Molson Coors Brewing Company — Form 10-Q Summary
Reporting period: Thirteen and thirty-nine weeks ended September 29, 2012, compared with September 24, 2011. The interim financial statements are unaudited and reported in U.S. dollars. On June 15, 2012, the company acquired StarBev, renamed Molson Coors Central Europe (MCCE), and added a Central Europe reporting segment.
Financial performance and key metrics
| Metric | Q3 2012 | Q3 2011 | First 39 weeks 2012 | First 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $1,195.5 million | $954.4 million | $2,886.3 million | $2,578.4 million |
| Gross profit | $508.5 million | $403.9 million | $1,180.4 million | $1,076.8 million |
| Operating income | $304.0 million | $255.0 million | $704.7 million | $679.0 million |
| Net income attributable to MCBC | $198.4 million | $197.4 million | $383.0 million | $503.1 million |
| Continuing-operations diluted EPS | $1.09 | $1.05 | $2.10 | $2.67 |
| Net cash from operating activities | Not separately provided | Not separately provided | $840.0 million | $603.4 million |
- Q3 net sales increased 25.3%, primarily from the MCCE acquisition. Consolidated gross margin was 42.5%, up 0.2 percentage points, while operating margin declined 1.3 percentage points to 25.4% because of higher marketing, general and administrative expenses and special charges.
- Q3 continuing-operations net income attributable to MCBC rose 1.5%. Underlying after-tax income, a non-GAAP measure, increased 17.2% to $248.9 million, or $1.37 per diluted share.
- First-nine-month continuing-operations net income declined 24.0%, mainly because of acquisition financing costs, foreign-exchange losses, higher special items and increased interest expense.
- Worldwide beer volume increased 30.8% in Q3 and 13.4% year to date, primarily from MCCE. Excluding the acquisition, worldwide volume declined 3.8% in Q3 and 1.8% year to date.
Segment developments
- Canada: Q3 pretax income declined 9.3% to $147.0 million. Volume decreased 4.1%, while pricing and cost reductions partly offset lower volume, unfavorable currency, higher pension costs and mix effects.
- United States/MillerCoors: Equity income increased 32.8% to $132.0 million in Q3. MillerCoors benefited from pricing, favorable brand mix and cost management, although volume declined 1.5%.
- Central Europe: MCCE contributed Q3 net sales of $264.2 million and pretax income of $75.2 million. On a pro forma basis, Q3 pretax income declined 6.7%, reflecting currency pressure, input-cost inflation and lower volume.
- United Kingdom: Q3 pretax income fell 69.6% to $7.7 million amid lower volume, input inflation and employee-related costs.
- MCI: Q3 pretax loss increased to $37.4 million, principally because of the MC Si’hai impairment and deconsolidation, as well as increased brand investment. Underlying pretax loss was $7.7 million.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $585.7 million at September 29, 2012, down from $1,078.9 million at December 31, 2011, mainly because of acquisition funding.
- Operating cash flow was $840.0 million year to date, compared with $603.4 million in the prior-year period. Underlying free cash flow was $741.6 million, compared with $463.9 million.
- Investing cash outflow was $2.615 billion, including $2.257 billion for acquisitions, $826.1 million invested in MillerCoors and $143.4 million of capital expenditures.
- Total borrowings were approximately $4.697 billion, including $3.438 billion of long-term debt, $1.231 billion of current long-term debt and $27.8 million of short-term borrowings. Borrowings increased approximately $2.7 billion from year-end 2011 due principally to the StarBev acquisition.
- The company issued $1.9 billion of senior notes in May 2012 and a €500 million zero-coupon convertible note to the StarBev seller. Approximately $1.231 billion of long-term debt was scheduled to mature in 2013.
- Revolving credit facilities of $400 million, $550 million and €150 million had no outstanding borrowings at quarter-end. Management stated that liquidity should be sufficient for operations, debt service, dividends and planned capital expenditures over the next twelve months.
- Capital expenditures were $143.4 million year to date; full-year 2012 capital expenditures were expected to be approximately $240 million, excluding MillerCoors and other equity-method ventures.
Material changes versus the prior comparable period
- The StarBev acquisition materially expanded revenue, assets, goodwill and intangible assets, while adding significant debt and acquisition-related expenses.
- Total assets increased to $16.467 billion from $12.424 billion at December 31, 2011. Goodwill increased to $2.416 billion and other intangible assets to $7.227 billion.
- Special items increased to $35.9 million in Q3 and $58.6 million year to date, versus $0.1 million and $11.1 million, respectively, in the comparable periods.
- MC Si’hai was deconsolidated after the company lost control of the China joint venture. The company recorded a $27.6 million impairment loss and $0.9 million of related costs in Q3, following $10.4 million of China impairments in Q2.
- Net interest expense increased substantially because of acquisition-related debt, including a $39.2 million Treasury Lock settlement loss and an $8.2 million Q3 unrealized loss on the convertible note’s embedded conversion feature.
- Accumulated other comprehensive income improved significantly, partly because of foreign-currency translation gains, including $301.9 million year to date.
Outlook, commentary and risks
- Management expected Q4 2012 to be the most challenging quarter of the year, with difficult Canada and U.K. profit comparisons, higher Central Europe input costs, and significantly higher U.S. marketing and business-transformation costs.
- Management expected 2012 cost of goods sold per hectoliter to increase at a high-single-digit rate in Canada and the U.K., and at a mid-single-digit rate in Central Europe on a pro forma local-currency basis.
- Expected 2012 corporate marketing, general and administrative expense was approximately $135 million, including approximately $40 million of acquisition-related costs. Expected corporate net interest expense was approximately $150 million.
- The 2012 effective tax rate was expected to range from 15% to 19%; the normalized long-term rate after 2012 was expected to range from 20% to 24%.
- The company planned to combine its U.K. and Ireland business with Central Europe at year-end 2012 to form Molson Coors Europe.
- Goodwill and brand impairment risk increased. The U.K. and Canada reporting units were estimated to have fair values only 7% and 15% above carrying value, respectively. Molson core brands were estimated to have fair value approximately 14% above carrying value.
- Key risks include integration and synergy execution for MCCE, additional acquisition liabilities, foreign exchange and commodity volatility, higher leverage and debt maturities, potential loss of investment-grade credit ratings, weak beer demand, pension obligations, environmental and litigation matters, and the potential effect of the NHL lockout on Canadian volumes.
- The company had no material off-balance-sheet arrangements and stated that it was in compliance with debt covenants.
Important facts for investors to verify
- Reconcile reported GAAP earnings with management’s underlying income and free-cash-flow measures, including the treatment of acquisition, financing and impairment items.
- Assess the ability to refinance or repay the approximately $1.231 billion of debt maturing in 2013 while maintaining dividends and planned capital expenditures.
- Monitor MCCE integration, pro forma Central Europe performance, currency trends and the achievement of expected synergies.
- Evaluate sensitivity of Canada, U.K. and Molson brand goodwill and intangible assets to weaker volumes, higher discount rates, pension costs or missed cost-savings targets.
- Review the $9.947 billion of contractual obligations, including debt, interest, derivatives, pensions, leases and other long-term obligations.
- Track unresolved tax, environmental and litigation exposures, including Kaiser indemnities and the company’s continuing environmental obligations.
- Confirm subsequent developments concerning the MC Si’hai arbitration and liquidation process, the 2013 convertible obligations, credit ratings and the planned European segment reorganization.