Business Context and Reporting Period
Molson Coors Brewing Company filed its Form 10-K for the fiscal year ended December 31, 2015. The company operates through Canada, the United States, Europe, Molson Coors International and Corporate. MillerCoors is accounted for under the equity method, with Molson Coors holding a 42% economic interest during 2015.
The filing also provides fourth-quarter information. Fiscal 2015 and fiscal 2014 are calendar years; 2013 included three additional days following the company’s fiscal-year change.
Financial Performance and Liquidity
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net sales | $3,567.5 million | $4,146.3 million | Down 14.0% |
| Gross profit | $1,404.0 million | $1,653.0 million | Down 15.1% |
| Operating income | $521.8 million | $726.5 million | Down 28.2% |
| Net income attributable to MCBC | $359.5 million | $514.0 million | Down 30.1% |
| Continuing-operations income attributable to MCBC | $355.6 million | $513.5 million | Down 30.7% |
| Diluted EPS from continuing operations | $1.91 | $2.76 | Down 30.8% |
| Underlying after-tax income | $700.4 million | $768.5 million | Down 8.9% |
| Underlying EBITDA | $1,331.4 million | $1,470.5 million | Down 9.5% |
| Operating cash flow | $696.4 million | $1,272.6 million | Down 45.3% |
| Underlying free cash flow | $704.3 million | $956.7 million | Down 26.4% |
Calculated margins were approximately 39.4% gross, 14.6% operating and 10.1% net income attributable to MCBC based on reported net sales. The filing reports a 13% effective tax rate and a 15% underlying effective tax rate.
Worldwide beer volume declined 1.5% to 58.105 million hectoliters, while consolidated financial volume declined 0.6% to 30.263 million hectoliters. Net sales were pressured primarily by foreign-exchange translation, lower Canada and U.S. volumes, and lost distribution or brewing contracts.
At December 31, 2015, cash and cash equivalents were $430.9 million, down from $624.6 million. Net working capital, excluding short-term debt and current maturities, was $70.3 million versus $101.2 million. Total debt obligations were approximately $2.94 billion, including $2.91 billion of long-term debt and $28.7 million of current debt and short-term borrowings. The company had no borrowings under its $750 million revolving credit facility or commercial paper program and remained in compliance with debt covenants.
Capital expenditures were $275.0 million. Pension contributions totaled $256.1 million, including a $227.1 million discretionary contribution to the U.K. pension plan. Dividends paid were $303.4 million, or $1.64 per share. Approximately $150 million was used to repurchase Class B shares before the repurchase program was suspended.
Fourth-Quarter Information
Fourth-quarter 2015 net sales were $844.4 million versus $973.8 million in the fourth quarter of 2014. Continuing-operations income attributable to MCBC was $33.4 million versus $93.2 million, and diluted continuing-operations EPS was $0.18 versus $0.50.
Material Changes Versus the Prior Comparable Period
- Canada net sales declined 15.7% and volume declined 4.7%, reflecting termination of the Miller distribution agreement, competitive pressure and weak market conditions. Underlying pretax income declined 16.6% to $304.5 million.
- Equity income from MillerCoors declined 8.1% to $516.3 million. MillerCoors experienced a 2.9% volume decline, although pricing, mix and cost savings were favorable. Underlying equity income was essentially unchanged at $562.5 million.
- Europe underlying pretax income declined 16.2% to $203.4 million. The segment recorded a $275.0 million impairment charge on European brands and incurred brewery closure and contract termination costs.
- MCI volume excluding royalty volume increased 20.0%, supported by India and Latin America, but the segment’s underlying pretax loss widened to $18.4 million due to foreign exchange and China restructuring costs.
- Special items increased to a net pretax charge of $346.7 million from $324.4 million, including European brand impairments, Canadian bottling-line asset abandonment, brewery closures, China restructuring and other termination costs.
- Foreign-currency translation losses contributed to a $797.5 million decline in other comprehensive income, with accumulated other comprehensive loss reaching $1.69 billion at year-end.
Guidance, Outlook, Risks and Unusual Items
Pending MillerCoors Acquisition
On November 11, 2015, Molson Coors agreed to acquire SABMiller’s remaining 58% economic and 50% voting interest in MillerCoors, together with Miller brand assets outside the U.S. and Puerto Rico, for $12.0 billion in cash, subject to adjustment. Closing was expected in the second half of 2016 and depended on the ABI-SABMiller transaction and regulatory approvals.
The company arranged a $9.3 billion 364-day bridge facility and $3.0 billion of term-loan commitments, none of which were drawn at December 31, 2015. Management expected to fund the acquisition with cash, debt and equity. The acquisition was expected to increase leverage, financing costs, integration expenses and pension exposure, and could require divestitures of up to $4 billion to obtain regulatory clearance.
2016 Outlook
- Management expected low-single-digit local-currency increases in cost of goods sold per hectoliter in Canada, MillerCoors, Europe and MCI.
- Corporate marketing and general and administrative expense was expected to be approximately $120 million, excluding acquisition-related effects.
- Consolidated net interest expense was expected to be approximately $110 million, excluding acquisition financing.
- Underlying effective tax rate was expected to be 18% to 22% in 2016, excluding acquisition effects.
- Capital expenditures were expected to be approximately $300 million, excluding MillerCoors and acquisition implications.
- The company planned to maintain the quarterly dividend at $0.41 per share while reducing debt and had suspended share repurchases.
Key Risks and Contingencies
- Failure to close or integrate the acquisition, inability to realize synergies, additional debt, potential ratings downgrades and restrictive financing covenants.
- Europe goodwill and the Molson core brands remained sensitive to adverse changes in forecasts, discount rates, competition and macroeconomic conditions. A 50-basis-point increase in the discount rate would have produced a negative fair-value cushion for the Molson core brands.
- Canadian regulatory changes under Ontario’s new beer framework included a phased-in CAD 100 million annual industry tax, restrictions on certain price increases and changes to retail access and BRI governance.
- European regulatory assessments totaled approximately $76 million, with an estimated current potential loss ranging from zero to $114.7 million; no provision was recorded.
- An Ontario class-action lawsuit involving Brewers’ Retail and alleged price fixing seeks certification and approximately CAD 1.4 billion in damages. The company intends to defend the claim vigorously.
- Additional risks include foreign-exchange volatility, mature-market volume declines, consumer migration toward craft beer, wine and spirits, commodity costs, pension funding, supplier concentration and brewery closures.
Most Important Facts an Investor Should Verify
- Whether the MillerCoors acquisition closed on the expected timetable, the final purchase price and any required divestitures.
- The amount, maturity and pricing of incremental acquisition debt, resulting leverage, credit ratings and covenant headroom.
- Progress toward volume stabilization in Canada and the U.S., including Coors Light and Miller Lite performance.
- Whether Europe’s goodwill or the Molson core brand required additional impairment charges.
- The outcome and financial impact of the European tax assessments and Ontario class-action litigation.
- Actual cash generation after pension contributions, capital expenditures, dividends, acquisition costs and debt service.
- Whether brewery closures and supply-chain initiatives deliver the projected savings without materially reducing capacity or customer service.