Business Context and Reporting Period
Molson Coors Brewing Company filed this unaudited Form 10-Q for the three and nine months ended September 30, 2015. The company operates through Canada, Europe and Molson Coors International and accounts for its 42% economic interest in MillerCoors under the equity method. Results are reported in U.S. dollars and are affected by substantial foreign-currency exposure and seasonal demand.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $1,017.4 million | $1,168.0 million | $2,723.1 million | $3,172.5 million |
| Gross profit | $431.5 million | $501.4 million | $1,102.5 million | $1,299.4 million |
| Operating income | $8.1 million | $3.1 million | $447.7 million | $572.1 million |
| Net income attributable to MCBC | $16.6 million | $(34.4) million | $326.7 million | $419.9 million |
| Diluted EPS | $0.09 | $(0.19) | $1.75 | $2.26 |
| Underlying diluted EPS from continuing operations | $1.40 | $1.46 | $3.27 | $3.58 |
| Underlying EBITDA | $420.2 million | $469.2 million | $1,104.1 million | $1,196.6 million |
| Operating cash flow | Not provided for the quarter | Not provided for the quarter | $461.5 million | $1,058.4 million |
| Underlying free cash flow | Not provided for the quarter | Not provided for the quarter | $476.8 million | $766.1 million |
- Q3 net sales declined 12.9% year over year, although sales increased 0.7% excluding foreign-currency effects. Worldwide beer volume increased 0.7% in the quarter but declined 1.4% year to date.
- Approximate gross margin was 42.4% in Q3 2015 versus 42.9% in Q3 2014; nine-month gross margin was approximately 40.5% versus 41.0%.
- Q3 operating income benefited from lower special items, while underlying income declined 4.3% because of currency, increased brand investment and terminated contracts.
- Cash and cash equivalents were $393.6 million at September 30, 2015, down from $624.6 million at December 31, 2014. Approximately 89% of cash was held outside the United States.
- Total debt and short-term borrowings were approximately $3.0 billion at September 30, 2015, compared with approximately $3.2 billion at year-end 2014. The company had $740.0 million available under its $750.0 million revolving credit facility and was in compliance with debt covenants.
- Capital expenditures paid were $208.3 million through nine months, and 2015 capital expenditures were expected to be approximately $275 million. Dividends paid were $228.1 million and share repurchases were approximately $100 million through nine months.
- The company contributed $246.4 million to defined benefit plans through nine months, including a $227.1 million discretionary U.K. pension contribution. Full-year contributions were expected to be approximately $260 million.
Material Changes Versus the Prior Comparable Period
- Underlying EBITDA declined 10.4% in Q3 and 7.7% year to date, despite lower reported special-item charges and modest quarterly volume growth.
- Canada results weakened as volume fell 4.0% in Q3 and 4.5% year to date, partly because the Miller Canadian license agreement ended. Canada pretax income declined 24.4% in Q3 and 30.8% year to date.
- MillerCoors equity income declined 14.9% in Q3 to $135.3 million, primarily from lower volume, higher marketing and technology investment, and $28.0 million of charges related to the planned Eden, North Carolina brewery closure.
- Europe reported a $183.2 million pretax loss in Q3, including a $275.0 million impairment of certain indefinite-lived brands. The comparable 2014 quarter included $360.0 million of European brand impairments.
- Q3 special items declined to $293.5 million from $367.6 million; year-to-date special items increased to $335.8 million from $317.8 million. Items included European brand impairment, Canadian bottling-line closures, the U.K. Alton brewery closure, China restructuring and contract termination costs.
- Operating cash flow fell by $596.9 million year to date, mainly because of the U.K. pension contribution, higher taxes, lower earnings and less favorable working-capital changes.
- In September 2015, the company refinanced CAD 900 million of 5.0% notes maturing in 2015 with CAD 500 million of 2.75% notes due 2020 and CAD 400 million of 2.25% notes due 2018.
Guidance, Outlook, Risks and Unusual Items
- Management expected 2015 results to remain pressured by foreign currency and the termination of major business contracts. It planned significantly higher brand and information-technology investment in the fourth quarter, which was expected to reduce fourth-quarter earnings but support longer-term growth.
- Management expected U.S. underlying operating margins to be relatively flat for 2015, Corporate marketing and general and administrative expense of approximately $110 million, net interest expense of approximately $110 million, and an underlying tax rate of 14% to 16%.
- Management expected MCI to pursue profitability in 2016 excluding foreign-currency effects. The India acquisition of Mount Shivalik was intended to expand brewing capacity and regional brands.
- Management proposed closing Burton South Brewery in the U.K. and consolidating production in Burton North. Additional restructuring charges were expected beginning in the fourth quarter of 2015. The Vancouver brewery sale and leaseback was expected to close in the first quarter of 2016 and would generate additional special items and capital requirements.
- The Ontario beer framework agreement included a phased-in CAD 100 million annual tax on beer volume, restrictions on certain price increases through the second quarter of 2017, broader retail access and CAD 100 million of Brewers' Retail capital spending through 2018. The ultimate effect on Canada results remained uncertain.
- Certain European brands were reclassified from indefinite-lived to definite-lived assets after the impairment review. Annual amortization was expected to increase by approximately $15 million, and the Europe and Canada reporting units and the Molson core brand remained exposed to future impairment.
- The company faced European indirect-tax assessments of approximately $78 million and estimated a possible loss range of zero to approximately $106 million. No provision was recorded, and the company intended to appeal.
- A proposed Ontario class action alleges price fixing and market allocation involving Brewers' Retail and seeks CAD 1.4 billion in damages. The company stated that it considers the claim without merit and intends to defend it.
- Remaining discontinued-operations contingencies related to the former Kaiser business included a maximum exposure of $68.0 million for certain tax, civil and labor indemnities and a separate maximum potential purchased-tax-credit claim of $88.6 million.
Investor Verification Priorities
- Reconcile reported earnings with underlying income and EBITDA, particularly the effect of the $275.0 million European impairment, other special items and discrete tax benefits.
- Assess whether currency pressure, volume declines, terminated contracts and higher brand investment could continue to reduce underlying earnings and cash flow.
- Review debt maturities, refinancing terms, interest-rate and currency swaps, covenant compliance and the availability of the revolving credit facility.
- Monitor the Ontario beer framework, related tax and pricing restrictions, the Brewers' Retail class action and the European indirect-tax assessments.
- Evaluate future impairment risk for European brands, the Molson core brand and the Canada and Europe reporting units.
- Verify the planned 2015 capital expenditures, pension funding, brewery closures and Vancouver sale-and-leaseback against subsequent filings.