Business Context and Reporting Period
Molson Coors Brewing Company is a global brewer with operations in Canada, the United States through its 42% economic interest in MillerCoors, the United Kingdom, Central Europe and international markets. This Form 10-K covers the 52 weeks ended December 29, 2012; fiscal 2011 covered 53 weeks ended December 31, 2011.
- On June 15, 2012, the Company acquired StarBev for approximately $3.4 billion, including assumed and repaid debt, and renamed the business Molson Coors Central Europe.
- 2012 results include Central Europe only from the acquisition date. Beginning in 2013, the U.K. and Central Europe businesses are combined into a single Europe segment.
- The Company deconsolidated its China joint venture, MC Si’hai, during the third quarter after losing control.
Financial Performance and Position
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Net sales | $3,916.5 million | $3,515.7 million | +11.4% |
| Gross profit | $1,564.0 million | $1,466.6 million | +6.6% |
| Operating income | $867.4 million | $893.2 million | -2.9% |
| Income from continuing operations attributable to MCBC | $441.5 million | $674.0 million | -34.5% |
| Diluted EPS from continuing operations | $2.43 | $3.62 | -32.9% |
| Underlying net income | $710.5 million | $701.5 million | +1.3% |
| Underlying diluted EPS | $3.91 | $3.76 | +4.0% |
| Operating cash flow | $983.7 million | $868.1 million | +13.3% |
| Underlying free cash flow | $864.7 million | $618.4 million | +39.8% |
Approximate 2012 margins were 39.9% gross, 22.1% operating and 11.3% attributable continuing-operations net margin. Underlying net income margin was approximately 18.1%. Special and non-core items reduced reported results; the filing reconciles underlying results to GAAP but cautions that underlying measures are non-GAAP.
Fourth-quarter net sales were $1,030.2 million, gross profit was $383.6 million, income from continuing operations attributable to MCBC was $60.1 million and diluted continuing-operations EPS was $0.33. Comparable fourth-quarter 2011 net sales were $937.3 million, gross profit was $389.8 million, income from continuing operations attributable to MCBC was $172.4 million and diluted EPS was $0.95.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents declined to $624.0 million from $1,078.9 million, primarily because of the StarBev acquisition.
- Total borrowings were approximately $4.7 billion, including $1.25 billion of current debt and short-term borrowings and $3.42 billion of long-term debt, versus approximately $2.0 billion of total borrowings at the prior year-end.
- 2012 financing included $1.9 billion of senior notes, a €500 million zero-coupon convertible note and term-loan borrowings. The Company repaid approximately $180 million of bank debt during the second half of 2012.
- Debt maturities due in 2013 totaled approximately $1.25 billion, including the $575 million convertible bonds and the €500 million convertible note. The Company had no borrowings on its $400 million and $550 million revolving credit facilities at year-end.
- Capital expenditures were $222.3 million in 2012. Planned 2013 capital expenditures were approximately $330 million, excluding MillerCoors.
- Share repurchases were suspended while management prioritizes deleveraging. Dividends paid were $1.28 per share, compared with $1.24 in 2011.
Material Changes Versus the Prior Comparable Period
- The StarBev acquisition materially increased sales, assets, goodwill, intangible assets and debt. Central Europe contributed $481.2 million of segment net sales and $97.4 million of pre-tax income after the acquisition date.
- Reported earnings declined primarily because of acquisition-related financing and integration costs, special charges, China-related impairments, higher interest expense and unfavorable foreign currency movements.
- Underlying earnings improved modestly because of the Central Europe contribution and stronger MillerCoors performance, partly offset by weaker Canada and U.K. results.
- Worldwide beer volume increased 13.9% to 55.059 million hectoliters, but declined 3.2% excluding the acquired Central Europe business.
- Canada volume decreased 3.9%, net sales declined 1.5% and underlying pre-tax income declined 10.2%, reflecting lower industry volume, competitor discounting, higher costs, pension expense and the 2011 extra fiscal week.
- MillerCoors volume declined 0.5%, but MCBC’s equity income increased 11.6% to $510.9 million, supported by pricing, mix and cost savings.
- On a pro forma basis, Central Europe volume declined 0.6%, net sales declined 11.5% and underlying pre-tax income declined 27.0%, driven by currency weakness, input inflation and lower volume.
- U.K. volume declined 9.0%, net sales declined 5.0% and underlying pre-tax income declined 41.3% amid a weak beer market and fixed-cost deleverage.
- Special items increased to $81.4 million from $12.3 million, including restructuring charges, Home Draft asset abandonment and $39.2 million of China-related impairment and deconsolidation costs.
Outlook, Commentary and Risks
- Management expects to focus on brand and innovation-led growth, integration synergies, disciplined capital allocation and debt reduction over the next two to three years.
- The Company remains on schedule to capture $50 million of Central Europe cost and revenue synergies and expects the acquisition to provide more than $70 million of 2012 pre-tax earnings accretion on an underlying basis, net of related interest expense.
- For 2013, management expects Canada cost of goods sold per hectoliter to rise at a mid-single-digit local-currency rate; MillerCoors, Europe and MCI cost of goods sold per hectoliter to rise at low-single-digit rates; net interest expense of approximately $170 million; pension contributions of approximately $150 million including MillerCoors; and an underlying effective tax rate of 16% to 20%.
- Management expects approximately $105 million of 2013 Corporate marketing, general and administrative expense and approximately $330 million of capital expenditures excluding MillerCoors.
- Material risks include mature and highly competitive beer markets, pricing pressure, changing consumer preferences, commodity and packaging costs, foreign exchange, pension funding requirements, regulatory and excise-tax changes, dependence on major brands and third-party distribution or licensing arrangements, and joint-venture governance.
- Goodwill and indefinite-lived intangible assets totaled approximately $2.5 billion and $7.2 billion, respectively. The U.K. and Canada reporting units and Molson core brands had limited valuation cushions, creating impairment risk if volumes, margins, cash flows, discount rates or market multiples deteriorate.
- Miller Brewing Company sought to terminate the Canadian license agreement covering certain Miller products. The Company filed litigation and states that it cannot predict the outcome or potential impact. The related definite-lived intangible asset had a carrying value of approximately $70 million at year-end.
- The Company has approximately $658.2 million of unfunded defined-benefit pension obligations and $186.4 million of postretirement obligations. Future contributions may vary with asset returns, interest rates and regulatory requirements.
- The Company reported effective internal control over financial reporting, but the 2012 assessment and audit excluded newly acquired MCCE, which represented 27% of total assets and 13% of net sales.
Important Facts for Investors to Verify
- Reconcile GAAP earnings and cash flow to underlying income and underlying free cash flow, particularly the $273.1 million pre-tax net adjustment from special and non-core items.
- Assess the maturity and refinancing plan for approximately $1.25 billion of 2013 debt, including the two convertible instruments.
- Evaluate the pace and sustainability of debt reduction, the effect of suspended repurchases and the continuing dividend policy.
- Review Central Europe pro forma performance, integration synergies and the finalization of acquisition purchase accounting.
- Monitor the Miller Canadian license litigation and any related impairment of the approximately $70 million intangible asset.
- Stress-test goodwill and brand valuations against weaker volumes, margin pressure, higher discount rates and continued European economic weakness.
- Review pension funding needs, foreign-exchange exposures, cross-currency swap obligations and contractual commitments totaling approximately $9.9 billion.