Molson Coors Brewing Company — Q1 2013 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company filed an unaudited Form 10-Q for the 13 weeks ended March 30, 2013, compared with the 13 weeks ended March 31, 2012. The company operates through Canada, the U.S. investment in MillerCoors, Europe, and Molson Coors International. Fiscal 2013 included the Central Europe operations acquired from StarBev in June 2012; prior-year European comparisons are presented on a pro forma basis where indicated.
Financial performance and key metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net sales | $828.5 million | $691.4 million | 19.8% increase |
| Gross profit | $281.4 million | $252.6 million | 11.4% increase |
| Gross margin | 33.9% | 36.5% | Down 2.6 percentage points |
| Operating income | $112.0 million | $121.8 million | 8.0% decrease |
| Operating margin | 13.5% | 17.6% | Down 4.1 percentage points |
| Net income attributable to MCBC | $35.6 million | $79.5 million | 55.2% decrease |
| Diluted EPS | $0.20 | $0.44 | 54.5% decrease |
| Net cash from operations | $118.4 million | $50.4 million | Increase of $68.0 million |
Worldwide beer volume increased 20.3% to 11.932 million hectoliters, primarily because of the Central Europe acquisition. Underlying after-tax income declined 36.0% to $54.6 million, or $0.30 per diluted share, excluding special and other non-core items. The company reported approximately $21.9 million of pre-tax adjustments in Q1 2013, including mark-to-market losses, acquisition-related costs, special items, and other non-core items.
Equity income from MillerCoors declined 1.3% to $117.4 million. MillerCoors reported a 1.9% volume decline, while net sales increased 1.6% due primarily to pricing and favorable mix. Canada pretax income declined 17.1% to $36.4 million. Europe reported a $3.7 million pretax loss, although pro forma European pretax loss improved 63.0% from the comparable prior period. MCI’s pretax loss improved to $6.1 million from $8.6 million.
Cash and cash equivalents were $511.5 million at March 30, 2013, compared with $624.0 million at December 29, 2012 and $836.3 million at March 31, 2012. Net cash used in investing activities was $173.9 million, including $331.8 million invested in MillerCoors, $222.4 million received as a return of capital from MillerCoors, and $68.3 million of capital expenditures. Net cash used in financing activities was $35.2 million, including $58.2 million of dividends paid.
Debt, liquidity, and capital resources
Total borrowings were approximately $4.651 billion, consisting of $3.391 billion of long-term debt, $1.247 billion of current maturities, and $13.3 million of short-term borrowings. Approximately $1.247 billion of long-term debt was scheduled to mature during 2013, including the $575 million 2.5% convertible notes due in July 2013 and the €500 million zero-coupon convertible note due December 31, 2013.
The company had no outstanding borrowings under its $550 million and $400 million revolving credit facilities, its $950 million commercial paper program, or its €150 million uncommitted European facility. Management stated that operating cash flow, MillerCoors distributions, and available borrowing capacity were expected to be adequate for operating needs, debt service, dividends, and planned capital expenditures over the next 12 months.
Net working capital was $335.3 million, compared with $394.9 million at year-end 2012 and $862.4 million at March 31, 2012. Underlying free cash flow was negative $48.9 million, an improvement from negative $78.5 million in Q1 2012. Planned 2013 capital expenditures were approximately $330 million, excluding MillerCoors and other equity-method investments.
Material changes versus the prior comparable period
- Reported revenue and worldwide volume increased substantially because Central Europe was included after the StarBev acquisition.
- Profitability and EPS declined despite higher sales, primarily because of increased debt service, Central Europe operating losses, unfavorable foreign exchange, lower Canada results, and lower MillerCoors earnings.
- Net interest expense increased by $51.1 million to $74.9 million, largely because of acquisition financing. The company recorded a $29.7 million unrealized loss on the fair value of the conversion feature of the €500 million convertible note.
- Cash flow from operations more than doubled, reflecting improved working capital, although capital expenditures and the investment in MillerCoors resulted in negative underlying free cash flow.
- Other comprehensive loss was $204.8 million, driven primarily by a $261.3 million foreign currency translation loss.
- Corporate pretax loss increased to $102.6 million from $58.9 million, primarily because of higher interest expense related to acquisition financing.
Guidance, outlook, risks, contingencies, and unusual items
Management’s 2013 outlook emphasized profitable growth through brands and innovation, debt reduction, disciplined cash use, and efforts to improve Europe and MCI profitability. The company expected Corporate marketing, general and administrative expense of approximately $105 million, consolidated net interest expense of approximately $170 million, pension contributions of approximately $150 million including the company’s MillerCoors share, and an underlying effective tax rate of 16% to 20%. Expected 2013 capital expenditures were approximately $330 million.
Key risks include the substantial 2013 debt maturities, foreign exchange exposure, pension funding requirements, commodity costs, weak economic conditions in Europe, and potential impairment of goodwill and indefinite-lived brand assets. The U.K. and Canada reporting units and Molson core brands had limited valuation cushions based on prior impairment testing. Central Europe carried $789.4 million of goodwill and $2.332 billion of indefinite-lived intangibles at March 30, 2013.
Miller Brewing Company disputed Molson Coors’ rights under the Canadian license agreement covering several Miller brands and purported to terminate the agreement. Molson Coors filed suit in Ontario and sought an injunction; the hearing was scheduled for May 9, 2013. The agreement generated $17.2 million of Q1 2013 net sales, and the related definite-lived intangible asset had a $66.4 million carrying value.
The company also disclosed potential pre-acquisition liabilities in several Central European countries that could affect the StarBev purchase price allocation, although the amounts and probability of outcomes could not be reliably estimated. Other contingencies included Kaiser-related indemnities, environmental matters, guarantees, and ordinary-course litigation. The company had accrued $14.4 million for litigation, disputes, and environmental matters.
Important facts for investors to verify
- Verify the refinancing, repayment, conversion, or settlement of the $575 million and €500 million convertible obligations due in 2013.
- Monitor deleveraging, interest expense, liquidity, credit ratings, and the availability of revolving credit and commercial paper capacity.
- Assess whether Central Europe’s operating improvement continues and whether the acquired goodwill and brand assets remain recoverable.
- Follow the Miller Canadian license litigation and the potential effect on sales, brand rights, and the $66.4 million related intangible asset.
- Compare actual 2013 capital expenditures, pension contributions, interest expense, tax rate, and cash flow with management’s stated outlook.
- Evaluate the effect of foreign currency movements, commodity inflation, and weak beer volumes in Canada, the U.S., and Europe.