Molson Coors Brewing Company — FY2010 Form 10-K Summary
Reporting period: Fiscal year ended December 25, 2010, a 52-week year. The request references 2010 Q4, but this filing is an annual Form 10-K; quarterly information is provided for the fourth quarter and full year. Results are reported in U.S. dollars unless otherwise noted.
Business Context
Molson Coors is a global brewer operating primarily in Canada, the United Kingdom, and international markets, with its U.S. exposure represented by a 42% economic interest in MillerCoors accounted for under the equity method. Key brands include Coors Light, Molson Canadian, Miller Lite, Blue Moon, and Carling.
The company operates through Canada, United States, United Kingdom, and Molson Coors International and Corporate segments. The U.S. business is not consolidated following the formation of MillerCoors in 2008.
Financial Performance and Key Metrics
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Net sales | $3,254.4 million | $3,032.4 million | +7.3% |
| Gross profit | $1,442.2 million | $1,305.5 million | +10.5% |
| Gross margin | 44.3% | 43.1% | +120 bps |
| Operating income | $864.5 million | $754.0 million | +14.7% |
| Income before taxes | $809.0 million | $717.5 million | +12.8% |
| Income from continuing operations attributable to MCBC | $668.1 million | $729.4 million | -8.4% |
| Diluted EPS from continuing operations | $3.57 | $3.92 | -$0.35 |
| Net income attributable to MCBC | $707.7 million | $720.4 million | -1.8% |
| Operating cash flow | $749.7 million | $858.3 million | -12.7% |
| Underlying free cash flow | $924.3 million | $729.0 million | +26.8% |
Reported continuing-operations earnings declined despite higher pretax income because the 2010 effective tax rate was approximately 17%, compared with an unusually favorable negative 2% rate in 2009. Underlying after-tax earnings were $666.9 million, down 5.7%, while underlying pretax income increased 10.6%.
- Canada: Net sales were $1,938.2 million, up 11.9%; volume increased 2.1% to 8.9 million hectoliters; operating income rose 11.6% to $460.5 million. Market share increased nearly one percentage point.
- United States/MillerCoors: MCBC equity income was $456.1 million, up 19.4%. MillerCoors reported $7,570.6 million of net sales, down slightly, with operating income of $1,078.9 million, up 24.6%.
- United Kingdom: Net sales increased 0.7% to $1,234.9 million, while volume declined 6.7%. Pretax income increased 5.0% to $95.3 million; underlying pretax income declined 10.3% due principally to higher pension expense.
- MCI and Corporate: Net sales increased 10.0% to $81.3 million, but the pretax loss widened to $196.4 million from $217.9 million of loss in 2009. Corporate other income included $47.9 million from Foster’s-related derivatives.
Liquidity, Cash Flow, Debt, and Balance Sheet
- Cash and cash equivalents increased to $1,217.6 million from $734.2 million.
- Debt-free net working capital increased to $888.1 million from $427.3 million.
- Long-term debt was $1,959.6 million, compared with $1,412.7 million; total principal debt maturities were $2,009.2 million, including $575.0 million due in 2013 and $892.6 million due in 2015.
- The company issued CAD 500 million of 3.95% notes due 2017 and repaid $300.0 million of 4.85% notes due in 2010.
- MCBC had no borrowings outstanding under its $750.0 million revolving credit facility, which was scheduled to expire August 31, 2011; management expected a replacement facility before expiration.
- Capital expenditures were $177.9 million in 2010. Management expected approximately $230 million of 2011 capital expenditures, excluding MillerCoors.
- The consolidated pension deficit declined to $250.2 million from $626.1 million, supported by $284.4 million of pension contributions, including $195.5 million to the U.K. plan.
- Credit ratings were Baa2 with positive outlook from Moody’s, BBBHigh with stable outlook from DBRS, and BBB- with stable outlook from Standard & Poor’s.
Material Changes Versus the Prior Comparable Period
- Net sales and operating income improved, driven by pricing, cost reductions, favorable Canadian foreign exchange, and stronger MillerCoors results.
- Worldwide financial volume declined 1.7% to 18.464 million hectoliters; total worldwide beer volume declined 2.6% to 48.689 million hectoliters.
- Cost-reduction programs delivered $194 million of total reductions in 2010. RFG2 contributed $66 million toward its $150 million annualized target by 2012, while MillerCoors delivered $232 million of incremental synergies.
- Operating cash flow decreased because pension contributions were $224.6 million higher than in 2009. Underlying free cash flow increased after adjusting for pension funding, MillerCoors investment and other unusual cash flows.
- MCBC settled a portion of its Kaiser indemnity obligations for $96.0 million, recognizing a $42.6 million gain in discontinued operations. Remaining indemnity reserves totaled $33.7 million.
- The company acquired a controlling 51% interest in MC-Si’hai Brewing in China and acquired full ownership of Granville Island Brewing in Canada.
- The company changed the classification of returnable bottles and pallets from current inventories to noncurrent properties and retrospectively adjusted prior-period cash-flow presentations.
Outlook, Risks, Contingencies, and Unusual Items
- Management’s 2011 priorities were brand building, cost reduction, cash generation, innovation, and selective strategic investment.
- Management expected higher fuel, commodity, packaging, and other input costs in 2011. Canada cost of goods sold per hectoliter was expected to rise at a mid-single-digit local-currency rate, while U.K. owned-brand cost per hectoliter was expected to rise at a low-double-digit rate.
- 2011 MCI and Corporate marketing and general and administrative expense was forecast at approximately $200 million, plus or minus 5%, compared with $172.2 million in 2010.
- Management expected 2011 corporate net interest expense of approximately $120 million and an effective tax rate of 17% to 21%; normalized long-term tax rates were expected at 22% to 26% after 2011.
- Key risks include mature and highly competitive beer markets, declining industry volumes, brand concentration, commodity and packaging cost inflation, foreign-exchange exposure, pension funding requirements, dependence on MillerCoors and independent distributors, labor disruptions, regulatory changes, and potential goodwill or intangible-asset impairment.
- The company had $4.739 billion of contractual obligations, including $2.009 billion of debt, $385.6 million of stated interest payments, $1.904 billion of other long-term obligations, and $988.4 million of U.K. Tradeteam distribution commitments.
- MCBC guaranteed approximately 50% of Brewers’ Retail Inc.’s CAD 200 million debt due June 30, 2011. The company could be required to fund approximately 50% of that debt if it was not refinanced.
- The company reported a $21.3 million total special-item charge in 2010, primarily for software abandonment, Canadian pension and restructuring costs, U.K. restructuring, and strategic initiatives.
- The filing states that no goodwill or indefinite-lived intangible-asset impairment was identified in the 2010 annual testing.
- PricewaterhouseCoopers issued an unqualified opinion, and management concluded that internal control over financial reporting was effective as of December 25, 2010.
Most Important Facts for Investors to Verify
- Reconcile reported earnings with underlying earnings, particularly the effect of the unusually low 2009 tax rate and 2010 Foster’s derivative income.
- Assess MillerCoors’ ongoing volume trends, pricing, cost synergies, cash distributions, and MCBC’s limited control over the joint venture.
- Review the 2012–2015 debt maturities, the 2011 revolving-credit-facility renewal, and refinancing requirements.
- Monitor pension funding, actuarial assumptions, and the remaining $250.2 million consolidated pension deficit.
- Evaluate the Brewers’ Retail guarantee and possible 2011 cash funding requirement.
- Track commodity, packaging, fuel, foreign-exchange, and U.K. pension-cost pressures against management’s 2011 outlook.
- Review remaining Kaiser indemnities, Brazilian litigation, environmental reserves, and other legal contingencies.
- Confirm the effect of the returnable-container reclassification when comparing historical working capital and cash-flow trends.