Molson Coors Brewing Company 2014 Form 10-K Summary
Business context and reporting period
Molson Coors is a global brewer with operations in Canada, the United States through its 42% economic interest in MillerCoors, Europe, and international markets. Key brands include Coors Light, Miller Lite, Molson Canadian, Carling, Staropramen, Blue Moon, Cobra, craft beers, ciders, and other malt beverages.
The filing covers the fiscal year ended December 31, 2014. The company changed from a 52/53-week fiscal year to a calendar year beginning in 2014; the three additional days included in fiscal 2013 were considered immaterial.
Financial performance and key metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net sales | $4,146.3 million | $4,206.1 million | (1.4%) |
| Gross profit | $1,653.0 million | $1,660.5 million | (0.5%) |
| Operating income | $726.5 million | $805.7 million | (9.8%) |
| Net income attributable to MCBC | $514.0 million | $567.3 million | (9.4%) |
| Continuing-operations diluted EPS | $2.76 | $3.07 | (10.1%) |
| Operating cash flow | $1,272.6 million | $1,168.2 million | 8.9% |
| Underlying free cash flow | $956.7 million | $892.0 million | 7.3% |
| Underlying EBITDA | $1,470.5 million | $1,468.5 million | 0.1% |
Reported gross margin was approximately 39.9%, operating margin approximately 17.5%, and net margin attributable to MCBC approximately 12.4%. Underlying after-tax income increased 5.7% to $768.5 million, or $4.13 per diluted share, reflecting the impact of excluding special and other non-core items.
Worldwide beer volume declined 1.3% to 58.964 million hectoliters. Consolidated financial volume declined 0.2%, while proportionate MillerCoors and other equity-investment sales-to-retail declined 3.3%. Canada volume declined 3.1%, Europe volume declined 0.3%, and MCI volume increased 21.2% excluding royalty volume.
Equity income from MillerCoors increased 4.2% to $561.8 million. MillerCoors reported lower volume but benefited from higher pricing, favorable mix, and cost savings.
Cash and cash equivalents were $624.6 million at December 31, 2014, compared with $442.3 million at year-end 2013. Debt-free net working capital improved to positive $103.0 million from negative $36.8 million. Total debt obligations were approximately $3.18 billion, including $849.6 million due in 2015 and $730.3 million due in 2017. Long-term debt was $2.337 billion, and current debt and short-term borrowings were $849.4 million.
The company repaid $613.4 million of total debt during 2014, including commercial paper, European credit-facility borrowings, and the remaining amount withheld from the 2013 convertible-note settlement. No borrowings were outstanding under the $750 million revolving credit facility or the commercial paper program at year-end. The company was in compliance with debt covenants, including a maximum leverage ratio of 3.5x debt to EBITDA.
Material changes versus the prior comparable period
- Reported earnings declined primarily because net special charges increased to $324.4 million from $200.0 million.
- Europe recorded a $360.0 million non-cash impairment of the Jelen and Ozujsko brand intangibles, compared with $150.9 million of European brand impairments in 2013.
- Canada results were pressured by industry softness, competitive activity, foreign exchange, and the termination of the Modelo Molson Imports joint venture. Canada underlying pretax income declined 7.1% to $365.0 million, despite a $63.2 million termination payment from Modelo.
- Europe underlying pretax income increased 13.8% to $242.7 million, supported by higher net sales, supply-chain savings, and lower general and administrative costs, despite weak demand and flooding in the Balkans.
- MCI reduced its underlying pretax loss 17.9% to $13.3 million, driven by volume growth and cost control, but remained unprofitable.
- Cost-reduction initiatives generated more than $70 million across the company, while MillerCoors delivered approximately $143 million of incremental savings, of which MCBC’s share was approximately $60 million.
- Foreign currency translation produced a significant adverse effect on reported equity and results; accumulated other comprehensive loss was $898.4 million at year-end 2014 versus accumulated other comprehensive income of $154.9 million at year-end 2013.
Guidance, outlook, risks, contingencies, and unusual items
Management expects 2015 to remain challenging because of foreign-exchange translation, weak consumer demand, a higher effective tax rate, and the loss of three commercial arrangements. The company estimates that termination of the Modelo distribution arrangement in the U.K., the Heineken contract-brewing arrangement, and the Miller brand license in Canada will reduce 2015 pretax profit by approximately $40 million.
- Expected 2015 capital expenditures are approximately $330 million, excluding MillerCoors and other equity-method joint ventures.
- Expected 2015 consolidated net interest expense is approximately $120 million.
- Underlying tax rate guidance is 18% to 22%; normalized long-term underlying tax rate guidance is 20% to 24%.
- Expected 2015 defined-benefit pension contributions are approximately $260 million to $270 million, including the approximately $230 million U.K. pension contribution paid in January 2015.
- Management does not expect U.S. operating margins to grow in 2015 because of continued brand and information-technology investment.
- Management expects MCI to move toward profitability by 2016.
- A proposed closure of the Alton brewery in the U.K. may generate additional 2015 restructuring and closure costs.
- Europe’s Jelen, Ozujsko, and Niksicko brands and the Canada and Europe reporting units remain exposed to future impairment. The Molson core brand had approximately 9% excess fair value over carrying value at the impairment testing date.
- A Canadian class-action lawsuit concerning The Beer Store and Ontario beer distribution seeks damages of CAD 1.4 billion. The company disputes the allegations and expects to defend the case vigorously.
- The company received a European regulatory tax assessment of approximately $64 million, with an estimated possible loss range of zero to $77.8 million. The company is appealing the assessment.
- Other exposures include pension underfunding, foreign-exchange and commodity-price volatility, regulatory changes to Canadian distribution, reliance on joint ventures and third-party distributors, supplier concentration, consumer migration toward craft beer, value brands, wine, and spirits, and indemnities related to the former Kaiser business in Brazil.
On February 10, 2015, the company increased its quarterly dividend from $0.37 to $0.41 per share and authorized a new four-year, $1.0 billion share-repurchase program. No repurchases were made under the prior program during 2014.
Most important facts for an investor to verify
- Reconcile GAAP earnings with underlying earnings and assess whether the $324.4 million of special charges should be treated as non-recurring.
- Evaluate the sustainability of MillerCoors distributions and the company’s limited control over the 50/50-governed joint venture.
- Monitor the 2015 impact of lost Miller, Modelo, and Heineken arrangements and the planned Alton brewery closure.
- Assess impairment risk for the $2.2 billion of goodwill and $5.8 billion of indefinite-lived intangible assets, particularly the at-risk European and Molson brands.
- Confirm the timing and funding sources for the $849.6 million of 2015 debt maturities and the $260 million to $270 million of pension contributions.
- Follow the Ontario distribution litigation, the European tax assessment, and remaining Kaiser indemnity claims.
- Separate operational performance from foreign-exchange translation effects when comparing 2015 results with 2014.