Business Context and Reporting Period
Molson Coors Brewing Company filed this unaudited Form 10-Q for the thirteen and thirty-nine weeks ended September 26, 2009, compared with September 28, 2008. The company operates primarily in Canada, the United Kingdom and through its 42% equity investment in MillerCoors in the United States.
Year-over-year comparisons are significantly affected by the July 1, 2008 formation of MillerCoors, which changed the U.S. business from consolidated reporting to equity-method accounting. Accordingly, consolidated sales and volumes are not directly comparable for the nine-month periods without considering pro forma information.
Key Financial Metrics
| Metric | Q3 2009 | Q3 2008 | First 39 Weeks 2009 | First 39 Weeks 2008 |
|---|---|---|---|---|
| Net sales | $853.7 million | $921.1 million | $2,211.6 million | $4,035.2 million |
| Gross profit | $381.1 million | $396.7 million | $960.3 million | $1,642.3 million |
| Gross margin | 44.6% | 43.1% | 43.4% | 40.7% |
| Operating income | $237.3 million | $241.6 million | $617.8 million | $476.1 million |
| Operating margin | 27.8% | 26.2% | 27.9% | 11.8% |
| Income from continuing operations attributable to MCBC | $244.3 million | $168.1 million | $511.2 million | $303.2 million |
| Net income attributable to MCBC | $235.3 million | $171.3 million | $498.3 million | $285.1 million |
| Diluted EPS from continuing operations | $1.31 | $0.90 | $2.75 | $1.63 |
| Diluted net EPS | $1.26 | $0.92 | $2.68 | $1.53 |
Q3 reported financial volume declined 5.5% to 5.181 million hectoliters. Worldwide beer volume, including the company’s proportionate share of equity investments, declined 2.9% to 13.799 million hectoliters.
- Cash flow: Operating cash flow for the first 39 weeks was $666.8 million, up from $395.6 million. Investing cash flow used $226.5 million, including $346.5 million contributed to MillerCoors and $237.3 million received as a return of capital. Financing cash flow used $91.6 million, primarily reflecting $125.8 million of dividends.
- Liquidity: Cash and cash equivalents were $565.1 million at September 26, 2009, versus $216.2 million at December 28, 2008. Management reported net working capital of $410.0 million, excluding short-term borrowings and current debt maturities.
- Debt: Total debt, including the current portion, was $1.677 billion; long-term debt excluding the current portion was $1.377 billion. The $300.0 million 4.85% senior notes due September 2010 were classified as current.
- Profit drivers: Equity income from MillerCoors was $101.2 million in Q3 and $332.4 million year to date. MillerCoors reported Q3 net income attributable to MillerCoors of $229.7 million, up 36.6% from the comparable quarter.
- Unusual income: Other income was $55.9 million in Q3, including a $59.3 million gain on a cash-settled Foster’s total return swap.
- Dividends: Dividends per share were $0.24 in Q3 and $0.68 for the first 39 weeks, compared with $0.20 and $0.56, respectively, in the prior comparable periods.
Material Changes Versus the Prior Comparable Period
- Q3 net sales decreased 7.3%, while reported operating income decreased 1.8%. Higher gross margin, lower special items and strong MillerCoors earnings substantially offset lower volume and foreign-exchange pressure.
- Income from continuing operations attributable to MCBC increased 45.3% in Q3 and 68.6% year to date. The improvement benefited from MillerCoors synergies, lower special charges, lower interest expense and favorable tax items.
- Total special items declined to $4.3 million in Q3 and $21.6 million year to date, compared with $24.8 million and $136.1 million, respectively. Prior-year charges included MillerCoors formation costs, brand and fixed-asset impairments, and outsourcing initiatives.
- Canada Q3 pretax earnings declined 8.3% to $135.7 million, reflecting lower volume, higher marketing costs and foreign-exchange effects. Canada market share declined approximately one percentage point.
- U.K. Q3 pretax earnings increased 6.2% to $32.4 million despite a 6.3% volume decline, supported by pricing, mix and the decision to forgo low-margin volume.
- MillerCoors Q3 net sales increased 3.1% and operating income increased 35.7%, driven by pricing, cost synergies and lower marketing and administrative expenses.
- Brewers’ Retail, Inc. was deconsolidated effective March 1, 2009 and is now accounted for under the equity method. The change resulted in recognition of a $74.3 million guarantee liability associated with BRI debt obligations.
- The U.K. acquired a 50.1% interest in Cobra Beer Partnership for $19.6 million and recognized $5.7 million of related special costs during the first 39 weeks.
Guidance, Outlook, Risks and Unusual Items
- Tax outlook: Management lowered its expected 2009 effective tax rate to between negative 2% and 2%, reflecting anticipated favorable resolution of uncertain tax positions and approximately $100 million to $110 million of expected non-cash tax benefits.
- Cost savings: The Resources for Growth program generated approximately $18 million of Q3 savings and $68 million year to date, with cumulative savings of approximately $246 million since inception. MillerCoors delivered $73 million of Q3 synergies and expects $270 million of cumulative savings by year-end 2009, above its original $225 million target.
- Capital expenditures and liquidity: Full-year 2009 capital expenditures were expected to be approximately $130 million, excluding MillerCoors and consolidated joint ventures. Management expected operating cash flow and available borrowings to fund operations, debt service, dividends and capital expenditures.
- MillerCoors funding: MCBC expected approximately $95 million of incremental 2009 cash needs related to MillerCoors integration, restructuring and capital spending. MillerCoors expected approximately $225 million of related spending and $110 million to $120 million of pension contributions.
- Debt and credit risk: Standard & Poor’s lowered the company’s long-term credit rating to BBB- in May 2009. A downgrade below investment grade could increase borrowing costs, require collateral postings and trigger early termination provisions for certain derivatives. No borrowings were outstanding under the $750 million committed credit facility at quarter-end.
- Derivative risk: Net derivative liabilities were approximately $322.5 million. The Foster’s total return swaps were in-the-money at quarter-end, but their fair value and settlement requirements remain exposed to equity-market movements and contractual triggers.
- Contingencies: Kaiser indemnity reserves related to the former Brazil business totaled $161.7 million at September 26, 2009. Maximum potential claims for certain purchased tax credits were substantially higher than recorded reserves. A Brazilian distributor judgment of approximately $42 million was under appeal, and management did not consider a material loss probable.
- Other potential liability: The company was evaluating a possible indirect-tax liability with an estimated loss range of $0 to $23 million; no reserve had been recorded because the existence and mitigation of any liability remained uncertain.
- Subsequent event: The company agreed to sell its 19.9% interest in the Montreal Canadiens for estimated net proceeds of approximately CAD $63 million and expected a gain of approximately CAD $50 million in Q4 2009 or Q1 2010, subject to closing conditions.
- Operating risks: Management cited weak industry volumes, promotional pricing, input-cost inflation, foreign-exchange movements, regulatory changes, climate-related supply risks, alcohol-industry demand risks and the execution of MillerCoors synergies.
Important Facts for Investors to Verify
- Reconcile reported year-to-date sales and volume declines with the MillerCoors deconsolidation and review the pro forma MillerCoors comparisons.
- Assess the sustainability of earnings excluding the $59.3 million Foster’s swap gain, favorable tax resolutions and other nonrecurring items.
- Verify the timing and refinancing plan for the $300 million of senior notes due in 2010.
- Monitor MillerCoors synergy realization, MCBC’s required funding and the additional $200 million savings target through 2012.
- Evaluate the adequacy and timing of reserves for Kaiser indemnities, BRI guarantees, environmental matters and other litigation.
- Review the effect of currency movements, promotional pricing and volume declines in Canada and the U.K. on future margins.
- Confirm completion and accounting treatment of the Montreal Canadiens transaction and the related expected gain.
- Consider the volatility of the projected 2009 tax rate and the reliance on uncertain-tax-position settlements to achieve the stated outlook.