Molson Coors Brewing Company — Q1 2014 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is a global brewer operating through Canada, MillerCoors in the U.S., Europe and Molson Coors International. The filing covers the three months ended March 31, 2014, compared with the thirteen weeks ended March 30, 2013. Beginning in 2014, the company changed to a calendar-year reporting cycle. Results are seasonal and the first quarter is typically a relatively small profit quarter.
Financial performance and key metrics
| Metric | Q1 2014 | Comparable Q1 2013 | Change |
|---|---|---|---|
| Net sales | $816.0 million | $828.5 million | (1.5%) |
| Gross profit | $292.8 million | $281.4 million | +4.0% |
| Operating income | $204.2 million | $103.4 million | +97.5% |
| Net income from continuing operations attributable to MCBC | $165.3 million | $29.4 million | Not meaningful |
| Diluted EPS from continuing operations | $0.89 | $0.16 | Not meaningful |
| Underlying income attributable to MCBC | $102.2 million | $47.5 million | +115.2% |
| Underlying diluted EPS | $0.55 | $0.26 | +111.5% |
| Underlying EBITDA | $251.2 million | $208.6 million | +20.4% |
| Net cash provided by operating activities | $149.7 million | $118.4 million | +$31.3 million |
| Underlying free cash flow | $(64.6) million | $(48.9) million | Higher cash use |
- Gross margin improved to approximately 35.9% from 34.0%; operating margin increased to approximately 25.0% from 12.5%.
- Total worldwide beer volume was 11.918 million hectoliters, down 0.1%. Owned volume increased 3.4%, but proportionate equity-investment volume declined 3.6%.
- Cash and cash equivalents were $337.6 million at March 31, 2014, down from $442.3 million at December 31, 2013 and $511.5 million at March 30, 2013.
- Total long-term debt, including the current portion, was $3.177 billion; short-term borrowings were $615.4 million. Total borrowings declined substantially from the prior comparable period, supporting lower interest expense.
- Current assets were $1.484 billion and current liabilities were $2.072 billion. Debt-free net working capital was $42.9 million.
- The company paid $68.2 million in dividends and spent $65.3 million on capital expenditures. Planned 2014 capital expenditures are approximately $330 million, excluding MillerCoors and other equity-method investments.
- Interest expense, net was $35.4 million versus $74.9 million, primarily because the prior-year period included fair-value losses on a convertible-note conversion feature and higher borrowings.
Material changes versus the prior comparable period
- Net income benefited from improved underlying performance, lower interest expense and a favorable $81.2 million change in special and other non-core items.
- Canada net sales declined 12.3% and volume declined 5.5%, reflecting weak demand, promotional challenges, the fiscal-calendar change and the loss of Modelo brands following termination of the MMI joint venture. Underlying pretax income nevertheless increased 20.5% to $35.3 million due to pricing, cost savings and spending timing.
- MillerCoors equity income increased 4.6% to $122.8 million, despite a 3.2% decline in MillerCoors volume, reflecting pricing, mix, cost savings and lower marketing expense.
- Europe net sales increased 7.7%, volume increased 5.6% and pretax income improved to $27.0 million from a $5.2 million loss, driven by volume growth, cost savings and favorable foreign exchange.
- MCI net sales increased 19.3% to $32.2 million and pretax loss improved to $3.0 million from $5.2 million.
- Advertising expense accounting for interim periods changed to an incurred basis and prior interim periods were retrospectively adjusted. The change affects quarterly timing but not full-year results.
- Foreign currency translation produced a $161.5 million after-tax loss in other comprehensive income, compared with a $261.2 million loss in the prior comparable period.
Guidance, outlook, risks and unusual items
- Management expects 2014 Corporate marketing, general and administrative expense of approximately $110 million, excluding foreign exchange; consolidated net interest expense of approximately $145 million; pension contributions of approximately $20 million to $40 million; and pension expense of approximately $27 million.
- Following an advance pricing agreement finalized in April 2014, management expects the 2014 underlying effective tax rate to be 12% to 16%. The long-term underlying tax rate is expected to remain near 20% to 24% after 2014, absent further changes.
- The MMI joint venture terminated on February 28, 2014. Molson Coors recognized $63.2 million of termination-fee income and a $4.9 million intangible-asset write-off. A further gain or loss may be recognized when the remaining joint-venture assets are distributed in the second quarter.
- Special items also included $5.8 million of restructuring charges. Management expects additional restructuring charges may occur but cannot estimate the amount.
- The company settled its remaining cross-currency swaps for $65.2 million and released the remaining $15.0 million withheld on the euro-denominated convertible note in April 2014.
- Miller Brewing litigation concerning the Canadian license agreement remains unresolved. A trial was tentatively scheduled for November 2014. The company had a $34.0 million carrying value for the related intangible asset and stated that an adverse outcome could cause additional impairment; the agreement generated $13.9 million of Q1 2014 net sales.
- Goodwill and brand assets in Canada and Europe remain subject to impairment risk. Certain European brands had fair values only approximately 1% above carrying value, and the Molson core brand was approximately 10% above carrying value at the last impairment test.
- The company had approximately $9.004 billion of contractual cash obligations, including $3.798 billion of debt obligations and $1.830 billion of related interest payments. A U.K. pension funding commitment includes a GBP 150 million lump-sum contribution expected in 2015.
- Management states that operating cash flow, MillerCoors distributions and available borrowing capacity should be sufficient for the next twelve months. At March 31, 2014, $573.0 million was available under revolving credit facilities, and the company was in compliance with debt covenants.
Important facts for investors to verify
- Reconcile GAAP earnings growth with the $63.2 million MMI termination benefit, tax benefits and other special or non-core items.
- Assess the sustainability of underlying earnings growth given management’s warning that first-quarter marketing timing benefits will reverse at MillerCoors.
- Monitor Canada volume declines, the loss of Modelo brands and the performance of Coors Light and planned innovations.
- Review Miller Brewing litigation, the $34.0 million license-related intangible asset and potential impairment exposure.
- Evaluate liquidity after the decline in cash, the $615.4 million of short-term borrowings and upcoming debt obligations.
- Consider foreign-exchange exposure, the $161.5 million quarterly translation loss and the concentration of cash and receivables outside the United States.
- Verify the 12% to 16% 2014 underlying tax-rate outlook and the effect of the advance pricing agreement.
- Review goodwill and indefinite-lived brand assets at risk of impairment, pension funding commitments and Kaiser-related indemnity contingencies.