Business Context and Reporting Period
Molson Coors Brewing Company filed this unaudited Form 10-Q for the thirteen and thirty-nine weeks ended September 25, 2010, compared with the periods ended September 26, 2009. The company operates primarily in Canada, the United Kingdom and through its 42% economic interest in MillerCoors in the United States. Results are seasonal and quarterly performance is not necessarily indicative of full-year results.
Key Financial Metrics
| Metric | Q3 2010 | Q3 2009 | Change |
|---|---|---|---|
| Net sales | $875.0 million | $853.7 million | 2.5% increase |
| Gross profit | $417.6 million | $381.1 million | 9.6% increase |
| Operating income | $300.9 million | $237.3 million | 26.8% increase |
| Income from continuing operations attributable to MCBC | $257.0 million | $244.3 million | 5.2% increase |
| Net income attributable to MCBC | $256.1 million | $235.3 million | 8.8% increase |
| Diluted EPS from continuing operations | $1.38 | $1.31 | 5.3% increase |
| Diluted net EPS | $1.37 | $1.26 | 8.7% increase |
| Operating cash flow, year to date | $725.9 million | $666.8 million | $59.1 million increase |
Calculated Q3 gross margin improved to approximately 47.7% from 44.6%, while operating margin increased to approximately 34.4% from 27.8%. Year-to-date net sales were $2.419 billion, gross profit was $1.083 billion, operating income was $703.5 million and net income attributable to MCBC was $597.9 million.
- Worldwide beer volume declined 4.0% in the quarter and 2.8% year to date. Reported financial volume declined 4.6% in the quarter and 1.9% year to date.
- Canada segment net sales increased 9.3% in the quarter, with volume up 2.5%; pretax income increased 19.1% to $161.6 million.
- MillerCoors net income increased 36.3% to $313.0 million in the quarter. MCBC recorded $135.3 million of equity income, up from $101.2 million.
- U.K. segment net sales declined 7.4% in the quarter as volume declined 12.5%, but pretax income increased 5.9% to $34.3 million due to pricing and cost reductions.
- Cash and cash equivalents were $763.5 million at September 25, 2010, compared with $734.2 million at December 26, 2009.
- Long-term debt was $1.447 billion, compared with $1.413 billion at year-end. The company repaid its $300 million 4.85% notes due September 2010.
- Net working capital was $641.4 million at quarter-end, excluding short-term borrowings and current debt maturities.
- Underlying free cash flow, a non-GAAP measure, was $671.1 million year to date versus $534.4 million in the prior-year period.
Material Changes Versus the Prior Comparable Period
- Profitability improved despite lower global volume, supported by pricing, cost reductions, favorable foreign exchange and higher MillerCoors earnings.
- MCBC achieved approximately $24 million of RFG2 cost savings in the quarter and $55 million year to date. MillerCoors delivered $56 million of incremental synergies in the quarter and $173 million year to date.
- Marketing, general and administrative expense increased 3.4% in the quarter and 14.4% year to date on a consolidated basis, while MillerCoors reduced its comparable expense by 9.8% in the quarter and 9.4% year to date.
- Other income included a $42.3 million gain from Foster's total-return swaps in the quarter, compared with a $59.3 million gain in the prior-year quarter. These gains are excluded from underlying income.
- Year-to-date discontinued operations included a $41.1 million gain, primarily reflecting a $42.6 million favorable settlement of Kaiser indemnity obligations. The prior-year period included a $12.9 million loss.
- Financing cash outflows increased to $484.9 million from $91.6 million, primarily because of the $300 million debt repayment, $42 million of debt-derivative settlements and higher dividends.
- During the quarter, MCBC acquired a controlling 51% interest in a newly formed Chinese brewing venture for $34.7 million, recognizing $9.6 million of goodwill and $7.0 million of other intangible assets.
Guidance, Outlook, Risks and Unusual Items
- Management expects 2010 effective tax rate of 14% to 18% and underlying effective tax rate of 15% to 17%. It expects $3 million to $7 million of income tax expense related to uncertain tax positions over the next twelve months.
- Management expects 2010 underlying free cash flow of approximately $900 million, plus or minus 5%, and capital expenditures of approximately $150 million excluding MillerCoors.
- Management expects Canada cost of goods sold per hectoliter to decline at a low-single-digit rate for the full year, but with less favorable trends in the fourth quarter.
- U.S. cost of goods sold per hectoliter is expected to increase at a low-single-digit rate for 2010 and be approximately flat in the fourth quarter.
- U.K. cost of goods sold per hectoliter is expected to increase at a mid-single-digit rate in the fourth quarter, with higher pension expense, hedging comparisons and channel mix among the factors.
- The company expects 2010 MCI and corporate marketing, general and administrative expense of approximately $180 million, plus or minus 5%, and corporate net interest expense of approximately $105 million, excluding U.K. trade-loan interest income.
- Management stated that operating cash flow, MillerCoors distributions and borrowing capacity should be adequate for operating needs, debt service, dividends and capital expenditures. The $750 million committed credit facility had no borrowings and expires August 31, 2011.
- Key exposures include foreign exchange, interest rates, commodity and packaging costs, equity-price movements related to Foster's derivatives, pension funding, litigation, environmental matters and indemnity obligations.
- Remaining maximum potential claims related to one category of Kaiser purchased tax credits were $258.8 million, with total estimated purchased-tax-credit indemnity liability of $23.5 million at quarter-end. Total Kaiser indemnity reserves were $33.4 million.
- MCBC guarantees approximately 50% of Brewers' Retail, Inc.'s CAD $200 million debt due June 30, 2011. If the debt is not refinanced, the company could face a significant 2011 cash outflow.
- The company identified implementation of SAP and related logistics and financial systems in the U.K. in early 2011 as an additional risk, including potential disruption to orders, cash collection and timely financial reporting.
- Special items totaled $3.1 million in the quarter and $21.5 million year to date, primarily restructuring, pension, software-abandonment and strategic-initiative costs. No goodwill or indefinite-lived intangible impairment was recorded in the third quarter.
Investor Verification Checklist
- Verify the sustainability of earnings growth given the 4.0% decline in worldwide beer volume and continued weakness in the U.S. and U.K.
- Separate recurring operating performance from the $42.3 million Foster's derivative gain and the year-to-date Kaiser settlement gain.
- Assess MillerCoors pricing, volume, synergy delivery and distribution levels, including the company’s dependence on MillerCoors cash distributions.
- Review debt maturities, the subsequent October 6, 2010 CAD $500 million notes issuance and the refinancing or renewal of the $750 million credit facility.
- Monitor pension funding requirements, Kaiser indemnity claims, BRI debt guarantees, litigation and environmental reserves.
- Compare actual fourth-quarter results with the stated tax, cost-per-hectoliter, marketing expense and free-cash-flow expectations.