Molson Coors Brewing Company: FY2011 Form 10-K Summary
Business context and reporting period
Molson Coors is a global brewer operating primarily in Canada, the United States through its 42% equity interest in MillerCoors, the United Kingdom and Molson Coors International. Key brands include Coors Light, Molson Canadian, Miller Lite, Carling, Blue Moon and Cobra. The filing covers the 53 weeks ended December 31, 2011; comparable 2010 results cover 52 weeks ended December 25, 2010. The filing is an annual report rather than a standalone quarterly filing, although fourth-quarter information is included in unaudited quarterly data.
Financial performance and key metrics
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Net sales | $3,515.7 million | $3,254.4 million | Up 8.0% |
| Gross profit | $1,466.6 million | $1,442.2 million | Up 1.7% |
| Operating income | $893.2 million | $864.5 million | Up 3.3% |
| Income from continuing operations attributable to MCBC | $674.0 million | $668.1 million | Up 0.9% |
| Diluted continuing-operations EPS | $3.62 | $3.57 | Up 1.4% |
| Net cash from operating activities | $868.1 million | $749.7 million | Up 15.8% |
| Underlying free cash flow | $635.3 million | $924.3 million | Down 31.3% |
- Gross margin was approximately 41.7%, compared with approximately 44.3% in 2010. Operating margin was approximately 25.4%, compared with approximately 26.6%.
- Underlying after-tax income increased 5.2% to $701.5 million, or $3.76 per diluted share, excluding special and other non-core items.
- Worldwide beer volume declined 0.7% to 48.358 million hectoliters. Financial volume increased 2.2%, but MillerCoors volume declined 2.8% and Canadian volume declined 0.8%; U.K. volume increased 3.2% and MCI volume increased 50.6%.
- Income tax expense from continuing operations was $99.4 million, producing an effective tax rate of approximately 12.8%, versus 17.1% in 2010.
- Cash and cash equivalents were $1,078.9 million at year-end, down from $1,217.6 million. Debt-free net working capital was $887.7 million, essentially unchanged from $888.1 million.
- Long-term debt was $1,914.9 million, with $46.9 million of current debt and short-term borrowings. Total debt obligations, including current maturities, were $1,992.7 million.
- The company had no borrowings on its new $400 million revolving credit facility and remained in compliance with debt covenants. Credit ratings included BBB- from Standard & Poor’s, Baa1 from Moody’s and BBB High from DBRS.
- Capital expenditures were $235.4 million, up from $177.9 million, including investment in a high-speed can line at the Montreal brewery. Management expected approximately $200 million of 2012 capital expenditures, excluding MillerCoors.
- Dividends paid were $228.1 million, and the annualized dividend was increased by 14.3% to $1.28 per share. The company repurchased 7.5 million Class B shares for $321.1 million under a $1.2 billion authorization.
Material changes versus the prior comparable period
- Revenue growth was driven by positive pricing in Canada and the U.S., international growth, favorable foreign exchange and the additional fiscal week, despite lower worldwide volume.
- Cost savings contributed $107 million in 2011, including the company’s share of MillerCoors savings. MillerCoors cumulative synergies reached $546 million, exceeding the original $500 million target.
- Canada net sales increased 6.7% to $2,067.3 million, while operating income increased 4.7% to $482.3 million. Higher pricing and foreign exchange were partly offset by lower volume and input inflation.
- MillerCoors net sales declined 0.3% to $7,550.2 million and net income attributable to MillerCoors declined 5.0% to $1,003.8 million. MCBC’s reported equity income increased slightly to $457.9 million, while underlying equity income increased 2.4% to $480.1 million.
- U.K. net sales increased 8.0% to $1,333.5 million and earnings before tax increased 4.2% to $99.3 million. Volume and market share improved despite a 4.2% decline in the U.K. beer market.
- MCI net sales increased 53.3% to $122.6 million, but the pre-tax loss widened 29.6% to $33.3 million as the company invested in China, India and other strategic markets.
- Special items totaled a $12.3 million charge, compared with a $21.3 million charge in 2010. MillerCoors separately recorded $113.4 million of special charges, primarily a $60.0 million Sparks brand impairment and a $50.9 million Milwaukee Brewery Workers’ Pension Plan charge.
- Operating cash flow improved primarily because pension contributions were approximately $270 million lower than in 2010. Free cash flow declined because of higher capital expenditures, working-capital timing, lower earnings and the absence of the 2010 discontinued-operations gain.
Guidance, outlook, risks and unusual items
- Management expected 2012 to remain challenging, with adverse foreign exchange, higher pension expense, increased marketing investment and higher brewery and input costs.
- Expected 2012 cost-of-goods-sold per hectoliter growth was mid-single digit in Canada, low single digit at MillerCoors and high single digit in the U.K. The U.K. forecast included approximately $8 million of incremental brewery redevelopment expense.
- Management expected 2012 Corporate net interest expense of approximately $100 million and an effective tax rate of 17% to 21%; the normalized long-term tax rate was expected to be 22% to 26%.
- MCI was expected to deliver double-digit top-line growth in priority markets but remain investment-focused, with a goal of becoming a significant contributor to company profitability by 2015.
- Cross-currency swaps had a net liability fair value of $311.9 million, including $103.2 million due in May 2012. Settlement amounts were subject to future foreign exchange rates.
- Defined benefit and postretirement obligations remained significant. The consolidated defined benefit plans were underfunded by $539.2 million, and postretirement obligations were $168.4 million. Management expected $50 million to $70 million of consolidated pension contributions in 2012, excluding MillerCoors, BRI and BDL.
- Goodwill was $1.453 billion and indefinite-lived intangible assets were $4.3 billion. The China reporting unit’s fair value exceeded carrying value by only 4%, creating a stated risk of a future goodwill impairment charge if performance does not improve.
- The company recorded $30.6 million of remaining Kaiser indemnity reserves related to the discontinued Brazilian business, including $21.5 million for purchased tax-credit indemnities and $9.1 million for tax, civil and labor claims.
- A Brazilian distribution dispute had a $4.8 million accrued liability and a reasonably possible outcome ranging from no liability to approximately $9 million plus interest and attorney’s fees. A new February 2012 lawsuit concerning beer sales near the Pine Ridge Indian Reservation had no estimable liability at the filing date.
- Principal operating risks include mature and declining beer markets, intense competition and discounting, dependence on major brands, commodity and packaging costs, foreign exchange, unionized labor, pension funding, regulation and excise taxes, joint-venture governance, distributor relationships and emerging-market execution.
Important facts for investors to verify
- Reconcile reported net sales and earnings with the 53rd-week benefit and assess whether pricing is offsetting sustained volume declines.
- Review MillerCoors’ underlying results, special charges and the company’s ability to influence a jointly controlled 42% investment.
- Monitor gross-margin pressure from commodities, packaging, distribution, pension expense and U.K. brewery redevelopment.
- Evaluate liquidity around the $46.9 million of 2012 debt maturities, the $575 million convertible notes due in 2013 and the cross-currency swap liability due in 2012 and 2014.
- Assess pension underfunding, actuarial assumptions, required contributions and the potential impact of lower discount rates or investment returns.
- Track the China reporting unit’s performance and impairment headroom, as well as the carrying values of goodwill and indefinite-lived brands.
- Review the Kaiser indemnities, Brazilian litigation, environmental reserves, guarantees and other contractual commitments totaling $5.625 billion.
- Confirm execution of the $1.2 billion share-repurchase authorization while balancing dividends, acquisitions, pension funding and debt obligations.