Molson Coors Brewing Company — Q3 2011 Form 10-Q Summary
Business context and reporting period
Molson Coors Brewing Company is principally a holding company with operating activities in Canada, the United Kingdom and international markets, and a 42% economic interest in MillerCoors accounted for under the equity method. The filing covers the 13 weeks ended September 24, 2011, compared with September 25, 2010, and the first 39 weeks of fiscal 2011 compared with the comparable 2010 period. Fiscal 2011 contains 53 weeks and the fourth quarter will include an extra week; MillerCoors reports on a calendar-month basis and will not have the additional week.
Financial results and key metrics
| Metric | Q3 2011 | Q3 2010 | First 39 weeks 2011 | First 39 weeks 2010 |
|---|---|---|---|---|
| Net sales | $954.4 million | $875.0 million | $2,578.4 million | $2,419.3 million |
| Gross profit | $403.9 million | $417.6 million | $1,076.8 million | $1,082.7 million |
| Operating income | $255.0 million | $300.9 million | $679.0 million | $703.5 million |
| Net income from continuing operations attributable to MCBC | $194.7 million | $257.0 million | $501.6 million | $556.8 million |
| Diluted EPS from continuing operations | $1.05 | $1.38 | $2.67 | $2.98 |
| Net cash from operating activities | Not provided for the quarter | Not provided for the quarter | $603.4 million | $743.2 million |
- Q3 net sales increased 9.1%, while first-nine-month net sales increased 6.6%, primarily from foreign exchange, pricing, international growth, contract brewing and new brands.
- Gross margin declined to approximately 42.3% from 47.7% in Q3 and to approximately 41.8% from 44.8% year to date, reflecting commodity inflation, higher operating costs and unfavorable fixed-cost absorption.
- Operating margin declined to approximately 26.7% from 34.4% in Q3 and to approximately 26.3% from 29.1% year to date.
- Q3 underlying after-tax income was $212.4 million, or $1.14 per diluted share, down 11.2% and 10.9%, respectively. Year-to-date underlying income was $525.6 million, or $2.80 per diluted share, down 3.3% and 3.4%.
- Total worldwide beer volume declined 0.8% in Q3 and 1.7% year to date. Reported financial volume increased 0.5% in Q3 but declined 1.5% year to date.
- Q3 equity income from MillerCoors fell 26.5% to $99.4 million. MillerCoors reported a $60.0 million Sparks brand impairment and a $50.9 million charge for the planned assumption of an underfunded Milwaukee brewery workers’ pension plan.
- Cash and cash equivalents were $987.2 million at September 24, 2011, versus $1,217.6 million at December 25, 2010. Net working capital was $758.4 million.
- Long-term debt was $1,901.3 million, including $44.8 million classified as current. The company had no borrowings outstanding under its new $400 million four-year revolving credit facility and was in compliance with debt restrictions.
- Underlying free cash flow was $463.9 million, down from $671.1 million in the comparable 2010 period.
Material changes versus the prior comparable period
- Profitability declined despite higher sales because of lower volumes, commodity and packaging inflation, fixed-cost deleverage and higher MillerCoors special charges.
- Q3 2010 benefited from a $42.3 million pretax gain on Foster’s total return swaps; the remaining swap arrangements were settled in 2011, producing $15.4 million of cash proceeds year to date.
- Operating cash flow decreased $139.8 million year to date, primarily because of lower earnings and working-capital timing, including lower U.K. accounts payable and accrual balances.
- Investing cash use increased to $270.9 million, including a $93.6 million capital contribution to Brewers’ Retail, increased capital expenditures, and acquisitions of Sharp’s Brewery and a controlling interest in Cobra India.
- Financing cash use increased to $556.3 million, driven by $271.1 million of share repurchases, higher dividends and $99.2 million of cross-currency swap settlements.
- The company repurchased approximately 6.35 million Class B shares for $271.1 million during the quarter under a new $1.2 billion, three-year authorization. The remaining authorization was approximately $928.9 million at quarter end.
- Effective tax rates were approximately 14% in Q3 and 15% year to date, compared with 19% and 18%, respectively, in the prior periods.
Outlook, management commentary, risks and unusual items
- Management expects full-year 2011 effective tax rates of 12% to 16%, including a projected CAD 18.6 million non-cash tax benefit from the favorable resolution of uncertain tax positions.
- 2011 capital expenditures are expected to be approximately $250 million, excluding MillerCoors and other equity-method ventures, an increase of $20 million from prior guidance.
- Management expects 2011 corporate net interest expense of approximately $115 million, excluding U.K. trade-loan interest income.
- Canada faces competitive pricing and volume pressure, but management expects easier fourth-quarter comparisons, continued brand expansion and benefits from the NHL sponsorship. Canada cost of goods sold per hectoliter is expected to increase at a mid-single-digit local-currency rate.
- MillerCoors is focused on brand growth, craft and import expansion, and cost savings. MillerCoors cost of goods sold per hectoliter is expected to increase at a low-single-digit rate in 2011.
- U.K. results remain pressured by weak market volumes, channel changes and input inflation. U.K. cost of goods sold per hectoliter is expected to increase at a high-single-digit local-currency rate.
- MCI and Corporate spending is expected to be approximately $190 million in 2011, compared with $172.2 million in 2010, reflecting investment in emerging markets and new businesses.
- Management reports approximately $106 million of program-to-date savings under the RFG2 initiative toward a $150 million annualized reduction goal by 2012. MillerCoors cumulative synergies reached $546 million, exceeding the original $500 million commitment.
- Cross-currency swaps had a net liability of $295.5 million at quarter end. Approximately half of the remaining swaps were subsequently extended to March 2014, while approximately 25% remained due in May 2012.
- Kaiser-related indemnity reserves totaled $31.1 million, with maximum potential claims for one purchased-tax-credit category of $241.6 million. The company also disclosed Brazilian litigation, environmental obligations and other ordinary-course disputes; management believes a material adverse outcome is not probable, but future adjustments are possible.
- The China reporting unit had only a limited excess of fair value over carrying value, and delays at the Si’hai Brewing venture could result in a future goodwill impairment charge.
- The company states that it has no material off-balance-sheet arrangements and that disclosure controls and internal controls were effective as of September 24, 2011.
Most important facts for investors to verify
- Whether MillerCoors volume weakness, special charges and commodity inflation persist and how they affect the company’s 42% equity income.
- The sustainability of underlying earnings and free cash flow after excluding special items, derivative effects and other non-core items.
- The company’s ability to fund share repurchases, dividends, capital expenditures and debt maturities while cash declined by $230.4 million from year-end.
- Exposure to cross-currency swap liabilities, foreign-exchange movements, commodity prices and the $575 million convertible notes due in 2013.
- The status and ultimate cost of Kaiser indemnities, Brazilian litigation, environmental matters and other contingencies.
- Whether the China reporting unit requires a goodwill impairment and whether the company’s international investments generate the expected returns.
- The effect of the additional fiscal week in Q4 2011 and the difference between fiscal-quarter results and MillerCoors’ calendar reporting period.