Molson Coors Brewing Company — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the thirteen weeks ended March 31, 2012, compared with the thirteen weeks ended March 26, 2011. Molson Coors operates primarily in Canada, the United Kingdom, international markets, and, through a 42% economic interest accounted for under the equity method, MillerCoors in the United States. Results are seasonal and the first quarter is not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Net sales | $691.4 million | $690.4 million | 0.1% |
| Gross profit | $252.6 million | $263.2 million | (4.0%) |
| Gross margin | 36.5% | 38.1% | (1.6 percentage points) |
| Operating income | $121.8 million | $126.0 million | (3.3%) |
| Operating margin | 17.6% | 18.3% | (0.7 percentage points) |
| Net income attributable to MCBC | $79.5 million | $82.9 million | (4.1%) |
| Diluted EPS | $0.44 | $0.44 | Unchanged |
| Underlying income attributable to MCBC | $85.3 million | $81.6 million | 4.5% |
| Operating cash flow | $50.4 million | $45.0 million | +$5.4 million |
Net sales per hectoliter increased 2.2%, while cost of goods sold per hectoliter increased 4.8%, primarily because of input inflation, pension costs, and additional contract brewing and joint-venture activity. Worldwide beer volume declined 0.4%; reported financial volume declined 2.0%.
- Canada pretax income declined 15.9% to $43.9 million as lower volume, inflation, pension costs, and unfavorable comparisons outweighed pricing benefits.
- MillerCoors net income increased 17.3% to $275.3 million; Molson Coors' reported equity income increased 17.5% to $118.9 million.
- U.K. pretax income declined 80.9% to $1.3 million, reflecting lower volume, marketing investment, and higher non-cash pension expense.
- MCI sales increased 30.1% to $28.1 million, but the pretax loss widened 14.7% to $8.6 million because of infrastructure and joint-venture investment.
Cash and cash equivalents were $836.3 million at March 31, 2012, down from $1,078.9 million at December 31, 2011. Net cash used in investing activities was $258.2 million, including $236.0 million invested in MillerCoors and $110.6 million paid to settle cross-currency swaps. Capital expenditures were $33.8 million. Financing activities used $45.9 million, including $57.8 million of dividends.
Total debt, including the current portion, was approximately $1,995.0 million, consisting principally of senior notes and $575.0 million of convertible notes due 2013. Long-term debt was $1,950.4 million, and the company had no borrowings outstanding under its $400 million revolving credit facility. Net debt based on total debt less cash was approximately $1.16 billion, excluding derivative and other liabilities. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Underlying income improved despite lower GAAP earnings, primarily because of pricing, sales mix, and cost-savings initiatives.
- Gross and operating margins contracted because cost inflation and pension expense exceeded pricing benefits.
- Equity income from MillerCoors was a larger contributor to results, increasing by $17.7 million.
- Marketing, general and administrative expense rose 4.1%, including costs associated with the proposed StarBev acquisition and increased brand investment.
- Special items were a net charge of $1.5 million versus zero in the prior-year quarter. Q1 2012 also included $6.1 million of StarBev acquisition-related costs.
- RFG2 cost savings totaled approximately $10 million in the quarter and $136 million cumulatively toward a three-year annualized goal of $150 million by 2012. MillerCoors delivered an additional $25 million of savings in the quarter.
Guidance, outlook, risks, and unusual items
Management expects 2012 to remain challenging, with adverse foreign exchange, higher pension expense, and higher input costs. The company expects to offset part of the inflation through further cost reductions and plans additional investment in brands and innovation.
- 2012 effective tax rate guidance is 17% to 21%; normalized long-term tax rate guidance remains 22% to 26%.
- 2012 capital expenditures are expected to be approximately $200 million, excluding MillerCoors and other equity-method joint ventures.
- Corporate net interest expense is expected to be approximately $100 million, excluding StarBev-related costs.
- Canada cost of goods sold per hectoliter is expected to increase at a mid-single-digit local-currency rate; MillerCoors is expected to increase at a low-single-digit rate; U.K. cost of goods sold per hectoliter is expected to increase at a mid-single-digit rate.
- The outlook excludes StarBev because the transaction had not closed at the filing date.
On April 3, 2012, the company agreed to acquire StarBev for approximately €2.65 billion, or $3.54 billion, including the repayment of existing StarBev debt. StarBev generated approximately $953 million of 2011 sales and $322 million of EBITDA under EU IFRS. The transaction requires regulatory approval and was financed with $1.9 billion of senior notes, a $300 million term loan, an expanded revolving facility of up to $550 million, and a planned €500 million convertible note. If the acquisition does not close by November 2, 2012, the senior notes must generally be redeemed at 101% of principal plus accrued interest.
Following the financing, management suspended share repurchases and intends to keep per-share dividends constant while using operating cash flow to reduce debt. The company disclosed potential integration, execution, European market, leverage, covenant, credit-rating, and impairment risks related to StarBev. Ratings were reduced by DBRS and Moody's, while S&P changed its outlook to negative.
Other notable matters include a potential goodwill impairment of up to $9.6 million for the China reporting unit, $31.2 million of Kaiser indemnity reserves, environmental reserves including $6.2 million for the Lowry Superfund site, and an agreement in principle to settle Brazilian litigation for approximately $7.1 million, including legal fees. The company was voluntarily dismissed from the Oglala Sioux Tribe lawsuit, although MillerCoors remains a defendant.
Important facts an investor should verify
- Whether StarBev closed as planned, the final purchase price, financing mix, convertible-note terms, and resulting leverage.
- The effect of StarBev integration, synergies, Central European operating performance, and any required regulatory divestitures.
- Whether pricing and cost savings can offset inflation, pension expense, foreign-exchange pressure, and weaker volumes, particularly in Canada and the U.K.
- Future MillerCoors distributions and the sustainability of the significant increase in MillerCoors equity income.
- Debt maturities, credit-rating changes, covenant compliance, and the company's ability to reduce debt while maintaining dividends.
- Progress of the China joint venture and whether the disclosed goodwill impairment risk becomes probable.
- Final outcomes and cash requirements for Kaiser indemnities, Brazilian litigation, environmental matters, and other contingencies.