Molson Coors Brewing Company: Q1 2011 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is a global brewer with reportable segments in Canada, the United States through its 42% equity investment in MillerCoors, and the United Kingdom. The filing covers the thirteen weeks ended March 26, 2011, compared with the thirteen weeks ended March 27, 2010. Results are seasonal and the company cautions that quarterly results are not an appropriate basis for projecting the full year.
Key financial metrics
| Metric | Q1 2011 | Q1 2010 | Change |
|---|---|---|---|
| Sales | $997.3 million | $947.0 million | 5.3% |
| Net sales | $690.4 million | $661.0 million | 4.4% |
| Gross profit | $263.2 million | $256.6 million | 2.6% |
| Gross margin | 38.1% | 38.8% | Down 0.7 percentage points |
| Operating income | $126.0 million | $107.5 million | 17.2% |
| Operating margin | 18.2% | 16.3% | Up 2.0 percentage points |
| Net income from continuing operations attributable to MCBC | $82.6 million | $62.0 million | 33.2% |
| Diluted EPS from continuing operations | $0.44 | $0.33 | 33.3% |
| Net income attributable to MCBC | $82.9 million | $104.6 million | Down 20.8% |
| Net cash provided by operating activities | $45.0 million | $90.4 million | Down $45.4 million |
| Underlying after-tax income | $81.6 million | $69.7 million | 17.1% |
| Underlying free cash flow | $(72.4) million | $(4.7) million | Higher cash use |
Worldwide beer volume declined 1.5%; reported financial volume declined 2.1%. Net sales per hectoliter increased 6.6%, reflecting pricing, sales mix and foreign exchange. The effective tax rate was approximately 16%, compared with a stated full-year 2011 expectation of 17% to 21%.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1.082 billion at March 26, 2011, down from $1.218 billion at December 25, 2010 but up from $656.6 million at March 27, 2010.
- Long-term debt was $2.003 billion, compared with $1.960 billion at year-end 2010 and $1.437 billion at March 27, 2010. Short-term borrowings were $2.0 million.
- Net working capital was $761.0 million, excluding short-term borrowings and the current portion of long-term debt.
- Net cash used in investing activities was $144.6 million, including $277.2 million invested in MillerCoors, $34.3 million of capital additions and $29.4 million for the acquisition of Sharp’s Brewery.
- Net cash used in financing activities was $50.1 million, including $52.1 million of dividends. The quarterly dividend was $0.28 per share, compared with $0.24 in the prior-year quarter.
- After quarter-end, the company entered into a four-year, $400 million revolving multicurrency credit facility and terminated its $750 million facility. There were no borrowings on the terminated facility at quarter-end.
- Management stated that operating cash flow, MillerCoors distributions and borrowing capacity should be adequate for operating needs, debt service, dividends and planned capital expenditures for at least the next twelve months.
Material changes versus the prior comparable period
- Continuing-operations earnings improved substantially, but total net income declined because Q1 2010 included a $42.6 million gain from discontinued Brazilian operations; Q1 2011 included only a $0.3 million gain.
- Operating income increased primarily because of higher equity income from MillerCoors, improved U.K. performance, pricing and cost reductions. Equity income in MillerCoors rose 11.2% to $101.2 million.
- Canada volume declined 5.9% and pretax income declined 3.9% to $52.2 million. Pricing, overhead reductions and foreign exchange were more than offset by lower volume and input inflation.
- MillerCoors net income increased 12.5% to $234.7 million despite a 2.6% volume decline. Pricing, brand mix, cost management and a $14 million one-time third-party payment supported results.
- U.K. pretax income increased to $6.8 million from $1.5 million, aided by pricing, lower pension expense and the addition of Modelo and Sharp’s brands, despite lower volume and higher product costs.
- Special operating items were zero on a consolidated basis in Q1 2011 versus a $2.6 million expense in Q1 2010. Q1 2011 included Canada termination charges, a flood-insurance benefit, U.K. restructuring charges and a release of a U.K. tax reserve.
- Foreign currency translation generated $161.7 million of after-tax other comprehensive income, compared with a $10.9 million loss in the prior-year quarter.
Outlook, management commentary and risks
- Management expects 2011 to focus on brand investment, cost reduction and cash generation. RFG2 cost savings were approximately $10 million in the quarter and $76 million program-to-date toward a goal of $150 million of annualized savings by 2012.
- MillerCoors delivered $23 million of cost synergies in the quarter and $528 million since formation, exceeding its original $500 million commitment. Molson Coors benefits from 42% of those savings.
- Expected 2011 capital expenditures are approximately $230 million, excluding MillerCoors and other equity-method joint ventures.
- Canada expects owned-brand cost of goods sold per hectoliter to rise at a low-single-digit rate in local currency, or at a mid-single-digit rate including contract brewing.
- MillerCoors cost of goods sold per hectoliter is expected to increase at a low-single-digit rate. Second- and third-quarter results are expected to reflect increased marketing and information-technology spending.
- U.K. all-in cost of goods sold per hectoliter is expected to increase at a mid-single-digit rate; owned-brand costs are expected to rise at a low-double-digit rate in local currency.
- MCI and Corporate full-year marketing, general and administrative expense is forecast at approximately $200 million, plus or minus 5%. Corporate net interest expense is expected to be approximately $115 million at quarter-end foreign exchange rates, excluding U.K. trade-loan interest income.
- Key risks include weak beer volumes, competitive pricing, commodity, fuel and freight inflation, foreign exchange volatility, interest rates, pension obligations, tax-law changes, and execution of brand and cost-saving programs.
- The company guarantees approximately 50% of Brewers’ Retail, Inc.’s CAD 200 million debt due June 30, 2011. If the debt is not refinanced, Molson Coors could face a significant 2011 cash outflow; $96.9 million related to the guarantee was classified as a current liability.
- Other contingencies include Kaiser-related indemnities to FEMSA, environmental obligations and Brazilian litigation. The company believes a material adverse result in the Brazilian distributor litigation is not probable, but litigation outcomes remain uncertain.
- Derivative liabilities had a net fair value of approximately $471.7 million at quarter-end, primarily from cross-currency swaps and foreign currency forwards. A hypothetical 10% adverse change in interest rates produced estimated debt fair-value volatility of $202.9 million.
Important facts for investors to verify
- Reconcile reported net income with continuing-operations income, particularly the absence of the prior-year $42.6 million discontinued-operations gain.
- Assess whether pricing and mix can continue to offset declining volumes and commodity, fuel and freight inflation.
- Monitor MillerCoors earnings, cash distributions, pension contributions and the sustainability of reported synergies, including the one-time third-party payment.
- Review liquidity after the post-quarter-end refinancing, including the $400 million revolving facility and debt maturities from 2012 through 2017.
- Evaluate the potential cash requirement associated with the Brewers’ Retail guarantee and the timing and uncertainty of Kaiser, environmental and litigation obligations.
- Distinguish GAAP results from management’s non-GAAP underlying income and underlying free cash flow measures.