Molson Coors Brewing Company — Form 10-Q Summary
Business context and reporting period
This unaudited Form 10-Q covers the three and nine months ended September 30, 2016, compared with the same periods in 2015. Molson Coors operated through Canada, Europe, Molson Coors International, and a U.S. segment represented by its 42% economic interest in MillerCoors under the equity method.
On October 11, 2016, after the reporting date, the company completed its $12.0 billion cash acquisition of SABMiller’s remaining 58% economic and 50% voting interest in MillerCoors, as well as international Miller brand assets. MillerCoors became wholly owned and will be consolidated prospectively from the acquisition date.
Financial performance and key metrics
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Net sales | $947.6 million | $1,017.4 million | $2,591.0 million | $2,723.1 million |
| Gross profit | $406.3 million | $431.5 million | $1,073.5 million | $1,102.5 million |
| Operating income | $289.2 million | $8.1 million | $800.3 million | $447.7 million |
| Net income attributable to MCBC | $202.5 million | $16.6 million | $537.5 million | $326.7 million |
| Diluted EPS from continuing operations | $0.94 | $0.07 | $2.54 | $1.73 |
| Operating cash flow | Not separately provided | Not separately provided | $630.2 million | $479.0 million |
- Q3 net sales declined 6.9%; nine-month net sales declined 4.9%. Consolidated volume declined 3.5% in Q3 and 1.0% year to date. Foreign currency reduced Q3 net sales by approximately $47.2 million.
- Gross margin was approximately 42.9% in Q3 and 41.4% for the first nine months, compared with approximately 42.4% and 40.5%, respectively, in the prior-year periods.
- Operating margin was approximately 30.5% in Q3 and 30.9% year to date, versus approximately 0.8% and 16.4% in the prior-year periods. The comparison benefited substantially from the absence of the $293.5 million of Q3 2015 special charges.
- Q3 equity income from MillerCoors increased 16.0% to $156.9 million. MillerCoors net income increased 16.7% to $369.2 million, driven by pricing, mix, lower cost of goods sold, and lower special charges.
- Operating cash flow increased $151.2 million year over year, primarily because 2015 included a $227.1 million discretionary U.K. pension contribution. Capital expenditures paid were $188.9 million, and investing cash flow was negative $188.9 million.
- Cash and cash equivalents were $9.98 billion at September 30, 2016, compared with $430.9 million at December 31, 2015. Debt-free net working capital was $9.67 billion versus $70.3 million at year-end 2015.
- Total debt, including the current portion, was approximately $9.86 billion at September 30, 2016, compared with $2.94 billion at year-end 2015. Long-term debt was $9.56 billion, and $750 million remained available under the revolving credit facility.
- Financing cash flow was $9.12 billion, reflecting approximately $2.5 billion of net equity proceeds and approximately $6.9 billion of net proceeds from the July 2016 senior-note issuance. The company subsequently borrowed $2.5 billion under its term loan at the October acquisition closing.
Material changes versus the prior comparable period
- Profitability improved sharply because Q3 2015 included a $275.0 million European intangible-brand impairment and other restructuring-related charges. Q3 2016 special items were a net benefit of $4.9 million versus a $293.5 million net charge in Q3 2015.
- For the first nine months, special items were a net benefit of $79.0 million versus a $335.8 million net charge in 2015. The 2016 amount included a $110.4 million gain on the Vancouver brewery sale, partly offset by a $30.8 million India impairment.
- Corporate costs increased materially due to acquisition-related transaction, financing, derivative, and interest costs. Q3 acquisition-related costs included $17.2 million in marketing, general and administrative expense, $11.0 million in other expense, and $39.3 million in net interest expense.
- Canada net sales declined 2.2% in Q3 and 6.3% year to date, while Europe net sales declined 9.4% and 3.8%, respectively. Europe income before tax improved to $98.5 million in Q3 from a $183.2 million loss, primarily because of the prior-year impairment.
- Molson Coors International net sales declined 19.1% in Q3, and its pre-tax loss widened to $2.7 million, primarily due to the Bihar alcohol prohibition, changes in Staropramen rights, and prior China restructuring.
- The company early adopted new share-based payment accounting guidance, reducing 2016 income tax expense by $4.1 million in Q3 and $8.0 million year to date and recasting cash-flow classifications.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected 2016 capital expenditures of approximately $220 million, excluding the replacement Vancouver brewery, MillerCoors, and other equity-method joint ventures.
- Management expected Corporate marketing, general and administrative expense of approximately $120 million for 2016, excluding acquisition costs; pension contributions of up to approximately $12 million; and consolidated 2016 net interest expense of approximately $110 million excluding acquisition-related interest income and expense.
- The company planned to maintain its $0.41 quarterly dividend while paying down acquisition-related debt and revisit dividend policy after deleveraging is well underway.
- Management expected integration of Miller brands, operational synergies, expanded U.S. scale, and enhanced cash flows. Results from the acquired MillerCoors business will be fully consolidated beginning October 11, 2016.
- The company expected a fourth-quarter 2016 special-item gain of approximately $3.5 billion from remeasurement of its existing 42% MillerCoors interest, offset by an estimated $1.1 billion tax expense. It also expected an approximately $500 million special-item loss from reclassification of historical MillerCoors-related accumulated other comprehensive loss, with an estimated $200 million tax benefit. These estimates were preliminary.
- Additional acquisition integration and restructuring costs were expected but could not yet be quantified. Preliminary acquisition accounting included approximately $9.9 billion of identifiable intangible assets and approximately $5.9 billion of MillerCoors goodwill; these values remained subject to measurement-period adjustments.
- MillerCoors expected total Eden brewery closure special charges of up to approximately $180 million; $160.8 million had been incurred through September 30, 2016.
- The company expects additional Vancouver brewery closure charges, including approximately CAD 15 million of accelerated depreciation, and lease costs of approximately CAD 5 million annually through the anticipated 2018 closure.
- European indirect-tax assessments totaled approximately $103 million, with an estimated potential loss ranging from zero to approximately $128 million. No provision was recorded; the company intends to appeal.
- Other exposures include a proposed Ontario class action seeking approximately CAD 1.4 billion, Kaiser-related indemnities with a maximum purchased-tax-credit claim of approximately $107.3 million, environmental matters, and guarantees including a $20.6 million liability related to Brewers Retail Inc.
- Key operating risks include declining beer volumes, competitive pricing and mix pressure, foreign exchange volatility, economic weakness in Canada and Europe, the U.K.’s Brexit-related uncertainty, impairment risk for Europe goodwill and Molson core-brand intangibles, and regulatory restrictions such as the Bihar alcohol prohibition.
Most important facts for investors to verify
- Verify post-October 11, 2016 consolidated results, including MillerCoors revenue, expenses, cash flow, pension obligations, and debt.
- Verify the final purchase-price allocation, fair value of the pre-existing MillerCoors interest, goodwill, intangible assets, and related depreciation and amortization.
- Verify actual fourth-quarter acquisition-related special items and tax effects against management’s preliminary estimates.
- Track leverage, interest expense, covenant compliance, debt repayment, and progress toward deleveraging.
- Assess whether projected MillerCoors synergies and integration benefits offset volume pressure and incremental financing costs.
- Monitor Europe’s indirect-tax assessments, the Ontario class action, Kaiser indemnities, and environmental contingencies.
- Reassess impairment headroom for the Europe reporting unit and Molson core-brand intangible assets, particularly if volumes, currencies, or macroeconomic conditions weaken.