TAP

Business Context and Reporting Period

Company: Molson Coors Brewing Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 1, 2007 (13 weeks) and 26 weeks
Business Overview: The Company operates in three primary geographic segments: Canada, United States, and Europe. It is a leading brewer of beer and other beverages. The reporting period includes the impact of a 52-week fiscal year structure, whereas the prior year included a 53rd week in the fourth quarter.

Key Financial Metrics

Note: Net sales increased 5.9% in the quarter and 6.1% year-to-date compared to the prior year periods.

Material Changes vs. Prior Period

• Revenue Growth: Net sales grew 5.9% in the quarter and 6.1% year-to-date, driven by volume increases in Canada and the U.S. and higher revenue per barrel.
• Profitability Surge: Income from continuing operations increased 16.9% in the quarter and 46.4% year-to-date. The U.S. segment was the primary driver, with operating income up 131.2% in the quarter due to the absence of special charges present in the prior year.
• Special Items: The Company recorded $25.4 million in special items for the quarter, primarily a $24.1 million non-cash impairment charge related to the Foster's distribution right intangible asset in Canada. This contrasts with $25.8 million in special items in the prior year quarter.
• Cash Position: Cash and cash equivalents increased significantly to $680.0 million from $79.6 million in the prior year period, largely due to the issuance of $575 million in convertible senior notes in June 2007.
• Discontinued Operations: The Company reported a loss of $14.2 million from discontinued operations (Kaiser Brazil) for the 26-week period, compared to a loss of $13.1 million in the prior year, primarily due to adjustments in indemnity liabilities.

Guidance, Outlook, and Risks

• Outlook: Management anticipates full-year 2007 consolidated effective tax rates between 20% and 25%. Corporate general and administrative expenses are expected to range from $97 million to $103 million. Net interest expense is projected at $113 million to $117 million, excluding premiums for debt repurchases.
• Cost Outlook: Full-year cost of goods sold per barrel is expected to increase at a low-to-mid-single-digit rate in local currency, excluding specific impacts like the Edmonton strike and currency hedging. U.S. cost of goods sold is expected to increase approximately 2% for the full year.
• Subsequent Events:
  • Debt Repurchase: On July 11, 2007, the Company repurchased $625 million of 6 3/8% Senior Notes due 2012, incurring a loss of approximately $24.5 million to be recognized in Q3 2007.
  • Edmonton Closure: On July 31, 2007, the Company committed to closing its Edmonton, Alberta brewery. A pretax non-cash impairment charge of approximately $37 million is expected in Q3 2007, with additional costs of $10 million to $12 million.
  • Stock Split: A two-for-one stock split was declared on August 1, 2007, with a planned distribution date of October 3, 2007.
• Risks and Contingencies:
  • Indemnity Obligations: Significant indemnity liabilities remain related to the sale of Kaiser Brazil, totaling $137.1 million as of July 1, 2007, with potential exposure up to $340 million regarding tax credits.
  • Legal Proceedings: Ongoing litigation includes class actions regarding merger disclosures and advertising practices targeting underage consumers.
  • Market Risks: Exposure to foreign currency fluctuations (CAD, GBP, JPY), interest rates, and commodity prices is managed through derivatives, though volatility remains a risk.

Investor Verification Checklist

• Debt Restructuring Impact: Verify the timing and accounting treatment of the $24.5 million loss on the repurchase of the 6 3/8% Senior Notes in Q3 2007.
• Edmonton Closure Costs: Monitor the Q3 2007 financials for the anticipated $37 million impairment charge and additional $10-$12 million in closure costs.
• Stock Split Adjustments: Confirm pro forma EPS adjustments following the two-for-one stock split effective October 2007.
• Tax Rate Volatility: Watch for impacts of pending Canadian and U.K. tax law changes on the effective tax rate, which could alter the 20-25% guidance range.
• Indemnity Liability Fluctuations: Review future filings for changes in the $137.1 million indemnity reserve related to the Kaiser Brazil sale, which is sensitive to foreign exchange and legal rulings.