Business Context and Reporting Period
Molson Coors Brewing Company filed an unaudited Form 10-Q for the thirteen weeks ended March 27, 2010, compared with the thirteen weeks ended March 29, 2009. The company operates primarily through Canada and the U.K. and holds a 42% economic interest in MillerCoors, which is accounted for under the equity method. Quarterly results are seasonal and are not necessarily indicative of full-year performance.
Financial Performance and Position
| Metric | Q1 2010 | Q1 2009 | Change |
|---|---|---|---|
| Sales | $947.0 million | $824.2 million | 15.0% increase |
| Net sales | $661.0 million | $559.0 million | 18.2% increase |
| Gross profit | $256.6 million | $212.9 million | 20.5% increase |
| Operating income | $107.5 million | $117.2 million | 8.3% decrease |
| Income from continuing operations attributable to MCBC | $62.0 million | $79.6 million | 22.1% decrease |
| Net income attributable to MCBC | $104.6 million | $75.7 million | 38.2% increase |
| Diluted EPS from continuing operations | $0.33 | $0.43 | Decrease |
| Diluted net EPS | $0.56 | $0.41 | Increase |
| Net cash provided by operating activities | $86.0 million | $4.8 million | Increase of $81.2 million |
| Free cash flow | $(34.2) million | $(79.9) million | Improvement of $45.7 million |
- Gross margin was approximately 38.8%, compared with 38.1% in the prior-year quarter. Operating margin declined to approximately 16.3% from 21.0%, while continuing-operations net margin declined to approximately 9.5% from 14.2%.
- Total worldwide beer volume declined 3.8% to 10.117 million hectoliters. Reported financial volume declined 3.6%.
- Cash and cash equivalents were $656.6 million at March 27, 2010, compared with $734.2 million at December 26, 2009 and $94.4 million at March 29, 2009.
- Total debt, including the current portion, was $1.737 billion, including $300.0 million of notes due in September 2010. Long-term debt excluding the current portion was $1.437 billion.
- Total assets were $11.981 billion and total liabilities were $4.815 billion. Net working capital, excluding short-term borrowings and current debt maturities, was $148.2 million.
- Cash used in investing activities was $118.4 million, including a $298.2 million investment in MillerCoors partially offset by a $199.5 million return of capital. Financing cash use was $39.3 million, including $44.7 million of dividends.
Material Changes Versus the Prior Comparable Period
- Net sales increased primarily because of foreign exchange and higher sales in Canada and the U.K.; consolidated volume declined.
- Marketing, general and administrative expense increased to $237.5 million from $182.6 million, reflecting higher commercial, innovation, corporate and employee-related costs.
- Equity income from MillerCoors declined to $91.0 million from $97.1 million. MillerCoors reported a 3.0% volume decline and a 0.9% net sales decline, partly offset by pricing and cost savings.
- Special items decreased to $2.6 million from $10.2 million, primarily because the prior-year period included a $5.3 million Canadian pension curtailment loss.
- Other expense improved to $8.6 million from $18.5 million, largely because the mark-to-market loss on the Foster’s total-return swap decreased to $6.9 million from $21.4 million.
- Income from discontinued operations was $42.6 million, versus a $3.9 million loss in the prior-year quarter. The gain resulted from a settlement of Kaiser indemnity obligations.
- Operating cash flow improved substantially due to stronger working capital, higher MillerCoors distributions and higher net income. The first quarter remained a cash-use quarter because of seasonal working capital and MillerCoors funding needs.
Guidance, Outlook, Risks and Unusual Items
- Management expects a 2010 effective tax rate of 18% to 22%, compared with approximately 16% in the first quarter. It expects $1 million to $4 million of additional tax expense related to uncertain tax positions.
- Management expects 2010 capital expenditures of approximately $150 million, excluding MillerCoors and consolidated joint ventures, and corporate net interest expense of approximately $110 million, excluding U.K. trade-loan interest income.
- The Resources for Growth 2 program delivered $15 million of first-quarter savings toward a three-year $150 million target. MillerCoors delivered $53 million of incremental savings toward its original $500 million synergy commitment and $7 million toward a further $200 million program.
- Management expects Canada cost of goods sold per hectoliter to decline at a low-single-digit rate in local currency. U.K. cost of goods sold per hectoliter is expected to increase at a high-single-digit rate because of pension, input-cost, mix and volume-related factors.
- The company expects to refinance the $300 million of senior notes due in September 2010. It had no borrowings under its $750 million committed credit facility at quarter-end and stated that liquidity was adequate for operating needs, debt service, dividends and planned capital expenditures.
- The company plans to invest approximately $40 million for a 51% controlling interest in a proposed Chinese joint venture, expected to close in summer 2010.
- The Kaiser settlement required a $96.0 million cash payment, made in the first week of the second quarter, and eliminated $284.5 million of maximum potential tax claims. Remaining Kaiser indemnity reserves totaled $127.3 million at quarter-end, including $118.0 million for purchased tax credits.
- Material risks include weak beer demand and volume, competitive pricing, commodity and packaging inflation, foreign-exchange exposure, pension funding requirements, MillerCoors cash needs, refinancing risk, tax-law changes, litigation and environmental contingencies.
- Derivative liabilities had a net carrying value of $454.0 million at quarter-end. The company recorded a $6.9 million loss on the Foster’s total-return swap during the quarter.
- Pending matters include a potential Canadian action against Brewers’ Retail seeking damages exceeding CAD $750 million, Brazilian litigation with a prior judgment of approximately $42 million vacated and remanded for recalculation, and environmental claims. Management does not believe a material adverse result is probable in the Brazilian litigation.
Most Important Facts to Verify
- Verify the refinancing plan and funding terms for the $300 million September 2010 maturity.
- Assess whether volume weakness in the U.S. and U.K. is offset by pricing, brand investment and cost savings.
- Reconcile reported net income and EPS with the $42.6 million discontinued-operations gain and evaluate underlying earnings of $69.7 million, or $0.37 per diluted share.
- Monitor MillerCoors distributions, required contributions, pension funding and the delivery of the stated synergy programs.
- Review remaining Kaiser indemnity exposure, tax uncertainties and the timing of the $96 million settlement cash outflow.
- Evaluate exposure to commodity costs, foreign exchange, pension obligations, derivative valuations and the disclosed litigation and environmental matters.