# CONSTELLATION BRANDS, INC. (STZ) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from CONSTELLATION BRANDS, INC.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/16918/000001691822000069/stz-20220228.htm
Accession: 0000016918-22-000069
Filing date: 2022-04-21
Report date: 2022-02-28
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/STZ/
All MD&A years: /company/STZ/mda/
Next year: /company/STZ/mda/fy2023/ (FY 2023)

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, 2021, filed on April 20, 2021, for reference to discussion of the fiscal year ended February 29, 2020, 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 recent developments, COVID-19 and global supply chain related impacts, and significant investments, acquisitions, and divestitures.

Results of operations.    This section provides an analysis of our results of operations presented on a business segment basis. In addition, a brief description of 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

Our internal management financial reporting consists of three business divisions: (i) Beer, (ii) Wine and Spirits, and (iii) Canopy and we report our operating results in four segments: (i) Beer, (ii) Wine and Spirits, (iii) Corporate Operations and Other, and (iv) Canopy. Our Canopy Equity Method Investment makes up the Canopy segment.

In the Beer segment, our portfolio consists of high-end imported beer brands, craft beer, and ABAs. We have an exclusive perpetual brand license to import, market, and sell our Mexican beer portfolio in the U.S. In the Wine and Spirits segment, we sell a portfolio that includes higher-margin, higher-growth wine brands complemented by certain higher-end spirits brands. Amounts included in the Corporate Operations and Other segment consist of costs of executive management, corporate development, corporate finance, corporate growth and strategy, human resources, internal audit, investor relations, legal, public relations, and information technology, as well as our 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.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 33"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Strategy

Our business strategy for the Beer segment focuses on upholding our leadership position in the high-end segment of the U.S. beer market 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 DTC and 3-tier eCommerce channels, as well as continued expansion, optimization, and/or construction activities for our Mexico beer operations. Additionally, in an effort to more fully compete in growing sectors of the high-end segment of the U.S. beer market, we have leveraged our innovation capabilities to create new line extensions behind celebrated, trusted brands and package formats that meet emerging needs.

We have increased our production capacity in Mexico by fourfold since the 2013 acquisition of the imported beer business. In early Fiscal 2022, we completed part of a planned expansion at the Obregon Brewery, increasing our production capacity to approximately 39 million hectoliters. Expansion, optimization, and/or construction activities continue under our Mexico Beer Projects to align with our anticipated future growth expectations. At this time, we have suspended all Mexicali Brewery construction activities, following a negative result from a public consultation held in Mexico. See “Capital expenditures” below.

Our business strategy for the Wine and Spirits segment focuses on growing industry-leading, higher-end wine and spirits brands through margin improvements and creation of operating efficiencies. We focus our investment dollars on (i) building and refreshing existing brands within our portfolio through consumer insights, sensory expertise, and innovation, and (ii) refining our portfolio through targeted acquisitions of higher-margin, higher-growth wine and spirits brands. We recently reorganized this business 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 net sales and expanding margins. Additionally, we continue to strengthen our leadership position and invest in DTC and 3-tier eCommerce channels. In markets where it is feasible, we entered into contractual arrangements 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 U.S. 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, craft beer, ABA, 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 complement our strategy with our investment in Canopy by expanding our portfolio into adjacent categories. Canopy is a leading cannabis company with operations in countries across the world. This investment is consistent with our long-term strategy to identify, address, and stay ahead of evolving consumer trends and market dynamics. Our strategic relationship with Canopy is designed to help position it to be successful in cannabis production, branding, and intellectual property.

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, maintain our targeted net leverage ratio, and deliver returns to stockholders through the payment of dividends and periodic share repurchases. Our results of operations and financial condition have been affected by inflation and changing prices and we expect these impacts to continue in Fiscal 2023. Our Fiscal 2023 results of operations could also be impacted by reductions in discretionary income of consumers available to purchase our products. We intend to pass along rising costs through increased selling prices, subject to normal competitive conditions. In addition, we continue to identify ongoing cost savings initiatives, including our commodity hedge program. However, there can be no assurances 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 events, such as the 2020 U.S. wildfires or the late frost in New Zealand,

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 34"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

continue to occur or accelerate in future periods, it could have a material impact on our results of operations and financial condition.

Recent Developments

Class B Stock declassification proposal

In April 2022, we received the Proposal which proposes that each share of Class B Stock would be converted into 1.35 shares of Class A Stock. Our Board of Directors has established a Special Committee to evaluate the Proposal. Any definitive agreement with respect to the potential transaction must be approved by the Special Committee as well as our Board of Directors. In addition, pursuant to the terms of the Proposal, any potential transaction would require the approval of holders of a majority of the shares of our Class A Stock that do not also hold shares of Class B Stock.

Other acquisitions

During the first quarter of Fiscal 2023, we completed the acquisitions of other businesses, consisting of Lingua Franca, which included a collection of luxury wines, a vineyard, and a production facility, and the remaining 73% ownership interest in Austin Cocktails, which included a portfolio of small batch, RTD cocktails. The purchase price for each acquisition includes an earn-out based on the performance of the respective brands. The results of operations of these acquired businesses will be reported in the Wine and Spirits segment and will be included in our consolidated results of operations from their respective date of acquisition.

COVID-19 and Global Supply Chain Related Impacts

COVID-19 containment measures affected us predominantly in the first half of Fiscal 2021 primarily in the reduction of (i) depletion volume on our products in the on-premise business due to bar and restaurant closures and (ii) shipment volume related to the reduced production activity at our major breweries in Mexico which we were able to rectify in the second half of Fiscal 2021. The on-premise business has historically been about 10% to 15% of our depletion volume for beer, wine, and spirits. Our on-premise depletion volumes for Fiscal 2022 were, and in Fiscal 2023 may continue to be, impacted by regional COVID-19 case levels, vaccine immunization rates, new COVID-19 variants, and vaccine efficacy against new COVID-19 variants. Currently, our breweries, wineries, distilleries, and bottling facilities are open and operational.

As reflected in the discussion below, we have seen consumers shift more of their total shopping spend to online channels since the COVID-19 outbreak, which has led to increased eCommerce sales, including DTC, for our business. Fiscal 2022 was impacted by challenges with both global supply chain logistics and transportation which contributed to lower product inventory levels and higher cost of product sold. For example, wine produced in New Zealand and Italy and subsequently shipped to the U.S. for distribution continues to be affected by the lack of availability and increased costs of ocean freight shipping containers and port delays causing increased storage charges. In addition, during Fiscal 2022, we experienced a brown glass purchasing shortage, which impacted certain of our imported beer brands. This supply returned to normal levels in early Fiscal 2023. To the extent these circumstances continue to occur or accelerate in future periods it could have a material impact on our results of operations.

In response to COVID-19, we have ensured our ongoing liquidity and financial flexibility through cash preservation initiatives, capital management adjustments, and cost control measures. We have used opportunities to defer some payments including certain payroll taxes under the CARES Act afforded to us earlier in the pandemic. We are not able to estimate the long-term impact of COVID-19 on our business, financial condition, results of operations, and/or cash flow. We believe we have sufficient liquidity available from operating cash flow, cash on hand, and availability under our revolving credit facility. We expect to have continued access to capital markets and to be able to continue to return value to stockholders through dividends and periodic share repurchases.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 35"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Investments, Acquisitions, and Divestitures

Beer segment

Ballast Point Divestiture

In March 2020, we sold the Ballast Point craft beer business, including a number of its associated production facilities and brewpubs. Accordingly, our consolidated results of operations include the results of operations of our Ballast Point craft beer business through the date of divestiture.

Wine and Spirits segment

My Favorite Neighbor acquisition

In November 2021, we acquired the remaining 65% ownership interest in My Favorite Neighbor, which primarily included the acquisition of goodwill, trademarks, inventory, and property, plant, and equipment. The results of operations of My Favorite Neighbor are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition. In April 2020, we made an initial investment in My Favorite Neighbor that was accounted for under the equity method. We recognized our share of their equity in earnings (losses) in our consolidated financial statements in the Wine and Spirits segment up to the date we acquired the remaining ownership interest. The My Favorite Neighbor investment and subsequent acquisition supported our strategic focus on consumer-led premiumization trends and meeting the evolving needs of our consumers.

Paul Masson Divestiture

In January 2021, we sold the Paul Masson Grande Amber Brandy brand, related inventory, and interests in certain contracts. We received cash proceeds of $267.4 million, net of post-closing adjustments. The net cash proceeds were used for general corporate purposes. We recognized a net gain of $58.4 million on the sale of the business primarily for the year ended February 28, 2021.

Wine and Spirits Divestitures

In January 2021, we sold a portion of our wine and spirits business, including lower-margin, lower-growth wine and spirits brands, related inventory, interests in certain contracts, wineries, vineyards, offices, and facilities. We received net cash proceeds of $538.4 million, net of post-closing adjustments. In addition, we have the potential to earn an incremental $250 million of contingent consideration if certain brand performance targets are met over a two-year period after closing.

In January 2021, we also sold the New Zealand-based Nobilo Wine brand and certain related assets. We received cash proceeds of $129.0 million, net of post-closing adjustments.

The cash proceeds from the Wine and Spirits Divestitures were utilized to reduce outstanding debt and for other general corporate purposes. We recognized a net loss of $33.6 million on the Wine and Spirits Divestitures primarily for the year ended February 28, 2021.

Concentrate Business Divestiture

In December 2020, we sold certain brands used in our concentrates and high-color concentrate business, and certain related intellectual property, inventory, interests in certain contracts, and other assets.

The following presents selected financial information included in our historical consolidated financial statements that are no longer part of our consolidated results of operations following the Paul Masson Divestiture, Wine and Spirits Divestitures, and Concentrate Business Divestiture:

[[GREPCENT_TABLE]]
[["","Fiscal 2021"],["(in millions)"],["Net sales","$","642.3"],["Gross profit","$","252.9"],["Marketing (1)","$","14.5"]]
[[/GREPCENT_TABLE]]

(1)Included in selling, general, and administrative expenses within our consolidated results of operations.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 36"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Copper & Kings acquisition

In September 2020, we acquired the remaining ownership interest in Copper & Kings which primarily included the acquisition of inventory and property, plant, and equipment. This acquisition included a collection of traditional and craft batch-distilled American brandies and other select spirits. The results of operations of Copper & Kings are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.

Empathy Wines acquisition

In June 2020, we acquired Empathy Wines, which primarily included the acquisition of goodwill, trademarks, and inventory. This acquisition, which included a digitally-native wine brand, strengthened our position in the DTC and other eCommerce markets. The results of operations of Empathy Wines are reported in the Wine and Spirits segment and have been included in our consolidated results of operations from the date of acquisition.

Corporate Operations and Other segment

Corporate investment

In February 2022, we sold an investment made through our corporate venture capital function. We recognized our share of their equity in earnings (losses) in our consolidated financial statements in the Corporate Operations and Other segment up to the date we sold our ownership interest.

Canopy segment

Canopy investment

In May 2020, we exercised the November 2017 Canopy Warrants at an exercise price of C$12.98 per warrant share for C$245.0 million, or $173.9 million.

For additional information on these recent developments, investments, acquisitions, and divestitures, refer to Notes 2, 7, 10, and 17.

Results of Operations

Financial Highlights

References to organic throughout the following discussion exclude the impact of the brands divested in January 2021, as appropriate.

For Fiscal 2022 compared with Fiscal 2021:

•Our results of operations were negatively impacted by (i) an unrealized net loss from the changes in fair value of our investment in Canopy as compared with the unrealized net gain in Fiscal 2021, (ii) an impairment of long-lived assets for Fiscal 2022 in connection with certain assets at the Mexicali Brewery, (iii) a decrease in Wine and Spirits net sales due largely to the divestitures, and (iv) an increase in operational costs within the Beer segment, partially offset by an increase in Beer net sales, as well as a decrease in equity in losses from Canopy’s results.

•Net sales increased 2% as an increase in Beer net sales, driven predominantly by shipment volume growth and favorable impact from pricing, was offset by the decrease in Wine and Spirits net sales, due largely to the divestitures.

•Operating income decreased 16% largely due to (i) the impairment of long-lived assets, (ii) the decrease in Wine and Spirits net sales, (iii) an increase in cost of product sold within the Beer segment, and (iv) an increase in marketing spend for the Beer segment, driven by a planned increase to support the growth of our brands, partially offset by the increase in Beer net sales.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 37"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

•Net income (loss) attributable to CBI and diluted net income (loss) per common share attributable to CBI decreased largely due to the items discussed above, partially offset by lower provision for income taxes.

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:

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021"],["(in millions)"],["Cost of product sold"],["Net gain (loss) on undesignated commodity derivative contracts","$","109.9","","","$","25.1"],["Net flow through of reserved inventory","12.1","","","\u2014"],["Settlements of undesignated commodity derivative contracts","(35.9)","","","31.6"],["Strategic business development costs","(2.6)","","","(29.8)"],["Recovery of (loss on) inventory write-down","(1.0)","","","(70.4)"],["Flow through of inventory step-up","(0.1)","","","(0.4)"],["COVID-19 incremental costs","\u2014","","","(7.6)"],["Accelerated depreciation","\u2014","","","(0.1)"],["Total cost of product sold","82.4","","","(51.6)"],["Selling, general, and administrative expenses"],["Transition services agreements activity","(19.2)","","","0.4"],["Transaction, integration, and other acquisition-related costs","(1.4)","","","(7.6)"],["Restructuring and other strategic business development costs","0.6","","","(23.9)"],["Net gain (loss) on foreign currency derivative contracts","\u2014","","","(8.0)"],["Impairment of intangible assets","\u2014","","","(6.0)"],["COVID-19 incremental costs","\u2014","","","(4.8)"],["Other gains (losses)","(2.3)","","","14.3"],["Total selling, general, and administrative expenses","(22.3)","","","(35.6)"],["Impairment of brewery construction in progress","(665.9)","","","\u2014"],["Impairment of assets held for sale","\u2014","","","(24.0)"],["Gain (loss) on sale of business","1.7","","","14.2"],["Comparable Adjustments, Operating income (loss)","$","(604.1)","","","$","(97.0)"],["Income (loss) from unconsolidated investments","$","(1,488.2)","","","$","265.2"]]
[[/GREPCENT_TABLE]]

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

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 38"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

reflect the economic effects of the commodity derivative contracts without the resulting unrealized mark to fair value volatility.

Net flow through of reserved inventory

We sold reserved inventory previously written down in Fiscal 2021 following the 2020 U.S. wildfires.

Strategic business development costs

We recognized costs primarily in connection with losses on write-downs of excess inventory and contract terminations resulting from our initiatives to optimize our portfolio, gain efficiencies, and reduce our cost structure within the Wine and Spirits segment.

Recovery of (loss on) inventory write-down

We recognized a loss primarily on the write-down of bulk wine inventory and certain grapes as a result of smoke damage sustained during the 2020 U.S. wildfires (Fiscal 2021).

COVID-19 incremental costs

We recognized costs for incremental wages and hazard payments to employees, purchases of personal protective equipment, more frequent and thorough cleaning and sanitization of our facilities, and costs associated with the unused beer keg reimbursement program with distributors.

Selling, general, and administrative expenses

Transition services agreements activity

We recognized costs in connection with transition services agreements related to the Wine and Spirits Divestitures (Fiscal 2022).

Transaction, integration, and other acquisition-related costs

We recognized transaction, integration, and other acquisition-related costs in connection with our investments, acquisitions, and divestitures.

Restructuring and other strategic business development costs

We recognized costs primarily in connection with initiatives to optimize our portfolio, gain efficiencies, and reduce our cost structure within the Wine and Spirits segment (Fiscal 2021).

Net gain (loss) on foreign currency derivative contracts

We recognized a net loss primarily in connection with the settlement of foreign currency forward contracts entered into to fix the U.S. dollar cost of the May 2020 Canopy Investment.

Impairment of intangible assets

We recognized trademark impairment losses related to our Beer segment’s Four Corners craft beer trademark asset. For additional information, refer to Note 7.

COVID-19 incremental costs

We recognized costs for payments to third-party general contractors to maintain their workforce for expansion activities at the Obregon Brewery and recognized costs for incremental wages and hazard payments to employees.

Other gains (losses)

We recognized other gains (losses) primarily in connection with (i) a gain recognized on the remeasurement of our previously held equity interest in My Favorite Neighbor to the acquisition-date fair value (Fiscal 2022), (ii) a property tax settlement (Fiscal 2022), (iii) an adjustment to understated excise tax accruals primarily related to a prior period acquisition (Fiscal 2022), (iv) net increase (decrease) in estimated fair value of contingent liabilities associated with prior period acquisitions (Fiscal 2022, Fiscal 2021), and (v) a gain recognized on the sale of a vineyard (Fiscal 2021).

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 39"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Impairment of brewery construction in progress

We recognized an impairment of long-lived assets in connection with certain assets at the Mexicali Brewery. For additional information, refer to Note 7.

Impairment of assets held for sale

We recognized impairments of long-lived assets held for sale in connection with the Wine and Spirits Divestitures and the Concentrate Business Divestiture. For additional information, refer to Note 7.

Gain (loss) on sale of business

We recognized a net gain (loss) primarily on the completion of the Paul Masson Divestiture and the Wine and Spirits Divestitures. For additional information, refer to Note 2.

Income (loss) from unconsolidated investments

We recognized income (loss) primarily from (i) an unrealized gain (loss) from the changes in fair value of our securities measured at fair value, (ii) equity in earnings (losses) from Canopy’s results, including equity in losses from Canopy largely related to costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand, and (iii) a net gain recognized from the sale of an equity method investment made through our corporate venture capital function (Fiscal 2022). For additional information, refer to Notes 7 and 10.

Business Segments

Net sales

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions)"],["Beer","$","6,751.6","","","$","6,074.6","","","$","677.0","","","11","%"],["Wine and Spirits:"],["Wine","1,819.3","","","2,208.4","","","(389.1)","","","(18","%)"],["Spirits","249.8","","","331.9","","","(82.1)","","","(25","%)"],["Total Wine and Spirits","2,069.1","","","2,540.3","","","(471.2)","","","(19","%)"],["Canopy","444.3","","","378.6","","","65.7","","","17","%"],["Consolidation and eliminations","(444.3)","","","(378.6)","","","(65.7)","","","(17","%)"],["Consolidated net sales","$","8,820.7","","","$","8,614.9","","","$","205.8","","","2","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Beer segment"],["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions, branded product, 24-pack, 12-ounce case equivalents)"],["Net sales","$","6,751.6","","","$","6,074.6","","","$","677.0","","","11","%"],["Shipments","364.2","","","334.6","","","","","8.8","%"],["Depletions","","","","","","","8.9","%"]]
[[/GREPCENT_TABLE]]

The increase in Beer net sales is largely due to (i) $534.8 million of volume growth within our Mexican beer portfolio, which benefited from continued consumer demand and a return to on-premise, including bars and restaurants, and (ii) $182.4 million of favorable impact from pricing in select markets within our Mexican beer portfolio, partially offset by $45.5 million of unfavorable product mix primarily from an increase in on-premise keg sales and a shift in package types. Product inventories in our 3-tier distribution channel returned to more normal levels by the end of Fiscal 2022.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 40"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

[[GREPCENT_TABLE]]
[["","Wine and Spirits segment"],["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions, branded product, 9-liter case equivalents)"],["Net sales","$","2,069.1","","","$","2,540.3","","","$","(471.2)","","","(19","%)"],["Shipments"],["Total","29.9","","","45.0","","","","","(33.6","%)"],["Organic (1) (2)","29.9","","","29.1","","","","","2.7","%"],["U.S. Domestic","26.3","","","41.5","","","","","(36.6","%)"],["Organic U.S. Domestic (1) (2)","26.3","","","25.8","","","","","1.9","%"],["Depletions (1) (2)","","","","","","","(5.8","%)"]]
[[/GREPCENT_TABLE]]

(1)Includes an adjustment to remove volume associated with the Wine and Spirits Divestitures for the period March 1, 2020, through January 4, 2021.

(2)Includes an adjustment to remove volume associated with the Paul Masson Divestiture for the period March 1, 2020, through January 11, 2021.

The decrease in Wine and Spirits net sales is due to $642.3 million from the divestitures, partially offset by a $171.1 million increase in organic net sales. The increase in organic net sales is driven by (i) $62.7 million increase from favorable product mix shift, (ii) $40.3 million of favorable impact from pricing driven by distributor transition and price increases, (iii) $37.7 million increase primarily from bulk wine and non-branded net sales, and (iv) $28.2 million increase in branded wine and spirits shipment volume attributable to our continued focus on growing our brands and an overlap of lower shipment volumes in Fiscal 2021. The increase in organic net sales was negatively impacted by global supply chain logistics and route to market changes. For Fiscal 2022, the organic U.S. shipment volume was ahead of the depletion volume largely driven by a challenging overlap due to consumer pantry loading behavior in the first half of Fiscal 2021 and timing related to transition activities with distributors that occurred at the end of Fiscal 2021.

[[GREPCENT_TABLE]]
[["","Canopy segmentOur ownership interest in Canopy allows us to exercise significant influence, but not control, and, therefore, we account for our investment in Canopy under the equity method. Amounts included for the Canopy segment represent 100% of Canopy\u2019s reported results on a two-month lag. Accordingly, we recognized our share of Canopy\u2019s earnings (losses) from January through December 2021, in our Fiscal 2022 results and January through December 2020, in our Fiscal 2021 results. Although we own less than 100% of the outstanding shares of Canopy, 100% of its results are included and subsequently eliminated to reconcile to our consolidated financial statements. See \u201cIncome (loss) from unconsolidated investments\u201d below for a discussion of Canopy\u2019s net sales, gross profit (loss), selling, general, and administrative expenses, and operating income (loss)."]]
[[/GREPCENT_TABLE]]

Gross profit

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions)"],["Beer","$","3,677.0","","","$","3,402.4","","","$","274.6","","","8","%"],["Wine and Spirits","947.9","","","1,115.2","","","(167.3)","","","(15","%)"],["Canopy","(18.6)","","","(14.1)","","","(4.5)","","","(32","%)"],["Consolidation and eliminations","18.6","","","14.1","","","4.5","","","32","%"],["Comparable Adjustments","82.4","","","(51.6)","","","134.0","","","NM"],["Consolidated gross profit","$","4,707.3","","","$","4,466.0","","","$","241.3","","","5","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 41"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

[[GREPCENT_TABLE]]
[["","The increase in Beer is primarily due to $301.3 million of shipment volume growth and the $182.4 million favorable impact from pricing, partially offset by $200.1 million of higher cost of product sold. The higher cost of product sold is predominantly due to higher operational costs including (i) a $78.2 million increase in obsolescence primarily from excess inventory of hard seltzers largely resulting from a slowdown in the overall category, (ii) $66.3 million of brewery costs primarily driven by higher compensation and benefits, largely resulting from increased headcount to support the growth of our Mexican beer portfolio, and increased utility costs, (iii) $61.5 million of higher material costs, including pallets, cartons, steel, corn, and aluminum, and (iv) $44.3 million of higher depreciation, partially offset by (i) $47.8 million of favorable fixed cost absorption primarily as a result of increased production levels for Fiscal 2022 and (ii) $20.1 million of foreign currency transactional benefits."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","The decrease in Wine and Spirits is due to a decrease of $252.9 million from the divestitures, partially offset by a $85.6 million increase in organic gross profit. The increase in organic gross profit is attributable to (i) the $40.3 million of favorable pricing, (ii) $35.7 million increase from favorable product mix shift, and (iii) $9.6 million primarily related to favorable bulk wine and non-branded net sales, partially offset by $2.9 million of higher cost of product sold. The increased cost of product sold was largely attributable to $29.0 million of increased transportation costs resulting from global supply chain challenges, including inflation, and route to market changes, partially offset by (i) $16.5 million of net favorable fixed cost absorption and (ii) approximately $10 million of lower grape raw materials and other cost savings initiatives. The net favorable fixed cost absorption in Fiscal 2022 primarily resulted from the impact of the 2020 U.S. wildfires, partially offset by decreased production levels at certain facilities as a result of a late frost in New Zealand which reduced the grape harvest."]]
[[/GREPCENT_TABLE]]

Gross profit as a percent of net sales increased to 53.4% for Fiscal 2022 compared with 51.8% for Fiscal 2021. This was largely due to approximately (i) 150 basis points of favorable change in Comparable Adjustments, (ii) 95 basis points of favorable impact from the lower-margin wine and spirits divestitures, and (iii) 95 basis points of favorable impact from Beer pricing in select markets, partially offset by approximately 220 basis points of rate decline from cost of product sold within the Beer segment, driven by the increase in operational costs.

Selling, general, and administrative expenses

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions)"],["Beer","$","973.7","","","$","908.1","","","$","65.6","","","7","%"],["Wine and Spirits","477.2","","","492.8","","","(15.6)","","","(3","%)"],["Corporate Operations and Other","238.2","","","228.6","","","9.6","","","4","%"],["Canopy","611.5","","","1,481.9","","","(870.4)","","","(59","%)"],["Consolidation and eliminations","(611.5)","","","(1,481.9)","","","870.4","","","59","%"],["Comparable Adjustments","22.3","","","35.6","","","(13.3)","","","(37","%)"],["Consolidated selling, general, and administrative expenses","$","1,711.4","","","$","1,665.1","","","$","46.3","","","3","%"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","The increase in Beer is primarily due to $35.3 million of higher marketing spend and $29.3 million of increased general and administrative expenses. The higher marketing spend was driven by our planned investments to support the growth of our Mexican beer portfolio through media and event sponsorships. The increase in general and administrative expenses was primarily driven by increased legal expense, increased depreciation and other costs related to the implementation of a new ERP, unfavorable foreign currency transaction losses, and higher compensation and benefits."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","The decrease in Wine and Spirits is primarily due to $14.0 million of lower marketing spend as a result of the divestitures."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 42"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

[[GREPCENT_TABLE]]
[["","The increase in Corporate Operations and Other is largely due to an approximate (i) $12 million increase in consulting and third-party services, largely related to strategic initiatives, (ii) $5 million increase in travel as compared to reduced travel in Fiscal 2021 resulting from COVID-19 containment measures, and (iii) $4 million increase in depreciation expense, primarily related to the implementation of a new ERP, partially offset by an approximate (i) $6 million decrease in compensation and benefits, primarily related to the reversal of stock-based compensation for a performance award tied to earnings from our investment in Canopy that did not achieve a threshold level of performance and (ii) $5 million of favorable foreign currency impact."]]
[[/GREPCENT_TABLE]]

Selling, general, and administrative expenses as a percent of net sales increased to 19.4% for Fiscal 2022 as compared with 19.3% for Fiscal 2021. The increase is driven largely by approximately 35 basis points of rate growth in connection with the wine and spirits divestitures, largely offset by approximately 15 points of rate decline in the Beer segment as the increase in Beer net sales exceeded the increase in selling, general, and administrative expenses and a decrease in the Wine and Spirits segment selling, general, and administrative expenses, which resulted in approximately 10 basis points of rate decline.

Operating income (loss)

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions)"],["Beer","$","2,703.3","","","$","2,494.3","","","$","209.0","","","8","%"],["Wine and Spirits","470.7","","","622.4","","","(151.7)","","","(24","%)"],["Corporate Operations and Other","(238.2)","","","(228.6)","","","(9.6)","","","(4","%)"],["Canopy","(630.1)","","","(1,496.0)","","","865.9","","","58","%"],["Consolidation and eliminations","630.1","","","1,496.0","","","(865.9)","","","(58","%)"],["Comparable Adjustments","(604.1)","","","(97.0)","","","(507.1)","","","NM"],["Consolidated operating income (loss)","$","2,331.7","","","$","2,791.1","","","$","(459.4)","","","(16","%)"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","The increase in Beer is largely attributable to the strong shipment volume growth within our Mexican beer portfolio and favorable pricing impact, partially offset by higher operational costs, marketing spend, and general and administrative expenses, as discussed above."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","The decrease in Wine and Spirits is largely attributable to the divestitures, partially offset by the increase in organic net sales, led by favorable impacts from product mix shift and pricing, bulk wine net sales, and branded wine and spirits shipment volume growth."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","As previously discussed, the Corporate Operations and Other increase in operating loss is largely due to the increases in consulting and third-party services and travel expense as compared to Fiscal 2021, partially offset by favorable impacts from the reversal of stock-based compensation and foreign currency."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 43"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Income (loss) from unconsolidated investments

General

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions)"],["Unrealized net gain (loss) on securities measured at fair value","$","(1,644.7)","","","$","802.0","","","$","(2,446.7)","","","NM"],["Equity in earnings (losses) from Canopy and related activities (1)","(73.6)","","","(679.0)","","","605.4","","","89","%"],["Equity in earnings (losses) from other equity method investees","31.8","","","27.3","","","4.5","","","16","%"],["Net gain (loss) on sale of unconsolidated investment (2)","51.0","","","\u2014","","","51.0","","","NM"],["","$","(1,635.5)","","","$","150.3","","","$","(1,785.8)","","","NM"]]
[[/GREPCENT_TABLE]]

(1)Includes $82.4 million and $359.6 million of costs designed to improve their organizational focus, streamline operations, and align production capability with projected demand for Fiscal 2022 and Fiscal 2021, respectively.

(2)Represents the sale of our previously held equity interest in an investment made through our corporate venture capital function.

For additional information regarding our equity method investments, refer to Note 10.

[[GREPCENT_TABLE]]
[["","Canopy segmentCanopy net sales increased to $444.3 million for Fiscal 2022 from $378.6 million for Fiscal 2021. This increase of $65.7 million, or 17%, is primarily attributable to an increase in other consumer product sales and Canadian THC recreational sales. The increase in other consumer product sales largely resulted from (i) sales of sports nutrition beverages and mixes by BioSteel Sports Nutrition Inc., as they expanded their U.S. distribution and introduced new RTD products and (ii) sales of vaporizers by Storz & Bickel GmbH & Co. KG also increased due to continued U.S. distribution expansion, partially offset by supply chain challenges and shipping restrictions. Canadian THC recreational sales benefited from Canopy\u2019s Fiscal 2022 acquisitions including the Supreme Cannabis Company, Inc. and AV Cannabis Inc. (\u201cAce Valley\u201d), partially offset by lower supply of high demand products and unfavorable impacts from product mix shift and pricing. Canopy gross profit (loss) declined to $(18.6) million for Fiscal 2022 from $(14.1) million for Fiscal 2021. This increase in loss of $4.5 million is primarily driven by (i) higher inventory write-downs for Fiscal 2022 as compared with Fiscal 2021, (ii) price compression in the Canadian recreational channel and for Canopy\u2019s, now former, international pharmaceutical business, C3, (iii) shifts in business mix, (iv) unfavorable fixed cost absorption for certain of its businesses, and (v) higher shipping and warehousing costs in North America. The decline in Canopy\u2019s gross profit (loss) was partially offset by payroll subsidies received from the Canadian government in Fiscal 2022 pursuant to a COVID-19 relief program. Canopy selling, general, and administrative expenses decreased $870.4 million primarily from a reduction in (i) asset impairment and restructuring charges related to its previous year decision to close greenhouse facilities as well as other changes related to its organizational and strategic review of their business, (ii) expected credit losses on financial assets and related charges, (iii) stock-based compensation expense, and (iv) sales and marketing expenses. The combination of these factors were the main contributors to the $865.9 million decrease in operating loss."]]
[[/GREPCENT_TABLE]]

Interest expense

Interest expense decreased to $356.4 million for Fiscal 2022 from $385.7 million for Fiscal 2021. This decrease of $29.3 million, or 8%, is due to approximately $1.2 billion of lower average borrowings, partially offset by approximately 10 basis points of higher weighted average interest rates. The lower average borrowings are primarily attributable to the partial repayment of financing entered into in connection with the November 2018 Canopy Transaction.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 44"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Loss on extinguishment of debt

Loss on extinguishment of debt primarily consists of a make-whole payment in connection with the early redemption of our (i) 2.70% May 2017 Senior Notes and 2.65% November 2017 Senior Notes (Fiscal 2022) and (ii) 2.25% November 2017 senior notes (Fiscal 2021).

(Provision for) benefit from income taxes

The (provision for) benefit from income taxes decreased to $(309.4) million for Fiscal 2022 from $(511.1) million for Fiscal 2021. Our effective tax rate for Fiscal 2022 was 99.7% as compared with 20.1% for Fiscal 2021. In comparison to prior year, our taxes were impacted primarily by:

•valuation allowances on a portion of the unrealized net loss from the changes in fair value of our investment in Canopy and Canopy equity in earnings (losses);

•the effective tax rates applicable to our foreign businesses, including the impact of the long-lived asset impairment of brewery construction in progress; and

•a net income tax benefit from stock-based compensation award activity for Fiscal 2022 from changes in option exercise activity.

For additional information, refer to Note 13.

We expect our reported effective tax rate for the next fiscal year to be in the range of 19% to 21%. Since estimates are not currently available, this range does not reflect any future changes in the fair value of our Canopy investment measured at fair value and any future equity in earnings (losses) and related activities from the Canopy Equity Method Investment.

Net income (loss) attributable to CBI

Net income (loss) attributable to CBI decreased to $(40.4) million for Fiscal 2022 from $1,998.0 million for Fiscal 2021. This decrease of $2,038.4 million is largely attributable to (i) the unrealized net loss from the changes in fair value of our investment in Canopy as compared with an unrealized net gain in Fiscal 2021, (ii) an impairment of long-lived assets for Fiscal 2022 in connection with certain assets at the Mexicali Brewery, (iii) the decrease in Wine and Spirits net sales due largely to the divestitures, and (iv) higher operational costs within the Beer segment, partially offset by strong shipment volume growth within the Beer segment and the decrease in the provision for income taxes.

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.

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, primarily short-term borrowings, 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.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 45"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

In December 2021, we entered into an agreement with a financial institution for payable services. We plan to facilitate a voluntary supply chain finance program through this participating financial institution in Fiscal 2023. The program will be available to certain of our suppliers allowing them the option to manage their cash flow. We will not be 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, will not be impacted. We are still evaluating the impact of this program on future liquidity.

As of February 28, 2022, the exercise of all Canopy warrants held by us would have required a cash outflow of approximately $5.9 billion based on the terms of the November 2018 Canopy Warrants.

Cash Flows

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions)"],["Net cash provided by (used in):"],["Operating activities","$","2,705.4","","","$","2,806.5","","","$","(101.1)","","","(4)","%"],["Investing activities","(1,035.8)","","","(87.9)","","","(947.9)","","","NM"],["Financing activities","(1,929.5)","","","(2,346.6)","","","417.1","","","18","%"],["Effect of exchange rate changes on cash and cash equivalents","(1.3)","","","7.2","","","(8.5)","","","(118)","%"],["Net increase (decrease) in cash and cash equivalents","$","(261.2)","","","$","379.2","","","$","(640.4)","","","(169)","%"]]
[[/GREPCENT_TABLE]]

Operating activities

The decrease in net cash provided by (used in) operating activities consists of:

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions)"],["Net income (loss)","$","1.0","","","$","2,031.8","","","$","(2,030.8)","","","(100)","%"],["Unrealized net (gain) loss on securities measured at fair value","1,644.7","","","(802.0)","","","2,446.7","","","NM"],["Deferred tax provision (benefit)","84.8","","","336.4","","","(251.6)","","","(75)","%"],["Equity in (earnings) losses of equity method investees and related activities, net of distributed earnings","61.6","","","673.4","","","(611.8)","","","(91)","%"],["Impairment of brewery construction in progress","665.9","","","\u2014","","","665.9","","","NM"],["Other non-cash adjustments","433.0","","","418.6","","","14.4","","","3","%"],["Change in operating assets and liabilities, net of effects from purchase and sale of business","(185.6)","","","148.3","","","(333.9)","","","NM"],["Net cash provided by (used in) operating activities","$","2,705.4","","","$","2,806.5","","","$","(101.1)","","","(4)","%"]]
[[/GREPCENT_TABLE]]

The net change in operating assets and liabilities was largely driven by (i) higher Fiscal 2022 inventory levels for the Beer and Wine and Spirits segments as compared to Fiscal 2021 inventory levels which were negatively impacted by climate-related events, (ii) increased accounts receivable for the Beer and Wine and Spirits segments, and (iii) higher income tax payments in Fiscal 2022 as compared to Fiscal 2021. This was partially offset by benefits from (i) accounts payable primarily attributable to the timing of payments for both the Beer and Wine and Spirits segments and (ii) an exclusivity payment received in Fiscal 2022 related to distribution arrangements for our U.S. wine and spirits brand portfolio.

Investing activities

Net cash used in investing activities for Fiscal 2022 increased primarily due to $994.9 million of lower proceeds from sale of business and $162.2 million of higher capital expenditures for Fiscal 2022 as compared with Fiscal 2021. The increase in net cash used in investing activities was partially offset by the $173.9 million exercise of the November 2017 Canopy Warrants in May 2020.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 46"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Business investments, acquisitions, and divestitures consist primarily of the following:

[[GREPCENT_TABLE]]
[["","","Investments","","Acquisitions","","Divestitures"],["Fiscal 2022"],["","","","","\u2022My Favorite Neighbor","","\u2022Corporate investment"],["Fiscal 2021"],["","","\u2022May 2020 Canopy Investment","","\u2022Copper & Kings","","\u2022Paul Masson Grande Amber Brandy"],["","","\u2022My Favorite Neighbor","","\u2022Empathy Wines","","\u2022Wine and Spirits Divestiture"],["","","","","","","\u2022Nobilo Wine"],["","","","","","","\u2022Concentrates and high-color concentrates"],["","","","","","","\u2022Ballast Point"]]
[[/GREPCENT_TABLE]]

For additional information on these investments, acquisitions, and divestitures, refer to Notes 2, 7, and 10.

Financing activities

The decrease in net cash provided by (used in) financing activities consists of:

[[GREPCENT_TABLE]]
[["","Fiscal 2022","","Fiscal 2021","","Dollar Change","","Percent Change"],["(in millions)"],["Net proceeds from (payments of) debt, current and long-term, and related activities","$","(81.3)","","","$","(1,787.8)","","","$","1,706.5","","","95","%"],["Dividends paid","(573.0)","","","(575.0)","","","2.0","","","0","%"],["Purchases of treasury stock","(1,390.5)","","","\u2014","","","(1,390.5)","","","NM"],["Net cash provided by stock-based compensation activities","167.8","","","51.2","","","116.6","","","NM"],["Distributions to noncontrolling interests","(52.5)","","","(35.0)","","","(17.5)","","","(50)","%"],["Net cash provided by (used in) financing activities","$","(1,929.5)","","","$","(2,346.6)","","","$","417.1","","","18","%"]]
[[/GREPCENT_TABLE]]

Debt

Total debt outstanding as of February 28, 2022, amounted to $10,416.5 million, a decrease of $25.8 million from February 28, 2021. This decrease consisted of:

[[GREPCENT_TABLE]]
[["","","Debt repayment","","Debt issuance"]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 47"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Bank facilities

In June 2021, the Company and the Administrative Agent and Lender amended the March 2020 Term Credit Agreement. The principal change effected by the June 2021 amendment was a reduction in LIBOR margin from 0.88% to 0.63% from June 1, 2021, through December 31, 2021.

In April 2022, we entered into the 2022 Restatement Agreement that amended and restated the 2020 Credit Agreement. The 2022 Restatement Agreement resulted in (i) the refinance and increase of the existing revolving credit facility from $2.0 billion to $2.25 billion and extension of its maturity to April 14, 2027, (ii) the refinement of certain negative covenants, and (iii) the replacement of LIBOR rates with rates based on term SOFR. There are no borrowings outstanding under the 2022 Credit Agreement.

In April 2022, the Company and the Administrative Agent and Lender amended the June 2021 Term Credit Agreement. The principal changes effected by the April 2022 amendment were the refinement of certain negative covenants and replacement of LIBOR rates with rates based on term SOFR.

Senior notes

In July 2021, we issued the 2.25% July 2021 Senior Notes. Proceeds from this offering, net of discount and debt issuance costs, of $987.2 million were used towards the repayment of our 2.70% May 2017 Senior Notes and 2.65% November 2017 Senior Notes.

General

The majority of our outstanding borrowings as of February 28, 2022, consisted of fixed-rate senior unsecured notes, with maturities ranging from calendar 2023 to calendar 2050, and a variable-rate senior unsecured term loan facility under our June 2021 Term Credit Agreement with a calendar 2024 maturity date as follows:

Additionally, we have a commercial paper program which provides for the issuance of up to an aggregate principal amount of $2.0 billion of commercial paper. Our commercial paper program is backed by unused commitments under our revolving credit facility under our 2022 Credit Agreement. Accordingly, outstanding borrowings under our commercial paper program reduce the amount available under our revolving credit facility.

We do not have purchase commitments from buyers for our commercial paper and, therefore, our ability to issue commercial paper is subject to market demand. If the commercial paper market is not available to us for any reason when commercial paper borrowings mature, we will utilize unused commitments under our revolving credit facility under our 2022 Credit Agreement to repay commercial paper borrowings. We do not expect that

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 48"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

fluctuations in demand for commercial paper will affect our liquidity given our borrowing capacity available under our revolving credit facility.

We had the following remaining borrowing capacity available under our 2020 Credit Agreement and 2022 Credit Agreement, respectively:

[[GREPCENT_TABLE]]
[["","February 28, 2022","","April 14, 2022"],["(in millions)"],["Revolving credit facility (1)","$","1,664.8","","","$","1,678.0"]]
[[/GREPCENT_TABLE]]

(1)    Net of outstanding revolving credit facility borrowings and outstanding letters of credit under our 2020 Credit Agreement and 2022 Credit Agreement, respectively, and outstanding borrowings under our commercial paper program.

The financial institutions participating in our 2022 Credit Agreement have complied with prior funding requests and we believe they will comply with any future funding requests. However, there can be no assurances that any particular financial institution will continue to do so.

As of February 28, 2022, we and our subsidiaries were subject to covenants that are contained in our 2020 Credit Agreement, including those restricting the incurrence of additional subsidiary indebtedness, additional liens, mergers and consolidations, transactions with affiliates, and sale and leaseback transactions, in each case subject to numerous conditions, exceptions, and thresholds. The financial covenants are limited to a minimum interest coverage ratio and a maximum net leverage ratio, both as defined in our 2020 Credit Agreement. As of February 28, 2022, under our 2020 Credit Agreement, the minimum interest coverage ratio was 2.5x and the maximum net leverage ratio was 4.0x.

The representations, warranties, covenants, and events of default set forth in our June 2021 Term Credit Agreement are substantially similar to those set forth in our 2020 Credit Agreement.

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

As of February 28, 2022, we were in compliance with our covenants under our 2020 Credit Agreement, our June 2021 Term Credit Agreement, and our indentures, and have met all debt payment obligations.

For further discussion and presentation of our borrowings and available sources of borrowing, refer to Note 12.

Common Stock Dividends

On April 6, 2022, our Board of Directors declared a quarterly cash dividend of $0.80 per share of Class A Stock, $0.72 per share of Class B Stock, and $0.72 per share of Class 1 Stock payable on May 19, 2022, to stockholders of record of each class as of the close of business on May 5, 2022. We expect to return approximately $600 million to stockholders in Fiscal 2023 through cash dividends.

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

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 49"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Share Repurchase Program

Our Board of Directors authorized the repurchase of up to $3.0 billion of our Class A Stock and Class B Stock under the 2018 Authorization and an additional repurchase of up to $2.0 billion of our Class A Stock and Class B Stock under the 2021 Authorization. No shares have been repurchased under the 2021 Authorization.

During Fiscal 2022, we repurchased 6,179,015 shares of Class A Stock pursuant to the 2018 Authorization at an aggregate cost of $1,390.5 million, or an average cost of $225.04 per share, through a combination of open market transactions and an ASR. Pursuant to the ASR announced in June 2021, we repurchased 2,240,397 shares of Class A Stock at an average purchase price paid of $223.17 per share. We primarily used cash on hand to pay the purchase price for the repurchased shares.

On April 7, 2022, we entered into an additional ASR to repurchase $500.0 million of our Class A Stock. We utilized short-term borrowings and cash on hand to pay the dollar value for shares repurchased in this ASR under the 2018 Authorization.

As of April 21, 2022, total shares repurchased under the 2018 Authorization and the 2021 Authorization are as follows:

[[GREPCENT_TABLE]]
[["","","","Class A Common Shares"],["","Repurchase Authorization","","Dollar Value of Shares Repurchased","","Number of Shares Repurchased"],["(in millions, except share data)"],["2018 Authorization","$","3,000.0","","","$","2,936.4","","","12,802,171"],["2021 Authorization","$","2,000.0","","","$","\u2014","","","\u2014"]]
[[/GREPCENT_TABLE]]

Share repurchases under the 2018 Authorization and 2021 Authorization may be accomplished at management’s discretion from time to time based on market conditions, our cash and debt position, and other factors as determined by management. Shares may be repurchased through open market or privately negotiated transactions. We may fund future share repurchases with cash generated from operations and/or proceeds from borrowings. Any repurchased shares will become treasury shares, including shares repurchased under the 2018 Authorization.

We currently expect to continue to repurchase shares in the future, but such repurchases are dependent upon our financial condition, results of operations, capital requirements, and other factors, including those set forth under Item 1A. “Risk Factors” of this Form 10-K.

For additional information, refer to Note 17.

Capital Resources

We have maintained adequate liquidity to meet working capital requirements, fund capital expenditures, and repay scheduled principal and interest payments on debt. Absent deterioration of market conditions, we believe that cash flows from operating and financing activities, primarily short-term borrowings, will provide adequate resources to satisfy our working capital, scheduled principal and interest payments on debt, anticipated dividend payments, periodic share repurchases, and anticipated capital expenditure requirements for both our short-term and long-term capital needs.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 50"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

The following sets forth information about our outstanding obligations at February 28, 2022. For a detailed discussion of the items noted in the following table, refer to Notes 11, 12, 13, 14, 15, and 16.

[[GREPCENT_TABLE]]
[["","Short-term payments","","Long-term payments","","Total"],["(in millions)"],["Contractual obligations:"],["Short-term borrowings","$","323.0","","","$","\u2014","","","$","323.0"],["Long-term debt (excluding unamortized debt issuance costs and unamortized discounts)","$","606.8","","","$","9,563.1","","","$","10,169.9"],["Interest payments on long-term debt (1)","$","375.3","","","$","3,526.0","","","$","3,901.3"],["Operating leases","$","95.1","","","$","546.5","","","$","641.6"],["Other long-term liabilities (2)","$","63.1","","","$","353.1","","","$","416.2"],["Purchase obligations"],["Raw materials and supplies","$","874.3","","","$","2,284.7","","","$","3,159.0"],["Contract services","$","222.3","","","$","543.1","","","$","765.4"],["Capital expenditures (3)","$","272.5","","","$","217.3","","","$","489.8"],["In-process inventories","$","19.1","","","$","31.5","","","$","50.6"],["Other purchase obligations","$","8.8","","","$","10.9","","","$","19.7"],["Other:"],["Return value to stockholders (4)","$","1,842.3","","","$","\u2014","","","$","1,842.3"],["Investments in businesses (5)","$","19.8","","","$","131.9","","","$","151.7"]]
[[/GREPCENT_TABLE]]

(1)Interest payments on long-term debt do not include interest related to finance lease obligations as amounts are not material.

(2)Other long-term liabilities do not include payments for unrecognized tax benefit liabilities of $246.5 million due to the uncertainty of the timing of future cash flows associated with these unrecognized tax benefit liabilities. In addition, other long-term liabilities do not include expected payments for interest and penalties associated with unrecognized tax benefit liabilities as amounts are not material. For a detailed discussion of these items, refer to Note 13.

(3)Contracts to purchase equipment and services primarily related to the Mexico Beer Projects. For further information about these purchase obligations, refer to “Capital expenditures” below.

(4)Publicly announced intent to return $5 billion in value to stockholders through dividends and share repurchases to be made from Fiscal 2020 through Fiscal 2023. We have returned $3,157.7 million through Fiscal 2022.

(5)Publicly announced intent to invest (i) $100 million in female-founded or led companies through our Focus on Female Founders program over a 10-year period concluding in fiscal 2029 and (ii) $100 million to support minority-owned companies in the beverage alcohol space and related categories through our Focus on Minority Founder Venture program over a 10-year period concluding in fiscal 2031. We have invested $42.7 million and $5.6 million through Fiscal 2022 in female-founded or led companies and minority-owned companies, respectively.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 51"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

Capital Expenditures

During Fiscal 2022, we incurred $1,026.8 million for capital expenditures, including $849.5 million for the Beer segment primarily for the Mexico Beer Projects.

We plan to spend from $1.3 billion to $1.4 billion for capital expenditures in Fiscal 2023, including approximately $1.2 billion for the Beer segment associated primarily with the Mexico Beer Projects. The remaining planned Fiscal 2023 capital expenditures consist of improvements to existing operating facilities and replacements of existing equipment and/or buildings. The Mexico Beer Projects are expected to be substantially completed by Fiscal 2026. Accordingly, for the Beer segment, we expect to spend $5.0 billion to $5.5 billion over Fiscal 2023 through Fiscal 2026, with the majority of spend expected to occur in the first three fiscal years of that timeframe. Management reviews the capital expenditure program periodically and modifies it as required to meet current and projected future business needs.

In fiscal 2017, we began construction of the Mexicali Brewery. In March 2020, a public consultation was held on the construction of our Mexicali Brewery. Following the negative result of the public consultation, we continue to work with government officials in Mexico to (i) determine next steps for our suspended Mexicali Brewery construction project, (ii) pursue various forms of recovery for capitalized costs and additional expenses incurred in establishing the brewery, however, there can be no assurance of any recoveries, and (iii) explore options to add further capacity at other locations in Mexico, including the construction of the Southeast Mexico Brewery where there is ample water and we will have a skilled workforce to meet our long-term needs. See Note 7 for further discussion.

Critical Accounting Policies and Estimates

Our significant accounting policies are more fully described in Note 1. Certain policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by management to determine appropriate assumptions to be used in certain estimates; as a result, they are subject to an inherent degree of uncertainty. Estimates are based on historical experience, observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. We review estimates to ensure that they appropriately reflect changes in our business on an ongoing basis. Our critical accounting estimates include:

•Equity method investments. We monitor our equity method investments for factors indicating other-than-temporary impairment. We consider several factors when evaluating our investments, including, but not limited to, (i) the period of time for which the fair value has been less than the carrying value, (ii) operating and financial performance of the investee, (iii) the investee’s future business plans and projections, (iv) recent transactions and market valuations of publicly traded companies, where available, (v) discussions with their management, and (vi) our ability and intent to hold the investment until it recovers in value.

Canopy Equity Method Investment – monitored for other-than-temporary impairment at each reporting date, or more frequently if events or changes in circumstances indicate that the carrying value of the investment may not be recoverable. As of February 28, 2022, the carrying value of our Canopy Equity Method Investment exceeded the fair value by $1,488.7 million. If Canopy’s stock

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 52"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

price does not recover above our C$22.34 carrying value in the near-term, it may result in an impairment of our Canopy Equity Method Investment. There may also be a future impairment of our Canopy Equity Method Investment if our expectations about Canopy’s prospective results and cash flows decline, which could be influenced by a variety of factors including adverse market conditions or if Canopy records a significant impairment of goodwill or intangible or other long-lived assets, makes significant asset sales, or has changes in senior management.

•Fair value of financial instruments. Management’s estimate of fair value requires significant judgment and is subject to a high degree of variability based upon market conditions and the availability of specific information. The fair values of our financial instruments that require the application of significant judgment by management are as follows:

Canopy investment

Equity securities, Warrants – estimated using the Black-Scholes option-pricing model (Level 2 fair value measurement) and Monte Carlo simulations (Level 2 fair value measurement). These valuation models use various market-based inputs, including stock price, remaining contractual term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable. Management applies significant judgment in its determination of expected volatility. We consider both historical and implied volatility levels of the underlying equity security and apply limited consideration of historical peer group volatility levels.

Debt securities, Convertible – estimated using a binomial lattice option-pricing model (Level 2 fair value measurement), which includes an estimate of the credit spread based on market spreads using bond data as of the valuation date. This valuation model uses various market-based inputs, including stock price, remaining term, expected volatility, risk-free interest rate, and expected dividend yield, as applicable.

•Goodwill and other intangible assets. Goodwill and other intangible assets are classified into three categories: (i) goodwill, (ii) intangible assets with definite lives subject to amortization, and (iii) intangible assets with indefinite lives not subject to amortization. For intangible assets with definite lives, impairment testing is required if conditions exist that the carrying value may not be recoverable. For intangible assets with indefinite lives and for goodwill, impairment testing is required at least annually or more frequently if events or circumstances indicate that these assets might be impaired. We may perform a qualitative evaluation prior to a quantitative test to determine if an impairment exists. However, if the results of the qualitative evaluation are inconclusive or suggest an impairment may exist, we must proceed to the quantitative test. The qualitative evaluation is an assessment of factors, including market conditions, industry changes, actual results as compared to forecasted results, or the timing of recent acquisitions and/or divestitures. The quantitative test estimates the fair value utilizing assumptions and projections regarding items such as future cash flows, revenues, earnings, and other factors. The factors and assumptions used reflect management’s estimates and are based on historical trends, projections and assumptions, including expectations of future economic and competitive conditions that are used in current strategic operating plans, however, these are subject to change as a result of changing market conditions. If these estimates or their related assumptions change in the future, we may be required to recognize an impairment loss for these assets. The recognition of any resulting impairment loss could have a material adverse impact on our financial statements.

We perform annual impairment tests and re-evaluate the useful lives of other intangible assets with indefinite lives at the annual impairment test measurement date of January 1 or when circumstances arise that indicate a possible impairment or change in useful life might exist.

Goodwill – Our reporting units with goodwill include the Beer segment and the Wine and Spirits segment. In the fourth quarter of Fiscal 2022, we performed our annual goodwill impairment analysis using the qualitative assessment. We determined it is more likely than not the fair value of each of our reporting units with goodwill exceeded their carrying value, and therefore no goodwill impairment was recognized related to this test. For Fiscal 2021 and Fiscal 2020, as a

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 53"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

result of our annual goodwill impairment analyses, we concluded that there were no indications of impairment for either of our reporting units.

Other intangible assets – Our intangible assets consist primarily of customer relationships and trademarks obtained through business acquisitions. Customer relationships are amortized over their estimated useful lives. The trademarks that were determined to have indefinite useful lives are not amortized. In the fourth quarter of Fiscal 2022, we performed our annual trademark impairment analysis using both the qualitative and quantitative assessments. No indication of impairment was noted for our trademark units utilizing the qualitative assessment, with the exception of the Four Corners trademark. We proceeded with a quantitative impairment test for the Four Corners trademark as certain continued negative trends indicated the fair value may not exceed its carrying value. When using the quantitative assessment, the estimated fair value of trademark is calculated based on an income approach using the relief from royalty method. The most significant assumption used in determining the estimated fair value was the annual revenue projection. No indication of impairment was noted using the quantitative test, as the estimated fair value of the Four Corners trademark was equal to its $4.0 million carrying amount.

During the fourth quarter of Fiscal 2021, certain negative trends within our Four Corners craft beer portfolio, including slower growth rates and increased competition, resulted in updated long-term financial forecasts indicating lower revenue and cash flow generation for the related portfolio. This change in financial forecasts indicated it was more likely than not the fair value of our indefinite-lived intangible asset associated with the Four Corners trademark might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. As a result of this assessment, the Beer segment’s Four Corners craft beer business recognized a $6.0 million impairment loss in connection with its trademark asset. During the second quarter of Fiscal 2020, certain continuing negative trends within our Beer segment’s Ballast Point craft beer portfolio, including increased rate of revenue decline and increased competition, indicated that it was more likely than not the fair value of our indefinite-lived intangible asset associated with the Ballast Point craft beer trademarks might be below its carrying value. Accordingly, we performed a quantitative assessment for impairment. As a result of this assessment, the Ballast Point craft beer trademark asset recognized an impairment loss of $11.0 million. Refer to Note 7 for further discussion.

Divestitures – When some, but not all of a reporting unit is disposed of, some of the goodwill of the reporting unit should be allocated to the portion of the reporting unit being disposed of, if that portion constitutes a business. The allocation of goodwill is based on the relative fair values of the portion of the reporting unit being disposed of and the portion of the reporting unit remaining. This approach requires a determination of the fair value of both the business being disposed and the businesses retained within the reporting unit.

For Fiscal 2021, our estimate of fair value for the Paul Masson Divestiture, the Wine and Spirits Divestitures, the Concentrate Business Divestiture, and the Ballast Point Divestiture was determined based on the expected proceeds from the transactions. The components sold were a part of the Wine and Spirits or Beer segment and were included in those reporting units through the date of divestiture. Goodwill was allocated to the assets held for sale based on the relative fair value of the businesses being sold compared to the relative fair value of the reporting unit. Goodwill not allocated to assets associated with the respective divestitures remained in the wine and spirits or beer reporting unit.

•Accounting for income taxes. We estimate our deferred tax assets and liabilities, income taxes payable, provision for income taxes, and unrecognized tax benefit liabilities based upon various factors including, but not limited to, historical pretax operating income, future estimates of pretax operating income, differences between book and tax treatment of various items of income and expense, interpretation of tax laws, and tax planning strategies. We are subject to income taxes in Canada, Mexico, Switzerland, the U.S., and other jurisdictions. We are regularly audited by federal, state, and

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 54"]]
[[/GREPCENT_TABLE]]

PART II ITEM 7. MD&A Table of Contents

foreign tax authorities, but a number of years may elapse before an uncertain tax position is audited and finally resolved.

We believe all tax positions are fully supported. We recognize tax assets and liabilities in accordance with the FASB guidance for income tax accounting. Accordingly, we recognize a tax benefit from an uncertain tax position when it is more likely than not the position will be sustained upon examination based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. In addition, changes in existing tax laws or rates could significantly change our current estimate of our unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which they are determined. Changes in current estimates, if significant, could have a material adverse impact on our financial statements.

We recognize our deferred tax assets and liabilities based upon the expected future tax outcome of amounts recognized in our results of operations. If necessary, we recognize a valuation allowance on deferred tax assets when it is more likely than not they will not be realized. We evaluate our ability to realize the tax benefits associated with deferred tax assets by assessing the adequacy of future expected taxable income, historical, and projected operating results, and the availability of prudent and feasible tax planning strategies. The realization of deferred tax assets is evaluated by jurisdiction and the realizability of these assets can vary based on the character of the tax attribute and the carryforward periods specific to each jurisdiction. We believe it is more likely than not the results of future operations will generate sufficient taxable income to realize our existing deferred tax assets, net of valuation allowances. Changes in the realizability of our deferred tax assets will be reflected in our effective tax rate in the period in which they are determined.

Change in Accounting Guidance

Accounting guidance adopted for Fiscal 2022 did not have a material impact on our consolidated financial statements.

[[GREPCENT_TABLE]]
[["Constellation Brands, Inc. FY 2022 Form 10-K","#WORTHREACHINGFOR I 55"]]
[[/GREPCENT_TABLE]]