Molson Coors Brewing Company 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016, including fourth-quarter results. Molson Coors operates through U.S., Canada, Europe and Molson Coors International segments, with brands including Coors Light, Miller Lite, Molson Canadian, Carling, Staropramen, Blue Moon and other craft, specialty and licensed beverages.
On October 11, 2016, the Company completed its $12.0 billion acquisition of SABMiller’s 58% economic interest and 50% voting interest in MillerCoors, plus the international Miller brand portfolio. MillerCoors became wholly owned and was consolidated prospectively from the acquisition date; therefore, reported 2016 results are not directly comparable with 2015.
Financial performance and key metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Net sales | $4,885.0 million | $3,567.5 million |
| Gross profit | $1,881.9 million | $1,404.0 million |
| Operating income | $3,309.4 million | $521.8 million |
| Net income attributable to MCBC | $1,975.9 million | $359.5 million |
| Diluted EPS from continuing operations | $9.27 | $1.91 |
| Operating cash flow | $1,126.9 million | $715.9 million |
| Capital expenditures | $341.8 million | $275.0 million |
| Cash and cash equivalents | $560.9 million | $430.9 million |
| Total borrowings | $12,059.4 million | $2,908.7 million |
Reported 2016 profitability was heavily affected by acquisition accounting and special items. The Company recorded an approximately $3.0 billion net special-items gain from remeasuring its pre-existing MillerCoors interest and reclassifying related accumulated other comprehensive loss. Income tax expense was $1,050.7 million, producing an effective tax rate of approximately 34.6% versus 12.6% in 2015.
On an unaudited pro forma basis, assuming the acquisition and financing occurred on January 1, 2015, 2016 net sales were $10,983.2 million, down 2.3% from $11,238.1 million in 2015. Pro forma net income attributable to MCBC was $277.5 million, down 48.9% from $542.6 million, and diluted EPS was $1.28 versus $2.51.
Reported gross margin was approximately 38.5% of net sales, compared with approximately 39.4% in 2015. The filing does not provide a comparable adjusted operating margin excluding special items.
Segment and operational trends
- U.S.: Pro forma net sales were $7,704.3 million, down 0.3%; volume declined 1.5%, while operating income increased 17.1% to $1,283.6 million, supported by pricing, mix, cost savings and lower commodity costs. MillerCoors held approximately 25% of U.S. beer market volume, down from 26% in 2015.
- Canada: Net sales declined 5.7% to $1,425.7 million and volume declined 2.8%. The segment reported a $135.5 million pretax loss, primarily due to a $495.2 million impairment of Molson core brand intangibles, lower volume, higher amortization and commercial investments.
- Europe: Net sales declined 8.1% to $1,760.2 million and volume declined 1.7%. Pretax income improved to $138.0 million from a $109.7 million loss, largely because 2015 included $275.0 million of brand impairment charges. A $50 million indirect-tax provision and unfavorable currency movements weighed on 2016.
- MCI: Net sales increased 13.2% to $163.6 million, but the pretax loss widened to $39.7 million. The segment was affected by Bihar’s alcohol prohibition, which resulted in $30.8 million of impairment charges, while Miller brand additions and Latin American growth were positive.
Material changes versus the prior comparable period
- The acquisition materially increased reported assets, liabilities, revenue and debt. Total assets rose to $29.3 billion from $12.3 billion, while long-term debt rose to $11.4 billion from $2.9 billion.
- The Company issued approximately $2.5 billion of Class B stock, approximately $6.9 billion of senior notes and $2.5 billion of term loans to fund the acquisition. It repaid $200 million of the three-year term-loan tranche during the fourth quarter.
- Pro forma worldwide beer volume declined 2.0% to 101.934 million hectoliters. Pro forma net sales declined 2.3%, primarily due to lower volume, unfavorable foreign exchange of $182.4 million and the European tax provision.
- Total cost reductions, including 100% of MillerCoors savings, exceeded $165 million in 2016; MillerCoors delivered more than $85 million of incremental pro forma savings.
- Cash flow from operations increased 57.4% to approximately $1.1 billion, partly because MillerCoors was consolidated for the post-acquisition period and because 2015 included a $227.1 million discretionary U.K. pension contribution.
Guidance, outlook, risks and unusual items
- Management targeted flat U.S. volume in 2018 and volume growth in 2019, with continued investment in Coors Light, Miller Lite, Coors Banquet, craft brands, innovation and economy offerings.
- Management expected approximately $750 million of 2017 capital expenditures, approximately $370 million of 2017 net interest expense, and $100 million to $120 million of defined-benefit pension contributions.
- The quarterly dividend was maintained at $0.41 per share. The share-repurchase program was suspended while the Company deleverages, and the prior dividend target was also suspended.
- The Company had $750 million available under its revolving credit facility, was in compliance with debt covenants, and reported investment-grade ratings with stable outlooks. It intends to use operating cash flow to reduce debt.
- Important unusual items included the $3.0 billion acquisition-related gain, $495.2 million Molson brand impairment, $30.8 million India impairment, $110.4 million Vancouver brewery sale gain, $50 million European indirect-tax provision and ongoing brewery-closure costs.
- Europe’s tax assessments totaled approximately $98 million, with a potential loss of up to approximately $132 million excluding interest and penalties; $50 million was accrued in 2016. The assessments remain under challenge and future taxes could increase if the methodology is upheld.
- The Europe goodwill reporting unit had only a 14% estimated fair-value cushion over carrying value and remained sensitive to adverse changes in cash flows, discount rates, market multiples, regulation and macroeconomic conditions.
- Risks include acquisition integration and synergy execution, substantially higher leverage, mature and declining beer markets, competitive pricing, craft-beer and spirits substitution, foreign exchange, commodity costs, pension obligations, regulatory changes and operating restrictions in emerging markets.
- A Toronto brewery labor strike began in early 2017 and slowed production. Bihar’s alcohol prohibition left the local brewery idle, with additional impairment or receivable losses possible.
Most important facts for investors to verify
- Reconcile reported results with pro forma results; reported 2016 earnings and EPS are not representative because of the acquisition-related special gain.
- Verify the final purchase-price allocation, including approximately $6.4 billion of goodwill and $9.9 billion of acquired intangible assets, which were preliminary at filing.
- Track debt reduction, scheduled maturities, interest expense, covenant headroom and progress toward management’s deleveraging objectives.
- Assess whether expected MillerCoors integration savings and broader synergies offset acquisition costs, higher interest expense and weaker underlying volumes.
- Monitor Canada and Europe brand performance, including potential further impairment of goodwill or intangible assets.
- Follow the European indirect-tax assessments, the Ontario class-action litigation seeking CAD 1.4 billion, pension funding requirements and Kaiser indemnity obligations.
- Confirm the effect of the 2017 segment realignment, the Toronto labor disruption, Bihar’s prohibition and any changes to foreign exchange or regulatory conditions.