Molson Coors Brewing Company — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the 13 and 26 weeks ended June 25, 2011, compared with June 26, 2010. The company operates primarily in Canada and the United Kingdom and holds a 42% economic interest in MillerCoors, accounted for under the equity method. Fiscal 2011 contains 53 weeks and is scheduled to end December 31, 2011. Results are seasonal and quarterly performance is not necessarily indicative of full-year results.
Key financial metrics
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Net sales | $933.6 million | $883.3 million | $1,624.0 million | $1,544.3 million |
| Gross profit | $409.7 million | $408.5 million | $672.9 million | $665.1 million |
| Operating income | $298.0 million | $295.1 million | $424.0 million | $402.6 million |
| Net income attributable to MCBC | $222.8 million | $237.2 million | $305.7 million | $341.8 million |
| Diluted EPS | $1.18 | $1.27 | $1.62 | $1.83 |
| Net cash from operating activities | Not separately provided | Not separately provided | $271.8 million | $405.8 million |
Q2 gross margin was approximately 43.9%, compared with 46.2% in the prior-year quarter; operating margin was approximately 31.9%, compared with 33.4%. First-half gross margin was approximately 41.4%, compared with 43.1%; operating margin was approximately 26.1%, compared with 26.1%.
- Underlying after-tax income was $231.6 million, or $1.23 per diluted share, down 1.2% and 1.6%, respectively, from the prior-year quarter.
- Worldwide beer volume declined 2.8% in Q2 and 2.2% in the first half. Consolidated net sales increased 5.7% in Q2 and 5.2% in the first half, supported by pricing, mix, foreign exchange and international growth.
- MillerCoors net income attributable to its owners increased 1.9% in Q2 and 5.6% in the first half. MCBC’s equity income in MillerCoors increased 5.0% to $171.8 million in Q2 and 7.2% to $273.0 million in the first half.
- Cash and cash equivalents were $1,184.2 million at June 25, 2011, versus $1,217.6 million at December 25, 2010 and $798.6 million at June 26, 2010.
- Long-term debt was $1,951.1 million, with total long-term borrowings including the current portion of $1,996.0 million. Short-term borrowings were $5.5 million. The company had no borrowings under its new $400 million revolving facility.
- Net working capital was $567.3 million, compared with $888.1 million at year-end 2010 and $655.7 million at June 26, 2010. Current liabilities included approximately $437.6 million of cross-currency swap liabilities.
Material changes versus the prior comparable period
- Q2 net income attributable to MCBC declined 6.1%, while first-half net income declined 10.6%, primarily reflecting the absence of the $42.6 million net gain from the Kaiser discontinued operation recognized in Q1 2010 and weaker operating performance.
- Q2 continuing-operations income attributable to MCBC declined 5.7%, although first-half continuing-operations income increased 2.4%.
- Operating cash flow declined $134.0 million in the first half, mainly because of working-capital timing, higher Canadian inventories and lower accounts payable in Canada and the U.K.
- Underlying free cash flow fell to $121.9 million from $323.0 million, driven by lower earnings, working-capital movements and the prior-year discontinued-operation gain and MillerCoors-related adjustments.
- Canada volume declined 3.9% in Q2 and 4.8% year to date; Canada underlying pretax income declined 4.5% in Q2 and 4.1% in the first half.
- MillerCoors volume declined 3.5% in Q2 and 3.1% in the first half, but pricing, mix and cost management improved its earnings.
- U.K. volume declined 4.9% in Q2 and 3.5% in the first half, partly due to cycling the 2010 FIFA World Cup. U.K. underlying pretax income increased 6.1% in Q2 and 12.9% in the first half.
- The company replaced its expiring $750 million revolving facility with a four-year $400 million multicurrency facility, including a $100 million letter-of-credit sub-facility.
Guidance, outlook, risks and unusual items
- Management expects a 2011 effective tax rate of 15% to 19%, versus a normalized long-term range of 22% to 26% after 2011.
- Expected 2011 capital expenditures are approximately $230 million, excluding MillerCoors and other equity-method joint ventures.
- Management expects 2011 corporate net interest expense of approximately $115 million at June 25, 2011 foreign-exchange rates, excluding U.K. trade-loan interest income.
- MCI and Corporate marketing, general and administrative expense is forecast at approximately $200 million, plus or minus 5%, compared with $172.2 million in 2010.
- Management expects cost of goods sold per hectoliter to increase at mid-single-digit rates in Canada, low-single-digit rates at MillerCoors and mid-single-digit total rates in the U.K.; U.K. owned-brand costs are expected to increase at a low-double-digit rate.
- The RFG2 program targets $150 million of annualized cost reductions by 2012. The company achieved approximately $12 million in Q2, $22 million in the first half and $88 million cumulatively. MillerCoors reported $546 million of cumulative synergies, exceeding its original $500 million commitment.
- Special items were a net charge of $11.0 million in Q2 and the first half, including a $7.6 million Canadian fixed-asset correction, $2.4 million of U.K. restructuring charges and a $2.0 million gain from reducing the Brewers’ Retail, Inc. guarantee.
- Other income was affected by the prior-year Foster’s total-return-swap gain of $21.9 million in Q2 2010; the remaining Foster’s instruments were settled in January 2011.
- Cross-currency swaps mature in Q2 2012 and had a net liability of approximately $438 million at quarter-end. Management expects to address the maturity through a combination of settlement and extension.
- The company guaranteed approximately 47% of Brewers’ Retail, Inc.’s CAD $200 million debt maturing in June 2012. Failure to refinance could require a significant 2012 cash outflow; $94.1 million was recorded as a current liability related to the guarantee.
- Kaiser indemnity reserves totaled $35.5 million, including $25.0 million for purchased tax-credit claims and $10.5 million for tax, civil and labor claims. Maximum potential purchased-tax-credit claims were $275.9 million, although management believes the exposure is less likely than prior claims.
- Legal matters include a Brazilian distribution dispute with a prior judgment of approximately $42 million vacated on appeal and a renewed Canadian lawsuit concerning an NHL sponsorship. Management states a material adverse result in the Brazilian case is not probable and notes NHL indemnification for damages and fees in the sponsorship matter.
- The Board subsequently authorized repurchases of up to $1.2 billion of Class B common stock over an expected three-year period. Moody’s raised the issuer rating to Baa1 with a stable outlook; S&P’s rating remained BBB-.
Most important facts for investors to verify
- Whether volume weakness in Canada, the U.S. and the U.K. persists and whether pricing and mix can offset commodity, freight and fuel inflation.
- The timing and cash impact of the CAD $1.2 billion cross-currency swap settlement or extension in Q2 2012.
- Brewers’ Retail, Inc.’s refinancing plans and MCBC’s potential share of the CAD $200 million maturity.
- Underlying free cash flow conversion, working-capital normalization and the sustainability of MillerCoors distributions.
- Execution of the RFG2 savings program, MillerCoors synergies and increased MCI investments.
- The effect of the proposed $1.2 billion share-repurchase program on liquidity, leverage and future EPS.
- Changes in Kaiser indemnity reserves, environmental liabilities, tax uncertainties and the outstanding Brazilian and NHL-related litigation.