guidance. Additionally, this guidance requires enhanced disclosures regarding the amount, timing and uncertainty of cash flows arising from leasing arrangements. We are required to adopt this guidance for our annual and interim periods beginning March 1, 2019. We intend to implement this guidance under the modified retrospective approach and apply the transition method which does not require adjustments to comparative periods or require modified disclosures for those comparative periods.

The guidance provides a number of optional practical expedients in transition. We expect to elect all of the available transition practical expedients, other than the use-of-hindsight. We are currently preparing to implement changes to our accounting policies, systems and controls, including the implementation of new leasing software capable of producing the required data for accounting and disclosure purposes. Based on analysis to date, we do not expect the adoption of this guidance to have a material impact on our results of operations or liquidity. We are in the process of quantifying the impact on our financial condition from applying this guidance, including the recognition of new right-of-use assets and lease liabilities associated with our operating leases. Among other items, we are finalizing (i)  the development and application of the rates at which future lease payments will be discounted and (ii)  the review of our existing contracts for embedded lease arrangements. Our assessment will be completed during the fourth quarter of fiscal 2019.

The guidance also provides practical expedients for an entity’s ongoing accounting. We expect to elect the short-term lease recognition exemption which will allow us to not recognize right-of-use assets and lease liabilities for all leases with an initial term of 12 months or less. We also expect to elect the practical expedient to not separate lease and non-lease components for all of our leases.

3.    INVENTORIES:

Inventories are stated at the lower of cost (primarily computed in accordance with the first-in, first-out method) or net realizable value. Elements of cost include materials, labor and overhead and consist of the following:
 
November 30,
2018
 
February 28,
2018
(in millions)
 
 
 
Raw materials and supplies
$
142.3

 
$
160.8

In-process inventories
1,532.5

 
1,382.8

Finished case goods
523.2

 
540.4

 
$
2,198.0

 
$
2,084.0


Related party transactions and arrangements –
We have an equally-owned glass production plant joint venture with Owens-Illinois. We have entered into various contractual arrangements with affiliates of Owens-Illinois primarily for the purchase of glass bottles used largely in our imported and craft beer portfolios. Amounts purchased under these arrangements were $172.4 million and $282.5 million for the nine months ended November 30, 2018, and November 30, 2017, respectively, and $48.7 million and $83.4 million for the three months ended November 30, 2018, and November 30, 2017, respectively.


7




4.    DERIVATIVE INSTRUMENTS:

Overview –
Our risk management and derivative accounting policies are presented in Notes 1 and 6 of our consolidated financial statements included in our 2018 Annual Report and have not changed significantly for the nine months and three months ended November 30, 2018. In addition, we have investments in certain equity securities which provide us with the option to purchase an additional ownership interest in the equity securities of that issuer (see Note 8). These investments are included in other assets and are accounted for at fair value, with the net gain (loss) from the changes in fair value of these investments recognized in income (loss) from unconsolidated investments (see Note 5).

The aggregate notional value of outstanding derivative instruments is as follows:
 
November 30,
2018
 
February 28,
2018
(in millions)
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
Foreign currency contracts
$
1,598.7

 
$
1,465.4

 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
Foreign currency contracts
$
356.8

 
$
440.6

Commodity derivative contracts
$
260.2

 
$
177.5


Credit risk –
We are exposed to credit-related losses if the counterparties to our derivative contracts default. This credit risk is limited to the fair value of the derivative contracts. To manage this risk, we contract only with major financial institutions that have earned investment-grade credit ratings and with whom we have standard International Swaps and Derivatives Association agreements which allow for net settlement of the derivative contracts. We have also established counterparty credit guidelines that are regularly monitored. Because of these safeguards, we believe the risk of loss from counterparty default to be immaterial.

In addition, our derivative instruments are not subject to credit rating contingencies or collateral requirements. As of November 30, 2018, the estimated fair value of derivative instruments in a net liability position due to counterparties was $65.8 million. If we were required to settle the net liability position under these derivative instruments on November 30, 2018, we would have had sufficient available liquidity on hand to satisfy this obligation.


8




Results of period derivative activity –
The estimated fair value and location of our derivative instruments on our balance sheets are as follows (see Note 5):
Assets
 
Liabilities
 
November 30,
2018
 
February 28,
2018
 
 
November 30,
2018
 
February 28,
2018
(in millions)
 
 
 
 
 
 
 
 
Derivative instruments designated as hedging instruments
Foreign currency contracts:
Prepaid expenses and other
$
4.8

 
$
21.2

 
Other accrued expenses and liabilities
$
34.9

 
$
7.8

Other assets
$
4.9

 
$
17.0

 
Other liabilities
$
30.6

 
$
9.9

 
 
 
 
 
 
 
 
 
Derivative instruments not designated as hedging instruments
Foreign currency contracts:
Prepaid expenses and other
$
1.6

 
$
2.1

 
Other accrued expenses and liabilities
$
2.0

 
$
2.2

Commodity derivative contracts:
Prepaid expenses and other
$
6.6

 
$
6.3

 
Other accrued expenses and liabilities
$
8.7

 
$
3.0

Other assets
$
1.7

 
$
2.8

 
Other liabilities
$
8.5

 
$
2.6


The principal effect of our derivative instruments designated in cash flow hedging relationships on our results of operations, as well as Other Comprehensive Income (“OCI”), net of income tax effect, is as follows:
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
Net
Gain (Loss)
Recognized
in OCI
 
Location of Net Gain (Loss)
Reclassified from
AOCI to Income
 
Net
Gain (Loss)
Reclassified
from AOCI
to Income
(in millions)
 
 
 
 
 
 
For the Nine Months Ended November 30, 2018
 
 
 
 
 
 
Foreign currency contracts
 
$
(55.6
)
 
Sales
 
$
0.1

 
 
 
 
Cost of product sold
 
5.2

 
 
$
(55.6
)
 
 
 
$
5.3

 
 
 
 
 
 
 
For the Nine Months Ended November 30, 2017
 
 
 
 
 
 
Foreign currency contracts
 
$
44.5

 
Sales
 
$
(0.3
)
 
 
 
 
Cost of product sold
 
0.3

Interest rate swap contracts
 
(1.5
)
 
Interest expense
 
1.3

 
 
$
43.0

 
 
 
$
1.3

 
 
 
 
 
 
 
For the Three Months Ended November 30, 2018
 
 
 
 
 
 
Foreign currency contracts
 
$
(48.6
)
 
Sales
 
$

 
 
 
 
Cost of product sold
 
0.5

 
 
$
(48.6
)
 
 
 
$
0.5

 
 
 
 
 
 
 
For the Three Months Ended November 30, 2017
 
 
 
 
 
 
Foreign currency contracts
 
$
(22.1
)
 
Sales
 
$
(0.4
)
 
 
 
 
Cost of product sold
 
2.3

Interest rate swap contracts
 
0.9

 
Interest expense
 
1.4

 
 
$
(21.2
)
 
 
 
$
3.3



9




We expect $15.5 million of net losses, net of income tax effect, to be reclassified from accumulated other comprehensive income (loss) (“AOCI”) to our results of operations within the next 12 months.

The effect of our undesignated derivative instruments on our results of operations is as follows:
Derivative Instruments Not
Designated as Hedging Instruments
 
 
 
Location of Net Gain (Loss)
Recognized in Income
 
Net
Gain (Loss)
Recognized
in Income
(in millions)
 
 
 
 
 
 
For the Nine Months Ended November 30, 2018
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
(5.1
)
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
(58.5
)
Interest rate swap contracts
 
 
 
Interest expense
 
35.0

 
 
 
 
 
 
$
(28.6
)
 
 
 
 
 
 
 
For the Nine Months Ended November 30, 2017
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
4.3

Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
4.4

 
 
 
 
 
 
$
8.7

 
 
 
 
 
 
 
For the Three Months Ended November 30, 2018
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
(14.7
)
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
(30.4
)
Interest rate swap contracts
 
 
 
Interest expense
 
32.3

 
 
 
 
 
 
$
(12.8
)
 
 
 
 
 
 
 
For the Three Months Ended November 30, 2017
 
 
 
 
 
 
Commodity derivative contracts
 
 
 
Cost of product sold
 
$
3.5

Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
(2.0
)
 
 
 
 
 
 
$
1.5


5.    FAIR VALUE OF FINANCIAL INSTRUMENTS:

Authoritative guidance establishes a framework for measuring fair value, including a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. The hierarchy includes three levels:

Level 1 inputs are quoted prices in active markets for identical assets or liabilities;
Level 2 inputs include data points that are observable such as quoted prices for similar assets or liabilities in active markets, quoted prices for identical assets or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) such as interest rates and yield curves that are observable for the asset and liability, either directly or indirectly; and
Level 3 inputs are unobservable data points for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability.

Fair value methodology and assumptions –
The following methods and assumptions are used to estimate the fair value for each class of our financial instruments:

Foreign currency and commodity derivative contracts: The fair value is estimated using market-based inputs, obtained from independent pricing services, entered into valuation models. These valuation models require various inputs, including contractual terms, market foreign exchange prices, market commodity prices, interest-rate yield curves and currency volatilities, as applicable (Level 2 fair value measurement).

10




Canopy investments:
Equity securities, Common stockThe fair value of the November 2017 Canopy Investment (as defined in Note 8) is calculated through the date of the November 2018 Canopy Transaction (as defined in Note 8) by using the closing market price of the underlying equity security (Level 1 fair value measurement). As of the date of the November 2018 Canopy Transaction, the November 2017 Canopy Investment, collectively with the November 2018 Canopy Investment (as defined in Note 8), is accounted for under the equity method (see Note 8).
Equity securities, WarrantsThe fair value of the November 2017 Canopy Warrants and the November 2018 Canopy Warrants (both as defined in Note 8) is estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement). The assumptions used to estimate the fair value of the warrants are as follows:
 
November 30, 2018
 
February 28, 2018
 
November
2018 Canopy
Warrants
 
November
2017 Canopy
Warrants
 
November
2017 Canopy
Warrants
Expected life (1)
2.9 years

 
1.4 years

 
2.2 years

Expected volatility (2)
75.2
%
 
83.2
%
 
70.9
%
Risk-free interest rate (3)
2.2
%
 
2.1
%
 
1.8
%
Expected dividend yield (4)
0.0
%
 
0.0
%
 
0.0
%
(1) 
Based on the expiration date of the warrants.
(2) 
Based on historical volatility levels of the underlying equity security.
(3) 
Based on the implied yield currently available on Canadian Treasury zero coupon issues with a remaining term equal to the expected life.
(4) 
Based on historical dividend levels.
Debt securities, ConvertibleIn June 2018, we acquired convertible debt securities issued by Canopy for C$200.0 million, or $150.5 million (the “Canopy Debt Securities”). We have elected the fair value option to account for the Canopy Debt Securities. This provides the greatest level of consistency with the accounting treatment for the November 2017 Canopy Warrants. Interest income on the Canopy Debt Securities is calculated using the effective interest method and is recognized separately from the changes in fair value in interest expense. The Canopy Debt Securities have a contractual maturity of five years from the date of issuance, but may be converted prior to maturity by either party upon the occurrence of certain events. At settlement, the Canopy Debt Securities can be settled at the option of the issuer, in cash, equity shares of the issuer, or a combination thereof. The fair value is estimated using a binomial lattice option-pricing model (Level 2 fair value measurement). As of November 30, 2018, the assumptions used to estimate the fair value of the Canopy Debt Securities are as follows:
Remaining term (1)
4.6 years

Expected volatility (2)
44.2
%
Risk-free interest rate (3)
2.2
%
Expected dividend yield (4)
0.0
%
(1) 
Based on the contractual maturity date of the notes.
(2) 
Based on historical volatility levels of the underlying equity security reduced to account for certain risks not incorporated into the option-pricing model.
(3) 
Based on the implied yield currently available on Canadian Treasury zero coupon issues with a term equal to the remaining contractual term of the debt securities.
(4) 
Based on historical dividend levels.
Debt securities, Available-for-sale (“AFS”): The fair value is estimated by discounting cash flows using market-based inputs (Level 3 fair value measurement) (see Note 9).
Short-term borrowings: The revolving credit facility under our senior credit facility is a variable interest rate bearing note which includes a fixed margin which is adjustable based upon our debt rating (as defined in our senior credit facility). Its fair value is estimated by discounting cash flows using LIBOR plus a margin reflecting

11




current market conditions obtained from participating member financial institutions (Level 2 fair value measurement). The remaining instruments, including our commercial paper, are variable interest rate bearing notes for which the carrying value approximates the fair value.
Long-term debt: The term loans under our 2018 Credit Agreement and our Term Credit Agreement (both as defined in Note 10) are variable interest rate bearing notes which include a fixed margin which is adjustable based upon our debt rating. The Senior Floating Rate Notes (as defined in Note 10) are variable interest rate bearing notes which include a fixed margin. The fair value of the term loans and the Senior Floating Rate Notes are estimated by discounting cash flows using LIBOR plus a margin reflecting current market conditions obtained from participating member financial institutions (Level 2 fair value measurement). The fair value of the remaining long-term debt, which is primarily fixed interest rate, is estimated by discounting cash flows using interest rates currently available for debt with similar terms and maturities (Level 2 fair value measurement).

The carrying amounts of certain of our financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and short-term borrowings, approximate fair value as of November 30, 2018, and February 28, 2018, due to the relatively short maturity of these instruments. As of November 30, 2018, the carrying amount of long-term debt, including the current portion, was $12,838.1 million, compared with an estimated fair value of $12,460.7 million. As of February 28, 2018, the carrying amount of long-term debt, including the current portion, was $9,439.9 million, compared with an estimated fair value of $9,398.4 million.

Recurring basis measurements –
The following table presents our financial assets and liabilities measured at estimated fair value on a recurring basis:
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
(in millions)
 
 
 
 
 
 
 
November 30, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
11.3

 
$

 
$
11.3

Commodity derivative contracts
$

 
$
8.3

 
$

 
$
8.3

Equity securities (1) (2)
$

 
$
1,881.2

 
$

 
$
1,881.2

Canopy Debt Securities (2)
$

 
$
166.9

 
$

 
$
166.9

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
67.5

 
$

 
$
67.5

Commodity derivative contracts
$

 
$
17.2

 
$

 
$
17.2

 
 
 
 
 
 
 
 
February 28, 2018
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
40.3

 
$

 
$
40.3

Commodity derivative contracts
$

 
$
9.1

 
$

 
$
9.1

Equity securities (1)
$
402.4

 
$
253.2

 
$

 
$
655.6

Debt securities, AFS
$

 
$

 
$
16.6

 
$
16.6

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
19.9

 
$

 
$
19.9

Commodity derivative contracts
$

 
$
5.6

 
$

 
$
5.6


12




(1) 
Equity securities consist of:
November 30, 2018
 
February 28, 2018
 
(in millions)
 
 
 
 
November 2017 Canopy Investment
$

 
$
402.4

 
November 2017 Canopy Warrants
476.8

 
253.2

 
November 2018 Canopy Warrants
1,404.4

 

 
 
$
1,881.2

 
$
655.6

(2) 
Unrealized net gain (loss) from the changes in fair value of our securities measured at fair value recognized in income (loss) from unconsolidated investments, are as follows:
 
 
For the Nine Months Ended
 
For the Three Months Ended
 
 
November 30, 2018
 
November 30, 2017
 
November 30, 2018
 
November 30, 2017
 
(in millions)
 
 
 
 
 
 
 
 
November 2017 Canopy Investment (i)
$
292.5

 
$
139.7

 
$
(168.5
)
 
$
139.7

 
November 2017 Canopy Warrants
223.5

 
77.1

 
(212.4
)
 
77.1

 
November 2018 Canopy Warrants
257.6

 

 
257.6

 

 
Canopy Debt Securities
12.9

 

 
(40.6
)
 

 
 
$
786.5

 
$
216.8

 
$
(163.9
)
 
$
216.8

 
(i) 

Accounted for at fair value from the date of investment in November 2017 through October 31, 2018. Accounted for under the equity method from November 1, 2018.

Nonrecurring basis measurements –
The following table presents our assets and liabilities measured at estimated fair value on a nonrecurring basis for which an impairment assessment was performed for the period presented:
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total Losses
(in millions)
 
 
 
 
 
 
 
For the Nine Months Ended November 30, 2017
 
 
 
 
 
 
 
Trademarks
$

 
$

 
$
136.0

 
$
86.8


For the first quarter of fiscal 2018, we identified certain negative trends within our Beer segment’s Ballast Point craft beer portfolio which, when combined with the then-recent negative craft beer industry trends, indicated that it was more likely than not that the fair value of our indefinite lived intangible asset associated with the craft beer trademarks might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment of the craft beer trademark asset. As a result of this assessment, the craft beer trademark asset with a carrying value of $222.8 million was written down to its estimated fair value of $136.0 million, resulting in an impairment of $86.8 million. This impairment is included in selling, general and administrative expenses.


13




6.    GOODWILL:

The changes in the carrying amount of goodwill are as follows:
 
Beer
 
Wine and Spirits
 
Consolidated
(in millions)
 
 
 
 
 
Balance, February 28, 2017
$
5,053.0

 
$
2,867.5

 
$
7,920.5

Purchase accounting allocations (1)
63.9

 
56.2

 
120.1

Foreign currency translation adjustments
40.7

 
1.8

 
42.5

Balance, February 28, 2018
5,157.6

 
2,925.5

 
8,083.1

Purchase accounting allocations (2)
22.3

 
11.8

 
34.1

Foreign currency translation adjustments
(48.7
)
 
(6.7
)
 
(55.4
)
Balance, November 30, 2018
$
5,131.2

 
$
2,930.6

 
$
8,061.8

(1) 
Purchase accounting allocations associated primarily with the acquisitions of a brewery operation business in Obregon, Sonora, Mexico (the “Obregon Brewery”) ($13.8 million) and Funky Buddha Brewery LLC (Beer), and Schrader Cellars, LLC (Wine and Spirits).
(2) 
Preliminary purchase accounting allocations associated primarily with the acquisitions of Four Corners Brewing Company LLC (Beer) and a production facility in Italy (Wine and Spirits).
Acquisitions –
Four Corners:
In July 2018, we acquired the Four Corners Brewing Company LLC business, a portfolio of high-performing, dynamic and bicultural, Texas-based craft beers (“Four Corners”). This transaction primarily included the acquisition of operations, goodwill, property, plant and equipment, and trademarks, plus an earn-out over five years based on the performance of the brands. The results of operations of Four Corners are reported in the Beer segment and have been included in our consolidated results of operations from the date of acquisition.

Other:
In October 2018, we acquired a business in Italy, consisting primarily of a production facility, vineyards and inventory, to provide for additional processing and sourcing capabilities for our Italian wine portfolio.

During the year ended February 28, 2018, we completed the acquisitions of other businesses, including the Funky Buddha Brewery LLC business, which included a portfolio of high-quality, Florida-based craft beers (“Funky Buddha”), and the Schrader Cellars, LLC business, which included a collection of highly-rated, limited-production fine wines (“Schrader Cellars”). The total combined purchase price for these acquisitions was $149.8 million. The purchase price for each acquisition was primarily allocated to goodwill and trademarks. In addition, the purchase price for Funky Buddha includes an earn-out over five years based on the performance of the brands. The results of operations of these acquired brands are reported in the respective segment and have been included in our consolidated results of operations from their respective date of acquisition.


14




7.    INTANGIBLE ASSETS:

The major components of intangible assets are as follows:
 
November 30, 2018
 
February 28, 2018
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
(in millions)
 
 
 
 
 
 
 
Amortizable intangible assets
 
 
 
 
 
 
 
Customer relationships
$
89.9

 
$
40.4

 
$
89.8

 
$
44.2

Other
20.4

 
1.0

 
20.3

 
1.4

Total
$
110.3

 
41.4

 
$
110.1

 
45.6

 
 
 
 
 
 
 
 
Nonamortizable intangible assets
 
 
 
 
 
 
 
Trademarks
 
 
3,266.4

 
 
 
3,259.2

Total intangible assets
 
 
$
3,307.8

 
 
 
$
3,304.8


We did not incur costs to renew or extend the term of acquired intangible assets for the nine months and three months ended November 30, 2018, and November 30, 2017. Net carrying amount represents the gross carrying value net of accumulated amortization.

8.    EQUITY METHOD INVESTMENTS:

Our equity method investments are as follows:
 
November 30, 2018
 
February 28, 2018
 
Carrying Value
 
Ownership Percentage
 
Carrying Value
 
Ownership Percentage
(in millions)
 
 
 
 
 
 
 
Canopy Equity Method Investment
$
3,435.2

 
36.0
%
 
$

 
%
Other equity method investments
147.8

 
20%-50%

 
121.5

 
20%-50%

 
$
3,583.0

 
 
 
$
121.5

 
 

In November 2017, we acquired 18.9 million common shares, which represented a 9.9% ownership interest in Ontario, Canada-based Canopy Growth Corporation (the “November 2017 Canopy Investment”), a public company and leading provider of medicinal and recreational cannabis products (“Canopy”), plus warrants which give us the option to purchase an additional 18.9 million common shares of Canopy (the “November 2017 Canopy Warrants”) for C$245.0 million, or $191.3 million. The November 2017 Canopy Warrants were issued with an exercise price of C$12.98 with 50% currently vested and the remaining 50% to vest on February 1, 2019. These warrants expire in May 2020. These investments have been accounted for at fair value from the date of investment through October 31, 2018 (see “Canopy Equity Method Investment” below).

On November 1, 2018, we increased our ownership interest in Canopy by acquiring an additional 104.5 million common shares (the “November 2018 Canopy Investment”) (see Canopy Equity Method Investment below), plus warrants which give us the option to purchase an additional 139.7 million common shares (the “November 2018 Canopy Warrants”, and together with the “November 2018 Canopy Investment”, the “November 2018 Canopy Transaction”) for C$5,078.7 million, or $3,869.9 million. The allocation of the consideration paid as of the date of closing was determined using a relative fair value approach based upon a market value of C$5,060.9 million for the acquired common shares and a fair value of C$2,131.3 million for the acquired warrants using a Black-Scholes option-pricing model with similar assumptions as disclosed in Note 5. Accordingly, C$3,573.7 million, or $2,723.1 million, was allocated to the November 2018 Canopy Investment, and C$1,505.0 million, or $1,146.8 million, was allocated to the November 2018 Canopy Warrants. In addition, we incurred $24.5 million of direct acquisition costs which were allocated to the acquired securities utilizing this relative fair value approach.

15




This resulted in $17.2 million of direct acquisition costs being allocated to the November 2018 Canopy Investment and included in the value of the Canopy Equity Method Investment under the cost-accumulation model, and $7.3 million being allocated to the November 2018 Canopy Warrants and expensed to selling, general and administrative expenses.

The November 2018 Canopy Warrants consist of 88.5 million warrants (the “Tranche A Warrants”) and 51.2 million warrants (the “Tranche B Warrants”). The Tranche A Warrants are immediately exercisable at an exercise price of C$50.40. The Tranche B Warrants are exercisable upon the exercise, in full, of the Tranche A Warrants and at an exercise price equal to the volume-weighted average of the closing market price of Canopy’s common shares on the Toronto Stock Exchange for the five trading days immediately preceding the exercise date. The November 2018 Canopy Warrants expire in November 2021 and are accounted for at fair value from the date of investment. For the nine months and three months ended November 30, 2018, we recognized an unrealized net gain of $257.6 million resulting from the mark to fair value of the November 2018 Canopy Warrants.

On November 1, 2018, our ownership interest in Canopy increased to 36.6% and, as we can now exercise significant influence over Canopy, we account for the November 2017 Canopy Investment and the November 2018 Canopy Investment, each of which represents an investment in common shares of Canopy, collectively, under the equity method (the “Canopy Equity Method Investment”). As of November 1, 2018, the Canopy Equity Method Investment balance consists of the amount allocated to the November 2018 Canopy Investment of $2,740.3 million, plus the fair value of the November 2017 Canopy Investment at the date of closing of $694.9 million. We will recognize equity in earnings for this investment on a two-month lag. Accordingly, we will recognize equity in earnings from Canopy’s results for the period November 1, 2018, through December 31, 2018, in our consolidated financial statements for the fourth quarter of fiscal 2019. As of November 30, 2018, the carrying amount of the Canopy Equity Method Investment is greater than our equity in the underlying assets of Canopy by approximately $2.5 billion due primarily to the estimated fair value of identifiable intangible assets and goodwill. Beginning with the fourth quarter of fiscal 2019, our equity in earnings from the Canopy Equity Method Investment will be adjusted to reflect, among other items, the amortization of the fair value adjustments associated with the definite-lived intangible assets over their estimated useful lives.

In connection with the November 2018 Canopy Transaction, we entered into foreign currency option contracts in August 2018 to fix the U.S. dollar cost of the transaction. For the nine months and three months ended November 30, 2018, we recognized net losses of $30.2 million and $25.5 million, respectively, in selling, general and administrative expenses with the payment at maturity of the derivative instruments reported as cash flows from investing activities in investments in equity method investees and securities.

Canopy has various convertible equity securities outstanding, including equity awards granted to its employees and options and warrants issued to various third parties, including our November 2017 Canopy Warrants and November 2018 Canopy Warrants. As of November 30, 2018, the conversion of Canopy equity securities held by its employees and/or held by other third parties would not have a significant effect on our share of Canopy’s reported earnings or losses. Additionally, under an amended and restated investor rights agreement, we have the option to purchase additional common shares of Canopy at the then-current price of the underlying equity security to allow us to maintain our relative ownership interest. The exercise of our November 2017 Canopy Warrants as of November 30, 2018, also would not have a significant effect on our share of Canopy’s reported earnings or losses. However, as of November 30, 2018, the exercise of all of the November 2017 Canopy Warrants and the November 2018 Canopy Warrants held by us would result in an increase in our ownership interest in Canopy to greater than 50% and the consolidation of Canopy’s results of operations in our consolidated results of operations with the recognition of an associated noncontrolling ownership interest, as appropriate. This may have a significant effect on our share of Canopy’s reported earnings or losses. As of November 30, 2018, the exercise of all Canopy warrants held by us would require a cash outflow of approximately $5.3 billion based on the terms of the November 2017 Canopy Warrants and the November 2018 Canopy Warrants. Additionally, as of November 30, 2018, the fair value of our equity method investment in Canopy was $4,190.8 million based on the closing price of the underlying equity security as of that date.


16




9.    OTHER ASSETS:

The major components of other assets are as follows:
 
November 30,
2018
 
February 28,
2018
(in millions)
 
 
 
Deferred income taxes (see Note 2)
$
2,177.7

 
$

Investments in securities measured at fair value
2,048.1

 
672.2

Other
87.2

 
93.4

 
$
4,313.0

 
$
765.6


Sale of Accolade Wine Investment –
In May 2018, we completed the sale of our remaining interest in our previously-owned Australian and European business (the “Accolade Wine Investment”) for A$149.1 million, or $113.6 million, subject to closing adjustments. We received cash proceeds, net of direct costs to sell, of $110.2 million and a note receivable of $3.4 million. This interest consisted of an investment accounted for under the cost method and AFS debt securities. For the nine months ended November 30, 2018, we recognized a net gain of $99.8 million in connection with this transaction. This net gain is included in income (loss) from unconsolidated investments.

10.    BORROWINGS:

Borrowings consist of the following:
 
November 30, 2018
 
February 28,
2018
 
Current
 
Long-term
 
Total
 
Total
(in millions)
 
 
 
 
 
 
 
Short-term borrowings
 
 
 
 
 
 
 
Senior credit facility, Revolving credit loans
$
105.0

 
 
 


 
$
79.0

Commercial paper
626.5

 
 
 


 
266.9

Other

 
 
 


 
400.9

 
$
731.5

 


 


 
$
746.8

 
 
 
 
 
 
 
 
Long-term debt
 
 
 
 
 
 
 
Senior credit facility, Term loan
$
5.0

 
$
489.0

 
$
494.0

 
$
497.7

Term loan credit facility
50.0

 
1,448.9

 
1,498.9

 

Senior notes
997.0

 
9,816.1

 
10,813.1

 
8,674.2

Other
13.6

 
18.5

 
32.1

 
268.0

 
$
1,065.6

 
$
11,772.5

 
$
12,838.1

 
$
9,439.9


Senior credit facility –
The Company, CIH International S.à r.l., a wholly-owned subsidiary of ours (“CIH”), CB International Finance S.à r.l., a wholly-owned subsidiary of ours (“CB International”) (together with CIH, the “European Borrowers”), Bank of America, N.A., as administrative agent (the “Administrative Agent”), and certain other lenders were parties to a credit agreement, as amended and restated (the “2017 Credit Agreement”).


17




In August 2018, the Company, CIH, CB International, certain of the Company’s subsidiaries as guarantors, the Administrative Agent, and certain other lenders entered into a Restatement Agreement (the “August 2018 Restatement Agreement”) that amended and restated the 2017 Credit Agreement (as amended and restated by the August 2018 Restatement Agreement, the “August 2018 Credit Agreement”). The principal changes effected by the August 2018 Restatement Agreement were:

The removal of CIH as a borrower under the August 2018 Credit Agreement;
The termination of a cross-guarantee agreement by the European Borrowers; and
The addition of a mechanism to provide for the replacement of LIBOR with an alternative benchmark rate in certain circumstances where LIBOR cannot be adequately ascertained or available.

In September 2018, the Company, CB International, certain of the Company’s subsidiaries as guarantors, the Administrative Agent, and certain other lenders entered into a Restatement Agreement (the “2018 Restatement Agreement”) that amended and restated the August 2018 Credit Agreement (as amended and restated by the 2018 Restatement Agreement, the “2018 Credit Agreement”). The primary change effected by the 2018 Restatement Agreement was the increase of the revolving credit facility from $1.5 billion to $2.0 billion and extension of its maturity to September 14, 2023. The 2018 Restatement Agreement also modified certain financial covenants in connection with the November 2018 Canopy Transaction and added various representations and warranties, covenants and an event of default related to the November 2018 Canopy Transaction.

Term Credit Agreement –
In September 2018, the Company, the Administrative Agent, and certain other lenders entered into a term loan credit agreement (the “Term Credit Agreement”). The Term Credit Agreement provides for aggregate credit facilities of $1.5 billion, consisting of a $500.0 million three-year term loan facility (the “Three-Year Term Facility”) and a $1.0 billion five-year term loan facility (the “Five-Year Term Facility”).

The Three-Year Term Facility is not subject to amortization payments, with the balance due and payable at maturity. The Five-Year Term Facility will be repaid in quarterly payments of principal equal to 1.25% of the original aggregate principal amount of the Five-Year Term Facility, with the balance due and payable at maturity.

The obligations under the Term Credit Agreement are guaranteed by certain of our U.S. subsidiaries. We and our subsidiaries are subject to covenants that are contained in the Term Credit Agreement, including those restricting the incurrence of additional indebtedness (including guarantees of indebtedness) by subsidiaries that are not guarantors, additional liens, mergers and consolidations, transactions with affiliates, and sale and leaseback transactions, in each case subject to numerous conditions, exceptions and thresholds. The financial covenants are limited to a minimum interest coverage ratio and a maximum net leverage ratio. The representations, warranties, covenants and events of default set forth in the Term Credit Agreement are substantially similar to those set forth in the 2018 Credit Agreement.


18




As of November 30, 2018, aggregate credit facilities under the 2018 Credit Agreement and the Term Credit Agreement consist of the following:
 
Amount
 
Maturity
(in millions)
 
 
 
2018 Credit Agreement
 
 
 
Revolving Credit Facility (1) (2)
$
2,000.0

 
Sept 14, 2023
U.S. Term A-1 Facility (1) (3)
500.0

 
July 14, 2024
 
$
2,500.0

 
 
Term Credit Agreement
 
 
 
Three-Year Term Facility (1) (3)
$
500.0

 
Nov 1, 2021
Five-Year Term Facility (1) (3)
1,000.0

 
Nov 1, 2023
 
$
1,500.0

 
 
(1) 
Contractual interest rate varies based on our debt rating (as defined in the respective agreement) and is a function of LIBOR plus a margin, or the base rate plus a margin, or, in certain circumstances where LIBOR cannot be adequately ascertained or available, an alternative benchmark rate plus a margin.
(2) 
We and/or CB International are the borrower under the $2,000.0 million Revolving Credit Facility. Includes a sub-facility for letters of credit of up to $200.0 million.
(3) 
We are the borrower under the U.S. Term A-1 loan facility, the Three-Year Term Facility and the Five-Year Term Facility.

As of November 30, 2018, information with respect to borrowings under the 2018 Credit Agreement and the Term Credit Agreement is as follows:
 
2018 Credit Agreement
 
Term Credit Agreement
 
Revolving
Credit
Facility
 
U.S.
Term A-1
Facility (1)
 
Three-Year
Term
Facility (1)
 
Five-Year
Term
Facility (1)
(in millions)
 
 
 
 
 
 
 
Outstanding borrowings
$
105.0

 
$
494.0

 
$
499.5

 
$
999.4

Interest rate
3.4
%
 
3.8
%
 
3.4
%
 
3.5
%
LIBOR margin
1.13
%
 
1.50
%
 
1.13
%
 
1.25
%
Outstanding letters of credit
$
10.7

 
 
 
 
 
 
Remaining borrowing capacity (2)
$
1,257.2

 
 
 
 
 
 
(1) 
Outstanding term loan facility borrowings are net of unamortized debt issuance costs.
(2) 
Net of outstanding revolving credit facility borrowings and outstanding letters of credit under the 2018 Credit Agreement and outstanding borrowings under our commercial paper program of $627.1 million (excluding unamortized discount) (see “Commercial paper program”).

Commercial paper program
In October 2018, our Board of Directors authorized a $1.0 billion increase to our commercial paper program, thereby providing for the issuance of up to an aggregate principal amount of $2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 2018 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility under our 2018 Credit Agreement. As of November 30, 2018, we had $626.5 million of outstanding borrowings, net of unamortized discount, under our commercial paper program with a weighted average annual interest rate of 2.7% and a weighted average remaining term of 14 days.


19




Senior notes –
In October 2018, we issued $2,150.0 million aggregate principal amount of Senior Notes (the “October 2018 Senior Notes”). Proceeds from this offering, net of discount and debt issuance costs, were $2,129.0 million. The October 2018 Senior Notes consist of:
 
 
 
Date of
 
Redemption
 
Principal
 
Maturity
 
Interest Payments
 
Stated Redemption Date
 
Stated Basis Points
(in millions, except basis points)
 
 
 
 
 
 
 
 
 
Senior Floating Rate Notes (1) (2)
$
650.0

 
Nov 2021
 
Quarterly
 
 
 
 
4.40% Senior Notes (1) (3)
$
500.0

 
Nov 2025
 
May/Nov
 
Sept 2025
 
20

4.65% Senior Notes (1) (3)
$
500.0

 
Nov 2028
 
May/Nov
 
Aug 2028
 
25

5.25% Senior Notes (1) (3)
$
500.0

 
Nov 2048
 
May/Nov
 
May 2048
 
30

(1) 
Senior unsecured obligations which rank equally in right of payment to all of our existing and future senior unsecured indebtedness. Guaranteed by certain of our U.S. subsidiaries on a senior unsecured basis.
(2) 
Interest will accrue for each quarterly interest period at a rate equal to three-month LIBOR plus 0.70% per year as determined on the applicable interest determination date as defined in the indenture. Interest is payable quarterly in February, May, August and November. The notes are not redeemable prior to October 30, 2019. On or after this date, the notes are redeemable, in whole or in part, at our option at any time prior to maturity, at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest.
(3) 
Redeemable, in whole or in part, at our option at any time prior to the stated redemption date as defined in the indenture, at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest and a make-whole payment based on the present value of the future payments at the adjusted Treasury Rate plus the stated basis points as defined in the indenture. On or after the stated redemption date, redeemable, in whole or in part, at our option at any time at a redemption price equal to 100% of the outstanding principal amount, plus accrued and unpaid interest.

Interest rate swap contracts –
In August 2018, we entered into forward-starting interest rate swap contracts with an aggregate notional value of $1,250.0 million to economically hedge our exposure to interest rate volatility associated with the debt financing for the November 2018 Canopy Transaction. The effective date and mandatory termination date of the interest rate swap contracts were the same. The interest rate swap contracts were not designated as a hedge for accounting purposes. For the nine months and three months ended November 30, 2018, we recognized a gain of $35.0 million and $32.4 million, respectively, in connection with the settlement of the interest rate swap contracts in October 2018. This amount was recognized in interest expense.

Other long-term debt
In August 2018, we recorded a conversion of $248.4 million from long-term debt to noncontrolling equity interests associated with the noncash settlement of a prior contractual agreement with our glass production plant joint venture partner, Owens-Illinois.


20




Debt payments
As of November 30, 2018, the required principal repayments under long-term debt obligations (excluding unamortized debt issuance costs and unamortized discounts of $72.9 million and $16.1 million, respectively) for the remaining three months of fiscal 2019 and for each of the five succeeding fiscal years and thereafter are as follows:
(in millions)
 
2019
$
16.6

2020
1,068.5

2021
764.1

2022
1,710.1

2023
1,856.6

2024
1,842.5

Thereafter
5,668.7

 
$
12,927.1


11.    INCOME TAXES:

Our effective tax rate for the nine months ended November 30, 2018, and November 30, 2017, was 15.5% and 20.1%, respectively. Our effective tax rate for the three months ended November 30, 2018, and November 30, 2017, was 10.2% and 23.3%, respectively.

For the nine months and three months ended November 30, 2018, our effective tax rate was lower than the federal statutory rate of 21% primarily due to:

Lower effective tax rates applicable to our foreign businesses;
The recognition of an income tax benefit for the three months ended November 30, 2018, associated with an adjustment to provisional amounts recognized for the year ended February 28, 2018, in connection with the Tax Cuts and Jobs Act (the “TCJ Act”) (see additional discussion below); and
The recognition of a net income tax benefit from stock-based compensation award activity.

For the three months ended November 30, 2018, our effective tax rate was also unfavorably impacted by the lower effective tax rate on the benefit of the net unrealized losses from the changes in fair value of the November 2017 Canopy investments.

For the nine months and three months ended November 30, 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 our assertion regarding indefinitely reinvesting earnings of certain foreign subsidiaries, which was initially asserted in the third quarter of fiscal 2017; and
The recognition of a net income tax benefit from stock-based compensation award activity.

On December 22, 2017, the TCJ Act was signed into law. The TCJ Act significantly changes U.S. corporate income taxes. Additionally, in December 2017, the SEC issued guidance related to the income tax accounting implications of the TCJ Act. This guidance provides a measurement period, which extends no longer than one year from the enactment date of the TCJ Act, during which a company may complete its accounting for the income tax implications of the TCJ Act. In accordance with this guidance, we recognized a provisional net income tax benefit for the year ended February 28, 2018. Refer to Note 13 of our consolidated financial statements included in our 2018 Annual Report for further information.

For the three months ended November 30, 2018, we completed our analysis of the income tax implications of the TCJ Act. We recognized an additional income tax benefit of $37.6 million resulting from a decrease in the mandatory one-time transition tax on unremitted earnings of our foreign businesses.


21




The TCJ Act also creates a new requirement that certain income earned by foreign subsidiaries (“GILTI”) be included in U.S. gross income. The FASB allows an accounting policy election of either recognizing deferred taxes for temporary differences expected to reverse as GILTI in future years or recognizing such taxes as a current period expense when incurred. We have elected to treat the tax effect of GILTI as a current-period expense when incurred.

12.    STOCKHOLDERS’ EQUITY:

In January 2018, our Board of Directors authorized the repurchase of up to $3.0 billion of our Class A Common Stock and Class B Convertible Common Stock (the “2018 Authorization”). The Board of Directors did not specify a date upon which this authorization would expire. Shares repurchased under the 2018 Authorization have become treasury shares.

For the nine months ended November 30, 2018, we repurchased 2,352,145 shares of Class A Common Stock pursuant to the 2018 Authorization at an aggregate cost of $504.3 million through open market transactions.

As of November 30, 2018, total shares repurchased under the 2018 Authorizations are as follows:
 
 
 
Class A Common Shares
 
Repurchase
Authorization
 
Dollar Value
of Shares
Repurchased
 
Number of
Shares
Repurchased
(in millions, except share data)
 
 
 
 
 
2018 Authorization
$
3,000.0

 
$
995.9

 
4,632,012

In October 2018, our Board of Directors retired 74,000,000 shares of our Class A treasury stock. The retired shares are now authorized and unissued shares of our Class A Common Stock.

13.    NET INCOME PER COMMON SHARE ATTRIBUTABLE TO CBI:

For the nine months and three months ended November 30, 2018, and November 30, 2017, net income per common share – diluted for Class A Common Stock has been computed using the if-converted method and assumes the exercise of stock options using the treasury stock method and the conversion of Class B Convertible Common Stock as this method is more dilutive than the two-class method. For the nine months and three months ended November 30, 2018, and November 30, 2017, net income per common share – diluted for Class B Convertible Common Stock has been computed using the two-class method and does not assume conversion of Class B Convertible Common Stock into shares of Class A Common Stock.


22




The computation of basic and diluted net income per common share is as follows:
 
For the Nine Months Ended
 
November 30, 2018
 
November 30, 2017
 
Common Stock
 
Common Stock
 
Class A
 
Class B
 
Class A
 
Class B
(in millions, except per share data)
 
 
 
 
 
 
 
Net income attributable to CBI allocated – basic
$
1,949.3

 
$
247.1

 
$
1,240.0

 
$
152.9

Conversion of Class B common shares into Class A common shares
247.1

 

 
152.9

 

Effect of stock-based awards on allocated net income

 
(5.6
)
 

 
(3.6
)
Net income attributable to CBI allocated – diluted
$
2,196.4

 
$
241.5

 
$
1,392.9

 
$
149.3

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
167.203

 
23.322

 
171.854

 
23.339

Conversion of Class B common shares into Class A common shares
23.322

 

 
23.339

 

Stock-based awards, primarily stock options
5.396

 

 
5.990

 

Weighted average common shares outstanding – diluted
195.921

 
23.322

 
201.183

 
23.339

 
 
 
 
 
 
 
 
Net income per common share attributable to CBI – basic
$
11.66

 
$
10.59

 
$
7.22

 
$
6.55

Net income per common share attributable to CBI – diluted
$
11.21

 
$
10.35

 
$
6.92

 
$
6.40

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For the Three Months Ended
 
November 30, 2018
 
November 30, 2017
 
Common Stock
 
Common Stock
 
Class A
 
Class B
 
Class A
 
Class B
Net income attributable to CBI allocated – basic
$
268.9

 
$
34.2

 
$
438.7

 
$
54.1

Conversion of Class B common shares into Class A common shares
34.2

 

 
54.1

 

Effect of stock-based awards on allocated net income

 
(0.5
)
 

 
(1.3
)
Net income attributable to CBI allocated – diluted
$
303.1

 
$
33.7

 
$
492.8

 
$
52.8

 
 
 
 
 
 
 
 
Weighted average common shares outstanding – basic
166.364

 
23.318

 
171.922

 
23.333

Conversion of Class B common shares into Class A common shares
23.318

 

 
23.333

 

Stock-based awards, primarily stock options
5.138

 

 
5.922

 

Weighted average common shares outstanding – diluted
194.820

 
23.318

 
201.177

 
23.333

 
 
 
 
 
 
 
 
Net income per common share attributable to CBI – basic
$
1.62

 
$
1.47

 
$
2.55

 
$
2.32

Net income per common share attributable to CBI – diluted
$
1.56

 
$
1.45

 
$
2.45

 
$
2.26



23




14.    COMPREHENSIVE INCOME ATTRIBUTABLE TO CBI:

Comprehensive income consists of net income, foreign currency translation adjustments, net unrealized gains (losses) on derivative instruments, net unrealized gains (losses) on AFS debt securities and pension/postretirement adjustments. The reconciliation of net income attributable to CBI to comprehensive income attributable to CBI is as follows:
 
Before Tax
Amount
 
Tax (Expense)
Benefit
 
Net of Tax
Amount
(in millions)
 
 
 
 
 
For the Nine Months Ended November 30, 2018
 
 
 
 
 
Net income attributable to CBI
 
 
 
 
$
2,196.4

Other comprehensive income (loss) attributable to CBI:
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
Net losses
$
(248.4
)
 
$

 
(248.4
)
Reclassification adjustments