TAP

Business Context and Reporting Period

Company: Molson Coors Brewing Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 24, 2006 (Thirteen and Thirty-Nine Weeks)
Business Overview: The Company operates in three primary segments: Canada, United States, and Europe. The Brazil segment (Kaiser) was sold in January 2006 and is reported as a discontinued operation. The Company is a large accelerated filer.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 3.3% for the thirteen weeks and 4.6% for the thirty-nine weeks compared to the prior year periods. This growth was driven by volume gains in the U.S. and Canada, partially offset by volume declines in Europe.
• Profitability: Net income increased significantly, rising 25.5% for the thirteen weeks and 132.6% for the thirty-nine weeks. The year-to-date increase is largely attributable to the sale of the Brazil business (discontinued operations) which resulted in a gain in 2006 versus a loss in 2005.
• Discontinued Operations: The Company sold a 68% interest in its Brazil unit (Kaiser) in January 2006. This resulted in a net gain of $13.4 million for the quarter and $0.3 million for the thirty-nine weeks, compared to losses of $22.8 million and $83.5 million in the respective prior year periods.
• Special Charges: Total special charges were $28.5 million for the quarter and $81.1 million for the thirty-nine weeks. Key items included accelerated depreciation and restructuring costs related to the closure of the Memphis brewery in the U.S. and supply chain restructuring in Europe.
• Foreign Exchange: The strengthening of the Canadian dollar (approx. 7% vs. USD) and the British pound (approx. 5% vs. USD in Q3) favorably impacted reported results.

Guidance, Outlook, and Risks

• Outlook: Management anticipates full-year 2006 effective tax rates between 16% and 20%. Corporate general and administrative expenses are expected to range from $110 million to $120 million for the full year. Share-based compensation expense is projected at $25-$30 million for the year.
• Cost Initiatives: The Company aims to achieve total annual synergies of $175 million by the third year post-merger. In the U.S., closing the Memphis brewery is expected to yield approximately $30 million in annual pretax cost savings.
• Key Risks:
  • Legal Proceedings: Ongoing litigation with Miller Brewing Company regarding distribution rights in Canada; class action lawsuits regarding advertising practices and underage consumption.
  • Indemnities: Significant indemnity obligations remain regarding the sale of Kaiser (Brazil), with a carrying value of $81.5 million as of September 24, 2006.
  • Market Risks: Exposure to fluctuations in foreign exchange rates (CAD, GBP) and commodity prices (aluminum, diesel, packaging materials).
  • Internal Controls: A material weakness in internal control over financial reporting regarding income tax accounting continues to exist, though remediation steps are underway.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the sustainability of earnings growth given the one-time gain from the Kaiser sale and the reversal of prior year losses.
• Memphis Closure Savings: Monitor the realization of the projected $30 million annual savings from the Memphis brewery closure in the fourth quarter and beyond.
• Indemnity Liabilities: Review updates on the $81.5 million indemnity liability related to the Kaiser sale, as future adjustments could impact earnings.
• Internal Control Remediation: Track progress on the remediation of the material weakness in income tax accounting controls.
• Segment Performance: Assess the Europe segment's ability to maintain profitability amidst industry volume declines and the potential impact of the U.K. smoking ban in 2007.