Molson Coors Brewing Company — Q2 2012 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is a global brewer operating in Canada, the United States through its 42% equity investment in MillerCoors, the United Kingdom, Central Europe and other international markets. This unaudited Form 10-Q covers the thirteen and twenty-six weeks ended June 30, 2012, compared with June 25, 2011. Fiscal 2012 ends December 29, 2012.
On June 15, 2012, the company completed its approximately $3.4 billion acquisition of StarBev, renamed Molson Coors Central Europe (MCCE). MCCE contributed two weeks of results to the quarter and became a new reporting segment.
Key financial metrics
| Metric | Q2 2012 | Q2 2011 | Change | First half 2012 | First half 2011 |
|---|---|---|---|---|---|
| Net sales | $999.4 million | $933.6 million | 7.0% | $1,690.8 million | $1,624.0 million |
| Gross profit | $419.3 million | $409.7 million | 2.3% | $671.9 million | $672.9 million |
| Gross margin | 42.0% | 43.9% | Down 1.9 pts | 39.7% | 41.4% |
| Operating income | $278.9 million | $298.0 million | Down 6.4% | $400.7 million | $424.0 million |
| Operating margin | 27.9% | 31.9% | Down 4.0 pts | 23.7% | 26.1% |
| Net income attributable to MCBC | $105.1 million | $222.8 million | Down 52.8% | $184.6 million | $305.7 million |
| Diluted EPS | $0.57 | $1.18 | Down 51.7% | $1.01 | $1.62 |
| Underlying diluted EPS from continuing operations | $1.38 | $1.23 | 12.2% | $1.85 | $1.66 |
Worldwide beer volume increased 6.4% in Q2 and 3.5% in the first half, primarily from the MCCE acquisition. Excluding Central Europe, worldwide volume declined 1.0% in Q2 and 0.7% in the first half. MillerCoors equity income increased 8.0% to $185.6 million in Q2 and 11.5% to $304.5 million in the first half.
Net cash provided by operating activities was $397.4 million in the first half, compared with $271.8 million in the prior-year period. Underlying free cash flow was $335.2 million, compared with $121.9 million. Capital expenditures were $81.4 million, and management expects approximately $240 million of 2012 capital expenditures, excluding MillerCoors and other equity-method ventures.
Liquidity, debt and capital structure
- Cash and cash equivalents were $516.0 million at June 30, 2012, down from $1,078.9 million at December 31, 2011, primarily because of the acquisition.
- Long-term debt was $4,097.9 million, compared with $1,914.9 million at year-end 2011. Including current maturities and short-term borrowings, total borrowings were approximately $4.9 billion.
- The company issued $1.9 billion of senior notes maturing in 2017, 2022 and 2042, funded a $300 million term loan, and issued a €500 million zero-coupon convertible note due December 31, 2013.
- Current portions of long-term debt and short-term borrowings totaled $802.5 million at June 30, 2012.
- The company had no borrowings outstanding under its $550 million or $400 million revolving credit facilities and was in compliance with debt covenants.
- Share repurchases were suspended following the acquisition until credit metrics return closer to pre-acquisition levels. No repurchases occurred in the first half of 2012.
Material changes versus the prior comparable period
- Reported revenue and volume increased because MCCE was included for two weeks; the acquisition also added substantial goodwill, intangible assets and debt.
- Reported earnings declined sharply because of acquisition-related financing and transaction costs, including a $39.2 million Treasury Lock loss, a $57.9 million Euro currency purchase loss, $13.0 million of bridge facility fees, a $5.6 million unrealized loss on the convertible note conversion feature and $25.3 million of acquisition-related non-financing costs in Q2.
- Underlying after-tax income increased 8.0% in Q2 and 7.1% in the first half, excluding special and other non-core items.
- Gross and operating margins declined because of input-cost inflation, higher pension costs, increased marketing investment and higher special charges.
- U.K. volume declined 6.4% in Q2 and pretax income declined 49.5%; Canada pretax income increased 6.1% in Q2, while MillerCoors delivered stronger pricing, mix and cost management.
- MCI’s Q2 pretax loss increased to $24.3 million from $10.6 million, including a $10.4 million impairment of China-related goodwill and definite-lived intangibles.
Outlook, commentary, risks and unusual items
Management described 2012 as challenging and expects adverse foreign exchange, higher pension expense and higher input costs. It expects approximately $15 million of additional pension expense in Canada and $10 million in the U.K., higher marketing investment in Canada, the U.K., MCI and MillerCoors, and additional cost reductions. Management expects 2012 corporate net interest expense of approximately $150 million, a 17% to 21% effective tax rate, and a normalized long-term tax rate of 22% to 26%.
The company expects 2012 Canada and U.K. cost of goods sold per hectoliter to increase at high-single-digit rates in local currency. It expects MillerCoors cost of goods sold per hectoliter to increase at a low-single-digit rate and Central Europe cost of goods sold per hectoliter to increase at a low-single-digit rate on a pro forma basis.
Key risks include integration of MCCE, realization of expected synergies, weaker European markets, foreign exchange volatility, input inflation, increased leverage, potential loss of investment-grade ratings, debt covenant compliance, pension funding and impairment of goodwill or intangible assets. The company stated that its China reporting unit had only a 4% valuation cushion before the impairment and may require further costs or asset impairment if the planned purchase of its joint venture partner’s 49% interest does not close.
The company recorded $22.7 million of special items in the first half, including restructuring and termination charges, a U.K. packaging asset abandonment charge, the China impairment and a Canadian insurance reimbursement. It also had $28.4 million of Kaiser-related indemnity reserves, $22.2 million accrued for litigation, disputes and environmental matters, and $9.1 million of guaranteed RMMC debt. A Brazilian distributor settlement of $6.3 million was finalized after quarter-end and had been accrued at June 30.
Disclosure controls were deemed effective; however, the assessment excluded the recently acquired StarBev business. No material off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- Whether MCCE integration delivers the expected growth, cost savings and synergies, and whether preliminary purchase accounting is finalized without material adjustments.
- Debt reduction, refinancing or repayment requirements for the approximately $4.9 billion of borrowings, particularly the 2013 convertible obligations and other near-term maturities.
- Compliance with debt covenants and the impact of credit-rating changes on financing costs and liquidity.
- Whether Central Europe, the U.K. and China operations generate the expected volume and margin improvement amid weak European markets.
- Potential additional impairment charges related to the China reporting unit, U.K. reporting unit or acquired indefinite-lived brands.
- Actual foreign exchange, pension and input-cost impacts versus management’s 2012 outlook.
- Reconciliation of reported GAAP earnings to underlying income and free cash flow, including the treatment of acquisition-related and other non-core items.