Business Context and Reporting Period
Molson Coors Brewing Company filed this unaudited Form 10-Q for the quarter and six months ended June 30, 2016. The company operates through Canada, U.S. MillerCoors, Europe, Molson Coors International, and Corporate activities. MillerCoors was accounted for under the equity method, with Molson Coors holding a 42% economic interest during the period.
The principal strategic event was the pending $12.0 billion cash acquisition of SABMiller’s remaining 58% economic and 50% voting interest in MillerCoors, together with specified Miller brand assets outside the U.S. and Puerto Rico.
Financial Metrics
| Metric | Q2 2016 | Q2 2015 | Six Months 2016 | Six Months 2015 |
|---|---|---|---|---|
| Net sales | $986.2 million | $1,005.7 million | $1,643.4 million | $1,705.7 million |
| Gross profit | $424.0 million | $425.8 million | $667.2 million | $671.0 million |
| Operating income | $267.8 million | $314.3 million | $511.1 million | $439.6 million |
| Net income attributable to MCBC | $172.3 million | $229.0 million | $331.1 million | $310.1 million |
| Diluted EPS | $0.80 | $1.23 | $1.58 | $1.66 |
| Net cash from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $264.4 million | $198.1 million |
- Q2 net sales declined 1.9%; six-month net sales declined 3.7%. Reported sales were reduced by unfavorable foreign currency movements, including a $38.7 million Q2 impact.
- Q2 gross margin was approximately 43.0%, versus 42.3% in the prior year. Six-month gross margin was approximately 40.6%, versus 39.4%.
- Q2 operating margin was approximately 27.2%, versus 31.3%. Six-month operating margin was approximately 31.1%, versus 25.8%; the comparison benefited from the $110.4 million Vancouver brewery sale gain recorded in the first quarter.
- Q2 net income from continuing operations attributable to MCBC declined 24.1% to $174.1 million, or $0.81 per diluted share. Six-month continuing-operations income increased 8.1% to $333.4 million, while diluted EPS declined 3.6% because of the larger share count.
- Worldwide beer volume declined 0.8% in Q2 and was flat for the first six months. Financial volume declined 0.5% in Q2 and increased 0.5% year to date.
- Equity income from MillerCoors was $191.9 million in Q2, down 6.6%, and $334.3 million for the first six months, essentially flat year over year. The six-month amount included an $11.1 million anticipated U.S. federal excise-tax refund benefit.
- Cash and cash equivalents were $2.990 billion at June 30, 2016, compared with $430.9 million at December 31, 2015. The increase primarily reflected $2.526 billion of net proceeds from the February equity offering.
- Total debt, including the current portion, was approximately $3.0 billion at June 30, 2016, consisting primarily of fixed-rate senior notes. The company had $750 million available under its revolving credit facility and no outstanding borrowings under that facility or commercial paper.
- Operating cash flow increased $66.3 million year over year, principally because of lower pension contributions than in 2015. Capital expenditures paid were $121.6 million, and the company expects approximately $220 million of 2016 capital expenditures, excluding the replacement Vancouver brewery and MillerCoors spending.
Material Changes Versus the Prior Comparable Period
- Q2 profitability was pressured by higher transaction-related MG&A, financing and derivative costs associated with the pending acquisition. Acquisition-related costs recorded in Q2 totaled $19.6 million in MG&A, $31.8 million in other expense, and $13.3 million in net interest expense.
- Six-month special items were a net benefit of $74.1 million, compared with a net charge of $42.3 million in the prior year, primarily because of the $110.4 million Vancouver brewery sale gain. Q2 special items were a $34.5 million charge, largely related to India impairments.
- Canada Q2 pretax income declined 16.6% to $88.5 million, reflecting lower volume, increased brand investment and input-cost inflation. Europe pretax income increased 20.4% to $59.0 million, supported by higher volume and lower special charges. MCI reported a $33.4 million pretax loss, versus a $12.2 million loss, primarily due to India impairment charges.
- MillerCoors Q2 net income declined 11.8% to $429.5 million, including $39.4 million of special charges related to the planned Eden, North Carolina brewery closure. Total Eden closure charges are expected to be approximately $150 million to $200 million; $144 million had been incurred through June 30.
- The company issued 29.9 million Class B shares in February 2016 and suspended its share repurchase program. Weighted-average diluted shares increased to 215.7 million in Q2 from 186.5 million.
Guidance, Outlook, Risks, Contingencies and Unusual Items
- On July 7, 2016, after quarter end, the company issued approximately $6.9 billion of net proceeds from USD, EUR and CAD senior notes. The proceeds, the equity offering proceeds and planned term-loan borrowings were expected to fund the $12.0 billion acquisition.
- Management continued to expect the acquisition to close in the second half of 2016, subject to completion of the ABI/SABMiller transaction. The 2016 Notes require special mandatory redemption at 101% of principal, plus accrued interest, if the acquisition is not completed by the applicable deadline or the company abandons it.
- Management expected 2016 consolidated net interest expense of approximately $110 million, excluding acquisition-related interest and financing effects. Corporate MG&A was expected to be approximately $120 million, excluding acquisition costs. The current quarterly dividend of $0.41 per share was expected to continue while debt is repaid.
- The company expects up to approximately $20 million of 2016 cash contributions to its consolidated defined-benefit pension plans, including $10.4 million paid in the first half.
- Key risks include acquisition execution and financing, foreign exchange volatility, particularly the British pound following the U.K. Brexit vote, weak Canadian and European market conditions, beer-volume pressure, commodity costs, and potential impairment of Europe goodwill and Molson core-brand intangible assets.
- Bihar, India’s total alcohol prohibition resulted in $30.8 million of Q2 impairment charges for tangible assets, goodwill and definite-lived intangibles. Additional losses may result if Bihar receivables of $6.9 million become less collectible or projected cash flows deteriorate.
- European indirect-tax assessments total approximately $106 million, with management estimating a possible loss range of zero to approximately $122 million. No provision was recorded, and the regulatory appeal remained ongoing.
- Other contingencies include the Ontario Beer Store class-action claim seeking CAD 1.4 billion, Kaiser-related indemnities, environmental matters, and guarantees for equity-method investments.
Investor Verification Points
- Verify completion, purchase-price adjustments and final financing terms for the MillerCoors acquisition.
- Reconcile post-quarter-end debt issuance, acquisition-related leverage, interest expense and the special mandatory redemption provisions.
- Assess the sustainability of earnings excluding the Vancouver sale gain, acquisition costs, tax benefits, derivative effects and other special items.
- Monitor MillerCoors performance, Eden brewery closure costs and the expected timing of full ownership consolidation.
- Evaluate exposure to the U.K. pound, European economic conditions, Canadian volume weakness and potential goodwill or brand impairments.
- Track the European indirect-tax assessments, Ontario litigation, Bihar receivables and other disclosed contingencies.