Molson Coors Beverage Company: Q2 2014 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is a global brewer with operations in Canada, the United States through its 42% MillerCoors interest, Europe, and Molson Coors International. This unaudited Form 10-Q covers the three and six months ended June 30, 2014, compared with June 29, 2013. Beginning in 2014, the company moved to a calendar-year fiscal year. Prior-period interim results were retrospectively adjusted for a change in the timing of advertising expense recognition.
Key financial metrics
| Metric | Q2 2014 | Q2 2013 | Change |
|---|---|---|---|
| Net sales | $1,188.5 million | $1,178.0 million | 0.9% increase |
| Gross profit | $505.2 million | $493.9 million | 2.3% increase |
| Operating income | $364.8 million | $345.7 million | 5.5% increase |
| Net income attributable to MCBC | $290.9 million | $267.3 million | 8.8% increase |
| Continuing-operations diluted EPS | $1.56 | $1.44 | 8.3% increase |
| Underlying after-tax income | $292.7 million | $271.3 million | 7.9% increase |
| Underlying EBITDA | $476.2 million | $458.0 million | 4.0% increase |
| Worldwide beer volume | 16.574 million hectoliters | 16.720 million hectoliters | 0.9% decrease |
For the first six months, net sales were $2,004.5 million, essentially flat with $2,006.5 million in the prior period. Net income attributable to MCBC from continuing operations increased to $456.0 million from $295.0 million, principally reflecting stronger operating performance, favorable tax-related items, lower interest expense, and nonrecurring items. Diluted EPS from continuing operations was $2.46 versus $1.61.
Q2 gross margin was approximately 42.5%, compared with 41.9% in the prior period. Operating margin was approximately 30.7%, compared with 29.3%. The filing does not provide a clearly labeled consolidated underlying margin percentage.
Segment performance and material changes
- Canada: Q2 net sales declined 7.5% to $516.5 million and pretax income declined 6.1% to $120.8 million. Volume fell 2.0%, primarily due to the termination of the Molson Modelo Imports joint venture, while pricing and mix were positive. First-half pretax income increased because of the $63.2 million termination fee received from Modelo, partly offset by a $4.9 million intangible-asset write-off.
- United States/MillerCoors: Equity income increased 10.1% to $190.1 million in Q2 and 7.9% to $312.9 million for the first half. Improvements reflected pricing, mix, and cost savings, despite lower domestic volumes.
- Europe: Q2 pretax income increased 11.5% to $84.5 million and net sales increased 7.4% to $629.4 million. Cost savings, favorable geographic mix, and foreign-exchange movements offset flooding in Serbia, Bosnia, and Croatia and weak demand in certain markets.
- Molson Coors International: Q2 net sales increased 25.9% to $43.7 million, while pretax loss improved to $3.7 million from $4.0 million. Higher volumes in Mexico, Latin America, India, and Australia were partly offset by weakness in Russia and Ukraine.
Cash flow, liquidity, debt, and capital resources
| Metric | Six months ended June 30, 2014 | Comparable 2013 period |
|---|---|---|
| Operating cash flow | $576.0 million | $591.0 million |
| Capital expenditures | $126.4 million | $149.7 million |
| Net cash used in investing | $194.1 million | $244.9 million |
| Net cash used in financing | $323.1 million | $144.1 million |
| Underlying free cash flow | $331.7 million | $365.8 million |
| Cash and cash equivalents at period end | $506.0 million | $801.6 million |
Total long-term debt was $3,208.6 million at June 30, 2014, excluding short-term borrowings. Short-term borrowings and the current portion of long-term debt totaled $451.6 million, including $301.1 million of commercial paper. The company entered into a new five-year $750 million revolving credit facility and reported $448.9 million of availability after commercial paper borrowings. Debt covenants were satisfied, and all debt payments were current.
Total liabilities were $6,887.9 million and total equity was $8,985.1 million. Debt-free net working capital was $140.2 million, compared with negative $36.8 million at December 31, 2013. Management stated that operating cash flow, MillerCoors distributions, and borrowing capacity should be sufficient for expected operating needs, debt service, dividends, and capital expenditures over the next twelve months.
Capital expenditures for full-year 2014 were expected to be approximately $315 million. The company expected approximately $35 million of pension contributions in 2014. No share repurchases were made during the quarter.
Guidance, outlook, commentary, and risks
- Management expected 2014 Corporate marketing, general and administrative expense of approximately $110 million, excluding foreign exchange.
- Expected 2014 consolidated net interest expense was approximately $135 million.
- Underlying 2014 tax rate guidance was 12% to 16%; management expected the rate to be near the low end of its long-term 20% to 24% range in 2015, subject to tax-law changes, audits, and uncertain tax positions.
- Management expected higher brand investment, marketing expense, and promotional activity in the second half of 2014.
- Canada faced continued effects from the MMI termination, higher Quebec excise taxes beginning August 1, 2014, unfavorable currency, and difficult comparisons.
- Europe expected flood-related effects on volume and profit through at least the second half of 2014. The company was evaluating whether the damage could lead to a material impairment of the Jelen brand; the 2014 impairment test was expected in the third quarter.
- The Miller Canada license litigation remained pending, with trial scheduled for early November 2014. The related intangible asset had a $32.0 million carrying value and approximately three years of remaining life. An adverse outcome could cause further impairment or loss of related sales.
- The company reported $17.1 million of accrued litigation, dispute, and environmental liabilities. Kaiser-related indemnity exposure included a $68.0 million cap for certain tax, civil, and labor claims and a potential purchased-tax-credit claim amount of $158.1 million.
- Goodwill and brand valuations remained sensitive to economic conditions, market share, foreign exchange, discount rates, and projected cash flows, particularly in Canada and Europe.
- Approximately 85% of cash and cash equivalents was held outside the United States, primarily in foreign currencies, creating repatriation and currency considerations.
Unusual items and accounting matters
- The MMI termination generated $63.2 million of special-item income and a $4.9 million intangible write-off in the first half.
- Europe recorded $1.8 million of flood-related special-item costs in Q2.
- A favorable U.S.-Canada advanced pricing agreement produced an approximately $21 million discrete tax benefit in Q2; this was partly offset by an $8.7 million out-of-period deferred-tax adjustment.
- The company revised the December 31, 2013 balance sheet for omitted uncertain tax positions, increasing current and noncurrent unrecognized tax benefits by $19.3 million and $14.4 million, respectively, and reducing retained earnings by $33.7 million.
- The company adopted interim advertising-expense recognition as incurred and retrospectively adjusted prior interim periods. The change did not affect full-year consolidated results.
- Subsequent to quarter-end, the CEO announced retirement effective December 31, 2014; Mark Hunter was appointed CEO and president effective January 1, 2015.
Most important facts for investors to verify
- Whether second-half volume, pricing, and mix offset continued weakness in Canada and the U.S.
- The financial and impairment consequences of Balkan flooding, particularly for the Jelen brand.
- The outcome of the Miller Canada license litigation and potential impairment of the related $32.0 million intangible asset.
- Whether the company achieves its 2014 guidance for capital expenditures, interest expense, pension contributions, and tax rate.
- The sustainability of MillerCoors earnings and cash distributions, including the effect of cost savings and pension funding.
- Future cash requirements from debt maturities, pensions, commercial commitments, tax positions, environmental matters, and Kaiser indemnities.
- The effect of foreign exchange movements and the concentration of cash and receivables outside the United States.