Business Context and Reporting Period
Molson Coors Brewing Company filed its Form 10-K for the 52-week fiscal year ended December 26, 2009. The company operates principally in Canada, the United Kingdom and international markets, while its U.S. beer business is represented by a 42% economic interest in MillerCoors and is accounted for under the equity method.
Reported consolidated comparisons are materially affected by the July 1, 2008 formation of MillerCoors, which removed the U.S. operating results from consolidated sales and expenses and replaced them with equity income.
Financial Performance and Liquidity
| Metric | 2009 | 2008 | Change |
|---|---|---|---|
| Net sales | $3,032.4 million | $4,774.3 million | Down 36.5% |
| Gross profit | $1,305.5 million | $1,933.5 million | Down 32.5% |
| Gross margin | 43.0% | 40.5% | Up 250 basis points |
| Operating income | $754.0 million | $622.0 million | Up 21.2% |
| Operating margin | 24.9% | 13.0% | Up 1,870 basis points |
| Income from continuing operations attributable to MCBC | $729.4 million | $390.8 million | Up 86.6% |
| Diluted continuing-operations EPS | $3.92 | $2.11 | Up 85.8% |
| Net income attributable to MCBC | $720.4 million | $378.7 million | Up 90.2% |
| Net cash provided by operating activities | $824.2 million | $411.5 million | Up $412.7 million |
Reported net sales declined primarily because the U.S. business was no longer consolidated for a full year. Worldwide owned and royalty volume was 19.1 million hectoliters, down from 35.1 million in 2008; including the company's proportionate share of equity-investment sales-to-retail, worldwide beer volume was 50.0 million hectoliters versus 51.5 million in 2008.
- Canada net sales were $1,732.3 million and operating income was $412.8 million. Comparable sales-to-retail volume declined 1.9%, while comparable net sales per hectoliter increased 1.8% in local currency.
- The U.K. reported net sales of $1,226.2 million and operating income of $87.2 million. Volume declined 10.3%, but pricing, mix and cost reductions improved profitability.
- MillerCoors generated $842.8 million of net income in 2009, up 57.9% from pro forma 2008, and MCBC recorded $382.0 million of equity income from the investment.
- Cash and cash equivalents increased to $734.2 million from $216.2 million. Net working capital was $181.9 million.
- Total long-term borrowings, including current maturities, were $1,713.0 million; current maturities were $300.3 million and long-term debt was $1,412.7 million. The company had no borrowings under its $750 million revolving credit facility.
- Capital expenditures were $124.7 million in 2009, and dividends paid to common shareholders were $170.4 million, or $0.92 per share.
Material Changes Versus the Prior Comparable Period
- Revenue and reported volume decreased substantially because MillerCoors was accounted for as an equity investment after July 1, 2008; the resulting comparison is not an organic decline in the full consolidated business.
- Profitability improved through MillerCoors synergies, lower special charges, cost reductions, favorable pricing and a significantly lower effective tax rate. The 2009 effective tax rate was approximately negative 2%, compared with 19% in 2008.
- MCBC achieved $92 million of 2009 Resources for Growth savings and $270 million over the three-year program, exceeding its $250 million commitment. MillerCoors achieved $273 million of cumulative synergies by year-end 2009.
- Brewers' Retail Inc. was deconsolidated effective March 1, 2009 and is now accounted for under the equity method. MCBC recorded a $74.3 million liability for its proportionate guarantee of BRI debt obligations.
- MCBC acquired a controlling interest in Cobra Beer Partnership in the U.K. and began consolidating it. It also entered into an agreement to acquire Granville Island Brewing in Canada, with closing expected in the second quarter of 2010.
- The company sold its 19.9% interest in the Montréal Canadiens-related entities for $53.3 million and recorded a $46.0 million gain. The buyer included entities affiliated with directors Andrew and Geoff Molson.
- Consolidated pension plans were underfunded by approximately $626.1 million at year-end, compared with $319.0 million after noncontrolling interests at the prior year-end, largely because of lower discount rates, inflation assumptions and foreign-exchange effects.
Guidance, Outlook, Risks and Unusual Items
Management expected 2010 volumes to remain challenging, particularly in the first half, while emphasizing brand investment, cost reduction and cash generation. Specific 2010 expectations included approximately $150 million of capital expenditures excluding MillerCoors, a corporate net interest expense of approximately $105 million, and an effective tax rate of 18% to 22%.
- MillerCoors expected to achieve $450 million of cumulative annual synergies by the end of 2010 and continue pursuing an additional $200 million of second-generation cost reductions through 2012.
- Canada was expected to experience continued discounting and competitive pressure, although management anticipated low-single-digit local-currency cost-of-goods savings per hectoliter.
- The U.K. outlook included incremental Cobra benefits and expected mid-single-digit local-currency cost-of-goods inflation, partly from channel and product mix.
- Special items totaled $32.7 million in 2009, including Canada pension curtailment and restructuring costs, U.K. Cobra and restructuring costs, a $10.4 million U.K. non-income-related tax reserve, and other strategic costs.
- The company reported a $9.0 million loss from discontinued operations related to indemnity obligations from the former Kaiser Brazil business. Kaiser indemnity reserves totaled $164.1 million, while maximum potential claims related to certain purchased tax credits were substantially higher.
- Material risks include mature and declining beer markets, brand concentration, aggressive price discounting, commodity and packaging inflation, foreign-exchange exposure, pension funding requirements, labor disruptions, reliance on distributors and suppliers, goodwill impairment, and limited control over MillerCoors.
- Outstanding commitments included total contractual obligations of $8.6 billion, derivative-related gross payment obligations of $2.6 billion before expected offsetting receipts, and $1.23 billion of commitments under the U.K. Tradeteam distribution agreement.
- Legal contingencies included a potential Brazilian distribution claim of approximately $42 million plus fees and interest, a threatened Canadian BRI action seeking damages exceeding CAD $750 million, and environmental claims. Management stated that material losses were not probable or could not be reasonably estimated in the principal matters disclosed.
Important Facts for Investors to Verify
- Separate the reported consolidated sales decline from underlying performance by reviewing MillerCoors pro forma results and MCBC's 42% equity interest.
- Assess the sustainability of 2009 earnings growth after excluding the $46.0 million Montréal Canadiens gain, favorable tax items and lower special charges.
- Verify the refinancing plan for the $300 million of senior notes due in September 2010 and the company's ability to maintain liquidity while funding pensions, capital expenditures and MillerCoors requirements.
- Review MillerCoors synergy realization, distribution policy and cash requirements, since MCBC does not control its day-to-day operations.
- Monitor the $626.1 million pension underfunding, the 2010 U.K. pension valuation and potential future funding commitments.
- Review Kaiser indemnities, the BRI guarantee and litigation disclosures for possible cash outflows beyond recorded liabilities.
- Consider the effect of foreign-exchange movements in the Canadian dollar and British pound, commodity costs, discounting and declining beer volumes on margins and cash generation.