STZ 5.31.2014 10Q
Table of Contents

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

FORM 10-Q
(Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     

Commission File Number 001-08495
CONSTELLATION BRANDS, INC.
(Exact name of registrant as specified in its charter)
Delaware
16-0716709
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
 
207 High Point Drive, Building 100, Victor, New York
14564
 
(Address of principal executive offices)
(Zip Code)
 
 
 
 
(585) 678-7100
 
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes ý    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes ý    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨ (Do not check if a smaller reporting company)
Smaller reporting company
¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨    No  ý

The number of shares outstanding with respect to each of the classes of common stock of Constellation Brands, Inc., as of June 30, 2014, is set forth below:
Class
 
Number of Shares Outstanding
Class A Common Stock, par value $.01 per share
 
169,203,304
Class B Common Stock, par value $.01 per share
 
23,402,864
Class 1 Common Stock, par value $.01 per share
 
None


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TABLE OF CONTENTS

 
 



























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

Unless the context otherwise requires, the terms “Company,” “we,” “our,” or “us” refer to Constellation Brands, Inc. and its subsidiaries. Unless otherwise defined herein, refer to the Notes to the Consolidated Financial Statements under Item 1 of this Quarterly Report on Form 10-Q for the definition of capitalized terms used herein.



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PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share data)
(unaudited)
 
May 31,
2014
 
February 28,
2014
ASSETS
 
 
 
CURRENT ASSETS:
 
 
 
Cash and cash investments
$
378.0

 
$
63.9

Accounts receivable, net
651.3

 
626.2

Inventories
1,781.5

 
1,743.8

Prepaid expenses and other
326.4

 
313.3

Total current assets
3,137.2

 
2,747.2

PROPERTY, PLANT AND EQUIPMENT, net
2,157.1

 
2,014.3

GOODWILL
6,153.1

 
6,146.8

INTANGIBLE ASSETS, net
3,229.4

 
3,231.1

OTHER ASSETS, net
165.6

 
162.7

Total assets
$
14,842.4

 
$
14,302.1

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
CURRENT LIABILITIES:
 
 
 
Notes payable to banks
$
235.2

 
$
57.2

Current maturities of long-term debt
614.4

 
590.0

Accounts payable
345.7

 
295.2

Accrued excise taxes
27.5

 
27.7

Other accrued expenses and liabilities
1,031.9

 
1,055.6

Total current liabilities
2,254.7

 
2,025.7

LONG-TERM DEBT, less current maturities
6,345.6

 
6,373.3

DEFERRED INCOME TAXES
795.9

 
762.6

OTHER LIABILITIES
159.2

 
159.2

COMMITMENTS AND CONTINGENCIES (NOTE 12)

 

STOCKHOLDERS’ EQUITY:
 
 
 
Class A Common Stock, $.01 par value- Authorized, 322,000,000 shares; Issued, 248,822,004 shares at May 31, 2014, and 248,264,944 shares at February 28, 2014
2.5

 
2.5

Class B Convertible Common Stock, $.01 par value- Authorized, 30,000,000 shares; Issued, 28,408,664 shares at May 31, 2014, and 28,436,565 shares at February 28, 2014
0.3

 
0.3

Additional paid-in capital
2,157.5

 
2,116.6

Retained earnings
4,644.9

 
4,438.2

Accumulated other comprehensive income
133.4

 
86.0

 
6,938.6

 
6,643.6

Less: Treasury stock –
 
 
 
Class A Common Stock, 79,802,766 shares at May 31, 2014, and 80,225,575 shares at February 28, 2014, at cost
(1,649.4
)
 
(1,660.1
)
Class B Convertible Common Stock, 5,005,800 shares at May 31, 2014, and February 28, 2014, at cost
(2.2
)
 
(2.2
)
 
(1,651.6
)
 
(1,662.3
)
Total stockholders’ equity
5,287.0

 
4,981.3

Total liabilities and stockholders’ equity
$
14,842.4

 
$
14,302.1


The accompanying notes are an integral part of these statements.

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions, except per share data)
(unaudited)
 
For the Three Months
Ended May 31,
 
2014
 
2013
SALES
$
1,687.1

 
$
766.2

Less – excise taxes
(161.1
)
 
(92.8
)
Net sales
1,526.0

 
673.4

COST OF PRODUCT SOLD
(855.9
)
 
(417.3
)
Gross profit
670.1

 
256.1

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
(277.9
)
 
(185.6
)
Operating income
392.2

 
70.5

EQUITY IN EARNINGS OF EQUITY METHOD INVESTEES
0.5

 
66.6

INTEREST EXPENSE, net
(86.4
)
 
(54.8
)
Income before income taxes
306.3

 
82.3

PROVISION FOR INCOME TAXES
(99.6
)
 
(29.4
)
NET INCOME
$
206.7

 
$
52.9

 
 
 
 
COMPREHENSIVE INCOME
$
254.1

 
$
29.4

 
 
 
 
SHARE DATA:
 
 
 
Earnings per common share:
 
 
 
Basic – Class A Common Stock
$
1.09

 
$
0.29

Basic – Class B Convertible Common Stock
$
0.99

 
$
0.26

 
 
 
 
Diluted – Class A Common Stock
$
1.03

 
$
0.27

Diluted – Class B Convertible Common Stock
$
0.95

 
$
0.25

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic – Class A Common Stock
168.158

 
161.729

Basic – Class B Convertible Common Stock
23.415

 
23.499

 
 
 
 
Diluted – Class A Common Stock
200.358

 
194.884

Diluted – Class B Convertible Common Stock
23.415

 
23.499


The accompanying notes are an integral part of these statements.

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
For the Three Months
Ended May 31,
 
2014
 
2013
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income
$
206.7

 
$
52.9

 
 
 
 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Deferred tax provision
39.6

 
21.0

Depreciation of property, plant and equipment
39.0

 
27.5

Stock-based compensation expense
11.7

 
12.8

Amortization of intangible assets
10.5

 
1.5

Amortization of deferred financing costs
2.6

 
1.7

Equity in earnings of equity method investees, net of distributed earnings
0.2

 
(35.7
)
Change in operating assets and liabilities:
 
 
 
Accounts receivable, net
(24.3
)
 
18.2

Inventories
(31.8
)
 
30.7

Prepaid expenses and other current assets
(17.4
)
 
(6.2
)
Accounts payable
32.5

 
(55.1
)
Accrued excise taxes
(0.3
)
 
(1.3
)
Other accrued expenses and liabilities
(44.1
)
 
(78.7
)
Other, net
7.4

 
14.0

Total adjustments
25.6

 
(49.6
)
Net cash provided by operating activities
232.3

 
3.3

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Purchases of property, plant and equipment
(131.4
)
 
(22.0
)
Other investing activities
(4.9
)
 
2.0

Net cash used in investing activities
(136.3
)
 
(20.0
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net proceeds from notes payable
178.1

 
221.1

Excess tax benefits from stock-based payment awards
57.4

 
47.3

Proceeds from exercises of employee stock options
10.8

 
62.4

Payments of minimum tax withholdings on stock-based payment awards
(28.4
)
 
(17.2
)
Principal payments of long-term debt
(4.8
)
 
(4.9
)
Proceeds from issuance of long-term debt

 
1,550.0

Payment of restricted cash upon issuance of long-term debt

 
(1,550.0
)
Payments of financing costs of long-term debt

 
(13.2
)
Net cash provided by financing activities
213.1

 
295.5

 
 
 
 
Effect of exchange rate changes on cash and cash investments
5.0

 
(1.0
)
 
 
 
 
NET INCREASE IN CASH AND CASH INVESTMENTS
314.1

 
277.8

CASH AND CASH INVESTMENTS, beginning of period
63.9

 
331.5

CASH AND CASH INVESTMENTS, end of period
$
378.0

 
$
609.3

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES:
 
 
 
Property, plant and equipment acquired under financing arrangements
$
1.1

 
$
0.1


The accompanying notes are an integral part of these statements.

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CONSTELLATION BRANDS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MAY 31, 2014
(unaudited)

1.
BASIS OF PRESENTATION:

The consolidated financial statements included herein have been prepared by Constellation Brands, Inc. and its subsidiaries (the “Company”), without audit, pursuant to the rules and regulations of the Securities and Exchange Commission applicable to quarterly reporting on Form 10-Q and reflect, in the opinion of the Company, all adjustments necessary to present fairly the financial information for the Company. All such adjustments are of a normal recurring nature. Certain information and footnote disclosures normally included in financial statements, prepared in accordance with generally accepted accounting principles, have been condensed or omitted as permitted by such rules and regulations. These consolidated financial statements and related notes should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2014 (the “2014 Annual Report”). Results of operations for interim periods are not necessarily indicative of annual results.

2.
RECENTLY ADOPTED ACCOUNTING GUIDANCE:

Liabilities –
Effective March 1, 2014, the Company adopted the Financial Accounting Standards Board (“FASB”) guidance for the recognition, measurement and disclosure of certain obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date. The adoption of this guidance on March 1, 2014, did not have a material impact on the Company’s consolidated financial statements.

Foreign currency translation –
Effective March 1, 2014, the Company adopted the FASB amended guidance to clarify the applicable guidance for the release of foreign currency cumulative translation adjustments under generally accepted accounting principles in the U.S. The amended guidance clarifies when cumulative translation adjustments should be released into net income in connection with (i)  the loss of a controlling financial interest in a subsidiary or group of assets within a foreign entity or (ii)  the partial sale of an equity method investment that is a foreign entity. The amended guidance also clarifies the types of events that result in the sale of an investment in a foreign entity. The adoption of this amended guidance on March 1, 2014, did not have a material impact on the Company’s consolidated financial statements.

Income taxes –
Effective March 1, 2014, the Company adopted the FASB amended guidance to clarify the presentation of unrecognized tax benefits when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists as of the reporting date. The adoption of this amended guidance on March 1, 2014, did not have a material impact on the Company’s consolidated financial statements.

3.    ACQUISITION:

Prior to June 7, 2013, Constellation Beers Ltd., an indirect wholly-owned subsidiary of the Company, and Diblo, S.A. de C.V., an entity majority-owned by Grupo Modelo, S.A.B. de C.V. (“Modelo”), each had, directly or indirectly, equal interests in a joint venture, Crown Imports LLC (“Crown Imports”). Crown Imports had the exclusive right to import, market and sell primarily Modelo’s Mexican beer portfolio sold in the U.S. and Guam (the “Mexican Beer Brands”).

On June 7, 2013, the Company acquired (i)  the remaining 50% equity interest in Crown Imports (the “Crown Acquisition”) and (ii)(a)  all of the issued and outstanding equity interests of Compañía Cervecera de Coahuila, S. de R.L. de C.V. (the “Brewery Company”), which owns and operates a brewery located in Nava, Coahuila, Mexico (the “Brewery”), (ii)(b)  all of the issued and outstanding equity interests of Servicios Modelo de Coahuila, S. de R.L. de C.V., which provides personnel and services for the operation and maintenance of the

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Brewery (the “Service Company”), and (ii)(c)  an irrevocable, fully-paid license to produce in Mexico (or worldwide under certain circumstances) and exclusively import, market and sell the Mexican Beer Brands as of the date of acquisition, and certain extensions (all collectively referred to as the “Brewery Purchase”). The business of the Brewery Company and Service Company acquired by the Company is referred to as the “Brewery Business.” The Crown Acquisition and the Brewery Purchase are collectively referred to as the “Beer Business Acquisition.” In connection with the Beer Business Acquisition, the Company is required to build out and expand the Brewery from 10 million hectoliters to a nominal capacity of at least 20 million hectoliters of packaged beer annually by December 31, 2016. In addition, an interim supply agreement and a transition services agreement were entered into in association with the Beer Business Acquisition. The interim supply agreement obligates the supplier to provide Crown Imports with a supply of product not produced by the Brewery and the transition services agreement provides for certain specified services and production materials, both for a specified period of time. The associated agreements provide, among other things, that the United States will have approval rights, in its sole discretion, for amendments or modifications to the associated agreements and the United States will have a right of approval, in its sole discretion, of any extension of the term of the interim supply agreement beyond three years. The aggregate purchase price of $5,226.4 million consists of cash paid at closing of $4,745.0 million, net of cash acquired of $106.8 million, plus the fair value of an additional purchase price for the finalization of the Final EBITDA Amount (as defined in the stock purchase agreement) of $543.3 million, as well as additional estimated cash payments for certain working capital adjustments. The fair value of the additional purchase price related to the Final EBITDA Amount was estimated by discounting future cash flows. During the third quarter of fiscal 2014, the calculation of the Final EBITDA Amount was finalized requiring the Company to make a payment of $558.0 million no later than June 7, 2014, consisting of the additional purchase price of $543.3 million plus imputed interest of $14.7 million.

The aggregate cash paid at closing was financed with:

The proceeds from the issuance of $1,550.0 million aggregate principal amount of May 2013 Senior Notes (as defined in Note 10);
$1,500.0 million in term loans consisting of a $500.0 million European Term A Facility (as defined in Note 10) and a $1,000.0 million European Term B Facility (as defined in Note 10) under the 2013 Credit Agreement (as defined in Note 10);
$675.0 million in term loans under the U.S. Term A-2 Facility (as defined in Note 10) under the 2013 Credit Agreement;
$208.0 million in proceeds of borrowings under the Company’s then existing accounts receivable securitization facility;
$580.0 million in borrowings under the Company’s revolving credit facility under the 2013 Credit Agreement; and
Approximately $232.0 million of cash on hand (inclusive of $13.0 million of borrowings under a subsidiary working capital facility).

Subsequent to May 31, 2014, the Company paid the Final EBITDA Amount of $558.0 million with $150.0 million in borrowings under the Revolving Credit Facility (as defined in Note 10) under the 2014 Credit Agreement (as defined in Note 10), $100.0 million in proceeds of borrowings under the Company’s accounts receivable securitization facilities and $308.0 million of cash on hand.

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


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The aggregate purchase price of the Beer Business Acquisition and the estimated fair value of the Company’s preexisting 50% equity interest in Crown Imports have been allocated to the assets acquired and the liabilities assumed based upon the estimated fair values of each as of the acquisition date. The following table summarizes the allocation of the estimated fair value of the Beer Business Acquisition to the separately identifiable assets acquired and liabilities assumed as of June 7, 2013:
(in millions)
 
Cash
$
106.8

Accounts receivable
193.7

Inventories
243.1

Prepaid expenses and other
103.9

Property, plant and equipment
698.9

Goodwill
3,715.8

Intangible assets
2,403.2

Other assets
0.3

Total assets acquired
7,465.7

Accounts payable
123.2

Accrued excise taxes
14.4

Other accrued expenses and liabilities
72.9

Deferred income taxes
66.4

Other liabilities
10.6

Total liabilities assumed
287.5

Total estimated fair value
7,178.2

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


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

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

The intangible assets are being amortized either on a straight-line basis or an economic consumption basis, which is consistent with the pattern that the economic benefits of the intangible assets are expected to be utilized based upon estimated cash flows generated from such assets. Goodwill associated with the acquisition is primarily attributable to the distribution of the Mexican Beer Brands in the U.S. as well as complete control over the sourcing of product into the U.S. Approximately $1,647.0 million of the goodwill recognized is expected to be deductible for income tax purposes.


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The Company has recognized transaction, integration and other acquisition-related costs of $82.8 million through May 31, 2014. For the three months ended May 31, 2014, and May 31, 2013, the Company has recognized transaction, integration and other acquisition-related costs of $4.5 million and $27.6 million, respectively. These costs are included in selling, general and administrative expenses on the Company’s Consolidated Statements of Comprehensive Income.

The results of operations of the Beer Business Acquisition is reported in the Company’s Beer segment and has been included in the consolidated results of operations of the Company from the date of acquisition. The following table sets forth the unaudited historical financial information for the three months ended May 31, 2014, and the unaudited pro forma financial information for the three months ended May 31, 2013. The unaudited pro forma financial information for the three months ended May 31, 2013, presents consolidated information as if the Beer Business Acquisition had occurred on March 1, 2013. Because of different fiscal period ends, and in order to present results for comparable periods, the unaudited pro forma financial information for the three months ended May 31, 2013, combines (i)  the Company’s historical statement of income for the three months ended May 31, 2013; (ii)  Crown Imports’ historical statement of income for the three months ended March 31, 2013; and (iii)  the Brewery Business’ carve-out combined income statement for the three months ended March 31, 2013. The unaudited pro forma financial information is presented after giving effect to certain adjustments for depreciation, amortization of definite lived intangible assets, interest expense on acquisition financing, amortization of deferred financing costs and related income tax effects. The unaudited pro forma financial information excludes the gain on the remeasurement to fair value of the Company’s preexisting 50% equity interest in Crown Imports and the acquisition-related costs noted above as both are nonrecurring amounts directly attributable to the transaction. The unaudited pro forma financial information is based upon currently available information and upon certain assumptions that the Company believes are reasonable under the circumstances. The unaudited pro forma financial information does not purport to present what the Company’s results of operations would actually have been if the aforementioned transaction had in fact occurred on such date or at the beginning of the period indicated, nor does it project the Company’s financial position or results of operations at any future date or for any future period.
 
For the Three Months
Ended May 31,
 
2014
 
2013
(in millions, except per share data)
 
 
 
Net sales
$
1,526.0

 
$
1,239.0

Income before income taxes
$
306.3

 
$
213.4

Net income
$
206.7

 
$
139.8

 
 
 
 
Earnings per common share:
 
 
 
Basic – Class A Common Stock
$
1.09

 
$
0.76

Basic – Class B Convertible Common Stock
$
0.99

 
$
0.69

 
 
 
 
Diluted – Class A Common Stock
$
1.03

 
$
0.72

Diluted – Class B Convertible Common Stock
$
0.95

 
$
0.66

 
 
 
 
Weighted average common shares outstanding:
 
 
 
Basic – Class A Common Stock
168.158

 
161.729

Basic – Class B Convertible Common Stock
23.415

 
23.499

 
 
 
 
Diluted – Class A Common Stock
200.358

 
194.884

Diluted – Class B Convertible Common Stock
23.415

 
23.499



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4.    INVENTORIES:

Inventories are stated at the lower of cost (computed in accordance with the first-in, first-out method) or market. Elements of cost include materials, labor and overhead and consist of the following:
 
May 31,
2014
 
February 28,
2014
(in millions)
 
 
 
Raw materials and supplies
$
78.8

 
$
87.8

In-process inventories
1,149.2

 
1,235.4

Finished case goods
553.5

 
420.6

 
$
1,781.5

 
$
1,743.8


5.    DERIVATIVE INSTRUMENTS:

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

The Company enters into derivative instruments, primarily foreign currency forward and option contracts, commodity pricing swaps and interest rate swaps, to manage foreign currency, commodity pricing and interest rate risks, respectively. The Company recognizes all derivatives as either assets or liabilities on its Consolidated Balance Sheets and measures those instruments at fair value (see Note 6). The fair values of the Company’s derivative instruments change with fluctuations in currency rates, commodity prices and/or interest rates and are expected to offset changes in the values of the underlying exposures. The Company’s derivative instruments are held solely to hedge economic exposures. The Company follows strict policies to manage foreign currency, commodity pricing and interest rate risks, including prohibitions on derivative market-making or other speculative activities.

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

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

Certain of the Company’s derivative instruments do not qualify for hedge accounting treatment under the FASB guidance for derivatives and hedging; for others, the Company chooses not to maintain the required documentation to apply hedge accounting treatment. These undesignated instruments are primarily used to economically hedge the Company’s exposure to fluctuations in the value of foreign currency denominated receivables and payables; foreign currency investments, primarily consisting of loans to subsidiaries, and cash flows related primarily to the repatriation of those loans or investments; and commodity prices, primarily consisting of diesel fuel, corn, aluminum and natural gas prices. Foreign currency contracts, generally less than 12 months in duration, and commodity swap contracts, generally less than 36 months in duration, are used to hedge some of these risks. The Company’s derivative policy permits the use of undesignated derivatives as approved by senior management.


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For these undesignated instruments, the mark to fair value is reported currently through earnings on the Company’s Consolidated Statements of Comprehensive Income. For purposes of measuring segment operating performance, the unrealized gains or losses from the mark to fair value of the Company’s undesignated commodity swap contracts are reported outside of segment operating results until such time that the underlying exposure is realized in the segment operating results. At that time, the realized gains or losses from the mark to fair value of the undesignated commodity swap contracts are reported in the appropriate operating segment, allowing the Company’s operating segments to realize the economic effects of the commodity swap contracts without the resulting unrealized mark to fair value volatility. The net unrealized gain reported outside of segment operating results for the three months ended May 31, 2014, was not material. There were no amounts reported outside of segment operating results for the three months ended May 31, 2013.

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

The Company records the fair value of its foreign currency contracts, commodity swap contracts and interest rate swap contracts qualifying for cash flow hedge accounting treatment on its Consolidated Balance Sheets with the effective portion of the related gain or loss on those contracts deferred in stockholders’ equity (as a component of AOCI (as defined in Note 14)). These deferred gains or losses are recognized on the Company’s Consolidated Statements of Comprehensive Income in the same period in which the underlying hedged items are recognized and on the same line item as the underlying hedged items. However, to the extent that any derivative instrument is not considered to be highly effective in offsetting the change in the value of the hedged item, the hedging relationship is terminated and the amount related to the ineffective portion of such derivative instrument is immediately recognized on the Company’s Consolidated Statements of Comprehensive Income. The Company expects $2.4 million of net gains, net of income tax effect, to be reclassified from AOCI to earnings within the next 12 months.

The absolute notional value of outstanding derivative instruments are as follows:
 
May 31,
2014
 
February 28,
2014
(in millions)
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
Foreign currency contracts
$
708.0

 
$
636.6

Interest rate swap contracts
$
500.0

 
$
500.0

 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
Foreign currency contracts
$
951.7

 
$
643.8

Commodity swap contracts
$
168.0

 
$
88.0

Interest rate swap contracts
$
1,000.0

 
$
1,000.0



9

Table of Contents

Fair values of derivative instruments:
The estimated fair value and location of the Company’s derivative instruments on its Consolidated Balance Sheets are as follows (see Note 6):
Balance Sheet Location
 
May 31,
2014
 
February 28,
2014
(in millions)
 
 
 
 
Derivative instruments designated as hedging instruments
 
 
 
 
Foreign currency contracts:
 
 
 
 
Prepaid expenses and other
 
$
15.0

 
$
11.2

Other accrued expenses and liabilities
 
$
0.3

 
$
3.2

Other assets, net
 
$
8.4

 
$
4.4

Other liabilities
 
$
0.4

 
$
0.7

 
 
 
 
 
Interest rate swap contracts:
 
 
 
 
Other accrued expenses and liabilities
 
$
3.8

 
$
3.4

Other liabilities
 
$
0.5

 
$
0.7

 
 
 
 
 
Derivative instruments not designated as hedging instruments
 
 
 
 
Foreign currency contracts:
 
 
 
 
Prepaid expenses and other
 
$
2.0

 
$
3.3

Other accrued expenses and liabilities
 
$
5.6

 
$
0.9

 
 
 
 
 
Interest rate swap contracts:
 
 
 
 
Prepaid expenses and other
 
$
4.4

 
$
3.5

Other accrued expenses and liabilities
 
$
16.6

 
$
13.3

Other assets, net
 
$
0.6

 
$
0.9

Other liabilities
 
$
12.8

 
$
15.5

 
 
 
 
 
Commodity swap contracts:
 
 
 
 
Prepaid expenses and other
 
$
1.0

 
$
1.3

Other accrued expenses and liabilities
 
$
0.7

 
$
0.1

Other assets, net
 
$
0.8

 
$
0.2

Other liabilities
 
$
0.4

 
$
0.4



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Table of Contents

The effect of the Company’s derivative instruments designated in cash flow hedging relationships on its Consolidated Statements of Comprehensive Income, as well as its Other Comprehensive Income (“OCI”), net of income tax effect, is as follows:
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
Net
Gain (Loss)
Recognized
in OCI
(Effective
portion)
 
Location of Net Gain (Loss)
Reclassified from AOCI to
Income (Effective portion)
 
Net
Gain (Loss)
Reclassified
from AOCI to
Income
(Effective
portion)
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2014
 
 
 
 
 
 
Foreign currency contracts
 
$
9.9

 
Sales
 
$
1.2

Foreign currency contracts
 
0.4

 
Cost of product sold
 
0.3

Interest rate swap contracts
 
(0.5
)
 
Interest expense, net
 
(2.0
)
Total
 
$
9.8

 
Total
 
$
(0.5
)
 
 
 
 
 
 
 
For the Three Months Ended May 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
$
(0.5
)
 
Sales
 
$
0.9

Foreign currency contracts
 
(1.2
)
 
Cost of product sold
 
0.2

Interest rate swap contracts
 
1.2

 
Interest expense, net
 
(2.1
)
Total
 
$
(0.5
)
 
Total
 
$
(1.0
)
Derivative Instruments in
Designated Cash Flow
Hedging Relationships
 
 
 
Location of Net (Loss) Gain
Recognized in Income
(Ineffective portion)
 
Net
(Loss) Gain
Recognized
in Income
(Ineffective
portion)
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2014
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
(0.1
)
 
 
 
 
 
 
 
For the Three Months Ended May 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
0.1

Commodity swap contracts
 
 
 
Selling, general and administrative expenses
 
0.1

 
 
 
 
 
 
$
0.2


The effect of the Company’s undesignated derivative instruments on its Consolidated Statements of Comprehensive Income is as follows:
Derivative Instruments Not
Designated as Hedging Instruments
 
 
 
Location of Net Gain (Loss)
Recognized in Income
 
Net
Gain (Loss)
Recognized
in Income
(in millions)
 
 
 
 
 
 
For the Three Months Ended May 31, 2014
 
 
 
 
 
 
Commodity swap contracts
 
 
 
Cost of product sold
 
$
0.2

Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
(5.7
)
 
 
 
 
 
 
$
(5.5
)
 
 
 
 
 
 
 
For the Three Months Ended May 31, 2013
 
 
 
 
 
 
Foreign currency contracts
 
 
 
Selling, general and administrative expenses
 
$
(2.0
)
Commodity swap contracts
 
 
 
Selling, general and administrative expenses
 
(1.0
)
 
 
 
 
 
 
$
(3.0
)


11

Table of Contents

Credit risk:
The Company enters into master agreements with its bank derivative trading counterparties that allow netting of certain derivative positions in order to manage credit risk. The Company’s derivative instruments are not subject to credit rating contingencies or collateral requirements. As of May 31, 2014, the estimated fair value of derivative instruments in a net liability position due to counterparties was $28.0 million. If the Company were required to settle the net liability position under these derivative instruments on May 31, 2014, the Company would have had sufficient availability under its revolving credit facility to satisfy this obligation.

Counterparty credit risk:
Counterparty credit risk relates to losses the Company could incur if a counterparty defaults on a derivative contract. The Company manages exposure to counterparty credit risk by requiring specified minimum credit standards and diversification of counterparties. The Company enters into master agreements with its bank derivative trading counterparties that allow netting of certain derivative positions in order to manage counterparty credit risk. As of May 31, 2014, all of the Company’s counterparty exposures are with financial institutions which have investment grade ratings. The Company has procedures to monitor counterparty credit risk for both current and future potential credit exposures. As of May 31, 2014, the estimated fair value of derivative instruments in a net receivable position due from counterparties was $19.1 million.

6.    FAIR VALUE OF FINANCIAL INSTRUMENTS:

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

The carrying amount and estimated fair value of the Company’s financial instruments are summarized as follows:
 
May 31, 2014
 
February 28, 2014
 
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
(in millions)
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Cash and cash investments
$
378.0

 
$
378.0

 
$
63.9

 
$
63.9

Accounts receivable, net
$
651.3

 
$
651.3

 
$
626.2

 
$
626.2

Available-for-sale debt securities
$
9.0

 
$
9.0

 
$
8.8

 
$
8.8

Foreign currency contracts
$
25.4

 
$
25.4

 
$
18.9

 
$
18.9

Interest rate swap contracts
$
5.0

 
$
5.0

 
$
4.4

 
$
4.4

Commodity swap contracts
$
1.8

 
$
1.8

 
$
1.5

 
$
1.5

 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
Notes payable to banks
$
235.2

 
$
235.2

 
$
57.2

 
$
57.2

Accounts payable
$
345.7

 
$
345.7

 
$
295.2

 
$
295.2

Long-term debt, including current portion
$
6,960.0

 
$
7,133.7

 
$
6,963.3

 
$
7,140.8

Foreign currency contracts
$
6.3

 
$
6.3

 
$
4.8

 
$
4.8

Interest rate swap contracts
$
33.7

 
$
33.7

 
$
32.9

 
$
32.9

Commodity swap contracts
$
1.1

 
$
1.1

 
$
0.5

 
$
0.5



12

Table of Contents

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

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

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


13

Table of Contents

The following table presents the Company’s financial assets and liabilities measured at estimated fair value on a recurring basis.
 
Fair Value Measurements Using
 
 
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
(in millions)
 
 
 
 
 
 
 
May 31, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$

 
$

 
$
9.0

 
$
9.0

Foreign currency contracts
$

 
$
25.4

 
$

 
$
25.4

Interest rate swap contracts
$

 
$
5.0

 
$

 
$
5.0

Commodity swap contracts
$

 
$
1.8

 
$

 
$
1.8

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
6.3

 
$

 
$
6.3

Interest rate swap contracts
$

 
$
33.7

 
$

 
$
33.7

Commodity swap contracts
$

 
$
1.1

 
$

 
$
1.1

 
 
 
 
 
 
 
 
February 28, 2014
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
AFS debt securities
$

 
$

 
$
8.8

 
$
8.8

Foreign currency contracts
$

 
$
18.9

 
$

 
$
18.9

Interest rate swap contracts
$

 
$
4.4

 
$

 
$
4.4

Commodity swap contracts
$

 
$
1.5

 
$

 
$
1.5

Liabilities:
 
 
 
 
 
 
 
Foreign currency contracts
$

 
$
4.8

 
$

 
$
4.8

Interest rate swap contracts
$

 
$
32.9

 
$

 
$
32.9

Commodity swap contracts
$

 
$
0.5

 
$

 
$
0.5


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


14

Table of Contents

7.    GOODWILL:

The changes in the carrying amount of goodwill are as follows:
 
Wine and Spirits
 
Beer
 
Consolidation
and
Eliminations
 
Consolidated
(in millions)
 
 
 
 
 
 
 
Balance, February 28, 2013
 
 
 
 
 
 
 
Goodwill
$
2,722.3

 
$
13.0

 
$
(13.0
)
 
$
2,722.3

Accumulated impairment losses

 

 

 

 
2,722.3

 
13.0

 
(13.0
)
 
2,722.3

Purchase accounting allocations

 
3,702.8

 
13.0

 
3,715.8

Impairment of goodwill
(278.7
)
 

 

 
(278.7
)
Foreign currency translation adjustments
(11.4
)
 
(1.2
)
 

 
(12.6
)
Balance, February 28, 2014
 
 
 
 
 
 
 
Goodwill
2,693.5

 
3,714.6

 

 
6,408.1

Accumulated impairment losses
(261.3
)
 

 

 
(261.3
)
 
2,432.2

 
3,714.6

 

 
6,146.8

Foreign currency translation adjustments
4.9

 
1.4

 

 
6.3

Balance, May 31, 2014
 
 
 
 
 
 
 
Goodwill
2,703.7

 
3,716.0

 

 
6,419.7

Accumulated impairment losses
(266.6
)
 

 

 
(266.6
)
 
$
2,437.1

 
$
3,716.0

 
$

 
$
6,153.1


For the year ended February 28, 2014, purchase accounting allocations of $3,702.8 million and $13.0 million in the Beer segment and Consolidation and Eliminations, respectively, consist of purchase accounting allocations associated with the Beer Business Acquisition. For the year ended February 28, 2014, impairment of goodwill in the Wine and Spirits segment consists of an impairment loss of $278.7 million associated with goodwill assigned to the segment’s Canadian reporting unit.

8.    INTANGIBLE ASSETS:

The major components of intangible assets are as follows:
 
May 31, 2014
 
February 28, 2014
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Net
Carrying
Amount
(in millions)
 
 
 
 
 
 
 
Amortizable intangible assets:
 
 
 
 
 
 
 
Customer relationships
$
104.0

 
$
69.5

 
$
103.6

 
$
70.5

Favorable interim supply agreement
68.3

 
54.7

 
68.3

 
62.3

Other
21.3

 
10.3

 
14.7

 
5.3

Total
$
193.6

 
134.5

 
$
186.6

 
138.1

 
 
 
 
 
 
 
 
Nonamortizable intangible assets:
 
 
 
 
 
 
 
Trademarks
 
 
3,089.8

 
 
 
3,088.0

Other
 
 
5.1

 
 
 
5.0

Total
 
 
3,094.9

 
 
 
3,093.0

Total intangible assets, net
 
 
$
3,229.4

 
 
 
$
3,231.1



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Table of Contents

The Company did not incur costs to renew or extend the term of acquired intangible assets during the three months ended May 31, 2014, and May 31, 2013. The difference between the gross carrying amount and net carrying amount for each item presented is attributable to accumulated amortization. Amortization expense for intangible assets was $10.5 million and $1.5 million for the three months ended May 31, 2014, and May 31, 2013, respectively. Estimated amortization expense for the remaining nine months of fiscal 2015 and for each of the five succeeding fiscal years and thereafter is as follows:
(in millions)
 
2015
$
30.7

2016
$
39.4

2017
$
10.1

2018
$
5.5

2019
$
5.5

2020
$
5.5

Thereafter
$
37.8


9.    OTHER ACCRUED EXPENSES AND LIABILITIES:

The major components of other accrued expenses and liabilities are as follows:
 
May 31,
2014
 
February 28,
2014
(in millions)
 
 
 
Beer Business Acquisition payable
$
559.4

 
$
555.7

Promotions and advertising
102.2

 
103.1

Income taxes payable
69.4

 
45.4

Salaries, commissions, and payroll benefits and withholdings
61.0

 
118.7

Accrued interest
48.8

 
56.9

Deferred revenue
48.6

 
52.8

Other
142.5

 
123.0

 
$
1,031.9

 
$
1,055.6


10.    BORROWINGS:

Borrowings consist of the following:
 
May 31, 2014
 
February 28, 2014
 
Current
 
Long-term
 
Total
 
Total
(in millions)
 
 
 
 
 
 
 
Notes Payable to Banks:
 
 
 
 
 
 
 
Senior Credit Facility – Revolving Credit Loans
$

 
$

 
$

 
$

Other
235.2

 

 
235.2

 
57.2

 
$
235.2

 
$

 
$
235.2

 
$
57.2

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

 
$
2,767.8

 
$
2,864.8

 
$
2,864.8

Senior Notes
499.6

 
3,548.0

 
4,047.6

 
4,047.3

Other Long-term Debt
17.8

 
29.8

 
47.6

 
51.2

 
$
614.4

 
$
6,345.6

 
$
6,960.0

 
$
6,963.3



16

Table of Contents

Senior credit facility –
In connection with the Beer Business Acquisition, on May 2, 2013 (the “2013 Restatement Date”), the Company, CIH International S.à r.l., an indirect wholly owned subsidiary of the Company (“CIH” and together with the Company, the “Borrowers”), and Bank of America, N.A., as administrative agent (the “Administrative Agent”), and certain other lenders entered into a Restatement Agreement (the “2013 Restatement Agreement”) that amended and restated the Company’s then existing senior credit facility (as amended and restated by the 2013 Restatement Agreement, the “2013 Credit Agreement”). The 2013 Restatement Agreement was entered into by the Company to arrange a portion of the debt to finance the Beer Business Acquisition. On May 28, 2014, the Company, CIH, the Administrative Agent, and certain other lenders (all such parties other than either of the Borrowers are collectively referred to as the “Lenders”) entered into a Restatement Agreement (the “2014 Restatement Agreement”) that amended and restated the 2013 Credit Agreement (as amended and restated by the 2014 Restatement Agreement, the “2014 Credit Agreement”). The principal change to the 2013 Credit Agreement effected by the 2014 Credit Agreement was the conversion of the pre-existing $850.0 million revolving credit facility into two tranches, a $425.0 million U.S. revolving credit facility (the “U.S. Revolving Credit Facility”) and a $425.0 million European revolving credit facility (the “European Revolving Credit Facility”). The Company is the borrower under the U.S. Revolving Credit Facility and the Company and/or CIH is the borrower under the European Revolving Credit Facility.

The 2014 Credit Agreement provides for aggregate credit facilities of $3,714.8 million, consisting of a $496.3 million U.S. term loan facility maturing on June 7, 2018 (the “U.S. Term A Facility”), a $245.0 million U.S. term loan facility maturing on June 7, 2019 (the “U.S. Term A-1 Facility”), a $649.7 million U.S. term loan facility maturing on June 7, 2018 (the “U.S. Term A-2 Facility”), a $481.3 million European term loan facility maturing on June 7, 2018 (the “European Term A Facility”), a $992.5 million European term loan facility maturing on June 7, 2020 (the “European Term B Facility”), and an aggregate $850.0 million revolving credit facility (including two sub-facilities for letters of credit of up to $200.0 million in the aggregate) which terminates on June 7, 2018 (the “Revolving Credit Facility”). The Revolving Credit Facility provides for credit facilities consisting of the $425.0 million U.S. Revolving Credit Facility and the $425.0 million European Revolving Credit Facility. The 2014 Credit Agreement also permits the Company from time to time to elect to increase the Lenders’ revolving credit commitments under the U.S. Revolving Credit Facility or add one or more tranches of additional term loans, subject to the willingness of existing or new lenders to fund such increase or term loans and other customary conditions. The minimum aggregate principal amount of such incremental revolving credit commitment increases or additional term loans may be no less than $25.0 million and the maximum aggregate principal amount of all such incremental revolving credit commitment increases and additional term loans, other than term loans the proceeds of which are applied to repay existing term loans, may be no more than $750.0 million. A portion of the borrowings under the 2013 Credit Agreement were used to refinance the outstanding obligations under the Company’s then existing senior credit facility with the remainder used to finance a portion of the purchase price for the Beer Business Acquisition and related expenses.

The U.S. obligations under the 2014 Credit Agreement are guaranteed by certain of the Company’s U.S. subsidiaries. These obligations are also secured by a pledge of (i)  100% of the ownership interests in certain of the Company’s U.S. subsidiaries and (ii)  65% of the ownership interests in certain of the Company’s foreign subsidiaries. The European obligations under the 2014 Credit Agreement are guaranteed by the Company and certain of the Company’s U.S. subsidiaries. These obligations are also secured by a pledge of (i)  100% of certain interests in certain of CIH’s subsidiaries and (ii)  100% of the ownership interests in certain of the Company’s U.S. subsidiaries and 65% of the ownership interests in certain of the Company’s foreign subsidiaries.

As of May 31, 2014, under the 2014 Credit Agreement, the Company had outstanding borrowings under the U.S. Term A Facility of $496.3 million bearing an interest rate of 1.9%, U.S. Term A-1 Facility of $245.0 million bearing an interest rate of 2.2%, U.S. Term A-2 Facility of $649.7 million bearing an interest rate of 1.9%, European Term A Facility of $481.3 million bearing an interest rate of 1.9%, European Term B Facility of $992.5 million bearing an interest rate of 2.8%, outstanding letters of credit of $14.2 million, and $835.8 million in revolving loans available to be drawn. As of May 31, 2014, the LIBOR margin for the U.S. Term A Facility, the U.S. Term A-2 Facility, the European Term A Facility and the Revolving Credit Facility was 1.75%; the LIBOR margin for the U.S. Term A-1 Facility was 2.0%; and the LIBOR margin for the European Term B Facility was 2.0%.


17

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In April 2012, the Company transitioned its interest rate swap agreement to a one-month LIBOR base rate versus the then existing three-month LIBOR base rate by entering into a new interest rate swap agreement which was designated as a cash flow hedge for $500.0 million of the Company’s floating LIBOR rate debt. In addition, the then existing interest rate swap agreement was dedesignated as a hedge. The Company also entered into an additional interest rate swap agreement for $500.0 million that was not designated as a hedge to offset the prospective impact of the newly undesignated interest rate swap agreement. As a result of these hedges, the Company has fixed its interest rates on $500.0 million of the Company’s floating LIBOR rate debt at an average rate of 2.8% (exclusive of borrowing margins) through September 1, 2016. The unrealized losses in AOCI related to the dedesignated interest rate swap agreements are being reclassified from AOCI ratably into earnings in the same period in which the original hedged item is recorded in the Consolidated Statements of Comprehensive Income. For the three months ended May 31, 2014, and May 31, 2013, the Company reclassified net losses of $2.0 million and $2.1 million, net of income tax effect, respectively, from AOCI to interest expense, net, on the Company’s Consolidated Statements of Comprehensive Income.

Senior notes –
On May 14, 2013, the Company issued $500.0 million aggregate principal amount of 3.75% Senior Notes due May 2021 (the “May 2013 Eight Year Senior Notes”) and $1,050.0 million aggregate principal amount of 4.25% Senior Notes due May 2023 (the “May 2013 Ten Year Senior Notes”) (collectively, the “May 2013 Senior Notes”). The Company used the net proceeds from the offering ($1,535.5 million) to fund a portion of the purchase price for the Beer Business Acquisition. Interest on the May 2013 Senior Notes is payable semiannually on May 1 and November 1 of each year, beginning November 1, 2013. The May 2013 Senior Notes are redeemable, in whole or in part, at the option of the Company at any time at a redemption price equal to 100% of the outstanding principal amount plus a make whole payment based on the present value of the future payments at the adjusted Treasury Rate plus 50 basis points. The May 2013 Senior Notes are senior unsecured obligations that rank equally with the Company’s other senior unsecured indebtedness. Certain of the Company’s U.S. subsidiaries guarantee the May 2013 Senior Notes on a senior unsecured basis. In connection with the issuance of the May 2013 Senior Notes, the Company and Manufacturers and Traders Trust Company, as Trustee, escrow agent, and securities intermediary, entered into an agreement (the “May 2013 Escrow Agreement”), pursuant to which an amount equal to 100% of the principal amount of the May 2013 Senior Notes (collectively, with any other property from time to time held by the escrow agent, the “May 2013 Escrowed Property”) was placed into an escrow account to be released to the Company upon the closing of the Beer Business Acquisition. In accordance with the terms of the May 2013 Escrow Agreement, in connection with the closing of the Beer Business Acquisition, the May 2013 Escrowed Property was released to the Company and used to fund a portion of the purchase price for the Beer Business Acquisition. As of May 31, 2014, the Company had outstanding $1,550.0 million aggregate principal amount of May 2013 Senior Notes.

Accounts receivable securitization facilities –
On October 1, 2013, the Company entered into an amended and restated 364-day revolving trade accounts receivable securitization facility (the “CBI Facility”). Under the CBI Facility, trade accounts receivable generated by the Company and certain of its subsidiaries are sold by the Company to a wholly-owned bankruptcy remote single purpose subsidiary (the “CBI SPV”), which is consolidated with the Company for financial reporting purposes. The CBI Facility provides borrowing capacity of $190.0 million up to $290.0 million structured to account for the seasonality of the Company’s business, subject to further limitations based upon various pre-agreed formulas. As of May 31, 2014, the CBI SPV had aggregate outstanding borrowings under the CBI Facility of $54.0 million bearing a weighted average interest rate of 1.1%. As of May 31, 2014, the Company had $216.0 million available under the CBI Facility.

Also, on October 1, 2013, Crown Imports entered into a 364-day revolving trade accounts receivable securitization facility (the “Crown Facility”). Under the Crown Facility, trade accounts receivable generated by Crown Imports are sold by Crown Imports to its wholly-owned bankruptcy remote single purpose subsidiary (the “Crown SPV”), which is consolidated with the Company for financial reporting purposes. The Crown Facility provides borrowing capacity of $100.0 million up to $160.0 million structured to account for the seasonality of Crown Imports’ business. As of May 31, 2014, the Crown SPV had aggregate outstanding borrowings under the Crown Facility of $38.0 million bearing a weighted average interest rate of 1.1%. As of May 31, 2014, the Company had $122.0 million available under the Crown Facility.

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11.    INCOME TAXES:

The Company’s effective tax rate for the three months ended May 31, 2014, and May 31, 2013, was 32.5% and 35.7%, respectively. The Company’s effective tax rate for the three months ended May 31, 2014, benefitted from the integration of the Beer Business Acquisition.

12.    COMMITMENTS AND CONTINGENCIES:

Indemnification liabilities
In connection with a prior divestiture, the Company indemnified respective parties against certain liabilities that may arise related to certain contracts with certain investees of the divested business, a certain facility in the U.K. and certain income tax matters. As of May 31, 2014, and February 28, 2014, the carrying amount of these indemnification liabilities was $11.5 million and $11.6 million, respectively, and is included in other liabilities on the Company’s Consolidated Balance Sheets. If the indemnified party were to incur a liability, pursuant to the terms of the indemnification, the Company would be required to reimburse the indemnified party. As of May 31, 2014, the Company estimates that these indemnifications could require the Company to make potential future payments of up to $292.7 million under these indemnifications with $278.9 million of this amount able to be recovered by the Company from third parties under recourse provisions. The Company does not expect to be required to make material payments under the indemnifications and the Company believes that the likelihood is remote that the indemnifications could have a material adverse effect on the Company’s financial position, results of operations, cash flows or liquidity.

13.    EARNINGS PER COMMON SHARE:

Earnings per common share – basic excludes the effect of common stock equivalents and is computed using the two-class computation method. Earnings per common share – diluted for Class A Common Stock reflects the potential dilution that could result if securities or other contracts to issue common stock were exercised or converted into common stock. Earnings per common share – diluted for Class A Common Stock has been computed using the more dilutive of the if-converted or two-class computation method. Using the if-converted method, earnings per common share – diluted for Class A Common Stock assumes the exercise of stock options using the treasury stock method and the conversion of Class B Convertible Common Stock. Using the two-class computation method, earnings per common share – diluted for Class A Common Stock assumes the exercise of stock options using the treasury stock method and no conversion of Class B Convertible Common Stock. For the three months ended May 31, 2014, and May 31, 2013, earnings per common share – diluted for Class A Common Stock has been calculated using the if-converted method. For the three months ended May 31, 2014, and May 31, 2013, earnings per common share – diluted for Class B Convertible Common Stock is presented without assuming conversion into Class A Common Stock and is computed using the two-class computation method.


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The computation of basic and diluted earnings per common share is as follows:
 
For the Three Months
Ended May 31,
 
2014
 
2013
(in millions, except per share data)
 
 
 
Income available to common stockholders
$
206.7

 
$
52.9

 
 
 
 
Weighted average common shares outstanding – basic:
 
 
 
Class A Common Stock
168.158

 
161.729

Class B Convertible Common Stock
23.415

 
23.499

 
 
 
 
Weighted average common shares outstanding – diluted:
 
 
 
Class A Common Stock
168.158

 
161.729

Class B Convertible Common Stock
23.415

 
23.499

Stock-based awards, primarily stock options
8.785

 
9.656

Weighted average common shares outstanding – diluted
200.358

 
194.884

 
 
 
 
Earnings per common share – basic:
 
 
 
Class A Common Stock
$
1.09

 
$
0.29

Class B Convertible Common Stock
$
0.99

 
$
0.26

Earnings per common share – diluted:
 
 
 
Class A Common Stock
$
1.03

 
$
0.27

Class B Convertible Common Stock
$
0.95

 
$
0.25


For the three months ended May 31, 2014, and May 31, 2013, stock-based awards, primarily stock options, which could result in the issuance of 0.9 million and 1.0 million shares, respectively, of Class A Common Stock were outstanding, but were not included in the computation of earnings per common share – diluted for Class A Common Stock because the effect of including such awards would have been antidilutive.


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14.    COMPREHENSIVE INCOME:

Comprehensive income consists of net income, foreign currency translation adjustments, net unrealized gains (losses) on derivative instruments, net unrealized gains (losses) on AFS debt securities and pension/postretirement adjustments. The reconciliation of net income to comprehensive income is as follows:
 
Before Tax
Amount
 
Tax Expense
 
Net of Tax
Amount
(in millions)
 
 
 
 
 
For the Three Months Ended May 31, 2014
 
 
 
 
 
Net income
 
 
 
 
$
206.7

Other comprehensive income:
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
Net gains
$
37.5

 
$
(0.7
)
 
36.8

Reclassification adjustments

 

 

Net gain recognized in other comprehensive income
37.5

 
(0.7
)
 
36.8

Unrealized gain on cash flow hedges:
 
 
 
 
 
Net derivative gains
13.6

 
(3.8
)
 
9.8

Reclassification adjustments
1.4

 
(0.8
)
 
0.6

Net gain recognized in other comprehensive income
15.0

 
(4.6
)
 
10.4

Unrealized gain on AFS debt securities:
 
 
 
 
 
Net AFS debt securities gains
0.3

 
(0.1
)
 
0.2

Reclassification adjustments

 

 

Net gain recognized in other comprehensive income
0.3

 
(0.1
)
 
0.2

Pension/postretirement adjustments:
 
 
 
 
 
Net actuarial gains

 

 

Reclassification adjustments

 

 

Net gain recognized in other comprehensive income

 

 

Other comprehensive income
$
52.8

 
$
(5.4
)
 
47.4

Total comprehensive income
 
 
 
 
$
254.1

 
 
 
 
 
 
For the Three Months Ended May 31, 2013
 
 
 
 
 
Net income
 
 
 
 
$
52.9

Other comprehensive (loss) income:
 
 
 
 
 
Foreign currency translation adjustments:
 
 
 
 
 
Net losses
$
(22.3
)
 
$
(0.5
)
 
(22.8
)
Reclassification adjustments

 

 

Net loss recognized in other comprehensive loss
(22.3
)
 
(0.5
)
 
(22.8
)
Unrealized gain on cash flow hedges:
 
 
 
 
 
Net derivative losses

 
(0.5
)
 
(0.5
)
Reclassification adjustments
1.5

 
(0.7
)
 
0.8

Net gain recognized in other comprehensive loss
1.5

 
(1.2
)
 
0.3

Unrealized loss on AFS debt securities:
 
 
 
 
 
Net AFS debt securities losses
(1.2
)
 
(0.1
)
 
(1.3
)
Reclassification adjustments

 

 

Net loss recognized in other comprehensive loss
(1.2
)
 
(0.1
)
 
(1.3
)
Pension/postretirement adjustments:
 
 
 
 
 
Net actuarial gains
0.2

 
(0.1
)
 
0.1

Reclassification adjustments
0.3

 
(0.1
)
 
0.2

Net gain recognized in other comprehensive loss
0.5

 
(0.2
)
 
0.3

Other comprehensive loss
$
(21.5
)
 
$
(2.0
)
 
(23.5
)
Total comprehensive income
 
 
 
 
$
29.4



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Accumulated other comprehensive income (loss) (“AOCI”), net of income tax effect, includes the following components:
 
Foreign
Currency
Translation
Adjustments
 
Net
Unrealized
(Losses) Gains on
Derivative Instruments
 
Net
Unrealized
(Losses) Gains
on AFS Debt
Securities
 
Pension/
Postretirement
Adjustments
 
Accumulated
Other
Comprehensive
Income
(in millions)
 
 
 
 
 
 
 
 
 
Balance, February 28, 2014
$
103.6

 
$
(8.9
)
 
$
(1.5
)
 
$
(7.2
)
 
$
86.0

Other comprehensive income:
 
 
 
 
 
 
 
 
 
Other comprehensive income before reclassification adjustments
36.8

 
9.8

 
0.2

 

 
46.8

Amounts reclassified from accumulated other comprehensive income

 
0.6

 

 

 
0.6

Other comprehensive income
36.8

 
10.4

 
0.2

 

 
47.4

Balance, May 31, 2014
$
140.4

 
$
1.5

 
$
(1.3
)
 
$
(7.2
)
 
$
133.4


15.    CONDENSED CONSOLIDATING FINANCIAL INFORMATION:

The following information sets forth the condensed consolidating balance sheets as of May 31, 2014, and February 28, 2014, the condensed consolidating statements of comprehensive income for the three months ended May 31, 2014, and May 31, 2013, and the condensed consolidating statements of cash flows for the three months ended May 31, 2014, and May 31, 2013, for the parent company, the combined subsidiaries of the Company which guarantee the Company’s senior notes (“Subsidiary Guarantors”), the combined subsidiaries of the Company which are not Subsidiary Guarantors (primarily foreign subsidiaries) (“Subsidiary Nonguarantors”) and the Company. The Subsidiary Guarantors are 100% owned, directly or indirectly, by the parent company and the guarantees are joint and several obligations of each of the Subsidiary Guarantors. The guarantees are full and unconditional, as those terms are used in Rule 3-10 of Regulation S-X, except that a Subsidiary Guarantor can be automatically released and relieved of its obligations under certain customary circumstances contained in the indentures governing the Company’s senior notes. These customary circumstances include, so long as other applicable provisions of the indentures are adhered to, the termination or release of a Subsidiary Guarantor’s guarantee of other indebtedness or upon the legal defeasance or covenant defeasance or satisfaction and discharge of the Company’s senior notes. Separate financial statements for the Subsidiary Guarantors of the Company are not presented because the Company has determined that such financial statements would not be material to investors. The accounting policies of the parent company, the Subsidiary Guarantors and the Subsidiary Nonguarantors are the same as those described for the Company in the Summary of Significant Accounting Policies in Note 1 to the Company’s consolidated financial statements included in the Company’s 2014 Annual Report, and include the recently adopted accounting guidance described in Note 2 herein. There are no restrictions on the ability of the Subsidiary Guarantors to transfer funds to the Company in the form of cash dividends, loans or advances.
In connection with the preparation of the condensed consolidating financial information, the Company made certain immaterial adjustments to the condensed consolidating statement of cash flows for the three months ended May 31, 2013. The Company will also make similar adjustments to its condensed consolidating statements of cash flows for comparative prior periods presented in future filings. These adjustments (i)  did not change the net increase in cash and cash investments for the parent company, the Subsidiary Guarantors or the Subsidiary Nonguarantors and (ii)  had no impact on the consolidated amounts. The substantial majority of these adjustments had the effect of (i)  decreasing the parent company’s cash flows from operating activities and increasing the parent company’s cash flows from financing activities and (ii)  increasing the Subsidiary Guarantors’ cash flows from operating activities and decreasing the Subsidiary Guarantors’ cash flows from financing activities.


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Table of Contents

 
Parent
Company
 
Subsidiary
Guarantors
 
Subsidiary
Nonguarantors
 
Eliminations
 
Consolidated
(in millions)
 
 
 
 
 
 
 
 
 
Condensed Consolidating Balance Sheet at May 31, 2014
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash investments
$
9.8

 
$
2.6

 
$
365.6

 
$

 
$
378.0

Accounts receivable, net
0.1

 
29.5

 
621.7

 

 
651.3

Inventories
158.2

 
1,302.4

 
404.0

 
(83.1
)
 
1,781.5

Intercompany receivable
9,158.3

 
13,523.5

 
4,767.2

 
(27,449.0
)
 

Prepaid expenses and other
48.7

 
69.1

 
687.0

 
(478.4
)
 
326.4

Total current assets
9,375.1

 
14,927.1

 
6,845.5

 
(28,010.5
)
 
3,137.2

Property, plant and equipment, net
47.7

 
850.8

 
1,258.6

 

 
2,157.1

Investments in subsidiaries
11,320.0

 
10.6

 

 
(11,330.6
)
 

Goodwill

 
5,411.3

 
741.8

 

 
6,153.1

Intangible assets, net

 
710.9

 
2,514.8

 
3.7

 
3,229.4

Intercompany notes receivable
3,660.5

 
7.9

 

 
(3,668.4
)
 

Other assets, net
60.7

 
70.8

 
34.1

 

 
165.6

Total assets
$
24,464.0

 
$
21,989.4

 
$
11,394.8

 
$
(43,005.8
)
 
$
14,842.4

 
 
 
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
 
 
Notes payable to banks
$

 
$

 
$
235.2

 
$

 
$
235.2

Current maturities of long-term debt
563.0

 
16.1

 
35.3

 

 
614.4

Accounts payable
28.2

 
103.4

 
214.1

 

 
345.7

Accrued excise taxes
9.9

 
12.5

 
5.1

 

 
27.5

Intercompany payable
12,953.2

 
9,849.2

 
4,646.6

 
(27,449.0
)
 

Other accrued expenses and liabilities
690.4

 
115.3

 
730.4

 
(504.2
)
 
1,031.9

Total current liabilities
14,244.7

 
10,096.5

 
5,866.7

 
(27,953.2
)
 
2,254.7

Long-term debt, less current maturities
4,877.0

 
29.1

 
1,439.5

 

 
6,345.6

Deferred income taxes
20.6

 
588.9

 
186.4

 

 
795.9

Intercompany notes payable

 
3,652.0

 
16.4

 
(3,668.4
)
 

Other liabilities
34.7

 
24.2

 
100.3

 

 
159.2

Stockholders’ equity
5,287.0

 
7,598.7

 
3,785.5

 
(11,384.2
)
 
5,287.0

Total liabilities and stockholders’ equity
$
24,464.0

 
$
21,989.4

 
$
11,394.8

 
$
(43,005.8
)
 
$
14,842.4

 
 
 
 
 
 
 
 
 
 

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Table of Contents

 
Parent
Company
 
Subsidiary
Guarantors
 
Subsidiary
Nonguarantors
 
Eliminations
 
Consolidated
(in millions)
 
 
 
 
 
 
 
 
 
Condensed Consolidating Balance Sheet at February 28, 2014
Current assets:
 
 
 
 
 
 
 
 
 
Cash and cash investments
$
0.5

 
$
0.8

 
$
62.6

 
$

 
$
63.9

Accounts receivable, net
0.2

 
9.0

 
617.0

 

 
626.2

Inventories
153.5

 
1,270.0

 
384.8

 
(64.5
)
 
1,743.8

Intercompany receivable
8,529.4

 
13,339.0

 
4,104.0

 
(25,972.4
)
 

Prepaid expenses and other
49.1

 
61.6

 
701.6

 
(499.0
)
 
313.3

Total current assets
8,732.7

 
14,680.4

 
5,870.0

 
(26,535.9
)
 
2,747.2

Property, plant and equipment, net
39.4

 
846.3

 
1,128.6

 

 
2,014.3

Investments in subsidiaries
10,795.6

 
9.4

 

 
(10,805.0
)
 

Goodwill

 
5,411.3

 
735.5

 

 
6,146.8

Intangible assets, net

 
707.6

 
2,523.0

 
0.5

 
3,231.1

Intercompany notes receivable
3,606.0

 
8.5

 

 
(3,614.5
)
 

Other assets, net
62.4

 
64.6

 
35.7