Overview
The Company is the world's leading wine company with a strong portfolio of consumer-preferred premium wine brands complemented by spirits, imported beer and other select beverage alcohol products. The Company continues to supply imported beer in the United States ("U.S.") through its investment in a joint venture with Grupo Modelo, S.A.B. de C.V. This imported beers joint venture operates as Crown Imports LLC and is referred to hereinafter as "Crown Imports." The Company is the leading premium wine company in the U.S.; a leading producer and exporter of wine from Australia and New Zealand; the largest producer and marketer of wine in Canada; and a major supplier of beverage alcohol in the United Kingdom ("U.K."). Through its investment in a joint venture with Punch Taverns plc, the Company has an interest in a U.K. wholesale business ("Matthew Clark"), which is the U.K.'s largest independent premier drinks wholesaler serving the on-trade drinks industry.
In connection with the Company's divestiture of its value spirits business and the integration of the retained spirits brands into the Constellation Wines business (see "Divestitures in Fiscal 2010 and Fiscal 2009" below), the Company changed its internal management financial reporting on May 1, 2009, to consist of two business divisions: Constellation Wines and Crown Imports. Accordingly, the Company now reports its operating results in three segments: Constellation Wines (branded wine, spirits and other), Corporate Operations and Other, and Crown Imports (imported beer). Prior to the divestiture of the value spirits business, the Company's internal management financial reporting included the Constellation Spirits business division. Amounts included in the Corporate Operations and Other segment consist of general corporate administration and finance expenses. These amounts include costs of executive management, corporate development, corporate finance, human resources, internal audit, investor relations, legal, public relations, global information technology and global supply chain. Any costs incurred at the corporate office that are applicable to the segments are allocated to the appropriate segment. The amounts included in the Corporate Operations and Other segment are general costs that are applicable to the consolidated group and are therefore not allocated to the other reportable segments. All costs reported within the Corporate Operations and Other segment are not included in the chief operating decision maker's evaluation of the operating income performance of the other reportable segments.
In addition, the Company excludes acquisition-related integration costs, restructuring charges and unusual items that affect comparability from its definition of operating income for segment purposes as these items are not reflective of normal continuing operations of the segments. The Company excludes these items as segment operating performance and segment management compensation is evaluated based upon a normalized segment operating income. As such, the performance measures for incentive compensation purposes for segment management do not include the impact of these items.
The Company's business strategy is to remain focused on consumer preferred premium wine brands, complemented by premium spirits and imported beers. The Company intends to continue to focus on fast growing premium product categories and geographic markets and expects to capitalize on its size and scale in the marketplace to profitably grow the business. The Company has implemented a strategic project to consolidate its U.S. distributor network in key markets and create a new go-to-market strategy designed to focus the full power of its U.S. wine and spirits portfolio in order to improve alignment of dedicated, selling resources which is expected to drive execution and accountability. The Company believes that this is the right strategy to take in order to position the Company for future growth in a consolidating market. The Company remains committed to its long-term financial model of growing sales, expanding margins, increasing cash flow and reducing borrowings to achieve earnings per share growth and improve return on invested capital.

Worldwide and domestic economies have experienced adverse conditions and may be subject to further deterioration. The economic and consumer conditions in the Company's key markets and on a global basis are currently very challenging. Accordingly, the current competitive environment in the marketplace remains intense. While the global credit and capital markets may be showing signs of improvement, the global economic situation has or could adversely affect the Company's major suppliers, distributors and retailers. The inability of suppliers, distributors or retailers to conduct business or to access liquidity could adversely impact the Company's business and financial performance. In order to mitigate the impact of these challenging conditions, the Company continues to focus on improving operating efficiencies, containing costs, optimizing cash flow, reducing borrowings and increasing return on invested capital. The Company has also maintained adequate liquidity to meet current obligations and fund capital expenditures. However, changing conditions in the worldwide and domestic economies could have a material impact on the Company's business, liquidity, financial condition and results of operations.
Marketing, sales and distribution of the Company's products are managed on a geographic basis in order to fully leverage leading market positions within each core market. Market dynamics and consumer trends vary significantly across the Company's five core markets (U.S., Canada, U.K., Australia and New Zealand) within the Company's three geographic regions (North America, Europe and Australia/New Zealand). Within North America, the Company offers a range of beverage alcohol products across the branded wine and spirits and, through Crown Imports, imported beer categories in the U.S. Within the Company's remaining geographies, the Company offers primarily branded wine.
The environment for the Company's products is competitive in each of the Company's core markets, due, in part, to industry and retail consolidation. In particular, the U.K. and Australian markets are highly competitive, as further described below.
The U.K. wine market is primarily an import market with Australian wines comprising approximately one-quarter of all wine sales in the U.K. off-premise business. The Australian wine market is primarily a domestic market. The Company has leading share positions in the Australian wine category in both the U.K. and Australian markets.
Due to competitive conditions in the U.K. and Australia, it has been difficult for the Company in recent fiscal periods to recover certain cost increases, in particular, the duty increases in the U.K. which have been imposed at least annually for the past several years. In the U.K., significant consolidation at the retail level has resulted in a limited number of large retailers controlling a significant portion of the off-premise wine business. The continuing surplus of Australian wine has made and continues to make very low cost bulk wine available to these U.K. retailers which has allowed certain of these large retailers to create and build private label brands in the Australian wine category. During the first quarter of calendar 2008, the Company implemented price increases in the U.K. and Australia. In addition, price increases were implemented in the U.K. in the last quarter of calendar 2008 and early in the second quarter of calendar 2009. These increases were implemented in an effort to cover certain cost increases, including the U.K. duty increases, and to improve profitability; however, the concentrated retail environment, competition from private label causing deterioration of retail pricing, foreign exchange volatility, and the continuing consumer recession have all contributed to declining gross margins for the Company's U.K. and Australian businesses for the six months and three months ended August 31, 2009 ("Six Months 2010" and "Second Quarter 2010", respectively).

The three years prior to the calendar 2007 Australian grape harvest were all years of record Australian grape harvests which contributed to the current surplus of Australian bulk wine. The calendar 2007 Australian grape harvest was significantly lower than the calendar 2006 Australian grape harvest as a result of an ongoing drought and late spring frosts in several regions. As a result of various conditions surrounding the calendar 2008 Australian grape harvest, the Company previously expected the supply of wine to continue to move toward balance with demand. However, the calendar 2008 Australian grape harvest was higher than expected. Although the calendar 2009 Australian grape harvest came in lower than the calendar 2008 Australian grape harvest, the total intake continues to exceed the current annual global demand for Australian wine products. Accordingly, the current Australian bulk wine surplus and related intense competitive conditions in the U.K. and Australian markets are not expected to subside in the near term. In the U.S., the calendar 2009 grape harvest is expected to be similar in size to slightly larger than the calendar 2008 grape harvest. Accordingly, the Company continues to expect the overall supply of wine to remain generally in balance with demand within the U.S.
For Second Quarter 2010, the Company's net sales decreased 8% over the three months ended August 31, 2008 ("Second Quarter 2009"), primarily due to the divestitures of the value spirits business (see "Divestitures in Fiscal 2010 and Fiscal 2009" below) and a Canadian distilling facility combined with an unfavorable year-over-year foreign currency translation. Operating income increased significantly over the comparable prior year period primarily due to lower unusual items, which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment. The significant amount of unusual items recognized in Second Quarter 2009 were related to the Company's plan to sell certain assets and implement operational changes designed to improve the efficiencies and returns associated with the Australian business, primarily by consolidating certain winemaking and packaging operations and reducing the Company's overall grape supply due to reduced capacity needs resulting from a streamlining of the Company's product portfolio (the "Australian Initiative"). In addition, operating income benefitted from the Company's cost reduction initiatives, including reduced advertising and selling expenditures; an increase in the U.S. branded wine net sales in connection with the Company's Second Quarter 2010 U.S. distributor consolidation initiative; and an overlap of prior year losses on foreign currency transactions; partially offset by the declining margins in the Company's international businesses and the divestitures discussed above. The Company recognized net income for Second Quarter 2010 as compared to a net loss for Second Quarter 2009 primarily due to the items discussed above combined with lower interest expense and a reduction in the Company's provision for income taxes.
For Six Months 2010, the Company's net sales decreased 12% over the six months ended August 31, 2008 ("Six Months 2009"), primarily due to an unfavorable year-over-year foreign currency translation impact and the divestitures of (i) the value spirits business, (ii) a Canadian distilling facility and (iii) the Pacific Northwest Business (see "Divestitures in Fiscal 2010 and Fiscal 2009" below). Operating income increased significantly over the comparable prior year period primarily due to the lower unusual items, which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment, recorded primarily in connection with the Company's Australian Initiative for Six Months 2009. In addition, operating income benefitted from the Company's cost reduction initiatives, including reduced advertising and selling expenditures, an overlap of prior year losses on foreign currency transactions; and an increase in U.S. branded wine net sales in connection with the Company's Second Quarter 2010 U.S. distributor consolidation initiative; partially offset by the declining margins in the Company's international businesses and the divestitures discussed above. Net income increased significantly over the comparable prior year period primarily due to the items discussed above combined with lower interest expense and a reduction in the Company's provision for income taxes.

The following discussion and analysis summarizes the significant factors affecting (i) consolidated results of operations of the Company for Second Quarter 2010 compared to Second Quarter 2009 and Six Months 2010 compared to Six Months 2009 and (ii) financial liquidity and capital resources for Second Quarter 2010. This discussion and analysis also identifies certain acquisition-related integration costs, restructuring charges and unusual items expected to affect consolidated results of operations of the Company for the fiscal year ending February 28, 2010 ("Fiscal 2010"). This discussion and analysis should be read in conjunction with the Company's consolidated financial statements and notes thereto included herein and in the Company's Annual Report on Form 10-K for Fiscal 2009.
Divestitures in Fiscal 2010 and Fiscal 2009 Value Spirits Business
In March 2009, the Company sold its value spirits business for $336.4 million, net of direct costs to sell. The Company received $276.4 million, net of direct costs to sell, in cash proceeds and a note receivable for $60.0 million. The Company retained certain mid-premium spirits brands, including SVEDKA Vodka, Black Velvet Canadian Whisky and Paul Masson Grande Amber Brandy. This transaction is consistent with the Company's strategic focus on premium, higher growth and higher margin brands in its portfolio. In connection with the classification of the value spirits business as an asset group held for sale as of February 28, 2009, the Company recorded a loss of $15.6 million in the fourth quarter of fiscal 2009, primarily related to asset impairments. In the first quarter of fiscal 2010, the Company recognized a net gain of $0.2 million, which included a gain on settlement of a postretirement obligation of $1.0 million, partially offset by an additional loss of $0.8 million. This net gain is included in selling, general and administrative expenses for Six Months 2010 on the Company's Consolidated Statements of Operations.
Pacific Northwest Business
In June 2008, the Company sold certain businesses consisting of several California wineries and wine brands acquired in the December 2007 acquisition of all of the issued and outstanding capital stock of Beam Wine Estates, Inc. ("BWE") (the "BWE Acquisition"), as well as certain wineries and wine brands from the states of Washington and Idaho (collectively, the "Pacific Northwest Business") for cash proceeds of $204.2 million, net of direct costs to sell. In addition, if certain objectives are achieved by the buyer, the Company could receive up to an additional $25.0 million in cash payments. This transaction contributes to the Company's streamlining of its U.S. wine portfolio by eliminating brand duplication and excess production capacity. In connection with this divestiture, the Company's Constellation Wines segment recorded a loss of $23.2 million for Six Months 2009, which included a loss on business sold of $15.8 million and losses on contractual obligations of $7.4 million. The loss of $23.2 million is included in selling, general and administrative expenses on the Company's Consolidated Statements of Operations.

Results of Operations
Second Quarter 2010 Compared to Second Quarter 2009
     Net Sales
     The following table sets forth the net sales (in millions of dollars) by
operating segment of the Company for Second Quarter 2010 and Second Quarter
2009.

                                                                 Second Quarter 2010 Compared to Second Quarter 2009
                                                                                      Net Sales
                                                                                                                % (Decrease)
                                                               2010                        2009                   Increase
Constellation Wines:
Branded wine                                            $            752.4          $            782.1                     (4 )%
Spirits                                                               64.9                       109.1                    (41 )%
Other                                                                 59.5                        65.3                     (9 )%

Constellation Wines net sales                                        876.8                       956.5                     (8 )%
Crown Imports net sales                                              693.0                       732.1                     (5 )%
Consolidations and eliminations                                     (693.0 )                    (732.1 )                    5 %

Consolidated Net Sales                                  $            876.8          $            956.5                     (8 )%

Net sales for Second Quarter 2010 decreased to $876.8 million from $956.5 million for Second Quarter 2009, a decrease of $79.7 million, or (8%). This decrease resulted primarily from an unfavorable year-over-year foreign currency translation impact of $51.3 million and a decrease in spirits net sales of $44.2 million. The decrease in spirits net sales resulted predominantly from the divestitures of the value spirits business and a Canadian distilling facility.
Constellation Wines
Net sales for Constellation Wines decreased to $876.8 million for Second Quarter 2010 from $956.5 million in Second Quarter 2009, a decrease of $79.7 million, or (8%). Branded wine net sales decreased $29.7 million primarily due to an unfavorable year-over-year foreign currency translation impact of $42.5 million, partially offset by $12.8 million of branded wine growth on a constant currency basis. The branded wine growth was due largely to growth in U.S. branded wine net sales in connection with the Company's U.S. distributor consolidation initiative. The net sales benefit received from the U.S. distributor consolidation initiative, which is estimated to be approximately $40 to $50 million, includes both volume growth and favorable product mix shift primarily from timing of shipments in Second Quarter 2010. The timing benefit received in Second Quarter 2010 is expected to have an unfavorable impact on sales in the U.S. branded wine portfolio in the second half of fiscal 2010. The Second Quarter 2010 timing benefit was partially offset by a decrease in net sales associated primarily with the remaining U.S. branded wine portfolio. Spirits net sales decreased $44.2 million primarily due to a decrease in net sales of $65.3 million in connection with the divestitures of the value spirits business and the Canadian distilling facility, partially offset by growth within the retained spirits brands which was driven largely by volume growth of SVEDKA Vodka. Other net sales decreased $5.8 million primarily due to an unfavorable year-over-year foreign currency translation impact of $8.8 million.
Crown Imports
As this segment is eliminated in consolidation, see "Equity in Earnings of Equity Method Investments" below for a discussion of Crown Imports net sales, gross profit, selling, general and administrative expenses, and operating income.

Gross Profit
The Company's gross profit increased to $309.6 million for Second Quarter 2010 from $305.8 million for Second Quarter 2009, an increase of $3.8 million, or 1%. This increase was primarily due to a decrease in unusual items of $38.7 million and an increase in the U.S. branded wine portfolio gross profit of $10.4 million, partially offset by a decrease in gross profit of $22.3 million related to the divestitures of the value spirits business and the Canadian distilling facility and a decrease in gross profit on a constant currency basis in the Australian and U.K. businesses of $18.6 million. The decrease in unusual items, which consist of certain costs that are excluded by management in their evaluation of the results of each operating segment, resulted primarily from inventory write-downs of $47.6 million in Second Quarter 2009 associated with the Company's Australian Initiative. The increase in the U.S. branded wine portfolio gross profit was driven by the net sales increase resulting from the Company's U.S. distributor consolidation initiative combined with the lower U.S. promotional spend. The decrease in the Australian and U.K. gross profit was due largely to the flow through of higher Australian calendar 2008 harvest costs and an unfavorable mix of sales towards lower margin products.
Gross profit as a percent of net sales increased to 35.3% for Second Quarter 2010 from 32.0% for Second Quarter 2009 primarily due to the lower unusual items and a benefit from positive mix and lower promotional spend in the U.S. in connection with the U.S. distributor consolidation initiative, partially offset by increased Australian cost of product sold driven by the flow through of the higher Australian calendar 2008 harvest costs, and an unfavorable mix of sales towards lower margin products in the international businesses.
Selling, General and Administrative Expenses Selling, general and administrative expenses decreased to $167.8 million for Second Quarter 2010 from $225.2 million for Second Quarter 2009, a decrease of $57.4 million, or (25%). This decrease is due to a decrease of $50.5 million in the Constellation Wines segment, a decrease of $5.8 million in the Corporate Operations and Other segment, and a slight decrease in unusual costs, which consist of certain items that are excluded by management in their evaluation of the results of each operating segment. The decrease in the Constellation Wines segment's selling, general and administrative expenses is primarily due to decreases in general and administrative expenses of $22.8 million, selling expenses of $15.9 million and advertising expenses of $11.8 million. These decreases are largely attributable to (i) an overlap of prior year losses on foreign currency transactions; (ii) a favorable year-over-year foreign currency translation impact; (iii) the divestiture of the value spirits business;
(iv) cost savings in connection with the Company's various restructuring activities; and (v) a planned reduction in marketing and advertising spend. The decrease in the Corporate Operations and Other segment's selling, general and administrative expenses is due to a decrease in general and administrative expenses resulting primarily from lower insurance costs and reduced consulting service fees. Selling, general and administrative expenses as a percent of net sales decreased to 19.1% for Second Quarter 2010 as compared to 23.5% for Second Quarter 2009 primarily due to the cost savings in connection with the Company's various restructuring activities and planned reduction in marketing and advertising spend; the overlap of prior year losses on foreign currency transactions; the benefit from the increase in the U.S. branded wine net sales in connection with the U.S. distributor consolidation initiative without a corresponding increase in selling, general and administrative expenses; and the decrease in the Corporate Operations and Other segment's general and administrative expenses.

Restructuring Charges
The Company recorded $3.2 million of restructuring charges for Second Quarter 2010 associated primarily with the Company's plan to simplify its business, increase efficiencies and reduce its cost structure on a global basis (the "Global Initiative"). Restructuring charges included $3.2 million of employee termination costs, $0.4 million of contract termination costs and $0.3 million of facility consolidation/relocation costs, partially offset by $0.7 million of net gains on asset sales in Australia. The Company recorded $35.5 million of restructuring charges for Second Quarter 2009 associated primarily with the Company's Australian Initiative.
In addition, the Company incurred additional costs for Second Quarter 2010 and Second Quarter 2009 in connection with the Company's restructuring and acquisition-related integration plans. Total costs incurred in connection with these plans for Second Quarter 2010 and Second Quarter 2009 are as follows:

                                                            Second      Second
                                                            Quarter     Quarter
       (in millions)                                         2010        2009
       Cost of Product Sold
       Accelerated depreciation                             $ 11.1      $  2.3
       Inventory write-downs                                $  0.6      $ 47.6
       Other                                                $  1.3      $    -

       Selling, General and Administrative Expenses
       Other costs                                          $ 10.2      $  3.7

       Impairment of Intangible Assets                      $    -      $ 21.8

       Restructuring Charges                                $  3.2      $ 35.5

       Acquisition-Related Integration Costs (see below)    $    -      $  1.8

The Company expects to incur the following costs in connection with its restructuring and acquisition-related integration plans for Fiscal 2010:

                                                             Expected
                                                              Fiscal
             (in millions)                                     2010
             Cost of Product Sold
             Accelerated depreciation                        $   24.5
             Other                                           $    6.3

             Selling, General and Administrative Expenses
             Other costs                                     $   45.9

             Restructuring Charges                           $   54.9

             Acquisition-Related Integration Costs           $    1.8

Acquisition-Related Integration Costs The Company did not incur any acquisition-related integration costs for Second Quarter 2010 as compared to $1.8 million for Second Quarter 2009. Acquisition-related integration costs for Second Quarter 2009 consisted of costs recorded primarily in connection with the Fiscal 2008 Plan. The Fiscal 2008 Plan consists of (i) the Company's plans (announced in November 2007) to streamline certain of its international operations, including the consolidation of certain winemaking and packaging operations in Australia, the buy-out of certain grape processing and wine storage contracts in Australia, equipment relocation costs in Australia, and certain employee termination costs; (ii) certain other restructuring charges incurred during the third quarter of fiscal 2008 in . . .