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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
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(Mark One) |
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended February 29, 2024
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-08495
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware | 16-0716709 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
207 High Point Drive, Building 100, Victor, New York 14564
(Address of principal executive offices) (Zip code)
Registrant’s telephone number, including area code (585) 678-7100
Securities registered pursuant to Section 12(b) of the Act:
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Title of Each Class | Trading Symbol(s) | Name of Each Exchange on Which Registered |
Class A Common Stock | STZ | 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 ☒ 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 ☒
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 ☒ 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). 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.
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Large Accelerated Filer | ☒ | 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
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 Common Stock 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 $42.0 billion.
| | | | | |
The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of April 16, 2024, is set forth below: |
Class | Number of Shares Outstanding |
Class A Common Stock, par value $.01 per share | 182,952,680 |
Class 1 Common Stock, par value $.01 per share | 23,661 |
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement of Constellation Brands, Inc. to be issued for the 2024 Annual Meeting of Stockholders are incorporated by reference in Part III to the extent described therein.
TABLE OF CONTENTS
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FORWARD-LOOKING STATEMENTS | |
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DEFINED TERMS | |
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PART I |
Item 1. | Business | |
Item 1A. | Risk Factors | |
Item 1B. | Unresolved Staff Comments | NA |
Item 1C. | Cybersecurity | |
Item 2. | Properties | |
Item 3. | Legal Proceedings | |
Item 4. | Mine Safety Disclosures | NA |
| | |
PART II |
Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities | |
Item 6. | [Reserved] | NA |
Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | |
Item 8. | Financial Statements and Supplementary Data | |
Item 9. | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure | NA |
Item 9A. | Controls and Procedures | |
Item 9B. | Other Information | |
Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | NA |
| | |
PART III |
Item 10. | Directors, Executive Officers, and Corporate Governance | |
Item 11. | Executive Compensation | |
Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | |
Item 13. | Certain Relationships and Related Transactions, and Director Independence | |
Item 14. | Principal Accountant Fees and Services | |
| | |
PART IV |
Item 15. | Exhibits and Financial Statement Schedules | |
Item 16. | Form 10-K Summary | |
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INDEX TO EXHIBITS | |
| | |
SIGNATURES | |
Market positions and industry data discussed in this Form 10-K are as of calendar 2023 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); Circana; Beer Institute; 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 U.S. dollar sales.
Forward-Looking Statements
This Form 10-K contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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 Form 10-K are forward-looking statements, including without limitation:
•The statements under Item 1. “Business” and Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding:
◦our mission, core values, business strategy, strategic vision, growth plans, innovation and Digital Business Acceleration initiatives, NPDs, future operations, financial position, net sales, expenses, hedging programs, cost savings initiatives, capital expenditures, effective tax rates and anticipated tax liabilities, expected volume, inventory, supply and demand levels, balance, and trends, long-term financial model, access to capital markets, liquidity and capital resources, and prospects, plans, and objectives of management;
◦our beer expansion, optimization, and/or construction activities, including anticipated scope, capacity, costs, capital expenditures, and timeframes for completion;
◦the potential sale of the remaining assets at the Mexicali Brewery;
◦the anticipated availability of water, agricultural and other raw materials, and packaging materials;
◦our ESG strategy, sustainability initiatives, environmental stewardship targets, and human capital and DEI objectives and ambitions;
◦anticipated inflationary pressures, changing prices, and reductions in consumer discretionary income as well as other unfavorable global and regional economic conditions, and geopolitical events, and our responses thereto;
◦the potential impact to supply, production levels, and costs due to global supply chain disruptions and constraints, and shifting consumer behaviors;
◦expected or potential actions of third parties, including possible changes to laws, rules, and regulations;
◦the potential impact of climate-related severe weather events;
◦unfavorable trends in the wine market and for certain of our wine and spirits brands, the expected timeframes for improvement of such trends, and our associated actions to improve marketing execution and sales performance;
◦the availability of a supply chain finance program;
◦the manner, timing, and duration of the share repurchase program and source of funds for share repurchases;
◦the amount and timing of future dividends; and
◦our target net leverage ratio.
•The statements regarding the impacts of recent accounting pronouncements;
•The statements regarding our future accounting treatment for our investment in Canopy, including the expected gain related to the conversion of our Canopy common shares into Exchangeable Shares and exchange of the 2023 Canopy Promissory Note for Exchangeable Shares; and
•The statements regarding the future reclassification of net gains from AOCI.
When used in this Form 10-K, the words “anticipate,” “expect,” “intend,” “will,” 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 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
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I i |
compete, our forward-looking statements contained in this Form 10-K are also subject to the risk, uncertainty, and possible variance from our current expectations regarding:
•water, agricultural and other raw material, and packaging material supply, production, and/or shipment difficulties which could adversely affect our ability to supply our customers;
•the ability to respond to anticipated inflationary pressures, including reductions in consumer discretionary income and our ability to pass along rising costs through increased selling prices;
•the actual impact to supply, production levels, and costs from global supply chain disruptions and constraints, transportation challenges (including from labor strikes or other labor activities), shifting consumer behaviors, wildfires, and severe weather events;
•reliance on complex information systems and third‐party global networks as well as risks associated with cybersecurity and AI;
•economic and other uncertainties associated with our international operations;
•dependence on limited facilities for production of our Mexican beer brands, including beer operations expansion, optimization, and/or construction activities, scope, capacity, supply, costs (including impairments), capital expenditures, and timing;
•results of the potential sale of the remaining assets at the Mexicali Brewery or obtaining other forms of recovery;
•operational disruptions or catastrophic loss to our breweries, wineries, other production facilities, or distribution systems;
•the impact of the military conflicts, geopolitical tensions, and responses, including on inflation, supply chains, commodities, energy, and cybersecurity;
•climate change, ESG regulatory compliance and failure to meet emissions, stewardship, and other ESG targets, objectives, or ambitions;
•reliance on wholesale distributors, major retailers, and government agencies;
•contamination and degradation of product quality from diseases, pests, weather, and other conditions;
•communicable disease outbreaks, pandemics, or other widespread public health crises and associated governmental containment actions;
•effects of employee labor activities that could increase our costs;
•a potential decline in the consumption of products we sell and our dependence on sales of our Mexican beer brands;
•impacts of our acquisition, divestiture, investment, and NPD strategies and activities;
•dependence upon our trademarks and proprietary rights, including the failure to protect our intellectual property rights;
•potential damage to our reputation;
•competition in our industry and for talent;
•our indebtedness and interest rate fluctuations;
•our international operations, worldwide and regional economic trends and financial market conditions, geopolitical uncertainty, or other governmental rules and regulations;
•class action or other litigation we may face;
•potential write-downs of our intangible assets, such as goodwill and trademarks;
•changes to tax laws, fluctuations in our effective tax rate, accounting for tax positions, the resolution of tax disputes, changes to accounting standards, elections, assertions, or policies, and the impact of a global minimum tax rate;
•the amount, timing, and source of funds for any share repurchases;
•the amount and timing of future dividends; and
•ownership of our Class A Stock by the Sands Family Stockholders and their Board of Director nomination rights as well as the choice-of-forum provision in our Amended and Restated By-laws.
For additional information about risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by our forward-looking statements contained in this Form 10-K are those described in Item 1A. “Risk Factors” and elsewhere in this Form 10-K and in our other filings with the SEC.
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I ii |
Defined Terms
Unless the context otherwise requires, the terms “Company,” “CBI,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. We use terms in this Form 10-K and in our Notes that are specific to us or are abbreviations that may not be commonly known or used.
| | | | | | |
Term | | Meaning |
| | |
$ | | U.S. dollars |
3.20% February 2018 Senior Notes | | $600.0 million principal amount of 3.20% senior notes issued in February 2018, partially tendered in May 2022, and fully redeemed in June 2022, prior to maturity |
4.25% May 2013 Senior Notes | | $1,050.0 million principal amount of 4.25% senior notes issued in May 2013, partially tendered in May 2022, and fully redeemed in June 2022, prior to maturity |
2018 Authorization | | authorization to repurchase up to $3.0 billion of our publicly traded common stock, approved by our Board of Directors in January 2018 and fully utilized during Fiscal 2023 |
2021 Authorization | | authorization to repurchase up to $2.0 billion of our publicly traded common stock, approved by our Board of Directors in January 2021 |
2022 Credit Agreement | | tenth amended and restated credit agreement, dated as of April 14, 2022, provides for an aggregate revolving credit facility of $2.25 billion |
2022 Restatement Agreement | | restatement agreement, dated as of April 14, 2022, that amended and restated our ninth amended and restated credit agreement, dated as of March 26, 2020, which was our then-existing senior credit facility as of February 28, 2022 |
2023 Authorization | | authorization to repurchase up to $2.0 billion of our publicly traded common stock, approved by our Board of Directors in November 2023 |
2023 Canopy Promissory Note | | C$100.0 million principal amount of 4.25% promissory note issued to us by Canopy in April 2023, exchanged for Exchangeable Shares in April 2024 |
3-tier | | distribution channel where products are sold to a distributor (wholesaler) who then sells to a retailer; the retailer sells the products to a consumer |
3-tier eCommerce | | digital commerce experience for consumers to purchase beverage alcohol from retailers |
ABA | | alternative beverage alcohol |
Administrative Agent | | Bank of America, N.A., as administrative agent for the senior credit facility and term loan credit agreements |
AI | | artificial intelligence |
Amended and Restated By-Laws | | our amended and restated by-laws |
Amended and Restated Charter | | our amended and restated certificate of incorporation |
AOCI | | accumulated other comprehensive income (loss) |
April 2022 Term Credit Agreement | | amended and restated term loan credit agreement, dated as of March 26, 2020, that provided for aggregate facilities of $491.3 million, consisting of a five-year term loan facility, inclusive of amendments dated as of June 10, 2021, and April 14, 2022, now repaid in full |
| | |
August 2022 Term Credit Agreement | | term loan credit agreement, dated as of August 9, 2022, that provided for a $1.0 billion unsecured delayed draw three-year term loan facility, now repaid in full |
Austin Cocktails | | we made an initial investment in the Austin Cocktails business and subsequently acquired the remaining ownership interest |
BioSteel | | BioSteel Sports Nutrition Inc., formerly a subsidiary of Canopy |
BRG(s) | | business resource group(s) |
C$ | | Canadian dollars |
California | | the state of California (U.S.) unless otherwise specified |
Canopy | | Canopy Growth Corporation, an Ontario, Canada-based public company in which we have an investment |
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I iii |
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Term | | Meaning |
| | |
Canopy Amendment | | an amendment to Canopy’s share capital which created Exchangeable Shares and provided for the conversion of Canopy common shares into Exchangeable Shares on a one-for-one basis at any time and at the option of the holder of such shares |
Canopy Debt Securities | | debt securities issued by Canopy in June 2018, no longer outstanding |
Canopy Equity Method Investment | | an investment in Canopy common shares, no longer applicable following conversion of Canopy common shares into Exchangeable Shares in April 2024 |
Canopy Transaction | | corporate transaction by Canopy, including the creation of Exchangeable Shares, designed to accelerate its entry into the U.S. cannabis market |
| | |
CB International | | CB International Finance S.à r.l., a wholly-owned subsidiary of ours |
CDIO | | Chief Data and Information Officer |
CISO | | Chief Information Security Officer |
Class 1 Stock | | our Class 1 Convertible Common Stock, par value $0.01 per share |
Class A Stock | | our Class A Common Stock, par value $0.01 per share |
Class B Stock | | our Class B Convertible Common Stock, par value $0.01 per share, eliminated on November 10, 2022, pursuant to the Reclassification |
CMP | | crisis management plan |
CODM | | chief operating decision maker, our President and Chief Executive Officer |
Comparable Adjustments | | certain items affecting comparability that have been excluded by management |
Consent Agreement | | an agreement between Canopy and (i) Greenstar Canada Investment Limited Partnership and (ii) CBG Holdings LLC, our indirect, wholly-owned subsidiaries |
CPG | | consumer packaged goods |
Craft Beer Divestitures | | the Four Corners Divestiture and the Funky Buddha Divestiture, collectively |
Crown | | Crown Imports LLC, a wholly-owned subsidiary of ours |
CSR | | corporate social responsibility |
current Mexican breweries | | the Nava Brewery and the Obregon Brewery, collectively |
Daleville Facility | | production facility located in Roanoke, Virginia, sold May 2023 |
DEI | | diversity, equity, and inclusion |
Depletions | | represent U.S. distributor shipments of our respective branded products to retail customers, based on third-party data |
DGCL | | General Corporation Law of the State of Delaware |
Digital Business Acceleration | | a multi-year initiative by the Company to create a cohesive digital strategy and build an advanced digital business |
Domaine Curry | | Domaine Curry wine business, acquired by us |
DTC | | direct-to-consumer inclusive of (i) a digital commerce experience for consumers to purchase directly from brand websites with inventory coming straight from the supplier and (ii) consumer purchases at hospitality locations (tasting rooms and tap rooms) from the supplier |
Effective Time | | the time that the Amended and Restated Charter was duly filed with the Secretary of State of the State of Delaware on November 10, 2022 |
EHS | | environmental, health, and safety |
Employee Stock Purchase Plan | | the Company’s 1989 Employee Stock Purchase Plan, under which 9,000,000 shares of Class A Stock may be issued |
ERM | | enterprise risk management |
| | |
ESG | | environmental, social, and governance |
Exchangeable Shares | | new class of non-voting and non-participating exchangeable shares in Canopy which are convertible into common shares of Canopy on a one-for-one basis |
Exchange Act | | Securities Exchange Act of 1934, as amended |
FASB | | Financial Accounting Standards Board |
February 2023 Senior Notes | | $500.0 million aggregate principal amount of senior notes issued in February 2023 |
Financial Statements | | our consolidated financial statements and notes thereto included herein |
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I iv |
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Term | | Meaning |
| | |
Fiscal 2021 | | the Company’s fiscal year ended February 28, 2021 |
Fiscal 2022 | | the Company’s fiscal year ended February 28, 2022 |
Fiscal 2023 | | the Company’s fiscal year ended February 28, 2023 |
Fiscal 2024 | | the Company’s fiscal year ended February 29, 2024 |
Fiscal 2025 | | the Company’s fiscal year ending February 28, 2025 |
Fiscal 2026 | | the Company’s fiscal year ending February 28, 2026 |
Fiscal 2027 | | the Company’s fiscal year ending February 28, 2027 |
Fiscal 2028 | | the Company’s fiscal year ending February 29, 2028 |
Fiscal 2029 | | the Company’s fiscal year ending February 28, 2029 |
Form 10-K | | this Annual Report on Form 10-K for Fiscal 2024 unless otherwise specified |
Four Corners Divestiture | | sale of the Four Corners craft beer business |
Funky Buddha Divestiture | | sale of the Funky Buddha craft beer business |
GHG | | greenhouse gas |
GILTI | | global intangible low-taxed income |
Glass Plant | | glass production plant in Nava operated through an equally-owned joint venture with Owens-Illinois |
| | |
IRA | | Inflation Reduction Act of 2022 |
IRP | | IT incident response plan |
IT | | information technology |
January 2024 Senior Notes | | $400.0 million aggregate principal amount of senior notes issued in January 2024 |
June 2021 Term Credit Agreement | | amended and restated term loan credit agreement, dated as of March 26, 2020, inclusive of amendment dated as of June 10, 2021 |
Lender | | Bank of America, N.A., as lender for the April 2022 Term Credit Agreement |
LIBOR | | London Interbank Offered Rate |
Lingua Franca | | Lingua Franca wine business, acquired by us |
Long-Term Stock Incentive Plan | | a stockholder-approved omnibus incentive plan that provides the ability to grant various types of equity and cash awards to eligible plan participants |
May 2023 Senior Notes | | $750.0 million aggregate principal amount of senior notes issued in May 2023 |
MD&A | | Management’s Discussion and Analysis of Financial Condition and Results of Operations under Part II — Item 7. of this Form 10-K |
Mexicali Brewery | | canceled brewery construction project located in Mexicali, Baja California, Mexico |
Mexico Beer Projects | | expansion, optimization, and/or construction activities at the Obregon Brewery, Nava Brewery, and Veracruz Brewery |
M&T | | Manufacturers and Traders Trust Company |
My Favorite Neighbor | | we made an initial investment in the My Favorite Neighbor wine business and subsequently acquired the remaining ownership interest |
NA | | not applicable |
Nava | | Nava, Coahuila, Mexico |
Nava Brewery | | brewery located in Nava |
Net sales | | gross sales less promotions, returns and allowances, and excise taxes |
NM | | not meaningful |
Note(s) | | notes to the consolidated financial statements under Item 8. of this Form 10-K |
| | |
November 2018 Canopy Warrants | | warrants acquired in November 2018 which gave us the option to purchase common shares of Canopy, now expired |
NPD | | new product development |
Obregon | | Obregon, Sonora, Mexico |
Obregon Brewery | | brewery located in Obregon |
OCI | | other comprehensive income (loss) |
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I v |
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Term | | Meaning |
| | |
October 2022 Credit Agreement Amendment | | amendment dated as of October 18, 2022, to the 2022 Credit Agreement |
OECD | | Organization for Economic Cooperation and Development |
Owens-Illinois | | O-I Glass, Inc., the ultimate parent of the company with which we have an equally-owned joint venture to operate the Glass Plant |
Pre-issuance hedge contracts | | treasury lock and/or swap lock contracts designated as cash flow hedges entered into to hedge treasury rate volatility on future debt issuances |
Proxy Statement | | Proxy Statement for Fiscal 2024 to be issued in connection with the 2024 Annual Meeting of Stockholders of our Company |
Purple-team Tests | | testing involving collaboration between offensive and defensive cybersecurity teams |
Reclassification | | the reclassification, exchange, and conversion of the Company’s common stock to eliminate the Class B Stock pursuant to the terms and conditions of the Reclassification Agreement |
Reclassification Agreement | | reclassification agreement in support of the Reclassification, dated June 30, 2022, among the Company and the Sands Family Stockholders |
Registration Rights Agreement | | Registration Rights Agreement, dated as of November 10, 2022, by and among the Company and the Sands Family Stockholders |
Registration Statement on Form S-4 | | our Registration Statement on Form S-4, including our proxy statement/prospectus, in connection with the Reclassification declared effective by the SEC on September 21, 2022 |
RTD | | ready-to-drink |
Sands Family Stockholders | | RES Master LLC, RES Business Holdings LP, SER Business Holdings LP, RHT 2015 Business Holdings LP, RSS Master LLC, RSS Business Holdings LP, SSR Business Holdings LP, RSS 2015 Business Holdings LP, RCT 2015 Business Holdings LP, RCT 2020 Investments LLC, NSDT 2009 STZ LLC, NSDT 2011 STZ LLC, RSS Business Management LLC, SSR Business Management LLC, LES Lauren Holdings LLC, MES Mackenzie Holdings LLC, Abigail Bennett, Zachary Stern, A&Z 2015 Business Holdings LP (subsequently liquidated), Marilyn Sands Master Trust, MAS Business Holdings LP, Sands Family Foundation, Richard Sands, Robert Sands, WildStar, Astra Legacy LLC, AJB Business Holdings LP, and ZMSS Business Holdings LP |
Scope 1 | | direct GHG emissions from sources that are owned or controlled by a company, such as emissions associated with furnaces or vehicles |
Scope 2 | | indirect GHG emissions associated with the purchase of electricity, steam, heat, or cooling |
SEC | | Securities and Exchange Commission |
Securities Act | | Securities Act of 1933, as amended |
SKU | | stock-keeping unit, a scannable bar code, most often seen printed on product labels in a retail store |
SOFR | | secured overnight financing rate administered by the Federal Reserve Bank of New York |
Specified Time | | such time as the domestic sale of marijuana could not reasonably be expected to violate the Controlled Substances Act, the Civil Asset Forfeiture Reform Act (as it relates to violation of the Controlled Substances Act), and all related applicable anti-money laundering laws |
U.S. | | United States of America |
U.S. GAAP | | generally accepted accounting principles in the U.S. |
Veracruz | | Heroica Veracruz, Veracruz, Mexico |
Veracruz Brewery | | a new brewery being constructed in Veracruz |
WildStar | | WildStar Partners LLC |
Wine Divestiture | | sale of certain mainstream and premium wine brands and related inventory |
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I vi |
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PART I | ITEM 1. BUSINESS | Table of Contents |
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, and Italy with powerful, consumer-connected, high-quality brands like Corona Extra, Modelo Especial, Robert Mondavi Winery, Kim Crawford, Meiomi, The Prisoner Wine Company, High West, Casa Noble, and Mi CAMPO. In the U.S., we are one of the top growth contributors at retail among beverage alcohol suppliers. We are the second-largest beer company in the U.S. and continue to strengthen our leadership position as the #1 share gainer in the high-end beer segment and the overall U.S. beer market. In Fiscal 2024, Modelo Especial became the #1 beer brand in the U.S. beer market in dollar sales. Within wine and spirits, we have reshaped our brand portfolio to a higher-end focused business and continue to expand our supply channels through DTC and international markets. The strength of our brands makes us a supplier of choice to many of our consumers and our customers, which include wholesale distributors, retailers, and on-premise locations. We conduct our business through entities we wholly own as well as through a variety of joint ventures and other entities.
Our mission is to build brands that people love because we believe elevating human connections is Worth Reaching For. It is worth our dedication, hard work, and calculated risks to anticipate market trends and deliver more for our consumers, shareholders, employees, and industry. This dedication is what has driven us to become one of the fastest-growing, large CPG companies in the U.S. at retail. Our core values guide our pursuits:
People
True strength is achieved when everyone has a voice. That is why we build our culture on a foundation that encourages inclusion and diversity in background and thought and aspire to foster an environment where everyone feels empowered to bring their true selves and different points of view to the workplace to drive us forward
Customers
We work relentlessly to anticipate what consumers want today, tomorrow, and well into the future
Entrepreneurship
As an industry leader, we act with a bold, calculated approach to realize our vision and unlock new growth opportunities
Quality
Our promise is to pursue quality in our processes and products by continuously seeking to enhance what we do and how we do it
Integrity
It is about more than achieving goals. How we achieve them is also important. We aspire to act with high moral and ethical standards and always do the right thing, even when it is the hard thing
Headquartered in Victor, New York, through May 2024 and in Rochester, New York thereafter, we are a Delaware corporation incorporated in 1972, as the successor to a business founded in 1945.
Strategy
Our overall strategic vision is to consistently deliver industry-leading total stockholder returns over the long-term through a focus on these key pillars:
•continue building strong brands people love with advantaged routes to market;
•build a culture that is consumer-obsessed and leverages robust innovation capabilities to stay on the forefront of consumer trends;
•deploy capital in line with disciplined and balanced priorities;
•deliver on impactful ESG initiatives that we believe are not only good business, but also good for the world; and
•empower the whole enterprise to achieve best-in-class operational efficiency.
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PART I | ITEM 1. BUSINESS | Table of Contents |
We will continue to strive for success by ensuring consumer-led decision making drives all aspects of our business; building a diverse talent pipeline with best-in-class people development; investing in infrastructure that supports and enables our business, including data systems and architecture; and exemplifying intentional and proactive fiscal management. We place focus on positioning our portfolio on higher-margin, higher-growth categories of the beverage alcohol industry to align with consumer-led premiumization, product, and purchasing trends, which we believe will continue to drive faster growth rates across beer, wine, and spirits. To continue capitalizing on consumer-led premiumization trends, become more competitive, and grow our business, we have employed a strategy dedicated to organic growth and supplemented by targeted investments and acquisitions. We also believe a key component to driving faster growth rates is to invest and strengthen our position within the DTC and 3-tier eCommerce channels. We have launched a multi-year Digital Business Acceleration initiative, which we believe will enable us to drive results by enhancing our technology capabilities in key areas. In Fiscal 2024, we continued to focus on procurement, end-to-end supply chain planning, as well as introducing a new focus area, logistics. We believe our continued focus on maintaining a strong balance sheet provides a solid financial foundation to support our broader strategic initiatives. As a result of this strategy, we have realized impacts on each segment of our business.
In our beer business, we focus on upholding our leadership position in the U.S. beer market, including the high-end segment, and continuing to grow our high-end imported beer brands through maintenance of leading margins, enhancements to our results of operations and operating cash flow, and exploring new avenues for growth. This includes continued focus on growing our beer portfolio in the U.S. through expanding distribution for key brands, including within the 3-tier eCommerce channel, as well as investing in the next increment of modular capacity additions required to sustain our momentum. We continue to focus on consumer-led innovation by creating new line extensions behind celebrated, trusted brands and package formats, as well as new to world brands, that are intended to meet emerging needs.
In our wine and spirits business, we continue to focus on higher-end brands, improving margins, and creating operating efficiencies. We have reshaped our portfolio primarily through an enhanced focus on higher-margin, higher-growth wine and spirits brands. Our business is organized into two distinct commercial teams, one focused on our fine wine and craft spirits brands and the other focused on our mainstream and premium brands. While each team has its own distinct strategy, both remain aligned to the goal of accelerating performance by growing organic net sales and expanding margins. In addition, we are advancing our aim to become a global, omni-channel competitor in line with consumer preferences. Our business continues to progressively expand into DTC channels (including hospitality), 3-tier eCommerce, and international markets, while remaining a major supplier in U.S. 3-tier brick-and-mortar distribution.
For further information on our strategy, see “Overview” within MD&A.
Divestitures, acquisitions, and investments
In connection with executing our strategy as outlined above, during Fiscal 2024 we completed the following transactions:
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| | | Date | | Strategic Contribution |
Beer segment | | | | |
| Craft Beer Divestitures | | June 2023 | | Divestitures of the Four Corners and Funky Buddha craft beer businesses; supported our focus on continuing to grow our high-end imported beer brands. |
| Daleville Facility | | May 2023 | | Sale of the Daleville Facility in connection with our decision to exit the craft beer business; supported our focus on continuing to grow our high-end imported beer brands. |
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Wine and Spirits segment | | | | |
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| Domaine Curry | | June 2023 | | Acquisition of a luxury Napa Valley wine business; supported our focus on consumer-led premiumization trends and meeting the evolving needs of consumers. |
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PART I | ITEM 1. BUSINESS | Table of Contents |
For further information about our significant Fiscal 2024, Fiscal 2023, and Fiscal 2022 transactions, refer to (i) “Overview” within MD&A and (ii) Note 2.
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:
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| For the Years Ended | | | | | | |
| February 29, 2024 | | | | February 28, 2023 | | | | | | |
(in millions) | | | | | | | | | | | |
Beer | $ | 8,162.6 | | | | | $ | 7,465.0 | | | | | | | |
Wine and Spirits: | | | | | | | | | | | |
Wine | 1,552.1 | | | | | 1,722.7 | | | | | | | |
Spirits | 247.1 | | | | | 264.9 | | | | | | | |
Total Wine and Spirits | 1,799.2 | | | | | 1,987.6 | | | | | | | |
Consolidated Net Sales | $ | 9,961.8 | | | | | $ | 9,452.6 | | | | | | | |
Beer segment
We are the #1 brewer and seller of imported beer in the U.S. market. We are also the leader in the high-end segment of the U.S. beer market, which includes the imported and ABA categories. We have the exclusive right to import, market, and sell our Mexican beer brands in all 50 states of the U.S., of which include the following:
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Corona Brand Family | | Modelo Brand Family | | Victoria Brand Family | | Other Import Brand |
Corona Extra | Corona Non-Alcoholic | | Modelo Especial | | Victoria | | Pacifico |
Corona Familiar | Corona Premier | | Modelo Chelada | | Vicky Chamoy | | |
Corona Hard Seltzer | Corona Refresca | | Modelo Negra | | | | |
Corona Light | | | Modelo Oro | | | | |
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Notable achievements in the U.S. include the following: (i) we have 7 of the top 15 share gaining brands across the total beer category, (ii) Modelo Especial is the best-selling beer overall, (iii) Corona Extra is the second largest imported beer and fifth best-selling beer overall, and (iv) Pacifico and Corona Familiar are tied for the fastest growing major imported beer brand.
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PART I | ITEM 1. BUSINESS | Table of Contents |
During Fiscal 2024, we spent over $900 million on (i) the completion of planned expansions and execution of optimization initiatives, increasing total capacity in Mexico from approximately 42 million hectoliters to approximately 48 million hectoliters, and (ii) ongoing construction of the Veracruz Brewery. Expansion, optimization, and/or construction activities continue at our breweries in Mexico to support expected future business needs. We expect to spend approximately $3 billion over Fiscal 2025 through Fiscal 2028 on such activities. We believe these investments allow us the opportunity to further expand our leadership position in the high-end segment of the U.S. beer market. For further information about our Mexico Beer Projects, refer to (i) “Production” below, (ii) MD&A, and (iii) Note 5.
We are also building on the success of our leading import brand families through our innovation strategy. For example, our Modelo Chelada brands have become an important growth contributor to our portfolio as the leading chelada in the U.S. beer market. In Fiscal 2024, we continued to build on our successful innovation platform with the launch of new products aligned with consumer-led premiumization, betterment, and flavor trends, including: (i) Modelo Oro, a light and lower-calorie Mexican beer, (ii) Modelo Chelada Sandía Picante, a watermelon and chile pepper michelada-style beer, (iii) Modelo Chelada Variety Pack, a 12 ounce, 12-pack format offering of certain of our chelada flavors, and (iv) Corona Non-Alcoholic. Additionally, we announced the following products will be launched across select markets in Fiscal 2025: (i) Modelo Spiked Aguas Frescas, a blend of real fruit juice with a light spike inspired by the classic aguas frescas from Mexico, (ii) Corona Sunbrew, a beer brewed with real citrus peels and a splash of real citrus juice, and (iii) two new Modelo Chelada flavors, Fresa Picante and Negra con Chile.
Wine and Spirits segment
We are a major, higher-end wine and spirits company in the U.S. market, with a portfolio that includes higher-margin, higher-growth wine and spirits brands. 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 and spirits are primarily marketed in the U.S. and also sold in Canada, New Zealand, and other major world markets.
In the U.S., we have 7 of the 100 top-selling higher-end wine brands, with Meiomi and Kim Crawford achieving the 4th and 10th spots, respectively. Some of our well-known wine and spirits brands and portfolio of brands include:
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Wine Brands | | Wine Portfolio of Brands | | Spirits Brands |
Cook’s California Champagne | Mount Veeder | | My Favorite Neighbor | | Casa Noble | Mi CAMPO |
Kim Crawford | Ruffino | | Robert Mondavi Winery | | Copper & Kings | Nelson’s Green Brier |
Meiomi | SIMI | | Schrader | | High West | SVEDKA |
| | | The Prisoner Wine Company | | | |
In Fiscal 2024, the broader wine category experienced deceleration in both the U.S. wholesale and international markets, and, as a result, our largest mainstream and premium brands experienced a decline. We believe this deceleration is temporary. Despite this dynamic, our fine wine and craft spirits portfolio delivered
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muted gains and we achieved growth in DTC channels. Additionally, we have been actively working to address mainstream headwinds affecting our two largest volume brands, Woodbridge and SVEDKA, and anticipate these efforts to extend over the medium-term. We continue to believe that over the medium-term our wine and spirits business will return to net sales growth supported by the transformation undertaken over the last few years to better align our portfolio with broader consumer-led premiumization trends, expand our omni-channel capabilities, and extend into select international markets.
Over the last few years, we have been increasing our development of on-trend product innovation as we believe this is one of the key drivers of growth within the wine and spirits category. Our innovation strategy has evolved to introducing fewer new items which we believe will have the most success for our business. We focus our resources on brand line extensions aligned with consumer-led premiumization and betterment trends that have remained among the top new products in the wine category over the past couple of years, such as: Meiomi Red Blend, Meiomi Bright Pinot Noir, and Kim Crawford Prosecco.
Corporate Operations and Other segment
The Corporate Operations and Other segment includes traditional corporate-related items including costs of corporate development, corporate finance, corporate strategy, executive management, growth, human resources, internal audit, investor relations, IT, legal, and public relations, as well as our Canopy investment and investments made through our corporate venture capital function.
For further information regarding net sales and operating income (loss) of our business segments and geographic areas, refer to (i) MD&A and (ii) Note 22.
Marketing and distribution
To focus on their respective product categories, build brand equity, and increase sales, we employ full-time, in-house marketing, sales, and customer service functions for our (i) Beer and (ii) Wine and Spirits segments. 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 activations, and public relations.
When we advertise our products to consumers, we use a combination of methods to forecast the number of advertising impressions made on individuals at or above the legal drinking age. Through our media placement agencies, we leverage recognized audience measurement services such as Nielsen and ComScore to measure audience composition data on a regular and frequent basis. This data helps us to ensure that our advertising placements are purchased in media outlets and audience buying platforms (i.e., programmatic digital buys) that are primarily targeted toward legal drinking age consumers and, when appropriate, specifically targeted to audiences that are age-verified as of the legal drinking age. Our Global Code of Responsible Practices for Beverage Alcohol Advertising and Marketing provides the fundamental framework for responsible brand advertising and marketing that helps ensure our messages are directed at legal drinking age consumers.
We are a corporate member of Responsibility.org, a national not-for-profit that aims to empower adults to make a lifetime of responsible alcohol choices. As part of our efforts to promote responsible beverage alcohol consumption, our brand websites redirect a visitor who self-identifies as being under the legal drinking age to Responsibility.org for information on prevention of underage drinking, ending drunk driving, and drinking responsibly.
In Fiscal 2024, we had zero:
•instances of non-compliance with industry or regulatory labeling and/or marketing codes; and
•monetary losses as a result of legal proceedings associated with marketing and/or labeling practice.
In the U.S., our products are primarily distributed by wholesale distributors, and we generally use separate distribution networks for (i) our beer portfolio and (ii) our wine and spirits portfolio. In addition, in states where the government acts as the distributor, we distribute our products through state alcohol beverage control agencies, which set the retail prices of our products. As is the case with all other beverage alcohol companies,
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products sold through these agencies are subject to obtaining and maintaining listings to sell our products in that agency’s state. State governments can also affect prices paid by consumers for our products through the imposition of taxes.
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. We also have various licenses and distribution agreements for the sale, or the production and sale, of our products and products of others. 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.
Competition
The beverage alcohol industry is highly competitive. We compete on the basis of quality, price, brand recognition and reputation, 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:
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Beer | Anheuser-Busch InBev, The Boston Beer Company, Heineken, Mark Anthony, Molson Coors |
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Wine | Deutsch Family Wine & Spirits, Duckhorn Portfolio, E. & J. Gallo Winery, Ste. Michelle Wine Estates, Treasury Wine Estates, Trinchero Family Estates, The Wine Group |
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Spirits | Bacardi USA, Beam Suntory, Brown-Forman, Diageo, E. & J. Gallo Winery, Fifth Generation, Pernod Ricard, Sazerac Company |
Production
As of February 29, 2024, our production capacity at our Mexican breweries was approximately 48 million hectoliters. By the end of Fiscal 2028, we expect to increase our capacity in Mexico to approximately 65 million hectoliters to support the growth of our high-end beer brands through continued expansion, optimization, and/or construction activities at our Mexican breweries. For further information on these expansion, optimization, and/or construction activities, refer to (i) MD&A and (ii) Note 5.
In the U.S., we operate 12 wineries using many varieties of grapes grown principally in the Napa, Sonoma, Monterey, and San Joaquin regions of California as well as the Willamette Valley region of Oregon. We also operate two wineries in New Zealand and five wineries in Italy. Grapes are normally harvested and crushed in August through November in the U.S. and Italy, and in February through May in New Zealand 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 as sold throughout the year.
We currently operate five distilleries in the U.S. for the production of our spirits: two facilities for High West whiskey and one facility each for Copper & Kings American brandies, Nelson’s Green Brier bourbon and whiskey products, and Austin Cocktails RTDs. The requirements for agricultural products, neutral grain spirits, 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 multiple years. Therefore, our inventories of wines and spirits may be larger in relation to sales and total assets than in many other businesses.
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Resources and availability of production materials
The principal components in the production of our 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 are the largest cost component of production, with glass bottles representing the largest cost component of our packaging materials. We aim to reduce operational waste and enhance our use of returnable, recyclable, or renewable packaging. In Fiscal 2024, we transitioned from hi-cone plastic rings to recyclable paperboard for all applicable 4-pack and 6-pack SKUs across our beer portfolio. Additionally, our current Mexican breweries are in the process of being evaluated for TRUE Certification for Zero Waste.
For Fiscal 2024, the package format mix of our Mexican beer volume sold in the U.S. was as follows:
As part of our long-term beer glass sourcing strategy, we are a partner in an equally-owned joint venture with Owens-Illinois, one of the leading manufacturers of glass containers in the world. The joint venture owns a state-of-the-art Glass Plant adjacent to our Nava Brewery in Mexico. The Glass Plant supplies nearly 60% of the total annual glass bottle supply for our Mexican beer brands. We also have long-term glass supply agreements with other glass producers.
The current Mexican breweries each receive water originating from separate and distinct aquifers. We believe we have adequate access to water to support these breweries’ ongoing requirements, as well as future requirements after the completion of planned expansion, optimization, and/or construction activities at our breweries. These breweries employ comprehensive water management practices that focus on water efficiency and wastewater treatment operations to reuse water consumed as part of the production process.
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 grower purchases from each year’s harvest. We receive grapes from approximately 430 independent growers located in the U.S. and 40 independent growers in New Zealand and Italy. We enter into purchase agreements with a majority of these growers with pricing that generally varies year-to-year and is largely based on then-current market prices.
As of February 29, 2024, we owned or leased approximately 18,200 acres of land and vineyards, either fully bearing or under development, 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.
All of our owned and leased vineyards in California routinely adhere to documented water management plans as required by Sustainable Grape Growing Certifications including the California Sustainable Winegrowing Alliance and Fish Friendly Farming. We use the guidance of these plans to identify the designated beneficial use of the water body based on grape growing goals set before the growing season that account for soil types, slopes, irrigation water availability and quality, and energy efficiency.
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.
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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 bottles and other materials such as caps, corks, capsules, labels, and cardboard cartons in the bottling and packaging of our wine and spirits products. After grape purchases, glass bottles are the largest component of our cost of product sold, comprising more than 95% of our package format mix of our wine and spirits portfolio volume sold for Fiscal 2024. 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.
We have implemented plans to enhance our use of circular packaging and reduce waste across our wine and spirits portfolio in connection with our commitments to (i) reduce our ratio of total packaging weight versus the product weight of wine or spirits liquid by 10% across our portfolio between the periods Fiscal 2022 to Fiscal 2025 and (ii) ensure that 80% of packaging from our portfolio is returnable, recyclable, or renewable. In Fiscal 2024, we activated 40 wine and spirits sustainable packaging projects across more than 190 SKUs to optimize material consumption, decrease packaging weights, and enable reductions in consumer waste.
Government regulations
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. The countries in which we operate impose duties, excise taxes, and other taxes on beverage alcohol products, and on certain raw materials used to produce our beverage alcohol products, in varying amounts. 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, and/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.
ESG
During the course of our history, we have been committed to safeguarding our environment, making a positive difference in our communities, and advocating for responsible consumption of beverage alcohol products. We believe our ESG strategy enables us to better meet stakeholder expectations and create and protect value for our business, reflects our Company values, and directly addresses pressing environmental and societal needs that are important to our shareholders, communities, consumers, and employees.
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Specifically, we have focused on areas where we believe we have the greatest opportunities to make meaningful, positive impacts for people and the planet in a manner that strengthens our Company, and we dedicate our resources towards:
Serving as good stewards of our environment and natural resources
Improving water availability and resilience for our communities where we operate; reducing GHG emissions through energy conservation and renewable energy initiatives; and reducing operational waste and enhancing our use of returnable, recyclable, or renewable packaging
Enhancing social equity within our industry and communities
Championing the professional development and advancement of women in beverage alcohol industry and our communities; enhancing economic development and prosperity in disadvantaged communities; and championing an inclusive workplace culture, characterized by diversity in background and thought, which reflects our consumers and the communities where we live and work
Promoting responsible beverage alcohol consumption
Ensuring the responsible promotion and marketing of our products; and empowering adults to make responsible choices in their alcohol (substance) consumption by supporting fact-based education, engagement programs, and policies
We developed targets in connection with our strategy to serve as good stewards of our environment and natural resources. As of February 29, 2024, we are progressing towards our targets to:
•restore 5 billion gallons of water withdrawals from local watersheds near our production facilities, while improving accessibility and quality of water for communities where we operate between the periods Fiscal 2023 to Fiscal 2025;
•reduce Scope 1 (direct) and Scope 2 (indirect) GHG emissions by 15% between the periods Fiscal 2020 to Fiscal 2025;
•obtain a TRUE Certification for Zero Waste to Landfill in key operating facilities by Fiscal 2025; and
•significantly enhance our use of circular packaging across our beverage alcohol portfolio by Fiscal 2025.
During Fiscal 2024 we (i) published our 2023 ESG Impact Report where we highlighted notable progress in our ESG focus areas and (ii) took various steps to advance our ESG strategy, including the following:
Serving as good stewards of our environment and natural resources
•completed the transition from hi-cone plastic rings to recyclable paperboard for all applicable 4-pack and 6-pack SKUs across our beer portfolio
•collaborated on the Tecklenburg Groundwater Recharge project in California which will recharge groundwater, help to manage groundwater stress in the communities around our Woodbridge Winery and Lodi Distribution Center as well as in a region from which we source approximately 7% of our U.S. grape supply, and provide volumetric benefits toward our water restoration goal
•invested in a project in Nogales, Arizona, which we estimate will positively impact approximately 25,000 people, to address river borne trash to help improve the quality of water for communities near where we operate
Enhancing social equity within our industry and communities
•committed $100,000 to UnidosUS’ HOME initiative, a program whose goal is to transform the economic trajectory of Latinx families by advancing systemic change to create 4 million new homeowners by calendar 2030
•committed an additional $100,000 to support capacity building for Dress for Success Worldwide and its affiliates and expand direct support to five additional affiliates representing our major markets
Promoting responsible beverage alcohol consumption
•partnered with Uber to provide safe rides vouchers for U.S. employees celebrating during certain holidays and seasonal activities as part of our Safe Ride Home program
•in collaboration with Responsibility.org we shared responsible consumption messaging during certain holidays and seasonal activities with employees and external audiences
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As part of our brewery expansion efforts and commitment to making a positive impact on the communities where we operate, we plan to continue working with local authorities and community-based organizations on sustainability initiatives that benefit local residents. Critical local projects are identified through community collaboration and input and guidance from third-party water restoration organizations. This is in addition to other benefits we provide, including local job creation and fueling economic development.
For further information about our ESG advancements refer to (i) “Human capital resources” below and (ii) “Capital resources” within MD&A.
Human capital resources
As of February 29, 2024, we had approximately 10,600 employees, including approximately 1,300 employees through our equally-owned joint venture with Owens-Illinois. The number of employees may change throughout the year, as we employ additional workers during the grape crushing seasons. Approximately 20% of the employees are covered by collective bargaining agreements. Collective bargaining agreements expiring within one year are minimal. We consider our employee relations generally to be good.
Employee geographic data is as follows:
Diversity, equity, and inclusion
Our DEI strategic priorities are as follows:
Cultivate a best-in-class, diverse, and equitable workforce
Recruit diverse talent to reflect the richness of the communities in which we live and work and engage their insights and perspectives to create a sustainable competitive advantage, benefiting our stakeholders
Foster a winning, inclusive work culture
Foster an inclusive and equitable work culture that drives connection through proximity - to our work and each other - and actively promotes the sharing and leveraging of diverse perspectives, backgrounds, and experiences in relevant and meaningful ways
Enhance social equity within our industry and communities
Extend our influence to enhance social equity within the beverage alcohol industry and our surrounding communities by creating globally consistent and locally relevant opportunities that support our ESG goals and initiatives
We provide opportunities for our employees to unite around common interests, identities, perspectives, and shared experiences through a growing community of BRGs. Our BRGs are intended to advance our DEI strategic priorities and are supported at the highest level with sponsorships from our executives. See “Information about our Executive Officers” below. Each BRG is tasked with making a business impact on behalf of the represented group and welcomes allies. In Fiscal 2024, approximately 60% of our U.S. salaried employees were members of one or more BRGs and we expanded our BRGs to Mexico and New Zealand.
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We measure gender and ethnic representation to understand diversity at various levels across the organization, assess progress over time, and drive continuous improvement. We continue to make progress towards our ambitions to enhance both gender representation and overall ethnic diversity among our self-disclosed, U.S. salaried employee population by Fiscal 2026 as follows:
U.S. Salaried Female
Workforce Representation
Ambition of 50%
U.S. Salaried Ethnic Diversity
Workforce Representation
Ambition of 30%
Additionally, we utilize a DEI growth dashboard for our U.S. salaried employee base, centered around identifying and addressing workforce diversity representation opportunities, utilizing 2020 U.S. Census data as a benchmark. This dashboard is shared with our executives and with certain committees of the Board of Directors on a semi-annual basis enabling them to monitor the progress made and to provide guidance on next steps designed to attain our representation ambitions. We also assess metrics throughout the human resource lifecycle to identify potential bias and barriers in our processes, including talent acquisition, turnover, engagement scores, or participation in BRG events.
Compensation and benefits
We strive to provide pay, benefits, and services that meet the needs of our employees. The main components of compensation are: (i) base pay, (ii) long-term incentives dependent on a number of factors such as geographic location and management level which can include restricted stock units, stock options, and performance share units, (iii) short-term incentives, and (iv) recognition awards. Base and incentive compensation is reviewed on an annual basis ensuring it is competitive in the market and gives employees opportunities to earn more for exceeding expectations. Our total rewards program also offers valuable benefits, tools, and resources designed to help employees stay healthy and well, while achieving security, growth, satisfaction, and success.
Professional development
Building diverse talent pipelines, delivering best-in-class people development, and championing professional advancement are key components of our human capital strategy which is designed to position our business for long-term growth. We are committed to offering programs, resources, and experiences that empower employees to grow their careers. The University of Constellation Brands, our learning and development center, allows employees to find opportunities to grow, develop, gain new skills and insights, explore, and expand interests through regularly updated curricula. In Fiscal 2024, we (i) spent approximately $17 million in development and training costs, including the delivery of one executive development program, one leadership development program, two women’s focused development programs, and a newly-launched leadership coaching workshop for our people leaders and (ii) produced nearly 375 matched relationships under our formal career development mentoring program.
Succession planning
We have a comprehensive succession planning process, led by our human resources team and overseen by the Human Resources Committee of our Board of Directors. In addition to the Human Resources Committee’s enhanced focus on executive, senior leader, and high-potential employee succession, our full Board of Directors is also involved in Chief Executive Officer succession planning as well as succession and people development for the broader employee population. As part of the succession planning process, we review and discuss potential successors to key roles and examine backgrounds, capabilities, and appropriate developmental opportunities.
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Employee engagement
We assess employee engagement through global engagement and targeted pulse surveys, which provide feedback on a variety of topics, such as company direction and strategy, resources, support, enablement, empowerment, and well-being.
Safety
We are committed to ensuring the safety of our employees. Our global EHS policy describes our dedication to providing a safe and healthy working environment and developing and maintaining a culture where all employees take responsibility for their own safety as well as the safety of others while minimizing our impact on the environment in the communities where we live and work. With a focus on continuous improvement, we are developing more robust EHS management systems, strengthening employee awareness and training, and ensuring senior leadership engagement on safety. Work-related injuries resulting from the production of our beer, wine, and spirits products are well below industry average. Our recordable incident rate as compared to the industry average is as follows:
The recordable incident rate is defined as total number of worldwide CBI work-related injuries (cases beyond first aid) per 100 full-time employees. The industry average is calculated by taking the weighted average of the most recent (2022) U.S. Bureau of Labor Statistics data for wineries, breweries, and distilleries based on our portfolio mix in February 2024, February 2023, and February 2022 for the years ended February 29, 2024, February 28, 2023, and February 28, 2022, respectively.
Empowering our employees to give back
Giving back to our communities is a value instilled by our founder, Marvin Sands, and remains core to our Company’s DNA. We empower our employees to engage in the communities where they live and work in a variety of ways, including volunteering time and through a charitable matching program available to all U.S. employees.
We match donations ranging from a maximum of $5,000 to $50,000 per year, depending on employee level, to charitable organizations.
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$4.2 million |
Fiscal 2024 corporate charitable contributions, including Company match of employee donations |
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Information about our Executive Officers
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. Information with respect to our executive officers as of April 23, 2024, is as follows:
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William A. Newlands Age 65 | President and Chief Executive Officer Mr. Newlands has served as Chief Executive Officer of the Company and as a director since March 2019 and as President since February 2018. He served as Chief Operating Officer from January 2017 through February 2019 and as Executive Vice President of the Company from January 2015 until February 2018. From January 2016 to January 2017 he performed the role of President, Wine and Spirits Division and from January 2015 through January 2016 he performed the role of Chief Growth Officer. Mr. Newlands joined the Company in January 2015. Prior to that he 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. BRG sponsorship - ECP supporting our early career professionals |
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James O. Bourdeau Age 59 | Executive Vice President and Chief Legal Officer Mr. Bourdeau is the Executive Vice President and Chief Legal Officer of the Company, having served in the role since December 2017 and as the Company’s Secretary since April 2017. Prior to that, he served as the Company’s Senior Vice President and General Counsel, Corporate Development, having performed that role from September 2014 until December 2017. Before joining the Company in September 2014, Mr. Bourdeau was an attorney with the law firm of Nixon Peabody LLP from July 2000 through September 2014, and a partner from February 2005 through September 2014. Mr. Bourdeau was associated with another law firm from 1995 to 2000. BRG sponsorship - WISE supporting our female employees and communities |
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K. Kristann Carey Age 54 | Executive Vice President and Chief Human Resources Officer Ms. Carey is the Executive Vice President and Chief Human Resources Officer of the Company, having served in the role since May 2022. Prior to that, she served as the Company’s Senior Vice President, Human Resources, Beer Division, having performed that role from February 2019 until May 2022. From July 2018 until December 2020, she performed the role of Chief Diversity Officer. From July 2017 until January 2019, she served as Chief Compliance Officer and from November 2015 until January 2019, she served as Senior Vice President and General Counsel, Beer Division. From June 2013 until November 2015, she served as Vice President and Associate General Counsel, Beer Division. Before joining the Company, Ms. Carey served in roles of increasing responsibility with McDonald’s Corporation from January 2005 until June 2013, most recently as Senior Counsel. Prior to joining McDonald’s Corporation, she worked at the law firms of Seyfarth Shaw LLP from January 2003 through January 2005 and Cassiday, Schade & Gloor LLP from October 1998 until January 2003. BRG sponsorship - AASCEND supporting Black and African American employees and communities |
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Samuel Glaetzer Age 49 | Executive Vice President and President, Wine and Spirits Division Mr. Glaetzer is the Executive Vice President and President, Wine and Spirits Division of the Company, having served in the role since March 2024. Prior to that, he served as the Company’s Senior Vice President, Global Operations and International Sales for the Wine and Spirits Division, having performed that role from March 2021 until March 2024. From September 2018 until March 2021, he performed the role of Senior Vice President, Global Operations, Wine and Spirits, and from May 2016 until September 2018, he served as Senior Vice President, Production, Wine and Spirits. From March 2014 until May 2016, he served as President and Managing Director, New Zealand and Australia. Before joining the Company, Mr. Glaetzer served in roles of increasing responsibility with Treasury Wine Estates and its predecessors from 1996 until 2014. |
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Garth Hankinson Age 56 | Executive Vice President and Chief Financial Officer Mr. Hankinson is the Executive Vice President and Chief Financial Officer of the Company, having served in the role since January 2020. Prior to that, he served as the Company’s Senior Vice President, Corporate Development, a position he had been in since February 2016, where he was responsible for leading all of the Company’s financial planning, reporting, and analysis activities, as well as all efforts related to mergers, acquisitions, ventures investments, and strategic alliances. From October 2009 until February 2016, he served as the Vice President, Corporate Development of the Company. From October 2007 until October 2009, Mr. Hankinson served as the Vice President, Business Development for Constellation’s prior Canadian business, Constellation Brands Canada, Inc., which was a Canadian subsidiary of the Company during that time. From March 2004 until October 2007, he served as the Director of Corporate Development. BRG sponsorship - Valor supporting our employees who are veterans, service members, and first responders, and their families and communities |
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Michael McGrew Age 50 | Executive Vice President, Chief Communications, Strategy, ESG & Diversity Officer Mr. McGrew has been an Executive Vice President of the Company since April 2020. Beginning December 2023, Mr. McGrew has performed the role of Executive Vice President, and Chief Communications, Strategy, ESG & Diversity Officer of the Company. From December 2020 to November 2023 he performed the role of Executive Vice President, and Chief Communications, CSR, and Diversity Officer. Mr. McGrew joined Constellation Brands in 2014 as Senior Director, Communications for the Company’s Beer Division. He was promoted to Vice President, Communications – Beer Division in 2016 and assumed the role of Vice President, Corporate Communications in 2017. Prior to joining Constellation Brands, he held a number of roles with increasing responsibility at Grainger, then a $9 billion global provider of industrial supplies and equipment. While at Grainger, from 2011 to 2013 Mr. McGrew served as Director, U.S. Business Communications, from January 2013 to October 2013 he served as Senior Director, U.S. Business & Global Supply Chain Communications and from October 2013 to September 2014 he served as Senior Director, Communications – Americas, among other roles of increasing responsibility. BRG sponsorships - ASIAA supporting employees and communities of Asian descent SAGE supporting experienced career professionals Stellar PRIDE supporting our LGBTQ+ employees and communities |
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Mallika Monteiro Age 45 | Executive Vice President, Chief Growth & Digital Officer and Managing Director, Beer Brands Ms. Monteiro has been an Executive Vice President of the Company since October 2019. Beginning December 2023, Ms. Monteiro has performed the role of Executive Vice President, Chief Growth & Digital Officer and Managing Director, Beer Brands. From March 2021 to November 2023, Ms. Monteiro performed the role of Executive Vice President, and Chief Growth, Strategy, and Digital Officer. From October 2019 to February 2021 she performed the role of Executive Vice President, Chief Growth and Strategy Officer and from October 2018 to September 2019, she performed the role of Senior Vice President, Chief Growth Officer. She joined Constellation in October 2016 as Vice President, Beer Innovation and was given additional responsibilities as Chief of Staff to the Company’s Executive Management Committee in July 2018. Prior to joining Constellation, from July 2014 to September 2016, Ms. Monteiro was a Senior Marketing Director at Anheuser Busch InBev. Prior to joining Anheuser Busch InBev, she served in roles of increasing responsibility with Beam Suntory Inc., including as Associate Brand Manager - Jim Beam from July 2007 to June 2009, Brand Manager - Cognac from July 2009 to December 2011, and Senior Brand Manager - Vodka, from January 2012 to June 2014. BRG sponsorship - CPN supporting our parents and caregivers |
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James A. Sabia, Jr. Age 62 | Executive Vice President and President, Beer Division Mr. Sabia is the Company’s Executive Vice President and President, Beer Division of the Company, having performed these roles since January 2022 and February 2022, respectively. He has been an Executive Vice President of the Company since May 2018. From March 2021 through January 2022 he served as Executive Vice President, Managing Director, Beer Division. From May 2018 through March 2021 he performed the role of Executive Vice President, Chief Marketing Officer. He joined the Company in August 2007 as Vice President, Marketing for the Company’s spirits business. Since then, he has served in roles of increasing responsibility with the Company. Since 2009, he has served as the Chief Marketing Officer of the Company’s Beer Division. From 2009 to June 2013, Mr. Sabia was employed by Crown, of which the Company owned a 50% interest and was the Company’s beer business during that period. In June 2013, the Company acquired the remaining 50% of Crown, which became a wholly-owned indirect subsidiary of the Company on that date. Prior to joining the Company, Mr. Sabia was with Molson Coors Brewing Company for 17 years. BRG sponsorship - ¡SALUD! supporting Hispanic and Latinx employees and communities |
Company Information
Our website is https://www.cbrands.com, and our investor relations website is https://ir.cbrands.com. Our filings with the SEC, including our 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 Exchange Act, are accessible free of charge on our investor relations website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website, https://www.sec.gov, that contains reports, proxy and information statements, and other information regarding issuers, such as ourselves, that file electronically with the SEC.
Our Chief Executive Officer and Senior Financial Executive Code of Ethics specifically applies to our chief executive officer, our principal financial officer, and our controller, and is available on our investor relations website. This Chief Executive Officer and Senior Financial Executive Code of Ethics meets the requirements as set forth in the Exchange Act, Item 406 of Regulation S-K. Our Code of Business Conduct and Ethics 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, together with our Global Code of Responsible Practices for Beverage Alcohol Advertising and Marketing, is available on our website under “Our Policies.” Copies of these materials are available in print to any stockholder who requests them. Stockholders
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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.
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, Nominating, and Responsibility Committee are accessible on our investor relations website. 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 investor relations website.
The information regarding our websites and their content is for your convenience only. The content of our websites is not deemed to be incorporated by reference in this Form 10-K or filed with the SEC.
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Item 1A. Risk Factors
In addition to information discussed elsewhere in this Form 10-K, you should carefully consider the following factors, as well as additional factors not presently known to us or that we currently deem to be immaterial, which could materially affect our business, liquidity, financial condition, and/or results of operations in future periods. The following factors are organized under relevant headings; however, they may be relevant to other headings as well.
Operational Risks
Supply of quality water, agricultural, and other raw materials, certain raw and packaging materials purchased under supply contracts; supply chain disruptions and inflation; limited group of glass bottle suppliers
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. If climate patterns change and droughts continue or become more severe or other restrictions on currently available water resources are imposed, there may be a scarcity of water or poor water quality which may affect our and our suppliers’ operations, increase production costs, or impose capacity constraints. We are dependent on sufficient amounts of quality water for operation of our breweries, wineries, and 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. In addition, water purification and waste treatment infrastructure limitations could increase costs or constrain operations at our production facilities and vineyards. A substantial reduction in water supplies could result in material losses of grape crops and vines or other crops, such as corn, barley, or hops, which could lead to a shortage of our product supply.
We have substantial brewery operations in Mexico and substantial wine operations in the U.S. (primarily in California), New Zealand, and Italy as well as brewery and distillery operations in the U.S. Although certain areas in California have recently experienced flooding, the state has endured and may continue to experience prolonged drought conditions which have resulted in the imposition of certain restrictions on water usage. If these conditions or restrictions persist and/or increase in severity, it could have an adverse effect upon those operations. Our current Mexican breweries are each, and the Veracruz Brewery will be, sourced from a single water supply originating from separate and distinct aquifers. The sources of water, methods of water delivery, water quality, or water requirements to support our ongoing requirements may change materially in the future. We may incur additional expenses for improving water delivery, quality, and efficiency as well as for securing additional water sources.
Our breweries, the Glass Plant, our wineries, and our distilleries use a large volume of agricultural and other raw materials to produce our products. These include corn starch and sugars, malt, hops, fruits, yeast, and water for our breweries; soda ash and silica sand for the Glass Plant; grapes and water for our wineries; and grain and water for our distilleries. Our breweries, wineries, and distilleries all use large amounts of various packaging materials, including glass, aluminum, cardboard, and other paper products. Our production facilities also use electricity, natural gas, and diesel fuel in addition to renewable energy sources in their operations. Certain raw materials and packaging materials are purchased under contracts of varying maturities. The supply, on-time availability, and price of raw, packaging, and other materials, energy, and other commodities have been and may continue to be affected by many factors beyond our control, including economic factors, supply chain disruptions, inflationary pressures, market demand, global geopolitical events and military conflicts, droughts, storms, weather events, or natural or man-made disasters, plant diseases, and theft.
Our breweries, wineries, and distilleries are also dependent upon an adequate supply of glass bottles. At times, we have experienced glass bottle purchasing shortages, particularly for brown glass used for certain of our Mexican beer brands. Glass bottle costs are one of our largest components of cost of product sold. The Glass Plant produces a majority of the total annual glass bottle supply for our Mexican beer brands, and we have a small number of other suppliers of glass bottles for our Mexican beer brands. Meanwhile, we have two aluminum can suppliers that provide all of our total annual requirements for our Mexican beer brands, with one of those suppliers providing a majority of such aluminum can requirements. In the U.S., glass bottles have only a small
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number of producers. Currently, one producer supplies a majority of our glass container requirements for our U.S. wine and spirits operations.
To the extent any of the foregoing factors impact our business or operations, including by (i) increasing the costs of our products and we are unable or choose not to pass along such rising costs to consumers through increased selling prices, (ii) leading to a shortage of our product supply or inventory levels, or (iii) requiring unplanned diversions of funds, resources, and talent to address such factors, we could experience a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Reliance upon complex information systems and third-party global networks; cybersecurity; AI
We depend on IT to enable us to operate efficiently and interface with customers and suppliers, maintain financial accuracy and efficiency, and effect accurate and timely governmental reporting. If we do not allocate and effectively manage the resources necessary to build and sustain the proper technology infrastructure, including our global enterprise resource planning system, we could be subject to transaction errors, processing inefficiencies, increased costs, loss of customers, business disruptions, loss of or damage to intellectual property through security breach, penalties associated with the failure to timely file governmental reports, and/or other difficulties. Many groups on a worldwide basis have experienced increases in electronic security breaches, cyberattacks, and other hacking activities such as denial of service, malware, and ransomware, and there is the possibility of retaliatory cyberattacks, including by state-sponsored organizations. As with all large IT systems, we have been a target of cyberattackers and other hacking activities and our systems could be penetrated by increasingly sophisticated parties (including through the use of emerging AI technologies) intent on extracting confidential or proprietary information, corrupting our information, disrupting our business processes, engaging in the unauthorized use of strategic information about us or our employees, customers, or consumers, or demanding monetary payment. Such unauthorized access could disrupt our operations and result in various costs and adverse consequences, including the loss of assets or revenues, litigation, regulatory actions, remediation costs, increased cybersecurity protection costs, damage to our reputation, harm to our employees, or the failure by us to retain or attract customers following such an event.
We have outsourced various functions to third-party service providers and may outsource other functions in the future. We rely on such third-parties to provide services on a timely and effective basis, but we do not ultimately control their performance. In addition, our distributors, wholesalers, suppliers, joint venture partners, and other external business partners utilize their own IT systems that are subject to similar risks to us as described above. Their failure to perform as expected or as required by contract, or additional cyberattacks on them that disrupts their systems, could result in significant disruptions and costs to our operations or, in the case of third-party service providers, a penetration of our systems.
The recent proliferation and rapid evolution of AI technologies, including generative AI, has resulted in new challenges, including business, regulatory, and ethical considerations, and may intensify the risk of cyberattackers using such technologies to enhance their capabilities. We have implemented a governance framework that includes policies and processes to address the use of AI technologies, primarily focused on generative AI, by our employees and third-party service providers. Nevertheless, our employees and third-party service providers may not follow our governance framework, including if such providers incorporate AI technologies into their products or systems without disclosing this use to us. This may create risks in our ability to address existing or rapidly developing regulatory or industry standards related to AI technologies.
To the extent any of the foregoing factors result in significant disruptions and costs to our operations, compromise confidential or sensitive information, imperil our intellectual property, result in harm to our reputation and the public perception of the effectiveness of our IT systems and cybersecurity measures, and/or reduce the effectiveness of our internal control over financial reporting, it could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Economic and other uncertainties associated with our international operations
We have production facilities in the U.S., Mexico, New Zealand, and Italy and employees in various countries, and our products are sold in numerous countries. The countries in which we operate impose duties, excise taxes, and/or other taxes on beverage alcohol products, and/or on certain raw materials used to produce
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our beverage alcohol products, in varying amounts. Governmental bodies may propose changes to international trade agreements, treaties, tariffs, taxes, and other government rules and regulations including but not limited to environmental treaties and regulations. Significant increases in import and excise duties or other taxes on or impacting beverage alcohol products as well as any tariffs, particularly on imports from Mexico and any retaliatory tariffs imposed by the Mexican government, could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Meanwhile, escalating geopolitical tensions, have resulted and may continue to result in sanctions, tariffs, and import-export restrictions. These activities, when combined with any retaliatory actions that may be taken by other countries could cause further inflationary pressures and economic and supply chain disruptions (including impacts on prices and supply of certain commodities, such as aluminum, corn, crude oil, natural gas, and steel).
In addition, 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 regulations also require warning labels and signage. We may be subject to new or revised regulations, increased licensing fees, requirements, or taxes, or regulatory enforcement actions. Additionally, various jurisdictions may seek to adopt significant additional product labeling or warning requirements, limitations, or guidelines on the marketing or sale of our products because of what our products contain or allegations that our products cause adverse health effects. If these types of requirements become applicable to one or more of our major products under current or future laws or regulations, they may inhibit sales of such products or increase our costs. These uncertainties and changes, as well as the decisions, policies, and economic strength of our suppliers and distributors, could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Dependence on limited facilities for production of our Mexican beer brands; facility expansion, optimization, and construction activities
We are dependent on our current Mexican breweries to fulfill our Mexican beer brands’ production requirements, both now as well as for the near-term. Expansion, optimization, and/or construction activities continue at our breweries in Mexico. These are multi-billion-dollar activities with risks of completion delays, cost overruns, and asset impairments, such as the prior impairment of certain long-lived assets at the canceled Mexicali Brewery. We may not achieve the intended financial and operational benefits of these investments, including if we develop excess capacity that outpaces demand for our Mexican beer brands. We are pursuing the sale of the remaining assets at the Mexicali Brewery after exploring various options; however, we may not be successful in completing any such sale or obtaining other forms of recovery.
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 at all or on terms that are acceptable to us; (ii) potential changes in federal, state, and local laws and regulations, including environmental requirements, that prevent a project from proceeding or increase the anticipated cost of the project; (iii) our inability to acquire rights-of-way or land or water rights on a timely basis on terms that are acceptable to us; or (iv) our inability to acquire the necessary energy supplies, including electricity, natural gas, and diesel fuel. Any of these or other unanticipated events could halt or delay the expansion, optimization, or construction of our production facilities.
We may not be able to satisfy our product supply requirements for our Mexican beer brands in the event of (i) a significant disruption or the partial or total destruction of the current Mexican breweries or the Glass Plant, (ii) difficulty shipping raw materials and product into, within, or out of the U.S. or Mexico, including in the event of rail shipping disruptions with our major provider in each country, or (iii) a temporary inability to produce our product due to closure or lower production levels of one or more of our current Mexican breweries. A prolonged closure or restriction of the border between the U.S. and Mexico, particularly at key product and supply crossing points, could result in temporary or longer-term disruptions of sales, consumption, and trade patterns, supply chains, production processes, and/or operations. Also, if the contemplated expansion, optimization, and/or construction activities at our breweries in Mexico are abandoned or not otherwise completed by their targeted completion dates, we may not be able to produce sufficient quantities of our Mexican beer to satisfy our needs in
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the future. Under such circumstances, we may be unable to obtain our Mexican beer at a reasonable price from another source, if at all. A significant disruption at our current Mexican breweries, or the Glass Plant, 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 have a material adverse effect on our product supply, business, liquidity, financial condition, and/or results of operations.
Operational disruptions or catastrophic loss to breweries, wineries, other production facilities, or distribution systems
All of our Mexican beer products are produced at our current Mexican breweries. Many of the workers at these breweries are covered by collective bargaining agreements. The Glass Plant produces a majority of the total annual glass bottle supply for our Mexican beer brands. Several of our vineyards and production and distribution facilities, including certain California and Oregon wineries, are in areas prone to seismic activity. Additionally, we have various vineyards and wineries in California and Oregon which have experienced wildfires, landslides, and/or severe winter storms.
If any of these or other of our properties and production facilities were to experience a significant operational disruption or catastrophic loss, it could delay or disrupt production, shipments, and sales, and result in potentially significant expenses to repair or replace these properties or find suitable alternative providers. Also, our production facilities are asset intensive. As our operations are concentrated in a limited number of production and distribution facilities, we are more likely to experience a significant operational disruption or catastrophic loss in any one location from acts of war or terrorism, natural or man-made disasters, public health crises, labor strikes or other labor activities, cyberattacks and other attempts to penetrate our or our third-party service providers’ IT systems or the IT used by our non-production employees who work remotely, or unavailability of raw or packaging materials. We may be impacted by increases in global energy prices or reduced supply, particularly for crude oil and natural gas, including as a result of geopolitical events and military conflicts. If a significant operational disruption or catastrophic loss were to occur, we could breach agreements, our reputation could be harmed, and our business, liquidity, financial condition, and/or results of operations could be adversely affected by, among other items, higher maintenance charges, unexpected capital spending, or product supply constraints.
Our insurance policies do not cover certain types of catastrophes and may not cover certain events such as pandemics. Economic conditions and uncertainties in global markets may adversely affect the cost and other terms upon which we are able to obtain property damage and business interruption 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 business, liquidity, financial condition, and/or results of operations.
Climate change; ESG regulatory compliance; failure to meet emissions, stewardship, and other ESG targets
Our business depends upon agricultural activity and natural and human capital resources. There has been much public discussion related to concerns that GHGs may have an adverse impact on global temperatures, weather patterns, and the frequency and severity of extreme weather and natural disasters. Severe weather events and natural disasters, such as our experiences with drought, flooding, and/or wildfires in California and Oregon, severe winter storms in California, Texas, or Mexico, or late frosts or flooding in New Zealand, and climate change may negatively affect agricultural productivity in the regions from which we source our various agricultural raw materials or the energy powering our production facilities. Decreased availability of our raw materials may increase our cost of product sold. Severe weather events and natural disasters or changes in their frequency or intensity can also impact product quality; disrupt our supply chains, which may affect production operations, insurance cost and coverage, and delivery of our products to wholesalers, retailers, and consumers; and negatively affect the ability of consumers to purchase our products.
The landscape related to ESG regulation, compliance, and reporting is constantly evolving, including expanding in scope and complexity. For example, the SEC and the European Commission have promulgated final rules that would require significantly increased disclosures related to climate change, although the SEC has issued an order to stay the rules pending the completion of judicial review of multiple petitions challenging the rules. We may experience significant future increases in the costs associated with regulatory compliance for ESG matters, including fees, licenses, personnel, consultants, reporting, and the cost of capital improvements for our operating
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facilities to meet environmental regulatory requirements, as well as to address other regulations, standards, frameworks, and ratings from various governmental entities and other stakeholders or activist campaigns. We have disclosed various ESG-related targets, including on restoration of water withdrawals, Scope 1 and Scope 2 GHG emissions, enhancing social equity within our industry and communities, waste reduction, and circular packaging, and we may disclose new or updated ESG-related targets in the future. The achievement of such targets along with our broader value chain engagement efforts have required and will continue to require us and in some cases third parties with which we do business, such as our suppliers, to make investments and allocate resources.
In addition, we may be party to various environmental remediation obligations arising in the normal course of our business or relating to historical activities of businesses we acquire. Due to regulatory complexities, governmental or contractual requirements, uncertainties inherent in litigation, and the risk of unidentified contaminants at our current and former properties, the potential exists for remediation, liability, indemnification, and other costs to differ materially from the costs that we have estimated. We may also incur costs associated with environmental compliance arising from events we cannot control, such as natural disasters. We may not allot sufficient resources to attain, may not ultimately achieve, and/or may be subject to proceedings or litigation related to our ESG targets, and our costs in relation to any of the foregoing matters may exceed our projections, which could have a material adverse effect upon our business, liquidity, financial condition, and/or results of operations.
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 with generally separate distribution networks utilized for our beer portfolio and our wine and spirits portfolio. In the U.S., we sell our products principally to wholesalers for resale to retail outlets and directly to government agencies. We have an exclusive arrangement with one wholesaler that generates a large portion of our branded U.S. wine and spirits net sales, and we have one wholesaler for our beer portfolio which, through multiple entities, represents one-quarter of our consolidated net sales. Wholesalers and retailers of our products offer directly competing products that vie for retail shelf space, promotional support, and consumer purchases, and wholesalers or retailers may give higher priority to products of our competitors. The replacement or poor performance of our major wholesalers, retailers, or government agencies could result in temporary or longer-term sales disruptions or could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Contamination and degradation of product quality from diseases, pests, and weather and other conditions
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 sales. Various diseases, pests, fungi, viruses, drought, frosts, wildfires, and certain other weather conditions or the effects of climate conditions, such as smoke taint sustained during the 2020 U.S. West Coast wildfires or the late frost experienced in New Zealand in calendar 2021, could affect the quality and quantity of barley, hops, grapes, and other agricultural raw materials available and decrease the supply and quality of our products. Similarly, power disruptions, such as the outage at our Nava Brewery due to severe winter weather events in early 2021, could adversely impact our production processes and the quality of our products. We or our suppliers of agricultural raw materials may not succeed in preventing contamination in existing or future vineyards, fields, or production facilities. 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. It is also 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.
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 also reduce demand for our products or cause production and delivery disruptions. Contaminants or other defects 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 our brands.
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If any of our products become unsafe or unfit for consumption, are misbranded, or cause injury, we may have to engage in additional product recalls and/or be subject to liability and incur additional costs. Widespread or multiple product recalls or a significant product liability judgment or regulatory action could cause our products to be unavailable for a period, which could reduce consumer demand and brand equity and result in reputational harm.
Outbreaks of communicable infections or diseases, pandemics, or other widespread public health crises in the markets in which our consumers or employees live and/or in which we or our distributors, retailers, and suppliers operate
Communicable disease outbreaks, including the COVID-19 pandemic, and other widespread public health crises have resulted and in the future could result in disruptions and damage to our business caused by potential negative consumer purchasing behavior and reduced consumption as well as disruption to our supply chains, production processes, and operations. This includes containment actions that restrict consumer purchasing occasions, including from the inability to leave home or otherwise shop in a normal manner, cancellations of public events, venue closures, or capacity restrictions, as well as reductions in consumer discretionary income due to reduced or limited work and layoffs. Supply disruption may result from restrictions on the ability of employees and others in the supply chain to travel and work, including from quarantines, individual illnesses, or border closures imposed by governments to deter the spread of communicable infections or diseases; determinations by us or our suppliers or distributors to temporarily suspend operations in affected areas; or other actions which restrict or otherwise negatively impact our ability to produce, package, and ship our products, our distributors’ ability to distribute our products, or our suppliers’ ability to provide us with raw, packaging, and other materials. Channels of entry may be closed or operate at reduced capacity, or transportation of product within a region or country may be limited. Our operations and the operations of our suppliers may become less efficient or otherwise be negatively impacted if our or their executive management or other key operational personnel are unable to work or if a significant percentage of our workforce is unable to work at all or at their normal production or other facility. Another widespread health crisis or pandemic conditions could negatively affect the economies and financial markets of many countries resulting in a global economic downturn which could negatively impact demand for our products and our ability to borrow money. Any of these events could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Labor activities could increase our costs
If our employees were to engage in a labor strike, other work stoppage, or other labor activities, we could experience an operational disruption, incur higher ongoing labor costs, and/or suffer reputational harm, which could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Strategic Risks
Potential decline in the consumption of products we sell; dependence on sales of our Mexican beer brands
Our business depends upon consumers’ consumption of our beer, wine, and spirits brands, and sales of our Mexican beer brands in the U.S. are a significant portion of our business. Consumer preferences, behaviors, perception, and sentiment may shift due to a variety of factors, including changes in taste preferences and leisure, dining, and beverage purchasing and consumption patterns, trends involving demographics and ESG matters, changing market dynamics, including consumer-led premiumization and betterment trends, pricing considerations, perceived value, branding and marketing, and reputational considerations. Further, 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;
•inflation, including the impact of reduced discretionary income of consumers available to purchase our products and increased commodities and other costs;
•concern about the health consequences of consuming beverage alcohol products, including betterment trends, and about drinking and driving or other safety considerations;
•reduced consumption of beverage alcohol products, including as a result of stricter laws relating to consumption or driving while under the influence of alcohol or resulting from weight loss regimens and pharmaceuticals, including GLP-1 drugs;
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•increased activity from governmental entities, anti-alcohol groups, or other bodies, such as the World Health Organization, advocating measures or guidelines designed to reduce the consumption of beverage alcohol products or require more stringent labeling;
•increased excise or other taxes on beverage alcohol products and possible restrictions on beverage alcohol advertising and marketing;
•increased import and excise duties, other taxes, or tariffs on or impacting beverage alcohol products;
•increased regulation restricting the purchase or consumption of beverage alcohol products;
•the inability of our wine and spirits business to become a global, omni-channel competitor; and
•wars, disease outbreaks or pandemics, quarantines, weather, and natural or man-made disasters.
If these or any other factors cause a decline in the growth rate, amount, or profitability of our sales of the Mexican beer brands in the U.S. or any material shift in consumer preferences, behaviors, perception, and sentiment in our major markets away from our beer, wine, and spirits brands, and our Mexican beer brands in particular, or from the categories in which they compete, it could adversely affect our business, liquidity, financial condition, and/or results of operations.
Acquisition, divestiture, investment, and NPD strategies and activities
From time to time, we acquire businesses, assets, or securities of companies that we believe will provide a strategic fit with our business. We 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 not effectively assimilate the business or product offerings of acquired companies into our business or within the anticipated costs or timeframes, retain key customers and suppliers or key employees of acquired businesses, or successfully implement our business plan for the combined business. In addition, 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 and we may fail to fully realize anticipated cost savings, growth opportunities, or other potential synergies. The fair value of acquired businesses or investments may not remain constant.
We also divest businesses, assets, or securities of companies from time to time, including those that we believe no longer provide a strategic fit with our business. We may provide various indemnifications in connection with divestitures of businesses or assets. Divestitures of portions of our business may also result in costs stranded in our remaining business. Delays in developing or implementing plans to address such costs could delay or prevent the accomplishment of our financial objectives. The amount of contingent consideration, if any, received in divestitures may also vary based on various factors including actual future brand performance.
We have also acquired or retained ownership interests in companies which we do not control, such as our joint venture to operate the Glass Plant, our interest in Canopy, and investments made through our corporate venture capital function, and we have acquired control of companies which we do not wholly own, such as our majority ownership interest in Nelson’s Green Brier Distillery, LLC. 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 to, among other matters, pay certain costs, make capital investments, fulfill alone our joint venture partners’ obligations, or purchase other parties’ interests. The entities in which we have an interest may be subject to litigation which may have an adverse impact on their ability to do business or under which they may incur costs and expenses which could have a material adverse impact on their operations or financial condition which, in turn, could negatively impact the value of our investment.
In addition, our continued success depends, in part, on our ability to develop new products. The launch and ongoing success of NPDs are inherently uncertain, especially with respect to consumer appeal and our ability to deliver optimized marketing in an evolving and dynamic media landscape, including through emerging digital technologies such as AI and data analytics. A new product launch can give rise to a variety of costs. An
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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 has resulted and may in the future result in inventory write-offs and other costs.
We may not realize the expected benefits of acquisitions, divestitures, investments, or NPDs. We have recognized impairment losses and/or write-offs in connection with acquired and divested businesses and investments, and we may do so again in the future. Furthermore, our acquisitions, investments, or joint ventures may not be profitable, our forecasts regarding acquisition, divestiture, or investment activities may not be accurate, or the internal control over financial reporting of entities which we must consolidate as a result of our investment activities but do not control or wholly own may not be as robust as our internal control over financial reporting. Our failure to adequately manage the risks associated with acquisitions, divestitures, investments, or NPDs, or the failure of an entity in which we have an equity or membership interest, could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
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 and use certain trademarks under license covering our brands and products, and we have filed, and expect to continue to file or have filed on our behalf, 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 such trademark applications. We could also, by omission, fail to timely renew or protect a trademark and our competitors could challenge, invalidate, or circumvent any existing or future trademarks issued to, or licensed by, us.
Our subsidiaries CB Brand Strategies, LLC, Crown Imports LLC, and Compañía Cervecera de Coahuila, S. de R.L. de C.V. were named as defendants in a lawsuit originally filed in U.S. District Court for the Southern District of New York on February 15, 2021, and most recently amended on March 16, 2022, by Cervecería Modelo de México, S. de R.L. de C.V. and Trademarks Grupo Modelo, S. de R.L. de C.V., captioned Cervecería Modelo de México, S. de R.L. de C.V., et al. v. CB Brand Strategies, LLC, et al., Case No. 21 Civ. 01317-LAK (S.D.N.Y.). The plaintiffs alleged, among other things, that our sub-license of the trademarks for our Mexican beer brands should not permit us to use the Corona brand name on our Corona Hard Seltzer or the Modelo brand name on our Modelo Ranch Water. On August 5, 2022, both the plaintiffs and the defendants filed motions for summary judgment. On November 3, 2022, the court denied our motion for summary judgment. On December 13, 2022, the court denied plaintiffs’ motion for summary judgment. At a trial in March 2023, the jury returned a unanimous verdict in our favor on all counts in the plaintiffs’ complaint, and the court entered judgment dismissing the complaint on March 15, 2023. On April 12, 2023, the plaintiffs filed a motion for judgment as a matter of law or, in the alternative, for a new trial with the court, which motion was denied on April 14, 2023.
On May 12, 2023, the plaintiffs filed a notice of appeal to the U.S. Court of Appeals for the Second Circuit from the final judgment entered in the above-captioned case, rulings and orders incorporated in, antecedent to, or ancillary to that final judgment, and the district court’s order denying the plaintiffs’ motion for judgment as a matter of law or, in the alternative, for a new trial in that action. The appeal is captioned Cervecería Modelo de México, S. de R.L. de C.V., et al. v. CB Brand Strategies, LLC, et al., Case No. 23-810 (2d Cir.). The plaintiffs’ principal brief was filed on August 22, 2023, which appealed the district court’s order denying the plaintiff’s motion for summary judgment, an evidentiary ruling, and the district court’s instructions to the jury. Our response brief was filed on November 21, 2023, and the plaintiffs’ reply brief was filed on December 12, 2023. Oral argument was conducted before the Second Circuit on March 12, 2024. On March 25, 2024, the Second Circuit issued an order affirming the judgment of the district court, including affirming the denial of the plaintiffs’ motion for summary judgment, affirming the district court’s evidentiary ruling, and rejecting the plaintiffs’ challenges to the district court’s instructions to the jury.
While we continue to believe this lawsuit is without merit, litigation is inherently unpredictable and subject to substantial uncertainties and unfavorable developments and resolutions could occur. In addition, our cost of defending this litigation has been and could continue to be substantial. If we are not successful, we may not be able to market Corona Hard Seltzer in its current formulation under the Corona brand name or Modelo
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Ranch Water product in its current formulation under the Modelo brand name and we may be required to pay damage awards, each of which may have an adverse effect on our business, liquidity, financial condition and/or results of operations.
We have been and may continue to be subject to other litigation related to our trademarks and intellectual property rights. A substantial adverse judgment or other unfavorable resolution of these matters or our failure to otherwise protect our intellectual property rights as well as the costs associated with such activities could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Damage to our reputation
The success of our brands depends upon consumer perception, including having a positive image of those brands, and maintaining a good reputation is critical to selling our branded products. Our reputation could also be impacted negatively by public perception, adverse publicity (whether or not valid, such as the similarity of the name of certain of our brands or trademarks and a type of virus), negative comments or campaigns in social media, or our responses relating to, among other things:
•a perceived or actual failure to maintain high ethical standards and responsible operating practices to achieve our business goals;
•perceptions toward, and our performance related to, our ESG and DEI strategies, initiatives, and targets as well as associated reporting regulations, standards, frameworks, and ratings;
•a perceived or actual failure to address concerns relating to the quality, safety, or integrity of our products, including from accidental or deliberate contamination or tampering;
•actions we may take to enhance or safeguard our reputation and uphold our core values, including changes to our operations, sales, advertising, marketing, and new product development;
•allegations that we, or persons currently or formerly associated with us, have allegedly or actually violated applicable laws or regulations, including those related to safety, employment, discrimination, harassment, whistleblowing, privacy, corporate citizenship, improper business practices, or cybersecurity, or have otherwise engaged in negatively perceived activities;
•our environmental impact, including use of agricultural materials, packaging, water and energy use, and waste management;
•investors, activist groups, or other stakeholders seeking to influence our business, strategies, operations, and products;
•our investment in Canopy and our association with a cannabis business; or
•efforts that are perceived as insufficient to promote the responsible use of alcohol or cannabis.
Failure to comply with applicable laws and regulations, maintain an effective system of internal controls, provide accurate and timely financial statement information, or 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, liquidity, financial condition, and/or results of operations, as well as require additional resources to rebuild our reputation, competitive position, and brand equity and renew investor confidence.
Competition
We operate in a highly competitive industry, and our sales and profitability could be negatively affected by numerous factors including:
•our inability to maintain or increase prices or develop new products;
•increases in our advertising or marketing expenditures to maintain our competitive position;
•our inability to adopt or effectively deploy new and emerging technologies;
•new entrants in our market or categories, including from the convergence of beverage categories;
•the consolidation of distributors, wholesalers, retailers, suppliers, and other beverage companies;
•the decision of wholesalers, retailers, or consumers to purchase competitors’ products instead of ours;
•pricing, purchasing, financing, operational, advertising, or promotional decisions made by wholesalers, state and local agencies, and retailers which affect supply of or consumer demand for our products; or
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•a general decline in beverage alcohol consumption due to consumer dietary preference changes or consumers substituting legalized cannabis or other similar products in lieu of beverage alcohol.
Our continued success also depends on our ability to attract and retain a high-quality and diverse workforce in a competitive environment for talent and to implement our human capital priorities and initiatives. We could experience higher expenses for investment in our personnel, including due to employee turnover, continuing wage inflation, and other emerging employment trends, particularly in the U.S.; to deliver on our human capital priorities and initiatives; or for other reasons. We may be unable to increase our prices to pass along any increased costs we incur to our customers.
Financial and Economic Risks
Indebtedness and interest rate fluctuations
We have incurred indebtedness to finance investments and acquisitions, refinance other indebtedness, fund beer operations expansion, optimization, and construction activities, pay cash dividends, and repurchase shares of our common stock. In the future, we may continue to incur additional indebtedness for any or all of these activities as well as to fund other general corporate purposes. We are exposed to risks associated with interest rate fluctuations, and we have recently experienced a rising interest rate environment. We could experience further changes in our ability to manage fluctuations in interest rates, including for our variable interest rate debt outstanding or if we need to refinance indebtedness. In addition, our business may not generate sufficient cash flow from operations to meet all our debt service requirements, return value to stockholders such as through payment of dividends or repurchase of shares of our common stock, achieve our target net leverage ratio, and fund our general corporate and capital requirements.
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, investments, acquisitions, or other purposes may be limited;
•our funds available for operations, expansions, construction, dividends or other distributions, or share 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.
Additionally, any failure to meet required payments on our debt, or failure to comply with any covenants in the instruments governing our debt, could result in an event of default under the terms of those instruments and a downgrade to our credit ratings. A downgrade to our credit ratings would increase our borrowing costs and could affect our ability to issue commercial paper. Certain of our debt facilities also contain change of control provisions which, if triggered, may result in an acceleration of our obligation to repay the debt. In addition, certain of our current and future debt and derivative financial instruments have, or in the future, could have interest rates that are tied to reference rates, such as SOFR. The volatility and availability of such reference rates, including establishment of alternative reference rates, is out of our control. Changes to or the unavailability of such rates or the manner for calculation of such reference rates, could result in increases to the cost of our debt. In addition, our 2022 Credit Agreement (i) restricts repayment of the loans under the credit agreement with proceeds derived, directly or indirectly, from Canopy prior to the Specified Time, (ii) restricts the use of proceeds from the loans under our credit agreement, directly or indirectly, for any investment in, transaction with, or to fund the activities of or business with Canopy prior to the Specified Time, and (iii) provides that we will not convert any of our outstanding Exchangeable Shares for Canopy common shares or own any Canopy common shares until the Specified Time.
If we do not comply with the obligations contained in our senior credit facility, our existing or future indentures, or other loan agreements, we could be in default under such debt facilities or agreements. In such an event, the holders of our debt could elect to declare as due and payable all amounts outstanding under those instruments. An event of default could also result in events of default under other debt facilities or agreements
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that contain cross-acceleration or cross-default provisions, which could permit counterparties thereunder to exercise remedies. If that occurred, we might not have available funds to satisfy our repayment obligations.
International operations, worldwide and regional economic trends and financial market conditions, geopolitical uncertainty, or other governmental rules and regulations
Risks associated with international operations, any of which could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations, include:
•changes in political, economic, social, and labor conditions in U.S., Mexico, and international locales, including as a result of elections, potential government shutdowns, or other events;
•potential disruption from wars and military conflicts, terrorism, civil unrest, kidnapping, and drug-related, workplace, or other types of violence;
•restrictions on foreign ownership and investments or on repatriation of cash earned in countries outside the U.S.;
•import and export requirements and border accessibility;
•protectionist trade policies, sanctions, and tariffs;
•foreign currency exchange rate fluctuations, which may reduce the U.S. dollar value of net sales, earnings, and cash flows from non-U.S. markets or increase our supply chain costs, as measured in U.S. dollars, in those markets;
•a less developed and less certain legal and regulatory environment in some countries, which, among other things, can create uncertainty regarding contract enforcement, intellectual property rights, privacy obligations, real property rights, and liability issues; and
•inadequate levels of compliance with applicable domestic and foreign anti-bribery and anti-corruption laws, including the Foreign Corrupt Practices Act.
Unfavorable global or regional economic conditions, including economic slowdown or recession, instability in the banking sector, and the disruption, volatility, and tightening of credit and capital markets, as well as unemployment, tax increases, governmental spending cuts, or continuing 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 could also be affected by nationalization of our international operations, unstable governments, unfamiliar or biased legal systems, intergovernmental disputes, or animus against the U.S. or products produced in Mexico. 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.
Class action or other litigation, including relating to abuse or misuse of our products, product liability, marketing or sales practices including product labeling, or other matters
There has been public attention directed at the beverage alcohol industry, which we believe is due to concerns related to harmful use of alcohol, including drinking and driving, underage drinking, and health consequences from the misuse of alcohol. We could be exposed to lawsuits relating to product liability or marketing or sales practices, including product labeling. With our international operations, we have been and may continue to be subject to risk of a wide variety of other legal claims and proceedings by external parties, employees, and stockholders. Litigation is inherently unpredictable and subject to substantial uncertainties and unfavorable developments and resolutions could occur. In addition, the amount of time and cost to defend ourselves could be substantial. Adverse developments in lawsuits related to such matters as well as the time and costs associated with such activities or a significant decline in the social acceptability of beverage alcohol products or for our products specifically that may result from lawsuits could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
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Intangible assets, such as goodwill and trademarks
We 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. For example, if broader industry and market conditions decline and/or our expectations of future performance as reflected in our current strategic operating plans are not fully realized, a future impairment of Wine and Spirits goodwill is reasonably possible. A significant write-down of any of our intangible assets could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations.
Changes to tax laws; fluctuations in our effective tax rate; accounting for tax positions; resolution of tax disputes; changes to accounting standards, elections, assertions, or policies; global minimum tax
Changes to federal, state, provincial, local, or foreign tax laws, 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 levels or at other governmental bodies in recent years. Federal, state, provincial, local, or foreign governmental entities may consider increasing taxes upon beverage alcohol products as they explore available alternatives for raising funds, including to offset budget or other deficits.
In addition, significant judgment is required to determine our effective tax rate and evaluate our tax positions. Our provision for income taxes includes a provision for uncertain tax positions. 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, several years may elapse before such matters are audited and finally resolved. Unfavorable resolution of any tax matter could increase our effective tax rate and resolution of a tax issue may require the use of cash in the year of resolution.
U.S. tax changes or changes in how international corporations are taxed, including changes in how existing tax laws are interpreted or enforced, or changes to accounting standards, elections, or assertions as well as our accounting policies could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations. For example, the OECD has introduced a framework to implement a global minimum tax rate of 15%, referred to as Pillar Two. Many jurisdictions in which we do business have started to enact laws implementing, or have draft legislation proposed for adoption to implement, Pillar Two. These changes, when enacted by the various jurisdictions in which we do business, may significantly increase our taxes in these jurisdictions.
Cash dividends and share repurchases are subject to a number of uncertainties and may affect the price of our common stock
Our capital allocation strategy contemplates quarterly cash dividends and periodic share repurchases under our share repurchase program. We fund our cash dividends and share repurchases through a combination of cash flow from operations, borrowings, and divestiture proceeds. However, we are not required to declare dividends or to make any share repurchases under our share repurchase program. We may discontinue, limit, suspend, delay, or increase our dividends and share repurchases at any time without prior notice. Even if not discontinued, the amount of such dividends and repurchases may be changed, and the amount, timing, and frequency of such dividends and repurchases may vary from historical practice or from our stated expectations. Decisions with respect to dividends and share repurchases are subject to the discretion of our Board of Directors and will be based on a variety of factors. Important factors that could cause us to discontinue, limit, suspend, delay, or increase our cash dividends or share repurchases include market conditions, the price of our common stock, the nature and timing of other investment opportunities, changes in our business strategy, the terms of our financing arrangements, our outlook as to our ability to obtain financing at attractive rates, the impact on our credit ratings, changes in laws or regulations, and the availability of cash. The IRA imposes an excise tax of 1% on share repurchases, and the ongoing impact of this excise tax will be dependent on the extent of our share repurchases in future periods along with any changes to the excise tax rate and could increase our tax liability. The reduction or elimination of our cash dividend or longer suspension or elimination of our share repurchase program could adversely affect the market price of our common stock. Additionally, any share repurchases may not enhance stockholder value because the market price of our common stock may decline below the levels at which we repurchased shares of common stock, and short-term stock price fluctuations could reduce the program’s effectiveness.
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Governance Risks
Sands Family Stockholder Class A Stock ownership and Board of Directors nomination rights
Until November 2027 and so long as the Sands Family Stockholders, collectively, have beneficial or record ownership of at least 10% of the issued and outstanding shares of Class A Stock, our Board of Directors will, subject to the procedures and limitations set forth in the Reclassification Agreement, nominate two individuals designated by WildStar for election to our Board of Directors at any annual meeting of our stockholders at which directors are to be elected (or otherwise in connection with any action by written consent pursuant to which a majority of the Board of Directors will be elected). So long as the Sands Family Stockholders, collectively, have beneficial or record ownership of less than 10% but at least 9,239,463.1 shares of Class A Stock, as may be adjusted by any stock dividend, stock split, stock combination, or similar transaction, the Board of Directors will, subject to the procedures and limitations set forth in the Reclassification Agreement, nominate one individual designated by WildStar for election to the Board of Directors at any annual meeting of our stockholders at which directors are to be elected (or otherwise in connection with any action by written consent pursuant to which a majority of the Board of Directors will be elected).
The amount of Class A Stock currently held by the Sands Family Stockholders, together with the foregoing Board of Directors nomination rights, provide the Sands Family Stockholders with significant continued influence over our decisions. The interests of the Sands Family Stockholders with respect to matters potentially or actually involving or affecting us and our other stockholders, such as future acquisitions, financings, and other corporate opportunities and attempts to acquire us, may conflict with the interests of our other stockholders.
Certain Sands Family Stockholders have pledged shares of Class A Stock to secure various credit facilities. In the event of noncompliance with certain covenants under the credit facilities, the financial institutions to which such stock is pledged have certain remedies, including the right to sell the pledged shares subject to certain protections afforded to the borrowers and pledgors. The sale by such financial institutions of a substantial amount of the pledged shares could depress, or result in volatility in, the trading price of our Class A Stock.
Choice-of-forum provision in our Amended and Restated By-laws regarding certain stockholder litigation
Our Amended and Restated By-laws provide that, unless we consent in writing to the selection of an alternative forum, (i) the Court of Chancery of Delaware (or if such court lacks subject matter jurisdiction, the federal district court of Delaware) will be, to the fullest extent permitted by law, the sole and exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a claim of breach of a fiduciary duty owed by any of our current or former directors, officers, or stockholders to us or our stockholders; any action asserting a claim arising pursuant to any provision of the DGCL, our Amended and Restated Charter, or our Amended and Restated By-laws, or as to which the DGCL confers jurisdiction on the Court of Chancery of Delaware; or any action asserting a claim governed by the internal affairs doctrine, and (ii) the federal district courts of the U.S. will, to the fullest extent permitted by law, be the sole and exclusive forum for any complaint asserting a cause of action arising under the Securities Act.
To the fullest extent permitted by law, this choice-of-forum provision will apply to state and federal law claims, including claims under the federal securities laws (including the Securities Act and the Exchange Act), although our stockholders will not be deemed to have waived our compliance with the federal securities laws and the rules and regulations thereunder. This choice-of-forum provision may increase costs for a stockholder pursuing any such claim, discourage claims, or limit a stockholder’s ability to bring a claim in a judicial forum that such stockholder finds favorable for disputes with us or our directors, officers, other stockholders, or other employees which may discourage such lawsuits even though an action, if successful, might benefit our stockholders. In addition, the courts located in Delaware may reach different judgments or results than would other courts, including courts where a stockholder would otherwise choose to bring the action, and such judgments or results may be more favorable to us than to our stockholders. If a court were to find this choice-of-forum provision inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions which could adversely affect our business, liquidity, financial condition, and/or results of operations. Any person or entity purchasing or otherwise acquiring or holding any interest in shares of our capital stock will be deemed to have notice of and consented to the choice-of-forum provision described above.
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Item 1C. Cybersecurity
Cybersecurity risk management and strategy
We have developed and implemented an enterprise-wide cybersecurity program designed to provide structured and thorough cybersecurity risk management and governance. Our cybersecurity program prioritizes, among other things, prevention of unauthorized access; protection of sensitive information; detection, assessment, and response to cyber threats; and continuous improvement of our cybersecurity measures. We seek to achieve our cybersecurity program priorities through a multi-pronged approach to address cyber threats and incidents that includes implementation of various industry best practices, proactive monitoring of our IT systems, ongoing employee training, and regular risk assessments. We also maintain cyber insurance coverage to help mitigate a portion of the potential costs in the event of covered events.
Our cybersecurity program is aligned with various frameworks for managing cybersecurity risks, such as the National Institute of Standards and Technology Cyber Security Framework for IT systems and International Electrotechnical Commission 62443 which governs cybersecurity for Industrial Control Systems. This program is a component of our ERM function. Our ERM function manages enterprise-wide risk and has established a governance structure in charge of continuous risk management. It has defined risk management processes related specifically to cybersecurity, which include targeted cyber risk reviews and annual cyber risk assessments over our IT and operations. We also have a Cyber and Privacy Risk Committee, led by our CISO, which provides strategic and actionable recommendations on cybersecurity topics, issues, and controls to our executive management team, and a Crisis Management Committee, led by our head of ERM, which manages significant cybersecurity events.
We rely upon both internal and external resources for evaluating and enhancing our cyber posture. At least annually, our information security and internal audit teams conduct comprehensive internal and external penetration testing, supplemented by more frequent Purple-team Tests that are designed to identify critical areas of our technical environment and potential vulnerabilities that may need to be addressed. Our information security team also retains external cybersecurity firms to review and provide feedback on improving our cybersecurity program, including in the areas of data protection, threat and vulnerability management, and end-point protection. We conduct tabletop exercises to prepare for potential cyber incidents and assess our cybersecurity preparedness and processes. We also require annual cybersecurity training by our employees, conduct regular exercises to help our employees recognize phishing emails and other social engineering tactics, and provide various methods for employees to report suspicious activity that may give rise to a cyber incident or threat. Significant results of such testing and reviews are communicated to our executive management team and our Audit Committee, as applicable, and are utilized in our cybersecurity program’s continuous improvement process.
In response to the growing risks associated with third-party service providers, we have established review processes for assessing the technological and information security controls of our third-party suppliers to attempt to identify material cybersecurity risks associated with such providers, their IT systems, and their access to our IT systems that could significantly disrupt our operations. These processes encompass a range of measures, such as pre-engagement cybersecurity due diligence for providers who access our IT systems or information before their engagement, ongoing monitoring and evaluation of our providers, detailed examination of available System and Organization Controls attestation reports, and inclusion of relevant contractual provisions in our agreements with third-party service providers with respect to areas including cyber protections, notifications, auditing, and risk allocation.
We maintain an IRP, which provides a set of core practices and procedures when responding to certain high-risk information security threats and incidents, and a CMP, which is designed to ensure appropriate resources are utilized to provide an effective, timely, and coordinated response in managing crises, including significant cyber threats and incidents. Among other things, the IRP sets forth roles and responsibilities in connection with detecting, assessing, and mitigating cybersecurity incidents and outlines applicable communication and escalation protocols. Under the CMP, our Crisis Management Committee will assume overall responsibility in an effort to
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ensure that the appropriate functions and work streams are mobilized and coordinated to effectively manage any significant cyber events.
As with all large IT systems, we have been a target of cyberattackers and other hacking activities, as have certain of our third-party service providers. While our cybersecurity program is designed to prevent unauthorized access and protect sensitive information, including through continuous improvement of our cybersecurity measures, and we have not experienced any material cyber threats or incidents to date, we can give no assurance that we will be able to prevent, identify, respond to, or mitigate the impact of all cyber threats or incidents. To the extent future cyber threats or incidents result in significant disruptions and costs to our operations, reduce the effectiveness of our internal control over financial reporting, or otherwise substantially impact our business, it could have a material adverse effect on our business, liquidity, financial condition, and/or results of operations. For additional discussion on our cybersecurity risks, refer to Item 1A. “Risk Factors” of this Form 10-K.
Cybersecurity governance
Our Board of Directors oversees the management of risks inherent in the operation of our business, with a focus on the most significant risks that we face, including those related to cybersecurity. The Board of Directors has delegated oversight of cybersecurity, including privacy and information security, as well as enterprise risk management to the Audit Committee. In connection with that oversight responsibility, our CDIO and CISO meet with the Audit Committee on a quarterly basis and provide information and updates on a range of cybersecurity topics which may include our cybersecurity program and governance processes; cyber risk monitoring and management; the status of projects to strengthen our cybersecurity and privacy capabilities; recent significant incidents or threats impacting our operations, industry, or third-party suppliers; and the emerging threat landscape. Our head of ERM also meets with our executive management team and the Audit Committee on a quarterly basis and with the Board of Directors on an annual basis and reports on applicable cyber risk management processes and activities pertinent to the ERM function.
Our enterprise-wide cybersecurity program is managed by a dedicated information security team, including our Cyber and Privacy Risk Committee described above, led by our CISO. Our CISO has more than 25 years of technology experience across various disciplines, including nearly 15 years of experience as a CISO in the financial, manufacturing, and CPG industries. He has led our global information security organization for almost four years. In addition to his employment experience in the cybersecurity field, our CISO has a Master of Business Administration in management and operations and a Bachelor’s Degree in technology management, and he has served on corporate and industry advisory boards related to cybersecurity, all of which have provided him with skills and experience to manage our global information security function. Our CISO reports to our CDIO, who meets regularly with other members of our executive team and provides relevant updates on our cybersecurity program.
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Item 2. Properties
We operate breweries, wineries, distilleries, 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 principal physical 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. We plan to relocate our corporate headquarters to a leased office in Rochester, New York in June 2024. 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 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 demand. Within the Wine and Spirits segment, we have adequate capacity to meet our needs for the foreseeable future. As of February 29, 2024, our principal physical properties by segment, all of which are owned, consist of:
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| Beer | | | Wine and Spirits |
|
Breweries •Nava Brewery in Nava •Obregon Brewery in Obregon
Production facility •Glass Plant in Nava
| | Wineries •Gonzales Winery in Gonzales, California •Mission Bell Winery in Madera, California •Woodbridge Winery in Acampo, California •Kim Crawford Winery in Marlborough, New Zealand
Warehouse, distribution, and other production facilities •Lodi Distribution Center in Lodi, California •Pontassieve Winery in Florence, Italy |
Within our Wine and Spirits segment, as of February 29, 2024, we owned, leased, or had interests in approximately 10,100 acres of vineyards in the U.S., 6,700 acres of vineyards in New Zealand, and 1,400 acres of vineyards in Italy.
Item 3. Legal Proceedings
For information regarding Legal Proceedings, see Risk Factors and Note 16.
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I 32 |
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PART II | OTHER KEY INFORMATION | Table of Contents |
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our Class A Stock trades on the New York Stock Exchange under the symbol STZ. There is no public trading market for our Class 1 Stock. At April 16, 2024, the number of holders of record of our Class A Stock and Class 1 Stock were 483 and 17, respectively.
For information regarding dividends and share repurchase programs, see (i) MD&A and (ii) Note 17.
For information on securities authorized for issuance under our equity compensation plans, see Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters under Item 12. of this Form 10-K.
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I 33 |
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PART II | ITEM 7. MD&A | Table of Contents |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
We have elected to omit discussion on the earliest of the three years covered by the consolidated financial statements presented. Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Liquidity and Capital Resources” located in our Form 10-K for the fiscal year ended February 28, 2023, filed on April 20, 2023, for reference to discussion of the fiscal year ended February 28, 2022, the earliest of the three fiscal years presented. This MD&A, which should be read in conjunction with our Financial Statements, 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 a recent development, and significant divestitures, acquisitions, and investments.
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 significant transactions and other items that affect the comparability of the results is provided.
Liquidity and capital resources. This section provides an analysis of our cash flows, outstanding debt, liquidity position, and commitments. Included in the analysis of outstanding debt is a discussion of the financial capacity available to fund our ongoing operations and future commitments, as well as a discussion of other financing arrangements.
Critical accounting policies and estimates. This section identifies 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.
Overview
Effective May 31, 2023, we changed our internal management financial reporting to consist of two business divisions: (i) Beer and (ii) Wine and Spirits and we now report our operating results in three segments: (i) Beer, (ii) Wine and Spirits, and (iii) Corporate Operations and Other following the removal of the Canopy operating segment. For additional information, refer to Note 22.
In the Beer segment, our portfolio consists of high-end imported beer brands and ABAs. We have an exclusive perpetual brand license to produce our Mexican beer portfolio and to import, market, and sell such portfolio in the U.S. In the Wine and Spirits segment, we sell a portfolio that includes higher-end wine brands complemented by certain higher-end spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of corporate development, corporate finance, corporate strategy, executive management, growth, human resources, internal audit, investor relations, IT, legal, and public relations, as well as our Canopy investment and investments made through our corporate venture capital function. All costs included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are, therefore, not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in our CODM’s evaluation of the operating income (loss) performance of the other reportable segments. The business segments reflect how our operations are managed, how resources are allocated, how operating performance is evaluated by senior management, and the structure of our internal financial reporting.
Strategy
Our business strategy for the Beer segment focuses on upholding our leadership position in the U.S. beer market, including the high-end segment, and continuing to grow our high-end imported beer brands through
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maintenance of leading margins, enhancements to our results of operations and operating cash flow, and exploring new avenues for growth. This includes continued focus on growing our beer portfolio in the U.S. through expanding distribution for key brands, including within the 3-tier eCommerce channel, as well as investing in the next increment of modular capacity additions required to sustain our momentum. We continue to focus on consumer-led innovation by creating new line extensions behind celebrated, trusted brands and package formats, as well as new to world brands, that are intended to meet emerging needs.
Expansion, optimization, and/or construction activities continue under our Mexico Beer Projects to align with our anticipated future growth expectations, and we expect to spend approximately $3 billion over Fiscal 2025 through Fiscal 2028 on these activities. See “Capital expenditures” below. Additionally, we are pursuing the sale of the remaining assets at the canceled Mexicali Brewery after exploring various options; however, we may not be successful in completing any such sale or obtaining other forms of recovery.
Our business strategy for the Wine and Spirits segment continues to focus on higher-end brands, improving margins, and creating operating efficiencies. We have reshaped our portfolio primarily through an enhanced focus on higher-margin, higher-growth wine and spirits brands. Our business is organized into two distinct commercial teams, one focused on our fine wine and craft spirits brands and the other focused on our mainstream and premium brands. While each team has its own distinct strategy, both remain aligned to the goal of accelerating performance by growing organic net sales and expanding margins. In addition, we are advancing our aim to become a global, omni-channel competitor in line with consumer preferences. Our business continues to progressively expand into DTC channels (including hospitality), 3-tier eCommerce, and international markets, while remaining a major supplier in U.S. 3-tier brick-and-mortar distribution. In markets where it is feasible, we entered into a contractual arrangement with Southern Glazer’s Wine and Spirits to consolidate our U.S. distribution in order to obtain dedicated distributor selling resources which focus on our U.S. wine and spirits portfolio to drive organic growth. This distributor currently represents about 70% of our branded wine and spirits volume in the U.S.
Marketing, sales, and distribution of our products are primarily managed on a geographic basis allowing us to leverage leading market positions. In addition, market dynamics and consumer trends vary across each of our markets. Within our primary market in the U.S., we offer a range of beverage alcohol products across the imported beer, ABA, and branded wine and spirits categories, with generally separate distribution networks utilized for (i) our beer portfolio and (ii) our wine and spirits portfolio. The environment for our products is competitive in each of our markets.
We 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 as well as our target net leverage ratio and dividend payout ratio; investing to support the growth of our business; and delivering additional returns to stockholders through periodic share repurchases. Our results of operations and financial condition have been affected by inflation, changing prices, reductions in discretionary income of consumers available to purchase our products, and shifting consumer behaviors, as well as other unfavorable global and regional economic conditions, global supply chain disruptions and constraints, and geopolitical events. We expect some or all of these impacts to continue into Fiscal 2025 which could have a material impact on our results of operations. We intend to continue to monitor the inflationary environment and the impact on the consumer when we consider passing along rising costs through further selling price increases, subject to normal competitive conditions. In addition, we are continuing our commodity and foreign exchange hedging programs while also seeking to identify additional cost savings initiatives. However, there can be no assurance that we will be able to fully mitigate rising costs through increased selling prices and/or cost savings initiatives. Furthermore, to the extent climate-related severe weather events, such as droughts, floods, wildfires, extreme heat, and/or late frosts, continue to occur or accelerate in future periods, it could have a material impact on our results of operations and financial condition.
Recent Development
Conversion of Canopy common stock ownership and exchange of investment into Exchangeable Shares
In April 2024, the Canopy Amendment was approved by Canopy’s shareholders. We subsequently elected to convert our 17.1 million Canopy common shares into Exchangeable Shares on a one-for-one basis. Additionally,
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we exchanged our 2023 Canopy Promissory Note for 9.1 million Exchangeable Shares and forgave all accrued but unpaid interest together with the remaining principal amount of the note. For additional information, refer to Note 10.
Divestitures, acquisitions, and investments
Beer segment
Craft Beer Divestitures
In June 2023, we completed the Craft Beer Divestitures. Accordingly, our consolidated results of operations include the results of operations of such craft beer brands through the dates of these divestitures. The Craft Beer Divestitures are consistent with our strategic focus on continuing to grow our high-end imported beer brands through maintenance of leading margins and enhancements to our results of operations.
Daleville Facility
In May 2023, we sold the Daleville Facility in connection with our decision to exit the craft beer business.
Wine and Spirits segment
Wine Divestiture
In October 2022, we sold certain of our mainstream and premium wine brands and related inventory. Accordingly, our consolidated results of operations include the results of operations of such mainstream and premium wine brands through the date of divestiture. We received cash proceeds of $96.7 million from the Wine Divestiture that were utilized primarily to reduce outstanding borrowings. We recognized a $15.0 million net gain on the sale of business for Fiscal 2023. This gain was included in selling, general, and administrative expenses within our consolidated results.
Austin Cocktails acquisition
In April 2022, we acquired the remaining 73% ownership interest in Austin Cocktails, which included a portfolio of small batch, RTD cocktails. This transaction primarily included the acquisition of goodwill and a trademark. The results of operations of Austin Cocktails are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Lingua Franca acquisition
In March 2022, we acquired the Lingua Franca business, including a collection of Oregon-based luxury wines, a vineyard, and a production facility. This transaction also included the acquisition of a trademark and inventory. The results of operations of Lingua Franca are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.
Our Wine and Spirits segment divestiture and acquisitions support our strategic focus on consumer-led premiumization trends and meeting the evolving needs of our consumers.
Corporate Operations and Other segment
Corporate ventures
As of August 31, 2023, we evaluated certain equity method investments, made through our corporate venture capital function, and determined there were other-than-temporary impairments due to business underperformance. Investments with a carrying value of $14.9 million were written down to an estimated fair value of $2.6 million, resulting in an impairment of $12.3 million. This loss from impairment was included in income (loss) from unconsolidated investments within our consolidated results for Fiscal 2024. In October 2023, we exited one of these equity method investments in exchange for a note receivable.
Canopy investment
We have an investment in Canopy, a North American cannabis and CPG company providing medical and adult-use cannabis products, which expands our portfolio into adjacent categories.
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Canopy Equity Method Investment —
We evaluated the Canopy Equity Method Investment as of May 31, 2023, and determined there was an other-than-temporary impairment. Our conclusion was based primarily on several contributing factors, including: (i) the fair value being less than the carrying value and the uncertainty surrounding Canopy’s stock price recovering in the near-term, (ii) Canopy recorded significant costs in its fourth quarter of fiscal 2023 results designed to align its Canadian cannabis operations and resources in response to continued unfavorable market trends, (iii) the substantial doubt about Canopy’s ability to continue as a going concern, as disclosed by Canopy, and (iv) Canopy’s identification of material misstatements in certain of its previously reported financial results related to sales in its BioSteel reporting unit that were accounted for incorrectly, including the recording of a goodwill impairment during its restated second quarter of fiscal 2023. As a result, the Canopy Equity Method Investment with a carrying value of $266.2 million was written down to its estimated fair value of $142.7 million, resulting in an impairment of $123.5 million. This loss from impairment was included in income (loss) from unconsolidated investments within our consolidated results for Fiscal 2024.
Additionally, we evaluated the Canopy Equity Method Investment as of August 31, 2022, and determined that there was an other-than-temporary impairment. Our conclusion was based on several contributing factors, including: (i) the period of time for which the fair value had been less than the carrying value and the uncertainty surrounding Canopy’s stock price recovering in the near-term, (ii) Canopy recording a significant impairment of goodwill related to its cannabis operations during its first quarter of fiscal 2023, and (iii) the uncertainty of U.S. federal cannabis permissibility. As a result, the Canopy Equity Method Investment with a carrying value of $1,695.1 million was written down to its estimated fair value of $634.8 million, resulting in an impairment of $1,060.3 million. This loss from impairment was included in income (loss) from unconsolidated investments within our consolidated results for Fiscal 2023.
Other Canopy investments —
In July 2022, we received 29.2 million common shares of Canopy following the exchange of C$100.0 million principal amount of our Canopy Debt Securities. In April 2023, we extended the maturity of the remaining C$100.0 million principal amount of our Canopy Debt Securities by exchanging them for the 2023 Canopy Promissory Note. The fair value of the Canopy Debt Securities was $69.6 million as of February 28, 2023. As of May 31, 2023, we determined that the 2023 Canopy Promissory Note did not have future economic value and, accordingly, the fair value was reduced to zero. Additionally, on November 1, 2023, the initial tranche of the November 2018 Canopy Warrants expired in accordance with its terms. The remaining tranches of the November 2018 Canopy Warrants were conditioned on the exercise, in full, of the expired warrants. As such, there are no longer any outstanding November 2018 Canopy Warrants.
For additional information on these divestitures, acquisitions, and investments, refer to Notes 2, 5, 7, and 10.
Results of Operations
Financial Highlights
References to organic throughout the following discussion exclude the impact of the Wine Divestiture, as appropriate.
Fiscal 2024 compared with Fiscal 2023
•Our results of operations were primarily impacted by (i) lower impairment and other losses related to our investment in Canopy as compared with Fiscal 2023 and (ii) improvements within the Beer segment driven by 7.4% shipment volume growth and our successful execution of cost savings initiatives, partially offset by a decline in performance within the Wine and Spirits segment.
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•Net sales increased 5% largely due to an increase in Beer net sales driven primarily by shipment volume growth and favorable impact from pricing, partially offset by a decline in Wine and Spirits net sales driven primarily by a decrease in branded shipment volume.
•Operating income increased 11% largely due to the improvements within (i) the Beer segment as shipment volume outpaced the growth of cost of product sold, driven by the successful execution of cost savings initiatives, (ii) the Wine and Spirits segment driven by lower transportation and warehousing costs, and (iii) the Corporate Operations and Other segment from lower Digital Business Acceleration investments as compared to Fiscal 2023, partially offset by the decline in branded wine and spirits shipment volume.
•Net income attributable to CBI and diluted net income per common share attributable to CBI increased largely due to the items discussed above.
Comparable Adjustments
Management excludes items that affect comparability from its evaluation of the results of each operating segment as these Comparable Adjustments are not reflective of core operations of the segments. Segment operating performance and the incentive compensation of segment management are evaluated based on core segment operating income (loss) which does not include the impact of these Comparable Adjustments.
As more fully described herein and in the related Notes, the Comparable Adjustments that impacted comparability in our segment results for each period are as follows:
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| Fiscal 2024 | | Fiscal 2023 | | |
(in millions) | | | | | |
Cost of product sold | | | | | |
Net gain (loss) on undesignated commodity derivative contracts | $ | (44.2) | | | $ | (15.0) | | | |
Flow through of inventory step-up | (3.6) | | | (4.5) | | | |
Settlements of undesignated commodity derivative contracts | 15.0 | | | (76.7) | | | |
Strategic business development costs | — | | | (1.2) | | | |
Net flow through of reserved inventory | — | | | 1.2 | | | |
Recovery of (loss on) inventory write-down | — | | | 0.2 | | | |
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Comparable Adjustments, Cost of product sold | (32.8) | | | (96.0) | | | |
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Selling, general, and administrative expenses | | | | | |
Restructuring and other strategic business development costs | (46.3) | | | (9.9) | | | |
Transition services agreements activity | (24.9) | | | (20.5) | | | |
Gain (loss) on sale of business | (15.1) | | | 15.0 | | | |
Transaction, integration, and other acquisition-related costs | (0.6) | | | (1.4) | | | |
Insurance recoveries | 55.1 | | | 5.2 | | | |
Costs associated with the Reclassification | 0.2 | | | (37.8) | | | |
Impairments of assets | — | | | (66.5) | | | |
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Other gains (losses) | (11.4) | | | 18.1 | | | |
Comparable Adjustments, Selling, general, and administrative expenses | (43.0) | | | (97.8) | | | |
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Comparable Adjustments, Operating income (loss) | $ | (75.8) | | | $ | (193.8) | | | |
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Comparable Adjustments, Income (loss) from unconsolidated investments | $ | (478.0) | | | $ | (1,907.7) | | | |
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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.
Flow through of 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.
Strategic business development costs
We recognized costs in connection with certain activities which are intended to streamline, increase efficiencies, and reduce our cost structure within the Wine and Spirits segment.
Net flow through of reserved inventory
We sold reserved inventory previously written down following the 2020 U.S. West Coast wildfires.
Recovery of (loss on) inventory write-down
We recognized a gain from a change in estimate on reserved bulk wine inventory and certain grapes as a result of smoke damage sustained during the 2020 U.S. West Coast wildfires.
Selling, general, and administrative expenses
Restructuring and other strategic business development costs
We recognized costs primarily in connection with certain activities which are intended to streamline, increase efficiencies, and reduce our cost structure.
Transition services agreements activity
We recognized costs in connection with transition services agreements related to the previous sale of a portion of our wine and spirits business.
Gain (loss) on sale of business
We recognized a net gain (loss) primarily from (i) the Craft Beer Divestitures and the sale of the Daleville Facility (Fiscal 2024) and (ii) the completion of the Wine Divestiture (Fiscal 2023). For additional information, refer to Notes 2 and 5.
Transaction, integration, and other acquisition-related costs
We recognized costs in connection with our investments, acquisitions, and divestitures.
Insurance recoveries
We recognized business interruption and other recoveries largely related to severe winter weather events. For additional information on the Fiscal 2024 recoveries, refer to Note 16.
Costs associated with the Reclassification
We recognized costs primarily related to professional and consulting fees, printing and mailing the associated proxy statement/prospectus, all filing and other fees paid to the SEC, and the acceleration of certain commitments in connection with the Reclassification. For additional information, refer to Note 17.
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Impairments of assets
We recognized trademark and other long-lived asset impairment losses in connection with certain continued negative trends within our previously-owned craft beer business. For additional information, refer to Notes 5 and 7.
Other gains (losses)
We recognized other gains (losses) primarily from (i) a net loss from changes in the indemnification of liabilities associated with prior period divestitures (Fiscal 2024), (ii) net decreases in estimated fair values of contingent liabilities associated with prior period acquisitions, and (iii) a gain recognized on the remeasurement of our previously held equity interest to the acquisition-date fair value (Fiscal 2023).
Income (loss) from unconsolidated investments
We recognized income (loss) primarily from (i) comparable adjustments to equity in losses from Canopy’s results, (ii) impairments of our Canopy Equity Method Investment, (iii) unrealized net losses from the changes in fair value of our securities measured at fair value, and (iv) impairments of certain other equity method investments (Fiscal 2024). For additional information, refer to Notes 7 and 10.
Business Segments
Net sales
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| Fiscal 2024 | | Fiscal 2023 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 8,162.6 | | | $ | 7,465.0 | | | $ | 697.6 | | | 9 | % |
Wine and Spirits: | | | | | | | |
Wine | 1,552.1 | | | 1,722.7 | | | (170.6) | | | (10 | %) |
Spirits | 247.1 | | | 264.9 | | | (17.8) | | | (7 | %) |
Total Wine and Spirits | 1,799.2 | | | 1,987.6 | | | (188.4) | | | (9 | %) |
Consolidated net sales | $ | 9,961.8 | | | $ | 9,452.6 | | | $ | 509.2 | | | 5 | % |
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| Beer segment | | | | | | | |
| Fiscal 2024 | | Fiscal 2023 | | Dollar Change | | Percent Change |
(in millions, branded product, 24-pack, 12-ounce case equivalents) | | | | | | |
Net sales | $ | 8,162.6 | | | $ | 7,465.0 | | | $ | 697.6 | | | 9 | % |
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Shipments | 418.1 | | | 389.2 | | | | | 7.4 | % |
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Depletions | | | | | | | 7.5 | % |
The increase in Beer net sales is largely due to (i) $564.5 million of shipment volume growth, which benefited from continued consumer demand for our Mexican beer portfolio, and (ii) $147.6 million of favorable impact from pricing in select markets, partially offset by an $11.5 million decline in net sales from the Craft Beer Divestitures.
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| Wine and Spirits segment | | | | | | | |
| Fiscal 2024 | | Fiscal 2023 | | Dollar Change | | Percent Change |
(in millions, branded product, 9-liter case equivalents) | | | | | | |
Net sales | $ | 1,799.2 | | | $ | 1,987.6 | | | $ | (188.4) | | | (9 | %) |
| | | | | | | |
Shipments | | | | | | | |
Total | 23.8 | | | 27.1 | | | | | (12.2 | %) |
Organic (1) | 23.8 | | | 26.5 | | | | | (10.2 | %) |
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U.S. Wholesale | 21.0 | | | 23.5 | | | | | (10.6 | %) |
Organic U.S. Wholesale (1) | 21.0 | | | 23.1 | | | | | (9.1 | %) |
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Depletions (1) | | | | | | | (7.1 | %) |
(1)Includes adjustments to remove volumes associated with the Wine Divestiture for the period March 1, 2022, through October 5, 2022.
The decrease in Wine and Spirits net sales is due to a $149.9 million decrease in organic net sales and $38.5 million from the Wine Divestiture. The decrease in organic net sales is driven by a $175.2 million decrease in branded wine and spirits shipment volume, partially offset by (i) $21.4 million of favorable impact from pricing and (ii) $4.3 million of favorable product mix, driven by consumer-led premiumization. The decrease in branded wine and spirits shipment volume is primarily attributable to our U.S. wholesale market, driven by declines in both the overall wine market and in our mainstream and premium brands. The favorable impact from pricing was driven by price increases, partially offset by lower contractual distributor payments as compared to Fiscal 2023. While we expect the unfavorable U.S. wholesale wine market trends to continue in Fiscal 2025, we have identified key actions to improve marketing execution and sales performance.
Gross profit
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2024 | | Fiscal 2023 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 4,214.2 | | | $ | 3,937.8 | | | $ | 276.4 | | | 7 | % |
Wine and Spirits | 836.1 | | | 927.2 | | | (91.1) | | | (10 | %) |
Comparable Adjustments | (32.8) | | | (96.0) | | | 63.2 | | | NM |
Consolidated gross profit | $ | 5,017.5 | | | $ | 4,769.0 | | | $ | 248.5 | | | 5 | % |
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| The increase in Beer gross profit is primarily due to (i) $299.9 million of shipment volume growth and (ii) the $147.6 million of favorable impact from pricing, partially offset by (i) $163.7 million of higher cost of product sold and (ii) $12.0 million of unfavorable product mix. The higher cost of product sold is primarily due to (i) $113.8 million of higher material costs, including malt, aluminum, glass, and starch, driven by inflation and global supply chain constraints, (ii) $28.4 million of higher depreciation resulting from the Mexico Beer Projects, (iii) $21.6 million of costs related to the write-off of a value-added tax receivable, (iv) $13.7 million of costs related to a voluntary product recall of select kegs for quality assurance, and (v) a $9.6 million increase in brewery costs, including compensation and benefits and IT expenses, partially offset by (i) $21.0 million of decreased transportation costs and (ii) $15.3 million of favorable fixed cost absorption related to increased production levels as compared to Fiscal 2023. To partially offset the increases in cost of product sold we executed efficiency initiatives focused largely on logistics and procurement that resulted in nearly $205 million of net cost savings for Fiscal 2024. |
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PART II | ITEM 7. MD&A | Table of Contents |
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| The decrease in Wine and Spirits gross profit is due to a $68.4 million decrease in organic gross profit and $22.7 million from the Wine Divestiture. The decrease in organic gross profit is attributable to (i) an $88.0 million decrease in branded wine and spirits shipment volume, (ii) $31.7 million of unfavorable channel mix led by lower-margin, non-branded net sales, and (iii) an $11.2 million decrease in non-branded gross profit on net sales, partially offset by (i) $39.9 million of lower cost of product sold and (ii) the $21.4 million favorable impact from pricing. The decrease in cost of product sold was largely attributable to (i) $31.3 million of decreased transportation and warehousing costs, including ocean freight shipping, (ii) $13.1 million of cost savings initiatives, primarily resulting in lower grape costs, as well as lower materials and packaging costs, driven by our sustainable packaging projects, and (iii) a decrease in production costs, including lower compensation and benefits. |
Gross profit as a percent of net sales remained relatively flat at 50.4% for Fiscal 2024 compared with 50.5% for Fiscal 2023. This was driven by (i) 135 basis points of rate decline from higher cost of product sold within the Beer segment, driven by the increase in material costs, and (ii) approximately 30 basis points of rate decline resulting from unfavorable channel mix within the Wine and Spirits segment, offset by (i) approximately 60 basis points of favorable impact from Beer pricing in select markets, (ii) a favorable change of approximately 50 basis points in Comparable Adjustments, and (iii) approximately 35 basis points of rate growth from lower cost of product sold within the Wine and Spirits segment.
Selling, general, and administrative expenses
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| Fiscal 2024 | | Fiscal 2023 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 1,119.8 | | | $ | 1,076.3 | | | $ | 43.5 | | | 4 | % |
Wine and Spirits | 437.4 | | | 474.1 | | | (36.7) | | | (8 | %) |
Corporate Operations and Other | 247.6 | | | 277.9 | | | (30.3) | | | (11 | %) |
Comparable Adjustments | 43.0 | | | 97.8 | | | (54.8) | | | NM |
Consolidated selling, general, and administrative expenses | $ | 1,847.8 | | | $ | 1,926.1 | | | $ | (78.3) | | | (4 | %) |
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| The increase in Beer selling, general, and administrative expenses is largely driven by $31.1 million and $11.8 million of increased general and administrative expenses and marketing spend, respectively. The increase in general and administrative expenses was driven primarily by (i) unfavorable foreign currency impact and (ii) higher compensation and benefits, primarily related to incremental headcount to support the demand for our beer portfolio, partially offset by (i) the Craft Beer Divestitures, (ii) favorability from strategic asset relocation in Fiscal 2023, and (iii) decreased legal expenses as compared to Fiscal 2023. The increase in marketing spend is primarily driven by ongoing media investments to build awareness of our high-end imported beer brands, partially offset by decreased spend as a result of the Craft Beer Divestitures. Marketing as a percentage of net sales was 8.4% for Fiscal 2024 as compared to 9.1% for Fiscal 2023. |
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| The decrease in Wine and Spirits selling, general, and administrative expenses is largely due to $19.0 million and $17.0 million of decreased marketing spend and general and administrative expenses, respectively. The decrease in marketing spend is primarily driven by less planned media investments for our mainstream and premium brands as compared to Fiscal 2023. The decrease in general and administrative expenses is primarily due to lower incentive accruals and decreased consulting services both as compared to Fiscal 2023, partially offset by higher litigation expenses. |
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| The decrease in Corporate Operations and Other selling, general, and administrative expenses is largely due to an approximately $44 million reduction in third-party services, driven by lower Digital Business Acceleration investments, partially offset by an approximate $7 million increase in IT project expenses as compared to Fiscal 2023. Compensation and benefits remained relatively flat as incremental headcount to support the Digital Business Acceleration initiative was largely offset by favorability from the November 2022 Reclassification. |
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I 42 |
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PART II | ITEM 7. MD&A | Table of Contents |
Selling, general, and administrative expenses as a percent of net sales decreased to 18.5% for Fiscal 2024 as compared with 20.4% for Fiscal 2023. The decrease is driven largely by (i) approximately 95 basis points of rate decline as the increase in Beer net sales exceeded the increase in selling, general, and administrative expenses, (ii) a favorable change in Comparable Adjustments, contributing approximately 60 basis points of rate decline, and (iii) approximately 30 basis points of rate decline from a decrease in the Corporate Operations and Other segment’s selling, general, and administrative expenses.
Operating income (loss)
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| Fiscal 2024 | | Fiscal 2023 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Beer | $ | 3,094.4 | | | $ | 2,861.5 | | | $ | 232.9 | | | 8 | % |
Wine and Spirits | 398.7 | | | 453.1 | | | (54.4) | | | (12 | %) |
Corporate Operations and Other | (247.6) | | | (277.9) | | | 30.3 | | | 11 | % |
Comparable Adjustments | (75.8) | | | (193.8) | | | 118.0 | | | NM |
Consolidated operating income (loss) | $ | 3,169.7 | | | $ | 2,842.9 | | | $ | 326.8 | | | 11 | % |
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| The increase in Beer operating income is largely attributable to the shipment volume growth for our beer portfolio, the cost savings initiatives, and the favorable pricing impact, partially offset by higher material costs. |
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| The decrease in Wine and Spirits operating income is largely attributable to the decline in branded wine and spirits shipment volume, unfavorable channel mix, and the Wine Divestiture, partially offset by the lower transportation and warehousing costs, the favorable pricing impact, decreased selling, general, and administrative expenses, and the cost savings initiatives, as described above. |
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| As previously discussed, the Corporate Operations and Other decrease in operating loss is largely due to the lower third-party Digital Business Acceleration investments. |
Income (loss) from unconsolidated investments
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| Fiscal 2024 | | Fiscal 2023 | | Dollar Change | | Percent Change |
(in millions) | | | | | | | |
Impairment of equity method investments | $ | (136.1) | | | $ | (1,060.3) | | | $ | 924.2 | | | 87 | % |
Unrealized net gain (loss) on securities measured at fair value | (85.4) | | | (45.9) | | | (39.5) | | | (86 | %) |
Equity in earnings (losses) from Canopy and related activities | (321.3) | | | (949.3) | | | 628.0 | | | 66 | % |
Equity in earnings (losses) from other equity method investees and related activities | 30.7 | | | 19.1 | | | 11.6 | | | 61 | % |
Net gain (loss) on sale of unconsolidated investment | 0.3 | | | — | | | 0.3 | | | NM |
| $ | (511.8) | | | $ | (2,036.4) | | | $ | 1,524.6 | | | 75 | % |
Interest expense
Interest expense increased to $435.4 million for Fiscal 2024 as compared to $398.7 million for Fiscal 2023. This increase of $36.7 million, or 9%, is due to approximately $675 million of higher average borrowings and approximately 20 basis points of higher weighted average interest rates, partially offset by an increase in capitalized interest in connection with the Mexico Beer Projects. The higher average borrowings and weighted average interest rates are largely attributable to funding the aggregate cash payment to holders of Class B Stock in connection with the Reclassification. For additional information, refer to Notes 12 and 17.
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I 43 |
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PART II | ITEM 7. MD&A | Table of Contents |
Loss on extinguishment of debt
Loss on extinguishment of debt primarily consists of a premium payment and the write-off of debt issuance costs in connection with the tender offers of our 3.20% February 2018 Senior Notes and 4.25% May 2013 Senior Notes and make-whole payments in connection with the early redemption of those notes (Fiscal 2023).
(Provision for) benefit from income taxes
The provision for income taxes increased to $456.6 million for Fiscal 2024 from $422.1 million for Fiscal 2023. Our effective tax rate for Fiscal 2024 was 20.6% as compared with 110.0% for Fiscal 2023. In comparison to prior year, our income taxes were impacted primarily by:
•an increase in the valuation allowance related to our investment in Canopy, driven by the Canopy Equity Method Investment impairment recognized in Fiscal 2023; offset by
•a net income tax benefit recognized from the realization of tax losses related to a prior period divestiture recognized in Fiscal 2023; and
•the effective tax rates applicable to our foreign businesses.
For additional information, refer to Note 13.
The OECD introduced a framework under Pillar Two which includes a global minimum tax rate of 15%. Many jurisdictions in which we do business have started to enact laws implementing Pillar Two. We are monitoring these developments and currently do not believe these rules will have a material impact on our financial condition and/or consolidated results for Fiscal 2025.
We expect our reported effective tax rate for Fiscal 2025 to be in the range of 17.5% to 19.5%. This range does not reflect any tax impact associated with our Canopy investment and related activities.
Net income (loss) attributable to CBI
Net income (loss) attributable to CBI increased to $1,727.4 million for Fiscal 2024 from $(71.0) million for Fiscal 2023. This increase of $1,798.4 million, is primarily attributable to (i) lower impairment and other losses related to our investment in Canopy and (ii) the Fiscal 2024 improvements within the Beer segment as shipment volume growth exceeded the growth of cost of product sold, driven by the successful execution of cost savings initiatives, partially offset by the decline in performance within the Wine and Spirits segment.
Liquidity and Capital Resources
General
Our primary source of liquidity has been cash flow from operating activities. Our ability to consistently generate robust cash flow from our operations is one of our most significant financial strengths; it enables us to invest in our people and our brands, make capital investments and strategic acquisitions, provide a cash dividend program, and from time-to-time, repurchase shares of our common stock. Our largest use of cash in our operations is for purchasing and carrying inventories and carrying seasonal accounts receivable. Historically, we have used this cash flow to repay our short-term borrowings and fund capital expenditures. Additionally, our commercial paper program is used to fund our short-term borrowing requirements and to maintain our access to the capital markets. We use our short-term borrowings, including our commercial paper program, to support our working capital requirements and capital expenditures, among other things.
We seek to maintain adequate liquidity to meet working capital requirements, fund capital expenditures, and repay scheduled principal and interest payments on debt. Absent deterioration of market conditions, we believe that cash flows from operating and financing activities will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments, periodic share repurchases, and anticipated capital expenditure requirements for both our short-term and long-term capital needs.
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I 44 |
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PART II | ITEM 7. MD&A | Table of Contents |
We have an agreement with a financial institution for payment services and to facilitate a voluntary supply chain finance program through this participating financial institution. The program is available to certain of our suppliers allowing them the option to manage their cash flow. We are not a party to the agreements between the participating financial institution and the suppliers in connection with the program. Our rights and obligations to our suppliers, including amounts due and scheduled payment terms, are not impacted. For additional information, refer to Note 16.
Cash Flows
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| Fiscal 2024 | | Fiscal 2023 | | Dollar Change |
(in millions) | | | | | |
Net cash provided by (used in): | | | | | |
Operating activities | $ | 2,780.0 | | | $ | 2,756.9 | | | $ | 23.1 | |
Investing activities | (1,285.9) | | | (999.4) | | | (286.5) | |
Financing activities | (1,474.6) | | | (1,819.9) | | | 345.3 | |
Effect of exchange rate changes on cash and cash equivalents | (0.6) | | | (3.5) | | | 2.9 | |
Net increase (decrease) in cash and cash equivalents | $ | 18.9 | | | $ | (65.9) | | | $ | 84.8 | |
Operating activities
The increase in net cash provided by (used in) operating activities consists of:
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| Fiscal 2024 | | Fiscal 2023 | | Dollar Change |
(in millions) | | | | | |
Net income (loss) | $ | 1,765.2 | | | $ | (38.5) | | | $ | 1,803.7 | |
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Deferred tax provision (benefit) | 147.9 | | | 207.8 | | | (59.9) | |
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Equity in (earnings) losses of equity method investees and related activities, net of distributed earnings | 321.2 | | | 971.8 | | | (650.6) | |
Impairment of equity method investments | 136.1 | | | 1,060.3 | | | (924.2) | |
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Other non-cash adjustments | 697.4 | | | 830.0 | | | (132.6) | |
Change in operating assets and liabilities, net of effects from purchase and sale of business | (287.8) | | | (274.5) | | | (13.3) | |
Net cash provided by (used in) operating activities | $ | 2,780.0 | | | $ | 2,756.9 | | | $ | 23.1 | |
The $13.3 million net change in operating assets and liabilities was driven by an increase in accounts payable for both the Beer and Wine and Spirits segments largely due to the timing of payments. These changes were largely offset by operating cash flow increases for the Beer segment in both (i) inventory levels and (ii) accounts receivable primarily attributable to the timing of collections. Additionally, net cash provided by operating activities was negatively impacted by higher income tax payments in Fiscal 2024 as compared to Fiscal 2023.
Investing activities
Net cash used in investing activities increased to $1,285.9 million for Fiscal 2024 from $999.4 million for Fiscal 2023. This increase of $286.5 million, or 29%, was primarily due to (i) $233.7 million of additional capital expenditures for Fiscal 2024 largely related to the Mexico Beer Projects and (ii) $91.3 million of reduced proceeds from the sale of business, driven by the Wine Divestiture in Fiscal 2023. The increase in net cash used in investing activities was partially offset by a $29.6 million decrease in business acquisitions for Fiscal 2024.
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I 45 |
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PART II | ITEM 7. MD&A | Table of Contents |
Business acquisitions and divestitures consist primarily of the following:
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| | | | Acquisitions | | Divestitures |
Fiscal 2024 | | | | | | |
| | | | •Domaine Curry | | •Craft Beer Divestitures |
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Fiscal 2023 | | | | | | |
| | | | •Lingua Franca | | •Wine Divestiture |
| | | | •Austin Cocktails | | |
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For additional information on these acquisitions and divestitures, refer to Notes 2 and 8.
Financing activities
The decrease in net cash provided by (used in) financing activities consists of:
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| Fiscal 2024 | | Fiscal 2023 | | Dollar Change |
(in millions) | | | | | |
Net proceeds from (payments of) debt, current and long-term, and related activities | $ | (596.9) | | | $ | 1,991.3 | | | $ | (2,588.2) | |
Dividends paid | (653.8) | | | (587.7) | | | (66.1) | |
Purchases of treasury stock | (249.7) | | | (1,700.2) | | | 1,450.5 | |
Net cash provided by stock-based compensation activities | 93.3 | | | 32.0 | | | 61.3 | |
Distributions to noncontrolling interests | (52.6) | | | (55.3) | | | 2.7 | |
Payment of contingent consideration | (14.9) | | | — | | | (14.9) | |
Payment to holders of Class B Stock in connection with the Reclassification | — | | | (1,500.0) | | | 1,500.0 | |
Net cash provided by (used in) financing activities | $ | (1,474.6) | | | $ | (1,819.9) | | | $ | 345.3 | |
Debt
Total debt outstanding as of February 29, 2024, amounted to $11,879.3 million, a decrease of $582.0 million, or 5%, from February 28, 2023. This decrease consisted of:
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| | Debt repayment | | Debt issuance | |
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Constellation Brands, Inc. FY 2024 Form 10-K | #WORTHREACHINGFOR I 46 |
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PART II | ITEM 7. MD&A | Table of Contents |
Bank facilities
In May 2023, we repaid the outstanding three-year term loan facility borrowings under the August 2022 Term Credit Agreement with proceeds from the May 2023 Senior Notes (see “Senior notes” below). In August 2023, we repaid the outstanding five-year term loan facility borrowings under the April 2022 Term Credit Agreement with proceeds from commercial paper borrowings.
Senior notes