MOLSON COORS BEVERAGE CO - Annual Report: 2013 (Form 10-K)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________________________________________________________
FORM 10-K
(Mark One) | |
ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2013 | |
OR | |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______ . | |
Commission File Number: 1-14829
Molson Coors Brewing Company
(Exact name of registrant as specified in its charter)
DELAWARE | 84-0178360 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1225 17th Street, Denver, Colorado 1555 Notre Dame Street East, Montréal, Québec, Canada | 80202 H2L 2R5 | |
(Address of principal executive offices) | (Zip Code) | |
303-927-2337 (Colorado)
514-521-1786 (Québec)
(Registrant's telephone number, including area code)
_______________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Name of each exchange on which registered | |
Class A Common Stock, $0.01 par value | New York Stock Exchange | |
Class B Common Stock, $0.01 par value | New York Stock Exchange | |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES ý NO o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES ý NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ý NO o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) | ||||||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). YES o NO ý
The aggregate market value of the registrant's voting and non-voting common stock held by non-affiliates of the registrant at the close of business on June 28, 2013, was $7,089,069,915 based upon the last sales price reported for such date on the New York Stock Exchange and the Toronto Stock Exchange. For purposes of this disclosure, shares of common and exchangeable stock held by persons holding more than 10% of the outstanding shares of stock and shares owned by officers and directors of the registrant as of June 28, 2013, are excluded in that such persons may be deemed to be affiliates. This determination is not necessarily conclusive of affiliate status for other purposes.
The number of shares outstanding of each of the registrant's classes of common stock, as of February 7, 2014:
Class A Common Stock—2,556,894 shares | Class B Common Stock—159,737,216 shares | |
Exchangeable shares:
As of February 7, 2014, the following number of exchangeable shares was outstanding for Molson Coors Canada, Inc.:
Class A Exchangeable Shares—2,896,941 shares | Class B Exchangeable Shares—18,935,453 shares | |
These Class A and Class B exchangeable shares offer substantially the same economic and voting rights as the respective classes of common shares of the registrant. This is achieved via the following structure: The registrant has outstanding one share each of special Class A and Class B voting stock, through which the holders of Class A exchangeable shares and Class B exchangeable shares of Molson Coors Canada Inc. (a subsidiary of the registrant), respectively, may exercise their voting rights with respect to the registrant. The special Class A and Class B voting stock are entitled to one vote for each of the exchangeable shares, respectively, excluding shares held by the registrant or its subsidiaries, and generally vote together with the Class A common stock and Class B common stock, respectively, on all matters on which the Class A common stock and Class B common stock are entitled to vote. The trustee holder of the special Class A voting stock and the special Class B voting stock has the right to cast a number of votes equal to the number of then outstanding Class A exchangeable shares and Class B exchangeable shares, respectively.
Documents Incorporated by Reference: Portions of the registrant's definitive proxy statement for the registrant's 2014 annual meeting of stockholders, which will be filed no later than 120 days after the close of the registrant's fiscal year ended December 31, 2013, are incorporated by reference under Part III of this Annual Report on Form 10-K.
MOLSON COORS BREWING COMPANY AND SUBSIDIARIES
INDEX
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Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). From time to time, we may also provide oral or written forward-looking statements in other materials we release to the public. Such forward-looking statements are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995.
Statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements, and include, but are not limited to, statements in Part II—Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations in this report, and under the heading "Outlook for 2014" therein, relating to overall volume trends, consumer preferences, pricing trends, industry forces, cost reduction strategies, anticipated results, anticipated synergies, expectations for funding future capital expenditures and operations, debt service capabilities, shipment levels and profitability, market share and the sufficiency of capital resources. In addition, statements that we make in this report that are not statements of historical fact may also be forward-looking statements. Words such as "expects," "goals," "plans," "believes," "continues," "may," "anticipate," "seek," "estimate," "outlook," "trends," "future benefits," "potential," "projects," "strategies," and variations of such words and similar expressions are intended to identify forward-looking statements.
Forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those indicated (both favorably and unfavorably). These risks and uncertainties include, but are not limited to those described in Part I—Item 1A "Risk Factors", elsewhere throughout this report, and those described from time to time in our past and future reports filed with the Securities and Exchange Commission ("SEC"). Caution should be taken not to place undue reliance on any such forward-looking statements. Forward-looking statements speak only as of the date when made and we undertake no obligation to update any forward-looking statement, whether as a result of new information, future events or otherwise.
Market and Industry Data
The market and industry data used in this Annual Report on Form 10-K are based on independent industry publications, customers, trade or business organizations, reports by market research firms and other published statistical information from third parties, as well as information based on management’s good faith estimates, which we derive from our review of internal information and independent sources. Although we believe these sources to be reliable, we have not independently verified the accuracy or completeness of the information.
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PART I
ITEM 1. BUSINESS
Unless otherwise noted in this report, any description of "we", "us" or "our" includes Molson Coors Brewing Company ("MCBC" or the "Company"), principally a holding company, and its operating and non-operating subsidiaries included within our reporting segments and Corporate. Our reporting segments include: Molson Coors Canada ("MCC" or Canada segment), operating in Canada; MillerCoors LLC ("MillerCoors" or U.S. segment), which is accounted for by us under the equity method of accounting, operating in the United States ("U.S."); Molson Coors Europe (Europe segment), operating in Bosnia-Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Montenegro, Romania, Serbia and Slovakia (collectively, "Central Europe"), as well as the United Kingdom ("U.K.") and the Republic of Ireland; and Molson Coors International ("MCI"), operating in various other countries. Any reference to "Coors" means the Adolph Coors Company prior to the 2005 merger with Molson Inc. (the "Merger"). Any reference to Molson Inc. or Molson means MCC prior to the Merger. Any reference to "Molson Coors" means MCBC after the Merger.
Unless otherwise indicated, information in this report is presented in U.S. dollars ("USD" or "$").
Background
We are one of the world's largest brewers and have a diverse portfolio of owned and partner brands, including signature brands Coors Light, Molson Canadian, Carling and Staropramen, as well as craft and specialty beers such as Blue Moon, Creemore Springs, Cobra and Doom Bar. For more than 350 combined years, we have been brewing, innovating and delighting the world's beer drinkers. Our success depends on our ability to make our products available to meet a wide range of consumer segments and occasions.
Molson and Coors were founded in 1786 and 1873, respectively. Our commitment to producing the highest quality beers is a key part of our heritage and remains so to this day. Our brands are designed to appeal to a wide range of consumer tastes, styles and price preferences. Our largest markets are Canada, the U.S. and Europe.
Coors was incorporated in June 1913 under the laws of the state of Colorado. In August 2003, Coors changed its state of incorporation to the state of Delaware. In February 2005, upon completion of the Merger, Coors changed its name to Molson Coors Brewing Company.
Our Segments
In 2013, we operated the following segments: Canada, the U.S., Europe, and MCI. On June 15, 2012, we completed our acquisition (the "Acquisition") of StarBev Holdings S.a.r.l. ("StarBev"), which represents our Central Europe operations. Effective as of the first day of our 2013 fiscal year, we combined our U.K. and Ireland business with our Central Europe operations, which resulted in our Europe segment, and we have recast the historical presentation of segment information accordingly. A separate operating team manages each segment and each segment manufactures, markets, and sells beer and other beverage products.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 4, "Segment Reporting" of the Notes to the Consolidated Financial Statements ("Notes") for information relating to our segments and operations, including financial and geographic information. For certain risks attendant to our operations, refer to Part I—Item 1A, Risk Factors.
Our Products
We have a diverse portfolio of owned and partner brands which are positioned to meet a wide range of consumer segments and occasions in a variety of markets, including signature brands Coors Light, Molson Canadian, Carling and Staropramen.
Brands sold in Canada include Coors Light, Molson Canadian, Molson Export, Molson Canadian 67, Molson Dry, Molson Canadian Cider, the Rickard's family of brands, Carling, Carling Black Label, Pilsner, Keystone Light, Creemore Springs, the Granville Island brands, Coors Banquet and a number of other regional brands. We also brew or distribute under license the following brands: Heineken, Amstel Light, Murphy's, Newcastle Brown Ale and Strongbow cider under license from Heineken N.V. ("Heineken"), and Miller Lite, Miller Genuine Draft, Miller Chill, Milwaukee's Best, and Milwaukee's Best Dry under license from SABMiller plc ("SABMiller"). Additionally, we are party to a joint venture, Modelo Molson Imports, L.P. ("MMI"), with Grupo Modelo S.A.B. de C.V. ("Modelo") that imports, distributes and markets the Modelo beer brand portfolio, including the Corona, Coronita, Negra Modelo, and Pacifico brands, across all Canadian provinces and territories. MMI is accounted for under the equity method. In November 2013, Anheuser-Busch InBev ("ABI") and MCBC entered into an
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agreement providing for the accelerated termination of the MMI joint venture in February 2014. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for additional information. In Canada, we also have contract brewing agreements to produce for the U.S. market Asahi Super Dry and Asahi Select for Asahi Breweries, Ltd. and Labatt Blue and Labatt Blue Light for North American Breweries, Inc.
MillerCoors sells a wide variety of brands in the U.S. and Puerto Rico. In the formation of the MillerCoors joint venture, MCBC and SABMiller each assigned the U.S. and Puerto Rican ownership rights to its respective legacy brands to MillerCoors, but retained all ownership of these brands outside the United States and Puerto Rico. MillerCoors' flagship premium light brands are Coors Light and Miller Lite. Brands in the domestic premium segment are Coors Banquet and Miller Genuine Draft. Brands in the economy segment include Miller High Life, Keystone, Icehouse, Mickey's, Milwaukee's Best, Hamm's, and Olde English 800 brands. MillerCoors also brews or distributes under license the Molson and Foster's brands and George Killian's Irish Red. Craft and import brands, some of which are marketed and sold through Tenth and Blake, include the Blue Moon brands, Henry Weinhard's brands, Leinenkugel's brands, Redd's brands, Peroni Nastro Azzurro, Pilsner Urquell, Batch 19, Grolsch, Worthington's, St. Stefanus, Third Shift, and cider brands from the Crispin Cider Company. Brands in the non-alcoholic segment include Coors Non-Alcoholic and Sharp's.
Brands sold in Europe include Carling, Ozujsko, Jelen, Staropramen, Coors Light, Kamenitza, Niksicko, Bergenbier, Branik, Worthington's, Sharp's Doom Bar, Borsodi, Ostravar, Noroc, Astika, Apatinsko and Blue Moon, as well as a number of smaller regional ale brands in the U.K., Ireland and Central Europe. The European business has licensing agreements with various other brewers through which it also brews or distributes the Stella Artois, Hoegaarden, Leffe, Beck's, Lowenbrau, Spaten, Löwenweisse and Belle-Vue Kriek brands in certain Central European countries. In the U.K., we also sell the Grolsch brands through a joint venture with Royal Grolsch N.V. and the Cobra brands through the Cobra Beer Partnership Ltd. joint venture, and are the exclusive distributor for several brands which are sold under license, including Corona, which is sold under our licensing arrangement with Modelo through 2014, and Singha. Additionally, in order to be able to provide a full line of beer and other beverages to our U.K. on-premise customers, we sell "factored" brands, which are third-party beverage brands for which we provide distribution to retail, typically on a non-exclusive basis.
Brands sold in our international markets as part of our MCI segment, including brands sold under export and license agreements, include Staropramen, Coors Light, Carling, Cobra, Blue Moon and Corona. We also market and sell brands unique to these international markets which include Zima, Iceberg 9000, King Cobra, Coors, Coors Gold, and Coors Extra.
Canada Segment
We are Canada's second-largest brewer by volume and North America's oldest beer company. Our approximate market share of the Canada beer market in 2013 was 38%. We brew, market, sell and distribute a wide variety of beer brands nationally. Our portfolio has leading brands in all major product and price segments. Our focus and investment is on key owned brands, including Coors Light, Molson Canadian, Carling, Molson Dry, Molson Export, Rickard's, Pilsner, Creemore Springs, Coors Banquet and Granville Island and strategic distribution partnerships, including those with Heineken and SABMiller. In 2013, Coors Light had an approximate 13% market share and was the top selling beer brand in Canada, and Molson Canadian had an approximate 8% market share and was the third largest selling beer in Canada.
The Canada segment also includes our partnership arrangements related to the distribution of beer in Ontario, Brewers' Retail Inc. ("BRI"), and in the Western provinces, Brewers' Distributor Ltd. ("BDL"). BRI and BDL are accounted for under the equity method of accounting.
Sales and Distribution
In Canada, provincial governments regulate the beer industry, particularly with regard to the pricing, mark-up, container management, sale, distribution, and advertising of beer. Distribution and the retail sale of alcohol products involve a wide range and varied degree of Canadian government control through their respective provincial liquor boards.
Province of Ontario
In Ontario, beer may only be purchased at retail outlets operated by BRI, at government-regulated retail outlets operated by the Liquor Control Board of Ontario, at approved agents of the Liquor Control Board of Ontario, or at any bar, restaurant, or tavern licensed by the Liquor Control Board of Ontario to sell alcohol for on-premise consumption. We, together with certain other brewers, participate in the ownership of BRI in proportion to provincial market share relative to other brewers in the ownership group. Brewers may deliver directly to BRI's outlets or may choose to use BRI's distribution centers to access retail stores in Ontario, the Liquor Control Board of Ontario system and licensed establishments.
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Province of Québec
In Québec, beer is distributed to retail outlets directly by each brewer or through independent agents. We are the agent for the licensed brands we distribute. The brewer or agent distributes the products to permit holders for retail sales for on-premise consumption. Québec retail sales for off-premise consumption are made through grocery and convenience stores as well as government operated outlets. During November 2012, an increase in beer excise taxes of over 20% was announced and implemented in Québec.
Province of British Columbia
In British Columbia, the government's Liquor Distribution Branch controls the regulatory elements of distribution of all alcohol products in the province. BDL, which we co-own with a competitor, manages the distribution of our products throughout British Columbia. Consumers can purchase beer at any Liquor Distribution Branch retail outlet, at any independently owned and licensed retail store or at any licensed establishment for on-premise consumption. Establishments licensed primarily for on-premise alcohol sales may also be licensed for off-premise consumption.
Province of Alberta
In Alberta, the distribution of beer is managed by independent private warehousing and shipping companies or by a government sponsored system in the case of U.S. sourced products. All sales of liquor in Alberta are made through retail outlets licensed by the Alberta Gaming and Liquor Commission or licensees, such as bars, hotels and restaurants. BDL manages the distribution of our products in Alberta.
Other Provinces
Our products are distributed in the provinces of Manitoba and Saskatchewan through local liquor boards. Manitoba and Saskatchewan also have licensed private retailers. BDL manages the distribution of our products in Manitoba and Saskatchewan. In the Maritime Provinces (other than Newfoundland), local liquor boards distribute and sell our products. In Yukon, Northwest Territories and Nunavut, government liquor commissioners manage the distribution and sale of our products.
Manufacturing, Production and Packaging
Brewing Raw Materials
We select global suppliers in order to procure the highest quality materials and services at the lowest prices available. We also use hedging instruments to mitigate the risk of volatility in certain commodities and foreign exchange markets.
We source barley malt from one primary provider. Hops are purchased from a variety of global suppliers in the U.S., Europe, and New Zealand. Other starch brewing adjuncts are sourced from two main suppliers, both in North America. We do not foresee any significant risk of disruption in the supply of these agricultural products in the immediate future. Water used in the brewing process is from local sources in the communities where our breweries operate. We do not currently anticipate future difficulties in accessing water or agricultural products.
Brewing and Packaging Facilities
We operate seven breweries, strategically located throughout Canada. These locations brew and package all owned and certain licensed brands sold in, and exported from, Canada. See Item 2, "Properties" for further detail.
Packaging Materials
We single source glass bottles and have a committed supply through December 2014. We source lids and cans from two primary providers with contracts ending December 2014 and February 2015, respectively. We currently utilize a hedging program for aluminum requirements and related transportation and storage costs in Canada. We do not currently expect any future difficulties in accessing glass bottles or aluminum cans. The distribution systems in each province generally provide the collection network for returnable bottles and aluminum cans. The standard container for beer brewed in Canada is the 341 ml returnable bottle, which in 2013 represented a significant majority of the approximately 43% of volume sales (excluding imports) in Canada in bottles. In 2013, aluminum cans accounted for approximately 46% of our volume sales (excluding imports) in Canada. In 2013, we sold approximately 11% of our beer volume (excluding imports) in stainless steel kegs. A limited number of kegs are purchased every year, and we have no long-term supply commitment. Crowns, labels, corrugate, and paperboard are purchased from a small number of sources unique to each product. We do not currently foresee future difficulties in accessing these packaging products in the near term.
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Contract Manufacturing
We have an agreement with North American Breweries, Inc. to brew, package and ship Labatt trademark brands to the U.S. market through the end of 2015. We also have an agreement with Asahi Breweries, Ltd. to brew and package Asahi Super Dry and Asahi Select to the U.S. market through early 2017.
Seasonality of Business
Total industry volume in Canada is sensitive to factors such as weather, changes in demographics, consumer preferences and drinking occasions. Weather conditions consisting of high temperatures and extended periods of warm weather favor increased consumption of our products, while unseasonably cool or wet weather, especially during the summer months, adversely affects our sales volumes and net sales. Accordingly, consumption of beer in Canada is seasonal, with approximately 40% of industry sales volume typically occurring during the warmer months from May through August.
Known Trends and Competitive Conditions
2013 Canada Beer Industry Overview
The Canadian brewing industry is a mature market. It is characterized by aggressive competition for volume and market share from regional brewers, microbrewers and certain foreign brewers, as well as our main domestic competitor. These competitive pressures require significant annual investment in marketing and selling activities.
There are three major beer price segments: above premium, which includes most imports; premium, which includes the majority of domestic brands and the light sub-segment; and value (below premium).
Since 2001, the premium beer segment in Canada has gradually lost volume to the above premium and value segments. For each of the five years ended December 31, 2008, Canada beer industry shipments annual average growth rate approximated 1%. Since that time, the beer industry has been soft, with declines in four of the last five years. Aging population and a stalled economy have been main contributors to the declining state of the beer industry.
The following table summarizes the estimated percentage market share by volume of beer (including adjacencies, such as cider) and other alcoholic beverages as a component of the overall Canadian alcohol market over the last five years, for which data is currently available. We believe that 2013 data, when available, will reflect a continuation of the current consumer trends.
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
Beer | 51.3 | % | 51.9 | % | 52.8 | % | 53.3 | % | 53.4 | % | ||||
Other alcohol beverages | 48.7 | % | 48.1 | % | 47.2 | % | 46.7 | % | 46.6 | % | ||||
Our Competitive Position
Our brands compete with competitor beer brands and other alcohol beverages, including wine and spirits, and thus our competitive position is affected by consumer preferences between and among these other categories. Our brand portfolio gives us strong representation in all major beer segments.
The Canada brewing industry is composed principally of two major brewers, MCBC, which had approximately 39% of the market share in 2013, and ABI, which had approximately 40% of the market share in 2013. In 2013, the Ontario and Québec markets accounted for approximately 60% of the total beer market in Canada.
Regulation
In Canada, provincial governments regulate the production, marketing, distribution, selling, and pricing of beer (including the establishment of minimum prices), and impose commodity taxes and license fees in relation to the production and sale of beer. During November 2012, an increase in beer excise taxes of over 20% was announced and implemented in Québec. In addition, the federal government regulates the advertising, labeling, quality control, and international trade of beer, and also imposes commodity taxes, consumption taxes, excise taxes, and in certain instances, custom duties on imported beer. In 2013, our Canada excise taxes totaled $631.3 million or approximately $76 per hectoliter sold. Further, certain bilateral and multilateral treaties entered into by the federal government, provincial governments and certain foreign governments, especially with the United States, affect the Canadian beer industry.
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United States Segment
MillerCoors is the nation's second largest brewer by volume, selling approximately 28% of the total 2013 U.S. brewing industry shipments (excluding exports and U.S. shipments of imports). MillerCoors was formed on July 1, 2008 as a joint venture between MCBC and SABMiller. Each party contributed its U.S. and Puerto Rico businesses and related operating assets and certain liabilities. The percentage interests in the profits of MillerCoors are 58% for SABMiller and 42% for MCBC. Voting interests are shared 50% - 50%, and MCBC and SABMiller have equal board representation within MillerCoors. Each party to the MillerCoors joint venture agreed not to transfer its economic or voting interests in the joint venture for a period of five years from July 1, 2008. With the expiration of the restriction in 2013, both parties to the joint venture are now able to transfer their economic and voting interest, however, certain rights of first refusal will apply to any assignment of such interests. Our interest in MillerCoors is accounted for under the equity method of accounting.
Prior to the formation of MillerCoors, MCBC produced, marketed, and sold the MCBC portfolio of brands in the U.S. and its territories, and its U.S. operating segment included the results of the Rocky Mountain Metal Container ("RMMC") and Rocky Mountain Bottle Container ("RMBC") joint ventures. Effective July 1, 2008, MCBC's equity investment in MillerCoors represents our U.S. operating segment.
Sales and Distribution
In the United States, beer is generally distributed through a three-tier system consisting of manufacturers, distributors and retailers. A national network of approximately 450 independent distributors purchases MillerCoors' products and distributes them to retail accounts. In 2013, approximately 18% of MillerCoors' beer volume was sold on-premise in bars and restaurants, and the other 82% was sold off-premise in convenience stores, grocery stores, liquor stores and other retail outlets. MillerCoors wholly owns one distributorship, which handled less than 1% of its total volume in 2013.
Manufacturing, Production and Packaging
Brewing Raw Materials
MillerCoors uses the highest quality ingredients to brew its products. MillerCoors malts a portion of its production requirements, using barley purchased under yearly contracts from independent farmers located in the western United States. Other barley, malt, and cereal grains are purchased from suppliers primarily in the U.S. Hops are purchased from suppliers in the U.S., New Zealand and certain European countries. MillerCoors leases water rights, including leasing from MCBC for water usage in Colorado, to provide for and to sustain brewing operations in case of a prolonged drought in the regions for which it has operations. MillerCoors does not anticipate future difficulties in accessing water or agricultural products.
Brewing and Packaging Facilities
There are twelve brewery and packaging facilities which produce MillerCoors products. MillerCoors imports Molson brands and Worthington's from MCBC and Peroni Nastro Azzurro, Pilsner Urquell, Grolsch, and other import brands from SABMiller.
Packaging Materials
Over half of U.S. products sold were packaged in aluminum cans in 2013. A portion of aluminum cans were purchased from RMMC, a joint venture between MillerCoors and Ball Corporation ("Ball"), whose production facilities are located near MillerCoors' brewery in Golden, Colorado. In addition to the supply agreement with RMMC, MillerCoors has a supply agreement with Ball to purchase cans and ends in excess of what is supplied through RMMC. In 2011, MillerCoors signed a 10-year contract extension with Ball to extend the RMMC joint venture agreement along with the can and end purchase agreements. The contracts were renegotiated effective January 1, 2012 and both agreements expire December 31, 2021. Approximately one-third of U.S. products sold in 2013 were packaged in glass bottles, of which a portion was provided by RMBC, a joint venture between MillerCoors and Owens-Brockway Glass Container, Inc. ("Owens"). The joint venture with Owens, as well as a supply agreement with Owens for the glass bottles required in excess of RMBC's production, expires in 2015. The approximate remaining 10% of U.S. production volume sold in 2013 was packaged in half, quarter, and one-sixth barrel stainless steel kegs. A limited number of kegs are purchased each year, and there is no long-term supply agreement. Crowns, labels, corrugate and paperboard are purchased from a small number of sources unique to each product. MillerCoors does not foresee difficulties in accessing packaging products in the near future.
Contract Manufacturing
MillerCoors has an agreement to brew, package and ship products for Pabst Brewing Company through June 2020. Additionally, MillerCoors produces beer under contract for our Canada and MCI segments and SABMiller.
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Seasonality of the Business
MillerCoors U.S. sales volumes are normally lowest in the winter months (first and fourth quarters) and highest in the summer months (second and third quarters).
Known Trends and Competitive Conditions
2013 U.S. Beer Industry Overview
The beer industry in the United States is highly competitive, and the two largest brewers, ABI and MillerCoors together represented approximately 80% of the market in 2013. The formation of MillerCoors in 2008 created a stronger U.S. presence for MCBC with the scale, operational efficiency and distribution platform to compete more effectively in the U.S. market place. Growing or even maintaining market share has required significant investments in marketing. From 1998 to 2008, the U.S. beer industry shipments annual growth rate approximated 1%, compared with declines ranging from 1% to 2% in each of the years 2009, 2010 and 2011. With ideal weather conditions, industry volumes improved slightly in 2012, growing about 1%. However, in 2013 the industry saw a decline of approximately 1% to 2%.
The 2009 to 2011 and 2013 declines in the U.S. beer industry have been partially attributed to relatively poor economic conditions. High rates of unemployment, declining labor participation rates and lower consumer confidence have negatively affected the legal age key beer drinkers' purchasing behaviors. In addition, per capita beer consumption has declined as consumer preference shifts to higher alcohol, full calorie beers.
The following table summarizes the estimated percentage market share by volume of beer (including adjacencies, such as cider) and other alcoholic beverages as a component of the overall U.S. alcohol market over the last five years, for which data is currently available. We believe that 2013 data, when available, will reflect a continuation of the current consumer trends.
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
Beer | 52.8 | % | 53.2 | % | 54.4 | % | 55.1 | % | 56.0 | % | ||||
Other alcohol beverages | 47.2 | % | 46.8 | % | 45.6 | % | 44.9 | % | 44.0 | % | ||||
Our Competitive Position
The MillerCoors portfolio of beers competes with numerous above-premium, premium, and economy brands. These competing brands are produced by international, national, regional and local brewers. MillerCoors competes most directly with ABI, but also competes with imported and craft beer brands. MillerCoors is the nation's second largest brewer by volume, selling approximately 28% of the total 2013 U.S. brewing industry shipments (excluding exports and U.S. shipments of imports). This compares to ABI's estimated market share of 47%.
MillerCoors' products also compete with other alcohol beverages, including wine and spirits, and thus their competitive position is affected by consumer preferences between and among these other categories. Driven by increased spirits advertising along with increased wine and spirits sales execution, sales of wine and spirits have grown faster than sales of beer in recent years, resulting in a reduction in the beer segment's lead in the overall alcohol beverage market.
Regulation
The U.S. beer business is regulated by federal, state, and local governments. These regulations govern many parts of MillerCoors' operations, including brewing, marketing and advertising, transportation, distributor relationships, sales, and environmental issues. To operate their facilities, MillerCoors must obtain and maintain numerous permits, licenses and approvals from various governmental agencies, including the U.S. Treasury Department; Alcohol and Tobacco Tax and Trade Bureau; the U.S. Department of Agriculture; the U.S. Food and Drug Administration; state alcohol regulatory agencies; and state and federal environmental agencies.
Governmental entities also levy taxes and may require bonds to ensure compliance with applicable laws and regulations. In 2013, total excise taxes on malt beverages were $1,169.0 million, or approximately $16 per hectoliter sold. State excise taxes are levied in specific states at varying rates.
Europe Segment
As a result of our Acquisition of StarBev and combination of our historical U.K. and Central Europe segments, we are the second largest brewer by volume within the European countries in which we operate, with an approximate 21% market share (excluding factored products) in 2013. The majority of our European segment sales are in the U.K., Czech Republic, Serbia, Croatia, Romania, Bulgaria and Hungary. Our portfolio includes beers that have the largest share in their respective countries,
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such as Carling in the U.K., Jelen in Serbia, Kamenitza in Bulgaria and Ozujsko in Croatia. We have beers that rank in the top three in market share in countries throughout the region, including Staropramen and Borsodi. We also brew and distribute Stella Artois, Beck's, Lowenbrau and Spaten under license agreements with ABI companies. Additionally, our Europe segment includes our consolidated joint venture arrangements for the production and distribution of Grolsch and Cobra brands in the U.K. and the Republic of Ireland and factored brand sales (beverage brands owned by other companies, but sold and delivered to retail by us). Tradeteam Ltd. ("Tradeteam"), our previous joint venture arrangement with DHL (formerly Exel Logistics), provided for the distribution of products throughout the U.K. and was accounted for under the equity method of accounting. In December 2013, we terminated our existing distribution agreements with Tradeteam and concurrently entered into new agreements for the continued distribution of our products in the U.K. through 2023. The new agreements were entered into at more favorable rates, consistent with current market rates, and are expected to generate future cost savings. Subsequent to the execution of the new distribution agreements, we executed a sale and purchase agreement for the termination of the joint venture and sale of our 49.9% interest in Tradeteam to DHL. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for additional information. Additionally, we distribute the Modelo brands, including Corona, pursuant to a distribution agreement with Modelo. In conjunction with negotiations in November 2013 with ABI around our Modelo distribution agreements, ABI has agreed that we will continue to represent the Modelo brands in the U.K. through the end of 2014. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for additional information.
Sales and Distribution
In Europe, beer is generally distributed through either a two-tier system consisting of manufacturers and retailers, or a three-tier system consisting of manufacturers, distributors and retailers. Most of our beer in the U.K. is sold directly to retailers. It is also common in the U.K. for brewers to distribute beer, wine, spirits, and other products owned and produced by other companies to the on-premise channel (bars and restaurants). Approximately 17% of our Europe segment net sales in 2013 represented factored brands. Factored brand sales are included in our net sales and cost of goods sold, but are not included in our reported volumes.
Generally, over the years, volumes in Europe have shifted from the higher margin on-premise channel, where products are consumed in pubs and restaurants, to the lower margin off-premise channel, also referred to as the "take-home" market.
Off-Premise Channel
In Europe, the off-premise channel includes sales to supermarkets, convenience stores, liquor stores, distributors, and wholesalers. The off-premise channel accounted for approximately 60% of our Europe sales volume in 2013. The off-premise channel has become increasingly concentrated among a small number of super-store chains, placing increasing downward pressure on beer pricing.
On-Premise Channel
The on-premise channel includes sales to pubs and restaurants. The on-premise channel accounted for approximately 40% of our Europe sales volume in 2013. The installation and maintenance of draught beer dispensing equipment in the on-premise channel is generally the responsibility of the brewer. Accordingly, we own refrigeration units and other equipment used to dispense beer from kegs to consumers that are used in on-premise outlets. This includes beer lines, cooling equipment, taps, and counter mounts.
Similar to other brewers, we utilize loans in securing supply relationships with customers in the on-premise market in the U.K. These loans are normally granted at below-market rates of interest, with the outlet purchasing beer at lower-than-average discount levels to compensate. We reclassify a portion of sales revenue to interest income to reflect the economic substance of these loans. See Part II—Item 8 Financial Statements and Supplementary Data, Note 1, "Basis of Presentation and Summary of Significant Accounting Policies" of the Notes for additional information.
Distribution
Distribution activities for both the on-premise and off-premise channels are conducted primarily by third-party logistics providers. We utilize Tradeteam for these activities in the U.K. and several hundred third-party logistics providers across our Central European operations. We also conduct a small amount of secondary distribution in Czech Republic utilizing our own fleet of vehicles.
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Manufacturing, Production and Packaging
Brewing Raw Materials
We use the highest quality water, barley, malt and hops to brew our products. During 2013, our malt requirements were sourced from both owned production and third party suppliers. We produced 37% of our total required malt from our malt-house in the U.K., using barley sourced through two suppliers Frontier and Gleadell, with commitments until 2016 and 2014, respectively. We have also entered into long term contracts with two suppliers for an additional 50% of our required malt. These contracts are with Boortmalt and Malteries Soufflet and expire at the end of 2015 and 2020, respectively. The remaining 13% of our needs are purchased on a spot basis from various maltsters in the region. We do not currently anticipate future difficulties in accessing required barley and malt in the near term. Hops are purchased under various contracts with suppliers in Germany, the U.S. and the U.K., which cover our needs through 2015. Adjuncts are purchased under various contracts with local producers, which are typically crop year contracts commencing in October of each year. Water used in the brewing process is sourced from various wells and through water rights and supply contracts. We do not currently anticipate future difficulties in accessing required water or agricultural products in the near term.
Brewing and Packaging Facilities
We operate thirteen breweries in Europe, which brew and package all owned brands sold in Europe. See Item 2, "Properties" for additional information.
Packaging Materials
Approximately 31% of our Europe volumes sold in 2013 were packaged in bottles, with a significant majority in returnable bottles. We have contracts with five suppliers for bottles, of which the majority of the contracts expired at the end of 2013. We are currently negotiating long-term supply agreements for our bottle requirements and do not currently anticipate difficulty in resourcing our requirements in the near future. We used kegs and casks for approximately 28% of volume sold in Europe in 2013. A limited number of steel kegs are purchased each year, and we are currently negotiating the agreement for our steel keg requirements for 2014. Cans represented 23% of our Europe volumes sold in 2013. We have long term contracts with four providers for our required supply of cans. Approximately 18% of our Europe volume sold in 2013 consisted of products packaged in recyclable plastic containers for which we have one year agreements with various manufacturers in the region. Crowns, labels and corrugate are purchased from sources unique to each category. We do not currently foresee future difficulties in accessing these or other packaging materials in the near term.
Contract Manufacturing
We have a contract brewing and kegging agreement with Heineken whereby we produce and package the Foster's and Kronenbourg brands in the U.K. In December 2013, we entered into an agreement with Heineken to early terminate this arrangement. As a result of the termination, Heineken has agreed to pay us an aggregate early termination payment of GBP 13.0 million during and through the end of the transition period, concluding on April 30, 2015. We also have an agreement with Heineken whereby they sell, market and distribute Coors Light in the Republic of Ireland through December 2014. We expect that this will continue into 2015 and beyond, with negotiations currently on-going for a new contract. In addition, we have a five year agreement to contract brew ales for Carlsberg Group ("Carlsberg") which was entered into in 2011.
Seasonality of Business
In Europe, the beer industry is subject to seasonal sales fluctuations primarily influenced by holidays, weather and by certain major televised sporting events. Weather conditions consisting of high temperatures and extended periods of warm weather favor increased consumption of our products, while unseasonably cool or wet weather, especially during the summer months, adversely affects our sales volumes and net sales. Accordingly, the peak selling seasons typically occur during the summer and during the Christmas and New Year holiday season.
Known Trends and Competitive Conditions
2013 Europe Beer Industry Overview
We estimate that the Europe beer market declined by more than 3% in 2013, primarily driven by declines in the overall alcohol market, with volumes shifting from the higher margin on-premise channel to the lower margin off-premise channel. Since 2010, the off-premise market share has increased from 55% to 59% of total volume, and the on-premise market share has declined from 45% to 41%. Europe beer industry shipments have declined by approximately 1% in each of 2012 and 2011 after declines of approximately 7% in 2009 and increased by approximately 4% in 2010. These market fluctuations are consistent with the fluctuations within the overall alcohol market in each of the respective years.
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The following table summarizes the estimated percentage market share by volume of beer (including adjacencies, such as cider) and other alcoholic beverages as a component of the overall European alcohol market, within the countries in which we have production facilities, over the last five years, for which data is currently available. We believe that 2013 data, when available, will reflect a continuation of the current consumer trends.
2012 | 2011 | 2010 | 2009 | 2008 | ||||||||||
Beer | 35.7 | % | 35.3 | % | 35.1 | % | 35.6 | % | 37.4 | % | ||||
Other alcohol beverages | 64.3 | % | 64.7 | % | 64.9 | % | 64.4 | % | 62.6 | % | ||||
Our Competitive Position
Our beers compete not only with similar products from competitors, but also with other alcohol beverages, including wines, spirits, and ciders. With the exception of stout, where we do not have our own brand, we believe our brand portfolio gives us strong representation in all major beer categories.
In European countries where we operate, our principal competitors are Heineken, SABMiller, Carlsberg and ABI, with estimated regional market shares in 2013 of approximately 25%, 14%, 10%, and 7%, respectively, compared to our share of approximately 21%.
Regulation
Each country that is part of our Europe segment is either a member of the European Union ("EU") or a current candidate to join, with the exception of Bosnia, which is a potential current candidate, and, as such, there are similarities in the regulations that apply to many parts of our Europe segment's operations and products, including brewing, food safety, labeling and packaging, marketing and advertising, environmental, health and safety, employment and data protection regulations. To operate breweries and conduct our business in Europe, we must obtain and maintain numerous permits and licenses from various governmental agencies.
Each country's government levies excise taxes on all alcohol beverages. With the exception of Serbia, Montenegro and Bosnia, all countries' laws on excise taxes are consistent with the EU Directives. With the exception of Serbia, where a flat excise per hectoliter is used, all European countries use similar measurements based on either alcohol by volume or Plato degrees. Additionally, in 2010, the U.K. government announced that alcohol excise tax rates will increase at a rate of 2% above U.K. inflation annually through 2015, however, in March 2013, the U.K. government announced a reduction in beer excise tax of 2% for 2013 and cancelled the beer escalator for 2014 and replaced it with an increase of annual inflation thereafter. The 2% escalator above annual inflation is to remain in place for wine, cider and spirits. In 2013, the excise taxes for our Europe segment totaled $1,137.1 million, or approximately $54 per hectoliter.
Molson Coors International Segment
The objective of MCI is to grow and expand our business and brand portfolio in markets, including emerging markets, outside the U.S., Canada, U.K. and Central Europe. The focus of MCI includes Asia, continental Europe (excluding Central Europe, as it is a part of the Europe segment), Mexico, Latin America, the Caribbean (excluding Puerto Rico, as it is a part of the U.S. segment) and Australia.
Standalone Business
Our standalone operations are in the Asia region and are based in India, Japan and China.
Our consolidated joint venture in India gives us a 51% share and operational control of Molson Coors Cobra India ("MC Cobra India") which operates a brewery in the state of Bihar. MC Cobra India produces, markets and sells a beer portfolio consisting of King Cobra, Cobra and Iceberg 9000 in select Indian states.
In Japan, our focus is on the marketing and selling of the Zima, Coors Light, Blue Moon and Modelo brands. These brands are imported into Japan and are sold through independent wholesalers to both the on-premise and off-premise channels.
Our China business is focused on growing the Coors Light, Coors Extra, and Carling brands, which are produced under a contract brewing agreement in China. We market and sell these brands through independent wholesalers primarily in the on-premise channel. During the third quarter of 2012, we deconsolidated our 51% ownership in our joint venture in China, Molson Coors Si'hai ("MC Si'hai"), from our financial statements due to a loss of our ability to control the joint venture, and in December 2013, we finalized the sale of our interest in the investment to our former joint venture partner. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for additional information.
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Export Business
Our export business focuses on expanding the reach of our international brands which are exported from our breweries in the U.S., U.K. and Czech Republic. The brands sold include Staropramen, Coors Light, Carling, Cobra and Blue Moon.
In Latin America and the Caribbean, our products, primarily Coors Light, are sold through agreements with independent distributors. We also sell our brands, primarily Staropramen, in several countries in Western Europe. Additionally, in 2013, we introduced Coors and Blue Moon into Australia.
Beginning in fiscal year 2013, with the combination of our U.K. and Central Europe businesses, our Carling travel and export business is reported in our Europe segment. For periods prior to fiscal year 2013, this business was included within MCI.
License Business
Our license business builds long term partnerships with leading global brewers to market and grow our international brands in markets which typically have a greater barrier to entry. This business includes licensing arrangements with ABI to brew and distribute Staropramen in Russia and Ukraine and an exclusive licensing agreement with Heineken to brew and distribute Coors Light in Mexico. We also have various licensing agreements for the manufacturing and distribution of Carling primarily in Ukraine, Spain and Russia.
Corporate
Corporate includes interest and certain other general and administrative costs that are not allocated to any of the operating segments. The majority of these corporate costs relate to worldwide administrative functions, such as corporate affairs, legal, human resources, finance and accounting, treasury, tax, internal audit, insurance and risk management. Additionally, the results of our water resources and energy operations in Colorado are included in Corporate. Corporate also includes certain royalty income and administrative costs related to the management of intellectual property.
Other Information
Global Intellectual Property
We own trademarks on the majority of the brands we produce and have licenses for the remainder. We also hold several patent and design registrations with expiration dates through 2049 relating to beer dispensing systems, packaging and certain other innovations. We are not reliant on patent royalties for our financial success. Therefore, these expirations are not expected to have a significant impact on our business.
Corporate Responsibility
Corporate responsibility is integral to our business strategy. We are committed to sustainable growth while improving the impact we have on our communities, people and the environment. In 2013 and 2012, we were named Global Beverage Sector Leader on the Dow Jones Sustainability World Index. We were listed on the Dow Jones Sustainability North America Index in 2013 and 2011. Additionally, we were selected for inclusion in the RobecomSAM's Sustainability Yearbook 2014 and have received the Industry Leader and Gold Class distinction for our sustainability performance.
Environmental Matters
Our operations are subject to a variety of extensive and changing federal, state and local environmental laws, regulations and ordinances that govern activities or operations that may have adverse effects on human health or the environment. Such laws, regulations or ordinances may impose liability for the cost of remediation, and for certain damages resulting from sites of past releases of hazardous materials. Our policy is to comply with all such legal requirements. While we cannot predict our eventual aggregate cost for the environmental and related matters in which we may be or are currently involved, we believe that any payments, if required, for these matters would be made over a period of time in amounts that would not be material in any one year to our operating results, cash flows, or our financial or competitive position. We believe adequate reserves have been provided for losses that are probable and estimable. However, there can be no assurance that environmental laws will not become more stringent in the future or that we will not incur material costs in the future in order to comply with such laws. See Part II—Item 8 Financial Statements and Supplementary Data, Note 19, "Commitments and Contingencies" of the Notes under the caption "Environmental" for additional information regarding environmental matters.
Employees
As of the end of 2013, we have approximately 9,250 full-time employees within MCBC globally, including 2,600 within our Canada segment, 6,000 employees within our Europe segment throughout Czech Republic, Serbia, Croatia, Romania,
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Bulgaria, Hungary, Montenegro, Bosnia-Herzegovina, Slovakia, the U.K. and the Republic of Ireland, 450 employees within our MCI segment in 13 countries, and 200 employees in our Corporate headquarters in Colorado. Additionally, MillerCoors has approximately 8,400 employees.
Financial Information about Foreign and Domestic Operations and Export Sales
See Part II—Item 8 Financial Statements and Supplementary Data, Note 4, "Segment Reporting" of the Notes for discussion of sales, operating income and identifiable assets attributable to our country of domicile, the United States, and all foreign countries.
Available Information
We file with or furnish to the SEC reports, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934. These reports are available free of charge on our corporate website (www.molsoncoors.com) as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. Copies of any materials we file with the SEC can be obtained at www.sec.gov or at the SEC's public reference room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the public reference room is available by calling the SEC at 1-800-SEC-0330. The foregoing website addresses are provided as inactive textual references only. The information provided on our website (or any other website referred to in this report) is not part of this report and is not incorporated by reference as part of this report.
Executive Officers
The following tables set forth certain information regarding our executive officers as of February 14, 2014:
Name | Age | Position | ||
Peter Swinburn | 61 | President, Chief Executive Officer, and a Director of MillerCoors LLC | ||
Krishnan Anand | 56 | President and Chief Executive Officer of Molson Coors International | ||
Peter H. Coors | 67 | Chairman of the Board of the Company, Executive Director of Coors Brewing Company, and Chairman of the Board of MillerCoors LLC | ||
Stewart Glendinning | 48 | President and Chief Executive Officer of Molson Coors Canada | ||
Gavin Hattersley | 51 | Chief Financial Officer, Chief Accounting Officer and a Director of MillerCoors LLC | ||
Mark Hunter | 51 | President and Chief Executive Officer of Molson Coors Europe | ||
Celso White | 52 | Chief Supply Chain Officer and a Director of MillerCoors LLC | ||
Samuel D. Walker | 55 | Chief People and Legal Officer, Corporate Secretary, and a Director of MillerCoors LLC | ||
ITEM 1A. RISK FACTORS
The reader should carefully consider the following risk factors and the other information contained within this document. The risks set forth below are those that management believes are most likely to have a material adverse effect on us. We may also be subject to other risks or uncertainties not presently known to us. If any of the following risks or uncertainties actually occurs, it may have a material adverse effect on our business, results of operations and prospects.
Risks Specific to Our Company
Competition in our markets could require us to reduce prices or increase capital and other expenditures or cause us to lose sales volume, any of which could have a material adverse effect on our business and financial results. In most of our markets, our primary competitors have substantially greater financial, marketing, production and distribution resources than we do, and are more diverse in terms of their geographies and brand portfolios. In all of the markets in which we operate, aggressive marketing strategies, such as reduced pricing, brand positioning, and increased capital investments by these competitors could have a material adverse effect on our business and financial results. In addition, continuing consolidation among major global brewers may lead to stronger or new competitors, loss of partner brands, negative impacts on our distributor networks and predatory marketing and pricing tactics by competitors. Further, distributor consolidation could have a long-term material adverse effect on our business by diminishing our ability to promote our brands in the market in a manner that enhances rather than diminishes their value, as well as reducing our ability to manage our pricing effectively, which could have a material adverse effect on our business and financial results. These factors could result in lower margins or loss of market share, due to increased pressures for reduced pricing or difficulties in increasing prices while remaining competitive
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within our markets, as well as the need for increased capital investment, marketing and other expenditures. Moreover, several of our major markets are mature, so growth opportunities may be more limited to us than to our competitors.
Our success as an enterprise depends largely on the success of relatively few products in several mature markets specific to the beer industry; if consumer preferences shift away from our products or consumption of our products decline, our business and financial results could be materially adversely affected. Our Molson Canadian and Coors Light brands in Canada, Miller Lite and Coors Light brands in the U.S., and Carling, Jelen, Staropramen, and Ozujsko brands in Europe represented more than half of each respective segment's sales in 2013. Additionally, several of our brands represent a significant share of their respective market, therefore volatility in these markets could disproportionately impact the performance of these brands. Consequently, any material shift in consumer preferences away from these brands, or from the categories in which they compete, could have a material adverse effect on our business and financial results. Consumer preferences and tastes may shift away from our brands or beer generally due to, among others, changing taste preferences, demographics, downturn in economic conditions or perceived value, as well as changes in consumers' perception of our brands due to negative publicity, regulatory actions or litigation. Additionally, in our major markets there has been a recent shift in consumer preferences within the total beer market away from premium brands to "craft beer" produced by small, regional microbreweries, as well as a shift within the total alcohol market from beer to wine and spirits. Moreover, several of our major markets are mature and we have significant share, therefore small movements in consumer preference can disproportionately impact our results. As a result, a shift in consumer preferences away from our products could result in a material adverse impact on our business and financial results.
Continued weak, or further weakening of, economic conditions in the markets in which we do business could have a material adverse impact on our business and financial results. Beer consumption in many of our markets is closely tied to general economic conditions and a significant portion of our brand portfolio consists of premium and above premium brands. Difficult macroeconomic conditions in our markets, such as decrease in per capita income and level of disposable income driven by increases to inflation, income taxes, the cost of living, unemployment levels, political or economic instability or other country specific factors could have an adverse effect on the demand for our products.
If the Pentland Trust and the Coors Trust do not agree on a matter submitted to stockholders, generally the matter will not be approved, even if beneficial to us or favored by other stockholders. Pentland Securities (1981) Inc. (the "Pentland Trust") (a company controlled by the Molson family and related parties) and the Adolph Coors, Jr. Trust (the "Coors Trust"), which together control more than ninety percent of our Class A common stock and Class A exchangeable shares, have voting trust agreements through which they have combined their voting power over the shares of our Class A common stock and the Class A exchangeable shares that they own. In the event that these two stockholders do not agree to vote in favor of a matter submitted to a stockholder vote (other than the election of directors), the voting trustees are required to vote all of the Class A common stock and Class A exchangeable shares deposited in the voting trusts against the matter. There is no other mechanism in the voting trust agreements to resolve a potential deadlock between these stockholders. Therefore, if either the Pentland Trust or the Coors Trust is unwilling to vote in favor of a proposal that is subject to a stockholder vote, we would be unable to implement the proposal even if our board of directors, management or other stockholders believe the proposal is beneficial to us. Similarly, our bylaws require the authorization of a super-majority (two-thirds) of the board of directors to take certain transformational actions. Thus it is possible that the Company will not be authorized to take action even if it is supported by a simple majority of the board of directors.
The interests of the controlling stockholders may differ from those of other stockholders and could prevent the Company from making certain decisions or taking certain actions that would be in the best interest of the other stockholders. Our Class B common stock has fewer voting rights than our Class A common stock and holders of our Class A common stock have the ability to effectively control or have a significant influence over certain company actions requiring stockholder approval, which could have a material adverse impact on Class B stockholders.
Poor investment performance of pension plan holdings and other factors impacting pension plan costs could unfavorably impact our business, liquidity and our financial results. Our costs of providing defined benefit pension plans are dependent upon a number of factors, such as the rates of return on the plans' assets, discount rates, the level of interest rates used to measure the required minimum funding levels of the plans, exchange rate fluctuations, future government regulation, global equity prices, and our required and/or voluntary contributions to the plans. While we comply with the minimum funding requirements, we have certain qualified pension plans with obligations which exceed the value of the plans' assets. These funding requirements may also require contributions even when there is no reported deficit. Without sustained growth in the pension investments over time to increase the value of the plans' assets, and depending upon the other factors as listed above, we could be required to fund the plans with significant amounts of cash. Such cash funding obligations could have a material adverse impact on our cash flows, credit rating and cost of borrowing, financial position and/or results of operations.
We rely on a small number of suppliers to obtain the packaging we need to operate our business. The inability to obtain materials could unfavorably affect our ability to produce our products. We purchase certain types of packaging
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materials including aluminum cans and bottles, glass bottles and paperboard from a small number of suppliers. Consolidation of the packaging materials suppliers has reduced local supply alternatives and increased risks of supply disruptions. The inability of any of these suppliers to meet our production requirements without sufficient time to develop an alternative source could have a material adverse effect on our business and financial results.
Termination of one or more manufacturer/distribution agreements could have a material adverse effect on our business and financial results. We manufacture and/or distribute products of other beverage companies through various joint ventures, licensing, distribution, contract brewing or other arrangements. The loss of one or more of these arrangements, as a result of industry consolidation or otherwise, could have a material adverse effect on our business and financial results. For example, subsequent to ABI's acquisition of Grupo Modelo, we entered into an agreement to accelerate the termination of our MMI joint venture that imports, distributes and markets the Modelo beer brand portfolio across all Canadian provinces and territories, which, when consummated, will have an adverse impact on our Canadian volumes. Additionally, Miller Brewing Company (“Miller”) has notified us of its intent to terminate the license agreement between Miller and us in Canada, which, if the termination is upheld or the parties fail to resolve the dispute through negotiation, could have an adverse impact on our Canadian volumes. Further, Tradeteam exclusively handles all of the physical distribution for our products in the U.K., except where a different distribution system is requested by a customer. If Tradeteam were unable to continue distribution of our products and we were unable to find a suitable replacement in a timely manner, we could experience significant disruptions in our U.K. operations that could have an adverse financial impact to our business and financial results.
Changes in tax, environmental or other regulations or failure to comply with existing licensing, trade and other regulations could have a material adverse effect on our business and financial results. Our business is highly regulated by federal, state, provincial and local laws and regulations in various countries regarding such matters as licensing requirements, trade and pricing practices, labeling, advertising, promotion and marketing practices, relationships with distributors, environmental matters, smoking bans at on-premise locations and other matters. These laws and regulations are subject to frequent re-evaluation, varying interpretations and political debate and inquiries from government regulators charged with their enforcement. Examples of this are the recent changes in the Canadian tax legislation and U.K. statutory tax rate increases. Failure to comply with existing laws and regulations or changes in these laws and regulations or in tax, environmental, excise tax levels imposed or any other laws or regulations could result in the loss, revocation or suspension of our licenses, permits or approvals and could have a material adverse effect on our business, financial condition and results of operations. Additionally, uncertainties exist with respect to the interpretation of complex tax regulations and the amount and timing of future taxable income. Given the wide range of international business relationships and the long-term nature and complexity of existing contractual agreements, differences arising between the actual results and assumptions made, or future changes to such assumptions, could necessitate future adjustments to tax income and expense already recorded. Finally, advocates of prohibition and other severe restrictions on the marketing and sales of alcohol are becoming increasingly organized on a global basis, seeking to impose regulations or to bring actions against us, to curtail substantially the consumption of alcohol, including beer, in developed and developing markets. To the extent such views gain traction in regulations where we do or plan to do business, they could have a material adverse impact on our business and financial results.
Our consolidated financial statements are subject to fluctuations in foreign exchange rates, most significantly the Canadian dollar and the European operating currencies such as, but not limited to, British Pound, Euro, Czech Koruna, Croatian Kuna, Serbian Dinar, New Romanian Leu, Bulgarian Lev and Hungarian Forint. We hold assets and incur liabilities, earn revenues and pay expenses in different currencies, most significantly in Canada and throughout Europe. Because our financial statements are presented in U.S. Dollars ("USD"), we must translate our assets, liabilities, income and expenses into USD. Increases and decreases in the value of the USD will affect, perhaps adversely, the value of these items in our financial statements, even if their local currency value has not changed. Additionally, we are exposed to currency transaction risks related to transactions denominated in currencies other than one of the functional currencies of our operating entities, such as the purchase of certain raw material inputs or capital expenditures, as well as sales transactions and debt issuances or other incurred obligations. Further, certain actions by the government of any of the countries in which we operate could adversely affect our results and financial position. To the extent that we fail to adequately manage these risks through our risk management policies intended to protect our exposure to currency movements, including if our hedging arrangements do not effectively or completely hedge changes in foreign currency rates, our results of operations may be materially and adversely impacted.
Our operations face significant exposure to changes in commodity prices, which could materially and adversely affect our business and financial results. We use a large volume of agricultural and other raw materials, some of which are purchased through supply contracts with third parties, to produce our products, including barley, malted barley, hops, corn, other various starches, water and packaging materials, including aluminum cans and bottles, glass and polyethylene terephthalate (“PET”) containers, as well as, cardboard and other paper products. We also use a significant amount of diesel fuel, natural gas and electricity in our operations. The supply and price of these raw materials and commodities can be affected by a number of factors beyond our control, including market demand, alternative sources for suppliers, global geopolitical
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events (especially as to their impact on crude oil prices and the resulting impact on diesel fuel prices), frosts, droughts and other weather conditions, economic factors affecting growth decisions, inflation, plant diseases and theft. To the extent any of the foregoing factors affect the prices of ingredients or packaging or our hedging arrangements do not effectively or completely hedge changes in commodity price risks and we are not able to pass these increased costs along to customers, our financial results could be materially adversely impacted.
The success of our business relies heavily on brand image, reputation, product quality and protection of intellectual property. It is important that we maintain and increase the image and reputation of our existing products. Concerns about product quality, even when unsubstantiated, could be harmful to our image and reputation of our products. Deterioration to our brand equity may be difficult to combat or reverse and could have a material effect on our business and financial results. In addition, because our brands carry family names, personal activities by certain members of the Molson or Coors families that harm their public image or reputation could have an adverse effect on our brands. Further, the success of our Company is dependent on our ability to protect our intellectual property rights, including trademarks, patents, domain names, trade secrets and know-how. We cannot be certain that the steps we have taken to protect our intellectual property rights will be sufficient or that third parties will not infringe upon or misappropriate these rights. If we are unable to protect our intellectual property rights, it could have a material adverse effect on our business and financial results.
Due to a high concentration of unionized workers in Canada, the United Kingdom, and at MillerCoors in the U.S., we could be significantly affected by labor strikes, work stoppages or other employee-related issues. Approximately 60%, 36% and 26% of our Canadian, MillerCoors and U.K. workforces, respectively, are represented by trade unions. In addition, a number of our Central European employees are represented by trade councils. Stringent labor laws in the U.K. expose us to a greater risk of loss should we experience labor disruptions in that market. A labor strike, work stoppage or other employee-related issue could have a material adverse effect on our business and financial results.
Changes to the regulation of the distribution systems for our products could adversely impact our business and financial results. In our U.S. market, there is a three-tier distribution system that has historically applied to the distribution of products sold through MillerCoors (including our non-U.S. products). That system is increasingly subject to the legal challenges on the basis that it allegedly interferes with interstate commerce. To the extent that such challenges are successful and require changes to the three-tier system, such changes could have a materially adverse impact on MillerCoors and, consequently, MCBC. Further, in Canada, our products are required to be distributed through each province's respective provincial liquor board. Additionally, in certain provinces, we rely on our joint venture arrangements, such as BRI in Ontario and BDL in the Western provinces, to distribute our products via retail outlets that are mandated and regulated by provincial government regulators. If provincial regulation should change, the costs to adjust our distribution methods could have a material adverse impact on our business and financial results.
Changes in various supply chain standards or agreements could have a material adverse impact on our business and financial results. Our business includes various joint venture and industry agreements which standardize parts of the supply chain system. An example includes our warehousing and customer delivery systems organized under joint venture agreements with other brewers. Any negative change in these agreements could have a material adverse impact on our business and financial results.
Because of our reliance on third-party service providers and internal and outsourced systems for our information technology and certain other administrative functions, we could experience a disruption to our business. We rely exclusively on information services providers worldwide for our information technology functions including network, help desk, hardware and software configuration. We also have outsourced a significant portion of work associated with our finance and accounting, human resources and other information technology functions to third-party service providers. If one of these service providers was to fail and we were unable to find a suitable replacement in a timely manner, we could be unable to properly administer our outsourced functions. Additionally, our internal and outsourced systems may also be the target of outside parties attempting to breach our security, which, if successful, could expose us to the loss of key business or employee information and disruption of our operations.
We may incur impairments of the carrying value of our goodwill and other intangible assets. In connection with various business combinations, we have allocated material amounts of the related purchase prices to goodwill and other intangible assets that are considered to have indefinite useful lives. These assets are tested for impairment at least annually, using estimates and assumptions affected by factors such as economic and industry conditions and changes in operating performance. Additionally, in conjunction with the brand impairment tests, we also reassess each brand's indefinite-life classification. Potential resulting charges from an impairment of goodwill or brand intangible, as well as reclassification of an indefinite-lived to a definite-lived brand intangible, could have a material adverse impact on our results of operations. Our most recent impairment analysis, conducted as of June 30, 2013, the first day of our third quarter, indicated that the fair value of our Europe and Canada reporting units were close to failing step one of the goodwill impairment test. The fair value of the Europe and Canada reporting units were estimated at approximately 11% and 16% in excess of their carrying values, respectively. In
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addition, we determined that the fair value of our Jelen and Ostravar indefinite-lived brand intangible assets within our Europe segment were below their respective carrying values as of June 30, 2013. As a result, we recorded an aggregate impairment charge of $150.9 million recorded within special items in our consolidated statements of operations during the third quarter of 2013. The aggregate fair value of the Jelen, Ozujsko and Branik indefinite-lived brands in Europe, at the valuation date, was estimated at approximately 1% in excess of the aggregate carrying value. Further, the fair value of the Molson core brands was estimated at approximately 10% in excess of its carrying value. The Europe and Canada reporting units, and the Jelen, Ozujsko and Branik brands in Europe and Molson core brands in Canada, are therefore at risk of a future impairment in the event of significant unfavorable changes in the forecasted cash flows (including significant delays in projected macroeconomic recovery or prolonged adverse economic conditions), terminal growth rates, market transaction multiples and/or weighted-average cost of capital utilized in the discounted cash flow analysis. We have also identified risks related to the possible termination of our license agreement with Miller in Canada, which resulted in an impairment of our related definite-lived intangible asset during the fourth quarter 2013. Additionally, the results of our annual testing determined that the indefinite-life classification could no longer be supported for the Ostravar brand. The Ostravar brand has therefore been reclassified as a definite-lived intangible asset and the remaining fair value of the asset will be amortized over its estimated remaining life. Any future impairment of the Jelen, Ozujsko, Branik, Molson or other brands, or reclassification of additional brands from indefinite-lived to definite-lived, may result in material charges that could have a material adverse impact on our business and financial results.
Climate change and water availability may negatively affect our business and financial results. There is concern that a gradual increase in global average temperatures could cause significant changes in weather patterns around the globe and an increase in the frequency and severity of natural disasters. While warmer weather has historically been associated with increased sales of beer, changing weather patterns could result in decreased agricultural productivity in certain regions which may limit availability or increase the cost of key agricultural commodities, such as hops, barley and other cereal grains, which are important ingredients for our products. Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. In addition, public expectations for reductions in greenhouse gas emissions could result in increased energy, transportation and raw material costs and may require us to make additional investments in facilities and equipment. As a result, the effects of climate change could have a long-term, material adverse impact on our business and financial results. Clean water is a limited resource in many parts of the world and climate change may increase water scarcity and cause a deterioration of water quality in areas where we maintain brewing operations. The competition for water among domestic, agricultural and manufacturing users is increasing in some of our brewing communities. Even where water is widely available, water purification and waste treatment infrastructure limitations could increase costs or constrain our operations.
Failure to successfully identify, complete or integrate attractive acquisitions and joint ventures into our existing operations could have an adverse impact on our business and financial results. We have made a number of acquisitions and entered into several joint ventures. In order to compete in the consolidating global brewing industry, we anticipate that we may, from time to time, in the future acquire additional businesses or enter into additional joint ventures that we believe would provide a strategic fit with our business. Potential issues associated with acquisitions and joint ventures could include, among other things: our ability to identify attractive acquisitions and joint ventures; our ability to offer potential acquisition targets and joint ventures competitive transaction terms; our ability to realize the benefits or cost savings that we expect to realize as a result of the acquisition or joint venture; diversion of management's attention; our ability to successfully integrate our businesses with the business of the acquired company; motivating, recruiting and retaining key employees; conforming standards, controls, procedures and policies, business cultures and compensation structures among our company and the acquired company; consolidating and streamlining sales, marketing and corporate operations; potential exposure to unknown liabilities of acquired companies; loss of key employees and customers of the acquired business; and managing tax costs or inefficiencies associated with integrating our operations following completion of an acquisition or entry into a joint venture. If an acquisition or joint venture is not successfully completed or integrated into our existing operations, our business and financial results could be materially adversely impacted.
Risks associated with operating our joint ventures may materially adversely affect our business and financial results. We have entered into several joint ventures, including our MillerCoors joint venture in the United States and Puerto Rico with SABMiller. We may enter into additional joint ventures in the future. Our joint venture partners may at any time have economic, business or legal interests or goals that are inconsistent with our goals or with the goals of the joint venture. In addition, we compete against our joint venture partners in certain of our other markets. Disagreements with our business partners may impede our ability to maximize the benefits of our partnerships and could have a material adverse effect on our business and financial results. Our joint venture arrangements may require us, among other matters, to pay certain costs or to make certain capital investments or to seek our joint venture partner's consent to take certain actions. In addition, our joint venture partners may be unable or unwilling to meet their economic or other obligations under the operative documents, and we may be required to either fulfill those obligations alone to ensure the ongoing success of a joint venture or to dissolve and liquidate a joint venture. For example, in December 2013 we sold our interest in our MC Si'hai joint venture in China, following the failure of our partner to meet its obligations in 2012. Additionally, we have entered into an agreement to
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accelerate the termination of our MMI joint venture that imports, distributes and markets the Modelo beer brand portfolio across all Canadian provinces and territories, which, when consummated, will have an adverse impact on our Canadian volumes and financial results.
We depend on key personnel, the loss of whom would harm our business. The loss of the services and expertise of any key employee could harm our business. Our future success depends on our ability to identify, attract and retain qualified personnel on a timely basis. Turnover of senior management can adversely impact our stock price, our results of operations and our client relationships and may make recruiting for future management positions more difficult. In addition, we must successfully integrate any new management personnel that we hire within our organization, or who join our organization as a result of an acquisition, in order to achieve our operating objectives, and changes in other key management positions may temporarily affect our financial performance and results of operations as new management becomes familiar with our business.
Our operations outside of North America and the U.K. expose us to additional risks which could harm our business and financial results. We expect our operations outside of North America and the U.K. to become more significant to our operating results as we continue to further expand internationally. In certain of these markets, we have limited operating experience and may not succeed. In addition to risks described elsewhere in this section, our operations in these markets expose us to additional risks, including: changes in local political, economic, social and labor conditions; restrictions on foreign ownership and investments; repatriation of cash earned in countries outside the U.S.; import and export requirements; increased costs to ensure compliance with complex foreign laws and regulations; currency exchange rate fluctuations; a less developed and less certain legal and regulatory environment, which among other things can create uncertainty with regard to liability issues; longer payment cycles, increased credit risk and higher levels of payment fraud; and other challenges caused by distance, language, and cultural differences.
In addition, as a global company, we are subject to foreign and U.S. laws and regulations designed to combat governmental corruption, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act. Violations of these laws and regulations could result in fines and penalties, criminal sanctions against us, our officers, or our employees, prohibitions on the conduct of our business and on our ability to offer our products and services in one or more countries and a materially negative impact on our brands and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these foreign and U.S. laws and regulations, including the U.S. Foreign Corrupt Practices Act and the U.K. Bribery Act, there can be no assurance that our employees, business partners or agents will not violate our policies.
Loss of a major brewery or other key facility, due to unforeseen or catastrophic events or otherwise, could have a material adverse impact on our business and financial results. Our business and financial results could be materially adversely impacted by physical risks such as earthquakes, hurricanes, floods, other natural disasters or catastrophic events that damage or destroy one of our breweries or key facilities or the key facilities of our suppliers. Additionally, certain catastrophes are not covered by our general insurance policies, which could result in significant unrecoverable losses. In addition, our business and results of operations could be adversely impacted by under-investment in physical assets or production capacity, including contract brewing and effect on priority of MCBC brands if production capacity is limited.
Failure to comply with our debt covenants or a deterioration in our credit rating could have an adverse effect on our ability to obtain future financing at competitive rates and/or our ability to refinance our existing indebtedness. Under the terms of each of our debt facilities, we must comply with certain restrictions. These include restrictions on priority indebtedness (certain threshold percentages of secured consolidated net tangible assets), leverage thresholds, liens, and restrictions on certain types of sale lease-back transactions and transfers of assets. Failure to comply with these restrictions or maintain our credit rating may result in issues with our current financing structure and potential future financing requirements. A deterioration in our credit rating could also affect our ability to obtain future financing or refinance our current debt, as well as increase our borrowing rates, which could have an adverse impact on our business and financial results.
Risks Specific to the Canada Segment
We may experience adverse impacts to our Canada business and financial results due to declines in the overall Canadian beer industry, continued price discounting, increased cost of goods sold and higher taxes. If the Canadian beer market continues to decline, the impact to our financial results could be exacerbated due to our significant share of the overall market. Additionally, continuation, acceleration or the increase of price discounting, in Ontario, Québec, Alberta or other provinces, as well as increases in our cost of goods sold, could adversely impact our business. Further, changes in the Canadian tax legislation, such as the recent increase in beer excise taxes in Quebec, could decrease our net sales. Moreover, the future success and earnings growth of the Canada business depends, in part, on our ability to efficiently conduct our operations. Failure to generate significant cost savings and margin improvement through our ongoing initiatives could adversely affect our profitability.
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In the event that we are required to move away from the industry standard returnable bottle we use today, we may incur unexpected losses. Along with ABI and other brewers in Canada, we currently use an industry standard returnable bottle which represents more than 43% of total volume sales (excluding imports) in Canada. Changes to the Industry Standard Bottle Agreement could impact our use of the industry standard returnable bottle. If we cease to use the industry standard returnable bottle, our current bottle inventory and a portion of our bottle packaging equipment could become obsolete and could result in a material write-off of these assets.
Risks Specific to the United States Segment and MillerCoors
We do not fully control the operations and administration of MillerCoors, which represents our interests in the U.S. beer business. We jointly control MillerCoors with SABMiller and hold a 42% economic interest in the joint venture. While we direct the MillerCoors business through our equal representation on its board of directors (along with SABMiller) and otherwise impact its business activities through our ongoing communication and oversight, MillerCoors’ management is responsible for the day-to-day operation of the business. As a result, we do not have full control over MillerCoors’ activities. Our results of operations are dependent upon the efforts of MillerCoors management, our ability to govern the joint venture effectively with SABMiller and factors beyond our control that may affect SABMiller. Additionally, our disclosure controls and procedures with respect to MillerCoors are necessarily substantially more limited than those we maintain with respect to our consolidated subsidiaries. Each party to the MillerCoors joint venture agreed not to transfer its economic or voting interests in the joint venture for a period of five years from July 1, 2008. With the expiration of the restriction in 2013, both parties to the joint venture are now able to transfer their economic and voting interest. Certain rights of first refusal will apply to any assignment of such interests. Any transfer of ownership interest could have a significant impact on our results of operations and financial position, as well as our ongoing internal and external business relationships.
MillerCoors is highly dependent on independent distributors in the United States to sell its products, with no assurance that these distributors will effectively sell its and our products. MillerCoors sells all of its products and our non-U.S. products in the United States to distributors for resale to retail outlets and the regulatory environment of many states makes it very difficult to change distributors. Consequently, if MillerCoors is not allowed or is unable to replace unproductive or inefficient distributors, its business, financial position and results of operation may be adversely affected, which could have a material adverse effect on our business and financial results.
Risks Specific to the Europe Segment
We may not recognize the benefits of the Acquisition. We may not realize the expected benefits of the Acquisition because of integration difficulties and other challenges. The long-term success of the Acquisition will depend, in part, on our ability to realize all or some of the anticipated synergies and other benefits from integrating Central Europe's business with our existing businesses. The integration process may be complex, costly and time-consuming.
The difficulties of recognizing the potential benefits of the Acquisition include, among others:
• | failure to implement our business plan for the combined business; |
• | unanticipated issues in integrating manufacturing, logistics, information, procurement, communications and other systems; |
• | possible inconsistencies in standards, controls, procedures and policies, and compensation structures between |
Central Europe's structure and our structure;
• | failure to retain key customers and suppliers; |
• | unanticipated changes in applicable laws and regulations; |
• | operating risks inherent in Central Europe's business and our business; |
• | unanticipated issues, expenses and liabilities. |
We may not be able to maintain the levels of revenue, earnings or operating efficiency that each of Molson Coors and Central Europe had achieved or might achieve separately. In addition, we may not accomplish the integration of Central Europe's business smoothly, successfully or within the anticipated costs or timeframe. Moreover, the markets in which Central Europe operates may not experience the growth rates expected and any further economic downturn affecting Europe could negatively impact Central Europe's business. These markets are in differing stages of development and may experience more volatility than expected or face more operating risks than in the more mature markets in which Molson Coors has historically operated. If we experience difficulties with the integration process or if the Central Europe business or the markets in which it operates deteriorate, the anticipated cost savings, growth opportunities and other synergies of the Acquisition may not be realized fully, or at all, or may take longer to realize than expected. In such case, our business and financial results may be materially adversely impacted.
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Economic trends and intense competition in European markets could unfavorably impact our profitability. Our European businesses have been and may continue to be adversely affected by conditions in the global financial markets and economic and political conditions generally. As a result of our annual impairment testing, we determined that the fair value of our Jelen and Ostravar indefinite-lived brand intangible assets were below their respective carrying values as of June 30, 2013. As a result, we recorded an impairment charge in the third quarter of 2013. The decline in fair value of these brands was due, in part, to the continued weakening of the current macro-economic environment in certain European markets. Our impairment testing also indicated risk of additional future impairments of Jelen and other indefinite-lived intangible brands sold in these markets. Additionally, we face intense competition in certain of our European markets, particularly with respect to price, which could lead to reduced sales or profitability. In particular, the on-going focus by large competitors in Europe to drive increased market share through aggressive pricing strategies could adversely affect our sales and results of operations. In addition, in recent years, beer volume sales in Europe have been shifting from pubs and restaurants (on-premise) to retail stores (off-premise), for the industry in general. Margins on sales to off-premise customers tend to be lower than margins on sales to on-premise customers, and, as a result, continuation or acceleration of these trends would further adversely impact our profitability.
In the event that a significant pub chain was to go bankrupt, or experience similar financial difficulties, our business and financial results could be materially adversely impacted. We extend credit to pub chains in the U.K., and in some cases the amounts are significant. The continuing challenging economic environment in the U.K. has caused business at on-premise outlets to decrease since late 2008, and some pub chains may face increasing financial difficulty, if economic conditions do not improve. In the event that one or more significant pub chains were to be unable to pay amounts owed to us as a result of bankruptcy or similar financial difficulties, our business and financial results could be materially adversely impacted.
Risks Specific to the Molson Coors International Segment
An inability to expand our operations in emerging markets could adversely affect our growth prospects. Our ability to grow our MCI segment in emerging markets depends on social, economic and political conditions in those markets and on our ability to create effective product distribution networks and consumer brand awareness in new markets. Due to product price, local competition from competitors that are larger and have more resources than we do and cultural differences, there is no assurance that our products will be accepted in any particular emerging market. If we are unable to expand our businesses in emerging markets, our growth prospects could be adversely affected.
Risks Specific to Our Discontinued Operations
Indemnities provided to the purchaser of 83% of the Cervejarias Kaiser Brasil S.A. ("Kaiser") business in Brazil could result in future cash outflows and statement of operations charges. In 2006, we sold our 83% ownership interest in Kaiser to FEMSA Cerveza S.A. de C.V. ("FEMSA"). The terms of the sale agreement require us to indemnify FEMSA for exposures related to certain tax, civil and labor contingencies and certain purchased tax credits. The ultimate resolution of these claims is not under our control. These indemnity obligations are recorded as liabilities on our consolidated balance sheets, however, we could incur future statement of operations charges as facts further develop resulting in changes to our estimates or changes in our assessment of probability of loss on these items as well as due to fluctuations in foreign exchange rates. Due to the uncertainty involved in the ultimate outcome and timing of these contingencies, significant adjustments to the carrying value of our indemnity liabilities and corresponding statement of operations charges/credits could result in the future.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
As of December 31, 2013, our major facilities were owned (unless otherwise indicated) and are as follows:
Facility | Location | Character | ||
Canada Segment | ||||
Administrative offices | Montréal, Québec | Corporate Headquarters | ||
Toronto, Ontario | Canada Segment Headquarters | |||
Vancouver, British Columbia | Granville Island Brewing Head Office | |||
Brewery/packaging plants | Creemore, Ontario | Brewing and packaging | ||
Moncton, New Brunswick | Brewing and packaging | |||
Montréal, Québec(1) | Brewing and packaging | |||
St John's, Newfoundland | Brewing and packaging | |||
Toronto, Ontario(1) | Brewing and packaging | |||
Vancouver, British Columbia(2) | Brewing and packaging | |||
Distribution warehouses | Québec Province(3) | Distribution centers | ||
Rest of Canada(4) | Distribution centers | |||
Europe Segment | ||||
Administrative offices | Prague, Czech Republic | Europe Segment Headquarters | ||
Brewery/packaging plants | Alton Brewery, Hampshire, U.K.(1) | Brewing and packaging | ||
Apatin, Serbia(1) | Brewing and packaging | |||
Bőcs, Hungary | Brewing and packaging | |||
Burton-on-Trent, Staffordshire, U.K.(1) | Brewing and packaging | |||
Haskovo, Bulgaria | Brewing and packaging | |||
Niksic, Montenegro | Brewing and packaging | |||
Ostrava, Czech Republic | Brewing and packaging | |||
Ploiesti, Romania(1) | Brewing and packaging | |||
Plovdiv, Bulgaria | Brewing and packaging | |||
Prague, Czech Republic(1) | Brewing and packaging | |||
Sharp's Brewery, Cornwall, U.K. | Brewing and packaging | |||
Tadcaster Brewery, Yorkshire, U.K. | Brewing and packaging | |||
Zagreb, Croatia | Brewing and packaging | |||
Malting/grain silos | Burton-on-Trent, Staffordshire, U.K. | Malting facility | ||
Distribution warehouses | Europe(5) | Distribution centers | ||
MCI Segment | ||||
Brewery/packaging plants | Patna, India | Brewing and packaging | ||
(1) | Montréal and Toronto breweries collectively account for approximately 78% of our Canada production. The Burton-on-Trent, Alton, Apatin, Prague and Ploiesti breweries collectively account for approximately 67% of our Europe production. |
(2) | We own one and lease one brewing and packaging facility in Vancouver, British Columbia. |
(3) | We own 10 distribution centers, lease four additional distribution centers, lease seven cross docks, lease one warehouse and lease one parking facility in the Québec Province. |
(4) | We own one and lease eight warehouses throughout Canada, excluding the Québec Province. |
(5) | We own 16 distribution centers, lease 16 additional distribution centers, own 4 warehouses and lease 4 additional warehouses throughout Europe. |
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We also lease offices in Colorado, the location of our Corporate headquarters, as well as within various international countries in which our MCI segment operates. We believe our facilities are well maintained and suitable for their respective operations. In 2013, our operating facilities were not capacity constrained.
ITEM 3. LEGAL PROCEEDINGS
In December 2012, Miller Brewing Company (“Miller”) orally informed us of its intent to terminate the license agreement between Miller and us whereby we have exclusive rights to distribute certain Miller products in Canada (the “License Agreement”) including Miller Lite, Miller High Life, Milwaukee's Best, Mickey's, Olde English, Miller Genuine Draft, and Miller Chill. Miller alleges that we failed to meet certain volume sales targets under the License Agreement. We do not believe Miller has any right under the License Agreement or otherwise to terminate the License Agreement. We filed a lawsuit in Ontario, Canada (Molson Canada 2005 v. Miller Brewing Company, Sup. Ct. of Justice-Ontario, CV-12-470589) seeking an injunction preventing Miller from terminating the License Agreement and ordering Miller to abide by its contractual terms. On January 18, 2013, Miller sent written notice to us purporting to terminate the License Agreement. On June 20, 2013, we were granted an injunction preventing Miller's termination of the License Agreement, pending a trial on the merits, originally scheduled for December 2013. During December 2013, upon completion of discovery and exchange of affidavits, both parties requested an extension of the trial and entered into private settlement discussions.
Should settlement negotiations fail to result in an agreeable outcome for both parties, the litigation will proceed to trial where we would intend to vigorously assert and defend our rights in this lawsuit. At this time we are unable to predict the outcome of this matter or the impact, if any, of an adverse outcome on our business and results of operations, including any possible future asset impairment. We recognized net sales related to the License Agreement of $92.3 million, $98.0 million and $110.6 million for the fiscal years of 2013, 2012 and 2011, respectively. As of December 31, 2013, we had a definite-lived intangible asset related to the License Agreement with a carrying value of approximately $38.6 million (CAD $41.0 million) and a remaining life of three years reflective of the impairment charge and accelerated life discussed in Part II—Item 8 Financial Statements and Supplementary Data, Note 19, "Commitments and Contingencies" of the Notes for additional information.
We are involved in other disputes and legal actions arising in the ordinary course of our business. While it is not feasible to predict or determine the outcome of these proceedings, in our opinion, based on a review with legal counsel, none of these disputes and legal actions is expected to have a material impact on our consolidated financial position, results of operations or cash flows. However, litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Class A common stock and Class B common stock trade on the New York Stock Exchange under the symbols "TAP A" and "TAP," respectively. In addition, the Class A exchangeable shares and Class B exchangeable shares of our indirect subsidiary, Molson Coors Canada Inc., trade on the Toronto Stock Exchange under the symbols "TPX.A" and "TPX.B," respectively. The Class A and B exchangeable shares are a means for shareholders to defer tax in Canada and have substantially the same economic and voting rights as the respective common shares. The exchangeable shares can be exchanged for our Class A or B common stock at any time and at the exchange ratios described in the Merger documents, and receive the same dividends. At the time of exchange, shareholders' taxes are due. The exchangeable shares have voting rights through special voting shares held by a trustee.
The approximate number of record security holders by class of stock at February 7, 2014, is as follows:
Title of class | Number of record security holders | |
Class A common stock, $0.01 par value | 25 | |
Class B common stock, $0.01 par value | 3,004 | |
Class A exchangeable shares | 252 | |
Class B exchangeable shares | 2,629 | |
The following table sets forth the high and low sales prices per share of our Class A common stock for each fiscal quarter of 2013 and 2012 as reported by the New York Stock Exchange, as well as dividends paid in such fiscal quarter.
High | Low | Dividends | ||||||||||
2013 | ||||||||||||
First quarter | $ | 49.03 | $ | 41.75 | $ | 0.32 | ||||||
Second quarter | $ | 52.88 | $ | 48.00 | $ | 0.32 | ||||||
Third quarter | $ | 53.26 | $ | 46.94 | $ | 0.32 | ||||||
Fourth quarter | $ | 55.72 | $ | 50.20 | $ | 0.32 | ||||||
2012 | ||||||||||||
First quarter | $ | 45.74 | $ | 42.80 | $ | 0.32 | ||||||
Second quarter | $ | 45.80 | $ | 38.50 | $ | 0.32 | ||||||
Third quarter | $ | 46.30 | $ | 40.53 | $ | 0.32 | ||||||
Fourth quarter | $ | 45.50 | $ | 40.31 | $ | 0.32 | ||||||
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The following table sets forth the high and low sales prices per share of our Class B common stock for each fiscal quarter of 2013 and 2012 as reported by the New York Stock Exchange, as well as dividends paid in such fiscal quarter.
High | Low | Dividends | ||||||||||
2013 | ||||||||||||
First quarter | $ | 49.28 | $ | 41.26 | $ | 0.32 | ||||||
Second quarter | $ | 53.35 | $ | 46.95 | $ | 0.32 | ||||||
Third quarter | $ | 53.70 | $ | 47.17 | $ | 0.32 | ||||||
Fourth quarter | $ | 56.49 | $ | 49.43 | $ | 0.32 | ||||||
2012 | ||||||||||||
First quarter | $ | 45.99 | $ | 41.96 | $ | 0.32 | ||||||
Second quarter | $ | 45.91 | $ | 37.96 | $ | 0.32 | ||||||
Third quarter | $ | 46.35 | $ | 39.88 | $ | 0.32 | ||||||
Fourth quarter | $ | 45.19 | $ | 39.46 | $ | 0.32 | ||||||
The following table sets forth the high and low sales prices per share of our Class A exchangeable shares for each fiscal quarter of 2013 and 2012 as reported by the Toronto Stock Exchange, as well as dividends paid in such fiscal quarter.
High | Low | Dividends | ||||||||||
2013 | ||||||||||||
First quarter | CAD | 52.10 | CAD | 41.86 | $ | 0.32 | ||||||
Second quarter | CAD | 54.00 | CAD | 48.86 | $ | 0.32 | ||||||
Third quarter | CAD | 54.66 | CAD | 52.04 | $ | 0.32 | ||||||
Fourth quarter | CAD | 59.09 | CAD | 51.01 | $ | 0.32 | ||||||
2012 | ||||||||||||
First quarter | CAD | 45.50 | CAD | 42.64 | $ | 0.32 | ||||||
Second quarter | CAD | 43.00 | CAD | 39.05 | $ | 0.32 | ||||||
Third quarter | CAD | 47.00 | CAD | 40.00 | $ | 0.32 | ||||||
Fourth quarter | CAD | 44.09 | CAD | 39.77 | $ | 0.32 | ||||||
The following table sets forth the high and low sales prices per share of our Class B exchangeable shares for each fiscal quarter of 2013 and 2012 as reported by the Toronto Stock Exchange, as well as dividends paid in such fiscal quarter.
High | Low | Dividends | ||||||||||
2013 | ||||||||||||
First quarter | CAD | 50.50 | CAD | 41.01 | $ | 0.32 | ||||||
Second quarter | CAD | 54.69 | CAD | 49.25 | $ | 0.32 | ||||||
Third quarter | CAD | 55.49 | CAD | 50.00 | $ | 0.32 | ||||||
Fourth quarter | CAD | 59.75 | CAD | 51.06 | $ | 0.32 | ||||||
2012 | ||||||||||||
First quarter | CAD | 46.32 | CAD | 42.26 | $ | 0.32 | ||||||
Second quarter | CAD | 45.50 | CAD | 39.52 | $ | 0.32 | ||||||
Third quarter | CAD | 45.00 | CAD | 39.01 | $ | 0.32 | ||||||
Fourth quarter | CAD | 44.50 | CAD | 39.60 | $ | 0.32 | ||||||
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PERFORMANCE GRAPH
The following graph compares our cumulative total stockholder return over the last five fiscal years with the Standard and Poor's 500 Index® ("S&P 500"), and a customized index including MCBC, SABMiller, ABI, Carlsberg, Heineken and Asahi (the "Peer Group"). We have used a weighted-average based on market capitalization to determine the return for the Peer Group. The graph assumes $100 was invested on December 26, 2008 (the last trading day of our fiscal year 2008) in our Class B common stock, the S&P 500 and the Peer Group, and assumes reinvestment of all dividends.
Molson Coors Brewing Company
At Fiscal-Year End | ||||||||||||||||||||||||
2008 | 2009 | 2010 | 2011 | 2012 | 2013 | |||||||||||||||||||
Molson Coors | $ | 100.00 | $ | 96.97 | $ | 113.40 | $ | 99.80 | $ | 100.94 | $ | 133.62 | ||||||||||||
S&P 500 | $ | 100.00 | $ | 132.23 | $ | 150.54 | $ | 153.86 | $ | 175.50 | $ | 226.57 | ||||||||||||
Peer Group(1) | $ | 100.00 | $ | 184.22 | $ | 214.46 | $ | 218.82 | $ | 296.07 | $ | 338.68 | ||||||||||||
(1) | The Peer Group represents the weighted-average based on market capitalization of the common stock of MCBC, SABMiller, ABI, Carlsberg, Heineken and Asahi. These securities are traded on various exchanges throughout the world. Modelo was removed from the peer group, as it was acquired during 2013 by ABI. |
Dividends
On February 13, 2014, we declared an increased regular quarterly dividend of $0.37 per share, payable March 17, 2014, to Class A and Class B shareholders of record on February 28, 2014. This dividend represents a 16% increase from the most recent quarter’s dividend of $0.32 per share. In addition, Molson Coors Canada Inc. (TSX: TPX.B, TPX.A), declared a quarterly dividend of the Canadian dollar equivalent of $0.37 per share using the February 13, 2014 noon spot exchange rate as reported by the Bank of Canada, payable March 17, 2014, to Class A exchangeable and Class B exchangeable shareholders of record on February 28, 2014.
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Issuer Purchases of Equity Securities
In 2011, we announced that our Board of Directors approved and authorized a program to repurchase up to $1.2 billion of our Class A and Class B common stock in the open market or in privately negotiated transactions. The number, price, and timing of the repurchases will be at our sole discretion and will be evaluated depending on market conditions, liquidity needs or other factors. Our Board of Directors may suspend, modify, or terminate the program at any time without prior notice. We did not make any share repurchases during the three months ended December 31, 2013.
ITEM 6. SELECTED FINANCIAL DATA
The table below summarizes selected financial information for the five years ended December 31, 2013. For further information, refer to our consolidated financial statements and notes thereto presented under Part II—Item 8 Financial Statements and Supplementary Data.
2013(1) | 2012(1)(2) | 2011(1) | 2010(1) | 2009(1) | ||||||||||||||||
(In millions, except per share data) | ||||||||||||||||||||
Consolidated Statements of Operations: | ||||||||||||||||||||
Net sales | $ | 4,206.1 | $ | 3,916.5 | $ | 3,515.7 | $ | 3,254.4 | $ | 3,032.4 | ||||||||||
Income from continuing operations attributable to MCBC | $ | 565.3 | $ | 441.5 | $ | 674.0 | $ | 668.1 | $ | 729.4 | ||||||||||
Income from continuing operations attributable to MCBC per share: | ||||||||||||||||||||
Basic | $ | 3.09 | $ | 2.44 | $ | 3.65 | $ | 3.59 | $ | 3.96 | ||||||||||
Diluted | $ | 3.07 | $ | 2.43 | $ | 3.62 | $ | 3.57 | $ | 3.92 | ||||||||||
Consolidated Balance Sheets: | ||||||||||||||||||||
Total assets | $ | 15,580.1 | $ | 16,212.2 | $ | 12,423.8 | $ | 12,697.6 | $ | 12,021.1 | ||||||||||
Current portion of long-term debt and short-term borrowings | $ | 586.9 | $ | 1,245.6 | $ | 46.9 | $ | 1.1 | $ | 300.3 | ||||||||||
Long-term debt | $ | 3,213.0 | $ | 3,422.5 | $ | 1,914.9 | $ | 1,959.6 | $ | 1,412.7 | ||||||||||
Other information: | ||||||||||||||||||||
Dividends per share of common stock | $ | 1.28 | $ | 1.28 | $ | 1.24 | $ | 1.08 | $ | 0.92 | ||||||||||
(1) | On November 14, 2013, our Board of Directors approved a resolution to change MCBC's fiscal year from a 52/53 week fiscal year to a calendar year. As such, our 2013 fiscal year was extended from December 28, 2013 to December 31, 2013, with subsequent fiscal years beginning on January 1 and ending on December 31 of each year. The impact of the three additional days in fiscal year 2013 is immaterial to the consolidated financial statements. Fiscal year 2011 contained 53 weeks whereas fiscal years 2009, 2010, and 2012 contained 52 weeks. Fiscal year 2013 included three additional days beyond 52 weeks due to the above mentioned fiscal year change. |
(2) | Reflects activity as a result of our acquisition of StarBev Holdings S.a.r.l. on June 15, 2012. See Part II—Item 8 Financial Statements and Supplementary Data, Note 3, "Acquisition of StarBev" of the Notes for further discussion. |
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is provided to assist in understanding our company, operations and current business environment and should be considered a supplement to, and read in conjunction with, the accompanying consolidated financial statements and notes included within Part II—Item 8 Financial Statements and Supplementary Data, as well as the discussion of our business and related risk factors in Part I—Item 1 Business and Part I—Item 1A Risk Factors, respectively,
On November 14, 2013, our Board of Directors approved a resolution to change MCBC's fiscal year from a 52/53 week fiscal year to a calendar year. As such, our current fiscal year was extended from December 28, 2013, to December 31, 2013, with subsequent fiscal years beginning on January 1 and ending on December 31 of each year. Beginning January 1, 2014, quarterly results will be for the three month periods ending March 31, June 30, September 30 and December 31. We are not required to file a transition report because this change is not deemed a change in fiscal year for purposes of reporting subject to Rule 13a-10 or Rule 15d-10 of the Securities Exchange Act of 1934, as amended, as the new fiscal year commences within seven days of the prior fiscal year and the new fiscal year commences with the end of the prior fiscal year. This change aligns our fiscal year and interim reporting periods with our Central Europe business and MillerCoors, which are already following a monthly fiscal reporting calendar as noted below. Unless otherwise indicated, (a) all $ amounts are in U.S. Dollars ("USD"), (b) comparisons are to comparable prior periods, and (c) 2013 refers to the period from December 30, 2012 through December 31, 2013, 2012 refers to the 52 weeks ended on December 29, 2012, and 2011 refers to the 53 weeks ended on December 31, 2011. The impact of the three additional days in fiscal year 2013 is immaterial to the consolidated financial statements.
Central Europe and MillerCoors follow a monthly reporting calendar. For Central Europe, 2013 refers to the 12 months ended December 31, 2013 and 2012 refers to the period from the Acquisition date of June 15, 2012, through December 31, 2012. For MillerCoors, 2013, 2012 and 2011 refer to the 12 months ended December 31, 2013, December 31, 2012, and December 31, 2011, respectively.
In addition to financial measures presented on the basis of accounting principles generally accepted in the United States of America ("U.S. GAAP"), we also present pretax and after-tax "underlying income," "underlying income per diluted share," "underlying effective tax rate," and "underlying free cash flow," which are non-GAAP measures and should be viewed as supplements to (not substitutes for) our results of operations presented under U.S. GAAP. We also present underlying earnings before interest, taxes, depreciation, and amortization ("underlying EBITDA") as a non-GAAP measure. Our management uses underlying income, underlying income per diluted share, underlying EBITDA, underlying effective tax rate and underlying free cash flow as measures of operating performance to assist in comparing performance from period to period on a consistent basis; as a measure for planning and forecasting overall expectations and for evaluating actual results against such expectations; and in communications with the board of directors, stockholders, analysts and investors concerning our financial performance. We believe that underlying income, underlying income per diluted share, underlying EBITDA, underlying effective tax rate and underlying free cash flow performance are used by and are useful to investors and other users of our financial statements in evaluating our operating performance because they provide an additional tool to evaluate our performance without regard to special and non-core items, such as acquisition-related costs, which can vary substantially from company to company depending upon accounting methods and book value of assets and capital structure. We have provided reconciliations of all non-GAAP measures to their nearest U.S. GAAP measures.
In addition to the non-GAAP measures noted above, we have certain operational measures, such as sales-to-retailers (“STRs”) and sales-to-wholesalers (“STWs”), which we believe are important metrics. STR is a metric that we use in our U.S. business to reflect the sales from our operations to our direct customers, generally wholesalers. The STW metric is important because it gives an indication of the amount of beer and adjacent products that we have produced and shipped to customers. STR is a metric that we use in our Canada and U.S. businesses to refer to sales closer to the end consumer than STWs, which generally means sales from our wholesalers or our company to retailers, who in turn sell to consumers. The STR metric is important because, unlike STWs, it provides the closest indication of the performance of our brands in relation to market and competitor sales trends.
Executive Summary
We are one of the world's largest brewers and have a diverse portfolio of owned and partner brands, including signature brands Coors Light, Molson Canadian, Carling and Staropramen, as well as craft and specialty beers such as Blue Moon, Creemore Springs, Cobra and Doom Bar. For more than 350 combined years, we have been brewing, innovating and delighting the world's beer drinkers. Our success depends on our ability to make our products available to meet a wide range of consumer segments and occasions.
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In 2013, we sharpened our focus on generating a higher return on our invested capital, managing our working capital and ensuring a greater return on investment for our shareholders. We grew net income from continuing operations attributable to MCBC, underlying after-tax earnings and EBITDA and exceeded our targets for cost savings, cash generation and debt reduction. Our U.S. business improved results, especially late in the year. Europe performed well in a difficult environment, Canada continued to face challenges, and our international business made significant progress toward its goal of profitability by 2016. Particular challenges included Miller Lite in the U.S. and Coors Light in Canada, along with commercial performance in Serbia. Nonetheless, our focus on building our core brands, growing the above-premium segment of our portfolio, and driving sales revenue from innovation was instrumental in delivering these results. Coors Light grew more than 30% in the U.K., where it is now our second largest brand. and it is growing even faster in Mexico and our Latin American markets. Coors Light also gained segment share in the U.S., but declined in Canada and will be a focus for 2014. Carling, the U.K.’s number one brand, reaffirmed its leading position by growing both volume and share in a soft U.K. market. Molson Canadian brand increased both volume and share in Canada in 2013. Meanwhile, Coors Banquet achieved its seventh year of growth in the U.S. and has sold ahead of expectations across Canada following its launch there in the 3rd quarter. Staropramen grew share in its home market, Czech Republic, and grew volume strong double digits in the rest of our European business. Our brands continue to increase market share in Croatia and Czech Republic and grew market share in Bulgaria for the full year and in Romania for the second half of the year. We lost market share in both Serbia and Hungary during 2013. The loss of share in Serbia is being addressed by a new management team, and the loss in Hungary was planned, as we gave up low-margin private label production. Our above-premium brands grew volume at a double-digit rate globally, contributing to mix-related net sales per hectoliter growth of 1.4% in the U.S. and 1% in Europe, on a comparable basis, in local currency. We continue to make progress in the craft sector through Tenth and Blake in the U.S. and Six Pints in Canada. As a result, we accounted for 29% of craft beer growth in the U.S. and saw our Six Pints volume in Canada increase nearly 13% in 2013. Finally, our innovation pipeline had its best year so far and delivered nearly 6% of global net sales. Our focus on innovation remains a top priority as we extend the reach of our portfolio to bring in new consumers to our brands. In summary, our overall brand performance was strong, and strategically we are gaining momentum in the areas that will have the most impact on our financial results as markets begin to improve.
2013 Financial Highlights:
• | Net income from continuing operations attributable to MCBC of $565.3 million, or $3.07 per diluted share, increased 28.0% from a year ago, due to cycling of financing and acquisition costs incurred in 2012 related to the Acquisition, lower income taxes and an increase in earnings from our Europe segment operations, offset by an increase in special charges, primarily due to non-cash impairments of intangible assets and restructuring charges incurred in 2013. Additionally, underlying after-tax income of $727.1 million, or $3.95 per diluted share, increased 2.3% and underlying EBITDA increased 5.1% compared to 2012, primarily due to an increase in underlying earnings in Europe and the U.S., partially offset by lower underlying income in Canada, due to lower volumes. Our underlying income excludes some special and other non-core gains, losses and expenses that net to a $210.9 million pretax charge, as explained below. |
• | Worldwide beer volume for MCBC in 2013 increased 8.5% compared to 2012, primarily due to including the results of our Central Europe operations, as well as increased volumes in the U.K., partially offset by lower volumes in Canada and the U.S. Additionally, total-company net sales increased 7.4% compared to 2012, primarily due to including a full year of results from our Central Europe operations, positive pricing in Europe, partially offset by lower volumes and unfavorable foreign exchange rate changes in Canada. |
• | We generated cash flow from operating activities of $1,168.2 million, representing an 18.8% increase from $983.7 million in 2012 and a 34.6% increase from $868.1 million in 2011. Underlying free cash flow in 2013 was $892.0 million, compared to $864.7 million in 2012, representing an increase of 3.2% from 2012. These increases in operating cash flow and underlying free cash flow are driven by higher net income, adjusted for increased non-cash impairments and other non-cash add-backs. Additionally, increased operating cash flows are primarily driven by an increased focus on managing working capital, particularly in Canada and Europe, along with lower cash paid for interest, partially offset by higher tax payments and pension contributions. |
• | We decreased our total outstanding debt balances by $868.2 million during the year, primarily due to the repayment of our $575 million convertible notes, as well as the €500 million convertible note (less amounts initially withheld of €44.9 million) and remaining outstanding portion of our €120 million term loan, offset by commercial paper issuances and borrowings on our Euro credit facility during 2013. Additionally, we saw an improvement in the net underfunded position of our pension and other postretirement benefit plans, excluding those of MillerCoors and other equity method investments, of approximately $405 million primarily driven by increased discount rates, increased employer contributions and the performance of our plan assets. We also made repayments on our outstanding cross currency swaps of approximately $114 million. |
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• | Regionally: |
• | In Canada, we gained share in the value segment, which has been a source of share loss in recent years, and we delivered strong cash and cost-saving results, but our overall performance declined. We are reducing our cost base in the same manner that we did in the U.K., and as a result, we expect to increase our capital spend in Canada by approximately CAD 40 million this year, with the expectation that we will begin to realize the resulting benefits in 2015. As in the U.K., we expect to re-invest most of the benefits back into our Canadian brands. Our 2013 income from continuing operations before income taxes and underlying pretax income in Canada decreased by 14.1% to $363.3 million and by 10.1% to $392.8 million, respectively, compared to 2012. Positive pricing and cost reductions were more than offset by the negative impact of lower volume and higher costs, driven by input inflation, sales mix shift toward higher-cost brands and packages, increased promotional packaging expense and increased pension costs, in addition to negative foreign currency movements. |
• | We grew U.S. 2013 pretax earnings on the strength of positive net pricing, strong sales mix and significant cost reductions. Although overall industry volume declined, we held share in the premium light segment, and we led the industry in above-premium share growth. Our above-premium portfolio now represents nearly 14% of our total net revenue, up more than 3 percentage points from 2012. Our 2013 equity income in MillerCoors increased 5.5% to $539.0 million, while underlying equity income in MillerCoors increased 4.4% to $547.3 million compared to 2012, primarily driven by higher net pricing, favorable brand mix and lower MG&A partially offset by lower sales volume, commodity and brewery inflation and lower fixed cost absorption. |
• | In Europe, although consumer demand remained weak, our business delivered solid growth in market share, net pricing, earnings and free cash flow. In addition to the brand performances mentioned above, our craft business is performing well and posted record volumes, with Doom Bar becoming the biggest selling cask ale in the U.K. on-premise channel. We reported 2013 income from continuing operations before income taxes of $34.3 million, a decrease of 78.6% from 2012 on a pro forma basis, which is primarily attributable to a non-cash impairment charge of $150.9 million recognized in 2013 related to indefinite-lived intangible brand assets. Underlying income of $213.3 million increased by 15.3% on a pro forma basis, compared to $185.0 million in 2012, driven by strong net pricing and lower supply chain costs, partially offset by negative impact of lower volume, a mix shift toward higher-cost products and packages, increased marketing investments and spending behind our products. |
• | Our International business rationalized its cost base and migrated its sales mix toward more profitable businesses in 2013. As a result, we reduced the underlying loss by nearly half versus 2012 and are on track to our goal of profitability by 2016. Internationally, the portfolio is led by Coors Light but has been reinforced by Staropramen and increasingly Blue Moon, with Carling being used tactically. Our MCI 2013 loss from continuing operations before income taxes decreased by 83.6% to $11.8 million and our 2013 underlying pretax loss decreased by 44.9% to $16.2 million. This was driven by the addition of the Central Europe export and license business for a full year in 2013, the elimination of losses in our MC Si’hai joint venture, lower overhead costs and improved profit performance in our non-joint venture business in China, partially offset by lower sales volumes due to the negative impact of transferring our Carling travel and export business to the Europe segment. Additionally, the decrease in our loss from continuing operations before income taxes in 2013 is also driven by a gain recognized on the sale of our MC Si'hai joint venture in China during the fourth quarter of 2013, versus charges incurred in 2012 on the impairment and deconsolidation of the joint venture. |
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The following table highlights summarized components of our consolidated statements of operations for the years ended December 31, 2013, December 29, 2012, and December 31, 2011, and provides a reconciliation of "underlying income", a non-GAAP measure, to its nearest U.S. GAAP measure.
For the years ended | |||||||||||||||||
December 31, 2013 | Change | December 29, 2012 | Change | December 31, 2011 | |||||||||||||
(In millions, except percentages and per share data) | |||||||||||||||||
Volume in hectoliters | 30.521 | 20.4 | % | 25.343 | 34.4 | % | 18.861 | ||||||||||
Net sales | $ | 4,206.1 | 7.4 | % | $ | 3,916.5 | 11.4 | % | $ | 3,515.7 | |||||||
Net income attributable to MCBC from continuing operations | $ | 565.3 | 28.0 | % | $ | 441.5 | (34.5 | )% | $ | 674.0 | |||||||
Adjustments: | |||||||||||||||||
Special items(1) | 200.0 | 145.7 | % | 81.4 | N/M | 12.3 | |||||||||||
42% of MillerCoors special items, net of tax(2) | 8.3 | (38.1 | )% | 13.4 | (71.7 | )% | 47.4 | ||||||||||
Acquisition, integration and financing related costs(3) | 10.7 | (93.7 | )% | 170.5 | N/M | — | |||||||||||
Unrealized mark-to-market (gains) and losses(4) | 15.4 | 20.3 | % | 12.8 | 178.3 | % | 4.6 | ||||||||||
Basis amortization related to the Sparks brand impairment(5) | — | — | % | — | (100.0 | )% | (25.2 | ) | |||||||||
Other non-core items(6) | (23.5 | ) | N/M | (5.0 | ) | (165.8 | )% | 7.6 | |||||||||
Tax impact of Serbia statutory tax rate increase(7) | — | (100.0 | )% | 38.3 | N/M | — | |||||||||||
Noncontrolling interest effect on special items(8) | — | (100.0 | )% | (5.1 | ) | N/M | — | ||||||||||
Tax effect on special and non-core items(9) | (49.1 | ) | 31.6 | % | (37.3 | ) | 94.3 | % | (19.2 | ) | |||||||
Non-GAAP: Underlying net income attributable to MCBC from continuing operations | $ | 727.1 | 2.3 | % | $ | 710.5 | 1.3 | % | $ | 701.5 | |||||||
Net income attributable to MCBC per diluted share from continuing operations | $ | 3.07 | (100.0 | )% | $ | 2.43 | (32.9 | )% | $ | 3.62 | |||||||
Non-GAAP: Underlying net income attributable to MCBC per diluted share from continuing operations | $ | 3.95 | 1.0 | % | $ | 3.91 | 4.0 | % | $ | 3.76 | |||||||
N/M = not meaningful
(1) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 8, "Special Items" of the Notes to the Consolidated Financial Statements ("Notes") for additional information. |
(2) | See "Results of Operations", "United States Segment" under the sub-heading "Special Items" in this section for additional information. |
(3) | In connection with the Acquisition, we recognized fees in marketing, general and administrative expenses of $10.7 million and $40.2 million in 2013 and 2012, respectively. |
Concurrent with the announcement of the Acquisition, we entered into a bridge loan agreement, which we terminated upon the closing of our issuance of the $1.9 billion senior notes. In connection with the issuance and subsequent termination of the bridge loan, we incurred debt fees of $13.0 million in the second quarter of 2012 recorded as other expense. Additionally, in advance of our issuance of the $1.9 billion senior notes, we systematically removed a portion of our interest rate market risk in the second quarter of 2012 by entering into standard pre-issuance U.S. Treasury interest rate hedges ("Treasury Locks"). This resulted in an increase in the certainty of our yield to maturity when issuing the notes during which we recognized a cash loss of $39.2 million on settlement of the Treasury Locks recorded as interest expense. Further, we used the proceeds from our issuance of the $1.9 billion senior notes to purchase Euros. As a result of a negative foreign exchange movement between the Euro and USD prior to using these proceeds to fund the Acquisition, we realized a foreign exchange loss of $57.9 million on our Euro cash holdings in the second quarter of 2012 recorded as other expense. We also recognized $10.7 million of interest expense in the second quarter of 2012 on our $1.9 billion senior notes prior to the closing of the Acquisition and $0.9 million of additional interest expense in the third quarter of 2012. See Part II—Item 8 Financial Statements and Supplementary Data, Note 6, "Other Income and Expense" and Note 13, "Debt" of the Notes for additional information.
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As part of the allocation of the consideration transferred for the Acquisition, Central Europe's inventory value was increased by $8.6 million to its fair value in accordance with U.S. GAAP in the second quarter of 2012. This resulted in a corresponding decline in gross profit after the Acquisition date of June 15, 2012, as all of this inventory was subsequently sold in the second quarter of 2012.
(4) | We issued a €500 million Zero Coupon Senior Unsecured Convertible Note ("Convertible Note") to the Seller in conjunction with the closing of the Acquisition. The Convertible Note's embedded conversion feature was determined to meet the definition of a derivative required to be bifurcated and separately accounted for at fair value with changes in fair value recorded in earnings. In 2013 and 2012, we recognized an unrealized loss of $5.4 million and an unrealized gain of $8.0 million, respectively, recorded as interest expense related to changes in the fair value of the conversion feature. On August 13, 2013, the Seller exercised the conversion feature at an agreed upon value of $14.4 million incremental to the Convertible Note's principal. Upon settlement, $0.8 million was recognized as the realized gain on settlement of the conversion feature, which was initially recorded as a liability of $15.2 million when issued in the second quarter of 2012. Additionally, within other income (expense), we recorded losses of $2.4 million and $23.8 million during the 2013 and 2012, respectively, related to foreign currency movements on this Convertible Note. We additionally recorded a net loss of $4.9 million during 2013 related to foreign exchange contracts and cash positions entered into to hedge our risk associated with the payment of this foreign denominated debt. See Part II—Item 8 Financial Statements and Supplementary Data, Note 13, "Debt" and Note 17, "Derivative Instruments and Hedging Activities" of the Notes for additional information. |
Additionally, the changes in fair value on our commodity swaps not designated in hedging relationships are recorded as cost of goods sold within our Corporate business activities. As the exposure we are managing is realized, we reclassify the gain or loss to the segment in which the underlying exposure resides, allowing our segments to realize the economic effects of the derivative without the resulting unrealized mark-to-market volatility. Related to these derivatives, we recorded an unrealized loss of $2.7 million in 2013, an unrealized gain of $3.0 million in 2012 and an unrealized loss of $4.6 million in 2011.
(5) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes under the sub-headings "Equity Investments" and "Investment in MillerCoors" for additional information. |
(6) | In 2013, we recognized a net gain of $23.5 million within other income related to the sales of non-core investment assets. See Part II—Item 8 Financial Statements and Supplementary Data, Note 6, "Other Income and Expense" of the Notes for additional information. |
In 2012, we recognized a gain of $5.2 million related to a sale of water rights recorded as other income. Additionally, other non-core items for 2012 include costs recognized related to the Molson Coors Si'hai joint venture, changes to environmental litigation provisions and the write-off of provisions for repayment of tax rebates received in the U.K.
In 2011, we recognized a $6.7 million loss related to the designation of our cross currency swap contracts as a net investment hedge of our Canadian business recorded as other expense. These swaps were historically designated as cash flow hedges and upon dedesignation as cash flow hedges, we reclassified the amounts previously recognized in accumulated other comprehensive income to earnings. See Part II—Item 8 Financial Statements and Supplementary Data, Note 17, "Derivative Instruments and Hedging Activities" of the Notes for additional information. Additionally, other non-core items for 2011 include repayment of tax rebates received in the U.K., gains recognized on the mark-to-market impact and settlement of the Foster's total return swap, gains on sale of non-operating property and changes to environmental litigation provisions.
(7) | In the fourth quarter of 2012, the Serbian government increased statutory corporate income tax rates from 10% to 15%, effective January 1, 2013. As a result of the impact of the rate change on differences between the book basis and tax basis of intangible and other assets purchased in the Acquisition, we increased our deferred tax liability by, and recognized income tax expense of, $38.3 million. |
(8) | The effect of noncontrolling interest on the adjustments used to arrive at underlying income, a non-GAAP measure, is calculated based on our ownership percentage of our subsidiaries from which each adjustment arises. This adjustment relates primarily to the goodwill impairment charge in our MC Si'hai joint venture. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for additional information. |
(9) | The effect of taxes on the adjustments used to arrive at underlying net income, a non-GAAP measure, is calculated based on applying the estimated underlying full-year effective tax rate to underlying earnings, excluding special and non-core items. The effect of taxes on special and non-core items is calculated based on the statutory tax rate applicable to the item being adjusted for in the jurisdiction from which each adjustment arises. |
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The following table highlights summarized components of our consolidated statements of operations for the years ended December 31, 2013, December 29, 2012, and December 31, 2011, and provides a reconciliation of "underlying EBITDA", a non-GAAP measure, to its nearest U.S. GAAP measure.
For the years ended | |||||||||||||||||
December 31, 2013 | Change | December 29, 2012 | Change | December 31, 2011 | |||||||||||||
(In millions, except percentages and per share data) | |||||||||||||||||
Net income attributable to MCBC from continuing operations | $ | 565.3 | 28.0 | % | $ | 441.5 | (34.5 | )% | $ | 674.0 | |||||||
Add: Net income (loss) attributable to noncontrolling interests | 5.2 | N/M | (3.9 | ) | N/M | 0.8 | |||||||||||
Net income (loss) from continuing operations | $ | 570.5 | 30.4 | % | $ | 437.6 | (35.2 | )% | $ | 674.8 | |||||||
Adjustments: | |||||||||||||||||
Add: Interest expense (income), net | 170.1 | (8.1 | )% | 185.0 | 71.3 | % | 108.0 | ||||||||||
Add: Income tax expense (benefit) | 84.0 | (45.6 | )% | 154.5 | 55.4 | % | 99.4 | ||||||||||
Add: Depreciation and amortization | 320.5 | 17.5 | % | 272.7 | 25.6 | % | 217.1 | ||||||||||
Adjustments to arrive at underlying EBITDA(1) | 194.9 | (10.1 | )% | 216.9 | N/M | 24.5 | |||||||||||
Adjustments to arrive at underlying EBITDA related to our investment in MillerCoors(2) | 128.5 | (2.1 | )% | 131.2 | (8.2 | )% | 142.9 | ||||||||||
Non-GAAP: Underlying EBITDA | $ | 1,468.5 | 5.1 | % | $ | 1,397.9 | 10.4 | % | $ | 1,266.7 | |||||||
N/M = Not meaningful
(1) | Includes adjustments to non-GAAP underlying income within the table above, excluding adjustments related to interest, taxes and depreciation and amortization, as these items are added back in total as adjustments to net income attributable to MCBC from continuing operations. |
(2) | Adjustments to our equity income from MillerCoors, which include our proportional share of MillerCoors' interest, income tax, depreciation and amortization, special items, and amortization of the difference between the MCBC contributed cost basis and proportional share of the underlying equity in net assets of MillerCoors. |
Worldwide Beer Volume
Worldwide beer volume (including adjacencies, such as cider) is composed of our financial volume, royalty volume and proportionate share of equity investment STR. Financial volume represents owned beer brands sold to unrelated external customers within our geographical markets, net of returns and allowances. Royalty beer volume consists of our brands produced and sold by third parties under various license and contract-brewing agreements. Equity investment STR brand volume represents our ownership percentage share of volume in our subsidiaries accounted for under the equity method, including MillerCoors and Modelo Molson Imports, L.P. ("MMI"), our joint venture in Canada with Grupo Modelo S.A.B. de C.V. ("Modelo"). In November 2013, ABI and MCBC entered into an agreement providing for the accelerated termination of the MMI joint venture. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for additional discussion.
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The following table highlights summarized components of our sales volume for the years ended December 31, 2013, December 29, 2012, and December 31, 2011:
For the years ended | ||||||||||||||
December 31, 2013 | Change | December 29, 2012 | Change | December 31, 2011 | ||||||||||
(In millions, except percentages) | ||||||||||||||
Volume in hectoliters: | ||||||||||||||
Financial volume | 30.521 | 20.4 | % | 25.343 | 34.4 | % | 18.861 | |||||||
Royalty volume(1) | 1.353 | 27.2 | % | 1.064 | 135.9 | % | 0.451 | |||||||
Owned volume | 31.874 | 20.7 | % | 26.407 | 36.7 | % | 19.312 | |||||||
Proportionate share of equity investment sales-to-retail(2) | 27.864 | (2.8 | )% | 28.652 | (1.4 | )% | 29.046 | |||||||
Total worldwide beer volume | 59.738 | 8.5 | % | 55.059 | 13.9 | % | 48.358 | |||||||
(1) | Includes MCI segment volume in Russia, Ukraine, and Mexico and a portion of Europe segment volume in Ireland. |
(2) | Reflects the addition of our proportionate share of equity method investments STR for the periods presented. |
Our worldwide beer volume increased 8.5% in 2013 compared to 2012, primarily due to including a full year of Central Europe volumes, as well as increased volumes in the U.K. partially offset by lower volumes in the U.S. and Canada. Worldwide beer volume increased 13.9% in 2012 versus 2011, due to including the results of our Central Europe operations following the Acquisition partially offset by lower volumes in the U.K., U.S. and Canada.
Cost Savings Initiatives
We achieved more than $70 million of cost reductions across our company in 2013, driven primarily from the U.K. within our Europe segment. MillerCoors delivered incremental cost savings in 2013, of which our 42% share is approximately $43 million.
Depreciation and Amortization
Depreciation and amortization expense was $320.5 million in 2013, an increase of $47.8 million compared to 2012, primarily due to a full year of Central Europe results. Depreciation and amortization expense was $272.7 million in 2012, an increase of $55.6 million compared to 2011, primarily due to the addition of a full year of Central Europe results.
33
Income Taxes
Our effective tax rate, a U.S. GAAP measure, was approximately 13% in 2013, 26% in 2012 and 13% in 2011. Our effective tax rates were significantly lower than the federal statutory rate of 35% primarily due to lower effective income tax rates applicable to our foreign businesses. The 2013 effective tax rate decreased versus 2012 due to the statutory corporate income tax rate increase in Serbia, which was enacted in 2012. Specifically, as a result of differences between the book and tax bases of intangible assets purchased in the Acquisition we increased our deferred tax liability, which resulted in increased deferred tax expense in 2012. Additionally, the increase in valuation allowances in 2012 contributed to the higher 2012 effective rate driven by losses in the normal course of business in foreign jurisdictions and a capital loss generated in the U.S. related to the impairment charges recognized in our MC Si'hai joint venture in China. Our 2013 and 2011 effective tax rate and our 2013 and 2011 underlying effective tax rate, a non-GAAP measure, were low compared to 2012 due primarily to the favorable resolution of unrecognized tax positions and lower valuation allowances. See table below for the reconciliation of our underlying effective tax rate to its nearest U.S. GAAP measure.
For the years ended | ||||||||
December 31, 2013 | December 29, 2012 | December 31, 2011 | ||||||
Effective tax rate | 13 | % | 26 | % | 13 | % | ||
Adjustments: | ||||||||
Tax rate changes | — | % | (5 | )% | — | % | ||
Acquisition-related costs | — | % | (2 | )% | — | % | ||
China impairments | — | % | (1 | )% | — | % | ||
Tax impact of special and non-core items | 2 | % | — | % | — | % | ||
MillerCoors special items | — | % | — | % | 1 | % | ||
Non-GAAP: Underlying effective tax rate | 15 | % | 18 | % | 14 | % | ||
Additionally, our unrecognized tax benefits increased by approximately $34 million, primarily driven by the addition for tax positions of prior years resulting from the proposed settlement of a tax audit in Canada, an identified immaterial out-of-period adjustment to uncertain tax positions related to prior years, and the adjustments to unrecognized tax benefits in Europe upon finalization of purchase accounting related to the Acquisition, partially offset by increased releases in Canada resulting from the favorable impact of enacted tax law in the second quarter.
Discontinued Operations
Discontinued operations are primarily associated with the formerly-owned Cervejarias Kaiser Brasil S.A. ("Kaiser") business in Brazil and the related indemnity obligations to FEMSA Cerveza S.A. de C.V. ("FEMSA") related to purchased tax credits and other tax, civil and labor issues. Our results in 2012 and 2011 also include amounts related to discontinued operations associated with a distributorship litigation which was settled in 2012. See Part II—Item 8 Financial Statements and Supplementary Data, Note 19, "Commitments and Contingencies" of the Notes for further discussion.
Results of Operations
Canada Segment
The Canada segment consists of our production, marketing and sales of the Molson family of brands, Coors Light, Rickard's, Carling, and other owned and licensed brands in Canada. Also included in the Canada segment is MMI, our joint venture established to import, distribute, and market the Modelo beer brand portfolio across all Canadian provinces and territories. MMI is accounted for under the equity method. In November 2013, ABI and MCBC entered into an agreement providing for the accelerated termination of the MMI joint venture. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for further discussion. In addition, the Canada segment includes Brewers' Retail, Inc. ("BRI"), our joint venture arrangement related to the distribution and retail sale of beer in Ontario, and Brewers' Distributor Ltd. ("BDL"), our joint venture arrangement related to the distribution of beer in the western provinces. Both BRI and BDL are accounted for under the equity method.
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The following represents our results of operations for Canada for the years ended December 31, 2013, December 29, 2012, and December 31, 2011.
For the years ended | |||||||||||||||||
December 31, 2013 | Change | December 29, 2012 | Change | December 31, 2011 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Volume in hectoliters | 8.332 | (2.0 | )% | 8.505 | (3.9 | )% | 8.850 | ||||||||||
Sales | $ | 2,575.1 | (3.7 | )% | $ | 2,675.2 | (2.1 | )% | $ | 2,732.8 | |||||||
Excise taxes | (631.3 | ) | (1.1 | )% | (638.4 | ) | (4.1 | )% | (665.5 | ) | |||||||
Net sales | 1,943.8 | (4.6 | )% | 2,036.8 | (1.5 | )% | 2,067.3 | ||||||||||
Cost of goods sold | (1,104.3 | ) | (1.5 | )% | (1,120.7 | ) | 3.0 | % | (1,087.8 | ) | |||||||
Gross profit | 839.5 | (8.4 | )% | 916.1 | (6.5 | )% | 979.5 | ||||||||||
Marketing, general and administrative expenses | (448.0 | ) | (6.0 | )% | (476.5 | ) | (1.9 | )% | (485.6 | ) | |||||||
Special items, net | (30.7 | ) | 124.1 | % | (13.7 | ) | 18.1 | % | (11.6 | ) | |||||||
Operating income (loss) | 360.8 | (15.3 | )% | 425.9 | (11.7 | )% | 482.3 | ||||||||||
Other income (expense), net | 2.5 | (186.2 | )% | (2.9 | ) | (60.8 | )% | (7.4 | ) | ||||||||
Income (loss) from continuing operations before income taxes | $ | 363.3 | (14.1 | )% | $ | 423.0 | (10.9 | )% | $ | 474.9 | |||||||
Adjusting items: | |||||||||||||||||
Special items | 30.7 | 124.1 | % | 13.7 | 18.1 | % | 11.6 | ||||||||||
Other non-core items | (1.2 | ) | N/M | — | — | % | — | ||||||||||
Non-GAAP: Underlying pretax income (loss) | $ | 392.8 | (10.1 | )% | $ | 436.7 | (10.2 | )% | $ | 486.5 | |||||||
N/M = not meaningful
Foreign currency impact on results
Our Canada segment was unfavorably impacted by a year-over-year depreciation of the Canadian Dollar ("CAD") against the USD in 2013 versus 2012. This represented an approximate decrease of $9 million and $11 million to our 2013 USD earnings before income taxes and USD underlying pretax income, respectively. Our Canada segment was unfavorably impacted by a year-over-year depreciation of the CAD against the USD in 2012 versus 2011. This represented an approximate $11 million decrease to our 2012 USD earnings before income taxes and USD underlying pretax income, respectively.
Assets and liabilities recorded in foreign currencies that are the functional currencies for the respective operations are translated at the prevailing exchange rate at the balance sheet date. Translation adjustments resulting from this process are reported as a separate component of other comprehensive income. Revenue and expenses are translated at the average exchange rates during the period. Gains and losses from foreign currency transactions are included in earnings for the period.
Volume and net sales
Our 2013 Canada STRs decreased 1.9% versus 2012. The decrease was driven by higher beer excise taxes in Quebec, weak economic conditions, increased competitor promotional activity and unfavorable weather across key regions this year.
The Canadian beer industry STRs decreased slightly in calendar year 2013 compared to 2012. As a result, our market share declined slightly on a full-year basis.
Our 2013 Canada sales volume decreased by 2.0% to 8.3 million hectoliters compared to 2012, due to continued industry softness and increased competitive pressure on our core brands and in Quebec, partially offset by export business results.
Our 2013 net sales per hectoliter increased 0.4% in local currency compared to 2012, driven by favorable pricing and export business results offset by mix shift to lower priced brands and packages.
Net sales decreased to $1,943.8 million in 2013 compared to $2,036.8 million in 2012, driven by lower sales volume, and unfavorable mix, as well as unfavorable foreign exchange rates.
Our 2012 Canada STRs decreased 4.4% versus 2011. The decrease was driven by cycling the 53rd week in 2011, along with declines in Western Canada and Québec due to increased competitor price discounting in these regions. Additionally, in
35
the second half of 2012, the National Hockey League ("NHL") lockout limited our ability to activate our established brands of Coors Light and Molson Canadian, the official beer of the NHL.
The Canadian beer industry STRs decreased approximately 2% in calendar year 2012 compared to 2011. As a result, our market share declined approximately a full share point on a full-year basis.
Our 2012 Canada sales volume decreased by 3.9% to 8.5 million hectoliters compared to 2011, driven by the decline in STRs.
Our 2012 net sales per hectoliter increased 3.9% in local currency compared to 2011, driven by positive net pricing, favorable mix and the absence of the North American Breweries, Inc. ("NAB") contract revenue in the first half of 2011.
Net sales decreased to $2,036.8 million in 2012 compared to $2,067.3 million in 2011, driven by lower sales volume and unfavorable foreign exchange rates, partially offset by the increase in net sales per hectoliter.
Cost of goods sold
Cost of goods sold per hectoliter in local currency increased 3.6% in 2013 versus 2012, driven by input inflation and fixed-cost deleverage, sales mix shift toward higher-cost brands and packages, increased promotional packaging expense, along with increased pension and other costs. These factors were partially offset by cost savings.
Cost of goods sold per hectoliter in local currency increased 8.6% in 2012 versus 2011, driven by higher pension expense, input inflation, a mix shift toward higher-cost brands and packages, fixed cost deleverage from lower volume and a full year of contract brewing sales to NAB in 2012, partially offset by cost savings.
Marketing, general and administrative expenses
Our 2013 marketing, general and administrative expenses decreased 3.2% in local currency versus 2012, driven by reductions in incentive compensation and overhead costs.
Our 2012 marketing, general and administrative expenses decreased 0.5% in local currency versus 2011, driven by lower marketing and sales investments.
Special items, net
During 2013, we recognized special charges of $17.9 million related to the impairment of our definite-lived intangible asset associated with the Miller distribution agreement. Additionally, we recognized special charges of $10.6 million relating to an ongoing restructuring program focused on labor savings across all functions. Further, we recognized charges for special termination benefits related to certain defined benefit pension plans of $2.2 million.
During 2012, we recognized charges of $10.1 million relating to a restructuring program focused on labor savings across all functions. Also, during 2012 we recognized charges for pension curtailment and special termination benefits related to certain defined benefit pension plans of $5.0 million. Additionally, during 2012 we recognized a $1.4 million benefit related to the timing of insurance proceeds for flood damages in our Toronto offices.
During 2011, we recognized special termination benefit costs of $5.2 million as eligible employees elected to take early retirement. Additionally, we recognized a $7.6 million loss related to the correction of an immaterial error to adjust fixed assets resulting from the performance of a fixed asset count. We also recognized a $2.0 million gain resulting from a reduction of our guarantee of BRI's debt obligations.
Other income (expense), net
Other income of $2.5 million in 2013 increased $5.4 million compared to other expense of $2.9 million in 2012, due to foreign currency movements, as well as a $1.2 million gain realized in the first quarter of 2013 for proceeds received related to a non-income-related tax settlement resulting from historical activity within our former investment in the Montreal Canadiens. Other expense in 2012 decreased $4.5 million compared to 2011, due to foreign currency movements.
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United States Segment
The U.S. segment consists of our interest, and results from our interest, in MillerCoors, our joint venture with SABMiller plc ("SABMiller") for all U.S. operations. MillerCoors produces, markets and sells beer brands in the U.S. and Puerto Rico. Its major brands include Coors Light, Miller Lite, Miller High Life, Keystone Light, Blue Moon, Leinenkugel's and Coors Banquet. Our interest in MillerCoors is accounted for under the equity method of accounting. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for further discussion.
The following represents the results of operations for MillerCoors for the years ended December 31, 2013, December 31, 2012, and December 31, 2011.
For the years ended | |||||||||||||||||
December 31, 2013 | Change | December 31, 2012 | Change | December 31, 2011 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Volumes in hectoliters | 74.274 | (2.7 | )% | 76.299 | (0.5 | )% | 76.652 | ||||||||||
Sales | $ | 8,969.8 | — | % | $ | 8,966.6 | 2.3 | % | $ | 8,763.3 | |||||||
Excise taxes | (1,169.0 | ) | (3.0 | )% | (1,205.5 | ) | (0.6 | )% | (1,213.1 | ) | |||||||
Net sales | 7,800.8 | 0.5 | % | 7,761.1 | 2.8 | % | 7,550.2 | ||||||||||
Cost of goods sold | (4,723.7 | ) | 0.7 | % | (4,689.7 | ) | 0.9 | % | (4,647.9 | ) | |||||||
Gross profit | 3,077.1 | 0.2 | % | 3,071.4 | 5.8 | % | 2,902.3 | ||||||||||
Marketing, general and administrative expenses | (1,769.9 | ) | (3.2 | )% | (1,828.5 | ) | 3.4 | % | (1,768.6 | ) | |||||||
Special items, net | (19.8 | ) | (37.7 | )% | (31.8 | ) | (72.0 | )% | (113.4 | ) | |||||||
Operating income | 1,287.4 | 6.3 | % | 1,211.1 | 18.7 | % | 1,020.3 | ||||||||||
Interest income (expense), net | (1.6 | ) | 14.3 | % | (1.4 | ) | (22.2 | )% | (1.8 | ) | |||||||
Other income (expense), net | 2.0 | 17.6 | % | 1.7 | (43.3 | )% | 3.0 | ||||||||||
Income from continuing operations before income taxes and noncontrolling interests | 1,287.8 | 6.3 | % | 1,211.4 | 18.6 | % | 1,021.5 | ||||||||||
Income tax expense | (3.9 | ) | (29.1 | )% | (5.5 | ) | (26.7 | )% | (7.5 | ) | |||||||
Income from continuing operations | 1,283.9 | 6.5 | % | 1,205.9 | 18.9 | % | 1,014.0 | ||||||||||
Less: Net income attributable to noncontrolling interests | (13.4 | ) | (10.7 | )% | (15.0 | ) | 47.1 | % | (10.2 | ) | |||||||
Net income attributable to MillerCoors | $ | 1,270.5 | 6.7 | % | $ | 1,190.9 | 18.6 | % | $ | 1,003.8 | |||||||
Adjusting items: | |||||||||||||||||
Special items | 19.8 | (37.7 | )% | 31.8 | (72.0 | )% | 113.4 | ||||||||||
Tax effect on special items, net | — | — | % | — | (100.0 | )% | (0.4 | ) | |||||||||
Non-GAAP: Underlying net income attributable to MillerCoors | $ | 1,290.3 | 5.5 | % | $ | 1,222.7 | 9.5 | % | $ | 1,116.8 | |||||||
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The following represents our proportional share of MillerCoors' net income reported under the equity method:
For the year ended December 31, 2013 | Change | For the year ended December 29, 2012 | Change | For the year ended December 31, 2011 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Net income attributable to MillerCoors | $ | 1,270.5 | 6.7 | % | $ | 1,190.9 | 18.6 | % | $ | 1,003.8 | |||||||
MCBC economic interest | 42 | % | 42 | % | 42 | % | |||||||||||
MCBC proportionate share of MillerCoors net income | 533.6 | 6.7 | % | 500.2 | 18.6 | % | 421.6 | ||||||||||
Amortization of the difference between MCBC contributed cost basis and proportional share of the underlying equity in net assets of MillerCoors(1) | 4.6 | (6.1 | )% | 4.9 | (86.2 | )% | 35.4 | ||||||||||
Share-based compensation adjustment(1) | 0.8 | (86.2 | )% | 5.8 | N/M | 0.9 | |||||||||||
Equity Income in MillerCoors | $ | 539.0 | 5.5 | % | $ | 510.9 | 11.6 | % | $ | 457.9 | |||||||
Adjusting items: | |||||||||||||||||
MCBC proportionate share of MillerCoors special items | 8.3 | (38.1 | )% | 13.4 | (71.8 | )% | 47.6 | ||||||||||
Basis amortization related to Sparks brand impairment(1) | — | — | % | — | (100.0 | )% | (25.2 | ) | |||||||||
Tax effect on special items | — | — | % | — | (100.0 | )% | (0.2 | ) | |||||||||
Non-GAAP Equity Income in MillerCoors | $ | 547.3 | 4.4 | % | $ | 524.3 | 9.2 | % | $ | 480.1 | |||||||
N/M = not meaningful
(1) | See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes, for a detailed discussion of these equity method adjustments. |
The discussion below highlights the MillerCoors results of operations for the year ended December 31, 2013, versus the year ended December 31, 2012, and for the year ended December 31, 2012, versus the year ended December 31, 2011.
Volume and net sales
MillerCoors domestic STRs declined 2.8% in 2013 versus 2012, driven by declines in both the premium light and value portfolios, partially offset by growth in Coors Banquet and high single digit growth in Tenth and Blake, led by the Leinenkugel's, Blue Moon and Batch 19 brands.
Total STWs volume declined 2.7% in 2013 compared to 2012. Domestic STWs decreased 3.0% versus 2012, driven by the decline in STRs, while contract brewing volume declined slightly.
Domestic net sales per hectoliter increased 3.4% in 2013 compared to 2012, driven by net pricing and brand mix. Total net sales per hectoliter, including contract brewing and company-owned distributor sales, increased 3.3% in 2013 compared to 2012.
Net sales increased to $7,800.8 million in 2013, compared to $7,761.1 million in 2012. This increase was driven by the increase in domestic net sales per hectoliter, partially offset by lower sales volume.
MillerCoors domestic STRs declined 1.3% in 2012 versus 2011, driven by declines in Miller Lite and the value portfolio, partially offset by growth in Coors Light and double-digit growth in Tenth and Blake, led by the Blue Moon and Leinenkugel's brands.
Total sales volume declined 0.5% in 2012 compared to 2011. Domestic STWs decreased 1.1% versus 2011, driven by the decline in STRs, partially offset by increased contract brewing volume.
Domestic net sales per hectoliter increased 3.5% in 2012 compared to 2011, due to strong net pricing and brand mix. Total net sales per hectoliter, including contract brewing and company-owned distributor sales, increased 3.3% in 2012 compared to 2011.
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Net sales increased to $7,761.1 million in 2012, compared to $7,550.2 million in 2011. This increase was driven by the increase in domestic net sales per hectoliter, partially offset by lower sales volume.
Cost of goods sold
Cost of goods sold per hectoliter increased 3.5% in 2013 compared to 2012, driven by commodity and brewery inflation and higher costs associated with brand innovation, as well as lower fixed-cost absorption due to lower volume.
MillerCoors 2012 cost of goods sold per hectoliter increased 1.4% compared to 2011, driven by the cost of packaging innovations and commodity inflation, partially offset by cost savings initiatives.
Marketing, general and administrative expenses
Marketing, general and administrative expenses decreased by 3.2% in 2013 versus 2012, driven primarily by a reduction in media investment and lower pension expense.
Marketing, general and administrative expenses increased by 3.4% in 2012 versus 2011, due to increased marketing investments and spending behind new products and packaging innovations.
Special items
During 2013, MillerCoors recognized special charges of $17.2 million related to restructuring activities and $2.6 million related to asset write-offs associated with a business transformation project.
During 2012, MillerCoors recognized special charges of $31.8 million, primarily due to the write-down of assets related to discontinuing the production of the Home Draft packaging line and the write-down of information systems assets related to a business transformation project partially offset by a pension curtailment gain.
During 2011, MillerCoors recognized special charges totaling $113.4 million, driven primarily by a $60.0 million write-down of the value of the Sparks brand and a $50.9 million charge resulting from the planned assumption of the Milwaukee Brewery Worker's Pension Plan, an underfunded multi-employer pension plan.
Europe Segment
The Europe segment consists of our production, marketing and sales of our brands, including Carling, Ozujsko, Jelen, Staropramen, Coors Light, Kamenitza, Niksicko, Bergenbier, Branik, Worthington's, Sharp's Doom Bar, Borsodi, Ostravar, Noroc, Astika, Apatinsko and Blue Moon, as well as a number of smaller regional ale brands in the U.K., Ireland and Central Europe. The European business has licensing agreements with various other brewers through which it also brews or distributes the Stella Artois, Hoegaarden, Leffe, Beck's, Lowenbrau, Spaten, Löwenweisse and Belle-Vue Kriek brands in certain Central European countries; our consolidated joint venture arrangements to produce, import and distribute the Grolsch and Cobra brands in the U.K. and the Republic of Ireland; and factored brand sales (beverage brands owned by other companies, but sold and delivered to retail by MCBC) in the U.K. Additionally, our previous joint venture arrangement with DHL ("Tradeteam") provided for the distribution of products throughout the U.K. and was accounted for under the equity method of accounting. In December 2013, we terminated our existing distribution agreements with Tradeteam and concurrently entered into new agreements for the continued distribution of our products in the U.K. through 2023. Subsequent to the execution of the new distribution agreements, we executed a sale and purchase agreement for the termination of the joint venture and sale of our interest in Tradeteam to DHL. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for further discussion. We also distribute the Modelo brands, including Corona, in the U.K. pursuant to a distribution agreement with Modelo and we contract manufacture for Heineken U.K. and Carlsberg U.K. In conjunction with negotiations in November 2013 with ABI around our Modelo distribution agreements, we agreed with ABI to continue to represent the Modelo brands in the U.K. through the end of 2014. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for further discussion. Additionally, in December 2013, we entered into an agreement with Heineken to early terminate the contract brewing arrangement, whereby we produce and package Heineken products. As a result of the termination, Heineken has agreed to pay us an aggregate early termination payment of GBP 13.0 million during and through the end of the transition period, concluding on April 30, 2015.
Effective July 1, 2012, management decided to move the Central Europe export and license business acquired as part of the Acquisition, which includes licensing arrangements in Russia and Ukraine and export of certain Central European brands, to our MCI segment. The impact for the period from Acquisition through the end of the second quarter 2012 was immaterial and therefore, actual results have not been recast to be included in MCI results. On a pro forma basis, this reporting change resulted in reclassifying from Central Europe to MCI net sales and pretax income of $12.8 million and $6.0 million, respectively, for the first half of 2012. Included in these amounts are net sales and income from continuing operations of $1.4 million and $0.7 million, respectively, that were earned from the Acquisition date of June 15, 2012, through June 30, 2012, that
39
were previously reported in our Europe segment. On a pro forma basis, the reporting change resulted in reclassifying from Central Europe to MCI net sales and pretax income of $25.9 million and $9.8 million, respectively, for 2011.
The following represents our results of operations for Europe for the years ended December 31, 2013, December 29, 2012, and December 31, 2011. Prior year amounts have been recast to combine actual results in the U.K. and Central Europe with pro forma results related to Central Europe to give effect to the Acquisition as if it had occurred at the beginning of fiscal year 2011.
For the years ended | ||||||||||||||||||
2013 | 2012 | |||||||||||||||||
Actual | Actual-Europe(3) | Pro Forma-Central Europe(4) | Pro Forma Combined 2012(4) | Change | ||||||||||||||
(In millions, except percentages) | ||||||||||||||||||
Volume in hectoliters(1) | 21.146 | 15.896 | 5.303 | 21.199 | (0.3 | )% | ||||||||||||
Sales(1) | $ | 3,265.4 | $ | 2,783.6 | $ | 420.5 | $ | 3,204.1 | 1.9 | % | ||||||||
Excise taxes | (1,137.1 | ) | (1,036.1 | ) | (92.8 | ) | (1,128.9 | ) | 0.7 | % | ||||||||
Net sales(1)(5) | 2,128.3 | 1,747.5 | 327.7 | 2,075.2 | 2.6 | % | ||||||||||||
Cost of goods sold(6) | (1,357.5 | ) | (1,159.9 | ) | (194.2 | ) | (1,354.1 | ) | 0.3 | % | ||||||||
Gross profit | 770.8 | 587.6 | 133.5 | 721.1 | 6.9 | % | ||||||||||||
Marketing, general and administrative expenses(7) | (569.5 | ) | (431.4 | ) | (108.8 | ) | (540.2 | ) | 5.4 | % | ||||||||
Special items, net | (172.4 | ) | (23.5 | ) | — | (23.5 | ) | N/M | ||||||||||
Operating income (loss) | 28.9 | 132.7 | 24.7 | 157.4 | (81.6 | )% | ||||||||||||
Interest income(2) | 4.9 | 5.7 | — | 5.7 | (14.0 | )% | ||||||||||||
Other income (expense), net | 0.5 | (2.2 | ) | (0.6 | ) | (2.8 | ) | (117.9 | )% | |||||||||
Income (loss) from continuing operations before income taxes | $ | 34.3 | $ | 136.2 | $ | 24.1 | $ | 160.3 | (78.6 | )% | ||||||||
Adjusting items: | ||||||||||||||||||
Special items | 172.4 | 23.5 | — | 23.5 | N/M | |||||||||||||
Acquisition and integration related costs | 6.6 | 13.0 | (11.1 | ) | 1.9 | N/M | ||||||||||||
Other non-core items | — | (0.7 | ) | — | (0.7 | ) | (100.0 | )% | ||||||||||
Non-GAAP: Underlying pretax income (loss) | $ | 213.3 | $ | 172.0 | $ | 13.0 | $ | 185.0 | 15.3 | % | ||||||||
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For the years ended | ||||||||||||||||||
2012 | 2011 | |||||||||||||||||
Pro Forma Combined 2012(3)(4) | Actual-Europe(3) | Pro Forma-Central Europe(4) | Pro Forma Combined 2011(4) | Change | ||||||||||||||
(In millions, except percentages) | ||||||||||||||||||
Volume in hectoliters(1) | 21.199 | 9.151 | 12.951 | 22.102 | (4.1 | )% | ||||||||||||
Sales(1) | $ | 3,204.1 | $ | 2,301.1 | $ | 1,166.6 | $ | 3,467.7 | (7.6 | )% | ||||||||
Excise taxes | (1,128.9 | ) | (967.6 | ) | (252.5 | ) | (1,220.1 | ) | (7.5 | )% | ||||||||
Net sales(1)(5) | 2,075.2 | 1,333.5 | 914.1 | 2,247.6 | (7.7 | )% | ||||||||||||
Cost of goods sold(6) | (1,354.1 | ) | (887.4 | ) | (504.7 | ) | (1,392.1 | ) | (2.7 | )% | ||||||||
Gross profit | 721.1 | 446.1 | 409.4 | 855.5 | (15.7 | )% | ||||||||||||
Marketing, general and administrative expenses(7) | (540.2 | ) | (352.6 | ) | (234.7 | ) | (587.3 | ) | (8.0 | )% | ||||||||
Special items, net | (23.5 | ) | 0.3 | (7.0 | ) | (6.7 | ) | N/M | ||||||||||
Operating income (loss) | 157.4 | 93.8 | 167.7 | 261.5 | (39.8 | )% | ||||||||||||
Interest income(2) | 5.7 | 6.3 | — | 6.3 | (9.5 | )% | ||||||||||||
Other income (expense), net | (2.8 | ) | (0.8 | ) | (2.9 | ) | (3.7 | ) | (24.3 | )% | ||||||||
Income (loss) from continuing operations before income taxes | $ | 160.3 | $ | 99.3 | $ | 164.8 | $ | 264.1 | (39.3 | )% | ||||||||
Adjusting items: | ||||||||||||||||||
Special items | 23.5 | (0.3 | ) | 7.0 | 6.7 | N/M | ||||||||||||
Acquisition and integration related costs | 1.9 | — | — | — | N/M | |||||||||||||
Unrealized foreign exchange loss on Acquisition financing instruments | — | — | — | — | — | % | ||||||||||||
Other non-core items | (0.7 | ) | 2.5 | — | 2.5 | (128.0 | )% | |||||||||||
Non-GAAP: Underlying pretax income (loss) | $ | 185.0 | $ | 101.5 | $ | 171.8 | $ | 273.3 | (32.3 | )% | ||||||||
N/M = Not meaningful
(1) | Reflects gross segment sales and for 2013 and 2012 includes intercompany sales to MCI of 0.066 million hectoliters and 0.246 million hectoliters, respectively and $4.8 million of net sales and $16.0 million of net sales, respectively. The offset is included within MCI cost of goods sold. These amounts are eliminated in the consolidated totals. |
(2) | Interest income is earned on trade loans to on-premise customers exclusively in the U.K. and is typically driven by note receivable balances outstanding from period to period. |
(3) | Actual Europe results for 2012 include the actual results for the U.K. for the full year 2012 combined with the actual results for Central Europe from the Acquisition date of June 15, 2012, through December 31, 2012. Actual Europe results for 2011 include the actual results for the U.K. for the full year 2011. |
(4) | Pro forma amounts for 2012 include the results of operations for StarBev from January 1, 2012, to June 15, 2012 (Pro Forma Central Europe) and on a combined basis with the actual results of our historical post acquisition Central Europe and U.K. segments (Pro Forma Combined) for the year ended December 29, 2012. Additionally, for 2011 pro forma amounts include the historic StarBev results for the year ended December 31, 2011 (Pro Forma Central Europe) and on a combined basis with the actual results of our U.K. segment (Pro Forma Combined). These amounts also include pro forma adjustments as if StarBev had been acquired on December 26, 2010, the first day of our 2011 fiscal year, including the effects of acquisition accounting as described below and eliminating non-recurring costs and expenses directly related to the transaction, but do not include adjustments for costs related to integration activities, cost savings or synergies that have been or may be achieved by the combined businesses. Pro forma amounts are not necessarily indicative of what the results would have been had we operated the businesses since December 26, 2010, nor are they indicative of the results that may be obtained in the future. Financial information for StarBev is from audited annual and unaudited interim financial information in Euros derived from StarBev's underlying books and records maintained in accordance with International Financial Reporting Standards ("IFRS") and translated to USD using quarterly average exchange rates during each period indicated. Based on our review of StarBev's historical financial statements and understanding of the differences between U.S. GAAP and IFRS, we are not aware of any |
41
further adjustments that we would need to make to StarBev's historical financial statements to present them on a U.S. GAAP basis except as noted below.
(5) | StarBev's historical net sales were reduced by $25.4 million and $61.8 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, to reflect reclassifications relating primarily to the treatment of payments made to customers. Specifically, in accordance with U.S. GAAP, these customer payments are considered a reduction of net sales and, therefore, have been reclassified from marketing, general and administrative expenses. These amounts include $6.3 million and $14.1 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, that StarBev classified as amortization associated with intangible assets related to customer supply rights. |
(6) | To align StarBev to U.S. GAAP and to our accounting policies, StarBev's historical cost of goods sold were increased by $37.6 million and $101.4 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, to reflect U.S. GAAP reclassifications from the financial statements of StarBev to align their presentation with ours. This adjustment primarily relates to the reclassification of $39.0 million and $104.7 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, of distribution and logistics costs from marketing, general and administrative expenses to cost of goods sold. Additionally, there were $2.1 million and $4.7 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, of production equipment-related gains that were reclassified from marketing, general and administrative expenses to cost of goods sold. We also made pro forma adjustments to cost of goods sold for an increase of $1.7 million and a decrease of $3.2 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, resulting from the purchase price allocation for the Acquisition primarily driven by the amortization of the fair value of a favorable malting agreement within other intangibles offset in part by adjustments to decrease depreciation as a result of changes in the fair value of properties. Additionally, $8.6 million of charges related to the non-recurring fair value adjustment to acquisition date inventory that are reflected in the historical post-Acquisition MCBC results were added back for the fiscal 2012 results as they are non-recurring and directly related to the Acquisition. |
(7) | To align StarBev to U.S. GAAP and to our accounting policies, StarBev's marketing, general and administrative expenses were reduced by $64.6 million and $162.7 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, to reflect reclassifications from the financial statements of StarBev to align presentation with ours. Along with the reclassifications discussed in notes (5) and (6) above, $2.3 million and $0.9 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, were added to marketing, general and administrative expenses to align recognition of various other immaterial items. We also made pro forma adjustments to reduce depreciation and amortization expense by $1.5 million and $0.1 million for the pre-Acquisition periods of January 1, 2012, to June 15, 2012, and the year ended December 31, 2011, respectively, to reflect the purchase price adjustments related to the valuations of properties and other intangibles. Additionally, for the year ended December 29, 2012, $2.5 million in acquisition-related costs incurred in the second quarter of 2012 that are reflected in the historical post-Acquisition MCBC results were removed from marketing, general and administrative expenses, as they are non-recurring and directly related to the Acquisition. |
In order to provide meaningful trend analysis, the discussion below is based on actual results for 2013 and pro forma combined results for 2012 and 2011.
Foreign currency impact on results
During 2013, foreign currency movements reduced our Europe USD income from continuing operations before income taxes by approximately $3 million, and increased USD underlying pretax income by approximately $5 million. On a pro forma basis, foreign currency movements reduced Europe USD income from continuing operations before income taxes by approximately $4 million and increased USD underlying pretax income by approximately $3 million.
On a pro forma basis, during 2012, the local currencies in the countries in which our Europe segment operates depreciated versus the USD on an average basis versus 2011, resulting in an approximate $25 million and $27 million decrease to our pro forma 2012 USD earnings before income taxes and USD underlying pretax income, respectively.
Assets and liabilities recorded in foreign currencies that are the functional currencies for the respective operations are translated at the prevailing exchange rate at the balance sheet date. Translation adjustments resulting from this process are reported as a separate component of other comprehensive income. Revenue and expenses are translated at the weighted-average exchange rates during the period. Gains and losses from foreign currency transactions are included in earnings for the period.
42
Volume and net sales
Europe sales volume decreased 0.3% in 2013 compared to 2012, on a pro forma basis, due to weak consumer demand, negative channel and package mix, as well as the impacts of a flood in Czech Republic in June. These factors were partially offset by improved performance in the U.K., as well as overall positive pricing.
The business delivered a solid share overall with year over year growth in almost all key markets.
Our 2013 net sales per hectoliter increased 2.7% in local currency in 2013 compared to 2012, on a pro forma basis, due to positive net pricing and brand mix.
Europe sales volume decreased 4.1% in 2012 compared to 2011, due to a decrease in consumer demand, the effect of destocking trade inventories in Romania and Serbia, a strong U.K. volume performance in the fourth quarter of 2011 driven by customer buy-in ahead of our January 2012 price increase and a focus on maintaining price growth in all markets.
Our 2012 net sales per hectoliter increased 2.3% in local currency in 2012 compared to 2011, on a pro forma basis, driven by positive net pricing and favorable channel mix.
Cost of goods sold
Cost of goods sold per hectoliter increased 0.5% in local currency in 2013 compared to 2012, on a pro forma basis, primarily driven by adverse mix shift to higher cost packages, partially offset by lower supply chain costs.
Cost of goods sold per hectoliter increased 6.9% in local currency in 2012 compared to 2011, on a pro forma basis, primarily driven by package mix changes and input inflation, higher pension expense and fixed cost deleverage from lower volume.
Marketing, general and administrative expenses
Marketing, general and administrative expenses increased 5.3% in local currency in 2013 compared to 2012, on a pro forma basis, driven by higher incentive compensation and investment behind core brands and innovation.
Marketing, general and administrative expenses decreased 2.6% in local currency in 2012 compared to 2011, on a pro forma basis, due to cost reduction initiatives and lower marketing investments, partially offset by higher pension expense, as well as increased bad debt expenses.
Special items, net
During 2013, we recognized charges of $14.5 million relating to a restructuring program focused on labor savings across all functions. We also recognized a non-cash impairment charge of $150.9 million related to indefinite-lived intangible brand assets in Europe. Additionally, upon termination of our Tradeteam distribution agreement and subsequent termination of the joint venture and sale of our 49.9% interest in Tradeteam to DHL, we recognized a loss of $13.2 million in December 2013. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" for further discussion.
Further, we recognized a gain of $4.2 million relating to the release of a portion of a non-income-related-tax reserve that was recorded as a special charge in 2009.
During the second quarter of 2013, our business in Czech Republic was adversely impacted by flooding that affected our brewery capacity in Prague and resulted in damages to inventory and returnable packaging materials in an off-site warehouse. As a result, we recorded losses and related costs of $5.4 million due to significant flooding in Czech Republic in the second quarter of 2013. These losses were offset by $7.4 million insurance proceeds received. We have claimed business interruption coverage from our relevant insurance carriers, which may defray some, but not all, of the impact on results. Receipt of insurance proceeds for business interruption, if any, will occur in future periods.
During 2012, we recognized employee termination costs of $19.8 million related to a restructuring program focused on labor savings across all functions. Also, we recognized an asset abandonment charge of $7.2 million related to the discontinuation of primary packaging. We determined that the Home Draft package was not meeting expectations, and as a result, we recognized a loss related to the write-off of the Home Draft packaging line, tooling equipment, and packaging materials. Additionally, we recognized a $3.5 million gain related to a release of a portion of a non-income-related-tax reserve that was recorded as a special item in 2009.
During 2011, we recognized employee termination costs of $2.1 million related to supply chain restructuring activity and company-wide efforts to increase efficiency in operations. Additionally, we recognized a $2.4 million gain related to a release of a portion of a non-income-related-tax reserve that was recorded as a special item in 2009 and strategic cost initiatives. On a
43
pro forma basis, we recognized additional special charges of $7.0 million primarily related to restructuring and special termination benefits.
Other income (expense), net
We recognized other income of $0.5 million and other expense of $2.8 million and $3.7 million, on a pro forma basis, in 2013, 2012 and 2011, respectively. Other income and expense activity primarily relates to foreign currency movements and other non-operating activities.
Interest income
Interest income is earned on trade loans to U.K. on-premise customers. Interest income in local currency declined 12.9% and 9.6% in 2013 and 2012, respectively. The declines in both 2013 and 2012 were due to reductions in trade loan balances.
Molson Coors International Segment
The objective of MCI is to grow and expand our business and brand portfolio in markets, including emerging markets, outside the U.S., Canada, U.K. and Central Europe, comprising our standalone businesses in India (consisting of the Molson Coors Cobra India joint venture, "MC Cobra India"), Japan and China; our export business, which is expanding the reach of our international brands, in Latin America, the Caribbean, Western Europe, and Australia; and our license business, which builds long term licensing partnerships with leading global brewers to market and grow our international brands in markets which typically have a greater barrier to entry, in Ukraine, Russia, Mexico and Spain. Beginning July 1, 2012, our Central Europe export and license business is reported in our MCI segment.
The following represents our results of operations for MCI for the years ended December 31, 2013, December 29, 2012, and December 31, 2011.
For the years ended | |||||||||||||||||
December 31, 2013 | Change | December 29, 2012(1) | Change | December 31, 2011 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Volume in hectoliters(2) | 1.109 | (6.6 | )% | 1.188 | 17.4 | % | 1.012 | ||||||||||
Sales | $ | 162.7 | (4.9 | )% | $ | 171.0 | 19.0 | % | $ | 143.7 | |||||||
Excise taxes | (25.1 | ) | 4.6 | % | (24.0 | ) | 13.7 | % | (21.1 | ) | |||||||
Net sales | 137.6 | (6.4 | )% | 147.0 | 19.9 | % | 122.6 | ||||||||||
Cost of goods sold(3) | (85.0 | ) | (5.7 | )% | (90.1 | ) | 16.1 | % | (77.6 | ) | |||||||
Gross profit | 52.6 | (7.6 | )% | 56.9 | 26.4 | % | 45.0 | ||||||||||
Marketing, general and administrative expenses | (68.9 | ) | (21.2 | )% | (87.4 | ) | 12.9 | % | (77.4 | ) | |||||||
Special items, net | 4.4 | (110.4 | )% | (42.2 | ) | N/M | (1.0 | ) | |||||||||
Operating income (loss) | (11.9 | ) | (83.6 | )% | (72.7 | ) | 117.7 | % | (33.4 | ) | |||||||
Other income (expense), net | 0.1 | (83.3 | )% | 0.6 | N/M | 0.1 | |||||||||||
Income (loss) from continuing operations before income taxes(4) | $ | (11.8 | ) | (83.6 | )% | $ | (72.1 | ) | 116.5 | % | $ | (33.3 | ) | ||||
Adjusting items: | |||||||||||||||||
Special items | (4.4 | ) | (110.4 | )% | 42.2 | N/M | 1.0 | ||||||||||
Other non-core items | — | (100.0 | )% | 0.5 | N/M | — | |||||||||||
Non-GAAP: Underlying pretax income (loss) | $ | (16.2 | ) | (44.9 | )% | $ | (29.4 | ) | (9.0 | )% | $ | (32.3 | ) | ||||
N/M = Not meaningful
(1) | The results related to the Central Europe export and license business have been moved to our MCI segment beginning July 1, 2012. The impact of our Central Europe export and license business for the period from Acquisition through the end of the second quarter 2012 was immaterial and therefore, amounts for that period continue to be included in the Europe segment. The MCI results for the second half of 2012 reflect $5.4 million and $5.5 million of income from continuing operations before income taxes and non-GAAP underlying pretax income, respectively, relating to Central Europe export and license business. |
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(2) | Excludes royalty volume of 1.141 million hectoliters, 0.810 million hectoliters and 0.265 million hectoliters in 2013, 2012 and 2011, respectively. |
(3) | Reflects gross segment amounts and for 2013 and 2012 includes intercompany cost of goods sold from the U.K. of $4.8 million and $16.0 million, respectively. The offset is included within U.K. net sales. These amounts are eliminated in the consolidated totals. |
(4) | Includes loss attributable to noncontrolling interest of $8.0 million and $3.0 million in 2012 and 2011, respectively. |
Foreign currency impact on results
Our MCI segment operates in numerous countries around the world and each country's operations utilize distinct currencies. MCI's results were insignificantly impacted by foreign currency movements in both 2013 and 2012. This includes an insignificant effect on both USD losses before income taxes and USD underlying pretax loss.
Assets and liabilities recorded in foreign currencies that are the functional currencies for the respective operations are translated at the prevailing exchange rate at the balance sheet date. Translation adjustments resulting from this process are reported as a separate component of other comprehensive income. Gains and losses from foreign currency transactions are included in earnings for the period.
Volume and net sales
Including royalty volumes, MCI total sales volume increased 12.6% in 2013 compared to 2012, due to the addition of the Central Europe export and license business, along with strong Coors Light growth in Mexico and Latin America markets, offset by the negative impact of transferring our Carling travel and export business to the Europe segment. Excluding royalty sales (primarily in Mexico and Eastern Europe), MCI reported sales volume decreased 6.6% in 2013 compared to 2012 due to the negative impact of transferring our Carling travel and export business to the Europe segment.
Net sales per hectoliter increased 0.3% in 2013 versus 2012, driven by positive geographic mix, higher net pricing in China and the addition of contract brewing volume in India.
Including royalty volumes, MCI total sales volume increased 56.5% in 2012 compared to 2011, due to the addition of the Central Europe export and license business, Carling growth in our Europe export and license markets, Coors Light growth in Latin America, higher sales of Zima and Modelo brands in Japan, and sales from MC Cobra India. Excluding royalty sales (primarily in Mexico and Eastern Europe), MCI reported sales volume increased 17.4% in 2012 compared to 2011.
Net sales per hectoliter increased 2.1% in 2012 versus 2011, driven by positive sales mix, including higher sales of Zima and Modelo brands in Japan.
Cost of goods sold
Cost of goods sold per hectoliter increased 1.1% in 2013 versus 2012, due to the addition of contract brewing volume in India.
Cost of goods sold per hectoliter increased 1.1% in 2012 versus 2011, driven by sales mix, including higher sales of Zima and Modelo brands in Japan.
Marketing, general and administrative expenses
Marketing general and administrative expenses decreased 21.2% to $68.9 million in 2013 compared to 2012, due to lower marketing spending in low-margin accounts in China, as well as the exit from our China joint venture and reduced overhead expenses in other markets. These decreases were partially offset by increases in marketing investments related to the launch of Coors and Blue Moon in Australia.
Marketing general and administrative expenses increased 12.9% to $87.4 million in 2012 compared to 2011, due to incremental brand investments in priority markets and asset-value and cost adjustments in our MC Si'hai joint venture. Marketing, general and administrative expenses attributable to the addition of the Central Europe export and license business were insignificant for 2012.
Special items, net
In 2013, we sold our interest in the MC Si'hai joint venture in China and recognized a gain of $6.0 million. The gain consists of the release of the $5.4 million liability representing the fair value of our remaining investment upon deconsolidation of the joint venture in 2012, as well as $0.6 million of proceeds received for our interest in the joint venture. We also recognized legal and related fees in relation to the sale of $1.2 million during 2013. See Part II—Item 8 Financial Statements
45
and Supplementary Data, Note 5, "Investments" of the Notes for further discussion. Additionally, during 2013, we recognized charges of $0.4 million relating to a restructuring program focused on labor savings across all functions.
During 2012, we recognized a $27.6 million impairment charge related to the deconsolidation of our MC Si'hai joint venture and $1.2 million of related costs. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" of the Notes for further discussion. Also, during 2012, we recognized a $10.4 million impairment charge to write-off the goodwill and definite-lived intangibles associated with MC Si'hai. See Part II—Item 8 Financial Statements and Supplementary Data, Note 12, "Goodwill and Intangible Assets" of the Notes for further discussion. Additionally, during 2012, we recognized charges of $3.0 million relating to a restructuring program focused on labor savings across all functions.
Corporate
Corporate includes corporate interest and certain other general and administrative costs that are not allocated to any of the operating segments. The majority of these corporate costs relate to worldwide administrative functions, such as corporate affairs, legal, human resources, finance and accounting, tax, treasury, internal audit, insurance and risk management. Additionally, the results of our water resources and energy operations in the state of Colorado are included in Corporate. Corporate also includes certain royalty income and administrative costs related to the management of intellectual property.
The following represents our results of operations for Corporate for the years ended December 31, 2013, December 29, 2012, and December 31, 2011.
For the years ended | |||||||||||||||||
December 31, 2013 | Change | December 29, 2012 | Change | December 31, 2011 | |||||||||||||
(In millions, except percentages) | |||||||||||||||||
Volume in hectoliters | — | — | % | — | — | % | — | ||||||||||
Sales | $ | 1.2 | — | % | $ | 1.2 | (7.7 | )% | $ | 1.3 | |||||||
Excise taxes | — | — | % | — | — | % | — | ||||||||||
Net sales | 1.2 | — | % | 1.2 | (7.7 | )% | 1.3 | ||||||||||
Cost of goods sold | (3.6 | ) | N/M | 2.2 | (141.5 | )% | (5.3 | ) | |||||||||
Gross profit | (2.4 | ) | (170.6 | )% | 3.4 | (185.0 | )% | (4.0 | ) | ||||||||
Marketing, general and administrative expenses | (107.4 | ) | (17.9 | )% | (130.8 | ) | 26.5 | % | (103.4 | ) | |||||||
Special items, net | (1.3 | ) | (35.0 | )% | (2.0 | ) | N/M | — | |||||||||
Operating income (loss) | (111.1 | ) | (14.1 | )% | (129.4 | ) | 20.5 | % | (107.4 | ) | |||||||
Interest expense, net | (175.0 | ) | (8.2 | )% | (190.7 | ) | 66.8 | % | (114.3 | ) | |||||||
Other income (expense), net | 15.8 | (118.4 | )% | (85.8 | ) | N/M | (2.9 | ) | |||||||||
Income (loss) from continuing operations before income taxes | $ | (270.3 | ) | (33.4 | )% | $ | (405.9 | ) | 80.7 | % | $ | (224.6 | ) | ||||
Adjusting items: | |||||||||||||||||
Special items | 1.3 | (35.0 | )% | 2.0 | N/M | — | |||||||||||
Acquisition and integration related costs | 4.1 | (97.4 | )% | 157.5 | N/M | — | |||||||||||
Unrealized mark-to-market (gains) and losses | 15.4 | 20.3 | % | 12.8 | 178.3 | % | 4.6 | ||||||||||
Other non-core items | (22.3 | ) | N/M | (4.8 | ) | (194.1 | )% | 5.1 | |||||||||
Non-GAAP: Underlying pretax income (loss) | $ | (271.8 | ) | 14.0 | % | $ | (238.4 | ) | 10.9 | % | $ | (214.9 | ) | ||||
N/M = Not meaningful
Marketing, general and administrative expenses
Marketing, general and administrative expenses were $107.4 million in 2013, a decrease of $23.4 million or 17.9% versus 2012, due to higher acquisition and related integration costs recognized in 2012.
Marketing, general and administrative expenses were $130.8 million in 2012, an increase of $27.4 million or 26.5% versus 2011, due to acquisition and integration costs of $35.8 million, partially offset by lower project and overhead costs.
46
Special items, net
During 2013 and 2012, we recognized charges of $1.3 million and $2.0 million, respectively, relating to a restructuring program focused on labor savings across all functions. See Part II—Item 8 Financial Statements and Supplementary Data, Note 8, "Special Items" of the Notes for further discussion.
Interest expense, net
Net interest expense decreased $15.7 million to $175.0 million in 2013, primarily driven by additional interest amounts incurred in 2012 related to financing activities in connection with the Acquisition further discussed below, as well as the resulting lower interest costs following the debt repayments in 2013.
Net interest expense increased $76.4 million to $190.7 million in 2012, driven by acquisition-related financing costs and the new debt issued to finance the Acquisition. Specifically, in 2012 we recognized a cash loss of $39.2 million on settlement of Treasury Locks we entered into in advance of our issuance of the $1.9 billion senior notes, which we used to remove a portion of our interest rate market risk. Additionally, we recognized $10.7 million of interest expense on our $1.9 billion senior notes in 2012 prior to the closing of the Acquisition, partially offset by the recognition of a $8.0 million unrealized gain in 2012 related to changes in the fair value of the conversion feature on the Convertible Note. Excluding the new debt issued to finance the Acquisition and acquisition-related financing costs, net interest expense decreased $13.7 million to $100.6 million in 2012, primarily driven by the net investment hedge designation of our cross currency swap contracts in the fourth quarter of 2011. As a result of this designation, all changes in fair value of the designated swaps, inclusive of the periodic interest incurred, are recorded in accumulated other comprehensive income, partially offsetting the movements resulting from the periodic translation adjustment of our Canadian business.
Other income (expense), net
Other income was $15.8 million in 2013, primarily driven by a gain of $22.3 million resulting from the sale of a non-operating asset. See Part II—Item 8 Financial Statements and Supplementary Data, Note 6, "Other Income and Expense" of the Notes for further discussion.
Other expense was $85.8 million in 2012, primarily driven by a $57.9 million foreign exchange loss in 2012 on our Euro cash holdings when we used the proceeds from our issuance of the $1.9 billion senior notes to purchase Euros and experienced a negative foreign exchange movement between the Euro and USD prior to using these proceeds to fund the Acquisition. Additionally, concurrent with the announcement of the Acquisition, we entered into a bridge loan agreement, which we terminated upon the closing of our issuance of the $1.9 billion senior notes. In connection with the issuance and subsequent termination of the bridge loan, we incurred debt fees of $13.0 million in 2012. Also, we recognized a net unrealized foreign exchange loss of $23.8 million related to financing instruments entered into in conjunction with the closing of the Acquisition in 2012. Finally, we recognized a $5.2 million gain on a sale of water rights and $2.3 million gain related to other foreign currency movements.
Other expense was $2.9 million in 2011, driven by $6.7 million expense related to the change in designation of our cross currency swaps from a cash flow hedge to a net investment hedge, partially offset by a $0.8 million mark-to-market gain related to final settlement of the remaining total return swaps and related financial instruments we arranged with respect to Foster's common stock, a $0.5 million gain related to foreign currency movements, and a $1.0 million gain on the sale of non-core real estate to MillerCoors.
Liquidity and Capital Resources
Our primary sources of liquidity include cash provided by operating activities, access to external borrowings and monetization of assets. We believe that cash flows from operations, including distributions from MillerCoors, and cash provided by short-term and long-term borrowings, when necessary, will be more than adequate to meet our ongoing operating requirements, scheduled principal and interest payments on debt, and anticipated dividend payments and capital expenditures for the next twelve months and our long-term liquidity requirements. A significant portion of our trade receivables are concentrated in Europe. While these receivables are not concentrated in any specific customer and our allowance on these receivables factors in collectibility, we may encounter difficulties in our ability to collect due to the impact to our customer of any further economic downturn within Europe.
A significant portion of our cash flows from operating activities is generated outside the U.S., in currencies other than USD. As of December 31, 2013, approximately 79% of our cash and cash equivalents were located outside the U.S., largely denominated in foreign currencies. Most of the amounts held outside of the U.S. could be repatriated to the U.S., but under current law, would be subject to U.S. federal and state income taxes, less applicable foreign tax credits. We accrue for U.S. federal and state tax consequences on the earnings of our foreign subsidiaries upon repatriation. When the earnings are
47
considered indefinitely reinvested outside of the U.S., we do not accrue U.S. federal and state tax consequences. We utilize a variety of tax planning and financing strategies in an effort to ensure that our worldwide cash is available in the locations in which it is needed. We periodically review and evaluate these strategies, including external committed and non-committed credit agreements accessible by MCBC and each of our operating subsidiaries. These financing arrangements, along with the distributions received from MillerCoors are sufficient to fund our current cash needs in the U.S.
Net Working Capital
As of December 31, 2013, and December 29, 2012, we had debt-free net working capital of negative $17.5 million and positive $394.9 million, respectively. Short-term borrowings and current portion of long-term debt are excluded from net working capital as they are not reflective of the ongoing operational requirements of the business. The levels of working capital required to run our business fluctuate with the seasonality in our business. Our working capital is also sensitive to foreign exchange rates, as a significant majority of current assets and current liabilities are denominated in either CAD or our European operating currencies such as, but not limited to, GBP, Euro, Czech Koruna, Croatian Kuna, Serbian Dinar, New Romanian Leu, Bulgarian Lev and Hungarian Forint, while financial results are reported in USD. Below is a table outlining our current and historical net working capital levels:
As of | ||||||||
December 31, 2013 | December 29, 2012 | |||||||
(In millions) | ||||||||
Current assets | $ | 1,537.7 | $ | 1,748.0 | ||||
Less: Current liabilities | (2,142.1 | ) | (2,598.7 | ) | ||||
Add back: Current portion of long-term debt and short-term borrowings | 586.9 | 1,245.6 | ||||||
Net working capital | $ | (17.5 | ) | $ | 394.9 | |||
The decrease in net working capital from $394.9 million at December 29, 2012, to negative $17.5 million at December 31, 2013, is primarily related to an increase in accounts payable and accrued trade payables of $109.4 million as we have increased our focus on managing working capital through increased vendor terms, the reduction in our cash balances due to the repayment of the $575 million convertible bonds and the settlement of the €500 million Zero Coupon Senior Unsecured Convertible Note (less the net €44.9 million initially withheld) in 2013, partially offset by cash raised through issuances under our commercial paper program and borrowings on our Euro-denominated revolving credit facility during 2013, of which we have outstanding balances of $379.8 million and $137.4 million, respectively, at December 31, 2013. See additional discussion below under subheading "Cash and Cash Equivalents" and Part II—Item 8 Financial Statements, Note 13, "Debt" of the Notes for further details of the current portion of long-term debt and short-term borrowings.
Cash Flows
Our business generates positive operating cash flow each year, and our debt maturities are of a longer-term nature. However, our liquidity could be impacted significantly by the risk factors described in Part I, Item 1A. Risk Factors presented herein.
Cash Flows from Operating activities
Net cash provided by operating activities of $1,168.2 million in 2013, increased by $184.5 million compared to 2012. This increase was primarily due to higher net income, adjusted for increased non-cash impairments and other non-cash add-backs, including increases in our accounts payable and accrued trade payables balances, driven by the addition of our Central Europe operations, along with lower cash paid for interest, partially offset by higher income tax payments and pension contributions.
Net cash provided by operating activities of $983.7 million in 2012, was higher by $115.6 million compared to 2011. The increase was primarily due to improved working capital management of $197.0 million, primarily driven by lower accounts receivable balances in the U.K. and Canada and higher accrued liability balances in Corporate and the cycling of lower accounts payable and accrued liability balances in the U.K. in 2011, which were related to timing.
Cash Flows from Investing activities
Net cash used in investing activities of $277.0 million in 2013, decreased by $2,358.1 million compared to 2012.
• | This decrease was primarily driven by the $2,257.4 million used in the Acquisition during the second quarter of 2012. |
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• | Additionally, in 2012, we settled $110.6 million of our cross currency swaps. |
• | Further, proceeds from sales of properties and other assets increased $37.9 million in 2013 primarily due to the sale of our interest in our Tradeteam joint venture to DHL as well as the sale of other non-core investment assets. See Part II—Item 8 Financial Statements and Supplementary Data, Note 5, "Investments" and Note 6, "Other Income and Expense" of the Notes for further discussion. |
• | This decrease was partially offset by an increase in additions to properties of $71.6 million primarily related to investments in Europe in 2013. |
Net cash used in investing activities of $2,635.1 million in 2012, was higher by $2,297.0 million compared to 2011. Drivers of this change include:
• | Higher net cash used in investing activities was driven by the Acquisition of $2,257.4 million, net of cash acquired compared to the $31.0 million acquisition of Sharp's Brewery Ltd. and the $10.3 million acquisition of a controlling stake of MC Cobra India in 2011. |
• | Higher net cash used in investing activities further relates to the $110.6 million settlement in 2012 of approximately 33% of our remaining cross currency swaps designated as a net investment hedge. See Part II—Item 8 Financial Statements and Supplementary Data, Note 17, "Derivative Instruments and Hedging Activities" of the Notes for further discussion. |
• | Higher net cash used was driven by increased net contributions to MillerCoors of $49.0 million in 2012. |
• | These increases in net cash used were partially offset by the $93.6 million capital contribution to BRI in 2011, which BRI used, along with the capital contributions received from its other shareholders, to repay its CAD 200 million debt, releasing us from our guarantee of this debt. |
Cash Flows from Financing activities
Net cash used in financing activities totaled $1,059.2 million in 2013, compared to net cash provided by financing activities of $1,171.4 million in 2012.
• | This change from "cash provided by" to "cash used in" financing activities was primarily driven by the $2,195.4 million in proceeds from issuance of long-term debt associated with the Acquisition, reduced by the related debt issue costs of $40.3 million, during 2012. This amount was partially offset by payments during 2012 of $424.3 million and $105.0 million related to debt and overdraft balances, respectively, assumed in the Acquisition, $181.9 million on our term loans and $44.8 million for the settlement of our 10-year senior notes issued in 2002. |
• | During 2013 we repaid the $575 million convertible bonds, the €500 million convertible note (less the €44.9 million initially withheld) for $614.7 million, and the balance of our Euro denominated term loan for $123.8 million (€93.7 million). These repayments were partially offset by net issuances under our commercial paper program and net borrowings on our Euro-denominated revolving credit facility of $517.2 million. |
• | We additionally made $119.4 million in net interest and notional payments primarily associated with our cross currency swaps, which were extended and designated as a net investment hedge in the fourth quarter of 2011, compared to only $8.2 million in net interest payments in 2012. |
• | The increase in cash used in financing activities was partially offset by a $54.7 million increase in the proceeds from the exercise of stock options. |
Net cash provided by financing activities totaled $1,171.4 million in 2012, compared to net cash used of $665.1 million compared to 2011, an increase of $1,836.5 million. Drivers of this change include:
• | Higher net cash provided by financing activities was driven by proceeds from issuances of long-term debt of $2,195.4 million related to the Acquisition. This increase was partially offset by 2012 debt repayments including the $424.3 million repayment of the Subordinated Deferred Payment Obligation, which we assumed as part of the Acquisition, the repayment of the $150 million term loan, the principal repayment of approximately $32 million on the €120 million term loan and $38.1 million of higher debt issuance costs. We also repaid the remaining $44.8 million outstanding of our $850 million 6.375% 10-year notes that were due in May 2012. |
• | Additionally, in 2012 we purchased a portion of the non-controlling interests in Central Europe for $27.9 million. |
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• | In 2011, we repurchased 7.5 million of our Class B common shares for $321.1 million that contributed to higher net cash used in 2011. We did not repurchase any shares in 2012. We also made payments related to our cross currency swaps in 2011 for $104.5 million, inclusive of the settlement of a portion of these swaps. |
See Part II—Item 8 Financial Statements and Supplementary Data, Note 13, "Debt" of the Notes for a summary of our financing activities and debt position at December 31, 2013, and December 29, 2012.
Underlying Free Cash Flow
We generated $892.0 million of underlying free cash flow in 2013. This represents a 3.2% increase in underlying free cash flow compared to $864.7 million in 2012, driven by higher net income, after considering non-cash adjustments, , an increase in operating cash flow due to the addition of Central Europe for a full year and improvements in year-over-year working capital management.
The following table provides a reconciliation of Underlying Free Cash Flow, a non-GAAP measure, to the nearest U.S. GAAP measure (Net Cash Provided by Operating Activities).
For the years ended | |||||||||||||
December 31, 2013 | December 29, 2012 | December 31, 2011 | |||||||||||
(In millions) | |||||||||||||
U.S. GAAP: | Net Cash Provided by Operating Activities | $ | 1,168.2 | $ | 983.7 | $ | 868.1 | ||||||
Less: | Additions to properties(1) | (293.9 | ) | (222.3 | ) | (235.4 | ) | ||||||
Less: | Investment in MillerCoors(1) | (1,186.5 | ) | (1,008.8 | ) | (800.1 | ) | ||||||
Add: | Return of capital from MillerCoors(1) | 1,146.0 | 942.4 | 782.7 | |||||||||
Add: | Cash impact of Special items(2) | 48.8 | 11.6 | 3.1 | |||||||||
Add: | Costs related to the Acquisition(3) | 7.7 | 134.7 | — | |||||||||
Add: | MillerCoors investment in businesses(4) | — | 14.4 | — | |||||||||
Add: | MillerCoors purchase of noncontrolling interest(4) | — | 9.0 | — | |||||||||
Add: | MillerCoors cash impact of Special items(4) | 1.7 | — | — | |||||||||
Non-GAAP: | Underlying Free Cash Flow | $ | 892.0 | $ | 864.7 | $ | 618.4 | ||||||
(1) | Included in Net cash used in investing activities. |
(2) | Included in Net cash provided by operating activities. |
(3) | Included in Net cash provided by operating activities and reflects integration costs of $7.7 million and $37.6 million paid in 2013 and 2012, respectively. Additionally, the adjustment to 2012 Net cash provided by operating activities reflects the loss related to settlement of Treasury Locks of $39.2 million and Euro currency purchase loss of $57.9 million. |
(4) | Amounts represent our proportionate 42% share of the cash flow impacts, as determined by management. These items adjust operating cash flow to arrive at our underlying free cash flow for 2012. |
Capital Resources
Cash and Cash Equivalents
As of December 31, 2013, we had total cash and cash equivalents of $442.3 million, compared to $624.0 million at December 29, 2012. The decrease versus prior year end was driven by the use of a significant amount of cash to repay the debt obligations further discussed below. Our cash and cash equivalents are invested in a variety of highly liquid investments with original maturities of 90 days or less. These investments are viewed by management as low-risk investments and on which there are little to no restrictions regarding our ability to access the underlying cash to fund our operations as necessary. We also utilize a cash pooling arrangement to facilitate the access to cash across Central European countries.
Borrowings
The majority of our outstanding borrowings as of December 31, 2013 consisted of publicly traded notes. Our outstanding borrowings have maturities ranging from 2014 to 2042. Long-term debt was $3,213.0 million and $3,422.5 million at December 31, 2013, and December 29, 2012, respectively. Not included in these amounts are current portions of long-term debt and short-term borrowings. Current portions of long-term debt were $61.8 million and $1,232.4 million as of December 31,
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2013, and December 29, 2012, respectively. Short-term borrowings were $525.1 million and $13.2 million as of December 31, 2013, and December 29, 2012, respectively. Our total borrowings decreased by $868.2 million from December 29, 2012 to December 31, 2013, primarily due to the repayment of our $575 million convertible notes, as well as the €500 million Convertible Note (less amounts initially withheld of €44.9 million) and remaining outstanding portion of our €120 million term loan issued in conjunction with the Acquisition, offset by commercial paper issuances during 2013, as further discussed below.
In the first quarter of 2013, a $950 million commercial paper program was approved by our Board of Directors and implemented. The commercial paper program is supported by our $550 million and $400 million revolving credit facilities. To fund the repayment of our €500 million Zero Coupon Senior Unsecured Convertible Note, we issued short-term commercial paper during the third quarter of 2013. As of December 31, 2013, the outstanding borrowings under the commercial paper program were $379.8 million at a weighted average effective interest rate and tenor of 0.49% and 47.2 days, respectively.
On July 30, 2013, the $575 million convertible notes matured and were repaid for face value of $575 million using cash on hand. The required premium payment of $2.6 million, which was based on our weighted-average Class B common stock price exceeding the then-applicable conversion price on any of the 25 trading days following the maturity date, was paid in September 2013. This premium was hedged by call options that mitigated our exposure to increases in our stock price and resulted in proceeds of $2.6 million from these call options in September 2013, which fully offset the premium payment. Separately, we entered into warrant transactions concurrent with these call options, pursuant to which we were required to issue Class B common stock to the counterparty if our stock price reached $66.13 per share. These warrants began expiring in December 2013 and the final warrants expired February 6, 2014, all of the warrants expired out-of-the-money.
On August 13, 2013, the seller exercised the conversion feature on our €500 million Zero Coupon Senior Unsecured Convertible Note for a total agreed upon value upon exercise of €510.9 million, consisting of €500 million in principal and €10.9 million for the conversion feature. Separate from the seller's notice to put, we have made claims under the purchase agreement and the management warranty deed provided to us upon close of the Acquisition related to certain exposures associated with pre-acquisition periods. As a result, we initially withheld €44.9 million ($61.8 million as of December 31, 2013) from the €500 million in principal related to these outstanding claims. Therefore, on September 3, 2013, we paid the seller in cash a total of €466.0 million ($614.7 million) consisting of €455.1 million ($600.3 million) in principal and €10.9 million ($14.4 million) for the conversion feature. To partially fund the repayment, we issued short-term commercial paper during the third quarter of 2013 as discussed above. The remaining €44.9 million ($61.8 million as of December 31, 2013) continues to be classified as current portion of long-term debt pending the resolution of the unsettled claims. In January 2014, we settled one of the claims resulting in a payment to the Seller of €34.0 million ($46.3 million at settlement). We have not incurred, and do not expect to incur, any interest on the amounts withheld.
During 2012, we repaid the $150 million borrowing and made principal repayments of €26.0 million on the remaining €120 million borrowing. During the third quarter of 2012, we designated the €120 million term loan as a net investment hedge of our Central European operations. During 2013, we made principal repayments of $123.8 million (€93.7 million), respectively, on the remaining balance of our €120 million term loan. As a result, the term loan, which was designated as a net investment hedge, was fully repaid in the third quarter of 2013. See Note 17, "Derivative Instruments and Hedging Activities" for further discussion.
On May 3, 2012, we issued $1.9 billion of senior notes with portions maturing in 2017, 2022 and 2042. The 2017 senior notes were issued in an initial aggregate principal amount of $300 million at 2.0% interest and will mature on May 1, 2017. The 2022 senior notes were issued in an initial aggregate principal amount of $500 million at 3.5% interest and will mature on May 1, 2022. The 2042 senior notes were issued in an initial aggregate principal amount of $1.1 billion at 5.0% interest and will mature on May 1, 2042. The issuance resulted in total proceeds to us, before expenses, of $1,880.7 million, net of underwriting fees and discounts of $14.7 million and $4.6 million, respectively. Total debt issuance costs capitalized in connection with these senior notes, including the $14.7 million of underwriting fees, were approximately $18.0 million and are being amortized over the life of the notes. The issuance added a number of guarantors to these debt securities as well as to our existing senior obligations, pursuant to requirements of our existing senior debt obligation agreements. These new guarantors consist principally of the U.K. operating entity. See Note 20, "Supplemental Guarantor Information" for further discussion and guarantor financial information reflective of this change.
On September 10, 2012, we entered into a revolving credit agreement ("Euro Credit Agreement") to support the operations of our Europe segment. The Euro Credit Agreement provides for a 1-year revolving credit facility of €150 million on an uncommitted basis. In the third quarter of 2013, this revolving credit facility was renewed and restructured and will continue to provide €150 million on an uncommitted basis through September 2014. As of December 31, 2013, the outstanding borrowings under this revolving credit facility were $137.4 million. There were no outstanding borrowings under this revolving credit facility as of December 29, 2012.
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Based on the credit profile of our lenders that are party to our credit facilities, we are confident in our ability to draw on such credit facilities if the need arises. There were no outstanding borrowings on our 4-year revolving $550 million or 4-year revolving $400 million credit facilities as of December 31, 2013, which were issued in the second quarter of 2012 and second quarter of 2011, respectively. These facilities support our commercial paper program discussed above and as such, we have $570.2 million available to draw on as of December 31, 2013. We also have uncommitted lines of credit with several banks should certain business units need additional short-term liquidity.
Under the terms of each of our debt facilities, we must comply with certain restrictions. These include restrictions on priority indebtedness (certain threshold percentages of secured consolidated net tangible assets), leverage thresholds, liens, and restrictions on certain types of sale lease-back transactions and transfers of assets. As of December 31, 2013, and December 29, 2012, we were in compliance with all of these restrictions and have met all debt payment obligations.
See Part II—Item 8 Financial Statements and Supplementary Data, Note 13, "Debt" of the Notes for a complete discussion and presentation of all borrowings and available sources of borrowing, including lines of credit.
Use of Cash
Following the Acquisition in the second quarter of 2012, we intend to continue to focus our use of cash primarily on debt repayment, along with cash dividends, potential strategic investments and other general corporate uses.
In addition to the repayment of the $575 million convertible bonds, the settlement of the €500 million Zero Coupon Senior Unsecured Convertible Note (less the net €44.9 million initially withheld) and the principal repayments of $123.8 million (€93.7 million) on the remaining balance of our €120 million term loan in 2013 as discussed above, we made payments on our cross currency swaps of $113.9 million. Our outstanding cross currency swaps, which were due to mature March 31, 2014, were in a net liability position of $71.7 million at December 31, 2013. These repayments were partially offset by issuances under our commercial paper program and borrowings on our Euro-denominated revolving credit facility during 2013, of which we have outstanding balances at December 31, 2013 of $379.8 million and $137.4 million, respectively.
Early in the first quarter of 2014, we repaid €34.0 million ($46.3 million at settlement) of the €44.9 million ($61.8 million as of December 31, 2013) initially withheld on the €500 million Zero Coupon Senior Unsecured Convertible Note repayment related to settlement of one of the outstanding claims. Additionally, in January 2014, we cash settled the final remaining CAD 241 million notional of our outstanding currency swaps designated as a net investment hedge of our Canadian operations for $65.2 million, which were scheduled to mature March 31, 2014.
In 2013, we made contributions to our defined benefit pension plans of $113.1 million including a contribution to our U.K. plan of $11.2 million, which reflects the acceleration of a required contribution for 2014. Our U.K. pension plan is currently undergoing a triennial statutory valuation as of June 30, 2013, which is necessary for funding purposes and required to be finalized by September 2014. While we cannot predict the outcomes of this valuation, it may result in a material increase to our long-term cash contribution obligations to our U.K. pension plan.
In 2011, we announced that our Board of Directors approved a program authorizing the repurchase of up to $1.2 billion of our Class A and Class B common stock, with an expected program term of three years. There were no repurchases in 2012, and we do not expect further repurchases until our debt ratios return closer to levels maintained prior to the financing activities related to the Acquisition.
Credit Rating
Our current long-term credit ratings are BBB-/Positive Outlook, Baa2/Stable Outlook, BBB/Stable Outlook and BBB/Stable Outlook with Standard & Poor's, Moody's Investor Services, Fitch Ratings and DBRS, respectively. Similarly, our short-term credit ratings are A-3, Prime-2, F2 and R-2, respectively. The BBB-/Positive Outlook rating from Standard & Poor's is one notch above "below investment grade." A securities rating is not a recommendation to buy, sell or hold securities, and it may be revised or withdrawn at any time by the rating agency.
MillerCoors
MillerCoors distributes its excess cash to its owners, SABMiller and MCBC, on a 58%/42% basis, respectively. As of December 31, 2013, and December 31, 2012, MillerCoors had cash of $12.3 million and $17.3 million, respectively. As of December 31, 2013, and December 31, 2012, MillerCoors had total debt of $10.6 million and $23.6 million, respectively. There are no restrictions from external sources on its ability to make cash distributions to its owners.
MillerCoors recognized $291.5 million, $285.4 million and $301.8 million of depreciation and amortization during 2013, 2012 and 2011, respectively.
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MillerCoors contributed $101.9 million (our 42% share is $42.8 million) to its defined benefit pension plans in 2013. For 2014, MillerCoors' contributions to its defined benefit pension plans are expected to be approximately $90 million to $110 million (our 42% share is $38 million to $46 million), which are not included in our contractual cash obligations.
MillerCoors delivered incremental cost savings of approximately $102 million in 2013. We benefit from 42% of the MillerCoors cost savings.
Foreign Exchange
Foreign exchange risk is inherent in our operations primarily due to the significant operating results that are denominated in currencies other than USD. Our approach is to reduce the volatility of cash flows and reported earnings which result from currency fluctuations rather than business related factors. Therefore, we closely monitor our operations in each country and seek to adopt appropriate strategies that are responsive to foreign currency fluctuations. Our financial risk management policy is intended to offset a portion of the potentially unfavorable impact of exchange rate changes on net income and earnings per share. See Part II—Item 8 Financial Statements and Supplementary Data, Note 17, "Derivative Instruments and Hedging Activities" of the Notes for additional information on our financial risk management strategies.
Our consolidated financial statements are presented in USD, which is our reporting currency. The significant exchange rates to the USD used in the preparation of our consolidated financial results for the primary foreign currencies used in our foreign operations (functional currency) are as follows:
For the years ended | ||||||||
December 31, 2013 | December 29, 2012 | December 31, 2011 | ||||||
Weighted-Average Exchange Rate (1 USD equals) | ||||||||
Canadian dollar (CAD) | 1.03 | 1.00 | 0.98 | |||||
Euro (EUR) | 0.77 | 0.80 | N/A | |||||
British pound (GBP) | 0.64 | 0.63 | 0.62 | |||||
Czech Koruna (CZK) | 19.60 | 19.82 | N/A | |||||
Croatian Kuna (HRK) | 5.70 | 5.96 | N/A | |||||
Serbian Dinar (RSD) | 85.24 | 89.97 | N/A | |||||
New Romanian Leu (RON) | 3.31 | 3.55 | N/A | |||||
Bulgarian Lev (BGN) | 1.48 | 1.57 | N/A | |||||
Hungarian Forint (HUF) | 223.91 | 227.11 | N/A | |||||
As of | |||||
December 31, 2013 | December 29, 2012 | ||||
Closing Exchange Rate (1 USD equals) | |||||
Canadian dollar (CAD) | 1.06 | 1.00 | |||
Euro (EUR) | 0.73 | 0.76 | |||
British pound (GBP) | 0.60 | 0.62 | |||
Czech Koruna (CZK) | 19.89 | 19.00 | |||
Croatian Kuna (HRK) | 5.54 | 5.72 | |||
Serbian Dinar (RSD) | 83.40 | 85.84 | |||
New Romanian Leu (RON) | 3.25 | 3.36 | |||
Bulgarian Lev (BGN) | 1.42 | 1.48 | |||
Hungarian Forint (HUF) | 216.26 | 220.07 | |||
The exchange rates for the years ended December 31, 2013, December 29, 2012 and December 31, 2011 have been calculated based on the average of the foreign exchange rates during the relevant period and have been weighted according to the foreign denominated earnings before interest and taxes of the USD equivalent.
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Capital Expenditures
In 2013, we spent $293.9 million on capital improvement projects worldwide, which excludes capital spending by MillerCoors and other equity method joint ventures, representing a 32% increase versus 2012 capital expenditures of $222.3 million. Capital expenditures in 2013 increased driven by the addition of our Central Europe operations. Of the 2013 capital spending, approximately 70% was in support of the Europe segment, with the remainder split between Canada and Corporate. The capital expenditure plan for 2014 is expected to be approximately $330 million, excluding MillerCoors and other equity method joint ventures, which is higher than 2013 primarily due to our planned improvements to our Canada supply chain.
Contractual Obligations and Commercial Commitments
Contractual Obligations
A summary of our consolidated contractual obligations as of December 31, 2013, and based on foreign exchange rates at fiscal year end 2013, is as follows:
Payments due by period | ||||||||||||||||||||
Total | 2014 | 2015 - 2016 | 2017 - 2018 | 2019 and Thereafter | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Debt obligations(1) | $ | 3,805.0 | $ | 586.9 | $ | 847.4 | $ | 770.7 | $ | 1,600.0 | ||||||||||
Interest payments on debt obligations(1) | 1,870.2 | 140.3 | 226.0 | 162.3 | 1,341.6 | |||||||||||||||
Derivative payments(2) | 76.9 | 73.9 | 2.9 | 0.1 | — | |||||||||||||||
Retirement plan expenditures(3) | 134.3 | 41.3 | 17.2 | 18.5 | 57.3 | |||||||||||||||
Operating leases | 107.6 | 33.3 | 43.5 | 13.9 | 16.9 | |||||||||||||||
Other long-term obligations(4) | 3,236.7 | 1,178.3 | 833.4 | 365.8 | 859.2 | |||||||||||||||
Total obligations | $ | 9,230.7 | $ | 2,054.0 | $ | 1,970.4 | $ | 1,331.3 | $ | 3,875.0 | ||||||||||
See Part II - Item 8 Financial Statements and Supplementary Data, Note 13, "Debt", Note 16, "Employee Retirement Plans and Postretirement Benefits", Note 17, "Derivative Instruments and Hedging Activities", and Note 19, "Commitments and Contingencies" of the Notes for additional information.
(1) | The "debt obligations" line item includes the principal payment obligations related to our short-term commercial paper borrowings assuming repayment at maturity as well as the current borrowings on our EUR revolving credit facility assuming repayment in 2014. The "interest payments on debt obligations" line item includes floating-rate interest payments estimated using interest rates effective as of December 31, 2013, related to the EUR revolving credit facility. The "debt obligations" line item excludes unamortized discounts and also excludes capital leases obligations which are immaterial for current fiscal year. |
(2) | The "derivative payments" line includes the payment obligations, to be paid to counterparties under our derivative contracts, as well as interest on our outstanding cross currency swap agreements. These obligations are primarily related to the cross currency swaps and exclude derivatives in an asset position of $20.0 million. As market rates fluctuate, payments to or receipts from our counterparties will also fluctuate. Due to the nature of our counterparty agreements, we are not able to net positions with the same counterparty across business units. Thus, in the event of default, we may be required to early settle all out-of-the-money contracts, without the benefit of netting the fair value of any in-the-money positions against this exposure. |
Our outstanding cross currency swaps, which were to mature in March 2014, were in a net liability position of $71.7 million at December 31, 2013. In January 2014, we early settled the final remaining CAD 241 million notional of our outstanding currency swaps designated as a net investment hedge of our Canadian operations for $65.2 million.
(3) | Represents expected contributions under our defined benefit pension plans in the next twelve months and our benefits payments under postretirement benefit plans for all periods presented. The net underfunded liability at December 31, 2013 of our defined benefit pension plans (excluding our overfunded plans) and postretirement benefit plans is $312.5 million and $162.1 million, respectively. Contributions in future fiscal years will vary as a result of a number of factors, including actual plan asset returns and interest rates, and as such, have been excluded from the above table. We fund pension plans to meet the requirements set forth in applicable employee benefits laws. Sometimes we voluntarily increase funding levels to meet financial goals. Pension contributions and postretirement benefit payments |
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on a consolidated basis (excluding MillerCoors, BRI and BDL) were $121.6 million in 2013. Excluding MillerCoors, BRI and BDL, we expect to make contributions to our defined benefit pension plans of $20 million to $40 million and benefit payments for our other postretirement benefit plans of approximately $10 million in 2014. Our U.K. pension plan is subject to a statutory valuation for funding purposes every three years, with a valuation as of June 30, 2013 currently underway. While we cannot predict the outcome of this valuation, it may result in a material increase to our long-term cash contribution obligations to our U.K. pension plan. The 2010 statutory valuation resulted in a long-term funding commitment plan along with an MCBC guarantee for annual contributions of GBP 25 million from 2013 through March 2022. Additionally, MCBC guarantees the lesser of the net underfunded liability amount for the U.K. plan ($217.0 million as of December 31, 2013) or the GBP 25 million annual contributions through March 2022, adjusted annually by the change in the Retail Price Index, subject to a maximum increase of 3% per annum. We have taken numerous steps in recent years to reduce our exposure to these long-term pension obligations, including the closure of the U.K. pension plan to future earning of service credit in early 2009 and benefit modifications in several of our Canada plans. However, given the net liability of these plans and their dependence upon the global financial markets for their financial health, the plans will continue to periodically require potentially significant amounts of cash funding.
(4) | The "other long-term obligations" line primarily includes non-cancellable purchase commitments as of December 31, 2013, that are enforceable and legally binding. Approximately $753 million of the total other long-term obligations relate to long-term supply contracts with third parties to purchase raw material, packaging materials and energy used in production. Approximately $1,456 million relates to commitments associated with Tradeteam in the U.K. Our aggregate commitments for advertising and promotions, including sports sponsorship, total approximately $270 million. The remaining amounts relate to sales and marketing, distribution, information technology services, open purchase orders and |