Molson Coors Brewing Company — Q3 2014 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is a global brewer with operating segments in Canada, the United States through its 42% economic interest in MillerCoors, Europe, and Molson Coors International. This filing covers the three and nine months ended September 30, 2014, compared with September 28, 2013. Beginning in 2014, the company adopted a calendar-year reporting cycle; prior-year quarterly results were retrospectively adjusted for the interim recognition of advertising expenses.
Financial performance and key metrics
| Metric | Q3 2014 | Q3 2013 | 9M 2014 | 9M 2013 |
|---|---|---|---|---|
| Net sales | $1,168.0 million | $1,171.2 million | $3,172.5 million | $3,177.7 million |
| Gross profit | $501.4 million | $501.2 million | $1,299.4 million | $1,276.5 million |
| Gross margin | 42.9% | 42.8% | 41.0% | 40.2% |
| Operating income | $3.1 million | $195.7 million | $572.1 million | $644.8 million |
| Net income attributable to MCBC | $(34.4) million | $134.3 million | $419.9 million | $430.1 million |
| Diluted EPS | $(0.19) | $0.73 | $2.26 | $2.34 |
| Underlying diluted EPS | $1.46 | $1.51 | $3.58 | $3.25 |
| Underlying EBITDA | $469.2 million | $481.3 million | $1,196.6 million | $1,147.9 million |
| Worldwide beer volume | 16.435 million hl | 17.007 million hl | 44.927 million hl | 45.659 million hl |
Q3 net sales declined 0.3%, while worldwide beer volume decreased 3.4%. Underlying after-tax income declined 2.7%, primarily because of lower volume, increased brand investment, unfavorable foreign exchange, and a higher underlying tax rate. These pressures were partly offset by pricing and mix, cost reductions, and lower underlying interest expense. The reported Q3 operating margin was approximately 0.3%, versus 16.7% in the prior-year quarter, principally because of special items.
Nine-month net cash provided by operating activities was $1,058.4 million, up from $1,030.0 million. Capital additions were $195.8 million, and net cash used in investing activities was $237.9 million. Net cash used in financing activities was $513.2 million, including $205.1 million of dividends and $350.5 million of net repayments under revolving credit facilities and commercial paper. Underlying free cash flow was $766.1 million, compared with $746.8 million.
Cash and cash equivalents were $722.1 million at September 30, 2014, compared with $442.3 million at December 31, 2013. Total long-term debt, including the current portion, was $3,149.2 million, and short-term borrowings were $305.3 million. The company had $588.6 million available under its $750 million revolving credit facility. Debt covenants were satisfied, including the 3.5x maximum leverage threshold specified in the credit agreement.
Material changes versus the prior comparable period
- Reported Q3 earnings shifted to a $34.4 million net loss from $134.3 million of net income, driven primarily by $367.6 million of net special items versus $163.0 million.
- Europe recorded a $360.0 million impairment of the Jelen and Ozujsko indefinite-lived brand assets. The brands, along with Niksicko, remain exposed to potential future impairment.
- Canada recorded an $8.9 million impairment related to the Miller license agreement. Under an October 2014 settlement, distribution of the affected Miller brands will end March 31, 2015.
- The MMI joint venture with Grupo Modelo ceased operations in February 2014 and was dissolved in Q3. The company recognized $63.2 million of termination-fee income and $4.9 million of accelerated intangible-asset amortization during the first nine months.
- MillerCoors equity income increased 7.1% in Q3 to $158.9 million and 7.6% for the first nine months to $471.8 million, supported by pricing, mix, and cost savings.
- Canada Q3 net sales declined 3.7%, Europe net sales increased 1.8% despite a 4.6% volume decline, and MCI net sales increased 15.1% with a 24.1% volume increase.
- Accumulated other comprehensive income declined to a $325.6 million loss from $154.9 million of income at year-end, primarily due to foreign-currency translation losses of $520.9 million for the first nine months.
Guidance, outlook, commentary, and risks
Management expects higher brand investment in local currency across segments during the fourth quarter, with unfavorable foreign-exchange effects, particularly in Canada. Corporate marketing, general and administrative expense is expected to be approximately $110 million for 2014, excluding foreign exchange. Expected 2014 capital expenditures are approximately $315 million, pension contributions approximately $34 million, and consolidated net interest expense approximately $135 million.
Management expects the 2014 underlying effective tax rate to range from 12% to 16%, with the 2015 rate expected near the low end of the company’s long-term 20% to 24% range, assuming no material changes in tax law, audits, or uncertain tax positions. Management is continuing cost-reduction and business-transformation initiatives and expects significantly higher U.S. marketing and general and administrative expense in Q4 because of these initiatives and increased brand investment.
- European performance remains exposed to weak consumer demand, macroeconomic conditions, flooding impacts, migration toward value brands, and potential additional impairment charges.
- Canada faces industry declines, competitive pressure, foreign-exchange headwinds, the loss of Modelo distribution rights, and the scheduled termination of the Miller license.
- The company is exposed to foreign-currency, interest-rate, commodity-price, pension, and customer-collection risks. Approximately 93% of cash was held outside the United States at quarter-end.
- The company disclosed a fourth-quarter 2014 regulatory assessment related to European operations of approximately $66 million. Management intends to challenge the assessment and estimated a possible loss range of zero to $66 million.
- Kaiser-related indemnities remain outstanding, including a $68.0 million cap for tax, civil, and labor claims and potential purchased-tax-credit claims of up to $143.0 million based on September 30 exchange rates.
- Total contractual obligations were $8.25 billion, including $3.46 billion of debt obligations, $1.76 billion of debt interest, $347.6 million of retirement-plan expenditures, and $2.59 billion of other long-term obligations.
Important facts for investors to verify
- Reconcile reported earnings and cash flow with non-GAAP underlying income, EBITDA, and free cash flow, particularly the impact of the $360.0 million European impairment and other special items.
- Monitor the carrying values and valuation assumptions for the Europe and Canada reporting units and the at-risk Jelen, Ozujsko, Niksicko, and Molson brand assets.
- Assess the earnings and volume effects of the MMI termination and the March 31, 2015 termination of the Miller Canada license.
- Review refinancing needs for the CAD 900 million notes due in 2015 and the company’s access to its revolving credit facility and commercial paper program.
- Evaluate the effect of European flooding, macroeconomic weakness, foreign-exchange movements, and potential additional impairments.
- Follow the outcome of the approximately $66 million European regulatory assessment and the remaining Kaiser indemnity exposures.
- Confirm the effect of the advertising-expense accounting change and the correction of prior-period unrecognized tax benefits when comparing reported periods.